Taxation 2 de Leon PDF

TITLE IV
VALUE-ADDED TAX
CHAPTER I
IMPOSITION OF TAX
SECTION 105. Persons Liable. Any person who, in the

course of trade or business, sells, barters, exchanges, leases goods
or properties, renders services, and any person who imports goods
shall be subject to the value-added tax ( V A T ) imposed in Sections
106 to 108 of this Code.
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. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at
the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means 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 nonstock, nonprofit private
organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services
as defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being rendered in the course
of trade or business.
ANNOTATION
1. Value-added tax (VAT) is a percentage tax imposed at

every stage of the distribution process on the sale, barter, exchange
(including any other transaction d e e m e d by law as a sale), or
l
THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. 105
ANNOTATED
lease of goods, or properties and on the performance of service

in the course of trade or business,' or on the importation of goods,
whether for business or non-business purposes. It is essentially
a tax on spending or consumption levied on certain transactions
involving a wide range of goods, properties, and services, such tax
being payable by the seller, transferor, lessor, or importer.
2. Tax imposed on value added to goods or services. T h e
tax is so-called because it is imposed on the value not previously
subjected to the VAT, i.e., on the value a d d e d to the goods or
services at each stage of the distribution chain.
(1) VAT is a business tax on transactions; hence, it is still
subject to the tax even in the a b s e n c e of profit attributable
thereto.
(2) Certain sales of g o o d s and/or services are either zero-
rated or e x e m p t e d f r o m the VAT. (Sees. 106[A, 2], 108[B],
109[1].)
(3) A n y person w h o s e sales or receipts are e x e m p t under
Section 109(1)(V) of the Tax C o d e f r o m p a y m e n t of VAT and
w h o is not a VAT-registered person shall pay p e r c e n t a g e tax
equivalent to 3%. (Sec. 116.)
(4) A n y individual e n g a g e d in business or businesses
w h e r e the aggregate gross sales or receipts do not e x c e e d
P100,000.00 during any 12-month period shall be principally
for subsistence or livelihood a n d not in the c o u r s e of trade or
business, and shall be e x e m p t f r o m the p a y m e n t of VAT a n d
from any percentage tax i m p o s e d under t h e Tax C o d e , (see
Sec. 9-236.2, Rev. R e g s . No. 16-2005, Consolidated Value-
Added Tax Regulations of 2005, cited as CVR, A p p e n d i x "S".)
(5) Under the Tax C o d e , t h e p e r f o r m a n c e of service for a

consideration is considered a n d taxable as a sale. It includes
the use or lease of properties, w h e t h e r real or personal, (see
Sec. 108[A].) A transaction subject to the VAT is a "taxable
sale."
( 6 ) T h e dissolution of the c o - o w n e r s h i p and the partition of

the properties is not a sale of g o o d s a n d services pursuant to
Section 105. (BIR Ruling No. 6 4 1 - 2 0 0 4 , Dec. 17, 2004.)
'The Local Government Code ( R . A . No. 7160.) defines "business" as "trade or

commercial activity regularly engaged in as a means of livelihood or with a view to
profit organization." (Sec. 131[d] thereof.)
105 V A L U E - A D D E D TAX 3
Imposition of Tax
( 7 ) S o m e h o m e o w n e r s ' associations of subdivisions

in Metro Manila are collecting fees from car owners in
p a y m e n t of gate passes/tickets. T h e collection by officers of
the h o m e o w n e r s ' association from car owners is an activity
c o n d u c t e d for profit regardless of the disposition thereof, and
thus, the proceeds f r o m said collection shall be subject to the
regular corporate income tax. Moreover, its income derived
f r o m the sale of g o o d s (e.g., stickers) or services in the course
of a business pursuit is subject to VAT. (BIR Ruling No. 196-
2 0 0 4 , April 6, 2004.)
(8) T h e a s s i g n m e n t by a c o m p a n y e n g a g e d in the real

estate business, and not in t h e selling or leasing of machinery
a n d e q u i p m e n t for the construction of water facilities of
m a c h i n e r y of said a n d e q u i p m e n t as p a y m e n t of its liabilities, is
not subject to VAT, since they do not f o r m part of its inventory
and are not primarily held for sale in the ordinary course of
trade or business and are, therefore, classified as capital
assets. (BIR Ruling No. DA 2 3 2 - 0 6 , April 1 1 , 2006.)
(9) T h e allocation of c o n d o m i n i u m units to partners of a

joint venture or consortium f o r m e d for the purpose of undertaking
construction projects as a return on their contributions is not
subject to:
(a) income tax, b e c a u s e it is merely a return of
contribution and no income is realized;
(b) VAT b e c a u s e it is not a sale, barter or exchange of
real property d o n e in the ordinary course of business; and
(c) documentary stamp tax (DST) under Section 196,
b e c a u s e the transfer is without consideration. (BIR Ruling
No. D A - 5 7 2 - 0 6 , Sept. 2 2 , 2006.)
(10) A sale of lot which is involuntary and only forced upon
the seller by virtue of the exercise of the government's power of
eminent domain cannot be said to have been conducted in the
course of the taxpayer's trade or business and, therefore, not
subject to VAT. (BIR Ruling No. DA 640-06, Oct, 27, 2006.)
3. Transaction entered into in course of trade or business.
An important requirement for imposing VAT is that the sale or
transaction sought to be taxed must be entered into by a person
in the course of trade or any business carried on by such person.
A transaction is characterized as having been entered into by a
person in the course of trade or business if it is regularly conducted
and undertaken in pursuit of a commercial or economic activity.
ANNOTATED
(1) A sale transaction is d e e m e d to be d o n e in the

ordinary course of trade or business, and thus subject to VAT,
if it w a s done pursuant to a corporation's incidental powers as
appearing in its articles of incorporation. (Ing Barings Securities
Philippines, Inc. vs. Com. of Internal Revenue, CTA Case No.
6188, Jan. 14, 2005.)
(2) The act of supplying electricity to C o . G and C o . H,
which is not a m o n g the ventured activities of Co. F and w a s not
undertaken in the pursuit of C o . F's commercial or economic
activity is not subject to VAT. Neither can it be considered
incidental thereto since the supply of electricity does not
necessarily follow the primary function of manufacturing yarns
and textiles.
Since the billings m a d e by C o . F to its subsidiaries are purely
at cost and without any profit and are merely reimbursements,
they are not subject to the VAT.
Finally, from the start of operation of t h e p o w e r plant as
well as the reimbursement of e x p e n s e s , C o . H a n d Co. G did
not recognize input tax for s u c h p a y m e n t s and neither did C o . F
pay output tax on the s a m e transactions. T h e parties had b e e n
consistent in their appreciation that t h e transaction of supplying
electricity and r e i m b u r s e m e n t a n d other o v e r h e a d e x p e n s e s
are not subject to VAT. (BIR Ruling No. D A - 3 8 4 - 0 4 , July 13,
2004.)
4. Transactions incidental to pursuit of commercial or eco-

nomic activity. Under Section 105, the p h r a s e "in t h e course of
trade or b u s i n e s s " includes "transactions incidental" to "the regular
conduct or pursuit of a c o m m e r c i a l or e c o n o m i c activity."
BIR Ruling No. D A - 5 6 3 - 0 6 held that the sale of the c o m p a n y ' s
cars m a d e by a c o m p a n y w h o s e regular line of business is
manufacturing and export of c u s t o m m a d e dental products is not
subject to VAT on sales since t h e sale is not m a d e on a regular
basis or even incidental to its regular line of business. This ruling
w a s revoked by Rev. M e m o . Cir. No. 1 5 - 2 0 1 1 , construing s u c h sale
as a transaction incidental to its regular or primary line of business
because the cars w e r e p u r c h a s e d and used in furtherance of t h e
c o m p a n y ' s business, forming part of its capital assets although not
held for sale or lease. T h u s , e v e n an isolated transaction involving
assets used in business m a y be subject to VAT if incidental to the
pursuit of a commercial or e c o n o m i c activity a n d , therefore, is
considered as entered into "in the course of trade or b u s i n e s s . "
Sec. 105 V A L U E - A D D E D TAX 5
Imposition of Tax
5. VAT is an indirect tax. As s u c h , it can be shifted to the

purchasers/transferees, or lessees of goods, properties, and
services. T h e shifting of t h e VAT to t h e m does not make them
directly liable for the p a y m e n t of the VAT; hence, they cannot invoke
the e x e m p t i o n privileges granted to avoid the passed-on-VAT. T h e
VAT shifted forms additional part of the cost of goods, properties,
a n d services p u r c h a s e d . O n c e shifted, the VAT ceases to be a tax.
T h u s , for the VAT-registered purchaser, the tax burden passed

on d o e s not constitute cost, but input tax w h i c h is creditable against
his output tax liabilities. This voids t h e cascading effect which is
characteristic of the former sales tax system w h e r e the sales tax
is necessarily cost to the buyer, a n d as s u c h b e c o m e s a factor of
cost w h i c h is a basis of the m a r k e d - u p seller price, in turn, to his
c u s t o m e r s , and so on a n d so forth d o w n the distribution chain.
In the VAT s y s t e m , it is only in t h e c a s e of a non-VAT purchaser

that VAT f o r m s part of cost of the p u r c h a s e . (BIR Ruling No. 1 4 1 -
9 9 , Sept. 13, 1999.)
6. As a general rule, the VAT s y s t e m , uses the destination

principle as a basis for the jurisdictional reach of the tax. G o o d s and
services are t a x e d only in the country w h e r e they are c o n s u m e d .
T h u s , exports are z e r o - r a t e d , while imports are t a x e d . ( C o m m . vs.
A m e r i c a n Express International, Inc., 4 6 2 S C R A 1 9 7 [2005].)
7. Some basic principles governing VAT VAT is ultimately

a tax on c o n s u m p t i o n , e v e n t h o u g h it is a s s e s s e d on many levels
of transactions on the basis of a fixed percentage.
(1) It is the end user of c o n s u m e r g o o d s or services which

ultimately shoulders the tax, as the liability therefrom is passed
on to the e n d users by the providers of these goods or services
w h o , in turn, m a y credit their o w n VAT liability (or input VAT)
from the VAT p a y m e n t s they receive from the final consumer
(or output VAT). T h e final purchase by the end consumer
represents the final link in a production chain that itself involves
several transactions and several acts of consumption.
(2) T h e VAT system assures fiscal adequacy through the

collection of taxes on every level of consumption, yet assuages
the manufacturers or providers of goods and services by
enabling them to pass on their respective VAT liabilities to the
next link of the chain until finally the end consumer shoulders
the entire tax liability.
ANNOTATED
(3) VAT is not a singular-minded tax on every transactional

level. Its assessment bears direct relevance to the taxpayer's
role or link in the production chain. Hence, as affirmed by
Section 105 of the Tax C o d e and its subsequent incarnations,
the tax is levied only on the sale, barter or exchange of g o o d s
or services by persons w h o e n g a g e in such activities, in the
course of trade or business. ( C o m m . vs. M a g s a y s a y Lines,
Inc., 497 S C R A 63 [2006].)
8. Shifting of VAT. T h e VAT taxpayer m a y choose to absorb

the VAT and not pass it on to the purchaser or lessee.
(1) T h e exemption of cooperatives f r o m taxes under
Articles 61 and 62 of the Cooperatives C o d e (R.A. No. 6938.)
is limited only to taxes directly payable by t h e m . T h e value-
added tax is an indirect tax payable by t h e seller a n d not by t h e
purchaser of the goods. Being an indirect tax, it can be a d d e d
to the cost of g o o d s p u r c h a s e d , not as tax but as additional cost
which the purchaser has to pay to obtain the g o o d s p u r c h a s e d .
(BIR Ruling No. 1 5 1 , A u g . 9 , 1 9 9 1 . ) Similarly, suppliers of g o o d s
and services to a c o m p a n y w h i c h is a holder of a legislative
franchise and subject to a 3% franchise tax b a s e d on gross
receipts, "in lieu of any and all taxes on its franchise, rights,
privileges, receipts, revenues a n d profits a n d properties u s e d , "
can pass-on VAT to the latter on its p u r c h a s e s of g o o d s and
services in pursuit of its franchise. Indirect taxes like VAT are
not covered by the e x e m p t i o n . (BIR Ruling N o . D A - 8 3 1 - 0 9 ,
Dec. 2 3 , 2009.)
(2) T h e VAT, as an indirect tax, can be p a s s e d on to VAT-

exempt entities (e.g., shipping c o m p a n i e s by their contractors
and suppliers b e c a u s e t h e f o r m e r ' s e x e m p t i o n s are limited
only to direct taxes). (VAT Ruling N o . 2 3 5 , Sept. 13, 1989.)
Purchases by non-stock non-profit organizations are likewise
subject to VAT w h e r e there is no s h o w i n g that they are e x e m p t
from VAT. (VAT Ruling No. 0 1 0 - 0 9 , July 3 1 , 2009.)
(3) While VAT is an indirect tax a n d c a n be shifted to the

lessee, the lessor m a y elect to a b s o r b the tax himself. T h u s ,
w h e r e a lease a g r e e m e n t provides that all taxes, g o v e r n m e n t
fees and charges d u e on the land subject of the lease are to be
paid by the lessor, the latter c a n n o t legally p a s s on the VAT to
the lessee by including it in the rental p a y m e n t s . T h e lessor is
considered to have agreed to absorb the VAT. (BIR Ruling No.
597-04, Nov. 2 4 , 2004.)
Imposition of Tax
(4) T h e sale of g o o d s and services to a government agency

(e.g., Department of Budget a n d M a n a g e m e n t ) is not exempt
from VAT. H e n c e , the VAT on the security services rendered to
a g o v e r n m e n t a g e n c y m a y be p a s s e d on to said agency since
VAT is an indirect tax. (VAT Ruling No. 2 4 5 , Sept. 22, 1989.)
(5) Pursuant to the Vienna Convention on Diplomatic
Relations: "A diplomatic agent shall be e x e m p t from all dues and
taxes, personal or real, national, regional or municipal, except:
(a) indirect taxes of a kind w h i c h are normally incorporated in
the price of g o o d s or services, x x x." (Art. 34.) Accordingly, the
tax e x e m p t i o n of an E m b a s s y or its diplomatic agents does not
include e x e m p t i o n f r o m the v a l u e - a d d e d tax. In other words,
p u r c h a s e s of locally-produced automobiles by the Embassy
shall be subject to both VAT a n d excise taxes under Sections
106(A) a n d 149, respectively, in relation to Section 128. (VAT
Ruling N o . 0 8 9 , M a r c h 19, 1992.)
(6) T h e sale of services by stock transfer agents to

stockbrokers t h r o u g h clearing h o u s e s is subject to VAT pursuant
to Section 108(A). T h e VAT, being an indirect tax, can be passed
on by t h e a g e n t s to t h e clearing house (which is registered as
a bank; h e n c e , a non-VAT entity) a n d o n c e shifted, forms an
additional a n d integral part of t h e cost of g o o d s and/or services
that t h e non-VAT entity has to shoulder. (VAT Ruling No. 077,
A u g . 2 1 , 1991.)
(7) A foreign contractor, w h i c h is organized under the laws

of a foreign country, rendering services for the construction
of the National P o w e r Corporation (NPC) Gas Turbine Plant
Project f u n d e d f r o m a foreign loan agreement, is subject to
VAT, notwithstanding the fact that N P C is tax exempt under
its Charter and their contract stipulated that NPC will assume
the responsibility for taxes due said foreign contractor. Such
a stipulation is binding only between NPC and the contractor,
in their private capabilities, and the latter's personal liability to
pay its taxes may not be transferred to the former with binding
effect on the BIR.
However, in case the loan agreement was made pursuant
to the Foreign Borrowings Act (R.A. No. 4860, as amended by
P.D. No. 150.), the contractor may be accorded VAT exemption
if such agreement contained a proviso that a contractor shall
be exempt from taxes, including the VAT. Otherwise, VAT
exemption cannot be granted the NPC, for and in behalf of said
ANNOTATED
contractor, for lack of legal basis. (VAT Ruling No. 063, June
27, 1991.)
9. Taxes replaced. T h e VAT has been adopted by virtue of
2
Executive Order No. 2 7 3 (July 2 5 , 1987), issued by the President
in the exercise of her legislative powers effective January 1, 1988.
It replaced the following taxes:
(1) fixed privilege annual taxes payable by persons
engaged in business;
(2) percentage taxes on g o o d s , namely: original sales tax
payable by manufacturers and producers, subsequent sales tax
(turnover tax) payable by subsequent sellers, a d v a n c e sales
tax and compensating tax payable by importers, and miller's
tax payable by producers of certain milled agricultural products;
(3) percentage taxes on selected types of business
services (e.g., contractor's tax, broker's tax); a n d
(4) excise taxes on certain articles (i.e., solvents, m a t c h e s
and video tapes).
Note: Unlike percentage taxes, VAT c a n n o t be fixed, deter-
mined, c o m p u t e d or ascertained at the time of the m o n e y p a y m e n t ;
hence, the s a m e is not subject to any withholding tax at s o u r c e and
remittance provisions. (BIR Ruling N o . 0 8 3 , M a y 15, 1991.)
10. It has been held that Executive Order N o . 273 satisfies
all the constitutional requirements of a valid tax law. It is uniform
and equitable. (Kapatiran ng m g a Naglilingkod sa P a m a h a l a a n ng
Pilipinas, Inc. vs. Tan, 163 S C R A 3 7 1 , J u n e 3 0 , 1988.)
11. The VAT system. This is a m e t h o d of imposing an ad
valorem tax on value a d d e d .
(1) T h e w h o l e of the sales v a l u e of c o n s u m e r g o o d s ,

properties (or services) is t a x e d by installments as t h e g o o d s
pass along the production a n d distribution chain involving
successive transactions b e t w e e n businesses but the tax is
2
Amended by R . A . N o . 7716, the Expanded V A T L a w , which took effect on M a y
28, 1994 after its publication in two newspapers of general circulation, although its
implementation was suspended until January 1, 1994 to allow time for registration
of business entities and dissemination of information. It would have been enforced on
July 1, 1994 but its enforcement was stopped by the Supreme Court when it granted
a temporary restraining order on June 30,1994. The l a w widens the V A T base there-
by subjecting to the tax, transactions and services which were previously exempt
therefrom and/or paying percentage taxes. The latest amendments were effected by
R.A. No. 9337, which became effective on November 1, 2005 and R . A . N o . 9361.
Imposition of Tax
levied at e a c h stage only on the value added at o n e point. At

the manufacturer's level, the tax is applied on the sale price of
the manufacturer.
(2) T h e v a l u e - a d d e d tax (VAT) is a multi-stage or multi-

point sales tax as it is collected at e a c h stage or point in the
production and distribution process. However, although the tax
is levied at all stages, their total value is subject to tax once and
o n c e only, so that the a m o u n t of tax collected would be equal
to that of a single, first-stage tax on original sales. This is said
to be m o r e equitable than the former sales tax.
T h e former s u b s e q u e n t turnover tax w a s also a multi-point

sales tax applicable to all sales s u b s e q u e n t to original sales.
12. Techniques of computing the value-added tax. There
are at least three (3), namely:
(1) Addition method. Here, the tax is applied on the
value a d d e d to a product w h i c h includes all payments made
at e a c h stage in t h e f o r m of w a g e s , salaries, rents, interests,
profits, and other inputs;
(2) Tax credit method. Under this a p p r o a c h , the value-
a d d e d tax rate is applied on the total sale price without any
deduction w h a t s o e v e r ; a n d f r o m the tax arrived at (tentative
tax), are d e d u c t e d all previous tax p a y m e n t s on purchases
m a d e . In other w o r d s , t h e tax is applied only to the value
a d d e d by the taxpayer, that is, to the excess of his/its sales
over his/its p u r c h a s e s f r o m other business taxpayers. This is
also k n o w n as the "invoice m e t h o d . " T h e r e are no tax credits
for any t a x - e x e m p t business purchaser, a n d , of course, for the
final consumer; and
(3) Cost-deduction or cost-subtraction method. In this
case, the value-added tax rate is applied on the difference
between the gross selling price or gross value of the taxable
article and the cost of raw materials utilized by the taxpayer
which have b e e n previously subject to tax.
T h e former single-stage tax on original sales was essentially
a gross product type of VAT which used the credit system for
calculating the tax from manufacturer, producer, or importer.
T h e Tax Code in Section 105 has adopted the tax credit
method in computing the value-added tax due. The former
original sales tax w a s already in the nature of a value-added tax
employing the tax credit approach whereby taxes paid on raw
materials used in manufacture were credited against the sales
10 THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. 105
ANNOTATED
tax due. Both the tax credit and cost deduction approaches
amount to the same thing, but the tax credit approach entails a
separate itemization of the tax on all invoices, and this reduces
opportunities for tax evasion.
13. VAT not an entirely new concept of business taxation.
VAT is just another form of tax levied on a wide range of goods,
properties and services. Specifically, it simply means tax on the
value added by every seller, etc. to his purchases, etc. of goods,
properties, and services. Since taxes on goods, properties and
services are not new, the concept of VAT is not entirely unfamiliar in
the Philippines.
(1) Before July 1, 1978, the sales tax imposed on
manufacturers w a s c o m p u t e d by first determining the a m o u n t
of taxable sales, and s e c o n d , by multiplying the taxable sales
by the appropriate rate of tax. Taxable sales w e r e c o m p u t e d
by deducting the cost of raw materials used in manufacturing
finished articles from the selling price of s u c h finished articles.
In other w o r d s , the excess of the selling price over the cost of
raw materials represents a very crude f o r m of value a d d e d by
3
the manufacturer on such cost of raw materials.
Below is an e x a m p l e of h o w the sales tax w h i c h is a crude
form of VAT w a s c o m p u t e d before July 1, 1978.
S u p p o s e a manufacturer p u r c h a s e d raw materials at
P60,000. He converted the s a m e into finished products w h i c h
he sold for P100,000. T h e sales tax is c o m p u t e d as follows:
Sales P100,000
Less: Cost of raw materials 60,000
Total P40.000
Tax d u e at 1 0 % P4,000
3
"In the Philippines, the value-added system of sales taxation has long been
in existence, albeit in a different mode. Prior to 1978, the system was a single-stage
tax computed under the 'cost deduction method' and was payable only by the original
sellers. The single-stage system was subsequently modified, and a mixture of the 'cost
deduction method' and 'tax credit method' was used to determine the value-added tax
payable. Under the 'tax credit method,' an entity can credit against or subtract from
the V A T charged on its sales or outputs the V A T paid on its purchases, inputs and
imports.
It was only in 1987, when President Corazon C. Aquino issued Executive Order
No. 273, that the V A T system was rationalized by imposing a multi-stage tax rate of
0% or 10% on all sales using the 'tax credit method."' ( A b a k a d a Guro Party-List vs.
Ermita, 469 S C R A 10 [2005].)
Imposition of Tax
This m e t h o d of c o m p u t i n g the sales tax is known as the "cost

deduction m e t h o d " b e c a u s e the cost of goods sold (P60,000) is
d e d u c t e d f r o m the sales price (P100,000) in arriving the value-
a d d e d on w h i c h the tax is c o m p u t e d .
(2) On July 1, 1978, by virtue of Pres. Decree No. 1358,

the law w a s a m e n d e d by introducing the so-called "tax credit
m e t h o d " of c o m p u t i n g the sales tax. Subsequently, Pres.
Decrees No. 1705 a n d No. 1773 e m p o w e r e d the President to
impose, u p o n r e c o m m e n d a t i o n of the Minister of Finance, a
v a l u e - a d d e d tax on s e c o n d sale of any article, the tax to be
c o m p u t e d on t h e cost-deduction m e t h o d . This power w a s
never exercised by t h e President; instead, he issued Pres.
Decree No. 1991 w h i c h i m p o s e d in 1985 a 3% turnover tax on
all s e c o n d sales w h i c h w a s later replaced by a turnover tax of
1.5% on all s u b s e q u e n t sales by Pres. Decree No. 2006.
Under t h e tax credit m e t h o d , the tax on sales is first

c o m p u t e d by multiplying total sales by the appropriate rate
of t h e tax. T h e n the a m o u n t of the tax on purchases on raw
materials w h i c h w a s p a s s e d on by the supplier to the seller is
credited against (deducted from) the sales tax and the difference
represents t h e sales tax (or VAT) payable. Theoretically, both
m e t h o d s will result in the s a m e a m o u n t of tax revenue assuming
the s a m e rate is used on the s a m e g o o d s since the s u m of all
the values a d d e d at all stages are equal to the retail selling
price of the g o o d s . Below is an illustration of how the tax w a s
c o m p u t e d under the tax credit m e t h o d .
A s s u m i n g t h e s a m e a m o u n t of sales and purchases in
the previous e x a m p l e and a tax rate of 10%, the sales tax is
c o m p u t e d under the tax credit method in the following manner:
Sales P100,000
1 0 % Sales tax P10,000
Purchases P60.000
1 0 % Tax on purchases 6,000
Sales tax payable P 4,000
Considering that the tax credit method of calculating the

sales tax is one of the essential features of the VAT, the former
system of taxing manufacturers may be considered "VAT-like"
tax a restricted or limited form of pre-retail VAT imposed only
ANNOTATED
on first sellers, i.e., manufacturers, producers and importers.

(BIR Primer on VAT, pp. 2-4.)
14. Types of VAT. The VAT is applied only to the value added
by the seller, that is, to the excess of his sales over his purchases.
It is collected by the tax credit method. Each business pays the
output tax on its taxable sales during the preceding quarter (see
Sec. 114[B].) but less a credit for the VAT paid by it on its purchases
from VAT-registered persons.
There are three w a y s (see No. 7.) under which the tax may be
computed by three different methods by subtraction, by credit, or
by addition:
(1) Under the gross product type, only the input tax on
purchases of raw material g o o d s for sale or for conversion
into other finished g o o d s for sale is allowed as tax credit in
determining tax liability;
(2) Under the consumption type, all input taxes on all
business purchases, including supplies, capital g o o d s or
equipment, and services can be credited; and
(3) Under the income type, w h i c h differs f r o m t h e other
types in that the input tax on capital g o o d s allowed as tax credit
is amortized over the depreciable life of said g o o d s .
T h e Tax C o d e (Sec. 110[A].) a d o p t e d t h e c o n s u m p t i o n type

and the income type in c o m p u t i n g and collecting the VAT.
Our VAT system w h i c h is invoice-based (see Sec. 113.) is

basically a c o n s u m p t i o n type VAT a n d , in g e n e r a l , follows the
"destination principle" or "cross-border doctrine." (see A n n o t a -
tion No. 34 under Sec. 108.)
15. Differences between former crude form of VAT and present

VAT. T h e differences lie in:
(1) Coverage or scope. T h e present VAT covers

all persons e n g a g e d in the business of selling g o o d s and
services, including manufacturers, producers or importers a n d
subsequent sellers, s u c h as w h o l e s a l e distributors, traders
and retailers, lessors of property, as well as contractors a n d
brokers. Under the former s y s t e m , the sales tax w h i c h w a s
c o m p u t e d under the tax credit s y s t e m w a s applicable only to
original sellers manufacturers, producers and importers.
Subsequent sellers subject to the cumulative 1.5% turnover tax
w e r e not entitled to claim tax credit for sales taxes p a s s e d on to
Imposition of Tax
t h e m by preceding sellers or suppliers. Sellers of services were

subject to percentage on gross receipts at variable rates.
(2) Extent of tax credit allowable. Under the former
s y s t e m , t h e tax credit w a s allowed only to be claimed by
manufacturers, producers and importers (original sellers) and
it w a s limited only to t h e sales, millers, and excise taxes on
purchases of raw materials. Under t h e present VAT method of
taxation that relies on sales invoices or official receipts (see
Sec. 110[A, 1], 113[A, B].), not only original sellers but also
s u b s e q u e n t sellers are entitled to claim the tax credit on value-
a d d e d tax paid on p u r c h a s e s of raw materials, supplies, capital
e q u i p m e n t a n d services m a d e in the course of the taxpayer's
trade or business. T h e only tax for w h i c h no credit would be
allowed w o u l d be that collected on sales m a d e to households
or ultimate c o n s u m e r s , rather than to t h e business.
(3) Number of rates. T h e present VAT has only two

rates: 0% a n d 1 2 % (formerly 10%) in contrast to the former
s y s t e m w h e r e the sales tax consisted o f 3 0 % , 2 0 % , 1 0 % , and
0% for original sellers a n d 1.5% for subsequent sellers. (Ibid.,
pp. 4-5.)
Zero-rated sales are considered taxable sales but subject

to zero-rate.
16. Advantages of VAT. T h e following have been given:
(1) It m a k e s the sales tax system more equitable because:
(a) It is i m p o s e d only on the value added by the
seller, etc. thereby avoiding the cascading effect ("tax on
t a x " shifted) of t h e former sales tax system, particularly
t h e s u b s e q u e n t sales tax by avoiding double or multiple
taxation of the s a m e g o o d s , properties, or services, the
value of w h i c h w e r e previously subjected to VAT;
(b) It is generally applicable to all persons and trans-
actions, thereby establishing a wider tax base and spread-
ing the burden of paying the tax; and
(c) It is imposed at a uniform rate, thereby equalizing
the tax burden.
(2) It has a built-in self-policing feature which will ensure
proper collection of the tax at all stages of distribution (see
Sec. 108.), since tax payments are based on the output tax
(VAT) and the input tax (tax credits) as supported by receipts,
ANNOTATED
thereby providing a more accurate audit trail or evidence for

BIR monitoring purposes. Furthermore, it will encourage
purchasers to d e m a n d accurate receipts to accumulate more
tax credits. It will thus minimize tax evasion;
(3) It is simple and consistent, having only two (2) tax rates
( 0 % and 12%) in place of the four (4) tax rates ( 0 % , 1 0 % , 2 0 %
and 30%) imposed under the former system depending upon
the classification of the articles; and
(4) It is, therefore, easy to administer and to comply with,
and expected to generate large revenues.
17. Meaning of certain terms. A s used in the law:
(1) Person refers to any individual, trust, estate, partnership,
corporation, joint venture, cooperative or association.
(2) Taxable person refers to any person liable for the
payment of value-added tax, w h e t h e r or not registered in
accordance with Section 2 3 6 .
(3) VAT-registered person refers to any person w h o is
registered as a VAT taxpayer under Section 2 3 6 . His status as
a VAT registered person shall continue until t h e cancellation of
such registration.
(4) Taxable sale refers to t h e sale, barter, e x c h a n g e , a n d /

or lease of g o o d s or properties including transactions " d e e m e d
s a l e " and the performance of service for a consideration, all of
which are subject to tax under Sections 106 a n d 108 of t h e Tax
Code. (Sec. 4 . 1 0 5 - 1 , C V R . )
18. Requisites for liability. For VAT to be c h a r g e d (other than
on imports), the following conditions must be satisfied:
(1) T h e r e must be a sale, etc. in the Philippines;
(2) T h e sale, etc. must be of taxable g o o d s , properties, or
services; and
(3) T h e sale must be m a d e by a taxable person in the

course or furtherance of his/its business.
19. Persons liable. This is provided in Section 105. Note that
while the importation of g o o d s m a y be for business or non-business
use, the sale, etc. of g o o d s , properties, and services must be m a d e
in the course of trade or business.
(1) G o v e r n m e n t entities a n d instrumentalities including

g o v e r n m e n t - o w n e d or controlled corporations, and nonstock,
Imposition of Tax
nonprofit organizations (par. 3.) are subject to VAT if in the

course of trade or business they sell, etc., goods or properties,
or render services, or w h e t h e r for business or not, import
goods.
(2) T h e r e is no automatic exemption from value-added

tax registration requirements of local government units. For
as long as a g o v e r n m e n t entity sells, barters, exchanges,
leases g o o d s , properties or renders services in the course of
trade or business, it is required to register as a VAT taxpayer.
Accordingly, if the local g o v e r n m e n t falls within the provision
of Section 105, it is required to register as a VAT taxpayer;
otherwise, it is not. (BIR Ruling No. 0 6 0 - 2 0 0 0 , Nov. 08, 2000.)
(3) T h e sale by a company, a dealer of scrap materials, of

a d a m a g e d vessel p u r c h a s e d by it f r o m an insurance company,
as scrap in the c o u r s e of its business is subject to the 1 0 %
VAT. (Sec. 106[A].) But t h e sale of the vessel by the insurance
c o m p a n y w h i c h insured t h e vessel and acquired custody of the
s a m e is not subject to VAT as s u c h sale w o u l d only be incidental
to its insurance and underwriting services. (BIR Ruling No. 224,
Nov. 2 9 , 1990.)
(4) Similarly, the sale of scrap vessels by a company

e n g a g e d as c o m m o n carrier (which is subject to carrier's tax
under Sec. 15 a n d not subject to VAT) is not subject to VAT
b e c a u s e such sale of scrap vessels is merely incidental to the
shipping business. But sale of fully depreciated construction
e q u i p m e n t by a VAT-registered single proprietor engaged in
the construction business and lease of construction equipment
w h i c h transactions, being inherently related to taxpayer's
construction business, are subject to VAT pursuant to Section
106(A). (VAT Ruling No. 025, March 11, 1992.)
Note: T h e fund-raising activity consisting of the sale of
raffle tickets by a religious, charitable, etc. organization (see
Sec. 30[E].) is not a business activity contemplated by Section
9 9 . (BIR Ruling No. 2 3 8 , Dec. 19, 1990.)
(5) A non-stock, non-profit corporation or organization
deriving income principally from contributions is exempt from
V A T However, if it engages in any of the taxable activities
stated in Section 105, it will b e c o m e liable to VAT. (VAT Ruling
No. 048-03, Dec. 1, 2003.) It is exempt only from direct taxes
such as income tax, and this exemption cannot be extended
to indirect taxes like VAT. Thus, its purchases of goods and
THE NATIONAL INTERNAL R E V E N U E CODE Sec. 105
ANNOTATED
services (as well as importation of goods) from VAT registered

(or VAT-registerable) suppliers are subject to VAT. (VAT Ruling
No. 005-09 and No. 007-09, April 22, 2009.)
(6) In general, all persons liable to the VAT include those
(except those specifically exempt under Sec. 109.) formerly
liable to pay the taxes replaced by the VAT. A n y person falling
under Section 105 is liable for the payment of VAT, whether or
not registered in accordance with Section 236.
20. All sellers of goods, properties, and services w h o s e
aggregate gross annual sales or receipts e x c e e d P1.5 Million will
be covered by the VAT, unless such sales are specifically exempt.
(a) Certain sales of g o o d s and services are either zero-
rated or e x e m p t e d from the VAT. By aggregate gross annual
sales is meant the total gross sale of all taxable operations
and activities of one taxpayer. For e x a m p l e , if a taxpayer is
e n g a g e d in selling taxable g o o d s , and operating a repair s h o p
and tailoring shop, the aggregate gross annual sales is t h e total
annual sales of these activities. (BIR Primer on VAT, p. 6.)
(b) A joint venture for t h e p u r p o s e of undertaking

construction projects (e.g., residential/commercial d e v e l o p m e n t
of lots) is not a taxable corporation under Section 22(B) of t h e
Tax C o d e . T h e assignment by the o w n e r to developer of the
latter's share in the d e v e l o p e d lots under a m e m o r a n d u m of
sharing is not subject to VAT since t h e owner, by contributing
his property neither sells, barters or e x c h a n g e s g o o d s or
properties nor renders any service subject to VAT. But the
subsequent disposition by the co-venturers of t h e areas
allocated to t h e m shall be subject to creditable withholding tax
( C W T ) or capital gains tax (CGT, as t h e c a s e m a y be, and to
VAT and d o c u m e n t a r y s t a m p tax under Section 196. T h e VAT is
based on the gross selling price ( G S P ) or t h e fair market v a l u e
(FMV) of the properties, w h i c h e v e r is higher. (BIR Ruling No.
DA-326-08, Oct. 2 2 , 2008.)
(c) Receipt by a condominium corporation of d u e s f r o m

its t e n a n t / m e m b e r s used solely for administrative e x p e n s e s do
not form part of its gross i n c o m e . R e i m b u r s e m e n t of costs with
no mark-up or profit element, for utility c h a r g e s paid on behalf
and for the account of the t e n a n t s / m e m b e r s shall not f o r m part
gross receipt subject to VAT, b e c a u s e they are not charges for
sales of g o o d s or services. (BIR Ruling No. D A - 3 3 6 - 0 8 , Oct.
23, 2008.)
Imposition of Tax
21. "In the course of trade or business." T h e phrase

is restricted to activities or affairs w h e r e profit is the purpose or
livelihood is the motive. ( C o m m . of Internal Revenue vs Court of
Appeals, 242 SCRA 289 [1995].)
(1) T h e intended transfer of assets of a subsidiary, other
than inventories of taxable g o o d s , to a proposed branch, is not
in the course of trade or business; neither is it incidental thereto
if the s a m e is just an isolated transaction and does not follow its
primary function. (BIR Ruling N o . 165-99, Oct. 21, 1999.)
(2) R e v e n u e derived by a non-stock, non-profit domestic
corporation f r o m " m e m b e r s h i p d u e s , annual dues and
contributions" is e x e m p t f r o m VAT. (BIR Ruling No. 005-00,
J a n . 27, 2000.)
(3) A representative office is a non-resident foreign corpo-
ration not e n g a g e d in any income-generating business in the
Philippines. Since it d o e s not e n g a g e in any income-generating
activity, it is not subject to i n c o m e tax, a n d , consequently, it is
e x e m p t f r o m t h e filing of the corporate income tax return. It is
e x e m p t f r o m VAT as it is not e n g a g e d in any income-generating
activity and it merely enables its overseas head office to
maintain s o m e p r e s e n c e in the Philippines. T h e exemption from
VAT applies only to the direct output VAT of the representative
office a n d not to the indirect VAT which may be passed on to it
by its suppliers of g o o d s a n d services. (BIR Ruling No. DA-529-
09, Sept. 10, 2009.)
T h e law contemplates "the regular conduct or pursuit of a
c o m m e r c i a l or an e c o n o m i c activity," regardless of whether or
not the entity is profit-oriented and liability attaches even in the
a b s e n c e of profit attributable to the transaction, (see C o m m . of
Internal R e v e n u e vs. Court of A p p e a l s , 329 SCRA 237 [2000].)
SEC. 106. Value-added Tax on Sale of Goods or Proper-

ties.
i A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor: Provided, That the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
18
ANNOTATED
(i) Value-added tax collection as a percentage of Gross

Domestic Product (GD) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1 1/2%)." (As
amended by R.A. No. 9337.)
(1) The term "goods or properties" shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
(a) Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design
or model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films,
films, tapes and discs; and
(e) Radio, television, satellite transmission and cable
television time.
The term "gross selling price" means 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. The excise tax, if
any, on such goods or properties shall form part of the gross selling
price.
(2) The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
"The philosophy behind these alternative conditions has been explained thus:
"1. V A T / G D P > 2.8% The condition set for increasing V A T rate to 12% have economic
or fiscal meaning. If V A T / G D P is less than 2.8%, it means that government has weak
or no capability of implementing the V A T or that V A T is not effective in the function
of the tax collection. Therefore, there is no value to increase it to 12% because such
action will also be ineffectual. 2. Nat'l Gov't Deficit/GDP > 1.5% The condition set for
increasing V A T when deficit/GDP is 1.5% or less means the fiscal condition of govern-
ment has reached a relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the V A T rate since the fiscal
house is in a relatively healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the V A T rate." ( A b a k a d a Guro Party List vs.
Ermita, 469 S C R A 10 [2005].)
Imposition of Tax
(a) Export Sales. The term "export sales" means:

(1) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or
its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyer's
goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales exceed sev-
enty percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas
(BSP);
(5) Those considered export sales under Executive Order
No. 226, otherwise known as the Omnibus Investments Code
of 1987, and other special laws; and
(6) The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or international
air transport operations. (As amended by R.A. No. 9337.)
(b) Foreign Currency Denominated Sale. The phrase
"foreign currency denominated sale" means sale to a nonresident
of goods, except those mentioned in Sections 149 and 150,
assembled or manufactured in the Philippines for delivery to
a resident in the Philippines, paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under
special laws or international agreements to which the Philippines
is a signatory effectively subjects such sales to zero-rate.
(B) Transactions Deemed Sale. The following transactions
shall be deemed sale:
THE N A T I O N A L I N T E R N A L R E V E N U E C O D E Sec. 106
20
ANNOTATED
(1) Transfer, use or consumption not in the course of business

of goods or properties originally intended for sale or for use in the
course of business.
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the
VAT-registered persons; or
(b) Creditors in payment of debt.
(3) Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such retirement or
cessation.
(C) Changes in or Cessation of Status of a VAT-registered
Person. The tax imposed in Subsection ( A ) of this Section shall
also apply to goods disposed of or existing as of a certain date if
under circumstances to be prescribed in rules and regulations to
be promulgated by the Secretary of Finance, upon recommendation
of the Commissioner, the status of a person as a VAT-registered
person changes or is terminated.
(D) Sales Returns, Allowances and Sales Discounts. The
value of goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-registered person may be
deducted from the gross sales or receipts for the quarter in which a
refund is made or a credit memorandum or refund is issued. Sales
discount granted and indicated in the invoice at the time of sale and
the grant of which does not depend upon the happening of a future
event may be excluded from the gross sales within the same quarter
it was given.
(E) Authority of the Commissioner to Determine the Appropriate
Tax Base. The Commissioner shall, by rules and regulations
prescribed by the Secretary of Finance, determine the appropriate
tax base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection (B) hereof, or
where the gross selling price is unreasonably lower than the actual
market value.
ANNOTATION
1. Rate and base of tax on sale of goods or properties.

Every sale, barter, or e x c h a n g e , or transaction d e e m e d as sale of
goods or properties, including g o o d s subject to excise taxes (see
Imposition of Tax
Sec. 129, par. 1.) except as provided in Section 109(e, f), is subject
to a VAT.
(1) T h e rate of tax is n o w 1 2 % based on gross selling price

or gross value in m o n e y of the g o o d s or properties. However,
the sales m e n t i o n e d in Section 106(A, 2) are subject to zero
percent (0%). Taxable g o o d s include capital g o o d s (see Sec.
110[A, 1, v].) irrespective of the date of acquisition of properties.
(Sec. 5, Rev. R e g s . No. 10-94.) Sale of real properties, including
residential house/lot, held primarily for sale to customers or
held for lease in t h e ordinary c o u r s e of trade or business of the
seller shall be subject to VAT. (see Sec. 4-106-3, CVR.)
(2) Receipts derived f r o m the sale of blocked television

time w h i c h consists in buying a n d selling TV airtime, are not
subject to t h e VAT, b e c a u s e the activity does not involve the
rendering of any service or e n g a g i n g in the sale of goods which
m e a n s only m o v a b l e or tangible objects. (BIR Ruling No. 184,
M a y 4, 1988.) Note: T h e y are n o w subject to the VAT under
Section 106(A, 1, e).
(3) Under Section 106, there must be a sale, barter, or

e x c h a n g e of g o o d s or properties before any VAT may be levied.
So services rendered for a fee e v e n on reimbursement-on-
cost basis only a n d without realizing profit are also subject to
VAT. In the case, however, of services rendered by advertising
c o m p a n i e s , paid for by the taxpayer evidenced by a VAT invoice
receipt (see Sec. 110[A, 1].), using its affiliate's dole-out or
assistance in view of the taxpayer's dire or adverse economic
conditions, in the a m o u n t equivalent to the latter's advertising
e x p e n s e but the affiliate never received any goods, properties,
or service f r o m the taxpayer, the subsidy is not subject to VAT;
since there is no sale, barter or e x c h a n g e in the subsidy given.
While the reimbursement by the affiliate may be considered
as income of the taxpayer, a n d , therefore, subject to income
tax, the s a m e cannot be subject to VAT. ( C o m m . vs. Sony
Philippines, Inc., G.R. No. 178697, Nov. 17, 2010.)
(4) In computing the VAT payable or excess input VAT, the

basis is the total output tax during the period (month or quarter)
less total allowable input tax during the same period. The
allowable input tax includes a carry-over of the excess input
tax from the preceding period in addition to those derived from
current purchases. Advanced VAT payment and VAT withheld
by authorized VAT withholding agent are likewise allowable
22
ANNOTATED
as tax credits from VAT payable/excess input VAT. (A-9, Rev.

Memo. Order No. 6-2003.)
(5) The transfer of shares in exchange for shares in
another corporation pursuant to Section 40(c)(2) is not subject
to VAT pursuant to Section 4.106-8(b)(1) of C V R . (Appendix
"S".)
(6) Inherent in the VAT system is the payment of output
tax on sales, etc. minus input taxes (tax credits) on business
expenditures, (see Sec. 110.) T h e only person w h o does not
get a tax credit for the VAT he has paid is the consumer. In
practice, VAT is levied on the total transactions of a business
and, therefore, the first seller w o u l d be claiming a credit for VAT
paid on all his purchases.
2. Export sales. T h e y are zero-rated if m a d e by VAT-
registered persons (see Sec. 236.); if the person is not registered,
they are treated as e x e m p t sales. (Sec. 109[O].) It is given as an
incentive to exporters since they are entitled to claim VAT refunds
on their input taxes while their export sales are subject to zero rate
with no need to apply and secure prior approval for VAT zero-rating.
(1) X, a domestic multinational corporation, sold g o o d s

manufactured by it to Y, a foreign corporation created a n d
organized under the laws of H o n g k o n g with a representative
office in the Philippines, w h i c h , in turn; sells the g o o d s directly
to Z (Duty-Free Philippines), a d o m e s t i c corporation. X directly
delivers the g o o d s to Z. Y pays X the peso equivalent of t h e
g o o d s and Z pays Y in U.S. dollars in H o n g k o n g .
Under Subsection (A, 2, a, 1), t h e sale of g o o d s by X to

Y, notwithstanding the fact, that Y is a foreign corporation, is
subject to the 1 2 % v a l u e - a d d e d tax. Actual s h i p m e n t of t h e
goods from the Philippines to a foreign country is a precondition
of an export sale following t h e destination principle being
adhered to by our VAT S y s t e m .
As s u c h , the o n u s of taxation under our VAT s y s t e m is in

that country w h e r e g o o d s , property or services are destined
to, used or c o n s u m e d . This is t h e reason w h y under the VAT
law, goods, property or services destined to, used or c o n s u m e d
in the Philippines are subject to the 1 2 % VAT w h e r e a s those
destined, used or c o n s u m e d a b r o a d are subject to the zero
percent VAT. H e n c e , it is inconsequential for VAT purposes that
the sale is m a d e to a foreign person if the g o o d s w e r e actually
Imposition of Tax
delivered within the Philippines. (VAT Ruling 0 2 8 - 2 0 0 2 , April

30, 2002.)
(2) Sales of raw materials or packaging materials to an

export-oriented enterprise w h o s e export sales e x c e e d 7 0 % of
its total a n n u a l production (Subsec. [A, 2, a, 3].) are to be zero-
rated provided the seller complies with other requirements,
like registration with the Board of Investments (BOI) and the
Philippine E c o n o m i c Z o n e Authority ( P E Z A ) . A photocopy of
the p u r c h a s e invoice or receipt evidencing the VAT paid shall
be submitted together with the application for refund or tax
credit for input tax. T h e original copy of said invoice-receipt
shall be presented for cancellation prior to the issuance of a
tax credit certificate or refund. It is the entirety or totality of the
sales to s u c h enterprise that is to be zero-rated, not just the
percentage of t h e sale in proportion to the actual exports m a d e
by s u c h enterprise. (Atlas Consolidated Mining & Dev. Corp.
v s . C o m m . , 3 1 8 S C R A 3 8 6 [1999]; Ibid., 534 S C R A 51 [2007].)
(3) While an ecozone is geographically within the Philip-
pines, it is d e e m e d a separate c u s t o m s territory and is regarded
in law as foreign soil. Sales by suppliers f r o m outside the
borders of t h e e c o z o n e to this separate c u s t o m s territory are
d e e m e d as exports and treated as export sales. ( C o m m . vs.
Sekisui Jushi Philippines, Inc., 4 9 6 S C R A 2 0 6 [2006].)
(4) T h e O m n i b u s Investments C o d e of 1987 (Exec. Order
No. 2 2 6 , p a s s e d July 17, 1987.) prescribes that the following
sales, without actual exportation, are considered constructively
exported:
(a) Sales to b o n d e d manufacturing w a r e h o u s e s of
export-oriented manufacturers;
(b) Sales to registered Philippine Economic Zone
Authority (PEZA) enterprises;
(c) Sales to registered export traders operating bond-
ed trading w a r e h o u s e s supplying raw materials used in the
manufacture of export products; and
(d) Sales to diplomatic missions and other agencies
and/or instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products, whether
paid for in foreign currency or not. (Art. 23 thereof.)
Consistent with this policy on constructive export, PEZA
accepts and registers as export enterprises even companies
ANNOTATED
engaged in 100% constructive exportations, enjoying the same

incentives and privileges granted to direct exporters such as
income tax holidays (ITH) and tax and duty-free importation.
The BIR has ruled that sales of petroleum products to
foreign international marine vessels do not fall within the
definition of "export sales" as contemplated by law although
the transactions transpire in the Philippines since they do not
involve exportation as there is no actual shipment to a foreign
country. The transactions are subject to excise tax under
Section 148. (BIR Ruling No. 148-99, Sept. 17, 1999.)
(5) Section 3 of R M O No. 9-2000 provides that sales of

goods, properties, or services m a d e by a VAT-registered
supplier to a BOI-registered exporter shall be accorded
automatic zero-rating, i.e., without necessity of applying for and
securing approval of the application for zero-rating as provided
in Rev. Regs. No. 7-95. Since the buyer is a BOI-registered
enterprise and at the s a m e time a VAT-registered taxpayer,
while its supplier is likewise a VAT-registered company, t h e sale
by the supplier to the buyer is subject to zero-percent (0%) VAT
pursuant to Section 3 of R M O No. 9-2000, Dec. 2 2 , 2 0 0 0 .
(6) Sections 3(1 )(a) of R M C No. 74-99 provides that
sales m a d e by a VAT-registered supplier to a PEZA-registered
enterprise is subject to zero-percent (0%) VAT pursuant to
Section 106(A)(2)(a)(5) a n d Section 23 of R.A. No. 7 9 1 6 .
However, if the VAT registration of the PEZA-registered
enterprise is an erroneous registration, it is not entitled to input
taxes on its purchases f r o m its supplier. (Ibid.)
T h e law does not distinguish b e t w e e n g o o d s sold for

the personal c o n s u m p t i o n of special e c o n o m i c z o n e ( S E Z ) -
registered enterprises, or for use in manufacturing g o o d s for
export; or
(7) T h e supply of services to the SEZ-registered enter-

prises by VAT-registered persons in the C u s t o m s Territory is
entitled to the benefit of effectively zero-rated VAT, w h e t h e r
or not the SEZ-registered enterprise is export-oriented. T h e
effective VAT zero-rating of sale of services to SEZ-registered
enterprises by VAT-registered suppliers in t h e C u s t o m s Territory
is premised on the provisions of Section 108(B)(3), in relation
to the provisions of R.A. No. 7 2 2 7 and 7 9 1 6 , and the cross-
border doctrine of the VAT S y s t e m enunciated in VAT Ruling
No. 032-98. (VAT Ruling No. 0 4 9 - 0 3 , Dec. 1, 2003.)
Imposition of Tax
(8) Sales of goods to the a b o v e SEZ-registered enterprises

by VAT-registered suppliers in the Customs Territory, being
treated in laws as export sales, are entitled to the benefit of the
effectively zero-rated VAT, pursuant to Section 106(A)(2)(a)(5).
T h e statute d o e s not distinguish between goods sold for the
personal c o n s u m p t i o n of SEZ-registered enterprises, or for use
in manufacturing g o o d s for export; or if such goods form part of
the finished products. (Ibid.)
(9) A PEZA-registered 1 0 0 % export enterprise that is a
VAT t a x p a y e r enjoying a six-year income tax holiday (ITH), and
is e n g a g e d in t h e sale scrap items to local buyers, is subject
to VAT b e c a u s e t h e sale is not considered an export sale and
s u c h of activity is "in t h e ordinary course of trade or business."
(BIR Ruling No. D A - 6 0 3 - 0 6 , Oct. 10, 2006.) T h e sale of rejects
or scrap items that inevitably arise at certain stages of the
registered mining activity of a PEZA-registered enterprise is
likewise subject to VAT. It will continue to enjoy exemption from
income tax during the ITH and will thereafter be subject to the
5% preferential tax on gross income learned (GIE). (BIR Ruling
No. D A - 2 5 5 - 0 7 , April 2 5 , 2007.)
Note: S u b s e c t i o n (A)(2)(a)(6) is a d d e d by R.A. No. 9337.

3. Foreign currency denominated sales which are referred to
as "foreign e x c h a n g e d e n o m i n a t e d sales or internal exports" in LOI
No. 1355 are also zero-rated.
(1) T h e t e r m "internal e x p o r t " under P D . No. 1820 and
E.O. No. 765 (which are laws prior to E.O. No. 273.) does
not apply for VAT purposes, being inconsistent with the term
"export s a l e s " under the VAT law (subsequent law), which is
restricted to actual exports and foreign currency denominated
sales. Such being the case, the sale of domestic manufacturers
for the supply of articles for g o v e r n m e n t projects, financed from
the proceeds of foreign loans cannot be considered subject to
zero percent VAT.
Moreover, although loan agreements between the
government and foreign creditors may provide for the exemption
from taxes, charges and other levies of local contractors and
suppliers for projects utilizing proceeds from said loans, this
exemption privilege is extended only to the awardee of the
contract (i.e., the contractor) and not to suppliers of such
contractors. Hence, the sale of steel pipes to a contractor of
a government agency for a waterworks project funded by the
26
ANNOTATED
World Bank cannot be legally considered VAT exempt nor zero-

rated. (VAT Ruling No. 062, June 26, 1991.)
(2) Sales of locally manufactured or assembled goods
for household and personal use to Filipinos abroad and other
non-residents of the Philippines as well as returning Overseas
Filipinos under the Internal Export Program of the G o v e r n m e n t
paid for in convertible foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP) shall also be considered export sales. (Sec.
4.100.2[b], Rev. Regs. No. 7-95.)
(3) G o o d s purchased from local suppliers and subsequently

sold by duty-free shops to returning Filipinos, balikbayans, or
other non-residents, which are paid for in acceptable foreign
currency can be considered foreign currency d e n o m i n a t e d
sales subject to 0% VAT. Similarly, g o o d s purchased f r o m
foreign suppliers and subsequently sold by duty-free s h o p s
also qualify for VAT zero-rating pursuant to t h e "destination
principle" which provides that g o o d s a n d services are t a x e d
only in the country w h e r e they are c o n s u m e d . T h u s , exports
are zero-rated b e c a u s e t h e c o n s u m p t i o n is m a d e outside t h e
Philippines. (BIR Ruling No. DA 2 8 6 - 0 8 , Oct. 13, 2008.)
(4) Sales by a domestic corporation (DC) to its non-resident
clients for delivery to Philippine residents w h i c h are paid for
in US currency through credit card charging are c o n s i d e r e d
as "foreign currency-denominated sales" and are subject to
0% VAT rate pursuant to subsection (A)(2)(b). T h e u n u s e d
excess input VAT credits of t h e DC f r o m its local p u r c h a s e s
which are directly attributable or ratably a p p o r t i o n e d to its z e r o -
rated sales, can be claimed for refund or tax credit pursuant to
Section 112. (BIR Ruling No. 119-06, Mar. 16, 2006.)
4. Zero-rated sale of goods or properties. S u c h sale by a

VAT-registered person is a taxable transaction for VAT purposes,
but shall not result in any output tax. However, the input tax on
purchases of goods, properties, or services related to s u c h z e r o -
rated sale shall be available as tax credit or refund. (Sec. 4.106-5,
CVR.)
Under Subsection (A, 2, c), it is not the person or entity

enjoying tax-exemption privilege under special law or international
agreement which is given the privilege of enjoying zero-rating
under the VAT law, but the sales (by suppliers) to such persons
or entities which may be subject to the zero-rate. (BIR Ruling No.
Imposition of Tax
0 7 7 , M a r c h 4, 1988.) T h e fact that the Philippines is a signatory to

an international a g r e e m e n t is of no m o m e n t w h e r e such agreement
d o e s not provide for any tax e x e m p t i o n .
T h e following are e x a m p l e s of zero-rated sales:
(1) Executive Order No. 161 provides that goods sold
directly to the A s i a n D e v e l o p m e n t Bank shall not be subject to
sales tax, a n d services rendered under contracts entered into
with t h e said bank shall not be subject to contractor's tax. In
this case, t h e sale of g o o d s and services to Asian Development
Bank are effectively zero-rated. (Ibid.)
(2) Pursuant to Section 2 of Executive Order No. 581 (as

a m e n d e d by Exec. O r d e r No. 587.), the sale of gold to the
Central Bank is c o n s i d e r e d export sale; hence, the sale of gold
tailings is subject to VAT at 0% pursuant to Section 106(A, 2, a),
if t h e seller is a VAT-registered p e r s o n ; otherwise, as exempt,
pursuant to Section 1 0 9 ( 0 ) . But the service fee charged to
c u s t o m e r s for processing their gold tailings is subject to VAT
under Section 108(A). He is subject to income tax on any gain
derived f r o m t h e sale to the Central Bank of gold tailings and
t h e service f e e for the processing of the s a m e . (BIR Ruling No.
2 2 4 , Nov. 2, 1989.)
(3) Section 3 of Executive Order No. 4 2 0 provides that the
J o h n Hay Special E c o n o m i c Z o n e shall have all the applicable
incentives of the Special E c o n o m i c Z o n e (SEZ) under Section
12 of R.A. No. 7 2 2 7 (Bases Conversion and Development Act
of 1992) and there applicable incentives granted in the Export
Processing Z o n e , the O m n i b u s Investment Code of 1987, the
Foreign Investment Act of 1 9 9 1 , and new investment laws that
m a y be e n a c t e d . (BIR Ruling No. 085-98, June 2, 1998.)
5. Effectively zero-rated sale of goods or properties. It
refers to the local sale of g o o d s and properties by a VAT-registered
person to a person or entity granted indirect tax exemption under
special laws or international agreement.
(1) Although not involving actual export, it is considered
as "constructive export," such as sale to export-oriented
enterprises, sale to persons e n g a g e d in international shipping
or air transport operations, foreign currency denominated sale,
and sale to tax-exempt persons or entities. Except export sale
and foreign currency denominated sale, other cases of zero-
rating required prior application and approval by the BIR for
effective zero-rating. (Sec. 4.106-6, CVR.)
28
ANNOTATED
(2) Sales of Goods to international organizations and

d i p l o m a t s which/who are tax-exempt under special laws or
international agreements are effectively zero-rated. (BIR Ruling
No. DA-286-08, Oct. 13, 2008.)
(3) The sale of goods and services to persons e n g a g e d in
international shipping are subject to VAT zero-rating only if the
sale pertains to, or is directly attributable to, the transport of
goods and passengers from a port in the Philippines directly
to a foreign port, (see Sec. 4.106-5, C V R ; Sec. 106 [A, 2, a,
6].) Products such as projectors, printers, and photocopying
machines do not pertain to, or are not directly attributable
to, the transport of g o o d s and passengers from a part in the
Philippines directly to a foreign port. H e n c e , their sale of such
goods even to persons e n g a g e d in international shopping
company is subject to 1 2 % VAT. (VAT Ruling No. 0 0 8 - 0 8 , A u g .
11, 2008.)
6. Non-eligibility for VAT zero-rating of automobile sales to

ECOZONE entities. Sales of ordinary automobiles to entities
registered with PEZA, S B M A , Clark D e v e l o p m e n t Authority, and
other E C O Z O N E registered enterprises are not entitled to VAT
zero-rating.
"Pursuant to Rule XV, Section 1(D) of the Rules a n d Regulations
issued by P E Z A to implement the Special E c o n o m i c Z o n e Act of
1995 (R.A. No. 7916.), e x e m p t i o n s f r o m t h e imposition of v a l u e -
added tax are being allowed only with respect to importation of
specialized vehicles and other transportation e q u i p m e n t that are
directly related to the registered activity. For e x a m p l e , a registered
construction firm m a y import specialized vehicles s u c h as pay
loaders, graders, etc. without the p a y m e n t of the v a l u e - a d d e d tax.
However, exemption d o e s not e x t e n d to importation of service

vehicles since the s a m e are not directly related to its registered
activity as a construction contractor. As a matter of policy, P E Z A
is not giving tax incentives for the p r o c u r e m e n t of vehicles or
transportation e q u i p m e n t that are not directly c o n n e c t e d with the
firms' registered activities in view of the a b s e n c e of an effective
monitoring system to determine w h e t h e r t h e s e vehicles are indeed
being utilized by registered enterprises in the conduct of their
registered activities. It appears, therefore, that with the issuance of
the aforementioned ruling, the BIR is more liberal in the grant of tax
incentives to locators inside the P E Z A z o n e . " (Rev. M e m o . Cir. No.
25-99; see BIR Ruling No. 0 7 4 - 9 9 , J u n e 4, 1999.)
Imposition of Tax
7. Royalty payments made by a BOI-registered enterprise to

a nonresident foreign licensor. T h e Board of Investments (BOI)
Certification that the buyer is a manufacturer-exporter w h o s e
products are 1 0 0 % e x p o r t e d , a n d furnishing a copy of the s a m e
to the supplier, are m a n d a t o r y requirements in order to avail of
the automatic VAT zero-rating under R M O No. 9-2000. Royalty
p a y m e n t s m a d e by a BOI-registered enterprise to a nonresident
foreign licensor are subject to VAT.
(a) Under R M O No. 9-2000, it is required, a m o n g others,

that "the supplier must be VAT-registered" in order to qualify
for automatic VAT zero-rating treatment. Considering that the
recipient (i.e., m o t h e r c o m p a n y ) of the royalty is a nonresident
entity, p r e s u m a b l y it is not VAT-registered. Hence, said royalty
p a y m e n t is not c o v e r e d by R M O No. 9-2000. T h e said royalty
p a y m e n t is subject to VAT pursuant to Section 108.
(b) T h e rationale behind R M O No. 9-2000 is essentially the

s a m e as that of R M C No. 74-99 w h i c h treats royalty payments
by PEZA-registered enterprise to a nonresident foreign licensor
as VAT-exempt. T h e distinction, however, lies in the fact that
s u c h royalty p a y m e n t s are m a d e VAT-exempt under Section
109(q). On t h e other h a n d , there is no equivalent provision
in the Tax C o d e w h i c h e x e m p t s a royalty payment m a d e by
a BOI-registered manufacturer/producer (whose products are
100%-exported) to a nonresident foreign licensor. (BIR Ruling
No. 3 8 1 - 2 0 0 5 , Sept. 2 6 , 2005.)
8. Transactions taxable as sales. They are the following:

(1) Barter or exchange. It is a contract by which the
parties e x c h a n g e o n e c o m m o d i t y or article of property for
another (see 7 C.J. 931.);
(2) Sales upon previous orders. A contract for the
delivery at a certain price of an article which the vendor in the
ordinary course of his business manufactures or procures for
the general market, whether the s a m e is on hand at the time
or not, is a contract of sale. (Celestino Co & Co. vs. Coll., 99
Phil. 841.) But if the g o o d s are to be manufactured specially
for the customer and upon his special order (i.e., article would
not have been m a d e but for the agreement), and not for the
general market, it is a contract for a piece of work and not a
contract of sale (see Art. 1467, Civil Code; Inchausti and Co.
vs. Cromwell, 20 Phil. 345.);
ANNOTATED
(3) Leases and hiring agreements with option to buy.

In this case, the tax is based on the gross selling price of
the property and not on the installments periodically paid to
the seller. (BIR Ruling, Feb. 4, 1948; G e n . Cir. No. 4 4 4 , Dec.
2 1 , 1939; Manila Gas Corp. vs. Calupitan, 66 Phil. 646.) In
a case where the court found that the so-called contracts of
lease of "neon signs" installed by a taxpayer for his customers
were in reality contracts of sale between the taxpayer and his
customers, the taxpayer w a s held liable to pay deficiency sales
tax on the neon signs (see C h u Hoi Horn vs. C.T.A., L-22046,
Oct. 29, 1968.); and
(4) Transactions deemed sale. T h e s e are e n u m e r a t e d
in Subsection (B) above. Transfer of g o o d s not in the course
of business can take place w h e n the VAT-registered person
withdraws goods from his business for his personal use. (Sec.
4.106-7[a, 1], CVR.) T h u s , the t e r m "sale" is not limited to
commercial sales; it extends to transactions that are " d e e m e d "
sales.
9. Circumstances giving rise to "deemed sale" transactions.
The following circumstances shall, a m o n g others, give rise to
transactions " d e e m e d s a l e " for purposes of Section 106(B, 4 ) :
(1) C h a n g e of o w n e r s h i p of business. T h e r e is a c h a n g e
in the ownership of the business w h e n a single proprietorship
incorporates; or the proprietor of a single proprietorship sells
his entire business; and
(2) Dissolution of a partnership and creation of a n e w
partnership w h i c h takes over the business. (Sec. 4 . 1 0 6 - 7 [ a , 4 ] ,
Ibid.)
10. Appropriate tax base. T h e C o m m i s s i o n e r shall, by
regulations, determine the appropriate tax b a s e in c a s e s w h e r e
a transaction is d e e m e d a sale, barter or e x c h a n g e of g o o d s or
properties, or w h e r e the gross selling price is unreasonably lower
than the actual market value, (infra.)
11. Change in or cessation of status as a VAT-registered
person.
(1) Subject to tax. T h e v a l u e - a d d e d tax provided for

in Section 106 shall apply to g o o d s or properties originally
intended for sale or for use in business a n d capital g o o d s w h i c h
are existing as of the o c c u r r e n c e of the following:
(a) C h a n g e of business activity f r o m v a l u e - a d d e d

taxable status to e x e m p t status. An e x a m p l e is a VAT-
Imposition of Tax
registered person e n g a g e d in a taxable activity, like

wholesaler or retailer, w h o decides to discontinue such
activity a n d e n g a g e s instead in life insurance business or
in any other business not subject to value-added tax;
(b) A p p r o v a l of a request for cancellation of registration

d u e to reversion to e x e m p t status;
(c) A p p r o v a l of a request for cancellation of registration

d u e to a desire to revert to e x e m p t status after the lapse
of three (3) consecutive years f r o m the time of registration
by a p e r s o n w h o voluntarily registered in spite of being
e x e m p t under Section 109(2); a n d
(d) A p p r o v a l of a request for cancellation of registration

of o n e w h o c o m m e n c e d business with the expectation of
gross sales or receipts e x c e e d i n g P1.5 million but w h o
failed to e x c e e d this a m o u n t during the first 12 months of
operation. (Sec. 4.106-8[a], Ibid.)
(2) Not subject to output tax. T h e value-added tax shall

not apply to g o o d s or properties existing as of the occurrence
of the following:
(a) C h a n g e of control of a corporation by the acquisition

of t h e controlling interest of such corporation by another
stockholder or group of stockholders. Example: transfer of
property to a corporation in e x c h a n g e for its shares of stock
under Section 4 0 ( C , 2, 6, c);
(b) C h a n g e in t h e trade or corporate name of the

business; and
(c) Merger or consolidation of corporations. The un-
used input tax of the dissolved corporation as of the date of
merger or consolidation shall be absorbed by the surviving
or n e w corporation. (Sec. 4.106-8[b], Ibid.)
12. "Deemed sale "for VAT purposes of merchandise inventories
in cases of merger/consolidation of corporations. Pertinent portion
of BIR Ruling No. S34-263-97 (Oct. 16, 1997) reads: "Moreover, for
value-added tax purposes, the transfer of the respective assets,
including tangible and movable properties, by the 10 A B S O R B E D
C O R P O R A T I O N S to U S W C I pursuant to the merger shall not be
subject to the value-added tax, and any unused input tax of each of
the 10 A B S O R B E D C O R P O R A T I O N S as of the date of merger, will
be absorbed by U S W C I as the surviving corporation, pursuant to
THE N A T I O N A L INTERNAL R E V E N U E CODE Sec. 106
ANNOTATED
Section 5(b)(3) of the Revenue Regulations No. 5-87. (BIR Ruling

No. 063-93 dated January 10, 1993; BIR Ruling No. 472-93 dated
December 3, 1993.)"
The above BIR ruling has been revoked in Rev. M e m o . Cir. No.
19-19 (Feb. 25, 1999) as follows:
"It is provided therein that (a) the transferred assets, w h i c h
include the merchandise inventory of the absorbed corpora-
tions, 'shall not be subject to the value-added tax' and (b) that
the unused input taxes of the a b s o r b e d entities shall be trans-
ferred for the use or tax credit to the output tax of the surviving
corporation."
The Ruling in question enunciated a twin illegality. T h e

absorbed corporation, upon t h e merger, c e a s e s or retires f r o m
doing business, so that its m e r c h a n d i s e inventory transferred to
the surviving corporation, by clear provision of law, is " d e e m e d
s a l e " for VAT purposes. (Section 106[B][4], Tax R e f o r m Code.) T h e
unused input taxes of the a b s o r b e d corporations c a n n o t legally be
transferred to the surviving corporation for the latter's use as tax
credits to its output VAT. This could only be used as tax credit to
the VAT payments of the a b s o r b e d corporations and the s a m e is
not transferable to a party not privy to t h e contracts f r o m w h e r e t h e
input taxes arose. In other w o r d s , only t h e direct buyers of g o o d s /
services to w h o m the input taxes w e r e ' p a s s e d o n ' could avail of t h e
right to tax credit. Under the VAT law, t h e a b s o r b e d entity should
pay the VAT on the m e r c h a n d i s e inventory, t h e r e being a ' d e e m e d
sale' transaction, after tax crediting t h e c o r r e s p o n d i n g input t a x e s ,
with the right to claim refund, if t h e input e x c e e d s t h e output tax.
If the output tax is paid, this m a y be ' p a s s e d o n ' to the surviving
corporation for its use as tax credit. BIR Ruling No. S 3 4 - 2 6 3 - 9 7 is a
flagrant violation of the VAT law. x x x . "
13. T h e output tax equivalent to 1 2 % b a s e d on t h e m a r k e t

value of the g o o d s or properties d e e m e d sold is i m p o s e d at t h e time
of the occurrence of the transactions d e e m e d sale e n u m e r a t e d in
Section 106(B, 1, 2, 3). However, in t h e c a s e of retirement f r o m or
cessation of business under Section 106(B, 4), t h e tax base shall
be the acquisition cost or the current market price of the g o o d s or
properties whichever is lower. (Sec. 4.106-7[b], C R V . )
14. Selling price/gross selling price or gross value in money.

Selling price is the a m o u n t of consideration in a contract of sale
between the buyer and seller or t h e latest price of the sale w h i c h
Imposition of Tax
m a y include c a s h or property and evidence of indebtedness issued

by the buyer, excluding the VAT. (Sec. 4.106-4, CVR.)
Sub-sections (A, 1) a n d (D, 1) of Section 106 define "gross
selling price" for purposes of determining the VAT.
(1) G r o s s selling price is net of the VAT but shall include as
part thereof the excise tax, if any. T h e Commissioner of Internal
R e v e n u e is authorized to determine the appropriate VAT base
in the t w o c a s e s m e n t i o n e d in Subsection (E).
T h e gross selling price is considered unreasonably lower

than the actual market value if it is lower by more than 3 0 % of
the actual m a r k e t v a l u e of t h e s a m e g o o d s or properties of the
s a m e quantity a n d quality sold in the immediate locality on or
nearest the date of sale. (Sec. 4.106-7[b], CVR.)
(2) T h e excise tax, if any, on the g o o d s or properties shall
f o r m part of the gross selling price. (Sec. 106[A, 1].) This implies
that the g o o d s or properties u p o n w h i c h the VAT is being levied
are likewise subject to the excise tax. (see Sec. 129.)
In other w o r d s , if t h e selling price does not include excise
tax, it shall not f o r m part of the gross selling price for purposes
of c o m p u t i n g the VAT payable. T h u s , the gross selling price of
under b o n d alcohol sold by t h e distiller to the rectifier-permittee
d o e s not include excise tax b e c a u s e the condition of the bond
provides that t h e distiller will pay the excise tax on the finished
product w h i c h is rectified alcohol. Actual payment of the excise
tax on under bond alcohol takes place only upon the transfer of
the rectified alcohol f r o m the rectifier's tank to the compounder's
tank under B.I.R. supervision. (BIR Ruling No. 260, June 23,
1988.)
Subsequently, the BIR ruled that even if the withdrawal of
alcohol be under b o n d , i.e., without prepayment of the excise
tax (see Sec. 137.), still in the computation of the 10% VAT due
thereon, the gross selling price shall include the excise tax. This
is so because under the joint bond filed by the distiller and the
rectifier, the latter shall pay the excise tax due on the rectified
alcohol. Said alcohol is still subject to excise tax although under
Section 137, the tax is payable by the rectifier on the finished
product. (BIR Ruling No. 1 2 1 , June 25, 1990, revoking BIR
Ruling No. 260-88 and reviving BIR Rulings No. 156-88 and
166-88.)
BIR Ruling 121-1990 to the effect that the tax base upon
which the VAT due on under bond alcohol shall be computed
34 THE N A T I O N A L INTERNAL R E V E N U E CODE Sec. 106
ANNOTATED
should include the excise tax even if the s a m e has not yet
been paid by the distiller w a s , in turn, revoked by BIR Ruling
No. 75 (March 3, 1992) which reinstated BIR Ruling No. 260-
88. The main objection to the assessment is that since the
excise tax on under bond alcohol w a s not included in the price
invoiced by the seller-distiller, the purchaser cannot claim the
corresponding input tax on the c o m p o u n d e d liquor. From the
end of the seller, since it did not include excise tax in the billing,
it could not pass on the 1 0 % value-added tax to the purchaser;
thus, the problem of treating/recording a "phantom e l e m e n t " in
the selling price arises.
No revenue loss had actually resulted by observing
previous BIR Ruling No. 260-88 holding that the gross selling
price of under bond alcohol sold by distiller to the rectifier
should not include excise tax b e c a u s e t h e s a m e is not paid by
the distiller. Under the "catching-up" effect in the VAT s y s t e m ,
where a raw material, w h i c h is u n t a x e d , or not fully t a x e d ,
forms part of the finished product, t h e 1 2 % v a l u e - a d d e d tax on
the untaxed portion of the raw materials will catch-up with the
finished product upon sale thereof. This is so b e c a u s e no input
tax credit (on the untaxed portion of the raw material) could be
claimed against the output tax on the finished product.
(3) Gross selling price is defined in Subsection (A, 1)

(a) It has b e e n construed as the total a m o u n t of m o n e y
or its equivalent w h i c h the purchaser pays to t h e v e n d o r
to receive or get the g o o d s . (San Miguel Corp. v s . M u n .
Council of M a n d a u e , C e b u , L - 3 0 7 6 1 , July 11, 1973.)
(b) It includes not only the actual cost of the production
of the g o o d s and the profit a d d e d thereto by the v e n d o r to
m a k e up its mill or factory of the m e r c h a n d i s e , but also
upon e a c h a n d every incidental e x p e n s e {e.g., freight
insurance, etc.) taken into account c h a r g e d to a n d paid by
the v e n d e e , w h e t h e r or not the v e n d o r m a k e s additional
profit on these incidental items (American Rubber C o . v s .
Coll., L-2565, J u n e 30, 1975, citing J. A r a n a s , Annotations
and Jurisprudence on the N I R C , 1970 e d . , p. 219.), e v e n if
these a m o u n t s are separately billed or invoiced.
Note that what the law taxes is the sale of article, not its
manufacture. Manufacturing is not a business taxable in itself.
(4) W h e r e the consideration of a sale is not wholly in
money, as in a part-exchange or barter transaction, its value
Imposition of Tax
is the price (excluding VAT) that would have been charged in

an o p e n market sale for purely monetary consideration. (BIR
Primer on VAT, p. 8.)
(5) T h e VAT is b a s e d on the gross selling price of the goods

sold. T h e trade practice of giving g o o d s free to customers in
order to p r o m o t e sales efforts in the course of trade or business
is not c o n s i d e r e d a transaction deemed sale. (BIR Ruling No
2 4 5 , J u n e 6, 1988.)
(6) In the c a s e of the sale, barter or e x c h a n g e of real

property subject to VAT, gross selling price shall mean the
consideration stated in the sales d o c u m e n t or the fair market
value, w h i c h e v e r is higher. If the VAT is not billed separately
in the d o c u m e n t of sale, the selling price or the consideration
stated therein shall be d e e m e d to be inclusive of VAT.
T h e t e r m "fair m a r k e t v a l u e " shall m e a n market whichever

is the higher of:
(a) T h e fair m a r k e t value as determined by the
C o m m i s s i o n e r (zonal value), or
(b) T h e fair m a r k e t value as s h o w n in schedule of
values of the Provincial a n d City A s s e s s o r s (real property
tax declaration).
However, in the a b s e n c e of zonal value, gross selling
price refers to the market value s h o w n in the latest real
property tax declaration or the consideration, whichever is
higher. If the gross selling price is based on the zonal value
or market value of the property, the zonal or market value
should be d e e m e d to be exclusive of VAT. Thus, the zonal/
market value, net of the output VAT, should still be higher
than the consideration in the d o c u m e n t of sale, exclusive of
VAT. (Sec. 4.106-4, par. 2, CVR.)
(7) T h e VAT is imposed on the taxable sales of the seller.

Accordingly, the output VAT should be based on the gross sales
price appearing in the seller's VAT invoice and not the sales price
appearing in the VAT invoice of the customer. Corporations are
distinct persons; hence, an act of one corporation cannot be
legally assigned to another corporation. (VAT Ruling No. 076,
A u g . 7, 1991.)
(8) Any person otherwise required to register for VAT
purposes w h o fails to register shall also be liable to VAT on his
sale of taxable goods or properties or services as if he were a
ANNOTATED
VAT-registered person, but without the input tax credits for the
period in which he w a s not properly registered. (Sec. 9.236-
1[b], CRV.)
(9) Since invitation forms, programs and leaflets describing
the scope of a convention are without commercial value, they
do not have a "gross selling price" upon which the value-added
tax could be imposed. Such being the case, they are not subject
to VAT pursuant to Section 106. (BIR Ruling No. 5 3 1 , Nov. 8,
1988.)
15. Allowable deductions from gross selling price. T h e y
include the selling price of g o o d s or properties returned and not
resold; bona fide or regular sales discounts given at the time of
sale and are expressly indicated in the invoice and the grant of
which does not d e p e n d upon the happening of a future event. (Sec.
106[D].)
In case of sales of g o o d s or properties, the VAT is b a s e d on
the gross selling price or gross value in m o n e y of the g o o d s or
properties sold, bartered or e x c h a n g e d pursuant to Section 106.
While the law allows deduction of discounts f r o m gross sales, such
discounts must not be conditioned u p o n the s u b s e q u e n t h a p p e n i n g
of an event or fulfillment of certain conditions. It then follows that
discounts given, but the e n j o y m e n t of w h i c h is conditioned u p o n
the subsequent happening of an event or the fulfillment of certain
conditions i m p o s e d , m a y not be d e d u c t e d f r o m gross sales for VAT
purposes, e.g., a discount to be given if t h e p u r c h a s e price is paid
upon delivery or a discount to be given if the buyer p a y s within
seven (7) days after delivery. (VAT Ruling No. 0 6 8 , July 5, 1991.)
16. Billing of VAT in the invoices. Before, the seller includes
an amount intended to cover the VAT as a separate item in the
invoice, which VAT shall be based on t h e gross selling price less
the amount intended to cover the tax. If not billed separately, or is
billed separately but erroneously, the a m o u n t intended to cover the
VAT shall be considered as part of the gross selling price. T h u s ,
if the gross selling price is P5.000 with P 5 0 0 billed as a separate
item in the invoice, the 1 0 % VAT shall be b a s e d on P5.000. But if
the invoice states the gross selling price as " P 5 , 5 0 0 . 0 0 " or "P5.500
with 1 0 % VAT included," or P5.000 with VAT billed separately but
erroneously, the gross selling price shall be b a s e d on P5.500, or
P5.000 including the tax billed erroneously.
In any such case, the VAT shall be d e t e r m i n e d by multiplying

the gross selling price by the factor 1/11 or such factor as m a y be
Imposition of Tax
prescribed by regulations in c a s e of persons partially exempt under

special laws.
Before the a m e n d m e n t by R.A. No. 9337, the tax is computed

by multiplying the total a m o u n t indicated in the invoice (including
the tax) by 1/11 or dividing it by 11. By multiplying the total selling
price (with the VAT p r e s u m e d to h a v e b e e n included) by the factor
1/11, the result is the s a m e as multiplying t h e selling price excluding
the VAT by the actual VAT rate of 1 0 % . This is usually referred to as
5
the "tax inclusive b a s i s " of calculation.
Now, in a sale for g o o d s or properties, the VAT (output tax) is

c o m p u t e d by multiplying the gross selling price by the regular rate
( 1 2 % ) of VAT, a n d for sellers of services, by multiplying the gross
receipts by the regular rate ( 1 2 % ) of VAT. (Sec. 4.110-6, CVR.) In
the c a s e , however, of real property if the gross selling price is based
on t h e z o n a l v a l u e or m a r k e t value of the property, said value shall
be d e e m e d inclusive VAT. If t h e VAT is not billed separately, the
selling price stated in t h e sale d o c u m e n t shall be d e e m e d inclusive
of VAT. (Sec. 4 . 1 0 6 - 4 , Ibid.)
17. Sale by manufacturer to jobbers through its sales repre-

sentatives is subject to VAT. A manufacturer is subject to VAT
on its sales to j o b b e r s b a s e d on selling net price of trade discounts
granted and d e t e r m i n e d at t h e time of sale expressly indicated in
the invoice. A j o b b e r is subject to VAT on its sales m a d e by the
sales representatives to retailers a n d other outlets. T h e sales rep-
resentative of the manufacturer cannot issue retail order forms to
replace the sales invoice. Retail service f o r m may be issued but
there should be a corresponding sales invoice. This revokes n u m -
ber 3 of BIR Ruling No. 2 2 0 - 8 8 . (VAT Ruling No. 002, Jan. 3 , 1 9 9 2 . )
18. Sale and leaseback transaction in acquiring capital
equipment is subject to VAT. A sale and leaseback transaction
in acquiring capital e q u i p m e n t b e t w e e n a company/borrower and
a financing company, partakes of the nature of a sale of personal
6
R . A . N o . 7716 deleted the provisions allowing the billing of tax as a separate
item in the invoice. There is, however, no express prohibition in the law against bill-
ing the tax separately in the invoice. The B I R , however, has ruled that beginning
January 1,1996, the date when Rev. Regs. N o . 7-95 became effective (see Sees. 4.100-
6 and 4.104-4 thereof.), VAT-registered taxpayers are no longer given the option to
indicate the V A T as a separate item in the sales invoice/receipt. The gross amount
as written thereon is considered as already made inclusive of the V A T due thereon.
(Rev. Memo. Cir. No. 8-99.) Rev. Regs. N o . 8-99 even provides a penalty for "failure or
refusal to comply with the requirement, upon conviction, for each act or omission," of
"a fine of not less than P1,000 but not more than P50.000" and "imprisonment of not
less than two (2) years but not more than four (4) years."
38
ANNOTATED
property from the former to the latter. Hence, the borrower/company

is subject to VAT on its sale of said equipment pursuant to Sec.
106(A).
On the part of the financing company, rental received from its
leaseback transaction is not subject to VAT but subject to 5% gross
receipts tax since it is treated as part of its gross income under Title
V (Other Percentage Taxes) of the Tax C o d e . Besides, the lease
rental during the t e r m of the lease covers principal and interest
payment of the credit extended by the finance company. Such
being the case, the VAT on the sale of equipment, if taxable, is
passed on by the lessee/borrower shall be recorded by the finance
company as part of its e x p e n s e or cost. (VAT Ruling N o . 0 5 1 , M a y
29, 1991.)
19. Computation to arrive at the total sale of goods.
Cash Sales Pxxx
Add: Collections of accounts receivable Pxx
Collections of notes receivable xx
(on sale of goods)
Sales discounts g r a n t e d xx
Sales returns a n d a l l o w a n c e s xx
Bad debts written off xx
A c c o u n t s receivable, e n d i n g xx
Notes receivable, e n d i n g xx
Total receivables during t h e period Pxx
Less: A c c o u n t s receivable, beginning Pxx
Notes receivable, beginning xx xx
Sales on account for the period xxx
Total sales during t h e period Pxxx
(VAT Audit M a n u a l , Rev. Audit M e m o . Order N o . 1-99.)
20. Determination of the quantity and amount of goods actually

sold.
Units of finished g o o d s / m e r c h a n d i s e inventory,

beginning xxx
Add: Total units of g o o d s m a n u f a c t u r e d or

purchaser of m e r c h a n d i s e inventory xxx
Total units of g o o d s available for sale xxx
Imposition of Tax
Less: Units of Finished goods/Merchandise

inventory, e n d xxx
N u m b e r of units issued xxx
Less: S a m p l e s , destroyed or lost items xxx

N u m b e r of units sold during the period xxx
Multiply by a v e r a g e selling price per unit Pxxx
Total sales per audit Pxxx
(Ibid.)
2 1 . Determination of the taxable sale.

Total sales during the period Pxxx
Add: D e e m e d sales per audit xxx
Total sales per audit xxx
Less: Zero-rated sales Pxxx
E x e m p t Sales xxx xxx
G r o s s taxable sales Pxxx
Less: Sales returns a n d allowances xxx
Net taxable sales Pxxx
(Ibid.)
22. Computation of gross taxable receipts during the period.
Income or billings during t h e period Pxxx
Add: A c c o u n t s receivable, beginning Pxxx

Retention receivable, beginning xxx xxx
Total a m o u n t for collection xxx
Less: A c c o u n t s receivable, ending Pxxx
Retention receivable, ending xxx xxx
Collections of income a n d receivables xxx
Add: Deposits, a d v a n c e s and/or mobilization fee xxx
Gross receipts during the period xxx
Less: Gross receipts from exempt service Pxxx
Gross receipts from zero-rated
service xxx xxx
Taxable gross receipts Pxxx
(Ibid.)
40
ANNOTATED
23. Allocation of input tax between taxable and non-taxable

operations (figures assumed).
Sales:
From VAT operation P300.000
From non-VAT or exempt activity 200,000
Purchases which cannot be directly
attributed to taxable and e x e m p t activity 60,000
Input tax 6,000

Input tax on taxable operation
Total Input tax

Sales from taxable operation
input creditable to
Total sales (Taxable + tax VAT operation
non-VAT or e x e m p t activity)
Allowance
input tax = P300.000
x P6,000 = P3.600
credit P500.000
Thus:
Input tax P6.000
Less: Allowable input tax
credit attributable
to taxable operation 3,600
Unallowable input tax credit P2.400
attributable to e x e m p t activity.
(Ibid.)
2 4 . Sale of real property. Sale of real properties held primarily

for sale to c u s t o m e r s or held for lease in t h e ordinary c o u r s e of
trade or business of the seller shall be subject to VAT.
(1) In the case of sale of real properties on the installment

plan, the real estate dealer shall be subject to VAT on the
installment p a y m e n t s , including interests and penalties, actually
and/or constructively received by t h e seller.
(2) "Sale of real property on the installment p l a n " m e a n s

sale of real property by a real estate dealer, t h e initial p a y m e n t s
of which in the year of sale do not e x c e e d 2 5 % of t h e gross
selling price.
Imposition of Tax
(3) "Sale of real property by a real estate dealer on a

deferred p a y m e n t basis," not on the installment plan means
sale of real property, the initial payments of which in the year
of sale e x c e e d 2 5 % of the gross selling price. T h e transaction
shall be treated as cash sale which m a k e s the entire selling
price taxable in m o n t h of sale.
(4) "Initial p a y m e n t s " m e a n s payment or payments which

the seller receives before or upon execution of the instrument of
sale and p a y m e n t s w h i c h he expects or is scheduled to receive
in c a s h or property (other than e v i d e n c e of indebtedness of the
purchaser) during the year w h e n the sale or disposition of the
real property w a s m a d e . It covers any d o w n p a y m e n t made and
includes all p a y m e n t s actually or constructively received during
t h e year of sale, the a g g r e g a t e of w h i c h determines the limit set
by law.
(a) Initial p a y m e n t s do not include the a m o u n t of mort-

g a g e on the real property sold except w h e n such mortgage
e x c e e d s the cost or other basis of the property to the seller,
in w h i c h c a s e , t h e excess shall be considered part of the
initial p a y m e n t s .
(b) A l s o e x c l u d e d f r o m initial payments are notes or
other e v i d e n c e s of indebtedness issued by the purchaser
to the seller at the time of the sale.
(5) Pre-selling of real estate properties by real estate
dealers shall be subject to VAT in accordance with the rules
prescribed a b o v e .
(6) "Real estate dealer" includes any person engaged in
the business of buying, developing, selling exchanging real
properties as principal and holding himself out as a full or part-
time dealer in real estate.
(7) Transmission of property to a trustee shall not be
subject to VAT if the property is to be merely held in trust for the
trustor and/or beneficiary. However, if the property transferred
is one for sale, lease or use in the ordinary course of trade
or business and the transfer constitutes a completed gift,
the transfer is subject to VAT as a d e e m e d sale transaction
pursuant to (Section 106[B]) The transfer is a completed gift
if the transferor divests himself absolutely of control over the
property, i.e., irrevocable transfer of corpus and/or irrevocable
designation of beneficiary. (Sec. 4.106-3, CVR.)
ANNOTATED
(8) Real property acquired through a dacion en pago in

payment of a debtor's loan obligation does not result in the
acquisition of an ordinary asset; hence, the sale thereof is
subject to the 6 % capital gains tax. The real property is merely
acquired by the creditor in payment of the debtor's obligation.
It is not acquired with the intention of selling or leasing it to
customers in the course of trade or business. T h e sale is
exempt from VAT since the real property is not primarily held
for sale to customers or held for lease in the ordinary course of
trade or business. (BIR Ruling No. 305-05, July 2 2 , 2005.)
(9) Real property which w a s never used in the trade

or business, or is not held for lease or sale to customers,
depreciated, or included in a c o m p a n y ' s inventory or stock in
trade, and reflected in its financial statement as an investment
is considered a capital asset and its s u b s e q u e n t sale is subject
to 6% capital gains tax ( C G T ) and d o c u m e n t a r y stamp tax
(DST), and is e x e m p t from VAT. (BIR Ruling No. D A - 6 5 3 - 0 6 ,
Nov. 7, 2006; No. 4 7 - 0 7 , J a n . 3 1 , 2 0 0 7 ; No. 197-07, Mar. 3 0 ,
2007; No. 573-07, Oct. 2 6 , 2007.) Note: Section 1 0 9 ( 1 , P)
clearly provides without exception or qualification that "sale of
real properties not primarily held for sale to c u s t o m e r s or held
for lease in the ordinary course of trade or business," shall be
exempt from VAT.
25. Sale of refined sugar. Rev. R e g s . No. 13-2008 consoli-

dated the regulations on a d v a n c e VAT on t h e sale of refined sugar,
including those m a d e by a duly accredited a n d registered agricul-
tural cooperative of g o o d standing.
SEC. 107. Value-added Tax on Importation of Goods. -

( A ) In General. There shall be levied, assessed and collected
on every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of Customs
in determining tariff and customs duties, plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody: Provided,
That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based
on the landed cost plus excise taxes, if any: Provided, further, That
the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1 , 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied:
Imposition of Tax

Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
the previous year exceeds one and one-half percent (1 1/2%).
(B) Transfer of Goods by Tax-exempt Persons. In the case of
tax-free importation of goods into the Philippines by persons, entities
or agencies exempt from tax where such goods are subsequently
sold, transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees or recipients shall be
considered the importers thereof, who shall be liable for any internal
revenue tax on such importation. The tax due on such importation
shall constitute a lien on the goods superior to all charges or liens on
the goods, irrespective of the possessor thereof.
ANNOTATION
1. Taxes replaced by VAT on importation. T h e VAT on

importation replaces the " a d v a n c e sales t a x " payable by regular
importers w h o import articles for sale or as raw materials in the
manufacture of finished articles for sale, and the "compensating
t a x " payable by all persons w h o import, whether in the course of
trade or business or not, articles for their o w n use or consumption.
2. Rationale for imposing VAT on importation of goods.
T h e rationale for imposing c o m p e n s a t i n g tax applies likewise to the
VAT on importation of g o o d s for non-business use.
(1) T h e purpose is to place persons purchasing from
merchants in the Philippines on a more or less equal basis for
tax purposes with those w h o buy directly from foreign countries.
T h e theory is that the former bears the burden of the local sales
tax because it is shifted to t h e m as part of the selling price of
the local merchants, while the latter do not.
(2) T h e tax also places casual importers on equal footing
with established merchants w h o pay sales tax on articles
imported by t h e m and other taxes, (see Report of the Tax
C o m m i s s i o n , Vol. 2, p. 205; Panay Elec. Co. vs. C o m m .
[Unrep.], 97 Phil. 979.)
T h e VAT on importation is a tax on the privilege of importing
goods. It shall be paid by the importer prior to the release of the
imported goods from customs custody.
ANNOTATED
3. Rate and base of tax on importation of goods. Under

Subsection (A), the 1 2 % VAT is based:
(1) on the total value used by the Bureau of Customs in
determining tariff and customs duties which value shall include
(a) dutiable value in pesos of the goods or articles, (b) the
customs duties, (c) excise taxes, if any, and (d) other charges
(e.g., wharfage dues, brokerage fees, etc.) payable by the
importer; or
(2) on the landed cost plus excise tax w h e r e the customs
duties are determined on the basis of the quantity or volume
of the imported goods. Landed cost consists of the invoice
amount, customs duties, freight, insurance and other charges.
If the goods imported are subject to excise tax, the excise tax
shall form part of the tax base.
If the goods imported are subject to excise tax, the excise,

tax shall form part of the tax base. T h e s a m e rule applies to
technical importation of g o o d s sold by a person located in
a Special Economic Z o n e to a c u s t o m e r located in c u s t o m s
territory. (Sec. 4.107-6[a], C V R . )
4. Applicability and payment. T h e rates prescribed under
Section 107(A) shall be applicable to all importations w i t h d r a w n
from customs custody.
T h e value-added tax on importation shall be paid by t h e
importer prior to the release of such g o o d s f r o m c u s t o m s custody.
"Importer" refers to any person w h o brings g o o d s into t h e
Philippines, whether or not m a d e in t h e c o u r s e of his t r a d e or
business. It includes n o n - e x e m p t persons or entities w h o acquire
tax-free imported g o o d s f r o m e x e m p t p e r s o n s , entities or a g e n c i e s .
(Sec. 4.107.1[b], Ibid.)
5. Cases when tax applicable.
(1) Importations are subject to VAT, whether donated
or purchased. S u c h being the c a s e , importation of articles
consigned to charitable, religious, cultural or social welfare
corporations or institutions, e.g., church bells a n d spares
consigned to a parish c h u r c h , are not e x e m p t but are subject to
VAT pursuant to Section 107. This, however, does not apply to
transactions w h e r e the recipient is g r a n t e d special e x e m p t i o n
privileges, i.e., exemption from indirect taxes like VAT, under its
charter or provided for under the Constitution. (VAT Ruling No.
057, June 2 1 , 1 9 9 1 , as supported by VAT Ruling No. 169-89.)
Imposition of Tax
(2) If a c h e m i c a l , e.g., xylene, is used as a raw material in

the manufacture of pesticides, its importation is exempt from
VAT pursuant to Section 109(c), now [A]. However, if it is not
used as a raw material in the manufacture of pesticides by the
importer himself a n d u s e d for agricultural purposes as duly
certified by the Fertilizer a n d Pesticides Authority (FPA), its
importation is subject to VAT in a c c o r d a n c e with Section 1 0 1 .
(VAT Ruling No. 0 5 8 , J u n e 2 6 , 1 9 9 1 , which clarified BIR Ruling
No. 092-91.)
(3) A non-profit organization is e x e m p t only from income

tax on i n c o m e received by it as a social welfare organization
under Section 3 0 ( G ) , a n d is not e x e m p t from other taxes.
As s u c h , imported relief g o o d s and e q u i p m e n t received as
donation f r o m a b r o a d by s u c h organization are subject to VAT
pursuant to Section 107. (VAT Ruling No. 0 7 2 , July 17, 1991.)
(4) E q u i p m e n t of a foreign contractor which is brought into
t h e Philippines to be used in discovering and locating oil and
petroleum basins in t h e Philippines is subject to compensating
tax (now VAT) despite t h e fact that the s a m e will be re-exported
after t h e work. (BIR Ruling, April 30, 1974.)
(5) Imported cotton is subject to VAT pursuant to Section
107. If t h e imported cotton is processed into textile by textile
mills and subsequently sold to g a r m e n t manufacturers, the sale
is also subject to VAT in the s a m e m a n n e r as the sale of textile
manufactured out of locally-produced cotton. (VAT Ruling No.
0 8 7 , Sept. 4, 1991.)
( 6 ) Sale of g o o d s c o n s u m m a t e d outside the territorial
jurisdiction of the Philippines b e t w e e n a Philippine supplier and
Philippine buyer is not subject to VAT. However, as importer
of the g o o d s , the Philippine buyer is subject to VAT on the
importation of the g o o d s . (BIR Ruling No. 264-2005, June 17,
2005.)
6. Cases when tax not applicable. No VAT is payable on
importation of g o o d s which are specifically exempted under Section
109(1).
(1) Deficiency advance sales tax (now VAT) arising from
recomputation or adjustment of the landed cost of imported
articles (not total value used by the Bureau of Customs x x x )
is not subject to surcharge and interest because the deficiency
tax is not the result of a delinquency but of final liquidation by
the Bureau of Customs. (BIR Ruling, Sept. 4, 1974.)
ANNOTATED
(2) Imported articles which are merely to replace those

returned by reason of their defective quality, are no longer
subject to the advance sales tax (now VAT). T h e advance sales
tax (now VAT) paid on the original importation can be applied
against the tax due on the replacement shipment, provided that
no additional amount is e x p e n d e d for the importation of the
replacement and that the replacement shipment is the s a m e
kind of articles as those re-exported to the foreign supplier.
(BIR Ruling, July 2, 1974.)
(3) Exported merchandise which w e r e shipped back to the
Philippines on account of rejection by port authorities in the
port of destination or by the buyers abroad are not subject to
the VAT because the shipment d o e s not constitute importation,
(see BIR Rulings No. 0 7 8 , J u n e 19, 1986; No. 178, Sept. 17,
1986.)
(4) W h e r e the imported g o o d s are for viewing and display

only and the s a m e shall be shipped out of the Philippines
after the exhibition is over, the importation is e x e m p t f r o m
VAT. Importation connotes p e r m a n e n c y a n d for g a i n , either for
personal use or for business. However, the exhibitor is required
to put up a bond equivalent to the v a l u e of the imported g o o d s
which shall a n s w e r for VAT and excise tax, if any, in t h e event of
failure to ship back the g o o d s after the exhibition. (BIR Ruling
No. 021-00, March 2 8 , 2000.)
( 5 ) Although the Tax C o d e i m p o s e s VAT on every

importation of g o o d s , the return s h i p m e n t of g o o d s or articles,
which had b e e n previously exported but rejected by the
consignee a b r o a d , is not an importation; h e n c e , not subject to
VAT. (BIR Ruling No. 104-05, Mar. 3 1 , 2 0 0 5 )
7. Credit for VAT paid. Only the VAT, a n d not any other kind
of import duties and charges paid on imported raw materials, c a n
be claimed as input tax credit against output tax liabilities. (Sec. 10,
Rev. Regs. No. 5-87.)
(1) A n y Tax Credit Certificate ( T C C ) received covering

the VAT paid on imported materials, w h e t h e r issued by the
BIR, BOI or B O C shall reduce the BOI-registered enterprise's
available input tax credit (pursuant to Sec. 11 of Rev. R e g s . No.
5-87)
(2) The T C C issued by the BOI d o e s not f o r m part of the

taxable gross income of the grantee pursuant to Section 21
Imposition of Tax
of E.O. No. 2 2 6 . Upon receipt thereof and in accordance with

Rev. R e g s . No. 9-89, the book entries shall be:
Input Tax xxx

(BIR Ruling No. 0 3 0 , M a y 29, 1991.)
Note: Rev. M e m o . Order No. 22-97 (Aug. 30, 2007)

prescribes policies a n d procedures, in addition to those stated
in Rev. M e m o . Order No. 16-2007, in the audit of input taxes
arising f r o m the importation of g o o d s .
8. In connection with Subsection (B) Transfer by tax-exempt

person of imported goods to non-exempt persons. It has been
ruled that the use of a t a x - e x e m p t vehicle by the surviving spouse of
a d e c e a s e d t a x - e x e m p t person d o e s not m a k e such spouse liable to
the p a y m e n t of c o m p e n s a t i n g tax (now VAT on importation), unless
o n e sells the vehicle to a n o n - e x e m p t purchaser. (BIR Ruling, May
2 4 , 1976.)
9. When importation begins and ends. Importation begins

w h e n the carrying vessel or aircraft enters the jurisdiction of the
Philippines with intention to unload therein. Importation is d e e m e d
terminated u p o n p a y m e n t of the duties, taxes and other charges
d u e u p o n the articles, or secured to be paid, at a port of entry and
the legal permit for withdrawal shall have been granted. (Sec. 1202,
Tariff and C u s t o m s Code.)
(1) Under the concept of bonded manufacturing ware-
house, the importation of articles brought to such warehouse
for processing and re-exportation is not yet complete; hence,
no tax c o n s e q u e n c e results as long as the imported article
remains therein within the prescribed period of time. Where the
processing is not d o n e within said w a r e h o u s e , then the pro-
cessing is said to be d o n e in the so-called "customs territory."
Since the importation in such case is d e e m e d complete, the
s a m e shall be subject to VAT pursuant to Section 107(A), which
provides that the tax shall be paid prior to (or upon) release
from customs custody. (BIR Ruling No. 062, April 17, 1990.)
( 2 ) T h e general rule is that the sale of goods by a

VAT-registered entity is subject to VAT. A customs-bonded
manufacturing w a r e h o u s e is removed from the jurisdiction of
the Philippine Customs Territory; hence, payment of internal
revenue taxes shall be made only upon withdrawal or removal
directly customs custody. Similarly, the Industry Specific
ANNOTATED
Bonded Warehouse (ICBW) is considered removed from

Philippine Customs Territory; therefore, shipment or delivery of
imported goods thereto is not subject to V A T In addition, since
the ICBW leases space only to companies selling exclusively to
customers located in PEZA-registered Ecozones and industrial
parks, the importation of products and/or supplies that are
merely consigned and stored in an ICBW is not subject to VAT,
since by the very nature of the consignment into the ICBW,
these articles are not intended to enter Customs Territory. (BIR
Ruling No. 544-2004, Nov. 3, 2004.)
( 3 ) Pursuant to Section 4.100-2(a)(5), of Rev. Regs.
No. 7-95 (now Sec. 4.106-5[a,5], Rev. Regs. No. 16-2005.),
importations through a c u s t o m s - b o n d e d manufacturing w a r e -
house of raw materials and spare parts used in the manufacture/
assembly of products for export are not subject to VAT. T h e
customs-bonded manufacturing w a r e h o u s e is r e m o v e d f r o m
the jurisdiction of the Philippine c u s t o m s territory; t h u s , t h e raw
materials and/or spare parts are d e e m e d not to have entered
the customs territory a n d , therefore, are never introduced into
Philippine c o m m e r c e . H e n c e , imported articles brought into
the bonded manufacturing w a r e h o u s e w h i c h are used as raw
materials for finished products that are eventually exported are
exempt from VAT. (BIR Ruling No. 4 8 3 - 2 0 0 4 , Sept. 10, 2004.)
(4) Importation by a domestic corporation of raw materials

through its c u s t o m s - b o n d e d w a r e h o u s e is not subject to VAT
because said importation is still b e y o n d the taxing authority of
the Philippine G o v e r n m e n t . T h e withdrawal by the corporations
from its registered c u s t o m s - b o n d e d w a r e h o u s e of g o o d s w h i c h
are being held in trust in behalf of its foreign c o m p a n y principals
for delivery to the latter's ultimate buyers is not c o n s i d e r e d a
sales transaction. If, however, the foreign c o m p a n y principal
of said corporation sells t h e g o o d s to c u s t o m e r s located in t h e
customs territory, i.e., outside the E C O Z O N E S , t h e s a m e is
subject to VAT. (BIR Ruling No. D A - 4 8 3 - 0 4 , Sept. 10, 2 0 0 4 )
Note: Department of Finance ( D O F ) Order No. 5 1 - 2 0 1 0

prescribes the guidelines to be o b s e r v e d by the BIR covering
requests for tax and duty e x e m p t i o n s on imported g o o d s . W h e r e
the grant of tax a n d duty e x e m p t i o n is based on a condition
that the g o o d s imported are not locally available or cannot be
sourced locally in reasonable quantity, quality a n d price, the
application for exemption should be a c c o m p a n i e d by s w o r n
Imposition of Tax
certifications to that effect from three (3) local distributors of

such products w h o are a w a r e of the relevant industry practices.
10. Law in force at time of payment applicable. As it is in the
will of the importer or t h e o w n e r of t h e imported goods to choose
the m o m e n t for making p a y m e n t of the internal revenue tax from
its arrival at the port of entry until immediately before its withdrawal
f r o m the c u s t o m h o u s e , the law in force w h e n the payment is made
is the one that should prevail, for h u m a n voluntary acts are governed
by the laws in force at the time of their performance, unless there
is a legal provision to t h e contrary. ( L u z o n Brokerage Co., Inc. vs.
P o s a d a s , 51 Phil. 3 0 5 ; BIR Ruling No. 110, March 18, 1988.)
SEC. 1 0 8 . Value-added Tax on Sale of Services and Use or

Lease of Properties.
( A ) Rate and Base of Tax. There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent ( 1 0 % ) of gross
receipts derived from the sale or exchange of services, including
the use or lease of properties: Provided, That the President, upon
the recommendation of the Secretary of Finance, shall, effective
January 1 , 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied. (As
amended by R.A. No. 9337.):
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent or 2 4/5%); or
the previous year exceeds one and one-half percent (1 1/2%).
The phrase "sale or exchange of services" means the perfor-
mance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or ren-
dered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or distribu-
tors of cinematographic films; persons engaged in milling, process-
ing, manufacturing or repacking goods for others; proprietors, op-
erators or keepers of hotels, motels, resthouses, pension houses,
inns, resorts; proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who trans-
port goods or cargoes for hire and other domestic common carriers
ANNOTATED
by land relative to their transport of goods or cargoes; common car-

riers 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; sales of electricity by generation companies, transmis-
sion companies, and distribution companies; services of franchise
grantees of electric utilities, telephone and telegraph, radio and tele-
vision broadcasting and all other franchise grantees except those
under Section 119 of this Code; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity
and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the
physical or mental faculties, (as amended by R.A. No. 9337.) The
phrase "sale or exchange of services" shall likewise include:
(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(2) The lease or the use of, or the right to use of any industrial,
commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial
knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or enjoyment
of any such property, or right as is mentioned in subparagraph (2) or
any such knowledge or information as is mentioned in subparagraph
(3);
(5) The supply of services by a nonresident person or his
employee in connection with the use of property or rights belonging
to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
(6) The supply of technical advice, assistance or services ren-
dered in connection with technical management or administration
of any scientific, industrial or commercial undertaking, venture,
project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines.
Imposition of Tax
The term "gross receipts" means the total amount of money or

its equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for the
services performed or to be performed for another person, excluding
value-added tax.
(B) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VAT-registered
persons shall be subject to zero percent (0%) rate:
(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 Bangko Sentral ng Pilipinas (BSP); (a)
(2) Services other than those mentioned in the preceding
paragraph, rendered to a person engaged in business conducted
outside the Philippines or to a nonresident 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 Bangko Sentral ng Pilipinas (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 (0%) rate;
(4) Services rendered to persons engaged in international
shipping or international air transport operations, including leases
of property for use thereof;
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
(6) Transport of passengers and cargo by air or sea vessels from
the Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable sources 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, (as amended by
R.A. No. 9337.)
ANNOTATED
ANNOTATION
1 . Amended: Subsection (B, 2) the phrase "which is

remitted inwardly to the Philippines" after "currency" is deleted.
2. Percentage taxes replaced by VAT on sale of services.
The VAT on services replaced the percentage taxes on certain milled
products (e.g., rope, sugar, coconut oil, palm oil), on contractor,
proprietors or operators of dockyards and others, on brokers, on
cinematographic film lessors or distributors, and on lessors of
personal property.
3. Rate and base of tax on sale of services and use or lease
of properties. Sale or e x c h a n g e of services in the Philippines,
including the use or lease of properties is subject to a 1 2 % VAT
based on gross receipts except the three (3) types of services
mentioned, Subsection (B) which are subject to 0 % .
"Sale or e x c h a n g e of services" and "gross receipts" are defined
in Subsection (A). Excepted are these a m o u n t s e a r m a r k e d for
payment to unrelated third (3rd) party or received as r e i m b u r s e m e n t
for advance payment on behalf of another w h i c h do not r e d o u n d to
the benefit of the payor. (Sec. 4 . 1 0 8 - 4 , C V R . )
4. Rendition of service in the course of trade or business.
The enumeration of the "sale or e x c h a n g e of services "subject to
VAT is not exhaustive. T h e w o r d s "including" a n d "shall likewise
include," indicate that the e n u m e r a t i o n is by w a y of e x a m p l e only.
Service has b e e n defined as "the art of doing s o m e t h i n g
useful for a person or c o m p a n y for a f e e " or "useful labor or w o r k
rendered by one person to another." ( C o m m . v s . A m e r i c a n Express
International, Inc., 4 6 2 S C R A 197 [2005].) A person is subject to
VAT only if he renders service "in the c o u r s e of trade or b u s i n e s s . "
(Sec. 105.) This implies that the rendering of service is d o n e with
regularity and continuity, and not just occasionally.
( 1 ) As an indirect tax on services, its m a i n object is t h e
transaction itself or, more concretely, the p e r f o r m a n c e of all
kinds of services c o n d u c t e d in t h e c o u r s e of trade or business
in the Philippines. T h e s e services must be regularly c o n d u c t e d
in the country; undertaken in "pursuit of a c o m m e r c i a l or an
economic activity;" for a valuable consideration; a n d not e x e m p t
under the Tax C o d e , other special laws, or any international
agreement. ( C o m m . vs. A m e r i c a n Express International, Inc.,
supra.)
(2) Since the VAT has replaced, a m o n g others, the

contractor's and broker's taxes effective January 1, 1988,
Imposition of Tax
the buying and selling of TV airtime constitutes the rendition

of service to others for a consideration subject to VAT. The
sale of a specific TV airtime contemplates the use by the
contractor-buyer of television broadcast facilities of the station
o w n e r and/or availment of the services of the latter wherein the
consideration is m e a s u r e d by the length of time allowed to the
buyer to use TV broadcast facilities. (BIR Ruling No 134 July
16, 1 9 9 1 ; Sec. 108[A, 8].)
(3) A customs broker who transports goods of customers

from the customs premises to their place of establishment for a
fee is subject to t h e 1 0 % (now 12%) VAT on the gross receipts
he derives f r o m the sale of his services. (Sec. 108[A].) However,
he is no longer subject to the 3% c o m m o n carriers tax imposed
by Section 117. (BIR Ruling No. 2 5 5 , Sept. 8, 1992.)
(4) A domestic corporation engaged in physical fitness

program and maintains physical fitness equipment and
facilities, a n d gives instruction to e a c h m e m b e r on how to
use the different e q u i p m e n t and facilities to attain physical
fitness, a n d for such services and facilities receives monthly
m e m b e r s h i p fees a n d one-time entrance fee, is not subject to
the VAT i m p o s e d by Section 108(A) as such activities do not
constitute sale of services but it is subject to income tax under
Section 27(A). (BIR Ruling No. 0 7 1 , April 2, 1989.)
(5) Film producers/owners/importers who share their
gross sales on a percentage basis with owners or operators of
moviehouses as well as those w h o rent or lease moviehouses
on a flat rental basis for exhibition of their films are subject to
VAT. In the latter case, the transaction is, in reality, a lease
of cinematographic films. If the rule is otherwise, there will
be no more occasion to impose the VAT thereby resulting in
t r e m e n d o u s loss of revenue to the government, for to evade
payment, the film producers, etc. can make it appear that they
are renting or leasing the moviehouses on a flat rental basis.
(BIR Ruling No. 096, M a y 4, 1989.)
(6) A U.S. company that established a Philippine branch to
render engineering and marketing support consultancy services
should be subject to 3 2 % (now 30%) corporate income tax as
a resident foreign corporation and also subject to VAT. It is also
subject to e x p a n d e d withholding tax. (BIR Ruling No. 237, Dec.
1990.)
(7) Under Subsection (A, 6), an entity that renders servic-
es to its affiliated companies and receives payments for such
ANNOTATED
assistance although on a reimbursement-of-cost basis, is sub-

ject to VAT on such services rendered. (BIR Ruling No. 010-98,
Feb. 5, 1998.)
(8) The sale of services by stock transfer agents to
stockbrokers through clearing houses is subject to VAT pursuant
to Section 108(A). The VAT, being an indirect tax, can be passed
on by the agents to the clearing house (which is registered as
a bank; hence, a non-VAT entity) and o n c e shifted, forms an
additional and integral part of the cost of g o o d s and/or services
that the non-VAT entity has to shoulder. (VAT Ruling No. 077,
Aug. 21, 1991.)
(9) O n e e n g a g e d in the business of door-to-door delivery

service to the Philippines is subject to VAT under Section 108(A).
Any fees or charges paid for services performed outside t h e
Philippines, say, fees for the transport or carriage of g o o d s f r o m
foreign port (e.g., U.S.A.) b o u n d for the Philippines shall not
form part of the taxable receipts. On t h e other h a n d , any fees
or charges paid for services performed within the Philippines,
say, fees for the transport of g o o d s f r o m the Philippines to a
foreign port (e.g., U.S.A.) shall be included in the taxable gross
income. (BIR Ruling No. DA-114-99, Dec. 6, 1999.)
(10) T h e business of leasing a space on public utility
vehicles for the purpose of putting up advertising boards, which
are then sublet or offered to the general public for a fee, involves
a sale of service. H e n c e , c o m p a n i e s e n g a g e d in said business
activity is subject to VAT pursuant to Sections 105 a n d 108.
This applies regardless of w h e t h e r t h e c o m p a n y m a k e s the
advertising paraphernalia by itself or subcontracts production
of the s a m e to outside contractors. (BIR Ruling N o . 0 4 4 , M a y
29, 1991.)
(11) A domestic corporation that provided technical,

research, m a n a g e m e n t a n d technical assistance to its affiliated
c o m p a n i e s and received payments on a reimbursement-of-cost
basis, without any intention of realizing profit, w a s subject to
VAT on services r e n d e r e d . In fact, e v e n if s u c h corporation w a s
organized without any intention of realizing profit, any income
or profit generated by the entity in t h e c o n d u c t of its activities
w a s subject to income tax.
Hence, it is immaterial w h e t h e r the primary p u r p o s e of a

corporation indicates that it received p a y m e n t s for services
rendered to its affiliates on a reimbursement-on-cost basis
Imposition of Tax
only, without realizing profit, for purposes of determining liability

for VAT on services r e n d e r e d . As long as the entity provides
service for a fee, remuneration or consideration, then the
service rendered is subject to VAT. ( C o m m . of Internal Revenue
vs. Court of A p p e a l s , 3 2 9 S C R A 237 [2000].)
(12) To be liable for VAT under Subsection (A), the service

must be done or rendered in the Philippines. Hence, the
c o m m i s s i o n paid for selling a b r o a d real property located in the
Philippines is not subject to VAT.
(13) Production of live concerts which involves rendering of

amusement services is not subject to VAT, since the jurisdiction
to i m p o s e a m u s e m e n t tax on gross receipts from admission to
places of a m u s e m e n t shall be exercised by the provinces and
cities, to the exclusion of the national or municipal government,
(see Sec. 125.) However, other revenues or receipts from the
c o n d u c t of live or televised concerts, other than admission
receipts, w h i c h are in the nature of revenues or receipts from
advertising services r e n d e r e d , such as payments received
f r o m sponsors of the live/televised concert w h o s e products are
advertised in t h e course of such concert, shall be subject to
VAT pursuant to Section 108.
Moreover, gross receipts f r o m m a n a g e m e n t of local talent

involve sales of services; h e n c e , are also subject to VAT under
Section 108. (VAT Ruling No. 0 7 3 , A u g . 5, 1 9 9 1 , a m e n d e d VAT
Ruling No. 092-90.)
(14) A domestic corporation engaged in the transport of
cargoes is subject to VAT based on its gross receipts. It is,
therefore, w r o n g to report VAT on accrual basis. Accordingly,
such corporation previously reporting VAT on accrual basis
can book the VAT previously remitted to the BIR as deferred
output VAT, apply the s a m e upon payment of the output VAT
on services actually collected f r o m its customers, and a m e n d
all VAT returns which incorrectly recognized the transaction on
an accrual basis to reflect the deferred output VAT as advance
payment and file the s a m e with the Revenue District Office
where the principal place of the corporation is l o c a t e d . ( B I R
Ruling No. 085-99, June 29, 1999.)
(15) T h e "lease of motion pictures films, films, tapes and

discs' is not the s a m e as the showing or exhibition of motion
pictures or films. T h e intent of the legislature must be ascertained
to determine whether such activity falls under the phrase "similar
56
ANNOTATED
services." Historically, the activity of showing motion pictures,

films or movies by cinema/theater operators or proprietors has
always been considered as a form of entertainment subject to
amusement tax. Only lessors or distributors of cinematographic
films are included in the coverage of VAT. ( C o m m . vs. SM Prime
Holdings, Inc., 613 S C R A 774 [2010].)
(16) For tax purpose, the Duty-Free S h o p s are considered

extensions of the main bonded w a r e h o u s e and are treated as
outside of the Philippines customs territory. Articles or g o o d s
remaining in customs bonded w a r e h o u s e s are considered as
not having been entered yet into the c u s t o m s territory if the
same have been shipped from a b r o a d . Accordingly, under
Exec. Order No. 226 and other special laws, sales to b o n d e d
warehouses, even without actual exportation, are considered
constructive exports. T h u s , w h e r e the concessionaire is a
nonresident, its g o o d s and m e r c h a n d i s e shipped f r o m a b r o a d ,
and which remains inside the D F S before sale to c u s t o m e r s /
travelers entering or arriving into the c u s t o m s territory, are still
not considered imported g o o d s or articles. Furthermore, m e r e
presence of g o o d s or articles belonging to said concessionaire
inside the bonded w a r e h o u s e or D F S d o e s necessarily m e a n
that said nonresident is doing business in t h e Philippines.
Therefore, the sale of ( m a n p o w e r a n d personnel) services by
a domestic corporation to a non-resident foreign corporation
not e n g a g e d in business in the Philippines in connection inside
the D F S is a VAT zero-rated sale under Section 108(B, 2). (BIR
Ruling No. D A - 0 0 9 - 0 9 , Sept. 3, 2009.)
(17) Placement fees charged by recruitment agencies

from applicants or w o u l d - b e contract w o r k e r s a r e part of gross
receipts from the "sale of services" as defined in Section
108. Generally, e v e n if the p l a c e m e n t f e e s are paid for by t h e
prospective e m p l o y e r s on behalf of the applicants, the sale of
services by the p l a c e m e n t a g e n c i e s are still subject to VAT.
The basis of the tax is the a m o u n t of p l a c e m e n t fee ex-

cluding reimbursement of e x p e n s e s , w h i c h shall be limited to
fees for passport/visa, medical e x a m i n a t i o n , clearances, inoc-
ulation, trade and skills testing, airport terminal, p e r f o r m a n c e
b o n d , p r e m i u m s , and notary public, provided these e x p e n s e s
are supported by receipts in the n a m e of the applicant. If the
above reimbursable e x p e n s e s are supported by receipts is-
sued in the n a m e of the agencies, its a g e n c y is required to pay
Imposition of Tax
the VAT on the entire a m o u n t of placement fee. (BIR Ruling No

D A - 6 8 0 - 0 9 , Nov. 18, 2009.)
(18) Tollway operators are subject to VAT. T h e sale

of services of franchises grantees except those excluded
under Section 119 (Tax on Franchises) is subject to VAT toll
services being rendered by tollway operators do not render the
exceptions specified under Section 119. (see Rev. M e m o Cir
No. 63-10, July 19, 2010.)
(19) Shipping services performed within the Philippines

by VAT-registered lease shipping companies for a nonresident
foreign corporation, w h e r e the services are paid for in
acceptable foreign currency are automatically subject to VAT at
0% rate under Section 108 (B, 2). (BIR Ruling No. DA-352-08,
J u n e 1 1 , 2008.)
(20) Similarly VAT-registered freight forwarders whose

services are rendered to clients outside the Philippines and
paid for in acceptable foreign currency and accounted for in
a c c o r d a n c e with B S P rules a n d regulations are zero-rated
pursuant to Section 108(B, 2). T h e r e is no need for them to
apply for zero-rating on their sale of services to said clients. On
transactions covered by Sections 106(A, 2, c) and 108(B, 3), an
application for zero-rating is required, (see VAT Ruling No. 056,
J u n e 2 1 , 1 9 9 1 , a s supported b y VAT Ruling No. 060-89.)
Note: Rev. M e m o Cir. No. 35-2006 (June 2 1 , 2006) clarifies
t h e proper VAT and withholding tax treatment of freight and
other incidental c h a r g e s billed by freight forewarders.
(21) Pursuant to Section 108(B, 2), the commissions
earned from the sale of airline tickets shall only be zero-rated
w h e n they are paid for in acceptable foreign currency actually
or constructively remitted to the Philippines and accounted
for in accordance with the rules and regulations of the BSP;
otherwise, the c o m m i s s i o n s shall be subject to 1 0 % (now 12%)
VAT in accordance with Section 108(A). (VAT Ruling No. 032,
May 29, 1991.)
(22) A BOI-registered enterprise is exempt from con-
tractor's tax pursuant to Section 39(E) of E.O. No. 226
(Omnibus Investments Code) if it is the party directly liable
therefor as w h e n it is the one selling the service, but not where
it is the buyer thereof. Thus, a company that sells general
construction services to a BOI-registered firm is not entitled to
claim the benefit of zero-rating under Section 108(B, 3), nor the
58
ANNOTATED
exemption under the Omnibus Investments Code in relation to

Section 109(q), now (K). Such privileges are granted to B O I -
registered firms only for its direct tax liability, and not to tax
liabilities of its suppliers which can be passed on to the former,
for said law does not provide for the extension of tax exemption
to suppliers of the grantee, (see VAT Ruling No. 075, A u g . 7,
1999.)
( 2 3 ) The current administrative position of the BIR on the
issue of whether or not condominium corporations are subject
to income tax and VAT remains as follows:
(a) C o n d o m i n i u m dues and a s s e s s m e n t s are not
taxable income of the c o n d o m i n i u m corporations, but are
funds held by t h e m in trust for their unit o w n e r s or m e m b e r s ;
(b) C o n d o m i n i u m corporations are not subject to
VAT w h e n they collect association d u e s f r o m unit o w n e r s
pursuant to their corporate purpose as trustees of the f u n d ;
and
(c) Membership dues, fees, and assessments collected
by condominium corporations and homeowners associations
are not considered payments for the sale of services.
Condominium corporations clearly collect funds in trust for
unit owners, members, and occupants to be disbursed for
maintenance and utilities expenses. Unless the condominium
corporation engages in activities for profit, it is not subject to
VAT. (BIR Ruling No. 18-05, Sept. 16, 2005.)
( d ) Collections of a c o n d o m i n i u m association w h i c h
are used solely for administrative e x p e n s e s in implementing
its corporate purposes are not subject to i n c o m e tax,
withholding tax, and VAT considering that t h e association
does not sell, barter, e x c h a n g e , lease g o o d s or property,
and neither d o e s it render service for a fee but merely
implements the administration of the required services to
collect the association d u e s f r o m the unit o w n e r s pursuant
to its corporate purposes as "trustee" for t h e f u n d thereof.
(BIR Ruling No. 4 9 0 - 0 4 , Sept. 14, 2004.)
(24) Director's fees are taxable, for income tax purposes,
as compensation income w h e n the recipient director is an
employee (e.g., President sitting as a m e m b e r of the board) of
the corporation which pays the s a m e .
Under Rev. M e m o . Cir. No. 34-2008, if the fees are paid to a

director w h o is not an e m p l o y e e of the corporation (i.e., w h o s e
Imposition of Tax
duties are confined to the attendance of and participation in the

meetings of the board), such fees fall under Section 32(A)(2)
of the Tax C o d e under the caption "Gross income derived from
the conduct of trade or business or exercise of a profession.
Such director falls under the category of seller of services liable
to pay 1 2 % VAT on his gross income pursuant to Section 108 or
to the 3% percentage tax i m p o s e d under Section 116 should be
fall to meet t h e VAT threshold of P1.5 million. Rev. M e m o . Cir.
N o . 77-2008 a m e n d s specifically t h e provision of Rev. M e m o .
Cir. No. 3 4 - 2 0 0 8 imposing business tax on fees, per diems
a l l o w a n c e s and the like received by directors from corporations
of w h i c h they are not e m p l o y e e s .
(25) Membership dues, seminar fees and funds collected

by a nonstock, nonprofit corporation, organized for the exclusive
benefit of its m e m b e r s held in trust by the said corporation for
t h e exclusive use a n d benefit of its m e m b e r s , are exempt from
i n c o m e tax, withholding tax, a n d VAT. T h e corporation merely
acts as a collecting agent in receiving the m e m b e r s h i p dues,
f e e s , and f u n d s , a n d such funds are u s e d solely for the payment
of t h e association's c o m m o n administrative expenses. (BIR
Ruling N o . 3 3 7 - 0 5 , A u g u s t 1, 2005.) But a nonstick, nonprofit
corporation is subject to VAT if it e n g a g e s in the regular conduct
or pursuit of a c o m m e r c i a l or e c o n o m i c activity, including
transactions incidental thereto. (BIR Ruling No. 009-05, June
2 3 , 2005.)
(26) Monies received by a corporation (X Corp.) primarily

e n g a g e d in real estate (Mall developer/owner) from its mall
tenants as payments for common usage and service area
(CUSA) expenses, such as electricity, water, repairs and
maintenance, w h i c h e x p e n s e s are billed by the utility and
service providers to the X Corp. which initially advances the
payment and then issues a billing statement to its tenants to
charge the above e x p e n s e s at cost in a pro-rata basis, are not
subject to VAT (and EWT). By its very nature, reimbursement of
expenses is not income. The amounts received by a corporation
in trust for another do not form part of gross taxable receipts
even for VAT purposes. Since X Corp. never benefited from
the monies received from its tenants, which are ultimately paid
to utility companies, there is no income from the transmission
which can be subject to tax. (BIR Ruling No. 078-06, Mar. 3,
2006.)
ANNOTATED
5. The VAT on rental and/or royalties payable to non-resident

foreign corporations or owners for the sale of services and use or
lease of properties in the Philippines shall be based on the contract
price agreed upon by the licensor and the licensee. T h e licensee
shall be responsible for the payment of VAT on such rentals a n d /
or royalties in behalf of the non-resident foreign corporation or
owner by filing a separate VAT declaration/return for this purpose.
The duly validated VAT declaration/return is sufficient evidence in
claiming input tax credit by the licensee. (BIR Ruling No. 16-99,
Feb. 4, 1999.)
"Non-resident lessor/owner" refers to any p e r s o n , natural or
juridical, an alien, or a citizen w h o establishes to the satisfaction
of the Commissioner the fact of his physical presence abroad
with a definite intention to reside therein, and w h o owns/leases
properties, real or personal, w h e t h e r tangible or intangible, located
in the Philippines. (Sec. 4.108-3[a], C V R . )
6. The advance payment by the lessee in a lease contract,
may be: (1) a loan to the lessor f r o m t h e lessee, or (2) an option
money for the property, or (3) a security deposit to insure t h e faithful
performance of certain obligations of the lessee to t h e lessor, or (4)
prepaid rental.
If the advance payment is actually a loan to the lessor, or an
option money for the property, or a security deposit for the faithful
performance of certain obligations of t h e lessee, s u c h a d v a n c e
payment is not subject to VAT.
However, a security deposit that is applied to rental shall be
subject to VAT.
If the a d v a n c e payment is, in fact, a prepaid rental, then such

payment is taxable to the lessor in t h e m o n t h or quarter w h e n
received regardless of the accounting m e t h o d s u s e d . (Ibid.)
7. The term gross receipts in the case of hotel and restaurant
operators, includes, a m o n g others, c h a r g e s for r o o m s , laundry a n d
valet services, food and b e v e r a g e s c o n s u m p t i o n , c o r k a g e , handling
charges for providing t e l e p h o n e , telex, cable, or fax services, c a k e
shop sales, lease to concessionaires, c o m p e n s a t i o n and other
service fees.
The said "gross receipts," however, shall not include the

following:
(1) Actual cost of long distance and overseas telephone

calls, fax, cable, telex and charges of the telecommunication
Imposition of Tax
c o m p a n i e s collected by the establishment from the customers/

clients for the c o n c e r n e d telecommunication c o m p a n i e s , such
as PLDT, w h i c h are e a r m a r k e d for payment to the latter;
(2) VAT p a s s e d on to c u s t o m e r s ; and
(3) Local taxes c h a r g e d . (Rev. M e m o . Cir. No. 7-96.)
Note: Rev. M e m o . Order No. 16-2010 prescribes the
policies a n d guidelines in determining the VAT liabilities of
motels (establishments that offer short time accommodation)
a n d other similar establishments.
8. T h e gross receipts for purposes of franchise grantees

subject to VAT, as defined under Section 4.108-4 of the C V R , refer
to the total a m o u n t of m o n e y or its equivalent representing the
contract price, c o m p e n s a t i o n , service fee, rental or royalty, including
the a m o u n t c h a r g e d for materials supplied with the services and
deposits applied for p a y m e n t for services rendered and advance
p a y m e n t s actually or constructively received during the taxable
period for t h e services performed or to be performed for another
p e r s o n , excluding VAT. However, said gross receipts subject to
VAT shall not include a m o u n t s e a r m a r k e d for payment to another
t e l e c o m m u n i c a t i o n s company, foreign administration's (FA's) share
for the services performed outside the Philippines, and amounts
received f r o m overseas dispatch, m e s s a g e or conversation
originating f r o m the Philippines w h i c h are covered by Section 120
of t h e Tax C o d e .
(1) T h e share of the foreign telecommunications

administration (FA) in the payment received by a local
telecommunications company from its customers in accordance
with their a g r e e m e n t is not subject to VAT because the related
services are performed by the FA outside the Philippines. The
telecommunications c o m p a n y shall not charge VAT on the
FA's share. In billing customers, the local telecommunications
c o m p a n y shall present the FA's share separately with a
notation that it is VAT-exempt. T h e FA's share may be
presented on the s a m e VAT invoice or official receipt showing
the telecommunications company's other VAT taxable charges.
(2) Deposits for telephone instruments and the like are
not subject to VAT. However, if the said deposits for telephone
instruments and the like are forfeited, the telecommunications
c o m p a n y shall be subject to VAT thereon. (Rev. Memo. Cir. No.
5-96.)
ANNOTATED
( 3 ) Reimbursements made by a franchisee to the fran-

chisor for the franchisee's actual share in the advertising and
promotional expenses are not part of the gross income in the
pursuit of the business of the franchisee of the franchisor and
are, therefore, not subject to income tax, creditable withholding
tax (CWT), and VAT. The funds are merely held in trust by
the franchisee to be used solely for national advertising and
advertising-related expenses for the benefit of the franchisee;
hence, the franchisor does not realize any gain or profit from
the funds.
The payments by the franchisee to the franchisor are not
subject to C W T because franchisors are not a m o n g the payees
enumerated in Rev. Regs. No. 2-98. Under Rev. Regs. No.
2-98, as a m e n d e d , only p a y m e n t s to persons e n u m e r a t e d in
the said Rev. Regs, are subject to CWT.
Since the franchisee is not an advertising agency a n d
the fees collected are mere r e i m b u r s e m e n t s of advertising
expenses paid to the advertising agency, it is not subject to
VAT on the said fees. It is the advertising a g e n c y that is liable
to VAT. (BIR Ruling No. 122-05, April 6, 2005.)
9. Non-life insurance companies including surety, fidelity,
indemnity and bonding c o m p a n i e s are n o w subject to VAT on
gross premium. They shall include all individuals, partnerships,
associations, or corporations including professional reinsurers as
defined in the Insurance C o d e of the Philippines, mutual benefit
associations and g o v e r n m e n t - o w n e d or -controlled corporations,
engaging in the business of property insurance, as distinguished
from insurance on h u m a n lives, health, accident a n d insurance
appertaining thereto or c o n n e c t e d therewith.
(1) T h e y are no longer liable to t h e p a y m e n t of t h e 5%

premium tax under Section 123 of the Tax C o d e . P r e m i u m s on
crop, life and health and accident insurance policies are not
subject to VAT.
(2) Health and accident insurance partakes of t h e nature
of a life insurance, and thus, p r e m i u m s received in relation
thereto, regardless of w h e t h e r they are received by a life or
non-life insurance company, shall be subject to the p r e m i u m
tax, and not to 1 2 % VAT a n d , therefore, shall not f o r m part of
its gross receipts for VAT purposes. (Rev. M e m o . Cir. No. 3 0 -
2008, as a m e n d e d by Rev. M e m o . Cir. No. 59-2008.)
(3) M a n a g e m e n t fees, rental and other income f r o m
services which can the pursued independently of the insurance
Imposition of Tax
business including reinsurance fees reinstatement fees,

renewal fees as well as penalties paid to the life insurance
c o m p a n y are subject to 1 2 % VAT or percentage tax under
Section 116, w h i c h e v e r is applicable. (Ibid.)
(4) Non-life reinsurance p r e m i u m s are subject to VAT.

(5) T h e VAT d u e f r o m the foreign reinsurance c o m p a n y
is to be withheld by t h e local insurance c o m p a n y and to be
remitted to t h e BIR by filing the Monthly Remittance Return of
V a l u e - A d d e d Tax W i t h h e l d . (BIR F o r m 1600.)
(6) C o m m i s s i o n s w h e t h e r life or non-life, of insurance
a g e n t s and/or brokers are subject to VAT. (Sec. 4.108-3[i]
CVR.)
10. T h e gross receipts from non-life insurance companies
shall m e a n total p r e m i u m s collected, w h e t h e r paid in money, notes,
credits or any substitute for money. (Ibid.)
Said gross receipts do not include the following:
(1) P r e m i u m s refunded within six (6) months after payment
on account of rejection of risk or returned for other reasons to
the person insured (return p r e m i u m s ) ;
(2) P r e m i u m on reinsurance of a c o m p a n y that has already
paid the tax;
(3) P r e m i u m s on account of any reinsurance if the
risk insured against covers property located outside of the
Philippines;
(4) D o c u m e n t a r y s t a m p and local taxes passed on by the
insurance c o m p a n y to the insured; and
(5) VAT p a s s e d on to the insured. ( R e v M e m o . Order No.
6-96.)
11. Pre-need companies are corporations registered with the
Securities and E x c h a n g e C o m m i s s i o n a n d authorized/licensed to
sell or offer for sale pre-need plans, whether a single plan or multi-
plan. They are e n g a g e d in business as seller of services providing
services to plan holders by managing the funds provided by them
and making payments at the time of need or maturity of the contract.
As service providers, the compensation for their services is
the premiums or payments received from the plan holders. (Sec.
4.108.3D], CVR.)
12. Health Maintenance Organizations (HMOs) are entities,
organized in accordance with the provisions of the Corporation
64
ANNOTATED
Code of the Philippines and licensed by the appropriate government

agency, which arranges for coverage or designated m a n a g e d
care services needed by plan holders/members for fixed prepaid
membership fees and for a specified period of time. (Sec. 4.108-
3[k], Ibid.)
HMO's gross receipts shall be the total amount of money or its
equivalent representing the service fee actually or constructively
received during the taxable period for the services performed or to
be performed for another person, excluding the value-added tax.
The compensation for their services representing their service fee
is presumed to be the total a m o u n t received as enrollment fee f r o m
their m e m b e r s plus other charges received. (Ibid.)
The BIR has issued rulings inconsistent with t h e a b o v e

provision of the C V R . In its latest ruling (No. D A - 3 7 5 - 0 8 , Oct. 3 1 ,
2008); it ruled that a m o u n t s received by a H M O f r o m its m e m b e r s
as membership fees w h i c h are pooled for medical utilization to
cover future medical claims of its m e m b e r s do not f o r m part of
its gross receipts subject to VAT. Only t h o s e a m o u n t s w h i c h will
redound to the benefit of its m e m b e r s (i.e., m e m b e r s h i p f e e s w h i c h
serve as the m a n a g e m e n t f e e and to cover legitimate e x p e n s e s for
acting as intermediary in the f u n d m a n a g e m e n t a r r a n g e m e n t ) will
be considered as its VAT-taxable i n c o m e . A m o u n t s e a r m a r k e d for
payment to a third party, or received as r e i m b u r s e m e n t for a d v a n c e
payment on behalf of another shall be e x c l u d e d f r o m gross receipts
for VAT purposes, since the H M O d o e s not h a v e any beneficial
ownership in said a m o u n t s .
The above ruling and other previous rulings in favor of H M O s

have been effectively revoked by M e m o . Cir. No. 0 0 6 - 0 9 (Jan.
27, 2009) which states that gross receipts should include the total
amount actually received during t h e taxable period for t h e services
performed or to be performed for a client. T h e a m o u n t paid by
H M O s to hospitals and clinics, as well as to medical a n d dental
practitioners in behalf of their clients should be included in the
computation of the VAT. In other w o r d s , the basis for c o m p u t i n g
the VAT shall be t h e m e m b e r s h i p fees received f r o m the m e m b e r s
undiminished by any a m o u n t paid or payable by the H M O .
13. Gross receipts. T h e t e r m is defined in Section 108. (see

Sec. 4.108-4, CVR.) It has b e e n interpreted to m e a n t h e w h o l e
amount received by the contractor without any d e d u c t i o n . H e n c e ,
the fact that the a m o u n t corresponding to t h e tax is shifted to the
customer and billed as a separate item by the contractor d o e s not
Imposition of Tax
relieve the contractor from paying the tax on the entire amount
received. (BIR Ruling, Dec. 5, 1969.) T h e rule applies to the other
percentage taxes (Title V) w h i c h are imposed on the basis of the
gross receipts of the taxpayer.
Gross receipts include not only c a s h or its equivalent actually or

physically received but also those constructively received, (infra.)
(1) T h e tax b a s e in c o m p u t i n g the VAT on the sales of
services is gross receipts. For VAT purposes, "gross receipts"
consist not only of direct costs s u c h as labor and equipment
but all other (indirect) costs such as insurance, overhead
contingencies, miscellaneous items, etc. included in arriving at
t h e final or e s t i m a t e d contract price. (BIR Ruling No. D A - 0 1 1 -
0 7 , A u g . 17, 2 0 0 7 )
(2) T h e a g g r e g a t e of c o m m i s s i o n s on sale of tickets and

service f e e s on sale of local tours by VAT-registered entities
e n g a g e d in the sale of services as travel and tour agents are
subject to the v a l u e - a d d e d tax of 1 0 % (now 12%) as they
are e m b r a c e d within the t e r m "gross receipts" as defined in
Subsection (A). (BIR Ruling No. 0 4 7 , Feb. 15, 1988.)
(3) A d v a n c e s or deposits for work not yet started or

finished are includible as part of gross receipts under Section
108(A) subject to VAT without waiting for liquidation through
actual a c c o m p l i s h m e n t s . (BIR Ruling No. 1 8 1 , June 1, 1992.)
(4) A m o u n t s received by a c o m p a n y from its clients which

represent a d v a n c e p a y m e n t s to third parties, which are invoiced
by the third parties directly in the n a m e of the company's clients
and are not covered by the c o m p a n y ' s official receipts (Ors), do
not constitute income or gross receipts and are not subject to
income tax and VAT in the hands of the company. (BIR Ruling
No. 238-05, J u n e 1, 2005.)
(5) Gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do
not belong to t h e m and do not redound to the taxpayer's benefit.
It is not necessary that there must be a law or regulation which
would e x e m p t such monies or receipts within the meaning of
gross receipts under the Tax C o d e . Thus, amounts received by
a company or behalf of another company for which the former
issues its o w n official receipts, do not form part of the former's
gross receipts for VAT purposes' since the amounts are only
held in trust for the letter's account and are actually being
ANNOTATED
remitted by the former to the latter. (BIR Ruling No. DA- 085-
08, July 30, 2008.)
14. VAT treatment of security agency's gross receipts.
In several rulings, the BIR has maintained that salaries of the
security guards received by the agency from its clients form part
of its taxable gross receipts. T h e reason (as cited in BIR Ruling
No. 69-02, No. 49-85, and No. 271-81) for this is "that the salaries
of the security guards are actually the liability of the agency and
that guards are considered their e m p l o y e e s ; h e n c e , for percentage
tax purposes, the salaries of the security g u a r d s are includible in
its gross receipts." However, technically s p e a k i n g , t h e salaries of
the security guards are being paid for by the principals or clients
of the security agency which is under obligation to earmark and
segregate for the guards the a m o u n t paid. Therefore, said a m o u n t
will not form part of the agency's gross i n c o m e nor its taxable gross
receipts, w h e n actually or constructively received.
Rev. M e m o . Cir. No. 39-07 (Jan. 2 2 , 2 0 0 7 ) clarifies the income

tax and VAT treatment of a g e n c y fees/gross receipts of security
agencies, including the withholding of taxes t h e r e o n .
(1) On the part of the security agency. For VAT purposes,

the taxable gross receipts of t h e Security A g e n c y pertains to
the amount actually or constructively received by it constituting
its gross income. Since only the a m o u n t covering the A g e n c y
Fee represents its gross i n c o m e , t h e n that portion alone of the
Contract Price, w h e n actually or constructively received, will
constitute the Security A g e n c y ' s taxable gross receipts. This
means that the a m o u n t received by the Security A g e n c y w h i c h
is segregated, e a r m a r k e d or set aside for t h e salaries of the
security guards will not f o r m part of its gross receipts but should
be recognized as a liability. Accordingly, the 1 2 % output tax will
only be c o m p u t e d on the A g e n c y Fee w h i c h shall in turn be t h e
input tax of its Client.
EXAMPLE
Vigilant Security A g e n c y w a s contracted by X Corporation

to provide security services in the latter's premises. T h e
contract on a monthly basis is P18,000.00 broken d o w n as
follows: Security guards' salaries P14,179.08 a n d A g e n c y
Fee P3.820.92 (inclusive of the VAT).
Imposition of Tax
T h e entry to record the transaction is as follows:

Debit: Cash P17.931.77
Prepaid i n c o m e tax ( 2 % E W T
on a g e n c y fee) 68.23
Credit: Service income (agency fee) P3.411.54
Output tax (on a g e n c y fee) 409,38
D u e to security g u a r d s 14,179.08
(2) On the part of the client. Only the portion of the

p a y m e n t representing the A g e n c y Fee, if covered by a VAT
Official Receipt, will entitle the VAT-registered Client to a claim
of input tax credit. This m e a n s that the a m o u n t of output tax
paid by the Security A g e n c y is the a m o u n t of input tax available
to t h e client. T h e client c a n n o t claim an input tax on the salary
portion of the e x p e n s e (Security Services) because it pertains
to services e x e m p t f r o m VAT. Section 109(1) specifically
e x e m p t s f r o m VAT services rendered by individuals pursuant
to an e m p l o y e r - e m p l o y e e relationship. T h e services of the
security guards/squarely fall under this category of exempt
transaction. This is b e c a u s e , in substance, the Client has the
principal obligation to bear the prescribed w a g e rates for the
security g u a r d s .
EXAMPLE:
W h e n the e x p e n s e (security services) is paid, X Corporation

must record the transaction as follows:
Debit: Security services A g e n c y fee P3.411.54

Security services Security guards
salaries 14,179.08
Input tax (only on agency fee) 409.38
Credit: Cash P17.931.77
Withholding tax payable ( 2 %

E W T on A g e n c y fee) 68.23
15. Constructive receipt of payment. It occurs when the

money consideration or its equivalent for the articles or property
sold, exchanged or leased, or services rendered has already
been placed under the control of the seller/transferor/lessor of the
article or property or person w h o rendered the service without any
restriction by the payor.
68
ANNOTATED
(1) The following and similar transactions are examples of

constructive receipts:
(a) deposit in banks which are m a d e available to the
seller of services without restrictions;
(b) issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by the seller as
payment for services rendered; and
(c) transfer of the a m o u n t s retained by the payor to
the account of the contractor. (Sec. 4.108-4, C V R . )
In the above instances, the seller of the service should
include the amount constructively received in the period w h e n
the transaction occurred. A receipt or invoice therefor should
be issued as of that date and the transaction entered in t h e
subsidiary sales journal of the seller of the service. (Sec. 6[g],
Rev. Regs. No. 5-87.)
(2) In contrast with constructive receipt, gross revenue

covers money or its equivalent actually or constructively
received, including the value of services rendered or articles
sold, e x c h a n g e d or leased, the p a y m e n t of w h i c h is yet to
be received. This is in c o n s o n a n c e with the International
Financial Reporting Standards (IFRS) w h i c h defines revenue
as the gross inflow of e c o n o m i c benefits (cash, receivables,
and other assets) arising f r o m the ordinary operating activities
of an enterprise (such as sales of g o o d s , sales of services,
interest, royalties, a n d dividends), w h i c h is m e a s u r e d at the
fair value of the consideration received or receivable. (Ericsson
Telecommunications, Inc. vs. City of Pasig, 538 S C R A 99
[2007].)
In the cited case, the petitioner's "audited financial state-

ments reflect income or revenue w h i c h a c c r u e d to it during
the taxable period although not yet actually or constructively
received or paid. This is b e c a u s e petitioner uses the accrual
method of accounting, w h e r e income is reportable w h e n all the
events have occurred that fix the taxpayer's right to receive t h e
income, and the a m o u n t can be d e t e r m i n e d with reasonable
accuracy; the right to receive income, and not the actual receipt,
determines w h e n to include the a m o u n t in gross i n c o m e . T h e
imposition of local business tax based on petitioner's gross
revenue will inevitably result in the constitutionally proscribed
double taxation taxing of the s a m e person twice by the
same jurisdiction for the s a m e thing i n a s m u c h as petitioner's
Imposition of Tax
revenue or income for a taxable year will definitely include its

gross receipts already reported during the previous year and
for w h i c h local business tax has already b e e n paid.
(3) Retention money d e d u c t e d from e a c h progress billing
submitted by the contractor to the contractee to be paid by the
contractee u p o n completion of the project by the contractor
should not be included in the tax b a s e for purposes of computing
the creditable VAT b e c a u s e it is not yet paid either actually or
constructively at the t i m e the progress payments are m a d e . The
VAT on sale of services is b a s e d on gross receipts pursuant to
Section 106. (BIR Ruling N o . 142-98, Sept. 2 9 , 1998.)
(4) Under S u b s e c t i o n (B, 2), w h e r e the contract involves

p a y m e n t in both foreign a n d local currency, only the service
corresponding to that paid in foreign currency shall enjoy zero-
rating. T h e portion paid for in local currency shall be subject to
VAT at the rate of 1 0 % (now 1 2 % ) . T h e e x a m p l e s given with
respect to sale of g o o d s to the former U.S. military facility and
t h e A s i a n D e v e l o p m e n t B a n k (see Sec. 106[A, 2, cj.) also apply
to t h o s e rendering services under Subsection (b, 3). (Sec. 8[c],
Rev. R e g s . No. 5-87.)
16. VAT on contractors. It is a privilege tax on the sale

of services or labor. It is an indirect tax and w h e t h e r or not the
contractor is e x e m p t f r o m internal revenue taxes is immaterial.
T h e services m a y be actual or technical ( C o m m . vs. Court of Tax
A p p e a l s , 134 S C R A 4 9 , J a n . 17, 1985.), physical or mental. It is
directly collectible f r o m t h e contractor.
It has b e e n administratively ruled that the concessionaire of
the g o v e r n m e n t to m a n a g e and operate the Lobby Admission
S y s t e m at the International Airport, w h o undertook to provide all the
necessary professional staff and facilities for the effective operation
of the S y s t e m and to collect admission fees from visitors to be
admitted to the lobby areas of the terminal w a s not subject to the
4% contractor's tax (now VAT) imposed by Section 170 (now in
Sec. 108[A]) b e c a u s e by m a n a g i n g and operating the admission
system, said concessionaire does not render any service. The
admission fees collected are subject to income tax. (BIR Ruling No.
0 4 4 , March 18, 1983.)
17. Test of being a contractor. T h e true test would seem
to be that he renders service in the course of an independent
occupation representing the will of his employer only as to the
result of his work and not as to means and methods by which it is
ANNOTATED
accomplished. (Luzon Stevedoring Co. vs. Trinidad, 43 Phil. 803;

C o m m . vs. Engineering Equipment and Supply Co., 64 S C R A 597,
June 30, 1975.)
(1) In a case, X corporation rendered technical services
through its "work engineers" to P N B , D B P and S S S in the
construction of their buildings. T h e "work e n g i n e e r s " acted
as overseers of X corporation, rendering their professional
services as e m p l o y e e s of X. T h e contractor's tax (now VAT)
imposed on X is a tax on its business and privilege of selling the
services of those e m p l o y e e s themselves. ( C o m m . of Internal
Revenue vs. Court of Tax Appeals, supra.)
(2) A firm which leases its n e o n signs and billboards
cannot be considered itself a media c o m p a n y like a n e w s p a p e r
or a radio broadcasting company. N e o n signs and billboards
are primarily designed for advertising. It performs advertising
services. It is, therefore, an independent contractor as
contemplated in Section 170. (now in Sec. 108[A].) (Advertising
Associates, Inc. v s . Court of A p p e a l s , 133 S C R A 7 6 5 , Dec. 2 6 ,
1984.)
(3) A lawyer w h o acted as conservator of an insurance

company in distress is neither an e m p l o y e e of t h e Insurance
Commission w h o appointed him nor of t h e insurance c o m p a n y
which paid for his services but an i n d e p e n d e n t contractor
w h o s e professional j u d g m e n t is being relied u p o n during t h e
period that the c o m p a n y is under conservatorship. (BIR Ruling
No. 87, March 19, 1992.)
18. It has b e e n administratively ruled that a partnership

of licensed professional engineers and architects rendering
professional services by preparing plans a n d specifications for a
particular project without actually undertaking the actual construction
is not subject to the withholding provisions of R.A. No. 1051 (as
implemented by Rev. R e g s . N o . 21-67.) a n d is not considered a
contractor for purposes of the contractor's p e r c e n t a g e tax under
Section 170 (now in Sec. 108[A].) of t h e Tax C o d e . It is subject
to occupation tax under Section 12 of t h e Local Tax C o d e . (BIR
Ruling No. 047, March 2 2 , 1983.) But a firm engaged in performing
professional and management services to its m a n a g e d c o m p a n i e s
is engaged in the sale of its services to t h e m . (BIR Ruling No. 2 5 0 ,
June 7, 1988.)
19. Presidential Decree No. 1354 i m p o s e s a final tax on sub-

contractors, whether domestic or foreign, e n g a g e d in petroleum
operations in the Philippines (under P.D. No. 87.) equivalent to 8% of
Imposition of Tax
its gross income derived f r o m its contract with a service contractor,

s u c h tax to be in lieu of any a n d all taxes, whether national or local.
However, any taxable i n c o m e received from all other sources are
subject to the regular income tax imposed under the Tax C o d e .
T h e t e r m "gross i n c o m e , " as used a b o v e , includes all income
e a r n e d or received as a result of the contract entered into by the
sub-contractor with a service contractor e n g a g e d in petroleum
operations in the Philippines under Presidential Decree No. 87.
(Sec. 1, Pres. Decree No. 1354.)
Before, foreign subcontractors involved in petroleum operations

in the Philippines w e r e taxable as resident foreign corporations
although they "perform transitory activities during the taxable year
and neither maintain regular office or fixed place of business nor
keep b o o k s of a c c o u n t s in t h e Philippines." In order "to place local
or d o m e s t i c subcontractors on equal footing and to make them
competitive with foreign subcontractors," the former are similarly
t a x e d as the latter. P a y m e n t s to subcontractors are subject to
withholding of tax at source as provided in Section 58 of the Tax
C o d e , (see Sec. 3, Ibid.)
2 0 . VAT liabilities of contractors of government projects.

T h e following clarifications are m a d e in connection with the VAT
liabilities of a contractor of a g o v e r n m e n t contract or project:
(1) Only the 1 % e x p a n d e d withholding tax o n gross
collections net of VAT is automatically deducted in contract
a w a r d e d by any g o v e r n m e n t entity;
(2) G r o s s receipts of the main contractor is subject
to VAT but he shall be allowed credits for payments to the
subcontractor and the gross receipts of the subcontractor from
the main contractor shall be subject to 1 0 % (now 12%) output
tax;
(3) T h e main contractor is not allowed to deduct the VAT
on the total gross collection and to remit the amount to the BIR
in the n a m e of the subcontractor;
(4) T h e subcontractor shall issue VAT receipts/invoices for
the payment m a d e by the main contractor after which he is
required to file his o w n VAT return covering the gross receipts
derived from the main contractor; and
(5) The main contractor can accept the subcontractor's
VAT receipts regardless of the latter's place of registration.
(VAT Ruling No. 237, Sept. 14, 1989.)
72
ANNOTATED
Note: Under Section 114(C), the G o v e r n m e n t or any of its

political subdivisions is required to deduct of withhold a final
VAT at the rate of 5% of the gross payment for the purchase of
goods and services.
2 1 . Broker. T h e term refers to o n e w h o s e occupation is to
bring parties together to bargain or to bargain for t h e m in matters
of trade, c o m m e r c e or navigation. He is strictly a m i d d l e m a n and
for some purposes, the agent of both parties. (Behn Meyer Co. Ltd.
vs. Nolting and Garcia, 35 Phil. 247.) It is immaterial whether t h e
fee paid to him is a fixed, regular a m o u n t or not, or w h e t h e r the act
performed by him can be performed by the principal. (Kuenzle and
Streiff, Inc. vs. C o m m . , L-17648, Oct. 3 1 , 1964.)
(1) T h e management of a subdivision m a y be regarded
as a part of the real estate broker's business. H e n c e , not only
the sales commission on the sales of subdivision lots but also
the fees received for planning, supervising and m a n a g i n g other
people's lands and for collecting p a y m e n t s are subject to the
real estate broker's percentage tax. ( C M . Hoskins and Co.,
Inc. vs. C o m m . , L-28383, J u n e 2, 1976.)
(2) Before, a broker e n g a g e d in the p u r c h a s e a n d sale

of securities w a s also subject to t h e dealers in securities
percentage tax of 6% under f o r m e r Section 116 (which has
been repealed), in addition to the p a y m e n t of t h e VAT. This is
for the reason that for e n g a g i n g in t h e sale of securities, t h e
broker w a s also e n g a g e d in a distinct a n d separate business.
( 3 ) T h e f a c t that the property subject o f the brokerage

transaction is located outside t h e Philippines is not of any
m o m e n t b e c a u s e in the imposition of the broker's tax (now
V A T ) , the criterion is where the brokerage act is performed. If
performed in the Philippines, the c o m m i s s i o n s e a r n e d by him
from the sale of the property are subject to the broker's tax
(now VAT). It is not any different f r o m the c a s e of a local broker
w h o solicits local buyers of the products of foreign suppliers.
(BIR Ruling No. 64-042.)
(4) A person w h o buys t a p e s or films for use in a B e t a m a x

or V H S unit and other projectors to be rented out (that is, a
customer rents a tape or film at a price, uses and t h e n returns
it), is considered a cinematographic film owner. (BIR Ruling No.
218, Dec. 8, 1983.)
(5) Fish brokers w h o sell fish a n d other marine and fresh

water products brought or shipped by traders, producers
Imposition of Tax
or shippers f r o m different provinces to public markets in

Divisoria, M a l a b o n a n d the Navotas Fish Port Complex on
wholesale basis to the highest bidders and in return charge
5% c o m m i s s i o n b a s e d on the a m o u n t of sales of the fish and
other products sold which are basically o w n e d or produced by
the traders, producers or shippers, are commercial brokers,
subject to the VAT under Section 108(A). (BIR Ruling No. 224
June 1,1988.)
(6) A person w h o acts as a sales agent of publishing

companies for a c o m m i s s i o n is a c o m m e r c i a l broker, but if he
purchases outright the publication he sells, he is considered
a merchant or an ordinary book dealer and not a commercial
broker. S u c h being the case, the selling of books by such
person is not subject to the 1 0 % VAT in accordance with
Section 109(y). (see BIR Ruling No. 2 1 9 , Oct. 30, 1989.)
(7) R e i n s u r a n c e contract is separate and distinct from

the corresponding insurance contract reinsured. Such being
the case, the reinsurer's agent w h o is a juridical person or the
broker of t h e insurer, is subject to value-added tax pursuant to
Section 108. As regards a reinsurer's agent w h o is a natural
p e r s o n , it has b e e n ruled that he is not subject to the value-
a d d e d tax but to the occupation tax of P75.00 pursuant to
Section 12(a) of the former Local Tax C o d e . (BIR Ruling No.
186, M a y 4, 1988.)
(8) Agents and/or salesmen acting for a domestic company
in the buying and selling of securities and paid solely on
c o m m i s s i o n basis are c o m m e r c i a l brokers. Accordingly, money
p a y m e n t s to said a g e n t s / s a l e s m e n in the form of commissions
are subject to 5% (now 10%) e x p a n d e d withholding tax pursuant
to Section 1(G) (now Sec. 2.57.2[G].) of Rev. Regs. No. 6-85
(now No. 2-98, as a m e n d e d . ) (Appendix "I".) implementing
Section 57(B) of the Tax C o d e . (VAT Ruling No. 127, June 28,
1991.)
(9) T h e income derived from the hauling and handling of
merchandise by a c u s t o m s broker with the use of trucks for
hire is income f r o m the rendering of a forwarding service and
not f r o m a c o m m o n carrier. Therefore, such income is subject
to VAT to be reported together with the income as a customs
broker. (VAT Ruling No. 240, Sept. 20, 1989.)
(10) Container freight service charges, container yard
charges and other fees like overtime and penalties being billed
by freight forwarding companies to customers are subject to
ANNOTATED
VAT. However, if the arrastre, wharfage and trucking fees are

considered as reimbursements, they are not subject to VAT,
provided the receipts are in the n a m e of the clients/customers.
(VAT Ruling No. 2 3 1 , Sept. 11, 1989.)
Note:
(1) Rev. M e m o . Cir. No. 23-2003 clarifies certain issues
relative to the imposition of VAT on services of stock, real estate,
commercial, customs, and immigration brokers beginning
January 1, 2003.
(2) Under R.A. No. 8761 (Feb. 16, 2000) w h i c h further
deferred the imposition of the value-added tax on services
performed by banking and financial institutions, and by
individuals in the exercise of a profession or calling to January
1, 2 0 0 1 , brokers, in lieu of the 1 0 % VAT, w e r e m a d e subject to
a tax equivalent to 7% based on gross receipts f r o m broking
services. Beginning January 1, 2 0 0 3 , they b e c a m e subject to
VAT in lieu of the 7% tax.
22. Dealer in securities. T h e t e r m refers to a merchant

of stock or securities, w h e t h e r an individual, partnership, or a
corporation, with an established place of business and regularly
reselling to customers at a profit, (see Sec. 22[u].) This profit is
expected, not because of a rise in value during the interval of time
between purchase and resale, but merely b e c a u s e t h e dealers h a v e
or hope to find a market or buyers w h o will p u r c h a s e the securities
from him at a price in excess of their cost. This e x c e s s or m a r k - u p
represents remuneration for his labor as a m i d d l e m a n in bringing
together buyer and seller and in performing the usual services of
retailer or wholesaler of g o o d s . ( C C H '86, Vol. 7, par. 53, 851.)
Accordingly, a person e n g a g e d in the trade or business of
buying and selling securities on his o w n account is not a dealer.
(BIR Ruling No. 2 3 6 , Dec. 18, 1990.) A s u b s e q u e n t ruling held
that a corporation, holder of investment certificates that sells the
same to prospective buyers in the ordinary c o u r s e of business,
is a dealer in securities and is subject to VAT on sale of services
because the term "dealer in securities" m e a n s "a person w h o buys
and sells securities for his/her o w n account in the ordinary c o u r s e
of business. (BIR Ruling No. DA-011-09, J a n . 14, 2009.)
23. Lending investor/pawnshop. T h e t e r m "lending investor"

is defined under the former provision of the Tax C o d e (Sec. 157[U]
thereof.) as one "who make(s) a practice of lending m o n e y for
themselves or others at interest."
Imposition of Tax
(1) For purposes of the imposition of fixed taxes (before

the adoption of the VAT), the Tax C o d e treated lending investors
differently f r o m p a w n s h o p s . T h e y w e r e subject to different
fixed taxes, (see former Sec. 161[3-dd, ft].) Under Section
175, which b e c a m e Section 116 (repealed by R.A. No. 7716.),
only dealers in securities a n d lending investors w e r e subject to
the percentage tax of 6% and 5% respectively. There w a s no
mention of p a w n s h o p s . H e n c e , p a w n s h o p s w e r e subject only
to the fixed tax of P1,000 under the cited section. T h e y never
b e c a m e subject to p e r c e n t a g e tax s h o w i n g that the Tax Code
did not consider a p a w n s h o p a lending investor for the purpose
of imposing the 5% percentage tax.
T h e BIR has ruled, however, that pawnshops shall be

subject to 5% lending investor's tax (under former Sec. 116.)
a n d d o c u m e n t a r y s t a m p tax. Prior to the a m e n d m e n t of the
National Internal R e v e n u e C o d e by Executive Order No. 237,
w h i c h took effect on January, 1988, p a w n s h o p s and lending
investors w e r e subject to different fixed taxes. Pawnshops
w e r e t h e n subject to the annual fixed tax of P1,000 under then
Section 161(3)(ff) of t h e Tax C o d e .
A c c o r d i n g to Rev. M e m o . Cir. No. 15-91 (clarified in R M C

No. 4 3 - 9 1 ) , a restudy of Presidential Decree No. 114 (Trast
Receipts Law) s h o w s that the principal activity of pawnshops is
lending m o n e y at interest and incidentally accepting a " p a w n "
of personal property delivered by t h e pawner to the p a w n e e as
security for the loan. (Sec. 3 thereof.) This m a k e s pawnshops'
business, according to the Circular, akin to lending investor's
business activity, w h i c h is broad e n o u g h to e n c o m p a s s the
business of lending m o n e y at interest by any person, whether
natural or juridical.
Since p a w n s h o p s are considered as lending investors,
they are subject to VAT. They are also subject to documentary
stamp taxes prescribed in Title VII of the Tax C o d e . (BIR Rulings
No. 0 6 5 , April 19, 1991 and No. 2 2 1 , Oct. 30, 1 9 9 1 , revoking
BIR Ruling No. 325, July 13, 1988). R.A. No. 9238, which was
passed on 2 0 0 4 (Rev. Regs. No. 10-2004), finally classifies
p a w n s h o p s as non-bank financial intermediaries, (see Sec.
122.)
According to the S u p r e m e Court, while it is true that
pawnshops are e n g a g e d in the business of lending money,
they are not considered "lending investors" for the purpose
of imposing the 5% percentage taxes for the reason that both
ANNOTATED
under the NIRC of 1977 (prior to its a m e n d m e n t by E.O. No.

273.) and the NIRC of 1986, they w e r e subjected to different tax
treatments and Congress never intended t h e m to be treated in
the same way as lending investors. Furthermore under Section
116 of the NIRC of 1997 (as a m e n d e d by E.O. No. 273.) which
subjected to percentage tax dealers in securities and lending
investors only, there w a s no mention of p a w n s h o p s . ( C o m m .
vs. M.J. Lhuiller Pawnshop, Inc., 4 0 6 S C R A 178 [2003]; C o m m .
vs. Trustworthy Pawnshop, Inc., 4 8 8 S C R A 538 [2006].) T h e y
are, therefore, not subject to the 5% lending investor's tax.
(2) On the issue of whether p a w n s h o p s are liable to pay VAT,
the Supreme Court, in First Planters Pawnshop, Inc. vs. Comm.
(560 S C R A 606 [2006].), held that since a p a w n s h o p is n o n -
bank financial intermediary, it is subject to VAT. But beginning
2004, by virtue of RA No. 9 2 3 8 , the services of banks, n o n -
bank financial intermediaries, finance c o m p a n i e s , and other
financial intermediaries not performing quasi-banking functions
were specifically e x e m p t e d f r o m VAT, a n d the percentage tax
on gross receipts f r o m 0% to 5 % , as t h e c a s e m a y be, w a s
reimposed under Section 122.
Note: T h e imposition of VAT on banks, etc. w a s deferred

for tax years 1996-2002. (see R.A. No. 8 0 4 1 , 8 7 6 1 , a n d 9010.)
With no further deferments by law, t h e levy w a s finally m a d e
effective beginning January 1, 2 0 0 3 .
(3) A bank depositor is not a lending investor. W h i l e
bank deposits are in the nature of loans, this d o e s not m a k e
the depositor a lending investor since the act of o p e n i n g a n d
maintaining a deposit with a bank c a n n o t be c o n s i d e r e d a
business. ( S i a o T i a o Hong v s . C o m m . , 2 1 3 S C R A 164, Sept. 1,
1992.)
(4) Lending investor includes all p e r s o n s , other t h a n

banks, non-bank financial intermediaries, finance c o m p a n i e s ,
and other financial intermediaries not performing quasi-banking
functions, w h o m a k e a practice of lending m o n e y for t h e m s e l v e s
or others at interest.. By analogy, it c a n be c o n c l u d e d that a
lending investor is not t h e s a m e nor c a n it be considered as
a non-banking financial intermediary. (BIR Ruling No. 0 4 4 - 0 0 ,
Sept. 15, 2000.)
(5) Cash a d v a n c e s provided to its affiliates for financial

support by a c o m p a n y w h i c h is not e n g a g e d in the business
of lending money are not subject to VAT on lending investors,
Imposition of Tax
since it d o e s not habitually e n g a g e in lending transactions and

it d o e s not extend t h e a d v a n c e s (based on bank reference
rate) with a view to profit. Rev. M e m o . Order No. 63-99 (July
19, 1999) provides that in imputing interest on related party
borrowings, t h e interest rate to be used is the bank reference
rate prescribed by the Bangko Sentral ng Pilipinas (BSP).
Since the interest rate c h a r g e d is the bank reference rate, such
interest is considered at arm's length. (BIR Ruling No. DA-320-
0 7 , M a y 3 1 , 2007.)
2 4 . Services of franchise grantees of telephone and telegraph,

radio and/or television b r o a d c a s t i n g , toll road operations, and all
other franchise g r a n t e e s except g a s and water utilities shall be
subject to VAT in lieu of franchise tax.
(1) Franchise grantees of radio and/or television broad-

casting w h o s e a n n u a l gross receipts of the preceding year
do not e x c e e d P 1 0 , 0 0 0 , 0 0 0 shall not be subject to VAT but
to t h e 3% franchise tax i m p o s e d under Section 119, subject
to optional registration under VAT by the grantee. Likewise,
franchise g r a n t e e s of gas and water utilities are subject to 2%
franchise tax on their gross receipts pursuant to Section 119.
(2) G r o s s receipts of all other franchises, other than those

covered by Section 119, regardless of h o w their franchises may
h a v e b e e n g r a n t e d , shall be subject to VAT under Section 108.
This includes, a m o n g others, P A G C O R and its licensees or
franchisee.
(3) Franchise grantees of telephone and telegraph shall
be subject to VAT on their gross receipts derived from their
telephone, telegraph, telewriter exchange, wireless and other
communication equipment services. However, amounts received
for overseas dispatch, message, or conversation originating from
the Philippines are subject to the percentage tax under Section
120, and hence, exempt from VAT. (Sec. 4.108-3[h], CVR.)
25. A person engaged in milling for others (except palay into
rice, corn into corn grits, and sugarcane into raw sugar) is subject
to value-added tax on sale of services.
(1) If the miller is paid in cash for his services, the VAT
shall be based on his gross receipts for the month or quarter.
(2) If he receives a share of the milled products instead of
c a s h , the VAT shall be based on the actual market value of his
share in the milled products.
ANNOTATED
(3) Sale by the owner or the miller of his share in the milled
products (except rice, corn grits and raw sugar) are subject to
VAT. (Sec. 4.108-3[G], Ibid.)
26. All receipts from service, hire, or operating lease of
transportation equipment not subject to percentage tax on domestic
c o m m o n carriers and keepers of garages imposed under Section
117 are subject to VAT.
(1) " C o m m o n carriers" refer to persons, corporations,
firms or associations e n g a g e d in the business of carrying or
transporting passengers or g o o d s or both, by land, water, or air,
for compensation, offering their services to the public, and shall
include transportation contractors.
(2) C o m m o n carriers by land with respect to then gross

receipts from the transport of passengers, including operators
of taxicabs, utility cars for rent or hire driven by the lessees
(rent-a-car companies) a n d tourist buses, used for t h e transport
of passengers are subject to the p e r c e n t a g e tax i m p o s e d under
Section 117 and not to VAT.
(3) Domestic c o m m o n carriers by air and sea are subject to

VAT on their gross receipts f r o m their transport of p a s s e n g e r s ,
goods or cargoes f r o m o n e place in the Philippines to another
place in the Philippines. (Sec. 4.108-3[d], Ibid.)
27. Warehousing service m e a n s rendering personal services

of a w a r e h o u s e m a n s u c h as:
(1) engaging in the business of receiving a n d storing

goods of others for c o m p e n s a t i o n or profit;
(2) receiving g o o d s and m e r c h a n d i s e to be stored in his

w a r e h o u s e for hire; and
(3) keeping and storing g o o d s for others, as a business

and for use. (Sec. 4.108-3[b], Ibid.)
28. Sale of electricity by generation, transmission, and dis-

tribution companies is subject to VAT on their gross receipts w h i c h
refer to the following:
(1) total a m o u n t charged by generation c o m p a n i e s for the

sale of electricity and related ancillary services; and/or
(2) total a m o u n t c h a r g e d by transmission c o m p a n i e s for

transmission of electricity and related ancillary services; and/or
Imposition of Tax
(3) total a m o u n t c h a r g e d by distribution companies and

electric cooperatives for distribution and supply of electricity,
a n d related electric service. T h e universal charge passed on and
collected by distribution c o m p a n i e s and electric cooperatives
shall be excluded f r o m the computation of the gross receipts
(Sec. 4.108-3[f], Ibid.)
2 9 . Non-life insurance companies. They are not subject to

the p r e m i u m tax under Section 123. Non-life insurance premiums
are subject to VAT w h e r e a s non-life reinsurance premiums are not
subject to VAT, the latter being already subjected to VAT upon receipt
of insurance p r e m i u m s . Insurance a n d reinsurance commission,
w h e t h e r life or non-life, are subject to VAT. (Sec. 4.1083[i], CVR.)
3 0 . Pre-need companies. T h e taxable base of pre-

n e e d c o m p a n i e s for VAT purposes should be the gross receipts
without any d e d u c t i o n , and not t h e receipts/contract price net of
contribution to the trust f u n d . Such contribution is similar or equated
to the recorded " r e s e r v e " in the c a s e of insurance companies,
w h e t h e r life or non-life. Reserve is not deductible for purposes of
determining the taxable gross direct premium/writing for life and
non-life insurance c o m p a n i e s . (Rev. M e m o . Cir. No. 74-07, Nov. 12,
2007.)
3 1 . Preferential treatment of certain transactions. Exemp-

tions f r o m VAT are granted by express provision of the Tax Code
or special laws. Under VAT, the transaction can have preferential
treatment in the following w a y s :
(a) VAT exemption. An exemption m e a n s that the sale
of g o o d s or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is
not allowed any tax credit on VAT (input tax) previously paid.
This is a case wherein the VAT is removed at the exempt stage
(i.e., at the point of the sale, barter or exchange of the goods or
properties services).
T h e person making the e x e m p t sale of goods, properties or
services shall not bill any output tax to his customers because
the said transaction is not subject to VAT. On the other hand, a
VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input
tax on such purchase despite the issuance of a VAT invoice or
receipt.
(b) Zero-rated sales. T h e s e are sales by VAT-registered
persons which are subject to 0% rate, meaning the tax burden
80
ANNOTATED
is not passed on to the purchaser. A zero-rated sale by a

VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input
tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.
Under zero-rating, all VAT is r e m o v e d from the zero-rated
goods, activity or firm. In contrast, exemption only removes the
VAT at the exempt stage, and it will actually increase, rather
than reduce the total taxes paid by the e x e m p t firm's business
or non-retail customers. It is for this reason that a sharp
distinction must be m a d e between zero-rating and exemption
in designating a value-added tax. (Contex Corporation v s .
C o m m . , 433 S C R A 376 [2004].)
32. Services subject to 0%. Transactions e x e m p t f r o m
paying VAT (output tax) but can claim tax credit (input tax) are zero-
rated transactions because they are subject to zero rate, and they
are those e n u m e r a t e d in Section 106(A, 2) a n d Section 108(B).
They are taxable transactions for VAT purposes.
(1) T h e performance of certain services to be qualified

for zero-rating must s o m e h o w translate to t h e export of g o o d s
or activities, in general. This is consistent with t h e Destination
Principle or Cross-Border Doctrine of the VAT s y s t e m w h i c h is
being observed in our jurisdiction, i.e., exports are e x e m p t or
imports are taxable. (VAT Ruling N o . 120-99, Dec. 10, 1999;
see No. 34 on the application of t h e destination principle, infra.)
(2) T h e law provides for an exception to the principle,

that as for a zero percent ( 0 % ) VAT rate for service that a r e
performed in the Philippines, "paid for in acceptable foreign
currency and a c c o u n t e d for in a c c o r d a n c e with the rules a n d
regulations of the [BSP]."
(3) Tax situs of a zero-rated service. T h e law neither
m a k e s a qualification nor a d d s a condition in determining t h e
tax situs of a zero-rated service. Under this criterion, the place
where the service is rendered d e t e r m i n e s t h e jurisdiction to
impose the VAT. Performed in the Philippines, s u c h service is
necessarily subject to its jurisdiction, for the State necessarily
has to have "a substantial c o n n e c t i o n " to it, in order to enforce
a zero rate. The place of p a y m e n t is immaterial; m u c h less
is the place w h e r e the output of the service will be further or
ultimately used. ( C o m m . vs. A m e r i c a n Express International,
Inc., 4 6 2 S C R A 197 [2005].)
Imposition of Tax
(4) W h e n Section 1 0 8 ( B ) ( 1 , 2) stipulates payment in

"acceptable foreign c u r r e n c y " under B S P rules, the law clearly
envisions the payer-recipient of services to be doing business
outside t h e Philippines. Only those not doing business in
the Philippines can be required under B S P rules to pay in
acceptable foreign currency for their purchase of goods or
services f r o m the Philippines. In a domestic transaction, w h e r e
the provider and recipient of services are both doing business
in the Philippines, the B S P c a n n o t require any party to make
p a y m e n t in foreign currency.
(a) Services covered by the provision are in the nature

of export sales since since the payer-recipient of services
is doing business outside the Philippines. Under B S P rules,
the proceeds of export sales must be reported to the BSP.
T h u s , there is reason to require the provider of services
under said provisions to account for the foreign currency
proceeds to the BSP. T h e s a m e rationale does not apply
if t h e provider a n d recipient of the services are both doing
business in the Philippines since their transaction is not in
the nature of an export sale e v e n if p a y m e n t is denominated
in foreign currency.
(b) Further, w h e n the provider and recipient of services

are both doing business in t h e Philippines, their transaction
falls squarely under Section 108(A) governing domestic
sale or e x c h a n g e of services. Indeed, this is a purely
local sale or e x c h a n g e of services subject to the regular
VAT, unless of c o u r s e the transaction falls under the other
provisions of Section 108(B). ( C o m m . vs. Burmeister and
W a i n , 512 S C R A 124 [2007].)
(5) Our VAT system generally follows the "destination

principle" (exports are zero-rated w h e r e a s imports are taxed).
T h e exception to the rule refers to the 0% VAT on services
e n u m e r a t e d in Section 108 and performd in the Philippines. For
services covered by Section 108(B)(1) and (2), the recipient
of the services must be a person doing business outside the
Philippine. T h u s , to be exempt from the destination principle
under Section 108(B)(1) and (2), the services must be (a)
performed in the Philippines; (b) for a person doing business
outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules. (Ibid.)
82
ANNOTATED
(6) Consumption contemplated bylaw.The performance

of a particular type of service should not be confused with the
consumption of its output abroad. In American Express (supra.),
the respondent is a VAT-registered entity that facilitates the
collection and payment of receivables belonging to its n o n -
resident foreign client for which it gets paid in acceptable
foreign currency.
(a) The S u p r e m e Court said: "In the present case,
the facilitation of the collection of receivables is different
from the utilization or consumption of the o u t c o m e of such
service. While the facilitation is d o n e in the Philippines, the
consumption is not. R e s p o n d e n t renders assistance to its
foreign clients the R O C s [regional operating centers]
outside the country by receiving the bills of service
establishments located here in the country and forwarding
them to the R O C s a b r o a d . T h e c o n s u m p t i o n contemplated
by law, contrary to petitioner's administrative interpretation,
does not imply that t h e service be d o n e a b r o a d in order to
be zero-rated.
Consumption is 'the use of a thing in a w a y that

thereby exhausts it.' A p p l i e d to services, t h e t e r m m e a n s
the performance or 'successful completion of a contractual
duty, usually resulting in t h e performer's release f r o m any
past or future liability x x x.' T h e services rendered by
respondent are performed or successfully c o m p l e t e d u p o n
its sending to its foreign client t h e drafts a n d bills it has
gathered f r o m service establishments here. Its services,
having been performed in t h e Philippines, are therefore
also c o n s u m e d in the Philippines.
Unlike g o o d s , services c a n n o t be physically u s e d

in or bound for a specific place w h e n their destination is
determined. Instead, there can only be a 'predetermined
end of a course' w h e n determining t h e service 'location or
position x x x for legal purposes.' R e s p o n d e n t ' s facilitation
service has no physical existence, yet takes place
upon rendition, and therefore u p o n c o n s u m p t i o n , in the
Philippines. Under the destination principle, as petitioner
asserts, such service is subject to VAT at the rate of 10
[now 12] percent.'" (Ibid.)
In other w o r d s , the c o n s u m p t i o n c o n t e m p l a t e d by law

does not imply that the service must be fully performed
Imposition of Tax
outside the Philippines to be entitled to zero-rated VAT.

Even if the services are rendered both in the Philippines
and a b r o a d , the z e r o rate w o u l d still apply provided the
p e r f o r m a n c e of the service has "a substantial connection"
(No. [3].) to the foreign state which has jurisdiction of the
person or entity.
(b) Branch-head office transactions. In general, a

home office is the principal place of business where the
main office is located as appearing in the corporation's
articles of incorporation. A c c o r d i n g to the S u p r e m e Court in
American Express: "By designation alone, respondent and
the R O C s are operated as branches. This m e a n s that each
of t h e m is a unit, 'an offshoot, literal extension, or division'
located at s o m e distance f r o m the h o m e office of the parent
company, carrying separate inventories; incurring their
o w n e x p e n s e s ; a n d generating their respective incomes.
Each m a y c o n d u c t sales operations in any locality as an
extension of t h e principal office, x x x A branch may be
operated as a r e v e n u e center, cost center, profit center
or investment center, d e p e n d i n g u p o n the policies and
accounting s y s t e m of the parent company. Furthermore,
the latter m a y c h o o s e not to m a k e any sale itself, but
merely to function as a control center, w h e r e most or all its
e x p e n s e s are allocated to any of its branches."
Note: In a strict legal s e n s e , a branch and the head office

are o n e and the s a m e entity, unlike a subsidiary and its parent
c o m p a n y w h i c h are considered distinct and separate entities
f r o m e a c h other; unless of course, the parent c o m p a n y owns
1 0 0 % of the subsidiary. In American Express, the taxpayer
involved is a VAT-registered Philippine branch of a non-resident
foreign corporation e n g a g e d in the business of providing
credit card facility. It facilitates the collection and payment of
receivables belonging to its non-resident (Hongkong based)
foreign client (also a branch of the head office in USA) and
getting paid for it in duly accounted acceptable foreign currency.
T h e S u p r e m e Court recognized that a non-resident foreign

company, for taxation purposes, m a y have several branches
in different countries which may be operated as separate
business units. Furthermore, "the business concept of a
transfer price allows goods and services to be sold between
and a m o n g intra-company units a t cost o r above cost, x x x
Gratia argumenti that the sending of drafts and bills by service
84
ANNOTATED
establishments to respondent is equivalent to the act of sending

them directly to its parent company abroad, and the parent
company's subsequent redemption of those drafts and billings
of credit card holders is also attributable to respondent, then
with greater reason should the service rendered by respondent
be zero-rated under our VAT system. T h e service partakes of
the nature of export sales as applied to g o o d s (see Sec. 106 A,
2, [a, b].) especially w h e n rendered in the Philippines by a VAT-
registered person that gets paid in acceptable foreign currency
accounted for in accordance with B S P rules and regulations."
(7) Under Section 108(B, 2), w h e r e the contract involves

payment in both foreign and local currency, only the service
corresponding to that paid in foreign currency shall enjoy z e r o -
rating. The portion paid for in local currency shall be subject to
VAT.
For example, c o m m i s s i o n s a n d a g e n c y fees received by

a shipping agent from foreign principals for services rendered
in the Philippines paid for in acceptable foreign currency duly
accounted for in a c c o r d a n c e with Central B a n k regulations
are considered zero-rated sales of services. T h e taxpayer
may, within two years after t h e close of the quarter w h e n s u c h
sales w e r e m a d e , apply for the issuance of tax credit certificate
or refund of input taxes attributable to s u c h sales, (see Sec.
112[A].)
(8) Services by a resident to a non-resident foreign client

such as project studies, information services, engineering
and architectural d e s i g n , and other similar services paid for
in acceptable foreign currency a c c o u n t e d for under B S P rules
and regulations shall be subject to z e r o percent VAT rate
pursuant to Subsection (B)(2). T h u s , call center, business
process outsourcing (BPO), a n d E-mail services provided by a
domestic corporation to non-resident foreign entities and paid
for in acceptable foreign currency a c c o u n t e d for under B S P
rules and regulations shall be VAT z e r o - r a t e d . (VAT Ruling No.
006-06, May 30, 2006.)
(9) Dollar income from sale of services for in-bound tours

and dollar c o m m i s s i o n s on sale of airline tickets to foreigners
which are accounted for in a c c o r d a n c e with Central Bank
regulations are subject to the v a l u e - a d d e d tax of 0% pursuant
to Section 108(B, 2). (BIR Ruling No. 0 4 7 , Feb. 15, 1988.)
Imposition of Tax
(10) T h e e x a m p l e s given with respect to sale of goods to

former U.S. military facilities and the Asian Development Bank
(see Sec. 106[A, 2, c].) also apply to those rendering services
under Section 108(B, 3).
(11) T h e lease of residential properties to foreign
e m b a s s i e s or their personnel here in the Philippines may
effectively be zero-rated provided the lessor w h o must be a
VAT-registered p e r s o n , applies and secures prior approval
for effective zero-rating on his sale of rental services under
Section 108(B, 3). In other w o r d s , although the said sale of
rental services is a taxable transaction for VAT purposes, the
s a m e shall not result in any output tax on the lessor and the
input tax on his purchasers of g o o d s , properties or services to
such effectively zero-rated sale of service shall be available as
tax credit or refund. (BIR Ruling No. 117-99, Dec. 7, 1999.)
(12) T h e t a x p a y e r ' s transaction with PAGCOR is

d e n o m i n a t e d as an "effectively z e r o - r a t e d " transaction because
it involves the rendition of services to an entity exempt from
indirect taxes. As s u c h , t h e t a x p a y e r is not only exempt from
p a y m e n t of t h e output tax but is also entitled to a refund of its
input tax. However, to enjoy an "effectively zero-rates" status,
prior application with the R e v e n u e District Office is necessary
otherwise t h e transaction is considered merely exempt. ( C o m m .
of Internal R e v e n u e vs. Acesite [Phils.] Hotel Corp., CA-G.R.
SP No. 5 6 8 1 6 , Nov. 7, 2000.) Note: P A G C O R is now subject to
VAT under Section 108. (Sec. 4.108-3[h], CVR.)
(13) Services rendered by call center in the Philippine to

foreign-based clients which are paid for in acceptable foreign
currency and a c c o u n t e d for in accordance with B S P rules and
regulation are automatically VAT-zero-rated. (VAT Ruling No.
0 0 1 - 0 9 , J a n . 16, 2009.) Similarly, pilotage and launch services
rendered to foreign vessels e n g a g e d in international shipping
or air transport operations, including leases of property for use
thereof, are VAT zero-rated. (VAT Ruling No. 002-09, Jan. 28,
2009.)
(14) An enterprise registered with the Philippine Economic
Zone Authority (PEZA) is entitled, a m o n g others, to the
incentives provided under R.A. No. 7916, otherwise known as
the "Special Economic Z o n e Act of 1995," particularly the 5%
preferential tax rate in lieu of all national and local taxes, and
in addition, to the incentives under Executive Order No. 226,
otherwise known as the "Omnibus Investments C o d e , " notably
ANNOTATED
the six (6) or four (4) years income tax holiday (ITH). Since R.A.
No. 7916 is a special law which grants exemptions to PEZA-
registered enterprises, sales of services (which include lease of
real property) to these c o m p a n i e s shall be effectively zero-rated
pursuant to Subsection (B, 3). Under R.A. No. 7 2 2 7 , otherwise
known as the "Bases Conversion and Development Act of
1992," the special law covering the Subic Bay Metropolitan
Authority (SBMA), duly registered enterprises are also entitled
to a preferential tax rate of 5% to the exclusion of all other
6
national or local taxes.
However, the VAT-registered supplier or service contractor
shall apply with the R e v e n u e District Office having jurisdiction
over its principal place of business for the effective zero-rating
of its sale of services. Without t h e a p p r o v e d application for
zero-rating, the transactions shall be considered e x e m p t in
which case the service contractor m a y not claim the related
input tax credits but they will instead f o r m part of his costs or
expenses.
T h e supplier or service contractor m a y pass on the VAT to
the PEZA-registered firm w h i c h m a y thereafter claim s u c h input
tax credit for refund or tax credit certificate, (see Sec. 112[Aj.)
Note: According to BIR Ruling 6 5 - 9 7 , R.A. N o . 7 9 1 6 a n d
No. 7227, laws granting preferential tax treatment, find no
application to real property under lease located outside P E Z A
and S B M A Z o n e s , so that t h e lease is not entitled to zero-rating.
T h u s , if the liaison office s p a c e a n d expat's h o u s e are outside
the Philippine E c o n o m i c Z o n e Authority ( P E Z A ) boundaries, t h e
lease thereof is subject to t h e 1 0 % VAT. T h e sale of services or
6
R . A . N o . 5490 designated Bataan as a foreign trade zone ( F T Z ) . It was re-
named by Presidential Decree N o . 66 as an export processing zone ( E P Z ) under the
management of the Export Processing Zone Authority ( E P Z A ) which was replaced by
the Philippine Export Zone Authority ( E P Z A ) with the enactment of RA N o . 7916.
On the other hand, Presidential Decree N o . 538 established the P H I L V I D E C
Industrial Authority to develop and administer designated industrial areas into in-
dustrial estates (IEs) for heavy industries. R . A . N o . 7916 shifted the development of
ecozone and IEs from the government to private developers and operators by offering
them tax incentives. RA N o . 7227 (as amended) formed the Subic Bay Freeport and
the Clark Freeport Zone, Poro Point Freeport and Special Economic Zone and the
John Hay Special Economic Zone. Thus, ecozones are now governed (1) by R . A . N o .
7916, the P E Z A law and (2) by separate legislative enactments such as R.A. N o . 7227
and other laws creating freeports and special economic zones ( F S E Z ) (i.e., Cagayan,
Zamboanga City, and Aurora), the most recent being R . A . N o . 9728, otherwise known
as the Freeport Area of Bataan ( F A B ) Act of 2009."
108 V A L U E - A D D E D TAX 87
Imposition of Tax
lease of property is not entitled to the benefits of Section 24 of

R.A. No. 7 9 1 6 . (BIR Ruling No. 33-99, March 23, 1999.)
Neither the law nor the regulations m a k e any distinction,
however, on the geographical location of the services rendered.
( 1 5 ) In claims for refund of input VAT attributable to zero-
rated export sales, the export sales invoices are not the only
m e a n s of proving the existence of the export sales. Other
d o c u m e n t s m a y be presented to prove the existence of the
export sales s u c h as t h e certificates of inward remittance,
airway bills, export declarations, and certifications of the
independent auditor. (Intel Technology Phils., Inc. vs. C o m m . ,
CTA C a s e No. 6 1 6 9 , Oct. 2 0 , 2004.)
(16) Under R.A. N o . 7 9 1 6 , business establishments

operating within t h e e c o z o n e are not subject to taxes, local
or national, but are subject to the preferential 5% income tax
rate b a s e d on gross i n c o m e e a r n e d (GIE). Consequently, the
sale of a parcel of land located within an E c o z o n e between
t w o PEZA-registered entities is not subject to capital gains tax
( C G T ) creditable withholding tax ( C W T ) , VAT, a n d documentary
s t a m p tax (DST). (BIR Ruling No. D A - 2 8 1 - 0 7 , M a y 2, 2007.)
T h e preferential tax rate is in lieu of all national and local taxes.
Proceeds f r o m the sale by a PEZA-registered enterprise of
its assets in the c o u r s e of w i n d i n g up its business affairs after
the cancellation of its PEZA-registration are no longer subject
to the preferential tax rate. (BIR Ruling No. 018-10, July 1,
2010.)
33. Effectively zero-rated sale of services. It refers to the
local sale of services by a VAT-registered person to a person or entity
granted indirect tax e x e m p t i o n under special laws or international
agreement. They are limited to local sales to persons or entities
that enjoy tax exemptions from indirect taxes under Subsection (B),
Nos. 3, 4 , and 5.
(1) T h e concerned taxpayer must seek prior approval or
prior confirmation from the appropriate BIR office so that a
transaction may be qualified for effective zero-rating. Without
an approved application for effective zero-rating, the transaction
otherwise entitled to the zero-rating, shall be considered
exempt. T h e Commissioner, however, may prescribe such
rules to effectively implement the processing of applications for
effective zero-rating. (Sec. 4.108-6, CVR.)
ANNOTATED
(2) Effective zero rating is not intended as a benefit to

the person legally liable to pay the tax, but to relieve certain
entities from the burden of indirect tax so as to encourage the
development of particular industries. T h e seller, by shifting the
VAT, to the purchaser (National Power Corporation) will add to
the cost of the goods or services (cost of electricity) sold to it.
(San Roque Power Corp. vs. C o m m . , 605 S C R A 536 [2009].)
Note: The term "local s a l e " used in the C V R m e a n s that
the place of performance of the service to an e c o z o n e entity is
within the Philippines. It does not specify that it should be inside
the ecozone. Under M e m o . Cir. No. 50-2007 (see Annotation
No. 36[3], [Q, 5], however, to be covered by VAT zero-rating,
the sale (supply of services must be "rendered or performed
within the Freeport Z o n e . " BIR Ruling No. D A - 2 0 2 - 0 8 (March
28, 2008.) states: " W h e r e the supplier of services is a VAT-
registered taxpayer, sale of services to a PEZA-registered
enterprises shall be subject to VAT at zero percent (0%),
provided that the services are rendered within t h e e c o z o n e , and
provided further, that the services are rendered in connection
with the registered activity/ies of the buyers, i.e., P E Z A -
registered entities. Conversely, if t h e service is rendered within
the customs territory, such sale of service by a VAT-registered
person shall be subject to the 1 2 % VAT irrespective of t h e
status of the buyer as e c o z o n e registered enterprise. This is
in consideration that the situs of VAT for sale of services is the
place w h e r e the service is r e n d e r e d . T h u s , w h e r e the service
by a VAT-registered person f r o m c u s t o m s territory is rendered
within the e c o z o n e such sale of service shall effectively be
subject to zero percent (0%) VAT.
Note also that under Section 24 of R.A. No. 7 9 1 6 (supra.),

the law creating special e c o n o m i c z o n e s , "no taxes, local
and national, shall be i m p o s e d on business establishments
operating within the e c o z o n e . In lieu of paying taxes, five
percent (5%) of the gross income e a r n e d by all businesses a n d
enterprises within the e c o z o n e shall be remitted to the national
government." In this c o n n e c t i o n , the S u p r e m e Court has held
that the exemption of P E Z A enterprises f r o m national a n d local
taxes covers both direct and indirect taxes s t e m m i n g f r o m the
nature of the VAT as a tax on c o n s u m p t i o n for w h i c h the direct
tax is imposed on one person but the indirect burden is p a s s e d
on to another. An e x e m p t enterprise can neither be directly
charged for the VAT on its sales nor indirectly m a d e to bear, as
Imposition of Tax
a d d e d cost to such sales, the equivalent VAT on its purchases.

Simply stated, no VAT m a y be p a s s e d on and impose indirectly
u p o n an e x e m p t business enterprise operating within the
e c o n z o n e . ( C o m m . vs. S e a g a t e Technology [Phils.], 451 S C R A
132 [2005])
34. Destination Principle or Cross Border Doctrine. Our

VAT Law, w h i c h w a s first a d o p t e d under Executive Order No. 273,
effective J a n u a r y 1, 1988, in general, adheres to the "Destination
Principle" or the "Cross Border Doctrine," as basis for the coverage
of VAT w h e r e b y imports are subject to VAT and exports are free of
the tax. Zero-rated transactions generally refer to the export sale
of g o o d s a n d supply of services. T h e tax rate is set at zero. W h e n
applied to the tax base, s u c h rate results in no tax chargeable
against the p u r c h a s e . T h e seller charges no output tax but can
claim a refund of or a tax credit certificate for the VAT previously
c h a r g e d by suppliers. ( C o m m . vs. S e a g a t e Technology [Phils.],
supra.)
(1) VAT exemption and VAT-zero rating distinguished.

Under this doctrine, VAT e x e m p t i o n and VAT zero-rating are
distinguished as follows:
"x x x z e r o rating should be used w h e n the authorities
really w i s h to e n s u r e that a product is to be free of VAT.
Using an e x e m p t i o n for VAT m e a n s that the tax is borne
by the trader, and if that trader sells to the public, he must
pass on the tax on input to the public in his PRICE or cut
p a y m e n t s to his factors of production (capital and labor).
This suggests that countries that generally wish to pass
on to the c o n s u m e r the benefits of VAT-free goods and
services should be allowed to use the zero-rate." (Value-
A d d e d Tax International Practice and Problems, Allan A.
Tait, International Monetary F u n d , Washington, D.C., 1988,
p. 51.)
" W h e n considering a VAT, an important decision to
be m a d e by a country concerns what regime to adopt for
international trade: the origin principle (export taxable,
imports exempt), or the destination principle (export
exempt, import taxable). (Value-Added Tax [VAT] by Antonio
Carlos Rodriguez, Harvard Law School, 1995, citing Shoup
[1986] on destination principle, viz.: "the country taxes all
value a d d e d , at home and abroad, or goods that have as
their destination the consumers of that country. Exports are
ANNOTATED
exempt, imports are taxable. This is comparable with the

consumption type VAT.)"
Accordingly, the onus of taxation under our VAT system
is in that country where goods, properties and services are
destined, used or c o n s u m e d . This is the reason w h y under our
VAT law, goods, properties and services destined to, used or
consumed abroad are subject to zero-percent (0%) VAT. (VAT
Ruling No. 015-00, March 28, 2000.)
(2) Application of the destination principle to services
subject to zero percent (0%) rate. T h e "destination principle"
calls for the imposition of the VAT on transactions in g o o d s ,
properties, or services destined to be c o n s u m e d in the
Philippines. T h e onus of taxation is in the country w h e r e t h e
goods, properties, or services are ultimately destined, u s e d ,
or c o n s u m e d . T h u s , imported g o o d s are subject to 1 2 % VAT
whereas exported g o o d s are subject to 0% VAT. Section 108(B)
enumerates the transactions (generally export in nature) that
are subject to 0% VAT. T h e law itself provides for exceptions
under which the supply of service shall be pro-rated subject to
meeting certain requirements.
(a) Section 108(B, 1) requires that w h e n t h e services

refer to the "processing, manufacturing or repacking g o o d s
for persons doing business outside the Philippines," the
goods must be "subsequently e x p o r t e d , " i.e., c o n s u m e d or
destined a b r o a d , in order to be t a x e d at z e r o rate.
(b) Section 108(B, 2) w h i c h refers to services other
than the a b o v e d o e s not expressly require, or e v e n imply,
that such services be c o n s u m e d outside the Philippines in
order to qualify for VAT zero rating. Neither d o e s Section
4.108-5[b-2], C V R . ) require that t h e services be c o n s u m e d
abroad and in view of the plain w o r d i n g of Section 108(B,
2), it is legally debatable if s u c h additional requirement can
be i m p o s e d .
In a number of rulings, however, the BIR, interpreting

Section 108(B, 2) of t h e Tax C o d e , treated services
rendered by non-resident foreign clients as being VAT
zero-rated only w h e n , a m o n g the other requirements, the
services are ultimately destined or c o n s u m e d outside the
Philippines.
(c) Services rendered by an R O H Q to its head office

are not VAT zero-rated under Section 108(B, 2). T h e
Imposition of Tax
R O H Q and its head office are treated as one and the same
entity a n d the head office cannot be d e e m e d to be doing
business outside the Philippines. (Institutional Shareholder
Services, Inc. Philippine R O H Q vs. C o m m . , No. 7662
J u n e 3, 2010.)
(d) T h e sole services to persons e n g a g e d in inter-

national shipping or air transport operations is zero-rated
under Section 108(B, 4). In order to qualify for zero-rating,
the services rendered by a VAT-registered person to a
person e n g a g e d in international air transport operations
must pertain, or must be attributable, to the transport of
g o o d s and p a s s e n g e r s f r o m a port in the Philippines
directly to a foreign port, without docking or stopping at
any port in t h e Philippines. R o o m a c c o m m o d a t i o n s , food
a n d b e v e r a g e services provided by a hotel to international
airlines are not directly attributable to the airlines' transport
of g o o d s a n d p a s s e n g e r s ; h e n c e , the sale of said services
to the airlines is not zero-rated but is subject to 1 2 % VAT.
(BIR Ruling No. D A - 0 1 6 - 1 0 , J a n . 28, 2010.)
35. Sale to foreign embassies. For taxation purposes,

e m b a s s i e s are considered extensions of their respective countries'
territory. As s u c h , any sale within a foreign e m b a s s y is considered
foreign sale or transaction outside the Philippine territory. The sale
of g o o d s or services by local suppliers to a non-resident foreign
corporation providing required security m e a s u r e of the embassy
is considered a transaction outside the Philippine territory that
qualifies for VAT zero-rating. However, the said sale is an effectively
zero-rated sale w h i c h shall require the said local suppliers to secure
prior approval from the BIR for effective zero-rating on their sale
of goods or services to the nonresident foreign corporation. (BIR
Ruling No. 536-04, Oct. 2 9 , 2004.)
36. Tax treatment of sale, etc. of goods, properties or services

in ecozones. Rev. M e m o . Cir. No. 50-07 (July 30, 2007) clarifies
the tax treatment of the sale, barter or exchange of goods, services,
or lease of properties m a d e by suppliers from the customs territory
to registered Freeport Z o n e enterprises in the Subic Freeport Zone
(SFZ) including the Clark Freeport Z o n e (CFZ) and Poro Point
Freeport Z o n e (PPFZ), and vice versa, under Sections 12 and 15 of
R.A. No. 7227 (Bases Conversion and Development Act of 1992),
as a m e n d e d by R.A. No. 9400, in relation to Sections 106(A)(2)(c)
and 108(B)(3) of the Tax Code, as implemented by Sections 4.106-
92
ANNOTATED
5, 4.106-6, and 4.106-6, and 4.106-8 of (as a m e n d e d by Rev. Regs.

No. 4.07) of Rev. Regs. No. 16-2005 (CVR).
The term "customs territory" m e a n s "the national territory
of the Philippines outside of the proclaimed boundaries of the
E C O Z O N E S except those areas specifically declared by other
laws and/or presidential proclamations to have the status of special
economic zones and/or free ports." (Sec. 1[g], P E Z A Rules and
Regulations.) Ecozones, by fiction of law, are considered foreign
territories.
(1) Background. Pursuant to Sections 12 and 15 of RA
No. 7227, as a m e n d e d by RA 9 4 0 0 , the foregoing Freeport
Zones shall be operated and m a n a g e d as separate c u s t o m s
territories. The free flow or m o v e m e n t of g o o d s and capital
within, into and exported out of the said Freeport Z o n e s , as
well as the implementation of tax incentives and duty-free
importations of raw materials, g o o d s , a n d capital e q u i p m e n t
shall be e n s u r e d . Being a separate c u s t o m s territories, the
exportation or removal of g o o d s f r o m t h e said Freeport Z o n e s
to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the C u s t o m s and Tariff C o d e ,
the Tax C o d e of and other relevant tax laws of the Philippines.
The S u p r e m e Court reiterated the g o v e r n m e n t ' s policy

governing Freeport Z o n e s under R.A. No. 7 2 2 7 of "converting
into alternative productive uses, f o r m e r military reservations
and their extensions, as well as providing t h e m incentives
to e n h a n c e the benefits that w o u l d be derived f r o m t h e m in
promoting e c o n o m i c and social d e v e l o p m e n t . " T h e s e Freeport
Z o n e s therefore, by legal fiction, are regarded as foreign
territories. This legal fiction is necessary to give meaningful
effect to the policies of the special law creating t h e said Freeport
zone. ( C o m m . vs. S e a g a t e Technology [Philippines], 4 5 1 S C R A
132 [2005]; C o m m . vs. Toshiba Information S y s t e m s [Phils.],
Inc., 4 6 6 S C R A 211 [2005].)
Generally, products m a n u f a c t u r e d or p r o d u c e d within

the SFZ, C F Z , and P P F Z are destined for export to foreign
countries. While such products, under certain conditions, m a y
also be sold to buyers in the c u s t o m s territory, such sales are
technically considered as importations by such buyers f r o m the
customs territory. Since these Freeport Z o n e s , as defined by
law, are considered as separate c u s t o m s territories, the buyer
from the customs territory is treated as an importer a n d is
Imposition of Tax
subject to the corresponding c u s t o m s duties and import taxes

on his p u r c h a s e of products f r o m within these Freeport Zones.
(2) Cross border doctrine. T h e Philippine VAT Law
a d h e r e s to this doctrine of the VAT s y s t e m , which basically
m e a n s that no VAT shall be i m p o s e d to form part of the cost of
g o o d s destined for c o n s u m p t i o n outside the territorial border of
the Philippine taxing authority. Hence, actual export of goods
a n d services f r o m the Philippines to a foreign country must
be free of VAT. Conversely, t h o s e g o o d s destined for use or
c o n s u m p t i o n and services to be rendered within the Philippines
shall be subject to t h e 1 2 % VAT. Under the cross border
principle of the VAT s y s t e m , no VAT shall be imposed to form
part of t h e cost of g o o d s destined for c o n s u m p t i o n outside of
the territorial border of the taxing authority. If exports of goods
and services f r o m t h e Philippines to a foreign country are free
of t h e VAT, t h e n t h e s a m e rule holds for such exports from the
national territory e x c e p t specifically declared areas to an
E c o z o n e , or in this c a s e , a Freeport Z o n e . ( C o m m . vs. Seagate
and CIR v s . Toshiba, supra.)
T h e provision on t h e incentives to S F Z , such as tax and

duty-free importations of raw materials, g o o d s and capital
e q u i p m e n t , should be interpreted within the context and in a
m a n n e r that w o u l d p r o m o t e in the fullest manner the policy
and object of t h e Legislature: "For as long as the goods remain
within the z o n e , w h e t h e r we call it an e c o n o m i c z o n e or a
freeport z o n e , for as long as we say in this law that all goods
entering this particular territory will be duty-free and tax- free,
for as long as they remain there, c o n s u m e d there or re-exported
or destroyed in that place, then they are not subject to duties
and taxes in a c c o r d a n c e with the laws of the Philippines." The
establishment of duty-free shops within the S F Z which sell
c o n s u m e r items is still well within the policy enunciated in R.A.
No. 7227, as long as the g o o d s are not brought out of the zone.
Hence, e v e n individuals can be entitled to tax and duty free
purchases of g o o d s within the S F Z and for as long as these
goods are not brought out of the Freeport Z o n e . (Coconut Oil
Refiners Association, Inc. vs. Ruben Torres, 465 S C R A 47
[2005].)
(3) Clarificatory questions and answers:

Q 1 : How will the sale, barter or exchange of goods or
properties into the Freeport Zone by suppliers/contractors
from the Customs Territory be considered?
94
ANNOTATED
A 1 : Such transactions shall be considered as export

sales in accordance with R.A. No. 7227, as a m e n d e d by
R.A. No. 9400, which provides that the Freeport Z o n e s
shall be operated and m a n a g e d as a separate customs
territory.
Moreover, Executive Order (EO) No. 226 provides
that sales from the C u s t o m s Territory to export processing
zones are considered as "export sales."
Q 2 : What will be the treatment of sale, barter, e x c h a n g e
or lease of goods, properties and sale or e x c h a n g e of
services to a registered Freeport Z o n e enterprise by
sellers/contractors f r o m the C u s t o m s Territory?
A 2 : If the seller is a VAT taxpayer, s u c h sale, barter or
exchange shall be subject to VAT at zero percent (0%). If
the seller is a non-VAT taxpayer, t h e transaction shall be
exempt from VAT.
Q 3 : W h a t is m e a n t by a "zero-rated" sale a n d an
"exempt" sale?
A 3 : A zero-rated sale of g o o d s , properties a n d /
or services (by a VAT registered person) is a taxable
transaction for VAT purposes, but shall not result in any
output tax. However, the input tax on p u r c h a s e s of g o o d s ,
properties or services, related to s u c h zero-rated sale,
shall be available as tax credit or refund in a c c o r d a n c e
with existing regulations. Under this type of sale, no VAT
shall be shifted or p a s s e d - o n by VAT-registered sellers/
suppliers f r o m the C u s t o m s Territory on their sale, barter
or e x c h a n g e of g o o d s , properties or services to the subject
registered Freeport Z o n e enterprises.
A VAT-exempt transaction, on t h e other h a n d , refers

to the sale of g o o d s , properties or services or t h e use or
lease of properties that is not subject to VAT (output tax)
under Section 109 of t h e Tax C o d e of 1997, and the seller/
supplier is not allowed any tax credit of VAT (input tax) on
purchases related to such e x e m p t transaction.
Q 4 : W h a t is the difference b e t w e e n an automatically

zero-rated sale and an effectively zero-rated sale?
A 4 : An automatically zero-rated sale refers to a sale
of goods, properties and services to a Freeport Z o n e -
registered enterprise by a VAT-registered seller/supplier
Imposition of Tax
that is regarded as either an export sale or a foreign

currency d e n o m i n a t e d sale under Section 106 of the Tax
C o d e of 1997.
An effectively zero-rated sale, on the other h a n d ,

refers to the local sale of g o o d s , properties and services
by a VAT-registered person to an entity that w a s granted
indirect tax e x e m p t i o n under special laws or international
a g r e e m e n t s . Since the buyer is e x e m p t from indirect
tax, the seller c a n n o t pass on the VAT and therefore, the
e x e m p t i o n enjoyed by t h e buyer shall extend to the seller,
making the sale effectively zero-rated.
Q 5 : W h a t is the c o v e r a g e of VAT zero-rating?
A 5 : T h e zero-rating will cover sale, barter, exchange
or lease of all g o o d s , properties and/or services by a VAT-
registered seller/contractor f r o m the C u s t o m s Territory to
a Freeport Zone-registered enterprise and shall include,
a m o n g others, t h e following:
(a) T h e sale/supply of ordinary cars, vehicles, auto-
mobiles, specialized vehicles or other transportation
e q u i p m e n t , provided that these are used exclusively
within the subject special Freeport Z o n e s ;
(b) T h e lease of properties by VAT-registered
lessors, provided that s u c h properties are located
within t h e subject Freeport Z o n e s ;
(c) T h e sale/supply of electricity by the National
Power Corporation ("NPC") or by any other VAT-
registered seller/supplier from the Customs Territory,
to any registered Freeport Z o n e enterprise engaged in
the distribution of power or electricity within the subject
Freeport Z o n e s ; and
(d) T h e sale/supply of services, provided such
services are rendered or performed within the Freeport
Zone.
Q 6 : Since the Freeport Z o n e s are considered as foreign
soil and therefore, a separate tax jurisdiction, what is the
VAT treatment of sale, e x c h a n g e , barter or lease of goods,
properties and/or services by a Freeport Zone-registered
enterprise or Resident within the Freeport Zone?
A 6 : Such sale, exchange, barter or lease of goods,
properties and services within the subject Freeport Zones
96
ANNOTATED
shall be exempt from VAT. T h e following transactions are

covered under this exemption:
(a) All transactions between and/or a m o n g two
registered Freeport Z o n e Enterprises or Residents;
(b) C o n s u m e r g o o d s purchased and c o n - s u m e d
within the Freeport Z o n e s ;
(c) Sale/supply of services, including power or
electricity, by a Freeport Zone-registered enterprise
or resident within the Freeport Z o n e , regardless of
whether or not the buyer or customer is a registered
Freeport Z o n e enterprise or Z o n e Resident, provided
that said power/electricity or services are rendered,
used or c o n s u m e d within the Freeport Z o n e ; and
(d) T h e lease of properties o w n e d by Freeport

Zone-registered enterprises or Resi-dents, provided
that such properties are located within the subject
Freeport Z o n e s .
Q 7 : W h a t is the tax treatment for t h e i n c o m e of Freeport

Zone-registered enterprises derived f r o m sources in t h e
Customs Territory?
A 7 : Freeport Zone-registered enterprises m a y g e n e -
rate income f r o m sources within the C u s t o m s Territory
of up to thirty percent (30%) of its total i n c o m e f r o m all
sources; provided, that should a Freeport Zone-registered
enterprise's income f r o m sources within the C u s t o m s
Territory e x c e e d thirty percent ( 3 0 % ) of its total income
f r o m all sources, t h e n it shall be subject to t h e i n c o m e tax
laws of the C u s t o m s Territory; provided further, that in any
case, c u s t o m s duties a n d t a x e s must be paid with respect
to transactions, receipts, i n c o m e and sales of articles to t h e
C u s t o m s Territory and in the C u s t o m s Territory.
Q 8 : W h a t is the tax treatment of sale, barter or e x c h a n g e

of g o o d s a n d properties by Freeport Zone-registered
enterprises to a buyer f r o m the c u s t o m s territory? (i.e.,
from the Freeport Z o n e into the C u s t o m s Territory)
A 8 : T h e sale, barter or e x c h a n g e shall be treated as
a technical importation m a d e by the buyer in the c u s t o m s
territory. T h e buyer shall be treated as the importer and
shall be imposed the corresponding import taxes a n d duties
prior to release of the g o o d s or m e r c h a n d i s e f r o m C u s t o m s
Imposition of Tax
custody. A n y unpaid taxes t h e r e o n , aside from being the

prime liability of the buyer-importer, shall constitute a lien
on s u c h g o o d s or m e r c h a n d i s e imported from the Freeport
Zone.
Q 9 : W h a t is the tax treatment of a sale of service
or lease of properties (machineries and equipment) by
Freeport Zone-registered enterprises to a customer or
lessee f r o m t h e C u s t o m s Territory?
A 9 : T h e sale of service shall be e x e m p t from VAT if the
service is performed or rendered within the Freeport Z o n e .
T h e lease of properties, on the other h a n d , shall
likewise be e x e m p t f r o m VAT if the property is located within
the Freeport Z o n e . However, if the properties (machineries
a n d e q u i p m e n t ) leased by t h e Freeport Zone-registered
enterprise is located outside of the Freeport Z o n e ,
p a y m e n t s to s u c h enterprise will be considered as royalties
a n d subject to the final withholding VAT of 1 2 % .
Q10: W h a t are the d o c u m e n t a r y requirements to
be submitted by Freeport Zone-registered enterprises to
t h e BIR to be entitled to the tax benefits clarified in this
Circular?
A 1 0 : (1) Certificate of Registration and Tax Exemption

as a Freeport Zoneregistered Enterprise;
(2) Copies of relevant d o c u m e n t a t i o n of the legal
status of t h e business enterprise (Articles of Incorporation,
Partnership A g r e e m e n t , S E C Registration and similar
d o c u m e n t s ) s h o w i n g , a m o n g others, beneficial ownership;
(3) If a corporation, partnership or other business
enterprise is organized or constituted outside the Philip-
pines, the n a m e , address of the legal agent of the
enterprise in the Freeport Z o n e a c c o m p a n i e d by sworn
proof of consent of the agent to serve as such;
(4) Evidence of the physical location of the business
enterprise within the Freeport Z o n e , such as certificate of
title, tax declaration, property d e e d , lease agreement and
similar d o c u m e n t s ;
(5) If previously part of a larger business enterprise
doing business elsewhere in the Philippines, evidence
of restructuring to exclude all business operations taking
place inside the boundaries of the Freeport Zone; and that
98
ANNOTATED
the unit left to operate inside the Freeport Zone is organized

as a separate legal entity.
(6) List of assets comprising the investment to be
made; and
(7) Such other documents as the BIR may require.
Note: Exec. Order No. 660 (Sept. 13, 2 0 0 7 , published
in Rev. M e m o . Cir. No. 20-2008, Feb. 9, 2008.) nationalizes
the tax privileges on importations by registered enterprises
or locators within the Subic Special E c o n o m i c Z o n e . Their
importation in excess of the requirements of their registered
business or authorized business activity, consisting of raw
materials, capital g o o d s and e q u i p m e n t shall be d e e m e d
bought into or sold within t h e c u s t o m s territory, and therefore,
subject to payment of taxes and c u s t o m s duties in a c c o r d a n c e
with existing c u s t o m s and tax laws.
37. Treatment of royalties paid by PEZA registered enterprises
subject to 5% preferential tax on gross income. T h e treatment
depends on the consideration for w h i c h s u c h fees are paid.
(1) W h e n the royalties relate to a s y s t e m or license royal-
ties, they are treated as general a n d administrative e x p e n s e s ,
which are not inventoriable costs.
(2) W h e n the royalties are c o n n e c t e d with a product d e -
sign, logo, formula, or process, then t h e p a y m e n t is capitalized
as part of inventories.
Thus, royalties paid for the transfer of technical informa-
tion and manufacturing k n o w - h o w are c o n s i d e r e d as part of the
cost of manufacturing the product. Manufacturing costs/factory
overhead can be d e d u c t e d f r o m t h e gross sales/revenue for
the purpose of c o m p u t i n g t h e gross i n c o m e e a r n e d (GIE) s u b -
ject to the 5% preferential tax rate. (BIR Ruling N o . D A - 5 5 2 - 0 7 ,
Oct. 23, 2007.)
38. Terms and conditions for payment of services rendered

to a domestic shipping company engaged in international trade to
be zero-rated. Pursuant to R e v e n u e M e m o r a n d u m Circular No.
47-88 (Sept. 12, 1988), that portion of freight collection used to
pay services rendered to foreign vessels while in Philippine port is
d e e m e d inwardly remitted provided prior Central Bank approval is
secured to deduct said fund f r o m its remittable freight collections.
This ruling has created a lopsided situation in favor of the

foreign shipping c o m p a n y vis-a-vis the domestic shipping c o m p a n y
Imposition of Tax
e n g a g e d in international trade. Since services rendered to foreign

vessels d o c k e d in Philippine ports are zero-rated while services
rendered in inter-ocean vessels of a domestic corporation, even if
paid with foreign e x c h a n g e e a r n e d a b r o a d , are subject to 1 0 % VAT,
the latter is unable to c o m p e t e with the former in charging freight on
their foreign shippers.
In order to correct the lopsided disadvantage of a domestic

shipping c o m p a n y e n g a g e d in international trade vis-a-vis the
foreign shipping c o m p a n y in charging freight on cargoes loaded
on its vessels u s e d in international trade, the various services
rendered on such vessels while d o c k e d in Philippine ports are
likewise a c c o r d e d the s a m e treatment as that provided under R M C
No. 4 7 - 8 8 a b o v e , subject to their conformity with the following terms
a n d conditions:
(1) T h a t the d o m e s t i c shipping c o m p a n y shall, for the

various services rendered to its vessels used in international
trade while d o c k e d in t h e Philippine ports, pay in foreign
currency g e n e r a t e d f r o m t h e freight collection of its branch
offices a b r o a d ;
(2) T h a t such freight collection in foreign currency shall be
remitted to the Philippines a n d deposited to a special foreign
currency account in a designated bank; and from such account
shall be d r a w n exclusively the foreign currency for conversion
to pesos to be used in the p a y m e n t of the various services
rendered to its vessels while d o c k e d in Philippine ports; and
(3) T h a t the local shipping c o m p a n y interested in availing
of the benefit of zero-rating for the services rendered to its
vessels while in Philippine ports shall attach to its quarterly
percentage tax return a Statement indicating the name of the
vessels used exclusively in international trade; the number
of times and date e a c h vessel d o c k e d in Philippine ports; the
a m o u n t of various services and the persons or firms rendering
the s a m e ; and the a m o u n t of foreign currency withdrawals from
the special foreign currency account and proof of conversion
of such a m o u n t to Philippine pesos. T h e statement shall be
furnished to the seller of the services and attached to the
seller's application for zero-rating or the sale of services to the
vessels of a foreign shipping c o m p a n y used in international
trade. (VAT Ruling No. 164, Sept. 3, 1990.)
39. Possible sources of input of tax.

(1) In the case of actors, actresses, talents, singers and
emcees, radio and television broadcasters, choreographers,
ANNOTATED
musical/radio/movie/television/stage directors and athletes.

Their sources of input tax may c o m e from the purchase of
apparels, accessories, cosmetics, office equipment, supplies,
telecommunication expenses, fuel oil, insurance, advertising
and promotions, representation, repairs and maintenance
expenses for transportation vehicles as well as professional
and other service fees paid for as long as theses are incurred
exclusively in pursuit of their professional/occupation/calling
and not for personal use or c o n s u m p t i o n , duly supported by
VAT-registered sales invoices/Official Receipts issued by the
sellers of goods and services and are reasonable in a m o u n t
compared to the declared gross taxable receipts.
It is to be noted, however, that input tax on purchase of

apparels, accessories, cosmetics can be allowed as tax credit
only to those taxpayers (i.e., actors/actresses, singers, e m c e e s ,
but not in all cases) w h e r e physical a p p e a r a n c e counts a lot in
the earning of the gross taxable receipts. (A-32, Rev. M e m o .
Cir. No. 6-2003.)
(2) In the case of GPPs and those in the practice of

profession. Their sources of input tax m a y c o m e f r o m lease/
rental payments of office spaces or p u r c h a s e of office, medical,
architectural, engineering, dental supplies, as the c a s e m a y
be, medical or dental laboratory e x p e n s e s , t e l e c o m m u n i c a t i o n
expenses, fuel oil, insurance, representation, repairs a n d
maintenance e x p e n s e s incurred in pursuit of their respective
professions and not for personal use of c o n s u m p t i o n , duly
supported by VAT registered sales invoices/Official Receipts,
issued by the sellers, a n d are reasonable in a m o u n t c o m p a r e d
to the declared gross taxable receipts. (A-34, Ibid.)
4 0 . Tax treatment of shifted VAT. VAT, being an indirect

tax, is passed-on or shifted by the service-provider to t h e service-
recipient.
(1) If the service-recipient is a taxpayer e n g a g e d in trade,

business/calling or profession liable to VAT on sale of g o o d s
or services or the so-called output VAT, the shifted VAT on
purchases in the course of trade or business is c o n s i d e r e d as
an input VAT which can be claimed as tax credit against the
output VAT, a m o n g others, in arriving at the VAT payable or
excess input tax.
(2) On the other h a n d , if the service-recipient is a taxpayer

e n g a g e d in trade, business/calling or profession not liable to
VAT, the shifted VAT on the purchases in the course of trade
Imposition of Tax
or business shall be treated as part of cost of purchases or

expenses.
(3) If the service-recipient is not e n g a g e d in trade,
business/calling or profession, or if the purchase is d o n e not in
the course of trade or business, the passed-on or shifted VAT
shall f o r m part of the cost or e x p e n s e s he incurred for personal
use or c o n s u m p t i o n a n d , therefore, not deductible in computing
any kind of tax. (A-24, Ibid.)
4 1 . Tax treatment of gross receipts received by a general
professional partnership. T h e G P P shall be treated as a separate
and distinct taxable person f r o m t h e individual partners composing
the partnership. For VAT p u r p o s e s , all gross receipts from the sales
of services rendered by the partners for and in the name of the
partnership shall be entirely taxable against the partnership.
However, the sales of service m a d e by any of the partners

thereof, in his personal a n d individual capacity, shall not be attributed
to the partnership, but shall be taxable against such partner in his
individual capacity. (A-33, Ibid.)
4 2 . Tax treatment of out-of-pocket expenses. Liquidation
of out-of-pocket e x p e n s e s / a d v a n c e s for clients which are mere
r e i m b u r s e m e n t s of costs a n d are c h a r g e a b l e to the client are not
considered professional f e e s that are subject to VAT, provided that
the official receipts for the e x p e n s e s are billed in the n a m e of the
client a n d , therefore, c a n be claimed only by the client as item of
deduction a n d that the partnership a d v a n c e s only the amount for
future liquidation by the client.
For this p u r p o s e , the collection of out-of-pocket expenses from

the client must be recorded as liquidation of advances for and on
behalf of clients; otherwise, they shall form part of the gross receipts
of the professional. (A-35, Ibid.)
4 3 . Tax treatment of net distributive share in net income of
GPP. For VAT purposes, the G P P is treated as a separate and
distinct taxable person from the individual partners composing the
partnership. As s u c h , in determining whether or not a professional
is subject to VAT using the P550.000 (now P1.5 million) VAT
threshold, his receipt of the net share in the net income of G P P of
which he is partner should not be considered.
EXAMPLE:
L, a lawyer, received P300.000 as his share in the net
income of the G P P of which he is partner. In addition thereto,
102
ANNOTATED
gross receipts he derived from his personal and individual

practice not attributable to the partnership amounted to
P400.000.
In this case, the P300.000 L derived from the G P P shall not
be considered in computing the P550.000 (now P1.5 million)
VAT threshold. Neither shall it be subjected again to VAT or
percentage tax. Therefore, having derived gross receipts
amounting only to P400.000. L is not subject to VAT but instead
subject to percentage tax at the rate of 3%. (A-37, Ibid.)
38. Sale of power. Under Subsection (B)(7), the VAT zero-

rating applies only to sale of p o w e r and d o e s not cover other
types of sale of g o o d s and services, including sale of transmission
services. (VAT Ruling No. 6 0 7 - 0 7 , April 19, 2007.)
SEC. 109. Exempt Transactions. (1) Subject to the provi-

sions of subsection (2) hereof, the following transactions shall be
exempt from the value-added tax:
(A) Sale or importation of agricultural and marine food products
in their original state, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor.
Products classified under this paragraph shall be considered in
their original state even if they have undergone the simple processes
of preparation or preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or stripping. Polished
and/or husked rice, corn grits, raw cane sugar and molasses, ordinary
salt, and copra shall be considered in their original state;
(B) Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo animals and other animals
generally considered as pets);
(C) Importation of personal and household effects belonging
to the residents of the Philippines returning from abroad and
nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines;
(D) Importation of professional instruments and implements,
wearing apparel, domestic animals, and personal household effects
Imposition of Tax
(except any vehicle, vessel, aircraft, machinery, other goods for use
in the manufacture and merchandise of any kind in commercial
quantity) belonging to persons coming to settle in the Philippines,
for their own use and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (90) days before or after
their arrival, upon the production of evidence satisfactory to the
Commissioner, that such persons are actually coming to settle in
the Philippines and that the change of residence is bona fide;
(E) Services subject to percentage tax under Title V;
(F) Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw
sugar;
(G) Medical, dental, hospital and veterinary services except
those rendered by professionals;
(H) Educational services rendered by private educational insti-
tutions, duly accredited by the Department of Education (DepEd),
the Commission on Higher Education (CHED), the Technical Edu-
cation and Skills Development Authority (TESDA) and those ren-
dered by government educational institutions;
( I ) Services rendered by individuals pursuant to an employer-
employee relationship;
(J) Services rendered by regional or area headquarters estab-
lished in the Philippines by multinational corporations which act
as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do
not earn or derive income from the Philippines;
( K ) Transactions which are exempt under international agree-
ments to which the Philippines is a signatory or under special laws,
except those under Presidential Decree No. 529;
( L ) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority to their members as well as sale
of their produce, whether in its original state or processed form, to
non-members; their importation of direct farm inputs, machineries
and equipment, including spare parts thereof, to be used directly
and exclusively in the production and/or processing of their produce;
(M) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Cooperative Develop-
ment Authority;
ANNOTATED
(N) Sales by non-agricultural, non-electric and non-credit coope-

ratives duly registered with the Cooperative Development Author-
ity: Provided, That the share capital contribution of each member
does not exceed Fifteen thousand pesos (P15,000) and regardless of
the aggregate capital and net surplus ratably distributed among the
members;
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business, or real
property utilized for low-cost and socialized housing as defined by
Republic Act No. 7279, otherwise known as the Urban Development
and Housing Act of 1992, arid other related laws, residential lot
valued at One million five hundred thousand pesos (PI,500,000)
and below, house and lot, and other residential dwellings valued at
Two million five hundred thousand pesos (P2,500,000) and below:
Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amounts herein stated shall be adjusted to
their present values using the Consumer Price Index, as published
by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not
exceeding Ten thousand pesos (P10,000): Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to its present value using
the Consumer Price Index as published by the National Statistics
Office (NSO);
(R) Sale, importation, printing or publication of books and any
newspaper, magazine, review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is not
devoted principally to the publication of paid advertisements;
(S) Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations;
(T) Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations;
(U) Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries; and
(V) Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed the
Imposition of Tax
amount of One million five hundred thousand pesos (PI,500,000):

Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index as published by the
National Statistics Office (NSO);
(2) A VAT-registered person may elect that Subsection (1) not
apply to its sale of goods or properties or services: Provided, That
an election made under this Subsection shall be irrevocable for a
period of three (3) years from the quarter the election was made, (as
ANNOTATION
1. VAT-exempt transactions. Exemptions from VAT are

granted by express provisions of the Tax C o d e or specified laws.
T h e VAT e x e m p t transactions are those e n u m e r a t e d in the above
provision.
(1) An exemption m e a n s that the sale of goods or pro-
perties and/or services a n d the use or lease of properties is not
subject to VAT (output tax) a n d the seller, etc. is not entitled to
claim tax credit on VAT (input tax) previously paid.
(2) An exempt transaction has been defined as one
involving g o o d s , properties or services w h i c h , by their nature,
are specifically listed in and expressly e x e m p t e d from VAT
under the Tax C o d e , without regard to the tax status of the party
in the transaction ( C o m m . vs. Philippine Health Care Providers,
Inc., 522 S C R A 131 [2007].)
2. T h e person making the e x e m p t sale of goods, properties,
or services shall not bill any output tax to his customers or clients
7
because the said transaction is not subject to VAT. (Sec. 4.109-
1[A], CVR.)
3. Food products. A g r i c u l t u r a l and marine food products in
their original state, the sale or importation of which is exempt from
VAT under Section 1 0 9 ( 1 , a) refer only to those intended for human
consumption.
7
O n the other hand, a VAT-registered purchaser of VAT-exempt goods, pro-
perties, or services which are exempt from V A T is not entitled to any input tax on
such purchase despite the issuance of a V A T invoice or receipt." (Sec. 4.103.1[A], par.
2, Rev. Regs. No. 7-95.) This provision in the former V A T regulations is deleted in
the CVR.
106
ANNOTATED
R.A. No. 8241 deleted "except importation of meat" after "original

state" in Subsection (c) (now 1, a), thus subjecting importation of
meat to VAT.
(1) The term "agricultural products" is not limited to
vegetables and substances directly resulting from the tillage
of the soil but includes everything which serves to satisfy
human needs which is grown upon the land whether it pertains
to the vegetable kingdom or to the animal k i n g d o m . (Molina
vs. Rafferty, 38 Phil. 167.) Hence, a person e n g a g e d in the
business of raising poultry and swine is not subject to value-
added tax.
(2) "Livestock and poultry" (Subsec. 1, A.) refer to live
animals of a kind generally used as, or yielding or producing
food for h u m a n c o n s u m p t i o n . Livestock shall include c o w s ,
bulls and calves, pigs, sheep, goats a n d rabbits.
(3) "Poultry" includes fowls, d u c k s , g e e s e and turkey.
Livestock or poultry d o e s not include fighting cocks, race
horses, z o o animals and other animals generally considered
as pets.
(4) "Marine food p r o d u c t s " includes fish a n d c r u s t a c e a n s ,
such as but not limited to eels, trout, lobsters, s h r i m p s , p r a w n s ,
oysters, mussels and c l a m s . (Sec. 4.109-1 [B, 1, a], C V R . )
Exemption from VAT on t h e sale of fish (Subsec. 1, A.)
covers only direct tax liability, i.e., output VAT on t h e gross sale
of fish in their original state. It d o e s not cover t h e input VAT
passed on by the suppliers as forming part of the invoice price.
Being an indirect tax, VAT m a y be shifted to buyers of g o o d s
and services. (BIR Ruling No. 174-98, Dec. 1 1 , 1998.)
(5) Meat, fruit, fish, vegetables and other agricultural a n d

marine food products, shall be c o n s i d e r e d in their original
state even if they have u n d e r g o n e t h e simple processes of
preparation or preservation for the market, s u c h as freezing,
drying, salting, broiling, roasting, s m o k i n g or stripping, including
those using a d v a n c e d technological m e a n s of p a c k a g i n g , s u c h
as shrink w r a p p i n g in plastics, v a c u u m p a c k i n g , tetra-pak, and
other similar packaging m e t h o d s . (Sec. 4.109-1[B, 1, a], C V R . )
(6) Polished and/or h u s k e d rice, corn grits, raw c a n e sugar
and molasses, ordinary salt and copra shall be considered
as agricultural food products in their original state. R.A. No.
8241 deleted "locally p r o d u c e d " before "raw c a n e s u g a r " in
Subsection ( 1 , A).
Imposition of Tax
(7) " R a w c a n e s u g a r " refers to the crystallized or solidified

juice of s u g a r c a n e through a milling process, short of the
process of being refined, without any addition of chemicals
resulting in m u s c a d o or granulated sugar. It does not include
refined sugar, molasses a n d bagasse. (Sec. 4.103-1 [B, c], Rev.
Regs. No. 7-95.) T h e sale of refined sugar is subject to the VAT
(effective Sept. 1 , 1 9 9 0 . ) i m p o s e d by Section 106(A) as it is not
included a m o n g the products under the definition of "raw cane
s u g a r " e x e m p t f r o m VAT. BIR Ruling No. 302-88 is considered
revoked. (BIR Rulings No. 182 a n d No. 184, A u g . 2 8 , 1989.)
(8) Specialty feeds (Subsec. 1, B.) refers to non-agricultural

feeds or food for race horses, fighting cocks, aquarium fish, zoo
animals a n d other animals generally considered as pets. (Sec.
4.109-1 [B, 1, b], C V R . )
(9) T h e preparation of dried parings, a by-product of

dessicated c o c o n u t s , is not d e e m e d simple. Apart from the
preliminary processes of d e h u s k i n g , m a c h i n e s are used to mill/
grind the paring a n d to dry t h e mill/grind parings. T h e s e dried
parings are not agricultural products in the original state. (VAT
Ruling No. 2 4 4 , Sept. 2 2 , 1989.)
(10) T h e VAT e x e m p t i o n granted to breeding stocks, and

genetic materials under Section 1 0 9 ( 1 , A), is limited only to
those that are intended for t h e raising of poultry and livestock
(which includes c o w s , bulls, calves, pigs, goats and rabbits). It
refers only to live animals that are generally used in yielding or
producing food for h u m a n c o n s u m p t i o n . Hence, the importation
of horses (thoroughbred b r o a d m a r e s ) for breeding purposes
to be used in sports or g a m e s which cannot be classified as
livestock, is not e x e m p t f r o m VAT. (VAT Rulings No. 102-89 and
No. 243-90.)
(11) Coffee beans are agricultural food products in their

original state; h e n c e , the sale and subsequent sale thereof is
not only e x e m p t from VAT pursuant to Section 109(1, A) but the
seller is likewise e x e m p t f r o m registering as a VAT taxpayer.
However, w h e n the seller opts to register as such pursuant to
Section 236(1), his local sales b e c o m e subject to VAT, while
his export sales are zero-rated under Section 106(A, 1). On
the other hand, if the coffee bean trader is not VAT-registered,
the sale, subsequent sale, or export of the coffee beans are
exempt in accordance with Section 109(1, A). (VAT Ruling No.
049, May 29, 1991.)
ANNOTATED
(12) Ordinary salt is considered agricultural product in its

original state. Accordingly, the importation of marine solar salt
is exempt VAT pursuant to Subsection ( 1 , A). (BIR Ruling No.
9-98.) Iodized salt is no longer in its original state as it has
already been enriched with iodine. (VAT Ruling No. 059-2003,
Dec. 15, 2003.)
(13) The process of making century eggs is a simple pro-
cess to prepare or preserve the s a m e for the market. It is similar
to the making of "balut, penoy" and salted e g g s . Accordingly,
the importation of century eggs is e x e m p t f r o m the 1 0 % VAT
imposed under Section 1 0 9 ( 1 , A). (BIR Ruling No. 0 2 5 - 2 0 0 0 ,
May 25, 2000.)
(14) T h e following processed food products which are
packed in bulk plastic bags and sold for resale or further
processing are no longer in their original state as contemplated
in Section 1 0 9 ( 1 , A):
(a) Dried fruits (e.g., m a n g o e s , p a p a y a ) m a d e f r o m
fresh fruits which are dried using a locally fabricated dryer;
sold to wholesalers/repackers;
(b) Dried and g r o u n d fruits a n d tubers (e.g., g u a v a ,
tamarind, ube) m a d e by blanching, slicing, drying
and grinding the fruits/tubers; sold to blenders for t h e
manufacture of s o u p mixes a n d other products; a n d
(c) Fruits preserved in syrup (e.g., jackfruit, b a n a n a ,

m a n g o ) m a d e by a d d i n g sugar to raw fruits t h e n heat
sterilizing, packing and chilling t h e s a m e ; sold to m a n u f a c -
turers of ice c r e a m and other products.
Hence, producers thereof shall be subject to VAT

pursuant to Section 106. (VAT Ruling No. 0 7 1 , July 5,
1991.)
(d) Herbal products w h i c h have u n d e r g o n e drying,

pulverizing and encapsulation or tea bagging as they are
not a m o n g the simple m e t h o d s of freezing, etc. e n u m e r a t e d
in subsection ( 1 , A). (BIR No. 0 0 3 - 0 6 , April 10, 2006.)
(15) In all cases of importation of VAT-exempt g o o d s , the

s a m e shall not be released f r o m c u s t o m s custody unless a
duly approved Authority to Release Imported G o o d s (ATRIG)
is secured f r o m the R e v e n u e District Officer of the place w h e r e
the port of entry is located. (BIR Ruling N o . 0 2 0 - 0 0 , M a y 11,
2000.)
Imposition of Tax
4. Articles or goods subject to excise tax are also subject to

the VAT. But all services rendered by persons subject to percentage
tax under Title V (Sees. 116, 117, 118, 119, 120, 123.) are exempt
f r o m the VAT. (Subsec. F.)
5. T h e milling for others ofpalay into rice, corn into grits, and
sugar cane into raw sugar (Subsec. 1, F.) by owners of corn mills,
"conos," "kiskisan," threshers or sugar centrals or mills is exempt
f r o m value-added tax. T h e total receipts of the miller whether paid
in c a s h or in kind is e x e m p t e d f r o m the value-added tax. Agricultural
contract growers refer to those persons producing for others
poultry, livestock or other agricultural and marine food products in
their original state. (Sec. 4 . 1 0 9 - 1 [ B , 1, f], C V R . )
(1) W h a t is e x e m p t e d f r o m VAT under the regulations are

t h e services of agricultural contract g r o w e r s in the production of
poultry, livestock, other agricultural a n d marine food products
in their original state, as well as milling of palay into rice, corn
into corn grits a n d sugar c a n e s into raw sugar. As for poultry
feeds, only their sale or importation, used in the manufacture of
finished feeds (except specialty feeds for race horses, etc., is
e x e m p t f r o m VAT. (VAT Ruling No. D A - 0 1 5 - 0 9 , Nov. 16, 2009.)
(2) C o r n millers w h o m a y be e x e m p t f r o m VAT on their sale

of milled corn starch to the manufacturers of other consumer
products will have to reckon with t h e "catching-up" effect in the
VAT system. Under this s y s t e m , w h e n the VAT-exempt product
is used as a raw material of a VAT-taxable article, the VAT
catches up with the e x e m p t product w h e n the finished or final
product is sold. This is so b e c a u s e while the exempt product
forms part of the cost of the finished article, no input tax can be
claimed by the manufacturer thereof.
T h u s , since corn starch is essentially an intermediate

product, e v e n if the s a m e w e r e e x e m p t e d from VAT when sold
by the miller producer upon being used as a raw material for
VAT-taxable g o o d s , e.g., glucose, glue, raisins, textiles, etc., the
VAT catches up with the corn starch w h e n the finished product
is finally sold. T h e collection of the VAT on the finished product
adds up to the cost thereof, resulting in the shifting of the tax to
the consumers w h o will have to shoulder the added cost of the
product if they wish to buy the s a m e . This ruling will not apply,
however, if the corn starch w e r e sold to one w h o will not use
it as ingredient in the manufacture of another product but for
direct consumption. (BIR Ruling No. 123, April 13, 1992.)
ANNOTATED
(3) The services of agricultural contract growers involve

growing of poultry, livestock or other agricultural and marine
food products into marketable poultry, livestock or other
agricultural and marine food products.
There are agricultural contract growers which offer toll
processing/toll dressing/toll manufacturing as a packaged
service to its contract growing. Toll processing/toll dressing/
toll manufacturing involves procedures such as w e i g h i n g ,
killing, dressing, scalding, cut-ups and packaging. In this
case, the contract growing and toll processing/toll dressing/
toll manufacturing services by agricultural contract growers
are exempt from VAT. However, the BIR has previously
issued rulings which e x e m p t e d f r o m VAT the toll processing
(or dressing) of chicken received f r o m other contract growers,
even if the toll processors/toll dressing contractors themselves
do not produce or raise the chicken. In other w o r d s , these
rulings considered the toll processing/dressing activity as VAT-
exempt, e v e n if the toll processing/dressing w a s independent
of the activity of contract g r o w i n g .
Rev. M e m o . Cir. No. 9 7 - 2 0 1 0 classifies the VAT e x e m p t i o n

of services by agricultural contract growers. Under t h e circular
the toll processing services c o n f i r m e d as VAT-exempt pertain
only to services to clients f r o m w h i c h g r o w i n g of animals w a s
contracted. As s u c h , preparing and p a c k a g i n g hogs/ chicken
ready for delivery, after producing or g r o w i n g t h e m , falls within
the purview of agricultural contract g r o w i n g . However, if s u c h
an activity is d o n e independently of g r o w i n g poultry, livestock
or other agricultural a n d marine f o o d products, s u c h activity is
subject to VAT b e c a u s e this is a service not c o v e r e d by agri-
cultural contract g r o w i n g . T h u s , toll processing/toll dressing/toll
manufacturing services performed independently f r o m growing
poultry, livestock or other agricultural a n d marine f o o d products
is subject to VAT.
6. Section 109 specifically e n u m e r a t e s imported articles
exempt from the VAT. A n y other article is subject to the tax e v e n if
the importer is a g o v e r n m e n t instrumentality.
(1) Under Section 1205 of the Tariff and C u s t o m s C o d e
(R.A. No. 1937, as a m e n d e d by P.D. No. 34.), except those
provided for in Section 105 (which e n u m e r a t e s articles
e x e m p t from payment of import duties), all importations by the
government for its o w n use or that of its subordinate branches
or instrumentalities or g o v e r n m e n t - o w n e d or -controlled
Imposition of Tax
corporations are now subject to the duties, taxes, fees and

other charges provided for in said C o d e .
(2) With respect to importations by certain government

agencies w h i c h under special laws are expressly exempt from
the p a y m e n t of c u s t o m s duties and internal revenue taxes, said
tax-free importations shall be subject to the prior approval of an
Inter-Agency C o m m i t t e e h e a d e d by the Secretary of Finance
w h i c h shall e n s u r e c o m p l i a n c e with the following conditions:
(a) T h a t no s u c h articles of local manufacture are

available in sufficient quantity and comparable quantity;
(b) T h a t the articles to be imported are directly and
actually n e e d e d and will be used exclusively by the grantee
of the e x e m p t i o n for its operations and projects or in the
conduct of its functions; and
(c) T h e shipping d o c u m e n t s covering the importation
are in the n a m e of the grantee to w h o m the goods shall be
delivered directly by c u s t o m s authorities, (see Sec. 1, Pres.
Decree No. 882.)
Note: R M C No. 4 8 - 2 0 0 2 provides a list of imported articles

that are clearly e x e m p t f r o m the imposition of the value-added
tax under Section 109. As s u c h , the prescribed Authority to
Release Imported G o o d s (ATRIG) shall no longer be issued by
t h e BIR prior to the release of these articles from the Bureau of
Customs.
7. Subsection ( 1 , E) e x e m p t s f r o m the value-added tax,
services rendered by persons subject to the 3% percentage tax,
e.g., common carriers by land, (see Sec. 117.). It does not include
a sea and airfreight forwarder w h o merely acts as agent of airline/
carrier. (BIR Ruling No. 139, April 15, 1988.) Sales of admission
tickets to movies which are subject to the 3 0 % amusement paid to
local g o v e r n m e n t s are not e x e m p t from VAT since the exemption
under said subsection, extends only to transactions subject to
a m u s e m e n t tax paid to the BIR. (BIR DA Ruling No. 260-06, April
12, 2006.)
8. In BIR Ruling No. 151-99, the BIR ruled that the business
of dressing live chicken for a fee falls under the definition of the
phrase "sale or exchange of service" as defined in Section 108(A).
However, it w a s ascertained that the business engaged in by the
taxpayer is similar in all aspects to the integrated operation of the
toll processor of another taxpayer which is exempt from VAT under
112
ANNOTATED
BIR Ruling No. 127-92 and VAT Ruling No. 061-97. There is no
cogent reason to depart from the principles enunciated in those
rulings which are applicable insofar as the situation of the taxpayer
is concerned. BIR Ruling No. 151-99 is therefore, revoked. (BIR
Ruling No. 028-2000, July 28, 2000.)
9. Transactions which are tax-exempt under the provisions
of special laws (except those enterprises registered under Pres.
Decree No. 529) are exempted from VAT pursuant to Section
109(1, K).
(1) Pres. Decree No. 529 grants to petroleum exploration
concessionaries under the Petroleum Act of 1949 (R.A. No.
387.) exemption f r o m c u s t o m s duty and c o m p e n s a t i n g tax
(now VAT) on importation of machinery a n d equipment, spare
parts and materials required for their exploration operations.
(2) BOI-registered enterprises w h i c h w e r e e x e m p t f r o m

the payment of the contractor's tax pursuant to Art. 39(E) of the
Omnibus Investments Code (E.O. N o . 226.) are n o w e x e m p t
from VAT which merely replaced the contractor's tax u p o n the
promulgation of E.O. No. 2 7 3 . (VAT Ruling No. 0 3 1 , M a y 2 9 ,
1991.)
(3) Subject to certain conditions the importation of capital

equipment and spare parts for use in t h e construction, repair,
renovation or alteration of any m e r c h a n t vessel e n g a g e d in the
domestic trade is e x e m p t f r o m VAT, pursuant to t h e "Domestic
Shipping Development Act of 2004" (R.A. No. 9295).
(4) Another e x a m p l e is R.A. No. 7 2 7 7 , otherwise, k n o w n

as the "Magna Carta for Disabled Persons," a special law w h i c h
grants tax incentives to foreign d o n o r s for d o n a t i o n , bequest,
subsidy or financial aid m a d e to g o v e r n m e n t a g e n c i e s e n g a g e d
in the rehabilitation of disabled p e r s o n s a n d organizations of
disabled persons pursuant to Section 42 of t h e Act. (BIR Ruling
No. 0 2 0 - 0 0 , April 6, 2000.)
(5) T h e sale of coal p r o d u c e d by a coal operator under a

coal operating contract ( C O C ) with the g o v e r n m e n t is e x e m p t
from VAT pursuant to Subsection ( 1 , k). Pres. Decree N o .
972, provides that a coal operator is e x e m p t "from all taxes
except income tax." It is not a m o n g the laws w h i c h w e r e
specifically repealed by Section 24 of R.A. No. 9 3 3 7 , a n d so
the tax incentives agreed u p o n by the g o v e r n m e n t under the
C O C subsist. T h e main object of t h e C O C for which the tax
Imposition of Tax
exemption w a s granted is the active exploration, development

and production of coal resources. T h e sales remain e x e m p t from
VAT pursuant to Subsection ( 1 , K). However, the importation
of coal by a coal operator is subject to VAT. T h e previous
e x e m p t i o n on importation of coal under Section (e) and (e)
of R.A. N o . 8 2 2 4 w a s r e m o v e d by R.A. No. 9337 (BIR Ruling
No. D A - 2 8 3 - 0 8 , Oct. 9, 2008.) T h e r e is no express mention of
Pres. Decree No. 9 7 2 in the repealing clause of R.A. No. 9337.
A special law cannot be impliedly repealed by a general law.
(Semirara Mining Corporation vs. C o m m . , C T A C a s e No. 7717,
Oct. 13, 2009.)
10. Medical, dental, hospital and veterinary services other than

those rendered by professionals (Subsec. 1, G), are exempt from
VAT. T h u s , in c a s e s w h e r e the p a y m e n t received by the hospital
or clinic also includes t h e professional fee of the medical doctor,
the professional fee w h e n paid to the doctor constitutes his gross
receipts inclusive of VAT w h i c h must be receipted by him using a
VAT-Official receipt. (A-38, Rev. M e m o . Cir. No. 6-2003.)
(1) In t h e c a s e of an O B - G y n e (obstetrician-gynecologist),
for e x a m p l e , w h o also o w n s a maternity clinic, how will the
p a y m e n t s of patients treated or confined therein be treated for
VAT p u r p o s e s ?
Since p a y m e n t s received m a y consist of the professional
fees of the O B - G y n e , laboratory fees, charges for use of
medical supplies a n d facilities, only that portion of payment not
pertaining to the professional fees of the O B - G y n e is exempt
f r o m VAT. For this purpose, in receiving such payments,
professional fees on the services rendered by OB-Gyne must
be issued a VAT-official receipt while those appertinent to
laboratory fees, use of medical facilities and supplies must be
receipted using a Non-VAT Official Receipt specifically detailing
the nature of the billed fees and charges attributable to the
clinic; otherwise, the total a m o u n t will be treated as derived
from the exercise of profession a n d , therefore subject to VAT.
(A-39, Ibid.)
(2) Laboratory services are also e x e m p t e d . If the hospital '

or clinic operates a pharmacy or drug store, the sale of drugs
and medicine, if it exceeds P1.5 million during a 12-month
period is subject to VAT.
(3) Hospital and medical services rendered by Ospital
Ng Maynila are not subject to VAT pursuant to Section 109(1,
114
ANNOTATED
G). The exemption, however, applies only to taxes for which it

is directly liable and does not apply to taxes which are being
passed on to it by its suppliers. Consequently, as regards
purchases of goods and services, the VAT thereon paid by the
supplier can be passed on to said hospital and ultimately be
considered as added cost of g o o d s and services procured, for
the VAT at this stage is merely an indirect tax. (VAT Ruling No.
0 4 1 , May 29, 1991.)
(4) The term "medical services" has been defined to
include various items of services like general treatment, physical
examination, consultation, medication, dressing, suturing sur-
gical operation, and all that pertain to or deal with the healing
art of the science of medicine. (BIR Ruling No. 107-99, Nov. 12,
1999, quoting Cortes vs. Pan Oriental March Co., 7 C.A.R. [2s]
1014.)
( 5 ) " T h e maintenance and operation of a pharmacy or
drugstore by a hospital is a necessary and essential service
or facility rendered by any hospital for its patients. In the legal
sense, a hospital is an institution d e v o t e d primarily to the
operation of facilities for the diagnosis, treatment, a n d care
o f individuals suffering f r o m illness x x x (Sec. 2[a], R.A. N o .
4226). x x x A person w h o resorts to t h e hospital for medical
treatment can reasonably expect that the hospital w o u l d m a k e
available to its patients i m m e d i a t e a n d prompt access not only
to the services of doctors, nurses, a n d allied medical personnel,
but also to necessary laboratory services as well as medicines,
drugs and pharmaceutical items w h i c h are indispensable
aids in practically any f o r m of medical treatment a n d care of
patients, x x x (A)ccordingly, t h e sale o f d r u g s o r medicine a n d
pharmaceutical items to in-patients of the hospital should be
exempt from VAT" (BIR Ruling No. 123-05, April 6, 2005.) since
they are considered part of hospital services. However, the sale
of medicines by hospitals to out-patients a n d other c u s t o m e r s
are not part of hospital services a n d are thus subject to VAT.
(BIR Ruling No. D A - 0 0 5 - 0 9 , J a n . 8, 2009.)
(6) A drug testing clinic is e x e m p t f r o m VAT as far as
medical services are c o n c e r n e d , but the professional fees
received by the medical technologist w h o performs the service
and issues the result of the test to clients, are subject to VAT.
But if the services of the medical technologist are rendered
under an e m p l o y e r - e m p l o y e e relationship all remuneration
received on account thereof, w h e t h e r these be in the form of
Imposition of Tax
salaries, w a g e s , e m o l u m e n t s , honoraria or fees, are considered

as c o m p e n s a t i o n income e x e m p t from the imprisonment of
VAT pursuant to Section 109(o) of the Tax C o d e but subject
to withholding tax on salaries of said e m p l o y e e pursuant to
Section 2.79 of Rev. R e g s . No. 2-98, as a m e n d e d . (BIR Ruling
No. 2 4 9 - 0 4 , M a y 12, 2004.)
(7) A c o m p a n y operating a laboratory and diagnostic

center is VAT-exempt f r o m its sales of medical, dental, and
health services to the public through its medical personnel and
facilities as it is regarded as an entity rendering nonprofessional
services, but is directly liable to VAT (i.e., VAT on gross receipts)
p a s s e d on to it by its supplier's of g o o d s and services. Said
suppliers are not e x e m p t f r o m VAT. (BIR Ruling No. DA-364-
0 6 , J u n e 9, 2006.) If the diagnostic services will be done by
independent professionals (consultants), the services will be
subject to VAT. (VAT Ruling No. D A - 7 5 0 - 0 9 , Dec. 8, 2009.)
(8) U n d e r Section 109(G), an accredited health main-

t e n a n c e organization ( H M O ) w h i c h merely arranges for the
provision of health services to its m e m b e r s , which will directly
be d o n e by i n d e p e n d e n t healthcare providers are not exempt
f r o m VAT since it d o e s not directly perform or render medical,
dental, hospital and/or veterinary services, non-professional or
otherwise. It merely acts as a conduit between its members
and their accredited and recognized hospital and clinics. (VAT
Ruling No. 0 0 3 - 0 8 , Mar. 2 6 , 2008.)
Note: T h e taxable base of H M O s for VAT purposes shall
be gross receipts without any deduction for medical utilization
(medical and dental fees, hospital bills laboratory fees,
professional fees, etc.). Rev. M e m o . Cir. No. 39-10 (May 2 1 ,
2010) provides for the verification of VAT compliance by HMOs.
(9) T h e act of making medicines available to in-patients

must be considered an indispensable part of "hospital services"
a n d , therefore, e x e m p t from VAT. Conversely, the pharmacy
sales to out-patients and other customers are subject to VAT.
(VAT Ruling No. 0 1 5 - 0 6 , Dec. 1 1 , 2006; No. 014-07, Oct. 27,
2007.)
11. Educational services exempted refer to academic, technical
or vocational education provided by private educational institutions
duly accredited by the Department of Education (DepEd), the
Commission on Higher Education (CHED), the Technical Education
and Skill Development Authority (TESDA) and those rendered by
ANNOTATED
government educational institutions. It does not include seminars,

in-service trainings, review classes and other similar services
rendered by persons w h o are not accredited by the D e p E d . (Sec.
4.109-1[B. 1, h], CVR.)
( 1 ) Educational services rendered by private educational
institutions duly accredited by the D e p E d and the C H E D are
exempt from VAT pursuant to Section 1 0 9 ( 1 , H). However,
this exemption does not extend to its other activities involving
sale of goods and services which are subject to VAT imposed
under the Section 106. Such tax payment m a y legitimately be
passed on to customers like nonstock, nonprofit educational
institutions.
Likewise, importation of books, films, slides, and other

educational materials and e q u i p m e n t such as c o m p u t e r s to be
actually, directly, and exclusively used for educational purposes
shall be exempt from VAT and c u s t o m s duties, provided t h e
guidelines under Department Order No. 137-87 in addition to
the usual import requirements are o b s e r v e d . (BIR Ruling N o .
322-04, J u n e 11, 2004.)
( 2 ) T h e sale of school supplies by said institutions a n d

their purchase of materials for repair of their buildings are
subject to VAT i m p o s e d under Section 106. S u c h tax p a y m e n t
may legitimately be p a s s e d on to c u s t o m e r s like educational
institutions.
The input tax w h i c h is the VAT shifted or p r e s u m e d to h a v e

been shifted or (passed on) by a VAT-registered p e r s o n (seller)
to another VAT-registered person (purchaser, i.e., educational
institution) is creditable against [i.e., deductible from) t h e latter's
output tax. In other w o r d s , the output tax of a seller b e c o m e s
the input tax of the purchaser w h o are both VAT-registered
persons. (BIR Ruling 2 3 4 - 0 4 , M a y 7, 2 0 0 4 )
( 3 ) Input taxes of educational institutions m a y arise f r o m :

(a) Purchases f r o m other VAT-registered p e r s o n s ;
(b) Importation of g o o d s (Sec. 110.); a n d
(c) Purchases of g o o d s or supply of services w h i c h
are otherwise e x e m p t f r o m VAT but t h e seller issued a
VAT invoice or receipt therefor. (BIR Ruling 2 3 4 - 0 4 , M a y 7,
2004)
12. T h e services exempted under Section 1 0 9 ( 1 , I) a n d ( 1 , J)

are limited only to the performance of such services. If they should
Imposition of Tax
e n g a g e in other lines of taxable services, they shall be subject to

value-added tax on such services.
(1) T h e operator w h o has contracted with a land owner/

permittee to extract and dispose quarry materials is liable for
the p a y m e n t of VAT pursuant to Sections 105 and 106(A) rather
than the l a n d o w n e r with w h o m the contract w a s executed.
Pursuant to Article 4 1 5 ( 1 0 ) of the Civil C o d e , a quarry permittee
holds a real right over an i m m o v a b l e property. T h u s , the royalty
fee received by the permittee f r o m the quarry operator is, in
effect, rental for t h e use of a real right over an immovable
property, (see VAT Ruling No. 0 2 9 , M a y 2 3 , 1991.)
(2) If an account executive is an e m p l o y e e of a company,

there being an e m p l o y e r - e m p l o y e e relationship, his commission
income shall be e x e m p t e d f r o m VAT pursuant to Section
109(1,1). However, t h e e m p l o y e r shall deduct and withhold the
withholding tax on w a g e s .
If there is no e m p l o y e r - e m p l o y e e relationship, he shall

be subject to VAT as a seller of service in the course of his
business or practice of profession, pursuant to Section 108(A).
Moreover, he shall not be subject to the e x p a n d e d withholding
tax b e c a u s e VAT is not c o v e r e d by the E x p a n d e d Withholding
Tax Regulations. (Rev. R e g s . No. 6-85, as amended.)
Furthermore, the payer is neither allowed by law to impose
the VAT nor is he allowed to withhold the s a m e from the payee
vis-a-vis his income p a y m e n t to the latter, whether or not such
payee is a VAT or non-VAT p e r s o n . Accordingly, the aforesaid
account executive cannot claim for a refund of credit of the
VAT i m p o s e d and withheld from him by his employer. Rather,
his recourse is to m a k e a d e m a n d from his employer of such
a m o u n t w h i c h w a s purportedly imposed and withheld from his
c o m p e n s a t i o n . (VAT Ruling No. 38, May 2 9 , 1991.)
(3) R e v e n u e s f r o m port services business, as an inde-
pendent line of business, are understood to include revenues
from berthing, terminalling, lease of service equipment at the
port and warehousing services, such activities being mainly
connected to, if not incidental or as a necessary consequence of,
port services business. T h e s a m e are, accordingly, indivisible;
hence, may not be detached and treated as revenues arising
from different independent lines of businesses.
Thus, berthing fees and receipts from warehousing services
may not be considered revenues from distinct, separate
ANNOTATED
and independent lines of businesses with the end in view of

treating them as lease of real property. Rather, the s a m e are all
classified as gross receipts from port services business, which
involves sale of services other than the real estate leasing
and accordingly, subject to VAT pursuant to Section 108. (VAT
Ruling No. 053, May 3 1 , 1991.)
(4) A contract with an owner/operator of cold storage
facilities is not a lease of real property but, rather, a w a r e h o u s i n g
contract. As s u c h , the w a r e h o u s e operator is subject to VAT
pursuant to Section 108. (VAT Ruling No. 0 5 2 , M a y 3 1 , 1991.)
As a further clarification, w a r e h o u s i n g business is not

considered a leasing of real property and the w a r e h o u s e m a n ' s
compensation for his w a r e h o u s i n g services cannot be
considered rentals f r o m lease of real property. Instead, a
w a r e h o u s e m a n ' s services consist of receiving and storing
goods and m e r c h a n d i s e for others, for a fee and his gross
receipts f r o m the sales of s u c h services are subject to VAT in
accordance with Section 108. This also follows f r o m t h e fact
that such w a r e h o u s i n g activities are part of the port services
business which is subject to VAT. (VAT Ruling No. 0 5 3 , M a y 3 1 ,
1991.) Note: Lease of real property is n o w subject to VAT.
(5) Services of rendered by regional or area headquarters

described in Section 1 0 9 ( 1 , J) are e x e m p t f r o m VAT but t h e sale
or lease of g o o d s a n d property a n d t h e rendition of services to
t h e m shall be subject to z e r o percent (0%) VAT pursuant to
Section 14 of R.A. No. 8 7 5 6 . (BIR Ruling No. 0 4 7 - 2 0 0 1 , Sept.
28, 2 0 0 1 ; No. D A - 1 4 4 - 0 8 , Mar. 7, 2 0 0 8 ; N o . D A - 3 2 5 - 0 8 , Oct.
2 2 , 2008.)
13. Under Subsection ( 1 , L) sale by agricultural coope-ratives

to n o n - m e m b e r s can only be e x e m p t e d if t h e producer of the
agricultural products sold is the cooperative itself. If the cooperative
is not the producer (e.g., trader) t h e n only t h o s e sales to its
m e m b e r s shall be e x e m p t e d f r o m VAT. Importation by an agricultural
multipurpose cooperative e n g a g e d in livestock production of
generator sets for the construction of a biogas digester that w o u l d
help in the proper disposal of animal w a s t e s is not e x e m p t f r o m VAT
since the generator sets are not "used directly and exclusively in the
production and/or processing of the cooperatives' p r o d u c e . " T h e
use of the generator sets for the disposal of animal w a s t e s does not
qualify as "production" or processing of cooperative's produce a n d ,
Imposition of Tax
therefore, c a n n o t qualify as a VAT-exempt importation. (VAT Ruling

No. 0 0 9 - 0 6 , A u g . 2, 2006.)
Note that the sale or importation of agricultural products in

their original state is e x e m p t f r o m VAT irrespective of the buyer and
seller thereof pursuant t o S u b s e c t i o n ( 1 , A). (Sec. 4 . 1 0 9 - 1 , CVR.)
14. Tax treatment of micro-finance services' rendered by duly
registered credit cooperatives:
(1) T h o s e dealing/transacting with m e m b e r s only shall

be e x e m p t f r o m paying t h e following taxes for which they are
directly liable: i n c o m e tax f r o m operations, VAT, percentage
tax, d o c u m e n t a r y s t a m p tax, a n d annual registration fee.
(2) T h o s e dealing (transacting business) with both

m e m b e r s and n o n - m e m b e r s :
(a) If their a c c u m u l a t e d reserves and undivided net

savings are not m o r e than P10 million, they are exempt
f r o m t a x e s for w h i c h they are directly liable.
(b) If m o r e t h a n P10 million, they are exempt from
i n c o m e tax subject to certain conditions, VAT under Section
109(1), (M) and p e r c e n t a g e tax under Section 116.
T h e y are subject to all other internal revenue taxes
unless otherwise provided by law.
(3) All income of cooperatives which undertake micro-

finance in addition to their regulated purpose, except credit
cooperatives a n d multi-purpose cooperatives which have
of their business activities as those performed by credit
cooperatives, shall be subject to applicable taxes under the
Tax C o d e , whether they deal exclusively with members, or with
both m e m b e r s and non-member. (Rev. Regs. No. 14, 2007.)
15. Under Subsection ( 1 , N), importations by non-agricultural,

non-electric, and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be used by them, are
subject to VAT. (Sec. 4.109-1[B, 1, n], CVR.)
16. Export sales by persons w h o are not VAT-registered are
exempt (Subsec. 1, O.); if by VAT-registered persons, they are
subject to 0 % . (Sec. 106[A, 2].)
17. Under Subsection ( 1 , R), imported educational materials
such as books are exempt from VAT. T h e s e do not include V H S
tapes and educational materials other than books. (BIR Ruling No.
054-00, Oct. 30, 2000.)
120
ANNOTATED
18. Sales of real properties are exempt from VAT, if such

properties are:
(1) not primarily held for sale to customers or for lease in
the ordinary course of trade or business;
(2) utilized for low-cost housing as defined by R.A. No.
7279 (Urban and Development Housing Act of 1992.), and
other related laws, such as R.A. No. 7835 and R.A. No. 8 7 6 3
the price ceiling of which per unit is P375.000, or as determined
from time to time by the Housing and Land Use Regulatory
Board (HLURB) and other related laws; and
(3) utilized for socialized housing as defined under R.A.
No. 7279 and other related laws, such as RA No. 7 8 3 5 and RA
No. 8763, the price ceiling of which per unit is P 2 5 5 . 0 0 0 , as
determined from time to time by the H U D C C and the N E D A and
other related laws; and
(4) residential lot valued at P1.5 million a n d below, or
house and lot and other residential dwellings valued at P2.5
million and below.
If two or more adjacent residential lots are sold or d i s p o s e d
in favor of o n e buyer, for the p u r p o s e of utilizing the lots as
one residential lot, the sale shall be e x e m p t f r o m VAT only if
the aggregate value of the lots do not e x c e e d P 1 , 5 0 0 , 0 0 0 . 0 0 .
Adjacent residential lots, although c o v e r e d by separate titles
and/or separate tax declarations, w h e n sold or d i s p o s e d to o n e
and the s a m e buyer, w h e t h e r covered by o n e or separate D e e d
of C o n v e y a n c e , shall be p r e s u m e d as a sale of o n e residential
lot. (Sec. 4.109-1 [B, 1, p], C V R . )
(5) T h e a s s i g n m e n t by w a y of dacion en pago of buildings

and all improvements which are not primarily held for sale to
customers or lease in the ordinary c o u r s e of trade or business
is e x e m p t VAT pursuant to Section 1 0 9 ( 1 , P).
T h e t e r m "primary" is defined as "first, principal, chief,

leading, or first in order of t i m e , or d e v e l o p m e n t , or intention"
(Black's Law Dictionary, Sixth Edition). T h u s , to be "held
primarily for sale or lease," the property must be held with
the chief intention of being sold or leased. In BIR DA Ruling
No. 669-2004, the assignment by a debtor of its buildings that
used to house the converting e q u i p m e n t , machinery, and parts
used in its manufacture of c e m e n t paper bags to the creditor-
bank as payment of the loan is e x e m p t f r o m VAT since the said
Imposition of Tax
properties are not a m o n g t h e stock in trade of debtor and the

debtor w a s not primarily e n g a g e d in the buying and selling or in
the leasing of real properties. (BIR Ruling No. 032-05 Jan 27
2005.)
19. Lease of residential units is e x e m p t if the monthly rental
per unit d o e s not e x c e e d P 1 0 , 0 0 0 , regardless of the amount
of aggregate rentals received by the lessor during the year; or it
e x c e e d s P 1 0 , 0 0 0 , but the aggregate rentals during the year do not
e x c e e d P1.5 million in w h i c h c a s e the s a m e shall be subject to 3%
p e r c e n t a g e tax.
In c a s e s w h e r e a lessor has several residential units for lease,

s o m e are leased out for a monthly rental per unit of not exceeding
P 1 0 , 0 0 0 . 0 0 while others are leased out for more than P10,000.00
per unit, his tax liability will be as follows:
(1) T h e gross receipts f r o m rentals not exceeding

P 1 0 , 0 0 0 . 0 0 per m o n t h per unit shall be e x e m p t from VAT
regardless of t h e a g g r e g a t e annual gross receipts.
(2) T h e gross receipts f r o m rentals exceeding P10,000.00
per m o n t h per unit shall be subject to VAT if the aggregate
annual gross receipts f r o m said units only (not including the
gross receipts f r o m units leased for not more than P10,000.00)
e x c e e d s P 1 , 5 0 0 , 0 0 0 . 0 0 , otherwise, the gross receipts will be
subject to the 3% tax. (Sec. 4.109.1 [B, 1, q], Ibid.)
(a) T h e t e r m lots residential units refers to apartments,
houses, a n d lots for residential purposes, and buildings, or
parts or units thereof used solely as dwelling places (e.g.,
dormitories, rooms, and bed spaces) except motels, motel
rooms, hotels a n d hotel rooms, lodging houses, inns and
pension houses.
(b) T h e t e r m "unit" m e a n s an apartment unit in the case
of apartments, house in the case of residential houses, per
person in the c a s e of dormitories, boarding houses and
bed spaces, and per room in case of rooms for rent. (Ibid.)
(c) Section 116 which imposes a percentage tax at
the rate of 3% is imposed only on transactions covered by
Section 1 0 9 ( 1 , V); hence, it excludes from its coverage other
VAT-exempt transactions mentioned in Section 109(1 ),(A
to V), such as item (Q) pertaining to the lease of residential
units with monthly rent nor exceeding P10,000, even if the
annual gross receipts therefrom exceed P1.5 million for the
ANNOTATED
reason that the same has been explicitly excluded from the
scope of Section 109(1, V) by the insertion of the phrase
"other than the transactions mentioned in the preceding
paragraphs."
(3) This differs from the lease transaction being described
under Section 1 0 9 ( 1 , V) on which the percentage tax is
imposed. An application of Section 1 0 9 ( 1 , V) w o u l d be the
lease of a 2-unit residential apartment for P50.000 a month per
unit. In this particular case, while the transaction is generally
considered as one on which VAT is imposed b e c a u s e the
rental payment e x c e e d s P10,000, it is nevertheless subject
to percentage tax because the gross annual receipts derived
therefrom (P1,200,000) is below the P1.5 million threshold
limit, (see BIR Ruling No. 0 9 0 - 9 9 , Sept. 6, 1999.)
(4) T h e lease of (two) residential a p a r t m e n t buildings with

a monthly rental not exceeding P10,000 (P2.500) per unit by a
non-VAT registered taxpayer is e x e m p t f r o m VAT and the 3%
percentage regardless of the total a m o u n t of rentals received
by the lessor during the year. T h e 3% p e r c e n t a g e tax will apply
if the rental per unit e x c e e d s P10,000 but t h e total a m o u n t of
rentals received by the lessor during the year d o e s not e x c e e d
P1.5 million. (VAT Ruling No. 0 1 0 - 0 7 , July 18, 2007.)
2 0 . Gross receipts f r o m the lease of commercial units are

subject to 1 2 % VAT under Section 105. (BIR Ruling N o . 144-06,
Mar. 17, 2006.) if they e x c e e d the threshold a m o u n t of P1.5 million.
2 1 . Sale, etc. of books, etc.
(1) T h e w o r d "books" as u s e d in S u b s e c t i o n ( 1 , R) is a
general term and e m b r a c e s all kinds of b o o k s , including a
school or college class a l b u m . S u c h being the c a s e , a printer
of an annual school y e a r b o o k is e x e m p t f r o m VAT. (BIR Ruling
No. 548, Nov. 16, 1988.) T h e provision (formerly subsec. [f],
w a s deleted by R.A. No. 7 7 1 6 a n d restored by R.A. No. 8 2 4 1 .
T h e sale, etc. of books is also e x e m p t under R.A. No. 8 0 4 7 ,
otherwise known as t h e "Book Publishing Industry D e v e l o p m e n t
Act."
T h e importation and distribution of c o m i c s is VAT-exempt.

(BIR Ruling No. 4-98.)
( 2 ) Section 3(a) of R.A. No. 8 0 4 7 a d o p t s t h e U N E S C O

definition of the term " b o o k " as a printed non-periodical
publication of at least 48 pages (exclusive of cover pages),
Imposition of Tax
published in the country and m a d e available to the public.

Section 3(b) defines the t e r m "textbook" as a book which is
an exposition of generally a c c e p t e d principles in one subject,
intended primarily as a basis for instruction in a classroom or
pupil-book-teacher situation. T h e w o r d "manual" is a book that
is conveniently h a n d l e d , especially handbook.
B a s e d on these definitions, textbooks and teachers'

m a n u a l s m a y be legally treated as books a n d , therefore,
e x e m p t f r o m VAT; h e n c e , also e x e m p t from the 3% creditable
withholding VAT, provided they meet the requirements under
Section 3(a) of R.A. No. 8 0 4 7 . (BIR Ruling No. 001-05, Feb. 2,
2005.)
(3) Under the Electronic C o m m e r c e Act (R.A. No. 8792.),

d o c u m e n t s , m e s s a g e s or information which are electronically
written, c a p a b l e of being sent, received, recorded, stored,
d o w n l o a d e d , transmitted, retrieved, and reduced into printed
f o r m m a y be c o n s i d e r e d as equivalent to print media.
Accordingly, t h e sale of online j o u r n a l , E-books and online
a c a d e m i c library resources w h i c h a p p e a r at regular intervals
with a fixed price, either for subscription or sale, and are not
principally d e v o t e d for t h e publication of paid advertisements,
is e x e m p t f r o m VAT. (VAT Ruling No. 002-08, Mar. 19, 2008.)
2 2 . T h o s e with annual gross sales and/or receipts not exceed-

ing the amount of P1.5 million are considered small business
enterprises under Section 116. T h e prescribed amount is subject to
adjustment to its present value using the CPI as published by the
NSO.
(1) As long as the a m o u n t of sale exceeds P1.5 million
during a 12-month period, a hospital operating a pharmacy or
drugstore b e c o m e s subject to the value-added tax irrespective
of w h o m s o e v e r the medicine or drug is sold, whether to inpatient
or outpatient pursuant to Section 12(b, 1), of Rev. Regs. No.
10-94. (see BIR Ruling No. 084, March 8, 1988.)
(2) C o m m i s s i o n s on the sale of real property earned
by individual agents w h o are not employees of real estate
companies are subject to VAT if such commissions per twelve-
month period exceed P1.5 million. However, it is not subject
to withholding of VAT. On the other hand, commissions not
exceeding P1.5 million are subject to the 3% tax prescribed in
Section 116. (see VAT Ruling No. 028, May 22, 1991.)
124
ANNOTATED
23. Crop insurances are exempt under Section 108(A).

24. Distinctions between zero-rating and exemption. Both
are two different ways by which transactions subject to the VAT are
given preferential treatment.
(1) Under the first, the transaction is completely free of
VAT. On the other hand, the second only removes the VAT at
the exempt stage.
(2) A VAT-payer w h o is subject to zero rate of tax (see Sec.
112[A].) can claim and enjoy a credit or refund for the input
tax invoiced to him on his purchases. T h e s a m e privilege is
not given to e x e m p t taxpayers. In view of these differences,
the total taxes payable by the e x e m p t taxpayer m a y increase
rather than decrease. T h e non-creditability of input taxes in
exempt transactions m a y thus result in increased prices a n d
consequently, proportionately increased taxes w h i c h are all
shouldered by the ultimate or non-retail consumer.
The person making the e x e m p t transaction shall not

separately bill any output tax to his c u s t o m e r s b e c a u s e t h e said
transaction is not subject to VAT. On the other h a n d , a VAT-
registered purchaser of g o o d s or services w h i c h are e x e m p t
from VAT is not entitled to any input tax on s u c h p u r c h a s e .
(Sec. 12[A], Rev. Regs. No. 10-94.)
(3) Although zero-rated transactions are not subject to

actual tax charge since the tax is levied at 0% pursuant to
Sections 106 and 108, they are nevertheless "taxable s a l e s " for
the purpose of m e a s u r i n g turnover sales to d e t e r m i n e w h e t h e r
VAT registration is required. By contrast, e x e m p t sales are not
"taxable sales." Generally, a person w h o m a k e s only e x e m p t
sales under Section 108 is not a "taxable p e r s o n " a n d m a y
not register for VAT. A n y VAT-registered person w h o s e sales
fall under Sections 106(A, 2) a n d 108(B) shall qualify for z e r o -
rating.
25. Effectively zero-rated transactions cover local sale of

goods, properties, and services to purchasers enjoying e x e m p t i o n
from indirect taxes under special laws a n d international a g r e e m e n t s .
In an effectively zero-rated transaction, t h e VAT-registered

seller of goods or services is required to file an application and
secure approval for zero-rating, w h e r e a s in an automatically
zero-rated transaction, the VAT-registered seller n e e d not file an
application for zero-rating.
Imposition of Tax
Zero-rated taxpayers are not allowed to offset excess input

taxes over output taxes against their other internal revenue tax
liabilities. (Rev. M e m o . Cir. N o . 17-96.)
2 6 . Exemption of diplomatic and consular premises or the
residence of heads of diplomatic missions or consular posts.
Under Article 34 of the V i e n n a C o n v e n t i o n on Diplomatic Relations
adopted on April 18, 1968, diplomatic agents shall be exempt from
all dues a n d t a x e s , personal or real, national, regional or municipal,
except:
(1) indirect taxes of a kind w h i c h are normally incorporated
in t h e price of g o o d s or services;
(2) d u e s a n d taxes on private i m m o v a b l e property situated
in t h e territory of the receiving state, unless he holds it on behalf
of t h e s e n d i n g state for the p u r p o s e of the mission;
(3) estate, s u c c e s s i o n , on inheritance duties levied by
the receiving state, subject to the provisions of paragraph 4 of
Article 3 9 ;
(4) d u e s a n d taxes on private income having its source in
t h e receiving state a n d capital taxes on investments m a d e in
c o m m e r c i a l undertakings in the receiving State;
(5) c h a r g e s levied for specific services rendered;
(6) registration, court, or record fees, mortgage dues and

s t a m p duty, with respect to i m m o v a b l e property, subject to the
provisions of Article 2 3 .
It is clear f r o m the foregoing that the tax exemptions of

diplomatic agents/representatives do not include exemption
f r o m the indirect taxes such as the value-added tax, falling
under No. (1) above. However, in accordance with the principle
of comity of nations, and w h e r e there is a certification by the
Department of Foreign Affairs that the Philippine Embassy
enjoys exemption f r o m indirect tax in a foreign state, local
purchases by the E m b a s s y of such foreign state shall be
effectively zero-rated pursuant to Section 106(A, 2, c), of the
Tax C o d e .
Importations of certain articles by a foreign Embassy, or its
personnel, are exempt from the value-added tax in accordance
with Article 36(1) of the Vienna Convention. (BIR Ruling No.
366, A u g . 1, 1988; BIR Ruling No. 0 0 1 , Jan. 7, 1988.)
Note: R M O No. 81-99 provides guidelines for the processing
and the issuance of a VAT-exemption certificate to all qualified
ANNOTATED
embassies and their personnel on g o o d s and services in the

Philippines. This R M O is modified by R M O No. 22-2004.
27. Regional or area headquarters (RHOs) and regional operating
headquarters (ROHQs). RHQs established in the Philippines by
multinational companies are exempt from the VAT. In addition, the
sale or lease of goods and property and the rendition of services
to RHQs are subject to zero percent (0%) VAT rate. R O H Q s are
subject to VAT as provided under the Tax C o d e . (Art. 65, Exec.
Order No. 226 [Omnibus Investments C o d e ] , as a m e n d e d by R.A.
No. 7756.)
An alien executive of the R H Q or R O H Q shall enjoy tax a n d
duty free importation of personal and household effects as provided
for under Section 105(h) of the Tariff a n d C u s t o m s C o d e a n d
Section 109(i) of the Tax C o d e , provided, s u c h effects shall arrive
in the Philippines within 90 d a y s before or after conversion of the
alien executive's category to multiple entry visa issued under Exec.
Order No. 226. (Art. 6 2 , Ibid.)
Note: S e e Annotation No. 22 under Sec. 110.
28. Special Purpose Vehicle Law. U n d e r R.A. No. 9 1 8 2 ,

otherwise k n o w n as the "Special P u r p o s e Vehicle (SPV) A c t of
2 0 0 2 " (as a m e n d e d by R.A. No. 9343.), as i m p l e m e n t e d by Rev.
Regs. No. 6-2004 (as a m e n d e d by Rev. R e g s . No. 9-2005; see Rev.
m e m o . Cir. No. 44-2006.), transactions involving transfer of real
and other properties o w n e d or acquired ( R O P O A ) by a Financial
Institution (Fl) to an individual as well as those transfers qualified
under S P V L a w have b e e n granted tax e x e m p t i o n s . Under Section
7(d) of Rev. Regs. No. 6-2004, subject to certain conditions, transfer
by a Fl of a R O P O A to an individual is e x e m p t f r o m the following
taxes:
(1) D S T on any d o c u m e n t s e v i d e n c i n g the transfer or d a -

tion in payment, the last phrase of Section 173 notwithstanding;
(2) C G T i m p o s e d on the transfer of land and/or building
treated as ordinary asset in the h a n d s of t h e transferor;
(3) C W T imposed on the transfer of land and/or building
treated as ordinary assets in the h a n d s of the transferor
pursuant to Rev. R e g s . No. 2-98, as a m e n d e d ; a n d
(4) VAT as m a y be i m p o s e d under the Tax C o d e ; Provided,
That in the case of VAT e x e m p t i o n a n d if the property being
transferred is a capital g o o d used in t h e trade or business of
a VAT-registered person, the input tax on the said property
Imposition of Tax
shall be allocated as follows: the depreciated book value of the

property over its acquisition cost, multiplied by the input tax
directly attributed to the said property shall not be allowed as
input tax to the transferor's other VAT-taxable activities. (BIR
Ruling No. 2 4 2 - 0 5 , J u n e 3, 2005.)
Section 7(a) of Rev. R e g s . No. 6-2004 specifies dation in

p a y m e n t or dacion en pago of a non-performing loan (NPL) by
a borrower to a Fl as a m o n g those transactions covered by the
tax e x e m p t i o n under t h e S P V law, subject to certain conditions.
(BIR Ruling No. D A - 0 0 4 - 0 8 , July 2, 2008.)
2 9 . Sale of petroleum by service contractors. It remains

e x e m p t f r o m VAT under Pres. Decree No. 8 7 , which is a special
law. R.A. No. 9 3 3 7 did not include Pres. Decree No. 87 a m o n g the
e n u m e r a t e d laws w h i c h h a v e b e e n repealed. (VAT Ruling No. 0 0 7 -
0 6 , J u n e 7, 2006.)
3 0 . Sale to senior citizens. Senior citizens or those resident

citizens at least 60 years old are entitled to 2 0 % discount on
their p u r c h a s e of basic essential g o o d s and services. Previously,
they w e r e effectively getting only an 8% discount because of the
1 2 % VAT i m p o s e d on their p u r c h a s e s . With the passage of R.A.
N o . 9 9 9 4 , otherwise k n o w n as " E x p a n d e d Senior Citizens Act of
2 0 1 0 , " e x e m p t i n g their p u r c h a s e s f r o m VAT, they now enjoy the full
2 0 % discount. Business establishments selling these goods and
services m a y claim t h e discounts as deduction from their gross
income. For those w h o c o m e in g r o u p s , the practice is to apply the
2 0 % discount on the total bill divided by the number of customers.
Note: Input VAT for zero-rated sales m a y be refunded or applied

against the output VAT of sellers on their gross sales/receipts. The
law, however, declares the transaction (purchase by senior citizen)
as VAT-exempt sale. T h u s , the seller stands to realize only 3 0 %
(income tax rate) of the input VAT it incurred or paid on its purchases
and shoulder 7 0 % thereof, instead of enjoying full credit of the input
VAT against its output VAT liability.
SEC. 110. Tax Credits. -

( A ) Creditable Input Tax.
( 1 ) Any input tax evidenced by a VAT invoice or official receipt
issued in accordance with Section 113 hereof on the following
transactions shall be creditable against the output tax:
(a) Purchase or importation of goods:
128
ANNOTATED
(i) For sale; or

(ii) For conversion into or intended to form part of a
finished product for sale including packaging materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service;
or
(v) For use in trade or business for which deduction for
depreciation or amortization is allowed under this Code.
(b) Purchase of services on which a value-added tax has
been actually paid.
(2) The input tax on domestic purchase of goods or properties
shall be creditable:
(a) To the purchaser upon consummation of sale and on
importation of goods or properties; and
(b) To the importer upon payment of the value-added tax
prior to the release of the goods from the custody of the Bureau
of Customs. Provided, That the input tax on goods purchased
or imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and the
fifty-nine (59) succeeding months if the aggregate acquisition
cost for such goods, excluding the V A T component thereof,
exceeds One million pesos (PI,000,000): Provided, however, That
if the estimated useful life of the capital good is less than five (5)
years, as used for depreciation purposes, then the input V A T
shall be spread over such a shorter period: Provided, finally, in
the case of purchase of services, lease or use of properties, the
input tax shall be creditable to the purchaser, lessee or licensee
upon payment of the compensation, rental, royalty or fee. (as
amended by RA. No. 9337.)
(3) A VAT-registered person who is also engaged in transactions
not subject to the value-added tax shall be allowed tax credit as
follows:
(a) Total input tax which can be directly attributed to
transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be
directly attributed to either activity.
The term "input tax" means the value-added tax due from or paid
by a VAT-registered person in the course of his trade or business on
Imposition of Tax
importation of goods or local purchase of goods or services, including

lease or use of property, from a VAT-registered person. It shall also
include the transitional input tax determined in accordance with
Section 111 of this Code.
The term "output tax" means 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 of this Code.
(B) Excess Output or Input Tax. If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters: Provided, however, Any input tax attributable
to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to
the provisions of Section 112. (as amended by R.A. No. 9361.)
(C) Determination of Creditable Input Tax. The sum of the
excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the amount of claim
for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable
to exempt sale.
The claim for tax credit referred to in the foregoing paragraph
shall include not only those filed with the Bureau of Internal
Revenue but also those filed with other government agencies, such
as the Board of Investments and the Bureau of Customs.
ANNOTATION
1. Input tax m e a n s the VAT due on or paid by a VAT-registered

person on importation of g o o d s or local purchases of goods,
properties, or services, including lease or use of properties, in the
course of his trade or business. It also include the transitional input
tax and the presumptive input tax determined in accordance with
Section 111.
It i n c l u d e s i n p u t taxes which can be directly attributed to
transactions subject to the value-added tax plus a ratable portion
of any input tax which cannot be directly attributed to either the
taxable or exempt activity. (Sec. 4 . 1 1 0 . 1 , CRV.)
Note: Refund of input tax on capital goods is no longer allowed.
130
ANNOTATED
2. Creditable input tax. Section 110 considers a duly

executed VAT invoice or official receipt in accordance with Section
113 as sufficient evidence to support a claim for input tax credit. T h e
input tax on the following transactions shall be creditable against
the output tax:
(1) Purchase or importation of g o o d s (see Sec. 110[A], [b]
[1], [a].):
(2) Purchase of real properties for w h i c h a VAT has actually
been paid;
(3) Purchase of services for which a VAT has actually been
paid;
(4) Transactions " d e e m e d s a l e " under Section 106(B);
and
(5) Transitional input tax allowed under Section 111.
(6) Presumptive input tax allowed under Section 111.
(Ibid.)
The unutilized input taxes w h i c h a VAT taxpayer has
accumulated over the years are available as a deduction f r o m the
output taxes payable for the current year.
Input tax attributable to VAT-exempt transactions c a n n o t be
credited against output tax but should be treated as part of cost or
expense.
3. 60-month period amortization. " S u b s e c t i o n (A)(2)(b)

imposes a 60-month period within w h i c h to amortize t h e creditable
input tax on purchase or importation of capital g o o d s with acquisition
cost of P1 Million pesos, exclusive of the VAT c o m p o n e n t . S u c h
spread out only poses a delay in t h e crediting of t h e input tax.
Petitioner's a r g u m e n t is without basis b e c a u s e t h e taxpayer is not
permanently deprived of his privilege to credit the input tax. It is
worth mentioning that C o n g r e s s admitted that t h e spread-out of
the creditable input tax in this c a s e a m o u n t s to a 4-year interest-
free loan to the government. In the s a m e breath, C o n g r e s s also
justified its m o v e by saying that t h e provision w a s d e s i g n e d to raise
an annual revenue of 22.6 billion. T h e legislature also dispelled the
fear that the provision will f e n d off foreign investments, saying that
foreign investors have other tax incentives provided by law, a n d
citing the case of China, w h e r e despite a 1 7 . 5 % non-creditable
VAT, foreign investments w e r e not deterred. A g a i n , for w h a t e v e r is
the purpose of the 6 0 - m o n t h amortization, this involves executive
Imposition of Tax
e c o n o m i c policy a n d legislative w i s d o m in which the Court cannot

intervene." (Abakada Guro Party List vs. Ermita, 4 6 9 S C R A 10
[2005].)
4. Capital goods or properties refer to goods or properties
with estimated useful life greater than o n e (1) year and which are
treated as depreciable assets under Section 34(F) of the Tax C o d e ,
used directly or indirectly in the production or sale of taxable goods
or services.
T h e aggregate acquisition cost of depreciable assets in any
calendar month refers to the total price, excluding the VAT, agreed
upon for o n e or m o r e assets acquired a n d not on the payments
actually m a d e during the calendar m o n t h . T h u s , an asset acquired
on installment for an acquisition cost of more than P1,000,000.00,
excluding the VAT, will be subject to the amortization of input tax
despite t h e fact that the monthly payments/installments m a y not
e x c e e d P 1 , 0 0 0 , 0 0 0 . 0 0 . (Sec. 4.110-3, C V R . )
5. Input tax on construction in progress (CIP) is the cost of

construction w o r k w h i c h is not yet c o m p l e t e d . CIP is not depreciated
until the asset is placed in service. Normally, upon completion, a
CIP item is reclassified and the reclassified asset is capitalized and
depreciated.
(1) CIP is c o n s i d e r e d , for purposes of claiming input tax, as
a purchase of service, the value of which shall be determined
based on the progress billings. Until such time the construction
has b e e n c o m p l e t e d , it will not qualify as capital goods as
defined, in w h i c h case, input tax credit on such transaction can
be recognized in the month the payment w a s m a d e provided,
that an official receipt of p a y m e n t has been issued based on
the progress billings.
(2) In case of contract for the sale of service w h e r e only
the labor will be supplied by the contractor and the materials
will be purchased by the contractee from other suppliers, input
tax credit on the labor contracted shall still be recognized on
the month the payment w a s m a d e based on a progress billings
while input tax on the purchase of materials shall be recognized
at the time the materials w e r e purchased.
(3) O n c e the input tax has already been claimed while
the construction is still in progress, no additional input tax can
be claimed upon completion of the asset when it has been
reclassified as a depreciable capital asset and depreciated.
(Ibid.)
ANNOTATED
6. When amortization required; conditions. T h e amorti-

zation of the input tax is required only if the purchased or imported
goods to be used in business are subject to depreciation in their
present state. If the said goods are not depreciable per se, but
will only be used as materials in the construction or assembly of a
depreciable asset, the input tax on the said goods is not required to
be amortized. For input taxes to be amortized. All of the following
conditions must be present:
(1) Input tax is paid on the purchase and/or importation of
goods;
(2) T h e aggregate acquisition cost (excluding VAT) of the
goods for the month e x c e e d s P1,000,000.00; and
(3) T h e g o o d s purchased or imported refer to an existing

or finished depreciable asset at the time of acquisition.
T h u s , input taxes paid on the importation a n d local

purchase of parts and spare parts to be used for t e l e p h o n e
interconnection w h e r e the (a) parts are not existing or finished
depreciable assets to be a s s e m b l e d into a depreciable asset
or equipment; and (b) spare parts are likewise not existing or
finished depreciable assets for the m a i n t e n a n c e of the facility,
are not subject to amortization but m a y be c l a i m e d as a credit
against output tax in the m o n t h of acquisition. (VAT Ruling N o .
003-07, Mar. 15, 2007.)
7. Carry-over/reduction of excess input taxes. Excess input
taxes may be carried over to t h e s u c c e e d i n g quarter or quarters. If
the input tax is attributable to the p u r c h a s e of capital g o o d s or to
zero-rated sales, it m a y be refunded or credited at the option of the
VAT-registered person against his liability for other internal revenue
taxes. (Subsec. B.)
8. Apportionment of tax credits. If a VAT-registered person

is e n g a g e d in VAT-subject a n d VAT-exempt transactions, t h e tax
credits allowable will be c o m p u t e d under an a p p o r t i o n m e n t formula.
(infra.)
9. Credit of each condominium unit owner's share in costs

of condominium renovation. VAT-registered unit o w n e r s of a
condominium w h o are m e m b e r s of the corporation c a n n o t apply
their proportionate share in the costs of the renovation of the
condominium as input VAT to be credited against their output
VAT w h e r e the invoices or receipts issued by the contractors w h o
undertook the renovation are in the n a m e of the c o n d o m i n i u m
corporation. This is true notwithstanding the certification by the
Imposition of Tax
c o n d o m i n i u m corporation to e a c h unit owner's share in the costs,

a c c o m p a n i e d by a photocopy of the official receipt by the contractor.
However, these certifications m a y be used as substantiation for
deductibility of business e x p e n s e s for income tax purposes (BIR
Ruling No. 0 8 1 - 9 9 , J u n e 2 2 , 1999.)
10. Credit of input tax against VAT payable on sale of imported

goods. Note that in the definition of input tax, the payment by the
VAT-registered person must be in the course of trade or business,
implying that if the importation of g o o d s is not in the course of
trade or business, no input tax can be credited, (par. 3.) Output tax
m e a n s the VAT on the sale or lease of taxable g o o d s , properties
or services. (Subsec. A, last par.) T h e importer cannot credit the
input tax on his importation of g o o d s against the VAT payable on
the importation but against the output tax payable on the sale of the
imported g o o d s , w h e t h e r sold in their original state or as ingredients
or parts of any finished product.
T h e p a y m e n t of t h e output tax is the obligation of the seller, not

of the purchaser.
11. Consumption and income types of VAT. Section 110(A)

8
has a d o p t e d these types of VAT. (see Annotation Nos. 8 and 9,
under Sec. 105.) S u b s e c t i o n (A, 2) requires that the input tax on
capital g o o d s shall be spread evenly for 60 months if the aggregate
acquisition cost of such g o o d s , excluding the VAT component,
thereof e x c e e d s P1 Million but if t h e estimated useful life of the
capital g o o d s is less than five (5) years, as used for depreciation
purpose, then the input VAT shall be spread over such a shorter
T h e former original sales tax was essentially a single-stage V A T of the gross

product type which also utilized the credit method in computing the tax payable by
the manufacturer, producer or importer, by subtracting the (excise, sales, and mill-
er's) taxes on his purchases of r a w materials against the amount of sales tax due on
his sales, (see Annotation No. 5, under Sec. 105.)
From 1939 to 1978, the sales tax system (applicable only to manufacturers)
was computed under the "cost-deduction method" under which the cost of previously
taxed raw materials was allowed as a deduction from the gross selling price of the
manufactured article, until it was replaced by the "tax credit method" by Presidential
Decree No. 1358 (effective July 1, 1978) "to eliminate the double taxation feature of
the [informer] sales tax system as regards raw materials used in the manufacture of
articles."
The President was subsequently empowered by Presidential Decrees No. 1705
and 1773 to subject the second sale of any taxable article to value-added tax to be
computed under the "cost-deduction method," but this power was never exercised.
Instead, a 3% turn-over tax on all second sales (effective November 1, 1985) was
imposed by Presidential Decree No. 1991 which was later replaced by a turn-over
tax of 1.5% on all subsequent sales (effective January 1, 1986) by Presidential Decree
No. 2006.
134
ANNOTATED
period. This is a deviation from the tax credit system under which
VAT works.
Note: Capital goods or properties refer to goods or properties
with an estimated useful life greater than one (1) year and which
are treated as depreciable assets under Section 34(F) of the Tax
Code, used directly or indirectly in the production or sale of taxable
goods or services. As a m e n d e d by R.A. Nof. 9337, the Tax Code no
longer allows the refund of input VAT paid on purchases of capital
goods, (see Annotations Nos. 1 and 5 under Sec. 112.)
12. Bases of VAT. T h e VAT is based on the gross selling
price or gross value in m o n e y of the g o o d s or properties sold (Sec.
106.) or gross receipts realized f r o m the sale of service. (Sec. 108.)
In the case of imported goods, the basis of the VAT is the v a l u e
used by the Bureau of C u s t o m s in determining tariff and c u s t o m s
duties, plus customs duties, excise t a x e s , if any, and other c h a r g e s ;
or the landed cost plus excise taxes, if any, w h e r e t h e c u s t o m s
duties are determined on the basis of the quantity or v o l u m e of the
goods. (Sec. 107.)
(1) Output is the total a m o u n t of sales or receipts of the
taxpayer while input is the total a m o u n t of his p u r c h a s e s f r o m
his suppliers. Output tax simply m e a n s tax on output a n d input
tax, on input.
(2) Since the supplier (subject to VAT) of the t a x p a y e r is
also a seller, he is also subject to output tax on his sales to
the taxpayer, w h i c h output tax b e c o m e s the input tax of the
taxpayer. Therefore, the input tax paid should not be treated as
part of the cost of g o o d s , etc., and t a c k e d in the selling price
because a s input tax, i t i s d e d u c t i b l e f r o m o r c r e d i t a b l e
against the output tax payable.
13. In computing the VAT payable (subsec. B), three possible
scenarios may arise:
First, if at the e n d of a taxable quarter the output taxes

charged by the seller are equal to the input taxes that he paid
and passed on by the suppliers, t h e n no p a y m e n t is required;
Second, w h e n the output taxes e x c e e d the input t a x e s , the
person shall be liable for t h e e x c e s s , w h i c h has to be paid to
the Bureau of Internal R e v e n u e (BIR); and
Third, if the input taxes e x c e e d the output taxes, the excess
shall be carried over to the succeeding quarter or quarters.
Should the input taxes result f r o m zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall
Imposition of Tax
instead be refunded to the taxpayer or credited against other

internal revenue taxes, at the taxpayer's option. (Abakada Guro
Party List v s . Ermita, 4 6 9 S C R A 10 [2005].)
14. Use of input taxes without distinction. T h e input tax
credit is the a m o u n t of input tax shifted to the taxpayer which he can
deduct f r o m or credit against his output tax. By deducting the input
tax (paid by the supplier as output tax) f r o m the taxpayer's output
tax, double or multiple taxation of the value of the s a m e goods, etc.,
previously t a x e d to t h e supplier (previous seller) is avoided as only
the value a d d e d is t a x e d .
(1) Input t a x e s are g e n e r a t e d f r o m the purchase of VAT

taxable g o o d s or services f r o m a VAT-registered taxpayer
without distinguishing w h e t h e r the input taxes are sourced
f r o m t h e p u r c h a s e of g o o d s or services. In other w o r d s , input
taxes thus g e n e r a t e d can be u s e d without distinction as a credit
against t h e output tax d u e f r o m a VAT-registered person. (BIR
Ruling N o . 159-99, Oct. 14, 1999.) T h u s , a c o m m i s s i o n earner
w h o is liable to t h e output tax on c o m m i s s i o n income m a y claim
t h e input tax f r o m his/its importation of g o o d s or trading activity
subject to the condition that s u c h input taxes have not already
b e e n applied against output taxes. (BIR Ruling No. 159-99,
Oct. 14, 1999.)
(2) Under Section 110 (A, 1), any input tax evidenced by
VAT invoice or official receipt is creditable against the output tax
of the taxpayer. An advertising e x p e n s e duly covered by a VAT
invoice/receipt is a legitimate business e x p e n s e . W h e r e the
taxpayer incurred advertising e x p e n s e and invoices/receipts
w e r e issued in the n a m e of t h e taxpayer w h o paid for the s a m e ,
the source of the m o n e y paid is immaterial. T h e taxpayer can
claim input tax credit on the advertising expense. ( C o m m . vs.
Sony Philippines, Inc., G.R. No. 178697, Nov. 17, 2010.)
Note: Rev. M e m o . Order No. 16-07 (July 20, 2007.) prescribes
additional policies and procedures in the audit by revenue officers
of input taxes claimed on VAT returns, and a m e n d s . Annex B of
Rev. M e m o . Order No. 53-98 on the checklist of documents to be
submitted by a taxpayer upon audit of his/its VAT liabilities, as well
as the mandatory reporting requirements to be prepared by the
assigned revenue officer.
15. Reimbursements on discounts extended to customers.
A company is entitled to claim as input VAT the VAT component
of reimbursements on discounts extended to customers. The VAT
system is based on a system of offsetting between the output tax
136
ANNOTATED
and the input tax. W h e r e under the discount agreement between

X Co. and Y Co. (exclusive distribution of X Co.), X C o . undertook
to reimburse Y Co. for the discounts given by the latter to its
customers, and X Co. effectively paid part of Y Co.'s selling price of
the products to Y Co.'s customers to the extent of the discount X Co.
asked Y Co. to give to its preferred customers, which is evidenced
by the Debit Notes issued by Y Co., Y Co. should be able to collect
the selling price in full as though no discount w a s in fact given. (BIR
No. 046-04, Dec. 6, 2004.)
16. Formula for computing VAT:
Output tax on sale, etc., of goods/properties/
services
Less: Input tax on purchases, etc., a n d /
or importation
= VAT payable
The VAT payable is the e x c e s s of output tax over allowable

input tax. In the case of importation, it is t h e VAT d u e on such
importation.
Thus (figures a s s u m e d ) :
(1) Sales (domestic) P550,000

Output tax (12%) 66,000
Less: Input tax on p u r c h a s e s
and/or importation
Raw materials P180,000
Supplies 40,000
Capital g o o d s 60,000
Services 50,000
Total P330.000
Input tax (12%) 39,600
VAT payable P26.400
Note:
(a) Services rendered by persons subject to

percentage tax under Title V are e x e m p t f r o m VAT. (see
Sec. 1 0 9 [ 1 , E].) H e n c e , there is no input tax that can be
credited on p a y m e n t s or expenditures for such services
such as gas and water, (see Sec. 119.) For other e x e m p t
transactions, see Section 109.
Imposition of Tax
(b) T h e a m o u n t of VAT otherwise due on tax-exempt

products sold to the VAT-registered taxpayer shall be
d e e m e d paid a n d , therefore, also creditable as input tax
against his output tax of P66.000.
(c) Under Section 110(B), and subject to Section

112(A), the taxpayer has the option, instead of crediting the
entire input tax of P39.600 and paying P26.400, to apply
for the refund of the input tax of P21,600 (P180,000 x 12%)
on the raw materials (attributed to zero-rated sale) and
pay P 4 8 . 0 0 0 , or credit P21.600 (P180.000 x 12%) against
other internal r e v e n u e taxes and pay P48.000 (P21.600 +
P26.400), or credit P21.600 against other internal revenue
taxes and pay P 4 8 . 0 0 0 or apply for refund of part of
P 2 1 . 6 0 0 (e.g., P 1 0 . 0 0 0 ) a n d claim credit for the balance
(P11,600) against the VAT payable (P26.400 - P11,600 =
P14,800) and/or internal revenue taxes.
(2) Export Sales P300.000

Output tax ( 0 % ) 0
Less: Tax credits ( 1 2 % )
Purchases Input Tax
R a w Materials P77.000 P 9,240
Supplies 16,500 1,980
Capital g o o d s 11,000 1,320
Services 5,500 660
Total P110.000 P13.200
Note:
(a) Export sales are zero-rated (Sec. 106[A, 2, a].),
and the exporter is entitled to tax credits or refund to all
input tax attributable to the g o o d s exported.
(b) Under Section 110(B) and subject to Section
112(A), the exporter has the option to apply for refund of the
entire amount of P13,200, or credit the amount of P13,200
against his liability for other internal revenue taxes, or
apply for refund of part of P13,200 and claim credit for the
balance against other internal revenue taxes. Credit cannot
be made against output tax for none is payable.
(c) T h e above rules apply to all sales that are zero-
rated or are effectively zero-rated, (see Sec. 112[A].)
138
ANNOTATED
17. Sale to persons with disability. VAT on sales of goods or

services with sales discounts granted by business establishments
shall be computed as follows:
Amount of sale (without VAT) P100.00
Less: 2 0 % sales discount 20.00
Vatable sale P8.000
Plus: 1 2 % VAT (based on P80) 9.60
Total amount to be paid P89.60
Note: T h e privileges granted to a person with disability shall

not be claimed if said person claims a higher discount as m a y
be granted by the commercial establishment and/or under other
existing laws or in combination with other discount p r o g r a m s . T h u s ,
a person with disability w h o is at the s a m e time a senior citizen can
only claim one 2 0 % discount on a particular sale transaction, (see
Sees. 4, 5, 6, Rev. Regs. No. 1-2009.)
18. Determination of input tax creditable during a taxable
month or quarter. All input taxes creditable to a VAT-registered
person during a taxable m o n t h or quarter plus any input tax carried
over from the preceding m o n t h or quarter shall be reduced by the
amount of the claim for VAT refund or tax credit certificate (whether
filed with the BIR, Department of Finance, Board of Investments,
or Bureau of C u s t o m s ) and other adjustments s u c h as those
for purchase returns or a l l o w a n c e s a n d input tax attributable to
exempt sales and input tax attributable to sales subject to final VAT
withholding, (see Sec. 4.110-5, C V R . )
Under Section 110(C) "the claim for tax credit x x x shall include
not only those filed with the B u r e a u of Internal R e v e n u e but also
those filed with other g o v e r n m e n t agencies, such as the Board of
Investments and the Bureau of C u s t o m s . "
Note: "It has c o m e to the attention of this Office that there are
certain taxpayers w h o file multiple claims for credit of input tax
attributable to zero-rated sales for a particular taxable period as in
the case of one w h o : (a) files a claim for Tax Credit Certificate ( T C C )
pursuant to Article 39(k) of Executive Order No. 2 2 6 , otherwise
known as the O m n i b u s Investments C o d e of 1987, (b) files a claim
for T C C with the O n e - S t o p - S h o p Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance pursuant to
Administrative Order No. 2 6 6 , (c) files a claim for T C C or refund
with the Bureau of Internal R e v e n u e pursuant to Section 112(A) of
the Tax C o d e , and (d) applies the s a m e a m o u n t against the output
Imposition of Tax
tax liability in the value a d d e d tax returns under Section 110 of the
s a m e C o d e . T h e VAT taxpayer is allowed to take only one of the
a b o v e options, thus, a c o m b i n a t i o n , or all, of the above actions is
a violation of the Tax C o d e . More so, it deprives the government
o f m u c h needed revenues, x x x Accordingly, any taxpayer found
to have m a d e a d o u b l e or multiple claims for tax credit under the
aforementioned c i r c u m s t a n c e s shall be subjected to civil and/or
criminal actions as provided for under Sections 2 2 8 , 248, 249 and
2 5 4 of the Tax C o d e . " (Rev. M e m o . Cir. No. 50-2002.)
19. Apportionment formula for computing allowable tax credits

for VAT-registered persons engaged in taxable and non-taxable
activities:
Sales subject Input tax w h i c h

t 0 V A T
x cannot b e directly = Ratable
Total Sales (taxable attributed to either portion
a n d non-taxable) sales
T h u s , if VAT-subject sales a m o u n t to P100,000, non-taxable

sales, P 5 0 . 0 0 0 , a n d t h e unattributable purchases, P15,000, the
ratable portion of t h e input tax of P1.800 on P15,000 is:
P100,000 o r 2 / 3 o f P1,800 = P1,200

P150,000
T h e VAT payable is P10,800 (12,000 - P1.200). T h e remaining

P600 (1/3) is input tax corresponding to the non-VAT taxable
operations.
Section 110(A, 3) contemplates a situation w h e r e a VAT-
registered person is e n g a g e d in t w o or more activities, one subject
to VAT and the other e x e m p t from VAT and he purchases goods
and/or services f r o m a VAT-registered person which goods and/
or services are used in both activities and there is an inherent
difficulty in attributing the input tax to either activity. Under such
circumstances, he has to pro rate the input tax to his VAT taxable
activity and to his e x e m p t activity. (BIR Ruling No. 104-99, Oct. 6,
1999.)
20. Substantiation of claims for input tax credits.

(1) Input taxes for the importation of goods or the domestic
purchases of goods, properties, or services. Input taxes
for the importation of goods or the domestic purchase of
goods, properties or services is made in the course of trade of
ANNOTATED
business, whether such input taxes shall be credited against

zero-rated sale, non-zero-rated sales, or subjected to the 5%
Final Withholding VAT, must be substantiated and supported
by the following documents, and must be reported in the
information returns required to be submitted to the BIR.
(a) For the importation of goods import entry or
other equivalent d o c u m e n t showing actual payment of VAT
on the imported goods.
(b) For the domestic purchase of g o o d s and properties
invoice showing the information required under Sees.
113 and 237.
(c) For the purchase of real property public

instrument, i.e., d e e d of absolute sale, d e e d of conditional
sale, contract/agreement to sell, etc., together with VAT
invoice issued by the seller.
(d) For the p u r c h a s e of services official receipt

showing the information required under Sees. 113 a n d 2 3 7 .
A cash register m a c h i n e tape issued to a registered buyer

shall constitute valid proof of substantiation of tax credit only if
it s h o w s the information required under Sees. 113 a n d 2 3 7 .
(2) Transitional input tax. It shall be supported by

inventory of g o o d s as s h o w n in a detailed list to be submitted to
the BIR.
(3) Input tax on deemed sale transactions. It shall be

substantiated with the required invoices.
(4) Input tax from payments made to non-residents. It

shall be supported by a copy of the Monthly R e m i t t a n c e Return
of VAT withheld (BIR F o r m 1600) return filed by t h e resident
payor in behalf of the non-resident evidencing remittance of the
VAT due which w a s withheld by the payor.
(5) Advance VAT on sugar. It shall be supported by the

Payment Order showing p a y m e n t of the a d v a n c e VAT. (Sec.
4.110-8, CVR.)
21. Input taxes passed to a VAT-registered Regional Operating

Headquarters (ROHQ). Since most of A C o . - R O H Q ' s revenues
are derived from services rendered to its h e a d office a n d other
affiliates a b r o a d , most of its sales are subject to z e r o percent (0%)
VAT. Its purchases, however, f r o m local suppliers of g o o d s and
services are subject to 1 2 % VAT. T h u s , it constantly a c c u m u l a t e s
110 V A L U E - A D D E D TAX 141
Imposition of Tax
creditable input taxes for w h i c h there are no output taxes to offset

or apply.
(1) If a taxpayer has no other sales transactions subject to

VAT against w h i c h input taxes m a y be used in payment, then
that taxpayer shall be constituted as the final person against
which t h e cost of the p a s s e d on tax shall legally stop and rest.
In this c a s e , the input taxes m a y be legally converted as cost
available as deduction for income tax purposes. T h u s , the input
taxes shifted to A C o . - R O H Q m a y be recognized outright as an
e x p e n s e for i n c o m e tax purposes, or a d d e d to the acquisition
cost u p o n p u r c h a s e of the capital asset subject to depreciation.
(2) This treatment shall likewise apply to situations

involving input taxes already recognized in the books of A Co.-
R O H Q w h e r e : (a) the 2-year prescriptive period had already
lapsed without a n y claim for refund or credit having been filed;
(b) a claim for refund or credit w a s denied or rejected by the BIR
for having b e e n filed b e y o n d t h e 2-year prescriptive period or
for n o n - c o m p l i a n c e with invoicing/substantiation requirements;
or (c) a claim for refund or credit is still pending with the BIR but
is voluntarily w i t h d r a w n by A C o . - R O H Q .
(3) As regards input taxes attributable to A C o . - R O H Q ' s

zero-rated sales, w h i c h it recognizes outright as an expense
or c h a r g e s to asset account subject to depreciation, the input
taxes p a s s e d on to A C o . - R O H Q shall (a) not be recorded as
input tax in its books; (b) not be reflected/reported as input tax
in its VAT returns; a n d (c) not be claimed by it as a tax refund or
tax credit. (BIR Ruling No. D A - 1 2 1 - 1 0 , July 9, 2010.) Note: See
Annotation N o . 26 under Sec. 109.)
22. Output VAT in construction in progress (CIP) cost.

Section 4.110-3 of the C V R (as a m e n d e d by Rev. Regs. No. 4-2007)
prescribes the rule in claiming input tax on CIP cost.
By w a y of illustration: X Co. a power-generating company
and owner of a gas-fired power generating facility entered into
an operation and maintenance (O & M) agreement with Y Co. As
operator of the plant, Y is responsible for the day-to-day operations
of the power plant and its maintenance and repair, including the
replacement of gas turbine blades and vanes during major overhauls
of the power plant for which X agreed to pay a monthly fixed and
variable operation fees. T h e gas turbine will not be installed yet by
Y until the major overhaul takes place. In effect, prior to the major
ANNOTATED
overhaul, X is just making an advance payment with respect to the

cost of the gas turbines.
In view of the advance nature of the payments with respect
to the portion allotted to fund the cost of the gas turbines, such
payments fall within the definition of CIP. Accordingly, the input
VAT credits that X incurred on its payments' of the monthly fixed
operation fee to Y can be claimed during the month in which the
payments are made as provided in said Section 4.110-3. (BIR
Ruling No. DA-063-08, July 18, 2008.)
23. Other rulings holding liability to VAT.
(1) Service income consisting of gross receipts for
cleaning and roasting of coffee beans for other persons or
firms is subject to the value-added tax of 1 0 % (now 12%) if
the gross receipts arising from the p e r f o r m a n c e of s u c h service
exceed P550,000.00 (now P1.5 million); otherwise, if the gross
receipts are less than P550.000.00 a n d the taxpayer did not opt
to register under the VAT, he is e x e m p t f r o m t h e value-added
tax but subject to the 3% tax b a s e d on his gross quarterly
sales or receipts. However, if his gross receipts are less t h a n
P550,000.00, but he is registered under the VAT, he is subject
to the value-added tax pursuant to Section 116. (BIR Ruling
No. 019, Feb. 2, 1988.)
(2) Under the manning contract with t h e o w n e r s / m a n a g e r s

of the vessels to provide/supply the crew and personnel
m a n a g e m e n t requirements of a f o r e i g n - o w n e d , but Philippine-
flag vessels e n g a g e d in w o r l d w i d e trade, a t a x p a y e r e n g a g e d
in the business of c r e w i n g / m a n n i n g vessels trading w o r l d w i d e
is d e e m e d to have performed all of s u c h services within the
Philippines; hence, he is taxable u n d e r Section 108(A). If
he is VAT-registered and the consideration paid to him is in
acceptable foreign currency remitted inwardly a n d a c c o u n t e d
for in accordance with t h e rules and regulations of t h e Central
Bank, he is subject to the v a l u e - a d d e d tax of 0% pursuant to
Section 108(B, 2). However, if he is not VAT-registered, or if
the consideration for his services is not in acceptable foreign
currency, he is subject to the v a l u e - a d d e d tax pursuant to
Section 108. (BIR Ruling No. 0 2 1 , Feb. 2, 1988.)
(3) As long as the amount of sale exceeds P550,000.00 ( n o w

P1.5 million) during a 12-month period, a hospital ope-rating
a pharmacy or drugstore b e c o m e s subject to VAT irrespective
of w h o m s o e v e r the medicine or drug is sold, whether to
110 V A L U E - A D D E D TAX 143
Imposition of Tax
inpatient or outpatient, pursuant to Section 12(B, 1) of Revenue

Regulations No. 10-94. (see BIR Ruling No. 023, Feb. 2 , 1 9 8 8 . )
(4) Only perfumes and toilet waters are subject to 2 0 %
excise tax, pursuant to Section 150(b). Essential oil used in the
manufacture of bath s o a p is not included in said Subsection
(b) as well as in other subsections of Section 150. Accordingly,
said essential oil is not subject to the 2 0 % excise tax imposed
by Section 150. However, said importation of essential oil is
subject to t h e v a l u e - a d d e d tax based on the total value used
by t h e B u r e a u of C u s t o m s in determining tariff and customs
duties, plus c u s t o m s duties, excise tax, if any, and other
charges pursuant to Section 107. (BIR Ruling No. 049, Feb.
17, 1988.)
(5) Patis is a p r o c e s s e d food product and the sale thereof

in bottle is subject to the v a l u e - a d d e d tax pursuant to Section
106. Likewise, t h e sales of bagoong which are placed even in
recycled cooking oil tin c a n s or recycled bottles and milk cans
are subject to the v a l u e - a d d e d tax. (BIR Ruling No. 070, March
4, 1988.)
(6) T h e resale of gardening needs like tools and flower
pots are subject to t h e v a l u e - a d d e d tax except those that are
specifically e x e m p t under Section 109 such as fertilizers. (BIR
Ruling 120, March 2 5 , 1988.)
(7) Banana meal as a raw material in the production
of poultry feeds (Sec. 1 0 9 [ 1 , B].) is subject to VAT. As an
agricultural food product, it is not considered in its original state
since it has already u n d e r g o n e the process of milling, (see BIR
Ruling No. 1 5 1 , April 9, 1988.)
(8) A l t h o u g h corn starch is a by-product in the process of
milling c o r n , it is not o n e of those considered in their original
state for purposes of Section 1 0 9 ( 1 , A). Under said provision,
only corn grits, another by-product, is considered in the original
state. Such being the case, corn starch which is a manufactured
product and no longer in its original state is subject to the value-
added tax. Similarly, corn germ is subject to VAT. (see BIR
Ruling No. 1 8 1 , June 2 9 , 1988.)
(9) Cassava starch can no longer be considered in its
original state; hence, the s a m e is subject to value-added
tax imposed by Section 106(A). The process involved in the
conversion of cassava tubers into cassava starch reveals
that the s a m e is not a mere simple process of preparation,
ANNOTATED
etc. as provided in Section 109(1, A) but rather the process

of manufacturing, (see BIR Ruling No. 128, June 16, 1989.)
However, the sale of cassava tubers by the growers and/or
purchasers to the manufacturer of cassava starch is exempt
from VAT pursuant to Section 1 0 9 ( 1 , A), (see BIR Ruling No.
309, July 13, 1988.)
(10) Recapping activity is classified as a sale of service.
(BIR Ruling No. 287, 1988.)
(11) Although the carpet is to be purchased for religious
purpose only, the s a m e is not e x e m p t from the value-added tax
which is payable by the manufacturer or seller thereof. (Sec.
106.) Said transaction is not o n e of those e x e m p t f r o m VAT
under Section 109. (BIR Ruling No. 3 1 1 , July 3 1 , 1988.)
(12) T h e local sales of crude coconut oil and copra pellets
are subject to VAT pursuant to Section 106(A) b e c a u s e the
s a m e is no longer in its original state, but a processed food
product. On the other h a n d , the export of coconut oil is subject
to VAT at 0% pursuant to Section 106(A, 2, a). (BIR Ruling No.
328, July 15, 1988.)
(13) Banana powder p a c k e d or placed in bottles and c a n s
and sold is considered a manufactured product subject to VAT.
(BIR Ruling No. 360, July 2 8 , 1988.)
(14) Fertilizers in Section 1 0 9 ( 1 , B) are those w h i c h are
used for agricultural purposes. H e n c e , mosquito coils, e v e n
raw materials used in the m a n u f a c t u r e thereof, are subject to
VAT. (BIR Rulings No. 149, July 13, 1989 a n d N o . 178, A u g . 8,
1989.) Note: Pesticides a n d herbicides are no longer e x e m p t .
(15) Fried green peas, peanuts and "patani" b e a n s ,

packed in plastic are considered as m a n u f a c t u r e d products;
hence, subject to VAT. (BIR Ruling No. 0 9 2 , M a y 2, 1981.)
(16) Mosquito coils, although used to kill insects, are not
used for agricultural purposes; h e n c e , they do not fall within
the purview of Section 1 0 9 ( 1 , B) (see BIR Ruling No. 149, July
13, 1989.); so are aerosol, mothballs, magic chalks and the
chemicals for their formulations. (BIR Ruling No. 166, A u g . 9,
1989.)
(17) Copra cake, also k n o w n as copra meal, is a by-

product of copra, which c o m e s out in pellet f o r m after the oil
is extracted using solvents or through pressing. Since it is a
processed product ultimately used as ingredient or s u p p l e m e n t
Imposition of Tax
to animal feeds, it cannot be considered e x e m p t under Section

1 0 9 ( 1 , A), (see VAT Ruling No. 0 5 0 , May 29, 1991.)
(18) Hamburger patties are "processed meat products"
having u n d e r g o n e manufacturing process thru mixture of salt,
pepper, garlic, powder, m o n o s o d i u m glutamate, hydrolyzed
vegetable, protein and water; hence, are no longer meat
products in their original state. S u c h being the case, their sales
are subject to VAT pursuant to Section 106. (VAT Ruling No
0 6 5 , J u n e 2 7 , 1991.)
(19) Importation of alcohol-free beer is not subject to

excise tax under Section 142 or 143, since it is not an alcohol
product, but it is subject to VAT. (BIR Ruling No. 153, July 26,
1989.)
(20) Since (under Art. Ill, Sec. 9 a n d Art. V, Sec. 19 of
the Philippine Treaty Series, C o n v e n t i o n on Immunities and
Privileges of t h e Specialized A g e n c i e s of the United Nations)
the e x e m p t i o n f r o m taxation of World Bank officials is in respect
of the salaries a n d e m o l u m e n t s paid to t h e m , the sales of g o o d s
a n d services to t h e m are not e x e m p t f r o m VAT. (BIR Ruling No.
165, A u g . 8, 1989.)
(21) T h e local sales of s o d i u m hypochlorite (a chemical

c o m p o u n d frequently used as a disinfectant or bleaching
agent) by a P E Z A e c o z o n e locator are subject to VAT since the
sale of said product is not a m o n g the VAT-exempt transactions
under Section 109(1). (VAT Ruling No. 0 0 9 - 0 9 , July 3 1 , 2009.)
Similarly, the local sales of hydrochlorous acid is subject to VAT
since it is only a by-product of a fertilizer material, and is not a
fertilizer perse. (VAT Ruling No. 011-09, A u g . 2 4 , 2009.)
24. Other rulings exempting from VAT.
(1) T h e business of supplying fresh water to inter-island
and ocean-going vessels is exempt; fresh water comes within
the purview of agricultural food products. (BIR Ruling No. 017,
Feb. 1, 1988.)
(2) Export sales of more than P1.5 million of roasted coffee
beans are subject to 0% if business is VAT-registered (Sec.
106[A, 2, a].); otherwise, exports shall be exempt. (Sec. 109[1,
O].) Roasted and ground coffee beans are not considered
manufactured products; hence, the sales thereof are exempt
from the value-added tax in all stages of distribution. (Sec.
1 0 9 [ 1 , A].) However, if the ground coffee is packed or placed in
bottles or cans and sold, the same is already a manufactured
ANNOTATED
product; hence, subject to the value-added tax if the sales

exceed P1.5 million during the 12-month period. But if the sales
derived from all lines of business do not exceed P1.5 million
during any 12-month period, the business is exempt from VAT
but subject to 3% of gross sales or receipts pursuant to Section
109(1, V) in relation to Section 116. (see BIR Ruling No. 012,
Feb. 2, 1988.)
(3) In the manufacture of fresh and cooked dog foods,
the manufacturer uses agricultural by-products such as soya
beans, chicken heads, organs, fish, animal and poultry feeds
as raw materials. All of such raw materials fall under the cat-
egory of agricultural products. T h e sale of fresh and c o o k e d
dog food falls within the purview of animal feeds pursuant to
Section 109(c) (BIR Ruling No. 0 3 9 , Feb. 11, 1988.), n o w Sec-
tion 109(1, B). Note: Fish and animal f e e d s , and soya and fish
meals are n o l o n g e r e x e m p t u n d e r S u b s e c t i o n ( 1 , B).
(4) Prawn feeds are expressly e x e m p t under Subsection

(LB).
(5) Dealers of dried fruits and vegetables as well as f o o d
companies e n g a g e d in the simple processing of agricultural
and marine food products are e x e m p t f r o m t h e v a l u e - a d d e d
tax. (BIR Ruling No. 0 7 1 , M a r c h 4, 1988.)
(6) Exchanges of personal property or securities for s h a r e s
of stock in another corporation w h i c h is a party to a m e r g e r or
consolidation (see Sec. 4 0 [ C , 2].) are e x e m p t f r o m VAT. (BIR
Rulings No. 155-88 and No. 186-88.)
(7) Reinsurance commissions derived by an insurance
c o m p a n y are not subject to VAT for t h e reason that s u c h c o m -
pany is not a seller but a buyer of service. Under the law, t h e
seller of service is the party subject to VAT. (BIR Ruling No.
107, May 18, 1989, modifying BIR Rulings No. 155-88 a n d
No. 186-88.) Note: Insurance a n d reinsurance c o m m i s s i o n s ,
whether life or non-life, are n o w subject to VAT. (Sec. 4.108-3[i],
CVR.)
(8) Others: Importation of frozen sliced potato still in its

original state is e x e m p t under Section 1 0 9 ( 1 , A) (see BIR
Ruling No. 135, April 14, 1988.) a n d industrial salt, alternatively
known as table salt which is neither iodized nor refined under
Section 1 0 9 ( 1 , A) (see BIR Ruling No. 2 8 0 , J u n e 2 9 , 1988.);
importation or sale of potassium nitrate as it is classified as
a non-traditional forliar fertilizer under Section 1 0 9 ( 1 , B) (see
Sec. I l l V A L U E - A D D E D TAX 147
Imposition of Tax
BIR Ruling No. 4 1 4 , A u g . 2 5 , 1988.); shipment of prawn feeds

s a m p l e s , t h o u g h in big quantity under Section 109(1, B) (see
BIR Ruling No. 4 9 3 , Oct. 12, 1988.); and sale of " a l a m a n g "
to which little salt has b e e n a d d e d to preserve its freshness,
to processors of " b a g o o n g " under Section 1 0 9 ( 1 , A), (see BIR
Ruling No. 119, J u n e 7, 1989.)
SEC. 111. Transitional/Presumptive Input Tax Credits.

( A ) Transitional Input Tax Credits. A person who becomes
liable to value-added tax or any person who elects to be a VAT-
registered person shall, subject to the riling of an inventory according
to rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to
two percent (2%) of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever
is higher, which shall be creditable against the output tax. (As
(B) Presumptive Input Tax Credits. Persons or firms engaged
in the processing of sardines, mackerel and milk, and in manufac-
turing refined sugar, cooking oil and packed noodle-based instant
meals, shall be allowed a presumptive input tax, creditable against
the output tax, equivalent to four percent (4%) of the gross value in
money of their purchases of primary agricultural products which are
used as inputs to their production. (As amended by RA. No. 9337.)
As used in this Subsection, the term "processing" shall mean
pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance
of a product in such manner as to prepare it for special use to which
it could not have been put in its original form or condition.
ANNOTATION
1 . S e c t i o n 111 (A) allows transitional credit for input tax on the

"beginning inventory of goods, etc.," of any person w h o becomes
liable to VAT or w h o elects to be a VAT-registered person.
T h e transitional input tax credit aims to avoid any inequity or
potential burden resulting from the change in status of a person
w h o becomes liable to VAT for the first time or elects to be a VAT-
registered person without recognizing the VAT it/he paid on related
inputs before becoming VAT-registered.
THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. Ill
148
ANNOTATED
(1) Transitional input tax on beginning inventories.

Taxpayers w h o became VAT-registered persons upon
exceeding the minimum turnover of P1.5 million (subject to
adjustment to its present value) or w h o voluntarily register
even if their turnover does not e x c e e d P1.5 million (except
franchise grantees of radio and television broadcasting w h o s e
threshold is P10,000,000), shall be allowed to a transitional
input tax on the inventory on hand as of the effectivity of their
VAT registration:
(a) The taxpayer shall be entitled to the input tax
credit on the inventory of the following goods, materials
and supplies:
1) g o o d s purchased for resale in their present
condition;
2) materials p u r c h a s e d for further processing, but
which have not yet u n d e r g o n e processing;
3) g o o d s which have b e e n manufactured by the
taxpayer;
4) g o o d s in process for sale; or
5) g o o d s and supplies, for use in t h e c o u r s e of
the taxpayer's trade or business as a VAT-registered
person. (Sec. 4.111-1[a], C V R . )
(b) Rate. T h e transitional input tax shall be 2%
of the value of the beginning inventory on h a n d or t h e
actual VAT paid, on s u c h g o o d s , materials a n d supplies,
whichever is higher, w h i c h a m o u n t m a y be a l l o w e d as tax
credit against the output tax of the VAT-registered p e r s o n .
To avail of the benefit, the t a x p a y e r must h a v e paid input
tax on his inventory.
(c) Basis of computation. T h e v a l u e allowed for

income tax purposes on inventories shall be the basis for
the computation of the 2% excluding g o o d s that are e x e m p t
from VAT under Section 109. (Sec. 4.111-1[b], Ibid.)
Real estate developers subject to VAT for the first

time are entitled to transitional input tax credit b a s e d on
the value of their beginning inventory of real property.
In the a b s e n c e of any statutory authority or basis, t h e
Commissioner has no p o w e r to limit the determination of
the transitional input tax credit only to the i m p r o v e m e n t s
on the real properties. Section 105 imposes VAT on the
Sec. Ill V A L U E - A D D E D TAX 149
Imposition of Tax
sale of "goods or properties." T h e term "goods" include real

properties formerly held for sale to customers or held for
lease in the ordinary course of business. (Fort Bonifacio
D e v e l o p m e n t Corp. vs. C o m m . , 583 S C R A 168 [2009].)
2. Presumptive input tax credits. This concept w a s also
m a d e part of the Tax C o d e , for the first time, by R.A. No. 8424. R.A.
No. 9 3 3 7 a d d e d "and p a c k e d noodle-based instant-meals" and
increased the creditable presumptive input to 4% from 1 1/2%.
3. Tax base of transitional input tax credit on sales of real
property. Prior to J a n u a r y 1, 1996, effective date of R.A. No.
7 7 1 6 , sales of real properties by real estate developer or dealers
w e r e not subject to tax. Beginning said date, they b e c a m e subject to
VAT in the full a m o u n t of 1 0 % (now 12%) of the gross selling price.
This i m p o s e d an u n e x p e c t e d burden on developers since they
w o u l d not be able to claim creditable input tax from their purchase
w h i c h w a s not subject to VAT; h e n c e , t h e a m e n d a t o r y provision on
transitional input tax credit in Section 105 (now Sec. 111 [A].) T h e
law as f r a m e d contemplates a situation w h e r e the credit is claimed
e v e n if there w a s p a y m e n t of VAT in the underlying transaction. In
such case, the tax b a s e used shall be the value of the "beginning
inventory of g o o d s , materials and supplies." T h e term "goods"
as used on Section 111(A), includes real properties as defined in
Section 106(A, 1). T h e computation of the transitional input tax
credit should be b a s e d on the value of the lands and improvements
and not only in the i m p r o v e m e n t s . (Fort Bonifacio Development
Corp. v s . C o m m . , supra.)
4 . Transitional input tax credit not limited to cases where tax
previously paid. Section 105 (now Section 111 [A].) precludes
reading into the law -precludes reading into the law that the
transitional input tax credit is limited to the a m o u n t of VAT previously
paid. W h e n the aforesaid section speaks of "eight percent (8%) of
the value of such inventory" followed by the clause "or the actual
value-added tax paid on such goods, materials and supplies," the
implication is clear that under the first clause, "eight percent (8%)
of the value of such inventory," the law does not contemplate the
payment of any prior tax on such inventory. This is distinguished
from the second clause, "the actual value-added tax paid on the
goods, materials and supplies" w h e r e actual payment of VAT on
the goods, materials and supplies is a s s u m e d . Had the intention of
the law been to limit the amount to the actual VAT paid, there would
have been no need to explicitly allow a claim based on 8% of the
value of such inventory.
150
ANNOTATED
The rationale behind the provisions of Section 105 w a s aptly

elucidated in the Decision sought to be reconsidered, thus:
"It is apparent that the transitional input tax credit operates

to benefit newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their beginning
inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax
credit serves to alleviate the impact of the VAT on the taxpayer.
At the very beginning, the VAT-registered taxpayer is obliged
to remit a significant portion of the income it derived f r o m its
sales as output VAT. T h e transitional input tax credit mitigates
this initial diminution of the taxpayer's income by affording the
opportunity to offset the losses incurred through the remittance
of the output VAT at a stage w h e n the person is yet unable to
credit input VAT payments."
To give Section 105 a restrictive construction that transitional

input tax credit applies only w h e n taxes w e r e previously paid on the
properties in the beginning inventory and there is a law imposing t h e
tax which is p r e s u m e d to have b e e n paid, is to i m p o s e conditions or
requisites to the application of the transitional tax input credit w h i c h
are not found in t h e law. {Ibid., 6 0 2 S C R A 159 [2009], motion for
reconsideration denied.)
S E C . 112. Refunds or Tax Credits of Input Tax. -

( A ) Zero-rated or Effectively Zero-rated Sales. A n y V A T -
r e g i s t e r e d p e r s o n , w h o s e sales a r e z e r o - r a t e d o r e f f e c t i v e l y z e r o - r a t e d
m a y , w i t h i n t w o (2) y e a r s a f t e r t h e close o f t h e t a x a b l e q u a r t e r w h e n
t h e sales w e r e m a d e , a p p l y f o r t h e i s s u a n c e o f a t a x c r e d i t c e r t i f i c a t e
or r e f u n d of creditable i n p u t t a x due or p a i d a t t r i b u t a b l e to such
sales, except t r a n s i t i o n a l i n p u t t a x , t o t h e e x t e n t t h a t s u c h i n p u t t a x
h a s n o t been a p p l i e d a g a i n s t o u t p u t t a x : Provided, however, T h a t
i n t h e case o f z e r o - r a t e d sales u n d e r S e c t i o n 1 0 6 ( A ) ( 2 ) ( a ) ( l ) , (2) a n d
(B) a n d Section 108 (B)(1) a n d (2), t h e acceptable f o r e i g n c u r r e n c y
exchange proceeds t h e r e o f h a d b e e n d u l y a c c o u n t e d f o r i n accordance
w i t h t h e r u l e s a n d r e g u l a t i o n s o f t h e Bangko Sentral ng Pilipinas
(BSP): Provided, further, T h a t w h e r e t h e t a x p a y e r i s e n g a g e d i n zero-
r a t e d o r effectively z e r o - r a t e d sale a n d also i n t a x a b l e o r e x e m p t sale
o f goods o r p r o p e r t i e s o r services, a n d t h e a m o u n t o f c r e d i t a b l e i n p u t
t a x due o r p a i d c a n n o t b e d i r e c t l y a n d e n t i r e l y a t t r i b u t e d t o a n y one
o f t h e t r a n s a c t i o n s , i t s h a l l b e a l l o c a t e d p r o p o r t i o n a t e l y o n t h e basis
o f t h e v o l u m e o f sales: Provided, finally, T h a t f o r a p e r s o n m a k i n g
Imposition of Tax
sales that are zero-rated under Section 108(B)(6), the input taxes
shall be allocated ratably between his zero-rated and non-zero-rated
sales. (As amended by R.A. No. 9337.)
(B) Cancellation of VAT Registration. A person whose
registration has been cancelled due to retirement from or cessation
of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of
cancellation, apply for the issuance of a tax credit certificate for
any unused input tax which may be used in payment of his other
internal revenue taxes.
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance
with Subsection (A) hereof. (As amended by R.A. No. 9337.)
In case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court
of Tax Appeals, (a)
(D) Manner of Giving Refund. Refunds shall be made upon
warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned
by the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall be subject to post
audit by the Commission on Audit.
ANNOTATION
1. Amended: Subsection (D) (now [C]) The period of 60
days fixed for granting a refund and for making an appeal to the
Court of Tax Appeals, is increased to 120 days.
Deleted by R.A. No. 9337: "(B) Capital Goods. A VAT-
registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported
or locally purchased, to the extent that such input taxes have not
ANNOTATED
been applied against output taxes. The application may be m a d e

only within two (2) years after the close of the taxable quarter w h e n
the importation or purchase w a s m a d e . "
2. Tax credit certificate/refund. Only a VAT-registered
person may be given a tax credit certificate or refund of unutilized
input VAT paid corresponding to the zero-rated sales of goods,
properties or services.
(1) The unutilized input tax that m a y be subject of the claim
shall exclude the portion of input tax that has b e e n applied
against the output tax. T h e application for refund or tax credit
of unutilized input VAT attributable to zero-rated or effectively
zero-rated sales should be filed "within two (2) years after the
close of the taxable quarter w h e n [such] sales w e r e m a d e , "
(Sec. 112[A].) regardless of w h e n the input VAT w a s paid or
w h e n the related official receipt w a s issued. T h u s , w h e n a z e r o -
rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for
refund or tax credit of the unutilized creditable input VAT.
( C o m m . vs. Mirant Pagbilao Corp., 565 S C R A 154 [2008].)
(2) Sections 204(c) a n d 209 also set a two-year pres-
criptive period, reckoned f r o m date of p a y m e n t of the tax or
penalty, for the filing of a claim for refund or tax credit. Said
provision apply only to instances of e r r o n e o u s p a y m e n t or
illegal collection of internal revenue t a x e s .
Section 112(A) (opening s e n t e n c e ) is the applicable
provisions in determining the start of the t w o - y e a r period for
claiming a refund or credit of unutilized input VAT. It refers to
applications for tax credit or refund filed with the C o m m i s s i o n e r
and not to appeals m a d e to the Court of Tax A p p e a l s . T h e
2-year prescriptive period d o e s not apply to judicial claims.
(Ibid.; C o m m . vs. Aichi Forging C o m p a n y of A s i a , 6 3 2 S C R A
4 2 2 [2010].)
Note: As b e t w e e n the Civil C o d e w h i c h provides that a
year is equivalent to 365 d a y s , a n d the Administrative C o d e
of 1987, which states that a year is c o m p o s e d of 12 calendar
months, it is the latter that must prevail being the m o r e recent
law. ( C o m m . vs. Primetime Property G r o u p , Inc., 531 S C R A
436 [2007].)
(3) In Atlas Consolidated and Development Corporation
vs. Comm. (524 S C R A 33 [2007].), the S u p r e m e Court ruled
that the two-year prescriptive period shall be counted f r o m the
date of filing of the return and p a y m e n t of the tax d u e . In Mirant,
Imposition of Tax
the refund must be claimed from the close of the taxable quarter
w h e n the relevant sales w e r e m a d e according to the Court of
Tax A p p e a l s . T h e ruling in Mirant dated September 12, 2008,
reckoning the two-year prescriptive period to file a claim for
refund of input VAT f r o m the close of the taxable quarter w h e n
the sales w e r e m a d e , applies only to cases filed after September
12, 2 0 0 8 or after the S u p r e m e Court promulgated its decisions
on the said case. (Team Energy Corporation vs. C o m m . , CTA
[First Division] C a s e No. 7 2 2 9 - 7 2 9 8 , Oct. 5, 2009.) T h e Mirant
c a s e should be applied prospectively. Judicial interpretations
reversing a prevailing doctrine a n d adopting a n e w one may not
be retroactively a p p l i e d . (Kepco llligan Corporation vs. C o m m . ,
CTA [En Banc] c a s e No. 5 2 8 , Oct. 14, 2 0 1 0 ; see Sec. 246.)
In Aichi Forging Company of Asia, Inc., the S u p r e m e Court

reiterated t h e Mirant ruling that t h e reckoning of the two-year
prescriptive period is f r o m t h e close of t h e taxable quarter w h e n
t h e sales w e r e m a d e . T h e period refers only to applications
under Section 112 on t h e issuance of a tax credit certificate or
refund with t h e Commissioner, a n d not to appeals to the Court
of Tax A p p e a l s .
(4) In c a s e of zero-rated sales under Sections 106(A(2)

(a)(1) a n d (2), and Section 106(A)(2)(b) a n d Section 108(B)(1)
and (2) of t h e Tax C o d e , the p a y m e n t s for the sale must have
been m a d e in acceptable foreign currency duly accounted for
in a c c o r d a n c e with t h e B S P rules a n d regulations. (Sec. 4.112-
1[a], C V R . )
(5) Effective zero-rating is not intended as a benefit to the
person legally liable to pay the tax, but to relieve certain exempt
entities, f r o m the burden of indirect tax so as to encourage the
d e v e l o p m e n t of particular industries. Before, as well as after,
the adoption of the VAT, certain special laws w e r e enacted for
the benefit of various entities and international agreements
w e r e entered into by the Philippines with foreign governments
and institutions exempting sale of goods or supply of services
from indirect taxes at the level of their suppliers. Effective zero-
rating w a s intended to relieve the exempt entity from being
burdened with the indirect tax which is or which will be shifted
to it had there been no exemption. (San Roque Power Corp. vs.
C o m m . of Internal Revenue, 605 S C R A 536 [2009].)
(6) There is no requirement in Section 112(A) that the
refundable input taxes should be paid or incurred during the
same quarter (or year) w h e n such sales were made. The input
154
ANNOTATED
taxes should be refunded or credited provided they relate to the

goods or services sold although the zero-rated sales occurred
at a later date or period. It is c o m m o n knowledge that goods
manufactured or procured are not immediately sold. Moreover,
under Section 110(B), if the unutilized input tax exceeds the
output tax, the excess may be carried over to the succeeding
quarter or quarters.
The taxpayer has to report in the VAT returns the input
taxes in the quarter the inputs w e r e p u r c h a s e d .
3. Allocation of proportionate share of input taxes. W h e r e
the taxpayer is e n g a g e d in both zero-rated or effectively zero-rated
sales and in taxable (including sales subject to final withholding VAT)
or exempt sales of goods, properties or services, a n d the a m o u n t
of creditable input tax due or paid cannot be directly a n d entirely
attributable to any one of the transaction, only the proportionate
share of input taxes allocated to zero-rated or effectively zero-rated
sales can be refunded or issued a tax credit certificate.
In the case of a person e n g a g e d in t h e transport of p a s s e n g e r

and cargo by air or sea vessels f r o m the Philippines to a foreign
country, the input taxes shall be allocated ratably b e t w e e n his z e r o -
rated sales and non-zero-rated sales (sales subject to regular rate,
subject to final VAT withholding and VAT-exempt sales). (Ibid.)
4. Cancellation of VAT registration. A VAT-registered
person w h o s e registration has b e e n cancelled d u e to retirement
from or cessation of business, or d u e to c h a n g e s in or cessation
of status under Section 106(C) may, within t w o (2) years f r o m t h e
date of cancellation, apply for the issuance of a tax credit certificate
for any unused input tax w h i c h he m a y use in p a y m e n t of his other
internal revenue taxes. However, he shall be entitled to a refund if
he has no internal revenue tax liabilities against w h i c h t h e tax credit
certificate may be utilized. (Sec. 4.112-1 [b], Ibid.)
5. Input taxes on capital goods. U n d e r Section 112(B),

before its deletion by R.A. No. 9 3 3 7 , (No. 1, above), t h e option
given to the taxpayer w a s r e m o v e d beginning N o v e m b e r 1, 2 0 0 5 .
Input taxes on capital g o o d s can no longer be r e f u n d e d . Under
Section 110(B), the input tax on (capital) g o o d s for w h i c h deduction
depreciation is allowed, shall be spread evenly for 60 m o n t h s
starting from the month of acquisition or the useful life the asset
whichever is shorter. This applies if the a g g r e g a t e acquisition cost
of such asset excluding the VAT c o m p o n e n t thereof e x c e e d s P1
million in one (1) month, (see Sec. 110[A, 2].)
Imposition of Tax
In the case, however, of zero-rated and effectively zero-rated

taxpayers, they continue to be entitled to issuance of tax credit
certificate or refund of input taxes paid on capital goods. Since they
are not subject to output tax, they retain not the right to claim input
tax, either as a tax credit against output liability or tax refund, paid
on or g o o d s , capital or non-capital.
6. Requirements for claim of refund or tax credit. To claim

a refund or tax credit of input VAT attributable to zero-rated or
effectively zero-rated sales, the taxpayer must satisfy the following
requirements:
(1) T h e taxpayer is VAT-registered;
(2) T h e t a x p a y e r is e n g a g e d in zero-rated or effectively
zero-rated sales;
(3) T h e input taxes are d u e or paid;
(4) T h e input taxes are not transitional input taxes;
(5) T h e input taxes have not b e e n applied against output
tax during a n d in the s u c c e e d i n g quarters;
(6) T h e input taxes c l a i m e d are attributable to zero-rated or
effectively zero-rated sales;
(7) For zero-rated sales under Sections 106(A)(2)(1) and
(2); 106(B), and 108(B)(1) a n d (2), the acceptable foreign
currency e x c h a n g e proceeds have b e e n duly accounted for in
a c c o r d a n c e with B S P rules a n d regulations;
(8) W h e r e there are both zero-rated or effectively zero-
rated sales a n d taxable or e x e m p t sales, and the input taxes
cannot be directly and entirely attributable to any of these
sales, the input taxes shall be proportionately allocated on the
basis of sales v o l u m e ; and
(9) T h e claim is filed within two (2) years after the close of
the taxable quarter w h e n such sales w e r e m a d e . (San Roque
Power Corporation vs. C o m m . , 605 S C R A 536 [2009]; AT & T
C o m m u n i c a t i o n s Services Phils., Inc. vs. C o m m . , 626 SCRA
567 [2010].)
Requisites Nos. (7) and (8) may not be applicable.
T h e failure to print the w o r d "zero-rated" on the invoices or
receipts is fatal to a claim for credit or refund of input VAT on zero-
rated sales. (J.R.A. Philippines, Inc. vs. C o m m . , 632 SCRA 517
[2010]; see K E P C O Philippines Corporation vs. C o m m . , G.R. no.
181858, Nov. 24, 2010.) Invoices or receipts which are not duly
156
ANNOTATED
registered have no probative value for the purpose of refund or

credit. (Silicon Philippines, Inc. vs. C o m m . , G.R. No. 172378, J a n .
17, 2011.)
Note that Section 106(B) which deals with the imposition of VAT
does not limit the term "sale" to commercial sales, rather it extends
the term to transactions that are " d e e m e d " sale.
7. Filing of claims for refund or tax credit. They shall be
filed with the appropriate BIR Office-Large Taxpayers Service
(LTS) or Revenue District Office ( R D O ) having jurisdiction over
the principal place of business of the taxpayer. However, direct
exporters may also file their claim for tax credit with the O n e - S t o p -
Shop Center of the Department of Finance. T h e filing of a claim with
one office shall preclude the filing of the s a m e claim with another
office.
(1) In proper cases, the C o m m i s s i o n e r shall grant a tax
credit/refund for creditable input taxes 120 d a y s f r o m the
date of submission of c o m p l e t e d o c u m e n t s in support of the
application filed for tax refund or credit under Section 112(A).
(2) In case of full or partial denial of t h e claim for tax credit/
refund as decided by the C o m m i s s i o n e r of Internal R e v e n u e ,
the taxpayer m a y appeal to t h e Court of Tax A p p e a l s within 30
days from the receipt of said denial; otherwise, the decision
will b e c o m e final. However, if no action on t h e claim for tax
credit/refund has been taken by the C o m m i s s i o n e r of Internal
Revenue after the 120 day period f r o m the date of s u b m i s s i o n
of the application with c o m p l e t e d o c u m e n t s , the t a x p a y e r m a y
appeal to the Court of Tax A p p e a l s with 30 d a y s f r o m the lapse
of the 120-day period. (Sec. 4.112-1[c, d ] , Ibid.)
(3) While the period under Section 112(A) for filing a claim
for refund of input VAT or the issuance of a tax credit certificate
is reckoned from the close of the taxable quarter w h e n t h e sales
w e r e m a d e , the period under Section 2 2 9 for filing an action to
recover taxes which have b e e n paid is r e c k o n e d f r o m the date
of payment. It is settled that in the c a s e of input VAT, t h e date of
payment is not d e e m e d to be the close of the quarter involved,
but rather the date of the filing of the VAT return, b e c a u s e it is
only then that the a m o u n t of refund, if any, can be d e t e r m i n e d .
(Atlas Consolidated Mining a n d D e v e l o p m e n t Corporation vs.
Commissioner of Internal R e v e n u e , CTA C a s e No. 5296, 20
July 1998; Atlas Consolidated Mining D e v e l o p m e n t Corp. vs.
Court of Tax Appeals, C A - G . R . SP. No. 4 6 7 1 8 , Sept. 15, 2000.)
Imposition of Tax
(4) T h e fact that a taxpayer filed its claim for refund or credit
during the quarter w h e n the effectivity VAT zero-rated sale took
place instead of after the close of the quarter as required does
not m a k e t h e taxpayer any less entitled to the refund or credit
claimed given t h e special circumstances of the case as w h e r e
the taxpayer w a s able to s h o w that it accumulated input VAT
on various importations and local p u r c h a s e s and there w a s no
d a n g e r that it w o u l d try to fraudulently claim input VAT paid on
purchases attributable to sales that are not zero-rated. (San
R o q u e P o w e r Corp. vs. C o m m . , supra.)
(5) To claim a refund for input VAT attributable to zero-rated
sales, t h e claimant-taxpayer must be VAT-registered and must
c o m p l y with the statutory invoicing requirements. (Sec. 113.)
Specifically, t h e taxpayer must imprint t h e w o r d "zero-rated" on
his sales invoice a n d official receipts. Failure to do so will result
in t h e disallowance of his claim for refund. T h e appearance of
the w o r d "zero-rated" on t h e f a c e of invoices covering zero-
rated sales prevents a buyer f r o m falsely claiming input VAT
f r o m its purchasers w h e n it did not pay any VAT to the seller.
A b s e n t s u c h w o r d , if a successful claim for input VAT is m a d e ,
t h e g o v e r n m e n t w o u l d be refunding m o n e y it did not collect in
the first place. T h e requirement to imprint the w o r d "zero-rated"
in official receipts and invoices is reasonable a n d is in accord
with t h e efficient collection of VAT from the covered sales of
g o o d s a n d services. (Panasonic C o m m u n i c a t i o n s Imaging
Corp. vs. C o m m . , 6 1 2 S C R A 2 8 [2010].)
(6) T h e s e c o n d paragraph of Section 112(C) envisions

two (2) scenarios: (a) w h e n a decision is issued by the
C o m m i s s i o n e r before the lapse of the 120-day period, and (b)
w h e n no decision is m a d e after the 120-day period. In both
instances, the taxpayer has 30 days within which to file an
appeal with the Court of Tax Appeals (CTA). T h e filing of a
judicial claim with the CTA by a taxpayer w h o did not wait for
the decision of the C o m m i s s i o n e r and before the lapse of the
120-day period would be premature and the CTA would not
acquire jurisdiction over the matter. ( C o m m . vs. Aichi Forging
C o m p a n y of Asia, Inc., G.R. No. 184823, Oct. 6, 2010.)
A decision rendered by the Commissioner after the 120-
day period can still be appealed to the CTA within 30 days from
receipt thereof.
(7) T h e use of the word "may" in subsection (C) of Section
112 indicates that judicial recourse within 30 days after the lapse
ANNOTATED
of the 120-day period is directory or permissive, and as neither

mandatory nor jurisdictional as long as the s a m e is within the
two-year prescriptive period under Section 229. (see, however,
Archi case, infra.) It is not necessary for the Commissioner
(CIR) to first act unfavorably on the claim for refund before the
Court of Tax Appeals (CTA) may acquire jurisdiction. W h e n the
two-year prescriptive period is about to expire and the claim for
refund has not been acted upon by the CIR, a taxpayer-claimant
should file a Petition for Review with the CTA; otherwise, if the
decision of the CIR is adverse to the taxpayer and it w a s m a d e
after the two-year prescriptive period, he can no longer appeal
the s a m e to the CTA. In protests of a s s e s s m e n t , the period
fixed for appeal to the CTA is within 30 d a y s f r o m receipt of
decision, (see Sec. 229.) T h e y p r e s u p p o s e the existence of a
prior decision by the CIR which could be subjected to review by
the CTA. ( C o m m . vs. S a n R o q u e Power Corporation, CTA EB
No. 4 0 8 , March 2 5 , 2009.)
(8) Section 112(c) provides for a specific period within

which a taxpayer should appeal to t h e Court of Tax A p p e a l s
the decision or inaction of t h e CIR (par. 2.): within 30 d a y s
from receipt of decision issued by the CIR before t h e lapse of
the 120-day period, or within 30 d a y s after the 180-day period
w h e n no decision is m a d e . ( C o m m . vs. Aichi Forging C o m p a n y
of Asia, Inc., supra.) T h e filing of a judicial claim with t h e CTA
before the rendition of the decision of t h e CIR a n d t h e lapse of
the 120-day period w o u l d be p r e m a t u r e .
(9) W h e n claiming tax refund or credit, the v a l u e - a d d e d

taxpayer must be able to establish that he d o e s h a v e refundable
or creditable input VAT, and the s a m e has not b e e n applied
against its output VAT liabilities information w h i c h are
supposed to be reflected in the t a x p a y e r ' s VAT returns. T h u s ,
an application for tax refund or credit must be accompanied
by copies of the taxpayer's VAT return or returns for taxable
quarter or quarters c o n c e r n e d . (Atlas Consolidated Mining &
Development Corporation vs. C o m m . , G.R. No. 1 5 9 4 7 1 , J a n .
26, 2011.)
(10) Sales invoices (Sec. 113) are recognized c o m m e r c i a l

documents to facilitate trade or transactions. T h e y are proofs
that a business transaction has b e e n c o n c l u d e d a n d , therefore,
should not be considered bereft of probative value. Only the
preponderance of evidence threshold, as applied in ordinary
civil actions, is needed to substantiate a claim for tax refund or
Imposition of Tax
credit. (AT & T C o m m u n i c a t i o n s Services Philippines, Inc. vs.

C o m m . , 626 S C R A 567 [2010]; see Annotations Nos. 1 and 2
Sec. 237.)
8. Tax credit certificates. Insofar as BIR-issued tax credit

certificates (TCC) are c o n c e r n e d , there is no provision in the Tax
C o d e expressly prohibiting their transfer or assignment, hence,
they can be transferred or a s s i g n e d by the o w n e r provided that
t h e s a m e h a v e not expired a n d remains valid in the hands of the
original holder pursuant to Section 2 3 0 . T h e law specifically allows
the conversion of unutilized tax credits into c a s h refund within five
(5) years f r o m the date of issue. If the taxpayer can ultimately
dispose the c a s h p r o c e e d s of his T C C s in any m a n n e r he chooses,
there is no c o g e n t reason w h y t h e source of s u c h proceeds should
be treated differently. At any rate, t h e conversion into cash refund
or t h e transfer of the T C C to another yields the s a m e result without
any revenue loss or prejudice to t h e g o v e r n m e n t .
In t h e c a s e of BOI-issued T C C w h i c h is in the nature of tax
incentive granted by special laws to the grantee, such T C C is
transferable only under certain conditions pursuant to Article 21 of
the O m n i b u s Investments C o d e , as i m p l e m e n t e d by Rule VII of the
Rules a n d Regulations of Exec. Order No. 226. (BIR Ruling No.
192-99, Dec. 6, 1999.)
Note: For rules on the issuance of Tax Credit Certificates, and
t h e conditions for their use, revalidation, a n d transfer, see Appendix
X. Rev. M e m o . Cir. N o . 2 9 - 2 0 0 9 clarifies certain issues raised
relative to the processing of claims for VAT credit/refund.
oOo
Chapter II
COMPLIANCE REQUIREMENTS
S E C . 113. Invoicing and Accounting Requirements for

VAT-Registered Persons.
(A) Invoicing Requirements. A V A T - r e g i s t e r e d p e r s o n s h a l l
issue:
(1) A V A T i n v o i c e f o r e v e r y sale, b a r t e r or e x c h a n g e of goods or
properties; and
(2) A V A T official r e c e i p t f o r e v e r y lease of goods or p r o p e r t i e s ,
a n d for e v e r y sale, b a r t e r o r exchange o f services.
(B) Information Contained in the VAT Invoice or VAT Official
Receipt. T h e f o l l o w i n g i n f o r m a t i o n s h a l l b e i n d i c a t e d i n t h e V A T
invoice o r V A T o f f i c i a l r e c e i p t :
(1) A s t a t e m e n t t h a t t h e s e l l e r is a V A T - r e g i s t e r e d p e r s o n ,
followed by his taxpayer's identification n u m b e r ( T I N ) ;
(2) T h e t o t a l a m o u n t w h i c h t h e p u r c h a s e r p a y s o r i s o b l i g a t e d t o
p a y t o t h e seller w i t h t h e i n d i c a t i o n t h a t s u c h a m o u n t i n c l u d e s t h e
v a l u e - a d d e d t a x : Provided, T h a t :
(a) T h e a m o u n t o f t h e t a x s h a l l b e s h o w n a s a s e p a r a t e i t e m
in the invoice or receipt;
(b) I f t h e sale i s e x e m p t f r o m v a l u e - a d d e d t a x , t h e t e r m
" V A T - e x e m p t sale" shall b e w r i t t e n o r p r i n t e d p r o m i n e n t l y o n
t h e invoice o r r e c e i p t ;
(c) I f t h e sale i s s u b j e c t t o zero p e r c e n t (0%) v a l u e - a d d e d

tax, the t e r m "zero-rated sale" shall be w r i t t e n or p r i n t e d
p r o m i n e n t l y on the invoice or receipt;
(d) I f t h e sale i n v o l v e s goods, p r o p e r t i e s o r services some
o f w h i c h a r e subject t o a n d some o f w h i c h a r e V A T z e r o - r a t e d
or V A T - e x e m p t , the invoice or receipt shall clearly indicate the
b r e a k d o w n o f t h e sale p r i c e b e t w e e n i t s t a x a b l e , e x e m p t a n d
zero-rated components, a n d t h e calculation of t h e value-added
t a x o n each p o r t i o n o f t h e sale s h a l l b e s h o w n o n t h e i n v o i c e o r
160
Compliance Requirements
receipt: Provided, That the seller may issue separate invoices or

receipts for the taxable, exempt, and zero-rated components of
the sale.
(3) The date of transaction, quantity, unit cost and descrip-
tion of the goods or properties or nature of the service; and
(4) In the case of sales in the amount of One thousand pesos
(PI,000) or more where the sale or transfer is made to a VAT-
registered person, the name, business style, if any, address and
taxpayer identification number ( T I N ) of the purchaser, customer
or client.
(C) Accounting Requirements. Notwithstanding the provi-
sions of Section 233, all persons subject to the value-added tax un-
der Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and subsid-
iary purchase journal on which the daily sales and purchases are
recorded. The subsidiary journals shall contain such information as
may be required by the Secretary of Finance.
(D) Consequence of Issuing Erroneous VAT Invoice or VAT
Official Receipt.
(1) If a person who is not a VAT-registered person issues an
invoice or receipt showing his Taxpayer Identification Number
( T I N ) , followed by the word "VAT":
(a) The issuer shall, in addition to any liability to other
percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the
benefit of any input tax credit; and
(ii) A 50% surcharge under Section 248(B) of this Code;
(b) The VAT shall, if the other requisite information
required under Subsection (B) hereof is shown on the invoice
or receipt, be recognized as an input tax credit to the purchaser
under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT
official receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the term 'VAT-exempt Sale,"
the issuer shall be liable to account for the tax imposed in Section
106 or 108 as if Section 109 did not apply.
(E) Transitional Period. Notwithstanding Subsection (B)
hereof, taxpayers may continue to issue VAT invoices and VAT
official receipts for the period July 1, 2005 to December 31, 2005,
ANNOTATED
in accordance with Bureau of Internal Revenue administrative

practices that existed as of December 3 1 , 2004." (as amended by RA.
No. 9337.)
ANNOTATION
1. VAT-registered persons must issue duly registered invoice

or receipt for every sale or lease of goods, properties or services
regardless of amount, containing the required information and must
comply with accounting and record-keeping requirements.
Under the "invoice s y s t e m , " each business pays the output tax
on its sales less a credit for input tax invoiced to it over that period
by its o w n suppliers. There are no tax-invoice credits for the tax-
exempt business purchaser (see Sec. 109.) a n d , of course, for t h e
final purchaser.
The buyer must be properly identified in the invoice before
he is given the privilege of claiming an input tax on his p u r c h a s e
of taxable goods and services. (VAT Ruling No. 0 1 5 - 0 5 , A u g . 2 6 ,
2005.)
2. Necessity of VAT Invoice/Official Receipt. Only VAT-
registered persons can print their T I N , followed by t h e w o r d "VAT"
in their invoice or receipt.
(1) Said d o c u m e n t shall be c o n s i d e r e d as a "VAT Invoice,"
or VAT Official Receipts.
(2) All purchases covered by invoices other t h a n VAT
invoice shall not give rise to any input tax.
(3) T h e invoice or receipt shall be p r e p a r e d at least in
duplicate, the original to be given to the buyer a n d t h e duplicate
to be retained by the seller as part of his accounting records.
(Sec. 4.113-1 [A], C V R . )
3. Invoicing and recording deemed sale transactions.

(1) Transfer use or consumption not in course of business.
In the case of Section 106(B, 1), a m e m o r a n d u m entry in
the subsidiary sales journal to record withdrawal of g o o d s for
personal use is required.
(2) Distribution or transfer to shareholders/investors/
creditors, or consignment of goods. In the c a s e of Section
106(B, 2 and 3), an invoice shall be prepared at the time of
the occurrence of the transaction, w h i c h should include, all
the information prescribed. T h e data appearing in the invoice
shall be duly recorded in the subsidiary sales journal. T h e total

a m o u n t of " d e e m e d s a l e " shall be included in the return to be
filed for the m o n t h or quarter.
(3) Retirement from or cessation of business. In the

c a s e of Section 106(B, 4), an inventory shall be prepared and
submitted to the R D O w h o has jurisdiction over the taxpayer's
principal place of business not later than 30 days after retirement
or cessation from business.
(a) An invoice shall be prepared for the entire inventory,

w h i c h shall be t h e basis of the entry into the subsidiary
sales j o u r n a l . T h e invoice n e e d not e n u m e r a t e the specific
items a p p e a r i n g in the invesntory, but it must s h o w the
total a m o u n t . It is sufficient to just m a k e a reference to
the inventory regarding the description of the goods.
However, the sales invoice n u m b e r should be indicated in
t h e inventory filed and a copy thereof shall f o r m part of this
invoice.
(b) If t h e business is to be continued by the new

o w n e r s or s u c c e s s o r s , the entire a m o u n t of output tax on
the a m o u n t d e e m e d sold shall be allowed as input taxes.
(c) If the business is to be liquidated and the goods
in the inventory are sold or d i s p o s e d of to VAT-registered
buyers, an invoice or instrument of sale or transfer shall
be prepared citing the invoice n u m b e r wherein the tax w a s
i m p o s e d on the d e e m e d sale. At the s a m e time the tax
paid corresponding to the g o o d s sold should be separately
indicated in the instrument of sale.
Example: "A," at the time of retirement, had 1,000
pieces of merchandise which w a s d e e m e d sold at a value
of P20,000.00 with an output tax of P2,000.00. After
retirement, "A" sold to " B . " 500 pieces for P12,000.00. In
the contract of sale or invoice, "A" should state the sales
invoice number wherein the output tax on "deemed sale"
w a s imposed and the corresponding tax paid on the 500
pieces is P1,000.00, which is included in the P12,000.00,
or he should indicate it separately as follows:
Gross selling price P11,000.00

VAT previously paid on "deemed sale" 1,000.00
Total P12,000.00
164
ANNOTATED
In the case, " B " shall be entitled only to P1,000 as input tax
and not 1/11 of P12.000.00. (Sec. 4.113-2, Ibid.) Note: VAT is
now 12%.
(4) As mentioned earlier, the appearance of the w o r d
"zero-rated" on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their
purchases w h e n no VAT w a s actually paid. If, absent such
word, a successful claim for input VAT is m a d e , the government
would be refunding input VAT on the claimants' purchases w h e n
no output VAT on the related sale w a s collected. (Panasonic v s .
C o m m . , 612 S C R A 2 8 [2010]; Hitachi Storage Corp. vs. C o m m . ,
634 S C R A 205 [2010].) Further, the printing of the w o r d "zero-
rated" on the invoice helps segregate sales that are subject to
1 2 % VAT from the sales that are zero-rated. T h e w o r d "zero-
rated" is one which is specifically and precisely included in the
enumeration in Section 113(B).
(5) A c o m p a n y can use a receipt format generated by
POS machines accredited by the National M a c h i n e Office
Accreditation Board, if the format substantially complies with
the information required by Section 113(B)(2)(a).
4. Accounting Requirements. Notwithstanding the provi-
sions of Section 2 3 3 , all persons subject to VAT under Sections 106
and 108 of the Tax C o d e shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and s u b s i d -
iary purchase journal on w h i c h every sale or p u r c h a s e on any given
day is recorded. T h e subsidiary journal shall contain s u c h informa-
tion as may be required by the C o m m i s s i o n e r of Internal R e v e n u e .
(Note: Secretary of Finance in Sec. 113[C].)
A subsidiary record in ledger f o r m shall be maintained for the
acquisition, purchase or importation of depreciable assets or capital
goods which shall contain, a m o n g others, information on the total
input tax thereon as well as the monthly input tax c l a i m e d in VAT
declaration or return. (Sec. 4.113-3, Ibid.)
5. Synchronization of the output tax and input tax. T h e VAT
system effects the synchronization of the output tax of the seller
and the input tax of the purchaser in a particular transaction. This
is because it is at certain point that the tax credit of the purchaser
simultaneously b e c o m e s the liability of the seller. To this e n d , the
only m e d i u m of " c o m m u n i c a t i n g " the shifting is the VAT-registered
official receipt (OR) or invoice. T h e issuance thereof is g o v e r n e d
specifically by Sections 113 and 117. (BIR Ruling No. 141-99, Sept.
13, 1999.)
T h e computation of the output VAT of the seller should be based

on the selling price appearing on its o w n VAT invoice not on the
selling price appearing on that of the customer. It is the duty of the
seller to c o m p l y with t h e invoicing and accounting requirements laid
d o w n in Section 113, a m o n g others. (Atlas Consolidated & Mining
Dev. Corp. v s . C o m m . , 318 S C R A 386 [1999].)
6. Consequences of issuing erroneous VAT invoice or VAT
official receipt.
(1) by a non-VAT person. If a person w h o is not VAT-
registered issues an invoice or receipt s h o w i n g his T I N , followed
by the w o r d "VAT," the e r r o n e o u s issuance shall result to the
following:
(a) the non-VAT p e r s o n shall be liable to:

1) the p e r c e n t a g e taxes applicable to his trans-
actions;
2) VAT d u e on t h e transactions under Section
106 or 108, without t h e benefit of any input tax credit;
and
3) a 5 0 % surcharge under Section 248(B);
(b) VAT shall be recognized as an input tax credit to
the purchaser under Section 110 of t h e Tax C o d e , provided
the requisite information required under the C V R is s h o w n
on t h e invoice or receipt.
(2) On exempt transaction by a VAT-registered person.
If a VAT-registered person issues a VAT invoice or VAT
official receipt for a VAT-exempt transaction, but falls to display
prominently on the invoice or receipt the w o r d s "VAT-exempt
sale," the transaction shall b e c o m e taxable and the issuer shall
be liable to pay VAT t h e r e o n . T h e purchaser shall be entitled to
claim an input tax credit on his purchase. (Sec. 4.113-4, Ibid.)
7. Identification of buyer in invoice. It is clear from the
provisions of the VAT regulations and the Tax Code that the buyer
must be properly identified in the invoice before it is given the
privilege to claim an input VAT on its purchase of taxable goods
and services. This provision is designed to avoid the possibility of
a VAT taxpayer claiming an input VAT based on a VAT invoice or
receipt issued to another taxpayer. (BIR Ruling No. 015-05, A u g .
26, 2005.)
8 . Credit of unrecorded input tax. A VAT-registered real
estate developer which paid VAT on its purchase of land for
ANNOTATED
development, but which failed to record the said VAT as a separate

item in its books and VAT returns because it recorded the VAT as
part of the cost of the land, may recognize the s a m e as its creditable
input VAT, but only up to the amount declared by the seller as output
VAT. (BIR Ruling No. 227-05, May 19, 2005.)
9. Corrections to reflect name of payor. VAT official receipts
(Ors) that have corrections/erasures on their face to reflect the
name of the correct payor are valid proof of its claim for issuance
of tax credit certificate (TCC), provided the authenticity and d u e
execution of the Ors have been undeniably established and all
alterations have been properly accounted for. (BIR Ruling No. 2 2 9 -
05, May 19, 2005.)
10. Type of VAT invoices or receipts. A VAT-registered person
is required to issue VAT invoices or receipts for its VAT taxable
transactions, non-VAT invoices or receipts for e x e m p t transactions,
and VAT invoices or receipts with "zero-rated" imprinted on the
invoice covering zero-rated sales. (BIR Ruling No. 194-2004, April
6, 2004; see Annotations Nos. 1 a n d 2, Sec. 237.)
11. Issues concerning invoices and receipts.
(1) A c o m p a n y m a y issue its o w n VAT-registered official
receipts (ORs) in favor of the installment buyer u p o n receipt
of the report f r o m the bank or finance c o m p a n y confirming the
installment p a y m e n t s d u e . This will give the VAT-registered
buyer the opportunity to claim against its output VAT t h e input
VAT paid on installments falling d u e after t h e sale of the AR
(accounts receivable) to the bank or finance company.
(2) To enable VAT-registered buyers to avail of the input
tax on their purchases of real property on installment, the
c o m p a n y may use the s a m e s y s t e m - g e n e r a t e d Ors that bear
the proposed notations and use a s e g r e g a t e d series n u m b e r s
within the BIR-approved series w h i c h will be utilized only for t h e
purpose of issuing the VAT a n d non-VAT official receipts ( O R s )
needed for the p r o p o s e d transactions.
(3) The issuance of the VAT-registered OR to the

installment buyer w h o is VAT-registered will e n a b l e it to claim
against its output VAT the input VAT on installments falling d u e
after the AR w a s sold. T h e r e w o u l d be no double availment of
input VAT on the part of the VAT-registered buyer nor a double
declaration of output VAT on the part of the c o m p a n y arising
from the issuance of the VAT-registered O R s , i n a s m u c h as the
company has already paid in a d v a n c e the VAT on the remaining
113 V A L U E - A D D E D TAX 167
installment p a y m e n t s u p o n the sale of the accounts receivable

(AR) to the bank or finance company.
(4) Considering that t h e deferred-payment sales are

treated as c a s h sales for VAT purposes, the full input VAT
has b e e n availed of upon issuance of the VAT-registered Ors
covering initial p a y m e n t m a d e . T h e subsequent payments to
the bank or finance c o m p a n y will not generate input taxes for
the VAT-registered buyer.
(5) T h e c o m p a n y will print and issue non-VAT receipts

generated f r o m their existing accounting system but using
a n u m b e r series s e g r e g a t e d f r o m the BIR-approved series
of n u m b e r s . T h e s e will be issued only for the purpose of
allowing t h e buyers on deferred p a y m e n t plan to evidence their
s u b s e q u e n t p a y m e n t s to the bank or finance c o m p a n y w h e n
t h e latter submits a report to t h e c o m p a n y of the clearing of the
postdated checks issued by the buyers on deferred payment
plan. T h e s e non-VAT receipts m a y not be used for claiming
another input tax credit by t h e VAT-registered buyers.
(6) T h e printing and issuance of special non-VAT receipts
by t h e c o m p a n y will merely serve as evidence of payments on
d e f e r r e d - p a y m e n t plan receivables that have been transferred
to t h e bank or f i n a n c e c o m p a n y a n d in no w a y will form part of
the gross receipts of the c o m p a n y subject to the condition that
a notation should be indicated on the receipts as follows:
"Issued as e v i d e n c e of s u b s e q u e n t payments made in

connection with sales on deferred payment plan receivables
that have b e e n transferred to the bank/finance company. Issued
solely for the benefit of the buyer for purposes of evidencing
payments m a d e and does not in a n y w a y constitute additional
receipts or income of the issuer for either VAT and/or income
tax purposes." (BIR Ruling No. DA-381-04, July 7, 2004.)
12. Interchangeable use of VAT invoices and official receipts.
Section 113(A), as now a m e n d e d , is very clear when it requires a
VAT-registered person to issue "a VAT invoice for every sale, barter
or e x c h a n g e of goods or properties a n d " a VAT official receipt
for every lease of goods or properties and for every sale, barter,
or exchange of services." In other words, a taxpayer is required
to support its sales of g o o d s with VAT invoices, and its sales of
services with VAT official receipts.
The Court of Tax Appeals has held that VAT invoices or VAT
official receipts cannot be used interchangeably to substantiate
1 6 8 THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. 114
ANNOTATED
zero-rated sales of services. T h e enumerated zero-rated

transactions under Section 106(A, 2) and Section 108(B) are those
which are duly covered by VAT invoices for sales of goods, and
VAT official receipts for sales of services. (AT & T Communications
Services Phils., Inc. vs. Commissioner, CTA, EB No. 3 8 1 , Sept.
24, 2008.) In Comm. vs. Manila Mining Corporation (468 S C R A
571 [2005].), the Supreme Court adopted the definitions of invoice
and receipts that apply t h e m to sale or transfer of both goods
and services, (see Sec. 237.), implying that zero-rated sales m a y
be supported either by sales invoice or an official receipt since
Section 113 does not m a k e any distinction b e t w e e n the t w o . (AT
& T Communications Services Philippines, Inc. vs. C o m m . , 6 2 6
SCRA 567 [2010].) Section 113(A), however, m a k e s a distinction
between a VAT invoice and a VAT official receipt, for purposes of
invoicing requirements. Before the a m e n d m e n t by R.A. No. 9 3 3 7
(effective Nov. 1, 2005) and t h e issuance of Rev. R e g s . No. 16-
2005 (Consolidated VAT Regulations), there w a s no clear provision
in the laws and regulations specifically requiring a sales invoice for
sale goods and properties or official receipt for rendition of service
as supporting d o c u m e n t for the claim of input tax credit.
13. Marginal income earners. T h e y are e x e m p t f r o m issuing
VAT-registered receipts or sales/commercial invoices covering their
respective transactions as provided under Rev. R e g s . No. 11-2000.
Purchases of g o o d s and/or services f r o m marginal earners (e.g.,
peddlers of scrap metals, w a s t e a n d j u n k , not registered with t h e
BIR) w h o do issue registered invoices for their sales m a y use/issue
simple purchase invoices to serve as the d o c u m e n t a r y e v i d e n c e of
their purchases f r o m the peddlers. (VAT Ruling No. 0 0 1 - 0 8 , Mar. 7,
2005.)
S E C . 114. Return and Payment of Value-added Tax.

(A) In General. E v e r y p e r s o n l i a b l e t o p a y t h e v a l u e - a d d e d t a x
imposed under this T i t l e shall file a q u a r t e r l y r e t u r n of t h e a m o u n t of
h i s gross sales o r receipts w i t h i n t w e n t y - f i v e (25) d a y s f o l l o w i n g t h e
close o f each t a x a b l e q u a r t e r p r e s c r i b e d f o r e a c h t a x p a y e r : Provided,
however, T h a t V A T - r e g i s t e r e d persons s h a l l p a y t h e v a l u e - a d d e d
t a x on a m o n t h l y basis.
A n y p e r s o n , whose r e g i s t r a t i o n h a s b e e n c a n c e l l e d i n accordance
w i t h Section 2 3 6 , s h a l l f i l e a r e t u r n a n d p a y t h e t a x d u e t h e r e o n
w i t h i n t w e n t y - f i v e (25) days f r o m t h e d a t e o f c a n c e l l a t i o n o f
r e g i s t r a t i o n : Provided, T h a t o n l y one c o n s o l i d a t e d r e t u r n s h a l l be
f i l e d b y t h e t a x p a y e r f o r h i s p r i n c i p a l place o f b u s i n e s s o r h e a d office
a n d a l l b r a n c h e s , (a)
( B ) Where to File the Return and Pay the Tax. Except as t h e
Commissioner otherwise permits, the r e t u r n shall be filed w i t h and
t h e t a x p a i d t o a n a u t h o r i z e d a g e n t b a n k , R e v e n u e D i s t r i c t Officer,
R e v e n u e C o l l e c t i o n Officer, o r d u l y a u t h o r i z e d c i t y o r m u n i c i p a l
Treasurer i n the Philippines located w i t h i n the revenue district
w h e r e t h e t a x p a y e r i s r e g i s t e r e d o r r e q u i r e d t o r e g i s t e r , (a)
(C) Withholding of Creditable Value-added Tax. T h e Gov-

ernment or any of its political subdivisions, instrumentalities or
agencies, i n c l u d i n g g o v e r n m e n t - o w n e d o r - c o n t r o l l e d c o r p o r a t i o n s
( G O C C s ) s h a l l , before m a k i n g p a y m e n t o n a c c o u n t o f each p u r c h a s e
o f goods a n d services w h i c h a r e s u b j e c t t o t h e v a l u e - a d d e d t a x i m -
posed i n Sections 106 a n d 108 o f t h i s Code, d e d u c t a n d w i t h h o l d a
f i n a l v a l u e - a d d e d t a x d u e a t t h e r a t e o f f i v e p e r c e n t (5%) thereof:
Provided, T h a t t h e p a y m e n t f o r lease o r u s e o f p r o p e r t i e s o r p r o p e r -
t y r i g h t s t o n o n r e s i d e n t o w n e r s s h a l l b e s u b j e c t t o t e n p e r c e n t (10%)
w i t h h o l d i n g t a x a t t h e t i m e o f p a y m e n t . F o r p u r p o s e s o f t h i s section,
the payor or person in control of t h e p a y m e n t shall be considered as
t h e w i t h h o l d i n g a g e n t , (as amended by R.A. No. 9337.)
The valued-added t a x w i t h h e l d u n d e r t h i s Section shall be

r e m i t t e d w i t h i n t e n (10) d a y s f o l l o w i n g t h e e n d o f t h e m o n t h t h e
withholding was made.
ANNOTATION
1. Amended: Subsection (A) the period for filing the

quarterly return is c h a n g e d f r o m 20 d a y s to 25 days. Subsection
(B) the phrase "Except as the C o m m i s s i o n e r otherwise permits
x x x" is a d d e d .
T h e term "taxable quarters" m e a n s the quarter that is
synchronized to the income return of the taxpayer, i.e., the calendar
quarter or fiscal quarter. (Sec. 4.114-1 [A], CVR.)
Note: Rev. Regs. No. 6-2009 (Mar. 2 1 , 2007) consolidates
the regulations on the advance payment of VAT on the sale of
refined sugar. Rev. Regs. No. 11-2007 (Aug. 15, 2007), however,
suspends its implementation. Rev. Regs. No. 13-2007 (Oct. 15,
2007) prescribes the rules on the advance payment of VAT and
percentage tax on naturally grown and planted timber products by
owners/sellers prior to their transport for purposes consummating a
sale. Rev. Regs. No. 29-2003 prescribes the policies and procedures
170
ANNOTATED
for the advance payment of VAT on the sale of flour which is milled
from imported wheat to level the playing field a m o n g players in the
flour milling industry, while Rev. M e m o . Cir. No. 5-2004 prescribes
the guidelines and procedures in the implementation of Rev. Regs.
No. 29-2003. (Sec. 4 . 1 1 4 - 1 , [B, 2], CVR.)
2. Where to file and pay.
(1) The monthly VAT declaration and quarterly return shall
be filed with, and VAT due thereon paid to, an Authorized A g e n t
Bank (AAB) under the jurisdiction of the R e v e n u e District/
BIR Office where the taxpayer (head office of the business
establishment) is required to be registered.
(2) In cases w h e r e there are no duly accredited agent
banks within the municipality or city, the monthly VAT
declaration and quarterly VAT return, shall be filed with a n d
any amount due shall be paid to the R D O , Collection A g e n t or
duly authorized Treasurer of the Municipality/City w h e r e s u c h
taxpayer (head office of t h e business establishment) is required
to be registered.
(3) T h e quarterly VAT return and the monthly VAT d e c l a -
ration, w h e r e no payment is involved, shall be filed with the
RDO/LTDO/Large Taxpayers A s s i s t a n c e Division (LTAD),
Collection Agent, duly authorized Municipality/City Treasurer of
Municipality/City w h e r e t h e taxpayer (head office of t h e business
establishment) is registered or required to be registered.
(4) Taxpayers filing via E F P S shall c o m p l y with the

provisions of the E F P S Regulations.
(5) Only o n e consolidated quarterly VAT return or monthly
VAT declaration covering the results of operation of t h e head
office as well as the branches for all lines of business subject to
VAT shall be filed by the taxpayer, for every return period, with
the BIR office w h e r e said t a x p a y e r is required to be registered.
(Sec. 4.114-2[D], Ibid.)
3. It has been held that Section 114(B) (before its a m e n d m e n t )
contemplates that the filing of the sales tax return and the payment
of the tax be made simultaneously, for the return serves as t h e
basis upon which the tax collector d e t e r m i n e s the a m o u n t of the
tax (now VAT) due at the time the taxpayer pays the tax. W h e r e the
taxpayer paid the sales tax due f r o m him, the only conclusion is that
he filed the corresponding return at the time he paid the tax and that
the tax collector regularly performed his duty by determining and
receipting the tax upon quarterly returns filed with a n d submitted
to him. (Arcega vs. Coll., CTA C a s e No. 574, Oct. 30, 1964.) Note,
however, that under Subsection (A), VAT-registered persons are
n o w required to pay the VAT on a monthly basis, (infra.)
4. It is well-nigh impossible for the taxpayer to add up his
income, write d o w n his deductions, and c o m p u t e the net amount
taxable as of the last w o r k i n g hour of the last day of the quarter
and at the s a m e t i m e go to t h e nearest revenue office, submit
the quarterly return a n d pay the tax. This account for the fact that
Section 114(A) gives t h e taxpayer a leeway of 25 days after the end
of each taxable quarter to file the return, (see C o m m . vs. Visayan
Electric Co., L - 2 2 6 1 1 , M a y 2 7 , 1966.)
5. Time of filing and payment. T h e quarterly return must be

filed within 25 d a y s following the close of e a c h calendar quarter.
(1) T h e tax shall be paid monthly, based on the taxable
sales/receipts for the m o n t h , using the prescribed monthly
VAT declaration f o r m within 20 d a y s following the end of each
m o n t h . T h e declaration shall be a c c o m p l i s h e d only for the first
two m o n t h s of e a c h calendar quarter.
(2) A m o u n t s reflected in the monthly VAT declarations for
the first t w o (2) m o n t h s of the quarter shall still be included in
the quarterly VAT return w h i c h reflects the cumulative figures for
the taxable quarter. P a y m e n t s in the monthly VAT declarations
shall, however, be credited in the quarterly VAT return to arrive
at the net VAT payable or excess input tax/over-payment as of
the end of a quarter.
Example: S u p p o s e t h e accounting period adopted by the

taxpayer is fiscal year ending October 2 0 1 1 , the taxpayer has
to file monthly VAT declarations for the months of November
2 0 1 0 , D e c e m b e r 2 0 1 0 , and for the months of February,
M a r c h , May, J u n e , A u g u s t , and September for Year 2 0 1 1 , on
or before the 20th day of the month following the close of the
taxable m o n t h . His quarterly VAT returns corresponding to the
quarters ending January, April, July, and October 2011 shall, on
the other h a n d , be filed and taxes due thereon be paid, after
crediting payments reflected in the Monthly VAT declarations,
on or before February 25, May 25, August 25, and November
25, 2 0 1 1 , respectively. (Sec. 4.114-1[A], CVR.)
6. Filing of return by VAT-registered exporters. Sales of
VAT-registered exporters of garments are automatically subject to
VAT at zero-rate pursuant to Section 106(A, 2, a). Such exporters
are, however, still required to file a quarterly VAT return which will
ANNOTATED
be used as basis for a refund of the input taxes paid to suppliers

of goods and services in connection with their export activity. (VAT
Ruling No. 246, Sept. 28, 1989.)
7. Monthly VAT Declaration. T h e monthly VAT declarations
(BIR Form 2550M) of taxpayers, whether large or non-large, shall
be filed, and taxes paid, not later than the 20th day following the
end of each month. With respect to taxpayers enrolled with the
Electronic Filing and Payment S y s t e m (EFPS), the deadline for
e-filing the Monthly VAT Declaration a n d e-paying the tax due
thereon is prescribed in Section 4.114-1 (A) of the C V R .
The monthly filing in triplicate of the declaration after the

end of the month is applicable only for the first a n d the s e c o n d
months of each calendar quarter. Declaration for the third m o n t h
shall be included in the quarterly VAT return. T h o s e w h i c h do not
involve payment in cash/check/tax debit m e m o shall be filed with
the revenue district office w h e r e the principal place of business is
located.
The tax computation is as follows:
Output Tax ( 1 2 % VAT on taxable

sales/receipts) P
Less: Input Tax
a. carried over f r o m
previous m o n t h P
b. on taxable g o o d s /
[properties/services]* P
VAT payable/(excess input tax) P
A d d : a. Surcharge P
b. Interest
c. C o m p r o m i s e penalty
Total a m o u n t d u e P
8. Electronic filing of tax returns and payment of taxes.

T h e Electronic Filing and P a y m e n t S y s t e m ( E F P S ) is an alternative
mode of filing returns and payment of taxes w h i c h deviates f r o m the
conventional manual process of e n c o d i n g paper b o u n d tax returns
filed which is highly susceptible to h u m a n errors a n d intervention.
*Exclude input taxes claimed or being claimed for Refund/Tax Credit Certifi-
T h e system allows the taxpayers to directly submit their tax returns

and pay their taxes d u e online over the internet through the BIR
website, thereby reducing t h e g o v e r n m e n t ' s administrative and
operational costs in interacting with taxpayers and in collecting
taxes. (Rev. M e m o . Cir. No. 5-2002.)
Note: Rev. R e g s . No. 9 - 2 0 0 1 , as a m e n d e d by Rev. Regs. Nos.

2 - 2 0 0 2 , 9-2002, and 16-2006 (see A p p e n d i x " Q " , Vol. 1.), regulates
the electronic filing of tax returns a n d p a y m e n t of taxes. R M O No.
5-2002, as a m e n d e d by R M O No. 19-2002, provides the guidelines
and procedures in t h e implementation of E F P S prescribed under
said Regulations a n d defines t h e roles and responsibilities of all
c o n c e r n e d offices. Rev. R e g s . No. 10-07 e x p a n d s the coverage of
the E F P S .
For purposes of filing returns under the E F P S , the C V R classifies
taxpayers under a g r o u p i n g of particular business industries and
prescribes the dates on or before w h i c h they are required to file
Monthly VAT Declarations, (see Sec. 4.114.1[A], thereof.)
9. A nonstock, nonprofit foundation that derives income
principally f r o m contribution a n d donations f r o m the general public,
locally a n d a b r o a d , is not e n g a g e d in transactions subject to VAT.
Accordingly, it is e x e m p t f r o m filing the VAT return prescribed in
Section 114(A). However, the foundation's purchases of goods,
properties, or services f r o m VAT-registered entities are subject to
VAT as an indirect tax and part of t h e invoice price thereof. (VAT
Ruling No. 0 0 5 - 0 5 , April 2 5 , 2005.)
10. Withholding of creditable VAT. T h e BIR has ruled that
the E x p a n d e d Withholding Tax Law under Presidential Decree No.
1 3 5 1 , as implemented by Rev. R e g s . No. 13-78 and as a m e n d e d
by Rev. Regs. No. 6-85 and No. 1-89, does not authorize the
withholding of the VAT since such law covers only the withholding
of income tax by certain persons upon certain classes of income
payments. Neither is the VAT subject to the withholding and
remittance provisions of Republic Act No. 1 0 5 1 , pursuant to Rev.
Regs. No. 4-88 and Rev. M e m o . Cir. No. 18-88. Therefore, any
government entity w h i c h buys f r o m VAT-registered persons cannot
be legally constituted as a withholding agent under R.A. No. 1051 in
connection with the VAT due from its supplies since the VAT cannot
be fixed or determined at the time of payment. (VAT Ruling No. 228,
Sept. 8, 1989.)
With the a m e n d m e n t by R.A. No. 7649 which inserted
Subsection (C), the general rule that VAT due on sales of goods
ANNOTATED
and services are not subject to withholding since the tax is not
determinable at the time of sale, is subject to exception in the case
of sale of goods and services to the government subject to VAT.
11. Failure to utilize withheld taxes. W h e r e a c o m p a n y failed
to utilize at the appropriate time its withheld taxes, either as input
taxes or withholding tax credits, because the issuance of the BIR
Form No. 2307 w a s m a d e by the withholding agents only after or
subsequent to the filing dates of the required returns, said withheld
taxes cannot be applied as credits in subsequent returns that the
company may file:
(1) There cannot be a carry-over of withheld taxes that
have not obviously been credited as yet in any given taxable
year.
(2) Withheld taxes, whether these are VAT or income
taxes, can only be d e d u c t e d f r o m items of i n c o m e or credited
against output taxes, for the given a n d corresponding taxable
period or year.
(3) T h e taxpayer must file a written claim for refund or
credit of taxes remitted by its withholding tax a g e n t s within t h e
two-year prescription period provided in Section 2 0 4 if it d o e s
not, in the alternative, a m e n d its returns to reflect belatedly
received certificates of creditable withheld taxes on unreported
items of income, or of creditable input taxes that have not
been deducted from output taxes in t h e c a s e of VAT, during
the taxable period or year involved, w h i c h e v e r c a s e m a y be
applicable. (VAT Ruling N o . 0 2 2 - 0 4 , A u g . 2 0 , 2004.)
12. Short period return. A n y person w h o retires f r o m

business with due notice to the BIR office w h e r e the taxpayer (head
office) is registered or w h o s e VAT registration has b e e n cancelled
shall file a final quarterly return and pay t h e tax d u e thereon within
twenty-five (25) days from the e n d of t h e m o n t h w h e n the business
ceases to operate or w h e n VAT registration has b e e n officially
cancelled.
(1) S u b s e q u e n t monthly declarations/quarterly returns a r e

still required to be filed if the results of the w i n d i n g up of the
affairs/business of the taxpayer reveal taxable transactions.
(2) All persons first registered under Sees. 9.236-1 of
these Regulations shall be liable to VAT on the effective date of
registration stated in their Certificates of Registration; i.e., the
first day of the month following their registration.
(3) If the effective date of registration falls on the first

or s e c o n d m o n t h of the taxable quarter, initial monthly VAT
declaration shall be filed within twenty days after the end of the
m o n t h , a n d the initial quarterly return shall be filed on or before
the 25th day after the e n d of the taxable quarter.
(4) On the other h a n d , if the effective date of registration
falls on the third m o n t h of the taxable quarter the quarterly
returns shall be filed on or before the 25th day of the month
following the e n d of the taxable quarter, and no monthly VAT
declaration n e e d be filed for the initial quarter. (Sec. 4.114-1 [C]
CVR.)
13. Time for e-filing and e-payment by Large Taxpayers.
Rev. Regs. No. 17-2010 prescribe the t i m e , place, and manner of
filing tax returns and p a y m e n t of taxes by Large Taxpayers, (see
Annotation No. 22 under Sees. 52-55, Vol. 1, and Annotation Nos.
7 a n d 8 under Section 245[j].)
W i t h respect to v a l u e - a d d e d tax:
(1) Monthly VAT Declaration (BIR Form No. 2550M) shall
be e-filed on a staggered basis according to the classification of
industry pursuant to Rev. R e g s . No. 2 6 - 2 0 0 2 and Rev. M e m o .
Cir. No. 2-2003, and t h e taxes shall be e-paid not later than the
20th day following the e n d of e a c h m o n t h in accordance with
Section 114 of the Tax C o d e .
(2) Quarterly VAT Return (BIR Form No. 2550Q) shall be
e-filed on a staggered basis according to the classification of
industry pursuant to Rev. Regs. No. 26-2002 and Rev. M e m o .
Cir. No. 2-2003 and the taxes shall be e-paid not later than the
25th day following the e n d of each quarter, in accordance with
Section 114 of the Tax C o d e . T h e a c c o m p a n y i n g schedules
and attachments shall be e-attached/e-submitted following the
file format prescribed under existing revenue issuances.
(3) Debit by authorized agent bank of taxpayer's account.
For the e-payment of tax for the returns required above
and to be e-filed earlier under the staggered filing system, the
taxpayer shall, upon e-filing using the facilities of the eFPS,
likewise give instruction to the A A B to debit its account for the
amount of tax payable on or before the due date for payment
thereof as prescribed under the existing issuances.
(4) Schedules and attachments. The accompanying
schedules and attachments on the tax returns above-men-
tioned, shall be e-attached/e-submitted with the information re-
quired under Rev. Regs. No. 2-2006 and Rev. Memo. Cir. No.
ANNOTATED
3-2006, and following the file format prescribed under existing

revenue issuances. (Sec. 6, Rev. Regs. No. 17-2010.)
14. Withholding of VAT on government money payments and
payments to non-residents. This is governed by Subsection (C).
(1) 5% final VAT. T h e 5% final VAT deducted by the
government shall represent the net VAT payable of the seller-
payee. The remaining 7% (formerly 5%) effectively accounts
for the standard input VAT for sales of g o o d s or services to
government or any of its political subdivisions, instrumentalities
or agencies including G O C C s , in lieu of the actual input VAT
directly attributable or ratably apportioned to such sales. Should
actual input VAT e x c e e d 7% (standard input tax) of gross
payments, the excess may form part of the seller's e x p e n s e
or cost. On the other h a n d , if actual input VAT is less than 7%
of gross payment, the difference must be credited against
expense or cost which in effect constitutes as additional income
to the seller. Ordinarily, the VAT is collected through the credit
method (output VAT - input VAT). T h e 5% final withholding tax
limits to only 7% ( 1 2 % - 5%) t h e a m o u n t of input tax that m a y
be credited by the seller.
By w a y of illustration: S u p p o s e a seller sells g o o d s to t h e

government at P112 (P 100 + P12 OA/AT) a piece. T h e net VAT
payable by the seller is the 5% final withholding tax or P5.00
( 5 % of P100). If the actual cost to him to p u r c h a s e t h e g o o d s
sold is P89.60 (P80 + P9.60 I A/AT), t h e difference b e t w e e n the
actual input tax (AIT) of P9.60 a n d the standard input tax (SIT)
of P7.00 ( 7 % of P100) is P2.60. Since t h e A I T is greater t h a n
the SIT, the difference of P2.60 w h i c h t h e seller c a n n o t credit
as input tax, shall be recorded as part of t h e cost or e x p e n s e
of the seller. On the other h a n d , if the actual cost of the seller
is P50.40 (P45 + P5.40 I A/AT), the SIT of P7.00 is greater than
the A I T of P5.40 by P1.60. This difference of P1.60 w h i c h is
actually a gain, shall be recognized as additional i n c o m e to t h e
seller.
(2) 10% VAT. T h e g o v e r n m e n t or any of its political

subdivisions, instrumentalities or agencies, including G O C C s ,
as well as private corporations, individuals, estates and trusts,
whether large or non-large taxpayers, shall withhold 1 0 % VAT
with respect to the following p a y m e n t s :
(a) Lease or use of properties or property rights o w n e d

by non-residents;
(b) Services rendered to local insurance companies,

with respect to reinsurance p r e m i u m s payable to n o n -
residents; and
(c) Other services rendered in the Philippines by non-

residents.
In remitting VAT-withheld, the withholding agent shall

use BIR F o r m No. 1600-Remittance Return of VAT and
other Percentage Taxes W i t h h e l d .
(3) Non-resident recipient. VAT withheld and paid for

the non-resident recipient (remitted using BIR Form No. 1600),
w h i c h VAT is p a s s e d on to the resident withholding agent by
the non-resident recipient of t h e i n c o m e , m a y be claimed as
input tax by said VAT-registered withholding agent upon filing
his o w n VAT Return, subject to t h e rule on allocation of input
tax a m o n g taxable sales, zero-rated sales, a n d e x e m p t sales.
T h e duly filed BIR Form No. 1600 is the proof or documentary
substantiation for t h e c l a i m e d input tax or input VAT.
Nonetheless, if t h e resident withholding agent is non-VAT

taxpayer, said p a s s e d - o n VAT by the non-resident recipient of
the i n c o m e , e v i d e n c e d by the duly filed BIR Form No. 1600,
shall f o r m part of t h e cost of p u r c h a s e d services, which may
be treated either as an "asset" or "expense," whichever is
applicable, of the resident withholding agent. (Sec. 4.114-2,
CVR.)
(4) Withholding by the Government. Subsection (C)

merely provides a m e t h o d of collection, or a more simplified VAT
withholding s y s t e m . T h e g o v e r n m e n t in this case is constituted
as a withholding agent with respect to payments for goods and
services.
Prior to its a m e n d m e n t , Section 114(C) provided for

different rates of value-added taxes to be withheld 3% on
gross payments for purchases of goods; 6% on gross payments
for services supplied by contractors other than by public works
contractors; 8 . 5 % on gross payments for services supplied by
public work contractors; or 1 0 % on payment for the lease or use
of properties or property rights to nonresident owners. Under
the present Section 114(C), these different rates, except for the
1 0 % on lease or property rights payment to nonresidents, were
deleted, and a uniform rate of 5% is applied.
ANNOTATED
The law the uses the w o r d final. In tax usage, final,

as opposed to creditable, means full. Thus, it is provided in
Section 114(C): "final value-added tax due at the rate of five
percent (5%)." this means that taxable transactions with the
government are subject to a 5% rate, which constitutes as full
payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. T h e other 5% effectively
accounts for the standard input VAT ( d e e m e d input VAT), in
lieu of the actual input VAT directly or attributable to the taxable
transaction.
It is clear that Congress intended to treat differently taxable

transactions with the government. This is supported by the fact
that under the old provision (prior to its a m e n d m e n t by R.A.
No. 9337.), the 5% tax withheld by the g o v e r n m e n t remains
creditable against the tax liability of the seller or contractor.
(Abakada Guro Party List v s . Ermita, 4 6 9 S C R A 10 [2005].)
The a m o u n t withheld is n o w treated as a final VAT, no longer
under the creditable withholding tax s y s t e m .
(5) Withholding by a government owned or controlled

corporation. A G O C C is required to withhold the 1 0 % final
withholding VAT on p a y m e n t s of fees a n d related e x p e n s e s to
a general professional partnership ( G P P ) for services rendered
in the Philippines. However, w h e r e the p a y m e n t s to the G P P
representing the reimbursable fees a n d e x p e n s e s of t h e third-
party advisors are not c o m p e n s a t i o n for services rendered by
the G P P in the Philippines, but are rather p a y m e n t s for services
rendered by the third-party advisors within a n d without the
Philippines, the p a y m e n t s to t h e G P P for the fees a n d e x p e n s e s
of the third-party advisors do not f o r m part of the G P P ' s gross
receipts and are not subject to 1 0 % final withholding VAT. (BIR
Ruling No. 292-05, J u n e 2 7 , 2005.)
15 Computation of withholding taxes and other requirements

on government money payments. P u r c h a s e s of t h e g o v e r n m e n t
that are covered by Purchase Orders duly signed by the authorized
official/s as well as purchases using the Petty C a s h F u n d shall be
subject to the 5% final VAT withholding. However, p u r c h a s e s by
any government official and e m p l o y e e recorded as reimbursable
allowance, benefit or incentive to g o v e r n m e n t official a n d e m p l o y e e
by the concerned g o v e r n m e n t office (e.g., RATA) are not c o v e r e d
by the withholding of 5% final VAT. (Rev. M e m o . Cir. No. 2 3 - 2 0 0 7
(Mar. 2 0 , 2007) T h e basis of the withholding of income tax should

always be net of the VAT imposed on the purchase of goods a n d /
or services. T h e circular requires that the withholding of the 5%
final VAT should be synchronized with the provisions of Rev. Regs.
No. 2-98 (Withholding Tax at S o u r c e , A p p e n d i x " I , " Vol. 1) on the
withholding of income tax of 1 % on p u r c h a s e of g o o d s and 2% on
p u r c h a s e of services.
(1) Government purchases from VAT-registered suppliers

of goods and/or services and employee by the concerned
government office (e.g., RATA) are not covered by the
withholding of 5% final VAT.
E X A M P L E : G o v e r n m e n t p u r c h a s e s f r o m VAT registered
suppliers of g o o d s and/or services
A g o v e r n m e n t a g e n c y has t h e following purchases for the
m o n t h of January, 2011 f r o m VAT registered suppliers of g o o d s
and/or services:
Invoice A m o u n t
Purchase of G o o d s (inclusive of VAT) P1,120.00
Purchase of Services (inclusive of VAT) 5,600.00
H o w will t h e g o v e r n m e n t a g e n c y c o m p u t e for the amount

d u e to their suppliers?
H o w will the g o v e r n m e n t a g e n c y c o m p u t e for the amount
of withholding tax to be filed and remitted for the month of
January, 2011?
Hereinbelow are the a n s w e r s to the foregoing questions:
(a) Purchase of goods:
Selling Price P1,000.00
Output VAT (P1,000.00 x 12%) 120.00
Invoice A m o u n t P1,120.00
Less:
5% withholding of final VAT
(P1,000.00 x 5%) 50.00
1 % withholding o f Income Tax

( P 1 , 0 0 0 . 0 0 x 1%) 10.00
A m o u n t Payable to supplier of Goods P1,060.00

180
ANNOTATED
(b) Purchase of service

Selling Price P5.000.00
Output VAT (P5.000.00 x 12%) 600.00
Invoice A m o u n t P5.600.00
Less:
5% withholding of final VAT
(P5,000.00 x 5%) 250.00
2% withholding of Income Tax
(P5.000.00 x 2%) 100.00
A m o u n t Payable to supplier of Services P5.250.00
The person in-charge of withholding in e a c h g o v e r n m e n t

agency (Government offices, bureaus, a g e n c i e s or instrumen-
talities, local g o v e r n m e n t units, G O C C s ) shall prepare t h e
following forms, file the tax returns to t h e appropriate BIR
collecting agents and pay the corresponding withholding taxes
due thereon, to wit:
BIR Form 1600 (Monthly Remittance Return of Value-

A d d e d Tax and Other Percentage Taxes Withheld) to be filed
on or before the 10th day of t h e m o n t h following t h e m o n t h
in which the withholding w a s m a d e for the following a m o u n t
based on the a b o v e e x a m p l e :
Withholding of Final VAT on G o o d s P 50.00

Withholding of Final VAT on Services 250.00
BIR Form 1601-E (Monthly R e m i t t a n c e Return of

Creditable Income Taxes W i t h h e l d - E x p a n d e d ) to be filed on
or before the 10th day of t h e m o n t h following t h e m o n t h in
which the withholding w a s m a d e e x c e p t for tax returns covering
transactions in D e c e m b e r w h i c h shall be filed on or before
January 15 of the s u c c e e d i n g year, for t h e following a m o u n t
Withholding on G M P - g o o d s ( E W T ) P 10.00
Withholding on G M P - s e r v i c e s ( E W T ) 100.00
(Filers under the Electronic Filing a n d P a y m e n t S y s t e m

[EFPS] of the Bureau of Internal R e v e n u e [BIR] are g o v e r n e d
by the EFPS rules on filing of tax returns a n d p a y m e n t of taxes )
BIR Form 2 3 0 6 (Certificate of Final Tax Withheld at Source)

to be given to the supplier of g o o d s and/or services within ten
(10) d a y s following the e n d of the month in which the withholding
w a s m a d e or u p o n d e m a n d . T h e certificates and hard copy of
the S u m m a r y Alphalist of Withholding Taxes (SAWT) shall be
attached to the Monthly/Quarterly VAT Declaration/Return (BIR
Form 2 5 5 0 M / 2 5 5 0 Q ) , in those instances w h e r e there are not
more than ten (10) withholding agents, or the certificates shall
be used for the preparation of the electronic S u m m a r y Alphalist
of Withholding Taxes ( S A W T ) w h i c h shall be attached, together
with the certificates, to the VAT Return of the seller-payee, in
those instances w h e r e there are more than ten (10) withholding
agents. For t h e a b o v e e x a m p l e , t h e following a m o u n t shall be
reflected on the Certificate (BIR Form 2306):
Withholding of Final VAT on G o o d s P 50.00

Withholding of Final VAT on Services 250.00
( E F P S filers shall a l w a y s submit the S A W T in electronic

format.)
BIR Form 2 3 0 7 (Certificate of Creditable Tax Withheld at
Source) for the withholding of income tax on G M P to be given to
the supplier of g o o d s and/or services not later than the 20th day
of t h e m o n t h following t h e close of the taxable quarter in which
t h e withholding w a s m a d e o r u p o n d e m a n d . T h e certificates
shall be the proof of claimed tax credit of E W T against income
tax d u e and shall be attached to the Quarterly/Annual Income
Tax Return, together with the hard copy of the SAWT, in those
instances w h e r e there are not more than ten (10) withholding
agents, or the certificates shall be used for the preparation of
the electronic S A W T that shall be attached, together with the
certificates, to the Quarterly/Annual Income Tax Return of the
seller-payee, in those instances w h e r e there are more than ten
(10) withholding agents. For the above example, the following
amount shall be reflected on the Certificate (BIR Form 2307):
Withholding on G M P - g o o d s (EWT) P 10.00

Withholding on GMP-services (EWT) 100.00
(EFPS filers shall always submit the S A W T in electronic

format.)
Government purchases that are subject to percentage
tax shall be governed by R.A. No. 1051 on the withholding
ANNOTATED
of percentage tax, as well as, by Rev. Regs. No. 2-98, as

amended, on the withholding of Percentage Tax and Income
Tax. It is to be stressed that purchases by any government
official and employee recorded as reimbursable allowance,
benefit or incentive to government official and e m p l o y e e by the
concerned government office (e.g., RATA) as well as casual
government purchases amounting to not more than P10,000
are not subject to the 1 % or 2% withholding of income tax.
(2) Government purchases from non-VAT registered
suppliers of goods and/or services.
EXAMPLE: Government Purchases from non-VAT

registered suppliers of g o o d s and/or services
A government agency has the following purchases for the
month of January, 2011 f r o m NON-VAT registered taxpayer:
Invoice A m o u n t
Purchase of G o o d s P1,000.00
Purchase of Services 5,000.00
How will the g o v e r n m e n t a g e n c y c o m p u t e the a m o u n t of

withholding tax d u e f r o m their suppliers?
How will the g o v e r n m e n t a g e n c y c o m p u t e for the a m o u n t of
withholding tax to be remitted for t h e m o n t h of January, 2 0 1 0 ?
Hereinbelow are the a n s w e r s to t h e foregoing questions:
(a) Purchase of goods
Selling Price P1,000.00
Less:
3% withholding of Percentage Tax
( P 1 , 0 0 0 . 0 0 x 3%) 30.00
1 % withholding o f Income Tax
( P 1 , 0 0 0 . 0 0 x 1%) 10.00
A m o u n t Payable to t h e supplier
of G o o d s P 960.00
(b) Purchase of service
Selling Price P5.000.00
Less:
3% withholding of Percentage Tax
(P5.000.00 x 3%) 150.00
2% withholding of Income Tax

(P5.000.00 x 2%) 100.00
A m o u n t Payable to supplier
of Services P 4.750.00
T h e person in-charge of withholding in e a c h government

a g e n c y ( G o v e r n m e n t offices, bureaus, agencies or instrumen-
talities, local g o v e r n m e n t units, G O C C s ) shall prepare the fol-
lowing f o r m s , file the tax returns together with the required
Monthly Alphalist of P a y e e s as required under Rev. Regs. No.
2-2006, to the BIR collecting agents and pay the corresponding
withholding taxes d u e t h e r e o n , to wit:
BIR F o r m 1600 (Monthly Remittance Return of Value-

A d d e d Tax a n d Other P e r c e n t a g e Taxes Withheld) to be filed
on or before t h e 10th day of the m o n t h following the month
in w h i c h the withholding w a s m a d e , for the following a m o u n t
b a s e d o n the a b o v e e x a m p l e :
Withholding of Percentage Tax on Purchase

of G o o d s P 30.00
of Services 150.00
BIR Form 1601-E (Monthly Remittance Return of

Creditable Income Taxes W i t h h e l d - E x p a n d e d ) to be filed on or
before the 10th day of t h e month following the month in which
the withholding w a s m a d e except for tax returns covering
transactions in D e c e m b e r w h i c h shall be filed on or before
January 15 of the succeeding year, for the following amount
Withholding on GMP-services ( E W T ) 100.00
(Filers under the E F P S of the BIR are governed by the

E F P S rules on filing of tax returns and payment of taxes.)
BIR Form 2307 (Certificate of Creditable Tax Withheld at
Source) for the withholding of income tax on G M P to be given to
the supplier of goods and/or services not later than the 20th day
of the month following the close of the taxable quarter in which
the withholding w a s m a d e or upon d e m a n d . The certificates
shall be the proof of claimed tax credit of E W T against income
tax due and shall be attached to the Quarterly/Annual Income
184
ANNOTATED
Tax Return, together with the hard copy of the SAWT, in those
instances where there are not more than ten (10) withholding
agents, or said certificates shall be used for the preparation of
the electronic S A W T that shall be attached, together with the
certificates, to the Quarterly/Annual Income Tax Return of the
seller-payee, in those instances w h e r e there are more than ten
(10) withholding agents. For the above e x a m p l e , the following
amount shall be reflected on the Certificate (BIR Form 2307):
Withholding on GMP-services ( E W T ) 100.00
(EFPS filers shall always submit the S A W T in electronic

format.)
BIR Form 2 3 0 7 (Certificate of Creditable Tax Withheld at
Source) for the withholding of Percentage Tax on G M P to be
given to the supplier of g o o d s and/or services not later than
the 10th day of the m o n t h following the close of the m o n t h
in which the withholding w a s m a d e or u p o n d e m a n d . T h e
certificates shall be used as proof of the c l a i m e d percentage
tax credit against Percentage Tax D u e and shall be attached to
the Percentage Tax Return, together with t h e hard copy of the
SAWT, in those instances w h e r e there are not more than ten
(10) withholding agents, or said certificates shall be u s e d for
the preparation of the electronic S A W T that shall be a t t a c h e d ,
together with the certificates, to the Percentage Tax Return
of the seller-payee, in t h o s e instances w h e r e t h e r e are m o r e
than ten (10) withholding agents. For the a b o v e e x a m p l e , the
following a m o u n t shall be reflected on the Certificate (BIR F o r m
2307):

of G o o d s P 30.00
Withholding of Percentage Tax on P u r c h a s e
of Services 150.00
( E F P S filers shall always submit t h e S A W T in electronic

format.)
Considering that BIR F o r m No. 2 3 0 7 is the certificate that is

issued for withholding of both income tax and percentage tax, it
is inherent that there m a y be t w o (2) sets of BIR F o r m N o . 2 3 0 7
that may be issued for o n e (1) particular transaction.
The rates of withholding of income tax on specific types

of income payments as prescribed in Rev. Regs. No. 2-98, as
amended, shall be followed; thus, the rates of 1% on purchase
of goods and 2% on purchase of services shall apply only to
those types of income payments not specifically enumerated in
the said Regulations.
SEC. 115. P o w e r of the Commissioner to Suspend the

Business Operations of a Taxpayer. The Commissioner or
his authorized representative is hereby empowered to suspend
the business operations and temporarily close the business
establishment of any person for any of the following violations:
(a) In the Case of a VAT-registered Person.
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required
under Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or receipts for
the taxable quarter.
(b) Failure of any Person to Register as Required under Section
236. -
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.
ANNOTATION
1. Guidelines for suspension or temporary closure of busi-
ness. As provided in Rev. Memo. Order No. 57-2000 (Dec. 1,
2000), as amended by Rev. Memo. Order No. 20-2002, No. 35-
2007, and No. 40-2007:
(1) Grounds. The following shall be the only grounds for
suspension or temporary closure of business:
(a) Failure to issue receipts or invoices by a VAT-
registered or registrable taxpayer;
(b) Failure to file a value added tax return;
(c) Understatement of taxable sales or receipts by
30% or more of the correct amount thereof in the case of a
VAT-registered or registrable taxpayer; and
ANNOTATED
(d) Failure to register.

(2) Revenue officers authorized to conduct surveillance
activities on business establishments for possible violations
of Sections 113, 114, 236, 237, and 238 of the Tax Code.
Pursuant to R M O No. 54-2000, at least two (2) implementing
officers comprised of Revenue Officers (ROs) (Assessment/
Excise), Intelligence Officers (lOs) and Special Investigators
(Sis) assigned in the following investigating offices/divisions
shall be authorized to conduct surveillance activities on iden-
tified business establishments based on a validly issued
mission order signed by the concerned authorized revenue
official:
In order to avoid multiple surveillance activities being
conducted upon one taxpayer by several offices of the B u r e a u
and to clearly define which Office shall conduct surveillance
activities, the following rules shall be o b s e r v e d :
(a) if the basis of the surveillance activities c o m e s
from information gathered f r o m the internal sources of t h e
Bureau, e.g., information in the tax returns, information
required to be furnished by certain g o v e r n m e n t agencies
as well as taxpayers to the B u r e a u on a regular basis
(e.g., B O C , LRA, BIR R E L I E F S y s t e m , etc.) pursuant to
M e m o r a n d a of A g r e e m e n t e x e c u t e d with the B u r e a u a n d
revenue regulations issued, the surveillance activities
shall be c o n d u c t e d by the R e v e n u e District Office ( R D O ) ,
Large Taxpayers Audit a n d Investigation Division I (LTAID
I), Large Taxpayers Audit a n d Investigation Division (LTAID
II), or Large Taxpayers District Office I (LTDO) with respect
to taxpayers falling under their respective jurisdictions; and
(b) if the basis of surveillance activities c o m e s f r o m
a confidential information filed by an informer or f r o m
other external sources, t h e surveillance activities shall be
conducted by the Tax Fraud Division (TFD). T h e D C I R -
Legal and Inspection G r o u p , however, in consultation with
the DCIR-Operations G r o u p , m a y decide to refer the c a s e
to the Special Investigation Division (SID) or R D O / L T D O .
T h e conduct of surveillance and p e r f o r m a n c e of sur-

veillance activities shall c o n f o r m strictly with the policies
and procedures laid d o w n by R M O No. 5 4 - 2 0 0 0 .
(3) Mandatory requirement for the conduct of surveillance
and apprehension of business establishments. No surveil-
lance activities shall be conducted nor apprehension effected

unless the s a m e has b e e n authorized by a mission order is-
sued in a c c o r d a n c e with the provisions of R M O No. 54-2000.
(4) Documentary requirements. T h e recommendation
of the c o n c e r n e d h e a d of the investigating office/division to
the Regional Director or A C I R , Enforcement Service or A C I R ,
Large Taxpayers Service, as t h e case may be, to suspend or
temporarily close business shall invariably be accompanied by
d o c u m e n t a r y proof required by R M O No. 57-2000 in support of
the particular violation.
(a) Failure to issue value-added tax invoice/receipts:

1) A certification by t h e record custodian
c o n c e r n e d to t h e effect that the Taxpayer Identification
N u m b e r (TIN) of the taxpayer has been verified as
correct;
2) T h e Mission O r d e r issued to the apprehending

officer, if any;
3) A p p r e h e n s i o n slip detailing the items seized;
4) T h e items seized s u c h as the pad of invoices
or delivery receipts used instead of sales invoices, or
used invoices w h e r e duplicate and triplicates are left
blank or not filled up;
5) S w o r n statement under oath of the
a p p r e h e n d i n g revenue officer stating the circumstances
leading to the a p p r e h e n s i o n ; and
6) Other evidence, if available.
(b) Failure to file value-added tax returns:
1) A certification from the records custodian
that the Taxpayer Identification Number (TIN) of the
taxpayer has been verified as correct;
2) A certification from the Revenue District Officer
concerned and/or the accredited banks, collection
agent or duly authorized Treasurer of the City or
Municipality w h e r e the principal office of the offender is
located that no return w a s filed;
3) T h e m e m o r a n d u m report of the Revenue
Enforcement Officer narrating the fact of non-filing,
the grounds relied upon for such a conclusion, with
attachments, if any; and
ANNOTATED
4) The m e m o r a n d u m report shall be supported

by at least a preliminary finding as to the amount of
sales and the tax evaded during the quarters under
investigation, these to be reflected in the prescribed
reportorial forms and working papers;
(c) Understatement of taxable sales by 30% or more:
1) T h e return filed;
2) The taxpayer's records or part thereof as will
show or from which it can be s h o w n by other c o m p e t e n t
evidence that an understatement of sales/receipts
has been c o m m i t t e d . Invariably, the investigating
enforcement officer should take custody over these
records under proper receipt as evidence;
3) T h e d o c u m e n t s or certified copies thereof
obtained through access to records of third persons or
entities as provided under Section 5 of the Tax C o d e ,
which tend to s h o w the actual sales/receipts of the
taxpayer;
4) T h e m e m o r a n d u m report of the investigating
revenue e n f o r c e m e n t officer; a n d
5) T h e prescribed reportorial f o r m s , including
working papers reflecting the details of the investiga-
tor's finding of understatement.
(d) Failure of a value-added tax-subject person to
register:
1) A n y o n e or a combination of t h e d o c u m e n t s
which s h o w the line of business of t h e taxpayer,
such as Certificate of Registration with t h e D T I , S E C ,
Treasurer's Office of c o n c e r n e d L G U , B O I , BIR;
2) A n y o n e or a combination of d o c u m e n t s
showing that t h e annual gross sales/receipts f r o m
value-added tax-covered transactions of the taxpayer
during the previous year e x c e e d P 5 5 0 . 0 0 0 or h a v e
e x c e e d e d said a m o u n t during t h e current year, such
as the financial statements, income and business
tax returns, reports of investigation by revenue
enforcement officers, and the taxpayer's o w n records.
In the case of an importer, the letters of credit o p e n e d ,
import d o c u m e n t s , or certifications f r o m the B u r e a u of
C u s t o m s , a m o n g others;
3) Certification f r o m the Revenue District Officer

w h o has jurisdiction over the taxpayer to the effect that
the latter did not register as a value-added tax person;
and
4) Late registration of business w h o shall have

registered shall carry a penalty of P5.000.00.
(5) Execution and enforcement.
(a) W h e r e t h e taxpayer refuses, neglects, or fails

to c o m p l y with the t e r m s of the 10-Day VAT Compliance
Notice or to satisfactorily refute the findings of the BIR,
t h e R e v i e w Board chaired by the Regional Director/ACIR-
E n f o r c e m e n t S e r v i c e / A C I R - L I T S , shall prepare a report
r e c o m m e n d i n g the closure of t h e establishment for the
approval of the D C I R - L e g a l and Inspection Group, the
Regional Director/ACIR-Enforcement Service/ACIR-LTS
shall prepare, s i g n , a n d execute t h e Closure Order. (Annex
" B " of R M O No. 57-2000.) T h e service of the Closure Order
shall be a c c o m p a n i e d with t h e report of the Review Board
as a p p r o v e d by t h e DCIR-Legal a n d Inspection Group
indicating therein the c o m p u t e d tentative a m o u n t of under
declaration of gross sales/receipts/other taxable base as a
result of t h e violations c o m m i t t e d .
However, if in t h e m e a n t i m e the taxpayer corrects

the violation pursuant to Section IV hereof, the Regional
Director or the A C I R , Enforcement Service/Large Taxpayer
Service w h o signed t h e closure order shall desist from
implementing the closure order and shall communicate
s u c h information to the Deputy Commissioner Legal
and Inspection Group w h o approved the recommendation
of the Review Board for the issuance of the closure order.
(b) T h e execution of the closure order shall consist in

the physical closing of the doors or other means of ingress
unto the establishment and the sealing thereof with the BIR
official seal.
(c) Should the Commissioner decide to impose the
administrative sanction of closure by issuing the closure
order, the execution thereof shall consist in the physical
closing of the doors or other means of ingress unto the
establishment and the sealing thereof with the Bureau of
Internal Revenue (BIR) official seal.
ANNOTATED
(d) Where d e e m e d necessary, the execution of the

closure order shall be carried out with the assistance
of elements of the Philippine National Police (PNP) or
barangay officials in the locality in accordance with the
M e m o r a n d u m of Agreement between the Bureau of Internal
Revenue and the P N P or concerned barangay officials.
(6) Duration of closure. T h e closure shall not be for
less than five (5) days and shall continue until the violation,
is rectified. Upon rectification by the taxpayer of the violation
the Review Board chaired by the Regional Director/ACIR-
Enforcement Service/ACIR-LTS, shall prepare a report stating
the subsequent compliance m a d e by the taxpayer thereby
recommending the lifting of the closure order for approval by
the DCIR-Legal and Inspection Group. On the basis of t h e
approval m a d e by the DCIR-Legal and Inspection G r o u p , a
written order for lifting of the closure order shall be prepared by
the Review Board to be signed by the Regional Director/ACIR-
Enforcement Service/ACIR-LTS. T h e written order of lifting of
closure order must be served immediately, together with the
report r e c o m m e n d i n g therefor as a p p r o v e d by t h e DCIR-Legal
and Inspection G r o u p , to the t a x p a y e r without prejudice to the
conduct of audit on t h e taxpayer's records a n d tax liabilities, if
warranted.
(7) Compliance by taxpayer. T h e closure order shall

only be lifted if t h e violation/s as stated in t h e 10-Day VAT
Compliance Notice is/are rectified by the t a x p a y e r by:
(a) Complying with the registration requirements set
forth in Sections 113, 2 3 6 , and 2 3 8 of the Tax C o d e in c a s e
of failure to register;
(b) Filing of VAT returns which h a v e not b e e n filed a n d

paying the a m o u n t of taxes d u e t h e r e o n ;
(c) A m e n d i n g previously filed VAT returns to reflect
the correct taxable sales/receipts w h i c h w e r e previously
understated due to the failure to issue sales invoices/
receipts or d u e to underdeclaration of sales/receipts.
Nonetheless, taxpayer is not precluded f r o m a m e n d i n g /
filing returns covering other tax liabilities as a result of t h e BIR
findings as aforestated.
(8) Effect of rescission/lifting of closure order. T h e lifting

or rescission of the closure order shall be d o n e in c a s e s w h e n :
(a) There has b e e n a subsequent filing or a m e n d m e n t

of returns with the p a y m e n t of the tax, inclusive of statutory
penalties;
(b) S u b s e q u e n t registration with the payment of the
corresponding c o m p r o m i s e penalties;
(c) P a y m e n t of deficiency taxes inclusive of penalties
corresponding to the sales w h e r e no invoices/receipts have
been issued; and
(d) P a y m e n t of deficiency taxes, inclusive of penalties

corresponding to t h e understatement of taxable sales or
receipts.
If there is no 1 0 0 % c o m p l i a n c e with the tentative figures
but t h e t a x p a y e r partially complies by a m e n d i n g returns, which
a m e n d e d figures are b a s e d on the ratio and percentages
reflected in t h e original returns filed, such compliance shall
still be r e c o m m e n d e d for t h e issuance of the written order of
lifting of the closure order, provided that the tax payments in the
a m e n d e d returns filed or on returns initially filed, in case of no
previously returns, for business tax shall not be less than the
following:
(a) In c a s e of seller of service, 5% of gross receipts
based on the tentative gross receipts as found by the BIR;
or
(b) In case of seller of g o o d s , 3% of gross sales except
for sellers e n g a g e d in the grocery and/or pharmaceutical
business stores w h e r e the m i n i m u m amount of tax payment
shall be not less than 1 % of gross sales, based on the
tentative gross sales as found by the BIR.
Notwithstanding compliance with the 10-Day VAT Notice
and the subsequent lifting of the closure order, the taxpayer may
still be subjected to audit of returns filed (original or amended
returns) and records pertaining to all his tax liabilities. The
lifting order shall not release the taxpayer from the compliance
requirements and f r o m the penalties prescribed by the Tax
C o d e for the violation which shall be dealt with by the criminal
prosecution or by c o m p r o m i s e settlement, at the discretion of
the Commissioner of Internal Revenue or the DCIR-Legal and
Inspection Group.
Note: Rev. M e m o . Order No. 3-2009 amends and consoli-
dates the guidelines and procedures in the conduct of surveil-
192 THE N A T I O N A L I N T E R N A L R E V E N U E CODE
ANNOTATED
lance and stock-taking and the enforcement of the administra-

tive sanction of suspension and temporary closure of business
as provided in Rev. M e m o . Orders Nos. 54-2000, 20-2002, 3 1 -
2002, and 35-2007. Rev. M e m o . Order No. 4 3 - 2 0 0 9 a m e n d s
certain provisions of Rev. M e m o . Order No. 3-2009.
See Annotation under Section 6[C], Vol. 1.
- oOo -
TITLE V
OTHER PERCENTAGE TAXES
S E C . 116. Tax on Persons Exempt from Value-added Tax

(VAT). A n y p e r s o n w h o s e sales o r r e c e i p t s are exempt under
S e c t i o n 1 0 9 ( 1 X V ) o f t h i s Code f r o m t h e p a y m e n t of value-added tax
and w h o is n o t a VAT-registered person shall pay a tax equivalent to
t h r e e p e r c e n t (3%) o f h i s gross q u a r t e r l y sales o r receipts: Provided,
T h a t cooperatives shall be e x e m p t f r o m the three p e r c e n t (3%) gross
receipts t a x h e r e i n imposed.
ANNOTATION
1. Percentage tax is a business tax which is based on a given

ratio b e t w e e n the gross sales or receipts and the burden imposed
u p o n the taxpayer. (City of Manila vs. Inter-Island G a s , 99 Phil.
847.) T h e percentage tax on sales is b a s e d on a set ratio between
the v o l u m e of sales a n d the a m o u n t of the tax. (Pepsi Cola Bottling
Co., Inc. v s . M u n . of Tanauan, L-31156, Feb. 27, 1976.)
2. Unlike income tax, percentage tax is not subject to withholding.
( C o m m . vs. Solidbank Corporation, 416 SCRA 436 [2003].)
3. T h e Tax C o d e d o e s not define "gross receipts" for purposes
of the percentage tax. Despite the a b s e n c e of a statutory definition,
the term e m b r a c e s the entire receipts without any deduction or
exclusion, including any deduction of withholding tax. There is a
policy objective w h y no deductions, exemptions or exclusions are
normally allowed in a gross receipts tax. The gross receipts tax, as
o p p o s e d to the income tax, w a s devised to maintain simplicity in
tax collection and to assure a steady source of state revenue even
during periods of e c o n o m i c s l o w d o w n . Such a policy frowns upon
erosion of the tax base. Deductions, exemptions or exclusions
complicate the tax system and lessen the tax collection.
By its nature, a gross receipts tax applies to the entire receipts
without any deduction, exemption or exclusion, unless the law
193
ANNOTATED
clearly provides otherwise. (China Banking Corporation vs. Court

of Appeals, 403 S C R A 634 [2003].)
4. To be subject to the 3% percentage tax, the person must
be exempt under Section 109(1)(V) and is not a VAT-registered
person. He may, however, apply for optional registration as a VAT-
registered person (Sec. 236[l].) in which case he shall be liable
to the value-added tax. A taxpayer subject to the value-added tax
is required to register and pay the annual registration fee. (Sec.
236[A].)
Section 116 excludes from its coverage other VAT-exempt
transactions mentioned in Section 109(1), (A to U), except
subsection ( 1 , E), such as item (Q) thereof pertaining to lease of
residential units (BIR Ruling No. 0 9 0 - 9 9 , Sept. 6, 1999.) and item
(R) pertaining to the selling, printing and selling of books. (BIR
Ruling No. 107-06, Mar. 14, 2006.) In fine, all e x e m p t transactions
enumerated in subsection (1) (A to U) of Section 109, except
subsection (1)(E), referring to services subject to p e r c e n t a g e tax
under Title V, are e x e m p t both f r o m VAT and p e r c e n t a g e tax.
5. A business shall be e x e m p t f r o m t h e p a y m e n t of both the
VAT and the applicable percentage tax w h e r e its gross sales or
receipts do not e x c e e d P 1 0 0 , 0 0 0 during any 12-month period,
(see Sec. 3, Rev. Regs. No. 10-2000.) If they e x c e e d P 1 0 0 , 0 0 0 but
do not e x c e e d P1.5 million the business is not subject to VAT but
subject to percentage tax; if they e x c e e d P1.5 million it is subject to
VAT.
6. Section 116 expressly subjects to the 3% p e r c e n t a g e tax

non-VAT taxpayers w h o s e gross sales or receipts are e x e m p t under
Section 109(1, V). W h e r e the selling prices of c o n d o m i n i u m units
and other residential dwellings are P1.5 million or below e a c h , the
seller does not fall under Section 1 0 9 ( 1 , V) but rather under Section
109(1, P), and hence, e x e m p t not only f r o m VAT but also f r o m the
3% percentage tax. (see BIR Ruling No. 120-99, A u g . 1 1 , 1999.)
7. W h e n a c o m p a n y is taxed on its m a i n business, it is no
longer taxable further for e n g a g i n g in an activity or w o r k w h i c h is
mainly a part of incidental to a n d is necessary to its m a i n business.
Thus, where a c o m p a n y has already paid p e r c e n t a g e tax on its
insurance business, it cannot be required to pay percentage
tax again for an activity which is necessarily a part of the s a m e
business. There must be a law expressly requiring s u c h additional
payment of tax. T h e creation of the "investment i n c o m e " has long
been held to be generally if not necessarily, essential to the business
Sec. 117 OTHER P E R C E N T A G E TAXES 195
of insurance c o m p a n i e s which are required by law to posses and

maintain substantial legal reserves to meet their obligations to
policyholders. ( C o m m . vs. Philippine A m e r i c a n Accident Insurance
Company, Inc., 4 5 3 S C R A 668 [2005].)
8. Cooperatives are n o w e x e m p t f r o m the 3% percentage tax

while franchises on gas a n d water utilities are subject only to 2% of
gross receipts. (Sec. 119.) In any case, every business is required
to register, including cooperatives, although they are not liable to
t h e annual registration fee. (see Sec. 236[A, B].)
SEC. 1 1 7 . Percentage Tax on Domestic Carriers and

Keepers of Garages. Cars for rent or hire driven by the lessee;
transportation contractors, including persons who transport
passengers for hire, and other domestic carriers by land for the
transport of passengers (except owners of bancas and owners of
animal-drawn two-wheeled vehicle, and keepers of garages shall
pay a tax equivalent to three percent (3%) of their quarterly gross
receipts, (as amended by R.A. No. 9337.)
The gross receipts of common carriers derived from their
incoming and outgoing freight shall not be subjected to the local
taxes imposed under Republic Act No. 7 1 6 0 , otherwise known as the
Local Government Code of 1 9 9 1 .
In computing the percentage tax provided in this Section, the
following shall be considered the minimum quarterly gross receipts
in each particular case:
Jeepney for hire
1. Manila and other cities P2,400
2. Provincial 1,200
Public utility bus

Not exceeding 30 passengers 3,600
Exceeding 30 but not exceeding 50 passengers 6,000

Exceeding 50 passengers 7,200
Taxis -
1. Manila and other cities 3,600
2. Provincial 2,400
Car for hire (with chauffeur) 3,000
Car for hire (without chauffeur) 1,800
(as amended by R.A. No. 7716 and No. 8241.)

ANNOTATED
Note: T h e m i n i m u m gross receipts p e r u n i t o f c a r r i e r p r e s c r i b e d

u n d e r Section 117 w e r e o r i g i n a l l y f i x e d i n 1978. Rev. Regs. N o . 9-2007
prescribes t h e u p d a t e d m i n i m u m m o n t h l y / q u a r t e r l y gross receipts
i n c o m p u t i n g t h e percentage t a x o f domestic c a r r i e r s a n d keepers o f
garages. I t took effect o n A u g u s t 1 , 2007 b u t i t s i m p l e m e n t a t i o n w a s
suspended.
S E C . 118. Percentage Tax on International Carriers.

(A) I n t e r n a t i o n a l a i r c a r r i e r s d o i n g b u s i n e s s i n t h e P h i l i p p i n e s
s h a l l p a y a t a x o f t h r e e p e r c e n t (3%) o f t h e i r q u a r t e r l y gross r e c e i p t s .
(B) I n t e r n a t i o n a l s h i p p i n g c a r r i e r s d o i n g b u s i n e s s i n t h e P h i l i p -
pines s h a l l p a y a t a x e q u i v a l e n t t o t h r e e p e r c e n t (3%) o f t h e i r
q u a r t e r l y gross receipts, (as inserted by R.A. No. 8241.)
ANNOTATION
1. T h e carrier's tax provided in Sections 117 and 118 is a

privilege tax being a tax on the activity of transporting, conveying
or removing passengers and cargo f r o m o n e place to another. It
purports to tax the business of transportation. ( C o m m . vs. U.S. Lines
Co., L-16850, M a y 30, 1960.) It is not i m p o s e d on the passenger.
(BIR Ruling No. 026, Feb. 18, 1983.)
Being a privilege tax, the s a m e can be levied by t h e state only
w h e n the acts, privileges or business are d o n e or performed within
the jurisdiction of the Philippines.
(1) Section 117 applies only to d o m e s t i c carriers w h i c h
transport passengers by land. It d o e s not apply to t h e carriage
of cargo or freight. A u t o - c a l e s a s are no longer t a x e d .
(2) A c o m m o n carrier subject to p e r c e n t a g e tax is exempt
from the VAT. (Sec. 1 0 9 [ 1 , e].) Other operators, s u c h as leasing
of equipment or vessels, are subject to the VAT pursuant to
Section 108(A). (BIR Ruling N o . 0 7 8 , M a r c h 8 , 1 9 8 8 . ) Obviously,
a carrier w h o carries his o w n cargo is not subject to t h e tax.
(3) T h e business of barging and towing services w h i c h
transports cargoes f r o m o n e port to another falls under the
category of services performed by a transportation contractor
formerly subject to percentage tax under Section 117. (BIR
Ruling No. 189, May 4, 1988.) T h e y are n o w subject to VAT
under Section 108(A).
T h e income derived f r o m the hauling and handling of

merchandise by a c u s t o m s broker with the use of trucks for
hire is income f r o m the rendering of a forwarding service and

not from a c o m m o n carrier. Therefore, such income is subject
to VAT to be reported together with the income as a customs
broker. (VAT Ruling No. 2 4 0 , Sept. 2 0 , 1989.)
(4) T h e earnings of t h e driver (who pays a fixed amount,

so-called " b o u n d a r y " ) derived f r o m the operation of a PUJ
vehicle are not subject either to the 1 2 % VAT, 3 % percentage
tax, or 3% c o m m o n carrier's tax, respectively, imposed under
Sections 108(A), 116, a n d 117. On the other h a n d , the PUJ
operator is subject to the 3% c o m m o n carrier's tax under said
Section 117, but e x e m p t f r o m the v a l u e - a d d e d tax pursuant to
Section 1 0 9 ( 1 , E). (BIR Ruling No. 4 9 8 , Oct. 14, 1988.)
(5) A local corporation e n g a g e d in recruiting seamen for
a foreign shipping principal (non-resident foreign corporation)
is not b o u n d to pay for t h e account of said principal the 3%
c o m m o n carrier's tax since the principal is not engaged in
transport business in the Philippines. (BIR Ruling No. 560, Nov.
2 4 , 1988.)
(6) T h e 3% c o m m o n carrier's tax is payable by C o m p a n y

X, w h i c h w a s chartered by C o m p a n y Y, for the transport of cargo
for C o m p a n y Z, although C o m p a n y Y has already paid the 3%
tax b a s e d on its gross receipts on its contract with C o m p a n y
Z. T h e 3% tax i m p o s e d by Section 117 is an excise tax; it is a
c h a r g e i m p o s e d u p o n the performance of an act, the enjoyment
of a privilege, or the e n g a g i n g in an occupation. W h a t the legal
provision purports to tax is the business of transportation, so
m u c h so that, the tax is based on t h e gross receipts.
Accordingly, for engaging in the business of transporting
the cargo of C o m p a n y Z, C o m p a n y Y is subject to the 3%
c o m m o n carrier's tax based on the a m o u n t paid by Company
Z w h i c h a m o u n t constitutes its gross receipts derived from said
business. Likewise, C o m p a n y X is liable for the payment of the
3% tax based on the a m o u n t paid by C o m p a n y Y which amount
constitutes its gross receipts derived from its business. (BIR
Ruling No. 140, July 14, 1989.)
(7) Charter hire contracts for vessels are of two types,
namely, charter of demise and charter of affreightment.
(a) A charter of demise, also known as "bareboat
charter," is a charter wherein the vessel owner delivers
the chartered vessel to the lessee without provisions and
198
ANNOTATED
complement of the crew, with the lessee himself supplying

the necessary provisions and crew for the operation of
the vessel. This type of charter is considered a contract of
lease.
(b) On the other h a n d , in a charter of affreightment,
commonly known as a "time charter," the vessel owner
himself operates and runs the vessel through his o w n crew
for the purpose of transporting the person and/or cargo
of the charterer. This type of charter hire is considered
a contract of carriage and a c o m p a n y e n g a g e d in s u c h ,
is subject to the 3% c o m m o n carrier's tax based on its
gross quarterly receipts pursuant to Section 119; hence,
exempted from the 1 0 % VAT pursuant to Section 109(j).
(VAT Ruling No. 0 5 3 , May 3 1 , 1991.)
(8) R.A. No. 8241 deleted "operators of taxicabs; utility cars

for rent or hire driven by the lessees (rent-a-car c o m p a n i e s ) ;
tourist buses;" in the s e c o n d paragraph of Section 108(A),
being a m o n g those subject to VAT on sale of services.
(9) Under Section 108(A), domestic c o m m o n carriers by
land e n g a g e d in the transport of g o o d s or c a r g o e s a n d c o m m o n
carriers by air and sea relative to t h e transport of p a s s e n g e r s ,
goods or cargoes f r o m o n e place in the Philippines a n d to
another place in the Philippines are subject to VAT. Section 117
limits its application to domestic carriers by land e n g a g e d in
the transport of passengers, while Section 118 applies to all
international carriers doing business in t h e Philippines.
( 1 0 ) By transporting its students f r o m their respective

houses to the school and vice-versa, the buses that an
educational institution o w n s are actually, directly, a n d
exclusively used for educational purposes. H e n c e , it is e x e m p t
from taxes and duties in relation thereto, pursuant to Article
XIV of the Constitution, w h i c h provides that "All revenues and
assets of nonstock, nonprofit educational institutions u s e d
actually, directly, and exclusively for educational purposes shall
be exempt from taxes and duties." (BIR Ruling No. 18-05, Sept.
16, 2005.)
2. The Tax C o d e provides in Section 117 for minimum quarterly

gross receipts in computing the percentage tax of the mentioned
c o m m o n carriers by land to prevent tax a v o i d a n c e . T h e y shall be
used as bases in the computation of the 3% percentage tax e v e n
where its actual gross receipts are less than such m i n i m u m . T h e
Sec. 118 OTHER PERCENTAGE TAXES 199
term "gross receipts" refers to the total receipts as o p p o s e d to net

receipts.
3. W h a t Section 117 purports to tax is the business of

transportation, so m u c h so that the tax is based on the gross
receipts. T h e person liable is, of course, the o w n e r or operator, but
this does not m e a n that he a n d he alone can be made actually to
pay the tax. In other w o r d s , whosoever acts on his behalf and for
his benefit may be held liable to pay, for a n d on behalf of the carrier
or operator, the p e r c e n t a g e tax on the business, especially w h e r e
the principal is a non-resident corporation b e y o n d the jurisdiction of
the Philippines. ( C o m m . vs. United States Lines Co., L-16850, May
30, 1962.)
It has b e e n administratively ruled that the fact that a taxi with

a franchise has not b e e n in operation d u e to s o m e unavoidable
circumstances will not e x e m p t the operator f r o m paying the 3% tax
b a s e d on the m i n i m u m quarterly gross receipts of P2,400. (BIR
Ruling No. 156, A u g . 16, 1990.)
4. The 2 1/2% tax on "gross Philippine billings" of resident

foreign corporations (Sec. 28[A, 3].) is an income tax, a direct tax on
income of persons or other entities "of whatever kind and in whatever
form derived f r o m any source." ( C o m m . of Internal Revenue vs.
British Overseas Airways Corporation, 149 S C R A 395, April 30,
1987; see Rev. Regs. No. 15-2002 under Sec. 28[A, 3].)
5. Owners of vessels engaged in foreign trade or overseas
shipping, w h e t h e r the vessels are of domestic or foreign registry,
are subject to the 3% c o m m o n carrier's tax based on the total
a m o u n t of gross receipts derived f r o m p a s s a g e of persons, excess
baggage, freight or cargo, including mail cargo, originating from
the Philippines. In other w o r d s , only the gross receipts derived
from outgoing freight and passenger service are subject to the
percentage tax. (BIR Ruling No. 120-86, July 22, 1986.)
T h e s a m e is true with airline companies. The taxable gross
receipts refer solely to receipts corresponding to outgoing freight
and passage irrespective of the place of sale or issue and the place
of payment of the ticket, (see Phil. Air Lines vs. Coll. of Internal
Revenue, CTA Case No. 4 5 , Feb. 8, 1956; see Rev. Regs. No.
6-06, Dec. 1, 1966.)
6. Regarding the correct taxable portion of an airline ticket
sold in the Philippines, the total gross receipts for the entire journey
from the point of uplift to the point of final destination shall be the
correct taxable receipts for purposes of the 3% c o m m o n carrier's
ANNOTATED
tax. In other words, if there is a change in plane belonging to the

same airline at a certain point which is not the final destination of
the passenger, for any reason other than force majeure, the flight is
still "continuous and uninterrupted;" hence, the basis of the gross
receipts reportable for percentage tax purposes will be the cost of
the ticket corresponding from the point of origin (Manila) to the final
destination of the passenger. (BIR Ruling No. 164, April 27, 1988.)
7. Common carrier's tax liability of international airline

companies. For purposes of determining the c o m m o n carrier's
tax liability of international airline c o m p a n i e s pursuant to Section
118, gross receipts shall be the s a m e as the tax b a s e for c o m p u t i n g
Gross Philippine Billings Tax under Section 28(A, 3) as prescribed
by Rev. Regs. No. 15-2002. (Sec. 10, Rev. R e g s . No. 15-2002.)
8. Under Section 118, the international carrier must be doing
business in the Philippines to be subject to the tax. An off-line
international carrier which has no flight operations to and f r o m
the Philippines is not d e e m e d e n g a g e d in business as a c o m m o n
carrier in the Philippines by reason merely of its entering rate a
contract with a General Sales A g e n t ( G S A ) in the Philippines, w h o
sells tickets for its off-line flights. As s u c h , the off-line carrier is not
subject to that 3% tax under Section 118(A). It is also not subject to
the 2 1/2 % Gross Philippine Billings ( G P B ) under Section 28 (A)(3)
(a). (BIR Ruling No. D A - 2 6 9 - 0 7 , April 2 7 , 2007.)
9. Issues affection common carriers by sea. Rev. M e m o .

Cir. No. 31-2008 clarifies several issues affecting c o m m o n carriers
by sea, their agents and suppliers:
(1) Definition of terms

(a) Common Carrier refers to individuals, corporations,
firms or associations e n g a g e d in t h e business of carrying
or transporting p a s s e n g e r s or g o o d s or both, by land, water
or air, for c o m p e n s a t i o n , offering their services to t h e public
and shall include transportation contractors.
(b) Gross receipts the t e r m refers to the total a m o u n t

of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services
and advance p a y m e n t s actually or constructively received
during the taxable quarter/period for the services performed
or to be performed for another p e r s o n , excluding VAT,
but shall not include a m o u n t e a r m a r k e d for remittance to
a third party as agreed in an implied or express contract
or m a n d a t e d by law and invoiced/receipted by such third

party directly to the real customer or actual recipient of the
service.
For c o m m o n carriers, gross receipts is the amount

actually or constructively received as compensation for the
services of undertaking the contract of carriage.
(c) International sea carrier refers to a foreign shipping
c o m p a n y doing business in the Philippines, having touch-
ed or intention of touching any Philippine port to perform
international sea transportation services/activities from
the Philippines to a n y w h e r e in the world and vice versa,
in the c a s e of on-line carrier, or having maintained busi-
ness establishment, agent or representative office in
the Philippines for the sale of o w n e d tickets/passage
d o c u m e n t s or tickets/passage d o c u m e n t s of other shipping
c o m p a n i e s , w h i c h shipping c o m p a n i e s operate without
touching a n y Philippine port, in the c a s e of off-line carrier.
International sea carrier includes both off-line carrier and
on-line carrier.
(2) Clarifications:
Q-1 Who are the common carriers subject to the
regular VAT rate (10% effective Nov. 1, 2005/12% effective
Feb. 1, 2006) under R.A. No. 9337?
A - 1 : T h e c o m m o n carriers subject to VAT under R.A.
No. 9 3 3 7 are domestic c o m m o n carriers by sea or air
w h e r e they are liable to pay the regular 1 2 % output VAT
on their domestic operation and 0% output VAT on their
on-line international operation. Domestic c o m m o n carriers
which trans port g o o d s and cargoes by land, however, are
already subject to VAT e v e n prior to R.A. No. 9337. C o m m o n
carriers by land with respect to their gross receipts from the
transport of passengers including operators of taxicabs,
utility cars for rent or hire driven by the lessees and tourist
buses used for the transport of passengers shall be subject
to the 3% percentage tax imposed under Section 117, but
shall not be liable to VAT. On-line international c o m m o n
carrier by air and sea shall continue to be subject to the 3%
c o m m o n carrier's tax under Section 118 of the Tax Code.
Q-2: W h a t transactions of domestic sea carriers are

subject to VAT?
202
ANNOTATED
A-2: Transport of passengers, goods or cargoes

from one place in the Philippines to another place in
the Philippines is subject to 1 2 % VAT. A n y other income
incidental to its operations shall likewise be subject to 1 2 %
VAT.
Q-3: Are on-line international sea carriers subject to
VAT?
A - 3 : No. On-line international sea carriers are not
subject to VAT they being subject to percentage tax under
Title V. They are liable to the three percent (3%) percentage
tax imposed on their gross receipts f r o m o u t b o u n d fares
and freight, pursuant to Section 118 of the Tax C o d e .
However, if these on-line international sea carriers e n g a g e
in other transactions not e x e m p t under Section 119 of t h e
Tax C o d e , they shall be liable to the 1 2 % VAT on these
transactions.
Q-4: Are demurrage fees collected by on-line
international sea carriers due to delay by the shipper in
unloading their inbound cargoes subject to tax?
A - 4 : Yes, D e m u r r a g e f e e s , w h i c h are in t h e nature of
rent for the use of property of the carrier in t h e Philippines
is considered income f r o m Philippine source a n d is subject
to income tax under the regular rate as t h e other types of
income of the on-line carrier. Said other line of business m a y
likewise be subject to VAT or p e r c e n t a g e tax applying the
rule on threshold discussed in the s u c c e e d i n g p a r a g r a p h .
Q-5: Are detention fees and other charges collected by

international sea carriers subject to tax?
A - 5 : Detention f e e s a n d other c h a r g e s relating to
outbound cargoes and inbound c a r g o e s are all considered
Philippine-sourced income of t h e international sea carriers
they being collected for the use of property or rendition of
services in the Philippines, and are subject to the Philippine
income tax under t h e regular rate, a n d to t h e value a d d e d
tax, if the total annual receipts f r o m all the VAT-registered
activities P1,500,000.00. However, if the total annual gross
receipts do not e x c e e d o n e million five hundred t h o u s a n d
pesos, said taxpayer is liable to pay the 3% p e r c e n t a g e tax.
Q-6: Are domestic common carriers engaged in both
domestic and international transport operations subject to
VAT on both operations?
A - 6 : Domestic carriers are subject to 1 2 % VAT on

income derived f r o m their domestic operations. However,
their income f r o m international transport operations,
involving the transport of passengers, g o o d s and cargoes
from the Philippines to a foreign country, shall be subject
to VAT at zero rate (0%) while income f r o m international
transport operations involving the transport of passengers,
g o o d s and c a r g o e s f r o m a foreign country to the Philippines
shall be VAT-exempt, the latter being revenue/receipts from
foreign source.
Q-7; Can on-line international sea carriers opt to be

under the VAT system and be subject to VAT at zero-
rate on their international operations similar to domestic
corporations?
A - 7 : No. T h e business of an international sea carrier
is e x e m p t f r o m VAT b e c a u s e this is a service subject to
p e r c e n t a g e tax. If t h e main business is e x e m p t from VAT,
the VAT-exempt person can not elect that its exempt
business/es be placed under the VAT s y s t e m . T h e option
to be subject to VAT on its e x e m p t transactions is available
only to a VAT-registered p e r s o n .
Q-8: Are domestic shipping carriers with international
operations considered as "international carriers" and be
subject to the 3% common carrier's tax under Section 118
of the Code?
A - 8 : No. "International shipping carriers" refers to
foreign shipping c o m p a n i e s only. It does not include
domestic sea carriers/corporations with international
shipping operations.
Q-9: Are shipping carriers which operate under a
government franchise still required to pay the franchise tax
in addition to the VAT?
A - 9 : No. T h e VAT is in lieu of the franchise tax.
Q-10: Are the sale, importation or lease of passenger
or cargo vessels, including engine, equipment and spare
parts thereof for domestic or international transport
operations exempt from VAT?
A - 1 0 : T h e sale, importation or lease of passenger or
cargo vessels, including engine, equipment and spare
parts thereof for domestic or international transport ope-
ANNOTATED
rations, are exempt from VAT. The exemption from VAT

on the importation and local purchase of passenger and/
or cargo vessels shall be limited to those of 150 tons and
above, including engine and spare parts of said vessels.
The vessels to be imported shall comply with the age limit
requirement, at the time of acquisition counted f r o m the
date of the vessel's original c o m m i s s i o n i n g , as follows:
(i) for passenger and/or cargo vessels, the age limit is 15
years old; (ii) for tankers, the age limit is ten (10) years old;
and (iii) for high-speed passenger crafts, the age limit is 5
years old. T h e exemption shall be subject to the provisions
of Section 4 of Republic Act No. 9 2 9 5 , otherwise k n o w n as
"The Domestic Shipping D e v e l o p m e n t Act of 2 0 0 4 . "
Q-11: What is the consequence if the domestic shipping
carrier fails to comply with Section 4 of R.A. No. 9295?
A - 1 1 : T h e importation or local purchase of p a s s e n g e r
and/or cargo vessels, including engine, e q u i p m e n t and
spare parts thereof, shall not be e x e m p t f r o m VAT.
Q-12: Are the importation of life-saving equipment,
safety and rescue equipment and communication and
navigational safety equipment, steel plates and other metal
plates, including marine-grade aluminum plates, used for
transportation operations of Philippine Registered Vessel,
exempt from VAT?
A - 1 2 : Yes, provided that it has c o m p l i e d with Section

4(b) of R.A. No. 9 2 9 5 .
Q-13: Are importation of fuel, goods and supplies by
persons engaged in international shipping exempt from
VAT?
A - 1 3 : T h e importation of fuel, g o o d s a n d supplies for

use in the international sea transport operations is VAT
exempt. T h e said fuel, g o o d s and supplies shall be u s e d
exclusively or shall pertain to the transport of g o o d s and/or
passenger from a port in t h e Philippines directly to a foreign
port without stopping at any other port in t h e Philippines
to unload passengers and/or c a r g o e s loaded in and f r o m
another domestic port; Provided, further, That if any portion
of such fuel, g o o d s or supplies is used for purposes other
than that mentioned in this p a r a g r a p h , such portion of fuel,
goods and supplies shall be subject to 1 2 % VAT.
Q-14: Are sales of goods, supplies, equipment, fuel

and services to persons engaged in international shipping
operations subject to VAT?
A - 1 4 : T h e sale of g o o d s , supplies, equipment, fuel

a n d services (including leases of property) to the c o m m o n
carrier to be u s e d in its international sea transport operations
is zero-rated. T h e s a m e is limited to goods, supplies,
e q u i p m e n t , fuel a n d services pertaining to or attributable
to the transport of g o o d s a n d passengers f r o m a port in
t h e Philippines directly to a foreign port without docking
or stopping at a n y other port in the Philippines to unload
p a s s e n g e r s and/or c a r g o e s loaded in and f r o m another
d o m e s t i c port; If any portion of such fuel, equipment,
g o o d s or supplies a n d services is used for purposes other
t h a n that m e n t i o n e d in this p a r a g r a p h , such portion of fuel,
e q u i p m e n t , g o o d s , supplies a n d services shall be subject
to 1 2 % VAT.
Q-15: Are importation of fuel by shipping company
exclusively engaged in international operations automa-
tically exempt from the imposition of VAT? What about
its purchases of fuel from domestic suppliers? Will these
purchases automatically qualify as zero-rated?
A - 1 5 : Direct importations of fuel by a shipping c o m -
pany that is exclusively e n g a g e d in international operations
are considered as VAT exempt. However, the importer has
to secure a VAT-exempt Authority to Release Imported
G o o d s (ATRIG) f r o m the appropriate BIR office prior to the
release of imported fuel f r o m the custody of the Bureau of
C u s t o m s . With respect to its domestic purchases of fuel,
considering that the s a m e are normally loaded directly
to the international carrier/vessel, the sales thereof by
its suppliers are considered as automatically zero-rated;
hence, there is no need to secure prior approval for zero-
rating from the BIR. T h e seller of the fuel must issue a zero-
rated VAT invoice in the n a m e of the international carrier/
vessel and the s a m e must be supported by Delivery Receipt
or any document, evidencing the actual loading of the fuel
to the international carrier/vessel duly acknowledged by its
captain or duly authorized representative.
Q-16: How shall we tax petroleum products imported
by/directly sold to sea transportation companies that are
engaged in both domestic and international operations?
ANNOTATED
A-16: It will depend upon the nature of procurement of

petroleum products by these sea transportation companies:
1) If the sea transport operators locally purchase
petroleum products on a per v o y a g e basis, such that
the specific lifting/purchase of the fuel can be directly
identified to be used by the loading vessel for outbound
international v o y a g e , the said sales are considered
effec-tively zero-rated or the importation is considered
VAT-exempt. T h e domestic seller of the fuel must issue
a zero-rated VAT invoice in the n a m e of the carrier
and the s a m e must be supported by Delivery Receipt
or any d o c u m e n t evidencing the actual loading of the
fuel to the carrier for o u t b o u n d international v o y a g e
duly a c k n o w l e d g e d by its captain or duly authorized
representative;
2) If the petroleum products are imported/sold

in bulk and the destinations of t h e vessel m a y be
k n o w n only u p o n loading of the fuel to the departing
vessel, such bulk importation by/ direct sales to the sea
transport operators shall be subject to the 1 2 % VAT. T h e
concerned sea transport operators can either utilize
the VAT paid on the importations or local p u r c h a s e s
of fuel as credit against their output tax liabilities, or
can claim for tax refund/credit s u c h portion of VAT
p a y m e n t s on local as well as imported p u r c h a s e s that
are attributable to their zero-rated sales.
3) If the sea transport operator is main-taining

dedicated tanks for the storage of fuel to be u s e d
exclusively for international v o y a g e , a n d the imported/
locally purchased petroleum products will be delivered
directly to these dedicated storage tanks u p o n
release f r o m B O C custody/supplier oil company, t h e
importation of these fuel by the sea transport operator
shall be e x e m p t f r o m VAT, while its local purchases will
be subject to VAT effective z e r o rating. In both c a s e s ,
however, the m a i n t e n a n c e of these storage tanks shall
be subject to prior approval and regular monitoring
by the BIR. Otherwise, the rule in t h e immediately
preceding paragraph will apply.
Q-17: If the country of registry of the international
vessel purchasing locally the petroleum product does not
grant similar tax treatment to Philippine-registered carriers,

are we still going to treat the sale of these products as zero-
rated for VAT purposes?
A - 1 7 : Yes. Unlike the provisions of Section 135 of the

Tax C o d e with respect to the imposition of excise taxes
on petroleum products, the provision of the new VAT law
treating the direct sales of petroleum products to shipping
c o m p a n i e s e n g a g e d in international operations as zero-
rated did not m a k e any distinction. As such, the rule on
reciprocity on these sales will not apply.
Q-18: What is the basis in the computation of output

VAT on sale of services of the shipping company?
A - 1 8 : T h e basis in the computation of output VAT of a
shipping c o m p a n y is its gross receipts as defined in this
Circular.
Q-19: Which transactions with international sea

transport operators are zero-rated?
A - 1 9 : Sale of services to persons e n g a g e d exclusively
in international sea transport, including leases of property
for use thereof, and t h e sale of g o o d s supplies, equipment
a n d fuel are zero-rated. However, sale of goods, supplies,
e q u i p m e n t a n d fuel as well as services to persons engaged
in both d o m e s t i c and international sea transport operations
shall be zero-rated only with respect to the portion that will
be u s e d in international operations.
Q-20: How shall we tax petroleum products imported
by/directly sold to international sea carriers that are
engaged in both domestic and international operations?
A - 2 0 : It will d e p e n d on the nature of procurement of
petroleum products by these international sea carriers:
1. If the international sea carrier locally procures
petroleum products on a per voyage basis, such
that the specific purchase of the fuel can be directly
identified to be used by the loading vessel for outbound
v o y a g e , the said sales are considered zero-rated
or the importation is considered VAT-exempt. The
domestic seller of the fuel must issue a zero-rated VAT
invoice in the n a m e of the carrier and the same must
be supported by Delivery Receipt or any document
evidencing the actual loading of the fuel to the carrier
ANNOTATED
for outbound international voyage duly acknowledged

by its captain or duly authorized representative.
2. If the petroleum products are imported/sold
in bulk and the destinations of the vessel may be
known only upon loading of the fuel to the departing
vessel, such bulk importation by/direct sales to the
transport operators shall be subject to the 1 2 % VAT.
The concerned transport operators can either utilize
the VAT paid on the importation or local purchase
of fuel as credit against their output tax liabilities, or
can claim for tax refund/credit such portion of the VAT
payments on local as well as imported purchases that
are attributable to their zero-rated sales.
3. If the transport operator is maintaining

dedicated tanks for the storage of fuel to be u s e d
exclusively for international v o y a g e , a n d the imported/
locally purchased petroleum products will be delivered
directly to these dedicated storage tanks u p o n
release f r o m B O C custody/supplier oil company, the
importation of these fuel by t h e transport operator shall
be e x e m p t f r o m VAT while t h e local p u r c h a s e s will be
subject to VAT at zero rate. In both c a s e s , however, the
maintenance of t h e s e storage tanks shall be subject
to prior approval a n d regular monitoring by t h e BIR.
Otherwise, t h e rule in the immediately preceding
paragraph will apply.
Q - 2 1 : W h o a m o n g the sea transport operators are

required to register as VAT taxpayer effective N o v e m b e r 1,
2005?
A - 2 1 : Philippine shipping c o m p a n i e s , w h e t h e r e n g a g e d
in domestic or international trade, w h o s e gross sales a n d /
or receipts f r o m the transport of p a s s e n g e r s , g o o d s a n d
cargoes for any 12-month period e x c e e d P 1 , 5 0 0 , 0 0 0 are
required to register as VAT taxpayers.
Q-22: Can domestic tickets, bills of lading and excess
baggage tickets issued by domestic sea transport carriers
serve as a VAT official receipt?
A - 2 2 : No, VAT-registered domestic sea transport

carriers are still required to issue VAT Official Receipts on
their sale of passenger or cargo tickets for both domestic
and international operations. T h e passenger or cargo
tickets are considered contracts of passage/carriage and

cannot serve as official receipts. VAT Official Receipts are
issued u p o n receipt, actual or constructive, of payments
f r o m the purchasers . In case of tickets sold thru general
sales agents of such domestic sea transport carriers, the
agents shall issue the VAT official receipts of the domestic
sea transport carriers since the sellers of the tickets are
the domestic sea transport carriers and not the agents w h o
merely collect the p r o c e e d s of sales f r o m the buyers on
behalf of the domestic sea transport carriers.
T h e agents shall, in turn, bill the domestic sea

carriers for their c o m m i s s i o n s a n d the 1 2 % VAT on said
c o m m i s s i o n , if t h e a g e n t s are VAT-registered or VAT-
registrable t a x p a y e r s . T h e VAT official receipts issued by
t h e a g e n t s to the domestic sea carriers shall be the bases
of the latter in claiming input taxes on c o m m i s s i o n s paid
to agents. On the other h a n d , if the agent is a qualified
non-VAT taxpayer, he shall issue non-VAT official receipt to
the domestic carrier. However, said non-VAT official receipt
issued by the agent to the domestic c o m m o n carrier cannot
generate input tax to the latter.
On the other h a n d , if the intermediary-entity between

the carrier a n d the customer purchases in bulk passenger
spaces or cargo s p a c e s and resells the s a m e to the said
customer at a price dictated by said intermediary as
evidenced by t h e issuance of the intermediary's official
receipt and sales invoice/billing statement, a wholesaler-
distributor/retailer relationship is created between the
carrier and the intermediary and they shall be taxed
accordingly.
Q-23: W h a t is the basis of the 1 2 % VAT on the c o m -

mission of the general sales agents with respect to their
sales of domestic sea tickets?
A - 2 3 : On the sale of passage tickets by agents, the
said agent's gross receipts shall pertain to or cover their
commission which is included in the price of passage
tickets. T h e price of the passage tickets plus the 12% VAT
passed on by the domestic sea carrier (seller) to the buyer
shall, after issuance of the carrier's VAT official receipt to
the said buyer, be collected by the agent on behalf of the
domestic sea carrier. The agent shall remit to the carrier
210
ANNOTATED
the following: the price of the tickets (less the agent's

commission); the 1 2 % VAT (less the VAT accruing on the
agent's commission); and the 1 0 % creditable withholding
of income tax on agent's commission.
The proceeds of the sale of the ticket do not form part
of the gross receipts of the agent. T h e s e are gross receipts
of the carrier that personally, or through the agent, issued
the carrier's VAT official receipt.
E X A M P L E : SL S H I P P I N G sold domestic ticket at
P1,000.00 through its general sales agent (agent's
commission is 3.5%). S h o w n hereinbelow is the c o m -
putation:
Buyer
Top 10,000 Others

Corporations
Price of Ticket P1,000.00 P1,000.00
Add: 12% VAT 120.00 120.00
Sub-Total P1,120.00 P1,120.00
Less: 2% Withholding Tax (20.00)
Total Amount Collected from P1,100.00 P1,120.00

Buyer
Less: Agent's Commission 35.00 35.00
12% VAT on Commission 4.20 4.20
Sub-Total P1,060.80 P1,080.80
Add: 10% Withholding of 3.50 3.50
Income Tax on Agent's
Commission
Amount to be remitted by the P1,064.30 P1,084.30
Agent to SL SHIPPING
T h e agent shall remit to t h e BIR the 1 2 % VAT accruing

on its c o m m i s s i o n , net of input taxes incurred by the agent.
On the other h a n d , the domestic shipping c o m p a n y shall
remit the VAT on transport business, net of input taxes
which includes the VAT on c o m m i s s i o n c h a r g e d by the
agent.
For buyers classified as belonging to the 10,000

private corporations, they have to d e d u c t and withhold 2%
on their p a y m e n t s for domestic sea tickets and issue a

Certificate of Creditable Tax Withheld at Source (BIR Form
No. 2307) in the n a m e of the domestic sea carrier as the
income recipient. T h e latter shall in turn issue BIR Form No.
2 3 0 7 to the income recipient-agent for the 1 0 % creditable
withholding tax withheld f r o m the agent's c o m m i s s i o n .
Q-24: Will a non-VAT registered ticket agent be liable

for VAT as a result of the 12% VAT passed on to buyers of
domestic shipping ticket?
A - 2 4 : No. T h e 1 2 % VAT on the sale of domestic

p a s s a g e tickets is p a s s e d on to the buyer by the seller
w h i c h is the d o m e s t i c sea carrier. T h e agent collects the
p a y m e n t s for t h e domestic p a s s a g e ticket plus the 1 2 %
VAT on behalf of the d o m e s t i c sea carrier. T h e non-VAT
registered ticket agent shall be liable to 3% tax on his gross
receipts of c o m m i s s i o n i n c o m e pursuant to Section 116 of
t h e Tax C o d e , w h i c h c o m m i s s i o n income is evidenced by
his issuance of Non-VAT Official Receipt to his customer
w h i c h is the sea carrier. It is a s s u m e d , of course, that the
annual gross receipts of the agent does not exceed P
1,500,000.
Q-25: How much should be the passed-on VAT on
services rendered to the government? Is it 12% or 5%
VAT?
A - 2 5 : T h e gross p a y m e n t s m a d e by the government to
sellers of g o o d s and services shall be subject to a final VAT
withholding of 5% on gross payments. However, the VAT to
be passed on by the sellers of g o o d s and services to the
g o v e r n m e n t shall still be 1 2 % to cover the final VAT of 5%
and the standard input tax of 7% (The 1 2 % rate is effective
on Feb. 1, 2006). T h e standard input tax shall cover the
actual input tax plus or minus the difference between the
standard input tax and the actual input tax, which difference
shall be an adjustment to cost.
Q-26: Are shipping companies who are subject to VAT
starting Nov. 1, 2005 entitled to transitional input tax?
A - 2 6 : Shipping companies are entitled to transitional
input tax as follows:
1) For goods, materials or supplies not for sale
but purchased for use in business in their present
ANNOTATED
condition, which are not intended for further processing

and are on hand as of October 3 1 , 2005, a transitional
input tax equivalent to 2% of the value of the inventory
on hand as of Nov. 1, 2005, or actual VAT paid on such
goods, materials or supplies, whichever is higher, shall
be allowed.
2) For goods purchased with the object of resale
in their present condition, the s a m e transitional input
tax equivalent to 2% of the value of such g o o d s or the
actual VAT paid on such g o o d s unsold as of October
3 1 , 2005, whichever is higher, shall be a l l o w e d , w h i c h
amount m a y be credited against the output tax of the
VAT-registered shipping company.
For this purpose, an inventory as of October 3 1 ,

2005 of such g o o d s or supplies s h o w i n g the quantity,
description and a m o u n t should have b e e n filed with the
R D O or c o n c e r n e d BIR office not later t h a n N o v e m b e r
30, 2005.
In recognizing transitional input tax as of O c t o b e r
3 1 , 2 0 0 5 , a journal entry should be m a d e in the
books debiting the input tax account a n d crediting the
inventory/asset account.
Q-27; When a Philippine shipping company charters a
vessel to an oil company doing business in the Philippines
for use in domestic trade, is the charter income subject to
VAT?
A - 2 7 : T h e charter income of t h e shipping c o m p a n y is

subject to VAT since the service is p e r f o r m e d within the
Philippines.
Q-28: What is the treatment for VAT purposes on the

charter income of a Philippine overseas shipping company
engaged in international trade to another Philippine
shipping company likewise engaged in overseas shipping?
A - 2 8 : Income e a r n e d / g r o s s receipts f r o m t h e charter
of the vessel b e t w e e n t w o Philippine shipping c o m p a n i e s
which are domestic corporations w h o s e operations are
exclusively for overseas operation is subject to zero-
percent (0%) VAT.
Q-29: Is the transport service rendered to a government

agency by domestic carrier engaged in international ship-
ping originating from foreign port to Philippine port subject

to five percent (5%) final withholding VAT?
A - 2 9 : T h e transaction is not subject to 5% final
withholding VAT since the service w a s rendered outside
the Philippines w h i c h service is VAT-exempt.
Q-30: When a Philippine overseas shipping company
charters to an oil company doing business in the Philippines
for use in the overseas trade, is the charter income subject
to VAT?
A - 3 0 : T h e charter i n c o m e derived by a Philippine

overseas shipping c o m p a n y f r o m the charter of a vessel
used for o v e r s e a s trade is subject to VAT.
Q-31: What is the treatment for VAT purposes of the
revenue derived from the charter of a vessel to a domestic
shipping company where said vessel is used both for
domestic operation and international operations?
A - 3 1 : T h e charter revenue is subject to the 1 2 % VAT.
T h e portion of t h e charter fee relating to the international
operations m a y be claimed as a refund because it is
attributable to a zero-rated activity. T h e portion relating to
domestic operations will give rise to a creditable input tax
since the d o m e s t i c operation is subject to 1 2 % VAT.
Q-32: When a Philippine shipping company whose
vessel carries cargo from a foreign port to the Philippines
and transships it on a domestic registered ship bound for
another Philippine port, is the income derived therefrom
subject to VAT?
A - 3 2 : Only the portion w h e r e the cargo is carried by a
domestic ship from o n e Philippine port to another Philippine
port is subject to VAT which is assessed on and payable by
the Philippine c o m p a n y / d o m e s t i c shipping corporation.
Q-33: What are the consequences if domestic common
carriers failed to register as VAT taxpayers?
A - 3 3 : Non-registration as VAT taxpayers does not
exempt said c o m p a n i e s from their output tax liability on their
sales of service and other taxable transactions. However,
in computing their VAT payable for the period, no input tax
credits on their purchases of goods, properties or services
prior to registration shall be allowed to be credited against
their output tax liability.
ANNOTATED
Q-34: Are commission incomes received by the local

shipping agents from their foreign principals subject to
VAT?
A-34: T h e commission income or fees received by the
local shipping agents for outbound freights/fares received
by their foreign principals which are on-line international sea
carriers (touching any port in the Philippines as part of their
operation) shall be zero-rated pursuant to the provisions of
Section 108(B)(4) of the Tax C o d e . Said provision does not
require that payments of the c o m m i s s i o n income or fees
for "services rendered to persons e n g a g e d in international
shipping operations, including leases of property for use
thereof," be paid in acceptable foreign currency in order
that such transaction m a y be zero-rated. On the other h a n d ,
commission income or fees received by the local shipping
agents pertaining to inbound freights/fares received by
their foreign principals/on-line international sea carriers or
pertaining to freights/fares received by off-line international
sea carriers shall be subject to VAT at 1 2 % .
Q-35:Are other income of domestic shipping companies
earned on cancelled tickets subject to VAT?
A - 3 5 : All related income such as penalty or charges
earned on the cancellation of tickets by the clients of
domestic shipping c o m p a n i e s are subject to VAT.
Q-36: Can a taxpayer whose main/principal line of
business is subject to VAT and therefore VAT-registered,
likewise register under the VAT its secondary lines of
business which are exempt from VAT under Section 109 of
the Tax Code?
A - 3 6 : Yes. Section 109(2) of the Tax C o d e provides

"A VAT-registered person m a y elect that Subsection
(1) [referring to e x e m p t transactions] not apply to its sale
of g o o d s or properties or services." Perforce, if the m a i n /
principal line of business is subject to VAT a n d the taxpayer
e n g a g e d thereon is VAT-registered, said taxpayer m a y
elect that all his e x e m p t transactions will be placed within
the VAT s y s t e m .
Q-37: Can an international shipping company which

is engaged in other activities subject to VAT, i.e., leasing
of properties, etc., elect that all its business activities be
subject to VAT?
A - 3 7 : No. T h e main or principal business of an

international shipping c o m p a n y is VAT-exempt because it
is subject to the percentage tax under Title V of the Tax
C o d e . Therefore, it can not elect that said principal exempt
business be subject to VAT e v e n if its secondary businesses
are subject to VAT.
Q-38: How do we determine the main or principal

business of a taxpayer who is engaged in mixed business
activities?
A - 3 8 : In determining t h e main or principal business of a

taxpayer, we apply the p r e - d o m i n a n c e test. Under this test,
if m o r e than fifty percent ( 5 0 % ) of its gross selling price
and/or gross receipts c o m e s f r o m its business/es subject to
VAT, its main/principal business falls within the VAT system
making its status as a VAT p e r s o n . Otherwise, he can not
be c o n s i d e r e d as a VAT person eligible for the election
provided for under Section 109(2) of the Tax C o d e .
Q-39: How should the foreign international shipping
line register as a taxpayer with the Bureau of Internal
Revenue?
A - 3 9 : T h e d o m e s t i c shipping agent shall apply for a
Taxpayer Identification N u m b e r (TIN) for e a c h principal it
represents. Each principal is by itself a taxpayer separate
a n d distinct f r o m the agent and the other principals of the
s a m e agent. For purposes of registration and securing the
T I N of the principal/s, the shipping agent must submit the
A g e n c y A g r e e m e n t b e t w e e n him and his principal/s which
will suffice as t h e documentation requirement.
Q-40: How should the foreign international shipping

line file its tax returns?
A - 4 0 : T h e shipping agent shall file the pertinent tax
returns for e a c h principal using the TIN and name of the
particular principal. T h e shipping agent should not use its
o w n TIN in filing the returns of the principal it represents.
Q-41: Should the foreign international shipping line
issue "Receipts" and maintain "Books of Accounts" in
its own name (meaning using the name and TIN of the
principal)?
A - 4 1 : Yes. Whether the foreign international shipping
line operates business on its own or through a shipping
216
ANNOTATED
agent, it is required to issue receipts and maintain books of

accounts in its o w n name being a taxpayer in itself.
Q-42: In the case of transport by a domestic carrier
of passengers and/or cargoes from a domestic port to a
foreign port but passing through another domestic port
to load additional passengers and/or cargoes bound for
foreign destination, will the entire journey be subject to a
zero rate VAT?
A - 4 2 : Yes, the receipts from the entire journey from a
domestic port to a foreign port shall be subject to zero rate
VAT. However, if before proceeding to the foreign port the
carrier loads passengers and/or cargoes f r o m a domestic
port and unloads t h e m in another domestic port, t h e gross
receipts therefrom (domestic port to another domestic port)
shall be subject to 1 2 % VAT.
Q-43: If the purchaser of the domestic sea ticket

refused to voluntarily disclose the information that he is
a VAT-registered person, will the seller of the domestic
ticket be liable for non-indication in the official receipt of the
required information prescribed under Section 113(a) and
Section 237?
A - 4 3 : If the purchaser is a regular customer, t h e
seller has no valid e x c u s e for not k n o w i n g w h e t h e r the
purchaser is VAT-registered or not. As s u c h , it shall be
liable for any omission of t h e prescribed information in
the Receipt to be issued. Official receipts issued to VAT-
registered purchasers that do not reflect t h e information
prescribed under Sections 2 3 7 a n d 113 of t h e Tax C o d e
will not be allowed as sources of input tax credits on the
part of the VAT-registered purchasers. However, for n o n -
regular customers, the seller will not be held liable for s u c h
omissions.
Q-44: If an international carrier issues a contract of

carriage of goods from Davao to Los Angeles, USA but
said carrier picks up the goods only in Manila and therefore
sub-contracts to a domestic carrier the carriage service
from Davao to Manila, what are the tax liabilities of the two
(2) carriers in this continuing transaction?
A - 4 4 : In this scenario, the international carrier shall be

liable to pay the Gross Philippine Billing Tax (Income Tax)
a n d the c o m m o n carrier tax based on freight from Davao

to Los A n g e l e s w h e r e a s the domestic carrier shall be liable
for i n c o m e tax on the freight or service income from Davao
to Manila. However, said freight income of the domestic
carrier shall be subject to VAT at zero percent (0%), it
being service rendered to international carrier e n g a g e d in
international transport operation.
10. Issues affecting common carriers by air. Rev. M e m o .
Cir. No. 4 6 - 2 0 0 8 , on t h e other h a n d , clarifies several issue affecting
c o m m o n carriers by air a n d their agents relative to the revenue and
receipts f r o m transport of p a s s e n g e r s , goods/cargo and mail, and
f r o m e x c e s s b a g g a g e . Most of the clarifications in Rev. M e m o . Cir.
N o . 3 1 - 2 0 0 8 with respect to c o m m o n carriers by sea are repeated
in Rev. M e m o . Cir. N o . 4 6 - 2 0 0 8 as they also apply to c o m m o n
carriers by air. Only those clarifications applicable only to c o m m o n
carriers by air h a v e b e e n included below.
(1) Definition of terms

(a) International air carrier refers to a foreign airline
corporation doing business in the Philippines, having been
g r a n t e d landing rights in any Philippine port to perform
international air transportation services/activities or flight
operations f r o m the Philippines to a n y w h e r e in the world,
and vice versa, in t h e c a s e of an on-line carrier, or having
maintained business establishment, agent or representative
office in the Philippines for the sale of its o w n tickets/
p a s s a g e d o c u m e n t s or tickets/passage documents of
other airline c o m p a n i e s , which airline companies operate
without touching any Philippine port, in the case of an off-
line carrier. International air carrier includes both off-line
carrier and on-line carrier..
(b) Automated ticketing system refers to an
automated process that comprises the equipment,
programs and procedures which allow access to airline
data stored in a Customer Reservation System (CRS) or
airline reservation system for the automated issuance of
Standard Traffic Documents.
(c) Electronic ticketing refers to a method used to
d o c u m e n t the s a m e of passenger transportation services
(electronic ticket) and other related services (electronic
miscellaneous documents) without requiring the issuance
of paper value documents.
ANNOTATED
(d) Travel agentsrefers to travel agents w h o are duly

accredited with the International Air Transport Association
(IATA) w h o are authorized to issue in the Philippine tickets
of on-line and off-line international air carriers.
(e) IATA cargo accounts settlement system (CASS)
cargo agents refers to the duly accredited cargo agents
of IATA w h o are authorized to issue in the Philippines cargo
airway bills/passage d o c u m e n t s of on-line international
air carrier or an off-line international air carrier, and earn
commission income for their services.
(f) Refund refers to the r e p a y m e n t to the purchaser

of a portion of or the entire sale rate or charge for u n u s e d
carriage or service.
(2) Clarifications:
Q-3. Are on-line international air carriers subject to
VAT?
A - 3 : No. On-line international air carriers (international
air carriers that touch any port in the Philippines as part of
their carriage operation) are e x e m p t f r o m VAT. T h e y are
liable to the 3% p e r c e n t a g e tax on their gross receipts f r o m
outbound fares and freight, pursuant to Section 118 of the
Tax C o d e .
Q-4: What about domestic air carriers engaged in both

domestic and international transport operations; are they
subject to VAT on both operations?
A - 4 : No. Domestic air carriers are subject to VAT only
for services performed within the Philippines. T h e 1 2 % VAT
shall apply to income derived f r o m their d o m e s t i c operations
as mentioned under A - 2 . However, their international
transport operations involve services p e r f o r m e d both within
and b e y o n d the Philippines. Income f r o m services involving
the transport of p a s s e n g e r s , g o o d s and cargo f r o m t h e
Philippines to a foreign country are derived f r o m w i t h i n , but
are subject to 0% VAT pursuant to Section 108(8) of the
Tax C o d e . On the other h a n d , i n c o m e f r o m international
transport operations involving t h e transport of p a s s e n g e r s ,
g o o d s and cargo from a foreign country to the Philippines
are derived from services rendered outside the Philippines,
hence, exempt from business taxes (including the VAT)
due to lack of tax jurisdiction.
Q-5: In the case of transport by a domestic air carrier

(engaged in both domestic and foreign operations) of
passengers and/or cargo from a domestic port to a foreign
port but passing through another domestic port to load
additional passengers and/or cargo bound for foreign
destination, will the entire journey be subject to 0% VAT?
A - 5 : Yes. T h e receipts f r o m the entire journey from a

domestic port to a foreign port shall be subject to 0% VAT.
However, if before proceeding to the foreign port the carrier
loads p a s s e n g e r s and/or cargo from a domestic port and
unloads t h e m in another domestic port, the gross receipts
t h e r e f r o m (domestic port to another d o m e s t i c port) shall be
subject to 1 2 % VAT.
Q-17. If the purchaser of the domestic air tickets

refuses to voluntarily disclose the information that he is
a VAT-registered person, will the seller of the domestic
ticket be liable for non-indication on the OR of the required
information prescribed under Section 113(a) and Section
237 of Tax Code?
A - 1 7 . S e e A - 4 3 , Rev. Rev. M e m o . Cir. No. 31-2008,

supra.
Q-18: How about domestic air tickets sold through
electronic ticketing where no paper value documents are
issued; what will serve as a VAT receipt?
A - 1 8 : T h e domestic air carrier should provide a facility
to allow the buyer to d o w n l o a d the information in the airline
ticket electronically stored in its computer system and to
generate/print an OR which shall reflect the information
required under Sections 113 and 237 of the Tax Code.
This particular situation presupposes that the air carrier
has a BIR-approved computerized accounting system, or
c o m p o n e n t s thereof that include the system, that allows the
issuance of a computer-generated VAT OR. In the absence
of such facility, a manual VAT OR that complies with the
requirements under Sections 237 and 113 of the Tax Code
shall be issued by the domestic air carrier and shall be the
basis of the VAT-registered buyer in claiming input tax on
his purchase of carriage service.
Q-19. What is the basis of the 12% VAT on the
commission of general sales agents (GSAs) with respect
to their sales of domestic air tickets?
ANNOTATED
A-19. See A-23, Rev. M e m o . Cir. No. 31-2008, supra.
If the domestic airline ticket w a s sold by a s u b -

agent of the G S A of a domestic air carrier, the a m o u n t
to be remitted by the sub-agent to the G S A will depend
on whether the sub-agent is VAT-registered or not, as
illustrated below:
VAT- Non-VAT
registration registered
Sub-agent Sub-agent
Total Amount Collected from P1,120.00 P1,120.00

Buyer (inclusive of 12% VAT)
Less: Agent's Commission (2%) 20.00 20.00

12% VAT on Commission 2.40 20.00
Sub-Total P1,097.60 P1,100.00
Add: 10% WT on Agent's 2.00 2.00
Commission
Amount to be remitted to GSA P1,099.60 P1,102.00
T h e G S A shall issue BIR F o r m 2 3 0 7 to the s u b -

agent for the 1 0 % C W T o n t h e sub-agent's c o m m i s s i o n .
Sub-agents of a G S A shall present proofs of their BIR
registration (whether VAT or non-VAT) to t h e G S A for
verification purposes.
For the c o m m i s s i o n and t h e c o r r e s p o n d i n g output

VAT on c o m m i s s i o n withheld by the G S A / s u b - a g e n t s
f r o m their remittances to the d o m e s t i c air carrier/GSA,
the G S A / s u b - a g e n t s shall issue a receipt (be it a n o n -
VAT receipt if t h e agent is non-VAT registered or a VAT-
receipt if the agent is VAT-registered) to the domestic
air carrier/GSA shall be net of the C W T on the agent/
subagent's c o m m i s s i o n , w h i c h should be remitted by
the domestic air carrier/GSA to t h e BIR.
Q-21: In case of refund of domestic air ticket fare,

including the 12% VAT, to the purchaser for unused carriage
or service, can the domestic air carrier-seller deduct the
VAT previously remitted to the BIR from its VAT liability for
the succeeding return period?
A - 2 1 : T h e domestic air carrier-seller making a refund to

t h e purchaser of domestic air ticket shall require the latter
to surrender the u n u s e d flight c o u p o n , which shall be the
basis for the seller to record "Sales Returns" and deduct
the 1 2 % VAT previously remitted to the BIR on the refunded
ticket f r o m its output tax liability during the month/quarter
the refund w a s m a d e . A s u m m a r y list of tickets refunded
containing t h e n a m e , T I N , address of the purchasers,
domestic airline ticket n u m b e r and the a m o u n t refunded
including the VAT shall be prepared by the domestic air
carrier-seller on a monthly basis. S u b m i s s i o n thereof shall
be d o n e quarterly, together with the quarterly VAT return.
Q-23: Are sales of tickets to the government, its political

subdivisions, instrumentalities or agencies, and GOCCs by
a domestic airline with international operations to cover
transport of passengers and/or cargo from the Philippines
to a foreign country, and vice versa, subject to the 5% final
VAT withholding?
A - 2 3 : N o . T h e final VAT withholding is only a procedure
for collecting the VAT f r o m g o v e r n m e n t m o n e y payments and
will be i m p o s e d only if the service to be rendered is subject
to the 1 2 % VAT. Transport services f r o m the Philippines
to a foreign country is subject to 0% VAT, while transport
services f r o m any foreign country to the Philippines is
e x e m p t f r o m VAT d u e to lack of tax jurisdiction. Accordingly,
the sale of tickets to the g o v e r n m e n t representing services,
w h i c h are either zero-rated or exempt, are not subject to
the final VAT withholding.
Q-26: When a Philippine airline company whose
carrier carries cargo from a foreign pod t the Philippines
and transships it on a domestic-registered air carrier bound
for another Philippine port, is the income derived therefrom
subject to VAT?
A - 2 6 : Only the portion w h e r e the cargo is carried by
a domestic air carrier from one Philippine port to another
Philippine port is subject to VAT, which is assessed on
and payable by the Philippine company/domestic airline
company.
S E C . 119. Tax on Franchises. Any provision of general or

special law to the contrary notwithstanding, there shall be levied,
ANNOTATED
assessed a n d collected i n respect t o a l l f r a n c h i s e s o n r a d i o a n d / o r

television b r o a d c a s t i n g companies whose a n n u a l gross receipts o f
t h e preceding y e a r do n o t exceed T e n m i l l i o n pesos (P10,000,000),
subject to Section 236 of t h i s Code, a t a x of t h r e e p e r c e n t (3%) a n d
on gas a n d w a t e r u t i l i t i e s , a t a x of t w o p e r c e n t (2%) on t h e gross
receipts d e r i v e d f r o m t h e business covered b y t h e l a w g r a n t i n g t h e
f r a n c h i s e : Provided, however, T h a t r a d i o a n d t e l e v i s i o n b r o a d c a s t i n g
companies r e f e r r e d t o i n t h i s Section s h a l l h a v e a n o p t i o n t o b e
registered as a value-added taxpayer a n d pay the t a x due thereon:
Provided, further, T h a t once t h e o p t i o n i s exercised, s a i d o p t i o n s h a l l
be irrevocable, (as amended by R.A. No. 9337.)
The grantee shall file the r e t u r n w i t h , and pay the tax due
thereon to the Commissioner or his duly authorized representative,
i n accordance w i t h t h e p r o v i s i o n s o f S e c t i o n 128 o f t h i s Code, a n d t h e
r e t u r n s h a l l b e subject t o a u d i t b y t h e B u r e a u o f I n t e r n a l R e v e n u e ,
any provision of any existing l a w to the contrary n o t w i t h s t a n d i n g .
(as amended by R.A. No. 7416 and No. 8241.)
ANNOTATION
1. Franchise is a special privilege or right g r a n t e d to persons

or corporations by the State through t h e legislature subject to s u c h
conditions, regulations, and restrictions as t h e g o v e r n m e n t m a y
impose in the public interest. It m a y m e a n either the:
(1) Corporate, general, or primary franchise, which is the

right granted to a group of individuals to exist and act as a cor-
poration by virtue of a duly approved articles of incorporations,
or a charter pursuant to a special law creating the corporation,
(see Sec. 16, Art. XII, Constitution.); or
(2) Secondary or special franchise, which is the right grant-

ed to an individual, or to a corporation after its incorporation, to
exercise certain powers and privileges like the power to oper-
ate telephone c o m p a n i e s , electric light s y s t e m s , ice plants, a n d
other public utilities, (see Sec. 11, Ibid.) This is the franchise
referred to in Section 117.
2. A public utility has b e e n d e s c r i b e d as a business o r g a n i -

zation which regularly supplies the public with s o m e c o m m o d i t y
or service, as electricity, gas, water, transportation or telephone
or telegraph service. (51 C.J.S.) Public utilities are also k n o w n as
public service companies, (see C.A. No. 136; R.A. No. 776.)
3. Provinces and cities are specifically authorized by the Lo-

1
cal G o v e r n m e n t C o d e to impose a tax on business enjoying fran-
2
chise. (Sees. 127, 151 thereof.) T h e local franchise rax is intended
to be in addition to the franchise tax i m p o s e d by the national gov-
e r n m e n t on businesses w h i c h are holders of franchise.
4. T h e t e r m "franchise" has a m e a n i n g distinctly different
f r o m a "certificate of public c o n v e n i e n c e " w h i c h operators of public
utility vehicles m a y s e c u r e without securing a franchise, municipal
or legislative. T h e Constitution (see Sec. 1 1 , Art. XII thereof.) itself
s p e a k s of franchise separately f r o m "certificate or any other form
of authorization for the operation of a public utility." (Op. of Sec. of
Justice No. 3 3 , s. 1974.)
T h e franchise g r a n t e e s referred to under Section 119 only
refer to legislative franchise g r a n t e e s pertaining to "radio and/or
television broadcasting g a s a n d water utilities." If the franchise is
not e m b r a c e d by Section 119, the sale or e x c h a n g e of services
is subject to the VAT under Section 108. (BIR Ruling No. 140-99,
Sept. 9 , 1 9 9 9 . ) Franchise g r a n t e e s of electric utilities are subject to
VAT. (Sec. 108[A].)
5. As c o m m o n l y u n d e r s t o o d , the t e r m "gross receipts" means

t h e entire receipts without any deduction. In a case, the term "gross
receipts" in Section 2 2 7 (now Sec. 119.) w a s construed to mean
"gross e a r n i n g s , " thereby subjecting the uncollected revenues to
the franchise tax. (Phil. Long Distance Tel. C o . vs. Coll., 90 Phil.
6 7 6 ; see Escudero Electric Service v s . Tobias, L-23014, June 30,
1970.) Note, however, that the law s p e a k s of "gross receipts," not
of "gross receipts or e a r n i n g s . "
It has been administratively ruled that the term "gross receipts"
for franchise tax purposes, d o e s not include money w h i c h , in fact,
'It is denned by the Local Government Code ( R . A . N o . 7160.), as "a right or

privilege, affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and its political
subdivisions may impose in the interest of the public welfare, security and safety."
(Sec. 131[m] thereof.)
2
A s commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state." It is
not levied on the corporation simply for existing as a corporation, upon its property
or its income, but on its exercise of the rights or privileges granted to it by the gov-
ernment. Hence, a corporation need not pay franchise tax from the time it ceased to
do business and exercise its franchise. It is within this context that the phrase 'tax
on businesses enjoying a franchise" in Section 137 of the L G C should be interpreted
and understood. (National Power Corporation vs. City of Cabanatuan, 401 S C R A 259
[2003].)
ANNOTATED
belongs to another person. Thus, where 1 5 % of the gross billings

of a radio/TV broadcasting station represents agency commissions
paid directly by the advertisers to the advertising agency, the
franchise tax payable by the network should be based only on the
8 5 % actually remitted to it. (BIR Ruling No. 140, July 2 4 , 1990.)
6. Section 119 applies only to the franchises m e n t i o n e d . All
other franchise grantees except those under Section 119 are subject
to VAT under Section 108(A). Radio and television c o m p a n i e s ,
however, are given the option to register as VAT-taxpayers. O n c e
exercised, the option shall be irrevocable. Franchise grantees
subject to VAT are no longer liable to pay franchise tax.
7. VAT instead of franchise tax shall be "in lieu of all t a x e s " due
from a franchise grantee. However, "[a]ny provision of general or
special law to the contrary notwithstanding, all grantees of franchise
shall be subject to income tax levied under the Tax C o d e . " (Sec. 2,
Exec. Order No. 7 2 , Nov. 2 5 , 1986, w h i c h a m e n d e d Section 2 2 7 ,
now Section 119.)
8. T h e right to e x e m p t i o n f r o m local franchise tax must be

clearly established b e y o n d r e a s o n a b l e doubt. T h e "in lieu of all
t a x e s " clause in a franchise is not clear w h e t h e r it pertains to
exemption from local or national taxes or b o t h . This uncertainty
should be construed against t h e t a x p a y e r or franchise grantee if
it fails to prove that C o n g r e s s intended it to be e x e m p t f r o m t h e
payment of all kinds of taxes, both local a n d national. ( Q u e z o n City
vs. A B S - C B N Broadcasting Corporation, 5 6 7 S C R A 4 9 6 [2008];
Smart C o m m u n i c a t i o n s , Inc. v s . City of D a v a o , 5 6 5 S C R A 2 3 7
[2008].)
Note: T h e franchise tax on broadcasting c o m p a n i e s with yearly

gross receipts exceeding P10 million has b e e n abolished. T h e y
are now subject to VAT. (see Sec. 108[A].) H e n c e , with respect to
t h e m , the "in lieu of all t a x e s " clause has b e c o m e ineffective or
inoperative.
9. In the operation of a public utility, municipal corporations

act in a proprietary rather than a g o v e r n m e n t a l capacity. H e n c e , u n -
less expressly e x e m p t e d by law, they are subject to franchise tax.
SEC. 120. Tax on Overseas Dispatch, Message or Conver-

sation Originating from the Philippines. -
(A) Persons Liable. There shall be collected upon every
overseas dispatch, message or conversation transmitted from the
Philippines by telephone, telegraph, telewriter exchange, wireless
and other communication equipment services, a tax of ten percent

(10%) on the amount paid for such services. The tax imposed in this
Section shall be payable by the person paying for the services ren-
dered and shall be paid to the person rendering the services who is
required to collect and pay the tax within twenty (20) days after the
end of each quarter.
(B) Exemptions. The tax imposed by this Section shall not ap-
ply to:
(1) Government. Amounts paid for messages transmitted by
the Government of the Republic of the Philippines or any of its po-
litical subdivisions or instrumentalities;
(2) Diplomatic Services. Amounts paid for messages trans-
mitted by any embassy and consular offices of a foreign government;
(3) International Organizations. Amounts paid for messages
transmitted by a public international organization or any of its
agencies based in the Philippines enjoying privileges, exemptions and
immunities which the Government of the Philippines is committed to
recognize pursuant to an international agreement; and
(4) News Services. Amounts paid for messages from any
newspaper, press association, radio or television newspaper,
broadcasting agency, or newstickers services, to any other newspaper,
press association, radio or television newspaper broadcasting
agency, or newsticker service or to a bona fide correspondent, which
messages deal exclusively with the collection of news items for,
or the dissemination of news item through, public press, radio or
television broadcasting or a newsticker service furnishing a general
news service similar to that of the public press. (As amended by
Pres. Decree No. 1457.)
ANNOTATION
1. Exemptions limited. Section 120 explicitly limits the
exemption from the payment of the 10% overseas communications
tax to only four (4) entities. Enterprises registered with the Board
of Investments (BOI) and multinational companies with regional
headquarters located in the Philippines are not among those
enumerated. (BIR Ruling No. 035, March 8, 1993; BIR Ruling No.
416, Aug. 26, 1988.)
2. Government instrumentality. It is a corporation owned
or controlled by the government to promote certain aspects of the
economic life of the people. (Gonzales vs. Hechanova, 9 SCRA
ANNOTATED
230.) It is defined as an "agency of the National Government not

integrated within the department framework, vested with special
functions or jurisdiction by law, e n d o w e d with s o m e if not all corpo-
rate powers, administering special funds and enjoying operational
autonomy, usually a charter. This term includes regulatory a g e n -
cies, chartered institutions and g o v e r n m e n t - o w n e d or -controlled
corporations."
S E C . 121. Tax on Banks and Non-bank Financial Inter-

mediaries Performing Quasi-Banking Functions.* T h e r e
s h a l l b e collected a t a x o n gross r e c e i p t s d e r i v e d f r o m sources w i t h i n
the Philippines by all banks a n d non-bank financial intermediaries
i n accordance w i t h t h e f o l l o w i n g schedule:
(a) O n i n t e r e s t , c o m m i s s i o n s a n d d i s c o u n t s f r o m l e n d i n g
activities as w e l l as income f r o m financial leasing, on the basis of
r e m a i n i n g m a t u r i t i e s of i n s t r u m e n t s f r o m w h i c h such receipts are
derived:
M a t u r i t y p e r i o d i s f i v e y e a r s o r less 5%
M a t u r i t y period i s more t h a n f i v e years 1%
(b) O n d i v i d e n d s a n d e q u i t y s h a r e s a n d n e t i n c o m e o f s u b s i -
diaries 0%
(c) O n r o y a l t i e s , r e n t a l s o f p r o p e r t y , r e a l o r p e r s o n a l , p r o f i t s
f r o m exchange a n d a l l o t h e r i t e m s t r e a t e d a s gross i n c o m e u n d e r
Section 3 2 o f t h i s Code 5%
(d) O n n e t t r a d i n g g a i n s w i t h i n t h e t a x a b l e y e a r o n f o r e i g n
currency, debt securities, derivatives, a n d other s i m i l a r financial
instruments 5%
Provided, however, T h a t i n case t h e m a t u r i t y p e r i o d r e f e r r e d t o

i n p a r a g r a p h (a) i s s h o r t e n e d t h r u p r e t e r m i n a t i o n , t h e n t h e m a t u r i t y
period shall be reckoned to end as of the date of p r e t e r m i n a t i o n for
purposes o f c l a s s i f y i n g t h e t r a n s a c t i o n a n d t h e c o r r e c t r a t e o f t a x
shall be applied accordingly.
Provided, finally, That the generally accepted accounting

principles as m a y be prescribed b y t h e Bangko Sentral ng Pilipinas
for t h e b a n k o r n o n - b a n k f i n a n c i a l i n t e r m e d i a r y p e r f o r m i n g q u a s i -
b a n k i n g f u n c t i o n s s h a l l l i k e w i s e b e t h e basis f o r t h e c a l c u l a t i o n o f
gross receipts.
*Performing Quasi-Banking Functions, added by R.A. N o . 9238.

Nothing in this Code shall preclude the Commissioner from

imposing the same tax herein provided on persons performing
similar banking activities. (As amended by R.A. No. 9337 and No
9238.)
ANNOTATION
1. Definition of terms. T h e imposition of value-added tax

on services rendered by banks, non-bank financial intermediaries,
finance c o m p a n i e s a n d other financial intermediaries not performing
quasi-banking functions, w a s deferred to January 1, 2 0 0 0 . (see
Sec. 17, R.A. No. 7 7 1 6 , as a m e n d e d by R.A. No. 8241 and No.
8424.) R.A. No. 8 7 6 1 further delayed the imposition of the VAT for
another year until J a n u a r y 1, 2 0 0 1 and R.A. No. 9010, deferring it
for t h e last t i m e to J a n u a r y 1, 2 0 0 3 . R.A. No. 9238 repeals Section
1(b) of R.A. No. 9 0 1 0 and re-imposes the gross receipts tax on
banks, etc. beginning J a n u a r y 1, 2 0 0 4 .
Rev. R e g s . No. 9-2004 (June 2 1 , 2004) implements Sections

3 a n d 4 of R.A. No. 9 2 3 8 . T h e definitions in said regulations of
the t e r m s e n u m e r a t e d t h e r e u n d e r m a y be used to convey their
meaning:
(1) Financial institutions shall refer to banks, non-bank

financial intermediaries including quasi-banks and finance
c o m p a n i e s . This d o e s not, however, include insurance
companies.
(2) Banks or banking institutions shall refer to those
entities as defined in Section 3 of R.A. No. 8 7 9 1 , as a m e n d e d ,
otherwise k n o w n as the "General Banking Law of 2000."
T h e term "banks" or "banking institutions" are synonymous
and interchangeable and specifically include universal banks,
commercial banks, thrift banks (savings and mortgage banks,
stock savings and loan associations, and private development
banks), cooperative banks, rural banks, Islamic banks and
other classifications of banks as m a y be determined by the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP).
(3) Non-bank financial intermediaries shall refer to persons

or entities w h o s e principal functions include the lending,
investing to placement of funds or evidences of indebtedness
or equity deposited with t h e m , acquired by them or otherwise
coursed through t h e m , either for their own account or for the
account of others.
ANNOTATED
This includes all other entities regularly e n g a g e d in

the lending of funds or purchasing of receivables or other
obligations with funds obtained from the public through the
issuance, endorsement or acceptance of debt instruments
of any kind for their o w n account, or through the issuance of
certificates of assignment or similar instruments with recourse,
trust certificates, or of repurchase a g r e e m e n t s , whether any of
these means of obtaining funds from the public is d o n e on a
regular basis for only occasionally.
(4) Quasi-banking activities shall refer to the borrowing of

funds from 20 or more personal or corporate lenders at any
one time, through the issuance, e n d o r s e m e n t or acceptance
of debt instruments of any kind other than deposits for the
borrower's o w n account, or through the issuance of certificates
of assignment or similar instruments, with recourse, or of
repurchase a g r e e m e n t s for purposes of relending or purchasing
receivables and other similar obligations. However, c o m m e r c i a l ,
industrial and other non-financial c o m p a n i e s , which borrow
funds through any of theses m e a n s for t h e limited purpose
of financing their o w n n e e d s or t h e needs of their a g e n t s or
dealers, shall not be considered as performing quasi-banking
functions.
(5) Deposit substitutes shall refer to an alternative f o r m

of obtaining funds f r o m the public (the t e r m "public" m e a n s
borrowing f r o m 20 or more individual or corporate lenders
at any o n e time), other than deposits through the issuance,
e n d o r s e m e n t s , or a c c e p t a n c e of d e b t instruments for the
borrower's o w n account, for t h e purpose of relending or
purchasing of receivables and other obligations, or financing
their o w n needs or the n e e d s of their agent or dealer.
T h e s e instruments m a y include, but n e e d not be limited

to, bankers' a c c e p t a n c e s , promissory notes, r e p u r c h a s e
agreements, including reverse repurchase agreements
entered into by and b e t w e e n t h e B S P a n d any authorized agent
bank, certificates of a s s i g n m e n t or participation a n d similar
instruments with recourse. However, debt instruments issued
for inter-bank call loans with maturity of not more than five (5)
days to cover delinquency in reserves against deposit liabilities
including those between or a m o n g banks and quasi-banks
shall not be considered as deposit substitute debt instruments.
(6) Insurance companies shall refer to entities that under-

take for a consideration to indemnify other (insured) against
loss, d a m a g e or liability f r o m an u n k n o w n or contingent event.
(7) Financing companies shall refer to corporations except
banks, investment h o u s e s , savings a n d loan associations,
insurance c o m p a n i e s , cooperatives, and other financial
institutions organized or operating under other special laws,
w h i c h are primarily organized for the purpose extending
credit facilities to c o n s u m e r s a n d to industrial, commercial,
or agricultural enterprises, by direct lending or by discounting
or factoring c o m m e r c i a l p a p e r s or accounts receivables, or
by buying a n d selling contracts, leases, chattel mortgages,
or other e v i d e n c e s of indebtedness, or by financial leasing of
m o v a b l e s as well as i m m o v a b l e properties. (R.A. No. 5980, as
a m e n d e d by R.A. N o . 8556.)
(8) Financial leasing shall refer to the m o d e of extending

credit through a non-cancellation lease contract under which
the lessor p u r c h a s e s or a c q u i r e d , at the instance of the lessee,
machinery, e q u i p m e n t , motor vehicles, appliances, business
a n d office m a c h i n e s , and other m o v a b l e or i m m o v a b l e property
in consideration of t h e periodic p a y m e n t by the lessee of a
fixed a m o u n t of m o n e y sufficient to amortize at least 7 0 % of
the purchase price or acquisition cost, including any incidental
e x p e n s e s a n d a margin of profit over an obligatory period of not
less t h a n t w o (2) years during w h i c h the lessee has the right to
hold a n d use the leased property with the right to expense the
lease rentals paid to the lessor a n d bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no
obligation or option on his part to purchase the leased property
f r o m the owner-lessor at the e n d of the lease contract. (R.A.
No. 5980 as a m e n d e d by R.A. No. 8556.)
A finance lease is a lease that transfers substantially all the

risks and rewards incident to ownership of an asset. Title may
or m a y not eventually be transferred.
(9) Operating lease shall refer to a lease other than finance
lease of a finance company.
(10) Interest income shall include interest and discounts
earned on loans and investment transactions.
(11) Securities shall include shares of stock in a corporation
and rights to subscribe for or to receive such shares; and
bonds, debentures, notes or certificates, or other evidence of
ANNOTATED
indebtedness issued by a corporation, including those issued

by the government or political subdivisions thereof, with interest
coupons or in registered f o r m .
(12) Government securities shall refer to securities
issued by the Republic of the Philippines or any of its agencies,
instrumentalities, and political subdivisions.
(13) Private securities shall refer to securities other than
government securities.
(14) Gross receipts shall refer to the c o m p e n s a t i o n for all
financial and non-financial services, or combination thereof,
[exclusive of the value a d d e d tax] performed by financial
institutions within the Philippines, which include:
(a) Financial intermediation service fee;
(b) Financial leasing income;
(c) Rentals on properties, real or personal;
(d) Royalties;
(e) C o m m i s s i o n s ;
(f) Trust fees;
(g) Estate planning fees;
(h) Service f e e s ;
(i) Other c h a r g e s or fees received as c o m p e n s a t i o n
for services;
(j) Net trading gains;
(k) Net foreign e x c h a n g e gains;
(I) Gain on sale or r e d e m p t i o n of investments;
(m) Net gain f r o m the sale of properties acquired
through foreclosure lodged under the a c c o u n t "Real and
Other Properties O w n e d a n d A c q u i r e d " ( R O P O A ) or under
any other appropriate account, w h i c h is m e a s u r e d by the
difference b e t w e e n the selling price or t h e consideration
received for such sale a n d the carrying cost or book value
of the asset at the time of sale as d e t e r m i n e d in a c c o r d a n c e
with the generally a c c e p t e d accounting principles
prescribed by the B S P for b a n k s and non-bank financial
intermediaries performing quasi-banking functions or by
the Securities and E x c h a n g e C o m m i s s i o n ( S E C ) for other
financial intermediaries; a n d
In determining gross receipts, any a m o u n t withheld by the

payor of the income as taxes, i.e., on rentals, interest, etc., shall
f o r m part thereof under the doctrine of constructive receipt of
income. (Sec. 2, thereof.)
2. T h e gross receipts tax is based on the gross receipts
w h e t h e r derived f r o m banking or non-banking operations. "Gross
receipts" is not the s a m e as "gross e a r n i n g s . " "Receipts" means
a m o u n t actually received, (see Rev. R e g s . No. 12-80 governing
taxation of certain income derived from certain banking activities,
A p p e n d i x "N".)
T h e t e r m "gross receipts" in t h e a b s e n c e of any statutory
definition of the t e r m must be taken to include the "whole, entire,
t o t a l " receipts without any d e d u c t i o n . Interest, as part of gross
receipts for gross receipts tax p u r p o s e s , refers to the entire interest
e a r n e d a n d o w n e d by the bank without any deduction, even if
subject to t h e final tax a n d e x c l u d e d f r o m taxable gross income."
(China Banking Corporation v s . Court of A p p e a l s , 4 0 3 S C R A 634
[2003]; C o m m . v s . Citytrust Investment Phils., Inc., 503 S C R A 398
[2006].)
3 . A bank m a y be subject to tax as a banking institution and
also to the v a l u e - a d d e d tax as dealer in securities (Sec. 108[A].)
unless the dealing in securities is only incidental to its banking
business. T h e interest e a r n e d by a bank f r o m its purchase from
the g o v e r n m e n t of P W and ED B o n d s issued under R.A. No. 1000
is subject to t h e 5% gross receipts tax. (see BIR Ruling, March 26,
1974.)]
4. Savings and loan associations are considered non-bank
financial intermediaries as defined under Section 2.3 of Rev. Regs.
No. 9-2004. However, the 5% G R T on their interest income from
their lending activities can be charged to the borrower as part of
the cost of service. (BIR Ruling No. DA-571-06, Sept. 22, 2006.)
P a w n s h o p s should be treated as non-bank financial intermediaries.
(First Planters P a w n s h o p , Inc. vs. C o m m . , 560 S C R A 606 [2008].)
5. Private development banks (see Sec. 10, R.A. No. 4893,
as a m e n d e d by Pres. Decree No. 119.) and the Land Bank of the
Philippines (see Sec. 98, R.A. No. 3844, as amended [Code of
Agrarian Reforms].) are e x e m p t from the gross receipts tax.
6. Presidential Decree No. 2026 added paragraph (f) to
the enumeration of several tax exemptions and privileges not
abolished by Presidential Decree No. 1955, in effect, restoring all
tax exemptions and/or preferential tax treatment previously enjoyed
ANNOTATED
by rural banks prior to their abolition by Presidential Decree No.

1955, which took effect on October 15, 1984. Presidential Decree
No. 2026 is explicit that the tax exemption benefits which w e r e
restored by said decree shall apply only to rural banks w h o s e
net assets are less than P30,000,000 and the s a m e shall only be
enjoyed for a period of five (5) years f r o m the date of its effectivity
which is February 3, 1986, subject to further extension as may be
recommended by the Secretary of Finance.
In other words, the restoration of the aforementioned tax
exemption and/or preferential tax privileges shall be effective only
from and after February 3, 1986. (Rev. M e m o . Cir. No. 9-86 dated
May 8 , 1 9 8 6 . ) However, the said tax e x e m p t i o n s and/or preferential
tax privileges of rural banks w e r e again w i t h d r a w n by and u p o n the
effectivity of Executive Order No. 93 on M a r c h 10, 1987.
In view thereof, effective March 10, 1987, rural banks b e c a m e

subject to the corporate income tax of 3 5 % (now 3 5 % / 3 0 % ) , [to t h e
gross receipts tax (Sec. 121.),] to the 2 0 % final withholding tax on
interest income from deposits with c o m m e r c i a l banks, a n d to t h e
5% (now 6%) capital gains tax based on t h e selling price as s h o w n
in the mortgage foreclosure sales, (par. 3 . 1 , Rev. M e m o . Order No.
29-86.) (BIR Rulings No. 2 4 5 , Dec. 1 1 , 1989 and No. 0 8 8 , M a y 17,
1990.)
7. Effective January 1, 2 0 0 0 , all thrift banks, w h e t h e r in

operation as of that date or thereafter, shall no longer enjoy tax
exemption as provided under Section 17 of R.A. N o . 7 9 0 6 , thereby
subjecting all thrift banks to taxes, fees a n d c h a r g e s in t h e s a m e
manner and at the s a m e rate as b a n k s and other financial inter-
mediaries. Pursuant to Section 3.2(c) of R.A. N o . 8 7 9 1 , otherwise
known as "The General Banking L a w of 2 0 0 0 , " thrift b a n k s shall
e m b r a c e the following: (1) Savings a n d m o r t g a g e banks, (2) Stock
savings and loan associations, a n d (3) Private d e v e l o p m e n t banks,
as defined in R.A. No. 7 9 0 6 (Thrift B a n k s Act of 1995). (see R M C
No. 7-2001.)
Thrift banks are primarily intended to e n c o u r a g e further savings

and meet the credit needs of households and small and m e d i u m
enterprises.
8. Computation of gross receipts tax. T h e 5% tax on gross

receipts is imposed on banks a n d non-bank financial intermediaries
with respect to their gross receipts w h i c h consist of royalties, rentals
of property, real or personal, profits f r o m e x c h a n g e a n d all other
items treated as gross income under Section 32.
In c o m p u t i n g the correct gross receipts subject to tax, the

following basic formula m a y be u s e d :
Gross R e v e n u e
Interest Income Pxx

A d d : Other Income xx
Total G r o s s R e v e n u e Pxx
A d d / D e d u c t : Beginning Balances of:
Acrrued Income Receivable Pxx
A c c r u e d Interest Receivable xx
Ending Balance of U n e a r n e d Income xx xx
Less: Beginning Balances of:
U n e a r n e d Interest and Discounts xx
A d v a n c e Rentals on Bank Premises/Safety
Deposit B o x / E q u i p m e n t xx
Ending Balances of:
A c c r u e d Interest Receivable-Local xx
A c c r u e d Interest Receivable-Foreign xx xx
G r o s s Receipts Pxx
Less: Tax E x e m p t Income:
Equity in Net Income of Subsidiaries Pxx
Unrealized Income xx
Gross Income outside the Philippines xx
Dividends from Domestic Corporations xx xx
Taxable Gross Receipts Pxx
Less: Gross Receipts Subjected to G R T xx
Gross Receipts Still Subject to G R T Pxx
(Chap. V l - C , R A M O No. 2-2000.)
In the case of financial leasing, taxable gross receipts

shall consist of the interest income only whereas in the case of
transactions under operating lease agreements, the gross receipts
is the gross rental.
9. Sale of receivables. Such sale, even on a without
recourse basis, is not subject to VAT as it may be considered as a
financing arrangement and part of traditional banking or financial
ANNOTATED
service. The net trading gains derived by banks and non-bank

financial intermediaries are subject to GRT. (BIR Ruling No. DA-
109-10, June 25, 2010.)
10. Computation of net trading gain. In computing for the net
trading gain within the taxable year on items of income provided in
Section 121(d), the figure to be reported in the monthly percentage
tax return (GRT) shall be the cumulative total of the net trading
gain/loss since the first month of the applicable taxable year less
the figures already reflected in the previous months of the s a m e
taxable year. The net trading loss on items of income provided in
(d) may only be deducted f r o m net trading gain on items of income
provided in (d) but not from any other items of gross receipt to arrive
at the total monthly gross receipts tax d u e .
ILLUSTRATIONS:
A B C Bank has the following income/loss for t h e m o n t h of

March 2 0 1 1 :
Interest Income with Maturity of less than
five years P50,000.00
Rentals 50,000.00
Net trading Loss (10,000.00)
For the month of M a r c h 2 0 1 1 , A B C Bank is liable for G R T

amounting to P5.000.00 c o m p u t e d as follows:
Interest Income with Maturity of Less than
Five years P50.000.00
Multiply by G R T Rate 5% P2.500.00
Rentals P50.000.00
Multiply by G R T Rate 5% 2.500.00
TOTAL P5,000.00
For the month of April 2 0 1 1 , A B C Bank has the following

income:
Interest Income with Maturity of less than

five years P100,000.00
Rentals 50,000.00
Net trading gain 20,000.00
For the m o n t h of April 2 0 1 1 , A B C Bank is liable for G R T

a m o u n t i n g to P8.000.00 c o m p u t e d as follow:
Interest Income with Maturity of Less than

Five years P100,000.00
Multiply by G R T Rate 5% P5.000.00
Rentals P50.000.00
Multiply by G R T Rate 5% 2,500.00
Net Trading G a i n for April 2011 P20.000.00
Less: Net Trading Loss for
M a r c h 2011 (10,000.00)
A d j u s t e d Net Trading Gain P10,000.00
Multiply by G R T Rate 5% 500.00
TOTAL P8,000.00
Furthermore, if for t h e s a k e of this illustration, A B C Bank

shall h a v e by the e n d of D e c e m b e r 2 0 1 1 , a cumulative net
trading loss of P50.000.00, said trading loss can no longer be
carried over to taxable year 2 0 1 2 and deducted against any
trading gain e a r n e d on any taxable year other than the year it
w a s incurred.
11. Pretermination.
(1) T h e pretermination of a long-term loan by the borrower,
subjects, as far as the Bureau of Internal Revenue is concerned,
the lending institution to the deficiency tax arising from the
pretermination as it is a direct liability of the lender although
the borrower has agreed to pay or reimburse any amount that
the lender may be required to pay. (BIR Ruling No. 166-86,
Sept. 11, 1986.) After paying the deficiency tax, the lender may
enforce reimbursement against the borrowers as provided in
the contract.
(2) In case of pretermination, the maturity period shall be

reckoned to end as of the date of pretermination for purposes
of classifying the transaction and applying the correct rate of
tax. A n y adjustment in tax due caused by preterminations of
existing agreements shall be reflected as a separate item in the
G R T return covering all transactions of the month in which the
preterminations take place.
ANNOTATED
ILLUSTRATIONS:
Mr. A executed on November 10, 2006 a long-term loan
from Bank B in the amount of P5,000.000 payable within ten
(10) years with the first installment due on or before November
10, 2007 and the succeeding yearly installment on the same
date of the subsequent years. A s s u m e that on N o v e m b e r 10,
2 0 1 1 , the loan w a s preterminated and that the interest paid and
other fees received from year 2 0 0 7 up to year 2 0 1 1 , amounting
to P100,000 annually, w e r e received and declared by Bank B
correctly and the applicable gross receipts taxes w e r e paid as
follows:
Year Remaining A m o u n t of Applicable Gross receipts tax

Maturity interest, etc. tax rate
2007 9 P100,000 1% P1.000
CO
2008 100,000 1% 1,000

2009 7 100,000 1% 1,000
2010 6 100,000 1% 1,000
2011 5 100,000 5% 5,000
Total gross receipts tax P9,000
In 2 0 1 1 , u p o n pretermination, the loan a g r e e m e n t shall be

reclassified and the correct gross receipt tax, including prior
years, shall be r e c o m p u t e d on t h e basis of t h e n e w category as
s h o w n hereunder:
Year Remaining A m o u n t of Applicable G r o s s receipts tax

Maturity interest, etc. tax rate
2007 4 P100,000 5% P5.000

2008 3 100,000 5% 5,000
CM
2009 100,000 5% 5,000

2010 1 100,000 5% 5,000
2011 Less than 100,000 5% 5.000
1 year P25,000
Total gross receipts tax P25.000
Less: Gross receipts tax
Previously paid 9,000
Gross receipts tax due as
recomputed P16,000
(Sec. 5, Rev. Regs. No. 9-2004.)
12. T h e 20% final withholding tax on the bank's interest income

should not f o r m part of taxable gross receipts for purposes of
c o m p u t i n g t h e gross receipts tax of a banking institution. The BIR
claims that the non-inclusion of the 2 0 % final withholding income
tax f r o m the gross interest income for purposes of the gross receipts
tax operates as an e x e m p t i o n f r o m tax.
T h e Court of A p p e a l s held that t h e non-inclusion is not actually
an e x e m p t i o n under the law but it is, in effect, an interpretation made
by t h e Court of Tax A p p e a l s that the 2 0 % final withholding income
tax is not within the contemplation of the phrase "gross receipts
derived f r o m sources within t h e Philippines" under the statute. In
other w o r d s , while the law d o e s not provide for any exemption,
t h e Court of Tax A p p e a l s merely interpreted the meaning of "gross
receipts." T h e w o r d "receipt" refers to "acquisition," "income," or
"gain." T h e 2 0 % withholding tax as income of the Government
and not that of the bank's, d o e s not fall within the phrase "gross
receipts." ( C o m m . vs. Solidbank, C A - G . R . SP No. 5 4 5 9 9 , July 18,
2 0 0 0 ; see also C o m m . v s . China Banking Corporation, CA-G.R.
SP N o . 5 0 7 9 0 , Oct. 16, 2 0 0 0 ; China Banking Corporation vs.
C o m m . , C A - G . R . S P No. 5 1 6 3 7 , Dec. 1 1 , 2 0 0 0 ; C o m m . vs. Rizal
C o m m e r c i a l B a n k i n g Corporation, C A - G . R . SP No. 59524, Dec. 27,
2000.)
13. Income derived by offshore banking units under the

e x p a n d e d foreign currency deposit system (Sec. 28[A, 4, 7].) are
e x e m p t f r o m the 5% gross receipts tax. (BIR Ruling No. 225, A u g .
17, 1992.)
14. T h e Bangko Sentral ng Pilipinas (BSP) is neither a bank
nor a non-bank financial intermediary performing quasi-banking
functions, nor does it fall under the t e r m "other non-bank financial
intermediaries." Neither can it be considered as being engaged
in the performance of similar banking and financing activities.
Consequently, the G R T as prescribed in Sections 121 and 125
does not apply to revenue realized by the BSP. (Rev. Regs. No.
8-2008.)
S E C . 122. Tax on Other Non-Bank Financial Inter-

mediaries.* There shall be collected a tax of five percent (5%) on
the gross receipts derived by other non-bank financial intermediaries
doing business in the Philippines, from interest, discounts and all
*"Tax on Finance Companies" in old provision.

ANNOTATED
other items treated as gross income under this Code: Provided, That
interests, commissions and discounts from lending activities, as
well as income from financial leasing, shall be taxed on the basis of
remaining maturities of the instruments from which such receipts
are derived, in accordance with the following schedule:
Maturity period is five (5) years or less 5%

Maturity period is more than five (5) years 1%
Provided, however, That in case the maturity period is shortened

thru pretermination, then the maturity period shall be reckoned to
end as of the date of pretermination for purposes of classifying the
transaction and the correct rate of tax shall be applied accordingly.
Provided, finally, That the generally accepted accounting
principles as may be prescribed by the Securities and Exchange
Commission for other non-bank financial intermediaries shall
likewise be the basis for the calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from
imposing the same tax herein provided on persons performing
similar financing activities, (as amended by R.A. No. 9238.)
ANNOTATION
1. See Annotation No. 1 to Section 121. Finance companies

are now subject to value-added tax.
2. Republic Act No. 5980 (Financing Company Act) defines
"financing companies" as referring to "corporations, or partnerships,
except those regulated by the Central Bank of the Philippines, the
Insurance Commissioner and the Cooperatives Administration
3
Office, which are primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial or
agricultural enterprises, either by discounting or factoring com-
mercial papers or accounts receivable, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of indeb-
tedness, or by leasing of motor vehicles, heavy equipment and
industrial machinery, business and office machines and equipment,
appliances and other movable property." (Sec. 3[A] thereof.)
3. No company can operate as a finance company unless
organized in accordance with the provisions of Republic Act No.
3
N o w , Cooperatives Development Authority under the Office of the President.
5980. A lending investor cannot be treated or classified for internal

revenue tax purposes as a financing c o m p a n y and wee versa.
[4. T h e 5% gross receipts tax under Section 122 is collectible
on all finance c o m p a n i e s doing business in the Philippines from
interest, discounts a n d all other items treated as gross income under
t h e Tax C o d e . Accordingly, its income derived from investing the
excess funds in short-term market placements through commercial
banks constitutes i n c o m e ; h e n c e , subject to the 5% gross receipts
tax under said section.
T h e fact that it has b e e n subjected to the 2 0 % final withholding

tax under Section 57(A) is immaterial. Besides, the withholding tax
is i m p o s e d under Title II of the Tax C o d e while the finance tax is
provided under Title V thereof. (BIR Ruling No. 223, Nov. 2, 1989.)
Since the withholding tax only a n s w e r s for the income tax liability
of the recipient/income earner, the particular income received,
inclusive of the a m o u n t of withholding tax withheld by the payor,
shall still be subject to the p e r c e n t a g e tax, if applicable. The gross
receipts tax shall be b a s e d on the a m o u n t of income actually or
constructively received during a taxable period, which is equivalent
to the e c o n o m i c benefit derived f r o m the income payment. Hence,
not only should the a m o u n t actually received form part of gross
receipts for purposes of the gross receipts tax, but also the amount
constructively received corresponding to the final withholding tax
w h i c h w a s used in extinguishing the income tax liability of the
recipient on the i n c o m e received. In fine, the gross receipts tax for
percentage tax purposes is inclusive of the final withholding tax
applying the doctrine of "constructive receipt" of income.
For instance, in the case of a bank or finance company that

earns interest income or discount f r o m government securities and
other deposit substitutes which has been subjected to 2 0 % final
withholding tax, the basis of the gross receipts tax imposed under
Sections 121 and 122 of the Tax C o d e of 1997 is the gross amount
of interest without deduction for the 2 0 % withholding tax. (RMC No.
57-2002.)]
[5. A credit card company generates revenues principally from
discounts granted by business establishments selling goods and
services and incidentally from fees paid by the cardholders. The
c o m p a n y finances the cardholder for the latter's purchases on
credit, since said purchases are paid by the company prior to billing
the cardholder. Accordingly, these activities fall within the purview
of finance companies.
ANNOTATED
Pursuant to Section 122, the tax rate applied on discounts,

among others, is based on the remaining maturities of the
instruments from which said discount is derived by the financing
company, or person performing similar financing activities. It is the
charge sales slip (issued by the establishment to the company
evidencing sales to the cardholder) in relation to their agreement
in the instrument that generates the revenues which are taxable
at various rates pursuant to Section 122. As the establishments
are required to send the charge sales slips to the c o m p a n i e s for
payment within 15 to 30 d a y s from the date of the invoice, and
from the receipt thereof payment is m a d e within 48 hours, it can
be said that the s a m e is a short-term maturity (less than 2 years)
instrument; hence, subject to the 5% gross receipts tax. (BIR Ruling
No. 1 5 1 , A u g . 16, 1990.)]
6. A sale and leaseback transaction in acquiring capital equip-

ment between a company/borrower and a financing company
partakes the nature of a sale of personal property f r o m t h e former
to the latter. Hence, the b o r r o w e r / c o m p a n y is subject to VAT on
its sale of said e q u i p m e n t pursuant to Section 106(A). On the
part of the financing company, rental received f r o m its leaseback
transaction is not subject to VAT but subject to 5% gross receipts
tax since it is treated as part of its gross i n c o m e under Title V of t h e
Tax C o d e . Besides, the lease rental during the t e r m of t h e lease
covers principal and interest p a y m e n t of the credit e x t e n d e d by
the finance company. S u c h being t h e case, t h e VAT on t h e sale of
equipment, if taxable, p a s s e d on by t h e lessee/borrower shall be
recorded by the finance c o m p a n y as part of its e x p e n s e or cost.
(VAT Ruling No. 0 5 1 , M a y 2 9 , 1991.)
7. Taxable gross receipts. In t h e c a s e of financial leasing,

the taxable gross receipts shall consist only of interest income
(recovery of principal not included). However, in the c a s e of
transactions under operating lease a g r e e m e n t s , t h e gross receipts
is the gross rental a m o u n t . W h e t h e r the lease transactions is
"finance l e a s e " or "operating l e a s e " shall be d e t e r m i n e d by the
contents of the d o c u m e n t evidencing the lease a g r e e m e n t or, in
short, the substance of the a g r e e m e n t rather t h a n the f o r m u s e d to
evidence such a g r e e m e n t b e t w e e n the lessor a n d the lessee. (Sec.
4, Rev. Regs. No. 9-2004.)
8. Imposition of gross receipts tax on pawnshops. "Pursuant

to the provisions of Section 4 of R.A. No. 9 2 3 8 w h i c h restored a n d
a m e n d e d Section 122 of the Tax C o d e a n d thereby reimposing
Gross Receipts Tax on Other N o n - B a n k Financial Intermediaries,

the C o m m i s s i o n e r is authorized to impose the s a m e tax on persons
performing similar financing activities particularly as those falling
within the definition of the t e r m 'Non-bank Financial Intermediaries'
under Sec. 2.3 of Rev. R e g s . No. 9-2004. By virtue thereof, the
C o m m i s s i o n e r of Internal R e v e n u e t h u s , classified the services
rendered by p a w n s h o p s as those activities being performed by
Non-bank Financial Intermediaries; h e n c e , subject to the 5% GRT.
This effectively r e m o v e d the services rendered by pawnshops

f r o m the VAT s y s t e m unless otherwise a similar legislation is
e n a c t e d to place it under the VAT s y s t e m . " (Rev. Regs. No. 10-
2004.)
9. T h e main activities of a special purpose vehicle (SPV)

under R.A. No. 9 1 8 2 (the Special Purpose Vehicle Act of 2002) are
akin to the principal activities of non-bank financial intermediaries,
particularly of financing c o m p a n i e s w h i c h are primarily organized
for the purpose of extending credit by discounting or factoring
c o m m e r c i a l papers or a c c o u n t s receivable, or by buying and selling
contracts and other e v i d e n c e s of indebtedness. T h u s , a domestic
corporation organized as a S P V w h o s e primary purpose is to invest
in or acquire non-performing assets (NPAs) of financial institutions
(FIs) will be treated for tax purposes as "other non-bank financial
intermediary subject to G R T under Section 122." (BIR Ruling No.
D A - 2 9 8 - 0 7 , M a y 10, 2007.)
10. Filing and payment of gross receipts tax. The G R T

d u e shall be paid monthly within 20 d a y s following the end of the
taxable month using BIR Form 2 5 5 1 M to the concerned A A B of the
R D O / L T D O LT A I D I w h e r e the taxpayer is registered or required
to be registered. If the taxpayer is an E F P S taxpayer, the rules and
regulations governing the filing of returns and payment of taxes
under E F P S shall be o b s e r v e d . (Sec. 6, Rev. Regs. No. 9-2004.)
S E C . 123. Taxes on Life Insurance Premiums. - There

shall be collected from every person, company or corporation (except
purely cooperative companies or associations) doing life insurance
business of any sort in the Philippines a tax of two percent (2%) of the
total premiums collected, whether such premiums are paid in money,
notes, credits or any substitute for money; but premiums refunded
within six (6) months after payment on account of rejection of risk or
returned for other reason to a person insured shall not be included
ANNOTATED
in the taxable receipts; nor shall any tax be paid upon reinsurance
by a company that has already paid the tax; nor upon premiums
collected or received by any branch of a domestic corporation, firm
or association doing business outside the Philippines on account of
any life insurance of the insured who is a nonresident, if any tax on
such premiums is imposed by the foreign country where the branch
is established nor upon premiums collected or received on account of
any reinsurance, if the insured, in case of personal insurance, resides
outside the Philippines, if any tax on such premiums is imposed by
the foreign country where the original insurance has been issued
or perfected; nor upon that portion of the premiums collected
or received by the insurance companies on variable contracts (as
4
defined in Section 232[2] of Presidential Decree No. 612), in excess
of the amounts necessary to insure the lives of the variable contract
owners. 64s amended by Pres. Decree No. 1994, and R.A. No. 7616
and No. 10001.)
Cooperative companies or associations are such as are conducted
by the members thereof with the money collected from among
themselves and solely for their own protection and not for profit.
SEC. 124. Tax on Agents of Foreign Insurance Companies.

Every fire, marine or miscellaneous insurance agent authorized
under the Insurance Code to procure policies of insurance as he may
have previously been legally authorized to transact on risks located
in the Philippines for companies not authorized to transact business
in the Philippines shall pay a tax equal to twice the tax imposed in
Section 123: Provided, That the provisions of this Section shall not
apply to reinsurance: Provided, however, That the provisions of this
Section shall not affect the right of an owner of property to apply for
and obtain for himself policies in foreign companies in cases where
said owner does not make use of the services of any agent, company
or corporation residing or doing business in the Philippines. In all
cases where owners of property obtain insurance directly with the
foreign companies, it shall be the duty of said owners to report to the
Insurance Commissioner and to the Commissioner each case where
insurance has been so effected, and shall pay the tax of five percent
(5%) on premiums paid, in the manner required by Section 123. (as
amended by Exec. Order No. 273.)
4
N o w Presidential Decree No. 1460, "The Insurance Code of 1978."
Sees. 123-124 OTHER P E R C E N T A G E TAXES 243
ANNOTATION
1. T h e t e r m insurance company includes every person,

company, corporation or association, holding a certificate of
authority f r o m the Insurance C o m m i s s i o n e r to engage in the
business of underwriting insurance, (see Sees. 6, 186, P.D. No.
1460 [Insurance C o d e of 1978].) Banking institutions cannot directly
e n g a g e in insurance business as insurers, (see Sec. 54, R.A. No.
8 9 7 1 [the General Banking L a w of 2000].)
Section 123 applies only to p r e m i u m s collected by life insurance

c o m p a n i e s . T h e services of non-life insurance c o m p a n i e s (except
their crop insurances) including surety, fidelity, indemnity and
bonding c o m p a n i e s are subject to VAT under Section 108(A).
2. To be subject to the p r e m i u m tax, it is enough that the

insurer is doing life insurance business in the Philippines, irrespec-
tive of t h e place of its organization or establishment, or the place of
p a y m e n t of the p r e m i u m s . T h e law d o e s not contemplate premiums
collected in t h e Philippines. To a p p r o v e the position that advances
of p r e m i u m s m a d e in a foreign country are to be d e e m e d to have
b e e n paid there, will e n a b l e foreign insurers to e v a d e that tax by
contriving to require that p r e m i u m p a y m e n t s shall be m a d e at their
h e a d offices, (see Manufacturers Life Ins. Co. vs. Meer, 89 Phil.
358.)
But p r e m i u m s on non-life insurance policies issued abroad by
a branch in t h e foreign country of a domestic non-life insurance
c o m p a n y are not subject to p r e m i u m s imposed by Section 1 2 1 ,
although the c o m p a n y is a domestic corporation doing insurance
business in the Philippines. (BIR Ruling No. 006, J a n . 20, 1989.)
It has b e e n administratively ruled that the Philippine Deposit
Insurance Corporation (PDIC) created by law (R.A. No. 3591.) to
insure the deposits of all banks which are entitled to the benefit
of insurance under the Act does not c o m e within the purview of
"doing an insurance b u s i n e s s " considering that the corporation is
an instrumentality created by the government for the public welfare,
and is, therefore, not organized for private profit. (BIR Ruling No.
074-86, June 17, 1986.)
3. T h e 5% premium tax payable by an insurance company
is computed on the basis of the net premium received on policies
issued, that is, gross premiums received less returned premiums
on account of rejection of risk or for other reasons and reinsurance
premiums c e d e d , whether such premiums are paid in money,
244 THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sees. 123-124
ANNOTATED
notes, credits, or any substitute for money. If the government has a

counterpart share in the cost of insurance premiums, such share is
not exempted from the 5% premium tax. (BIR Ruling 0 5 1 , April 2 1 ,
1991.)
4. Reinsurance premiums remitted to a foreign re-insurance
company by a domestic insurance corporation are taxable. They
are considered income of the former derived from sources within
the Philippines. ( H o w d e n and Co., Ltd. v s . Coll., L-19392, April 14,
1965; British Traders, Inc., Co., Ltd. vs. C o m m . , L - 2 0 5 0 1 , April 30,
1965; C o m m . vs. Phoenix A s s n . Co., Ltd., L-19727, M a y 2 0 , 1 9 6 5 . )
5. Under Section 232(2) of the Insurance C o d e (now Pres.
Decree No. 1460 ), the t e r m variable contract mentioned in Section
123 means any policy or contract on either g r o u p or on individual
basis issued by an insurance c o m p a n y providing for benefits or
other contractual p a y m e n t s or values t h e r e u n d e r to vary so as to
reflect investment results or any s e g r e g a t e d portfolio of institutions
or of a designated separate account in w h i c h a m o u n t s received
in connection with such contracts shall h a v e b e e n placed a n d
accounted for separately a n d apart f r o m other investments and
accounts. This contract m a y also provide benefits or values
incidental thereto payable in fixed or variable a m o u n t s , or both.
6. Taxability of the various business activities of life insurance
company for business tax and documentary stamp tax. U n d e r
Presidential Decree No. 6 1 2 , otherwise k n o w n as "The Insurance
Code", and subject to the conditions prescribed therein a n d /
or subject to the approval of the Insurance C o m m i s s i o n , life
insurance c o m p a n i e s , aside f r o m undertaking its principal business
of underwriting life insurance contracts f r o m w h i c h it g e n e r a t e s
premiums, are likewise authorized to e n g a g e in investment activities
as well as acquire real properties for the production a n d generation
of income. From these ancillary business activities, life insurance
companies earn other types of revenue s u c h as rental i n c o m e ,
m a n a g e m e n t fees, renewal and/or re-issuance fees, penalties,
commission income, interest i n c o m e , gains, a n d other investment
income and the like.
Inasmuch as life insurance c o m p a n i e s are allowed to pursue

these ancillary business activities pursuant to the provisions of the
Insurance C o d e , the s a m e should be treated as a separate business
independent from its main business activity of underwriting life
insurance contracts.
"(1) Direct writings/premiums. T h e main revenue

generated by the life insurance c o m p a n i e s from their principal
activity of doing life insurance is the p r e m i u m s received from
their policyholders. For the p r e m i u m s received, the s a m e are
subject to p r e m i u m tax at t h e rate of 5% pursuant to Section
123.
(2) Management fees, rental income, commission

income, re-issuance fees, renewal fees, other income/fees.
M a n a g e m e n t f e e s , rental i n c o m e , or any other income earned
by the life insurance c o m p a n y f r o m services which can be
pursued independently of the insurance business activity, are
thus not subject to the 5% p r e m i u m tax imposed under Section
123 but, rather, the s a m e are treated as income for services
that are subject to t h e imposition of VAT pursuant to Section
108 or to the p e r c e n t a g e tax i m p o s e d under Section 116, as
the c a s e m a y be.
Re-issuance fees, reinstatement fees, renewal fees as

well as penalties paid to the life insurance c o m p a n y which are
incidental to or in connection with the insurance policy contracts
issued are c o n s i d e r e d akin to p r e m i u m s . T h u s , such types of
income are c o v e r e d by Section 123 and are subject to the 5%
p r e m i u m tax for t h e gross a m o u n t received on such fees a n d /
or penalties.
(3) Investment Income.

(a) Investment income realized from the investment of
premiums earned. T h e investment income earned by
the life insurance c o m p a n i e s f r o m investing the premiums
received in marketable securities, bonds and other finan-
cial instruments is considered e x e m p t from the further im-
position of business tax since the premiums which have
b e e n the source of the funds invested had already been
subject to the imposition of the 5% premium tax imposed
by Section 123.
(b) Investment income realized from the investment of

funds obtained from others. If these investment activities
have been allowed and approved by the Insurance C o m -
mission, the s a m e are considered as incidental activities
to the main activity a n d , therefore, are subject to the 5%
premium tax pursuant to Section 123. (Rev. M e m o . Cir. No.
30-2008, as a m e n d e d by Rev. Memo. Cir. No. 49-2010.)
ANNOTATED
7. Apportionment of exempt investment income and

investment income subject to gross receipts tax. As stated
above, investment income that is exempt from the imposition of
business tax only pertains to that portion of investment income
that is exempt from the imposition of business tax only pertains to
that portion of investment income w h e r e the source of the funds
used in the investment activities c o m e s f r o m the o w n e d funds
(i.e., premiums earned) of the life insurance company. For that
portion of investment income w h e r e b y the source of the funds used
w a s solicited from the policyholders for purposes other than the
payment of the current p r e m i u m s d u e to the life insurance c o m p a n y
and where such funds solicited are treated by the life insurance
company as liabilities, such income is considered to have b e e n
activities or similar banking activities, and therefore, subject to the
imposition of gross receipts tax pursuant to Section 1 2 1 .
In order to determine w h i c h portion of the investment income

earned for the month is e x e m p t and w h i c h portion is taxable, the
investment income e a r n e d for the m o n t h shall be allocated b e t w e e n
the following:
(i) liability account balance pertinent t h e other funds

solicited f r o m the policyholders as of t h e e n d of s u c h m o n t h ;
and
(ii) the total p r e m i u m s e a r n e d for the m o n t h .

E x e m p t / N o n Taxable Investment I n c o m e
= Investment Income x Item (ii) a b o v e

for the m o n t h S u m of items (i) & (ii) a b o v e
Investment Income Subject to G r o s s Receipts Tax
= Investment Income Item (i) a b o v e

for the m o n t h S u m of items (i) & (ii) a b o v e
EXAMPLE:
"Akim Life A s s u r a n c e Corp.", a life insurance company,

during the m o n t h of April, realized an investment income
amounting to P1,000,000. T h e investment funds used
in generating this income c o m e f r o m both the p r e m i u m s
earned by the c o m p a n y and the other funds solicited f r o m
its policyholders. For the s a m e m o n t h , the p r e m i u m s e a r n e d
by the c o m p a n y a m o u n t e d to P30,000,000 while the liability

balance of the end of the said m o n t h pertinent to the other
funds solicited a m o u n t e d to P20,000,000.
T h e e x e m p t portion of the investment income and the

portion to be subject to the gross receipts tax are determined
as follows:
P30,000,000
Exempt = P1,000.00 x
P50,000,000
= P600.000
P30,000,000
Taxable for G r o s s Receipts Tax = P1,000,000 x
P50,000,000
P400.00
(Ibid.)
8. Taxability of other financial services products sold by life

insurance companies. In pursuing its main activity of proposing
to undertake for a consideration to indemnify another against
loss, d a m a g e or liability arising f r o m an u n k n o w n or contingent
event through the issuance of insurance policies u p o n payment
by the insured of t h e p r e m i u m a life insurance c o m p a n y at the
s a m e t i m e , in addition to t h e life insurance policy solicited, may
offer to its policyholder other financial services/products, which
u p o n a c c e p t a n c e by t h e policyholder, are m a d e as a rider,
clause, warranty or e n d o r s e m e n t attached to and formed part of
the insurance policy contract issued. Examples of such financial
products are the Variable Unit Link (VUL) and the Premium Deposit
Fund (PDF).
(1) Variable Unit Link (VUL). A m o n g the salient features

of this financial service/product are, as follows:
(a) In addition to the life insurance policy contracted,
policyholders are m a d e to contribute to a fund set up by the
life insurance c o m p a n y ;
(b) Of the total a m o u n t given by the policyholder for
the life insurance policy and the contribution to be made to
such fund, only 2% to 5% represents the premium payment
for the life insurance policy, while 9 5 % to 9 8 % of the rest of
the amount paid pertains to the amount contributed to the
fund;
248 THE N A T I O N A L INTERNAL R E V E N U E CODE Sees. 123-124
ANNOTATED
(c) The contribution to the fund is represented by units

of shares;
(d) A fixed amount is set for each unit of share, thus,
the percentage of contribution of the policyholder to the
fund corresponds to the number of unit of shares he owns
therein;
(e) T h e a m o u n t pooled to the fund is then invested
in stocks, securities, debt instruments, and other similar
passive investments, income derived from which are those
that are either e x e m p t f r o m tax or subject to final tax;
(f) T h e life insurance c o m p a n y merely acts as fund

manager. As s u c h , the fund is not c o m m i n g l e d with the
o w n e d funds of the said life insurance c o m p a n y ;
(g) T h e life insurance c o m p a n y d o e s not share in the
income derived by the fund f r o m t h e investment activities
but rather derives income by charging m a n a g e m e n t fees
based on a certain fixed rate; a n d
(h) T h e income e a r n e d by the f u n d together with the

contributions m a d e are t h e n distributed to the policyholders
upon surrender/redemption of units of shares.
(2) Premium Deposit Fund (PDF) This is m a d e a rider
to the life insurance policy contract issued to the policyholder.
A m o n g the salient features of t h e product/service a r e as
follows:
(a) In addition to t h e life insurance policy contracted,

policyholders are m a d e to m a k e deposits for t h e future
premium payment;
(b) Deposits of at least P h p 5 0 0 e a c h m a y be m a d e to

this fund for p a y m e n t of future p r e m i u m on the policy;
(c) T h e fund will be used in investment activities;
(d) Interest shall be credited to the fund annually on
each policy anniversary at s u c h rates as the life insurance
c o m p a n y m a y declare e a c h year but never less t h a n the
lowest interest rate prevailing on savings a c c o u n t s in
banks;
(e) That the balance of the deposit inclusive of the

interest e a r n e d , m a y b e withdrawn anytime at the option of
the policyholder; and
(f) A n d that the insurance c o m p a n y treats such

deposits in its b o o k s of accounts as liabilities to the
policyholders.
(3) Tax consequences of VUL Insofar as this financial

product/service is c o n c e r n e d they are, as follows:
(a) T h e p r e m i u m s received on account of the life

insurance solicited f r o m the policyholder, being the main
business activity of the life insurance c o m p a n y is, in addition
to the income tax i m p o s e d u n d e r Title II of the Tax Code,
as a m e n d e d , subject to the a b o v e m e n t i o n e d business tax/
premium tax a n d documentary stamp tax;
(b) For t h e m a n a g e m e n t fees earned by the life

insurance c o m p a n y in m a n a g i n g the investment portfolio
of t h e V U L f u n d , s u c h m a n a g e m e n t fees , in addition to the
income tax i m p o s e d under Title II of the Tax C o d e , is subject
to VAT p u r s u a n t to Section 108, or to the percentage tax
i m p o s e d under Section 116, as the c a s e may be;
(c) T h e certificates issued to the policyholder

evidencing his contribution to the V U L fund w h i c h partake
t h e nature of d e e d s of trust shall not be subject to the
imposition of D S T prescribed by Section 195 considering
that the p r e m i u m s on variable contracts have already been
subjected to D S T under Section 183; a n d
(d) For the gain realized by the policyholder from the

redemption of his units of shares in the V U L f u n d , the s a m e
must be declared a n d reported by the said policyholder for
income tax p u r p o s e s .
(4) Tax consequences of PDF. Insofar as this financial

product/service is c o n c e r n e d they are, as follows:
(a) T h e p r e m i u m s received on account of the life

insurance solicited from the policyholder, being the main
business activity of the life insurance company is, in
addition to the income tax imposed by the Title II of the Tax
C o d e , subject to business tax/premium tax and DST;
(b) T h e investment income earned by the insurance

c o m p a n y f r o m the investment activities using the fund, in
addition to the income tax imposed by Title II of the Tax
C o d e , is subject to the gross receipts tax imposed under
Section 1 2 1 ;
ANNOTATED
(c) The instrument issued to the policyholder evi-

dencing deposits m a d e to the premium deposit fund which
is treated as liability in the books of accounts of the life
insurance companies, is considered as Certificate of
Indebtedness subject to the imposition of D S T prescribed
by Section 179, at the rate of P1.00 on e a c h P200, or
fractional part thereof, of the issue price of any such debt
instruments; and
(d) The interest earned by the policyholder from the
premium deposit fund is subject to 20% final withholding
tax imposed by Sections 24(B)(1); 25(A)(2); 27(D)(1) and
Section 28(A)(7) of the Tax C o d e , w h i c h provides t h a t " a
final tax at the rate of twenty percent (20%) is i m p o s e d u p o n
the amount of interest f r o m any currency bank deposit and
yield or any other monetary benefit f r o m deposit substitutes
and from trust funds a n d similar arrangements."
This is so because a close perusal of the a f o r e m e n t i o n e d
features of said fund s h o w s that with the m a n n e r t h e
insurance c o m p a n y operates this f u n d , the s a m e c a n be
likened to the m o d e by w h i c h b a n k s accepts deposits
from the public w h e r e b y deposits received are apparently
booked as liabilities and for s u c h liabilities received, interest
payments b a s e d on the a g r e e d interest rate are c o m m i t t e d
to be paid to the depositors w h i c h interest a n d deposit can
be w i t h d r a w n by said depositors anytime.
Inasmuch as insurance c o m p a n i e s transact in the

s a m e m a n n e r as the business of the b a n k s insofar as the
premium deposit fund is c o n c e r n e d , interest paid to their
policyholders e a r n e d out of t h e p r e m i u m deposit f u n d very
well falls within the purview of w h a t m a y be considered as
"similar arrangements" prescribed for by Tax C o d e . T h u s ,
such interest p a y m e n t s are subject to the final withholding
tax at the rate of 2 0 % . (Rev. M e m o . Cir. No. 3 0 - 2 0 0 8 , as
a m e n d e d by Rev. M e m o . Cir. No. 59-2008.)
9. Taxability of the non-life insurance company for business
tax. Pursuant to Section 108 of the Tax C o d e , the "gross receipts"
of non-life insurance c o m p a n i e s (except their crop insurances) is
subject to the imposition of VAT.
(1) Total premiums collected. T h e t e r m includes the total

premiums collected w h e t h e r such p r e m i u m s are paid in money,
notes, credits or any substitute for money. P r e m i u m s received
from a health and accident insurance contract underwritten

by the non-life insurance c o m p a n i e s , inasmuch as the same
partakes of the nature of a life insurance policy, are subject to
the p a y m e n t of the p r e m i u m tax imposed by Section 123.
T h e following non-life insurance c o m p a n i e s are subject to
VAT on gross p r e m i u m received beginning January 1, 1996:
(a) Marine, fire and casualty insurance companies;
(b) Surety, fidelity, indemnity and bonding companies;
(c) Mutual benefit associations;
(d) G o v e r n m e n t - o w n e d or controlled corporations

e n g a g e d in the business of non-life insurance;
(e) Non-stock, non-profit organizations and coope-

ratives e n g a g e d in the business of non-life insurance; and
(f) All other p e r s o n s , w h e t h e r individual, trust/estate,
partnership, association, joint venture, or corporation
e n g a g i n g in t h e non-life insurance business, such as but
not limited to resident foreign persons rendering non-life
insurance services in t h e Philippines in the course of its
trade or business.
(2) Items not included from gross receipts. They include
the following:
(a) P r e m i u m s refunded within six (6) months after
p a y m e n t on account of rejection of risk or returned for other
reason to the person insured (return premiums);
(b) P r e m i u m s on reinsurance of a company that has
already paid the tax;
(c) P r e m i u m s on account of any reinsurance, if the
risk insured against covers property located outside of the
Philippines;
(d) Documentary stamp and local taxes passed on by
the insurance c o m p a n y to the insured; and
(e) VAT passed on to the insured. (Ibid.)
Note: For purposes of computing the gross income
on the sale of services which shall be the basis of the 2%
Minimum Corporate Income Tax (MCIT) under Sections 27
(E) and 28(A), see Annotation No. 40 under Section 27 in
Volume 1 of this work.
ANNOTATED
SEC. 125. Amusement Taxes. There shall be collected from

the proprietor, lessee or operator of cockpits, cabarets, night or day
clubs, boxing exhibitions, professional basketball games, Jai-Alai,
and racetracks, a tax equivalent to:
(a) Eighteen percent (18%) in the case of cockpits;
(b) Eighteen percent (18%) in the case of cabarets, night or day
clubs;
(c) Ten percent (10%) in the case of boxing exhibitions:
Provided, however, That boxing exhibitions wherein World or
Oriental Championships in any division is at stake shall be exempt
from amusement tax: Provided, further, That at least one of the
contenders for World or Oriental Championship is a citizen of the
Philippines and said exhibitions are promoted by a citizen/s of the
Philippines or by a corporation or association at least sixty percent
(60%) of the capital of which is owned by such citizens (a);
(d) Fifteen percent (15%) in the case of professional basketball
games as envisioned in Presidential Decree No. 871: Provided,
however, That the tax herein shall be in lieu of all other percentage
taxes of whatever nature and description (a); and
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks
of their gross receipts, irrespective of whether or not any amount is
charged for admission.
For the purpose of the amusement tax, the term "gross receipts"
embraces all the receipts of the proprietor, lessee or operator of
the amusement place. Said gross receipts also include income from
television, radio and motion picture rights, if any. A person or entity
or association conducting any activity subject to the tax herein
imposed shall be similarly liable for said tax with respect to such
portion of the receipts derived by him or it.
The taxes imposed herein shall be payable at the end of each
quarter and it shall be the duty of the proprietor, lessee or operator
concerned, as well as any party liable, within twenty (20) days after
the end of each quarter, to make a true and complete return of the
amount of the gross receipts derived during the preceding quarter
and pay the tax due thereon, (as amended by Pres. Decree No. 1994.)
ANNOTATION
1. Amended: Section 125(c) The rate of tax is reduced

from 15% to 10%.
2. Kinds of amusement taxes. As provided above, they

are:
(1) Tax on gross receipts on certain a m u s e m e n t places

(Sec. 125.); a n d
(2) Tax on winnings in horse races and jai-alai. (Sec. 126.)

Section 125 m a k e s it clear that the percentage tax is
applied to the gross receipts, irrespective of whether or not any
a m o u n t is c h a r g e d for a d m i s s i o n .
Note: T h e tax on paid admissions (i.e., gross receipts from

admission fees) is n o w i m p o s e d by the provinces and cities
to the exclusion of t h e national g o v e r n m e n t under the Local
G o v e r n m e n t C o d e , (see Sees. 143, 151 thereof.) It is a tax
on t h e admission to places of a m u s e m e n t or on the right or
privilege to enter places of a m u s e m e n t or performance.
3. Tax on gross receipts. T h e person liable under Section

125 is the "proprietor, lessee or operator of cockpits, etc."
(1) A proprietor is o n e w h o has the legal right of exclusive
title to anything, w h e t h e r in possession or nor; an o w n e r
s o m e t i m e s , especially in statutory construction, in a wider
s e n s e , a person having interest less than absolute and exclusive
right, as the usufruct, present control a n d use, of property.
(2) An operator is, in general, o n e w h o or that which
operates as: (a) o n e w h o produces an effect or does something;
an agent; (b) o n e w h o d o e s appropriate practical operations as
in business, art, or science; a professional or official performer
of s u c h work. (11 Merriam-Webster, 2nd Ed., 1968, 1707.)
H e n c e , a person w h o merely loaned to the manager of an

opera c o m p a n y (or any of the a m u s e m e n t places enumerated
in Sec. 125) the funds which w e r e used for the presentation
of an opera, with the understanding that the s a m e would be
returned as soon as the C o m p a n y w a s without funds, cannot
be held liable for the payment of a m u s e m e n t tax on the gross
receipts from the opera presentation, because under the law,
the tax is imposed on the proprietor, lessee or operator of the
place of a m u s e m e n t and not on any person to w h o m the gross
receipts are destined and eventually paid. (Blaquera vs. Aldaba
and CTA, 107 Phil. 504.)
This ruling that a mere financier and capitalist of a stage
presentation cannot be held liable for the amusement tax is
ANNOTATED
not applicable where a person is s h o w n to have had a role

more involved than mere financing. Thus, w h e r e the financier
or capitalist did not merely finance the staging of the bullfight
exhibitions, but in addition, a s s u m e d active involvement in the
agreed business venture such as contracting the services of
a company for the construction of the bullfight arena, granting
to another c o m p a n y the exclusive rights of using the bullfight
for the advertisement of its products; taking charge of the
disbursements and gate receipts during the exhibitions as well
as the recording and keeping of the pertinent books of accounts,
she may be properly considered the proprietor or operator of
the bullfight exhibitions, thus, making her liable for the payment
of the a m u s e m e n t tax. (De Jesus Sevilla vs. C o m m . of Internal
Revenue, 23 S C R A 4 2 0 [1968].)
(3) Cabarets are restaurants or clubs w h e r e liquor and

food are served, with a stage provided for performances by
musicians, dancers or c o m e d i a n s including a v e n u e for dancing
by patrons/customers similar to that of nightclubs. (Rev. M e m o .
Circ. N o . 18-2010.)
(4) Night and day clubs are drinking a n d entertainment
venues w h i c h oftentimes also serve f o o d a n d provide enter-
tainment. (Ibid.)
(a) "Night c l u b s " are resorts frequented by pleasure-

seekers at night w h e r e f o o d s a n d w i n e s and drinks are
served and music furnished a n d the patrons allowed to
d a n c e w h e t h e r with their o w n partners or professional
hostesses furnished by s u c h resorts.
(b) "Day c l u b s " are resorts f r e q u e n t e d by pleasure-
seekers during the day w h e r e foods and w i n e s a n d drinks
are served and m u s i c furnished and t h e patrons allowed
to dance whether with their o w n partners or professional
hostesses furnished by such resorts. (Sec. 2[n, o ] , Rev.
Regs. No. 14-67.)
(5) A m u s e m e n t places w h i c h offer the s a m e pleasurable

diversion, entertainment and function, n o w include videoke
bars, karaoke bars, karaoke televisions, karaoke boxes, a n d
music lounges subject to 1 8 % a m u s e m e n t tax, and not to 1 2 %
VAT on gross receipts.
(6) Under Section 125(c), the purses of the participants in

case of boxing exhibitions shall be subject to i n c o m e tax.
(7) Under Section 125(d), an a m u s e m e n t tax of 1 5 % is

i m p o s e d in the case of professional basketball g a m e s as
envisioned in Presidential Decree No. 8 7 1 , and that the person,
entity or association conducting or sponsoring said activity
shall be similarly liable for the p a y m e n t of the tax with respect
to such portion of the receipts derived by him or it, unless by
a n y special law, such p e r s o n , etc. (e.g., Philippine National
Red Cross under Pres. D e c r e e No. 1264), is exempt from
a m u s e m e n t taxes.
(8) Since billiard is a sport a n d not a business enterprise,

the operator of billiard tables is not subject to the value-added
tax i m p o s e d under Section 106, w h e t h e r the billiards are open to
the public or available only to m e m b e r s of a private membership
club. Likewise, the gross receipts derived from operating
billiards are not subject to any p e r c e n t a g e (amusement) tax
since billiards is not o n e of the activities mentioned in Section
125. However, t h e i n c o m e is subject to income tax. (BIR Ruling
5
N o . 5 7 4 , Dec. 8, 1988.) Bowling is also considered a sport.
(9) T h e holding of a concert is not o n e of the activities
subject to t h e a m u s e m e n t tax under Section 125. (BIR Ruling
No. 15, J a n . 9, 1992.)
(10) T h e definition of gross receipts in Section 125 is
broad e n o u g h to e m b r a c e the cession of advertising and
streamer s p a c e s as t h e s a m e " e m b r a c e s all the receipts of
the proprietor, lessee or operator of the a m u s e m e n t place."
(Philippine Basketball Association vs. Court of Appeals, 337
S C R A 358 [2000].)
(11) T h e a m u s e m e n t tax on gross receipts is different from

the value-added tax i m p o s e d by Section 108(A) on caterers
which applies if the restaurant, etc., within the premises of the
cockpit, etc., is o w n e d or operated by a person other than the
proprietor, lessee or operator of the cockpit, etc.
(12) All foreign tourists, upon proper identification, are
entitled to a 5 0 % discount of the a m u s e m e n t tax provided in
Section 125. (Pres. Decree No. 386.)
6
U n d e r Letter of Instruction N o . 1504 (Dec. 29, 1985), bowling alleys are no
longer subject to amusement taxes, (see B I R Ruling No. 112, March 18, 1988.)
ANNOTATED
S E C . 126. Tax on Winnings. E v e r y p e r s o n w h o w i n s i n

horse races s h a l l p a y a t a x e q u i v a l e n t to t e n p e r c e n t (10%) of h i s
w i n n i n g s o r " d i v i d e n d s , " t h e t a x t o b e based o n t h e a c t u a l a m o u n t
p a i d t o h i m for e v e r y w i n n i n g t i c k e t a f t e r d e d u c t i n g t h e cost o f t h e
t i c k e t : Provided, T h a t i n t h e case o f w i n n i n g s f r o m double, forecast!
quinella a n d trifecta bets, t h e t a x s h a l l be f o u r p e r c e n t (4%). I n t h e
case o f o w n e r s o f w i n n i n g race horses, t h e t a x s h a l l b e t e n p e r c e n t
(10%) o f t h e p r i z e s .
The tax herein prescribed shall be deducted f r o m the "dividends"

c o r r e s p o n d i n g t o each w i n n i n g t i c k e t o r t h e " p r i z e " o f each w i n n i n g
race horse o w n e r a n d w i t h h e l d b y t h e o p e r a t o r , m a n a g e r o r p e r s o n
i n charge o f t h e horse races before p a y i n g t h e d i v i d e n d s o r p r i z e s t o
t h e persons e n t i t l e d t h e r e t o .
T h e o p e r a t o r , m a n a g e r o r p e r s o n i n c h a r g e o f h o r s e races s h a l l ,
w i t h i n t w e n t y (20) d a y s f r o m t h e d a t e t h e t a x w a s d e d u c t e d a n d
w i t h h e l d i n accordance w i t h t h e second p a r a g r a p h hereof, f i l e a t r u e
a n d correct r e t u r n w i t h t h e C o m m i s s i o n e r i n t h e m a n n e r o r f o r m
to be prescribed by the Secretary of Finance, a n d pay w i t h i n the
same p e r i o d t h e t o t a l a m o u n t o f t a x s o d e d u c t e d a n d w i t h h e l d , (as
amended by Pres. Decree No. 1959.)
ANNOTATION
1. Tax on winnings. T h e persons liable under Section 126

are the winners in horse races or jai-alai, a n d t h e o w n e r s of w i n n i n g
race horses.
(1) "Certain g a m b l i n g activities, although legalized, are

non-productive f r o m t h e e c o n o m i c point of view. Considering
also, as in t h e c a s e of c o n s u m p t i o n of alcohol beverages
(see Sees. 141-143.), that g a m b l i n g is socially and morally
undesirable, the increased rate of tax on winning (from 5% to
10%) is certainly justified." ( C o m m . Efren Plana, supra.)
(2) Executive Order No. 196 (June 1 6 , 1 9 8 7 ) provides that

the tax on winnings in race horses shall be 1 0 % . In the c a s e
of winnings f r o m double, forecast/qu/'ne//a and trifecta bets, the
tax shall be 4 % . In the c a s e of o w n e r s of winning race horses,
the tax shall be 1 0 % of the prizes. (Sec. 3 thereof.)
2. Definition of terms. For purposes of Section 126,

following terms shall be understood in t h e s e n s e given below:
Daily double It is an event wherein the bettor selects a

n u m b e r in e a c h of t w o consecutive races and the selection in
e a c h race must finish first.
Extra double It is an event wherein the bettor selects a

n u m b e r in e a c h of t w o (2) selected races and the selection in
e a c h race must finish first.
Forecast It is an event w h e r e i n the bettor selects two

n u m b e r s in a selected race, and the selection must finish first
a n d s e c o n d in the correct order.
Double Quinella It is an event wherein the bettor

selects t w o n u m b e r s in e a c h of the two selected races, and
the selection in e a c h race must finish first and second in either
order.
Trifecta It is an event w h e r e i n the bettor selects three

n u m b e r s in a selected race and the selections must finish first,
s e c o n d and third in t h e correct order.
Winner take all It is an event wherein the bettor selects

the most n u m b e r of w i n n e r s f r o m the seven (7) designated
races of the d a y as s h o w n in the race program.
Pick-six It is an event wherein the bettor selects the six

(6) winners f r o m the six (6) designated races of the day as
s h o w n in t h e p r o g r a m .
Quartet It is an event wherein the bettor selects four (4)

n u m b e r s w h i c h should arrive at finish line in the right order, such
as 1 st place, 2nd place, 3rd place and 4th place, respectively.
(Sec. 1, Rev. R e g s . No. 4-87.)
3. Time of payment and return required to be filed. It shall

be the duty of the operator or person in charge of horse races to
file a true and correct return on the tax on winnings or "dividends" in
the a m u s e m e n t tax return (BIR Form No. 2701-A) showing for each
class of bets, the total number and a m o u n t s of the tickets sold,
the unit price or cost of the tickets, the total number and amounts
of winning tickets, the net amount which is the basis of the tax on
winnings, the total amount of tax on winnings withheld, and pay the
tax d u e thereon to the collection agent of the city or municipality
where the main office is located, or to the authorized agent bank of
the Central Bank (now Bangko Sentral ng Pilipinas) within 20 days
from the time the tax w a s deducted and withheld. (Sec. 2[c], Ibid.)
ANNOTATED
SEC. 127. Tax on Sale, Barter or Exchange of Shares of

Stock Listed and Traded Through the Local Stock Exchange
or Through Initial Public Offering.
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange. There shall be
levied, assessed and collected on every sale, barter, exchange, or
other disposition of shares of stock listed and traded through the
local stock exchange other than the sale by a dealer in securities,
a tax at the rate of one-half of one percent (1/2 of 1%) of the gross
selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be paid by
the seller or transferor.
(B) Tax on Shares of Stock Sold or Exchanged through Initial
Public Offering. There shall be levied, assessed and collected
on every sale, barter, exchange or other disposition through initial
public offering of shares of stock in closely held corporations, as
defined herein, a tax at the rates provided hereunder based on the
gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed in accordance with the
proportion of shares of stock sold, bartered, exchanged or otherwise
disposed to the total outstanding shares of stock after the listing in
the local stock exchange:
Up to twenty-five percent (25%) 4%

Over twenty-five percent (25%) but not over
thirty-three and one third percent (33 1/3%) 2%
Over thirty-three and one third percent (33 1/3%) 1% (a)
The tax herein imposed shall be paid by the issuing corporation

in primary offering or by the seller in secondary offering.
For purposes of this Section, the term "closely held corporation"
means any corporation at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote is owned
directly or indirectly by or for not more than twenty (20) individuals.
For purposes of determining whether the corporation is a closely
held corporation, insofar as such determination is based on stock
ownership, the following rules shall be applied:
(1) Stock Not Owned by Individuals. Stock owned
directly or indirectly by or for a corporation, partnership, estate
or trust shall be considered as being owned proportionately by

its shareholders, partners or beneficiaries.
(2) Family and Partnership Ownerships. An individual
shall be considered as owning the stock owned, directly or
indirectly, by or for his family, or by or for his partner. For
purposes of this paragraph, the "family of an individual"
includes only his brothers and sisters (whether by whole or half-
blood), spouse, ancestors and lineal descendants.
(3) Option. If any person has an option to acquire stock,
such stock shall be considered as owned by such person. For
purposes of this paragraph, an option to acquire such an option
and each one of a series of options shall be considered as an
option to acquire such stock.
(4) Constructive Ownership as Actual Ownership. Stock
constructively owned by reason of the application of paragraph
(1) or (3) hereof shall, for purposes of applying paragraph
(1) or (2), be treated as actually owned by such person; but
stock constructively owned by the individual by reason of the
application of paragraph (2) hereof shall not be treated as owned
by him for purposes of again applying such paragraph in order
to make another the constructive owner of such stock.
(C) Return on Capital Gains Realized from Sale of Shares of
Stocks.
(1) Return on Capital Gains Realized from Sale of Shares of
Stock Listed and Traded in the Local Stock Exchange. It shall
be the duty of every stock broker who effected the sale subject
to the tax imposed herein to collect the tax and remit the same
to the Bureau of Internal Revenue within five (5) banking days
from the date of collection thereof and to submit on Mondays of
each week to the secretary of the stock exchange, of which he
is a member, a true and complete return which shall contain a
declaration of all the transactions effected through him during
the preceding week and of taxes collected by him and turned
over to the Bureau of Internal Revenue, (n)
(2) Return on Public Offerings of Shares of Stock. - In case
of primary offering, the corporate issuer shall file the return and
pay the corresponding tax within thirty (30) days from the date
of listing of the shares of stock in the local stock exchange. In
the case of secondary offering, the provision of Subsection (C)
(1) of this Section shall apply as to the time and manner of the
payment of the tax. (n)
ANNOTATED
( D ) Common Provisions. Any gain derived from the sale,

barter, exchange or other disposition of shares of stock under this
Section shall be exempt from the tax imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the
regular individual or corporate income tax. Tax paid under this
Section shall not be deductible for income tax purposes, (as inserted
by R.A. No. 7166.)
ANNOTATION
1. Amended: Subsection (B) T h e proportion of shares is

reduced to 2 5 % from 33 1/3% and to 33 1/3% from 5 0 % .
2. Taxes imposable on sale or disposition of shares of stock
in a domestic corporation. T h e taxes d e p e n d on whether or not
the shares are listed a n d traded in the local e x c h a n g e a n d whether
the seller or transferor is a dealer in securities.
(1) T h e sale, etc. of shares of stock listed and traded
through the local stock e x c h a n g e (Philippine Stock E x c h a n g e )
is subject to percentage tax, k n o w n as stock transaction tax
(STT) under Section 127(A, 1) a n d to d o c u m e n t a r y s t a m p tax
imposed under Section 175. T h e percentage tax is b a s e d on
the gross selling price or gross value in m o n e y of the shares
of stock sold without taking into account the cost thereof to the
seller, whether he suffers gain or loss. T h e tax is 1/2 of 1% or
0.005. T h u s , if the selling price is P 1 , 0 0 0 , 0 0 0 , the tax is P 5 . 0 0 0 .
If the sale involves shares of stock nor listed on the stock
exchange, the fair market value of the shares is the book value
as shown in the financial statements nearest to the date of sale,
duly certified by an independent certified public accountant.
(2) Net capital gains (i.e., e x c e s s of gains from sales or
exchanges of capital assets over the losses from such sales or
exchanges) realized during e a c h taxable year from dispositions
of shares of stock not traded through a local stock e x c h a n g e
are subject to income tax (capital gains tax) of 5% for gains not
over P100,000 and 1 0 % for gains in e x c e s s of P100,000. (see
Sees. 24[C], 2 7 [ D , 2], 28[A, 8, c], a n d 2 8 [ B , 5, c].) T h u s , if the
net capital gains realized during the taxable year is P160,000,
the capital gains tax is P21.000 (P5.000 + P16,000).
(3) In Nos. (1) and (2) a b o v e , the seller or transferor is

not a dealer in securities; otherwise, the shares of stock are
treated as ordinary assets subject to the regular income tax
w h e t h e r or not the shares are listed and traded in the local

stock e x c h a n g e .
(4) Income e a r n e d by qualified retirement plans from their

investment in shares listed and traded through the Philippines
Stock E x c h a n g e (PSE) is e x e m p t f r o m the stock transaction
tax (STT) under Section 127-A. Section 60(B) of the Tax C o d e
specifically e x e m p t s f r o m i n c o m e tax e m p l o y e e s ' trust which
f o r m s part of a p e n s i o n , stock, b o n u s or profit sharing plan
of an employer. A l t h o u g h the S T T falls under Title V (Other
Percentage Taxes) it is essentially an income tax. (BIR Ruling
N o . D A - 5 6 0 - 0 9 , Sept. 18, 2009.)
3. Sale, etc. of shares listed and traded through the local stock
exchange. T h e stock transaction tax is i m p o s e d at the rate of 1/2
of 1 % b a s e d on t h e gross selling price or gross value in m o n e y of
the s h a r e s of stock sold, etc. or otherwise d i s p o s e d of (Subsec.
A ) , w h i c h shall be a s s u m e d by t h e seller or transferor through the
remittance of t h e tax by t h e seller or transferor's broker.
(1) Persons liable to the tax. T h e tax is payable by

t h e seller or transferor. T h e t a x p a y e r m a y be (a) an individual
(whether citizen or not), (b) a corporation (whether domestic or
foreign), a n d (c) other taxpayers not falling under (a) and (b)
a b o v e , s u c h as estate, trust, trust funds and pension funds,
a m o n g others.
(2) Persons not liable to the tax. T h e tax does not apply
to (a) a dealer in securities, (Sec. 22[u].), (b) an investor in
shares of stock in a mutual fund c o m p a n y (see Sec. 22[BB]),
in connection with the gains realized by said investor upon
redemption of said shares of stock in the mutual fund company,
a n d (c) all other persons, w h e t h e r natural or juridical, specifically
e x e m p t from national internal revenue taxes under existing
investment incentives and other special laws. (Sees. 3, 4, Rev.
Regs. No. 6-2008.)
Note: Rev. M e m o . Circ. No. 21-2008 clarifies issues on the

persons liable to the tax imposed under Section 127 and the
crediting of the tax collection to the appropriate office of the office
of the BIR.
4. Definition of terms. A s used in Section 127:
(1) Gross selling price means the total amount of money or
its equivalent which the purchaser pays the seller in exchange
for the shares of stock.
ANNOTATED
(2) Gross value in money means the "fair market value,"

which in the case of shares traded thru the stock exchange,
shall consist of the actual selling price at which the transaction
was executed in the trading system and/or facilities of the local
stock exchange local stock e x c h a n g e w h e r e the sale w a s
effected.
(3) Initial public offering (IPO) refers to a public offering
made for the first time in the local stock e x c h a n g e .
(4) Local stock exchange refers to any domestic o r g a n -
ization, association, or group of persons, w h e t h e r incorporated
or unincorporated, licensed or unlicensed, which constitutes,
maintains, or provides a market place or facilities for bringing
together purchasers and sellers of stocks, a n d includes the
market place and the market facilities maintained by such
exchange. "Exchange is an organized domestic marketplace
or facility that brings together buyers and sellers a n d executes
trades of securities and/or c o m m o d i t i e s , duly registered with
the Securities a n d E x c h a n g e C o m m i s s i o n .
(5) Shares listed and traded through local stock exchange

refers to all sales, trades or transactions of listed s h a r e s of
stock executed through the trading s y s t e m and/or facilities of
the local stock e x c h a n g e . This t e r m includes block sale or other
types of sales, trades or transactions in t h e local stock e x c h a n g e
and e x e c u t e d through t h e trading s y s t e m and/or facilities of the
local stock e x c h a n g e in a c c o r d a n c e with t h e rules of the Local
Stock E x c h a n g e as a p p r o v e d by the Securities a n d E x c h a n g e
C o m m i s s i o n . (Sec. 2, Ibid.)
5. Sale etc. of shares of stock through initial public offering.

T h e tax which applies only to corporations that are considered
"closely-held," is i m p o s e d based on the gross selling price on gross
value in m o n e y of the s h a r e s in a c c o r d a n c e with the proportion of
shares disposed of to total outstanding shares of stock after the
listing in the local stock e x c h a n g e at rate of 4 % / 2 % / 1 % , as the c a s e
may be. (Subsec. B.)
Thus, if before the initial public offering (IPO), there w e r e

600,000 outstanding shares of stock at a par value of P10.00 e a c h ,
and another 200,000 shares ( 2 5 % of 8 0 0 , 0 0 0 ) w e r e sold through
IPO, the tax is 4 % ; if 300,000 shares (33 1/3% of 900,000), the tax
is 2 % ; if 300,100 shares ( 3 3 . 3 4 % of 900,100), the tax is 1 % .
By w a y of illustration of Subsection (B, 4), if A, B, C, and D
were the partners in X partnership which o w n s the entire capital
stock of Y corporation w h i c h , in turn, o w n s the entire capital stock

of Z corporation, the stock of both corporations shall be considered
as o w n e d equally by the partners as the o w n e r s of the beneficial
interest in the corporations.
(1) Transactions covered. T h e tax is imposed on the

sale, etc. of shares of stock: (1) listed and traded through the
local stock e x c h a n g e ; (2) in a closely-held corporation through
initial/primary public offering (IPO); a n d (3) in a closely-held
corporation through s e c o n d a r y offering.
T h e IPO tax applies only to corporations which are

considered "closely h e l d . " In the c a s e w h e r e the shares of
stock in the corporation to be listed are o w n e d by another
corporation, such shares will be considered as being o w n e d
proportionately by the latter's stockholders. (BIR Ruling No. 35-
9 9 , M a r c h 2 5 , 1999.)
In t h e c a s e of a multi-tiered corporation, the stock

contribution rule must be allowed to run continuously along
the chain of o w n e r s h i p until it finally reaches the individual
stockholders in c o n s o n a n c e with the "grandfatherrule" adapted
under the Corporation C o d e . By w a y of illustration:
W, Inc. is a d o m e s t i c corporation. Its c o m m o n shares w e r e

offered to the m a r k e t by w a y of listing on the Philippine Stock
E x c h a n g e (PSE). Prior to the listing more than 5 0 % of W's
issued a n d outstanding shares w e r e held by X, Inc. and Y, Inc.
T h e ultimate shareholder of X is Z, Inc., a public c o m p a n y listed
on the New York Stock E x c h a n g e ( N Y S E ) with about 187,723
stockholders. On the other h a n d , the ultimate beneficial
shareholders of Y are not more than 20 shareholders. The
shares of W that w e r e offered and sold consist of new shares
to be issued by w a y primary offering, and existing shares to be
sold by shareholders by w a y of secondary offering.
W and the selling stockholders are not subject to the IPO tax
under Section 127(B). Since more than 5 0 % of W's outstanding
capital stock is o w n e d by X and Y which were, in turn, owned
by more than 20 beneficial shareholders, at the time it applied
for listing on the P S E , W will be considered as proportionately
o w n e d by the shareholders of X and Y. As such, W cannot be
considered a closely-held corporation prior to its listing on the
PSE and, therefore, the IPO is not applicable. Considering that
the shares to be issued by W have a par value, the DST on the
ANNOTATED
original issuance thereof shall be based on the total par value

of the newly issued shares under Section 174. (BIR Ruling No.
DA-257-08, April 18, 2008.)
The tax does not apply w h e r e the transaction can be
classified as a lending of securities rather than a sale. (BIR
Ruling No. 168-90, Nov. 20, 1998.)
(2) Determination of persons liable to pay the tax.
(1) Primary offering. T h e tax i m p o s e d shall be paid
by the issuer corporation with respect to the Shares of
Stock corresponding to the primary offering.
(2) Secondary offering. T h e tax i m p o s e d shall
be paid by the selling shareholder(s) with respect to the
shares of stock corresponding to t h e s e c o n d a r y offering.
ILLUSTRATION:
R F B corporation, a closely-held corporation, has an
authorized capital stock of 100,000,000 s h a r e s with par v a l u e
of Php1.00/share as of J a n u a r y 1, 2 0 0 8 .
Of the 100,000,000 authorized shares, 2 5 , 0 0 0 , 0 0 0 thereof

is subscribed and fully paid up by t h e following stockholders:
Mr. Estoy B. Zabala 5,000,000

Mrs. R o w e n a V. P o s a d a s 5,000,000
Mr. C o n r a d o G. C r u z 5,000,000
Mr. Benedict O. Sison 5,000,000
Mrs. Linda O. Evangelista 5,000,000
Total Shares Outstanding 25,000,000
RFB Corporation finally d e c i d e s to c o n d u c t an IPO and

initially offers 2 5 , 0 0 0 , 0 0 0 of its unissued shares to the investing
public. After the IPO in M a r c h 2 0 0 8 , R F B Corporation's total
issued shares increased f r o m 2 5 , 0 0 0 , 0 0 0 to 50,000,000
shares.
At the IPO, one of the existing stockholders, Mrs. Linda O.

Evangelista, has likewise decided to sell her entire 5,000,000
shares to the public. T h u s , 2 5 , 0 0 0 , 0 0 0 shares h a v e b e e n
offered in the primary offering and 5,000,000 shares in the
secondary offering.
C o m p u t a t i o n of the percentage to be u s e d .
(i) Total N u m b e r of S h a r e s Outstanding
N u m b e r of S h a r e s issued by R F B
prior to IPO 25,000,000 shares
Add: N u m b e r of Additional Shares
T h r o u g h Primary Offering
for IPO 25,000,000 shares
Total S h a r e s Outstanding after
Listing at the Stock E x c h a n g e
or IPO 50,000,000 shares
(ii) C o m p u t a t i o n of P e r c e n t a g e Ratio to the
Total O u t s t a n d i n g S h a r e s
(ii.a) For Primary Offering:
N u m b e r of S h a r e s offered by R F B
Corporation to t h e public 25,000,000 shares
Divide by the n u m b e r of s h a r e s
outstanding after the Listing at the
Stock E x c h a n g e 50,000,000 shares
Ratio o f P e r c e n t a g e 50%
P e r c e n t a g e Ratio is 5 0 % w h i c h is over
33 1/3% so t h e Rate of Tax to be used
for Primary Offering (IPO) of shares is 1 % .
(ii.b) For S e c o n d a r y Offering:
N u m b e r of S h a r e s offered by existing
Stockholder of R F B Corporation
to the public 5,000,000 shares
Divide by the number of shares
outstanding after the Listing at the
Stock E x c h a n g e 50,000,000 shares
Ratio of Percentage 10%
Percentage Ratio is 1 0 % which is
under 2 5 % so the Rate of Tax to be
used for Secondary Offering (IPO) of shares is 4 % .
(iii) Computation of the Tax
(iii.a) RFB Corporation newly issued
shares (25,000,000 shares x
Php 1.50/share x 1 %) = Php 375,000
ANNOTATED
(iii.b) Mrs. Linda O. Evangelista's

shares (5,000,000 shares x
Php 1.50/share x 4 % ) = Php 300,000
If in June 2008, RFB Corporation again decides to increase

capitalization by offering another 30,000,000 of unissued
shares to the public at Php 2.00/share consequently bringing
the total issued shares to 80,000,000 shares, such follow-on/
follow-through sale which are shares issued subsequent to
IPO shall no longer be taxed pursuant to Section 6 hereof. T h e
transaction, however, is subject to Documentary Stamp Tax
similar to the transaction covered by Primary Offering as well
as Secondary Offering of shares of stock.
Nonetheless, in c a s e another existing shareholder decides

to offer his existing shares to the public s u b s e q u e n t to IPO, as
in the a b o v e illustration, if Mr. Benedict O. Sison ever decides
to sell his 5,000,000 shares to the public at Php 2.00 per share
(for the Php10,000,000 he received as consideration for the
shares he sold), he shall be t a x e d pursuant to Section 127(A)
of the Tax C o d e as i m p l e m e n t e d by Sec. 5 of these Regulations
which is 1/2 of 1 % of the gross selling price or P h p P 5 0 , 0 0 0
(i.e., 5,000,000 shares x Php 2.00/share = P h p 1 0 , 0 0 0 , 0 0 0 x
1/2 of 1%). (Sec. 6, Rev. Regs. No. 6-2008.)
Note: R.A. No. 7 7 1 7 repealed the provisions in Sections

21 and 25 (now Sees. 2 4 , 2 7 , and 28.) w h i c h i m p o s e d a tax of
1/4 of 1 % on capital gains p r e s u m e d to have b e e n realized by
an individual or corporation, domestic or foreign, f r o m the sale,
e x c h a n g e or disposition of shares of stock listed a n d traded
through a local stock e x c h a n g e .
6. Definition of other terms. A s used in Section 127:

(1) Option refers to an option to acquire stock or an option
to acquire such an option a n d e a c h o n e of a series of options
to acquire stock. "Options" are contracts that give the buyer t h e
right, but not the obligation, to buy or sell an underlying security
at a predetermined price, called the exercise or strike price, on
or before a predetermined date, called the expiry date, w h i c h
can only be extended by the C o m m i s s i o n u p o n stockholders'
approval.
(2) Stockbroker includes all persons w h o s e business it is,

for other brokers, to negotiate purchases or sales of stocks, or
e n g a g e d in the business of effecting transactions in securities
for the account of others but does not include a bank or

underwriters for o n e or more investment companies as defined
in the Investment C o m p a n y Act. "Broker" is a person engaged
in the business of buying and selling securities for the account
of others.
(3) Initial public offering (IPO) refers to a public offering

of shares of stock m a d e for the first time in the Local Stock
Exchange.
(4) Primary offering refers to the original sale m a d e to

the investing public by the issuer corporation of its unissued
Shares of Stock.
(5) Secondary primary refers to an offer for sale to the
investing public by the existing shareholders of their securities
w h i c h is c o n d u c t e d during an IPO or a follow-on/follow-through
offering.
(6) Follow-up/follow-through offering of shares refers to an

offering of shares to the investing public s u b s e q u e n t to an IPO.
(7) Family of an individual includes only his brothers and
sisters (whether by the w h o l e or half-blood), spouse, ancestors,
and lineal d e s c e n d a n t s . (Sec. 2, Rev. Regs. No. 6-2008.)
7. Time of payment of tax and manner of filing returns.
(1) Tax on sale of share of stock listed and traded through
the local stock exchange. T h e stock broker w h o effected
the sale has the duty to collect the tax from the seller upon
issuance of the confirmation of sale, issue the corresponding
official receipt thereof and remit the s a m e to the collecting
bank/officer of the R e v e n u e District Officers (RDO) w h e r e the
broker is registered within five (5) banking days from the date
of collection thereof and to submit on Mondays of each week
to the secretary of the local stock e x c h a n g e , of which he is
a member, a true and complete return, which shall contain a
declaration, that he m a d e under the penalties of perjury, of all
the transactions effected through him during the preceding
w e e k and of taxes collected by him and turned over to the
concerned R D O . T h e secretary of the local stock exchange
shall reconcile the records of the local stock exchange with the
weekly reports of stockbrokers and in turn transmit to the RDO,
on or before the 15th day of the following month, a consolidated
return of all transactions effected during the preceding month
through the Local Stock Exchange.
ANNOTATED
(2) Tax on shares of stock sold or exchanged through

IPO. The corporate issuer in primary offering shall file the
return and pay the corresponding tax to the R D O which has
jurisdiction over said corporate issuer within 30 days from the
date of listing of the shares of stock in the local stock exchange.
The return shall be a c c o m p a n i e d with a copy of the instrument
of sale.
In the case of shares of stock sold or e x c h a n g e d through
secondary offering at the time of listing at the local stock
exchange of shares of closely-held corporations, No. (1) a b o v e
shall apply as to the time and manner of the p a y m e n t of the tax
on the sale thereof.
(3) Tax on shares of stock not traded through the local
stock exchange. Persons deriving capital gains f r o m the
sale or e x c h a n g e of listed shares of stock not traded through
the local stock e x c h a n g e shall file a return within 30 d a y s
after e a c h transaction and a final consolidated return of all
transactions during the taxable year on or before the 15th day
of the fourth (4th) m o n t h following t h e close of t h e taxable year.
In the c a s e of an individual taxpayer, the filing of the final

consolidated return of all transactions shall be during the
calendar year. However, for corporate t a x p a y e r s , the filing
of the final consolidated return of all transactions shall be in
accordance with t h e accounting period e m p l o y e d by s u c h
taxpayer which m a y either be calendar or fiscal year basis.
(Sec. 10, Ibid.)
8. Time for e-filing and e-payment by Large Taxpayers: sale of
shares of stock listed and traded through the local stock exchange
and/or through initial public offering.
(1) In the c a s e of Initial Public Offering (IPO), the tax return
(BIR Form No. 2552) shall be e-filed a n d e-paid by the issuing
corporation within 30 d a y s f r o m the d a t e of listing of the s h a r e s
of stock in the local stock e x c h a n g e .
(2) In the case of secondary offering, the tax return shall
be e-filed and e-paid within five (5) banking d a y s f r o m the date
of collection by the stockbroker, containing a declaration of all
the transactions effected through him during the preceding
w e e k and of taxes collected by him and turned over to the
BIR w h e r e the tax collection f r o m the sale based on the gross
selling price of gross value in m o n e y of the shares of stock sold,
bartered, e x c h a n g e d or otherwise disposed in a c c o r d a n c e with
the proportion of shares of stock sold, bartered, exchanged or

otherwise d i s p o s e d to the total outstanding shares of stock after
the listing in the local stock e x c h a n g e provided for in Section
127(B). (Sec. 6, Rev. Regs. No. 17-2010.)
9. Tax exemptions. A n y gain derived f r o m the sale,
etc. of shares of stock listed a n d traded through the local stock
e x c h a n g e , or through initial or s e c o n d a r y public offering by closely-
held corporations are e x e m p t f r o m capital gains tax f r o m sales of
shares of stock (see Sees. 24[c], 2 7 [ D , 2], 28[A, 8, c], 2 8 [ B , 8, c].)
by citizens or residents, any d o m e s t i c corporation or any resident
or non-resident foreign corporation a n d f r o m the regular individual
a n d corporate income tax. However, the tax paid under Section
127 shall not be an allowable deduction for income tax purposes.
(Subsec. D.)
10. Income earned. In both t h e capital gains tax (CGT) and

t h e stock transaction tax, t h e nature of the object of the tax is the
s a m e , i.e., i n c o m e f r o m the sale, e x c h a n g e or other disposition of
a capital asset. In China Banking Corporation vs. Court of Appeals,
(336 S C R A 178 [2000].), t h e S u p r e m e Court held that "an equity
investment is a capital, not ordinary, asset of the investor the sale
or e x c h a n g e of w h i c h results in either a capital gain or capital loss."
T h u s , income e a r n e d by retirement plans f r o m their investments in
shares of stock listed and traded on the Philippine Stock Exchange
(PSE) is e x e m p t f r o m the stock transaction tax under Section
127(A), pursuant to Section 60(B). (BIR Ruling No. 324-05, July 19,
2005.)
SEC. 1 2 8 . Returns and Payment of Percentage Taxes.

( A ) Returns of Gross Sales, Receipts or Earnings and Payment of
Tax. -
(1) Persons Liable to Pay Percentage Taxes. - Every person
subject to the percentage taxes imposed under this Title shall file
a quarterly return of the amount of his gross sales, receipts or
earnings and pay the tax due thereon within twenty-five (25) days
after the end of each taxable quarter: Provided, That in the case of a
person whose V A T registration is cancelled and who becomes liable
to the tax imposed in Section 116 of this Code, the tax shall accrue
from the date of cancellation and shall be paid in accordance with
the provisions of this Section.
(2) Person Retiring from Business. Any person retiring from
a business subject to percentage tax shall notify the nearest internal
ANNOTATED
revenue officer, f i l e h i s r e t u r n a n d p a y t h e t a x d u e t h e r e o n w i t h i n
t w e n t y (20) days a f t e r c l o s i n g h i s business.
(3) Exceptions. T h e C o m m i s s i o n e r m a y , b y r u l e s a n d
r e g u l a t i o n s , prescribe:
(a) T h e t i m e f o r f i l i n g t h e r e t u r n a t i n t e r v a l s o t h e r t h a n t h e
t i m e p r e s c r i b e d i n t h e p r e c e d i n g p a r a g r a p h s f o r a p a r t i c u l a r class
or classes of t a x p a y e r s a f t e r c o n s i d e r i n g s u c h f a c t o r s as v o l u m e
o f sales, f i n a n c i a l c o n d i t i o n , a d e q u a t e m e a s u r e s o f s e c u r i t y , a n d
such o t h e r r e l e v a n t i n f o r m a t i o n r e q u i r e d t o b e s u b m i t t e d u n d e r
t h e p e r t i n e n t p r o v i s i o n s o f t h i s Code; a n d
(b) T h e m a n n e r a n d t i m e o f p a y m e n t o f p e r c e n t a g e t a x e s
o t h e r t h a n a s h e r e i n a b o v e p r e s c r i b e d , i n c l u d i n g a scheme o f t a x
prepayment.
(4) Determination of Correct Sales or Receipts. W h e n i t i s
found t h a t a person has failed to issue receipts or invoices, or w h e n
n o r e t u r n i s f i l e d , o r w h e n t h e r e i s r e a s o n t o b e l i e v e t h a t t h e books
o f accounts o r o t h e r records d o n o t c o r r e c t l y r e f l e c t t h e d e c l a r a t i o n s
made or to be made in a r e t u r n required to be filed under the
p r o v i s i o n s o f t h i s Code, t h e C o m m i s s i o n e r , a f t e r t a k i n g i n t o a c c o u n t
t h e sales, r e c e i p t s o r o t h e r t a x a b l e base o f o t h e r p e r s o n s e n g a g e d
i n s i m i l a r businesses u n d e r s i m i l a r s i t u a t i o n s o r c i r c u m s t a n c e s ,
or after considering other relevant i n f o r m a t i o n m a y prescribe a
m i n i m u m a m o u n t o f s u c h gross r e c e i p t s , sales a n d t a x a b l e base a n d
s u c h a m o u n t so p r e s c r i b e d s h a l l b e prima facie c o r r e c t f o r p u r p o s e s
of determining the i n t e r n a l revenue t a x liabilities of such person.
( B ) Where to File. E x c e p t as t h e C o m m i s s i o n e r o t h e r w i s e
permits, every person liable to percentage t a x u n d e r t h i s T i t l e
m a y , a t h i s o p t i o n , f i l e a s e p a r a t e r e t u r n f o r e a c h b r a n c h o r place
o f business, o r a c o n s o l i d a t e d r e t u r n f o r a l l b r a n c h e s o r places
o f business w i t h t h e a u t h o r i z e d a g e n t b a n k , R e v e n u e D i s t r i c t
Officer, C o l l e c t i o n A g e n t o r d u l y a u t h o r i z e d T r e a s u r e r o f t h e c i t y o r
m u n i c i p a l i t y where said business or p r i n c i p a l place of business is
l o c a t e d , as t h e case m a y be.
ANNOTATION
1. Amended: Subsection (B) "Except as the C o m m i s s i o n e r

otherwise permits" and "authorized agent b a n k " are a d d e d .
2. Time for filing of Monthly Percentage Tax Return. Except
the tax on overseas dispatch, etc. (Sec. 120[A].), a m u s e m e n t taxes
(Sec. 125, last par.), taxes on winnings (Sec. 126, last par.), and tax
on sale, etc. of shares of stock (Sec. 127[C].), the percentage tax
return shall n o w be filed a n d the tax due thereon paid monthly, (see
Subsec. A, 3.)
T h e Monthly Percentage Tax Returns (BIR Form No. 2551M)
of taxpayers, w h e t h e r large or non-large, shall be filed, and taxes
paid, not later than the 20th day following the e n d of e a c h month.
With respect to t a x p a y e r s enrolled with the Electronic Filing
and P a y m e n t S y s t e m ( E F P S ) , the deadline for e-filing the Monthly
Percentage Tax Return a n d e-paying the tax d u e thereon shall
be five (5) d a y s later than the deadline set a b o v e , provided, that
for p e r c e n t a g e tax returns/other returns required to be filed under
Sections 1 2 0 , 1 2 5 , 1 2 6 , a n d 127 of the Tax C o d e , they shall be filed
within the periods stated in said sections. (Sec. 2, Rev. Regs. No.
4 - 2 0 0 2 , M a r c h 2 6 , 2002.)
Note: For return to be filed by percentage tax withholding

agents, see Section 114 (VAT). Rev. Regs. No. 13-2007 (Oct. 15,
2 0 0 7 ) prescribes the rules on the a d v a n c e payment by owners/
sellers of VAT and percentage tax on naturally g r o w n and planted
timber products harvested f r o m industrial tree plantations and in
private lands c o v e r e d by a p p r o v e d land applications prior to their
transport for purposes of c o n s u m m a t i n g a sale.
3. Return to be filed by VAT and percentage tax withholding
agents. S e e Annotation No. 10, under Section 114.
4. Time for issuance of Certificate of Percentage Tax Withheld
at Source. Every withholding agent, w h e t h e r a large or non-large
taxpayer, shall furnish e a c h :
a) person e x e m p t from VAT under Section 109(1)(V) of
the Tax C o d e and w h o is not a VAT-registered person and,
there-fore, subject to percentage tax, except cooperatives;
(b) domestic carrier and keeper of garage;
(c) international carrier;
(d) franchise holder of radio and/or television broadcasting
w h o s e annual gross receipts do not exceed P10M and who are
not VAT-registered taxpayers, and of electric, gas, and water,
utilities;
(e) bank and non-bank financial intermediary;
(f) finance company;
(g) life insurance company;
ANNOTATED
(h) agent of a foreign insurance company;

(i) proprietor, lessee or operator of a cockpit, cabaret,
night or day club, boxing exhibition, professional basketball,
g a m e , jai-alai and racetrack; and
(j) seller of shares of stock listed and traded through the
local stock exchange or through initial and secondary public
offering;
from w h o m percentage taxes have b e e n d e d u c t e d and withheld,
the Certificate of Creditable Tax Withheld at S o u r c e (BIR Form
No. 2307).
The certificate shall be a c c o m p l i s h e d in quadruplicate, the first
three copies of which shall be given to the seller/payee not later
than the 10th day of the following m o n t h . T h e fourth copy shall be
the file copy of the g o v e r n m e n t withholding agent. Nonetheless,
for the percentage tax on winnings a n d prizes t a x e d under Sec.
126 of the Tax C o d e , withheld by t h e payor, the Certificate to be
issued by the withholding agent, g o v e r n m e n t or private shall be t h e
Certificate of Final Tax Withheld at S o u r c e (BIR F o r m N o . 2 3 0 6 )
which must be issued u p o n request of t h e p a y e e . (Sec. 7, Ibid.)
5. Stock transaction tax. It is t h e duty of t h e stockholder to
file the tax return (BIR Form 2 5 5 2 ) a n d pay the stock transaction
tax (STT) due under Section 127(A) after collecting t h e s a m e f r o m
the seller, within five (5) banking d a y s f r o m t h e date of collection
thereof. T h e tax collected shall be credited to t h e BIR Office w h i c h
has jurisdiction over the stockholder, (see Rev. M e m o . Cir. N o . 2 1 -
2008.)
6. Initial public offering. For t h e initial public offering (IPO)

tax under Section 127, the person liable in t h e c a s e of primary
offering is the issuing corporation, while t h e seller is t h e o n e
primarily liable in the case of s e c o n d a r y offering.
In primary offering, the tax d u e shall be paid within 30 d a y s
from the date of sale and t h e tax shall be credited to the BIR Office
having jurisdiction over t h e issuing corporation. In a s e c o n d a r y
offering, it is the duty of the stockbroker to file the return. (BIR
Form 2552) and pay the tax d u e after collecting the s a m e f r o m
the seller within five (5) banking d a y s f r o m the date of collection
thereof. T h e tax collected shall be credited to t h e BIR Office which
has jurisdiction over the stockbroker. (Ibid.)
For rule with respect to Large Taxpayers, see Annotation No. 9

under Section 127.
128 OTHER PERCENTAGE TAXES 273

Rev. R e g s . No. 17-2010 prescribe the time, place, and manner of
filing tax returns a n d p a y m e n t of taxes by Large Taxpayers (see
Annotation No. 22 under Sees. 52-55, Vol. 1 and Annotation Nos.
7-8 under Sec. 245[j]).
With respect to Other Percentage Taxes:

(1) Monthly percentage tax return (BIR Form No. 2551M)
shall be e-filed in a consolidated return and on a staggered
basis according to the classification of industry pursuant to Rev.
Regs. No. 2 6 - 2 0 0 2 a n d Rev. M e m o . Cir. No. 2-2003 and the
aggregate p e r c e n t a g e taxes d u e shall be e-paid within 20 days
after t h e end of e a c h taxable m o n t h subject to the pertinent
provisions of Section 128(A).
(2) Quarterly percentage tax return (BIR Form No. 2551Q)
shall be e-filed in a consolidated return on a staggered basis
according to the classification of industry pursuant to Rev.
R e g s . No. 2 6 - 2 0 0 2 and Rev. M e m o . Cir. No. 2-2003 and the
aggregate p e r c e n t a g e t a x e s d u e shall be e-paid within 25 days
after t h e e n d of e a c h taxable quarterly subject to the pertinent
provisions of Section 128(A).
(3) Returns of percentage tax payable under special laws

(BIR F o r m N o . 2 5 5 3 ) shall be e-filed and e-paid on or before
the d u e date for p a y m e n t of tax as stated in the special law.
(4) For the e - p a y m e n t of percentage tax returns required
to be e-filed as a b o v e - m e n t i o n e d under the staggered filing
s y s t e m , the taxpayer shall, u p o n e-filing using the facilities of
e F P S , likewise give instruction to the A A B to debit its account
for the month of tax payable on or before the due date for
payment thereof as prescribed under the prevailing/applicable
laws/regulations. (Sec. 6, Rev. Regs. No. 17-2010.)
- oOo -
TITLE VI
EXCISE TAXES ON CERTAIN GOODS

CHAPTER I
GENERAL PROVISIONS
SEC. 129. Goods Subject to Excise Taxes. Excise taxes
apply to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition and to
things imported. The excise tax imposed herein shall be in addition
to the value-added tax imposed under Title rv\
For purposes of this Title, excise taxes herein imposed and
based on weight or volume capacity or any other physical unit of
measurement shall be referred to as "specific tax" and an excise tax
herein imposed and based on selling price or other specified value
of the goods shall be referred to as "ad valorem tax." (as amended,
Exec. Order No. 273.)
ANNOTATION
1. Excise taxes, as u s e d in the Tax C o d e , refer to taxes

applicable to certain specified or selected g o o d s or articles
manufactured or produced in the Philippines for d o m e s t i c sale or
consumption or for any other disposition and to things imported into
the Philippines. T h e y are either specific or ad valorem.
2. Nature of excise taxes. A l t h o u g h they m a y be considered
taxes on production, being collected only f r o m manufacturers a n d
producers, they are really taxes on property as they are i m p o s e d
directly on certain specified g o o d s . (Silkhair [Singapore] Pte. Ltd.
vs. C o m m . , 571 S C R A 141 [2008], citing De Leon & De L e o n , Jr.,
T h e National Internal R e v e n u e C o d e A n n o t a t e d , Vol. 2 [2003], p.
198.)
(1) A tax is not excise w h e r e it d o e s not subject directly the

produce or goods to tax but indirectly as an incident to, or in
connection with, the business to be t a x e d .
274
Sec. 129 EXCISE TAXES ON CERTAIN GOODS 275
General Provisions
(a) T h u s , a municipal tax or license fee imposed

for the storage of copra and/or h e m p in a w a r e h o u s e or
for e n g a g i n g in buying or selling copra and/or h e m p , the
a m o u n t of the tax or license fee to be collected being based
on the w e i g h t (P0.05 for 100 kilos or fraction thereof per
month) is not an excise tax. It is a tax on the business of
buying and selling or storing copra, (see Uy Mateo and Co.,
Inc. vs. City of C e b u , 93 Phil. 300.)
(b) Similarly, a municipal tax of "P150 on tin can for

factories having a m a x i m u m annual output capacity of
3 0 , 0 0 0 " is not an excise tax as it is not one on specified
articles, (see Shell C o . vs. Vano, 84 Phil. 389; see Medina
vs. City of Baguio, 91 Phil. 854.)
(2) Excise t a x e s , w h e t h e r under the specific or the a d
valorem tax s y s t e m is basically an indirect tax imposed on c o n -
s u m p t i o n of certain types or class of goods, whether locally
m a n u f a c t u r e d or imported. While the tax is directly levied upon
t h e manufacturer/producer/importer upon removal of the tax-
able g o o d s f r o m its place of production or from the customs
custody in reality, t h e tax is actually passed on to the end c o n -
s u m e r as part of the transfer value or selling price of the goods,
sold, bartered or e x c h a n g e d . (Silkhair [Singapre] Pte. Ltd.
v s . C o m m . , 571 S C R A 141 [2008] supra, and 613 S C R A 638
[2010], citing De L e o n & De Leon, Jr., pp. 198-199; Exxon Mo-
bile Petroleum and C h e m i c a l Holdings, Inc. vs. C o m m . , G.R.
No. 180909, J a n . 19, 2011.)
(3) In the refund of indirect taxes, the statutory taxpayer

is the proper party that can claim the refund. Even if the
c o n s u m e r s or purchasers ultimately pay for the tax as part
of the price, they are not considered the taxpayers. The tax
liability remains with the manufacturer/producer/importer that
is primarily, directly and legally lliable for the payment of excise
taxes e v e n if it shifts the burden of the tax to the purchaser.
(Ibid.)
3. G o o d s subject to excise taxes, unless otherwise provided,
are subject to value-added tax. (see Sec. 103[d, e].)
4. Particular articles subject to excise taxes. More
specifically, excise taxes are laid by the Tax Code on the following:
(1) Alcohol products (ST).
(a) Distilled spirits and preparations of which distilled
spirits form the chief ingredient;
ANNOTATED
(b) Wines; and

(c) Fermented liquors.
(2) Tobacco products.
(a) Products of tobacco (ST);
(b) Cigars (AV); and
(c) Cigarettes (ST)
(3) Petroleum products (ST).
(a) Lubricating oils, g r e a s e s ;
(b) Processed g a s ;
(c) W a x e s and petrolatum;
(d) Denatured alcohol for motive power;
(e) Naphtha, regular gasoline, and other similar pro-
ducts of distillation;
(f) P r e m i u m gasoline;
(g) Aviation turbo jet fuel, diesel fuel oil;
(h) K e r o s e n e ;
(i) Diesel fuel oil and similar fuel oils;
0) Liquefied Petroleum G a s (LPG);
(k) Asphalts;
(I) Bunker fuel oil, a n d similar oils; a n d
(m) Naphtha, w h e n u s e d as a raw material in t h e
production of petrochemical products.
(4) Miscellaneous Articles (AV).
(a) A u t o m o b i l e s ; and
(b) Certain non-essential g o o d s .
(5) Mineral products.
(a) Coal a n d c o k e (ST);
(b) Non-metallic minerals a n d quarry resources (AV);
(c) Metallic minerals (AV); a n d
(d) Indigenous petroleum (AV).
T h e s e articles are subject to either specific tax (ST) or ad
valorem tax (AV). For g o o d s to be subject to excise taxes, they
must belong to any of the categories of g o o d s e n u m e r a t e d
above in Title VI and are for domestic sale or c o n s u m p t i o n ,
Sec. 130 EXCISE TAXES ON C E R T A I N GOODS 277
Genera] Provisions
excluding those that are actually exported (Sec. 129.) and

exempt. (Sec. 135.)
5. Basis of specific tax. T h e specific tax derives its name
from the fact that its rates are of a specific or fixed a m o u n t in pesos
and/or centavos levied on the articles e n u m e r a t e d according to a
certain physical unit of m e a s u r e m e n t , as follows:
(1) Volume, as in the case of distilled spirits (Sec. 141.),
w i n e s (Sec. 142.), a n d manufactured oils and other fuels (Sec
148.);
(2) Length, as in the c a s e of the tax formerly imposed on
cinematographic films;
(3) Number, as in the c a s e of cigars and cigarettes (Sec.
145.); a n d
(4) Weight, as in t h e c a s e of manufactured products of
t o b a c c o (Sec. 144.), and t h e tax formerly imposed on fireworks,
a n d saccharine.
6. In t h e c a s e of ad valorem tax, t h e rates or a m o u n t s fluctuate
as t h e prices of t h e articles m o v e up and d o w n . It is based on the
value or selling price of the m a n u f a c t u r e d or produced article.
S E C . 130. Filing of Return and Payment of Excise Tax on

Domestic Products.
( A ) Persons Liable to File a Return, Filing of Return on Removal
and Payment of Tax.
(1) Persons Liable to File a Return. E v e r y person liable t o pay
excise t a x i m p o s e d u n d e r t h i s T i t l e s h a l l f i l e a separate r e t u r n for
each place o f p r o d u c t i o n s e t t i n g f o r t h , a m o n g o t h e r s , t h e d e s c r i p t i o n
a n d q u a n t i t y or volume of products to be removed, the applicable tax
base a n d t h e a m o u n t o f t a x d u e t h e r e o n : Provided, however, T h a t i n
t h e case o f i n d i g e n o u s p e t r o l e u m , n a t u r a l gas o r l i q u e f i e d n a t u r a l
gas, t h e excise t a x s h a l l b e p a i d b y t h e f i r s t b u y e r , p u r c h a s e r o r
t r a n s f e r e e f o r local sale, b a r t e r o r t r a n s f e r , w h i l e t h e excise t a x o n
e x p o r t e d p r o d u c t s s h a l l b e p a i d b y t h e o w n e r , lessee, concessionaire
o r o p e r a t o r o f t h e m i n i n g c l a i m , (a)
S h o u l d domestic p r o d u c t s b e r e m o v e d f r o m t h e place o f
p r o d u c t i o n w i t h o u t t h e p a y m e n t o f t h e t a x , t h e o w n e r o r person
h a v i n g possession t h e r e o f s h a l l b e l i a b l e for t h e t a x due t h e r e o n .
(2) Time for Filing of Return and Payment of the Tax. Unless
o t h e r w i s e specifically a l l o w e d , t h e r e t u r n s h a l l b e f i l e d a n d t h e excise
ANNOTATED
tax paid by the manufacturer or producer before removal of domestic

products from place of production: Provided, That the excise tax on
locally manufactured petroleum products and indigenous petroleum
levied under Sections 148 and 151(A)(4), respectively, of this Title
shall be paid within ten (10) days from the date of removal of such
products for the period from January 1, 1998 to June 30, 1998;
within five (5) days from the date of removal of such products for the
period from July 1, 1998 to December 31, 1998; and, before removal
from the place of production of such products from January 1, 1999
and thereafter: Provided, further, That the excise tax on nonmetallic
mineral or mineral products, or quarry resources shall be due and
payable upon removal of such products from the locality where
mined or extracted, but with respect to the excise tax on locally
produced or extracted metallic mineral or mineral products, the
person liable shall file a return and pay the tax within fifteen (15)
days after the end of the calendar quarter when such products were
removed subject to such conditions as may be prescribed by rules
and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner. For this purpose, the
taxpayer shall file a bond in an amount which approximates the
amount of excise tax due on the removals for the said quarter. The
foregoing rules notwithstanding, for imported mineral or mineral
products, whether metallic or nonmetallic, the excise tax due thereon
shall be paid before their removal from customs custody, (n)
(3) Place for Filing of the Return and Payment of the Tax.
Except as the Commissioner otherwise permits, the return shall be
filed with and the tax paid to any authorized agent bank or Revenue
District Officer, Revenue Collection Officer, or duly authorized city
or municipal treasurer in the Philippines, (n)
(4) Exceptions. The Secretary of Finance, upon recommenda-
tion of the Commissioner, may, by rules and regulations, prescribe:
(a) The time for filing the return at intervals other than the
time prescribed in the preceding paragraphs for a particular
class or classes of taxpayers after considering factors such as
volume of removals, adequate measures of security and such
other relevant information required to be submitted under the
pertinent provisions of this Code; and
(b) The manner and time of payment of excise taxes other
than as herein prescribed, under a tax prepayment, advance
deposit or similar schemes. In the case of locally produced or
General Provisions
extracted minerals and mineral products or quarry resources

where the mine site or place of extraction is not the same as the
place of processing or production, the return shall be filed with
and the tax paid to the Revenue District Office having jurisdiction
over the locality where the same are mined, extracted or quarried:
Provided, however, That for metallic minerals processed abroad,
the return shall be filed and the tax due thereon paid to the
Revenue District Office having jurisdiction over the locality
where the same are mined, extracted or quarried, (n)
(B) Determination of Gross Selling Price of Goods Subject to Ad
Valorem Tax. Unless otherwise provided, the price, excluding the
value-added tax, at which the goods are sold at wholesale in the
place of production or through their sales agents to the public shall
constitute the gross selling price. If the manufacturer also sells or
allows such goods to be sold at wholesale in another establishment
of which he is the owner or in the profits of which he has an interest,
the wholesale price in such establishment shall constitute the gross
selling price. Should such price be less than the cost of manufacture
plus expenses incurred until the goods are finally sold, then a
proportionate margin of profit, not less than ten percent (10%) of
such manufacturing cost and expenses, shall be added to constitute
the gross selling price.
(C) Manufacturer's or Producer's Sworn Statement. Every
manufacturer or producer of goods or products subject to excise taxes
shall file with the Commissioner on the date or dates designated
by the latter, and as often as may be required, a sworn statement
showing, among other information, the different goods or products
manufactured or produced and their corresponding gross selling
price or market value, together with the cost of manufacture or
production plus expenses incurred or to be incurred until the goods
or products are finally sold.
(D) Credit for Excise Tax on Goods Actually Exported. - When
goods locally produced or manufactured are removed and actually
exported without returning to the Philippines, whether so exported
in their original state or as ingredients or parts of any manufactured
goods or products, any excise tax paid thereon shall be credited
or refunded upon submission of the proof of actual exportation
and upon receipt of the corresponding foreign exchange payment:
Provided, That the excise tax on mineral products, except coal and
coke, imposed under Section 151 shall not be creditable or refundable
even if the mineral products are actually exported.
ANNOTATED
SEC. 131. Payment of Excise Taxes on Imported Articles.

(A) Persons Liable. Excise taxes on imported articles shall be
paid by the owner or importer to the Customs Officers, conformably
with the regulations of the Department of Finance and before the
release of such articles from the custom house, or by the person who
is found in possession of articles which are exempt from excise taxes
other than those legally entitled to exemption.
In the case of tax-free articles brought or imported into the
Philippines by persons, entities, or agencies exempt from tax which
are subsequently sold, transferred or exchanged in the Philippines
to non-exempt persons or entities, the purchasers or recipients shall
be considered the importers thereof, and shall be liable for the duty
and internal revenue tax due on such importation.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes, distilled
spirits fermented liquors and wines into the Philippines, even if
destined for tax and duty free shops, shall be subject to all applicable
taxes, duties, charges, including excise taxes due thereon. This shall
apply to cigars and cigarettes, distilled spirits, fermented liquors,
and wines brought directly into the duly chartered or legislated
freeports of the Subic Special Economic and Freeport Zone, created
under Republic Act No. 7227; the Cagayan Special Economic
Zone and Freeport, created under Republic Act No. 7922; and the
Zamboanga City Special Economic Zone, created under Republic Act
No. 7903, and such other freeports as may hereafter be established or
created by law: Provided, That importations of cigars and cigarettes,
distilled spirits, fermented liquor and wines by a government-owned
and operated duty-free shop, like the Duty-Free Philippines (DFP),
shall be exempted from all applicable duties only: Provided, still
further, That such articles directly imported by a government-
owned and operated duty-free shop, like the Duty-Free Philippines,
shall be labelled "duty-free" and "not for resale": Provided, finally,
That the removal and transfer of tax and duty-free goods, products,
machinery, equipment and other similar articles other than cigars
and cigarettes, distilled spirits, fermented liquors and wines, from
one freeport to another freeport, shall not be deemed an introduction
into the Philippine customs territory.
Cigars and cigarettes, distilled spirits and wines within the

premises of all duty-free shops which are not labelled as hereinabove
required, as well as tax and duty-free articles obtained from a duty-
Sees. 130-132 EXCISE TAXES ON C E R T A I N GOODS 281
General Provisions
free shop a n d s u b s e q u e n t l y f o u n d i n a n o n - d u t y - f r e e shop t o b e

offered f o r resale s h a l l b e c o n f i s c a t e d , a n d t h e p e r p e t r a t o r o f s u c h
non-labelling or re-selling shall be punishable under the applicable
p r o v i s i o n s o f t h i s Code.
A r t i c l e s c o n f i s c a t e d s h a l l b e disposed o f i n accordance w i t h t h e
rules a n d regulations to be p r o m u l g a t e d by the Secretary of Finance,
upon recommendation of the Commissioners of Customs and
I n t e r n a l Revenue, u p o n consultation w i t h the Secretary of T o u r i s m
a n d t h e G e n e r a l M a n a g e r o f t h e P h i l i p p i n e T o u r i s m A u t h o r i t y , (n)
T h e t a x d u e o n a n y s u c h goods, p r o d u c t s , m a c h i n e r y , e q u i p m e n t
o r o t h e r s i m i l a r a r t i c l e s s h a l l c o n s t i t u t e a l i e n o n t h e a r t i c l e itself, a n d
s u c h l i e n s h a l l b e s u p e r i o r t o a l l o t h e r charges o r l i e n s , i r r e s p e c t i v e
o f t h e possessor t h e r e o f . (As amended by R.A. No. 9334.)
( B ) Rate and Basis of the Excise Tax on Imported Articles.

U n l e s s o t h e r w i s e specified, i m p o r t e d a r t i c l e s s h a l l be subject to t h e
same r a t e s a n d basis of excise taxes applicable to locally m a n u f a c t u r e d
articles.
S E C . 1 3 2 . Mode of Computing Contents of Cask or

Package. E v e r y f r a c t i o n a l p a r t o f a p r o o f l i t e r e q u a l t o or g r e a t e r
t h a n a h a l f l i t e r i n a cask o r p a c k a g e c o n t a i n i n g m o r e t h a n one l i t e r
shall be taxed as a liter, and any smaller fractional p a r t shall be
e x e m p t ; b u t a n y p a c k a g e o f s p i r i t s , t h e t o t a l c o n t e n t s o f w h i c h are
less t h a n a p r o o f l i t e r , s h a l l b e t a x e d a s one l i t e r .
ANNOTATION
1. Amended: Section 130(A, 1); New: Section 130(A, 2 , 3 , 4 ) ,

paragraphs 3, 4 and 5 of Section 131(A).
2. Filing of return and payment of excise tax. Every
person liable to pay excise tax is n o w required to file a return. The
persons liable for the payment of excise taxes are those mentioned
in Sections 130(A) and 131(A). A person for w h o m an article is
manufactured is considered the manufacturer or producer of
the s a m e . Therefore, he is liable for the tax. ( C o m m . vs. Central
Azucarrera San Pedro, L-14015, May 3 1 , 1960; Alca vs. C.T.A.,
L-24624, Nov. 27, 1968.)
(1) As a general rule, all withdrawals of excisable articles
from their place of production must be subject to excise
tax. Granting an outright exception is discouraged because
it deprives the government of the opportunity to evaluate
ANNOTATED
thoroughtly the legal and factual bases of the tax relief

sought. Thus government favors remedies after payment of
the tax because this option gives more protection to revenue
collectives without diminishing the impact of the tax relief to
which the taxpayer may be entitled. T h e s e remedies may come
in the form of either:
(a) Claim for excise tax credit/refund pursuant to
Sections 204 and 2 0 9 ; or
(b) Product replenishment (instead of filing-claim for
tax credit/refund) the m e c h a n i c s of w h i c h are presented in
Rev. Regs. No. 3-2008 (Jan. 2 2 , 2008).
Rev. Regs. No. 3-2008 a m e n d e d existing regulations on
granting outright excise tax e x e m p t i o n on removal of excisable
articles which are intended for export or sale/delivery to
international carriers or to t a x - e x e m p t entities/agencies a n d
prescribes the procedures for claims for product replenishment.
(2) Excise taxes attach e v e n on articles illicitly m a d e ,

or the production of w h i c h is prohibited or p u n i s h e d by law.
(Asiatic Petroleum C o . v s . Rafferty, 38 Phil. 475.)
(3) T h e y are d u e although the product was removed
from the place of production merely for the p u r p o s e of storing
the s a m e in s o m e other place and w a s not actually sold or
c o n s u m e d . (BIR Ruling, M a y 5, 1956.) It d o e s not matter to
what use the article subject to tax is put. ( C o m m . v s . A b a d ,
L-19627, J u n e 2 7 , 1968.)
(4) T h e loss of the articles subject to excise taxes before

removal from the place of production or release f r o m c u s t o m s
custody bars the collection of the tax w h i c h is otherwise d u e
thereon, or if the s a m e has already b e e n paid, entitles the
taxpayer to a refund, (see BIR Ruling, 1955; Sees. 1701-1704,
Tariff and C u s t o m s Code.) T h e loss of t h e articles after s u c h
removal or release d o e s not render the collection of the tax
illegal so as to entitle the taxpayer to the refund thereof.
(5) A manufacturer of petroleum products m a y properly
pass on excise taxes on its sale of petroleum products to a
tax-exempt international organization. Beginning J a n u a r y 1,
1999, manufacturers of petroleum products are required to pay
excise taxes e v e n before these products are r e m o v e d f r o m
the refinery and deposited in the depots, (see Subsec. A, 2.)
Since such products shall all be tax-paid beginning said date,
Sees. 130-132 EXCISE TAXES ON CERTAIN GOODS 283
General Provisions
this requirement effectively r e m o v e d from the manufacturers

the holding of tax-free petroleum inventory in their depots from
w h i c h they get their supply of products to be purchased by tax-
e x e m p t entities. (BIR Ruling No. 23-99, Feb. 2 5 , 1999.)
(6) Importation begins w h e n the carrying vessel or aircraft

enters t h e jurisdiction of the Philippines with intention to unload
a n d is d e e m e d terminated u p o n p a y m e n t of the duties, taxes
and other c h a r g e s d u e u p o n the articles and the legal permit
for withdrawal shall have b e e n g r a n t e d . If the articles are free of
duties, taxes a n d other c h a r g e s , importation is not terminated
until t h e articles shall have legally left the jurisdiction of the
c u s t o m s . (Tariff a n d C u s t o m s C o d e , Sec. 1202; Llamedo vs.
C o m m . of C u s t o m s , 122 S C R A 118 [1983]; Rodriguez vs. Court
o f A p p e a l s , 2 4 8 S C R A 2 8 8 [1995].)
T h e intention to u n l o a d , an essential element of importation,

is manifested only at t h e time w h e n the shipment is withdrawn
f r o m t h e c u s t o m s h o u s e u p o n p a y m e n t of the corresponding
duties a n d taxes, or u p o n issuance of a permit to withdraw;
otherwise, if t h e s a m e are not paid, importation is illegal. (BIR
Ruling N o . 122-98, A u g . 18, 1998.)
Note: D e p a r t m e n t of Finance ( D O F ) Order No. 51-2010

prescribes the guidelines to be o b s e r v e d by the BIR covering
requests for tax a n d duty e x e m p t i o n s on imported goods. All
requests for e x e m p t i o n should be lodged with the revenue
office, to the extent possible, at least 15 days before the
shipment leaves the port of origin.
3. Unless exciseable products are placed in the market for

domestic c o n s u m p t i o n by the public the tax will not apply. The
theory of the law s e e m s to be that the tax is not due and payable
until the merchandise is about to be put into the c o m m e r c e or trade
of the country. T h e condition of the market at a particular time,
or the situation in business generally, might cause the producer
to withhold his merchandise and allow it to be removed from the
place of production for months or e v e n years. The law permits the
producer of taxable merchandise to delay the payment of the tax
until immediately before removal of the same from the place of
production. (BIR Ruling No. 201-99, Sept. 16, 1999, citing Asiatic
Petroleum C o m p a n y vs. Rafferty, 38 Phil. 475.)
4. Under Section 130(A, 2), the excise tax on locally manu-

factured products shall be paid by the manufacturer/producer. In
284 THE NATIONAL INTERNAL REVENUE CODE Sees. 130-132
ANNOTATED
respect to the sale of petroleum products to international carriers,

the manufacturer/producer in practice would pay the excise tax
and bill the customer net of the tax and then claim for refund/tax
credit for the tax paid to the BIR. In case the manufacturer sell
its products through independent distributors w h o , in turn, directly
sell to international carriers, it is not clear whether the distributor
to w h o m the manufacturer passed on the excise tax, an indirect
tax, can property lodge the claim for refund/tax credit with the
BIR. Since, however, the exemption granted is f r o m the burden of
indirect taxation, the distributor is a proper party to lodge the claim
notwithstanding that it is not directly liable to pay the excise tax.
(supra.)
In the earlier Silkair case (544 S C R A 100 [2008].), involving
the same parties and the s a m e c a u s e of action, the S u p r e m e Court
categorically held that "the proper party to question, or seek a refund
of an indirect tax is the statutory taxpayer (see Sec. 204[C].), the
person on w h o m the tax is i m p o s e d by law and w h o paid t h e s a m e
even if he shifts the burden thereof to another. W h e n the burden of
the tax is shifted, the a m o u n t p a s s e d on to the buyer is no longer a
tax but a part of the p u r c h a s e price of the g o o d s sold.
5. New excise tax forms. Rev. R e g s . N o . 1-2002 (Sec. 1

thereof.) prescribes the use of n e w f o r m s in the filing of tax returns
by taxpayers subject to excise tax as follows:
Form No. Form Name

2200 A Excise Tax Return for Alcohol Products
2200 T Excise Tax Return for Tobacco Products
2200 P Excise Tax Return for Petroleum
Products
2200 A N Excise Tax Return for Automobiles and
Non-essentials
2200 M Excise Tax Return for Mineral Products
6. Persons required to file return. Every person liable to

pay the excise tax on domestically produced/extracted articles
under Title VI of the Tax C o d e shall file a separate return for e a c h
place of production or extraction, in c a s e of mineral products, using
the forms above prescribed:
Sees. 130-132 EXCISE TAXES ON C E R T A I N GOODS 285
General Provisions
(a) Non-tax-exempt transferee of excisable articles,

w h e t h e r domestically procured or imported, acquired from a
tax-exempt entity shall likewise use the aforementioned forms
in the p a y m e n t of excise tax.
(b) T h e a b o v e returns shall also be used for prepayments,

a d v a n c e deposits or other similar s c h e m e s in payment of
excise tax on locally m a n u f a c t u r e d or p r o d u c e d products and
shall replace BIR F o r m N o . 2 2 0 0 a n d its attachments. (Sec. 2,
Rev. R e g s . No. 1-2002.)
7. Time of filing. T h e excise tax return shall be filed and the

excise tax d u e thereon be paid before removal of the g o o d s from
t h e place of production, except for nonmetallic mineral or mineral
products or quarry resources w h i c h should be paid upon removal of
s u c h products f r o m the locality w h e r e m i n e d or extracted.
(a) T h e excise on locally p r o d u c e d or extracted metallic
mineral or mineral products shall be filed and the tax paid
within 15 d a y s after the e n d of t h e calendar quarter w h e n such
products w e r e r e m o v e d , subject to the filing of a bond in an
a m o u n t w h i c h a p p r o x i m a t e s t h e a m o u n t of excise tax due on
t h e r e m o v a l s for the said quarter.
(b) In filing the prescribed return for purposes of paying
deposits or a d v a n c e p a y m e n t s , the excise tax due on all
r e m o v a l s applied against the previous available balance
thereof, including the v o l u m e and/or value of articles removed
a n d inclusive dates of r e m o v a l , shall be clearly indicated in the
return.
(c) In c a s e of sale, transfer or any disposition of an excisable
article by a t a x - e x e m p t entity to a non-tax-exempt entity, the
return shall be filed a n d t h e excise transfer or disposition,
together with the submission of relevant documents proving the
transfer or disposition. However, any original and/or subsequent
sale, transfer or any disposition of excisable articles by persons
e x e m p t e d under special laws and their implementing rules and
regulations shall remain to be governed by such special laws
and implementing regulations. (Sec. 3, Ibid.)
8. Place of Filing. T h e excise tax return shall be
accomplished and filed in triplicate and the payment of tax due,
if any, m a d e to any Authorized Agent Bank (AAB) located within
the territorial jurisdiction of the Revenue District Office where the
taxpayer's place of production or place of extraction, in case of
mineral products, is located.
ANNOTATED
(a) The place of production or the place of extraction,

which-ever is applicable, shall be registered and assigned
a branch code just like an ordinary branch. In places where
there are no A A B s , the return shall be filed with and the tax
due shall be paid to the Revenue Collection Officer (RCO) or
duly authorized City or Municipal Treasurer ( C M T ) of the city
or municipality falling under the jurisdiction of the aforesaid
Revenue District Office.
(b) W h e r e the mine site or place of extraction is not the
s a m e as the place of processing or production, the excise
tax return shall be filed with and the tax paid to the Revenue
District Office ( R D O ) having jurisdiction over the locality w h e r e
the mineral products/minerals are m i n e d , extracted or quarried.
(c) In c a s e of sale, barter or transfer of indigenous
petroleum, natural g a s or liquefied natural g a s , the excise tax
return shall be filed and t h e c o r r e s p o n d i n g tax paid with the
concerned BIR Office having jurisdiction over t h e first taxable
buyer, purchaser or transferee, e x c e p t the tax on products for
export which shall be paid by t h e owner/lessee/concessionaire/
operator of the mining claim to the collection agents ( A A B s ,
R C O s , CMTs, w h i c h e v e r is applicable) of t h e BIR Office having
jurisdiction over the place of extraction.
(d) T h e excise tax t a x p a y e r s under the jurisdiction of t h e
Large Taxpayers Service in the National Office shall file the
return and pay the excise tax d u e with t h e A A B s located at
the BIR National Office, Diliman, Q u e z o n City. However, excise
taxpayers falling under the jurisdiction of provincial Large
Taxpayers District Office (LTDO) or R D O s shall file the return
and pay the tax due with the d e s i g n a t e d A A B s or R C O s / D M T s ,
whichever is applicable, in their respective areas of jurisdiction.
(e) Excise taxpayers availing of t h e Electronic Filing a n d

Payment S y s t e m ( E F P S ) shall file t h e returns via the E F P S
pursuant to existing rules a n d regulations. (Sec. 4, Ibid.)
Rev. Regs. No. 17-2010 prescribe the time, place, a n d m a n n e r of
filing tax returns and p a y m e n t of taxes by large taxpayers, (see
Annotation No. 22 under Sees. 52-55, Vol. 1 a n d Annotation Nos.
7-8 under Sec. 245fj]).
With respect to excise taxes, they shall e-file their excise tax
returns and e-pay the corresponding excise tax deposits/payments
Sees. 130-132 EXCISE TAXES ON CERTAIN GOODS 287
General Provisions
d u e before removal from the place of production subject to the

pertinent provisions of Sections 130(A)(2) and 131(A) using the
following f o r m s ; BIR F o r m s No. 2 2 0 0 A (alcohol products), No.
2 2 0 0 A N (automobiles and non-essential goods), No. 2200P
(petroleum products), No. 2 2 0 0 T (tobacco products), and No.
2 2 0 0 M (mineral products).
However, for locally p r o d u c e d or extracted metallic mineral

or mineral products, the t a x p a y e r s shall e-file excise tax returns
a n d e-pay the tax d u e within 15 d a y s after the e n d of the calendar
quarter (BIR Form N o . 2 2 0 0 M ) w h e n s u c h products w e r e removed
provided a b o n d duly a p p r o v e d by t h e BIR in an a m o u n t which
a p p r o x i m a t e s the a m o u n t of excise tax d u e on the removals for the
said quarter has b e e n p o s t e d . (Sec. 6, Rev. R e g s . No. 17-2010.)
10. Computation. Illustration of computation of ad valorem
tax excluding VAT under Section 130(B):
P55.00x 12% P6.60 (VAT)

P 5 5 . 0 0 - P6.60 P48.40 (Price without VAT)
P48.40x 15% P7.26 (ad valorem tax)
Section 130(B) applies in general to domestic products and

excludes t h e VAT in t h e determination of the selling price. Note the
phrase "unless otherwise p r o v i d e d " in the provision.
11. Refund or credit for excise taxes paid on exported goods.
T h e general rule allows credit for excise tax paid on goods actually
exported. A purchaser of locally manufactured tax-paid goods w h o
exported the s a m e m a y request refund of the excise tax element
or issuance of a corresponding tax credit certificate which can be
used in the p a y m e n t of other internal revenue tax liabilities. (BIR
Ruling No. 4 4 2 , Sept. 15, 1988.)
It has been held by the Court of Tax Appeals that a manufacturer-
exporter is not entitled to a refund on tax credit of excise tax paid by
its supplier, even though said excise tax forms part of the price of the
raw materials purchased by said manufacturer-exporter. To claim a
refund or tax credit of excise tax paid on goods actually exported
under Section 130(D), a manufacturer-exporter must prove it
actually paid the excise tax sought to be refunded. In taxation, a
"person liable for tax" refers to "a person subject to tax," or the
person on w h o m the tax is imposed by law and w h o has paid the
tax, even though the burden is shifted to another. Tax refunds are in
the mature of tax exemptions and thus, construed strictly against the
ANNOTATED
person claiming such exemption. T h e dissenting opinion maintains

that Section 130(D) clearly indicates that the entity referred to as
entitled to tax refund or credit is the manufacturer-exporter without
distinction as to w h o paid the excise tax on the locally manufactured
goods actually exported. (Diageo Philippines, Inc. vs. C o m m . , CTA
[En Banc], No. 260, July, 2008.)
12. Excise tax on mineral products, except coal and coke (see
Sec. 151.), is not creditable or refundable e v e n if s u c h products are
actually exported. (Sec. 130[D].)
Note: For rules on the issuance of tax credit certificates and t h e
condition for their use, revalidation and transfer, see Appendix "W."
- oOo -
CHAPTER II
EXEMPTION OR CONDITIONAL
TAX-FREE REMOVAL OF CERTAIN
ARTICLES
SEC. 133. Removal of Wines and Distilled Spirits for

Treatment of Tobacco Leaf. Upon issuance of a permit from the
Commissioner and subject to the rules and regulations prescribed
by the Secretary of Finance, manufacturers of cigars and cigarettes
may withdraw from bond, free of excise tax, local and imported
wines and distilled spirits in specific quantities and grades for use
in the treatment of tobacco leaf to be used in the manufacture of
cigars and cigarettes; but such wines and distilled spirits must first
be suitably denatured.
SEC. 134. Domestic Denatured Alcohol. Domestic alcohol
of not less than one hundred eighty degrees (180) proof (ninety
percent [90%] absolute alcohol) shall when suitably denatured
and rendered unfit for oral intake, be exempt from the excise tax
prescribed in Section 141: Provided, however, That such denatured
alcohol shall be subject to tax under Section 106(A) of this Code:
Provided, further, That if such alcohol is to be used for motive
power, it shall be taxed under Section 148(d) of this Code: Provided,
finally, That any alcohol, previously rendered unfit for oral intake
after denaturing but subsequently rendered fit for oral intake
after undergoing fermentation, dilution, purification, mixture or
any other similar process shall be taxed under Section 141 of this
Code and such tax shall be paid by the person in possession of such
reprocessed spirits, (a)
SEC. 135. Petroleum Products Sold to International
Carriers and Exempt Entities or Agencies. Petroleum
products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on
their use or consumption outside the Philippines: Provided, That
289
ANNOTATED
the petroleum products sold to these international carriers shall

be stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, con-
ventions and other international agreements for their use or
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities
or agencies; and
(c) Entities which are by law exempt from direct and indirect
taxes, (a)
SEC. 136. Denaturation, Withdrawal and Use of Denatured

Alcohol. Any person who produces, withdraws, sells, transports
or knowingly uses, or is in possession of denatured alcohol, or articles
containing denatured alcohol in violation of laws or regulations now
or hereafter in force pertaining thereto shall be required to pay the
corresponding tax, in addition to the penalties provided for under
Title X of this Code.
SEC. 137. Removal of Spirits Under Bond for Rectification.

Spirits requiring rectification may be removed from the place of
production to another establishment for the purpose of rectification
without the prepayment of the excise tax: Provided, That the distiller
removing such spirits and the rectifier receiving them shall file with
the Commissioner their joint bond conditioned upon the payment by
the rectifier of the excise tax due on the rectified alcohol: Provided,
further, That in cases where alcohol has already been rectified either
by original and continuous distillation or by redistillation, no loss for
rectification and handling shall be allowed and the rectifier thereof
shall pay the excise tax due on such losses: Provided, finally, That
where a rectifier makes use of spirits upon which the excise tax has
not been paid, he shall be liable for the payment of the tax otherwise
due thereon, (a)
SEC. 138. Removal of Fermented Liquors to Bonded

Warehouse. Any brewer may remove or transport from his
brewery or other place of manufacture to a bonded warehouse
used by him exclusively for the storage or sale in bulk of fermented
liquors of his own manufacture, any quantity of such fermented
liquors, not less than one thousand (1,000) liters at one removal,
Sees. 133-140 EXCISE TAXES O N CERTAIN GOODS
Exemption or Conditional Tax-Free Removal of Certain Articles
without prepayment of the tax thereon under a permit which shall

be granted by the Commissioner. Such permit shall be affixed to
every package so removed and shall be cancelled or destroyed in
such manner as the Commissioner may prescribe. Thereafter, the
manufacturer of such fermented liquors shall pay the tax in the
same manner and under the same penalty and liability as when
paid at the brewery, (as amended by Pres. Decree No. 1994.)
SEC. 139. Removal of Damaged Liquors Free of Tax.

When any fermented liquor has become sour or otherwise damaged
so as to be unfit for use as such, brewers may sell and after securing
a special permit from the Commissioner, under such conditions as
may be prescribed in the rules and regulations prescribed by the
Secretary of Finance, remove the same without the payment of tax
thereon, in cask or other packages, distinct from those ordinarily
used for fermented liquors, each containing not less than one hundred
seventy-five (175) liters with a note of their contents permanently
affixed thereon, (as amended by Pres. Decree No. 1994.)
SEC. 140. Removal of Tobacco Products Without Pre-

payment of Tax. Products of tobacco entirely unfit for chewing
or smoking may be removed free of tax for agricultural or industrial
use, under such conditions as may be prescribed in the rules and
regulations prescribed by the Secretary of Finance. Stemmed leaf
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco,
scraps, cuttings, clippings, stems or midribs, and sweepings of
tobacco may be sold in bulk as raw material by one manufacturer
directly to another without payment of the tax under such conditions
as may be prescribed in the rules and regulations prescribed by the
Secretary of Finance.
"Stemmed leaf tobacco," as herein used, means leaf tobacco
which has had the stem or midrib removed. The term does not
include broken leaf tobacco, (as amended by Pres. Decree No. 1994.)
ANNOTATION
1. Amended: Sections 137 and 138. New: proviso in Section

134 and last proviso in Section 137. T h e provisions of Section 135
are practically new.
2. Upon compliance with certain requirements and conditions,
articles may be removed without prepayment of excise taxes as
provided in Sections 133-135, 137-140.
ANNOTATED
3. Domestic alcohol, w h e n denatured for external use and

rendered unfit for oral intake, is not subject to specific tax under
Section 141 irrespective of the end use thereof except w h e n it is
to be used for motive power in which case it is subject to specific
tax under Section 148(A, 4). Denaturation is the process of making
alcohol unfit for oral intake. Denatured alcohol is m a d e by pouring
certain additives into ethyl alcohol. It falls under the term "distilled
spirits." (La Tondena, Inc. vs. Court of Tax Appeals, L-14336, April
30, 1964.)
Denatured alcohol which is e x e m p t f r o m excise tax under

Section 134 is subject VAT pursuant to Section 106(A). Said
denatured alcohol used for motive power is subject to 1 2 % VAT
pursuant to Section 134. (BIR Ruling No. 5 7 8 , Dec. 15, 1988.)
Thus, ethyl alcohol especially denatured for the manufacture of
vinegar and the resultant vinegar are e x e m p t f r o m excise tax under
Section 141 but the sale of vinegar is subject to VAT under Section
106(A). T h e resultant vinegar after denaturing cannot be regarded
as reprocessed spirit since it no longer contains ethyl alcohol,
the s a m e having b e e n converted into ascetic acid. T h e specially
denatured alcohol although it has u n d e r g o n e f e r m e n t a t i o n , dilution,
purification, or mixing process does not m a k e it an alcoholic drink fit
for oral intake. Unlike w i n e , liquor or spirit, vinegar c a n n o t be taken
orally in v o l u m e s but merely as c o n d i m e n t or as preservative. (BIR
Ruling No. 031-98, March 2 0 , 1998.)
4. Exemption from tax. Section 134 provides that only

domestic denatured alcohol w h i c h are unfit for h u m a n c o n s u m p t i o n
shall be e x e m p t f r o m excise tax. However, considering that there
is no provision in Title VI of the Tax C o d e w h i c h provides for t h e
rate and basis of excise tax on imported d e n a t u r e d alcohol, the
BIR ruled that the s a m e rates a n d basis of excise taxes applicable
to locally manufactured articles, like d o m e s t i c d e n a t u r e d alcohol
pursuant to Section 131(B), shall be a p p l i e d . Accordingly, the
importation of denatured alcohol w h i c h are unfit for oral intake are
exempt from excise tax. T h e importation a n d sale, however, of the
said denatured alcohol are subject to VAT under Sections 107(A)
and 106(A) of the Tax C o d e . (BIR Ruling No. 0 4 0 - 2 0 0 0 , Sept. 13,
2000.)
5. Excise tax exemption of international air carriers. "As

s o m e countries allow the sale of petroleum products to Philippine
carriers without payment of taxes t h e r e o n , " Section 135 grants
on grounds of reciprocity similar tax exemption in favor of foreign
international carriers "to foster goodwill and better relationship with
Sees. 133-140 EXCISE TAXES O N CERTAIN GOODS
foreign countries." Before, all products sold to international carriers

w e r e subject to excise tax except those e x e m p t e d on a case-to-
c a s e basis in a c c o r d a n c e with s o m e bilateral agreements with
other countries a n d Philippine m e m b e r s h i p in the International Air
Transport Association (IATA).
An international carrier m a y be allowed to purchase tax-free

petroleum products f r o m any domestic oil c o m p a n y only upon
submission to the C o m m i s s i o n e r of Internal R e v e n u e of duly
authenticated d o c u m e n t s issued by duly authorized officials of the
country of said carrier attesting to the fact that said country grants
similar tax e x e m p t i o n on petroleum products sold to Philippine
carriers. Local oil c o m p a n i e s shall be held liable for the payment of
excise tax on petroleum products sold tax-free to an international
carrier in violation of Section 135. (Sec. 1, Rev. Regs. No. 5-78.)
T h e M a n i l a - C e b u Link of PAL's international route are

international flights by an international carrier; hence, petroleum
products p u r c h a s e d by PAL a n d c o n s u m e d in s u c h flights shall not
be subject to excise tax pursuant to Section 135. (BIR Ruling No.
159, M a y 2 5 , 1992.)
6. Conditions and instances. T h e e x e m p t i o n from payment

of excise tax under Section 135(a) is subject to two (2) conditions.
Under Section 135, t h e three (3) instances w h e n petroleum
products sold are e x e m p t f r o m excise taxes are:
(1) Sales to international carriers for use or consumption
outside the Philippines;
(2) Sales to e x e m p t entities or agencies covered by tax
treaties, conventions, a n d other international agreements for
their use or c o n s u m p t i o n ; a n d ,
(3) Sales to entities e x e m p t by law from direct and indirect
taxes.
7. Generally, the importation of fuel oil is subject to excise
tax under Section 139. However, the subsequent sale (i.e., re-
exportation) of the imported oil to an international carrier for
consumption outside the Philippines is not subject to excise tax.
On the basis of the principle that tax will not be due and payable
until the articles subject to the excise taxes are placed in market for
domestic consumption, the excise taxes paid on the importation of
the fuel oil are refundable. (BIR Ruling No. DA-567-09, Sept. 25,
2009.)
ANNOTATED
8. Vessels transporting passengers or cargoes from the

Philippines to other countries or vice versa is an international carrier
within the purview of Section 135(a). T h e term "vessel" and "ship"
are used in a very broad sense to include all marine structures
intended for transportation of goods and passengers. T h e sale of
petroleum products stored in bonded storage tanks to international
marine vessels for their use or consumption outside the Philippines
falls within the purview of Section 135(a) which e x e m p t s such sale
from excise tax.
Rev. Regs. No. 13-77 or the Petroleum Products Regulations
provides for the conditions for exemption f r o m excise tax of the sale
of petroleum products to international marine vessels. (BIR Ruling
No. 2-2004, J a n . 12, 2004)
9. Under Subsection (c), entities (e.g., A s i a n D e v e l o p m e n t
Bank) exempt f r o m excise tax are entitled to refund in c a s e s , for
example, w h e r e their purchases of petroleum products, beginning
January 1, 1999 (see Sec. 130[A, 2].), are m a d e inclusive of taxes.
T h e remedy of the tax-exempt entity is to file with the BIR a claim
for tax refund/credit certificate within t w o (2) years f r o m the date
of payment of said tax. (BIR Ruling N o . 2 3 - 9 9 , Feb. 2 5 , 1999.)
Note: Rev. M e m o . Cir. No. 19-2006 ( A u g . 10, 2006) prescribes
the guidelines on procedures for, a n d checklist of, d o c u m e n t a r y
requirements for processing pending claims for tax credit or refund
of excise tax paid on petroleum products sold to international
carriers and e x e m p t entities or a g e n c i e s pursuant to Section 135.
Rev. M e m o . Order No. 28-06 (Dec. 18, 2 0 0 6 ) further s u p p l e m e n t s
the guidelines prescribed in Rev. M e m o . Order No. 19-2006.
10. Section 137 d o e s not require rectification; it provides

merely that the removal f r o m the place of the distiller should be
for the purpose of rectification, so as to e x e m p t the spirits f r o m the
prepayment of excise tax. ( L a T o n d e n a , Inc. vs. Coll., L-14875, Sept.
29, 1962.) Rectification is t h e process by w h i c h distilled spirits are
blended together or substantially c h a n g e d by the addition usually of
spirits, flavoring, or coloring material. (Webster's 3rd N e w Int. Diet.,
1976 Ed.)
11. T h e Tax C o d e d o e s not prohibit further rectification or

distillation of alcohol. In s u c h case, alcohol lost thru evaporation, in
further rectification is not to be d e d u c t e d f r o m the finished product,
(see proviso, Sec. 137.) In other w o r d s , the specific tax should be
based not only on the finished product but also on the evaporated
alcohol. (Coll. vs. L a T o n d e n a , Inc., L - 1 0 4 3 1 , July 3 1 , 1962.)
Sees. 133-140 EXCISE TAXES O N C E R T A I N GOODS
12. Removal of tobacco products free of tax. It is settled

that if the law uses a general t e r m without any qualifications, the
administrative agency m a n d a t e d to implement it cannot limit its
application. Section 140 e x e m p t s f r o m the specific tax sales in
bulk of s t e m m e d leaf tobacco as raw material by one manufacturer
directly to another without any conditions as to the domicile of
the producers. On the other h a n d , R e v e n u e Regulation No. V-39
requires that to be entitled to t h e e x e m p t i o n granted by Section
140, both the buyer a n d t h e seller should be holders of L-7 permits,
w h i c h are issued only to local manufacturers. In effect, Revenue
Regulation No. V-39 restricts the application of Section 140 to
domestic producers. A l t h o u g h Section 140 provides that the
e x e m p t i o n is granted "under s u c h conditions as m a y be prescribed
in the rules a n d regulations of the D e p a r t m e n t of Finance," this
merely contemplates matters of p r o c e d u r e , such as the manner of
claiming the e x e m p t i o n , but not questions of substance, such as
the inclusion or exclusion of entire classes of producers from the
e x e m p t i o n . T h e r e f o r e , t h e relevant portion of R e v e n u e Regulation
No. V-39 is invalid. ( C o m m . vs. La Suerte Cigar & Cigarette
Factory, Inc., C A - G . R . S P No. 5 1 9 0 2 , A u g . 3 1 , 2 0 0 0 ; see C o m m .
v s . Continental Leaf Tobacco [Phils.], C A - G . R . SP Nos. 4 9 5 4 6 and
5 0 9 4 2 , Oct. 2 6 , 2000.)
13. Conditions with respect to stemmed leaf tobacco. The
conditions under w h i c h s t e m m e d leaf t o b a c c o may be transferred
f r o m o n e factory to another without p r e p a y m e n t of specific tax are
as follows:
(1) T h e transfer shall be under an official L-7 (manufacturer
of tobacco product) invoice on which shall be entered the exact
weight of the t o b a c c o at the time of its removal.
(2) Entry shall be m a d e in the L-7 register in the place
provided on the p a g e removals.
(3) Corresponding debit entry shall be m a d e in the L-7
register book of the factory receiving the tobacco under the
heading "Refuse, etc., received from the other factory," showing
the date of receipt, assessment and invoice numbers, name
and address of the consignor, form in which received, and the
weight of the tobacco.
In a case, the question is whether the s t e m m e d leaf tobacco
purchased from a whole-sale leaf tobacco dealer is exempt from
the payment of specific tax. It w a s established that the purchase
w a s made from wholesale leaf tobacco dealers and not from
ANNOTATED
manufacturers of tobacco products. T h e S u p r e m e Court sustained

the contention of the Commissioner of Internal Revenue that the
exemption from specific tax on the sale of s t e m m e d leaf tobacco
as raw material by one manufacturer of tobacco products directly
to another manufacturer of tobacco products is because such
stemmed leaf tobacco products has been subjected to specific
tax w h e n a manufacturer of tobacco products has purchased the
same from wholesale leaf tobacco dealers, the latter being also a
stripper of tobacco. T h e s e are the sources of s t e m m e d leaf tobacco
to be used as raw materials by a manufacturer of tobacco products.
Hence, the purchases of s t e m m e d leaf tobacco f r o m the wholesale
leaf tobacco dealers w e r e not e x e m p t f r o m specific tax. ( C o m m . v s .
La C a m p a n a Fabrica de Tabacos, Inc., 369 S C R A 118 [2001].)
In view of the S u p r e m e Court decision, all removals of s t e m m e d

leaf tobacco by leaf t o b a c c o dealers (;'.e., L-3, L-3 1/4, L-3R, L-4,
L-G) are subject to the specific tax of P0.75 per kilogram under
Section 144 in addition to the inspection f e e i m p o s e d under Section
146. However, removals of said leaf t o b a c c o product by an L-7
(manufacturer of t o b a c c o products), for delivery to another shall
be exempt from such specific tax pursuant to t h e decision. (Rev.
M e m o . Cir. No. 18-2002.)
- oOo -
CHAPTER III
EXCISE TAX ON ALCOHOL PRODUCTS*
SEC. 141. Distilled Spirits. - On distilled spirits, there shall

be collected subject to the provisions of Section 133 of this Code,
excise taxes as follows:
( A ) If produced from the sap of nipa, coconut, cassava, camote,
or buri palm or from the juice, syrup or sugar of the cane, provided
such materials are produced commercially in the country where
they are processed into distilled spirits, per proof liter, Eleven pesos
and sixty-five centavos (PH.65); ,|.
(B) If produced from raw materials other than those enumerated
in the preceding paragraph, the tax shall be in accordance with the
net retail price per bottle of seven hundred fifty milliliter (750 ml.)
volume capacity (excluding the excise tax and the value-added tax)
as follows:
(1) Less than Two hundred and fifty pesos (P250.00) - One
hundred twenty-six pesos (P126.00), per proof liter;
(2) Two hundred and fifty pesos (P250.00) up to Six hundred
and seventy-five pesos (P675.00) Two hundred fifty-two pesos
(P252.00), per proof liter; and
(3) More than Six hundred and seventy five pesos (P675.00)
Five hundred four pesos (P504.00), per proof liter.
(C) Medicinal preparations, flavoring extracts, and all other
preparations, except toilet preparations, of which, excluding water,
distilled spirits form the chief ingredient, shall be subject to the
same tax as such chief ingredient.
*See Revised Tax Rates on Alcohol and Tobacco products. (Rev. Regs. No. 3-2006.
Appendix "T".) R.A. N o . 9334 (effective Jan. 2, 2005) provides that the amended
excise tax rates on alcohol and tobacco products for 2005 will be increased every two
(2) years thereafter starting on January 1, 2007 until January 1, 2011. (par. 12, Sec.
141.) The last increase of rates on such products took effect on January 1, 2011 (see
Rev. Memo. Cir. No. 95-2010.)
297
ANNOTATED
This tax shall be proportionally increased for any strength

of the spirit taxed over proof spirits, and the tax shall attach to
this substance as soon as it is in existence as such, whether it be
subsequently separated as pure or impure spirits, or transformed
into any other substance either in the process of original production
or by any subsequent process.
"Spirits or distilled spirits" is the substance known as ethyl
alcohol, ethanol or spirits of wine, including all dilutions, purifications
and mixtures thereof, from whatever source, by whatever process
produced, and shall include whisky, brandy, rum, gin and vodka,
and other similar products or mixtures.
"Proof spirits" is liquor containing one-half (1/2) of its volume
of alcohol of a specific gravity of seven thousand nine hundred and
thirty-nine ten thousandths (0.7939) at fifteen degrees centigrade
(15C). A "proof liter" means a liter of proof spirits.
'Net retail price', as determined by the Bureau of Internal
Revenue through a price survey to be conducted by the Bureau of
Internal Revenue itself, or by the National Statistics Office when
deputized for the purpose by the Bureau of Internal Revenue, shall
mean the price at which the distilled spirits is sold on retail in at
least ten (10) major supermarkets in Metro Manila, excluding the
amount intended to cover the applicable excise tax and the value-
added tax. For brands which are marketed outside Metro Manila,
the 'net retail price' shall mean the price at which the distilled
spirits in sold in at least five (5) major supermarkets in the region
excluding the amount intended to cover the applicable excise tax
and the value-added tax.
Variants of existing brands and variants of new brands which
are introduced in the domestic market after the effectivity of RA No.
9334 shall be taxed under the proper classification thereof based on
their suggested net retail price. Such classification shall not, in any
case, be lower than the highest classification of any variant of that
brand.
A 'variant of a brand' shall refer to a brand on which a modifier
is prefixed and/or suffixed to the root name of the brand.
New brands, as defined in the immediately following paragraph,
shall initially be classified according to their suggested net retail
price.
Willful understatement of the suggested net retail price of
distilled spirits by as much as fifteen percent (15%) of the actual
net retail price shall render the manufacturer liable for additional
Excise Tax on Alcohol Products
excise tax equivalent to the tax due and difference between the
understated suggested net retail price and the actual net retail
price.
"New brand" shall mean a brand registered after the date of
effectivity of R.A. No. 8240.
"Suggested net retail price" shall mean the net retail price
at which new brands, as defined above, of locally manufactured
or imported distilled spirits are intended by the manufacturer or
importer to be sold on retail in major supermarkets or retail outlets
in Metro Manila for those marketed nationwide, and in other regions,
for those with regional markets. At the end of three (3) months from
the product launch, the Bureau of Internal Revenue shall validate
the suggested net retail price of the new brand against the net retail
price as denned herein and determine the correct tax bracket to
which a particular new brand of distilled spirits, as defined above,
shall be classified. After the end of eighteen (18) months from such
validation, the Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net retail price as of
the time of revalidation in order to finally determine the correct
tax bracket which a particular new brand of distilled spirits shall
be classified: Provided, however, That brands of distilled spirits
introduced in the domestic market between January 1, 1997 and
December 31, 2003 shall remain in the classification under which
the Bureau of Internal Revenue has determined them to be long as
of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall
not be revised except by an act of Congress.
The rates of tax imposed under this Section shall be increased
by eight percent (8%) every two years starting on January 1, 2007
until January 1, 2011.
Any downward reclassification of present categories, for tax
purposes, of existing brands of distilled spirits duly registered at the
time of the effectivity of this Act which will reduce the tax imposed
herein, or the payment thereof, shall be prohibited.
The classification of each brand of distilled spirits based on the
average net retail price as of October 1, 1996, as set forth in Annex
"A", including the classification of brands for the same products
which, although not set forth in said Annex "A," were registered
and were being commercially produced and marketed on or after
October 1, 1996, and which continue to be commercially produced
and marketed after the effectivity of this Act, shall remain in force
until revised by Congress.
ANNOTATED
Manufacturers and importers of distilled spirits, shall, within

thirty (30) days from the effectivity of this Act, and within the
first five (5) days of every third month thereafter, submit to the
Commissioner a sworn statement of the volume of sales for each
particular brand of distilled spirits, sold at his establishment for the
three-month period immediately preceding.
Any manufacturer or importer who, in violation of the Section,
knowingly misdeclares or misrepresents in his or its sworn statement
herein required any pertinent data or information shall, upon final
findings by the Commissioner that the violation was committed,
be penalized by a summary cancellation or withdrawal of his or its
permit to engage in business as manufacturer/brewer or importer of
distilled spirits.
Any corporation, association or partnership liable for any of the
acts or omissions in violation of the Section shall be fined treble the
amount of deficiency taxes, surcharges and interest which may be
assessed pursuant to said sections.
Any person liable for any of the acts or omissions prohibited
under said sections shall be criminally liable and penalized under
Section 254 of this Code. Any person who willfully aids or abets in
the commission of any such act or omission shall be criminally liable
in the same manner as the principal.
If the offender is not a citizen of the Philippines, he shall be
deported immediately after serving the sentence, without further
proceedings for deportation, (as amended by R.A. No. 9334.)
ANNOTATION
1. Alcohol products refer to distilled spirits, wines, and

fermented liquor taxable under Sections 139 and 140, respectively.
Methanol is a light volatile pungent flammable poisonous liquid
alcohol usually made synthetically (as by catalytic reaction of
carbon monoxide and hydrogen under pressure) and used chiefly
as a solvent, anti-freeze or formaldehyde and other chemicals.
Considering that methyl alcohol or methanol is not one of the spirits
or distilled spirits defined under Section 141 the importation of the
same is exempt from the payment of excise tax. (BIR Ruling No.
039-2001, Sept. 13, 2001.)
2. Proof refers to the degree of strength such as high proof,
second proof, etc. with respect to spirits, (see Louisville Public
Warehouse Co. vs. Coll., 49 F. 501.)
3. Proof liter m e a n s a liter of proof spirits. It is c o m m o n l y

d e t e r m i n e d by multiplying the v o l u m e capacity in g a u g e liters by
t h e d e g r e e of proof of the distilled spirits expressed in decimal form
arrived at by dividing the d e g r e e of proof by 100. For e x a m p l e , 189
proof is 1.89; 80 proof is 0.8, etc. (see BIR Primer.)
4. Gauge liter means t h e actual v o l u m e of the liquor measured

in liter.
5. Computation of the tax. U n d e r Subsection (a), it may be
outlined as follows:
No. of g a u g e liters (GL)

Multiplied by: P e r c e n t a g e of proof (e.g., 1.89)
= No. of proof liters (PL)
Multiplied by: Tax rate (P11.65)
= Excise tax d u e
(1) S u p p o s e 300 d r u m s of distilled spirits @ 189 proof,

e a c h d r u m containing 100 g a u g e liters (GL), are to be removed
f r o m t h e place of production or released f r o m customs custody,
t h e excise tax p ay able by t h e distiller or importer, as the case
m a y be, shall be c o m p u t e d as follows:
3 0 0 (drums) x 100 (GL) = 30,000 (total v o l u m e in GL)

30,000 x 1.89 (proof) = 56,700 (total v o l u m e in PL)
56,700 x P11.65(tax rate) = P660.555 (excise tax due)
T h e country m e n t i o n e d in Subsection (A) may refer to a

foreign country.
(2) Under Subsection (B), the tax rate per proof liter will
d e p e n d on t h e net retail price per bottle of 750 ml. volume
capacity. To determine the net retail price as defined in Section
1 4 1 , the a m o u n t intended to cover the applicable excise tax
and the value-added tax is e x c l u d e d .
A s s u m e that the subject brand of distilled spirits produced
f r o m other raw materials (e.g., grains, cereals) refers to 100
cases of whisky @ 80 proof, each case containing 24 bottles @
7 5 0 ml., with a net retail price (excluding excise tax and VAT) of
P650. T h e tax classification falls under the P252.00 per proof
liter excise tax category. T h e excise tax due shall be computed
as follows:
ANNOTATED
100 (cases) x 24 (bottles) 2,400 (total no. of bottles)

2,400 x 0.750 (contents 1,800 (total volume in GL)
per bottle)
1,800 x 0.80 (proof) 1,440 (total volume in PL)
1,440 x P252 (tax rate) = P362.880 (excise tax due)
Note: New brands shall be classified according to their

current net retail price ( C N R P ) . In the m e a n t i m e that this price
has not yet been established, the suggested net retail price
(SNRP) or price at which the alcohol products are intended to
be sold, shall be used to determine the excise tax classification.
In case the S N R P is higher than the C N R P after a survey is
conducted, the former shall prevail; otherwise, the latter, in
which case any difference in excise tax shall be a s s e s s e d and
collected.
6. Accrual of tax. "The excise tax on alcohol shall attach
to the substance as s o o n as it c o m e s into existence, (par. 2.)
This will e n h a n c e the effectiveness of collecting the tax. Since it
will be based on the quantity of alcohol as s o o n as it c o m e s into
existence, the reduction of the taxable b a s e by claiming losses d u e
to excessive evaporation, handling, etc. is p r e v e n t e d . Distillers will
be encouraged to be more cautious in the handling a n d storage of
alcohol." ( C o m m . Efren Plana, supra.)
7. Medicinal preparations.
(1) This t e r m consists of t w o w o r d s .
(a) " M e d i c i n a l " m e a n s curative or alleviative used for
the cure or alleviation of body disorders.
(b) "Preparations" are those w h i c h are prepared
or something e q u i p p e d or c o m p o u n d e d for particular
purposes.
"Medicinal preparations" are, therefore, descriptive of

and refer to substances used in medicine and prepared for
the use of the apothecary or the physician administered
as a remedy for diseases. (La Tondefia, Inc. vs. Coll., 10
S C R A 309, April 30, 1964.)
(2) To be classified as medicinal preparation, a product
should have the following characteristics:
(a) T h e product must have b e e n p r e p a r e d , e q u i p p e d
or c o m p o u n d e d for a particular purpose; and
Sec. 141 EXCISE TAXES ON C E R T A I N G O O D S 303
(b) T h e product is of use or believed to be of use

by prescriber or user in curing, alleviating, palliating or
preventing s o m e disease or affliction of the h u m a n body.
( C o m m . v s . Court of Tax Appeals, 155 S C R A 386, Nov 5
1989.)
(3) Section 141(C) m a k e s no distinction as to medicinal

preparations intended for internal or external use. Rubbing
alcohol is a medicinal preparation of which distilled spirits
(especially d e n a t u r e d alcohol) f o r m the chief ingredient, subject
to specific tax under Section 1 4 1 . It is used as an antiseptic
to inhibit the g r o w t h of bacteria. (La Tondena, Inc. vs. Coll.,
supra.) A product (e.g., M e n n e n Baby Cologne) which contains
b e n z e t h e n i u m chloride, a topical anti-infective agent and of
w h i c h the chief ingredient is alcohol, a distilled spirit, falls under
the t e r m "other preparations" a n d is subject to excise tax as
s u c h distilled spirit pursuant to Section 141(C).
But w h e r e t h e excise tax on the product has already been

paid, no further excise tax is d u e a n d payable on said product,
(see BIR Rulings No. 152, Sept. 2, 1983 and No. 162, Oct. 15,
1983.)
T h e policy of t h e state to discourage the indiscriminate

purchase and excessive c o n s u m p t i o n of alcohol as the basis
of t h e prohibitive treatment a n d the imposition of specific tax is
true only with respect to w i n e s or liquors. (Ibid.)
8. Chief ingredient. T h e t e r m m e a n s more than 5 0 % of
the preparation, excluding water, are distilled spirits. The medicinal
preparations are subject to the s a m e tax as such chief ingredient.
(1) T h e therapeutic value of the medicinal preparation
is not considered in the determination of what is the chief
ingredient of the preparation, for there are preparations which
contain more than 5 0 % alcohol by volume, excluding water, but
nevertheless therapeutically speaking, alcohol is not the chief
ingredient.
(2) T h e determination of the chief ingredient of a certain
preparation based solely on its therapeutic value for purposes
of taxation is unstable and unreliable. (BIR Ruling, March 12,
1965.)
9. A toilet preparation is one which is intended to affect
and conceivably improve the bodily appearance, such as a lotion
intended to contribute to the health and appearance of the skin.
ANNOTATED
A product that is publicly represented as g o o d for cleansing,

moisturizing, lubricating or oiling the skin, or one of the functions of
which is principally to improve the bodily appearance and enhance
the health of the skin, making it soft, smooth and fragrant, is a toilet
preparation. ( C o m m . vs. Court of Tax Appeals, supra.)
Toilet preparations are subject to 2 0 % excise tax imposed in
Section 150(B).
10. The section on compounded liquors has b e e n repealed by
Executive Order No. 2 7 3 . A rectifier of alcohol is no longer required
to affix BIR Strip S t a m p s and secondary label on c o m p o u n d e d
liquors beginning January 1 , 1 9 8 8 . C o m p o u n d e d liquors are subject
to the 1 0 % VAT under Section 106. (BIR Ruling No. 4 1 3 , A u g . 2 5 ,
1988.)
11. Acetone. It is a solvent not subject to any specific tax. It

is not classified as distilled spirits or as manufactured oil or motor
fuel under Sections 141 a n d 148. A l t h o u g h it is f o u n d in destructive
distillation of w o o d , sugar, cellulose, etc., and for this reason it is
always preset in crude w o o d spirit, f r o m w h i c h a greater portion of it
may be recovered by fractional distillation, and reduction by s o d i u m
a m a l g a m converts its into isopropyl alcohol, it is not classified as
distilled spirits. Instead, a c e t o n e is a volatile f l a m m a b l e fragrant
liquid c o m p o u n d used in m a k i n g other c h e m i c a l c o m p o u n d s and as
a solvent. Individual solvents are u s e d to dissolve the resin portion
of paints or inks, and the resulting mixture is also used for t h e s a m e
purpose. H e n c e , they are not subject to any excise tax. (BIR Ruling
No. 146-05, April 12, 2005.)
S E C 142. W i n e s . O n w i n e s , t h e r e s h a l l b e collected p e r l i t e r
of volume capacity, the f o l l o w i n g taxes:
(A) S p a r k l i n g w i n e s / c h a m p a g n e s r e g a r d l e s s o f proof, i f t h e n e t
r e t a i l p r i c e per b o t t l e ( e x c l u d i n g t h e excise t a x a n d t h e v a l u e - a d d e d
t a x ) is:
(1) F i v e h u n d r e d pesos (P500.00) or less O n e h u n d r e d

f o r t y - f i v e pesos a n d s i x t y c e n t a v o s ( P 1 4 5 . 6 0 ) ; a n d
(2) M o r e t h a n F i v e h u n d r e d pesos (P500.00) Four
h u n d r e d t h i r t y - s i x pesos a n d e i g h t y c e n t a v o s (P436.80).
(B) S t i l l w i n e s c o n t a i n i n g f o u r t e e n p e r c e n t (14%) o f alcohol b y
v o l u m e o r less, S e v e n t e e n pesos a n d f o r t y - s e v e n c e n t a v o s (P17.47);
and
(C) Still wines containing more than fourteen percent (14%)

but not more than twenty-five percent (25%) of alcohol by volume,
Thirty-four pesos and ninety-four centavos (P34.94).
Fortified wines containing more than twenty-five percent (25%)
of alcohol by volume shall be taxed as distilled spirits. 'Fortified
wines' shall mean natural wines to which distilled spirits are added
to increase their alcohol strength.
"Net retail price", as determined by the Bureau of Internal
Revenue through a price survey to be conducted by the Bureau of
Internal Revenue itself, or by the National Statistics Office when
mean the price at which wine is sold on retail in at least ten (10) major
supermarkets in Metro Manila, excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands
which are marketed outside Metro Manila, the 'net retail price' shall
mean the price at which the wine is sold in at least five (5) major
super markets in the region excluding the amount intended to cover
the applicable excise tax and the value-added tax.
are introduced in the domestic market after the effectivity of this
Act shall be taxed under the proper classification thereof based
on their suggested net retail price: Provided, however, That such
classification shall not, in any case, be lower than the highest
classification of any variant of that brand.
A "variant of a brand" shall refer to a brand on which a modifier
New brands, as defined in the immediately following paragraph,
shall initially be classified according to their suggested net retail
price.
"New brand" shall mean a brand registered after the date of
"Suggested net retail price" shall mean the net retail price at
which new brands, as defined above, of locally manufactured or
imported wines are intended by the manufacturer or importer to be
sold on retail in major super markets or importer to be sold on retail
in major supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with regional
markets. At the end of three (3) months from the product launch, the
Bureau of Internal Revenue shall validate the suggested net retail
price of the new brand against the net retail price as defined herein
ANNOTATED
and determine the correct tax bracket to which a particular new

brand of wine, as defined above, shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price
against the net retail price as of the time of revalidation in order
to finally determine the correct tax bracket which a particular new
brand of wines shall be classified: Provided, however, That brands of
wines introduced in the domestic market between January 1, 1997
and December 31, 2003 shall remain in the classification under
which the Bureau of Internal Revenue has determined them to
belong as of December 31, 2003. Such classification of new brands
and brands introduced between January 1, 1997 and December 31,
2003 shall not be revised except by an act of Congress.
Any downward classification of present categories, for tax
purposes, of existing brands of wines duly registered at the time of
the effectivity of this Act which will reduce the tax imposed herein,
or the payment thereof, shall be prohibited.
The classification of each brand of wines based on the average
net retail price as of October 1, 1996, as set forth in Annex 'B\
including the classification of brands for the same products which,
although not set forth in said "Annex B", were registered and were
being commercially produced and marketed on or after October 1,
1996, and which continue to be commercially produced and marketed
after the effectivity of this Act, shall remain in force until revised by
Congress.
Manufacturers and importers of wines shall, within thirty (30)
days from the effectivity of this Act, and within the first five (5) days
of every month thereafter, submit to the Commissioner a sworn
statement of the volume of sales for each particular brand of wines
sold at his establishment for the three-month period immediately
preceding.
Any manufacturer or importer who, in violation of this Section,
herein required any pertinent data or information shall, upon
discovery, be penalized by a summary cancellation or withdrawal of
his or its permit to engage in business as manufacturer or importer
of wines.
A n y corporation, association or p a r t n e r s h i p liable for any of the

acts o r o m i s s i o n s i n v i o l a t i o n o f t h i s S e c t i o n s h a l l b e f i n e d t r e b l e t h e
a m o u n t o f deficiency t a x e s , s u r c h a r g e s a n d i n t e r e s t w h i c h m a y b e
assessed p u r s u a n t t o t h i s S e c t i o n .
A n y p e r s o n l i a b l e f o r a n y o f t h e acts o r o m i s s i o n s p r o h i b i t e d
under this Section shall be c r i m i n a l l y liable and penalized under
S e c t i o n 254 o f t h i s Code. A n y p e r s o n w h o w i l l f u l l y a i d s o r abets i n
t h e c o m m i s s i o n o f a n y s u c h act o r o m i s s i o n s h a l l b e c r i m i n a l l y l i a b l e
in the same m a n n e r as the p r i n c i p a l .

d e p o r t e d i m m e d i a t e l y a f t e r s e r v i n g t h e sentence, w i t h o u t f u r t h e r
p r o c e e d i n g s f o r d e p o r t a t i o n . " (As amended by R.A. No. 9334.)
ANNOTATION
1. Wines, under the Tax C o d e , include all alcoholic beverages

p r o d u c e d by fermentation without distillation f r o m the juice of any
kind of fruit. Fermentation is a process by w h i c h enzymatic changes
are brought about. It covers a period of time e n o u g h to produce the
desired results. (Sec. 2[17], Rev. R e g s . No. 2-97, Excise Taxation
of Alcohol Products, A p p e n d i x "R.") Examples: Tinto; vermouth;
jerez; moscatel.
2. Sparkling w i n e s or those bottled before the fermentation
has c e a s e d are subject to a higher tax than that imposed on still
w i n e s . (Smith, Bell and Co., Inc. v s . C o m m . , L - 2 8 2 7 1 , July 25,
1975.) Sparkling wine is an effervescent table w i n e usually white
but occasionally red in color, containing an average of 1 2 % alcohol
by v o l u m e w h i c h is carbonated by secondary fermentation. The
t e r m includes c h a m p a g n e . Still wine is w i n e that is not effervescent
(bubbling), or wine that is not carbonated. (Sec. 2[14, 16], Rev.
Regs. 2-97.)
3. There can be no uncertainty that the purpose of Section 139

is to impose a specific tax on wines. T h e first clause of Section 139
states so in plain language. T h e sole object of the sub-enumeration
that follows is, in turn, unmistakably to prescribe the amount of the
tax specifically to be paid for each type of wine so classified and
described.
T h e section, therefore, clearly and indubitably discloses the
legislative will, leaving to the officers charged with implementation
and execution thereof no more than the administrative function of
determining whether a particular kind of wine falls in one class or
ANNOTATED
another guided by the sound established practices and technology

of the wine industry.
Section 142 is not an undue delegation of legislative power.
(Ibid.)
4. The importation of mass or sacramental wine is subject
to specific tax pursuant to Section 143(B) as well as to VAT. (BIR
Ruling No. 468, Sept. 29, 1988.)
5. Computation of the tax. Under Subsections (B) and (C),
the excise tax due on still wines is arrived at by multiplying the
total liters of volume capacity by the tax rate, taking into account
the alcohol content; under Subsection (A), the tax rate per liter
of volume capacity will d e p e n d on the net retail price per bottle
(excluding the excise tax and the value-added tax) as defined in
Section 142, regardless of proof of the sparkling w i n e s .
(1) A s s u m e that the subject brand of sparkling w i n e s refers

to 100 cases of c h a m p a g n e , e a c h c a s e containing 12 bottles @
one (1) liter, with a net retail price (excluding excise tax and VAT)
of P550.00 per liter. T h e tax classification falls under t h e P 1 0 0 per
liter excise tax category. T h e excise tax payable shall be c o m p u t e d
as follows:
100 (cases) x 12 (bottles) = 1,200 (total no. of bottles)

1,200 x 1 (contents per = 1,200 (total v o l u m e in GL)
bottle)
1,200 x P436.80 (tax rate) = P 5 2 4 . 1 6 0 (excise tax d u e )

Note that the proof is not taken into account.
(2) A s s u m e 50 c a s e s of still w i n e s , e a c h c a s e containing

12 bottles @ 750 ml., 2 0 % alcohol content by v o l u m e , and net
retail price (excluding excise tax and VAT) of P 2 4 0 . 0 0 . T h e tax
classification falls under the P 2 4 . 0 0 per liter excise tax category.
The specific tax payable shall be c o m p u t e d as follows:
50 (cases) x 12 (bottles) = 6 0 0 (total no. of bottles)
600 x 0.750 (contents per = 4 5 0 (total v o l u m e in G L )
bottle)
450 x P34.94 (tax rate) = P15,723 (excise tax due)
(3) Fortified wines containing m o r e than 2 5 % of alcohol by

volume are taxed as distilled spirits under Section 141(A) or (B),
depending upon the raw materials of distilled spirits a d d e d . T h u s ,
if such raw materials a d d e d are f r o m sugar c a n e and the alcohol

content is 3 0 % (more than 2 5 % ) , the w i n e s are subject under
Section 141(A) at P11.65 excise tax rate. If the raw materials are
other than those e n u m e r a t e d in Section 141(A), they shall be taxed
under Section 141(B).
S E C . 1 4 3 . Fermented Liquors. T h e r e s h a l l be l e v i e d ,
assessed a n d collected a n excise t a x o n beer, l a g e r beer, a l e , p o r t e r
a n d o t h e r f e r m e n t e d l i q u o r s except tuba, basi, tapuy a n d s i m i l a r
f e r m e n t e d l i q u o r s i n accordance w i t h t h e f o l l o w i n g schedule:
( A ) I f t h e n e t r e t a i l p r i c e ( e x c l u d i n g t h e excise t a x a n d t h e v a l u e -
a d d e d t a x ) p e r l i t e r o f v o l u m e c a p a c i t y i s less t h a n F o u r t e e n pesos
a n d f i f t y centavos (P14.50), t h e t a x s h a l l b e e i g h t pesos a n d t w e n t y -
seven c e n t a v o s (P8.27) p e r l i t e r ;
(B) i f t h e n e t r e t a i l p r i c e ( e x c l u d i n g t h e excise t a x a n d t h e v a l u e -
a d d e d t a x ) p e r l i t e r o f v o l u m e c a p a c i t y i s F o u r t e e n pesos a n d f i f t y
c e n t a v o s (P14.50) u p t o T w e n t y - t w o pesos (P22.00), t h e t a x s h a l l b e
T w e l v e pesos a n d t h i r t y c e n t a v o s (P12.30) p e r l i t e r ;
(C) I f t h e n e t r e t a i l p r i c e ( e x c l u d i n g t h e excise t a x a n d t h e
value-added tax) per l i t e r of volume capacity is more t h a n Twenty-
t w o pesos (P22.00), t h e t a x s h a l l b e S i x t e e n pesos a n d t h i r t y - t h r e e
centavos (P16.33) p e r l i t e r .
are i n t r o d u c e d in t h e domestic m a r k e t after the affectivity of this
A c t s h a l l b e t a x e d u n d e r t h e p r o p e r c l a s s i f i c a t i o n t h e r e o f based
o n t h e i r suggested n e t r e t a i l p r i c e ; Provided, however, T h a t s u c h
c l a s s i f i c a t i o n s h a l l n o t , i n a n y case, b e l o w e r t h a n t h e h i g h e s t
classification of any v a r i a n t of t h a t b r a n d .
A " v a r i a n t of a b r a n d " s h a l l r e f e r to a b r a n d on w h i c h a m o d i f i e r
is prefixed and/or suffixed to the root name of the b r a n d .
F e r m e n t e d l i q u o r s w h i c h a r e b r e w e d a n d sold a t m i c r o - b r e w e r i e s
or small establishments such as pubs and restaurants shall be
subjected t o t h e r a t e i n p a r a g r a p h (c) hereof.
N e w brands, as defined in the immediately following paragraph,
s h a l l i n i t i a l l y b e classified a c c o r d i n g t o t h e i r suggested n e t r e t a i l
price.
" N e w b r a n d " s h a l l m e a n a b r a n d r e g i s t e r e d a f t e r t h e date o f
e f f e c t i v i t y o f R.A. N o . 8240.
"Suggested n e t r e t a i l p r i c e " s h a l l m e a n t h e n e t r e t a i l price a t
w h i c h n e w b r a n d s , a s d e f i n e d above, o f locally m a n u f a c t u r e d o r
ANNOTATED
imported fermented liquor are intended by the manufacturer or

importer to be sold on retail in major supermarkets or retail outlets
in Metro Manila for those marketed nationwide, and in other regions,
for those with regional markets. At the end of three (3) months form
the product launch, the Bureau of Internal Revenue shall validate,
the suggested net retail price of the new brand against the net retail
price as defined herein and determine the correct tax bracket to
which a particular new brand of fermented liquor, as defined above,
the time of revalidation in order to finally determine the correct tax
bracket which a particular new brand of fermented liquors shall
be classified: Provided, however, That brands of fermented liquors
introduced in the domestic market between January 1, 1997 and
December 31, 2003 shall remaiffin the classification under which
the Bureau of Internal Revenue has determined them to belong as
of December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall
not revised except by an act of Congress.
"Net retail price," as determined by the Bureau of Internal

Revenue through a price survey to be conducted by the Bureau
of Internal Revenue itself, or the National Statistics Office when
mean the price at which the fermented liquor is sold in retail in at
least twenty (20) major supermarkets in Metro Manila (for brands
of fermented liquor marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax.
For brands which are marketed outside Metro Manila, the 'net retail
price' shall mean the price at which the fermented liquor is sold at
least five (5) major supermarkets in the region excluding the amount
intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of fermented liquor based on its
'C,' including the classification of brands for the same products
which, although not set forth in said Annex 'C,' were registered and
were being commercially produced and marketed on or after October
1, 1996, and which continue to be commercially produced and the
marketed after the effectivity of this Act, shall remain in force until
revised by Congress.

Any downward classification of present categories, for tax
purposes, of existing brands of fermented liquor duly registered
at the time of the effectivity of this Act which will reduce the tax
imposed herein, or the payment thereof, shall be prohibited.
Every brewer or importer of fermented liquor shall, within
thirty (30) days from the effectivity of this Act, and within the first
five (5) days of every month thereafter, submit to the Commissioner
a sworn statement of the volume of sales for each particular brand
of fermented liquor sold at his establishment for the three-month
period immediately preceding.
Any brewer or importer who, in violation of this Section,
knowingly misdeclares or misrepresents in his or its sworn
statement herein required any pertinent data or information shall
be penalized by a summary cancellation or withdrawal of his or its
permit to engage in business as brewer or importer of fermented
liquor.
acts or omissions in violation of this Section shall be fined treble the
assessed pursuant to this Section.
under this Section shall be criminally liable and penalized under
proceedings for deportation. (as amended by R.A. No. 9334.)
ANNOTATION
1. Fermented liquors, under the Tax Code, are all alcoholic

beverages produced by fermentation without distillation of grains or
malt.
2. "Excise taxes on commodities (see Sees. 141-143.) which
are considered socially and morally undesirable for example,
taxes on consumption of liquor, generates substantial revenue for
ANNOTATED
the government. According to a recognized authority on tax reform,

the rationale for the sumptuary tax is that consumers of products
on which the taxes are levied create additional costs to society that
are not borne by the producers and are not reflected in the cost in
the form of loss of working time, accidents and increase of crime ...
the excise tax raises the price of the commodity, thus discouraging
consumption and at the s a m e time imposing a charge on the people
who are likely to create social problems. Although the specific taxes
on alcoholic beverages are considered as sumptuary taxes in the
sense that they may restrict or regulate activities considered as
socially undesirable, the increase in the tax rates is not expected to
diminish the consumption of alcoholic b e v e r a g e s . " ( C o m m . Efren I.
Plana, supra.)
3. New tax rates. T h e rates of tax i m p o s e d on fermented

liquors by Section 143 are increased by 1 2 % effective January 1,
2000. Thus, the new rates of tax are as follows: Subsec. (A), f r o m
P6.15 to P6.89; Subsec. (B), f r o m P9.15 to P10.25; and Subsec.
(C), from P12.15 to P 1 3 . 6 1 . T h e n e w rate for any existing brand
of fermented liquors shall not be lower t h a n t h e excise tax actually
being paid prior to January 1, 2 0 0 0 . (Sec. 1, Rev. R e g s . No. 17-99;
see Illustration with respect to cigarettes under Sec. 145.)
4. Computation of the tax. T h e rate of tax per liter d e p e n d s
on the net retail price (excluding the excise tax a n d VAT) as defined
in Section 143, per liter of v o l u m e capacity.
ILLUSTRATION:
A s s u m e 100 c a s e s of t h e subject brand of f e r m e n t e d liquor,

each case containing 12 bottles @ 330 ml., with a net retail price
(excluding the excise tax and VAT) of P16.00. T h e tax classification
falls under the P12.30 per liter excise tax category. T h e excise tax
payable shall be c o m p u t e d as follows:
100 (cases) x 12 (bottles) 1,200 (total no. of bottles)

1,200 x 0.330 (contents per bottle) = 3 9 6 (total v o l u m e in G L )
396 X P 1 2 . 3 0 (tax rate) P 4 . 8 7 0 . 8 0 (excise tax due)
- oOo -
Chapter IV
EXCISE TAX ON TOBACCO
PRODUCTS*
SEC. 144. Tobacco Products. There shall be collected a tax

of One peso (P1.00) on each kilogram of the following products of
tobacco:
( A ) Tobacco twisted by hands or reduced into a condition to be
consumed in any manner other than the ordinary mode of drying
and curing;
(B) Tobacco prepared or partially prepared with or without
the use of any machine or instruments or without being pressed or
sweetened except as otherwise provided hereunder; and
(C) Fine-cut shorts and refuse, scraps, clippings, cuttings, stems
and sweepings of tobacco except as otherwise provided hereunder.
Stemmed leaf tobacco, tobacco prepared or partially prepared
with or without the use of any machine or instrument or without being
pressed or sweetened, fine-cut shorts and refuse, scraps, clippings,
cuttings, stems, midribs, and sweepings of tobacco resulting from
the handling or stripping of whole leaf tobacco shall be transferred,
disposed of, or otherwise sold, without any prepayment of the excise
tax herein provided for, if the same are to be exported or to be used
in the manufacture of cigars, cigarettes, or other tobacco products
on which the excise tax will eventually be paid on the finished
product, under such conditions as may be prescribed in the rules
and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
*See Revised Rules on Alcohol and Tobacco Products (Rev. Regs. No. 3-2006.),
Appendix T. R.A. N o . 9334 (effective Jan. 1, 2005) provides that the amended excise
tax rules on alcohol and tobacco products for 2005 will be increased every two (2)
years thereafter starting on January 1, 2007 until January 1, 2011 (part. 4, Sec.
144.). The last increase of tax rates on such products took effect on January 1, 2011.
(see Rev. Memo. Cir. No. 95-2010.)
313
ANNOTATED
On tobacco specially prepared for chewing so as to be unsuitable

for use in any other manner, on each kilogram, Seventy-nine
centavos (P0.79).
by six percent (6%) every two years starting on January 1, 2007
Manufacturers and importers of tobacco products cigars and
cigarettes shall, within thirty (30) days from the effectivity of R.A.
No. 9334 and within the first five (5) days of every month thereafter,
submit to the Commissioner a sworn statement of the volume of
sales for each particular brand of tobacco products, sold at their
establishment for the three-month period immediately preceding.
Any manufacturer or importer who, in violation of this Section
144, knowingly misdeclares or misrepresents in his or its sworn
statement herein required any pertinent data or information
shall, upon discovery, be penalized by a summary cancellation or
withdrawal of his or its permit to engage in business as manufacturer
or importer of cigars or cigarettes.
assessed pursuant to this Section.
Section 254 of the Tax Code. Any person who wilfully aids or abets
in the commission of any such act or omission shall be criminally
liable in the same manner as the principal.
proceedings for deportation, (as amended by R.A. No. 9334.)
ANNOTATION
Manufactured products of tobacco, under the Tax Code, include
cigars, cigarettes, smoking tobacco, chewing tobacco, snuff and all
other forms of manufactured and partially manufactured tobacco.
(Sec. 2[a], Rev. Regs. No. V-39, Dept. of Finance.)
SEC. 145. Cigars and Cigarettes. -

(A) Cigars. There shall be levied, assessed and collected on
cigars an ad valorem tax based on the net retail price per cigar
Excise Tax on Tobacco Products
(excluding the excise tax and the value-added tax) in accordance

with the following schedule:
(1) If the net retail price per cigar is Five hundred pesos
(P500.00) or less, ten percent (10%); and
(2) If the net retail price per cigar (excluding the excise tax and
the value- added tax) is more than Five hundred pesos (P500.00),
Fifty pesos (P50.00) plus fifteen percent (15%) of the net retail price
in excess of Five hundred pesos (P500.00).
(B) Cigarettes Packed by Hand. There shall be levied,
assessed and collected on cigarettes packed by hand a tax at the
rates prescribed below:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three
centavos (P2.23) per pack;
Effective on January 1,2009, Two pesos and forty-seven centavos
(P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two
centavos (P2.72) per pack.
Duly registered or existing brands of cigarettes or new brands
thereof packed by hand shall only be packed in thirties.
(C) Cigarettes Packed by Machine. There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the
rates prescribed below:
(1) if the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three
Effective on January 1,2009, Two pesos and forty-seven centavos
Effective on January 1, 2011, Two pesos and seventy-two
(2) If the net retail price (excluding the excise tax and the value-
added tax) is Five pesos (P5.00) but does not exceed Six pesos and
fifty centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos
(P6.35) per pack;
ANNOTATED
Effective on January 1, 2007, Six pesos and seventy-four

Effective on January 1, 2009, Seven pesos and fourteen centavos
Effective on January 1, 2011, Seven pesos and fifty-six centavos
(P7.56) per pack.
added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos
(P10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight
Effective on January 1, 2009, Eleven pesos and forty-three
centavos (PH.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
added tax) is above Ten pesos (10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per
pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos
(P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen
centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty
Variants of existing brands and variants of new brands of
cigarettes which are introduced in the domestic market after the
effectivity of this Act shall be taxed under the proper classification
thereof based on their suggested net retail price: Provided, however,
That such classification shall not, in any case, be lower than the
highest classification of any variant of that brand.
A "variant of a brand" shall refer to a brand on which a modifier
Duly registered or existing brands of cigarettes or new brands
thereof packed by machine shall only be packed in twenties.
Any downward reclassification of present categories, for tax

purposes, of existing brands of cigars and cigarettes duly registered
at the time of the effectivity of this Act which will reduce the tax
imposed herein, or the payment thereof, shall be prohibited.
"New brands", as defined in the immediately following para-
graph, shall initially be classified according to their suggested net
retail price.
"New brands" shall mean a brand registered after the date of
"Suggested net retail price" shall mean the net retail price at
which new brands, as defined above, of locally manufactured or
imported cigarettes are intended by the manufacturer or importer
to be sold on retail in major supermarkets or retail outlets in Metro
Manila for those marketed nationwide, and in other regions, for
those with regional markets. At the end of three (3) months from
the product launch, the Bureau of Internal Revenue shall validate
the suggested net retail price of the new brand against the net
retail price as defined herein and determine the correct tax bracket
under which a particular new brand of cigarette, as defined above,
the time of revalidation in order to finally determine the correct tax
bracket under which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes introduced
in the domestic market between January 1, 1997 and December 31,
2003 shall remain in the classification under which the Bureau of
Internal Revenue has determined them to belong as of December
31, 2003. Such classification of new brands and brands introduced
between January 1,1997 and December 31, 2003 shall not be revised
except by an act of Congress.
"Net retail price," as determined by the Bureau of Internal
Revenue through a price survey to be conducted by the Bureau
of Internal Revenue itself, or the National Statistics Office when
deputized for the purpose by the Bureau of Internal Revenue, means
the price at which the cigarette is sold on retail in at least twenty
(20) major supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover the
applicable excise tax and the value-added tax. For brands which
are marketed only outside Metro Manila, the 'net retail price' shall
mean the price at which the cigarette is sold in at least five (5) major
ANNOTATED
supermarkets in the region excluding the amount intended to cover

the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its
'D', including the classification of brands for the same products
which, although not set forth in said Annex 'D', were registered
and were being commercially produced and marketed on or after
October 1, 1996, and which continue to be commercially produced
and marketed after the effectivity of this Act, shall remain in force
until revised by Congress.
Manufacturers and importers of cigars and cigarettes shall,
within thirty (30) days from the effectivity of this Act and within the
first five (5) days of every month thereafter, submit Commissioner
a sworn statement of the volume of sales for each particular brand
of cigars and/or cigarettes sold at his establishment for the three-
month period immediately preceding.
Any manufacturer or importer who, in violation of this Section,
herein, required any pertinent data or information shall, upon
discovery, be penalized by a summary cancellation or withdrawal of
his or its permit to engage in business as manufacturer or importer
of cigars or cigarettes.
aggregate amount of deficiency taxes, surcharges and interest which
may be assessed pursuant to this Section.
proceedings for deportation, (as mended by R.A. No. 9334.)
ANNOTATION
1. T h e excise taxes on locally manufactured cigars a n d

cigarettes accrue and shall be paid u p o n removal thereof f r o m the
place of production; if imported, upon removal thereof f r o m the
custody of the Bureau of Customs. (Sec. 5, Rev. Regs. No. 1-94.)

Sample cigarettes are subject to the tax provided as the law makes
no distinction between cigarettes manufactured for sale and those
for free distribution as mere samples. (BIR Ruling, May 17, 1956.)
2. For excise tax purposes, cigarette brands are grouped
into three (3) categories: (a) existing brands of cigarettes; (b) new
brands of cigarettes which are classified according to their current
net retail price; and (c) variants of existing brands of cigarettes in-
troduced in the domestic market after the effectivity of R.A. No.
8240, which are taxed under the highest classification of any vari-
ant of that brand. Such tax classification has no application to vari-
ants of new brands, in which case they should be classified as new
brands of cigarettes. (BIR Ruling No. 015-2002, April 16, 2002.)
SEC. 146. Inspection Fee. For inspection made in

accordance with this Chapter, there shall be collected a fee of Fifty
centavos (P0.50) for each thousand cigars or fraction thereof; Ten
centavos (P0.10) for each thousand cigarettes or fraction thereof;
Two centavos (P0.02) for each kilogram of leaf tobacco or fraction
thereof; and Three centavos (P0.03) for each kilogram or fraction
thereof, of scrap and other manufactured tobacco.
The inspection fee on leaf tobacco, scrap, cigars, cigarettes and
other tobacco products as denned in Section 147 of this Code shall be
paid by the wholesaler, manufacturer, producer, owner, or operator
of redrying plant, as the case may be, immediately before removal
thereof from the establishment of the wholesaler, manufacturer,
owner or operator of the redrying plant. In case of imported leaf
tobacco and products thereof, the inspection fee shall be paid by the
importer before removal from customs custody.
Fifty percent (50%) of the tobacco inspection fee shall accrue to
the Tobacco Inspection Fund created by Section 12 of Act No. 2613,
as amended by Act No. 3179 and fifty percent (50%) shall accrue to
the Cultural Center of the Philippines, (a)
ANNOTATION
1. Amended: paragraph 2.
2. See Revenue Regulations No. 1-73. (Dec. 26, 1972).
3. Memorandum Circular No. 30-67 (Aug. 1967) requires
the inspection of, among other things, all locally produced leaf
tobacco and partially manufactured tobacco intended for domestic
ANNOTATED
sale for factory use or export. In a case, it w a s contended that the

amendatory portion reading "or to tobacco for domestic sale or
factory use" in Section 6(c) of Act No. 2 6 1 3 refers to leaf tobacco
whether for local sale or factory use and does not include cigars
and cigarettes for domestic sale or c o n s u m p t i o n .
The Supreme Court held: "Prior to the a m e n d m e n t of Said
Act, Sections 6 and 7 thereof already covered the inspection of
leaf tobacco, partially manufactured tobacco for local sale and leaf
tobacco and its products for export. If the intention of C o n g r e s s
w a s to apply the a m e n d m e n t to those items already covered by Act
No. 2613, then the w o r d ' l e a f should have b e e n easily included to
modify the term 'tobacco.' T h e omission of the w o r d ' l e a f is a clear
indication that Congress intended to include within t h e purview of
the law a new item, namely, manufactured t o b a c c o products for
domestic sale and imported t o b a c c o for factory u s e . " (La Suerte
Cigar and Cigarette Factory v s . Court of Tax A p p e a l s , 134 S C R A
29, Jan. 17, 1985.)
4. It is within the p o w e r a n d duty of t h e C o m m i s s i o n e r of

Internal Revenue to collect t o b a c c o inspection f e e s , e v e n without
inspection, should t o b a c c o products be r e m o v e d clandestinely
or surreptitiously f r o m the establishment of t h e wholesaler,
manufacturer or redrying plant a n d f r o m the c u s t o m s custody in
case of imported leaf t o b a c c o . (Ibid.)
5. Tobacco inspection f e e s are levied a n d collected for pur-

poses of regulation a n d control a n d also as a s o u r c e of revenue
since 5 0 % of said fees shall a c c r u e to the Tobacco Inspection Fee
Fund and the other 5 0 % to the Cultural Center of t h e Philippines.
They are n o w payable before removal f r o m t h e t a x p a y e r ' s establish-
ment.
SEC. 147. Definition of Terms. When used herein and in

statements or official forms prescribed hereunder, the following
terms shall have the meaning indicated:
(a) "Cigars" mean all rolls of tobacco or any substitute thereof,
wrapped in leaf tobacco.
( b ) "Cigarettes" mean all rolls of finely-cut leaf tobacco, or any
substitute therefor, wrapped in paper or any other material.
(c) "Wholesale price" shall mean the amount of money or price
paid for cigars or cigarettes purchased for the purpose of resale,
regardless of quantity.
Sec. 147 E X C I S E T A X E S ON C E R T A I N G O O D S 321
(d) " R e t a i l p r i c e " s h a l l m e a n t h e a m o u n t o f m o n e y o r p r i c e

w h i c h a n u l t i m a t e c o n s u m e r o r e n d - u s e r p a y s f o r cigars o r c i g a r e t t e s
purchased.
ANNOTATION
Section 147 provides t h e definition of certain terms affecting

the tobacco industry.
- 0O0 -
Chapter V
EXCISE TAX ON PETROLEUM
PRODUCTS*
SEC. 148. Manufactured Oils and Other Fuels. There

shall be collected on refined and manufactured mineral oils and
motor fuels, the following excise taxes which shall attach to the
goods hereunder enumerated as soon as they are in existence as
such:
(a) Lubricating oils and greases, including but not limited
to, basestock for lube oils and greases, high vacuum distillates,
aromatic extracts and other similar preparations, and additives for
lubricating oils and greases, whether such additives are petroleum
based or not, per liter and kilogram, respectively, of volume capacity
or weight, Four pesos and fifty centavos (P4.50): Provided, however,
That the excise taxes paid on the purchased feedstock (bunker)
used in the manufacture of excisable articles and forming part
thereof shall be credited against the excise tax due therefrom:
Provided, further, That lubricating oils and greases produced from
basestocks and additives on which the excise tax has already been
paid shall no longer be subject to excise tax: Provided, finally, That
locally produced or imported oils previously taxed as such but are
subsequently reprocessed, rerefined or recycled shall likewise be
subjected to the tax imposed under this Section, (a)
(b) Processed gas, per liter of volume capacity, Five centavos
(P0.05);
(c) Waxes and petrolatum, per kilogram, Three pesos and fifty
centavos (P3.50);
(d) On denatured alcohol to be used for motive power, per liter
of volume capacity, Five centavos (P0.05): Provided, That unless
*See Excise Taxation of Petroleum Products (Rev. Regs. N o . 8-96.), Appendix
322
Excise Tax on Petroleum Products
otherwise provided by special laws, if the denatured alcohol is mixed

with gasoline, the excise tax on which has already been paid, only
the alcohol content shall be subject to the tax herein prescribed. For
purposes of this Subsection, the removal of denatured alcohol of not
less than one hundred eighty degrees (180) proof (ninety percent
[90%] absolute alcohol) shall be deemed to have been removed for
motive power, unless shown otherwise;
(e) Naphtha, regular gasoline and other similar products of
distillation, per liter of volume capacity, Four pesos and thirty-five
centavos (P4.35); Provided, however, That naphtha when used as
a raw material in the production of petrochemical products or as
replacement fuel for natural gas-fired-combined-cycle power plant,
in lieu of locally-extracted natural gas during the non-availability
thereof, subject to the rules and regulations to be promulgated by the
Secretary of Energy, in consultation with the Secretary of Finance,
per liter of volume capacity, Zero (P0.00): Provided, further, That
the by-product including fuel oil, diesel fuel, kerosene, pyrolysis,
gasoline, liquefied petroleum gases and similar oils having more
or less the same generating power, which are produced in the
processing of naphtha into petrochemical products shall be subject to
the applicable excise tax specified in this Section, except when such
by-products are transferred to any of the local oil refineries through
sale, barter, or exchange, for the purpose of further processing or
blending into finished products which are subject to excise tax under
this Section;
(f) Leaded premium gasoline, per liter of volume capacity, Five
pesos and thirty-five centavos (P5.35); unleaded premium gasoline,
per liter of volume capacity, Four pesos and thirty-five centavos
(P4.35);
(g) Aviation turbo jet fuel, per liter of volume capacity, Three
pesos and sixty-seven centavos (P3.67);
(h) Kerosene, per liter of volume capacity, zero (P0.00): Provided,
That kerosene, when used as aviation fuel, shall be subject to the
same tax on aviation turbo jet fuel under the preceding paragraph
(g), such tax to be assessed on the user thereof;
(i) Diesel fuel oil, and on similar fuel oils having more or less the
same generating power, per liter of volume capacity, zero (P0.00);
(j) Liquefied petroleum gas, per liter, Zero (P0.00): Provided,
That liquefied petroleum gas used for motive power shall be taxed
at equivalent rate as the excise tax on diesel fuel oil;
ANNOTATED
(k) Asphalts, per kilogram, Fifty-six centavos (P0.56); and

(1) Bunker fuel oil, and on similar fuel oils having more or less
the same generating power, per liter of volume capacity (P0.00). (as
amended by R.A. No. 9337 and No. 8184.)
ANNOTATION
1. Amended: Subsection (a) "and kilogram, respectively,"

and "or weight," and the last proviso, are a d d e d .
The sale of crude oil is not a m o n g those e n u m e r a t e d under
Section 148 as excisable petroleum product; h e n c e , it is not subject
to excise tax, but the gain derived f r o m such sale is subject to
income tax. (BIR Ruling No. 155-98, Oct. 2 1 , 1998.)
2. Upgrading of petroleum products. This takes place
w h e n there is a reclassification of a petroleum product to a higher
rate without undergoing any reprocessing or blending other than
putting additives. (Sec. 2[q], Rev. Regs. 8-96, Excise Taxation of
Petroleum Products, A p p e n d i x "T.")
(1) T h e tax on u p g r a d e d k e r o s e n e shall be collected at

the time of removal thereof f r o m t h e place w h e r e the s a m e is
upgraded and such upgrading shall not give rise to any crediting
of the excise taxes paid on t h e products originally classified
under the lower tax rate.
For e x a m p l e , if a manufacturer r e m o v e d f r o m its place of
production 1,000 liters of gasoline a n d paid t h e tax of P 6 0 0
or (P0.60 per liter) thereon a n d a m o n t h later t h e k e r o s e n e
w a s upgraded by the manufacturer to aviation turbo j e t fuel by
merely mixing anti-freeze or de-icing a g e n t with s u c h k e r o s e n e ,
said manufacturer is liable to pay excise tax of P3.670 (P3.67
per liter) before effecting the removal thereof f r o m t h e place of
upgrading without the benefit of crediting the P 6 0 0 excise tax
originally paid on kerosene.
(2) Similarly, crediting is not allowed in favor of a trader
w h o bought the upgraded k e r o s e n e f r o m a local oil company,
paying the lower tax of P 6 0 0 , and subsequently sold it as
aviation turbo jet fuel to an airline c o m p a n y or another trader.
T h e trader is liable to pay t h e excise tax of P3.670 before
effecting the removal of t h e said product f r o m his storage
premises.
Now, if the airline c o m p a n y p u r c h a s e d the jet fuel f r o m an

unregistered supplier w h o could not present proof of p a y m e n t
Sec. 148 EXCISE TAXES O N C E R T A I N G O O D S 325
of the specific tax, the c o m p a n y is liable to pay the P3.670

specific tax on the date of purchase. (Sec. 5, Ibid.)
3. Feedstock used in the manufacture of exciseable articles.
Under t h e s e c o n d proviso of Section 148(a), the crediting of
the specific taxes paid on p u r c h a s e d feedstock (bunker) shall be
limited to the proportion of t h e v o l u m e of s u c h raw materials used
in production, in relation to t h e total v o l u m e of finished products
subject to tax. A n y e x c e s s of excise taxes paid on raw materials
resulting f r o m m a n u f a c t u r i n g , blending, processing, storage and
handling losses shall not give rise to a tax refund or credit.
(1) Volume of raw materials used is less than the volume

of the finished goods produced and removed. Suppose,
b a s e d on production records, the manufacturer purchased and
u s e d 9 0 0 liters tax-paid bunker fuel to produce 1,000 kilograms
of asphalt. T h e excise tax d u e on t h e removal of 1,000 kgs. of
asphalt is c o m p u t e d as follows:
Tax d u e on asphalts (1,000 kgs. x P0.56) P560

Less: Tax paid b u n k e r fuel (900 liters
x P0.30) 270
Balance of excise tax P290
Only P 2 7 0 shall be allowed to be credited in the finished

goods produced and removed.
(2) Volume of raw materials used is more than the volume
of the finished goods produced and removed. S u p p o s e in
the a b o v e e x a m p l e , the manufacturer purchased and used
2,000 liters of bunker fuel. T h e computation is as follows:
Tax d u e on asphalts P560

Less: Creditable excise tax 600
Difference (P40)
T h e difference of P40.00 shall neither give rise to any claim

for refund/credit against subsequent removals. (Sec. 7, Ibid.)
4. Lubricating oils and greases produced from basestocks
and additives. Under the second proviso of Section 148(a). the
rules are:
(1) T h e removal of lubricating oils and greases shall not
be subject to excise tax where the specific tax on the material
ANNOTATED
components (basestocks and additives) has already been paid;

otherwise, the manufacturer is still liable for the tax that has not
been paid.
(2) The volume of finished goods produced and removed
(e.g., 1,000 liters of lube oil) must be equal to the volume of tax-
paid raw materials (e.g., 900 liters of basestocks and 100 liters
of additives).
(3) If the volume of finished g o o d s produced and removed
is more than the volume of tax of the raw materials u s e d , the
manufacturer is still liable for the balance of the tax due to
increase in volume of the finished products.
(4) On the other h a n d , if it is the v o l u m e of the finished
goods that is less, the difference will not give rise to any claim
for tax refund or credit, nor can t h e s a m e be allowed to be
credited against e x c e s s tax d u e on s u b s e q u e n t removals.
(Sec. 6, Ibid.)
The sale of crude oil is not a m o n g those e n u m e r a t e d under
Section 148 as excisable petroleum product; h e n c e , it is not subject
to excise tax, but the gain derived f r o m s u c h sale is subject to
income tax. (BIR Ruling No. 155-98, Oct. 2 1 , 1998.) T h e removal
of basestocks f r o m the t o p p e d crude oil is not subject to excise tax.
T h e removal of other yields like w a x a n d asphalt is subject to excise
tax and the gain derived therefrom to i n c o m e tax. (BIR Ruling No.
073-99, May 2 7 , 1999.) Water based lubricants do not fall under
manufactured oils and other fuels under Section 148, h e n c e , they
are not subject to excise tax but their importation is subject to t h e
1 0 % VAT. (BIR Ruling No. 0 4 9 - 2 0 0 1 , Oct. 2 4 , 2001.)
The third proviso of Section 148(a) is a d d e d by R.A. N o . 8 4 2 4 .
5. Denatured alcohol to be used for motive power. Under
Section 148(d), the computation on the specific tax m a y be m a d e
by the use of the following formula:
No. of g a u g e liters of d e n a t u r e d alcohol
Less: No. of g a u g e liters of tax-paid
gasoline denaturant
= Taxable liters
Multiplied by P0.05
= Excise tax due
6. Denatured alcohol is ethyl alcohol to w h i c h has b e e n a d d e d
denaturing materials as to render the alcohol unfit for beverages
or other preparations taken internally. (BIR Primer: see Sec. 168.)

Denaturing is a process of making alcohol unfit for drinking.
7. Section 141 i m p o s e s an excise tax on distilled spirits
(alcohol). W h e r e alcohol is denatured for motive power, it is subject
to a lesser a m o u n t of specific tax under Section 148(d). In the case
of alcohol not taxable under Section 141 or Section 148(d), such as
denatured alcohol for industrial uses (see Sec. 134.), it is subject to
value-added tax under Section 106(A).
8. It is manifest f r o m Section 148(d) that the burden is laid

upon the BIR authorities to prove that t h e t a x e d alcohol w a s actually
r e m o v e d for uses other t h a n for motive power.
(1) W h e r e the report of the BIR investigator contains no

specific finding in detail as to the purposes for which the n o n -
gasoline denatured alcohol, for w h i c h t h e sales tax is being
i m p o s e d , w a s w i t h d r a w n , other t h a n the segregation of sales
of gasoline d e n a t u r e d alcohol f r o m those of alcohol mixed
with other s u b s t a n c e s , the description of the latter as alcohol
r e m o v e d for industrial purposes is pure conjecture which is not
e v i d e n c e sufficient to o v e r c o m e t h e presumption in favor of
removal of alcohol for motive power.
(2) T h e law in establishing the presumption of use for

motive power, m a k e s no mention of the kind of denaturant mixed
with the alcohol. From this, it can be concluded that denatured
alcohol w h e n mixed with gasoline is not the only instance
wherein said alcohol is to be used for motive power. In other
words, denatured alcohol may be removed from the distillery to
be used for motive power, without being mixed with gasoline,
(see Central Azucarera Don Pedro vs. C.T.A., L-21139, April 30,
1966.)
9. Under Pres. Decree No. 972 (Coal Development Act of
1976, as a m e n d e d by Pres. Decree No. 1174.), coal operators
holding coal operating contracts are e x e m p t e d from all taxes,
including income taxes.
10. A BOI-registered c o m p a n y which processes or imports
used/waste oil, unused/virgin oil or chemical additives for the
production and manufacture of re-defined oil shall be subject to the
payment of excise tax on its products if no excise tax has been paid
yet. On the other hand, lubricating oils and grease produced from
basestocks and additives on which the excise tax has already been
paid shall no longer be subject to excise tax. (Sec. 148[a].)
ANNOTATED
If the raw materials, however, consist of local and/or imported

used oil where no excise tax has been paid immediately before the
re-defining process, the volume of redefined oil produced out of the
used oil shall be subject to excise tax of P4.50 per liter pursuant
to Section 148. In both cases, the entire volume of its finished
products (re-defined oil) shall be subject to 1 0 % (now 12%) VAT
under Section 106(A). (BIR Ruling No. 32, April 2 0 , 1992.)
11. O n e e n g a g e d in the business of buying used bunker fuel
oil from various sources and selling the s a m e without alteration to
customers w h o use the s a m e for w o o d treatment, rust proofing or
as pesticides, is subject to VAT if his gross sales e x c e e d P550.000
during the 12-month period; otherwise, to 3% percentage tax under
Section 116.
Since used bunker fuel oil is without generating capacity, it is no
longer subject to excise tax under Section 148(1) w h i c h prescribes a
0% a d valorem tax only on bunker fuel oil or similar fuel oils with the
required generating capacity. (BIR Ruling No. 0 3 6 , March 9, 1989.)
12. T h e commingling of tax-paid u n l e a d e d gasoline with
leaded gasoline a n d the resulting gasoline sold as leaded gasoline
is subject to the excise tax of P5.35 per liter of v o l u m e capacity
pursuant to Section 148 subject to the procedures to be prescribed
by the BIR in order to monitor the deliveries a n d removals of the
stocks in the designated storage t a n k s . (BIR Ruling No. 0 0 2 - 2 0 0 0 ,
Jan. 4, 2000.)
- oOo -
Chapter VI
EXCISE TAX ON MISCELLANEOUS
ARTICLES
SEC. 149. Automobiles. There shall be levied, assessed

and collected an ad valorem tax on automobiles based on the
manufacturer's or importer's selling price, net of excise and value-
added tax, in accordance with the following schedule:
Net manufacturer's price I Rate

importer's selling price
Up to P600 thousand 2%
Over P600 Thousand to P l . l P12,000 + 20% of value in
Million excess of P600 Thousand
Over P l . l Million to P2.1 P112,000 + 40% of value in
Million excess of P l . l Million
Over P2.1 Million P512,000 + 60% of value in
excess of P2.1 Million
Provided, That the brackets reflecting the manufacturer's price

or importer's selling price, net of excise and value-added taxes, will
be indexed by the Secretary of Finance once every two (2) years if
the change in the exchange rate of the Philippine peso against the
United States (U.S.) dollar is more than ten percent (10%) from the
1
date of effectivity of this Act in the case of initial adjustment and
from the last revision date in the case of subsequent adjustments.
The manufacturer's price or importer's selling price, net of excise
and value-added taxes, shall be indexed by the full rate of the peso
depreciation or appreciation, as the case may be.
Provided, further, That in case the change in the exchange rate
of the Philippine peso against the U.S. dollar is at least twenty
October 4, 2003, R.A. No. 9224.
329
ANNOTATED
percent (20%) at anytime within the two-year period referred to

above, the Secretary of Finance shall index the brackets reflecting
the manufacturer's price or importer's selling price, net of excise
and value-added taxes, by the full rate of the peso depreciation or
appreciation, as the case may be.
As used in this Section
(a) Automobile shall mean any four (4) or more wheeled
motor vehicle regardless of seating capacity, which is propelled
by gasoline, diesel, electricity or any other motive power:
Provided, That for purposes of this Act, buses, trucks, cargo
vans, jeeps/jeepneys/jeepney substitutes, single cab chassis, and
special purpose vehicles shall not be considered as automobiles.
(b) Truck cargo van shall mean a motor vehicle of any
configuration that is exclusively designed for the carriage of
goods and with any number of wheels and axles, Provided, That
pick-ups shall not be considered as trucks.
(c) Jeep/jeepneys/jeepney substitutes shall mean as
"Philippine jeep or jeepney" which are of the jitney type locally
designed and manufactured generally from surplus parts and
components. It shall also include jeepney substitutes that are
manufactured from brand new single cab chassis or cowl chassis
and locally customized rear body that has continuous sideway
row seats with open rear door and without retractable glass
windows.
(d) Bus shall mean a motor vehicle of any configuration
with gross vehicle weight of 4.0 tons or more with any number
of wheels and axles, which is generally accepted and specially
designed for mass or public transportation.
(e) Single cab chassis shall mean a motor vehicle with
complete engine power train and chassis equipped with a cab that
has a maximum of two (2) doors and only one (1) row of seats.
(f) Special purpose vehicle shall mean a motor vehicle
designed for specific applications such as cement mixer, fire
truck, boom truck, ambulance and/or medical unit, and off-road
vehicles for heavy industries and not for recreational activities.
Provided, That in the case of imported automobiles not for sale
the tax imposed herein shall be based on the total landed value,
including transaction value customs duty and all other charges.
Automobiles used exclusively within the freeport zone shall be
exempt from excise tax. (as amended by R.A. No. 9224.)
Excise Tax on Miscellaneous Articles
ANNOTATION
1. Deleted: Sections 146 (Fireworks), 147 (Cinematographic

films), a n d 148 (Saccharine). Amended: Section 149.
2. Four-tiered value-based tax on automobiles. Before,
the excise tax rates on automobiles d e p e n d e d o n : (1) the engine
displacement (in cc.) of the automobile sold, (2) whether the
automobile required t h e use of gasoline or diesel fuel oil, and (3)
the manufacturer's or importer's selling price, net of excise and
v a l u e - a d d e d taxes, with tax rates of 1 5 % , 3 5 % , 5 0 % , and 100%.
T h e former excise tax structure governing automobile taxation
w a s considered inequitable a n d inefficient. First, it w a s based on
engine displacement and type of fuel u s e d , m e a n i n g the bigger the
e n g i n e size a n d the use of gasoline the higher the tax rate. Engine
displacement m a y not correlate with standard versus luxury cars,
while t h e distinction b e t w e e n gasoline a n d diesel may no longer
be relevant in v i e w of the dramatic evolution in engine technology.
S e c o n d , t h e definition of a u t o m o b i l e w a s biased against smaller
cars (Sedan type), A s i a n Utility Vehicles (AUVs) and public utility
vehicles ( P U V s ) b e c a u s e under the seating capacity rule, an
automobile w a s e x e m p t f r o m excise tax if it could a c c o m m o d a t e
at least 10 p a s s e n g e r s . Manufacturers of sports utility vehicles
(SUVs) exploited the seating capacity rule by adding j u m p seats.
Most S U V s w h i c h generally t h e rich can afford to buy escaped
taxation b e c a u s e of the rule, thereby adversely affecting tax y i e l d .
To illustrate the computation of the excise tax under the value
based s y s t e m , if t h e net manufacturer's price of an automobile is
P1.5 million, the tax payable is P272,000 (P112,000 + P160,000).
3. Definition of terms. In addition to the definitions in Section
149, Rev. Regs. No. 2 5 - 2 0 0 3 gives the m e a n i n g of the words and
phrases indicated below.
(1) Total landed cost. It shall refer to the total of the
(a) market value of the motor vehicles imported as indicated
in the motor vehicle reference books, such as the Japanese
and U.S. Red Book, Karo and World Car Book on automobile
utility vehicles and other motor vehicles, or the dutiable value
as defined in Section 201 of the Tariff and Customs Code of
the Philippines as a m e n d e d , whichever is higher; (b) customs
duties paid on the imported goods; and (c) all other charges
arising f r o m , or incident to, the importation.
(2) Manufacturers/assembler. It shall refer to any per-
son or group of persons, juridical or otherwise, who produces,
ANNOTATED
assembles, fabricates, or otherwise manufactures a motor

vehicle by combining body frame/chassis, engine, drive-train,
suspension and other automotive parts, or one w h o alters any
part of a motor vehicle to meet the specification of an automo-
bile and render it fit for registration with the Land Transportation
Office. It shall also include any person which manufactures,
assembles, or fabricates motor vehicles from surplus and/or
used parts.
(3) Importer. It shall refer to any person bringing
motor vehicles into the country f r o m a foreign country for
the purpose of sale, for personal use or for use in business.
It shall also refer to persons/enterprises duly registered with
legislated freeport z o n e s w h o p u r c h a s e motor vehicles f r o m
establishments located within the c u s t o m s territory. This shall
also include owner/possessor/purchaser or transferee of motor
vehicles intended for exclusive use within the freeport z o n e but
are introduced or re-introduced into the c u s t o m s territory.
(4) Completely knocked down (CKD). It shall refer

to parts and c o m p o n e n t s for a s s e m b l y purposes that are
imported in d i s a s s e m b l e d condition. T h e C K D pack, however,
may include not only parts a n d c o m p o n e n t s but also s u b -
assemblies and assemblies s u c h as e n g i n e , t r a n s m i s s i o n , axle
assembles, chassis and body a s s e m b l i e s .
(5) Semi-knocked down (SKD). It shall refer to parts
and c o m p o n e n t s for a s s e m b l y purposes that are imported in
partially a s s e m b l e d condition. S K D s include s e m i - a s s e m b l e d
vehicles; for purposes of ad valorem tax, t h e s a m e shall be
treated as C B U .
(6) Completely build up (CBU). It shall refer to vehicles

imported in completely a s s e m b l e d f o r m a n d ready for use by
the c o n s u m e r s .
A n y motor vehicle, t h o u g h referred to or otherwise d e n o -

minated as truck, cargo v a n , jeep/jeepney/jeepney substitute,
bus, single cab chassis, or special purpose vehicle, but
not falling within the purview of the definitions stated in the
regulations shall be classified as a u t o m o b i l e a n d , therefore,
subject to excise tax.
A special purpose vehicle refers to a motor vehicle, other

than truck, cargo v a n , jeep/jeepney/jeepney substitute, bus and
single cab c h a s s e s as defined in the law. T h e phrase "designed
for specific applications" shall m e a n the motor vehicle is
d e s i g n e d in such a m a n n e r that it c a n only be used strictly for

the intended purpose for w h i c h it w a s manufactured. (Sec. 2,
Rev. R e g s . No. 25-2003.)
4. Persons liable. T h e following persons shall be liable for
the p a y m e n t of ad valorem tax on automobiles:
(1) On locally manufactured/assembled automobiles.
T h e excise tax shall be paid by the manufacturer/assembler
of automobiles. S h o u l d domestically manufactured/assembled
automobiles be r e m o v e d f r o m the place of manufacture/
a s s e m b l y without the p a y m e n t of the tax, the dealer/trader,
owner, or person having p o s s e s s i o n thereof shall be liable
for the excise tax d u e t h e r e o n . In c a s e of transfer of locally
m a n u f a c t u r e d / a s s e m b l e d automobiles f r o m a tax-exempt
person to a non-tax e x e m p t individual or entity, the transferee
or possessor thereof shall be t h e o n e liable for the excise tax.
(2) On imported automobiles. T h e excise tax shall be
paid by the o w n e r or importer of the automobile or by the dealer/
trader, or by any person w h o is found in possession of any
untaxed automobiles including any person other than the one
legally entitled to e x e m p t i o n f r o m the ad valorem tax in the proper
c a s e . In c a s e s w h e r e automobiles are brought or imported tax
free into t h e country by p e r s o n s , entities, or agencies exempt
f r o m tax a n d are subsequently sold, transferred, or exchanged
in the Philippines to n o n - e x e m p t persons, or entities, including
t h e introduction a n d re-introduction into customs territory of
automobiles intended for exclusive use within the freeport
z o n e s , t h e purchaser or transferee, owner/possessor of the
automobiles shall be considered as the importer, and shall be
liable for the excise tax d u e on such importation.
Should a locally manufactured/assembled or imported
motor vehicle originally classified as truck, jeep/jeepney/jeep-
ney substitute, single cab chassis and special purpose vehicle
is converted at anytime from its removal from the place of
manufacture/assembly or release from customs custody into
a type of motor vehicle subject to ad valorem tax, the owner/
possessor shall be liable to the ad valorem tax on such con-
verted motor vehicle based on acquisition price plus cost of
conversion and shall be subjected to applicable penalties.
5. Manufacturer's or importers selling price. The net

manufacturer's or importer's selling price shall refer to the price, net
of excise and value-added taxes, at which locally manufactured/
ANNOTATED
assembled or imported automobiles are offered for sale by the

manufacturer/assembler or importer to the dealers, or to the
public directly or through their sales agents, as reflected in the
manufacturer's/assembler's or importer's sworn statement duly filed
with the BIR, or in their sales invoices/official receipts, whichever is
higher.
(1) In computing the manufacturer's/assembler's or
importer's selling price, it shall always include the value of
car air-conditioner, radio and m a g wheels including the cost
of installation thereof whether or not the s a m e w e r e actually
installed in the automobile.
(2) In no case shall the manufacturer's/assembler's or
importer's selling price be less than the a m o u n t c o m p u t e d as
follows:
8 0 % x (Suggested Retail price - Excise Tax Value-Added
Tax)
(3) T h e manufacturer/assembler's or importer's selling
price shall in no c a s e be less t h a n the cost of manufacture/
assembly/importation plus the industry profit margin of 1 0 %
and other e x p e n s e s incurred before the automobiles are sold
to the market provided that the s u g g e s t e d retail price shall not
be less than the actual selling price of t h e automobiles w h e n
sold to the market.
(4) T h e value o f o t h e r f a c t o r y - i n s t a l l e d accessory or optional
equipment such as w h e e l covers, or any other attachment
installed on the unit r e m o v e d or sold, or previously r e m o v e d
and returned for purposes of installation thereof, as well as t h e
costs of installation of the accessory, shall likewise f o r m part of
the manufacturer's/assembler's or importer's selling price, in
cases w h e r e accessories are installed outside the p r o d u c t i o n /
assembly plant or after the release f r o m the c u s t o m s custody
but before the actual sale of t h e imported automobile, as
the case may be, and the costs of s u c h accessories and the
cost of the installations shall f o r m part of t h e e x p e n s e s of the
manufacturer/assembler or importer, all s u b s e q u e n t billings
therefor by the manufacturer/assembler or importer to the
dealer or customer shall f o r m part of the selling price. (Sec. 5,
Ibid.)
6. Indexation of selling price. T h e brackets reflecting the

manufacturer's/assembler's or importer's selling price, net of excise
and value-added taxes, shall be indexed as follows:
149 EXCISE TAXES ON C E R T A I N GOODS 335
(1) O n c e every two (2) years if the c h a n g e in the exchange

rate of the Philippine Peso against the United States (U.S.)
dollar is more than 1 0 % f r o m the date of effectivity of R.A. No.
9 2 2 4 (on Oct. 4, 2003) or f r o m the last revision date in the
c a s e of s u b s e q u e n t adjustment, which shall be referred to as
an ordinary indexation.
(2) In c a s e the c h a n g e in the e x c h a n g e rate of the Philippine

Peso against the U.S. dollar is at least 2 0 % for a continuous
period of at least 10 d a y s at anytime within the said two-year
period, an indexation, referred to as extraordinary indexation,
of the manufacturer's/assembler's or importer's selling price,
net of excise and v a l u e - a d d e d taxes, shall be effected.
(3) T h e determination of the percentage of change in
the e x c h a n g e rate shall cover the period f r o m the date of
effectivity of R.A. N o . 9 2 2 4 , for the initial indexation, or from
the last indexation, in c a s e of a s u b s e q u e n t revision, to the
intended year of indexation. T h e manufacturer's/assembler's
or importer's selling price, net of excise a n d value-added taxes,
'shall be indexed by t h e full rate of the peso depreciation or
appreciation, as the c a s e m a y be. For purposes of determining
the percentage c h a n g e of e x c h a n g e rate of Philippine Peso
against the U.S. dollar, the official Bangko Sentral ng Pilipinas
(BSP) publication of e x c h a n g e rates shall be u s e d .
Ordinary or extraordinary indexation shall be implemented
through an issuance of R e v e n u e Regulations by the Secretary
of Finance u p o n r e c o m m e n d a t i o n of the Commissioner of
Internal R e v e n u e . (Sec. 6, Ibid.)
7. Tax treatment on importation of automobiles not intended
for sale. In case of automobiles that are imported for personal use
and not for sale by the importer, the excise tax shall be computed
based on the total landed value.
(1) Importation of more than one automobile unit by the
s a m e importer or the sale or transfer of an imported automobile
within a twelve (12)-month period shall not be considered as
importation not intended for sale.
(2) Should there be importations of automobiles made in
the name of several buyers but represented by a single person/
entity, such importations shall be d e e m e d an importation of
automobile for resale; therefore, subject to ad valorem tax
based on importer's selling price to be paid by such person/
entity representing the individual buyers. (Sec. 7, Ibid.)
ANNOTATED
8. Tax treatment on subsequent sale, transfer or exchange

of tax-exempt automobiles by a tax-exempt person/entity to a non-
exempt person/entity. In cases w h e r e a tax-exempt person/entity
acquired an automobile, whether locally purchased or imported,
without payment of the tax by reason of his/their e x e m p t i o n , the
purchase thereof by a non-exempt person/entity shall be subjected
to the ad valorem tax based on the higher of (1) actual consideration
between the tax-exempt person/entity and the non-exempt person/
entity; or (2) the depreciated value of the automobile at the time of
sale, transfer, or e x c h a n g e w h i c h depreciation rate shall be at 1 0 %
per year, but in no case shall the total a m o u n t of depreciation be
more than 5 0 % of the original cost or value.
However, in case w h e r e the automobile w a s acquired by the

tax-exempt person or entity prior to but sold after the effectivity of
the R.A. No. 9224, the computation of the ad valorem tax shall be
governed by the Act.
W h e r e a tax-exempt automobile subsequently sold, transferred
or e x c h a n g e d by a tax-exempt person or entity w a s d e t e r m i n e d
to be originally acquired by s u c h person or entity primarily for t h e
purpose of avoiding the p a y m e n t of the excise tax, t h e ad valorem
tax shall be c o m p u t e d based on t h e original p u r c h a s e price or
value of importation of s u c h motor vehicle at the time of its original
purchase or importation by s u c h t a x - e x e m p t person or entity without
the benefit of any deduction for depreciation otherwise allowed
under existing rules and regulations. (Sec. 8, Ibid.)
9. Tax-exempt removals of automobiles. T h e following
removals of locally m a n u f a c t u r e d / a s s e m b l e d or release of imported
automobiles from the place of production or f r o m c u s t o m s ' custody,
respectively, are e x e m p t f r o m the p a y m e n t of t h e appropriate excise
taxes subject to certain conditions.
(1) Removals for export. No ad valorem tax shall be
collected on locally m a n u f a c t u r e d / a s s e m b l e d automobiles
which shall be r e m o v e d for exportation a n d are actually
exported without returning to the Philippines subject to t h e
following conditions:
(a) Permit to export. Immediately before r e m o v a l ,

exporters of automobiles shall apply in writing for a written
permit from the C o m m i s s i o n e r of Internal R e v e n u e , stating
the brand/model, n u m b e r of units a n d value per unit of t h e
automobiles to be e x p o r t e d , country of destination, n a m e
of the vessel, c o n s i g n e e , a n d t h e place of loading. T h e dis-
covery of any of s u c h unit in-transit or which have actually

b e e n exported without the issuance of the appropriate per-
mit shall be d e e m e d prima facie evidence of illegal removal
of the s a m e and the ad valorem tax shall be due immedi-
ately u p o n d e m a n d .
(b) Direct delivery to vessel. A u t o m o b i l e s for export

shall be loaded direct f r o m the place of production/assem-
bly to the vessel or m e a n s of transportation carrying t h e m
outside the Philippines a n d the s a m e shall be under the
supervision of authorized internal revenue officer. A certi-
fication to this effect shall be duly issued by the Bureau
of C u s t o m s immediately after loading and departure of the
vessel or other m e a n s of transportation from the Philippine
territory.
(c) Proof of exportation. Exporters of automobiles

are required to submit proof of exportation satisfactory to
t h e C o m m i s s i o n e r of Internal R e v e n u e within 30 days from
t h e date of removal f r o m t h e place of assembly/production.
T h e proofs of exportation shall consist of the documents
e n u m e r a t e d in the Regulations.
(d) Exporter's bond. W h e n d e e m e d necessary, an

exporter shall be required to give a bond for an amount
equivalent to the removal of the s a m e for export shipment,
conditioned u p o n t h e exportation of the s a m e in g o o d faith.
(2) Delivery to tax-exempt persons or entities. M a n u -

facturers/assemblers or importers of automobiles are hereby
allowed to sell to tax-exempt persons or entities without the
pre-payment of ad valorem tax subject to certain conditions.
(a) Tax exempt persons or entities. They are the
following:
1) Embassies of foreign governments subject to
the principle of reciprocity;
2) Tax-exempt organizations such as the Asian
Development Bank (ADB) pursuant to special laws and
subject to existing rules and regulations; and
3) Other tax-exempt entities or agencies cov-
ered by tax treaties, conventions, and international
agreements to which the Philippines is a signatory
subject to reciprocity.
ANNOTATED
The above persons or entities may also remove

imported automobiles from customs custody without
the pre-payment of the ad valorem tax subject to
existing rules and regulations.
( b ) Requirements in the sale of automobiles to tax-
exempt entities. No automobiles shall be removed from
t h e assembly plant or place of production or release from
customs custody for sale to tax-exempt agencies without
prior written approval from the C o m m i s s i o n e r of Internal
Revenue. The tax-exempt customer of the manufacturers/
assembler or importer shall apply in writing for the approval
of such exemption submitting, a m o n g others, favorable
indorsement f r o m concerned g o v e r n m e n t agency (e.g.,
Department of Foreign Affairs for tax e x e m p t purchase of
automobile by foreign e m b a s s i e s for their official use); an
authenticated true copy of the p u r c h a s e order indicating
the description of the automobiles to be p u r c h a s e d ; the
chassis and e n g i n e n u m b e r s ; a n d the place or location of
the point of delivery of t h e automobiles.
T h e written approval of t h e C o m m i s s i o n e r of Internal

R e v e n u e or his duly authorized representative shall be for-
w a r d e d by the t a x - e x e m p t c u s t o m e r to t h e manufacturer/
assembler, through t h e dealer a n d thereafter, t h e a u t o m o -
bile m a y be r e m o v e d a n d delivered, free f r o m excise tax,
to the dealer. S u c h written approval is valid only for the par-
ticular transaction applied for by t h e tax e x e m p t customer.
(c) Tax credits/refunds by tax-exempt persons or

entities. In c a s e s w h e r e the t a x - e x e m p t persons or
entities purchased automobiles in w h i c h the ad valorem
tax d u e thereon w a s paid or w h e r e t h e ad valorem tax had
been erroneously or illegally collected, s u c h tax-exempt
persons or entities m a y file a claim for tax refund or tax
credit with t h e C o m m i s s i o n e r of Internal R e v e n u e under
existing rules and regulations, submitting the following:
1) Authenticated copy of the Certificate of Tax
Exemption;
2) Original and duplicate copies of sales invoices;

and
3) Certified photocopies of proof of p a y m e n t of

the ad valorem tax.
T h e claim for tax credit/refund for erroneous pay-

ment of ad valorem tax should be filed within two (2)
years f r o m date of p a y m e n t of the ad valorem tax. Pro-
cessing of claims for tax refund/credit shall be done
by the BIR but the actual issuance of Tax Credit Cer-
tificate/refund shall c o m e f r o m the agency where the
actual p a y m e n t w a s m a d e .
( 3 ) Removals for delivery and use exclusively within the
freeport zone. For p u r p o s e s of Rev. Regs. No. 25-2003,
automobiles imported directly into the legislated freeport zones
f r o m a b r o a d or p u r c h a s e d f r o m establishments located within
the c u s t o m s territory for use exclusively within the freeport
z o n e shall be e x e m p t f r o m the imposition of the excise tax.
Therefore, in the e v e n t that the automobile is, by whatever
m o d e , introduced into the c u s t o m s territory, in case w h e r e the
a u t o m o b i l e w a s directly imported, or re-introduced into the
c u s t o m s territory in c a s e the automobile w a s purchased from
establishments located within the c u s t o m s territory, the s a m e
shall be d e e m e d an importation into the Philippines subject
to c u s t o m s duties, t a x e s , and c h a r g e s , including excise and
v a l u e - a d d e d taxes.
(4) Removal of automobiles for test run. Should an
automobile be r e m o v e d for test run, prior notice of the test
should be given to the appropriate BIR Office that may allow
the test run; provided, that the unit under the test run shall be
returned to the plant on the s a m e day. In the event that the
manufacturer/assembler failed to return the said unit to the
manufacturing/assembly plant within the prescribed period, the
ad valorem tax otherwise due thereon shall be immediately due
and d e m a n d a b l e . (Sec. 9, Ibid.)
10. Filing of return and payment of tax.

(1) On locally manufactured/assembled automobiles:
(a) Time of filing of return and payment of the ad
valorem tax. A n y person w h o is liable to pay the ad
valorem tax on locally produced or assembled automobiles
shall file in triplicate for each place of production a separate
consolidated excise tax return and pay the ad valorem
tax before removal thereof from the place of production/
assembly.
In case of payment of ad valorem tax by any person
other than the local automobile manufacturer/assembler,
ANNOTATED
the excise tax return shall likewise be accomplished and

filed by such person indicating all the pertinent information
therein.
(b) Advance payment or deposit Every person liable
to the ad valorem tax imposed herein may, at his option,
pay to the Bureau of Internal Revenue an advance deposit,
and be allowed to remove automobiles from the place of
production/assembly without prior filing of the prescribed
excise tax returns provided that he has sufficient balance
of deposits with the BIR to cover full payment of the ad
valorem tax due on said removals. T h e prescribed excise
tax return shall be used in remitting the a d v a n c e payment
or deposit to the BIR.
(c) Where to file and pay. T h e excise tax return
shall be filed with, a n d the ad valorem tax d u e be paid
to a bank duly accredit by the C o m m i s s i o n e r of Internal
Revenue under the jurisdiction of the BIR Office w h e r e
the taxpayer is registered or required to be registered.
In places w h e r e there are no duly accredited agent bank
within the municipality or city, the excise tax return shall be
filed with and any a m o u n t d u e paid to the duly authorized
collection agent under t h e jurisdiction of the R e v e n u e
District Office w h e r e the taxpayer is registered or required
to be registered; or to the duly authorized Treasurer of t h e
City or Municipality w h e r e t h e assembly/production plant is
located or the person in possession of untaxed automobiles
is registered or required to be registered. (Sec. 10, Ibid.)
(2) On imported automobiles. All importation of auto-
mobiles whether for sale or not shall not be released f r o m
customs custody without p a y m e n t of ad valorem tax a n d
presentation to the Collector of C u s t o m s of the original copy of
the appropriate Authority to Release Imported G o o d s (ATRIG)
duly issued by the BIR office having jurisdiction over t h e
importer's principal place of business.
11. Tax treatment of brand new car purchased by a non-stock

corporation to be used as a major prize in a raffle draw. T h e
purchase of a brand new car by a non-stock, non-profit corporation
to be used as the major prize in a raffle d r a w (for the benefit of the
Philippine Military A c a d e m y A l u m n i Association Educational Trust
Fund) is not e x e m p t from the p a y m e n t of tax.
(1) T h e said automobile is subject to the ad valorem
(excise) tax in addition to the value-added tax pursuant to
Section 149, in relation to Section 106. Under Section 130,

the party liable for the p a y m e n t of the ad valorem tax is the
manufacturer or producer of t h e finished product. On the other
h a n d , under Section 105, the persons liable for the payment
of the v a l u e - a d d e d tax are not t h e buyers/purchasers but the
sellers or importers of g o o d s a n d those performing services for
a fee.
S u c h being the c a s e , the corporation, as purchaser, cannot

claim e x e m p t i o n f r o m the ad valorem tax and the value-added
tax on its p u r c h a s e of the car since it is not the party directly
liable therefor although s u c h tax can be shifted or passed on to
it as part of the p u r c h a s e price. O n c e shifted, it is no longer a
tax but an additional cost of the car w h i c h it has to pay in order
to obtain t h e s a m e .
(2) Moreover, under Section 2 4 ( B , 1), the winner of the said

car, w h e t h e r he is a citizen or a resident alien, is subject to a
final tax of 2 0 % b a s e d on t h e fair m a r k e t value of said car which
under Section 57(A) should be withheld by the corporation as
withholding agent in the s a m e m a n n e r and subject to the s a m e
conditions as provided in Section 58. (BIR Ruling No. 065, April
7, 1989; also VAT Ruling N o . 4 3 , M a y 2 9 , 1991.)
S E C . 1 5 0 . Non-essential Goods. T h e r e s h a l l b e l e v i e d ,
assessed a n d collected a t a x e q u i v a l e n t t o t w e n t y p e r c e n t (20%)
based on t h e wholesale price or t h e value of i m p o r t a t i o n used by the
B u r e a u of Customs in d e t e r m i n i n g t a r i f f and customs duties, net of
excise t a x a n d v a l u e - a d d e d t a x , o f t h e f o l l o w i n g goods:
(a) A l l goods c o m m o n l y o r c o m m e r c i a l l y k n o w n a s j e w e l r y ,
w h e t h e r r e a l o r i m i t a t i o n , p e a r l s , p r e c i o u s a n d semi-precious stones
a n d i m i t a t i o n s t h e r e o f ; goods m a d e of, o r o r n a m e n t e d , m o u n t e d
o r f i t t e d w i t h , precious m e t a l s o r i m i t a t i o n s t h e r e o f o r i v o r y (not
i n c l u d i n g surgical and dental i n s t r u m e n t s , silver-plated wares,
f r a m e s o r m o u n t i n g s f o r spectacles o r eyeglasses, a n d d e n t a l gold
o r gold alloys a n d o t h e r precious m e t a l s u s e d i n f i l l i n g , m o u n t i n g o r
fitting o f t h e t e e t h ) ; opera glasses a n d l o r g n e t t e s . T h e t e r m "precious
metals" s h a l l i n c l u d e p l a t i n u m , g o l d , s i l v e r , a n d o t h e r m e t a l s o f
s i m i l a r o r g r e a t e r v a l u e . T h e t e r m "imitations thereof s h a l l i n c l u d e
p l a t i n g s a n d alloys o f s u c h m e t a l s ;
(b) P e r f u m e s a n d t o i l e t w a t e r s ;
(c) Y a c h t s a n d o t h e r vessels i n t e n d e d for p l e a s u r e or sports, (as
ANNOTATED
ANNOTATION
1. Non-essential goods w e r e formerly subject to sales tax

equivalent to 5 0 % of the gross value in money of the goods sold,
bartered, exchanged or transferred, such tax to be paid by the
manufacturer or producer.
2. T h e phrase "net of excise and value-added tax" means that
the said taxes otherwise due shall be excluded in the computation
of the 2 0 % tax.
3. "Cologne" (toilet water) is a scented alcohol-based liquid
used as perfume, after-shave lotion, or deodorant. (Hawley's
Condensed Chemical Dictionary, 11th Ed.) Alcohol based is that
which contains ethly alcohol or distilled spirits as chief ingredient.
Green Cross Baby Cologne is classified as toilet w a t e r s covered
by Section 150(b). All other c o l o g n e s are, likewise, classified as
toilet waters subject to excise tax under the s a m e section, including
Johnson's Baby. (BIR Ruling No. 5 9 - 8 1 , M a r c h 30, 1 9 8 1 , a n d BIR
Ruling No. 535-88, Nov. 19, 1988, are declared null and void. (BIR
Ruling No. 043-2000, Sept. 15, 2000.)
Note: Under Rev. Regs. No. 8-84, only toilet w a t e r s or scented
alcohol or non-alcoholic preparations primarily used as body
fragrance containing essential oils m o r e than 3% by w e i g h t are
subject to excise tax under Section 150(b). BIR Ruling No. 0 4 3 -
2000 (published through Rev. M e m o . Cir. N o . 17-02) e x p a n d e d the
definition of toilet w a t e r s subject to excise tax to include all other
colognes, regardless of essential oil weight, in effect, a m e n d i n g the
definition of the t e r m "toilet w a t e r s " under Rev. R e g s . No. 8-84.
According to the Court of Tax A p p e a l s , an R M C w h i c h is merely an
administrative interpretation of the law, c a n n o t a m e n d a revenue
regulation issued by the Secretary of F i n a n c e . (Avon Products
Marketing, Inc. vs. C o m m . , CTA C a s e N o . 7 6 3 5 , J a n . 2 0 , 2011.)
- oOo -
Chapter VII
EXCISE TAX ON MINERAL
PRODUCTS
SEC. 151. Mineral Products. -

( A ) Rates of Tax. There shall be levied, assessed and collected
on minerals, mineral products and quarry resources, excise tax as
follows:
(1) On coal and coke, a tax of Ten pesos (P10.00) per metric ton.
(2) On all nonmetallic minerals and quarry resources, a tax
of two percent (2%) based on the actual market value of the gross
output thereof at the time of removal, in the case of those locally
extracted or produced; or the value used by the Bureau of Customs
in determining tariff and customs duties, net of excise tax and value-
added tax, in the case of importation.
Notwithstanding the provision of paragraph (4) of this Section,
locally extracted natural gas and liquefied natural gas shall not be
subject to the excise tax imposed herein. (As amended by i?_A. No.
9337.)
(3) On all metallic minerals, a tax based on the actual market
value of the gross output thereof at the time of removal, in the case of
those locally extracted or produced; or the value used by the Bureau
of Customs in determining tariff and customs duties, net of excise
tax and value-added tax, in the case of importation, in accordance
with the following schedule:
(a) Copper and other metallic minerals;
(i) On the first three (3) years upon the effectivity of
1
R.A. No. 7729, one percent (1%);
(ii) On the fourth and fifth year, one and a half percent
(1 1/2%); and
'On June 24, 1994.
343
ANNOTATED
(iii) On the sixth year and thereafter, two percent ( 2 % ) .

(b) Gold and Chromite, two percent (2%).
(4) On indigenous petroleum, a tax of three percent (3%) of the
fair international market price thereof, on the first taxable sale,
barter, exchange or similar transaction, such tax to be paid by the
buyer or purchaser before removal from the place of production. The
phrase "first taxable sale, barter, exchange or similar transaction"
means the transfer of indigenous petroleum in its original state to a
first taxable transferee. The fair international market price shall be
determined in consultation with an appropriate government agency,
(a)
For the purpose of this Subsection, "indigenous petroleum" shall
include locally extracted mineral oil, hydrocarbon gas, bitumen,
crude asphalt, mineral gas and all other similar or naturally
associated substances with the exception of coal, peat, bituminous
shale and/or stratified mineral deposits.
(B) For purposes of this Section, the term
(1) "Gross output" shall be interpreted as the actual market
value of minerals or mineral products, or of bullion from each mine
or mineral land operated as a separate entity, without any deduction
from mining, milling, refining (including all expenses incurred to
prepare the said minerals or mineral products in a marketable
state), as well as transporting, handling, marketing, or any other
expenses: Provided, That if the minerals or mineral products are
sold or consigned abroad by the lessee or owner of the mine under
C.I.F. terms, the actual cost of ocean freight and insurance shall be
deducted: Provided, however, That in the case of mineral concentrate
not traded in commodity exchanges in the Philippines or abroad,
such as copper concentrate, the actual market value shall be the
world price quotations of the refined mineral products content
thereof prevailing in the said commodity exchanges, after deducting
the smelting, refining and other charges incurred in the process of
converting the mineral concentrates into refined metal traded in
those commodity exchanges.
(2) "Minerals" shall mean all naturally occurring inorganic
substances (found in nature) whether in solid, liquid, gaseous or any
intermediate state.
(3) "Mineral products" shall mean things produced and
prepared in a marketable state by simple treatment processes such
as washing or drying, but without undergoing any chemical change
Excise Tax on Mineral Products
o r process o r m a n u f a c t u r i n g b y t h e lessee, concessionaire o r o w n e r

of mineral lands.
(4) "Quarry resources" s h a l l m e a n a n y c o m m o n stone o r o t h e r
c o m m o n m i n e r a l substances a s t h e D i r e c t o r o f t h e B u r e a u o f M i n e s
a n d Geo-Sciences m a y d e c l a r e t o b e q u a r r y resources s u c h a s b u t
not restricted to, m a r l , m a r b l e , g r a n i t e , volcanic cinders, basalt, t u f f
a n d r o c k p h o s p h a t e : Provided, T h a t t h e y c o n t a i n n o m e t a l o r m e t a l s
o r o t h e r v a l u a b l e m i n e r a l s i n e c o n o m i c a l l y w o r k a b l e q u a n t i t i e s , (as
ANNOTATION
1. Amended: S u b s e c t i o n (A, 4); Deleted: Subsection (c)

providing for t h e "time manner, and place of p a y m e n t of excise tax
on mineral a n d mineral p r o d u c t s . "
2. Basis of excise tax. Pursuant to Section 255 (now Sec.
151 [A, 1, 2, 3].), the a s s e s s m e n t of t h e ad valorem tax on metallic
a n d non-metallic minerals a n d quarry resources shall be based,
not u p o n the cost of production or extraction of said minerals or
mineral products but on the price w h i c h the s a m e before or
without undergoing a process of manufacturer would c o m m a n d
in the ordinary c o u r s e of business, that is to say, w h e n offered for
sale by o n e willing to sell, but not under compulsion to sell, and
purchased by another w h o is willing to buy, but under no obligation
to purchase. (Republic C e m e n t Corp. vs. C o m m . , 23 S C R A 967
[1968]; C o m m . vs. Court of A p p e a l s , 59 S C A D 565, 242 S C R A 289
[1995]; see C o m m . v s . Atlas Consolidated Mining and Dev. Corp.,
2 4 2 S C R A 655 [1995].)
Locally extracted natural gas and liquefied natural gas are no
longer subject to excise tax.
Generally, the tax is based on the actual market value of the
gross output of minerals, etc. at the time of removal, (see Sec. 5,
Rev. Regs. No. 13-80; see BIR Ruling No. 105, June 16, 1983.)
3. Nature of the tax. T h e excise tax is basically a severance
tax, i.e., a charge upon the privilege of severing or extracting
minerals from the earth, the government's right to exact the impost
springing from the Regalian theory of state ownership of its natural
resources. It is due and payable upon removal of the mineral
product from the bed or mines. (Republic Cement Corp. vs. Comm.,
supra.) T h e law does not impose a tax on cement qua cement.
W h a t is taxable under Section 255 (now Sec. 151 [A, 1, 2, 3].) are
ANNOTATED
the minerals constituting cement, i.e., limestone, silica, and shale,

in the original state before processing into cement. (Cebu Portland
Cement Co. vs. C o m m . , 13 S C R A 333 [1965]; see C o m m . vs. Court
of Appeals, 204 S C R A 182 [1991].)
4. Mineral products contemplated. T h e use of the term
"mineral product" defined in Subsection (B, 3) is intended to
comprehend cases w h e r e the mined or quarried elements may
not be usable in their original state without application of useful
treatments, such as w a s h i n g , or cutting t h e m into sizes, w h i c h
process does not necessarily involve the c h a n g e or transformation
of the raw materials into a composite distinct product. In the case
of cement, before it reaches its saleable f o r m , the minerals had
already undergone a chemical c h a n g e through manufacturing
process.
This is not the state of "mineral products" that t h e law c o n t e m -

plates for purposes of imposing the ad valorem tax. C e m e n t is no
longer a mineral product. It is a manufactured product e x e m p t f r o m
the 2% excise tax but subject to 1 0 % VAT under Section 106(A)
on the sale thereof, (see Republic C e m e n t C o . v s . C o m m . , supra;
Cebu Portland Co. vs. C o m m . , supra, Dec. 2 9 , 1967; C o m m . v s .
Republic C e m e n t Corp., 149 S C R A 4 8 7 [1987].) T h e r e f o r e , the
imposable ad valorem tax should be b a s e d on t h e selling price
of the quarried minerals, w h i c h is its actual m a r k e t v a l u e a n d not
on the price of the m a n u f a c t u r e d product. ( C o m m . v s . Court of
Appeals, supra.)
Imported salt d o e s not fall under the definition of mineral

products which is defined under S u b s e c t i o n (B)(3). Salt being
classified in Rev. Regs. No. 13-94 as a m o n g t h e other n o n m e t a l ,
pertains to rock salt only w h i c h is m i n e d or quarried like other
minerals. T h u s , (PVD) iodized salt is not subject to excise tax. (BIR
Ruling No. 321-04, J u n e 1 1 , 2004.)
Note: Rev. Regs. No. 13-94 w h i c h g o v e r n s t h e taxation of
minerals and mineral products includes in its c o v e r a g e under the
term "Other N o n - M e t a l , " "cement materials," but not the finished
product cement.
5. Quarry resources contemplated. Quarry resources

subject to the 3% (now 2%) excise tax i m p o s e d by Subsection (A,
2) and defined in Subsection (B, 4) include s a n d a n d gravel w h e t h e r
removed from river beds or quarried. (Sec. 2[h], Rev. R e g s . No. 13-
80.) But a contractor merely e n g a g e d in hauling/transporting s a n d
and gravel which are not disposed of commercially is subject to 3%
tax pursuant to Section 117 and not to 3% excise tax. The sale of
sand and gravel is subject to 3% excise tax in addition to VAT. (BIR
Ruling No. 4 0 3 - 8 9 , J a n . 1989.)
6. T h e m e m b e r s of an Association are grouped into the

following: (a) T h o s e w h o do not do a n y quarry operation but purchase
their marble blocks f r o m lessees, o w n e r s and quarry operators; (b)
T h o s e w h o enter into contract with claim o w n e r s for extraction of
marble blocks; (c) T h o s e w h o enter into operating contract under
Lessee-Lessor a r r a n g e m e n t ; and (d) T h o s e w h o o w n a claim and
are in actual quarry operation a n d cutting of marble blocks.
(1) Who are subject to the 2% excise tax? T h e excise

tax on mineral products under Subsection (A, 2) is payable by
the lessee, o w n e r or operator of the mining claim. Accordingly,
m e m b e r s of that Association falling under Nos. (2), (3) and (4)
are subject to the excise tax i n a s m u c h as they are either the
lessee, o w n e r or operator of a mining claim. However, those
w h o do not do any quarry operation but merely purchase their
marble blocks f r o m lessees, o w n e r s or quarry operators are not
subject to the excise tax unless t h e tax on the marble blocks
w h i c h they p u r c h a s e d has not b e e n paid, in which case, they
(purchasers) shall b e c o m e liable for p a y m e n t thereof being the
o w n e r s / p o s s e s s o r s of the marble blocks. This is in accordance
with Section 130 w h i c h provides that "should domestic products
be r e m o v e d without the p a y m e n t of the tax, the owner or
person having possession thereof shall be liable for the tax due
thereon."
(2) What is the basis of the tax? T h e 2% excise tax is

based on the market value of the extracted or produced minerals,
mineral products or quarry resources upon removal from the
mine site. However, if the m e m b e r s of that Association are
actually e n g a g e d in quarry operations and in the manufacture
of the extracted marble blocks into finished products cut the
s a m e into various sizes, the computation of the 3% excise tax
shall be based on the selling price minus the manufacturing
and processing cost to arrive at the market value of the mineral
products (marble blocks) prior to manufacturing.
T h i s f i n d s s u p p o r t i n BIR Ruling No. 2 8 1 - 8 7 d a t e d September
10, 1987, citing the decision of the Court of Tax Appeals in
the case of Atlas Consolidated Mining and Development
Corporation (CTA Case No. 2842 dated January 28, 1981 ),
wherein it w a s ruled that "manufacturing and processing cost
ANNOTATED
incurred after the removal of the copper concentrate from the

mine site up to its manufacture into wire bar is deductible from
the price quotation of the latter for the purpose of determining
the royalty due from the copper concentrate." (BIR Ruling No.
120, June 8, 1989.)
7. A producer of chromite ore extracting from its o w n mining
claim and from other mining firms for export is no longer liable for
the additional ad valorem tax on the ores purchased from the other
companies. If said tax-paid products are subsequently sold by the
producer, it shall be subject only to VAT under Section 106, but it is
no longer subject to additional ad valorem tax. (BIR Ruling No. 380,
Dec. 28, 1992.)
8. If the taxpayer is neither the manufacturer or producer of

the raw marbleized limestone nor a lessee, o w n e r or operator of a
mining claim, it is e x e m p t e d f r o m the p a y m e n t of the 2% excise tax
imposed under Section 151(A)(2). However, it must s h o w proof that
the excise tax on the raw marbleized limestone has already b e e n
paid by the manufacturer or producer of t h e s a m e ; otherwise, being
the person having possession of the marbleized products, it shall
be liable for the tax d u e t h e r e o n . (BIR Ruling No. 0 3 2 - 2 0 0 0 , Sept.
01,2000.)
9. R.A. No. 8 1 8 4 deleted the w o r d " a n n u a l " before "gross

output" in Subsection (A, 2). It reclassified natural g a s and liquefied
natural gas under non-metallic minerals a n d quarry resources
subject to tax at the rate of 2% and reduced the excise tax rate on
indigenous petroleum f r o m 1 5 % to 3%. (Subsec. A, 4.)
10. Taxation of locally produced crude oil. A c c o r d i n g to

Presidential Decree No. 1615 w h i c h inserted Subsection (B) to
Section 1 9 9 ( n o w S e c . 151[A, 4].), "the d o m e s t i c production of crude
oil eliminates the inward o c e a n freight a n d other incidental costs, as
well as customs duties, as cost c o m p o n e n t s thereby reducing the
acquisition price of locally p r o d u c e d crude oil" but "despite surplus
reduction in the buying price by local processors and refineries, it
is not yet economically feasible to reduce appreciably t h e selling
price of petroleum products for c o n s u m p t i o n , thereby benefitting
only a group of refinery c o m p a n i e s , " and "as it is necessary to
spread the benefits arising from the discovery and production of oil
in our country to a greater n u m b e r of our people as far as possible,"
taxation, which is an accepted instrument for redistribution of
wealth, can be utilized to achieve the o p t i m u m distribution of the
said benefits which w o u l d otherwise inure to oil refineries only.
Sec. 151 EXCISE TAXES ON C E R T A I N G O O D S 349
11. Indigenous petroleum (crude oil). Since excise taxes

apply only to g o o d s manufactured or p r o d u c e d in the Philippines
for domestic sale or c o n s u m p t i o n and to things imported (Sees.
129, 130.), a n d that for indigenous petroleum, the person liable is
not the producer thereof but the transferee in the first taxable sale,
the exportation of indigenous petroleum is not subject to excise tax
under Section 151 (A, 4); nor to VAT b e c a u s e , pursuant to Section
109(e), it is a raw material in the manufacture of petroleum products.
(VAT Ruling No. 0 0 9 , J a n . 2 5 , 1991.)
As a m e n d e d by R.A. N o . 8 4 2 4 , the tax is n o w payable before

removal f r o m the place of production, instead of "within fifteen (15)
d a y s f r o m t h e date of actual or constructive delivery to the said
buyer or purchaser."
12. Petroleum service contractor. In case of domestic or
local sale, barter or transfer of indigenous petroleum, natural gas
or liquefied natural g a s , t h e excise tax is paid by the first buyer,
purchaser or transferee. On t h e other h a n d , in case of export sale,
the excise tax is paid by t h e owner, lessee, concessionaire or
operator of the mining claim. Notwithstanding the foregoing, Section
12 of P.D. N o . 8 7 , as a m e n d e d , clearly e x e m p t s the contractor from
all taxes, e x c e p t i n c o m e tax. T h e e x e m p t i o n granted to service
contractors is consistent with the g o v e r n m e n t ' s objective "to
promote t h e discovery and d e v e l o p m e n t of the country's indigenous
petroleum r e s o u r c e s . " T h u s , while t h e privilege w a s repealed by
Executive Order No. 93 that took effect on March 10, 1987, the
s a m e w a s subsequently restored retroactively effective March 10,
1987 under Fiscal Incentives Review Board Resolution No. 19-87.
Accordingly, the e x e m p t i o n provided under Section 12(a) of

P.D. No. 87 and paragraph 6.2 of SC No. 38 necessarily covers the
e x e m p t i o n of the service contractors from excise tax on the export
of indigenous petroleum, such as natural gas and liquefied natural
gas. (BIR Ruling No. 0 3 6 - 2 0 0 1 , A u g . 2 0 , 2001.)
13. Market value of minerals sold or consigned abroad.
Under Subsection (B, 1), in case the minerals sold abroad were
paid in dollars thru bank drafts and/or letter of advice, the actual
market value thereof is the total amount received by the seller
in pesos after the cost in dollars has been converted at the rate
authorized by the Central Bank minus the cost of insurance and
freight in case they are consigned under C.I.F. terms; in case of
mineral products bartered for collateral goods, the market value
of the mineral products for tax purposes is the actual market value
thereof for barter purposes less the cost of insurance and freight in
ANNOTATED
case said expenses incurred in transporting the minerals are borne

by the shipper, (see BIR Ruling, Jan. 10, 1962.)
Only the VAT component on the purchase of coal from coal
miners/producers to be used in the manufacture of c e m e n t shall be
considered and taken up as input tax since coal is subject not only
to VAT under Section 106(A), but also to excise tax of P10.00 per
metric ton under Section 1 5 1 . However, the excise tax paid on coal
forms part of the taxable base in computing the VAT. Furthermore,
the input tax on the coal purchased and used in the manufacture
of said finished product is creditable against the output tax on the
manufacturer's sales pursuant to Section 110. (VAT Ruling No. 0 7 4 ,
A u g . 7, 1991.)
14. The imposition and collection of occupation fee (fee payable

by a locator, holder or recipient of a mining claim) and rentals (fees
for exploring, etc., minerals, etc., f r o m mineral lands covered by
lease payable by the lessee) have b e e n transferred to the city or
municipality w h e r e the mining claim is located. (Exec. Order No.
273, Sec. 22.)
15. Small-scale mining. R.A. N o . 7 0 7 6 (People's S m a l l -

Scale Mining Act of 1991) is principally intended to d e v e l o p , protect
and rationalize small-scale mining activities in v i e w of their capacity
to generate more e m p l o y m e n t opportunities and income for t h e
rural poor. Under the law, small-scale mining is defined as any
single mining operation having an a n n u a l production of not m o r e
than 50,000 metric tons of o r e and satisfying certain specified
requisites.
(1) Taxes payable. A holder of small-scale mining

contract is liable to pay the following national internal revenue
taxes:
(a) Excise tax at the rate of 2% (Subsec. [A][3][b], on

every sale of gold to the Bangko Sentral ng Pilipinas ( B S P )
based on actual market value;
(b) Value-added tax at the rate of zero percent (0%)

(Sec. 106 [A][2][a][4].) on every sale of gold to the B S P ;
(c) Income tax (Sees. 24[A], 27 [A].), a n d creditable
withholding tax ( C W T ) at the rate of 1 0 % . (Sec. 2.57-2rT|.
Rev. Regs. 2-98.)
For purposes of (a) a b o v e , actual market value shall refer

to the prices competitive with those prevailing in the world
market regardless of the v o l u m e or weight by which the B S P

has a g r e e d to buy the gold (Sec. 4, Rev. Regs. No. 7-2008.)
Note: Rev. R e g s . No. 7-2008 implements Section 13(d) of
R.A. No. 7 0 7 6 a n d covers only transactions between small-
scale miners a n d the BSP.
(2) Mode of collection and payment of taxes. All gold
product by small-scale miners in any mineral area shall be sold
to the B S P or its duly authorized representatives which shall
buy it at prices competitive with those prevailing in the world
market regardless of v o l u m e weight.
T h e B S P shall be constituted as agent for the collection

of the 2% excise tax on sale of gold by the small-scale miner.
As s u c h , it shall, u p o n p a y m e n t to the small-scale miner of its
p u r c h a s e of g o l d , d e d u c t f r o m s u c h p a y m e n t the corresponding
excise tax d u e t h e r e o n . S u c h deduction shall be in addition to
the 10% CWT required to be withheld on income payments or
p u r c h a s e s of minerals a n d mineral products. (Sec. 5, Ibid.)
(3) Time and manner of filing and payment of taxes with-

held. All excise taxes collected f r o m p a y m e n t s made to
small-scale miners on their sale of gold to B S P for the month
shall be remitted by t h e B S P by filing the corresponding Excise
Tax Return (BIR Form No. 2 2 0 0 - M ) a n d paying the amount of
tax it collected to t h e Accredited A g e n t Bank (AAB) having juris-
diction over its principal place of business on or before the 10th
day of t h e following m o n t h .
ILLUSTRATION:
Selling price of 10 o u n c e s of gold sold by

a small-scale miner to B S P with market
value of P900.00/ounce based on
provisional assay P 9,000.00
Partial p a y m e n t by B S P on date of receipt of
gold purchased ( 9 0 % of the provisional
value) P 8,100.00
Full payment of gold purchased by BSP upon

determination of final value after three (3)
months from date of sale P 800.00
Taxes to be withheld:
1. At the time of partial payment
(a) Excise tax ([P8.100 + 1.02] x 2%) P 158.82
ANNOTATED
(b) Income Tax (P8.100 x 10%) 810.00
2 At the time of full payment

(a) Excise tax (P800 + 1.02) x 2% 15.69
(b) Income tax (P800 x 10%) 80.00
Moreover, in accordance with Section 2.58 of Rev. Regs.
No. 2-98, as a m e n d e d , the C W T withheld by B S P under Section
2.57.2(T) shall be remitted by indicating the following, a m o n g
others: (a) the phrase "Gold miners/suppliers under PD 1899, as
a m e n d e d by RA No. 7076", in lieu of the individual n a m e s and
Taxpayer Identification N u m b e r s (TINs) of the G o l d Sellers; and
(b) the tax base and the a m o u n t withheld, as o n e line item, in
the Monthly Remittance Return of Creditable Withholding Taxes
Withheld (BIR Form No. 1601-E) with Monthly/Annual Alphalist of
Payees ( M A P / A A P ) periodically a c c o m p l i s h e d a n d filed by B S P as
a duly constituted withholding agent.
7b illustrate:
Name TIN Tax B a s e Amount
Gold miners/suppliers P100,000,000.00 P2.000.000

under PD 1899, as
a m e n d e d by R.A. No.
7076
T h e withholding tax return shall be filed a n d p a y m e n t shall

be m a d e within 10 d a y s after the e n d of e a c h m o n t h , e x c e p t for
taxes withheld for t h e m o n t h of December, w h i c h shall be filed on
or before January 15 of the following year.
However, if the B S P availed of t h e electronic filing a n d p a y m e n t

system (EFPS), the deadline for electronic filing of the applicable
withholding tax returns (BIR F o r m N o . 1601-E) a n d p a y m e n t of
taxes due thereon remains on t h e 15th day of the following m o n t h .
(Sec. 6, Ibid.)
- oOo -
CHAPTER VIII
ADMINISTRATIVE PROVISIONS
REGULATING BUSINESS OF PERSONS
DEALING IN ARTICLES SUBJECT
TO EXCISE TAX
S E C . 1 5 2 . Extent of Supervision Over Establishments

Producing Taxable Output. T h e B u r e a u o f I n t e r n a l Revenue
h a s a u t h o r i t y t o s u p e r v i s e e s t a b l i s h m e n t s w h e r e a r t i c l e s subject t o
excise t a x a r e m a d e o r k e p t . T h e S e c r e t a r y o f F i n a n c e s h a l l p r e -
scribe r u l e s a n d r e g u l a t i o n s a s t o t h e m o d e i n w h i c h t h e process o f
p r o d u c t i o n s h a l l b e c o n d u c t e d i n s o f a r a s m a y b e necessary t o secure
a sanitary output a n d to safeguard the revenue.
ANNOTATION
1. Electronic linkage with excise tax establishments. Rev.

Regs. No. 5-2002 (May 6, 2002) regulates the system of monitoring
operations of taxpayers subject to excise tax through electronic
linkages. T h e electronic linkage system will enable the BIR to
extract directly f r o m the taxpayer's d a t a b a s e relevant information
necessary in the determination of the correct amount of excise
taxes d u e from excise tax establishments. (Sec. 2, Rev. Regs. No.
5-2002.)
2. Objectives. T h e implementation of the electronic linkage
system a i m s to achieve the following objectives:
(a) Reduce the manual processes and hand-overs in
the preparation and submission/filing of information returns
prescribed from excise taxpayers;
(b) Minimize taxpayer contact in the course of supervising
and controlling its operation for purposes of determining the
correct volume of production and removals of excisable articles;
(c) Provide and establish an electronic link to ensure an
accurate, real-time information from excise taxpayers on pro-
353
ANNOTATED
duct movements from receipts of raw materials up to removals

and/or sales of goods;
(d) Establish a database that is valuable in the analysis,
profiling, simulation and forecasting of revenues from excise
taxes; and
(e) Reduce administrative costs in excise tax assessment,
enabling the staff to concentrate on analysis rather than
transactional issues. (Sec. 3, Ibid.)
3. Definition of terms. For purpose of Rev. Regs. No.
5-2002, the terms below are defined as follows:
(a) Electronic Linkage It refers to t h e system that
paves the submission/transmission of data and information in
electronic format viewable a n d accessible to t h e B u r e a u under
secured environment via internet facilities.
(b) Secured Environment It refers to the safeguard of
information and data f r o m unauthorized a c c e s s infusing a high
quality protection f r o m the s o u r c e to the destination over the
wide area network.
(c) Exciseable Establishment It refers to any p e r s o n ,

natural or judicial, w h o is e n g a g e d in t h e business of
manufacturing, producing, a s s e m b l i n g , importing, and/or
trading g o o d s or articles subject to excise tax under Title VI of
the Tax C o d e of 1997.
(d) Computerized Accounting System It refers to a

computer-based s y s t e m u s e d to process c a p t u r e d / e n c o d e d
accounting/financial data to g e n e r a t e b o o k s of accounts,
reports, or any other accounting information. This s y s t e m m a y
either be c o m p r e h e n s i v e in nature to cover all t h e financial
transactions of the s y s t e m o w n e r or m a y only be a c o m p o n e n t
or c o m p o n e n t s thereof.
(e) Computerized Books of Accounts It refers to

computerized books of entries (e.g., journals, ledgers
subsidiaries, etc.) e m a n a t i n g f r o m p r o c e s s e d transactions that
are captured or e n c o d e d into the accounting s y s t e m and/or
interfaced system(s). (Sec. 4, Ibid.)
4. Other provisions:
(a) Coverage. T h e establishment of the electronic link-
age system shall be mandatory to excise tax establishments
with computerized books of accounts and accounting system
Administrative Provisions Regulating Business of Persons Dealing
in Articles Subject to Excise Tax
as identified by the C o m m i s s i o n e r of Internal Revenue. The

system linkage shall cover business operations of excise
taxpayers f r o m receipts of raw materials up to removals and/or
sales of g o o d s .
(b) Notification of Exciseable Establishment. Taxpayers

identified for electronic linkage shall be notified in writing by the
C o m m i s s i o n e r of Internal R e v e n u e . U p o n notification thereof,
identified taxpayers shall immediately coordinate with the Large
Taxpayers Service (Excise Tax Group) on the determination of
the data requirements, operational a n d technical specifications,
and other resource requirements for the proper implementation
of the electronic linkage s y s t e m .
(c) Presumptions on Extracted Data/Information. All

information received by the BIR as a result of the linkage shall
be g o v e r n e d by the following presumptions.
1) T h e extracted information includes all the recorded

transactions c o v e r e d by t h e linkage a n d the s a m e are exact
replica of t h e pertinent data contained in the taxpayer's
d a t a b a s e ; and
2) In c a s e of disputes or discrepancies in the details

of extracted information, the data s h o w n in the BIR server
shall prevail.
(d) Security of Information. T h e information extracted
by the BIR from the taxpayer's database shall be treated
with utmost confidentiality and shall only be used for internal
revenue tax purposes in a c c o r d a n c e with the provisions
of Section 270 of the Tax C o d e . Sufficient system security
measures shall be instituted by both the BIR and the taxpayer to
prevent any destruction, or hacking that may be inflicted on the
computerized systems and facilities of both parties. Likewise,
security procedures shall be exercised to avoid any undue harm
or d a m a g e to the electronically linked excise taxpayers arising
f r o m divulgence of information to any unauthorized person.
(e) System Upgrade/Enhancement. In case of system
upgrade or e n h a n c e m e n t on the part of the taxpayer that may
in any w a y affect or impact the existing electronic linkage set-
up, the taxpayer shall immediately notify the BIR in writing
of such change for system re-evaluation, in accordance with
existing revenue rules and regulations. It shall be the sole
responsibility of the taxpayer to enhance the electronic linkage
ANNOTATED
module such that all data/information transmission will not be

hampered/delayed/affected/restructured. Should the agreed
data requirements be affected such e n h a n c e m e n t shall require
prior approval from the BIR.
(f) System Unavailability. In the event that downtime or
non-connectivity or unavailability of any of the critical c o m p o n e n t
of the system (such as application software, hardware or
network) is attributable to the Bureau, the taxpayer shall submit
the required report/s or data in diskette format readable and
compatible to the existing environment.
(g) Penalty Clause. A n y violation of the provisions of
Rev. Regs. No. 5-2002 shall be punishable under the pertinent
provision(s) of the Tax C o d e . T h e provisions of Section 204
of the Tax C o d e notwithstanding, no c o m p r o m i s e shall be
entertained/allowed in c a s e of willful refusal by any identified
excisable taxpayer to establish electronic linkage with the
BIR or c o m m i s s i o n of any deliberate act to submit erroneous
reports. (Sees. 5 - 1 1 , Ibid.)
S E C . 153. Records to be Kept by Manufacturers; Assess-

ment Based Thereon. M a n u f a c t u r e r s o f a r t i c l e s subject t o ex-
cise t a x s h a l l k e e p s u c h records a s r e q u i r e d b y r u l e s a n d r e g u l a t i o n s
recommended by the Commissioner and approved by the Secretary
of Finance, a n d such records, w h e t h e r of r a w m a t e r i a l s received i n t o
the factory or of articles produced t h e r e i n , shall be deemed public
and official documents for a l l purposes.
T h e records o f r a w m a t e r i a l s k e p t b y s u c h m a n u f a c t u r e r s m a y
b e u s e d a s evidence b y w h i c h t o d e t e r m i n e t h e a m o u n t o f excise
taxes due f r o m t h e m , a n d w h e n e v e r t h e a m o u n t s o f r a w m a t e r i -
als received i n t o a n y f a c t o r y exceeds t h e a m o u n t o f m a n u f a c t u r e d
or partially manufactured products on h a n d and lawfully removed
f r o m the factory, plus waste removed or destroyed, a n d a reasonable
a l l o w a n c e for u n a v o i d a b l e loss i n m a n u f a c t u r e , t h e C o m m i s s i o n e r
m a y assess a n d collect t h e t a x d u e o n t h e p r o d u c t s w h i c h s h o u l d
have been p r o d u c e d f r o m t h e excess. (As amended by Pres. Decree
No. 457.)
T h e excise t a x d u e o n t h e p r o d u c t s a s d e t e r m i n e d a n d assessed
i n accordance w i t h t h i s S e c t i o n s h a l l b e p a y a b l e u p o n d e m a n d o r
w i t h i n t h e p e r i o d specified t h e r e i n . (As amended by Pres. Decrees
No. 1459 and No. 1994.)
Sees. 154-156 EXCISE TAXES O N CERTAIN GOODS 357
ANNOTATION
T h e records are public d o c u m e n t s . They help the government

determine tax e v a s i o n .
SEC. 154. Premises Subject to Approval by Commissioner.

No person shall engage in business as a manufacturer of or dealer
in articles subject to excise tax unless the premises upon which
the business is to be conducted shall have been approved by the
Commissioner.
ANNOTATION
T h e business w h i c h is subject to excise taxes affected with

public interest aside f r o m being a source of revenue, deals with
products that are offered for public c o n s u m p t i o n .
SEC. 155. Manufacturers to Provide Themselves with

Counting or Metering Devices to Determine Production.
Manufacturers of cigarettes, alcoholic products, oil products, and
other articles subject to excise tax that can be similarly measured
shall provide themselves with such necessary number of suitable
counting or metering devices to determine as accurately as possible
the volume, quantity or number of the articles produced by them
under rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
This requirement shall be complied with before commencement
of operations.
SEC. 156. Labels and Form of Packages. All articles of

domestic manufacture subject to excise tax and all leaf tobacco
shall be put up and prepared by the manufacturer or producer,
when removed for sale or consumption, in such packages only and
bearing such marks or brands as shall be prescribed in the rules
and regulations promulgated by the Secretary of Finance; and goods
of similar character imported into the Philippines shall likewise be
packed and marked in such a manner as may be required.
ANNOTATION
Since locally compounded liquor is no longer subject to specific

or ad valorem taxes, the manufacturers thereof are, likewise,
exempt from the requirement of affixture of labels as indicated in
ANNOTATED
Section 156. On the other hand, since imported distilled spirits

remain subject to specific tax for control purposes, the requirement
of the affixture of labels on imported distilled spirits is still in force
as prescribed by Revenue Regulations No. V-21 and in accordance
with Section 156. (BIR Ruling No. 122, March 28, 1988.)
SEC. 157. Removal of Articles After the Payment of Tax.

When the tax has been paid on articles or products subject to
excise tax, the same shall not thereafter be stored or permitted to
remain in the distillery, distillery warehouse, bonded warehouse,
or other factory or place where produced. However, upon prior
permit from the Commissioner, oil refineries and/or companies
may store or deposit tax-paid petroleum products and commingle
the same with its own manufactured products not yet subjected
to excise tax. Imported petroleum products may be allowed to be
withdrawn from customs custody without the prepayment of excise
tax, which products may be commingled with the tax-paid or bonded
products of the importer himself after securing a prior permit from
the Commissioner: Provided, That withdrawals shall be taxed and
accounted for on a first-in, first-out basis, (a)
ANNOTATION
1. Amended: " B o n d e d p r o d u c t s " is c h a n g e d to "manufactured

products not yet subjected to excise tax."
2. Section 157 allows t h e storage of tax-paid petroleum
products in bonded w a r e h o u s e s u p o n prior permit by the C o m -
missioner in the s a m e m a n n e r that imported petroleum products
may be allowed to be w i t h d r a w n f r o m c u s t o m s custody without
prepayment of excise tax after securing a permit f r o m the
Commissioner.
SEC. 158. Storage of Goods in Internal-revenue Bonded

Warehouses. An internal-revenue bonded warehouse may
be maintained in any port of entry for the storing of imported or
manufactured goods which are subject to excise tax. The taxes on
such goods shall be payable only upon removal from such warehouse
and a reasonable charge shall be made for their storage therein.
The Commissioner may, in his discretion, exact a bond to secure the
payment of the tax on any goods so stored.
SEC. 159. Proof of Exportation; Exporter's Bond.

Exporters of goods that would be subject to excise tax, if sold or
Sees. 160-163 EXCISE TAXES O N C E R T A I N GOODS 359
removed for consumption in the Philippines, shall submit proof of

exportation satisfactory to the Commissioner, and, when the same
is deemed necessary, shall be required to give a bond prior to the
removal of the goods for shipment, conditioned upon the exportation
of the same in good faith.
SEC. 160. Manufacturers' and Importers' Bond. Manu-

facturers and importers of articles subject to excise tax shall post a
bond subject to the following conditions:
( A ) Initial Bond. In case of initial bond, the amount shall be
equal to One hundred thousand pesos (P100,000): Provided, That if
after six (6) months of operation, the amount of initial bond is less
than the amount of the total excise tax paid during the period, the
amount of the bond shall be adjusted to twice the tax actually paid
for the period.
(B) Bond for the Succeeding Years of Operation. The bonds
for the succeeding years of operation shall be based on the actual
excise tax paid during the year immediately preceding the year of
operation.
Such bond shall be conditioned upon faithful compliance,
during the time such business is followed, with laws and rules and
regulations relating to such business and for the satisfaction of all
fines and penalties imposed by this Code, (a)
SEC. 161. Records to be Kept by Wholesale Dealers.

Wholesale dealers shall keep records of their purchases and sales or
deliveries of articles subject to an excise tax, in such form as shall be
prescribed in the rules and regulations by the Secretary of Finance.
These records and the entire stock of goods subject to tax shall be
subject at all times to the inspection of internal revenue officers.
SEC. 162. Records to be Kept by Dealers in Leaf Tobacco.

Dealers in leaf tobacco shall keep records of the products sold
or delivered by them to other persons in such manner as may be
prescribed in the rules and regulations by the Secretary of Finance,
such records to be at all times subject to the inspection of internal
revenue officers.
SEC. 163. Preservation of Invoices and Stamps. - All

dealers whosoever shall preserve, for the period prescribed in
Section 235, all official invoices received by them from other dealers
or from manufacturers, together with the fractional parts of stamps
360 THE NATIONAL INTERNAL R E V E N U E CODE Sees. 164-166
ANNOTATED
affixed thereto, if any, and upon demand, shall deliver or transmit

the same to any internal revenue officer.
SEC. 164. Information to be Given by Manufacturers,
Importers, Indentors, and Wholesalers of any Apparatus
or Mechanical Contrivance Specially for the Manufacture
of Articles Subject to Excise Tax and Importers, Indentors,
Manufacturers or Sellers of Cigarette Paper in Bobbins,
Cigarette Tipping Paper or Cigarette Filter Tips. Manu-
facturers, indentors, wholesalers and importers of any apparatus
or mechanical contrivance specially for the manufacture of articles
subject to tax shall, before any such apparatus or mechanical con-
trivance is removed from the place of manufacture or from the cus-
toms house, give written information to the Commissioner as to the
nature and capacity of the same, the time when it is to be removed,
and the place for which it is destined, as well as the name of the
person by whom it is to be used; and such apparatus or mechanical
contrivance shall not be set up nor dismantled or transferred with-
out a permit in writing from the Commissioner.
A written permit from the Commissioner for importing, manu-
facturing or selling of cigarette paper in bobbins or rolls, cigarette
tipping paper or cigarette filter tips is required before any person
shall engage in the importation, manufacture or sale of the said
articles. No permit to sell said articles shall be granted unless the
name and address of the prospective buyer is first submitted to the
Commissioner and approved by him. Records showing the stock of
the said articles and the disposal thereof by sale of persons with
their respective addresses as approved by the Commissioner, shall
be kept by the seller, and records showing stock of said articles and
consumption thereof, shall be kept by the buyer, subject to inspection
by internal revenue officers.
SEC. 165. Establishment of Distillery Warehouses. Every

distiller, when so required by the Commissioner, shall provide at his
own expense a warehouse, and shall be situated in and to constitute
a part of his distillery premises and to be used only for the storage
of distilled spirits of his own manufacture until the tax thereon
shall have been paid; but no dwelling house shall be used for such
purpose. Such warehouse, when approved by the Commissioner, is
declared to be a bonded warehouse, and shall be known as a distillery
warehouse.
SEC. 166. Custody of Distillery or Distillery Warehouse.

Every distillery or distillery warehouse shall be in the joint
Sees. 158-169 EXCISE TAXES O N CERTAIN GOODS 361
c u s t o d y o f t h e r e v e n u e i n s p e c t o r , i f one i s assigned t h e r e t o , a n d o f
t h e p r o p r i e t o r t h e r e o f . I t s h a l l b e k e p t securely l o c k e d , a n d s h a l l a t
n o t i m e b e u n l o c k e d o r opened o r r e m a i n u n l o c k e d o r opened unless
i n t h e presence o f s u c h r e v e n u e i n s p e c t o r o r o t h e r p e r s o n w h o m a y
b e d e s i g n a t e d t o act f o r h i m a s p r o v i d e d b y l a w .
S E C . 1 6 7 . Limitation on Quantity of Spirits Removed

from Warehouse. N o d i s t i l l e d s p i r i t s s h a l l be r e m o v e d f r o m a n y
distillery, distillery warehouse, or bonded warehouse in quantities
o f less t h a n f i f t e e n (15) g a u g e l i t e r s a t a n y one t i m e , except b o t t l e d
goods, w h i c h m a y b e r e m o v e d b y t h e case o f n o t less t h a n t w e l v e (12)
bottles.
S E C . 168. Denaturing Within Premises. F o r purposes o f

t h i s T i t l e , t h e process o f d e n a t u r i n g a l c o h o l s h a l l b e effected o n l y
w i t h i n the d i s t i l l e r y premises w h e r e the alcohol to be denatured is
p r o d u c e d i n accordance w i t h f o r m u l a s d u l y a p p r o v e d b y t h e B u r e a u
o f I n t e r n a l R e v e n u e a n d o n l y i n t h e presence o f d u l y d e s i g n a t e d
representatives of said B u r e a u .
ANNOTATION
1. Amended: Section 160. Subsections (A) and (B) thereof

are n e w provisions. Section 60 provides a different computation for
the bonds to be posted by manufacturers and importers of articles
subject to excise tax. T h e r e is no more m i n i m u m or m a x i m u m
a m o u n t for the bonds.
2. Before, denaturing of alcohol can be effected either within
the distillery premises or in a b o n d e d denaturing warehouse
designated by the C o m m i s s i o n e r of Internal Revenue for denaturing
purposes only. Under Section 168, the process of denaturing can
be effected only within the distillery premises, (see Rev. Regs. No.
4-68.)
S E C . 1 6 9 . Recovery of Alcohol for Use in Arts and Indus-

tries. M a n u f a c t u r e r s e m p l o y i n g processes i n w h i c h d e n a t u r e d
alcohol u s e d i n a r t s a n d i n d u s t r i e s i s expressed o r e v a p o r a t e d f r o m
the articles manufactured may, under rules and regulations to be
prescribed by the Secretary of Finance, upon the recommendation of
t h e C o m m i s s i o n e r , be p e r m i t t e d to recover t h e alcohol so used a n d
restore i t a g a i n t o a c o n d i t i o n s u i t a b l e solely f o r use i n m a n u f a c t u r -
i n g processes.
ANNOTATED
SEC. 170. Requirements Governing Rectification and

Compounding of Liquors. Persons engaged in the rectification
or compounding of liquors shall, as to the mode of conducting
their business and supervision over the same, be subject to all the
requirements of law applicable to distilleries: Provided, That where
a rectifier makes use of spirits upon which the excise tax has been
paid, no further tax shall be collected on any rectified spirits produced
exclusively therefrom: Provided, further, That compounders in the
manufacture of any intoxicating beverage whatever, shall not be
allowed to make use of spirits upon which the excise tax has not
been previously paid.
ANNOTATION
A n y c o m p o u n d e r w h o manufactures any intoxicating beverage

whatsoever, for domestic sale or c o n s u m p t i o n , must use only
distilled spirits, the excise tax on which has b e e n previously paid,
and no further tax shall be collected t h e r e f r o m . This includes w h a t
w a s previously k n o w n as imitation w i n e s . However, c o m p o u n d e r s
w h o manufacture any intoxicating beverage for export, without
returning to the Philippines in its original state or as an ingredient of
another product, m a y use untaxed alcohol.
T h e excise tax on distilled spirits, therefore, used in t h e

manufacture of c o m p o u n d e d liquors for domestic sale shall be paid
before the removal f r o m t h e place of production. No importation of
flavoring extracts, e s s e n c e , or other similar preparation for use as
raw materials in the manufacture of c o m p o u n d e d liquors shall be
released from c u s t o m s custody without an "Authority to Release
Imported G o o d s " being issued by t h e R e v e n u e Office Chief
(Specific Tax Office) or his authorized representative. (Rev. M e m o .
Cir. No. 38-83.)
SEC. 171. Authority of Internal Revenue Officer in Search-

ing for Taxable Articles. Any internal revenue officer may in
the discharge of his official duties, enter any house, building, or
place where articles subject to tax under this Title are produced or
kept, or are believed by him upon reasonable grounds to be produced
or kept, so far as may be necessary to examine, discover or seize the
same.
He may also stop and search any vehicle or other means of
transportation when upon reasonable grounds he believes that the
same carries any article on which the excise tax has not been paid.
SEC. 172. Detention of Package Containing Taxable

Articles. Any revenue officer may detain any package containing
or supposed to contain articles subject to excise tax when he has
good reason to believe that the lawful tax has not been paid or that
the package has been or is being removed in violation of law, and
every such package shall be held by such officer in a safe place until
it shall be determined whether the property so detained is liable
by law to be proceeded against for forfeiture; but such summary
detention shall not continue in any case longer than seven (7) days
without due process of law or intervention of the officer to whom
such detention is to be reported.
- oOo -
TITLE VII
DOCUMENTARY STAMP TAX
SEC. 173. Stamp Taxes Upon Documents, Loan Agreements,

Instruments and Papers. Upon documents, instruments, loan
agreements, and papers and upon acceptances, assignments, sales,
and transfers of the obligation, right or property incident thereto,
there shall be levied, collected and paid for, and in respect of the
transaction so had or accomplished, the corresponding documentary
stamp taxes prescribed in the following Sections of this Title, by
the person making, signing, issuing, accepting, or transferring the
same wherever the document is made, signed, issued, accepted,
or transferred when the obligation or right arises from Philippine
sources or the property is situated in the Philippines, and at the
same time such act is done or transaction had: Provided, That
whenever one party to the taxable document enjoys exemption from
the tax herein imposed, the other party thereto who is not exempt
shall be the one directly liable for the tax. (as amended by R.A. No.
7660.)
ANNOTATION
1. Documentary stamp tax (DST) is a tax on documents,

instruments and papers evidencing the acceptance, assignment,
sale or transfer of an obligation, right, or property incident thereto.
It is actually an excise tax because it is imposed on the transaction
rather than on the document. (Phil. Banking Corp. vs. Comm., 577
SCRA 366 [2009], citing De Leon & De Leon, Jr., The National
Internal Revenue Code Annotated, Vol. 2 [2003], p. 286.) Thus, in
general, it may be levied on the transaction itself or on the document
evidencing the transaction. (Sec. 173.)
(1) Section 4 of Republic Act No. 5448 (Special Science
Fund Act) which levies additional documentary stamp taxes
called "science stamp taxes" equal to 100% of those imposed
under the Tax Code, has been repealed by Presidential Decree
364
Sec. 173 D O C U M E N T A R Y S T A M P TAX 365
No. 1457 w h i c h consolidated a n d increased the rates of

d o c u m e n t a r y s t a m p taxes payable under the Tax C o d e .
(2) R.A. No. 7 6 6 0 w h i c h took effect on January 13, 1994,
increased the a m o u n t s of d o c u m e n t a r y s t a m p taxes. It also
provides:
"Sec. 2 2 . T h e incremential revenues f r o m the increase

in t h e d o c u m e n t a r y s t a m p taxes under this Act shall be set
aside for t h e following p u r p o s e s :
(a) In 1994 a n d 1995, twenty-five percent (25%)

thereof respectively, shall accrue to the United H o m e -
Lending P r o g r a m under Executive Order No. 90
particularly for mass-socialized housing program to be
allocated as follows: fifty percent (50%) for mass-socialized
h o u s e ; thirty percent ( 3 0 % ) for the c o m m u n i t y mortgage
p r o g r a m ; a n d twenty percent (20%) for land banking and
d e v e l o p m e n t to be administered by the National Housing
Authority: Provided, T h a t not more than one percent (1%)
of t h e respective allocations thereof shall be used for
administrative e x p e n s e s ;
(b) In 1996, twenty-five percent (25%) thereof to be

utilized for t h e National Health Insurance Program that
hereafter m a y be m a n d a t e d by law; a n d
(c) In 1994 a n d every year thereafter, twenty-five
percent (25%) thereof shall accrue to a Special Education
F u n d to be administered by the Department of Education,
Culture a n d Sports for the construction and repair of
school facilities, training of teachers, and procurement or
production of instructional materials and teaching aids;
(d) In 1994 and every year thereafter, fifty percent
(50%) thereof shall accrue to a Special Infrastructure Fund
for the construction and repair of roads, bridges, d a m s and
irrigation, seaports, and hydroelectric and other indigenous
power projects: Provided, however, That for the years
1994 and 1995, thirty percent (30%), and for the years
1996, 1997, and 1998, twenty percent (20%), of this fund
shall be allocated for depressed provinces as declared by
the President as of the time of the effectivity of this Act:
Provided, further, That availments under this fund shall be
determined by the President on the basis of equity.
Provided, finally, That in paragraphs b, c, and d of this

Section not more than one percent (1%) of the allocated
ANNOTATED
funds thereof shall be used for administrative expenses by

the implementing agencies."
(3) Said Act also imposes an additional tax on motorcycles
and scooters, whether for hire or not. (Sec. 3 thereof.) Private
automobiles, jeeps and j e e p n e y s are subject to a private motor
vehicle tax imposed under Executive Order No. 4 3 .
2 . Document itself controls as to liability to and amount
of the tax. The liability to the tax and the a m o u n t thereof are
determined from the fact of the d o c u m e n t itself, i.e., by the form and
face thereof, and cannot be affected by proof of facts outside of the
same. The n a m e given by the parties is not controlling. However,
in cases of doubt, construction is in favor of e x e m p t i o n . (Danville
vs. Pickering, 294 F. 117; U.S. vs. Isham, 84 U.S. 496.) T h e s t a m p s
must be affixed on the original d o c u m e n t but if for s o m e reason the
original is not available, then on the duplicate w h i c h has b e e n used
in place of the original.
3. Nature of DST. Under Section 173, the subject of

D S T is not limited to the d o c u m e n t e m b o d y i n g the e n u m e r a t e d
transactions. A D S T is an excise tax on t h e exercise of a right or
privilege to transfer obligations, rights or properties incident thereto.
(1) In general, DSTs are levied on the exercise by persons
of certain privileges conferred by law for the creation, revision,
or termination of specific legal relationships through t h e
execution of specific instruments. H e n c e , in imposing t h e DST,
not only the d o c u m e n t but also t h e nature a n d character of the
transaction is c o n s i d e r e d . (Phil. B a n k i n g C o r p . vs. C o m m . ,
supra.) E x a m p l e s of such privileges, t h e exercise of w h i c h ,
as effected through the issuance of particular d o c u m e n t s , are
subject to the p a y m e n t of d o c u m e n t a r y s t a m p t a x e s are leases
of lands, mortgages, pledges a n d trusts, and c o n v e y a n c e s of
real property under Section 195. (Lhuillier P a w n s h o p , Inc. v s .
C o m m . , 4 8 9 S C R A 147 [2006].)
(2) D S T is not a tax on the business transacted but on the

privilege, opportunity, or facility offered at e x c h a n g e s for the
transaction of the business. It is an excise tax on the facilities
used in the transaction of the business separate a n d apart f r o m
the business itself. T h u s , the contention that the petitioner is
health maintenance organization ( H M O ) and not an insurance
c o m p a n y is irrelevant, w h e r e the health care a g r e e m e n t is
treated as an insurance contract pursuant to Section 185. S u c h
agreement is primarily a contract of indemnity in the nature of a
non-life insurance policy. (Phil. Health Care Providers, Inc. vs.

C o m m . , 554 S C R A 4 1 1 [2008].)
(3) Being an excise tax, D S T is paid only once. Since DST

is not a tax on income, an e x e m p t i o n from income tax does
not include DST. T h u s , a BOI-registered enterprise enjoying
income tax holiday (ITH) incentive is subject to D S T during the
ITH period, since D S T is not a tax on income but is in the nature
of an excise tax i m p o s e d either on a transaction or document.
(BIR Ruling No. D A - 1 0 6 - 0 8 , A u g . 4 , 2008.)
4. Time of payment. T h e law requires that the corresponding

d o c u m e n t a r y s t a m p taxes shall be paid at the time "the act is d o n e
or transaction h a d . "
(1) T h e implication is that the d o c u m e n t a r y stamp shall

be affixed to the taxable d o c u m e n t at the time it is issued
or e x e c u t e d or signed by the parties thereto (and not at the
time of notarization) or within 24 hours f r o m the time the act
is d o n e or transaction h a d . T h e rule, however, is well-settled
that the s t a m p tax m a y be paid at any time either before or at
t h e time t h e d o c u m e n t is presented in evidence. This is without
prejudice to criminal liability under Section 201 (see Del Castillo
v s . Madrilena, 49 Phil. 752.) and the civil liability of twenty-five
percent (25%) i m p o s e d by Section 2 4 8 .
(2) D S T is levied independently of the legal status of the

transactions going rise thereto. It must be upon the issuance
of t h e instrument without regard to whether the contract which
g a v e rise to it is rescissible, void, voidable, or unenforceable.
(Philippine H o m e A s s u r a n c e Corporation vs. Court of Appeals,
373 S C R A 4 4 3 [1999]; Jaka Investments Corporation vs.
C o m m . , 626 S C R A 16 [2010].)
(3) Section 173 states w h e n the documentary taxes are

due. Section 2 0 0 , a n e w provision, however, now gives ample
time to the taxpayer to pay the documentary stamp tax. It
requires the filing of a tax return and the payment of the tax
at the s a m e time (within 5 days under the regulations after the
close of the month w h e n the taxable document was made,
signed, issued, accepted or transferred), and provides the
exception in lieu thereof. Before, in order to avoid liability to
surcharges and interest, the taxpayer would only indicate the
date of execution only at such time that he was sure that the
payment of the tax could be made on that day with the result
ANNOTATED
that the document did not reflect the true date of the actual
execution thereof by the parties.
The fact that the articles of incorporation of a proposed
corporation w a s later on disapproved by the Securities and
Exchange Commission will not give rise to the refund of the
documentary stamp tax already paid because upon execution
of the document of c o n v e y a n c e , the taxable transaction is
closed and completed. (BIR Ruling No. 130, July 8, 1991.)
5. Place of payment. Rev. M e m o . Circular No. 44-86
(par. 3[1].) requires registration of real properties transferred or
exchanged in the R D O s having jurisdiction of the location of said
properties. As an exception, the BIR allowed t h e S a n Miguel Corp.
to pay the documentary stamp on the transfer/exchange of real
properties located in different parts of the country to the R D O of
Mandaluyong City w h e r e its principal place of business is located
considering the difficulty of having said properties so diversely
situated to be so registered. (BIR Ruling N o . 0 7 , J a n . 7, 1992.)
6. Transactions effected and consummated outside the

Philippines. D o c u m e n t a r y s t a m p tax is an excise tax. However, it
is m a d e applicable also to transactions effected a n d c o n s u m m a t e d
outside the Philippines although t h e d o c u m e n t is s i g n e d , etc.
abroad w h e r e the obligation or right arises f r o m Philippine sources
or the property is located within the Philippines.
(1) Section 179 w h i c h m a k e s specific reference to loan

agreements e x e c u t e d a b r o a d m a y be read as a limitation on the
general coverage under Section 173. T h u s , a chattel m o r t g a g e
contract executed a b r o a d by a non-resident foreign corporation
(debtor) in favor of another foreign corporation (creditor),
w h e r e the subject matters of t h e m o r t g a g e are located in t h e
Philippines as they are being leased to a d o m e s t i c corporation,
may not be registered in the Philippines under t h e provisions
of the chattel mortgage law (Act N o . 1508.) without paying
the d o c u m e n t a r y s t a m p tax. (see Sec. 195.) Similarly, non-life
insurance policies and b o n d s issued a b r o a d by a branch of a
domestic corporation in favor of another domestic corporation
is subject to d o c u m e n t a r y s t a m p tax. (see Sees. 184-185.)
(2) W h e t h e r the withdrawal of money shall be subject to

D S T would d e p e n d on w h e t h e r or not there is a transfer of funds
f r o m abroad. If, for e x a m p l e , Z Center d o e s not maintain a local
or foreign currency account in the Philippines, t h e transfer of
funds f r o m a US bank to X Foundation's bank account in the
Philippines is subject to DST. If Z Center maintains a local or

foreign currency account in the Philippines from where it will
draw the m o n e y a n d m a k e s the instruction or order to pay
through an electronic m e s s a g e , s u c h electronic instruction
is not subject to D S T since funds w e r e not transferred from
abroad or f r o m the place w h e r e the instruction originated. (BIR
Ruling No. 2 7 9 - 0 4 , M a y 17, 2004.)
7. Parties liable to the tax. Both the person issuing and
the person to w h o m the d o c u m e n t is issued m a y be m a d e liable
for the tax. T h e tax is i m p o s e d against "the person making, sign-
ing, issuing, accepting or transferring" the d o c u m e n t or facility
evidencing the transaction. In a contract of insurance, for example,
either the insurance c o m p a n y or the insured is liable.
(1) T h e proviso in Section 173 revokes rulings to the
effect that the d o c u m e n t a r y s t a m p tax is paid indifferently by
either party a n d accordingly, the party a s s u m i n g payment of
said taxes b e c o m e s directly liable therefor. Hence, if the party
a s s u m i n g p a y m e n t is tax-exempt, the d o c u m e n t becomes
e x e m p t f r o m the tax. S u c h a s s u m p t i o n of tax liability by the
t a x - e x e m p t party is no longer allowed. Consequently, the other
party in the d o c u m e n t w h o is not e x e m p t b e c o m e s directly
liable. (BIR Rulings No. 0 6 7 , M a y 2 7 , 1986 and No. 036, Jan.
2 4 , 1992.)
(2) If o n e party is e x e m p t to the extent of 5 0 % , the other

party to the taxable d o c u m e n t which the exempt party will
execute, is liable to the other 5 0 % . (BIR Ruling No. 013, Jan. 6,
1989.) T h e parties m a y agree, as between themselves, on w h o
shall be liable or h o w they m a y share on the amount of the tax.
(3) T h e BIR recognizes the validity of an agreement
between the seller and the buyer w h e r e b y the latter assumes
the p a y m e n t of all transfer taxes (including DST) as having the
force of law b e t w e e n the parties. (BIR Ruling No. 038-2000,
Sept. 11, 2000.) Similarly, the Republic of the Philippines, as
borrower, can accept the burden of paying the taxes (including
documentary stamp taxes) supposed to be imposed on the
lender bank which automatically accrues against the borrower.
(BIR Ruling No. 049-00, Oct. 23, 2000.)
(4) T h e designation of the seller as the agent of the buyer
in the payment of the documentary stamp tax is valid as long
as the remittance and payments are made in the name of its
buyer. (BIR Ruling No. 034-00, Sept. 05, 2000.)
ANNOTATED
8. Rural banks and their borrowers exempted. Rural banks

and their borrowers and mortgagors are now exempted from paying
all registration charges, fees, and documentary stamp taxes for any
instrument relating to loans or transactions not exceeding P50.000,
which before were being collected by the Register of Deeds. Land
Registration Administration Circular No. 45 dated July 16 orders
all Register of Deeds to implement Section 21 of R.A. No. 7353,
otherwise known as "Rural Banks Act of 1992."
Section 21 of the law states: "Any Register of Deeds shall

accept from any rural bank and its borrowers and mortgagors for
registration, free from all charges, fees and documentary stamps tax
collectible under existing laws, any instrument, w h e t h e r voluntary
or involuntary, relating to loans or transactions e x t e n d e d by a rural
bank in an amount not exceeding Fifty t h o u s a n d pesos (P50.000);
Provided, however, That charges, if any shall be collectible on
the amount in excess of Fifty t h o u s a n d pesos (P50.000); a n d
that in instruments related to a s s i g n m e n t s of several mortgages
consolidated in a single d e e d , if any, shall be levied only on t h e
amount in excess of Fifty t h o u s a n d pesos (P50.000) of the
consideration in the a s s i g n m e n t of e a c h m o r t g a g e , or s u c h a m o u n t
as the Secretary of Finance u p o n r e c o m m e n d a t i o n of t h e Monetary
Board, m a y prescribe as m a y be necessary to p r o m o t e a n d e x p a n d
the rural economy."
9. Asian Development Bank exempted. Article 56( 1) of the

Asian Development Bank (ADB) Charter accords A D B e x e m p t i o n
from any obligation for the p a y m e n t , w i t h h o l d i n g , or collection of
any tax or duty. As s u c h , A D B should not be required to withhold
any tax on interest income that the b o n d h o l d e r s shall earn f r o m the
bonds. T h e e x e m p t i o n shall e x t e n d to paying agents acting for and
on behalf of A D B with respect to the bonds, since the former are
merely acting as agents of A D B . Imposing t h e s a m e withholding
obligation on the paying agent w o u l d violate A D B ' s e x e m p t i o n f r o m
any obligation to withhold under Article 56(1) of the A D B Charter.
T h e issuance of b o n d s by A D B shall be e x e m p t f r o m D S T
imposed under Section 180, as a m e n d e d by RA No. 9 2 4 3 . T h e tax
exemption accorded to A D B under Article 56(1) of its Charter covers
all its assets, property, income, a n d its operations and transactions,
which shall be e x e m p t f r o m all taxation a n d f r o m all c u s t o m s duties.
Hence, a transaction that m a y be imposed thereon w h o e v e r m a y
be the party involved in the transaction entered into by A D B .
W h e r e A D B is a party to a transaction, the transaction itself is

e x e m p t from DST. Therefore, Section 173 which shifts to the other
party the p a y m e n t of D S T shall not apply, as there is no instance
that D S T m a y be i m p o s e d on any transaction entered into by A D B
under Article 56(1) of the A D B Charter. (BIR Ruling No. 247-05,
J u n e 8, 2005.)
10. Payment as effected by the amount of the tax. Section

2 of Presidential Decree No. 1045, as implemented by Section 6 of
R e v e n u e Regulations No. 9-76, requires that if the a m o u n t of the
s t a m p tax d u e is P10.00 or m o r e , the s t a m p tax shall be paid to the
B u r e a u of Internal R e v e n u e or through its authorized agent bank,
after w h i c h a c o r r e s p o n d i n g official receipt evidencing payment
shall be issued and a notation of s u c h p a y m e n t shall be m a d e on
the original a n d every copy of the d o c u m e n t , as follows: (a) A m o u n t
of s t a m p tax paid; (b) Official receipt number; (c) Date of payment;
and (d) N a m e and signature of the payor.
If the a m o u n t of s t a m p tax d u e is below P10.00, rather than the

said official receipt, actual s t a m p shall be issued by the BIR. T h e
s t a m p shall be affixed on t h e taxable d o c u m e n t and after affixture,
shall be cancelled in order that the p a y m e n t of the tax may be
effected. (Rev. M e m o . Cir. No. 4 4 - 8 6 ; see Annotation No. 5, Sec.
200.)
11. Guaranty agreement. It is not subject to DST. As opposed

to a loan a g r e e m e n t w h i c h has for its object m o n e y or consumable
thing, the object of a guaranty is not the money per se that is
transferred to the debtor, but the price paid by the debtor for the
guaranty of his or her loan. Neither can a guaranty be considered
a debt instrument (Sec. 179.) for purposes of imposing DST, since
there is no borrowing or lending transaction in a guaranty. (BIR
Ruling No. D A - 6 5 0 - 0 6 , Nov. 2, 2006.)
12. Special purpose vehicle. Under R.A. No. 9182, otherwise
k n o w n as the "Special Purpose Vehicle (SPV) Act of 2002," as
implemented by Rev. Regs. No. 6-2004, transactions involving
transfer of real property and other properties o w n e d or acquired
( R O P O A ) by a Financial Institution (Fl) to an individual as well as
those transfers qualified under S P V Law have been granted tax
exemptions.
Under Section 7(d) of Rev. Regs. No. 6-2004, subject to certain
conditions, transfer by a Fl of R O P O A to an individual is exempt,
aside from capital gains tax, creditable withholding tax and VAT,
from DST. (see Annotation No. 27 under Sec. 109.)
ANNOTATED
S E C . 174. Stamp Tax on Original Issue of Shares of Stock.

O n every o r i g i n a l issue, w h e t h e r o n o r g a n i z a t i o n , r e o r g a n i z a t i o n ,
o r for a n y u n l a w f u l purposes, o f shares o f stock b y a n y association,
company, or c o r p o r a t i o n , t h e r e s h a l l be collected a d o c u m e n t a r y
s t a m p t a x o f One peso ( P I . 0 0 ) o n each T w o h u n d r e d pesos (P200),
o r f r a c t i o n a l p a r t thereof, o f t h e p a r v a l u e , o f s u c h shares o f stock:
Provided, T h a t i n t h e case o f t h e o r i g i n a l issue o f shares o f stock
without par value the amount of the documentary stamp tax herein
prescribed s h a l l b e based u p o n t h e a c t u a l c o n s i d e r a t i o n f o r t h e
issuance o f s u c h shares o f stock: Provided, further, T h a t i n t h e case
o f stock d i v i d e n d s , o n t h e a c t u a l v a l u e r e p r e s e n t e d b y each s h a r e .
(As amended by R.A. No. 7660, No. 8424 and No. 9243.)
ANNOTATION
1. R.A. No. 8 4 2 4 a m e n d e d Section 175 by substituting

"shares" in place of "certificates." RA N o . 9 2 4 3 reduces t h e tax to
P1.00 for every P200.00. It deletes the former Section 174 (Stamp
Tax on Debentures and Certificates of Indebtedness. It r e n u m b e r s
Sections 175, 176, 177, 178, 179 and 180 as Sections 174, 175,
1 7 6 , 1 7 7 , 1 7 8 and 179 respectively. T h e law reduces t h e D S T rates
on original issue of shares of stock (Sec. 174.), sales, a g r e e m e n t s
to sell, etc. (Sec. 175.), policies of annuities a n d pre-need plans.
(Sec. 186.)
2. A mere transfer of surplus to capital a n d an increase in the

stated value of the outstanding no par value s h a r e s of a corporation
does not constitute an issuance of shares. Consequently, no
additional stamp tax is d u e on s u c h increase. ( C o m m . v s . Herald
Lumber Co., L-16340, Feb. 2 9 , 1964.)
3. Note that the first proviso of Section 174 s p e a k s of

actual consideration in t h e c a s e of the original issue of shares of
stock without par value as the basis of t h e DST. A n y additional
consideration w h i c h m a y be received for t h e certificates in t h e
future is of no c o n s e q u e n c e . (Ibid.)
In the case of stock dividend, Section 174 is very clear that t h e

basis of the D S T is the actual value (or book value) represented by
each share, not its par value.
4. Accrual of DST at time of issue of shares. T h e d o c u -

mentary stamp tax is imposed only o n c e on every original issue
of shares of stock and is in the nature of an excise (privilege) tax
because it is levied upon the privilege, the opportunity a n d the
Sec. 174 D O C U M E N T A R Y STAMP TAX 373
facility of issuing shares of stocks. It is clear from Section 174 that

for the tax to attach, the certificates of stock need not be issued
m u c h less delivered, actually or constructively. W h a t is taxed is the
privilege of issuing the shares of stock a n d , therefore, the taxes
accrue at the time the shares are issued (see C o m m . of Internal
R e v e n u e v s . Construction R e s o u r c e s of A s i a , Inc., 145 S C R A 6 7 1 ,
Nov. 2 5 , 1986.) regardless of the physical issuance and actual
delivery to the stockholder of t h e certificate of stock evidencing his
stockholding. A person m a y o w n shares of stock in a corporation
without possessing a certificate of stock.
5. When certificate/share of stock deemed issued. The

D S T i m p o s e d on original issuance of shares of stock accrues at the
time the s h a r e s are issued.
(1) A certificate/share of stock is d e e m e d issued for the

p u r p o s e of imposing the D S T at the time of release of the
stock certificate to the stockholder, the actual or constructive
possession by the stockholder of the certificate of stock being
immaterial a n d of no c o n s e q u e n c e . T h e certificate as issued by
the corporation, irrespective of w h e t h e r or not it is in the actual
or constructive p o s s e s s i o n of the stockholder, is considered
issued b e c a u s e it is with value, m e a n i n g , the certificate of
stock c a n be issued to exercise the attributes of ownership
over the stocks m e n t i o n e d on its face. T h u s , the stocks can
be alienated, dividends or fruits derived therefrom can be
e n j o y e d , and they can be c o n v e y e d , pledged, or e n c u m b e r e d ,
(see C o m m . vs. First Express P a w n s h o p Company, Inc., 589
S C R A 213 [2009]; Jaka Investments Corporation vs. C o m m . ,
6 2 6 S C R A 16 [2010].)
(2) T h e exception to the above rule is with regard to those
issued certificates of stocks temporarily subject to suspensive
conditions, such as but not limited to conditions set forth by the
S E C for the protection of the general public or w h e n the shares
issued are coming f r o m an increase in authorized capital stock,
which needs prior approval by the S E C . T h e s e certificates
shall only be liable for the D S T only w h e n released from
said conditions or w h e n increase of authorized capital stock
is approved by the S E C , for then and only then shall these
certificates truly acquire any practical value for their owners.
(BIR Ruling No. 318-04, June 11, 2004.)
6. DST imposed on entire subscription. With respect to

stock certificates, it is levied upon the privilege of issuing them;
ANNOTATED
not on the money or property received by the issuing company for

such certificates. Neither is it imposed upon the share of stock.
The documentary stamp tax is imposed on the entire subscription
(i.e., subscribed capital stock) which is the amount of the capital
stock subscribed whether fully paid or not. It connotes an original
subscription contract for the acquisition by a subscriber of unissued
shares in a corporation. (Jaka Investments Corporation vs. CIR,
CA-G.R. SP. No. 51834, A u g . 2 2 , 2000.)
7. Existence of subscription agreement. Sections 174 and
175 contemplate a subscription a g r e e m e n t in order to impose the
DST. There can be subscription only with reference to shares of
stock which have never issued, in the following c a s e s :
(1) T h e original issuance f r o m authorized capital stock
(ACS) at the time of incorporation;
(2) T h e o p e n i n g , during the life of t h e corporation, of the
portion of the original A C S previously u n i s s u e d ; or
(3) T h e increase of A C S a c h i e v e d t h r o u g h a formal
a m e n d m e n t of the articles of incorporation a n d registration
thereof with the S E C . (First Express P a w n s h o p C o m p a n y , Inc.
vs. CIR, CTA C a s e No. 6 5 2 9 , Sept. 2 4 , 2004.)
8. T h e original issuance of shares of stock by a non-resident

foreign corporation ( N R F C ) to another N R F C in e x c h a n g e for t h e
assets and liabilities of t h e Philippine b r a n c h of the latter corporation
is not subject to D S T since both corporations are outside Philippine
jurisdiction. T h e asset transfer a g r e e m e n t is also not subject to D S T
because the assets a n d liabilities to be transferred do not include
shares of stock. (BIR Ruling No. 0 7 5 - 9 9 , J u n e 16, 1999.)
9. Membership certificate in a non-profit corporation. It is in

the nature of a share of stock as defined in Section 22(L); h e n c e , the
original issuance thereof is subject to D S T i m p o s e d under Section
174 and its sale to the tax i m p o s e d under Section 175. (BIR Ruling
No. 206-99, Dec. 2 8 , 1999.)
1 0 . Conversion or reclassification of common shares into

redeemable preferred shares (RPS). It d o e s not partake of t h e
nature of an original issuance of shares. H e n c e , it is not subject to
the D S T imposed under Section 174, provided t h e n e w certificates
are issued to the s a m e stockholders a n d t h e par value is not higher
than the replaced certificates. Furthermore, no D S T is d u e w h e n the
c o m m o n shares are reclassified into shares convertible into R P S ,
since there is neither an original issuance nor transfer of shares. No

D S T is due on t h e surrender and cancellation of the R P S upon their
redemption.
(1) T h e surrender and cancellation of shares in a partial

liquidation do not constitute a sale, assignment, or transfer of
shares subject to DST, b e c a u s e the liquidating corporation is
not taking title to the surrendered shares and the shares are
retired as a c o n s e q u e n c e of liquidation and not retained as
treasury shares. (BIR Ruling No. 318-05, July 15, 2 0 0 5 ; Nov.
10, 1998.)
(2) T h e conversion of preferred shares to common shares

granted under t h e subscription contract, which does not involve
any transfer of o w n e r s h i p f r o m o n e stockholder to another is
not subject to d o c u m e n t a r y s t a m p tax. T h e transaction is but
a mere continuation of the initial transaction for which the
required d o c u m e n t a r y s t a m p tax w a s already paid. (BIR Ruling
N o . 158-98, Nov. 10, 1998.)
(3) T h e redemption of the RPS by the corporation is akin
to a partial liquidation of a corporation, b e c a u s e under the
SEC Rules Governing Redeemable and Treasury Shares, the
shares so r e d e e m e d or reacquired shall be considered retired
and no longer issuable, unless otherwise provided under the
Article of Incorporation (AOI). This is consistent with the settled
rule that a liquidating corporation's transfer of its remaining
assets to its stockholder is not considered a sale of assets;
thus, a liquidating corporation d o e s not realize gain or loss in
partial or complete liquidation.
On the other h a n d , any gain derived by the corporation
stockholders on the redemption of the R P S , will be treated
as gain f r o m the sale or e x c h a n g e of shares, subject to the
ordinary income tax rates under the Tax Code. (BIR DA Ruling
No. 318-05, July 15, 2005.) T h e issuance of new shares to
replace previously issued and outstanding shares pursuant to
a decrease in capital stock is exempt from DST because they
are not considered original issuance of shares of stock subject
to tax under Section 174. (BIR Ruling No. DA-674-09, Nov. 16,
2009.)
(4) T h e issuance of new shares at the reduced par value
to replace previously issued and outstanding shares at the
original par value, pursuant to a decrease in capital stock,
is exempt from the DST on original issuance of shares. The
ANNOTATED
replacement of old certificates of stock with new ones as a

consequence of the decrease in capital stock of the corporation
is not subject to the DST imposed under Section 174, but only
to the P15 DST imposed under Section 188. T h e transfer of
the old certificates is being made only to reflect the correct par
value of the shares and is without any monetary consideration.
(BIR Ruling No. 331-05, July 27, 2005.) T h e issuance of new
shares to replace previously issued and outstanding shares
pursuant to a decrease in capital stock is e x e m p t from D S T
because they are not considered original issuance of shares
of stock subject to tax under Section 174. (BIR Ruling No. DA-
674-09, Nov. 16, 2009.)
11. Deposits for future stock subscriptions. T h e y are not

subject to D S T in the a b s e n c e of proof that an equivalent a m o u n t of
shares w a s subscribed or issued in consideration for said deposits.
Section 56 of Rev. R e g s . No. 2 provides that w h e r e a corporation
requires additional funds for conducting its business a n d obtains
said funds through voluntary p a y m e n t s by its shareholders, t h e
amounts so received, w h i c h are credited to the corporation's
surplus account or to a special account, will not be considered
income. Although there is no increase in t h e outstanding shares
of stock of the corporation, the p a y m e n t s in s u c h c i r c u m s t a n c e s
are in the nature of voluntary a s s e s s m e n t s u p o n the shareholders,
and represent an additional price paid for their s h a r e s of stock. As
such, the p a y m e n t s will be treated as additions to a n d as part of the
operating capital of the company.
T h u s , the conversion by X C o . of its deposits for future stock

subscriptions into additional paid-in capital (APIC) in Y C o . is not
subject to income tax and d o n o r ' s tax b e c a u s e t h e infusion of A P I C
is in the nature of additional f u n d s w h i c h will be u s e d a s , a n d forms
part of Y Co.'s working capital for w h i c h no s h a r e s of stock will be
issued. As s u c h , the A P I C is not i n c o m e to Y C o .
Since no new shares will be issued, t h e conversion will not be
subject to the D S T i m p o s e d under Section 174. (BIR Ruling N o .
546-2004, N o v e m b e r 5, 2004.)
SEC. 175. S t a m p Tax on Sales, Agreements to Sell, Memo-

randa of Sales, Deliveries or Transfer of Shares or Certificates
of Stock. On all sales, or agreements to sell, or memoranda of
sales, or deliveries, or transfer of shares or certificates of stock in any
association, company or corporation, or transfer of such securities by
assignment in b l a n k , or by delivery, or by any paper or agreement,

o r m e m o r a n d u m o r o t h e r evidences o f t r a n s f e r o r sale w h e t h e r
e n t i t l i n g t h e h o l d e r i n a n y m a n n e r t o t h e b e n e f i t o f such stock, o r
t o secure t h e f u t u r e p a y m e n t o f m o n e y , o r f o r t h e f u t u r e t r a n s f e r
o f a n y stock, t h e r e s h a l l b e collected a d o c u m e n t a r y s t a m p t a x o f
S e v e n t y - f i v e c e n t a v o s ( P I . 7 5 ) o n e a c h T w o h u n d r e d pesos (P200),
o r f r a c t i o n a l p a r t t h e r e o f , o f t h e p a r v a l u e o f stock: Provided, T h a t
o n l y one t a x s h a l l b e collected o n e a c h sale o r t r a n s f e r o f stock f r o m
one p e r s o n t o a n o t h e r , r e g a r d l e s s o f w h e t h e r o r n o t a c e r t i f i c a t e o f
stock i s i s s u e d , i n d o r s e d , o r d e l i v e r e d i n p u r s u a n c e o f s u c h sale o r
t r a n s f e r : And provided, further, T h a t i n t h e case o f stock w i t h o u t p a r
value the a m o u n t of t h e documentary stamp tax herein prescribed
s h a l l b e e q u i v a l e n t t o t w e n t y - f i v e p e r c e n t (25%) o f t h e d o c u m e n t a r y
s t a m p t a x p a i d u p o n t h e o r i g i n a l issue o f s a i d stock, (as amended by
RA. No. 7660 and No. 9243.)
ANNOTATION
1. R.A. N o . 9 2 4 3 e x c l u d e s sales, etc. of d u e bills and

certificates of obligation.
2. While the d o c u m e n t a r y s t a m p tax on sales, etc. is being
levied on t h e instrument, it is actually a tax on the privilege to enter
into the transaction. T h u s , it is neither a tax on the transaction per
se nor on the property it describes. (BIR Ruling No. 158-98, Nov.
10, 1998.)
3. If the legal and beneficial title remains with the owner of
the certificate of stock, the transfer is e x e m p t f r o m tax. (BIR Ruling,
1946.)
4. A due bill is a promissory note w h i c h s h o w s on its face an
a c k n o w l e d g m e n t by a person of his indebtedness to another. The
w o r d " d u e " is usually u s e d . (The Phil. Negotiable Instruments Law
[and Allied Laws] A n n o t a t e d , 2 0 1 0 Ed., by H.S. De Leon and H.M.
De Leon, Jr., p. 391.)
5. T h e issuance of new certificates of stock bearing the new
n a m e of the stockholder to replace prior or original certificates is
not subject to documentary stamp tax since there is no change
in ownership, and provided that there is also no change in face
value. However, it should be noted on the new certificates of stock
that the proper documentary stamp has been affixed to the original
certificates. (Sec. 15, R e g . No. 2 6 ; BIR Ruling No. 051-84, March
6, 1984.)
ANNOTATED
6. Section 175 imposes documentary stamp tax on the

assignment of the shares of stock and not on the assignment of
the right to subscribe to the shares of stock. Hence, the physical
issuance of shares of stock to trustors should not be subject again to
the payment of the documentary stamp tax due on the subsequent
sale or transfer of the issued shares of stock. Accordingly, the
assignment of the right to subscribe to the corporate shares is
exempt from the payment of the documentary stamp tax w h e r e
these are, in fact, original issuances and the corresponding
documentary stamp taxes on w h i c h have b e e n paid on behalf of
the assignee by their trustee. (BIR Ruling No. 174-89, August 17,
1989.)
7. The transfer of shares of stock by virtue of a Deed of
Donation is not subject to D S T under Section 175. T h e r e must be
a consideration and an actual or constructive transfer of beneficial
ownership of the shares f r o m one person to another. T h e donation
does not fall within the contemplation of Section 175 and is,
therefore, e x e m p t from DST. (BIR Ruling No. 311-05, July 6, 2005.)
8. Transfer of shares of stock by a nominee shareholder/
trustee to the real owner is not subject to capital gains tax (CGT),
and donor's tax. It is not subject to C G T since it is not a taxable
transaction, there having b e e n no consideration involved and to
donor's tax as there is no donative intent on the part of the n o m i n e e /
trustee. Finally, the transfer is not subject to t h e D S T i m p o s e d
under Section 175. (BIR Ruling No. 2 9 4 - 0 5 , J u n e 2 7 , 2005.) T h u s ,
w h e r e X assigned to Y his shares of in a corporation, Y holding
the shares of stock merely as trustee in trust for X, the trustor and
beneficial owner, the transfer of t h e s h a r e s f r o m Y to X, without
monetary consideration is not to be t r e a t e d , as another transfer
separate and distinct f r o m the c o n v e y a n c e b e t w e e n X a n d Y but
as a continuation and confirmation of title in favor of X, t h e ultimate
and real beneficiary of t h e subject s h a r e s of stock. T h e d e e d of
transfer is subject, however, to D S T under Section 188. (BIR Ruling
DA No. 074-08, Feb. 6, 2008.)
9. A transfer of certificates of stock by operation of law as in

the case of intestate succession is not subject to the tax. It must be
by virtue of an act voluntarily m a d e by the transferor (BIR Ruling,
Oct. 24, 1954.) as in the c a s e of transfers by w a y of gift inter vivos
as they partake the nature of voluntary transfers. (BIR Ruling, Nov.
9, 1940.) Transfer of bonds has b e e n deleted f r o m a m o n g the
transactions subject to D S T under Section 176. (see Sec. 180.)
10. T h e transfer of a proprietary membership share in a club

is not a taxable transaction w h e r e the transfer does not involve
any monetary or material consideration whatsoever, and is merely
a transfer of legal title f r o m o n e n o m i n e e of a c o m p a n y (the true
and beneficial o w n e r of the share) to another, without transfer of
true and beneficial ownership. H e n c e , the transfer is not subject to
CGT. It is also not subject to d o n o r ' s tax since there is no donative
intent. Moreover, the transfer of the Certificate is not subject to the
D S T i m p o s e d under Section 175. (BIR Ruling No. 573-04, Nov. 11,
2004.)
11. W h e n the assets (in the f o r m of shares of stock) of an

a b s o r b e d corporation w h i c h is a party to a merger or consolidation
(see Sec. 40[c].) is e x c h a n g e d or transferred to the surviving
corporation, also a party to t h e merger or consolidation, solely for
shares of stock of t h e surviving corporation, the said transfer shall
be subject to the D S T under Section 175, and also to D S T under
Section 196 if the property to be transferred are real properties.
(BIR Ruling No. 0 0 2 - 0 1 , Feb. 2, 2001.)
(1) T h e mere act of transferring t h e shares of stock whether
it w o u l d entitle the holder in any m a n n e r to the benefit of such
shares of stock, is already taxable under Section 175. The
original issuance of s h a r e s of stock of the surviving corporation
in favor of the stockholders of the absorbed corporation as
a result of the merger is subject to D S T under Section 174.
(Ibid.)
(2) T h e transfer of shares as a legal consequence of a
corporate merger is not subject to C G T because a merger does
not involve a sale, e x c h a n g e , or disposition of shares since
there is no transfer of beneficial ownership over the shares, the
succeeding corporation s u c c e e d s to the rights and liabilities of
the absorbed corporation and merely carries on the identity of
the latter; hence, no taxable transaction actually takes place.
(BIR Ruling DA No. 247-08, April 16, 2008.)
(3) T h e transfer of the shares of a domestic corporation, a
wholly-owned subsidiary of the transferor foreign corporation
(X Co.) to another foreign corporation (Y Co.), parent company
of X Co., pursuant to a legitimate worldwide corporate
reorganization of a corporate group to which the X Co. and Y
Co are a part and without consideration is not subject to CGT
and donor's tax, but is subject to DST imposed on the transfer
of shares under Sec. 175. (BIR Ruling No. DA-406-07, July 23,
2007; No. 244-08, Sept. 19, 2008.)
ANNOTATED
(4) Under Section 175, sales "for the future transfer of any
stock" are subject to DST (Compagnie Financrete Sucres et
Denrees vs. C o m m . , 4 9 9 S C R A 664 [2006].); also, all sales of
securities, without making any distinction as to the nature or
type of the sale (e.g., whether it be a repurchase agreement or
not) are taxable. (Security Bank Corporation vs. C o m m . , 499
S C R A 453 [2006].)
(5) T h e transfer to the trustor of shares held by the trustees

is merely a confirmation of the title/ownership in favor of the
beneficial owner is not subject to D S T (neither to capital gains
tax and donor's tax) imposed in Section 175 but only to t h e
DST on certificates in Section 188.
12. Sale of property. (1) T h e zonal value or fair market value

existing at the time of execution of t h e d e e d of conditional sale
(price payable in installments) by the parties shall be the taxable
base of the (CGT) and the D S T d u e on t h e said sale, not on the
date the absolute sale w a s e x e c u t e d . T h e contract of purchase
and sale is perfected from the m o m e n t t h e parties agree upon a
determinate thing (i.e., object of the contract) a n d a price certain
therefor. Delivery of the thing sold is not necessary for the perfection
of the contract. (BIR Ruling N o . 2 3 9 - 0 4 , M a y 7, 2004.)
(2) N o n - p a y m e n t of tax on the d e e d of sale d o e s not invalidate

the sale but is subject to 2 5 % surcharge and 2 0 % interest, a n d
persons responsible for the transfer without p a y m e n t of taxes m a y
be held liable for penalties. (BIR Ruling N o . 2 5 8 - 0 4 , M a y 17, 2004.)
13. T h e person making a deposit for stock subscription to capital

stock is not subject to D S T b e c a u s e of the a b s e n c e of a subscription
agreement. He does not have the standing of a stockholder a n d is
not entitled to dividends, voting rights or other prerogatives a n d
attributes of a stockholder. ( C o m m . vs. Fast Express P a w n s h o p
Co., G.R. Nos. 172045-46, J u n e 16, 2009.)
S E C . 176. Stamp Tax on Bonds, Debentures, Certificates

of Stock or Indebtedness Issued in Foreign Countries.
On all bonds, debentures, certificates of stock, or certificates of
indebtedness issued in any foreign country, there shall be collected
from the person selling or transferring the same in the Philippines,
such tax as is required by law on similar instruments when issued,
sold, or transferred in the Philippines.
Sees. 177-178 D O C U M E N T A R Y STAMP TAX 381
ANNOTATION
Definition of terms:
(1) Bond is an obligation in writing binding the obligor to pay

a s u m of m o n e y to the obligee usually with a clause to the effect
that on t h e p e r f o r m a n c e of a certain condition the obligation shall
be void, (see 9 C.J. 7.) A b o n d , w h e n required by law, is c o m m o n l y
understood to m e a n an undertaking that is sufficiently secured and
not cash or currency. ( C o m m . of C u s t o m s v s . Alikpala, 36 S C R A
2 0 8 , Nov. 2 8 , 1970.)
(2) Debenture is a simple a c k n o w l e d g m e n t of a debt, (see 17

C.J. 1369.)
(3) Certificate of stock is a written instrument signed by the

proper officer of an association, c o m p a n y or corporation stating or
a c k n o w l e d g i n g that the person n a m e d therein is the o w n e r of a
designated n u m b e r of s h a r e s of its stock.
(4) Certificate of indebtedness is an instrument having the

general character of investment securities issued by a corporation
as distinguished f r o m an instrument evidencing debts arising in
ordinary transactions b e t w e e n individuals. (Sec. 3, Regs. No. 26,
Dept. of Finance.)
S E C . 177. Stamp Tax on Certificates of Profits or Interests

in Property or Accumulations. O n a l l certificates o f p r o f i t s ,
or any certificate or m e m o r a n d u m showing interest in the property
or accumulations of any association, company, or corporation, and
on all transfers of such certificates or m e m o r a n d a , there shall be
collected a d o c u m e n t a r y s t a m p t a x o f F i f t y centavos (P0.50) o n each
T w o h u n d r e d pesos (P200) o r f r a c t i o n a l p a r t t h e r e o f , o f t h e face
v a l u e o f s u c h c e r t i f i c a t e o r m e m o r a n d u m . (as amended by RA. No.
7660.)
S E C . 178. Stamp Tax on Bank Checks, Drafts, Certificates

of Deposits not Bearing Interest, and Other Instruments.
O n each b a n k check, d r a f t , o r c e r t i f i c a t e o f deposit n o t d r a w i n g
interest, or order for the p a y m e n t of any s u m of money d r a w n upon
o r issued b y a n y b a n k , t r u s t c o m p a n y , o r a n y person o r persons,
companies o r c o r p o r a t i o n s , a t s i g h t o r o n d e m a n d , t h e r e s h a l l b e
collected a d o c u m e n t a r y s t a m p t a x of O n e peso a n d fifty centavos
(P1.50). (as amended by RA. No. 7660.)
ANNOTATED
ANNOTATION
In case of bank checks, the DST are paid by the banks w h e n

they purchase the s a m e from the Bangko Sentral ng Pilipinas and
are passed on to the depositors as part of the purchase price of the
checks.
S E C . 179. Stamp Tax on all Debt Instruments. On

every o r i g i n a l issue of d e b t i n s t r u m e n t s , t h e r e s h a l l be collected a
d o c u m e n t a r y s t a m p o f O n e peso ( P I . 0 0 ) o n e a c h T w o h u n d r e d pesos
(P200), o r f r a c t i o n a l p a r t t h e r e o f , o f t h e issue p r i c e o f a n y s u c h d e b t
i n s t r u m e n t ; Provided, T h a t f o r s u c h d e b t i n s t r u m e n t s w i t h t e r m s
o f less t h a n one (1) y e a r , t h e d o c u m e n t a r y s t a m p t a x t o b e collected
s h a l l b e o f a p r o p o r t i o n a l a m o u n t i n accordance w i t h t h e r a t i o o f
i t s t e r m i n n u m b e r o f d a y s t o t h r e e h u n d r e d s i x t y - f i v e (365) d a y s ;
Provided, further, T h a t o n l y o n e d o c u m e n t a r y s t a m p t a x s h a l l b e
i m p o s e d o n e i t h e r l o a n a g r e e m e n t o r p r o m i s s o r y notes i s s u e d t o
secure s u c h l o a n .
F o r purposes o f t h i s S e c t i o n , t h e t e r m d e b t i n s t r u m e n t s h a l l
mean instruments representing borrowing and lending transactions
including b u t not l i m i t e d to debentures, certificates of indebtedness,
due b i l l s , b o n d s , l o a n a g r e e m e n t s , i n c l u d i n g t h o s e s i g n e d a b r o a d
w h e r e i n t h e object o f c o n t r a c t i s l o c a t e d o r u s e d i n t h e P h i l i p p i n e s ,
i n s t r u m e n t s a n d securities issued by t h e g o v e r n m e n t or any of its
i n s t r u m e n t a l i t i e s , deposit s u b s t i t u t e debt i n s t r u m e n t s , certificate
o r o t h e r evidences o f deposits t h a t a r e e i t h e r d r a w i n g i n t e r e s t
significantly higher t h a n the regular savings deposit t a k i n g i n t o
c o n s i d e r a t i o n t h e size o f t h e d e p o s i t a n d t h e r i s k i n v o l v e d o r d r a w i n g
i n t e r e s t a n d h a v i n g a specific m a t u r i t y d a t e , o r d e r s f o r p a y m e n t o f
any sum of money otherwise t h a n at sight or on demand, promissory
notes, w h e t h e r n e g o t i a b l e o r n o n - n e g o t i a b l e , e x c e p t b a n k notes
issued for c i r c u l a t i o n . (As amended by R.A. No. 7660 and No. 9243.)
ANNOTATION
1. Bonds and deposit substitute debt instruments (see Sec.

22[Y].) are taxed under this Section. A uniform D S T rate is n o w
imposed on the original issuance of all debt instruments defined
in paragraph 2. Note that for debt instruments with a t e r m of less
than one (1) year, the D S T to be collected shall be of a proportional
amount in accordance with the ratio of its t e r m in n u m b e r of d a y s to
365 days.
2. Under Section 179, the instrument must represent a

"borrowing and lending" transaction to be subject to DST.
(1) A promissory note that does not represent a borrowing
and lending transactions, as w h e r e it is issued merely to
represent or e v i d e n c e t h e unpaid price in a sale transaction is
not subject to DST. (BIR Ruling No. D A - 7 4 4 - 0 6 , Dec. 29, 2006.)
(2) Similarly, Section 179 does not apply to a situation
which involves c a s h a d v a n c e s by joint venture partners (co-
venturers) by w a y of capital contribution as part of their
respective undertakings in their joint venture agreement,
e v i d e n c e d by their inter-office m e m o s and/or bank transfer
f o r m s w h i c h are also not subject to DST. (BIR Ruling No. DA-
16-08, J a n . 18, 2008.)
3. Under Section 180 (now Sec. 179), the w o r d renewal

as c o m m o n l y used with reference to notes and bonds "imports
a p o s t p o n e m e n t of t h e maturity of t h e obligation dealt with, an
extension of t h e time in w h i c h that obligation m a y be discharged."
Accordingly, w h e n the maturity date of a certificate of time deposit
bearing interest is e x t e n d e d , said certificate is considered r e n e w e d .
(BIR Ruling No. 0 3 9 , April 7, 1986.)
Under Section 44 of Regulations No. 26 (Documentary Stamp
Tax Regulations), the d o c u m e n t a r y s t a m p tax imposed by Section
173 of the Tax C o d e is not merely on the d o c u m e n t but also on
e a c h a n d every renewal thereof. T h e tax on such renewal should
be at t h e s a m e rate as the tax on the original document. Such being
the case, the certificate of time deposit, the maturity date of which
has b e e n e x t e n d e d , is subject to the d o c u m e n t a r y stamp tax at the
s a m e rate as the original certificate. (BIR Ruling No. 0 4 1 , April 8,
1986.)
4. Even loan agreements "signed abroad, wherein the object

of the contract is located or used in the Philippines" are subject to
DST. Only one D S T shall be imposed on either the loan agreement
or promissory notes issued to secure such loan whichever will yield
a higher tax. Instruments and securities issued by the government
or any of its instrumentalities have been included among the
documents subject to DST.
5. Under the Documentary S t a m p Tax law, the mere with-
drawal of money from a bank deposit, local or foreign currency
account, is not subject to DST, unless the account so maintained is
a current or checking account, in which case, the issuance of the
ANNOTATED
check or bank drafts is subject to D S T imposed under Section 179.

(BIR Ruling No. 132-99, A u g . 2 3 , 1999.)
6. Long-term bonds. There is no legal basis to exempt
bonds of all classes from the payment of the documentary stamp
tax notwithstanding the fact that, pursuant to Section 32(B)(7)(g),
bonds with a maturity period of more than 5 years are e x e m p t from
income tax. (BIR Ruling No. 016-2000, J a n . 17, 2000.)
7. Zero coupon bonds. T h e original issuance of zero
coupon bonds shall be subject to D S T pursuant to Section 179,
while the sale or transfer thereof in the secondary market is e x e m p t
from DST. (see Sec. 32[B], [7][g].) T h e transfer of zero b o n d s in
bearer form in the secondary market by w a y of simple delivery
to the buyer is not subject to the DST, unless the transfer of t h e
instrument carries with it a renewal or issuance of n e w instruments
in the n a m e of the transferee to replace the old o n e s . (BIR Ruling
No. 2 6 - 0 2 , J u n e 2 7 , 2002.)
8. W h a t Section 179 taxes are loan a g r e e m e n t s , etc.

(1) Board resolutions a n d inter office m e m o r a n d a d o c u -
menting inter c o m p a n y a d v a n c e s to a corporation's affiliation
for financial support, charging m o n e t a r y interest using book ref-
erence rate, the grant of c a s h a d v a n c e s not being d o n e in pur-
suit of a business activity, a r e not c o n s i d e r e d loan a g r e e m e n t s
or promissory notes w h e r e t h e corporation did not e x e c u t e
any d o c u m e n t that m a y be c o n s i d e r e d as a loan a g r e e m e n t or
promissory note on w h i c h t h e tax is i m p o s e d . (BIR Ruling No.
D A - 3 2 0 - 0 7 , M a y 3 1 , 2007.)
(2) Loan transactions b e t w e e n a corporation a n d its

affiliates in the nature of c a s h a d v a n c e s as d o c u m e n t e d by
mere board resolutions and c a s h v o u c h e r s to be issued with
corresponding a c k n o w l e d g m e n t e v i d e n c i n g the d i s b u r s e m e n t
of the loans m a y not be considered as a loan a g r e e m e n t or
promissory note. Accordingly t h e loan transactions are not
subject to D S T under Section 179. (BIR Ruling No. D A - 0 7 6 - 0 8 ,
July 2 4 , 2008.)
(3) Interest-free intercompany advances are not subject

to D S T if the s a m e are not c o v e r e d by loan a g r e e m e n t s ,
promissory notes and debit a n d credit m e m o s or intercompany
loan m e m o s pursuant to Section 179. (BIR Ruling No. 145-03,
Sept. 26, 2003.)
(4) T h e D S T on a loan a g r e e m e n t subject to resolutory

condition is d u e and d e m a n d a b l e u p o n the execution a n d
notarization of said d o c u m e n t . (BIR Ruling No. 100-05, March

31,2005.)
(5) A credit facility a g r e e m e n t is not yet a loan agreement.

While credit facilities are a m o n g the a g r e e m e n t s included in
the definition of a loan a g r e e m e n t under Rev. Regs. No. 9-94,
a credit facility by itself is not considered a loan agreement for
purposes of t h e DST. However, o n c e an actual d r a w d o w n is
m a d e , the D S T shall be d u e on the a m o u n t actually d r a w n .
(BIR Ruling No. D A - 0 1 - 1 0 , J a n . 4, 2010.)
9 . T h e D S T is a privilege tax b e c a u s e it is really imposed on

t h e privilege to enter into a transaction rather than on the document.
T h e law taxes t h e d o c u m e n t b e c a u s e of t h e transaction.
(1) A certificate of deposit is a written a c k n o w l e d g m e n t by
a bank of the receipt of a s u m of m o n e y on deposit which it
p r o m i s e s to pay to t h e depositor, to the order of the depositor,
or to s o m e other p e r s o n or his order, w h e r e b y the relation
of debtor a n d creditor b e t w e e n the bank and the depositor
is c r e a t e d . Moreover, a certificate of deposit, like a deposit
credited in a passbook, represents m o n e y actually left with the
bank for s a f e k e e p i n g , w h i c h is to be retained until the depositor
demands them.
(2) Special Savings Deposits and Time Deposits are akin

to e a c h other. In both instances, the bank acknowledges the
receipt of a s u m of m o n e y on deposit and promises to pay the
depositor, bearer or to t h e order of a bearer within a specified
period of time. Moreover, in both cases, the bank allows
pretermination but at a rate of interest lower than that agreed
u p o n . T h e only difference is that the Special Savings Account
(SSA) is covered by a passbook while a time deposit is covered
by a certificate of deposit. However, in determining whether a
certain instrument is subject to DST, substance would control
over the form and labels. (United Overseas Bank Phils, vs.
C o m m . , CTA and No. 6 4 1 1 , April 2 1 , 2004.)
(3) A Trust Indenture Agreement between the bank and

the depositor is not subject to D S T as a certificate of time d e -
posit. It has a different feature and concept from a certificate of
deposit. A trust agreement creates a trustor-trustee relationship
and not a creditor-debtor relationship as alleged by the BIR.
T h e money deposited is placed in trust to a c o m m o n fund and
invested by the Trust Department in a profitable venture. The
yield is higher and varies depending on the actual profit earned.
ANNOTATED
In some trust agreements, a depositor may even get a negative

return on investment. T h e fact that there is an "expected rate
of return" does not necessarily convert a trust agreement into a
time deposit. Under Section X 4 0 7 of the Manual of Regulations
for Banks, the basic characteristic of trust, other fiduciary and
investment m a n a g e m e n t relationship, is the absolute non-exis-
tence of a debtor-creditor relationship, as there is no obligation
on the part of the trustee, fiduciary, or investment manager to
guarantee returns on the fund or properties regardless of the
results of investments. (Traders Bank vs. C o m m . , CTA C a s e
No. 6 3 9 1 , April 28, 2004.)
(4) Trust account transactions are not a m o n g the e n u m e r -

ated transactions subject to D S T under Section 179. M o r e -
over, such transaction cannot be likened to the S S A s a n d time
deposit transactions d o c u m e n t e d in certificates of deposit, or
any written m e m o r a n d u m of the fact that the bank accepted
a deposit of a s u m of m o n e y f r o m a depositor. T h e certificate
serves as proof of the existence of a debtor-creditor relation-
ship between the bank and the depositor. In a trust, there is
no absolute transfer of o w n e r s h i p to the trustee bank; w h a t is
created is a fiduciary relationship a m o n g the parties. ( C o m m .
vs. Phil. Veterans Bank, CTA EB C a s e No. Oct. 15, 2008.)
10. To be considered a certificate of deposit, a d o c u m e n t

requires no specific f o r m for as long as there is s o m e written m e m -
o r a n d u m that the bank a c c e p t e d a deposit of a sum of money.
Hence, a passbook representing an interest-earning deposit ac-
count issued by a bank m a y qualify as a certificate of deposit d r a w -
ing interest.
(1) W h a t is important a n d controlling is t h e nature or

meaning c o n v e y e d by the p a s s b o o k a n d not the particular
label attached to it. But a regular savings deposit with a
passbook w h i c h is w i t h d r a w a b l e at a n y time is not subject to
DST, unlike a time deposit w h i c h is payable on a fixed maturity.
(International E x c h a n g e Bank vs. C o m m . , 520 S C R A 688
[2007].) In International, the further a m e n d m e n t in t h e issued
paragraph of Section 180 (i.e., "certificates or other e v i d e n c e s "
up to "specific maturity date"), w a s intended to eliminate the
s c h e m e used by banks of issuing p a s s b o o k s to "cloak" their
time deposits as regular savings deposit. It served to eliminate
the ambiguity in the law. (see China Banking Corporation vs.
C o m m . , 6 0 2 S C R A 316 [2009].)
(2) Withdrawal before the expiration of the fixed term

stipulated in a time deposit results in the reduction of the
interest rate. T h u s , a Savings Account-Fixed Savings Deposit
(FSD) e v i d e n c e d by a passbook, w h i c h "provides for a higher
interest rate w h e n the deposit is not withdrawn within the
required fixed period, otherwise, it earns interest pertaining to a
regular savings deposit" w a s held substantially the s a m e as a
time deposit. Having a fixed t e r m and reduction of interest rate
in c a s e of pretermination are essentially the features of a time
deposit (Ibid.), w h e t h e r evidenced by a mere passbook or a
certificate of deposit.
(3) A certificate of time deposit is but a type of certificate

of Deposit in a bank d r a w i n g interest. (International Exchange
B a n k vs. C o m m . , supra.) U p o n availment of a credit line
s e c u r e d by c a s h or time deposit, from a bank, D S T under
Section 179 shall be i m p o s e d for e a c h availment regardless of
the procedures involved. (BIR Ruling No. D A - 5 4 8 - 0 6 , Sept. 19,
2006.)
(4) T h e written a m e n d m e n t of Section 179 by R.A. No.

9 2 4 3 particularly the phrase in the s e c o n d paragraph, to wit:
"certificates or other e v i d e n c e s . . . maturity d a t e , " is intended to
eliminate the s c h e m e used by banks of issuing passbooks to
cloak its time deposits as regular savings deposits. (International
E x c h a n g e Bank v s . C o m m . , supra.) A time deposit earns
"interest significantly higher than the regular savings deposit."
n d
( 2 par.)
11. Condonation of indebtedness is not subject to income tax if

nothing of e x c h a n g e a b l e value is received by the debtor. Neither is
it subject to donor's tax if there is no donative intent on the part of
the creditor. T h e c o m p r o m i s e agreement to effect the condonation
is not subject to DST. It is not in the nature of a loan and it does not
fall under any of the d o c u m e n t s enumerated in the Tax Code that
are subject to DST. (BIR Ruling No. DA-023-08, July 10, 2Q08.)
1 2 . Section 15 of R.A. No. 7353 (Rural Banks Act of 1992)

provides that all rural banks shall be exempt from the payment of
all taxes, fees, and charges except the corporate income tax and
local taxes, fees, and charges, for a period of five (5) years from
c o m m e n c e m e n t of operations. They are exempt from the payment
of DST on loans including promissory notes and time deposits as
listed in Section 179 not exceeding P50.000. However, since the
ANNOTATED
rural bank is exempt from the payment of DST, the other party to
the loan, time deposit, or promissory note shall be directly liable for
said tax under Section 173. (BIR Ruling No. 185-04, April 6, 2004.)
SEC. 180. Stamp Tax on All Bills of Exchange or Drafts.

On all bills of exchange (between points within the Philippines)
or drafts, there shall be collected a documentary stamp tax of thirty
centavos (P0.30) on each two hundred pesos (P200) or fractional part
thereof, of the face value of any such bill of exchange. (As added by
R.A. No. 9243.)
ANNOTATION
(1) The term "debt instrument" as defined in Section 179

excludes drafts and bills of exchange between points in the
Philippines which are covered by Section 180.
(2) The negotiable character of any and all documents under
Section 180 is immaterial for purposes of imposing DST. (Interna-
tional Exchange Bank vs. Comm., 520 SCRA 688 [2007].)
SEC. 181. Stamp Tax Upon Acceptance of Bill of Exchange

and Others. Upon any acceptance or payment of any bill of
exchange or order for the payment of money purporting to be drawn
in a foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on each
Two hundred pesos (P200) or fractional part thereof, of the face value
of any such bill of exchange, or order, or the Philippine equivalent
of such value, if expressed in foreign currency, (as amended by Pres.
Decrees No. 1457 and No. 1959.)
SEC. 182. Stamp Tax on Foreign Bills of Exchange and

Letters of Credit. On all foreign bills of exchange and letters of
credit (including orders, by telegraph or otherwise, for the payment
of money issued by express or steamship companies or by any
person or persons) drawn in but payable out of the Philippines in
a set of three (3) or more according to the custom of merchants and
bankers, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (P200), or fractional
part thereof, of the face value of any such bill of exchange or letter of
credit, or the Philippine equivalent of such face value, if expressed
in foreign currency, (as amended by Pres. Decrees No. 1457 and No.
1959.)
ANNOTATION
1. Definition of terms:
(1) A check is a bill of e x c h a n g e d r a w n on a bank payable

on d e m a n d . (Sec. 185, T h e Negotiable Instruments Law [Act
No. 2031].)
(2) A bill of exchange is an unconditional order in writing

a d d r e s s e d by o n e person to another, signed by the person
giving it, requiring t h e person to w h o m it is addressed to pay on
d e m a n d or a fixed or determinable future time, a s u m certain in
m o n e y to order or to bearer. (Sec. 126, Ibid.) Unlike a check,
it m a y not be d r a w n on a bank a n d m a y not be payable on
demand.
(3) A draft is a bill of e x c h a n g e payable on d e m a n d or at

sight (sight draft) or at s o m e future determinable time (time
draft). T h e t e r m is often used for a bill of e x c h a n g e . If drawn by
a bank against its branch or another bank, it is called a bank
draft.
(4) A negotiable promissory note is an unconditional

promise in writing m a d e by o n e person to another, signed by the
maker, e n g a g i n g to pay on d e m a n d , or at fixed or determinable
future t i m e , a s u m certain in m o n e y to order or to bearer. (Sec.
184, Ibid.) A non-negotiable promissory note is now subject to
the d o c u m e n t a r y s t a m p tax imposed under Section 180.
(5) A foreign bill of exchange is o n e w h e r e the drawer and
the d r a w e e are residents of countries foreign to each other.
(6) A letter of credit is that issued by one merchant
to another for t h e purpose of attending to a commercial
transaction. (Art. 567, C o d e of C o m m e r c e . ) In modern
business practice, it refers to an instrument or letter issued by
a bank in behalf and for the account of a buyer of merchandise
authorizing the seller to draw on the issuing bank or on one of
its correspondents instead of on the buyer for an amount on
certain terms stipulated. (Comprehensive Review of Business
Law, by De Leon and Castaneda, Jr., 2 0 1 0 Ed., p. 460.)
(7) Treasury bills are those issued by the Central Bank

(now Bangko Sentral ng Pilipinas) as evidence of indebtedness
of the Philippine Government whenever it is necessary to
borrow funds to meet public expenditures authorized by law
or to provide for the purchase, redemption or refunding of
ANNOTATED
any obligations, either direct or guaranteed, of the Philippine

Government. They are issued on a discount basis and payable
at maturity without interest; they may be offered for sale either
on a competitive basis or at a fixed rate of discount and may be
made payable at any date not later than one year from the date
of issue. (Sec. 1, R.A. No. 245.)
It is to be noted that treasury bills are considered as deposit
substitutes which are alternative forms of obtaining funds
from the public, other than deposits, through the issuance,
endorsement or acceptance of debt instruments for the purpose
of financing their o w n needs. (Sec. 20[y].) Accordingly, they are
subject to documentary s t a m p tax pursuant to Section 180.
(BIR Ruling No. 036, Feb. 10, 1988.)
However, since the floating rate, Treasury Notes with a

tenor of three (3) years are in bearer f o r m , the transfer of said
notes in secondary market by w a y of simple delivery to the
buyer is not subject to the d o c u m e n t a r y s t a m p tax. (Sees. 6
and 10, Regs. No. 26.) In other w o r d s , unless the transfer of
treasury notes carries with it t h e renewal or issuance of n e w
treasury notes in the n a m e of the transferee to replace t h e old
ones, no d o c u m e n t a r y s t a m p tax shall a c c r u e on such transfer.
(VAT Ruling No. 119, J u n e 2 5 , 1991.)
2. Under Section 1 8 1 , the D S T shall be levied on t h e instru-
ment, i.e., bill of e x c h a n g e or order for the p a y m e n t of money, w h i c h
purports to draw m o n e y f r o m a foreign country but payable in the
Philippines. In a situation w h e r e the instruction made through an
electronic message by a non-resident payor-client is to debit his
local or foreign currency a c c o u n t maintained in the Philippines a n d
pay a certain n a m e d recipient also residing in the Philippines is
not the transaction c o n t e m p l a t e d in Section 1 8 1 . In this case, the
withdrawal and p a y m e n t shall be m a d e in c a s h . It is parallel to an
automatic bank transfer of local funds f r o m a savings account to
a checking account maintained by a depositor in o n e bank. S u c h
debit of the account is not subject to D S T under Section 1 8 1 . (BIR
Ruling No. 132-99, A u g . 2 3 , 1999.)
It has been held by Court of A p p e a l s that Section 181 i m p o s e s

DST not on the bill of e x c h a n g e or order for p a y m e n t of m o n e y
but on the acceptance or payment of the said bill or order. Such
acceptance or payment is the instrument or facility out of w h i c h the
obligation to pay the tax arises. T h e law d o e s not require actual
transfer of funds from a b r o a d for the tax p a y m e n t obligation to arise.
W h a t is required to be d r a w n f r o m abroad is the bill of exchange

or order m a d e by the investor-client and not the funds out of which
payment is to be m a d e . W h a t is essential for the imposition of the
tax is that the d r a w e e accept or pay the bill of e x c h a n g e or order for
the p a y m e n t of m o n e y and that the bill or order w a s d r a w n abroad
but payable in the Philippines. ( C o m m . vs. H o n g k o n g and Shanghai
Banking Corporation [CA], SP No. 7 7 5 8 0 , July 8, 2004.)
3. Section 182 applies to foreign transactions while Section
179 to d o m e s t i c transactions (inland checks, etc.). In the case of
c h e c k s a n d drafts d r a w n a b r o a d , they are not inland checks or
drafts if they are d r a w n on foreign banks.
4. Bank drafts d r a w n a b r o a d but c a s h e d or negotiated with

local b a n k s are subject to d o c u m e n t a r y s t a m p tax in accordance
with Section 32 of Regulations No. 2 6 . On the other h a n d , w h e n
any bill of e x c h a n g e , or order for the p a y m e n t of money drawn in
a foreign country but payable in the Philippines is presented for
a c c e p t a n c e or p a y m e n t , there must be affixed upon acceptance
or p a y m e n t d o c u m e n t a r y s t a m p tax i m p o s e d by Section 181 of the
Tax C o d e . (Sec. 4 6 , R e g s . No. 26.)
A l t h o u g h t h e issuers of the bank drafts are the ones directly

liable for t h e tax, t h e g o v e r n m e n t as acceptor of said drafts may
be held liable for p a y m e n t thereof pursuant to Section 173. (BIR
Ruling N o . 0 6 4 , April 18, 1990.)
5. Cable instructions to a foreign banks for the transfer or sale
of foreign bills of e x c h a n g e are subject to D S T as they are in the
nature of a telegraphic transfer. T h e liability finds support under
Section 51 of Rev. Regs. No. 26 which provides that the D S T is
in the nature of an excise tax. It is not imposed upon the business
transacted but upon the privilege opportunity or facility offered at
e x c h a n g e s for the transaction of the business. (Allied Bank Corp.
vs. C o m m . , CTA C a s e No. 6 5 0 5 , Oct. 3 1 , 2003.) Section 182 refers
to a D S T which is an excise tax upon the facilities used in the
transaction of the business separate and apart from the business
itself. It is not a tax upon the business itself which is not transacted.
(Bank of the Phil. Islands vs. C o m m . , 4 9 6 S C R A 601 [2006].)
6. Section 182 covers foreign bills of exchange, letters of

credit, and orders of payment for money, drawn in Philippines,
but payable outside the Philippines. From this enumeration, two
common elements need to be present: (1) drawing the instrument
or ordering a drawee, within the Philippines; and (2) ordering that
drawee to pay another person a specified amount of money outside
ANNOTATED
the Philippines. What is being taxed is the facility that allows a party
to draw the draft or make the order to pay within the Philippines and
have the payment m a d e in another country. (Ibid.)
7. Section 51 of Regs. No. 2 6 , which provided the rules
and guidelines for the documentary stamp tax imposed under
the Administrative Code of 1917, contains an explanation for the
phrase "orders, by telegraph or otherwise, for the payment of
money:" "What may be regarded as telegraphic transfer. a local
bank cables to a certain bank in a foreign country with which bank
said local bank has a credit, and directs that foreign bank to pay to
another bank or person in the s a m e locality a certain s u m of money,
the d o c u m e n t for and in respect such transaction will be regarded
as a telegraphic transfer, taxable under t h e provisions of Section
1449(i) of the Administrative C o d e . "
Section 51 of R e g s . No. 2 6 , in using the phrase "with w h i c h
local bank has credit," involves transactions w h e r e i n the d r a w e e
bank pays with its o w n funds and e x c l u d e s f r o m t h e c o v e r a g e of
the law situations wherein t h e f u n d s paid out by t h e correspondent
bank are o w n e d by the drawer. "Credit is e q u a t e d with the t e r m
"deposits" w h e r e the relationship created b e t w e e n t h e depositor
and the bank is that of creditor a n d debtor. (Ibid.)
S E C . 183. Stamp Tax on Life Insurance Policies. On

a l l policies o f i n s u r a n c e o r o t h e r i n s t r u m e n t s b y w h a t e v e r n a m e
t h e same m a y b e c a l l e d , w h e r e b y a n y i n s u r a n c e s h a l l b e m a d e o r
r e n e w e d u p o n a n y l i f e o r l i v e s , t h e r e s h a l l b e collected a o n e - t i m e
documentary stamp at the following rates:
Amount of Insurance D S T Rate
Does n o t exceed P 1 0 0 , 0 0 0 Exempt
Exceeds P 1 0 0 , 0 0 0 b u t does n o t exceed P 3 0 0 , 0 0 0 P10.00
Exceeds P300,000 b u t does n o t exceed P 5 0 0 , 0 0 0 P25.00
Exceeds P 5 0 0 . 0 0 0 b u t does n o t exceed P 7 5 0 , 0 0 0 P50.00
Exceeds P 7 5 0 . 0 0 0 b u t does n o t exceed P 1 , 0 0 0 , 0 0 0 P75.00
Exceeds P1,000,000 P100.00
(As amended by RA. No. 10001.)

Note: T h e P r e s i d e n t v e t o e d S e c t i o n 4 o f R.A. N o . 1 0 0 0 1 , w h i c h
r e a d s : " F i v e y e a r s a f t e r t h e e f f e c t i v i t y o f t h e Code, n o t a x o n l i f e
i n s u r a n c e p r e m i u m s h a l l be collected; Provided, further, T h a t o n t h e
s a i d d a t e , a l l policies o f i n s u r a n c e o r o t h e r i n s t r u m e n t s b y w h a t e v e r
name the same shall be called whereby any insurance shall be made
upon any life or lives, shall be exempt f r o m the documentary stamp
tax."
P r e v i o u s a m e n d m e n t s t o S e c t i o n 183 w e r e m a d e b y P r e s i d e n t i a l
Decrees N o . 1457 a n d N o . 1 9 5 9 , a n d R.A. N o . 9 2 4 3 .
ANNOTATION
(1) Life insurance is insurance on h u m a n lives and

insurance appertaining thereto or c o n n e c t e d therewith. (Sec.
179, T h e Insurance C o d e of 1978 [Pres. Decree No. 1460].)
It m a y be m a d e payable on the death of a p e r s o n , or on his
surviving a specified period, or otherwise contingently on the
continuance or cessation of life. (Sec. 180, Ibid.)
(2) T h e t e r m "other instruments" includes any instrument
by w h a t e v e r n a m e it is called w h e r e b y insurance is m a d e or
r e n e w e d w h e t h e r it be a letter of acceptance, cablegrams,
letters, binders, certificates, covering notes or m e m o r a n d a .
(Sec. 52, Regs. N o . 26.)
B a s e d on the a b o v e definition of life insurance, medical, acci-
dent and travel insurance policies are considered as life insurance
under Section 183 inasmuch as they cover interest in the life of the
insured. (BIR Ruling No. D A - 4 7 7 - 0 7 , Sept. 4, 2007.)
2 . Renewal of life policy. T h e tax is collectible not only on
the original policy but also u p o n renewal thereof.
3. Tax base. Under Section 183, the tax base for the
computation of D S T on life insurance policies is the amount of
1
insurance.
( 1 ) T h e section provides for the imposition of DST on
all policies of insurance or other instruments by whatever
'R.A. No. 9243 (Feb. 17, 2004) amended Section 183 by changing the tax base
of D S T on life insurance policies from the "amount insured" to the "amount of pre-
mium collected." R.A. No. 10001 (Feb. 23, 2010) restored the tax base on the "amount
of insurance."
ANNOTATED
name the same may be called, whereby any insurance shall

be needed or renewed upon any life or lives. T h e phrase
"other instruments" pertain to any instrument (e.g., letter of
acceptance, letters, binders, covering notes or memoranda)
by which the relationship of insurer and insured is created or
evidenced.
( 2 ) In case there is an "automatic increase clause,"
the amount insured by the policy at the time of its issuance
necessarily includes the additional s u m covered by the said
clause because it w a s already determinable at the time the
transaction w a s entered into and f o r m e d part and parcel of the
policy. Hence, the a m o u n t fixed in the policy u p o n which the tax
shall be imposed is the figure written on its face and w h a t e v e r
increases will take effect in the future by reason of the clause
embodied in the policy without the n e e d of another contract.
In the event the clause takes effect, the insurer is liable for
deficiency D S T corresponding to the increase of the insurance
coverage. ( C o m m . vs. Lincoln Philippine Life, Inc., 379 S C R A
4 2 3 [2002].)
(3) With regard to health and accident insurance policies

issued by non-life insurance c o m p a n i e s , t h e basis for the
payment of D S T shall be the s a m e as i m p o s e d in life insurance
c o m p a n i e s under Section 183. (Rev. M e m o . Cir. No. 3 0 - 2 0 0 8 ,
as a m e n d e d by Rev. M e m o . Cir. No. 59-2008.)
(4) W h e n a group insurance plan is taken out, a group
master policy is issued with c o v e r a g e a n d p r e m i u m s paid,
based on the n u m b e r of the m e m b e r s covered at that time.
W h e n e v e r the master policy admits a n e w member, another
life is insured and covered without any n e e d for t h e issuance
of a new policy. T h e D S T is i m p o s e d on every increase in t h e
coverage or s u m insured being within the c o n c e p t of "other in-
struments" as provided under Section 183. ( C o m m . vs. Manila
Bankers Life Insurance, G.R. N o . 169103, M a r c h 16, 2011.)
For certificates issued, the D S T is i m p o s e d under Section
188.
SEC. 184. Stamp Tax on Policies of Insurance Upon Pro-

perty. On all policies of insurance or other instruments by
whatever name the same may be called, by which insurance shall
be made or renewed upon property of any description, including
rents or profits, against peril by sea or on inland waters, or by fire
or lightning, there shall be collected a documentary stamp tax of
F i f t y centavos (P0.50) o n each F o u r pesos (P4.00), o r f r a c t i o n a l p a r t

t h e r e o f , o f t h e a m o u n t o f p r e m i u m c h a r g e d : Provided, however,
T h a t n o d o c u m e n t a r y s t a m p t a x s h a l l b e collected o n r e i n s u r a n c e
c o n t r a c t s o r o n a n y i n s t r u m e n t b y w h i c h cession o r acceptance o f
i n s u r a n c e r i s k s u n d e r a n y r e i n s u r a n c e a g r e e m e n t i s effected o r
recorded. (As amended by R.A. No. 7660.)
ANNOTATION
(1) Property insurance includes every form of insurance

that has for its purpose the protection against loss arising from
the o w n e r s h i p or use of property. Included in this category are
fire, marine, casualty, a n d surety insurance.
(2) A contract of reinsurance is one by which an insurer
procures a third person to insure him against loss or liability by
reason of an original insurance. (Sec. 9 5 , T h e Insurance Code
of 1978.) It is an insurance u p o n liability.
2. Section 184 g o v e r n s the d o c u m e n t a r y stamp tax on n o n -
life insurance policies.
(1) T h e tax shall be c o m p u t e d based on the premium
c h a r g e d , i.e., without any deduction. (Rev. M e m o . Cir. No. 4 8 -
99.)
(2) T h e insurer, the agent or sub-agent or broker effecting,
accepting, placing or soliciting the insurance and also the
insured are liable for the tax. (Sec. 62, Regs. No. 26.)
3. T h e general rule is that D S T is in the nature of an excise tax. It
is not imposed upon the business transacted, but upon the privilege,
opportunity or facility offered at e x c h a n g e s for the transaction of
business. T h u s , D S T is imposed on the privilege of conducting a
particular transaction or executing a particular d o c u m e n t within the
Philippines, since the parties to the said transaction or document
exercise the privilege, opportunity or facility offered at exchanges
for the transaction of business in the Philippines.
However, R.A. No. 7660 introduced an exception to the general
rule in Section 173 by inserting the phrase "wherever the document
is m a d e , signed, issued or accepted or transferred when the
obligation or right arises from Philippine sources or the property
is situated in the Philippines." With this amendment, insurance
policies covering property situated in the Philippines shall be liable
to DST even if the policy is issued abroad.
ANNOTATED
Applying Section 184 in relation to Section 173, property

insurance policies issued by a Hong Kong Branch of a Philippine
Insurance Company will be subject to DST even if such policies are
signed or issued abroad, for as long as the properties which are
the objects of insurance are situated in the Philippines. Conversely,
if the property insured is situated outside the Philippines, the DST
imposed under Section 184 will not apply. While it may be true that
the insurance company's head office in the Philippines is considered
the same legal entity as its Hong Kong branch office under the
single entity concept, such fact is not relevant in determining liability
for DST on property insurance policies which depend solely on the
location of the subject property. (BIR Ruling No. 288-05, June 27,
2005.)
SEC. 185. Stamp Tax on Fidelity Bonds and Other Insur-

ance Policies. On all policies of insurance or bonds or obliga-
tions of the nature of indemnity for loss, damage, or liability made or
renewed by any person, association, company or corporation trans-
acting the business of accident, fidelity, employer's liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance),
and all bonds, undertakings, or recognizance, conditioned for the
performance of the duties of any office or position, for the doing or
not doing of anything therein specified, and on all obligations guar-
anteeing the validity or legality of any bond or other obligations is-
sued by any province, city, municipality, or other public body or or-
ganization, and on all obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits, which may be made
or renewed by any such person, company or corporation, there shall
be collected a documentary stamp tax of Fifty centavos (P0.50) on
each Four pesos (P4.00), or fractional part thereof, of the premium
charged. (As amended by Pres. Decree No. 7660.)
SEC. 186. Stamp Tax on Policies of Annuities and Pre-
Need Plans. On all policies of annuities, or other instruments
by whatever name the same may be called, whereby an annuity
may be made, transferred, or redeemed, there shall be collected
a documentary stamp tax of Fifty centavos (P0.50) on each Two
hundred pesos (P200), or fractional part thereof, of the premium or
installment payment or contract price collected. On pre-need plans,
the documentary stamp tax shall be twenty centavos (P0.20) on
each Five hundred pesos (P500), or fractional part thereof, of the
premium or contribution collected. (As amended by RA. No. 7660
and No. 9243.)
ANNOTATION
1. Section 185 contemplates bonds and suretyship for

w h i c h p r e m i u m s are c h a r g e d . W h a t is subject to D S T is obligation
guaranteeing "mercantile credits." On the other hand what is
being insured in a guaranty is the insolvency of the debtor, not the
mercantile credit itself. (BIR Ruling No. D A - 6 5 0 - 0 6 , Nov. 2, 2006.)
2. D S T is levied on the exercise by persons of certain privilege

conferred by law for t h e creation, revision, or termination of specific
legal relationship t h r o u g h t h e execution of specific instruments.
T h e D S T under Sec. 185 is i m p o s e d on the privilege of making or
renewing any policy of insurance (except life, marine, inland, and
fire insurance), b o n d or obligation in t h e nature of indemnity for
loss, d a m a g e , or liability.
(1) It has b e e n held by t h e S u p r e m e Court and ruled by

the BIR:
(a) T h e health care agreement between a health
m a i n t e n a n c e organization ( H M O ) and its enrolled individual
m e m b e r s is primarily a non-life insurance contract of
indemnity under Section 185. T h e a g r e e m e n t is not a
contract for t h e provision of medical services. T h e H M O
d o e s not actually provide medical or hospital services
but merely arranges for t h e s a m e . It a s s u m e s the risks
of paying for the costs of the services up to the stipulated
m a x i m u m a m o u n t of c o v e r a g e . T h e t e r m "loss or d a m a g e "
is broad e n o u g h to cover the m o m e n t a r y e x p e n s e or liability
a m e m b e r will incur in c a s e of illness or injury. T h e H M O ,
however, d o e s not bear the costs alone but distributes or
spreads t h e m out a m o n g a large group of persons bearing
a similar risk, that is, a m o n g all the other m e m b e r s of the
health care p r o g r a m . This is insurance. (Phil. Health Care
Providers, Inc. vs. C o m m . , 554 S C R A 411 [2008].)
(b) Enrollment fees and premiums received by a

H M O f r o m its clients under a health care agreement and
which are pooled to answer for future contingency (medical
claims) are subject to D S T since a health care agreement is
in the nature of an insurance contract subject to DST under
Section 185. But a fund m a n a g e m e n t arrangement by the
H M O with its clients under which it acts as intermediary
between its m e m b e r s and the health care providers is not
in the nature of an insurance contract and, therefore, not
subject to DST. (BIR Ruling No. DA-375-08, Oct. 3 1 , 2008.)
ANNOTATED
(2) In the same case of Philippine Health Card Providers,

Inc. vs. Comm., (600 S C R A 413 [2009], petitioner filed a
motion for reconsideration. T h e Supreme Court (First Division)
reversed itself holding that health care agreement between
the provider and its m e m b e r s are not considered insurance
contracts subject to DST as contemplated by Section 185 as
they do not possess all the elements of a contract of insurance
as defined in Section 2 of the Insurance C o d e . (Pres. Decree
No. 1460.)
"There is no loss, d a m a g e or liability on the part of the
m e m b e r that should be indemnified by petitioner as an
H M O . Under the agreement, the m e m b e r pays petitioner a
predetermined consideration in e x c h a n g e for the hospital,
medical and professional services rendered by petitioner's
accredited physician o r affiliated physician t o him. x x x T h e r e
is nothing in the a g r e e m e n t s that give rise to a monetary liability
on the part of the m e m b e r to any third party-provider of medical
services, which might in turn necessitate indemnification f r o m
petitioner.
Petitioner is not e n g a g e d in the insurance business. Its

primary business is to provide health or medical services
rather than the a s s u m p t i o n of risk of t h e type peculiar only
to insurance c o m p a n i e s . "In fact, a substantial portion of
petitioner's services cover preventive a n d diagnostic medical
services intended to k e e p m e m b e r s f r o m developing medical
conditions o r diseases, x x x T h u s , its undertaking under its
agreement is not to indemnify its m e m b e r s against any loss
or d a m a g e arising f r o m a medical services n e e d e d to prevent
such loss or d a m a g e . Overall, while petitioner a p p e a r s to
provide insurance-type benefits to its m e m b e r s , but these are
incidental to the principal activity of providing t h e m with medical
care. T h e 'insurance-like' a s p e c t of petitioner's business is
miniscule c o m p a r e d to its noninsurance activities. Therefore,
since it substantially provides health care services rather than
insurance services, it cannot be c o n s i d e r e d as being in the
insurance business."
Moreover, there is no legislative intent to impose D S T on

health care a g r e e m e n t s of H M O s . "If it had b e e n the intent of
the legislature to impose D S T on health care a g r e e m e n t s , it
could have d o n e so in clear and categorical terms. It had m a n y
opportunities to do so but it did not. T h e fact that the Tax C o d e
contained no specific provision on the D S T liability of health
care a g r e e m e n t s of H M O s at a time they w e r e already known

as s u c h , belies any legislative intent to impose it on them."
3. R.A. No. 9 2 3 4 c h a n g e s the tax base for the computation
of D S T on policies of annuities, a n d pre-need plans under Section
186 from "the capital of the annuity" a n d "the value or amount of
the plan," respectively, to "the p r e m i u m etc. collected" and "the
p r e m i u m or contribution collected."
4. While before the D S T w a s paid upfront upon issuance of
the policies, n o w t h e DST is paid periodically u p o n the collection of
the p r e m i u m .
S E C . 187. S t a m p T a x o n I n d e m n i t y B o n d s . O n a l l bonds
f o r i n d e m n i f y i n g a n y p e r s o n , f i r m o r c o r p o r a t i o n w h o s h a l l become
b o u n d or engaged as surety for t h e p a y m e n t of any s u m of money
o r f o r t h e d u e e x e c u t i o n o r p e r f o r m a n c e o f t h e d u t i e s o f a n y office o r
position or to account for money received by v i r t u e thereof, and on
a l l o t h e r b o n d s o f a n y d e s c r i p t i o n , except s u c h a s m a y b e r e q u i r e d i n
legal proceedings, or are otherwise provided for herein, there shall
b e collected a d o c u m e n t a r y s t a m p t a x o f T h i r t y centavos (P0.30) o n
e a c h F o u r pesos (P4.00), o r f r a c t i o n a l p a r t t h e r e o f o f t h e p r e m i u m
charged, (as amended by R.A. No. 7660.)
ANNOTATION
(1) A fidelity bond is a b o n d or other form of contract
e x e c u t e d by a surety or insurance c o m p a n y for indemnifying
an employer against financial loss by reason of the dishonesty
or non-performance of an e m p l o y e e of the insured.
(2) A contract of annuity is o n e under which one or more
persons receive fixed a m o u n t s payable at regular intervals
(e.g., yearly, quarterly) for a certain or uncertain period (e.g.,
for years, for life) in return for prior set of payments made by
themselves or another, (see Webster's 3rd Int. Diet., 1976; see
also Art. 2 0 2 1 , Civil Code.)
(3) An indemnity bond is counterbond or indemnity
agreement executed by a person to secure a surety or insurance
c o m p a n y from all possible loss arising under a surety bond
executed by the latter.
(4) A bail bond is the security or obligation given to obtain
the release of a person under legal custody and secure his due
appearance in court.
ANNOTATED
2. The amount of the DST on indemnity bonds is now made

to depend on the amount of the premium charged (no longer per
document). Where no premium is charged, the indemnity agreement
is exempt from DST.
SEC. 188. Stamp Tax on Certificates. O n each certificate

o f damage o r o t h e r w i s e , a n d o n e v e r y o t h e r c e r t i f i c a t e o r d o c u m e n t
issued b y a n y c u s t o m s officer, m a r i n e s u r v e y o r , o r o t h e r p e r s o n
a c t i n g a s s u c h , a n d o n each c e r t i f i c a t e i s s u e d b y a n o t a r y p u b l i c , a n d
o n each c e r t i f i c a t e o f a n y d e s c r i p t i o n r e q u i r e d b y l a w o r b y r u l e s o r
r e g u l a t i o n s o f a p u b l i c office, o r w h i c h i s i s s u e d f o r t h e p u r p o s e o f
giving information, or establishing proof of a fact, and not otherwise
specified h e r e i n , t h e r e s h a l l b e collected a d o c u m e n t a r y s t a m p t a x o f
F i f t e e n pesos (P15.00). (as amended by R.A. No. 7660.)
ANNOTATION
1. A certificate is a statement in writing issued by a person

having a public or official status concerning s o m e matter within his
knowledge or authority; a writing by w h i c h testimony is given that a
fact has or has not taken place. (Ibid.)
(1) Section 188 applies to all certificates issued by a public

official or person acting in a public capacity (Sec. 7 6 , R e g s .
No. 2 6 , Dept. of Finance.) as well as those issued by a private
individual provided, they are e n u m e r a t e d under Section 188.
(2) An application for e x a m i n a t i o n a n d a petition for c h a n g e

of registered n a m e d u e to marriage fall within t h e purview of
"certificates issued for the p u r p o s e of giving information or
establishment of proof of a fact not otherwise specified herein."
(BIR Ruling N o . 342, July 2 0 , 1988.)
(3) A certificate of c a n d i d a c y to an elective public office

falls within the purview of a certificate for the purpose of giving
information, etc. (BIR Ruling N o . 0 3 0 , F e b . 2 2 , 1989.)
Note: Rev. M e m o . Cir. No. 2 5 - 2 0 0 8 reiterates the m o d e
of payment and remittance of D S T on certificate issued by
educational institutions.
2. A d e e d of conveyance of realty not in connection with a sale

(by a realty firm of land title to the c o m m o n area of a c o n d o m i n i u m
for the m a n a g e m e n t of t h e c o n d o m i n i u m corporation c o m p o s e d
of unit owners) without any monetary consideration, a rescinded
sale, and a separation of title of real property b e t w e e n s p o u s e s
without consideration are not subject to documentary stamp tax but

the a c k n o w l e d g m e n t is subject to tax on certification pursuant to
Section 188. (BIR Rulings No. 4 6 , Feb. 13, 1992, No. 59, Feb 18
1992, and N o . 2 0 7 , July 16, 1992.)
Similarly, a deed of donation and acceptance of a parcel of land

to a g o v e r n m e n t entity is not subject to tax under Section 196 but
only to t h e tax under Section 188. (BIR Ruling No. 0 0 3 - 2 0 0 1 , Feb.
2 , 2 0 0 1 ; No. 2 4 0 - 0 6 , April 1 1 , 2006.)
3. Group insurance policies. For such policies, issued, the

p r e m i u m collected therefrom is subject to Section 183 while for
individual certificates issued to e a c h and every e m p l o y e e covered
by t h e g r o u p insurance policy, the issuance of such certificate
shall be subject to Section 188. With regard to health and accident
insurance policy issued, the basis for the payment of D S T shall also
be as prescribed by Section 183 i n a s m u c h as the s a m e partakes
the nature of a life insurance contract. (Rev. M e m o . Cir. No. 30-
2 0 0 8 , as a m e n d e d by Rev. M e m o . Cir. No. 59-2008.)
4 . Payment of documentary stamp tax on extra-judicial fore-
closure of capital assets initiated by banks, finance and insurance
companies. Under Section 63 of Pres. Decree No. 1529, other-
w i s e k n o w n as t h e "Property Registration D e c r e e , " "where the right
of redemption exists, t h e certificate of title of the mortgagor shall
not be cancelled, but the certificate of sale and the order confirming
the sale shall be registered by brief memorandum thereof made by
t h e Register of D e e d s u p o n the certificate of title. In the event the
property is r e d e e m e d , the certificate or d e e d of redemption shall be
filed with the Register of D e e d s , and a brief m e m o r a n d u m thereof
shall be m a d e by the Register of Deeds on the certificate of title of
the mortgagor.
(1) If the property is not r e d e e m e d , the final deed of
sale executed by the sheriff in favor of the purchaser at a
foreclosure sale shall be registered with the Register of Deeds;
w h e r e u p o n the title of the mortgagor shall be cancelled, and a
n e w certificate issued in the n a m e of the purchaser.
(2) If the mortgage w a s foreclosed extrajudicially, a
certificate of sale executed by the officer w h o conducted the
sale shall be filed with the Register of Deeds "who shall make
a brief memorandum thereof on the certificate of title."
It is clear from the above provision that where the right of
redemption of the mortgagor exists, the certificate of title of the
mortgagor shall not be cancelled yet even if the property had
ANNOTATED
already been subjected to foreclosure sale, but instead only a brief

memorandum shall be annotated at the back of the certificate of
title, and the cancellation of the title and the subsequent issuance
of a new title in favor of the purchaser/highest bidder d e p e n d s on
whether the mortgagor shall redeem or not the mortgaged property
within one year from the issuance of the certificate of sale. Thus,
no transfer of title to the highest bidder can be effected yet until
and after the lapse of the one year f r o m the issuance of the said
certificate of sale.
(1) In case the mortgagor exercises his right of redemption,
the transaction shall only be subject to the P15.00 documentary
stamp tax imposed under Section 188 of t h e Tax C o d e of
1997 because no land or realty w a s sold or transferred for a
consideration.
(2) In case of n o n - r e d e m p t i o n , the corresponding
documentary s t a m p tax shall be levied, collected a n d paid by
the person m a k i n g , signing, issuing, accepting, or transferring
the real property w h e r e v e r the d o c u m e n t is m a d e , s i g n e d ,
issued, accepted or transferred w h e r e t h e property is situated
in the Philippines. W h e n e v e r o n e party to the taxable d o c u m e n t
enjoys exemption from the tax, the other party thereto w h o is
not e x e m p t shall be the o n e directly liable for the tax. T h e tax
return prescribed under the Tax C o d e shall be filed within 10
days after the close of the m o n t h following the lapse of the
one-year redemption period, a n d the tax d u e under Section
196 shall be paid based on the bid price at the s a m e time the
aforesaid return is filed.
(3) In case of n o n - r e d e m p t i o n , a tax clearance certificate

(TCC) or Certificate Authorizing Registration ( C A R ) in favor
of the purchaser/highest bidder shall only be issued u p o n
presentation of t h e capital gains and d o c u m e n t a r y s t a m p taxes
returns duly validated by an authorized agent bank (AAB)
evidencing full p a y m e n t of the capital gains a n d d o c u m e n t a r y
stamp taxes due on the sale of the property classified as capital
asset. T h e A A B must be located at the R e v e n u e District Office
having jurisdiction over t h e place w h e r e the property is located.
(Rev. Regs. No. 4-99.)
5. Rescission of the deed of assignment. It does not give

rise to a taxable event for t w o reasons: (1) with rescission, it is
as if there has been no sale, transfer, or e x c h a n g e , and hence,
no income realized; and (2) the return of the properties subject-
matter of the rescinded contract is not for monetary consideration
Sees. 189-190 D O C U M E N T A R Y S T A M P TAX 403
a n d is merely an a c k n o w l e d g m e n t or confirmation of the title and

ownership of the original o w n e r of the property assigned. Likewise,
the d e e d of rescission will not be subject to D S T under Section 188
(BIR Ruling N o . 5 8 8 - 2 0 0 4 , Nov. 2 2 , 2004)
SEC. 189. Stamp Tax on Warehouse Receipts. O n each

w a r e h o u s e r e c e i p t f o r p r o p e r t y h e l d i n storage i n a p u b l i c o r p r i v a t e
warehouse or y a r d for any person other t h a n the proprietor of such
w a r e h o u s e o r y a r d , t h e r e s h a l l b e collected a d o c u m e n t a r y s t a m p t a x
o f F i f t e e n pesos (P15.00): Provided, T h a t n o t a x s h a l l be collected o n
each w a r e h o u s e r e c e i p t i s s u e d t o a n y one p e r s o n i n a n y one c a l e n d a r
m o n t h c o v e r i n g p r o p e r t y t h e v a l u e o f w h i c h does n o t exceed T w o
h u n d r e d pesos (P200). (As amended by R.A. No. 7660.)
ANNOTATION
(1) A warehouse receipt is a written a c k n o w l e d g m e n t by a
w a r e h o u s e m a n that he has received and holds certain goods
therein in behalf or for the benefit of the person to w h o m it is
issued.
(2) T h e W a r e h o u s e Receipts Law (Act No. 2137, as

a m e n d e d . ) defines a warehouseman as a person lawfully
e n g a g e d in the business of storing g o o d s for profit. (Sec. 58[a]
thereof.)
(3) T h e t e r m warehouse m e a n s the building or place

w h e r e g o o d s are deposited and stored for profit, (see Sec. 2,
General B o n d e d W a r e h o u s e Act [Act No. 3893, as amended].)
S E C . 190. Stamp Tax on Jai-alai, Horse Race Tickets, Lot-

to, or Other Authorized Numbers Games. O n each Jai-alai,
horse race t i c k e t , l o t t o , o r o t h e r a u t h o r i z e d n u m b e r s games, t h e r e
s h a l l b e collected a d o c u m e n t a r y s t a m p t a x o f T e n centavos (P0.10):
Provided, T h a t i f t h e cost o f t h e t i c k e t exceeds O n e peso ( P I . 0 0 ) , a n
a d d i t i o n a l t a x o f T e n centavos (P0.10) o n e v e r y O n e peso ( P I . 0 0 ) , o r
f r a c t i o n a l p a r t t h e r e o f , s h a l l be collected. (As amended by R.A. No.
7660.)
ANNOTATION
Under Executive Order No. 194 (June 16, 1987), the tax on
each horse race ticket is P0.10; if the cost of the ticket exceeds
P1.00, an additional tax of P0.10 on every P1.00 or fractional pay
ANNOTATED
hereof shall be collected. In the case of double, forecast/quinella

and trifecta, the tax shall be P0.05 on every P1.00 worth of tickets.
(Sec. 2 hereof.)
SEC. 191. Stamp Tax on Bills of Lading or Receipts. On

each set of bills of lading or receipts (except charter party) for any
goods, merchandise, or effects shipped from one port or place in the
Philippines to another port or place in the Philippines (except on
ferries across rivers), or to any foreign port, there shall be collected
a documentary stamp tax of One peso (PI.00), if the value of such
goods exceeds One hundred pesos (P100.00) and does not exceed One
thousand pesos (PI,000); Ten pesos (P10.00) if the value exceeds One
thousand pesos (PI,000): Provided, however, That freight tickets
covering goods, merchandise, or effects carried as accompanied
baggage of passengers on land and water carriers primarily engaged
in the transportation of passengers are hereby exempt. (As amended
by R.A. No. 7660.)
ANNOTATION
1. A bill of lading is a contract by which the carrier agrees to

deliver the goods entrusted to him for transportation to the person
named therein, to order, or to bearer.
2. Freight tickets issued by land transportation companies
may be regarded as bills of lading, a term which comprehends all
forms of transportation, whether by sea, land, or air, and includes
the receipts for cargo transported. The use of the word "place"
after "port" and of the word "receipt" shows that the receipts for
goods shipped on land are included. (Mindanao Bus Co. vs. Coll.,
L-14078, Feb. 24, 1961.)
SEC. 192. Stamp Tax on Proxies. On each proxy for voting

at any election for officers of any company or association, or for
any other purpose, except proxies issued affecting the affairs of
associations or corporations organized for religious, charitable, or
literary purposes, there shall be collected a documentary stamp tax
of Fifteen pesos (P15.00). (as amended by R.A. No. 7660.)
SEC. 193. Stamp Tax on Powers of Attorney. On each

power of attorney to perform any act whatsoever, except acts
connected with the collection of claims due from or accruing to the
Government of the Republic of the Philippines, or the government
o f a n y p r o v i n c e , c i t y o r m u n i c i p a l i t y , t h e r e s h a l l b e collected a
d o c u m e n t a r y s t a m p t a x o f F i v e pesos (P5.00). (As amended by R.A
No. 7660.)
ANNOTATION
(1) Proxy is the instrument w h i c h evidences the formal
authority of a person to vote or act for another.
(2) A power of attorney is an instrument authorizing a
person to act as t h e agent or attorney of the person granting it.
(2 C.J. 452.)
2. T h e tax on proxies and p o w e r s of attorney is imposed

on the instrument itself, a n d is not m e a s u r e d by the number of
grantors of the proxy (Sec. 139, R e g s . No. 2 6 , Dept. of Finance.) or,
in t h e c a s e of p o w e r s of attorney, by the n u m b e r of persons joining
thereon. (Sec. 144, Ibid.)
S E C . 1 9 4 . Stamp Tax on Leases and Other Hiring Agree-

ments. O n e a c h lease, a g r e e m e n t , m e m o r a n d u m , o r c o n t r a c t f o r
h i r e , use o r r e n t o f a n y l a n d s o r t e n e m e n t s , o r p o r t i o n s t h e r e o f , t h e r e
s h a l l b e collected a d o c u m e n t a r y s t a m p o f T h r e e pesos (P3.00) for t h e
f i r s t T w o t h o u s a n d pesos (P2,000), o r f r a c t i o n a l p a r t t h e r e o f , a n d a n
a d d i t i o n a l O n e peso ( P I . 0 0 ) f o r e v e r y O n e t h o u s a n d pesos (P1,000)
o r f r a c t i o n a l p a r t t h e r e o f , i n excess o f t h e f i r s t T w o t h o u s a n d pesos
(P2,000) f o r e a c h y e a r o f t h e t e r m o f s a i d c o n t r a c t o r a g r e e m e n t . (As
ANNOTATION
1. T h e a m o u n t of the D S T d e p e n d s not only on the term of the

lease but also on the rental c h a r g e d .
2. W h a t is contemplated in Section 194 is a contract for hire,
use, or rent of lands or tenements, and not for hire of personal
service. (BIR Ruling No. DA-650-06, Nov. 2, 2006.)
S E C . 195. Stamp Tax on Mortgages, Pledges, and Deeds of

Trust. O n e v e r y m o r t g a g e o r pledge o f l a n d s , estate, o r p r o p e r t y ,
r e a l o r p e r s o n a l , h e r i t a b l e o r m o v a b l e , w h a t s o e v e r , w h e r e t h e same
s h a l l be m a d e as a s e c u r i t y f o r t h e p a y m e n t of a n y d e f i n i t e a n d
c e r t a i n s u m o f m o n e y l e n t a t t h e t i m e o r p r e v i o u s l y due a n d o w i n g
ANNOTATED
or forborne to be paid, being payable, and on any conveyance of land,

estate, or property whatsoever, in trust or to be sold, or otherwise
converted into money which shall be and intended only as security,
either by express stipulation or otherwise, there shall be collected a
documentary stamp tax at the following rates:
(a) When the amount secured does not exceed Five thousand
pesos (P5,000), Twenty pesos (P20.00);
(b) On each Five thousand pesos (P5,000), or fractional part
thereof in excess of Five thousand pesos (P5,000), an additional
tax of Ten pesos (P10.00).
On any mortgage, pledge, or deed of trust, where the same shall be
made as a security for the payment of a fluctuating account or future
advances without fixed limit, the documentary stamp tax on such
mortgage, pledge or deed of trust shall be computed on the amount
actually loaned or given at the time of the execution of the mortgage,
pledge, or deed of trust. However, if subsequent advances are made
on such mortgage, pledge or deed of trust, additional documentary
stamp tax shall be paid which shall be computed on the basis of the
amount advanced or loaned at the rates specified above: Provided,
however, That if the full amount of the loan or credit, granted under
the mortgage, pledge or deed of trust is specified in such mortgage,
pledge or deed of trust, the documentary stamp tax prescribed in
this Section shall be paid and computed on the full amount of the
loan or credit granted. (As amended by R.A. No. 7660.)
ANNOTATION
1. Section 195 categorically taxes the privilege to enter into a
contract of mortgage, pledge, or trust. Note that the amount of the
tax is based on the amount secured and not upon the value of the
property mortgaged or pledged.
2. Under Section 195, documentary stamp tax is imposed
on every pledge of personal property "where the same (personal
property) shall be made as a security for the payment of any definite
and certain sum of money lent at the time or previously due and
owing or forborne to be paid being payable x x x." In other words, a
document evidencing a pledge of personal property which is made
as a security for payment of a loan is subject to the documentary
stamp tax. This implies that, under the document subject to tax, the
pledgor is indebted to the pledge and, therefore, the former has
pledged personal property to secure payment of the debt.
(1) In the case of the pawnshop business, the pawnee

( p a w n s h o p or pawnbroker) issues a "pawn ticket" to the pawner
(borrower f r o m a p a w n s h o p ) . T h e p a w n is the personal property
delivered by the pawner to the p a w n e e as security for a loan.
T h e "pawn ticket" is the p a w n b r o k e r ' s receipt for a p a w n . It
is neither a security nor a printed evidence of indebtedness.
(Sec. 3, P.D. N o . 114 [ P a w n s h o p Regulation Act].) W h a t is
subject to D S T is not the ticket itself but the privilege of entering
into a contract of pledge with the pawner or borrower. (Antem
P a w n s h o p Corp. vs. C o m m . , 566 S C R A 5 7 [2008].)
T h e BIR has ruled that the d o c u m e n t taxable under Section

195 must s h o w the existence of debt a n d inasmuch as, under
the law, a p a w n ticket is not printed evidence of indebtedness,
s u c h p a w n ticket c a n n o t be considered as a d o c u m e n t subject
to t h e d o c u m e n t a r y s t a m p tax i m p o s e d by Section 195. BIR
Rulings No. 3 0 5 - 8 7 a n d No. 0 1 8 - 8 8 subjecting p a w n ticket to
the d o c u m e n t a r y s t a m p tax are r e v o k e d . (BIR Ruling No. 325-
8 8 , July 13, 1988; First Express P a w n s h o p Company, Inc. vs.
C o m m . , CTA C a s e N o . 6 5 2 9 , Sept. 2 4 , 2004.)
(2) In Lhuillier Pawnshop, Inc. vs. Comm. (489 S C R A

147 [2006]; 4 0 6 S C R A 178 [2003].), the S u p r e m e Court held
otherwise, to wit: "True, the law does not consider said ticket as
an e v i d e n c e of security or indebtedness. However, for purposes
of taxation, the s a m e p a w n ticket is proof of an exercise of a
taxable privilege of concluding a contract of pledge. At any rate,
it is not said ticket that creates the pawnshop's obligation to pay
D S T but the exercise of the privilege to enter into a contract of
pledge. T h e r e is, therefore, no basis in petitioner's assertion
that a D S T is literally a tax on a d o c u m e n t and that no tax may
be imposed on a p a w n ticket, xxx Section 195 unqualifiedly
subjects, xxx [T]here is no law specifically and expressly
exempting pledges entered into by pawnshops from the
payment of DST. Section 199 of the NIRC enumerated certain
d o c u m e n t s which are not subject to stamp tax; but a pawnshop
ticket is not one of t h e m . "
T h e s a m e issue w a s raised in Tambunting Pawnshop,
Inc. vs. Comm. (584 S C R A 445 [2009].) which ruled: "The law
(Sees. 173-195.) imposes DST or documents issued in respect
of the specified transaction, such as pledge, and not only on
papers evidencing indebtedness. Therefore, a pawn ticket,
being issued in respect of a pledge transaction, is subject to the
documentary stamp tax." Dissenting Opinion: "The pawn ticket
ANNOTATED
is simply defined as the pawnbrokers receipt for a p a w n . (Sec.

3, P.D. No. 114.) It is neither a security nor a printed evidence
of an indebtedness. It is simply a receipt and nothing more. It
does not document the pledge. Such purpose is accomplished
by the pawnbroker in the m e m o r a n d u m book which governed
by Sec. 11 [of P.D. No. 114]. T h e entries in the m e m o r a n d u m
book document the loan or pledge agreement and not the pawn
ticket, x x x A pawn ticket is excluded f r o m the coverage of Sec.
195, P.D. No. 114 is a piece of social legislation granting social
justice to the poor."
In Tambunting Pawnshop, Inc. vs. Commissioner (610

S C R A 514 [2010].), the Court rejected the contention of the
petitioner, to relieve it f r o m liability for D S T on its p a w n tickets,
that such tickets are neither securities nor printed evidence of
indebtedness, reiterating its ruling in Lhuillier.
(3) A supplemental pledge a g r e e m e n t under w h i c h the

shares pledged under t h e original a g r e e m e n t are substituted
with the s a m e n u m b e r of s h a r e s without any c h a n g e in the
terms and conditions nor in the a m o u n t of the loan is no longer
subject to D S T under Section 195. (BIR Ruling No. 15-99, F e b .
3, 1999; First Express P a w n s h o p C o m p a n y , Inc. v s . C o m m . ,
CTA C a s e No. 6 5 2 9 , Sept. 2 4 , 2004.)
3. Since a voting trust allowed under Section 59 of t h e

Corporation C o d e (B.P. Big. 68.) is without consideration and
the beneficial ownership remains with t h e trustor, t h e voting trust
agreement executed in connection therewith is not subject to
documentary s t a m p tax pursuant to Rev. R e g s . N o . 26 ( D o c u m e n t a r y
Stamp Tax Regulations) but it shall be subject to the tax i m p o s e d
under Section 188. (BIR Ruling No. 137-98, Sept. 14, 1998.)
4. T h e highest bidder in a foreclosure sale acquires the

(mortgaged) property f r o m the original borrower (mortgagor) by
virtue of the extrajudicial foreclosure of t h e subsisting m o r t g a g e
and not by transfer of property rights f r o m the mortgagor or f r o m
the third party w h o a s s u m e s the m o r t g a g e loan. He is required to
pay only the capital gains tax ( C G T ) a n d D S T on the sale of the
foreclosed property b a s e d on his bid price. He c a n n o t be held liable
for any transaction taxes that m a y have b e e n d u e f r o m the original
borrower and/or third party-assumer with respect to the sale of the
mortgaged property prior to foreclosure. (BIR Ruling No. D A - 1 7 4 -
08, Mar. 19, 2008.)
S E C . 1 9 6 . Stamp Tax on Deeds of Sale and Conveyance

of Real Property. O n a l l conveyances, deeds, i n s t r u m e n t s ,
o r w r i t i n g s , o t h e r t h a n g r a n t s , p a t e n t s , o r o r i g i n a l certificates o f
adjudication issued by the Government, whereby any land, tenement
or other realty sold shall be g r a n t e d , assigned, transferred, or
o t h e r w i s e conveyed t o t h e p u r c h a s e r , o r p u r c h a s e r s , o r t o a n y o t h e r
p e r s o n o r persons d e s i g n a t e d b y s u c h p u r c h a s e r o r p u r c h a s e r s , t h e r e
s h a l l b e collected a d o c u m e n t a r y s t a m p t a x , a t t h e r a t e s h e r e i n b e l o w
prescribed based on t h e consideration contracted to be p a i d for such
r e a l t y o r o n i t s f a i r m a r k e t v a l u e d e t e r m i n e d i n accordance w i t h
S e c t i o n 6 ( E ) o f t h i s Code, w h i c h e v e r i s h i g h e r : Provided, T h a t w h e n
one o f t h e c o n t r a c t i n g p a r t i e s i s t h e G o v e r n m e n t , t h e t a x h e r e i n
i m p o s e d s h a l l b e b a s e d o n t h e a c t u a l c o n s i d e r a t i o n , (a)
(a) W h e n t h e c o n s i d e r a t i o n , o r v a l u e r e c e i v e d o r c o n t r a c t e d
to be p a i d for such realty, after m a k i n g proper allowance of any
e n c u m b r a n c e , does n o t exceed O n e t h o u s a n d pesos ( P I , 0 0 0 ) , F i f t e e n
pesos (P15.00).
(b) F o r e a c h a d d i t i o n a l O n e t h o u s a n d pesos ( P I , 0 0 0 ) , o r
f r a c t i o n a l p a r t t h e r e o f i n excess o f O n e t h o u s a n d pesos ( P I , 0 0 0 ) o f
s u c h c o n s i d e r a t i o n o r v a l u e , F i f t e e n pesos (P15.00).
W h e n it appears t h a t the a m o u n t of the documentary stamp tax
payable hereunder has been reduced by an incorrect statement, of
t h e consideration i n a n y conveyance, deed, i n s t r u m e n t , o r w r i t i n g
subject t o s u c h t a x t h e C o m m i s s i o n e r , p r o v i n c i a l o r c i t y t r e a s u r e r ,
o r o t h e r r e v e n u e officer s h a l l , f r o m t h e assessment r o l l s o r o t h e r
r e l i a b l e source o f i n f o r m a t i o n , assess t h e p r o p e r t y o f i t s t r u e m a r k e t
v a l u e a n d collect t h e p r o p e r t a x t h e r e o n , (as amended by R.A. No.
7660.)
ANNOTATION
1. T h e latter part of paragraph one of Section 196 beginning

from the w o r d " b a s e d " up to "actual consideration" is new, as
inserted by R.A. No. 8 4 2 4 .
2. Basis of the tax. T h e real property must be located
within the Philippines. T h e tax shall be based on the amount of
consideration or value received or contracted to be paid or the fair
market value of the real property, determined in accordance with
Section 6(E), whichever is higher, (see Rev. Memo. Cir. No. 44-48.)
When one of the contracting parties is the Government, the tax
payable shall be based on the actual consideration.
ANNOTATED
(1) W h e r e the conveyance is without consideration, such

as transfer by the developer of condominium units of the title to
the land to the condominium association as c o m m o n property,
the value of the land being already included in the purchase
price of each individually titled c o n d o m i n i u m unit, the d e e d of
conveyance is not subject to documentary s t a m p tax. However,
the notarial acknowledgment is subject to the tax on certificates
pursuant to Section 188. (BIR Ruling No. 0 5 2 , April 2, 1 9 9 1 ;
No. 176, Sept. 10, 1 9 9 1 , and No. 4 6 , Feb. 13, 1992; No. 0 2 1 ,
Feb. 1998.)
(2) The conveyance of real (or personal) property to a
trustee without consideration is e x e m p t f r o m income tax and
withholding tax as well as f r o m D S T i m p o s e d under Section
196. However, the notarial a c k n o w l e d g m e n t appearing on the
deed of c o n v e y a n c e is subject to D S T under Section 188 on
certificates. (BIR Ruling No. 2 8 - 0 2 , July 2 2 , 2002.)
Similarly, the transfer of shares of stock f r o m a shareholders

trustee and n o m i n e e to a new trustee or n o m i n e e is not subject
to capital gain tax (CGT), d o n o r ' s tax, a n d DST. (BIR Ruling No.
DA-231-08, April 10, 2008.)
(3) T h e transfer of remaining assets as liquidating divi-

dends to the shareholders of a corporation in partial or c o m p l e t e
liquidation is not also subject to D S T on c o n v e y a n c e of real
property as such distribution d o e s not constitute sale of said
asset but a return of capital to its stockholders.
(a) T h e corporation in liquidation d o e s not realize

any gain or loss and the c o n v e y a n c e is without any
consideration. However, t h e notarial certificate on the d e e d
of a s s i g n m e n t is subject to the D S T under Section 188.
If the stockholder sells the property received by him as
liquidating dividend after title is transferred to his n a m e , the
sale shall be subject to the 6% C G T (Sec. 21 [c].) a n d to
D S T under Section 196. (BIR Ruling No. D A - 5 1 6 - 0 9 , Sept.
9, 2009; No. 2 8 - 0 2 , July 2 2 , 2 0 0 2 ; BIR Ruling No. D A - 3 1 6 -
07, May 29, 2007.)
( b ) Rev. Regs. No. 1-90 d o e s not apply to a transfer

in complete liquidation w h e r e the assets of the liquidating
corporation are transferred to its stockholders in e x c h a n g e
for the surrender of the latter's shares of stock for
cancellation by the corporation. This c o n v e y a n c e is without
any consideration and is not considered as a sale of these
assets. (BIR Ruling No. 3 8 2 - 0 4 , July 12, 2004.) But the

a s s i g n m e n t of shares to the stockholder as liquidating
dividends is subject to DST, under Section 175. (BIR Ruling
No. 4 0 9 - 0 4 , July 2 8 , 2004.)
(4) A d e e d of c o n v e y a n c e e x e c u t e d between the corpo-
ration a n d the recipient stockholders covering real properties
declared as property dividends is not subject to documentary
s t a m p tax under Section 196 but under Section 188 on
certificates. (BIR Ruling No. 2 8 5 , Oct. 7, 1994.)
(5) Nothing in t h e Tax C o d e authorizes either the install-

ment p a y m e n t of t h e D S T or t h e computation thereof based in
s o m e m o d e or basis other t h a n the consideration as appearing
in the contract or d o c u m e n t itself. (BIR Ruling No. 5-98, Feb. 4,
1998.)
(6) T h e general rule is that in cases involving sale,
e x c h a n g e , or a n y disposition of real property, the tax base for
d o c u m e n t a r y s t a m p tax purposes shall be the s a m e as the
tax b a s e u s e d in the c o m p u t a t i o n of the capital gains tax or
the e x p a n d e d creditable withholding tax, as the case may be,
w h i c h m e a n s gross selling price, fair market value, or zonal
value of the real property, w h i c h e v e r is higher, at the time of
sale or c o n v e y a n c e .
In t h e c a s e of sale of real property on a deferred payment
basis, the BIR b a s e d the e x p a n d e d creditable withholding tax
on t h e price a g r e e d by the contracting parties at the time of sale
(1991), while the imposition of the D S T w a s based on the rules
at the time of t h e execution of the contract (1996). This ruling is
an exception to the general rule. (BIR Ruling No. 3-98, Jan. 16,
1998.)
(7) T h e sale of personal property is not subject to the
DST. In a "block s a l e " of real and personal properties, only the
consideration attributed to the real property shall be subject to
the tax. (BIR Ruling No. 141-98, Sept. 29, 1998.)
(8) If the sale of the realty of the delinquent taxpayer is by
virtue of the enforcement by a local government unit of its tax
lien for unpaid real estate taxes and is being conducted through
public bidding or a public auction sale, the tax base in computing
the capital gains tax and documentary stamp tax on such sale
transaction should, as in the case of mortgage foreclosure sale
under Act 3135, as a m e n d e d , be likewise on the highest bid
price. Hence, the capital gains tax and documentary stamp tax
ANNOTATED
due on the said sale of the realty in the public auction sale by
the city should be computed based on the highest bid price.
(BIR Ruling No. 036-2000, Sept. 11, 2000.)
(9) The DST under Section 196 shall be based on the
bid price of the highest bidder and it shall be paid only upon
the expiration of the o n e (1)-year redemption period (with
the mortgagor not exercising the right of redemption) a n d ,
specifically, within five (5) days after the close of the month
after the lapse of the o n e (1)-year redemption period. (BIR
Ruling No. 4 8 7 - 0 4 , Sept. 10, 2004.)
(10) A c o n v e y a n c e of furniture, fixtures a n d e q u i p m e n t
by w a y of dacion en pago by a holding c o m p a n y is subject
to corporate income tax on t h e net taxable gain or loss but
not subject to VAT and DST. Since the furniture, fixtures,
and equipment inside the hotel are not primarily held for sale
to customers or held for lease in the ordinary course of the
c o m p a n y trade or business, the a s s i g n m e n t thereby by w a y of
dacion en pago is not subject to VAT.
T h e assignment is also not subject to D S T under Section
196 since it is not a c o n v e y a n c e of land, t e n e m e n t , or other
realty. (BIR Ruling No. 136-05, April 0 7 , 2 0 0 5 , No. 151-2005,
April 14, 2005.)
(11) An e x c h a n g e / s w a p of principal residences is e x e m p t
from 6% capital gain tax ( C G T ) but is subject to t w o separate
D S T based on the zonal values of the properties. (BIR Ruling
No. 220-05, M a y 5, 2005.)
An e x c h a n g e of properties b e t w e e n t w o parties is subject

to C G T and D S T b a s e d on the fair market v a l u e (or z o n a l value)
of their respective properties. (BIR Ruling N o . 2 0 2 - 0 4 , April 12,
2004.)
(12) T h e gain f r o m the sale of land by a g o v e r n m e n t - o w n e d

or -controlled corporation, a g e n c y or instrumentality is e x e m p t
from income tax under Section 2 7 ( C ) but the sale is subject to
DST under Section 196, t h e tax to be paid by t h e taxpayer, (see
BIR Ruling No. D A - 6 4 1 - 0 9 , Nov. 4, 2009.)
(13) T h e transfer of lots as p a y m e n t of attorney's fees is

subject to capital gains tax ( C G T ) a n d DST. T h e liability to pay
C G T and D S T shall be on the client-transferor. In addition, t h e
fair market value ( F M V ) of the property shall form part of the
income of the counsel-transferee subject to regular income tax.
(BIR Ruling No. 15-04, Sept. 13, 2004.)
Sec. 196 D O C U M E N T A E Y STAMP TAX 413
(14) T h e sale of a parcel of land by the investment manager

of a qualified reasonable retirement benefits plan established
for the exclusive benefit of all the e m p l o y e e s of a bank and
the corpus or income of the f u n d is not used for or diverted
to purposes other t h a n for exclusive benefit of the m e m b e r s
a n d their beneficiaries, is e x e m p t f r o m capital gain tax (CGT);
however, t h e sale thereof shall be subject to D S T under Section
196. (BIR Ruling No. 4 9 0 - 0 4 , Sept. 14, 2004)
(15) A d e e d of rescission and reconveyance executed by

a n d b e t w e e n X a n d Y for t h e p u r p o s e merely of restoring the
parties to their previous status, as if no such Deed of Absolute
Sale w a s e x e c u t e d , is not subject to C G T under Section 24(D)
(1) a n d the D S T under Section 196. (BIR Ruling No. 375-04,
July 6, 2004.)
(16) T h e sale, a s s i g n m e n t or transfer of investment
certificates w h i c h simply represent t h e right of the holder to
perpetually use specific m e m o r i a l lot, is not subject to D S T
under Section 196, w h e r e there is no transfer of ownership of
t h e m e m o r i a l lots. T h e notarial a c k n o w l e d g m e n t of the deed is
subject only to D S T under Section 188. (BIR Ruling No. DA-
6 5 7 - 0 6 , Nov. 7, 2006.)
(17) T h e issuance by a corporation of n e w shares of

stock to replace t h e shares that are surrendered pursuant to
a reduction in its capital stock is not subject to D S T ( C G T and
d o n o r ' s tax) b e c a u s e it is without any monetary consideration
since nothing of value is received and there is no effective
transfer of beneficial ownership over the said shares. (BIR
Ruling No. D A - 1 7 0 - 0 6 , Dec. 2 9 , 2006.) T h e s a m e is true if
the replacement of stock certificates with n e w ones is made
to reflect the correct par value and number of shares resulting
f r o m the increase in par value and the corresponding decrease
in number of shares of stock in the corporation pursuant to the
a m e n d m e n t of its articles of incorporation, thereby maintaining
the a m o u n t of authorized and outstanding capital stock. The
transfer without monetary consideration and is effected purely
for business reasons.
(18) T h e transfer of real property as additional paid-in

capital (APIC) is not subject to D S T as the transfer is without
consideration since it does not result in the additional issuance
of shares of stock to the stockholder-transferor. (BIR Ruling No.
DA-737-06, Dec. 20, 2006.) There is no original issuance of
shares, (see Sec. 174.)
ANNOTATED
(19) The zonal value or fair market value existing at the

time of execution of the d e e d of conditional sale (price payable
in installments) by the parties shall be the taxable base of the
capital gains tax (CGT) and the D S T due on the said sale, not
on the date the absolute sale w a s e x e c u t e d . T h e contract of
purchase and sale is perfected from the m o m e n t the parties
agree upon a determinate thing (i.e., object of the contract)
and a price certain therefor. Delivery of the thing sold is not
necessary for the perfection of the contract. (BIR No. 239-04,
May 7, 2004.)
( 2 0 ) A s s i g n m e n t of rights in real property ( c o n d o m i n i u m

unit) is not subject to C G T b e c a u s e the a s s i g n e e merely
steps into the shoes of the assign without acquiring a better
right than the assignor. T h e ownership remains with t h e seller
(developer). However, the gain realized by the assignor f r o m
the assignment is subject to i n c o m e tax a n d the d e e d of
assignment to d o c u m e n t a r y s t a m p tax. (BIR Ruling N o . 2 8 8 -
04, May 24, 2004.)
3. "Any land, tenement or other realty." Under Article

410(10) of the Civil C o d e , "real rights over i m m o v a b l e property" are
themselves i m m o v a b l e or real property or realty. T h e t e r m " l a n d "
or "other realty," as u s e d in the context of d o c u m e n t a r y s t a m p
taxes, are understood as including any "interest or estate in l a n d s . "
T h e term " t e n e m e n t " is also broadly construed to include "not only
land, but rents, and several other rights a n d interest issuing out
of or concerning lands." T h e t e r m "other realty" should also be
susceptible of a broad interpretation.
Based on the foregoing, a right to r e d e e m is, therefore, within

the contemplation of the t e r m "land, t e n e m e n t and other realty"
under Section 196. Under said provision, the transaction w h i c h
is subject to d o c u m e n t a r y s t a m p tax is t h e c o n v e y a n c e of real
property to the purchaser. Since a d e e d of a s s i g n m e n t of the
right to redeem is a c o n v e y a n c e of real property, s u c h transaction
is subject to d o c u m e n t a r y s t a m p tax under Section 196. But a
deed of redemption is distinct f r o m an a s s i g n m e n t for a valuable
consideration of the right to r e d e e m . No redemption is being m a d e
w h e n a right to r e d e e m is being a s s i g n e d for value. This is not so
in redemption which involves the restoration of the property to the
mortgage-debtor from the purchaser. (BIR Ruling No. 169-98, Nov.
25, 1998.)
4. Allowance for any encumbrance. A d e e d of conveyance

is subject to d o c u m e n t a r y s t a m p tax based on the consideration or
value received or contracted to be paid for the land "after making
proper allowance for any e n c u m b r a n c e " thereon.
T h u s , w h e r e X bought a h o u s e and lot from Y which w a s paid
through a real estate m o r t g a g e loan secured by X f r o m Z bank and
the balance of t h e p u r c h a s e price w a s financed by Y as evidenced
by a s e c o n d m o r t g a g e in Y's favor and X failed to pay Y and Z
and b e c a u s e of X's failure, he r e c o n v e y e d the property to Y, the
mortgage with Z w h i c h is a pre-existing e n c u m b r a n c e is deductible
f r o m the consideration before c o m p u t i n g the documentary stamp
tax d u e on t h e said D e e d of R e c o n v e y a n c e with Assumption of
M o r t g a g e . (BIR Ruling No. 2 9 8 , July 6, 1988.)
In t h e c a s e of an e x c h a n g e of t w o properties, the deeds

transferring title to e a c h are subject to tax, w h i c h should in each
c a s e be c o m p u t e d on the basis of t h e actual value of the interest
or property c o n v e y e d , t h e a m o u n t of any pre-existing lien or
e n c u m b r a n c e w h i c h is not r e m o v e d by t h e sale being deductible.
(Sec. 173, Rev. R e g s . N o . 26, D S T Regulations.)
5. Refund of stamp tax already paid. Pursuant to Section
173, a D e e d of A s s i g n m e n t is subject to d o c u m e n t a r y stamp tax
i m p o s e d under Section 196, as of the time the act is done or
transaction h a d . In other w o r d s , the d o c u m e n t a r y s t a m p tax should
be affixed to the d o c u m e n t s , e.g., d e e d of assignment at the time of
the execution or signing of t h e d o c u m e n t by the parties thereto.
Documentary s t a m p tax paid on a sale of real property which
w a s subsequently rescinded cannot be credited to the new deed of
sale involving the s a m e property nor can it be refunded since there
had been a valid transaction which w a s subsequently rescinded.
But the capital gains tax (see Sec. 2 5 [ D , 1].) can be credited on the
new d e e d of sale. (BIR Ruling No. 148-98, Oct. 16, 1998.)
6. Share of stock as consideration for sale of realty. A
stock in a corporation is a valuable consideration for transfer of real
property. (Sec. 177, Rev. Regs. No. 26, DST Regulation.)
(1) Accordingly, if parcels of real properties are exchanged
with stocks in a corporation, the latter (share of stock) is the
consideration, the value of which shall be the basis of the
documentary stamp tax due on the Deed of Assignment and
Exchange. (BIR Ruling No. 259-88.) Accordingly, the zonal
values of the real properties cannot be considered the basis in
ANNOTATED
computing the documentary stamp tax. (BIR Ruling No. 4 1 2 ,

A u g . 12, 1988.)
(2) The transfer of real property in exchange for shares
of stocks pursuant to a merger (or consolidation) is not
subject to DST under Section 196, as there is no sale of real
property. The surviving corporation or constituent corporations
are not considered buyers in such transfer. T h e real property
transferred is absolved by the surviving corporation as a legal
consequence of the merger. (Stateland, Inc. v s . C o m m . , CTA
Case No. 7128, Nov. 6, 2009.)
(3) T h e tax-deferred e x c h a n g e of properties of a
corporation, which is a party to a merger or consolidation, solely
for shares of stock in a corporation, w h i c h is also a party to the
merger or consolidation, is subject to the d o c u m e n t a r y s t a m p
tax under Section 176 if the properties to be transferred are
shares of stock or e v e n certificates of obligations, a n d also to
the documentary s t a m p tax under Section 196, if the properties
to be transferred are real properties. T h e original issuance
of shares of stock of the surviving corporation in favor of the
stockholders of the a b s o r b e d corporation as a result of t h e
merger, is subject to t h e d o c u m e n t a r y s t a m p tax under Section
175. (Ibid.)
7. Deed of redemption. It is not subject to the d o c u m e n t a r y

stamp tax imposed under Section 196. U n d e r said provision,
the transaction w h i c h is subject to t h e d o c u m e n t a r y s t a m p tax is
the c o n v e y a n c e of real property to t h e purchaser. This is not so
in redemption of real property w h i c h involves restoration of the
property to the mortgagor-debtor f r o m t h e purchaser. S a i d d e e d
of redemption is, however, subject to t h e d o c u m e n t a r y s t a m p tax
imposed by Section 188. (BIR Rulings N o . 5 3 0 , Nov. 7, 1988 a n d
No. 158, A u g . 16, 1990.)
8. Sheriff's Certificate of Sale. It is subject to the d o c u -

mentary s t a m p tax i m p o s e d by Section 196 b a s e d on the bid price.
T h e tax shall be paid on t h e d a t e of issuance or execution (Sec.
173.) of the Certificate of Sale. (BIR Rulings N o . 3 7 6 , A u g . 9, 1988
and No. 2 2 9 , Dec. 7, 1990.)
(1) Under Rev. M e m o . Cir. N o . 5 8 - 2 0 0 8 ( A u g . 1 5 , 2 0 0 8 . ) , the

one-year redemption period, in the c a s e of individual mortgagor,
or the three-month redemption period for juridical persons/
mortgagors shall be reckoned f r o m t h e date of the confirmation
of the auction sale which is the date w h e n the certificate of

sale is i s s u e d . " T h e S u p r e m e Court has consistently ruled in a
n u m b e r of cases that t h e redemption period shall be reckoned
f r o m the date of registration (not issuance) of the certificate
of sale with the Register of D e e d s which registration operates
as a constructive notice to the w h o l e world of the right of the
winning bidder to the foreclosed property, subject to the right of
redemption of the mortgagor.
(2) Under Act N o . 3 1 3 5 , as a m e n d e d (Extra-judicial Fore-

closure of Real Estate, Sec. 6 thereof.) and RA No. 8791
(General Banking Law, Sec. 47 thereof), the redemption period
shall be r e c k o n e d within o n e year after the sale of the real
estate, i.e., "from the date of the registration of the certificate of
s a l e . " (Sec. 2 8 , Rule 39, Rules of Court.)
9. Under Section 173, t h e d o c u m e n t a r y s t a m p shall be affixed

to t h e taxable d o c u m e n t at the t i m e it is issued or e x e c u t e d . Such
being the c a s e , if t h e d o c u m e n t a r y s t a m p tax has already been
paid, the affidavit of non-redemption for consolidation of ownership
e x e c u t e d by the purchaser for failure of the o w n e r to redeem the
property is not subject to the tax. However, it is subject to the
d o c u m e n t a r y s t a m p tax on certificates imposed under Section
188. (BIR Ruling N o . 0 3 7 , March 2 7 , 1990.) Similarly, a d e e d of
revocation of a donation is subject to tax under Section 188. (BIR
Ruling No. 0 3 9 , M a r c h 2 9 , 1990.)
10. Extrajudicial foreclosure sale. Considering that the

transfer of o w n e r s h i p is not perfected until the execution and
delivery of the sheriff's final d e e d of sale after the expiration of
the one-year redemption period and that the registration of the
Certificate of Sale is a mere ministerial act by which as instrument
is sought to be inscribed in the records of the Register of Deeds,
and annotated at the back of certificate of title covering the land
subject of the instrument, the mere sale of the property at an extra-
judicial foreclosure sale which is similar to an execution sale under
Rule 39 of the Rules of Court, and the corresponding registration of
the Certificate of Sale is not subject to DST nor to capital gains tax.
(BIR Ruling No. D A - 2 9 1 , Sept. 2, 2003 and No. 296-04, May 3 1 ,
2003.)
In foreclosure sale, there is no actual transfer of the mortgaged
real property until after the expiration of the one-year redemption
period and the title thereto is consolidated in the name of the
mortgagee in case of non-redemption. Therefore, the capital gains
ANNOTATED
tax (CGT) and the DST b e c a m e due only in cases of non-redemption

and only upon the expiration of the one-year redemption period.
(BIR Ruling No. DA-509-09, Sept. 8, 2009.)
11. Reconveyance of property. Under the Pag-lbig
Program, one cf the requirements is that the title to the property
being sold should first be transferred in the n a m e of the buyer. The
reconveyance of the property by the buyer to the seller after the
withdrawal by the buyer of his application with Pag-lbig is e x e m p t
from the payment of capital gains tax imposed under Section 24(D)
(1) and documentary s t a m p tax prescribed under Section 196.
However, the s a m e is subject to the d o c u m e n t a r y stamp tax as
imposed by Section 188 on a c k n o w l e d g m e n t s . (BIR Ruling No.
042-97, April 8, 1997.)
The s a m e rule applies w h e r e real property is reconveyed from

a delinquent buyer for n o n p a y m e n t of monthly amortizations to
the previous o w n e r w h i c h w a s required to buy-back the property,
since the transaction is without any consideration and the d e e d of
reconveyance is not for monetary consideration. (BIR Ruling No.
DA-228-08, April 10, 2008.)
12. Contract to sell. A contract for t h e sale of real property
which does not vest title but contains only certain provisions for
the giving of a d e e d in the future u p o n c o m p l i a n c e with conditions
precedent is not subject to d o c u m e n t a r y s t a m p tax. (Sec. 163, Rev.
Regs. No. 26.)
(1) Since a contract to sell d o e s not transfer title until full

payment of the purchase, no D S T shall accrue, w h e t h e r the
sale is a sale on the installment plan or a deferred-payment
sale not on the installment plan. It shall be payable only w h e n a
d e e d of absolute sale is e x e c u t e d b e t w e e n the parties but the
basis of the imposition thereof is t h e gross selling price ( G S P )
or fair market value ( F M V ) of the property, w h i c h e v e r is higher,
at the time of the execution of t h e contract to sell (CTS).
(2) If upon completion of the p a y m e n t s but prior to
execution of the d e e d of absolute sale, the buyer of real
property classified as capital asset assigns his rights over it
to another person for a consideration, the a s s i g n m e n t shall
be considered as a separate sale of real property subject to
creditable withholding tax ( C W T ) or final withholding tax (FWT),
as the case m a y be, to be withheld by the a s s i g n e e based on
the consideration per d e e d of assignment or fair market value
(FMV) of such property at the time of the assignment. T h e D S T
shall likewise be c o m p u t e d using the s a m e basis. (BIR Ruling

No. D A - 1 8 6 - 0 8 , Mar. 19, 2008.)
(3) T h e contract to sell is subject to D S T under Section

188. (BIR Ruling No. 0 2 7 - 1 0 , A u g . 10, 2010.)
13. Sale of government property for socialized housing.

T h e direct sale by the g o v e r n m e n t through the H o m e Insurance
and Guaranty Corporation of its property intended for socialized
housing in favor of less privileged a n d h o m e l e s s citizens is exempt
f r o m the p a y m e n t of capital gains tax and creditable withholding tax
but is subject to d o c u m e n t a r y s t a m p tax since documentary stamp
tax is not a m o n g t h e taxes covered by t h e tax exemption clause
in Section 20 of R.A. N o . 7 2 7 9 , otherwise k n o w n as the "Urban
D e v e l o p m e n t and H o u s i n g A c t of 1 9 9 2 . " (BIR Ruling No. 77-99,
J u n e 16, 1999.)
14. Partition of properties. T h e partition of the properties

a m o n g t h e c o - o w n e r s is not subject to D S T under Section 196, but
only to D S T of P15 under Section 188. (BIR Ruling No. 641-04,
Dec. 17, 2004.)
15. Use of true market value as basis of the tax. Section
196 explicitly states that t h e determination of the documentary
s t a m p tax on d e e d s of sale of real property is to be based on the
consideration received or contracted to be paid appearing in the
deed.
Under the last p a r a g r a p h , t h e C o m m i s s i o n e r is allowed to utilize
the "true market value" as basis of the documentary stamp tax only
if the consideration is incorrectly stated in the d e e d of conveyance.
Hence, if the consideration is correctly stated in the d e e d of sale as
w h e r e the s a m e w a s determined by public bidding, the use of the
true market value or zonal value is not justified. Accordingly, in the
instant case, the documentary stamp tax should be based on the
actual consideration appearing on the d e e d of sale. (BIR Ruling No.
1 0 1 , May 1 1 , 1989.)
16. Procedure for determination and collection of stamp tax on
instrument of sale or conveyance of real property.
(1) T h e stamp tax on the said document shall be paid
through the Revenue District Office having jurisdiction over the
locality where the real property sold/disposed is located.
(2) The stamp tax referred hereunder applies only if the
instrument is a sale or other conveyance of real property for a
consideration in money or money's worth.
ANNOTATED
(3) Since the basis of the tax is either: (a) the consideration
as shown in the said document or (b) the fair market value of the
real property, whichever is higher, the taxpayer shall present to
the Revenue District Officer for verification.
(a) T h e original and every other copy/ies of the said
document; and
(b) A true copy of the latest Tax Declaration of the
said real property, duly certified by the corresponding City/
Municipal Assessor.
From the said d o c u m e n t s , the R e v e n u e District Officer
shall determine the actual a m o u n t of s t a m p tax d u e on the
said taxable d o c u m e n t .
(4) Payment Order shall be issued by the said R e v e n u e
District Officer to effect p a y m e n t of the s t a m p tax d u e .
(5) After payment, the R e v e n u e District Officer shall
cause the notation on the taxable d o c u m e n t of the following
information:
(a) A m o u n t of s t a m p tax paid;
(b) Official Receipt number;
(c) Date of p a y m e n t ; a n d
(d) N a m e and signature of t h e payor.
At the bottom of the foregoing notations, t h e following shall
also be s h o w n :
Amount of stamp tax paid on this document certified

correct:
R e v e n u e District Officer
(6) A notary public shall not a d d his jurat or a c k n o w l e d g m e n t
on the taxable d o c u m e n t unless e v i d e n c e of p a y m e n t of t h e tax
as provided a b o v e is s h o w n on the said d o c u m e n t .
(7) T h e Register of D e e d s shall not record t h e trans-
action and cause transfer of title to the real property unless the
evidence of p a y m e n t of the tax as provided in paragraph 3.5
hereof is s h o w n on the said d o c u m e n t .
This requirement shall be in addition to t h e certification

of the Revenue District Officer in c a s e of a sale, e x c h a n g e or
other disposition of real property, classified as capital asset,
made by an individual, estate or trust.
Sees. 197 D O C U M E N T A R Y STAMP TAX 421
(8) The stamp tax referred herein shall be due and payable
on every instrument of sale or conveyance of real property,
regardless of the parties to the taxable document, whether
an individual, estate, trust, a corporation or a partnership and
regardless of the class of the real property, whether capital or
ordinary business asset in the hands of the vendor/transferor,
(see Rev. Audit Memo. No. 1-88.)
SEC. 197. Stamp Tax on Charter Parties and Similar

Instruments. On every charter party, contract or agreement
for the charter of any ship, vessel, or steamer, or any letter or
memorandum or other writing between the captain, master, or
owner, or other person acting as agent of any ship, vessel, or steamer
and any other person or persons for or relating to the charter of any
such ship, vessel, or steamer, and on any renewal or transfer of such
charter, contract, agreement, letter or memorandum, there shall be
collected a documentary stamp tax at the following rates:
(a) If the registered gross tonnage of the ship, vessel or steamer
does not exceed one thousand (1,000) tons, and the duration of the
charter or contract does not exceed six (6) months, Five hundred
pesos (P500); and for each month or fraction of a month in excess
of six (6) months, an additional tax of Fifty pesos (P50.00) shall be
paid.
(b) If the registered gross tonnage exceeds one thousand (1,000)
tons and does not exceed ten thousand (10,000) tons, and the
duration of the charter or contract does not exceed six (6) months,
One thousand pesos (P1,000); and for each month or fraction of a
month in excess of six (6) months, an additional tax of One hundred
pesos (P100) shall be paid.
(c) If the registered gross tonnage exceeds ten thousand
(10,000) tons and the duration of the charter or contract does not
exceed six months, One thousand five hundred pesos (PI,500); and
for each month or fraction of a month in excess of six (6) months, an
additional tax of One hundred fifty pesos (P150) shall be paid, (as
ANNOTATION
A charter party is a contract by virtue of which the owner or
the agent of a vessel binds himself to transport merchandise or
persons for a stipulated price.
ANNOTATED
SEC. 198. Stamp Tax on Assignments and Renewals of

Certain Instruments. Upon each and every assignment or
transfer of any mortgage, lease or policy of insurance, or the renewal
or continuance of any agreement, contract, charter, or any evidence
of obligation or indebtedness by altering or otherwise, there shall be
levied, collected and paid a documentary stamp tax, at the same rate
as that imposed on the original instrument.
SEC. 199. Documents and Papers not Subject to Stamp Tax.

The provisions of Section 173 to the contrary notwithstanding,
the following instruments, documents and papers shall be exempt
from the documentary stamp tax:
(a) Policies of insurance of annuities made or granted by a
fraternal or beneficiary society, order, association, or cooperative
company, operated on the lodge system or local cooperation plan
and organized and conducted solely by the members thereof for the
exclusive benefit of each member and not for profit.
(b) Certificates of oaths administered to any government official
in his official capacity or of acknowledgment by any government
official in the performance of his official duties, written appearance
in any court by any government official, in his official capacity;
certificates of the administration of oaths to any person as to the
authenticity of any paper required to be filed in court by any person
or party thereto, whether the proceedings be civil or criminal; papers
and documents filed in court by or for the national, provincial, city
or municipal governments; affidavits of poor persons for the purpose
of proving poverty; statements and other compulsory information
required of persons or corporations by the rules and regulations of
the national, provincial, city or municipal governments exclusively
for statistical purposes and which are wholly for the use of the
bureau or office in which they are filed, and not at the instance or for
the use or benefit of the person filing them; certified copies and other
*Securities Borrowing and Lending ( S B L ) involves the lending of shares of stock

or securities by the Lender who owns or controls them, to the Borrower who needs
the shares of stock/securities borrowed to support trading strategies or settlement
obligations, in exchange for a collateral and the promise to return the equivalent
shares of stock/securities at the end of the borrowing period, which shall be no more
than two (2) years. Rev. Regs. N o . 10-2006 (amended by Rev. Regs. N o . 1-2008)
prescribes the set of procedures to govern the execution and registration of the
Master Securities Lending Agreement ( M S L A ) and multilateral M S L A s under the
S B L Program.
certificates placed upon documents, instruments, and papers for the

national, provincial, city or municipal governments, made at the
instance and for the sole use of some other branch of the national,
provincial, city or municipal governments; and certificates of the
assessed value of lands, not exceeding Two hundred pesos (P200) in
value assessed, furnished by provincial, city, or municipal Treasurer
to applicants for registration of title to land.
(c) Borrowing and lending of securities executed under the
Securities Borrowing and Lending Program* of a registered ex-
change, or in accordance with regulations prescribed by the appro-
priate regulatory authority: Provided, however, That any borrowing
or lending of securities agreement as contemplated hereof shall be
duly covered by a master securities borrowing and lending agree-
ment acceptable to the appropriate regulatory authority, and which
agreement is duly registered and approved by the Bureau of Inter-
nal Revenue (BIR).
(d) Loan agreements or promissory notes, the aggregate of which
does not exceed Two hundred fifty thousand pesos (P250,000), or
any such amount as may be determined by the Secretary of Finance,
executed by any individual for his purchase on installment for his
personal use or that of his family and not for business or resale,
barter or hire of a house, lot, motor vehicle, appliance or furniture;
Provided, however, That the amount to be set by the Secretary of
Finance shall be in accordance with a relevant price Index but not
to exceed ten percent (10%) of the current amount and shall remain
in force at least for three (3) years.
(e) Sale, barter or exchange of shares of stock listed and traded
through the local stock exchange. (As amended by R.A. No. 9648.)
(f) Assignment or transfer of any mortgage, lease or policy
of insurances, or the renewal or continuance of any agreement,
contract, charter, or any evidence of obligation or indebtedness.
If there is no change in the maturity date or remaining period of
coverage from that of the original instrument.
(g) Fixed income and other securities traded in the secondary
market or through an exchange.
(h) Derivatives: Provided, That for purposes of this exemption,
repurchase agreements and reverse repurchase agreements shall be
treated similarly as derivatives.
(i) Interbranch or Interdepartmental advances within the same
legal entity.
ANNOTATED
(j) A l l forbearance a r i s i n g f r o m sales o r service c o n t r a c t s

i n c l u d i n g c r e d i t c a r d a n d t r a d e receivables: Provided, T h a t t h e
e x e m p t i o n b e l i m i t e d t o those executed b y t h e seller o r service
p r o v i d e r itself.
( k ) B a n k deposit accounts w i t h o u t a f i x e d t e r m o r m a t u r i t y .
(1) A l l c o n t r a c t s , deals, d o c u m e n t s a n d t r a n s a c t i o n s r e l a t e d t o
the conduct o f business o f t h e Bangko Sentral ng Pilipinas.
(m) T r a n s f e r o f p r o p e r t y p u r s u a n t t o S e c t i o n 40(C)(2) o f t h e
N a t i o n a l I n t e r n a l Revenue Code o f 1997, a s a m e n d e d .
(n) I n t e r b a n k c a l l l o a n s w i t h m a t u r i t y o f n o t m o r e t h a n seven
(7) days t o cover deficiency i n reserves a g a i n s t d e p o s i t l i a b i l i t i e s ,
i n c l u d i n g those b e t w e e n o r a m o n g b a n k s a n d q u a s i - b a n k s . (As
amended by Pres. Decree No. 1994 and R.A. No. 9243.)
ANNOTATION
1. T h e a b o v e e x e m p t i o n s are in addition to t h o s e provided in

the preceding sections, in i m p l e m e n t i n g regulations, a n d in special
laws. Subsections (c) to (n) on e x e m p t t r a n s a c t i o n s / d o c u m e n t s
were a d d e d by R.A. No. 9 2 4 3 .
2. Secondary trading of the bonds. It is no longer subject
to DST. T h e transfer of the b o n d s in bearer f o r m in t h e s e c o n d a r y
market by w a y of simple delivery to t h e buyer is not subject to
DST, unless the transfer of the instrument carries with it a renewal
or issuance of n e w instruments in t h e n a m e of t h e transferee to
replace t h e old o n e s .
Section 198 w h i c h i m p o s e s D S T on a s s i g n m e n t s a n d renewals

of certain instruments, d o e s not apply in s e c o n d a r y trading of b o n d s
since the financial market (primary or s e c o n d a r y ) d o e s not c h a n g e
the tenor of bonds originally i s s u e d . T h e investing public w h o m a d e
the indirect investment in t h e s e c o n d a r y m a r k e t merely substitutes
the original lender. (BIR Ruling No. 2 4 7 - 0 5 , J u n e 8, 2005.)
3. Under then Section 2 4 8 (now Sec. 199.), a m o n g the d o c u -
ments and papers not subject to d o c u m e n t a r y s t a m p tax are those
e n u m e r a t e d in paragraph (1) thereof, namely: "bonds, debentures
and certificate of indebtedness issued by t h e G o v e r n m e n t of the
Philippines or the g o v e r n m e n t of any province, city or municipality."
However, under Pres. Decree No. 1994 (effective J a n . 1, 1986),
said paragraph (1) w a s deleted in the e n u m e r a t i o n , w h i c h d e l e -
tion has the effect of withdrawing the e x e m p t i o n of said d o c u m e n t s
issued by the G o v e r n m e n t and its political subdivisions from the

d o c u m e n t a r y stamp tax. In view thereof, treasury bills issued by the
Central Bank under R.A. No. 2 4 5 , as a m e n d e d , b e c o m e subject to
d o c u m e n t a r y s t a m p tax under Section 180 beginning January 1
1986. (BIR Ruling No. 0 3 6 , Feb. 10, 1988.)
4. Repurchase agreements issued by a non-bank financial
intermediary performing quasi-banking functions, and duly licensed
by t h e B S P to act as s u c h , are e x e m p t f r o m DST. Section 199(h)
of R.A. No. 9 2 4 3 , as i m p l e m e n t e d by Rev. Regs. No. 13-2004,
e x e m p t s the issuance of derivatives f r o m DST, and also provides
that, for D S T p u r p o s e s , r e p u r c h a s e a g r e e m e n t s and reverse
repurchase a g r e e m e n t s shall be treated similarly as derivatives.
(BIR Ruling N o . 2 9 6 - 0 5 , J u n e 2 9 , 2005.)
5. T h e transfer of shares of corporation to another pursuant
to a merger is not subject to D S T pursuant to Section 199(m). A
merger d o e s not involve a sale, e x c h a n g e , or disposition of shares
since there is no transfer of beneficial o w n e r s h i p over the shares.
In a merger, the surviving corporation s u c c e e d s to the rights and
liabilities of the a b s o r b e d corporation and merely carries on the
identity of the latter; h e n c e , no taxable transaction actually takes
place as a result of the merger. (BIR Ruling No. DA-152-08, Mar.
1 1 , 2008.)
6. Section 199 d o e s not include d o c u m e n t s and papers

involving expropriation sale a m o n g those e x e m p t from the
d o c u m e n t a r y s t a m p tax i m p o s e d by Section 196. T h e seller is the
o n e primarily liable for the p a y m e n t of the corresponding tax. The
g o v e r n m e n t or any of its instrumentalities is no longer exempt from
the payment of taxes, including the documentary stamp taxes. (BIR
Ruling No. 2 7 3 , Dec. 2 6 , 1991.)
SEC. 2 0 0 . Payment of Documentary Stamp Tax.

( A ) In General. The provisions of Presidential Decree No.
1045 notwithstanding, any person liable to pay documentary stamp
tax upon any document subject to tax under Title V I I of this Code
shall file a tax return and pay the tax in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Time for Filing and Payment of the Tax. Except as
provided by rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, the tax return
prescribed in this Section shall be filed within ten (10) days after the
ANNOTATED
close o f t h e m o n t h w h e n t h e t a x a b l e d o c u m e n t w a s m a d e , s i g n e d ,
issued, accepted, o r t r a n s f e r r e d , a n d t h e t a x t h e r e o n s h a l l b e p a i d a t
t h e same t i m e t h e aforesaid r e t u r n i s f i l e d .
(C) Where to File. E x c e p t i n cases w h e r e t h e C o m m i s s i o n e r
otherwise permits, the aforesaid t a x r e t u r n shall be filed w i t h and
t h e t a x due s h a l l b e p a i d t h r o u g h t h e a u t h o r i z e d a g e n t b a n k w i t h i n
t h e t e r r i t o r i a l j u r i s d i c t i o n o f t h e R e v e n u e D i s t r i c t Office w h i c h has
j u r i s d i c t i o n over t h e residence o r p r i n c i p a l place o f b u s i n e s s o f t h e
t a x p a y e r . I n places w h e r e t h e r e i s n o a u t h o r i z e d a g e n t b a n k , t h e
r e t u r n s h a l l b e f i l e d w i t h t h e R e v e n u e D i s t r i c t Officer, c o l l e c t i o n
agent, o r d u l y a u t h o r i z e d t r e a s u r e r o f t h e c i t y o r m u n i c i p a l i t y i n
w h i c h t h e t a x p a y e r h a s h i s l e g a l residence o r p r i n c i p a l place o f
business.
( D ) Exception. I n l i e u o f t h e f o r e g o i n g p r o v i s i o n s o f t h i s
Section, t h e t a x m a y b e p a i d e i t h e r t h r o u g h p u r c h a s e a n d a c t u a l
affixture, or by i m p r i n t i n g the stamps t h r o u g h a documentary stamp
metering machine, on the taxable document, in the manner as may
be prescribed by rules and regulations to be p r o m u l g a t e d by the
Secretary of Finance, upon recommendation of the Commissioner.
(As amended by R.A. No. 8424.)
ANNOTATION
1. Time of payment. R.A. No. 8 4 2 4 completely c h a n g e s

the provisions of Section 2 0 0 . A tax return is n o w required to be
filed. (Subsec. B.) Under the f o r m e r provision, the p a y m e n t of tax
w a s required to be m a d e on the date of t h e transaction.
(a) Under the exception, d o c u m e n t a r y s t a m p tax is d e e m e d
paid by: (1) the purchase a n d affixture of d o c u m e n t a r y s t a m p s
to the d o c u m e n t or instrument t a x e d or to s u c h other paper
as may be prescribed by rules a n d regulations; and (2) the
imprinting of the s t a m p s on t h e taxable d o c u m e n t . T h e s t a m p s
must be subsequently cancelled w h i c h m a y be d o n e by writing,
stamping, or perforating the date of cancellation across the
face of each stamp.
T h e overriding p u r p o s e of the law is the collection of taxes.

T h e steps mentioned are but the m e a n s to that e n d . T h u s , the
purchase of stamps is the f o r m of p a y m e n t m a d e ; the affixture
or imprinting thereof on the d o c u m e n t or instrument taxed is
to insure that the corresponding tax has b e e n paid for s u c h
document or instrument, while the cancellation of the stamps
is to obviate the possibility that said stamps will be reused for

similar d o c u m e n t s for similar purposes, (see C o m m . of Internal
R e v e n u e vs. Firemen's F u n d Insurance Co., 148 S C R A 315
March 9, 1987.)
(b) Rev. M e m o . Cir. No. 58-2008 provides that the one-
year redemption period in t h e case of individual mortgages or
the three-month period for juridical persons/mortgagor shall
be r e c k o n e d f r o m the date of confirmation of the auction sale,
w h i c h is the date w h e n t h e certificate of sale is issued. If the
property is an ordinary asset of the mortgagor, the creditable
withholding tax ( C W T ) shall be d u e and paid within 10 days
following the e n d of the m o n t h in w h i c h the redemption period
expires, while the D S T shall be d u e within five (5) days from the
e n d of the m o n t h w h e n the redemption period expires. ( C o m m .
v s . United C o c o n u t Planters Bank, 6 0 4 S C R A 343 [2009].)
2. Evidence to prove payment. T h e d o c u m e n t s (insurance

policies) together with the corresponding stamps affixed are the
best e v i d e n c e to prove p a y m e n t of the tax. This rule, however, does
not preclude t h e admissibility of t h e other proofs of considerable
weight especially if they are uncontradicted, such as copies of the
application for m a n a g e r ' s checks a n d copies of the m a n a g e r ' s check
vouchers of the bank s h o w i n g the purchases of the documentary
policies issued and properly identified by witnesses during the
hearing a n d admitted by the court. (Ibid.)
3. Documents having stubs or duplicates. In case of w a r e -

house receipts, certificates of stocks, p a s s a g e tickets and other
d o c u m e n t s having stubs or duplicates kept by the persons issuing
t h e m , the d o c u m e n t a r y s t a m p s shall be adhered to the stubs or to
the duplicates thereof.
(1) In meritorious cases involving issuance of numerous
certificates of stock at o n e time, the Commissioner of Internal
R e v e n u e may, in his discretion, authorize adherence of
stamps to the stock certificate register and for shares of stocks
traded through a stockbroker, affixture may be made to the
m e m o r a n d u m of sale or purchase or confirmation step.
(2) With respect to checks drawn against current account,
manager's/cashier's/treasurer's checks or insurance policies,
the documentary stamps shall be adhered to the requisition/
purchase slip, register copy or premium register.
(3) With respect to Banks, the documentary stamps may
be affixed in the proof sheets of each department.
ANNOTATED
(4) With respect to international airline companies,

affixture of documentary stamp tax shall be on the cargo
manifest instead of on each and every cargo airway bill on a
per flight basis, and that the cargo manifests containing all the
airway bills issued shall be numbered consecutively; and that
a note properly initialed by a responsible person on the face
of such documents shall be m a d e as follows: "Documentary
stamps to the value of P have b e e n affixed to t h e stub," [or to]
the duplicate, the requisition/purchase slip, the register copy,
stock certificate register, premium register, or Proof Sheet, or
cargo manifest, as the c a s e m a y be.
W h e r e the use of the Pitney-Bowes Postage Meter

and Machine, or the like for the manufacture and printing of
documentary stamps on d o c u m e n t s or instruments subject
to tax is permitted by the C o m m i s s i o n e r of Internal R e v e n u e ,
the payment of the tax d u e shall be a c c o m p l i s h e d by the filing
of proper requisition for s t a m p s intended to be manufactured
and printed with the C o m m i s s i o n e r of Internal R e v e n u e and by
the payment of the value of t h e s t a m p s so requisitioned. (Sec.
203, Regs. No. 26 [ D o c u m e n t a r y S t a m p Tax Regulations as
a m e n d e d by Rev. R e g s . No. 6-92]; For Revised R e g s , on the
m a n a g e m e n t of d o c u m e n t a r y s t a m p s metering m a c h i n e in the
custody of authorized t a x p a y e r s , see Rev. R e g s . N o . 7-92.)
4. Improper affixture of documentary stamps. It has b e e n

held that the affixture of d o c u m e n t a r y s t a m p s to p a p e r s other than
those authorized by law is not t a n t a m o u n t to failure to pay the tax;
hence, the taxpayer should not be required to pay a n e w the value of
the documentary s t a m p s that w e r e not properly affixed. (Firemen's
Fund Ins. Co. vs. C o m m . , CTA C a s e N o . 1629, M a y 2 6 , 1969.) It
does not m e a n , however, that this p r o c e d u r e of affixing t h e s t a m p
is valid. (BIR Ruling, 1972.)
5. Manner of payment of DST:
(1) In General. T h e p a y m e n t of the d o c u m e n t a r y s t a m p

tax due on any taxable d o c u m e n t / t r a n s a c t i o n , irrespective of the
a m o u n t thereof, shall be m a d e by the filing of a tax return a n d
the payment of the tax in a c c o r d a n c e with the existing rules a n d
regulations. If the a m o u n t of D S T d u e on a taxable d o c u m e n t /
transaction is P15 or less, the taxpayer has the option to pay
the D S T due by w a y of purchasing loose d o c u m e n t a r y stamps
in the manner provided for in No. 2(a).
This general m a n n e r of payment is c o m m o n l y known

as "constructive s t a m p i n g of D S T on the taxable document/
facility evidencing the transaction" or the "receipt system"
w h e r e b y constructive affixture is d o n e by affixing to the taxable
document/facility evidencing t h e transaction the duplicate copy
or certified true copy of the D S T return/proof of payment of
DST. U n d e r this p a y m e n t s y s t e m , a d v a n c e purchase of DST
for future application is not a l l o w e d .
(2) Exceptions. In lieu of constructive stamping, Section

2 0 0 ( D ) of the Tax C o d e , however, allows the payment of DST
i m p o s e d in Title VII thereof either through the purchase and
actual affixture of loose d o c u m e n t a r y s t a m p s or by imprinting
of s t a m p s t h r o u g h a d o c u m e n t a r y s t a m p metering machine
(conventional electro-mechanical d o c u m e n t a r y stamp metering
m a c h i n e or on-line electronic D S T imprinting machine) of the
proper v a l u e to t h e d o c u m e n t or facility evidencing a transaction
s o u g h t to be t a x e d , subject to the following conditions:
( a ) Purchase and actual affixture of loose documentary

stamps. A n y person m a y purchase from Revenue
Collection Officers/Deputized Municipal Treasurers loose
d o c u m e n t a r y s t a m p s not e x c e e d i n g P200 for future
application u p o n taxable documents/facilities evidencing
t h e transactions, p r o v i d e d , that such loose documentary
s t a m p s shall be allowed to be used only w h e n the amount
of D S T d u e on a taxable document/transaction does not
e x c e e d P15.
T h e cancellation of the d o c u m e n t a r y stamp affixed
to t h e taxable d o c u m e n t s must be d o n e by writing two
lines across t h e s t a m p and portion of the document/
facility evidencing t h e transaction to which it is affixed, and
indicating t h e date of affixture thereto by perforation as to
render it unreusable; and
(b) Imprinting/Affixture of DST through Documentary
Stamp Metering Machine. Purchase of documentary
stamps for future applications not covered under Nos. 1
and 2(a) above shall be allowed only to persons authorized
to use the conventional electro-mechanical BIR Registered
Metering Machines under Rev. Regs. No. 7-92 and those
classes of taxpayers which are mandated by Rev. Regs.
No. 9-2000 and subsequent regulations and orders to
use the "on-line electronic D S T imprinting machine" in the
payment of their DST.
ANNOTATED
1) That once a taxpayer has been granted by

the BIR the authority to use the documentary stamp
metering machine (whether conventional electro-
mechanical documentary stamp metering machine or
on-line electronic D S T imprinting machine), the payment
of DST on all of the transactions of such taxpayer,
irrespective of the a m o u n t of D S T due on e a c h taxable
document/transaction (i.e., e v e n D S T d u e is P15 or
less) shall be d o n e in the m a n n e r herein provided,
i.e., through the conventional electro-mechanical D S T
metering machine or on-line electronic D S T imprinting
machine, as the c a s e m a y be, until such time that
the permit to use D S T metering m a c h i n e is revoked,
and that the use of the D S T metering m a c h i n e is no
longer mandatory to the industry/business in which the
taxpayer belongs.
2) In the c a s e of taxpayers authorized/required to

use D S T metering m a c h i n e s , t w o or m o r e branches but
not exceeding four (4) branches of s u c h taxpayers m a y
be allowed to use only o n e (1) D S T metering m a c h i n e ,
subject to the following conditions.
a) T h e head office of the taxpayer/entity

shall identify t h e branches w h i c h shall utilize the
specified unit of D S T metering m a c h i n e and shall
furnish the BIR with the list of t h e s a m e .
b) Only the b r a n c h e s identified to the specific

unit of D S T metering m a c h i n e are allowed to use
s u c h unit for their respective D S T affixtures.
c) In no c a s e shall o n e b r a n c h be an identified
user to more than o n e (1) D S T metering m a c h i n e .
d) T h e p u r c h a s e of d o c u m e n t a r y s t a m p s to
be loaded on to the m a c h i n e shall be m a d e by filing
the D o c u m e n t a r y S t a m p Declaration/Return (BIR
Form No. 2 0 0 0 ) a n d paying the corresponding
a m o u n t of D S T p u r c h a s e d .
e) T h e D S T Declaration/Return (BIR Form

No. 2000) as well as the supporting details of D S T
usage under Schedule 1 thereof, subject of current
replenishment/purchase, shall be a c c o m p l i s h e d
on a per m a c h i n e basis, unless the C o m m i s s i o n e r
of Internal R e v e n u e (Commissioner) otherwise

provides. (Sec. 2, Rev. Regs. No. 15-2001.)
6. Medium of affixture or payment of DST on certain taxable

documents/transactions:
(1) In c a s e of w a r e h o u s e receipts, certificates of stocks

and/or contract of stock subscription, p a s s a g e tickets and other
d o c u m e n t s having stubs or duplicates kept by the persons
issuing t h e m , the D S T shall be affixed to the stubs or to the
duplicates thereof. For s h a r e s of stock sold without a certificate
issued, affixture shall be m a d e to the m e m o r a n d u m of sale or
p u r c h a s e or confirmation slip or its equivalent;
(2) In meritorious c a s e s involving the issuance of n u m e -

rous s h a r e s of stock at o n e time, the C o m m i s s i o n e r may, in his
discretion, authorize t h e affixture of stamps to the stock and
transfer book/register;
(3) With respect to c h e c k s d r a w n against current account,
manager's/cashier's/treasurer's c h e c k s , the documentary
s t a m p s shall be affixed to the requisition/purchase slip;
(4) With respect to insurance policies, the documentary
s t a m p s shall be affixed to t h e p r e m i u m register or its equivalent;
(5) W i t h respect to taxable transactions of banks, the
d o c u m e n t a r y s t a m p s shall be affixed to the proof sheets of
e a c h department; and
(6) With respect to airline and shipping companies,
affixture of d o c u m e n t a r y s t a m p shall be to the cargo manifests,
on a per flight/trip basis, instead of affixture to each and every
cargo airway bill/bill of lading and that the cargo manifests
containing all the airway bills/bills of lading issued shall be
n u m b e r e d consecutively.
A note, properly initialed by a responsible person, on
the face of the d o c u m e n t or facility evidencing the taxable
transaction shall be m a d e as follows "Documentary stamps to
the value of Php have been affixed to the stubs or to
the duplicate, m e m o r a n d u m of sale or confirmation slip, the
requisition/purchase slip, the register copy, stock and transfer
book, premium register, proof sheet, or cargo manifest, as
the case may be." W h e r e the use of DST metering machine,
whether conventional electro-mechanical documentary stamp
metering machine or on-line electronic DST imprinting machine,
for the imprinting of D S T on taxable documents or instruments
ANNOTATED
is permitted by the Commissioner or mandated by law and

regulations, No. (5)(2)(b) shall apply. (Sec. 3, Ibid.)
7. Retirement of electro-mechanical DST metering machines.
Taxpayers covered by Rev. Regs. 9-2000 currently using
conventional electro-mechanical documentary stamp metering
machines shall shift to the on-line electronic D S T imprinting
machines. T h e remaining D S T balance therein m a y be transferred
to the on-line electronic D S T imprinting machine only upon the
approval of the Commissioner or his duly authorized representative.
(Sec. 4, Ibid.)
8. Electronic documentary stamp tax system. This system
(eDST) implemented by Rev. R e g s . N o . 7-2009, replaces the
documentary stamp tax electronic printing m a c h i n e ( D S E I M ) under
Rev. Regs. No. 9-2000 on account of t h e limitations a n d problems
that surfaced during the implementation of t h e latter.
(1) Coverage. A n y taxpayer belonging to the following

industries is m a n d a t e d to use the w e b - b a s e d e D S T system
in the payment/remittance of its/his/her D S T liabilities
and the affixture of t h e prescribed d o c u m e n t a r y s t a m p on
taxable d o c u m e n t s , except those expressly e x e m p t e d by t h e
C o m m i s s i o n e r of Internal R e v e n u e , on meritorious g r o u n d s :
(a) Bank, quasi-bank or n o n - b a n k financial intermedi-

ary, finance company, or insurance, surety, fidelity, or a n n u -
ity c o m p a n y ;
(b) Shipping a n d airline c o m p a n i e s ;

(c) Pre-need c o m p a n y on sale of p r e - n e e d plans, as
provided under Section 186 of t h e Tax C o d e ;
(d) Educational institution, in respect to the issuance
of taxable certificates s u c h as D i p l o m a , Transcript of
Records, a n d other d o c u m e n t s t a x a b l e as certificates
under Section 188 of t h e Tax C o d e ; a n d
(e) Such other industries as m a y be required by the

C o m m i s s i o n e r t o use the " W e b - b a s e d e D S T S y s t e m " u p o n
written notification therefore.
Rev. Regs. No. 7-2009 shall also apply to taxpayers
w h o , at their option, c h o o s e to pay their D S T liabilities thru
the e D S T S y s t e m .
Prior to the enrollment in the e D S T S y s t e m , taxpayers

availing thereof, w h e t h e r on the m a n d a t o r y or optional
basis, shall be duly enrolled under the BIR eFPS. In

paying the D S T under the e D S T System, the Documentary
S t a m p Tax Return (BIR Form 2000) shall be filed and the
a m o u n t d u e thereon shall be paid thru the eFPS/eFTIS for
taxpayers/Authorized A g e n t Banks (AABs) on their own tax
liabilities, respectively. However, payments of DST arising
f r o m transfer of shares of stocks classified as capital asset
or real property classified as capital or ordinary assets,
shall not be covered by the Regulations. (Sec. 4, Rev.
R e g s . No. 7-2009.)
(2) Definition of Terms. For purposes of the Regulations,

the terms herein provided are defined as follows:
(a) Electronic Documentary Stamp Tax (eDST) System
is a w e b - b a s e d application created for taxpayers and the
BIR that is capable of affixing a secured documentary
s t a m p on the taxable d o c u m e n t s as defined under the
appropriate provisions under Title VII of the NIRC of 1997,
as a m e n d e d , thru the use of a computer unit, any laser
printer with at least 1200 dpi resolution, and IE 7.0. It is
also c a p a b l e of providing a 3-layer watermark on stamps
for a d d e d security.
(b) Documentary Stamp Tax Electronic Imprinting
Machine (DSEIM) is a device capable of imprinting the
value of the D S T and other data on the taxable document
with remote loading a n d resetting feature, and with built-
in m o d e m w h i c h enables the users to load the DST thru
an on-line set-up or electronic data transmission with the
BIR using the R e v e n u e Collection and Verification System
(RCVS).
(c) Electronic Filing and Payment System (eFPS)
is the electronic processing and transmission of tax return
information, including attachments, if any, and the payment
of the corresponding taxes due the government via the
internet thru the BIR websites.
(d) Electronic Fund Transfer Instruction System
(eFTIS) refers to the payment system used by commercial
and universal banks in paying their own liabilities.
(e) Account Owner refers to a taxpayer who is duly
enrolled in the e D S T System. For juridical person, an
Account O w n e r may be represented by any company
ANNOTATED
official who shall be responsible in the enrollment in the

system, maintenance of DST balance and creation of
branch/department user.
(f) eDST User refers to any person authorized by the
Account Owner to utilize the DST Account balance and
affix the prescribed documentary stamp to any taxable
document. (Sec. 5, Ibid.)
(3) Enrollment for System Usage. Taxpayers that are

mandated to use and/or voluntarily availing of the e D S T S y s t e m
shall enroll in the said s y s t e m , in a c c o r d a n c e with the provisions
of the applicable regulations, circulars and orders. For juridical
entities or persons, however, the enrollment shall be m a d e by
authorized natural persons specified in the c o m p a n y ' s board
resolution.
For taxpayers under the jurisdiction of t h e Large Taxpayers

Service (LTS) and taxpayers adopting centralized D S T
payment s c h e m e , enrollment shall be m a d e by their respective
Head Offices as the lone A c c o u n t Owner. On t h e o t h e r h a n d ,
taxpayers with decentralized D S T p a y m e n t s c h e m e may, at
their option, designate o n e or m o r e d e p a r t m e n t s / b r a n c h e s as
authorized A c c o u n t O w n e r s .
O n c e registered under t h e e D S T s y s t e m , the A c c o u n t

O w n e r may authorize as m a n y users he/she d e e m s necessary
in the c o m p a n y ' s business operations without n e e d for prior
approval by the BIR. (Sec. 6, Ibid.)
Note: Rev. M e m o . O r d e r N o . 14-2008 prescribed the

policies, guidelines a n d procedures in the t e m p o r a r y allowance
of payment a n d affisxture of D S T through "constructive
stamping or receipt s y s t e m " by t a x p a y e r s w h o are m a n d a t e d
to use D S F I M s . Constructive affixture is d o n e by affixing to the
taxable document/facility evidencing transaction, the duplicate
copy of the D S T return (BIR F o r m 2 0 0 0 ) as proof of p a y m e n t
of DST. T h e Order "shall automatically be revoked o n c e the
e D S T S y s t e m is fully i m p l e m e n t e d or beginning January 1,
2010 whichever c o m e s earlier." (Rev. M e m o . Cir. No. 2 4 - 2 0 1 0
further defers the implementation of e D S T S y s t e m to July 1,
2010. Rev. M e m o . Cir. No. 31-2010 prescribes the new stamp
to be affixed on taxable d o c u m e n t s of taxpayers m a n d a t e d to
use the e D S T s y s t e m , effective January 11, 2 0 1 0 .
Rev. M e m o . Cir. No. 51-2010 clarifies issues in the imple-

mentation of the e D S T S y s t e m pursuant to Rev. Regs No
7-2009.
9. E-filing and e-payment by Large Taxpayers. Rev. Regs.

No. 17-2010 prescribe the time, place and manner of filing tax
returns and p a y m e n t of taxes by Large Taxpayers, (see Annotation
No. 22 under Sees. 52-55, Vol. 1, a n d Annotation Nos. 7 and 8
under Sec. 245[j].)
With respect to d o c u m e n t a r y s t a m p taxes:
(1) Documentary stamp tax declaration/return (BIR Form

No. 2 0 0 0 ) shall be e-filed a n d e-paid within five (5) days after
the close of the m o n t h w h e n the taxable d o c u m e n t w a s m a d e ,
s i g n e d , issued, a c c e p t e d or transferred or w h e n reloading a
metering m a c h i n e b e c o m e s necessary or upon remittance by
revenue collection a g e n t s of collection f r o m the sale of loose
s t a m p s , as provided under Section 200(B) as implemented by
Rev. R e g s . Nos. 6 - 2 0 0 1 , 1 2 - 2 0 0 1 , 1 5 - 2 0 0 1 and 5-2004, through
p u r c h a s e or actual affixture or by imprinting the documentary
s t a m p s on the taxable d o c u m e n t using the e-DST System
or in t h e m a n n e r as m a y be prescribed by existing rules and
regulations.
(2) Documentary stamp tax declaration/return (One time

transactions) BIR Form No. 2 0 0 0 - O T shall be filed and paid
within five (5) d a y s after the close of the month w h e n the taxable
d o c u m e n t w a s m a d e , signed, issued, accepted or transferred.
This shall be manually filed and manually paid until such time
that this f o r m is available in the E F P S . (Sec. 6, Rev. Regs. No.
17-2010.)
S E C . 2 0 1 . Effect of Failure to Stamp Taxable Document. -

An instrument, document, or paper which is required by law to be
stamped and which has been signed, issued, accepted, or transferred
without being duly stamped, shall not be recorded, nor shall it or
any copy thereof or any record of transfer of the same be admitted
or used in evidence in any court until the requisite stamp or stamps
shall have been affixed thereto and cancelled.
No notary public or other officer authorized to administer oaths
shall add his jurat or acknowledgment to any document subject to
documentary stamp tax unless the proper documentary stamps are
affixed thereto and cancelled.
ANNOTATED
ANNOTATION
1. Admissibility of taxable document without the requisite

stamps. Under the first paragraph, the non-admissibility of the
document, which does not bear the requisite stamps, subsists only
"until the requisite stamp or stamps shall have been affixed thereto
and cancelled." Thus, w h e r e no documentary s t a m p is affixed to a
notarial will, the petition for probate should not be dismissed. W h a t
the probate court should do is to require the petitioner or proponent
to affix the requisite stamp to the notarial a c k n o w l e d g m e n t of the
will which is the taxable portion of that d o c u m e n t . ( G a b u c a n vs.
Manta, 95 S C R A 752, J a n . 28, 1980.)
T h e documentary s t a m p m a y be affixed at t h e time the taxable
document is presented in evidence. (Del Castillo v s . Madrilena, 2 0 9
Phil. 749; Del Rosario vs. Hamoy, 151 S C R A 7 1 9 , J u n e 3 0 , 1987.)
2. Effect of failure to stamp a taxable document. T h e failure
to stamp a taxable d o c u m e n t d o e s not render it invalid or void. Its
effects are provided in Section 2 0 1 . In the c a s e of failure to affix
the proper documentary s t a m p s to a d o c u m e n t or instrument, the
taxpayer shall be liable to pay the 2 5 % surcharge on t h e unpaid
amount. (Sec. 248.) In v i e w of Section 2 0 1 , the d o c u m e n t a r y s t a m p
tax is due at the s a m e time the d o c u m e n t or instrument evidencing
a particular transaction is notarized. (BIR Ruling No. 2 0 7 , M a y 11,
1988.)
3. Reporting loss of documentary stamp metering machine.

Revenue Regulations No. 9-85 g o v e r n s t h e m a n n e r of reporting
the loss of duly authorized d o c u m e n t a r y s t a m p metering m a c h i n e s
due to theft, fire or destruction or n o n - u s e thereof by reason of
cessation of business operations.
(1) Surrender of documentary stamp metering machine.

In case of cessation of t h e business operations of t h e
person authorized to use the m a c h i n e , said m a c h i n e shall be
surrendered to the R e v e n u e District Office w h e r e registered.
Thereafter, the m a c h i n e m a y be sold at public auction or in
a negotiated sale by the R e v e n u e District Officer with the
concurrence of the o w n e r of the m a c h i n e .
Metering machines which h a v e outlived their usefulness

due to obsolescence or w e a r a n d tear shall be surrendered
for destruction to the R e v e n u e District Office w h e r e they are
registered. A certificate to that effect shall be issued to the
owner by the R e v e n u e District Officer c o n c e r n e d .
(2) Notice and publication of loss. Within 24 hours

after the discovery of loss of a d o c u m e n t a r y stamp metering
m a c h i n e d u e to theft, fire or destruction, or any other cause,
the office or person responsible for the use of the machine shall
submit a report establishing the circumstances surrounding the
loss or destruction thereof. T h e report shall be submitted to
the R e v e n u e District Officer of the R e v e n u e District w h e r e the
m a c h i n e is registered a n d authorized under the provisions of
R e v e n u e M e m o r a n d u m Order N o . 2 0 - 7 7 .
S i m u l t a n e o u s with the s u b m i s s i o n of the report of loss

or destruction, t h e officer or person authorized to use the
m a c h i n e shall c a u s e t h e publication of the loss or destruction
in a n e w s p a p e r of general circulation, o n c e a w e e k for three
consecutive w e e k s .
(3) Verification of loss. Upon receipt of the report of loss
or destruction a n d s u b m i s s i o n of proof of publication of loss or
destruction, the R e v e n u e District Officer c o n c e r n e d shall cause
an investigation of the incident a n d submit a report thereon to
the R e v e n u e Service Chief, Inspection Service, within 30 days
f r o m notice of loss. (Sees. 2-4, Rev. Regs. No. 9-85.)
- oOo -
TITLE VIII
REMEDIES
CHAPTER I
REMEDIES IN GENERAL
1
SEC. 202. Final Deed to Purchaser. In case the taxpayer
shall not redeem the property as herein provided, the Revenue
District Officer shall, as grantor, execute a deed conveying to the
purchaser so much of the property as has been sold, free from all
liens of any kind whatsoever, and the deed shall succinctly recite all
the proceedings upon which the validity of the sale depends.
SEC. 203. Period of Limitation Upon Assessment and

Collection. Except as provided in Section 222, internal revenue
taxes shall be assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no proceeding in
court without assessment for the collection of such taxes shall be
begun after expiration of such period: Provided, That in a case where
a return is filed beyond the period prescribed by law, the three (3)-
year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last
day. (as amended by B.P. Big. 700.)
ANNOTATION
1. Limitations on the g o v e r n m e n t ' s right to a s s e s s and collect

taxes cannot be presumed in t h e a b s e n c e of legislation to the
contrary, and w h e r e the g o v e r n m e n t has not, by statutory provision
limited its right to assess unpaid taxes, such right is imprescriptible.
( C o m m . vs. Ayala Securities Corp., L-29485, Nov. 2 1 , 1980.)
'This provision is in the wrong place. It should follow Section 214.
438
Sees. 202-203 REMEDIES 439
Remedies in General
2. Sections 203 a n d 222 refer to a tax, the basis of which

is required by law to be reported in a return like, for example, an
income tax or value-added tax.
After the expiration of the prescriptive period, the government
loses the right to assess a tax; any a s s e s s m e n t thereafter m a d e is
invalid.
3. T h e general rule as to the prescriptive period for assessment
is that w h e r e a return w a s filed, the period is within three (3) years
after the date t h e return w a s d u e or w a s filed, whichever is later.
T h u s , if t h e income tax return d u e on April 15, 2011 w a s filed on
April 10, 2 0 1 1 , t h e three-year period is counted from April 15, 2 0 1 1 .
If filed on April 2 0 , 2 0 1 1 , it is c o u n t e d f r o m the latter date.
In c a s e s w h e r e t h e return has been a m e n d e d after it has been
filed, t h e prescriptive period should start to run from the filing of
the a m e n d e d return if it is substantially different from the original
return. To count the period f r o m the filing of the original return,
w o u l d e n a b l e taxpayers to e v a d e taxes by simply reporting losses
and deductions in the original return a n d later filing an a m e n d e d
return w h e n it is no longer possible for the g o v e r n m e n t to m a k e a
tax a s s e s s m e n t within the prescriptive period.
W h e n an a s s e s s m e n t is timely issued within the three-year
period, the BIR has another three-year period within which to collect
the tax a s s e s s e d recorded from the date of assessment.
4. An assessment is deemed made for the purpose of giving
effect thereto if:
(1) It is m a d e within the period of three (3) or ten (10)
years, as the c a s e m a y be; and
(2) Notice of the a s s e s s m e n t is released, mailed, or sent
to the taxpayer also within the s a m e period.
It is not required that the notice be received by the taxpayer
within the prescribed period. But the sending of the notice must
be clearly proved. (Basilan Estate, Inc. vs. C o m m . , L-22429,
Sept. 5, 1967.)
It is required that the taxpayer should actually receive, even
beyond the prescriptive period, the assessment notice which was
timely released, mailed and sent. (Barcelon, Roxas Securities,
Inc. vs. C o m m . , 498 S C R A 126 [2006].) T h e three-year period
for collection of the assessed tax begins to run on the date the
assessment has been released mailed and sent. ( C o m m . vs.
Philippine Global Communications, Inc., 506 SCRA 427 [2006].)
ANNOTATED
W h e n a mail matter is sent by registered mail, there exists a

presumption set forth under Section 3(v), Rule 1 3 1 , Rules of
Court that it w a s received in the regular course of mail. (Protection
Services, Inc. vs. Court of Appeals, 330 S C R A 404 [2000].)
5. An assessment contains not only a computation of tax
liabilities, but also a d e m a n d for payment within a prescribed period.
It also signals the time w h e n 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 the taxpayer. Accordingly, an affidavit, which w a s
executed by revenue officers stating the tax liabilities of a taxpayer
and attached to a criminal complaint for tax evasion cannot be
d e e m e d as a s s e s s m e n t that can be questioned before t h e Court of
Tax Appeals. ( C o m m . vs. Pascor Realty i i D e v e l o p m e n t Corp., 309
S C R A 4 0 2 [1999]; Estate of Late J.D. V d a . De Gabriel v s . C o m m . ,
421 S C R A 266 [2004].)
6. T h e general rule as to the prescriptive period for collection

by judicial action or by distraint or levy w h e r e an a s s e s s m e n t w a s
m a d e , is within three (3) years after the date of a s s e s s m e n t ; w h e r e
no a s s e s s m e n t w a s m a d e a n d a return w a s filed a n d the return is
not false or fraudulent, t h e period for collection is t h e s a m e as t h e
period for assessment, that is, within t h r e e (3) y e a r s after t h e return
w a s due or filed, w h i c h e v e r is later.
(1) Before the a m e n d m e n t , t h e t h e n Section 318 provided
for a 5-year period of prescription. T h e s h o r t e n e d periods of
limitation prescribed apply to a s s e s s m e n t s of internal r e v e n u e
taxes beginning taxable y e a r 1984. (Sec. 3, B.P. Big. 700.)
A s s e s s m e n t s or collection of taxes (a) m a d e or b e g u n on or after
April 5, 1984 (date of approval of B.P. Big. 700.) (b) covering
taxable years beginning January 1, 1984 shall be under t h e
three (3)-year period; otherwise, t h e y shall be g o v e r n e d by t h e
former five (5)-year period, (see Rev. M e m o . Cir. N o . 3 3 - 3 4 ;
see Protector's Services, Inc. v s . Court of A p p e a l s , 3 3 0 S C R A
4 0 4 [2000].)
(2) T h e prescriptive period to file action to collect deficiency

income tax w a s held to have prescribed w h e r e the action w a s
filed after five (5) (now 3) years f r o m t h e first a s s e s s m e n t in the
absence of evidence that a s u b s e q u e n t notice of a s s e s s m e n t
regarding the alleged deficiency tax w a s actually received by
the taxpayer. Such finding by a court, being o n e of fact, c a n
no longer be reviewed by the S u p r e m e Court. (Republic vs.
Ricarte, 140 S C R A , Nov. 12, 1985.)
Remedies in General
(3) An a s s e s s m e n t is d e e m e d m a d e w h e n notice to this

effect is released, m a i l e d , or sent by the Commissioner to
the taxpayer, and it is not required that the notice be received
within the three (3)-year prescriptive period, (supra.) Mere
notations m a d e without the taxpayer's intervention notice or
control, without a d e q u a t e supporting evidence, cannot suffice;
otherwise, t h e taxpayer w o u l d be at the mercy of the revenue
offices, without a d e q u a t e protect or d e f e n s e . (Nava vs. C o m m . ,
13 S C R A 104 [1965].)
W h e r e the taxpayer failed to properly inform the CIR of its

c h a n g e of a d d r e s s , the notice w a s d e e m e d received by it in the
ordinary course of mail f r o m the time the notice w a s mailed.
( H a m b r e c h t & Quist Philippines, Inc. vs. C o m m . , CTA Case No.
6 3 6 2 , Sept. 2 4 , 2004.)
(4) An a s s e s s m e n t notice that is sent by the BIR to the

taxpayer's old a d d r e s s , despite the latter's notice of change
of a d d r e s s , is null a n d v o i d , a n d the BIR's right to assess said
t a x p a y e r shall be d e e m e d prescribed if the a s s e s s m e n t w a s
not received within t h e three-year prescriptive period. While
a mailed letter is d e e m e d received by the addressee in the
course of mail, this is merely a disputable presumption subject
to controversion, a n d a direct denial of the receipt thereof shifts
the b u r d e n to t h e BIR to prove that the mailed letter w a s indeed
received by the a d d r e s s e e . ( C o m m . vs. Obayashi Philippines
Corporation, CTA C a s e No. 6 2 2 2 , J u n e 10, 2005.)
(5) A waiver of the statute of limitations (see Sec. 222.)
must, a m o n g other requirements, be executed by a responsible
officer of a corporation and must contain a definite expiration
date; otherwise, the waiver is void. Moreover, the presumption
that an a s s e s s m e n t notice sent by mail w a s received by the
taxpayer is only a disputable presumption. The BIR has the
burden to prove receipt if the taxpayer denies having received
the s a m e . (Akitsu Shipping Co., Ltd. vs. C o m m . of Internal
R e v e n u e , CTA C a s e No. 6360, May 2 6 , 2004.)
(6) All offenses against any special law or part of such
special law administered by the Bureau of Internal Revenue
shall prescribe after five (5) years in accordance with Section 1
of Act No. 3585 which a m e n d e d Act No. 3326. (see People vs.
Ching Lak [Unrep.], 103 Phil. 1149.)
(7) T h e prescriptive period for enforcing a tax compromise
is ten (10) years from the time the right of action accrues as
ANNOTATED
fixed in the Civil Code, (see Art. 1144, Civil Code.) C o m p r o m i s e

is a contract. (Art. 2028, Ibid.)
(8) In the absence of any provision in the Tax Code
governing the counting of the prescriptive periods for assess-
ment and collection of taxes, the s a m e shall be d o n e in
accordance with Article 13 of the Civil C o d e which provides:
"When the laws speak of years, months, d a y s or nights, it shall
be understood that years are of three hundred sixty-five e a c h ;
months, of thirty days; days, of twenty-four hours; and nights,
from sunset to sunrise.
If months are designated by their n a m e s , they shall be
computed by the number of d a y s which they respectively have.
In computing a period, the first day shall be e x c l u d e d , and the
last included."
Consequently, a 3-year prescriptive period for a s s e s s m e n t
under Sections 203 and 222(c) shall have an aggregate n u m b e r
of 1,095 days (365 d a y s x 3 years), reckoned f r o m t h e date of
filing of the return or f r o m t h e issuance of the a s s e s s m e n t , as
the case may be. In other w o r d s , the three-year prescriptive
period expires on the 1095th day notwithstanding t h e fact that
within that period, there is a leap year w h i c h is of 366 d a y s . For
example, from April 16, 1986 (the return w a s filed on April 15,
1986) to April 1 5 , 1 9 8 9 w h e n t h e deficiency i n c o m e a s s e s s m e n t
w a s issued and mailed, a total of 1096 d a y s h a v e already
elapsed since there are 29 d a y s in the m o n t h of February, 1988,
being a leap year. Accordingly, the a s s e s s m e n t w a s issued o n e
day after the expiration of t h e period of limitation. (Rev. M e m o .
Cir. No. 4 8 - 9 0 ; see National Marketing Corporation vs. Tecson,
29 S C R A 70, A u g . 27, 1969.)
Note: Under the Administrative C o d e of 1987 (Exec. Order
No. 292), a year is c o m p o s e d of 12 m o n t h s , t h e n u m b e r of d a y s
is irrelevant, (see Annotation N o . 9 to Section 229.)
7. Interruption of the prescriptive period. T h e period of
prescription provided by law to m a k e a collection by distraint or levy
or by a proceeding in court is interrupted o n c e a taxpayer requests
for reinvestigation or reconsideration of the a s s e s s m e n t .
(1) T h e s u m m a r y r e m e d y of distraint and levy is b e g u n by
the issuance of a warrant of distraint a n d levy. S u c h issuance
has the effect of stopping the running of prescription a n d it is
not necessary that it be actually e x e c u t e d to be m a d e effective.
(Palanca vs. C o m m . , L - 1 6 6 6 1 , J a n . 3 1 , 1962.)
Sec. 204 REMEDIES 443
Remedies in General
(2) A protest letter m a y be treated as letters of request

for reinvestigation and reconsideration although it does not
categorically state or use the w o r d s "reinvestigation" and
"reconsideration." ( C o m m . of Internal Revenue vs. Wyeth
S u a c o Laboratories, Inc., 2 0 2 S C R A 125, Sept. 30, 1 9 9 1 ;
C o m m . of Internal R e v e n u e vs. Capitol Subdivision, Inc., 10
S C R A 773, April 3 0 , 1964.) T h e statutory period of limitation
for collection m a y be interrupted if by the taxpayer's repeated
requests or positive acts, the g o v e r n m e n t has been, for good
reasons, p e r s u a d e d to postpone collection to make him feel
that t h e d e m a n d w a s not unreasonable or that no harassment
or injustice is m e a n t by the g o v e r n m e n t . (Cordero vs. Gonda,
18 S C R A 331 [1966].)
8. Benefits from fixing of prescriptive periods. The

periods of limitation relative to t h e a s s e s s m e n t and collection of
taxes are d e s i g n e d to s e c u r e the taxpayer against unreasonable
investigation after t h e lapse of the period prescribed. (Vol. 1, Phil.
Tax C o m m i s s i o n Report, 98.) T h e fixing of such periods is also
beneficial to t h e g o v e r n m e n t b e c a u s e tax officers would be obliged
to act promptly. (Republic v s . A b l a z a , 108 Phil. 1105 [1960].)
9. Prescription being a matter of defense, the burden is on

the taxpayer to prove that the full period of limitation has expired,
a n d this requires him to positively establish the date w h e n the
period started running a n d w h e n t h e s a m e w a s fully accomplished.
(Querol vs. Coll., L-16705, Oct. 30, 1962.)
10. Construction of law on prescription. T h e law should be
liberally construed in order to protect taxpayers. As a corollary,
the exception to the law should be strictly construed. ( C o m m . vs.
B.F. Goodrich, 4 7 3 S C R A 255 [2005]; C o m m . vs. Philippine Global
C o m m u n i c a t i o n s , Inc., 506 S C R A 4 2 7 [2006].)
SEC. 2 0 4 . Authority of the Commissioner to Compromise,

Abate, and Refund or Credit Taxes. The Commissioner
may
(A) Compromise the payment of 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.
The compromise settlement of any tax liability shall be subject
to the following minimum amounts:
ANNOTATED
For cases of financial incapacity, a minimum compromise rate

equivalent to ten percent (10%) of the basic assessed tax; and
For other cases, a minimum compromise rate equivalent to forty
percent (40%) of the basic assessed tax.
Where the basic tax involved exceeds One million pesos
(PI,000,000) or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners.
(B) Abate or cancel a tax liability, when:
(1) The tax or any portion thereof appears to be unjustly or
excessively assessed; or
(2) The administration and collection costs involved do not
justify the collection of the amount due.
All criminal violations may be compromised except: (a) those
already filed in court, or (b) those involving fraud.
(C) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of
destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment
shall be considered as a written claim for credit or refund.
A Tax Credit Certificate validly issued under the provisions of
this Code may be applied against any internal revenue tax, excluding
withholding taxes, for which the taxpayer is directly liable. Any
request for conversion into refund of unutilized tax credits may
be allowed, subject to the provisions of Section 230 of this Code:
Provided, That the original copy of the Tax Credit Certificate
showing a creditable balance is surrendered to the appropriate
revenue officer for verification and cancellation: Provided, further,
That in no case shall a tax refund be given resulting from availment
of incentives granted pursuant to special laws for which no actual
payment was made.
The Commissioner shall submit to the Chairmen of the Com-
mittee on Ways and Means of both the Senate and House of Rep-
Remedies in General
r e s e n t a t i v e s , e v e r y s i x (6) m o n t h s , a r e p o r t o n t h e exercise o f h i s
p o w e r s u n d e r t h i s S e c t i o n , s t a t i n g t h e r e i n t h e f o l l o w i n g facts a n d i n -
f o r m a t i o n , a m o n g o t h e r s : n a m e s a n d addresses o f t a x p a y e r s whose
cases h a v e b e e n t h e s u b j e c t o f a b a t e m e n t o r c o m p r o m i s e ; a m o u n t
i n v o l v e d ; a m o u n t c o m p r o m i s e d o r a b a t e d ; a n d reasons f o r t h e exer-
cise o f p o w e r : Provided, T h a t t h e s a i d r e p o r t s h a l l be p r e s e n t e d t o
t h e Oversight C o m m i t t e e in Congress t h a t shall be constituted to
d e t e r m i n e t h a t s a i d p o w e r s a r e r e a s o n a b l y exercised a n d t h a t t h e
G o v e r n m e n t i s n o t u n d u l y d e p r i v e d o f r e v e n u e s , (a)
ANNOTATION
1. Amended: S u b s e c . (A) provision after (2); New: proviso in

Subsection (C) a n d t h e following p a r a g r a p h s . Deleted: Subsection
(A, 2) t h e proviso on c o m p r o m i s e involving large taxpayers.
2. Compromise is a contract w h e r e b y t h e parties by reciprocal
c o n c e s s i o n s avoid a litigation or put an end to o n e already
c o m m e n c e d , (see A r t s . 2 0 2 6 , 2 0 3 7 , 2 0 3 8 , 2 0 4 1 , Civil Code.)
3. Only Commissioner may compromise, abate, or cancel tax
liability. T h e C o m m i s s i o n e r of Internal R e v e n u e is the only official
v e s t e d with t h e p o w e r a n d discretion to enter into c o m p r o m i s e of
criminal a n d civil c a s e s (see Pres. Decree No. 640.) and to abate
or cancel a tax liability or any portion thereof. This is to assure that
no improper c o m p r o m i s e or condonation is m a d e to the prejudice
of the G o v e r n m e n t . This p o w e r c a n n o t be delegated.
(1) Subordinate officials, however, m a y preliminarily enter

into a c o m p r o m i s e subject to review by the Commissioner.
T h e y can only r e c o m m e n d to t h e C o m m i s s i o n e r the abatement
or cancellation of any tax liability w h e n proper, irrespective of
the a m o u n t involved.
(2) T h e ultra vires act of revenue officials cannot have any
valid a n d binding legal effect u p o n the Commissioner so as to
proscribe the latter from issuing reassessment of unpaid taxes.
(Security Bank Corporation vs. C o m m . , 4 9 9 S C R A 4 5 3 [2006].)
4. Abatement, and cancellation. W h a t is referred to by
the parties as c o m p r o m i s e m a y actually be an abatement or a
cancellation.
Abatement is the act of "diminution or decrease in the amount
of tax imposed;" it refers to "the act of eliminating or nullifying; x x
x of lessening or moderating x x x." To abate is "to nullify or reduce
in value or amount"; while to cancel is "to obliterate, cross out, or
ANNOTATED
invalidate"; and "to strike out; x x x delete; x x x erase; x x x m a k e

void o r invalid; x x x annul; x x x destroy; x x x revoke o r recall."
The BIR may, therefore, abate or cancel the whole or any unpaid
portion of a tax liability, inclusive of increments, if its assessment is
excessive or erroneous; or if the administration costs involved do
not justify the collection of the a m o u n t d u e . No mutual concessions
need be m a d e , because an excessive or erroneous tax is not
compromised; it is abated or cancelled. Only correct taxes should
be paid. (People vs. S a n d i g a n b a y a n , 4 6 7 S C R A 137 [2005].)
5. Scope of authority to compromise. T h e authority of the
Commissioner to c o m p r o m i s e is not absolute as it is subject to the
limitations prescribed in Section 204 and to the provision of Section
229. (Republic vs. V d a . d e Lao, L-16513, J a n . 3 1 , 1962.) Although
the general rule is that c o m p r o m i s e s are to be f a v o r e d , and that
compromises entered into in g o o d faith cannot be set aside, this
rule is not without qualification. A court m a y still reject a c o m p r o m i s e
or settlement w h e n it is repugnant to law, morals, g o o d c u s t o m s ,
public order, or public policy. (Philippine National Oil C o m p a n y v s .
Court of A p p e a l s , 4 5 7 S C R A 32 [2005].)
(1) In civil cases. T h e c o m p r o m i s e settlement of any

tax liability is subject to the m i n i m u m a m o u n t s provided. T h e
provisions are new, a d d e d by R.A. N o . 8 4 2 4 . C o m p r o m i s e is
not permitted with respect to the liability of the taxpayer for
surcharge as their imposition is m a n d a t o r y (Republic vs. Phil.
Bank of C o m m e r c e , L - 2 0 9 5 1 , July 3 1 , 1970.), nor in c a s e s
which have b e e n finally terminated since there is no more
reason or basis for it.
Since the C o m m i s s i o n e r m a y c o m p r o m i s e and/or abate

the basic tax, there is no reason w h y the 2 5 % surcharge
(see Sec. 248.) m a y not be a b a t e d . In t h e exercise by the
C o m m i s s i o n e r of his discretion, t h e waiver of penalties m a y be
allowed only under t h e c i r c u m s t a n c e s e n u m e r a t e d in Section
204. (BIR Ruling No. 124-99, A u g . 17, 1999.) Under Sections
248 and 2 4 9 , however, t h e imposition of surcharge and interest
is mandatory.
(2) In criminal cases. With respect to those not involving

the commission of fraud (e.g., failure to keep or preserve books
and other records), after they reach the prosecutor's office, the
prosecutor must give his consent to the c o m p r o m i s e . O n c e the
information is filed in court, c o m p r o m i s e is no longer allowed,
(see People vs. Magdaluyo, L-16255, April 2 0 , 1961.)
Remedies in General
In fine, under Section 2 0 4 , all criminal violations may be

c o m p r o m i s e d except: (a) those already filed in court although
they do not involve f r a u d ; a n d (b) those involving fraud although
they have not yet b e e n filed in court.
In practice, after leave of court has been obtained, the BIR

allows the c o m p r o m i s e of internal revenue taxes already filed
in court involving criminal violations that do not involve fraud
under t h e provisions of Rev. M e m o . Cir. No. 188, as a m e n d e d
by Rev. M e m o . Cir. N o . 29-90 and Rev. M e m o . Cir. No. 2 9 - 9 1 .
(BIR Ruling N o . 1 6 1 , A u g . 2 1 , 1991.)
N o t e that t h e instances w h e n the C o m m i s s i o n e r may be

authorized to c o m p r o m i s e , a b a t e , or cancel the tax liability of a
t a x p a y e r are limited to t h o s e m e n t i o n e d in Section 2 0 4 . Other
g r o u n d s (e.g., financial constraints a n d other difficulties) are
not sufficient.
6. Compromise of tax cases. Sections 7(c) and 204(A) (see
Sec. 290[2].) give authority to the C o m m i s s i o n e r to c o m p r o m i s e
the p a y m e n t of internal r e v e n u e liabilities of certain taxpayers with
outstanding receivables a c c o u n t s and disputed a s s e s s m e n t s with
the BIR.
(1) Cases which may be compromised. Under Rev.
R e g s . No. 3 0 - 2 0 0 2 a n d No. 8-2004, w h i c h superseded Rev.
Regs. Nos. 6-2002 a n d 7 - 2 0 0 1 , the following cases may,
u p o n taxpayer's c o m p l i a n c e with the basis set forth under the
Regulations, be t h e subject matter of c o m p r o m i s e settlement,
viz.:
(a) Delinquent accounts;
(b) C a s e s under administrative protest after issuance
of the Final A s s e s s m e n t Notice to the taxpayer which are
still pending in the Regional Offices, Revenue District
Offices, Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service, and other offices
in the National Office;
(c) Civil tax cases being disputed before the courts;
(d) Collection cases filed in courts; and
(e) Criminal violations, other than those already filed
in court, or those involving criminal tax fraud.
(2) Exceptions. T h e following may not be compromised:
(a) Withholding tax cases, unless the applicant-tax-
ANNOTATED
payer invokes provisions of law that cast doubt on the

taxpayer's obligation to withhold;
(b) Criminal tax fraud cases confirmed as such by the
Commissioner of Internal R e v e n u e or his duly authorized
representative;
(c) Criminal violations already filed in court;
(d) Delinquent accounts with duly a p p r o v e d schedule
of installment p a y m e n t s ;
(e) C a s e s w h e r e final reports of investigation or
reconsideration have b e e n issued resulting to reduction
in the original a s s e s s m e n t and t h e taxpayer is agreeable
to such decision by signing t h e required a g r e e m e n t f o r m
for the purpose. On the other h a n d , other protested cases
shall be handled by t h e Regional Evaluation Board ( R E B )
or the National Evaluation Board ( N E B ) on a c a s e to c a s e
basis;
(f) C a s e s w h i c h b e c o m e final a n d executory after final

j u d g m e n t of a court, w h e r e c o m p r o m i s e is requested on
the ground of doubtful validity of the a s s e s s m e n t ; and
(g) Estate tax c a s e s w h e r e c o m p r o m i s e is requested
on the g r o u n d of financial incapacity of t h e taxpayer. (Sec.
2, Rev. R e g s . No. 30-2002.)
7. Basis for acceptance of compromise settlement. T h e
C o m m i s s i o n e r m a y c o m p r o m i s e t h e p a y m e n t of any internal
revenue tax on t h e following g r o u n d s :
(1) Doubtful validity of the assessment. T h e offer to
c o m p r o m i s e a delinquent a c c o u n t or disputed a s s e s s m e n t
under theses Regulations on t h e g r o u n d of reasonable doubt
as to the validity of the a s s e s s m e n t m a y be a c c e p t e d w h e n it is
s h o w n that:
(a) T h e delinquent account or disputed a s s e s s m e n t

is o n e resulting f r o m a j e o p a r d y a s s e s s m e n t (For this
purpose, "jeopardy a s s e s s m e n t " shall refer to a tax
a s s e s s m e n t w h i c h w a s a s s e s s e d without the benefit of
complete or partial audit by an authorized revenue officer,
w h o has reason to believe that the a s s e s s m e n t a n d
collection of a deficiency tax will be j e o p a r d i z e d by delay
b e c a u s e of the taxpayer's failure to comply with the audit
and investigation requirements to present his books of
accounts and/or pertinent records, or to substantiate all or
Remedies in General
any of the deductions, exemptions or credits claimed in his

return; or
(b) T h e a s s e s s m e n t s e e m s to be arbitrary in nature,

a p p e a r i n g to be b a s e d on presumptions a n d there is reason
to believe that it is lacking in legal and/or factual basis; or
(c) T h e taxpayer failed to file an administrative pro-
test on a c c o u n t of the alleged failure to receive notice
of a s s e s s m e n t and there is reason to believe that the
a s s e s s m e n t is lacking in legal and/or factual basis; or
(d) T h e t a x p a y e r failed to file a request for
reinvestigation/reconsideration within 30 d a y s from receipt
of final a s s e s s m e n t notice and there is reason to believe
that t h e a s s e s s m e n t is lacking in legal and/or factual basis;
or
(e) T h e t a x p a y e r failed to elevate to the Court of Tax

A p p e a l s (CTA) an a d v e r s e decision of the Commissioner,
or his authorized representative, in s o m e cases, within 30
d a y s f r o m receipt thereof and there is reason to believe
that t h e a s s e s s m e n t is lacking in legal and/or factual basis;
or
(f) T h e a s s e s s m e n t s w e r e issued on or after January
1, 1998, w h e r e the d e m a n d notice allegedly failed to
c o m p l y with the formalities prescribed under Section 228
of the Tax C o d e ;
(g) A s s e s s m e n t s m a d e b a s e d on the "Best Evidence
Obtainable Rule" a n d there is reason to believe that
the s a m e can be disputed by sufficient and competent
evidence; or
(h) T h e a s s e s s m e n t w a s issued within the prescriptive
period for a s s e s s m e n t as extended by the taxpayer's
execution of Waiver of the Statute of Limitations the validity
or authenticity of which is being questioned or at issue and
there is strong reason to believe and evidence to prove that
it is not authentic; or
(i) T h e assessment is based on an issue where a
court of competent jurisdiction m a d e an adverse decision
against the BIR, but for which the S u p r e m e Court has not
2
decided upon with finality. (Sec. 3, Ibid.)
"Paragraph (i) was added by Rev. Regs. No. 8-2004.

ANNOTATED
(2) Financial incapacity. T h e offer to compromise based

on financial incapacity may be accepted upon showing that:
(a) The corporation c e a s e d operation or is already
dissolved, provided that tax liabilities corresponding to the
Subscription Receivable or Assets distributed/distributable
to the stockholders representing return of capital at the
time of cessation of operation or dissolution of business
shall not be considered for c o m p r o m i s e ; or
(b) T h e taxpayer, as reflected in its latest Balance
Sheet supposed to be filed with the B u r e a u of Internal
Revenue, is suffering f r o m surplus or earnings deficit
resulting to impairment in the original capital by at least
5 0 % , provided that a m o u n t s payable or d u e to stockholders
other than business-related transactions w h i c h are properly
includible in the regular "accounts payable" are by fiction
of law considered as part of capital and not liability, and
provided further that the taxpayer has no sufficient liquid
asset to satisfy the tax liability; or
(c) T h e taxpayer is suffering f r o m a networth deficit

(total liabilities e x c e e d total assets) c o m p u t e d by deducting
total liabilities (net of deferred credits and a m o u n t s
payable to stockholder/owners reflected as liabilities,
except business-related transactions) f r o m total assets
(net of prepaid e x p e n s e s , deferred c h a r g e s , pre-operating
e x p e n s e s , as well as appraisal increases in fixed assets),
taken f r o m the latest audited financial statements, provided
that in the case of an individual taxpayer, he has no other
leviable properties under t h e law other t h a n his family
h o m e ; or
(d) T h e taxpayer is a c o m p e n s a t i o n i n c o m e earner

with no other source of i n c o m e a n d the family's gross
monthly c o m p e n s a t i o n income d o e s not e x c e e d the levels
of c o m p e n s a t i o n i n c o m e provided for under No. 7, 1, a
(infra.), and it a p p e a r s that the t a x p a y e r p o s s e s s e s no
other leviable or distrainable assets, other than his family
h o m e ; or
(e) T h e taxpayer has b e e n declared by any c o m p e t e n t

tribunal/authority/body/government a g e n c y as bankrupt or
insolvent.
T h e C o m m i s s i o n e r shall not consider any offer for c o m -

promise settlement on the g r o u n d of financial incapacity of a
Sec. 204 REMEDIES 4 5 1
Remedies in General
taxpayer with Tax Credit Certificate (TCC), issued under the

Tax C o d e or Executive Order No. 2 2 6 , on hand or in transit, or
with p e n d i n g claim for tax refund or tax credit with the Bureau
of Internal R e v e n u e , D e p a r t m e n t of Finance One-Stop-Shop
Tax Credit a n d Duty D r a w b a c k Center (Tax R e v e n u e Group or
Investment Incentive Group) and/or t h e courts, or with existing
finalized a g r e e m e n t or prospect of future a g r e e m e n t with any
party that resulted or could result to an increase in the equity
of t h e t a x p a y e r at t h e time of the offer for c o m p r o m i s e or at a
definite future t i m e . Moreover, no offer of c o m p r o m i s e shall be
entertained unless a n d until the taxpayer w a i v e s in writing his
privilege of t h e secrecy of bank deposits under R.A. No. 1405
or under other g e n e r a l or special laws, and such waiver shall
constitute as t h e authority of t h e C o m m i s s i o n e r to inquire into
t h e bank deposits of t h e taxpayer.
P r e s e n c e of c i r c u m s t a n c e s that w o u l d place the taxpayer-

applicant's inability to pay in serious doubt can be a ground
to d e n y t h e application for c o m p r o m i s e based on financial
incapacity of the taxpayer to pay t h e tax. (Sec. 3, Ibid.)
8. Prescribed minimum percentages of Compromise
Settlement. T h e c o m p r o m i s e settlement of t h e internal revenue
tax liabilities of t a x p a y e r s , r e c k o n e d on a per tax type assessment
basis, shall be subject to t h e following m i n i m u m rate based on the
basic a s s e s s e d tax:
(1) For cases of "financial incapacity."
(a) If taxpayer is an individual w h o s e only source of
i n c o m e is f r o m e m p l o y m e n t and w h o s e monthly salary,
if single, is P10,500 or less, or if married, w h o s e salary
together with his s p o u s e is P21,000 per m o n t h , or less,
a n d it a p p e a r s that the taxpayer possesses no other
leviable/distrainable assets, other
than his family h o m e 10%
(b) If the taxpayer is an individual without any
source of income
(c) W h e r e the taxpayer is under any of
the following conditions:
1) Zero networth computed in accord-
ance with No. 6, 2, c (supra.)
2) Negative networth computed in
accordance with No. 6, 2, c (supra.)
ANNOTATED
3) Dissolved corporations 20%

4) Already non-operating companies for
a period of:
(a) three (3) years or more as of the date of
application for c o m p r o m i s e settlement 10%
(b) less than 3 years 20%
5) Surplus or earnings deficit resulting to
impairment in the original capital
by at least 5 0 % 40%
6) Declared insolvent or bankrupt, unless
taxpayer falls squarely under any
situation as discussed a b o v e , thus
resulting to the application of the
appropriate rate.
(2) For cases of "doubtful validity" A m i n i m u m
c o m p r o m i s e rate equivalent to 4 0 % of the basic a s s e s s m e n t
tax.
T h e taxpayer may, nevertheless, request for a c o m p r o m i s e
rate lower than 4 0 % provided, however, that he shall be required
to submit his request in writing stating therein t h e r e a s o n s , legal
and/or factual, w h y he should be entitled to s u c h lower rate a n d
provided, further, that for applications of c o m p r o m i s e settlement
based on doubtful validity of t h e a s s e s s m e n t involving an offer
lower than the m i n i m u m 4 0 % c o m p r o m i s e rate, the s a m e shall
be subject to the prior approval by t h e N E B .
T h e herein prescribed m i n i m u m p e r c e n t a g e s shall likewise

apply in c o m p r o m i s e settlement of a s s e s s m e n t s solely of
increments, i.e., s u r c h a r g e , interest, etc., b a s e d on t h e total
amount assessed.
9. Documentary requirements. T h e y are as follows:

(1) If the application for c o m p r o m i s e is premised under
No. 7, 1, a (supra.), the taxpayer-applicant shall submit with
his application (a) a certification f r o m his e m p l o y e r on his
prevailing monthly salary, including allowances; a n d (b) a
sworn statement that he has no other source of i n c o m e other
than from e m p l o y m e n t .
(2) If the application is p r e m i s e d under No. 7, 1, b (supra.),

the taxpayer-applicant shall submit with his application a s w o r n
statement that he derives no i n c o m e from any source whatever.
Remedies in General
(3) If the application is premised under No. 7 , 1 , c (supra.),

a copy of the applicant's latest audited financial statements or
audited A c c o u n t Information Form filed with the BIR shall be
submitted with the application. Nonetheless, for situation under
No. 7, 1, c, 3 (supra.), t h e "Notice of Dissolution" submitted to
S E C or other similar or equivalent d o c u m e n t should likewise
be s u b m i t t e d . For situation under No. 7, 1, c, 6 (supra.), a
copy of t h e order declaring bankruptcy or insolvency shall be
submitted.
In all c a s e s of offer b a s e d on financial incapacity, waiver of

the secrecy of Bank Deposit under R.A. No. 1405 and Sworn
S t a t e m e n t saying that he has no Tax Credit Certificate (TCC)
on h a n d or in transit or claim for tax refund or T C C under the
Tax C o d e a n d Executive O r d e r N o . 2 2 6 pending in any office
shall be s u b m i t t e d .
Moreover, additional requirements prescribed under

t h e existing R e v e n u e M e m o r a n d u m Order ( R M O ) shall still
be c o m p l i e d with unless a m e n d e d and/or e x p a n d e d by an
a m e n d a t o r y R M O . (Sec. 5, Ibid.)
10. Approval of offer of compromise. Except for offers of

c o m p r o m i s e w h e r e t h e approval is delegated to the Regional
Evaluation Board ( R E B ) pursuant to the succeeding paragraph,
all c o m p r o m i s e settlements within the jurisdiction of the National
Office (NO) shall be a p p r o v e d by a majority of all m e m b e r s of the
National Evaluation Board ( N E B ) c o m p o s e d of the Commissioner
and t h e four (4) Deputy C o m m i s s i o n e r s . All decisions of the N E B ,
granting the request of the taxpayer or favorable to the taxpayer,
shall h a v e t h e concurrence of t h e Commissioner.
Offers of c o m p r o m i s e of a s s e s s m e n t s issued by the Regional

Offices involving basic deficiency taxes of P500.000 or less and for
minor criminal violations discovered by the Regional and District
Offices, shall be subject to the approval by the Regional Evaluation
Board (REB), comprised of the following Officers of the Region:
Regional Director C h a i r m a n ; M e m b e r s : Assistant Regional
Director; Chief, Legal Division; Chief, A s s e s s m e n t Division; Chief,
Collection Division; and Revenue District Officer having jurisdiction
over the taxpayer-applicant.
If the offer of compromise is less than the prescribed minimum
rates set forth in No. 7 (supra.), the s a m e shall always be subject to
the approval of the N E B . T h e compromise offer may be paid before
ANNOTATED
or after the approval of the offer of compromise by the Board (NEB

or REB), at the option of the taxpayer. In case of disapproval of
compromise offer previously paid, the s a m e shall be dealth with in
accordance with the prevailing procedures e m b o d i e d in the R M O
3
issued for this purpose, including a m e n d m e n t s thereto. (Sec. 6,
Ibid.)
11. Report of the Commissioner. T h e C o m m i s s i o n e r shall
submit to the Congressional Oversight C o m m i t t e e through the
Chairman of the Committee on W a y s and M e a n s of both the
Senate and House of Representatives every six (6) months of e a c h
calendar year, a report on the exercise of his p o w e r s to c o m p r o m i s e
the tax liabilities of taxpayers, in this regard, the R E B should submit
to the Commissioner all the necessary reports a n d data in d u e
time for the latter to be able to submit the required reports to the
Congressional Oversight C o m m i t t e e . (Sec. 7, Ibid.)
Note: Rev. M e m o . Cir. No. 5 1 - 2 0 0 9 prescribes the policies

for the imposition of c o m p r o m i s e penalties and the issuance
of subpoena duces tecum ( D S T ) to enforce t h e submission of
the required S u m m a r y Lists of Sales (SLS) a n d framing Lists
of Purchases (SLPs) to e n s u r e the uniform application of s u c h
procedures throughout all Regional a n d District Offices a n d t h e
Division a n d District Offices of the Large Taxpayers Services
(LTS). All VAT-registered p e r s o n s with both quarterly sales/receipts
exceeding P2.5 million (net of VAT) a n d total quarterly p u r c h a s e s
exceeding P1 million (net of VAT) are required to s u b m i t S L S s a n d
S L P s , respectively.
12. Evaluation Boards. A National Evaluation Board ( N E B )

in the National Office and a Regional Evaluation Board ( R E B ) in
each R e v e n u e Region all over the country are c r e a t e d in t h e BIR to
evaluate and a p p r o v e / d i s a p p r o v e the applications for settlement of
each delinquent account/disputed a s s e s s m e n t , the composition of
such Boards a n d the c a s e s under their respective jurisdictions are
as follows:
3
The last paragraph of Rev. Memo. Cir. N o . 20-2007 provides for a stricter
implementation in the payment of tax under the exercise of compromise power of the
BIR. There is an apparent inconsistency in the procedures prescribed. The provisions
of Rev. Regs. N o . 30-2002, as amended by Rev. Regs. N o . 8-2004 shall prevail over the
provisions of Rev. Memo. Cir. No. 20-2007 in case of conflict of provisions. A revenue
regulation is higher in category than a Revenue Memorandum Circular. (Rev. Memo.
Cir. No. 27-2008, June 16, 2008.)
Remedies in General
(a) National Evaluation Board (NEB). It is c o m p o s e d of

the C o m m i s s i o n e r of Internal R e v e n u e as Chairman and Four
(4) Deputy C o m m i s s i o n e r s as Members."
W h e r e t h e basic a s s e s s e d tax involved exceeds
P1,000,000.00 or w h e r e t h e settlement offered is less than the
prescribed m i n i m u m rates of 4 0 % (in c a s e s of doubtful validity),
1 0 % (in c a s e s of financial incapacity), and 5 0 % (in cases of
taxpayers registered under LTS a n d ETS) of the basic tax, the
c o m p r o m i s e shall be subject to the approval by the N E B .
For c o m p r o m i s e offers on delinquent accounts and disputed

a s s e s s m e n t s w h e r e the a s s e s s m e n t notices w e r e issued by
the Regional Offices a n d the basic a s s e s s e d tax exceeds
P 5 0 0 . 0 0 0 . 0 0 but not over P1,000,000.00, or for assessments
issued by t h e National Office w h e r e t h e basic a s s e s s e d tax
d o e s not e x c e e d P 1 , 0 0 0 , 0 0 0 . 0 0 , the c o m p r o m i s e offer, after
evaluation by the Technical W o r k i n g G r o u p ( T W G ) , shall be
a p p r o v e d by the Commissioner.
(b) Regional Evaluation Board (REB). It is c o m p o s e d

of the Regional Director as C h a i r m a n with the following as
m e m b e r s : Assistant Regional Director; Chief, Legal Division,
Chief, A s s e s s m e n t Division; Chief, Collection Division, and
R e v e n u e District Officer having jurisdiction over the taxpayer-
applicant.
T h e R E B m a y c o m p r o m i s e a s s e s s m e n t s issued b y the
regional offices involving basic a s s e s s e d taxes of P500.000.00
or less and minor criminal violations discovered by the Regional
and District Officials.
T h e evaluation of offers of c o m p r o m i s e shall, in all cases,
be conducted by a Technical Working Group, in the National
and Regional levels, respectively, to be constituted for the
purpose through the issuance of a Regional Special Order
(RSO).
"Section 204 in relation to Section 7(B) of the Tax Code is implemented by

Rev. Regs. N o . 30-2002, as amended by Rev. Regs. No. 8-2004. Said regulations men-
tion two (2) categories of Board: The N E B and the R E B ; the N E B is composed of the
Commissioner and the four (4) Deputy Commissioners. There are now one (1) Senior
Deputy Commissioner and six (6) Deputy Commissioner (4 line and 2 staff) in the
current BIR's administration. For purposes of implementing Section 204, the four
(4) line Deputy Commissioners (for Operations Group, Legal and Inspection Group,
Information Systems Group, and Resources Management Group) shall form part of
the N E B . The staff Deputy Commissioners are for Tax Reform Administration Group
and Special Concerns Group, (see Rev. Memo. Cir. No. 49-2008.)
ANNOTATED
The N E B and REBs of the Revenue Regions shall each

create a Secretariat to handle the administrative functions of
their respective T W G s . (Sec. 5, Rev. Regs. No. 6-2000.)
Note: Rev. Regs. No. 30-2002, however, expressly provides
that "these Regulations supersede Revenue Regulations No."
6-2000 and Revenue Regulations No. 7 - 2 0 0 1 . " (Sec. 8 thereof.)
13. Imposition of compromise penalty in criminal cases not
allowed. If an offer of c o m p r o m i s e is rejected by the taxpayer and
the Commissioner of Internal R e v e n u e believes that the taxpayer
has incurred criminal liability for the violation of the tax law, he
should file a criminal action to enforce the penalty. ( C o m m . v s . Pio
Barretto and Sons, L-11805, M a y 3 1 , 1960.) For him to impose a
(compromise) penalty is clearly illegal a n d unauthorized. (Coll. v s .
U.S.T., L-11274 a n d L-11280, Nov. 2 8 , 1 9 6 0 ; Phil. Int. Fair v s . Coll.,
L-12928 and 12932, M a r c h 3 1 , 1962.) A penalty can be i m p o s e d
only on a finding of criminal liability. ( C o m m . v s . A b a d , L-12627,
June 2 7 , 1968.)
14. Prescriptive period where tax compromise entered into.

An action to recover taxes, s u r c h a r g e s a n d penalty w h i c h w a s
the subject matter of a c o m p r o m i s e a g r e e m e n t e n t e r e d b e t w e e n a
taxpayer and the C o m m i s s i o n e r of Internal R e v e n u e , t h e p a y m e n t
thereof being g u a r a n t e e d by a b o n d , is predicated u p o n contract
and not o n e to collect taxes. Consequently, t h e prescriptive period
that would bar the action is not that provided by t h e Tax C o d e but
the Civil C o d e . (Republic v s . Far East A m e r i c a n C o m m e r c i a l C o . ,
Inc., L-17475, Feb. 2 8 , 1963; Republic v s . A r a n e t a , L-14142, M a y
30, 1961.)
15. Taxes not subject to contract except where there is

compromise. Taxes are fixed by law a n d a r e not subject to
contract b e t w e e n t h e t a x p a y e r a n d a tax official e x c e p t w h e n there
is an actual c o m p r o m i s e . T h e a c c e p t a n c e of any a m o u n t by tax
e m p l o y e e s and officials, w h i c h d o e s not constitute a full p a y m e n t
of the a m o u n t fixed by law, is no g r o u n d or reason for t h e claim for
exemption by the taxpayer f r o m liability for t h e remaining a m o u n t
due under the law. Taxes are not subject to a g r e e m e n t s b e t w e e n
the taxpayer and the tax officer. If any s u c h a g r e e m e n t s are m a d e ,
they cannot serve to defeat or discharge the tax liability that t h e
law fixes as full a m o u n t of the tax. (Coll. vs. M c G r a t h , 1 S C R A 6 3 9 .
Feb. 28, 1961.)
16. Abatement or cancellation of penalties and/or interest.

T h e following are instances w h e n the penalties and/or interest
Remedies in General
imposed on the taxpayer m a y be a b a t e d or cancelled on the ground

that the imposition thereof is unjust or excessive.
(1) W h e n t h e filing of the return/payment of the tax is m a d e
at the w r o n g v e n u e ;
(2) W h e n taxpayer's mistake in payment of his tax is due
to e r r o n e o u s written official advice of a revenue officer;
(3) W h e n taxpayer fails to file the return and pay the tax
on t i m e d u e to substantial losses f r o m prolonged labor dispute,
force m a j e u r e , legitimate business reverses such as in the
following instances, provided, however, that the abatement
shall only cover the surcharge a n d t h e c o m p r o m i s e penalty and
not t h e interest i m p o s e d under Section 2 4 9 of the Tax C o d e :
(a) Labor strike for m o r e than six (6) months which

has c a u s e d t h e t e m p o r a r y s h u t d o w n of business;
(b) Public turmoil;
(c) Natural calamity such as lightning, earthquake,
s t o r m , flood a n d the like;
(d) A r m e d conflicts s u c h as w a r or insurgency;
(e) Substantial losses sustained d u e to fire, robbery,
theft, e m b e z z l e m e n t ;
(f) C o n t i n u o u s heavy losses incurred by the taxpayer
for t h e last t w o (2) years;
(g) Liquidity problem of the taxpayer for the last three
(3) years; or
(h) Such other instances which the Commissioner
may d e e m analogous to the enumeration above.
(4) W h e n the a s s e s s m e n t is brought about or the result
of taxpayer's non-compliance with the law due to a difficult
interpretation of said law;
(5) W h e n taxpayer fails to file the return and pay the correct
tax on time due to circumstances beyond his control, provided,
however, that abatement shall cover only the surcharge and
the c o m p r o m i s e penalty and not the interest;
(6) Late payment of the tax under meritorious circum-
stances such as those provided hereunder:
(a) O n e day late filing and remittance due to failure to
beat bank cut-off time;
ANNOTATED
(b) Use of wrong tax form but correct amount of tax

was remitted;
(c) Filing an a m e n d e d return under meritorious
circum-stances, provided, however, that abatement shall
cover only the penalties and not the interest;
(d) Surcharge erroneously i m p o s e d ;
(e) Late filing of return due to unresolved issue on
classification/valuation of real property (for capital gains tax
cases, etc.);
(f) Offsetting of taxes of the s a m e kind, i.e., over-pay-
ment in o n e quarter/month is offset against u n d e r p a y m e n t
in another quarter/month;
(g) Automatic offsetting of o v e r p a y m e n t of o n e kind of
withholding tax against t h e u n d e r p a y m e n t of another kind;
(h) Late remittance of withholding tax on c o m p e n s a t i o n
of expatriates for services rendered in t h e Philippines
pending the issuance by the Securities a n d E x c h a n g e
C o m m i s s i o n of the license to t h e Philippine b r a n c h office
or subsidiary, provided, however, that t h e a b a t e m e n t shall
only cover the surcharge a n d t h e c o m p r o m i s e penalty a n d
not the interest;
(i) W r o n g use of Tax Credit Certificate ( T C C ) w h e r e

Tax Debit M e m o ( T D M ) w a s not properly applied for; a n d
G) S u c h other instances w h i c h t h e C o m m i s s i o n e r
may deem analogous to the enumeration above.
(7) Other c a s e s similar or s y n o n y m o u s thereto. (Sec. 2,
Rev. Regs. N o . 13-2001.)
17. Abatement or cancellation of tax liabilities, penalties and/or

interest. W h e n the administrative a n d collection costs, including
cost of litigation, are m u c h m o r e t h a n t h e a m o u n t that m a y be
collected f r o m the taxpayer, t h e a s s e s s m e n t m a y b e r e d u c e d
through abatement, or entirely cancelled pursuant to Section 2 0 4 ( B )
of the Tax C o d e . T h e instances that m a y fall under this category are
the following:
(1) A b a t e m e n t of penalties on a s s e s s m e n t c o n f i r m e d by
lower court but appealed by t h e taxpayer to a higher court;
(2) A b a t e m e n t of penalties on withholding tax a s s e s s m e n t
under meritorious circumstances;
Remedies in General
(3) A b a t e m e n t of penalties on delayed installment payment

under meritorious circumstances;
(4) A b a t e m e n t of penalties on a s s e s s m e n t reduced

after reinvestigation but taxpayer is still contesting reduced
assessment; and
(5) S u c h other instances w h i c h the Commissioner may

d e e m a n a l o g o u s t o t h e e n u m e r a t i o n above.
For Nos. 1 to 4 a b o v e , the a b a t e m e n t of the surcharge
and c o m p r o m i s e penalty shall be allowed only upon written
application by t h e t a x p a y e r signifying his willingness to pay the
basic tax a n d interest or basic tax only, w h i c h e v e r is applicable
under the prevailing c i r c u m s t a n c e . (Sec. 3, Ibid.)
18. Sole authority of the Commissioner to abate or cancel.

T h e C o m m i s s i o n e r has the sole authority to abate or cancel internal
revenue taxes, penalties and/or interest pursuant to Section 204(B),
in relation to Section 7(c), both of t h e Tax C o d e . This authority is
generally applicable to surcharge and c o m p r o m i s e penalties only.
In meritorious instances, t h e C o m m i s s i o n e r m a y likewise abate
t h e interest as well as basic tax a s s e s s e d . However, cases for
a b a t e m e n t or cancellation of tax, penalties and/or interest by the
C o m m i s s i o n e r shall be c o u r s e d through the following officials:
(1) T h e Deputy C o m m i s s i o n e r (Operations Group), w h o
shall constitute a Technical W o r k i n g C o m m i t t e e ( T W C ) for
the evaluation a n d review of any application for abatement or
cancellation of tax, penalties and/or interest processed by the
R e v e n u e District Office ( R D O ) as reviewed by the Regional
Office (RO), or by the Large Taxpayers' Service's Collection or
Audit Division a n d Large Taxpayers District Office (LTDO) as
reviewed by the Large Taxpayers Service (LTS), or by Collection
Enforcement Division/ Withholding Agent and Monitoring
Division as reviewed by the Collection Service, or by the Legal
Service, or any other office that has jurisdiction over the case;
and
(2) T h e Deputy Commissioner (Legal and Inspection
Group), w h o shall evaluate the legal issue involved in the case.
T h e application for abatement or cancellation of tax,
penalties and/or interest should state the reasons and causes
for such request. Documentary proofs for the underlying
reasons and causes aforestated should be appended to the
"Application for Abatement or Cancellation of Tax, Penalties
ANNOTATED
and/or Interest." (Annex "A" of Rev. Regs. No. 13-2001.) On

the other hand, denial of the application for abatement or
cancellation of tax, penalties and/or interest should state the
reasons therefor. (Sec. 4, Ibid.)
Note: T h e application for abatement or cancellation of
tax, penalties and/or interest should be acted upon by the
processing office and reviewing office within five (5) d a y s from
receipt by said office. T h e BIR National Office has 30 days
within which to act on the case. (Sec. 5, Ibid.)
19. Processing of applications for abatement/compromise
settlement.
(1) Abatement:
(a) T h e BIR processes applications for t h e a b a t e m e n t
of only the surcharges, interests and c o m p r o m i s e penalties.
A n y application for the a b a t e m e n t of the basic tax a s s e s s e d
or any portion thereof, if any, is not covered by any existing
regulations a n d , therefore, shall not be p r o c e s s e d .
(b) No application for a b a t e m e n t shall be initially

processed/evaluated by the investigating office without the
p a y m e n t of 1 0 0 % of the basic tax.
(c) T h e R e v e n u e District Office (RDO)/investigating
office of the Large Taxpayers Service (LTS) having
jurisdiction over the taxpayer/applicant shall process
the application, and m a k e t h e necessary evaluation a n d
prepare a report containing its r e c o m m e n d a t i o n .
(d) T h e RDO/investigating office c o n c e r n e d will
prepare t h e report to the Technical W o r k i n g C o m m i t t e e
( T W C ) containing its r e c o m m e n d a t i o n , a n d stating the
basis of the r e c o m m e n d a t i o n .
(e) T h e T W C shall review t h e report a n d r e c o m m e n -

dation of the investigating office, and thereafter prepare
the final r e c o m m e n d a t i o n for the approval of the C o m m i s -
sioner.
(2) Compromise settlement:
(a) T h e recommendation/final report on t h e application

for c o m p r o m i s e will be signed/approved as follows:
1) Regional Evaluation Board (REB). For
regional cases involving a basic tax a s s e s s m e n t
Remedies in General
a m o u n t i n g to P500.000.00 or less, and minor criminal

violations discovered by regional and district officials
already delegated to the R E B .
2) C o m m i s s i o n e r (CIR). for other cases which

are not delegated a n d for c a s e s entrusted by law to the
CIR.
3) National Evaluation Board (NEB) for cases

w h e r e t h e basic tax a s s e s s e d e x c e e d s P1,000,000.00
or w h e r e t h e settlement offered is less than the
prescribed m i n i m u m a m o u n t ( 1 0 % for cases if financial
incapacity, a n d 4 0 % for c a s e if doubtful validity of the
a s s e s s m e n t ) w h i c h by law h a v e b e e n entrusted to the
NEB.
(b) T h e proper investigating offices will process,

evaluate a n d r e c o m m e n d the application for c o m p r o m i s e .
(c) Regional office c a s e s will be processed and
evaluated by t h e respective district offices.
(d) T h e LTS c a s e s will be p r o c e s s e d a n d evaluated by
the LTS investigating offices.
(e) R e c o m m e n d a t i o n s will be submitted to the
T W C w h i c h shall review the report a n d prepare its final
r e c o m m e n d a t i o n for approval of t h e C I R / R E B / N E B .
(f) All applications for c o m p r o m i s e settlement will
not be f o r w a r d e d to t h e T W C , without being processed,
evaluated and provided with r e c o m m e n d a t i o n by the
originating office.
(g) T h e R D O / h e a d of the LTS investigating office
c o n c e r n e d shall require all taxpayers-applicants to pay
the basic tax a s s e s s e d (for abatement) and offers of
c o m p r o m i s e (for c o m p r o m i s e settlement) upon filing of the
application for a b a t e m e n t / c o m p r o m i s e settlement before
the application can be initially processed.
(h) In case of ultimate disapproval of the application by
the approving authority, payments already made pursuant
to the application shall be treated as partial or installment
payments of the assessment. (Rev. M e m o . Order No. 20-
2007.)
20. Filing of claim for credit or refund and appeal. Both
the claim for refund with the Bureau of Internal Revenue and the
ANNOTATED
subsequent appeal to the Court of Tax Appeals must be filed within

the two-year period. T h e s e two requirements are mandatory and
non-compliance therewith would be fatal to the action for refund
or tax credit. (Johnston Lumber Co., Inc. vs. C.T.A., 101 Phil. 1 5 1 ;
Guagua Elec. Light Co., Inc. vs. Coll., L - 1 4 4 2 1 , April 29, 1961.)
(1) A return filed showing an overpayment is automatically
considered as a written claim for credit or refund. (Subsec. C.)
Before, a formal written application for credit or refund w a s
required to be filed with the BIR. (see Sec. 230.)
(2) T h e taxpayer should not wait for the decision of the
Commissioner b e c a u s e the filing of the claim for refund with t h e
Commissioner does not s u s p e n d the running of the prescriptive
period. (Gibbs vs. C o m m . , L-17406, Nov. 2 9 , 1965.) If the
Commissioner takes time in deciding t h e claim, and the period
of two (2) years is about to e n d , the suit or proceeding must be
started in the Court of Tax A p p e a l s before the e n d of the t w o -
year period without awaiting the decision of the Commissioner.
(Insular L u m b e r Co. v s . Court of A p p e a l s , 104 S C R A 7 1 0 , M a y
2 9 , 1981.)
(3) However, should t h e C o m m i s s i o n e r d e n y t h e claim for

refund within the two-year period, the taxpayer has thirty (30)
days f r o m receipt of the denial within w h i c h to a p p e a l to the
Court of Tax A p p e a l s (Sec. 11, R.A. No. 1125; Coll. vs. C.T.A.
and H u m e Pipe & A s b e s t o s Co., Inc., L-11494, J a n . 2 8 , 1961.);
otherwise, the court w o u l d not acquire jurisdiction to entertain
the appeal. (Philam Mining, Inc. vs. C.T.A., L-213188, A u g . 3 1 ,
1970.)
(4) W h e n a tax is paid in installments, t h e prescriptive

period of two (2) years should be c o u n t e d f r o m t h e date of
final payment, (see Altas Consolidated Mining & Dev. Corp. vs.
C o m m . , 529 S C R A 7 2 [2007].)
(5) T h e taxpayer claimant has the b u r d e n of proving the

legal and factual basis of its claim for tax credit or refund, but
once it has submitted all the required d o c u m e n t s , it is the duly
of the BIR to assess these d o c u m e n t s with dispatch. (Ibid.)
Note: Rev. M e m o . Cir. No. 2 9 - 2 0 0 9 clarifies certain issues
regarding the processing of claims for tax credit/refund.
2 1 . Rule where assessment already final and executory.
An assessment that has b e c o m e final and executory b e c a u s e
of failure to dispute the s a m e m a y no longer be contested on
Remedies in General
its merits by paying the tax liability and then claiming the refund
thereof; otherwise, the thirty (30)-day period for appeal of disputed
a s s e s s m e n t s w o u l d m a k e little s e n s e , (see Republic vs. Lopez,
L-18007, M a r c h 3 0 , 1963; C o m m . v s . C o n c e p c i o n , L-23912, May
15, 1968.)
2 2 . Commencement of the two-year period under Sections
204(c) and 229. T h e c a s e s h a v e established the following rules:
(1) If t h e tax s o u g h t to be refunded is illegally or erroneously
collected, t h e period of prescription starts f r o m the date the tax
w a s paid. ( C o m m . v s . Victorias Milling Co., Inc., L-24108, Jan.
3 1 , 1968.)
(2) If t h e tax is paid in installments or only in part, the
period is c o u n t e d f r o m t h e date of t h e last or final installment or
p a y m e n t b e c a u s e for tax p u r p o s e s , there is no payment until
the w h o l e or entire tax liability is fully paid. ( C o m m . vs. Prieto, 2
S C R A 1007, A u g . 2 9 , 1 9 6 1 ; C o m m . v s . Palanca, 18 S C R A 4 9 6 ,
Oct. 2 9 , 1966.) T h u s , a p a y m e n t of a part or portion thereof
c a n n o t operate to start the c o m m e n c e m e n t of the statute of
limitations.
(3) If t h e taxpayer merely made a deposit, the period should
be c o u n t e d f r o m t h e c o n v e r s i o n of t h e deposit to payment.
Merely making a deposit is not equivalent to payment (Union
G a r m e n t v s . Coll., C.T.A. C a s e No. 4 1 6 , Nov. 17, 1958.) until
the a m o u n t is actually applied to the specific purpose for which
it w a s d e p o s i t e d . (J. Luna Subdivision, Inc. vs. Sarmiento, 91
Phil. 371.)
(4) If the tax has b e e n withheld from source (through

the withholding tax system), the period is counted from the
date it falls d u e at the e n d of the taxable year. A taxpayer
w h o contributes to the withholding tax system does not really
deposit an a m o u n t to the government, but, in truth, performs
and extinguishes his tax obligation for the year concerned. In
other w o r d s , he is paying his tax liabilities for that year. (Gibbs
vs. C o m m . , L-17406, Nov. 2 9 , 1965.) He is d e e m e d to have
paid his tax liability w h e n the s a m e falls due at the end of the
taxable year. (Aguilar v s . Court of Appeals, L-93488, Oct. 24,
1990.)
(5) There is a need for a corporation to file a return first
before a claim for refund can prosper inasmuch as the rules
and regulations mandate that the corporate taxpayer opting to
ask for a refund must show in its final adjustment return (see
ANNOTATED
Sees. 69, 70.) the income it received from all sources and the
amount of withholding taxes remitted by its withholding agents
to the BIR. The two-year prescriptive record within which to
claim a refund c o m m e n c e s to run, at the earliest, on the date of
the filing of the adjusted final return. T h e rationale in computing
this period is the fact that it is only then that the corporation
can ascertain whether it m a d e profits or incurred losses in its
business operations. (ACCPA Investments Corp. vs. Court of
Appeals, 204 S C R A 957, Dec. 2 0 , 1991.)
(6) T h e filing of quarterly income tax return required

in Section 68 and implemented per BIR F o r m 1702-Q and
payment of quarterly income tax should only be considered
mere installments of the annual tax d u e . T h e s e quarterly
tax payments which are c o m p u t e d b a s e d on the cumulative
figures of gross receipts and deductions in order to arrive at
net taxable income should be treated as a d v a n c e s or portions
of the annual income tax d u e , to be adjusted at t h e e n d of the
calendar or fiscal year. This is reinforced by Section 69 w h i c h
provides for the filing of a d j u s t m e n t returns a n d final p a y m e n t
of income tax. Consequently, the t w o - y e a r prescriptive period
provided in Section 2 2 9 should be c o m p u t e d f r o m the time of
filing of the A d j u s t m e n t Return or A n n u a l Income Tax Return
and final payment of i n c o m e tax. ( C o m m . v s . T M X Sales, Inc.,
205 S C R A 184, J a n . 15, 1992.)
(7) If the tax w a s not erroneously or illegally paid, but the

taxpayer b e c a m e entitled to refund b e c a u s e of supervening
circumstances, as w h e r e a law is p a s s e d repealing another
law under w h i c h the tax w a s collected a n d providing for t h e
refund of the tax paid, or w h e r e the basis of tax credit is a tax
exemption granted by the Board of Industries pursuant to law
(under R.A. No. 3127.), t h e two-year period should start to run
from the date the taxpayer b e c o m e s entitled to refund a n d not
from the date of payment, (see C o m m . v s . D o n Pedro Central
Azucarera, L-28467, Feb. 2 8 , 1 9 7 3 ; C o m m . v s . Insular L u m b e r
Co., L - 2 4 2 2 1 , Dec. 11, 1967; C o m m . v s . Victorias Milling Co.,
L-24108, J a n . 3, 1968; Intestate Estate of Jovita C o , 100 Phil.
4 6 4 ; C o m m . vs. National P o w e r Corporation, L-18874, J a n . 30,
1970.)
T h e reason is that before the right to refund or credit arises,

there is absolutely no basis to file a claim with the C o m m i s s i o n e r
under Section 204 or to c o m m e n c e a suit in court under Section
Remedies in General
2 2 9 . Section 2 2 9 , however, does not allow the extension of the

two-year period "regardless of any supervening cause."
2 3 . Party entitled to refund/credit. Generally, the person
entitled to ask for a refund/credit is the taxpayer w h o paid the same,
(see Sees. 204[c], 229.) T h e a m o u n t of the claim being a factual
matter, it must be proven that the taxpayer has a right to it. A tax
refund is in t h e nature of a tax e x e m p t i o n a n d , therefore, should be
construed strictissimi juris. It can only be granted w h e n the claim
has clear legal basis a n d is sufficiently supported by evidence.
(1) Where tax has been shifted. T h e rule applies even

if t h e tax has b e e n actually shifted by the taxpayer to his
c u s t o m e r s as in sales tax a n d e v e n if t h e tax has been billed as
a separate item in the invoice. This is so b e c a u s e the sales tax
is by law i m p o s e d directly on the seller as an occupation tax for
selling. ( C o m m . v s . A m e r i c a n Rubber Co., L-19667 and 1 9 0 8 1 -
0 3 , Nov. 2 9 , 1961.)
A more important reason that militates against a contrary

rule is that it w o u l d t e n d to perpetuate illegal taxation, for the
individual c u s t o m e r s to w h o m t h e tax is ultimately shifted will
ordinarily not care to s u e for its recovery in view of the small
a m o u n t paid by e a c h a n d t h e high cost of litigation. T h e court,
however, m a d e it clear that o n c e recovered, the seller must
hold the refunded taxes in trust for the individual purchasers
w h o a d v a n c e d p a y m e n t thereof a n d w h o s e n a m e must appear
on his records. (Ibid.)
(2) Where payer is not the taxpayer. T h e above case
should be distinguished f r o m two other earlier cases decided
by the S u p r e m e Court. In said cases, theater owners w h o
paid illegal municipal taxes billed to and collected from theater
goers w e r e held not entitled to claim refund of such taxes. The
reason given is that taxes paid w e r e municipal imposts which
w e r e levied upon the theater goers w h o actually paid the tax.
(Medina v s . City of Baguio, 91 Phil. 584; Mendoza Santos and
C o . v s . M u n . of M e y c a u a y a n , 94 Phil. 1047.)
(3) Where payer is withholding agent. The term
"taxpayer" is defined in Section 22(N) as referring to "any
person subject to tax imposed by this Title [Income Tax]."
T h e withholding agent is directly and independently liable
for the correct amount of tax that should be withheld, and for
deficiency assessments, surcharges and penalties, (see Sec.
251.) A "person liable for tax" has been held to be a "person
ANNOTATED
subject to tax" and properly considered a "taxpayer." Therefore,

a withholding agent is properly regarded as a "taxpayer" within
the meaning of Section 204(3). ( C o m m . vs. Procter and Gamble
Phil. Mfg. Corp., 204 S C R A 377, Dec. 2, 1991.)
Dissenting (Paras, J.): "Payment of tax is an obligation
physically passed off by law on the withholding agent, if any,
but the act of claiming tax refund is a right that in a strict sense,
belongs to the taxpayer. T h e role and function of the withholding
agent, as the remitter and payor of income, is merely to insure
the collection of the tax d u e f r o m the taxpayer. He is not the real
party in interest to claim reimbursement of tax alleged to have
been o v e r p a i d . "
(4) Where donor's tax was assumed by donee. It has
been held by the Court of Tax A p p e a l s that w h e r e under the
terms of the donation, the d o n o r ' s tax w a s a s s u m e d by the
donee but said tax w a s a d v a n c e d by the donor, t h e d o n e e w a s
the proper party to claim refund of the d o n o r ' s tax. (Pirovano
vs. Coll., C.T.A. C a s e No. 3 7 5 , Oct. 9, 1957.)
2 4 . T h e period for prescription of action for refund of tax not

provided for in the Tax Code a n d paid by reason of mistake in the
interpretation of law is six (6) y e a r s . S u c h p a y m e n t gives rise to the
quasi-contract of solutio indebiti. (see Arts. 2 1 5 4 , 2 1 5 5 , Civil Code.)
Consequently, the applicable law regarding prescription is Article
1145(2) of the Civil C o d e w h i c h provides: "The following actions
must be c o m m e n c e d within six (6) y e a r s : (1) x x x, (2) U p o n a q u a s i -
contract." (Olezon vs. Central Bank, L-16524, J u n e 3 0 , 1964.)
25. Doctrine of equitable recoupment explained.This doctrine

states that w h e n the refund of a tax illegally or erroneously collected
or overpaid by a taxpayer is barred by the statute of limitations,
and a tax is being presently a s s e s s e d against said taxpayer, s u c h
present tax m a y be r e c o u p e d or set-off against the tax, the refund
of which has been barred. Similarly, w h e n t h e collection of a tax
is already barred by s u c h statute and t h e t a x p a y e r is entitled to
a refund or credit of a tax illegally or erroneously collected a n d
such refund is not yet barred, t h e g o v e r n m e n t m a y set off t h e tax
w h o s e collection is barred against the refund of the tax illegally or
erroneously collected.
The S u p r e m e Court has held that the doctrine, which is a

c o m m o n law principle or doctrine, is not binding in our jurisdiction.
Its application, according to the court, w o u l d lower the bars of
Remedies in General
prescription as the tax collecting agency might be tempted to delay

or neglect the collection of taxes within the period set by law, and
the taxpayer, likewise, the filing of the corresponding suit for refund,
(see Coll. v s . U.S.T., 104 Phil. 1062.)
26. Tax credit certificate (TCC):
(1) Definition of terms:
(a) Tax credit refers to the a m o u n t due to a taxpayer

resulting f r o m an o v e r p a y m e n t of a tax liability or erroneous
p a y m e n t of a tax d u e .
(b) Tax credit certificate m e a n s a certification, duly

issued by the C o m m i s s i o n e r or his duly authorized
representative, reduced in a BIR A c c o u n t a b l e Form in
a c c o r d a n c e with t h e prescribed formalities acknowledging
that t h e grantee-taxpayer n a m e d therein is legally entitled
a tax credit, t h e m o n e y value of w h i c h m a y be used in
p a y m e n t or in satisfaction of any of his internal revenue
tax liability (except t h o s e excluded), or m a y be converted
as a c a s h refund, or m a y otherwise be disposed of in the
m a n n e r a n d in a c c o r d a n c e with the limitations, if any, as
m a y be prescribed by the provisions of Rev. Regs. No.
5-2000.
(c) Tax debit memo m e a n s a certification provisions

of Rev. R e g s . No. 5-2000. It shall be duly issued by the
C o m m i s s i o n e r or his duly authorized representative,
reduced in a BIR A c c o u n t a b l e Form in accordance with the
prescribed formalities, a c k n o w l e d g i n g that the taxpayer
n a m e d therein has duly paid his internal revenue tax
liability in the f o r m of a n d through the use of a Tax Credit
Certificate, duly issued and existing in accordance with
the provisions of the Regulations. T h e tax debit m e m o
shall serve as the official receipt from the BIR evidencing
a taxpayer's payment or satisfaction of his tax obligation.
T h e a m o u n t s h o w n therein shall be charged against and
deducted from the credit balance of the aforesaid Tax
Credit Certificate.
(d) Direct internal revenue tax liability refers to taxes
for which the taxpayer is m a d e statutorily liable. In essence,
"direct internal revenue tax liability" pertains to the liability
of a person mandated by law to file the tax return and pay
the tax due thereon. (Sec. 1, Rev. Regs. No. 5-2000.)
ANNOTATED
(2) Sources of tax credit. A tax credit is being granted

for the following:
(a) At the option of the taxpayer, excess quarterly
income taxes paid reflected in the final adjustment return.
(b) At the option of the taxpayer, overwithholding at
source of income taxes to the extent that the amount of
such overpayment w a s not deducted or applied against
income tax due.
(c) Input taxes as follows:
1) Attributed to z e r o - r a t e d sales m a d e by VAT-
registered taxpayer including export sales by a VAT-
registered exporter;
2) Attributed to effectively z e r o - r a t e d sales m a d e
by V A T - r e g i s t e r e d taxpayer; and
3) On capital g o o d s imported or locally-purchased
by a V A T - r e g i s t e r e d taxable p e r s o n .
(d) U n u s e d input taxes resulting f r o m cancellation
of VAT registration d u e to retirement f r o m or cessation of
business, or d u e to c h a n g e s in or cessation of status as
a VAT taxable taxpayer under Section 106(C) of the Tax
Code.
(e) Excise taxes paid o n :

1) Petroleum products sold to t a x - e x e m p t entities
and international carriers;
2) G o o d s locally p r o d u c e d or m a n u f a c t u r e d and
actually exported without returning to the Philippines;
3) Taxes erroneously or illegally paid or penalties
imposed without authority.
A n y taxpayer w h o is erroneously registered as a VAT
person will not be covered by p a r a g r a p h s (c) a n d (d) a b o v e .
In no case shall a tax refund or tax credit certificate be
given resulting f r o m availment of incentives granted pursuant
to special laws for which no actual tax p a y m e n t w a s m a d e .
(Sec. 2, Ibid.)
(3) Uses of tax credit certificate. W h e n e v e r a Tax Credit

Certificate (TCC) is issued to a taxpayer to a c k n o w l e d g e the
existence of a valid tax credit, such Tax Credit Certificate m a y be
used by the grantee or his a s s i g n e e in the payment of his direct
Remedies in General
internal revenue tax liability, s u c h as income tax, documentary

s t a m p tax, excise tax, v a l u e a d d e d tax, percentage tax and
other internal revenue taxes. However, in no case shall the
T C C be u s e d in p a y m e n t of the following:
(a) P a y m e n t or remittance for any kind of withholding

tax.
(b) P a y m e n t arising f r o m t h e availment of tax amnesty

declared under a legislative e n a c t m e n t ;
(c) P a y m e n t of deposits on withdrawal of exciseable

articles;
(d) P a y m e n t of t a x e s not administered or collected by

t h e B u r e a u of Internal R e v e n u e ; and
(e) P a y m e n t of c o m p r o m i s e penalty. (Sec. 3, Ibid.)
(4) Post-audit of TCCs. T h e T C C s are immediately valid

a n d effective u p o n their issuance s u c h that a post-audit may
not be validly c o n s i d e r e d as a s u s p e n s i v e condition for their
validity t h e post-audit shall be limited only to computational
discrepancies arising f r o m t h e use or transfer of T C C s . It would,
it at all, only give rise to an a d j u s t m e n t of the monetary value of
the T C C s .
(1) T h e applicable laws that govern the issuance,

a s s i g n m e n t a n d utilization of T C C s clearly provide that
t h e validity a n d effectivity of t h e T C C s as payment for tax
liabilities do not d e p e n d on the o u t c o m e of a post-audit;
otherwise, t h e very purpose of the T C C would be defeated
as there w o u l d be no guarantee that the T C C would be
honored by t h e g o v e r n m e n t as payment for taxes. No
investor w o u l d take the risk of utilizing T C C s if these were
subject to a post-audit that m a y invalidate them, without
prescribed g r o u n d s or limits as to the exercise of said post-
audit.
(2) Even if fraud attended the issuance of the TCCs,

that w o u l d still not prejudice the rights of the transferee
(a BOI-registered enterprise that went through the multi-
tiered prescribed procedures for the transfer and use of the
TCCs.) in the absence of any evidence it had a hand in,
or knowledge of, the fraud which purportedly attended the
issuance. A transferee in g o o d faith and for value, cannot
be said to have incurred any liability insofar as the transfer
ANNOTATED
of the subject T C C s are concerned. (Petron Corporation

vs. C o m m . , G.R. No. 180385, July 28, 2010.)
Note: For provisions of Rev. Regs. No. 5-2000 on assign-

ment or transfer, period of validity, conversion and revalidation
of T C C , see Appendix "X."
- oOo -
CHAPTER II
CWIL REMEDIES
FOR COLLECTION OF TAXES
SEC. 205. Remedies for the Collection of Delinquent

Taxes. The civil remedies for the collection of internal revenue
taxes, fees, or charges, and any increment thereto resulting from
delinquency shall be:
(a) By distraint of goods, chattels, or effects, and other personal
property of whatever character, including stocks and other securities,
debts, credits, bank accounts, and interest in and rights to personal
property, and by levy upon real property and interest in or rights to
real property; and
(b) By civil or criminal action.
Either of these remedies or both simultaneously may be pursued
in the discretion of the authorities charged with the collection of
such taxes: Provided, however, That the remedies of distraint and
levy shall not be availed of where the amount of tax involved is not
more than One hundred pesos (P100).
The judgment in the criminal case shall not only impose the
penalty but shall also order payment of the taxes subject of the
criminal case as finally decided by the Commissioner.
The Bureau of Internal Revenue shall advance the amounts
needed to defray costs of collection by means of civil or criminal
action, including the preservation or transportation of personal
property distrained and the advertisement and sale thereof, as well
as of real property and improvements thereon.
ANNOTATION
1. Distraint is the seizure by the government of personal

property, tangible or intangible, to enforce the payment of taxes, to
be followed by its public sale, if the taxes are not voluntarily paid,
(see Black's Law Dictionary.)
471
ANNOTATED
The Tax Code provides for two (2) kinds of distraint:

(a) Actual. Here, there is a taking of possession of
personal property out of the taxpayer into that of the government.
(Sees. 207-208.) Physical transfer of possession is, of course,
impossible in the case of intangible personal property like
stocks and credits; and
( b ) Constructive. In this case, t h e o w n e r is merely
prohibited f r o m disposing of his properties. (Sec. 206.)
2. T h e term civil action mentioned in Section 205 refers to
actions instituted by the g o v e r n m e n t in the ordinary courts (see
Republic vs. Del Rosario, 105 Phil. 2 7 7 ; Republic v s . Lopez,
L-18007, March 8 , 1 9 6 3 . ) the Regional Trial Courts or t h e city or
municipal trial courts d e p e n d i n g on the a m o u n t involved after the
assessment m a d e by t h e C o m m i s s i o n e r of Internal R e v e n u e has
b e c o m e final and executory for failure of t h e t a x p a y e r to dispute the
s a m e and appeal the a d v e r s e decision of the C o m m i s s i o n e r on the
disputed a s s e s s m e n t to the Court of Tax A p p e a l s .
In a proceeding for collection of a tax, t h e taxpayer's defenses

are similar to those of a d e f e n d a n t in a c a s e for the e n f o r c e m e n t of
a j u d g m e n t by judicial action, (see Sec. 2 2 9 , A n n o t a t i o n N o . 13.)
3. Criminal action is n o w a m o d e for t h e collection of t a x e s .
Before, it w a s allowed only for t h e e n f o r c e m e n t of statutory penalties
such as fines and/or imprisonment.
Note: Rev. M e m o . O r d e r No. 2 6 - 2 0 1 0 institutes a s y s t e m for t h e

development of a Data W a r e h o u s e that shall contain information
on the assets of the taxpayers w h o are t h e subject of investigation/
specification. T h e information m a y be utilized in collection
enforcement proceedings that m a y be instituted against taxpayers
in the future Rev. M e m o . Order N o . 11-2010 prescribes t h e policies
and guidelines for the monitoring, review a n d determination of
the tax c o n s e q u e n c e s of "Big-Ticket Items" (BTI) referring to
transactions that are significant in size a n d v o l u m e , i.e., a m o u n t
exceeds P200 million) with substantive tax c o n s e q u e n c e s .
4. T h e costs m e n t i o n e d (par. 3.) refer to e x p e n s e s in court

processes, while in Section 2 1 3 (par. 3.), to e x p e n s e s in enforcing
the administrative s u m m a r y r e m e d y of distraint or levy.
5. Disputed tax assessment. Republic Act No. 1125
creating the Court of Tax A p p e a l s allows t h e taxpayer to dispute
the correctness or legality of an a s s e s s m e n t both in the purely
Civil Remedies for Collection of Taxes
administrative level and in said court. It does not, however, prohibit

the Commissioner from collecting the tax through any of the means
provided for in Section 302 except when enjoined by said court.
(Republic vs. Lim Tian Teng Sons and Co., Inc., L-217-31, March
31, 1966.) The Court of Tax Appeals has jurisdiction over disputed
assessments of the BIR.
6. Where tax assessment disputed/not disputed. Where an
assessment is pending with the Commissioner, it cannot yet serve
as the basis of collection by distraint or levy or by judicial action.
Such assessment is clearly not yet final, executory or demandable.
(People vs. Sandiganbayan, 467 SCRA 137 [2005].)
If the tax assessment is not disputed, an ordinary action for the
collection of the tax may be filed by the Commissioner of Internal
Revenue. Any decision of the trial court sustaining an undisputed
assessment would be appealable to the Court of Appeals or
Supreme Court, (see Mambulao Lumber Co. vs. Republic, 132
SCRA 1 [1984].)
SEC. 206. Constructive Distraint of the Property of a

Taxpayer. To safeguard the interest of the Government, the
Commissioner may place under constructive distraint the property
of a delinquent taxpayer or any taxpayer who, in his opinion, is
retiring from any business subject to tax, or is intending to leave
the Philippines or to remove his property therefrom, or to hide or
conceal his property or to perform any act tending to obstruct the
proceedings for collecting the tax due or which may be due from him.
The constructive distraint of personal property 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.
In case the taxpayer or the person having the possession and
control of the property sought to be placed under constructive
distraint refuses or fails to sign the receipt herein referred to, the
revenue officer effecting the constructive distraint shall proceed
to prepare a list of such property and, in the presence of two (2)
witnesses, leave a copy thereof in the premises where the property
distrained is located, after which the said property shall be deemed
to have been placed under constructive distraint, (a)
ANNOTATED
ANNOTATION
1. Specific cases when a notice or warrant of constructive

distraint over the personal property/ies of a taxpayer may be issued.
They are:
(1) W h e n a taxpayer w h o applies for retirement from
business has a huge amount of assessment pending with the
Bureau of Internal Revenue (BIR). An a s s e s s m e n t is h u g e if the
amount thereof is equal to or bigger than the networth or equity
of the taxpayer;
(2) W h e n a taxpayer w h o is under tax investigation has a
record of leaving the Philippines at least twice a year, unless
such trips are justified and/or connected with his business,
profession or e m p l o y m e n t ;
(3) W h e n a taxpayer, other t h a n a banking institution, w h o
is under tax investigation has a record of transferring his bank
deposits and other valuable personal property/ies f r o m the
Philippines to any foreign country;
(4) W h e n the taxpayer uses aliases in bank accounts,
other than the n a m e for w h i c h he is legally and/or popularly
known;
(5) W h e n the taxpayer k e e p s bank deposits a n d o w n s
other property/ies under t h e n a m e of other p e r s o n s , w h e t h e r
or not related to h i m , and t h e s a m e are not under a n y lawful
fiduciary or trust capacity;
(6) W h e n a taxpayer's big a m o u n t of u n d e c l a r e d income

is k n o w n to the public or to t h e BIR by credible m e a n s a n d
there is a strong reason to believe that t h e taxpayer, in t h e
natural course of events, will h a v e great t e n d e n c y to hide or
conceal his property/ies. For this p u r p o s e , t h e t e r m big amount
of undeclared income m e a n s an a m o u n t e x c e e d i n g 3 0 % of
the gross sales, gross receipts or gross revenue declared per
return; and
(7) W h e n the BIR receives information or complaint

pertaining to undeclared income in an a m o u n t e x c e e d i n g 3 0 %
of gross sales, gross receipts or gross revenue declared per
return of a particular taxpayer a n d there is e n o u g h reason
to believe that the said information is correct as w h e n t h e
complaint or information is supported by substantial a n d
credible evidence. (Sec. 2, Rev. Regs. No. 5-2001.)
2. Persons who may conduct the constructive distraint.

In general, it is only the Commissioner who may decide whether
a notice of constructive distraint on the personal property of any
taxpayer may be issued. However, the Commissioner may delegate
this power by specific orders since this power is not one of those
which cannot be delegated as enunciated in Section 7 of the Tax
Code. Thus, pursuant to said section, this power can be delegated
to any subordinate official with the rank equivalent to a Division
Chief or higher. (Sec. 3, Ibid.)
SEC. 207. Summary Remedies.

( A ) Distraint of Personal Property. Upon the failure of the
person owing any delinquent tax or delinquent revenue to pay the
same at the time required, the Commissioner or his duly authorized
representative, if the amount involved is in excess of One million
pesos (PI,000,000), or the Revenue District Officer, if the amount
involved is One million pesos (P1,000,000) or less, shall seize and
distraint any goods, chattels, or effects, and the personal property,
including stocks and other securities, debts, credits, bank accounts,
and interest 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.
A report on the distraint shall, within ten (10) days from receipt
of the warrant, be submitted by the distraining officer to the Revenue
District Officer, and to the Revenue Regional Director: Provided,
That the Commissioner or his duly authorized representative shall,
subject to rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, have the power
to lift such order of distraint: Provided, further, That a consolidated
report by the Revenue Regional Director may be required by the
Commissioner as often as necessary.
(B) Levy on Real Property. After the expiration of the time
required to pay the delinquent tax or delinquent revenue as
prescribed in this Section, real property may be levied upon, before,
simultaneously or after the distraint of personal property belonging
to the delinquent. To this end, any internal revenue officer designated
by the Commissioner or his duly authorized representative shall
prepare a duly authenticated certificate showing the name of the
taxpayer and the amounts of the tax and penalty due from him.
Said certificate shall operate with the force of a legal execution
throughout the Philippines.
ANNOTATED
Levy shall be effected by writing upon said certificate 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 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.
In case the warrant of levy on real property is not issued before or
simultaneously with the warrant of distraint on personal property,
and the personal property of the taxpayer is not sufficient to satisfy
his tax delinquency, the Commissioner or his duly authorized
representative shall, within thirty (30) days after execution of the
distraint, proceed with the levy on the taxpayer's real property.
Within ten (10) days after receipt of the warrant, a report on any
levy shall be submitted by the levying officer to the Commissioner
or his duly authorized representative: Provided, however, That a
consolidated report by the Revenue Regional Director may be required
by the Commissioner as often as necessary: Provided, further, That
the Commissioner or his duly authorized representative, subject to
rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall have the authority to
lift warrants of levy issued in accordance with the provisions hereof,
(a)
ANNOTATION
1. R.A. No. 8424 increased the amounts in Section 207

from P5,000/P20,000 to P1,000,000, excluding mention of the
Revenue Regional Director. It deletes the period within which to
effect distraint, adds the proviso in Subsection (A), and transfers
the provision of Section 213 as Subsection (B) of Section 207 with
amendments.
The Commissioner or his duly authorized representative now
has the power to lift warrants of levy, (last par.)
2. In the case of notice of levy issued to satisfy delinquent
estate tax (see Subsec. B, par. 2.), the delinquent taxpayer is the
estate of the decedent, and not necessarily, and exclusively, the
heirs of the deceased. In the same vein, in the matter of income
tax delinquency, the heir is not the taxpayer liable. Hence, service
of notice of levy upon the heir is not required by law. (Marcos II vs.
Court of Appeals, 273 SCRA 47 [1997].)
3. Rev. M e m o . Order No. 76-98 designates the officials

authorized to sign Warrants of Distraint and Levy or Writ of
G a r n i s h m e n t a n d defines the jurisdictional a m o u n t s , and the
lifting of the Notice of Tax Liens and the cancellation of the Writ
of G a r n i s h m e n t a n d Authority to Cancel A s s e s s m e n t (ATCA), as
follows:
(1) C o m m i s s i o n e r of Internal R e v e n u e A m o u n t involved
is a b o v e P1 million;
(2) Deputy C I R (Operations) P500.000 to P1 million;
a p p r o v e A T C A in a c c o u n t s receivable c a s e s P1 million and
above;
(3) Assistant CIR for Collection Service P300.000 but
not over P 5 0 0 . 0 0 0 ; r e c o m m e n d approval of A T C A P1 million
and above;
(4) T h e Regional Director P 1 0 0 , 0 0 0 but not over
P 3 0 0 . 0 0 0 ; a p p r o v e A T C A below P1 million;
(5) Others
(a) Chief, Collection Division, Regional Office
r e c o m m e n d approval o f A T C A less than P 1 million;
(b) Chief, A s s e s s m e n t Division, Regional Office
r e c o m m e n d approval of A T C A pursuant to Section 204 prior
to their inclusion in BIR F o r m 40 less than P1 million;
(c) Chief, Tax Fraud Division and all other Operating
Units t a s k e d to investigate/audit in the National Office
r e c o m m e n d approval of A T C A pursuant to Section 204
prior to their inclusion in BIR Form 4 0 ;
(d) T h e R e v e n u e District Officer shall sign Warrants of
Distraint/Levy and Writ of Garnishment, including the lifting
of the Notice of Tax Liens and cancellation of the Writ of
G a r n i s h m e n t involving the a m o u n t of P100,000 and below.
In tax a s s e s s m e n t and collection, there is nothing more
compelling than the issuance of a warrant of distraint and/or levy
which is preparatory to the actual auction sale of the taxpayer's
property to satisfy his tax liability. (Antam Consolidated, Inc. vs.
Court of Appeals, G.R. No. 5 3 5 8 8 , Mar. 3 1 , 2004.)
4. As a rule, the warrant of distraint and levy is "proof of
the finality of a s s e s s m e n t " and renders hopeless a request for
reconsideration, being tantamount to an outright denial thereof
and m a k e s the said request d e e m e d rejected. ( C o m m . of Internal
Revenue vs. Algue, 158 S C R A 9 [1988].)
ANNOTATED
S E C . 2 0 8 . Procedure for Distraint and Garnishment.

T h e officer s e r v i n g t h e w a r r a n t o f d i s t r a i n t s h a l l m a k e o r cause t o
be m a d e an account of t h e goods, c h a t t e l s , effects, or o t h e r p e r s o n a l
p r o p e r t y d i s t r a i n e d , a copy o f w h i c h , s i g n e d b y h i m s e l f , s h a l l b e l e f t
e i t h e r w i t h t h e o w n e r o r p e r s o n f r o m w h o s e possession s u c h goods,
c h a t t e l s , o r effects, o r o t h e r p e r s o n a l p r o p e r t y w e r e t a k e n , o r a t t h e
d w e l l i n g o r place o f b u s i n e s s o f s u c h p e r s o n a n d w i t h someone o f
s u i t a b l e age a n d d i s c r e t i o n , t o w h i c h l i s t s h a l l b e a d d e d a s t a t e m e n t
o f t h e s u m d e m a n d e d a n d n o t e o f t h e t i m e a n d place o f sale, (a)
Stocks a n d o t h e r s e c u r i t i e s s h a l l b e d i s t r a i n e d b y s e r v i n g a copy
of the w a r r a n t of distraint upon the taxpayer and upon the president,
m a n a g e r , t r e a s u r e r , o r o t h e r r e s p o n s i b l e officer o f t h e c o r p o r a t i o n ,
c o m p a n y o r a s s o c i a t i o n , w h i c h i s s u e d t h e s a i d stocks o r s e c u r i t i e s .
Debts and credits shall be distrained by leaving w i t h the person
o w i n g t h e debts o r h a v i n g i n h i s possession o r u n d e r h i s c o n t r o l s u c h
c r e d i t s , o r w i t h h i s a g e n t , a copy o f t h e w a r r a n t o f d i s t r a i n t . T h e
w a r r a n t of distraint shall be sufficient a u t h o r i t y to the person owing
t h e debts o r h a v i n g i n h i s possession o r u n d e r h i s c o n t r o l a n y c r e d i t s
belonging to the taxpayer to pay to the Commissioner the amount of
s u c h debts o f c r e d i t s .
B a n k accounts s h a l l b e g a r n i s h e d b y s e r v i n g a w a r r a n t o f
garnishment upon the taxpayer and upon the president, manager,
t r e a s u r e r , o r o t h e r r e s p o n s i b l e officer o f t h e b a n k . U p o n r e c e i p t
o f t h e w a r r a n t o f g a r n i s h m e n t , t h e b a n k s h a l l t u r n over t o t h e
Commissioner so m u c h of t h e b a n k accounts as m a y be sufficient to
satisfy the c l a i m of t h e G o v e r n m e n t .
ANNOTATION
1. T h e phrase "officer levying t h e distraint" is a m e n d e d to

read "officer serving the warrant of distraint."
2. Note that with respect to bank a c c o u n t s (last par.), the law
speaks of g a r n i s h m e n t b e c a u s e w h a t is actually served is a writ of
garnishment. This is the proper t e r m for seizing the assets of the
taxpayer with the bank.
S E C . 2 0 9 . Sale of Property Distrained and Disposition of

Proceeds. T h e R e v e n u e D i s t r i c t O f f i c e r o r h i s d u l y a u t h o r i z e d
r e p r e s e n t a t i v e , o t h e r t h a n t h e O f f i c e r r e f e r r e d t o i n S e c t i o n 208 o f t h i s
Code s h a l l , a c c o r d i n g t o t h e r u l e s a n d r e g u l a t i o n s p r e s c r i b e d b y t h e
Secretary of Finance, u p o n r e c o m m e n d a t i o n of t h e Commissioner,
forthwith cause a notification to be exhibited in not less than two (2)

public places in the municipality or city where the distraint is made,
specifying the time and place of sale and the articles distrained. The
time of sale shall not be less than twenty (20) days after notice to
the owner or possessor of the property as above specified and the
publication or posting of such notice. One place for the posting of such
notice shall be at the Office of the Mayor of the city or municipality
in which the property is distrained.
At the time and place fixed in such notice, the said officer shall sell
the goods, chattels, or effects, or other personal property, including
stocks and other securities so distrained, at public auction, to the
highest bidder for cash, or with the approval of the Commissioner,
through duly licensed commodity or stock exchanges.
In the case of stocks and other securities, the officer making
the sale shall execute a bill of sale which he shall deliver to the
buyer, and a copy thereof furnished the corporation, company, or
association which issued the stocks or other securities. Upon receipt
of the copy of the bill of sale, the corporation, company or association
shall make the corresponding entry in its books, transfer the stocks
or other securities sold in the name of the buyer, and issue, if
required to do so, the corresponding certificates of stock or other
securities.
Any residue over and above what is required to pay the entire
claim, including expenses, shall be returned to the owner of the
property sold. The expenses chargeable upon each seizure and sale
shall embrace only the actual expenses of seizure and preservation
of the property pending the sale, and no charge shall be imposed for
the services of the local internal revenue officer or his deputy, (a)
ANNOTATION
It is now the Revenue District Officer or his duly authorized

representative, other than the officer serving the warrant of distraint
(Sec. 208.), who shall cause a notification to be exhibited.
SEC. 210. Release of Distrained Property upon Payment

Prior to Sale. If at any time prior to the consummation of the
sale all proper charges are paid to the officer conducting the sale, the
goods or effects distrained shall be restored to the owner.
SEC. 211. Report of Sale to Bureau of Internal Revenue. -
Within two (2) days after the sale, the officer making the same shall
ANNOTATED
make a report of his proceeding in writing to the Commissioner of

Internal Revenue and shall himself preserve a copy of such report as
an official record.
SEC. 212. Purchase by Government at Sale Upon Distraint.
When the amount bid for the property under distraint is not equal
to the amount of the tax or is very much less than the actual market
value of the articles offered for sale, the Commissioner or his deputy
may purchase the same in behalf of the National Government for
the amount of taxes, penalties, and cost due thereon.
Property so purchased may be resold by the Commissioner or
his deputy, subject to the rules and regulations prescribed by the
Secretary of Finance, the net proceeds therefrom shall be remitted
to the National Treasury and accounted for as internal revenue.
ANNOTATION
1. Actual distraint and constructive distraint distinguished.

Both are s u m m a r y r e m e d i e s for the collection of t a x e s a n d both
refer only to personal property. T h e distinctions are:
(1) T h e first is m a d e on the property of a delinquent
taxpayer; the s e c o n d , on the property of any taxpayer, w h e t h e r
delinquent or not;
( 2 ) In the first, there is a taking of p o s s e s s i o n ; in the
s e c o n d , the taxpayer is merely prohibited f r o m disposing of his
property; a n d
(3) T h e first is effected by leaving a list of the property, or
by service of a warrant of distraint; the s e c o n d , by requiring
the taxpayer to sign a receipt of the property or by the revenue
officer preparing a n d leaving a list of s u c h property.
2. Requisites for (actual) distraint and levy. To effect a valid
distraint and levy, it is required that:
(1) T h e taxpayer m u s t be delinquent in the p a y m e n t of tax;
( 2 ) T h e r e must b e a s u b s e q u e n t d e m a n d for its payment;
(3) T h e taxpayer must fail to pay the delinquent tax at the
tax time required; a n d
(4) T h e period within w h i c h to collect the tax has not yet
prescribed. (Sec. 2 2 2 [ c ] . ) W h e n constructive distraint is availed
of, delinquency (No. 1.) is essential.
3. Bank accounts m a y be distrained notwithstanding Republic

Act No. 1405 w h i c h prohibits inquiry into bank accounts, since in
the case of distraint, no inquiry is m a d e . T h e BIR simply seizes
so m u c h of the deposit as is sufficient to discharge the obligation
without having to k n o w h o w m u c h t h e deposits are, or w h e r e the
m o n e y or any part of it c a m e f r o m , (see O p . of Sec. of Justice, No.
54, s. 1956.)
4. Properties not subject to distraint. T h e following pro-

perties, a m o n g others, a r e recognized as not subject to distraint
and levy:
(1) B o n d or c a s h deposit for the possession of firearms for

otherwise, t h e objectives of t h e law in requiring the deposit (see
Sees. 8 8 7 a n d 9 0 1 , Rev. A d m . C o d e . ) w o u l d b e frustrated (see
O p . Atty. G e n . , J a n . 2 6 , 1926.);
(2) Property under judicial settlement, or in custodia legis

(under judicial custody) without the consent of the competent
court (see Coll. v s . C o d i n e r a , 102 Phil. 1165.);
(3) Property or interests in property which by special laws

are e x e m p t f r o m a t t a c h m e n t or levy, such as benefits paid or
payable by t h e G S I S (Sec. 3 3 , P.D. No. 1146.) a n d S S S . (Sec.
16, R.A. No. 1 1 6 1 , as a m e n d e d . )
Note: Under the Rules of Court, attachment of property under

custodia legis is allowed but it is required that "copy of the order of
attachment shall be filed with the proper court, and notice of the
attachment served u p o n the custodian of the property." (Sec. 7, last
par., Rule 57.)
S E C . 2 1 3 . Advertisement and Sale. W i t h i n t w e n t y

(20) d a y s a f t e r l e v y , t h e officer c o n d u c t i n g t h e proceedings s h a l l
proceed to a d v e r t i s e t h e p r o p e r t y or a u s a b l e p o r t i o n t h e r e o f as
m a y b e necessary t o s a t i s f y t h e c l a i m a n d cost o f sale; a n d s u c h
a d v e r t i s e m e n t s h a l l cover a p e r i o d o f a t l e a s t t h i r t y (30) days. I t
s h a l l b e e f f e c t u a t e d b y p o s t i n g a notice a t t h e m a i n e n t r a n c e o f
t h e m u n i c i p a l b u i l d i n g o r c i t y h a l l a n d i n a p u b l i c a n d conspicuous
place i n t h e b a r r i o o r d i s t r i c t i n w h i c h t h e r e a l estate lies a n d
by p u b l i c a t i o n once a w e e k f o r t h r e e (3) w e e k s in a n e w s p a p e r of
general circulation in the m u n i c i p a l i t y or city where the property is
located. The advertisement shall contain a statement of the amount
o f taxes a n d p e n a l t i e s s o d u e a n d t h e t i m e a n d place o f sale, t h e
n a m e o f t h e t a x p a y e r a g a i n s t w h o m taxes a r e l e v i e d , a n d a s h o r t
ANNOTATED
description of the property to be sold. At any time before the day

fixed for the sale, the taxpayer may discontinue all proceedings by
paying the taxes, penalties and interest. If he does not do so, the sale
shall proceed and shall be held either at the main entrance of the
municipal building or city hall, or on the premises to be sold, as the
officer conducting the proceedings shall determine and as the notice
of sale shall specify.
Within five (5) days after the sale, a return by the distraining or
levying officer of the proceedings shall be entered upon the records
of the Revenue Collection Officer, the Revenue District Officer and
the Revenue Regional Director. The Revenue Collection Officer, in
consultation with the Revenue District Officer, shall then make out
and deliver to the purchaser a certificate from his records, showing
the proceedings of the sale, describing the property sold, stating the
name of the purchaser and setting out the exact amount of all taxes,
penalties and interest: Provided, however, That in case the proceeds
of the sale exceeds the claim and cost of sale, the excess shall be
turned over to the owner of the property.
The Revenue Collection Officer, upon approval by the Revenue
District Officer may, out of his collection, advance an amount
sufficient to defray the costs of collection by means of the summary
remedies provided for in this Code, including the preservation or
transportation in case of personal property, and the advertisement
and subsequent sale, both in cases of personal and real property
including improvements found on the latter. In his monthly collection
reports, such advances shall be reflected and supported by receipts.
1
SEC. 214. Redemption of Property Sold. - Within one (1)
year from the date of sale, the delinquent taxpayer, or any one for
him, shall have the right of paying to the Revenue District Officer
the amount of the public taxes, penalties and interest thereon
from the date of delinquency to the date of sale, together with the
interest on said purchase price at the rate of fifteen percent (15%)
per annum from the date of purchase to the date of redemption,
and such payment shall entitle the person paying to the delivery
of the certificate issued to the purchaser and a certificate from
the said Revenue District Officer that he has thus redeemed the
property, and the Revenue District Officer shall forthwith pay over
to the purchaser the amount by which such property has thus been
'See Section 202 which should have been placed after this Section.
redeemed, and said property thereafter shall be free from the lien of
such taxes and penalties.
The owner shall not, however, be deprived of the possession of
the said property and shall be entitled to the rents and other income
thereof until the expiration of the time allowed for its redemption.
SEC. 215. Forfeiture to Government for Want of Bidder.

In case there is no bidder or real property exposed for sale as herein
above provided or if the highest bid is for an amount insufficient
to pay the taxes, penalties and costs, the Internal Revenue Officer
conducting the sale shall declare the property forfeited to the
Government in satisfaction of the claim in question and within two
(2) days thereafter, shall make a return of his proceedings and the
forfeiture which shall be spread upon the records of his office. It shall
be the duty of the Register of Deeds concerned, upon registration
with his office of any such declaration of forfeiture, to transfer
the title of the property forfeited to the Government without the
necessity of an order from a competent Court.
Within one (1) year from the date of such forfeiture, the
taxpayer, or any one for him, may redeem said property by paying to
the Commissioner or the latter's Revenue Collection Officer the full
amount of the taxes and penalties, together with interest thereon
and the costs of sale, but if the property be not thus redeemed, the
forfeiture shall become absolute.
SEC. 216. Resale of Real Estate Taken for Taxes. - The

Commissioner shall have charge of any real estate obtained by the
Government of the Philippines in payment or satisfaction of taxes,
penalties, or costs arising under this Code or in compromise or
adjustment of any claim therefor; and said Commissioner may, upon
the giving of not less than twenty (20) days notice, sell and dispose
of the same at public auction, or with the prior approval of the
Secretary of Finance, dispose of the same at private sale. In either
case, the proceeds of the sale shall be deposited with the National
Treasury, and an accounting of the same shall be rendered to the
Chairman of the Commission on Audit.
SEC. 217. Further Distraint or Levy. - The remedy by

distraint of personal property and levy on realty may be repeated
if necessary until the full amount due, including all expenses, is
collected.
ANNOTATED
ANNOTATION
1. Levy, as a summary administrative remedy, refers to the

same act of seizure but of real property in order to enforce the
payment of taxes. As in distraint, the property may be sold at public
sale if, after seizure, the taxes are not voluntarily paid.
2. Issuance of the warrant of distraint and levy. It begins
the s u m m a r y remedy of distraint and levy. Said warrant is the order
to distrain and levy upon the properties of the taxpayer. It is not to
be confused with the certificate referred to in Section 2 1 5 , which
is the one prepared and issued by the agent designated by the
Commissioner of Internal R e v e n u e to execute the order of distraint
and levy. It is issued after the seizure of the property distrained and
levied upon.
In other w o r d s , the issuance of t h e warrant is merely the

step that starts the s u m m a r y proceeding while the seizure of the
properties is the next step. It is for this reason that the warrant need
not contain the details regarding the properties to be distrained
or levied upon b e c a u s e they are only required in the certificate
referred to in Section 2 0 7 ( B ) . (Palanca vs. C o m m . , L - 1 6 6 6 1 , J a n .
3 1 , 1962.)
3. Strict compliance with requirements of sale essential.

Tax sale proceedings are in invitum (by invitation) a n d strict
observance of the statutory provisions is required not only for t h e
protection of taxpayers but also to allay a n y possible suspicion of
collusion b e t w e e n the p u r c h a s e r s a n d the public officials called
upon to conduct the sale. (Serfino v s . Court of A p p e a l s , 154 S C R A
19, Sept. 15, 1987.)
If the requirements are not strictly c o m p l i e d w i t h , s u c h sale m a y

be voided. T h u s , the court declared as void a tax sale:
(1) W h e r e the a m o u n t stated in the advertisement is
more than w h a t is d u e especially w h e n the statement of the
overcharge is intentionally m a d e . T h e law requires that the
"advertisement shall contain a statement of the a m o u n t of taxes
and penalties d u e " or in other w o r d s , that the correct a m o u n t
of the tax d u e must be specified in the notice of sale b e c a u s e
any residue over the claim a n d e x p e n s e s is s u p p o s e d to be
returned to the taxpayer (Castro vs. Coll., C.T.A. C a s e No. 1 4 1 ,
Dec. 2 9 , 1956.);
(2) W h e r e the notice of sale merely states the time w h e n

the sale would terminate but d o e s not specify the time w h e n
the sale w o u l d c o m m e n c e , b e c a u s e it d o e s not satisfy the

requirement that t h e notice of sale shall state "the time and
place of sale" ( G a n c a y c o vs. Coll., C.T.A. C a s e No. 2 8 7 , A u g .
2 7 , 1956.);
(3) W h e r e t h e notice of sale states that the sale shall

be held "on D e c e m b e r 15, 1940 at 9:00 a.m. and every day
thereafter at t h e s a m e place a n d hour, until all the properties
shall h a v e b e e n sold to t h e highest bidder" b e c a u s e it does not
satisfy the s a m e statutory requirement as to time and place
of sale. T h e notice must specify t h e exact date of sale so as
to e n a b l e t h e t a x p a y e r to protect his rights (Cabrera vs. Prov.
Treas. of Tayabas, 75 Phil. 80.);
(4) W h e r e there is a misdescription of the property sold

or a mistake in t h e n a m e of t h e o w n e r in t h e notice of sale
(Valencia v s . J i m e n e z , 11 Phil. 4 9 2 ; Velayo v s . O r d o v e z a , 102
Phil. 385.);
(5) W h e r e t h e sale at public auction for tax delinquency

of property w a s m a d e without notice to t h e taxpayer (Trigal vs.
Tobias, L-15869, A u g . 3 1 , 1 9 6 1 ; s e e Prov. Sheriff o f Rizal vs.
Court of A p p e a l s a n d Shaovy, L-22606, Dec. 12, 1975; Serfino
v s . Court of A p p e a l s , supra; Tongco v s . Philippine Veterans
Bank, 2 1 2 S C R A 176, A u g . 5, 1992.); and
(6) W h e r e the officer conducting the sale exceeds his a u -

thority by unnecessarily selling all the parcels of land belong-
ing to t h e taxpayer w h e n the sale of o n e w o u l d be sufficient to
satisfy t h e tax. (Stead v s . C o u r s e , 4 Cranch 4 0 3 , cited in Jose
A. A r a n a s , N I R C , 1970 Ed., Vol. 4, p. 182.)
In a tax sale, c o m p l i a n c e with the statutory requisites is not

p r e s u m e d . It is t h e duty of the purchaser to prove that none w a s
omitted. (Valencia vs. Jimenez, supra.)
4. Real property placed under levy may be sold at public

auction for less than its market value (par. 1, Sec. 215.) since the
taxpayer is given the right to r e d e e m . (Sec. 214.) With respect to
distrained personal property, the rule is different. (Sec. 212.)
5. Registration of the tax sale. It is but one of the safeguards

in order that the owner may have notice of the sale. Indeed, it is to
serve notice to all of the existence of the right recorded. Primarily,
it is to spur the owner to redeem the property within a one-year
period in pain of forever losing the s a m e to the vendee.
ANNOTATED
Therefore, if the party to be affected had actual knowledge of

the fact of the tax sale, then the purpose for which the registration
had been established, as a legal safeguard, is sufficiently complied
with. The purpose of registering an instrument related to land is
to give notice to the persons interested of the existence of legal
rights against the property. If the parties interested have actual
notice of the existence of the lien created under said instrument,
then the necessity of registration does not exist. Really, the law
does not require the unnecessary. A n d registration in the situation
just presented b e c o m e s an act of supererogation. For, actual
knowledge of an unregistered sale is equivalent to registration; "it
is equivalent to a notice resulting from t h e registry." (Winkleman vs.
Veluz, 43 Phil. 604.)
T h e one-year period for redemption begins f r o m the registration

of the deed of sale (Santos vs. R.F.C., 101 Phil. 980.) or forfeiture.
6. Effect of forfeiture of real property. T h e forfeiture of real
property e x p o s e d for sale for w a n t of bidder does not operate as a
total discharge of the claim.
T h e term "satisfaction" in p a r a g r a p h 1 of Section 2 1 5 signifies
nothing but full discharge of the t a x e s , penalties a n d costs claimed
by the state; it is intended to m e a n only a discharge pro tanto.
In other w o r d s , the forfeiture d o e s not operate in satisfaction of
the total claims e v e n b e y o n d the value of t h e property forfeited.
This is confirmed by the provisions of Section 2 1 7 . A contrary rule
would permit a clever taxpayer, w h o is able to conceal most or
the more valuable part of his property f r o m the r e v e n u e officers,
to escape his tax liability by sacrificing an insignificant portion of
his holdings. Section 2 1 6 m a k e s no distinction b e t w e e n forfeitures
to the G o v e r n m e n t and sales to third persons. (Castro v s . Coll., 4
S C R A 1094, April 2 6 , 1962.)
7. Redemption of forfeited real property. Only after the

forfeiture shall h a v e b e c o m e absolute (par. 2, Sec. 215.) can the
government exercise full d o m i n i o n over property so forfeited. W h e n
the real property is forfeited in favor of the g o v e r n m e n t a n d the
s a m e is r e d e e m e d by t h e taxpayer pursuant to Section 2 1 5 , t h e
act of redemption is not an act of p a y m e n t of the tax. In r e d e e m i n g
the property, the taxpayer merely repurchases property which
the government already o w n e d . S u c h being the case, the law
requires that the full a m o u n t of the taxes a n d penalties together
with the interest thereon and the cost of the s a m e be paid before
redemption can take place. (Castro vs. Coll., CTA C a s e No. 1 4 1 ,
Dec. 2 9 , 1956.)
8. A tax d e e d c o n v e y s no better title than that possessed by

the o w n e r (taxpayer) at the time of the sale, (see Gov't, vs. Adriano,
41 Phil. 112.) T h e principle of caveat emptor applies. (Serfino vs.
Court of A p p e a l s , supra.)
9. Distraint and levy distinguished. Both are summary

remedies for t h e collection of taxes, and both cannot be availed of
w h e r e the a m o u n t of tax is not m o r e t h a n P100.00. T h e distinctions
are:
(1) T h e first refers to personal property, while levy, to real
property;
(2) In the first, forfeiture by the g o v e r n m e n t is not provided
(Sec. 212.), while in the s e c o n d , forfeiture by the g o v e r n m e n t is
authorized; a n d
(3) T h e taxpayer is not given t h e right of redemption with
respect to distrained personal property sold, while such right is
given in c a s e of real estate levied u p o n and sold or forfeited to
the g o v e r n m e n t , (see par. 1, Sec. 214.)
1 0 . Administration of forfeited property. Under Section
2 1 7 , the C o m m i s s i o n e r is e m p o w e r e d to administer properties
absolutely forfeited for n o n - p a y m e n t of taxes. This authority has
b e e n delegated to the Regional Director, (see Sec. 14, Rev. Regs.
No. 3-69.) S u c h being t h e c a s e , t h e latter can no longer delegate
said authority to administer the forfeited properties in favor of a
private individual. However, t h e Regional Director concerned is not
prohibited f r o m e m p l o y i n g a n y b o d y including a private individual, to
do t h e j o b of overseeing the tax properties for and in his behalf. The
Regional Director shall remain the administrator of the property.
(BIR Ruling, A u g . 7, 1975.)
11. Warrant of distraint and levy as proof of finality of assess-
ment; exception. As a rule, the warrant of distraint and levy is
"proof of t h e finality of the a s s e s s m e n t " and "renders hopeless a
request for reconsideration," being "tantamount to an outright denial
thereof and m a k e s the said request d e e m e d rejected," because it is
the most drastic action of all media of enforcing the collection of tax.
But there m a y be special circumstances that prevent application of
this accepted doctrine.
(1) T h u s , in a case: "The proven fact is that four days after
the taxpayer received the notice of assessment, it filed its letter
protest. This w a s apparently not taken into account before the
warrant of distraint and levy w a s issued; indeed, such protest
ANNOTATED
could not be located in the office of the BIR. It w a s only after

the taxpayer's counsel g a v e the BIR a copy of the protest that
it was, if at all, considered by the tax authorities. During the
intervening period, the warrant w a s premature and could not be
served." ( C o m m . vs. Algue, Inc., 158 S C R A 9, Feb. 1 7 , 1 9 8 8 . )
(2) In another case, petitioner Commissioner of Internal
Revenue, without ruling on the private respondent's letter
protesting the a s s e s s m e n t for deficiency income taxes,
issued a warrant of distraint and levy which w a s received by
respondent's counsel w h o requested for reinvestigation of
the assessment a n d for the reconsideration of the s u m m a r y
collection thru the warrant of distraint and levy. Without acting
on the request, petitioner filed a collection suit in court against
private respondent.
Under the circumstances, t h e C o m m i s s i o n e r not having
clearly signified his final action on t h e disputed assessment,
the period to appeal to t h e Court of A p p e a l s has c o m m e n c e d
to run only w h e n respondent received t h e s u m m o n s on t h e civil
suit for collection of deficiency i n c o m e w h i c h , in effect, should
be considered a denial of the request for reinvestigation and
reconsideration. T h e C o m m i s s i o n e r should a l w a y s indicate to
the taxpayer in clear a n d unequivocal language that constitutes
his final determination of t h e disputed a s s e s s m e n t so that t h e
taxpayer without needless difficulty w o u l d be able to d e t e r m i n e
w h e n his right to a p p e a l a c c r u e s . ( C o m m . of Internal R e v e n u e
vs. Union Shipping Corp., 185 S C R A 5 4 7 , M a y 2 1 , 1990; see
Surigao Electric Co., Inc. v s . Court of Tax A p p e a l s , 57 S C R A
523, J u n e 2 8 , 1974.)
12. Resale of real property taken for taxes. Rev. R e g s . No.

22-2002 lays d o w n t h e following rules or policies in the sale or
disposition of real estate obtained by t h e G o v e r n m e n t under Section
216 with the objective of m a x i m i z i n g t h e realization of t h e taxes,
penalties or costs arising under t h e Tax C o d e or in c o m p r o m i s e or
adjustment of any claim therefor:
(1) All acquired/forfeited real properties transferred in the

n a m e of the Republic of the Philippines, having p a s s e d the
one-year redemption period, shall be converted into c a s h f r o m
the date of acquisition or forfeiture;
(2) T h e sale of acquired/forfeited real properties shall
be by sealed bids in a public auction to be witnessed by a
representative of the C o m m i s s i o n on Audit ( C O A ) ;
(3) T h e Notice of Sale of the acquired real properties shall

be published o n c e a w e e k for two (2) consecutive w e e k s in a
n e w s p a p e r of general circulation in the Philippines which must
be c o m p l e t e d at least 20 d a y s prior to the date of such public
auction;
(4) Unless the C o m m i s s i o n e r of Internal Revenue provides

otherwise, the M i n i m u m Bid Price/Floor Price shall be the
latest fair market v a l u e as d e t e r m i n e d by the Commissioner of
Internal R e v e n u e or the fair market value (FMV) s h o w n in the
latest tax declaration issued by the provincial, city or municipal
assessor, w h i c h e v e r is higher, pursuant to Section 6(E) of the
Tax C o d e ;
(5) A n y o n e could bid e x c e p t foreign nationals, corporate

or otherwise, a n d t h o s e qualified under existing laws, rules
and regulations, including e m p l o y e e s of the Bureau of Internal
Revenue;
(6) Bidders shall be required to post a bond in cash
or m a n a g e r ' s c h e c k in an a m o u n t representing 1 0 % of the
m i n i m u m bid price at least o n e (1) d a y before the scheduled
public auction;
(7) Unless the C o m m i s s i o n e r allows extension of time to

pay, in meritorious c a s e s , the winning bidder shall pay the full
a m o u n t of his bid cash or m a n a g e r ' s check within two (2) days
after receipt of notice of a w a r d ;
(8) All taxes and e x p e n s e s relative to the issuance of title
shall be borne by the winning bidder;
(9) T h e winning bidder shall be responsible at his o w n
e x p e n s e for the ejectment of squatters and/or occupants, if
any, of the auctioned property;
(10) Negotiated or private sale shall be resorted to as a
c o n s e q u e n c e of failed public bidding for two (2) consecutive
times;
(11) Negotiated or private sale shall, in all cases, be
approved by the Secretary of Finance;
(12) Public auction sale shall be approved by the C o m -
missioner of Internal Revenue or his authorized representative;
and
(13) T h e Government reserves the right to reject or cancel
any or all bids. (Sec. 2 thereof.)
ANNOTATED
SEC. 218. Injunction not Available to Restrain Collection

of Tax. No court shall have authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee, or
charge imposed by this Code.
ANNOTATION
1. T h e remedies available to the g o v e r n m e n t to effect the

collection of taxes are:
(1) Administrative:
(a) Distraint of personal property;
(b) Levy of real property;
(c) Enforcement of forfeiture of property;
(d) Entering into c o m p r o m i s e of tax c a s e s ;
(e) Requiring the filing of b o n d s to assure compliance
with certain tax laws or regulations (e.g., Sees. 9 1 , 1 0 1 ,
137, 158, 159, 160.);
(f) Requiring proof of the filing of income tax return
before a license to e n g a g e in business or occupation or to
practice a profession is issued (see R.A. No. 1538.);
(g) Giving of rewards to informers w h o give information
regarding violations of any tax law (see Sec. 282.);
(h) Imposition of surcharge and interest for non-
payment or late p a y m e n t of tax (Sees. 248-249.);
(i) Making arrest, s e a r c h , a n d seizure in certain cases
(Sec. 15.);
0) Deportation of aliens w h o violate tax laws (see

R.A. No. 1093.);
(k) Inspection and e x a m i n a t i o n of books of accounts

and records (infra.);
(I) Use of the national tax register (see R.A. No. 2070,
as a m e n d e d . ) ;
(m) Obtaining information on potential taxpayers and

examination of any person regarding his tax liability (Sec.
(n) Inventory-taking of stock-in-trade, placing the

business operations of a taxpayer under surveillance, and
prescribing presumptive gross sales and receipts (Sec

6[C].);
(o) Termination of the tax period (Sec. 6[D].); and
(p) Inquiring into bank deposit accounts of a decedent
(Sec. 6[F].); a n d
(2) Judicial:
(a) Ordinary civil action; a n d
(b) Criminal action, (see Sees. 2 2 0 , 2 2 1 , 229.)
2. Estoppel. T h e g o v e r n m e n t is never e s t o p p e d to collect

legitimate taxes b e c a u s e of the error c o m m i t t e d by its agents.
(Visayan C e b u Terminal C o . , Inc. v s . C o m m . , L-19530, Feb. 2 7 ,
1965; Republic v s . Phil. Rabbit B u s Lines, Inc., L-26862, March 30,
1970, a n d other cases.)
3. Proof of filing income tax return. Under Republic Act No.
1538, before a license to e n g a g e in trade, business or occupation
or to practice a profession c a n be issued to a p e r s o n , partnership,
association or corporation, he must present to the officer issuing
s u c h license or permit proof he has filed his income tax return
during the preceding year a n d that i n c o m e taxes d u e have been
paid t h e r e o n .
4. Giving of informer's reward. Under Republic Act

N o . 2 3 3 8 , t h e qualified informer (other than an internal revenue
or c u s t o m s official or e m p l o y e e , or other public official or other
relatives within the sixth d e g r e e of consanguinity) is entitled to be
rewarded in an a m o u n t equivalent to 5% of the realized revenues,
surcharges, c o m p r o m i s e s or penalties established by law, collected
and accounted for as a result of the information furnished, (as
a m e n d e d by P.D. No. 707.) T h e giving of informer's reward is now
g o v e r n e d by Section 2 8 2 .
5. National tax register. It is a record of the n a m e s of persons

residing in e a c h city or municipality kept and maintained by every
revenue regional director of every regional district with other facts:
(a) based u p o n the data and information given in the statement
of assets and income required by the National Tax Census Law;
(b) from the income and sales returns; (c) from other statements
which taxpayers are required to file with the BIR; and (d) from other
sources. It is available for use by any internal revenue or other tax
collecting officer as aid in the collection of taxes, (see Sees. 1, 2,
R.A. No. 2070, as a m e n d e d by R.A. No. 5268.)
ANNOTATED
6. Action of Commissioner on request for reinvestigation.

The Commissioner of Internal Revenue is not required by the Tax
Code to rule first on a taxpayer's request for reinvestigation before
he can go to court for the purpose of collecting the tax assessed.
On the contrary, Section 218 withholds from all courts, except the
Court of Tax Appeals (under Sec. 11, R.A. No. 1125.), the authority
to restrain the collection of any national internal revenue tax, fee
or charge thereby indicating the legislative policy to allow the
Commissioner much latitude in the speedy and prompt collection
of taxes. T h e reason is obvious. (Republic v s . Lim Tian Teng Sons
and Co., Inc., L - 2 1 7 3 1 , March 3 1 , 1966.) Taxes, being t h e chief
sources of revenue for the G o v e r n m e n t to keep it running, must be
paid immediately and without delay. ( C o m m . v s . Yuseco, L-12518,
Oct. 28, 1961.)
7. Court of Tax Appeals may grant injunction. T h e "court"

mentioned by Section 218 refers only to ordinary courts b e c a u s e
under Section 11 of R.A. No. 1125, as a m e n d e d , the Court of
Tax A p p e a l s is e m p o w e r e d to s u s p e n d t h e collection of internal
revenue taxes and c u s t o m s duties in c a s e s pending appeal
subject to certain conditions. T h e legislative policy is to allow the
C o m m i s s i o n e r of Internal R e v e n u e m u c h latitude on the prompt
and speedy collection of taxes. (Dayrit v s . Cruz, 165 S C R A 571
[1988.]) Rev. M e m o . Cir. No. 4 2 - 2 0 1 0 prohibits t h e issuance by
courts other than the Court of Tax A p p e a l s of t e m p o r a r y restraining
order (TROs) on t h e collection of t a x e s by the BIR, t h e issuance of
warrants of distraint a n d g a r n i s h m e n t , and/or levy on final decisions
of the BIR on disputed a s s e s s m e n t s , c a s e s filed before t h e Court of
Tax A p p e a l s , and the sale of property distrained a n d g a r n i s h e d .
T h e Court of Tax A p p e a l s m a y issue an injunction w h e n , in

its opinion, the collection of national internal r e v e n u e tax, f e e or
charge m a y j e o p a r d i z e t h e interest of t h e g o v e r n m e n t and/or t h e
taxpayer. (Angeles City vs. A n g e l e s City Electric Corporation, G.R.
No. 166134, J u n e 2 9 , 2010.)
8. Exceptions to rule on unavailability of injunction. T h e
rule that injunction will not lie to prevent a criminal prosecution has
admitted exceptions, to wit:
(1) to afford a d e q u a t e protection to the constitutional
rights of the a c c u s e d ;
(2) w h e n necessary for the orderly administration of
justice or to avoid oppression or multiplicity of actions;
(3) w h e n there is a prejudicial question w h i c h is subjudice;
(4) w h e n the acts of the officer are without or in excess of

authority;
(5) w h e r e the prosecution is under an invalid law,

ordinance or regulation;
(6) w h e n d o u b l e j e o p a r d y is clearly apparent;
(7) w h e n t h e court has no jurisdiction over the offense;
(8) w h e r e it is a c a s e of persecution rather than prosecu-
tion;
(9) w h e r e the c h a r g e s are manifestly false and motivated
by lust for v e n g e a n c e ;
(10) w h e n there is clearly no prima facie case against
the a c c u s e d a n d a motion to q u a s h on that ground has been
denied; and
(11) to prevent a t h r e a t e n e d unlawful arrest. ( C o m m . of
Internal R e v e n u e v s . Court of A p p e a l s , 257 S C R A 200 [1996];
Brocka v s . Enrile, 192 S C R A 183 [1990]; O c a m p o IV vs.
O m b u d s m a n , 2 2 5 S C R A 7 2 5 [1993].)
W i t h respect to realty t a x e s , exception to the rule that appeal
shall not s u s p e n d their collection is w h e r e t h e taxpayer has shown
a clear and u n m i s t a k a b l e right to refuse or to hold in abeyance the
p a y m e n t of t h e taxes. (Talento v s . Escalada, Jr., 556 S C R A 491
[2008]. This exception m a y be applicable to internal revenue taxes.
T h e prohibition on t h e issuance of a writ of injunction to enjoin
t h e collection of taxes applies only to internal revenue taxes and not
to local taxes. (Angeles City v s . A n g e l e s City Electric Corporation,
G.R. No. 166134, J u n e 2 9 , 2010.)
SEC. 219. Nature and Extent of Tax Lien. - If any person,

corporation, partnership, joint-account (cuenta en participation),
association or insurance company liable to pay an internal revenue
tax, neglects or refuses to pay the same after demand, the amount
shall be a lien in favor of the Government of the Philippines from
the time when the assessment was made by the Commissioner until
paid, with interest, penalties, and costs that may accrue in addition
thereto upon all property and rights to property belonging to the
taxpayer: Provided, That this lien shall not be valid against any
mortgagee, purchaser or judgment creditor until notice of such lien
shall be filed by the Commissioner in the office of the Register of
Deeds of the province or city where the property of the taxpayer is
situated or located.
ANNOTATED
ANNOTATION
1. Tax lien is a legal claim or change on property, real or

personal, established by law as security in default of the payment
of taxes, (see Hongkong and Shanghai Banking Corp. vs. Rafferty,
39 Phil. 105, 41 A m . Jur. 881.)
(1) Generally, it attaches to the property irrespective of
ownership or transfer thereof.
(2) T h e claim of the g o v e r n m e n t predicated on a tax lien
(subject to the provision of Sec. 219.) is superior to the claim
of a private litigant predicated on a j u d g m e n t . T h e lien attaches
not only from the service of the warrant of distraint of levy but
from the time the tax b e c a m e d u e and payable. (Republic vs.
Enriquez, 166 S C R A 6 0 8 , Oct. 2 1 , 1988; C o m m . vs. National
Labor Relations C o m m i s s i o n , 2 3 8 S C R A 42 [1994].)
2. "Rights to property" include products of the property such
as the proceeds of insurance policy on t h e property subject to the
lien, (see Rizal Surety and Ins. C o . vs. De La Paz, 95 Phil. 9 0 ; Phil.
Educ. Co. vs. Tan Tay Po, 56 Phil. 813.)
3. In a seizure of property to enforce a tax lien, t h e residue
after the payment of taxes a n d e x p e n s e s g o e s to the taxpayer or
owner of the property. (Bank of P.I. vs. Trinidad, 42 Phil. 220.)
4. Extinguishment of tax liens. It m a y be extinguished as
follows:
(1) by p a y m e n t or remission of the tax;

(2) by prescription of t h e right of the g o v e r n m e n t to assess
or collect (see Sees. 2 0 3 , 222.);
(3) by failure to file notice of s u c h lien in t h e office of the
Register of D e e d s , as against any m o r t g a g e e , purchaser, or
j u d g m e n t creditor (see Sec. 219.); or
(4) by destruction of t h e property subject of t h e lien.
In case of Nos. 1 a n d 2, there is no m o r e tax liability; under
Nos. 3 and 4, t h e taxpayer is still liable.
5. T h e w o r d "tax" in Section 2 1 9 of the Tax C o d e regarding
tax liens is not used in the limited s e n s e as referring to contributions
for the support of the g o v e r n m e n t . It includes "any national internal
revenue tax, fee or c h a r g e " i m p o s e d by the Tax C o d e , (see
C o m m . vs. Guerrero, L-19059, J a n . 2 1 , 1967.) It encompasses all
government revenues collectible by the C o m m i s s i o n e r of Internal
R e v e n u e under the Tax C o d e , whether involving taxes, in the

strict technical sense thereof, or not. ( C o m m . vs. Dingalan Forest
Products Corp., L-24405, A u g . 2 7 , 1968.)
S E C . 2 2 0 . Form and Mode of Proceeding in Actions Arising

under this Code. C i v i l a n d c r i m i n a l actions a n d proceedings
instituted in behalf of the Government under the authority of this
Code o r o t h e r l a w e n f o r c e d b y t h e B u r e a u o f I n t e r n a l Revenue
shall be brought in the name of the Government of the Philippines
a n d s h a l l b e c o n d u c t e d b y l e g a l officers o f t h e B u r e a u o f I n t e r n a l
R e v e n u e b u t n o c i v i l o r c r i m i n a l a c t i o n f o r t h e r e c o v e r y o f taxes o r
t h e e n f o r c e m e n t o f a n y f i n e , p e n a l t y o r f o r f e i t u r e u n d e r t h i s Code
s h a l l b e f i l e d i n c o u r t w i t h o u t t h e a p p r o v a l o f t h e C o m m i s s i o n e r , (a)
ANNOTATION
1. Civil a n d criminal actions are n o w to be conducted only by

t h e legal officers of t h e BIR. Before the a m e n d m e n t by R.A. No.
8 4 2 4 , t h e provincial or city fiscal (now prosecutor) or the Solicitor
General w a s also authorized to c o n d u c t such actions; and in the
c a s e of the legal officers of t h e BIR, they must be "deputized by the
Secretary of J u s t i c e . "
Note: Rev. M e m o . Order N o . 15-2010 prescribes the policies
a n d guidelines in the handling of court cases by BIR legal officers.
2. Under the decentralized set-up of the Bureau of Internal
R e v e n u e , the Regional Director has been given delegated authority
to administer a n d enforce revenue laws and regulations within his
district, (see M e m o . Order No. V-634, approved by the Sec. of
Finance on July 1, 1956.) This authority is broad e n o u g h to cover
approval of court actions as required by Section 220. The approval
by the C o m m i s s i o n e r of a civil action for the recovery of taxes is
not jurisdictional, but o n e relating to capacity to sue or affecting
the c a u s e of action only. T h e approval can be manifested in many
forms such as by referring a tax case to the Regional Office with
instruction that appropriate action be taken.
Section 7 authorizes the Commissioner to delegate the powers,
subject to certain exceptions, vested in him by the Tax Code to any
subordinate officials with the rank equivalent to a division chief or
higher. None of the exceptions relate to the Commissioner's power
to approve the filing of tax collection cases. (Republic vs. Hizon,
320 S C R A 574 [1999].)
ANNOTATED
3. Contracting accredited private lawyers to handle litigation

of tax cases. Under Section 35, Chap. 12, Title III, Book IV of
the present Administrative Code, the Office of the Solicitor General
is mandated "to represent the G o v e r n m e n t of the Philippines, its
agencies and instrumentalities and its officials and its agents in any
litigation, proceeding, investigation or matter requiring the services
of lawyers." The S u p r e m e Court, in one case, declared:
"There are cases w h e r e a g o v e r n m e n t agency declines the
services of the Solicitor General or otherwise fails or refuses
to forward the papers of the case to him for appropriate action.
The Court finds and so holds that this practice should be
stopped. To repeat, the Solicitor General is the lawyer of the
government, any of its agents and officials in any litigation,
proceeding, investigation or matter requiring the services of a
lawyer. T h e exception is w h e n s u c h officials or a g e n t s are being
charged criminally or are being civilly s u e d for d a m a g e s arising
from a felony. His services cannot be lightly rejected, m u c h less
ignored by the office or officials c o n c e r n e d . ( O r b o s v s . Civil
Service C o m m i s s i o n , 189 S C R A 4 5 9 , 4 6 6 - 4 6 7 [1990].)"
Emphasizing the dictates of national interest a n d fiscal

considerations, the S u p r e m e Court, in another c a s e , also said:
"xxx xxx xxx. A s i d e f r o m the legal provisions m a n d a t i n g that

the Solicitor General i s the lawyer o f t h e g o v e r n m e n t x x x , t h e
national interest a n d fiscal considerations must be taken into
account. T h e g o v e r n m e n t must not be unnecessarily subjected
to financial burdens w h i c h , in t h e first place, it n e e d not incur at
all. x x x." ( S u p r e m e Court Resolution in Gonzales vs. Chaves,
G.R. No. 9 7 3 5 1 , promulgated on M a r c h 17, 1992, clarifying its
earlier Decision promulgated on February 4, 1992 in t h e s a m e
case.)
Moreover, C o m m i s s i o n on Audit ( C O A ) Circular No. 8 6 - 2 5 5

dated April 2 , 1 9 8 6 (Inhibitions against e m p l o y m e n t by g o v e r n m e n t
agencies and instrumentalities, including g o v e r n m e n t - o w n e d or
controlled corporations, of private lawyers to handle their legal
cases) directs that "the p a y m e n t out of public f u n d s of retainer fees
to private law practitioners w h o are so hired or e m p l o y e d without the
prior written conformity and a c q u i e s c e n c e of the Solicitor General
or the G o v e r n m e n t Corporate C o u n s e l , as the c a s e m a y b e , as well
as the written concurrence of t h e C o m m i s s i o n on Audit shall be
disallowed in audit and the s a m e shall be a personal liability of the
officials c o n c e r n e d . "
T h e a m e n d a t o r y C O A Circular No. 98-002 dated June 9,

1998, provides that "public funds shall not be utilized for payment
of the services of a private legal counsel or law firm to represent
g o v e r n m e n t a g e n c i e s and instrumentalities, including government-
o w n e d or controlled corporations and local government units in
court or to render legal services for t h e m . In the event that such
legal services c a n n o t be avoided or is justified under extraordinary
or exceptional circumstances for g o v e r n m e n t agencies and
instrumentalities, including g o v e r n m e n t - o w n e d or controlled corpo-
rations, t h e written conformity and a c q u i e s c e n c e of the Solicitor
General or t h e G o v e r n m e n t Corporate C o u n s e l , as the case may
be, a n d t h e written c o n c u r r e n c e of t h e C o m m i s s i o n on Audit shall
be s e c u r e d before the hiring or e m p l o y m e n t of a private lawyer or
law f i r m . " (Opinion of t h e Sec. of Justice No. 4, Series of 2001.)
Note: In v i e w of the a m e n d m e n t of Section 2 2 0 , the written

conformity of t h e C o m m i s s i o n s of Internal R e v e n u e and no longer
of t h e Solicitor General or the G o v e r n m e n t Corporate Counsel,
should be s e c u r e d .
4. T h e ordinary courts, the Regional Trial Courts or the city or
municipal trial courts, as the c a s e m a y be, are given jurisdiction over
civil a n d criminal actions for the collection of internal revenue taxes
(and c u s t o m s duties) in c a s e s w h i c h are not within the appellate
jurisdiction of t h e Court of Tax A p p e a l s , (see Sec. 205; also par.
1, Sec. 11, R.A. No. 1125.) T h e y are also given jurisdiction over
cases involving local taxes a n d special taxes not administered by
t h e B u r e a u of Internal R e v e n u e and the Bureau of Customs.
S E C . 2 2 1 . Remedy for Enforcement of Statutory Penal

Provisions. T h e r e m e d y f o r e n f o r c e m e n t o f s t a t u t o r y p e n a l t i e s
o f a l l sorts s h a l l b e b y c r i m i n a l o r c i v i l a c t i o n , a s t h e p a r t i c u l a r
s i t u a t i o n m a y r e q u i r e , subject t o t h e a p p r o v a l o f t h e C o m m i s s i o n e r .
ANNOTATION
1. T h e approval m a y be given by the Regional Director, (see

Sec. 220, Annotation No. 1.)
2. Assessment before criminal prosecution. An a s s e s s -
m e n t of a tax deficiency is not necessary to a criminal prosecution for
tax evasion. T h e crime is complete w h e n the violator has knowingly
and willfully filed a fraudulent return with i n t e n t to e v a d e a n d
defeat the tax.
ANNOTATED
Accordingly, in a case, the claim of a taxpayer that the filing

of the information for tax evasion against him by the BIR (after it
found sufficient proof that he w a s guilty thereof) w a s precipitate
and premature on the ground that the Commissioner of Internal
Revenue had not yet resolved his protests against the assessment
of the Revenue District Officer and that he w a s denied recourse to
the Court of Tax Appeals w a s held without merit.
"What is involved here is not the collection of taxes w h e r e the
assessment of the Commissioner of Internal Revenue m a y be
reviewed by the Court of Tax Appeals, but a criminal prosecution
for violations of the National Internal R e v e n u e C o d e which is within
the cognizance of the Regional Trial Courts. While there can be no
civil action to enforce collection before the a s s e s s m e n t procedures
provided in the C o d e have b e e n followed, there is no requirement
for the precise computation and a s s e s s m e n t of t h e tax before there
can be a criminal prosecution under the C o d e . " ( U n g a b v s . Cusi, 97
S C R A 877 [1980].) T h e g o v e r n m e n t ' s failure to discover the violation
and promptly to assess has no connection with the c o m m i s s i o n of
the crime. ( A d a m s o n vs. Court of A p p e a l s , 588 S C R A 27 [2009];
see however, C o m m . of Internal R e v e n u e vs. Court of A p p e a l s , 257
S C R A 200 [1996], in Annotation No. 2, under Section 254.)
So, a petition for reconsideration of an a s s e s s m e n t m a y

suspend the running of the prescriptive period for collection of t h e
tax but not the prescriptive period of a criminal action for violation
of law. (see People vs. Ching Lot, L-10609, M a y 2 3 , 1958.)
S E C . 2 2 2 . Exceptions as to Period of Limitation of Assess-

ment and Collection of Taxes.
(a) I n t h e case o f a false o r f r a u d u l e n t r e t u r n w i t h i n t e n t t o
evade t a x o r o f f a i l u r e t o f i l e a r e t u r n , t h e t a x m a y b e assessed, o r a
proceeding in court for t h e collection of such t a x m a y be filed w i t h o u t
assessment, a t a n y t i m e w i t h i n t e n (10) y e a r s a f t e r t h e d i s c o v e r y o f
t h e f a l s i t y , f r a u d , o r o m i s s i o n : Provided, T h a t i n a f r a u d a s s e s s m e n t
w h i c h has become f i n a l a n d e x e c u t o r y , t h e f a c t o f f r a u d s h a l l b e
j u d i c i a l l y t a k e n cognizance o f i n t h e c i v i l o r c r i m i n a l a c t i o n f o r t h e
collection thereof.
(b) I f before t h e e x p i r a t i o n o f t h e t i m e p r e s c r i b e d i n Section

203 for t h e assessment o f t h e t a x , b o t h t h e C o m m i s s i o n e r a n d t h e
t a x p a y e r h a v e agreed i n w r i t i n g t o i t s a s s e s s m e n t a f t e r s u c h t i m e ,
t h e t a x m a y b e assessed w i t h i n t h e p e r i o d a g r e e d u p o n . T h e p e r i o d
s o agreed u p o n m a y b e e x t e n d e d b y s u b s e q u e n t w r i t t e n a g r e e m e n t
m a d e before t h e e x p i r a t i o n o f t h e p e r i o d p r e v i o u s l y a g r e e d u p o n .
(c) Any internal revenue tax which has been assessed within
the period of limitation as prescribed in paragraph (a) hereof may be
collected by distraint or levy or by a proceeding in court within five
(5) years following the assessment of the tax. (a)
(d) Any internal revenue tax, which has been assessed within
the period agreed upon as provided in paragraph (b) hereinabove,
may be collected by distraint or levy or by a proceeding in court
within the period agreed upon in writing before the expiration of the
five (5)-year period. The period so agreed upon may be extended by
subsequent written agreements made before the expiration of the
period previously agreed upon, (a)
(e) Provided, however, That nothing in the immediately
preceding Section and paragraph (a) hereof shall be construed to
authorize the examination and investigation or inquiry into any tax
return filed in accordance with the provisions of any tax amnesty
law or decree, (as amended by B.P. Big. 700 and R.A. No. 8424.)
ANNOTATION
1. Section 2 2 2 gives the exceptions to the general rule

provided in Section 2 0 3 . T h e period of three (3) years for collecting
delinquent taxes in Subsections (c) a n d (d) is increased to five (5)
years.
(1) A n e n t f r a u d , t h e rule is that it is never lightly to be
p r e s u m e d and should be alleged and proved because it is a
serious c h a r g e . ( C o m m . v s . Ayala Securities Corp. and C.T.A.,
L-29485, M a r c h 3 1 , 1976; Republic vs. Ker and Co., L-21609,
Sept. 30, 1966; A z n a r vs. C T A . and Coll., L-20569, A u g . 23,
1974.) But the g o v e r n m e n t need not prove fraud in the case
of a fraud a s s e s s m e n t w h i c h has b e c o m e final and executory.
(Sec. 222[a].)
(2) It is essential that the discovery of the falsity or fraud
or of failure to file (Ibid.) must have been m a d e within the
three-year period following the general rule. (Sec. 203.) The
exceptions refer to the ten-year period w h e n assessment may
be m a d e from the date of discovery. The discovery period
cannot be without time limit for otherwise the purpose of the
law in fixing prescriptive periods would be rendered nugatory.
(3) In Marcos II vs. Court of Appeals (273 S C R A 4 7 [1997].),
the Supreme Court ruled that under Section 223 (now Section
222) in case of failure to file a return, the tax may be assessed
ANNOTATED
at any time within 10 years after the omission and any tax so
assessed may be collected by levy upon real property within
three (now 5) years following the assessment of the tax. (see
C o m m . vs. Tulio, 474 S C R A 149 [2005].)
(4) Section 222(a) does not apply in the collection of
income taxes by s u m m a r y proceeding but w h e n the collection
is to be elected by court action, said provision is controlling.
(Republic vs. Ret, L-13754, March 3 1 , 1962.)
(5) Under Section 222(a), a proceeding in court m a y be
instituted for the collection of tax without an assessment.
(6) In Comm. vs. Pascor Realty and Development Corp.,
(309 S C R A 4 0 2 [1999].), private respondents insist that Section
222 should be read in relation to Section 255 w h i c h penalizes
failure to file a return and that a tax a s s e s s m e n t should precede
a criminal prosecution:
Held: "Said Section 2 2 2 states that an a s s e s s m e n t is not
necessary before a criminal c h a r g e can be filed. This is t h e
general rule. Private respondents failed to s h o w that they
are entitled to an exception. Moreover, t h e criminal c h a r g e
need only be supported by a prima facie s h o w i n g of failure
to file a required return. This fact n e e d not be proven by an
assessment."
2. Distinction between false return and fraudulent return.

The proper and reasonable interpretation of Section 2 2 2 should
be that in the three different cases of false return, fraudulent return
with intent to e v a d e tax, and failure to file a return, t h e tax m a y
be assessed, or a proceeding in court for t h e collection of s u c h
tax may be b e g u n without a s s e s s m e n t , at any time within t e n (10)
years after the discovery of t h e falsity, f r a u d , or o m i s s i o n .
(1) That the law should be interpreted to m e a n a separation

of the three different situations of false return, fraudulent
return with intent to e v a d e tax, and failure to file a return is
strengthened immeasurably by the last portion of t h e provision
which segregates the situation into three different classes,
namely, "falsity," "fraud," and "omission."
That there is a difference b e t w e e n "false return" a n d

"fraudulent return" cannot be d e n i e d . T h e former m a y be d u e
to mistake, carelessness or ignorance while the latter is m a d e
with intent to e v a d e the taxes d u e . While the first merely implies
deviation from the truth, w h e t h e r intentional or not, the s e c o n d
implies intentional or deceitful entry with intent to e v a d e the
taxes d u e . (Aznar vs. Court of Appeals, L-20569, A u g 23

1974.)
In a case, the issue w a s w h e t h e r or not a taxpayer w h o
merely stated as a footnote in his income tax return that a s u m
of m o n e y that he erroneously received a n d already spent w a s
the subject of a pending litigation a n d there did not declare it as
i n c o m e , w a s liable to pay t h e 5 0 % penalty imposed for filing a
fraudulent return.
T h e S u p r e m e Court held that it "is persuaded considerably

by the private respondent's (Javier's) contention that there is
no f r a u d in t h e filing of t h e return and a g r e e fully with the Court
of Tax A p p e a l s ' interpretation of Javier's notation in his income
tax return filed on M a r c h 15, 1978, thus: T h e taxpayer w a s
the recipient of s o m e m o n e y f r o m a b r o a d w h i c h he presumed
to be a gift but turned out to be an 'error a n d is n o w subject
of litigation,' that it w a s an 'error or mistake of fact or law'
not constituting f r a u d , that s u c h notation w a s practically an
invitation for investigation and that Javier had literally 'laid his
cards o n t h e table.'"
(2) Fraud is never imputed and the courts never sustain
findings of fraud u p o n circumstances w h i c h , at most, create
only suspicion a n d t h e m e r e understatement of a tax is not
itself proof of f r a u d for t h e p u r p o s e of tax evasion. A "fraudulent
r e t u r n " is a l w a y s an attempt to e v a d e a tax, but a merely "false
r e t u r n " m a y not be. ( C o m m . v s . Javier, Jr., 199 S C R A 824
[1991].) T h e fraud c o n t e m p l a t e d by law must be actual and
not constructive. It must be intentional consisting of deception
willfully a n d deliberately d o n e or resorted to. (see Transglobe
International, Inc. v s . Court of A p p e a l s , 302 S C R A 57 [1999].)
( 3 ) A f a l s e or fraudulent return as an exception to the period
of limitation a n d to collect taxes provided in Section 222 of the
Tax C o d e must be actual not constructive. In order to render a
return m a d e by a taxpayer a 'false return' within the meaning of
Section 2 2 2 , there must appear a design to mislead or deceive
on the part of the taxpayer, or at least culpable negligence.
Mere falsity of a return does not merit the application of the 10-
year prescriptive period. T h e element of fraud must be clearly
established. ( C o m m . vs. Obayashi Philippines Corporation,
C T A C a s e No. 6 2 2 2 , June 10, 2005.)
3. T h e exceptions relative to the prescriptive periods for as-
sessment are also applicable to collection of taxes where no as-
ANNOTATED
sessment has been made. Thus, the tax may be collected within
ten (10) years after the discovery of the falsity, fraud or omission.
Where the government m a k e s another assessment or revises an
assessment, the period is counted from the last or revised assess-
ment. (Republic vs. Lopez, L-18007, March 10, 1963; Republic vs.
Acebedo, L-20477, March 2 9 , 1968; C o m m . vs. Phoenix Assur.
Co., Ltd., L-19727, May 2 0 , 1966.)
The validity of the assessment itself is a separate and distinct
issue from the issue of whether the right of the BIR to collect the
validly assessed tax has prescribed. ( C o m m . vs. H a m b r e c h t &
Quist Philippines, Inc., G.R. No. 169225, Nov. 17, 2010.)
4. Sections 203 and 222 suppletory to Title on Income Tax.
T h e provisions of Sections 2 0 3 and 2 2 2 of the Tax C o d e are
general in character which m a y be considered suppletory with
regard to matters not covered by the Title covering income tax. In
other w o r d s , Title II of the Tax C o d e is a special provision w h i c h
governs exclusively all matters pertaining to i n c o m e tax, w h e r e a s
Title VIII, Chapter 2 is a general provision w h i c h g o v e r n s all internal
revenue taxes in general, w h i c h cannot apply insofar as it m a y
conflict with the provisions of Title II as to w h i c h the latter shall
prevail, but in the a b s e n c e of any provision in said Title II relative to
the period and method of collection of t h e tax, t h e provisions of Title
VIII, Chapter 2 m a y be d e e m e d to be suppletory in character.
5. Waiver after prescription. T h e w a i v e r of t h e statute of

limitations executed by t h e taxpayer c a n n o t be d e e m e d to include
taxes which had already prescribed. T h e clear import of Section
222(b) is that it does not authorize extension by a g r e e m e n t of the
Commissioner and the taxpayer o n c e prescription has a t t a c h e d ,
i.e., after expiration of the original period. (Republic vs. Lim De Yu,
L-17438, April 30, 1964.)
6. Collection after assessment. Section 2 0 3 gives the

G o v e r n m e n t three (3) years f r o m filing of t h e return (which is not false
or fraudulent) within w h i c h to a s s e s s t h e tax d u e . Section 222(b)
allows the extension of the period by m e a n s of a written a g r e e m e n t
between the taxpayer a n d the Commissioner. Collection of tax m a y
be effected within five (5) years after a s s e s s m e n t (Sec. 222[c].),
or within the period for collection a g r e e d u p o n in writing before the
expiration of the five-year period. (Sec. 222[d].) T h u s , although
under the waiver the taxpayer c o n s e n t e d to the a s s e s s m e n t and
collection if m a d e not later than a certain date (e.g., Dec. 3 1 , 2010),
such expiration date must be d e e m e d to refer only to the extension
of the a s s e s s m e n t period. Insofar as collection is concerned, the

period d o e s not apply, for otherwise the effect of the waiver would
be to shorten, not extend t h e legal period for the purpose. T h e BIR,
therefore, has five (5) years f r o m 2 0 1 0 within which to file an action
to collect, (see Republic v s . Lim De Y u , supra.)
R.A. No. 8 4 2 4 e x t e n d s the period for collection in Subsections

(c) and (d) f r o m three (3) years to five (5) years.
7. Procedure in the execution of waiver of statute of limitation.
As provided in R e v e n u e M e m o r a n d u m Order No. 20-90:
(1) T h e w a i v e r must be in the f o r m prescribed, (infra.)
This f o r m m a y be r e p r o d u c e d by the Office concerned but
there should be no deviation f r o m such f o r m . T h e phrase
"but not after, 2 0 0 " should be filled up. This indicates the
expiry date of t h e period a g r e e d u p o n to assess/collect the tax
after the regular three-year period of prescription. T h e period
a g r e e d upon shall constitute t h e time within which to effect
t h e assessment/collection of the tax in addition to the ordinary
prescriptive period.
(2) T h e waiver shall 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.
(3) S o o n after the w a i v e r is signed by the taxpayer, the
C o m m i s s i o n e r of Internal R e v e n u e or the revenue official
authorized by h i m , shall sign the waiver indicating that the
Bureau has accepted and a g r e e d to the waiver. T h e date of
s u c h a c c e p t a n c e by t h e B u r e a u should be indicated. 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 e x e c u t e d .
(4) T h e following revenue officials are authorized to sign

the waiver:
(a) In the National Office:
1) Assistant Commissioners for Collection,
Special Operations, National Assessment, Excise,
and Legal on tax cases pending before their
respective offices; and in the absence of the Assistant
Commissioner, the Head Executive Assistant may sign
the waiver. For tax cases involving not more than
P500.000.00.
ANNOTATED
2) Deputy Commissioner. For tax cases

involving more than P500.000.00 but not more than
P1M.
3) Commissioner. For tax cases involving
more than P 1 M .
(b) In the Regional Offices:
1) T h e R e v e n u e District Officer, with respect to

tax cases still pending investigation a n d the period to
assess is about to prescribe, regardless of amount.
2) T h e Regional Director, the Assistant Regional

Director, the Chief, A s s e s s m e n t Branch or the Chief,
Legal Branch with respect to c a s e s still pending review
and the period to assess/collect is about to prescribe,
regardless of a m o u n t .
3) T h e Regional Director, t h e Assistant Regional

Director, the Chief, Collection B r a n c h or t h e Chief,
Legal Branch with respect to c a s e s still pending
collection a n d t h e period to assess/collect is about to
prescribe, regardless of a m o u n t .
(5) T h e waiver m u s t be e x e c u t e d in t h r e e (3) c o p i e s , t h e

original c o p y to be attached to t h e d o c k e t of t h e c a s e , t h e
second copy for the taxpayer, a n d t h e third c o p y for t h e Office
accepting t h e waiver. T h e fact of receipt by t h e t a x p a y e r of his/
her file copy shall be indicated in t h e original copy.
(6) T h e foregoing p r o c e d u r e s shall be strictly f o l l o w e d .

A n y revenue official f o u n d not to h a v e c o m p l i e d with this Order
resulting in prescription of t h e right to assess/collect shall be
administratively dealt w i t h .
WAIVER OF T H E STATUTE OF LIMITATIONS

UNDER THE NATIONAL INTERNAL REVENUE CODE
I. , in consideration
of the approval by t h e C o m m i s s i o n e r of Internal R e v e n u e of my
request for reinvestigation and/or reconsideration of my pending
internal revenue c a s e involving the a s s e s s m e n t of t h e s u m s of
as for t h e years
, hereby w a i v e the running of the
prescriptive period provided for in Sections 203 and 222 and other
relevant provisions of t h e National Internal Revenue C o d e , and
consent to the a s s e s s m e n t and collection of the taxes which may
be found d u e after reinvestigation and reconsideration at any time
before or after t h e lapse of the period of limitations fixed by said
Sections 2 0 3 and 2 2 2 a n d other relevant provisions of the National
Internal R e v e n u e C o d e , but not after , 199 .
T h e intent a n d p u r p o s e of this waiver is to afford the C o m m i s -

sioner of Internal R e v e n u e a m p l e time to carefully consider the in-
stant protest of the u n d e r s i g n e d taxpayer against the assessment.
It is u n d e r s t o o d , however, that t h e undersigned taxpayer does not,
by the execution of this waiver, admit in a d v a n c e the correctness
of the a s s e s s m e n t w h i c h m a y be m a d e against him for the periods
a b o v e - m e n t i o n e d ; nor d o e s he w a i v e his right to use any of the
legal r e m e d i e s afforded by law to s e c u r e a credit or refund on such
tax that m a y be a s s e s s e d a n d paid for t h e s a m e period pursuant
to Sections 2 0 4 and 2 2 9 of the National Internal Revenue Code.
T h e period of s u s p e n s i o n a g r e e d u p o n herein m a y be extended by
s u b s e q u e n t a g r e e m e n t in writing m a d e before the expiration of said
period of extension.
Executed this day of , 200 in

Q u e z o n City, Philippines.
(Taxpayer or Authorized Representative)
ACCEPTED AND AGREED TO:
C o m m i s s i o n e r of Internal R e v e n u e
Date:
8. Nature, construction, and validity of waiver. A waiver of

the statute of limitations under the Tax C o d e , to a certain extent, is a
derogation of the taxpayer's right to security against prolonged and
unscrupulous investigations and must, therefore, be carefully and
strictly construed. It is an agreement between the taxpayer and the
BIR that the period to issue an assessment and collect the taxes
due is extended to a certain date.
(1) T h e waiver is not a unilateral act by the taxpayer or
the BIR but a bilateral agreement between the two parties to
extend the period to a certain date.
ANNOTATED
(2) The waiver does not mean that the taxpayer relinquishes
the right to invoke prescription unequivocally particularly where
the language of the document is equivocal, as w h e n the waiver
does not specify a definite date within which the BIR may
assess and collect the tax, and there w a s no consent by the
Commission implied consent cannot be p r e s u m e d .
(3) For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment, our
tax law provides a statute of limitations in the collection of
taxes. Thus, the law on prescription, being a remedial m e a s u r e ,
should be liberally construed in order to afford such protection.
The requirement to furnish the taxpayer with a copy of the
accepted waiver is to give notice not only of the existence of the
d o c u m e n t but of the acceptance by the BIR and the perfection
of the agreement. (Philippine Journalists, Inc. v s . C o m m . , 4 4 7
S C R A 214 [2004]; C o m m . vs. F M F D e v e l o p m e n t Corporation,
556 S C R A 698 [2008].)
(4) To be valid, a waiver must c o n f o r m to the requirements
of R M O No. 2 0 - 9 0 , a m o n g others, to wit:
(a) It must contain a definite expiration d a t e ;
(b) It must state t h e date of a c c e p t a n c e by the BIR and
the date of receipt by the taxpayer of t h e a c c e p t e d waiver;
(c) T h e taxpayer must be furnished a copy of the
waiver; and
(d) T h e original copy of t h e w a i v e r must indicate that

the taxpayer has received its file copy (see Ibid.; C o m m .
vs. Kudas Metal Corp., 6 2 0 S C R A 2 3 2 [2010].)
There is a detailed procedure for the proper execution of
the w a i v e r which the BIR must strictly follow.
9. Estoppel to question validity of waiver. A taxpayer
is estopped to question the validity of a waiver, a n d , therefore,
cannot use the d e f e n s e of prescription, if s u c h taxpayer paid
part of the a m o u n t a s s e s s e d covered by the waiver. (Rizal
Commercial Banking Corporation vs. C o m m . , CTA C a s e No.
6 2 0 1 , Dec. 15, 2004.)
10. Under Section 222(c), it is not essential that the warrant

of distraint and levy be fully e x e c u t e d in order that it m a y have
the effect of suspending the running of the statute of limitations
upon collection of the tax. It is enough that the proceeding be
validly begun or commenced and that its execution has not
b e e n s u s p e n d e d by reason of the voluntary desistance of

the C o m m i s s i o n e r of Internal R e v e n u e . (Palanca vs. C o m m
L - 1 6 6 6 1 , J a n . 3 1 , 1962.)
SEC. 2 2 3 . Suspension of Running of Statute of Limitations.

The running of the Statute of Limitations provided in Sections
2 0 3 and 2 2 2 on the making of assessments and the beginning of
distraint or levy or a proceeding in court for collection, in respect
of any deficiency, shall be suspended for the period during which
the Commissioner is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court and for sixty (60)
days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot
be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the
taxpayer informs the Commissioner of any change in address, the
running of the Statute of Limitations will not be suspended; when
the warrant of distraint or levy is duly served upon the taxpayer,
his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the
taxpayer is out of the Philippines.
ANNOTATION
1. Cases where running of period held suspended or

interrupted. T h e s e are provided in Section 2 2 3 . In the following
c a s e s , the running of t h e statute of limitations provided in Sections
203 and 2 2 2 w a s held s u s p e n d e d :
(1) W h e r e an appeal is filed by the taxpayer with the Court
of Tax A p p e a l s a n d the appeal precludes the Commissioner
f r o m instituting an action in court for collection (see Republic
vs. Kerr and Co., L-21609, Sept. 30, 1966.);
(2) W h e r e a bond is filed by the taxpayer to secure the
payment of his tax obligation, the period during which the bond
remains in full force and effect may be considered to have
s u s p e n d e d the running of the three (3)-year period provided
for in the Tax C o d e . T h e prescriptive period will be governed by
the Civil Code (Art. 1144.), the taxpayer having assumed a new
and entirely distinct obligation brought about by the bond itself,
a written contract which may be enforced within 10 years in the
regular courts independently of liability for the tax (see Republic
vs. Xavier G u n Trading, L-17325, April 26, 1963; Republic vs.
ANNOTATED
Far East American Commercial Co., Inc., L-17475, Feb. 28,

1963; Republic vs. Arcache, L-15547, Feb. 2 9 , 1969; Republic
vs. Manjares, L-14789, Nov. 30, 1962; Republic vs. M a m b u l a o
Lumber Co., L-18942, Nov. 30, 1962.);
(3) W h e r e a request for a reinvestigation is m a d e by the
taxpayer, provided it "is granted by the Commissioner, (see Tan
Guan vs. Noble, L-18598, July 2 3 , 1968; Republic v s . Lopez,
L-18004, March 30, 1963; Republic vs. A c e b e d o , L-20472,
March 9, 1968; Republic vs. G a n c a y c o , L-18307, J u n e 30,
1964.) The mere request for an investigation alone does not
suspend the prescriptive period. To effect a s u s p e n s i o n , the
request should first be granted.
(a) T h e grant of a request for reinvestigation interrupts

the running of the prescriptive period since it, in effect,
ties the hands of t h e BIR f r o m filing suit for collection. T h e
interruption terminates f r o m the d a y t h e BIR asserts t h e
imposition of the old a s s e s s m e n t , s u c h as by issuing a
warrant of distraint or levy as by s u c h act it unequivocably
s h o w s that as far as it is c o n c e r n e d , t h e old a s s e s s m e n t is
final. (Republic vs. A q u i a s , L-21874, J u n e 30, 1970.)
(b) T h e burden of proof that t h e request for

reinvestigation had actually b e e n g r a n t e d rests on the BIR.
Such grant m a y be e x p r e s s e d in its c o m m u n i c a t i o n with t h e
taxpayer, or implied f r o m the action of the BIR in response
to the request for reinvestigation. (Bank of t h e Phil. Islands
vs. C o m m . , 541 S C R A 105 [2008].)
(c) A request for reconsideration refers to a plea to

reevaluate an a s s e s s m e n t on the basis of existing records
without n e e d of additional e v i d e n c e . It m a y involve a q u e s -
tion of fact, question of law, or both. A request for reinves-
tigation, on the other h a n d , refers to a plea to reevaluate
an a s s e s s m e n t on the basis of newly discovered e v i d e n c e
or additional e v i d e n c e that a t a x p a y e r intends to present
in the investigation. It m a y also involve a question of fact,
question of law, or both. T h e distinction is significant. Unlike
a request for reinvestigation, a request for reconsideration
cannot s u s p e n d the statute of limitations on the collection
of the a s s e s s e d tax. ( C o m m . vs. Philippine Global C o m m u -
nication, Inc., G.R. No. 167146, Oct. 3 1 , 2006.) B a s e d on
the above, it would m a k e no difference e v e n if the request
for reconsideration is granted.
(d) A l t h o u g h the protest letter does not categorically

state or use the w o r d s "reinvestigation" and "reconsider-
a t i o n , " the s a m e may, however, be treated as letters re-
questing reinvestigation a n d reconsideration ( C o m m . vs.
W y e t h S u a c o Laboratories, Inc., 2 0 2 S C R A 125 [1991].);
( e ) W h e n a disputable issue has been raised in a
protest, there c a n be no imposition of increments until after
an a d v e r s e resolution of the issue is m a d e . T h e prescriptive
period for a s s e s s m e n t or collection of the tax is d e e m e d
s u s p e n d e d until t h e BIR rules on the protest. (BIR Ruling
N o . 5 4 6 - 0 4 , Nov. 5, 2004.)
(4) W h e r e t h e r e is a written agreement between the

t a x p a y e r a n d t h e C o m m i s s i o n e r (see Sec. 222.); or w h e r e
there is a waiver. A w a i v e r to t h e running of the prescriptive
period is not just an extension of t h e period of limitation, but
a renunciation of t h e t a x p a y e r ' s right to invoke the defense of
prescription w h i c h w a s t h e n available to him. There is nothing
unlawful nor immoral about this kind of waiver; just like any
other right, t h e right to avail of t h e defense is waivable. (Alca
v s . C.T.A., L-24674, Nov. 2 9 , 1968; see Republic vs. Lim Tian
Teng S o n s a n d Co., Inc., L - 2 1 7 3 1 , M a r c h 3 1 , 1966; S a m b r a n o
v s . C.T.A., 101 Phil. 1.)
But such waiver must be e x e c u t e d within the original five-
year period within w h i c h suit could be c o m m e n c e d . (Republic
v s . A c e b e d o , L-20477, March 2 9 , 1968.) It has been held that
a failure to plead prescription as a defense is d e e m e d a waiver
thereof ( C o m m . vs. Priscilla Estates, Inc., L-18382, May 29,
1964.);
(5) W h e r e the taxpayer's conduct may constitute estoppel
so as to preclude the defense of prescription even if he has not
previously w a i v e d it in writing as w h e r e the taxpayer admitted
his obligation a n d promised to pay the s a m e in various letters
to the Bureau of Internal Revenue and the delay w a s due to
his o w n repeated requests for reinvestigation and similarly
repeated requests for extension of time to pay (Republic vs.
A r c a c h e , L-15547, Feb. 29, 1964.) and the government has
b e e n , for g o o d reasons, persuaded to postpone collections
to m a k e him feel that the d e m a n d w a s not unreasonable or
that no harassment or injustice is meant by the government.
( C o m m . vs. Consolidated Mining Co., L-11527, Nov. 2 5 , 1 9 6 8 . )
Estoppel is a rule of law through which an admission or
representation is rendered conclusive upon the person making
ANNOTATED
it, and cannot be denied or disproved as against the person

relying thereon (Art. 1 4 3 1 , Civil Code.);
(6) W h e r e the letter of the Collector of Internal Revenue
demanding the amount of a rubber check previously paid
by a taxpayer declares and fixes the tax to be payable and
demands the settlement thereof, such letter should be d e e m e d
an assessment. Hence, the action to collect the unpaid tax
c o m m e n c e d a n e w from the time the letter of d e m a n d had been
sent to the taxpayer (Republic vs. L i m a c o a n d De G u z m a n
Commercial Co., Inc., L - 1 3 0 8 1 , A u g . 3 1 , 1962.); and
(7) W h e r e a timely service of a warrant of distraint or levy
is served upon the taxpayer. T h e disposition of t h e attached
properties might well take time to a c c o m p l i s h , extending e v e n
after the lapse of the statutory period for collection, t h e BIR
merely relying on the s u m m a r y r e m e d y without instituting any
judicial proceeding to collect t h e tax. T h e e n f o r c e m e n t of tax
collection through s u m m a r y p r o c e e d i n g s m a y be carried out
beyond the statutory period provided that s u c h r e m e d y w a s
seasonably availed of. (Republic v s . H i z o n , 320 S C R A 574
[1999].)
2. Cases where running of period held not suspended or

interrupted. It w a s held not s u s p e n d e d or interrupted:
(1) During the period that t h e property of t h e t a x p a y e r is in
custodia legis (under judicial custody) b e c a u s e it m a y still be
distrained subject to t h e prior lien of t h e a t t a c h m e n t creditor.
(Coll. vs. Codinera, 102 Phil. 1165.) Note: U n d e r the Rules of
Court, attachment or property under custodia legis is a l l o w e d ,
but it is required that "copy of the writ of a t t a c h m e n t shall be
filed with the proper court or quasi-judicial agency, and notice
of the attachment served u p o n t h e custodian of t h e property"
(Sec. 7, last par., Rule 57.);
(2) By partial payment b e c a u s e it w o u l d not prevent the

government f r o m collecting the tax nor d o e s it constitute a
waiver "in writing" of the d e f e n s e of prescription (Cordero vs.
G o n d a , 8 S C R A 331 [1966].);
(3) By a request for a reconsideration w h i c h d o e s not ask
for a reinvestigation as w h e r e t h e taxpayer merely a s k s that
he be furnished a copy of the c o m p u t a t i o n of his tax liability
(Republic vs. A b l a z a , L-14519, July 2 8 , 1960.); or by a request
for a reinvestigation w h i c h w a s d e n i e d or on w h i c h no action
w a s taken (Republic v s . A c e b e d o , L-20477, M a r c h 2 9 , 1968;
Republic vs. A l a n o , L-18865, Sept. 2 8 , 1964; see C o m m . vs.
Capitol Subdivision, Inc., L-18993, April 30, 1963.) as there

is nothing to prevent the e n f o r c e m e n t of the tax liability by
any of the m e a n s provided by law (see Sees. 220, 221.); or
by a request for reconsideration filed more than 30 days after
receipt of the a s s e s s m e n t as provided in Section 228 (Republic
v s . Hizon, 320 S C R A 574 [1999].) Under Section 2 2 3 , for the
period to enforce collection to be s u s p e n d e d , the taxpayer must
request for reinvestigation and the C o m m i s s i o n e r grants such
request. W h e r e no action w a s t a k e n by the C o m m i s s i o n e r in
connection with the t a x p a y e r ' s request or protest, it is d e e m e d
not g r a n t e d .
(4) By t h e pendency of a criminal c a s e against the taxpayer

for t h e s a m e reason that it d o e s not preclude the g o v e r n m e n t
f r o m collecting the tax (Republic vs. Ret, L-13754, March 3 1 ,
1962.); a n d
(5) By extra-judicial demand for the payment of assessed
taxes for t h e rule provided in the Civil C o d e w h i c h is a general
law (see Art. 1155, Civil Code.), has no application to tax
collection suits w h i c h are g o v e r n e d by a special law. (Republic
vs. G a n c a y c o , L-18307, J u n e 3 0 , 1 9 6 4 ; see, however, G. Puyat
a n d S o n s , Inc. v s . City of Manila, L-17447, April 30, 1963;
Republic vs. L i m a c o a n d De G u z m a n C o m m e r c i a l Co., Inc.,
L - 1 3 0 8 1 , A u g . 3 1 , 1962.)
3. Request for reconsideration/reinvestigation. As
noted earlier, a request for reconsideration, unlike a request for
reinvestigation c a n n o t s u s p e n d the statute of limitations on the
collection of an a s s e s s e d tax. Rev. R e g s . No. 12-85, the Procedure
Governing Administrative Protests of A s s e s s m e n t of the Bureau
of Internal R e v e n u e , issued on 27 N o v e m b e r 27, 1985, defines
the t w o types of protest, t h e request for reconsideration and the
request for reinvestigation, and distinguishes one from the other in
this manner:
"Section 6. Protest. T h e taxpayer may protest
administratively an a s s e s s m e n t by filing a written request for
reconsideration or reinvestigation specifying the following
particulars:
xxxx
For the purpose of protest herein
(a) Request for reconsideration refers to a plea for a re-
evaluation of an assessment on the basis of existing records
without need of additional evidence. It may involve both a
question of fact or of law or both.
ANNOTATED
(b) Request for reinvestigation refers to a plea for re-

evaluation of an assessment on the basis of newly-discovered
evidence or additional evidence that a taxpayer intends to
present in the investigation. It m a y also involve a question of
fact or law or both.
The main difference between these two types of protests
lies in the records or evidence to be e x a m i n e d by internal
revenue officers, whether these are existing records or newly
discovered or additional evidence. A re-evaluation of existing
records which results f r o m a request for reconsideration does
not toll the running of the prescription period for the collection
of an a s s e s s e d tax. Section 223 distinctly limits the suspension
of the running of the statute of limitations to instances w h e n
reinvestigation is requested by a taxpayer and is granted by the
Commissioner. "Undoubtedly, a reinvestigation, w h i c h entails
the reception a n d evaluation of additional evidence, will take
more time than a reconsideration of a tax a s s e s s m e n t , w h i c h
will be limited to the e v i d e n c e already at h a n d ; this justifies w h y
the former can s u s p e n d t h e running of the statute of limitations
on collection of the a s s e s s e d tax, while t h e latter c a n n o t . "
If both types of protest can effectively interrupt t h e running

of the statute of limitations, an e r r o n e o u s a s s e s s m e n t m a y
never prescribe. If t h e t a x p a y e r fails to file a protest, then t h e
erroneous a s s e s s m e n t w o u l d b e c o m e final a n d unappealable.
On the other h a n d , if t h e t a x p a y e r d o e s file the protest on a
patently e r r o n e o u s a s s e s s m e n t , the statute of limitations
w o u l d automatically be s u s p e n d e d a n d t h e tax thereon m a y be
collected long after it w a s a s s e s s e d . M e a n w h i l e , the interest on
the deficiencies a n d t h e s u r c h a r g e s continue to a c c u m u l a t e .
A n d for an unrestricted n u m b e r of y e a r s , t h e taxpayers remain
uncertain a n d are b u r d e n e d with t h e costs of preserving their
books and records. This is t h e p r e d i c a m e n t that the law on the
statute of limitations s e e k s to prevent. ( C o m m . v s . Philippine
Global C o m m u n i c a t i o n s , Inc., 5 0 6 S C R A 4 2 7 [2006].)
4. When return considered filed. In order that a tax return
may be considered as filed for purposes of prescription, it is required
that the return be valid a n d appropriate. A defective return is the
s a m e as if no return w a s filed at all.
5. When return valid. A return is valid if it complies s u b -
stantially with the requirements of the law; a n d there is substantial
compliance w h e n the return:
(1) Is made in good faith and is not false or fraudulent

T h u s , in a case, the S u p r e m e Court, applying the above criteria,
held that an estate and inheritance tax return that declared only
93 parcels of land leaving out 92 other parcels covering 503
hectares w a s false and fraudulent as such u n d e r d e c l a r a t i o n
could not have b e e n the result of an oversight or mistake; and
as the return did not mention a n y heir, w h e n there w e r e several
w h o w e r e entitled to the estate, no inheritance tax could,
therefore, be a s s e s s e d ; h e n c e , the return w a s not considered
a true a n d c o m p l e t e return sufficient to start the running of the
period of limitations ( C o m m . vs. G o n z a l e s , L-19495, Nov. 2 4 ,
1966; see Sec. 83[a].);
(2) Covers the entire period involved. T h u s , w h e r e the

return filed is for a calendar year instead of a fiscal year which
is t h e basis of the t a x p a y e r ' s b o o k k e e p i n g s y s t e m , the period
will begin to run only f r o m the date the return is filed which
includes that portion of t h e fiscal year not covered in the earlier
return (National Shirt S h o p s , Inc. v s . U.S., 67 F [2d] 925.); and
(3) Contains information as to the various items of income,

deduction and credit with such definiteness as to permit the
computation and assessment of the tax. A return, however,
need not be c o m p l e t e in all its particulars. It is sufficient if it
contains the necessary particulars although s o m e data are
inaccurate. T h u s , failure to include three (3) lots of relatively
negligible value in relation to the total asset d u e to mere
omission or mistake and undervaluation of certain lands arising
f r o m honest differences of opinion neither constitutes fraud nor
m a k e the return incomplete. (Republic vs. Jalandoni, L-18384,
Sept. 3 0 , 1965; see C o m m . vs. Gonzales, L-19495, Nov. 24,
1966; Republic vs. M a r s m a n Dev. Co., L-18956, April 22,
1972.)
6. When return appropriate. A return is appropriate if it is

a return for the particular tax required by law. W h e n the return is
filed for o n e kind of internal revenue tax, it cannot be considered
a return for another and different kind of internal revenue tax.
T h u s , an income tax return cannot be considered as the return
for compensating or sales tax purposes. T h e taxpayer must file a
return for the particular tax required by law in order to avail himself
of the benefits of the statute of limitations in Sections 203 and 223.
(Butuan Sawmill vs. C.T.A., L - 2 0 6 0 1 , Feb. 26, 1966.)
ANNOTATED
7. Filing of return must be proved. W h e r e the period

for assessment or collection is reckoned from the date the
corresponding return is filed, it is, of course, indispensable that
the taxpayer should have filed such return. In a case w h e r e the
taxpayer interposed the defense that the tax sought to be enforced
w a s assessed beyond the period fixed by the C o d e , the Court
sustained his liability because he w a s unable to prove that he
filed the corresponding return. T h e court held that the defense of
prescription is an affirmative allegation and the burden of proof
is upon the party laying claim to it. (Bollozos vs. C.T.A., L - 1 6 4 4 1 ,
March 3 1 , 1966.) Therefore, the g o v e r n m e n t had ten (10) years
within which to m a k e the corresponding a s s e s s m e n t . (Taligaman
Lumber Co. vs. C o m m . , L-15716, March 3 1 , 1962.)
It has been held that Section 193(a) (now Sec. 125[a, 1].)
contemplates that the filing of t h e sales tax (now VAT) return a n d the
payment of the tax be m a d e simultaneously, for the return serves
as the basis upon which the tax collector d e t e r m i n e s the a m o u n t
of the tax d u e at the time the taxpayer pays the tax. W h e r e the
taxpayer paid the sales tax d u e f r o m h i m , the only conclusion is that
he filed the corresponding return at t h e time he paid t h e tax and that
the tax collector regularly performed his duty by determining and
receipting the tax u p o n quarterly returns filed with a n d submitted to
him. (Arcega vs. Coll., C T A C a s e N o . 5 7 4 , Oct. 30, 1964.)
8. Construction of statutes of limitations. T h e law on
prescription being a remedial m e a s u r e s h o u l d be interpreted liberally
in order to protect the taxpayer. T h u s , it has b e e n held that a letter
requesting the C o m m i s s i o n e r of Internal R e v e n u e that the taxpayer
be furnished a copy of the detailed c o m p u t a t i o n of his alleged tax
liability did not imply a d e m a n d or request for a reinvestigation
a n d , therefore, it w o u l d not be interpreted to authorize or justify the
suspension of the running of the period of limitation. (Republic vs.
Ablaza, 108 Phil. 1105.)
S E C . 2 2 4 . Remedy for Enforcement of Forfeitures.

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 a legal action or proceeding,
civil or criminal, as the case may require.
S E C . 2 2 5 . When Property to be Sold or Destroyed. Sales

of forfeited chattels and removable fixtures shall be effected, so far
as practicable, in the same manner and under the same conditions

as to public notice and the time and manner of sale as are prescribed
for sales of personal property distrained for the non-payment of
taxes.
Distilled spirits, liquors, cigars, cigarettes, other manufactured
products of tobacco, and all apparatus used in or about the illicit
production of such articles may, upon forfeiture, be destroyed
by order of the Commissioner, when the sale of the same for
consumption or use would be injurious to public health or prejudicial
to the enforcement of the law.
All other articles subject to excise tax, which have been
manufactured or removed in violation of this Code, as well as dies
for the printing or making of internal revenue stamps and labels
which are in imitation of or purport to be lawful stamps, or labels
may, upon forfeiture, be sold or destroyed in the discretion of the
Commissioner.
Forfeited property shall not be destroyed until at least twenty
( 2 0 ) days after seizure.
SEC. 2 2 6 . Disposition of Funds Recovered in Legal Pro-

ceedings or Obtained from Forfeitures. All judgments and
monies recovered and received for taxes, costs, forfeitures, fines,
and penalties shall be paid to the Commissioner or his authorized
deputies as the taxes themselves are required to be paid, and except
as specially provided, shall be accounted for and dealt with in the
same way.
ANNOTATION
1. Forfeiture implies a divestiture of property without

c o m p e n s a t i o n in c o n s e q u e n c e of a default or offense. T h e effect of
forfeiture is to transfer the title to the specific thing from the owner
to the government. (Ballantine's Law Dictionary, p. 519; see Sec.
267.) In a s e n s e , forfeiture is a penalty.
2. T h e erring taxpayer m a y still be criminally prosecuted even
if the property has already b e e n forfeited. (Ibid.; Garcia vs. Coll., 66
Phil. 441.)
3. Real property levied upon for tax delinquency and exposed
for sale, w h e r e there is no bidder or if the highest bid is in an amount
insufficient to pay the taxes, penalties, and costs, is subject to
forfeiture, (see Sec. 215.) Judicial intervention which is required for
ANNOTATED
forfeiture of real property under Section 224 is not essential since

the taxpayer has the right of redemption, (see Sec. 214.)
4. All the proceeds from the sale of forfeited property go to the
government. (U.S. vs. Aurea, 20 Phil. 163.) In case of seizure for
enforcement of a tax lien, the residue goes to the taxpayer. (Bank
of P.I. vs. Trinidad, 42 Phil. 220.)
5. Forfeiture is not favored in law nor in equity. Fraud must
be proved to justify forfeiture. It must be actual amounting to
intentional w r o n g doing with the clear purpose of avoiding the tax.
Mere negligence is not equivalent to the fraud contemplated by law.
(Republic vs. Court of Tax A p p e a l s , 366 S C R A 4 8 9 [2001].) Failure
to prove the existence of actual fraud is a bar to forfeiture.
SEC. 227. Satisfaction of Judgment Recovered Against any

Internal Revenue Officer. When an action is brought against
any Internal Revenue Officer to recover damages by reason of any
act done in the performance of official duty, and the Commissioner
is notified of such action in time to make defense against the same,
through the Solicitor General, any judgment, damages, or costs
recovered in such action shall be satisfied by the Commissioner,
upon approval of the Secretary of Finance, or if the same be paid by
the person sued shall be repaid or reimbursed to him.
No such judgment, damages, or costs shall be paid or reimbursed
in behalf of a person who has acted negligently or in bad faith, or
with willful oppression.
ANNOTATION
1. T h e g o v e r n m e n t d o e s not undertake to g u a r a n t e e to any

person the fidelity of any of the officers or a g e n t s it e m p l o y s since
otherwise that w o u l d involve it in endless e m b a r r a s s m e n t s a n d
difficulties and losses which w o u l d be subversive of public interest.
(U.S. vs. Kirkpatrick, 9 W h e a t 7 2 0 ; Conwell v s . Vorkees, 13 O h i o
523.)
2. Under t h e second paragraph, the revenue officer is

personally liable.
- oOo -
CHAPTER III
PROTESTING AN ASSESSMENT,
REFUND, ETC.
SEC. 228. Protesting of Assessment. When the Commis-

sioner or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his find-
ings: Provided, however, That a preassessment notice shall not be
required in the following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on
the face of the return; or
(b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding
agent; or
(c) When a taxpayer 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 liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been
paid; or
(e) When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.
The taxpayer shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the assessment
shall be void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
517
ANNOTATED
Such assessment may be protested administratively by filing a

request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may
appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the said decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise, the decision shall become final,
executory and demandable. (a)
ANNOTATION
1. Requirement of pre-assessment notice. Section 228

outlines the procedure for protesting an a s s e s s m e n t . T h e proviso
(a to e) providing for five (5) instances w h e n a p r e - a s s e s s m e n t is
not required and the s e c o n d p a r a g r a p h requiring that the taxpayer
be informed in writing of the law and t h e facts on w h i c h the
assessment is m a d e , a r e n e w provisions a d d e d by R.A. No. 8424.
T h e other provisions h a v e b e e n a m e n d e d . T h e g e n e r a l rule is that
pre-assessment notice is required except only in the five (5) c a s e s
e n u m e r a t e d , (see Section 6[A, B].)
A taxpayer as a right to be informed of his liability for deficiency

taxes both through a preliminary a s s e s s m e n t notice (PAN) and a
final a s s e s s m e n t notice (FAN). T h e a s s e s s m e n t is void if only t h e
FAN is issued for it violates the t a x p a y e r ' s right to d u e process.
T h u s , in a case, for failure to s e n d the PAN w h i c h states the facts
and the law o n w h i c h the a s s e s s m e n t w a s m a d e , the a s s e s s m e n t
contained in a final letter of d e m a n d s e r v e d on t h e t a x p a y e r w a s
held void. ( C o m m . vs. Metro S t a r S u p e r a m a , Inc., G.R. No. 185371,
Dec. 8, 2010.)
2. Notifying/informing taxpayer. As a m e n d e d by R.A.
N o . 8424, t h e o l d requirement in Section 229 o n protesting a n
assessment, of merely notifying the t a x p a y e r of the C o m m i s s i o n e r ' s
findings w a s c h a n g e d to informing the taxpayer of not only the law,
but also of the facts on w h i c h an a s s e s s m e n t w a s m a d e ; otherwise,
the assessment itself w o u l d be invalid, (see Annotation No. 5[4].)
Protesting an Assessment, Refund, Etc.
Being invalid, the a s s e s s m e n t cannot, in turn, be used as a basis

for the perfection of a tax c o m p r o m i s e .
3. Mandatory nature of requirement. Both the formal
letter of d e m a n d and the notice of a s s e s s m e n t shall be void if
the former fails to state the facts, the law, rules and regulations
or j u r i s p r u d e n c e on w h i c h t h e a s s e s s m e n t is b a s e d , which is a
mandatory requirement under Section 2 2 8 . A notice containing a
mere computation of the tax deficiency a n d a d e m a n d for payment
does not c o m p l y with the requirement.
T h e use of the w o r d "shall" in Section 228 (par. 2.) indicates

the m a n d a t o r y nature of the requirement that the legal and factual
bases of the a s s e s s m e n t be stated in the formal letter of d e m a n d ,
and a s s e s s m e n t notice. In other w o r d s , the BIR must explain how it
arrived at its a s s e s s m e n t and mention the specific provision of the
Tax C o d e or rules and regulations w h i c h w e r e not complied with.
In a c a s e ( C o m m . v s . Enron Subic P o w e r Corporation, 576

S C R A 2 1 2 [2009].), t h e BIR through a preliminary five-day letter,
informed respondent corporation of a proposed a s s e s s m e n t
of deficiency i n c o m e tax. R e s p o n d e n t disputed the proposed
deficiency a s s e s s m e n t in its first protest letter. Subsequently,
it received f r o m the CIR a formal a s s e s s m e n t notice requiring it
to pay the alleged deficiency income tax. R e s p o n d e n t likewise
protested the a s s e s s m e n t . D u e to the non-resolution of its protest
wherein t h e 180-day private respondent filed a petition for review
in the Court of Tax A p p e a l s (CTA) on the g r o u n d that the tax
a s s e s s m e n t disregarded the provisions of Section 228 of the Tax
C o d e and Section 3.1.4 of Rev. Regs. No. 12-99 by not providing
the legal and factual bases of the a s s e s s m e n t . From the decision of
the Court of A p p e a l s (CA) affirming that of CTA, the CIR appealed
to the S u p r e m e Court which ruled:
"Both the CTA and the CA concluded that the deficiency tax
a s s e s s m e n t merely itemized the deductions disallowed and
included these in the gross income. It also imposed the preferential
rate of 5% on s o m e items categorized by Enron as costs. The legal
and factual bases w e r e , however, not indicated.
T h e CIR insists that an examination of the facts shows that
Enron w a s properly apprised of its tax deficiency. During the
pre-assessment stage, the CIR advised Enron's representative
of the tax deficiency, informed it of the proposed tax deficiency
assessment through a preliminary five-day letter and furnished
Enron a copy of the audit working paper allegedly showing in detail
ANNOTATED
the legal and factual bases of the assessment. T h e CIR argues that
these steps sufficed to inform Enron of the laws and facts on which
the deficiency tax assessment w a s b a s e d .
We disagree. T h e advice of tax deficiency, given by the CIR
to an employee of Enron, as well as the preliminary five-day letter,
were not valid substitutes for the mandatory notice in writing of the
legal and factual bases of the assessment. T h e s e steps w e r e mere
perfunctory discharges of the CIR's duties in correctly assessing a
taxpayer.-The requirement for issuing a preliminary or final notice,
as the case may be, informing a taxpayer of the existence of a
deficiency tax a s s e s s m e n t is markedly different f r o m the requirement
of what such notice must contain. Just b e c a u s e the CIR issued an
advice, a preliminary letter during the pre-assessment stage and
a final notice, in the order required by law, d o e s not necessarily
m e a n that Enron w a s informed of t h e law a n d facts on w h i c h the
deficiency tax a s s e s s m e n t w a s m a d e .
T h e law requires that t h e legal a n d factual b a s e s of the as-

sessment be stated in the formal letter of d e m a n d a n d a s s e s s m e n t
notice. T h u s , s u c h cannot be p r e s u m e d . O t h e r w i s e , the express
provisions of Article 2 2 8 of t h e N I R C a n d RR N o . 12-99 w o u l d be
rendered nugatory. T h e alleged 'factual b a s e s ' in the advice, pre-
liminary letter a n d 'audit w o r k i n g p a p e r s ' did not suffice. ( C o m m . v s .
Enron Subic P o w e r Corp., 5 7 6 S C R A 2 1 2 [2009].)
T h e law i m p o s e s a substantive, not merely a formal requirement.

( C o m m . v s . Metro Star S u p e r a m a , supra.) T h e formality of a control
number in the final a s s e s s m e n t notice (FAN) is not required for its
validity. ( C o m m . v s . G o n z a l e s , 6 3 3 S C R A 139 [2010].)
4. Notice of delinquent taxes; appealable decision to Court of
Tax Appeals. In the normal c o u r s e , t h e r e v e n u e district officer
sends the taxpayer a notice of delinquent t a x e s , indicating the
period c o v e r e d , t h e a m o u n t d u e including interest, a n d t h e reason
for the delinquency. If the t a x p a y e r disagrees with or w i s h e s to
protest the a s s e s s m e n t , it s e n d s a letter to the BIR indicating its
protest, stating t h e reasons therefore, a n d submitting s u c h proof
as may be necessary. T h a t letter is c o n s i d e r e d as t h e taxpayer's
request for reconsideration of the delinquent a s s e s s m e n t . After the
request is filed a n d received by t h e BIR, the a s s e s s m e n t b e c o m e s
a disputed a s s e s s m e n t on w h i c h it must render a decision. T h a t
decision is appealable to t h e Court of Tax A p p e a l s for review.
Prior to the decision on a disputed a s s e s s m e n t , there m a y still

be exchanges b e t w e e n the C o m m i s s i o n e r of Internal R e v e n u e
and the taxpayer. T h e former m a y ask clarificatory questions

or require the latter to submit additional evidence. However, the
C o m m i s s i o n e r ' s position regarding the disputed a s s e s s m e n t must
be indicated in the final decision. It is this decision that is properly
appealable to t h e Court of Tax A p p e a l s . ( C o m m . vs. Isabela Cultural
Corporation, 361 S C R A 71 [2001].)
A demand letter for p a y m e n t of delinquent taxes may be

considered a decision on a disputed or protested assessment.
T h e determination of w h e t h e r or not a d e m a n d letter is final is
conditioned u p o n t h e l a n g u a g e used or the tenor of the letter sent
t o the taxpayer. (Oceanic Wireless Network v s . C o m m . , 4 7 7 S C R A
2 0 5 [2005].)
5. Mode of procedures in the issuance of a deficiency tax

assessment:
(1) Notice for informal conference. T h e Revenue Officer

w h o audited t h e t a x p a y e r ' s records shall, a m o n g others, state
in his report w h e t h e r or not the taxpayer agrees with his findings
that the taxpayer is liable for deficiency tax or taxes.
(a) If t h e t a x p a y e r is not a m e n a b l e , based on the said

Officer's submitted report of investigation, the taxpayer
shall be informed, in writing, by the R e v e n u e District Office
or by t h e Special Investigation Division, as the case may be
(in the c a s e of R e v e n u e Regional Office) or by the Chief of
Division c o n c e r n e d (in the case of the BIR National Office),
of the discrepancy or discrepancies in the taxpayer's
payment of his internal revenue taxes, for the purpose of
"Informal C o n f e r e n c e , " in order to afford the taxpayer with
an opportunity to present his side of the case.
(b) If the taxpayer fails to respond within 15 days from

date of receipt of the notice for informal conference, he
shall be considered in default, in which case, the Revenue
District Officer or the Chief of the Special Investigation
Division of the Revenue Regional Office, or the Chief of
Division in the National Office, as the case may be, shall
endorse the case with the least possible delay to the
A s s e s s m e n t Division of the Revenue Regional Office or to
the Commissioner or his duly authorized representative, as
the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted.
ANNOTATED
(2) Preliminary Assessment Notice (PAN).

(a) If after review and evaluation by the A s s e s s m e n t
Division or by the Commissioner or his duly authorized
representative, as the case m a y be, it is determined that
there exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes, the said Office shall issue
to the taxpayer, at least by registered mail a Preliminary
A s s e s s m e n t Notice (PAN) for the p r o p o s e d assessment,
showing in detail, the facts and the law, rules and r e g u -
lations, o r j u r i s p r u d e n c e on w h i c h the proposed a s s e s s m e n t
is b a s e d .
(b) If the taxpayer fails to respond within 15 days
from date of receipt of the P A N , he shall be considered
in default, in w h i c h c a s e , a formal letter of d e m a n d a n d
a s s e s s m e n t notice shall be c a u s e d to be issued by the said
Office, calling for p a y m e n t of the taxpayer's deficiency tax
liability, inclusive of the applicable penalties.
(3) Exceptions to prior notice of the assessment. T h e
notice for informal c o n f e r e n c e a n d t h e preliminary a s s e s s m e n t
notice shall not be required in a n y of the five (5) c a s e s
e n u m e r a t e d in Section 2 2 8 , in w h i c h c a s e , issuance of t h e
formal a s s e s s m e n t notice for the p a y m e n t of t h e taxpayer's
deficiency tax liability shall be sufficient.
(4) Formal letter or demand and assessment notice. T h e
formal letter of d e m a n d a n d a s s e s s m e n t notice shall be issued
by the C o m m i s s i o n e r or his duly authorized representative.
(a) T h e letter of d e m a n d calling for p a y m e n t of the
taxpayer's deficiency tax or taxes shall state t h e facts a n d
the law, rules a n d regulations, or j u r i s p r u d e n c e on w h i c h
the a s s e s s m e n t is b a s e d , otherwise, t h e formal letter of
d e m a n d and a s s e s s m e n t notice shall be v o i d .
(b) T h e s a m e shall be sent to the t a x p a y e r only by
registered mail or by personal delivery. If sent by personal
delivery, the taxpayer or his duly authorized representative
shall a c k n o w l e d g e receipt thereof in t h e duplicate copy of
the letter of d e m a n d , s h o w i n g the following: 1) His n a m e ;
2) signature; 3) designation a n d authority to act for a n d
in behalf of t h e taxpayer, if a c k n o w l e d g e d / r e c e i v e d by a
person other t h a n t h e taxpayer himself; a n d 4) date of
receipt thereof.
(5) Disputed assessment. T h e taxpayer or his duly
authorized representative m a y protest administratively against
the aforesaid formal letter of d e m a n d and a s s e s s m e n t notice

within 30 d a y s f r o m date of receipt thereof.
(a) If there are several issues involved in the formal
letter of d e m a n d a n d a s s e s s m e n t notice but the taxpayer
only disputes or protests against the validity of s o m e of
t h e issues raised, t h e taxpayer shall be required to pay
the deficiency tax or taxes attributable to the undisputed
issues, in w h i c h c a s e , a collection letter shall be issued
to the t a x p a y e r calling for p a y m e n t of the said deficiency
tax, inclusive of the applicable surcharge and/or interest.
No action shall be taken on the taxpayer's disputed issues
until t h e t a x p a y e r has paid the deficiency tax or taxes
attributable to t h e said undisputed issues. T h e prescriptive
period for a s s e s s m e n t or collection of the tax or taxes
attributable to t h e disputed issues shall be s u s p e n d e d .
(b) T h e t a x p a y e r shall state the facts, the applicable

law, rules and regulations, or j u r i s p r u d e n c e on which his
protest is b a s e d ; otherwise, his protest shall be considered
void and without force and effect. If there are several issues
involved in t h e disputed a s s e s s m e n t and the taxpayer fails
to state t h e facts, the applicable law, rules and regulations,
or j u r i s p r u d e n c e in support of his protest against s o m e
of the several issues on w h i c h the a s s e s s m e n t is based,
the s a m e shall be considered undisputed issue or issues,
in w h i c h c a s e , the t a x p a y e r shall be required to pay the
corresponding deficiency tax or taxes attributable thereto.
(c) T h e taxpayer shall submit the required documents

in support of his protest within 60 d a y s from date of filing
of his letter of protest; otherwise, the assessment shall
b e c o m e final, executory and d e m a n d a b l e . T h e phrase
"submit the required d o c u m e n t s " includes submission or
presentation of the pertinent d o c u m e n t s for scrutiny and
evaluation by the Revenue Officer conducting the audit.
T h e said R e v e n u e Officer shall state this fact in his report
of investigation.
(d) If the taxpayer fails to file a valid protest against
the formal letter of d e m a n d and assessment notice within
30 days from date of receipt thereof, the assessment shall
b e c o m e final, executory and demandable.
(e) If the protest is denied, in whole or in part, by the
Commissioner, the taxpayer may appeal to the Court of
Tax Appeals within 30 days from date of receipt of the said
ANNOTATED
decision; otherwise, the assessment shall become final,

executory and demandable.
(f) In general, if the protest is d e n i e d , in whole
or in part, by the Commissioner or his duly authorized
representative, the taxpayer m a y appeal to the Court of
Tax Appeals within 30 days from date of receipt of the said
decision or ruling, or after the expiration of the period fixed
by law for action (Sec. 2 2 8 , last par.; see Sec. 7[a][2], R.A.
No. 9 2 8 2 , Appendix "Z".), otherwise, the a s s e s s m e n t shall
b e c o m e final, executory and d e m a n d a b l e . (see, however,
Sec. 3[a](2), Rule 4, Revised Rules of the CTA, Appendix
"AA".)
If the taxpayer elevates his protest to t h e C o m m i s s i o n e r
within 30 d a y s f r o m date of receipt of t h e final decision of
the C o m m i s s i o n e r ' s duly authorized representative, the
latter's decision shall not be considered final, executory and
d e m a n d a b l e , in w h i c h c a s e , t h e protest shall be decided by
the Commissioner.
(g) If the C o m m i s s i o n e r or his duly authorized repre-

sentative fails to act on the t a x p a y e r ' s protest within 180
d a y s f r o m date of s u b m i s s i o n , by the taxpayer, of t h e re-
quired d o c u m e n t s in support of protest, t h e t a x p a y e r m a y
appeal to the Court of Tax A p p e a l s within 30 d a y s f r o m t h e
lapse of t h e said 180-day period; otherwise, the a s s e s s -
ment shall b e c o m e final, executory a n d d e m a n d a b l e .
(6) Administrative decision on a disputed assessment.

T h e decision of t h e C o m m i s s i o n e r or his duly authorized
representative shall:
(a) state the facts, t h e applicable law, rules a n d r e g u -

lations, or j u r i s p r u d e n c e on w h i c h s u c h decision is b a s e d ;
otherwise, the decision shall be void in w h i c h case, t h e
s a m e shall not be considered a decision on a disputed
assessment; and
(b) that the s a m e is his final decision.

(7) Constructive service.
(a) If the required notice to t h e t a x p a y e r is served by

registered mail, and no r e s p o n s e is received f r o m taxpayer
within the prescribed period f r o m d a t e of the posting
thereof in the mail, the s a m e shall be c o n s i d e r e d actually
or constructively received by t h e taxpayer.
(b) If the s a m e is personally served on the taxpayer

or his duly authorized representative w h o , however,
refused to a c k n o w l e d g e receipt thereof, the s a m e shall be
constructively served on t h e taxpayer. Constructive service
thereof shall be considered effected by leaving the s a m e in
the premises of t h e taxpayer and this fact of constructive
service is attested to, w i t n e s s e d a n d signed by at least two
(2) revenue officers other t h a n t h e revenue officer w h o
constructively served t h e s a m e . T h e revenue officer w h o
constructively served t h e s a m e shall m a k e a written report
of this matter w h i c h shall f o r m part of the docket of this
c a s e . (Sec. 3, Rev. R e g s . No. 12-99.)
Note: Rev. M e m o . Order No. 2 9 - 0 7 (Sept. 2 6 , 2007) prescribes

the policies, guidelines, a n d standards in the audit of "large taxpay-
e r s " : Rev. M e m o . O r d e r No. 5-2009 (Jan. 2 2 , 2009) prescribes the
policies a n d guidelines to be o b s e r v e d in determining the inves-
tigating office that shall h a v e jurisdiction over the audit/examina-
tion of t a x p a y e r s , a n d in the resolution of conflicts of jurisdiction in
ongoing tax investigation. Rev. M e m o . Cir. No. 2 3 - 2 0 0 9 (April16,
2009) reiterates t h e policies a n d procedures for the revalidation of
Letters of Authority (LAs), issuance of subpoena duces tecum and
review of c a s e s by the A s s e s s m e n t Division of the BIR. Rev. M e m o .
Order No. 36-2010 (Mar. 2 6 , 2010) a m e n d s certain portions of Rev.
M e m o . Order No. 2 3 - 2 0 0 9 relating to t h e audit of related c o m p a -
nies and c o n g l o m e r a t e s . It w a s issued to g o v e r n the conduct of
special investigation and e n f o r c e m e n t activities a i m e d at related
c o m p a n i e s , their affiliates a n d subsidiaries for taxable year 2009.
Beginning J u n e 1, 2 0 1 0 , the rule on the need for revalidation

of LAs for failure of t h e R e v e n u e Officers to complete the audit
within the prescribed period has b e e n withdrawn by Rev. M e m o .
Order No. 4 4 - 1 0 , May 12, 2 0 1 0 . Accordingly, there is no need for
revalidation of the LA e v e n if the prescribed audit period has been
e x c e e d e d . Under the R M O , all BIR officials and employees con-
cerned shall use the facilities of the Letter of Authority Monitoring
System ( L A M S ) in the filing, processing and approval of requests
for issuance of electronic LAs, as well as the generation/printing of
the s a m e . No manually-prepared LA shall be issued after the effec-
tivity of the 2 0 1 0 Audit Program. T h e R M O prescribes the features
of the electronic LA and the policies and procedures on the use of
LAMS.
See Annotation Nos. 21 and 22 re: issuance of letters of
authority' under Section 235.
ANNOTATED
6. Appeals to the Courts. Under Rev. Regs. No. 12-99,

which implements Section 228, the taxpayer is given the choice
of appealing the decision of the Commissioner's duly authorized
representative either to the Commissioner or to the Court of Tax
Appeals. The decision of the Commissioner's duly authorized
representative will not attain finality if the taxpayer appeals the
same to the Commissioner w h o shall then be required to decide on
the protest himself. (Moog Controls Corp. Phil. Branch v s . C o m m .
CTA Case No. 6700, M a y 10, 2005.)
(1) From the decision of the C o m m i s s i o n e r on his duly
authorized representative on the disputed assessment, the
taxpayer adversely affected may appeal to t h e Court of Tax
Appeals (CTA) within 30 d a y s f r o m receipt thereof; or he may
appeal within 30 d a y s f r o m the lapse of the 180-day period
because of the BIR's inaction. T h e effect of the appeal is to
deprive the BIR of administrative jurisdiction over the case.
(2) A party adversely affected by a resolution of a Division
of the CTA on a motion for reconsideration or n e w trial, m a y file
a petition for review with the CTA en banc.
(3) From the Court of Tax A p p e a l s , en banc, t h e taxpayer
m a y file with the S u p r e m e Court a verified petition for review on
certiorari as provided in Rule 45 of t h e Rules of Court. (Sees.
18, 19, R.A. No. 9282.) T h e findings of fact of t h e Court of Tax
A p p e a l s w h e n supported by substantial e v i d e n c e shall be final.
T h e 60-day and 180-day periods referred to in Section 228
cover only a s s e s s m e n t s issued on or after J a n u a r y 1, 1998
w h e n the Tax Reform Act of 1997 (R.A. No. 8424.) took effect.
(BIR Ruling No. 2 2 - 9 8 , Feb. 19, 1998.)
7. Finality of the assessment/decision. Under the
penultimate and last p a r a g r a p h s , the failure of the taxpayer to
submit all "relevant supporting d o c u m e n t s " within 60 d a y s f r o m
filing the protest shall render t h e a s s e s s m e n t final, a n d his failure
to appeal to the Court of Tax A p p e a l s (CTA) t h e decision or inaction
on his protest within the prescribed 30-day period shall render the
decision final, executory a n d d e m a n d a b l e .
(1) In effect, the law creates a presumption of regularity

and correctness of the a s s e s s m e n t / d e c i s i o n arising from
such failure notwithstanding the taxpayer's inability to submit
the supporting d o c u m e n t s without his fault within the 30-day
period. Also, with the existence of the presumption (even an
assessment based on estimates not appearing to have b e e n
arbitrarily arrived at), the BIR can afford to take their time in
228 REMEDIES 527
reviewing a s s e s s m e n t s (even baseless ones) because even if

they "sleep on their duties," the taxpayer's failure to appeal to
the CTA will render the a s s e s s m e n t final and executory.
(2) T h e t e r m "relevant supporting documents" under
Section 228 refers to d o c u m e n t s necessary to support the
legal b a s e s in disputing a tax a s s e s s m e n t as determined by the
taxpayer. T h e BIR c a n n o t d e m a n d w h a t supporting documents
should be s u b m i t t e d ; otherwise, a taxpayer will be at the mercy
of t h e BIR, w h i c h m a y require the production of documents
that m a y be impossible to submit. ( C o m m . vs. Jimenez Basic
Advertising, Inc., CTA [En Banc] EB No. 509, Feb. 9, 2010.)
(3) It has b e e n held that t h e motion for reconsideration or

reinvestigation filed b e y o n d the 30-day period from receipt of
t h e a s s e s s m e n t (par. 4.) d o e s not s u s p e n d the running of the
prescriptive period provided under Section 222(c). (Republic vs.
Hizon, 3 2 0 S C R A 574 [1999].) A motion for reconsideration of
t h e denial of t h e administrative protest does not toll the 30-day
period to a p p e a l to the CTA. (Fishwealth Canning Corporation
v s . C o m m . , 6 1 0 S C R A 524 [2000].) Nevertheless, the taxpayer
has t h e option to protest the a s s e s s m e n t on the administrative
level in t h e line with t h e rule on exhaustion of administrative
remedies, or to a p p e a l directly to t h e CTA, particularly, w h e r e
t h e a s s e s s m e n t contains w o r d s of finality and the taxpayer is
led to believe that his only available remedy is to appeal to the
CTA.
8. Option of taxpayer. Section 228 clearly states that only
the decision of the C o m m i s s i o n e r not appealed by the taxpayer
b e c o m e s final, executory, and d e m a n d a b l e .
(1) Nothing in the law says that an assessment not ap-
pealed to the CTA after 180 d a y s b e c o m e s final, executory, and
d e m a n d a b l e . T h e taxpayer has the option to either (a) elevate
the case to the CTA if the Commissioner does not act on his or
her protest, or (b) to wait for the Commissioner to decide on his
protest before he or she elevates the case to the CTA. (Allied
Banking Corporation vs. Parayno, CTA Case No. 6565, Nov. 3,
2004.)
(2) T h e CTA can entertain an appeal only from a final
decision or assessment of the Commissioner, or in cases
w h e r e the Commissioner has not acted within the period
prescribed by Section 228. It is the Formal Letter of Demand
and A s s e s s m e n t Notice that must be administratively protested
or disputed within 30 days and not the Preliminary Assessment
ANNOTATED
Notice (PAN). (Allied Banking Corporation vs. C o m m . , 611

SCRA 692 [2010].)
9. BIR examiners' Joint Affidavit attached to a criminal com-
plaint as tax assessment. Neither the Tax C o d e nor the regulations
governing the protests of assessments provide a specific definition
or form of an assessment. An assessment informs the taxpayer
that he or she has tax liabilities. But not all d o c u m e n t s coming
from the BIR containing a computation of the tax liability can be
d e e m e d assessments. T h e issuance of an a s s e s s m e n t is vital in
determining the period of limitation regarding its proper issuance
and the period within which to protest it.
Section 203 provides that internal revenue taxes must be
assessed within three years f r o m the last day within w h i c h to file
the return. Section 222, on the other h a n d , specifies a period o f t e n
years in case a fraudulent return with intent to e v a d e w a s submitted
or in case of failure to file a return. Also, Section 2 2 8 of the s a m e
law states that said a s s e s s m e n t m a y be protested only within
30 days from the receipt thereof. Necessarily, t h e taxpayer must
be certain that a specific d o c u m e n t constitutes an a s s e s s m e n t .
Otherwise, confusion w o u l d arise regarding t h e period within w h i c h
to make an a s s e s s m e n t or to protest t h e s a m e , or w h e t h e r interest
and penalty may accrue t h e r e o n . It should also be stressed that
the said d o c u m e n t is a notice duly sent to the taxpayer. Indeed,
an assessment is d e e m e d m a d e only w h e n t h e C o m m i s s i o n e r
of Internal R e v e n u e releases, mails or s e n d s s u c h notice to the
taxpayer.
To consider the affidavit attached to t h e C o m p l a i n t as a proper

assessment is to subvert the nature of an a s s e s s m e n t a n d to set a
bad precedent that will prejudice innocent t a x p a y e r s . T h a t the BIR
examiner's Joint Affidavit contained s o m e details of t h e tax liabilities
of private respondents d o e s not ipso facto m a k e it an a s s e s s m e n t .
The purpose of the Joint Affidavit w a s merely to support a n d
substantiate the Criminal Complaint for tax e v a s i o n . It w a s not
meant to be a notice of the tax d u e a n d a d e m a n d to t h e private
respondents for p a y m e n t thereof. T h e fact that t h e Complaint itself
w a s specifically directed and sent to the D e p a r t m e n t of Justice a n d
not to private respondents s h o w s that the intent of t h e C o m m i s s i o n e r
w a s to file a criminal complaint for tax e v a s i o n , not to issue an
assessment. Although the revenue officers r e c o m m e n d e d the
issuance of an assessment, the C o m m i s s i o n e r opted instead to file
a criminal case for tax e v a s i o n . W h a t private respondents received
was notice from the D O J that a criminal c a s e for tax evasion had
b e e n filed against t h e m , not a notice that the Bureau of Internal

R e v e n u e had m a d e an a s s e s s m e n t . T h e Commissioner's action in
filing a r e c o m m e n d a t i o n for t h e criminal prosecution of the taxpayer
at the D O J is not t a n t a m o u n t to a decision a n d , therefore, is not
appealable to the CTA. Since there is no assessment, it follows
that there can be no protest and decision regarding the s a m e ,
(see C o m m . v s . P a s c o Builders and M a n a g e m e n t Corporation vs.
L i w a y w a y V i n z o n s - C h a t o , C A - G . R . SP No. 4 7 7 4 5 , April 6, 2000.)
10. 30-day period for appeal to Court of Tax Appeals. The

decisions, rulings, or inaction of t h e C o m m i s s i o n e r are necessary in
order to vest the Court of Tax A p p e a l s with jurisdiction to entertain
t h e a p p e a l , provided it is filed within 30 d a y s after the receipt of
s u c h decision or ruling, or within 30 d a y s after the expiration of the
180-day period fixed by law for the C o m m i s s i o n e r to act on the
disputed a s s e s s m e n t s .
(1) Period for appeal jurisdictional. This 30-day period
within w h i c h to file an appeal is jurisdictional and failure to
c o m p l y therewith w o u l d bar the appeal and deprive the Court
of Tax A p p e a l s of its jurisdiction to entertain and determine the
correctness of t h e a s s e s s m e n t s . Such period is not merely
directory but m a n d a t o r y a n d it is b e y o n d the power of the
courts to extend the s a m e . T h e options given to the taxpayer
are mutually exclusive, and resort to o n e bars the application of
the other.
In a c a s e , "the C o m m i s s i o n e r failed to act on the disputed
a s s e s s m e n t within 180 d a y s f r o m date of submission of
d o c u m e n t s . T h u s , petitioner opted to file a petition for review
before t h e Court of Tax A p p e a l s . Unfortunately, the petition
for review w a s filed out of time, i.e., it w a s filed more than 30
d a y s after t h e lapse of the 180-day period. Consequently, it
w a s dismissed by the Court of Tax Appeals for late filing.
Petitioner did not file a motion for reconsideration or make
an appeal; hence, the disputed assessment became final,
d e m a n d a b l e and executory. Based on the foregoing, petitioner
can not now claim that the disputed assessment is not yet
final as it remained unacted upon by the Commissioner; that
it can still await the final decision of the Commissioner and
thereafter appeal the s a m e to the Court of Tax Appeals. This
legal maneuver cannot be countenanced. After availing the first
option, i.e., filing a petition for review which was however filed
out of time, petitioner can not successfully resort to the second
option, i.e., awaiting the final decision of the Commissioner and
530
ANNOTATED
appealing the same to the Court of Tax Appeals, on the pretext

that there is yet no final decision on the disputed assessment
because of the Commissioner's inaction." (Rizal Commercial
Bank Corporation vs. C o m m . , 522 S C R A 144 [2007].)
( 2 ) Period to appeal reckoned from receipt of denial of
protest. Considering the myriad of responsibilities imposed
on the Commissioner of Internal R e v e n u e , it cannot be expected
that the Commissioner himself to attend to all those chores
personally. T h e sheer number of taxpayers alone m a k e s it
impossible for the BIR C o m m i s s i o n e r to perform, all by himself,
the tasks of tax assessment and collection. Surely, C o n g r e s s
could not have intended that the burden of tax administration
should rests on the shoulders of the C o m m i s s i o n e r of Internal
Revenue alone. T h u s , according to the Court of A p p e a l s , the
Court of Tax A p p e a l s correctly held that the 30-day period
allotted by law to the petitioner to appeal the denial of its
protest should be reckoned f r o m its receipt of the January 2 4 ,
1991 letter of the Chief of A c c o u n t s Receivable/Billing Division.
Since the said letter w a s p r e s u m e d to h a v e b e e n received by
the petitioner within a reasonable t i m e , it is not irrational to
conclude that the filing of t h e petition for review before t h e CTA
on N o v e m b e r 8, 1991 w a s w a y past the prescribed period to
appeal.
T h e major work of the head of a g e n c y is normally supervision

and direction. W h e n a g e n c y h e a d s permit t h e m s e l v e s to be over-
w h e l m e d by detail, they rob t h e m s e l v e s of time essential for their
most important tasks. T h e nature of administrative a g e n c i e s n e c e s -
sitates that delegation of function a n d authority be a p r e d o m i n a n t
feature of the organization, (citing Hector S. De L e o n a n d Hector M.
D e Leon, Jr., A D M I N I S T R A T I V E LAW, T E X T A N D C A S E S , 3rd Ed.,
1988, p. 32, citing W. G e l h o m a n d C. B y s e , Administrative Law:
Cases and C o m m e n t s , 4 t h Ed., 1960; O c e a n i c Wireless Network
vs. CIR, CA-G.R. S P No. 3 5 5 8 1 , Oct. 3 1 , 2000.)
11. Necessity of assessment before filing of criminal complaint.
The filing of a criminal complaint n e e d not be p r e c e d e d by an
assessment. Section 2 2 2 specifically states that in c a s e s w h e r e
a false or fraudulent return with intent to e v a d e tax is submitted
or in cases of failure to file a return, proceedings in court m a y be
c o m m e n c e d without an a s s e s s m e n t . Furthermore, Section 2 0 5
clearly mandates that the civil and criminal aspects of the case
may be pursued simultaneously. In Ungab vs. Cusi (97 S C R A 8 7 7
[1980].), petitioner therein sought the dismissal of the criminal
complaints for being premature, since his protest to the CTA had
not yet b e e n resolved. T h e S u p r e m e Court held that such protests
could not stop or s u s p e n d the criminal action which w a s independent
of the resolution of the protest in the CTA. This w a s because the
C o m m i s s i o n e r of Internal R e v e n u e had, in s u c h tax evasion cases,
discretion on w h e t h e r to issue an a s s e s s m e n t or to file a criminal
case against the taxpayer or to do both, (see Annotation No. 2
under Sec. 254.)
To reiterate, an a s s e s s m e n t is not necessary before a criminal
c h a r g e c a n be filed. This is the general rule. T h e taxpayer must show
that he is entitled to an exception. Moreover, the criminal charge
n e e d only be supported by a prima facie showing of failure to file
a required return. This fact n e e d not be proven by an assessment.
( C o m m . v s . Pascor Realty and D e v e l o p m e n t Corporation, supra;
A d a m s o n v s . Court of A p p e a l s , 588 S C R A 27 [2009].)
T h e ruling in Ungab w a s qualified in another c a s e ( C o m m . vs.

Court of A p p e a l s , 257 S C R A 2 0 0 [1996].), to the effect for a criminal
prosecution to p r o c e e d before a s s e s s m e n t , there must be a prima
facie s h o w i n g of willful attempt to e v a d e . T h e r e is a dissenting
opinion, (see A n n o t a t i o n N o . 2 under Sec. 254.)
12. Issuance of assessment and filing of a complaint dis-
tinguished. An a s s e s s m e n t must be distinguished from the filing
of a complaint. Before an a s s e s s m e n t is issued, there is, by practice,
a p r e - a s s e s s m e n t notice sent to the taxpayer. T h e taxpayer is
then given a c h a n c e to submit position papers and documents to
prove that the a s s e s s m e n t is u n w a r r a n t e d . If the Commissioner
is unsatisfied, an a s s e s s m e n t signed by him or her is then sent
to the taxpayer informing the latter specifically and clearly that an
a s s e s s m e n t has b e e n m a d e against him or her.
In contrast, the criminal charge need not go through all these.

T h e criminal charge is filed directly with the Department of Justice.
Thereafter, the taxpayer is notified that a criminal case had been filed
against h i m , not that the C o m m i s s i o n e r has issued an assessment.
It must be stressed that a criminal complaint is instituted not to
d e m a n d payment, but to penalize the taxpayer for violation of the
Tax C o d e . (Ibid.)
13. Administrative Remedies; Review by the Secretary of
Finance. T h e procedure outlined below does not cover disput-
ed assessments, refunds of internal revenue taxes, fees or other
charges, and penalties imposed in relation thereto, or other matters
arising under the Tax Code or other laws or portions thereof admin-
istered by the Bureau of Internal Revenue. In these instances, the
ANNOTATED
Court of Tax Appeals has the exclusive appellate jurisdiction pursu-

ant to the second paragraph of Section 4 of the Tax C o d e . Neither
shall it apply to rulings that are d e e m e d void ab initio because they
contradict duly issued Revenue Regulations, Revenue M e m o r a n -
dum Orders, Revised M e m o r a n d u m Rulings, and Revenue M e m o -
randum Circulars.
(1) Within 30 days from the date of receipt of the adverse
ruling of the Commissioner of Internal R e v e n u e , the affected
taxpayer may seek the review of the ruling by the Department
of Finance. In all cases, the adverse ruling that can be brought
in the Department shall only be the final adverse decision of the
Commissioner.
In the case of rulings by the C o m m i s s i o n e r ' s delegates,
the taxpayer shall exhaust administrative remedies within the
Bureau of Internal R e v e n u e by filing a letter of reconsideration
addressed to the Commissioner, but filed with the Office of
the Assistant C o m m i s s i o n e r for Legal Service ( A C I R - L S ) in
the case of adverse rulings decided by t h e R e v e n u e Regional
Directors, or with the Office of the Deputy C o m m i s s i o n e r of
Internal R e v e n u e for Legal and Inspection G r o u p ( D C I R - L I G )
in the case of adverse rulings decided by t h e A C I R - L S within
15 days from receipt of an a d v e r s e ruling, before requesting for
a review by the Secretary of Finance.
(2) File with the Office of the Commissioner, for e n d o r s e -

ment to the A C I R - L S , a copy of the request for review of the
Ruling.
(3) Request from the A C I R - L S for an authenticated a n d

certified true copy of the c o m p l e t e d o c k e t or records on file.
(4) Pay the certification fee to the authorized agent bank
having jurisdiction over the t a x p a y e r or the place of business of
the taxpayer, using P a y m e n t Form 0 6 0 5 .
(5) Present to the A C I R - L S the original c o p y of t h e official
receipt that evidences p a y m e n t of the certification fee, a n d
submit a photocopy thereof to f o r m part of the docket or records
of the case.
(6) Within five (5) d a y s f r o m the date of p a y m e n t of the

certification fee, the A C I R - L S shall instruct the Division Chief
of the Law Division or the International Tax Affairs Division, as
the case may be, for e a c h a n d every p a g e of the records of
the case, sequentially n u m b e r e d , to be p h o t o c o p i e d , including
a copy of the subject BIR Ruling and for the c o m p l e t e set to
be s t a m p e d a n d signed by the concerned Division Chief to

be an authentic a n d true copy of the original and complete
records on file. In the c a s e of rulings m a d e by the Revenue
Regional Directors a n d finally decided by the Commissioner
to be a d v e r s e to the taxpayer, the A C I R - L S shall certify and
authenticate t h e duplicate copy of the records of the case.
(7) T h e appropriate office shall also prepare the endorse-

m e n t letter of t h e C o m m i s s i o n e r of Internal R e v e n u e which
letter shall be signed by t h e Assistant Commissioner for
Legal Service, w h o is d e s i g n a t e d as the Commissioner's duly
authorized representative. In this regard, the A C I R - L S shall
submit to t h e Commissioner, copy furnished the O D C I R - L I G , a
monthly report of c a s e s a p p e a l e d a n d certifications m a d e .
(8) T h e authenticated a n d certified true copy of the docket

or records of the c a s e s , including t h e e n d o r s e m e n t thereof to
t h e Secretary of Finance, t h r o u g h R e v e n u e Operations Group,
shall be released to t h e holder of the original copy of the official
receipt evidencing p a y m e n t of the certification fee.
(9) A taxpayer w h o receives an adverse ruling from the

Commissioner, may, within 30 d a y s f r o m the date of the receipt
of s u c h ruling, s e e k its review by t h e Secretary of Finance, either
by himself/itself or t h r o u g h his/its duly accredited tax agent
or representative. T h e request for review must be in writing
a n d under both a n d must c o m p l y with the stated mandatory
requirements. (Rev. A d m . Order No. 39-2001.)
14. Rules for validity of assessment. For an assessment to

be valid, it must be issued in a c c o r d a n c e with the following rules:
(1) Notice of informal conference must be sent to the
taxpayer together with a S u m m a r y of Findings or Report of
Investigation;
(2) If the C o m m i s s i o n e r of Internal Revenue (CIR) or
his duly authorized representative finds that taxes should be
a s s e s s e d , the taxpayer has to be informed of such in writing in
the f o r m of a Pre-assessment Notice (PAN);
(3) Taxpayer has 15 d a y s f r o m receipt of the PAN to reply
to it. Here, the taxpayer is permitted to examine the BIR's
records and to submit written agreement;
(4) T h e taxpayer has to be informed in writing of the results
of the resolution of its protest; and
(5) If the taxpayer fails to respond within the 15-day period,
a formal letter of d e m a n d and assessment notice will be sent
ANNOTATED
to it. (A. Brown Co., Inc. vs. C o m m . of Internal Revenue, CTA

Case No. 6357, June 7, 2004.)
W h e r e the preliminary collection letter is considered the
assessment notice because the BIR could not prove the tax-
payer's receipt of the assessment notice, the preliminary col-
lection letter must itself state the facts and the law on which
the assessment is based; otherwise, the a s s e s s m e n t is void.
(LG Collins Electronics Philippines, Inc. vs. C o m m . of Internal
Revenue, CTA Case No. 6186, J u n e 9, 2004.)
15. Formal assessment notice/Post-reporting notice and pre-
assessment notice. T h e stringent requirement that in a s s e s s m e n t
notice be satisfactorily proved to have been issued and released
or, if receipt thereof is d e n i e d , that said a s s e s s m e n t notice has
been served on the taxpayer, applies only to formal a s s e s s m e n t s
prescribed under Section 2 2 8 , but not to post-reporting notices or
pre-assessment notices.
(1) T h e issuance of a valid formal a s s e s s m e n t is a

substantive prerequisite to tax collection, for it contains not only
a computation of tax liabilities but also a d e m a n d for p a y m e n t
within a prescribed period, thereby signaling w h e n the penalties
and interests begin to accrue against the taxpayer and enabling
the latter to determine his remedies therefore. D u e process
requires that it must be served on and received by t h e taxpayer.
(2) A post-reporting notice a n d a p r e - a s s e s s m e n t notice do

not have the s a m e w e i g h t or gravity as t h e formal a s s e s s m e n t
notice. T h e former merely hint at the initial findings of t h e
BIR against a taxpayer a n d invite the t a x p a y e r to an informal
conference or clarificatory m e e t i n g . Neither notice contains
a declaration of the tax liability of the t a x p a y e r or a d e m a n d
for payment thereof. Therefore, the lack of such notices d o e s
not prejudice the taxpayer for as long as the latter is properly
served a formal a s s e s s m e n t notice. ( C o m m . vs. Menguito, 565
S C R A 46 [2008].)
Note: T h e ruling in this c a s e is b a s e d on the provision of

Section 228 before its a m e n d m e n t by R.A. No. 8 4 2 4 in 1998. It
is now required that the taxpayer must be informed of the facts
and the law upon w h i c h the a s s e s s m e n t w a s m a d e through the
sending of the preliminary a s s e s s m e n t notice. (PAN).
For further discussions on a s s e s s m e n t , see Annotations
under Sections 229 and 2 3 5 (infra.), a n d Section 6(c): (Vol. 1.)
SEC. 2 2 9 . Recovery of Tax Erroneously or Illegally

Collected. No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected,
or of any penalty claimed to have been collected without authority,
or of any sum alleged to have been excessively or in any manner
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 such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on
1
the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
ANNOTATION
1. Tax refund or credit. Sections 204 and 229 govern all

kinds of refund or credit of internal revenue taxes those imposed
a n d collected pursuant to the National Internal Revenue Code
erroneously or illegally (see C o m m . v s . Central Azucarera Don
Pedro, L-28467, Feb. 2 8 , 1973; C o m m . vs. Insular Lumber Co.,
L - 2 4 2 2 1 , Dec. 1 1 , 1967.) whether or not the recovery is by a
counterclaim or by a separate action. (Republic vs. Limaco and
D e G u z m a n C o m m e r c i a l Co., Inc., L - 1 3 0 8 1 , A u g . 3 1 , 1962.) A n
erroneous or illegal tax is o n e levied without statutory authority.
( C o m m . vs. Philippine National Bank, 4 7 4 S C R A 303 [2005].)
(1) Tax refund or credit may also be granted under the
authority of Sections 75 and 76 (corporate quarterly income
tax), Section 112 (VAT), Section 130(D) (excise tax on exported
goods), special laws (e.g., Exec. Order No. 226, the new
O m n i b u s Investments Code), and tax treaties entered into by
the Philippines. But Sections 204 and 229 apply only to cases of
erroneously or illegally paid tax; otherwise, there is no need to
file a petition for review in the Court of Tax Appeals to preserve
the right to claim refund or tax credit.
(2) T h e two-year prescriptive period in Section 229 refers
exclusively to claims for refund of national internal revenue
'Should read "tax."

ANNOTATED
taxes erroneously or illegally collected and nor to a refund of

local or municipal license taxes or fees illegally collected. T h e
period for prescription of action to recover municipal license
taxes is six (6) years under Article 1145(2) of the Civil C o d e .
(Municipality of O p o n vs. Caltex [Phils.], Inc., L-21853, Feb. 26,
1968.) T h e period does not also apply to overpayments from
voluntary advance income tax payments. (Philippine National
Bank vs. C o m m . , CA, GR SP No. 7 6 4 8 8 , Oct. 14, 2003.)
(3) A claim for refund m a y be based on a statute granting

tax exemption or the result of legislative grace. In such case,
the claim is to be construed in strictissimi juris against the
taxpayer meaning that the claim cannot be m a d e to rest on
vague inference. W h e r e the rule of strict interpretation against
the taxpayer is applicable as the claim for refund partakes of
the nature of an e x e m p t i o n , the claimant must s h o w that he
clearly falls under the e x e m p t i n g statute.
On the other h a n d , a tax refund m a y be, as usually it is,

predicated on tax refund provisions allowing a refund of errone-
ous or excess p a y m e n t of tax. T h e return of w h a t w a s errone-
ously paid is f o u n d e d on the principle of solutio indebiti, a basic
postulate that no o n e should unjustly enrich himself at t h e ex-
pense of another. T h e caveat against unjust e n r i c h m e n t covers
the government. A n d as decisional law t e a c h e s , a claim for tax
refund proper, as here, necessitates only t h e preponderance-
of-evidence threshold like in a n y ordinary civil c a s e . ( C o m m .
vs. Mirant Pagbilao Corp., 5 6 5 S C R A 154 [2008].)
(4) Section 2 2 9 refers to a judicial action for t h e recovery

of tax, while Section 2 0 4 applies to administrative claims filed
with the Bureau of Internal R e v e n u e . Section 2 2 9 is an instance
where the State gives its c o n s e n t to be s u e d .
(5) Section 2 2 9 stipulates that t h e t w o - y e a r period to
claim refund should be c o u n t e d f r o m d a t e of p a y m e n t of the
tax sought to be refunded. W h e n applied to taxpayers filing
income tax returns on a quarterly basis, the d a t e of p a y m e n t
mentioned in Section 2 2 9 must be d e e m e d to be qualified
by Sections 75 a n d 7 6 . Clearly, t h e prescriptive period of two
years should c o m m e n c e to run only f r o m t h e time that the
refund is ascertained, w h i c h can only be d e t e r m i n e d after a
final adjustment return is a c c o m p l i s h e d . (Ibid.)
(6) It is generally recognized that before an accountant

can m a k e a certification on t h e financial statements or render
an auditor's opinion, an audit of the books of accounts has to

be c o n d u c t e d in a c c o r d a n c e with generally accepted auditing
standards.
Since the audit, as required by Section 232 is to be
c o n d u c t e d yearly, then it is the Final Adjustment Return, where
the figures of the gross receipts and deductions have been
audited a n d adjusted, that is truly reflective of the results of
operations of business enterprise. T h u s , it is only w h e n the
Adjustment Return covering the w h o l e year is filed that the
t a x p a y e r w o u l d k n o w w h e t h e r a tax is still due or a refund can
be c l a i m e d b a s e d on the adjusted and audited figures.
T h e r e f o r e , the filing of quarterly income tax returns
required in Section 75 and i m p l e m e n t e d per BIR Form 1702-A
a n d p a y m e n t of quarterly income tax should only be considered
m e r e installments of the a n n u a l tax d u e . T h e s e quarterly tax
p a y m e n t s w h i c h are c o m p u t e d based on the cumulative figures
of gross receipts and d e d u c t i o n s in order to arrive at a net
taxable i n c o m e , should be treated as a d v a n c e s or portions of
the annual income tax d u e , to be adjusted at the end of the
calendar or fiscal year. This is reinforced by Section 76 which
provides for t h e filing of a d j u s t m e n t returns and final payment
of i n c o m e tax. Consequently, the two-year prescriptive period
provided in Section 2 2 9 should be c o m p u t e d from the time of
filing the A d j u s t m e n t Return or A n n u a l Income Tax Return and
Final P a y m e n t of Income Tax. ( C o m m . vs. T M X Sales, Inc., 205
S C R A 184 [1992]; see A C C R A Investment Corp. vs. Court of
A p p e a l s , 2 0 4 S C R A 9 5 7 , Dec. 2 0 , 1991.)
(7) W h e n a tax is paid in installments, the prescriptive
period of two years provided in Section 229 should be counted
f r o m the date of final payment. (Collector vs. Prieto, 2 S C R A
1007 [1961].) This ruling w a s reiterated in Commissioner vs.
Palanca (18 S C R A 4 9 6 [1961].), wherein the Supreme Court
stated that w h e r e the tax account w a s paid on installment, the
computation of the two-year prescriptive period under Section
229 should be f r o m the date of the last installment.
In the TMX Sales, Inc. case (supra.), the respondent TMX
Sales, Inc., filed a suit for a refund on March 14, 1984. Since
the two-year prescriptive period should be counted from the
filing of the Adjustment Return on April 15, 1982, TMX Sales,
Inc. is not yet barred by prescription.
(8) T h e grant of refund is founded on the assumption that
the tax return is valid, that is, the facts stated thereon are true
ANNOTATED
and correct. A deficiency assessment, although not yet final,

creates a doubt as to, and constitutes a challenge against,
the truth and veracity of the facts stated in said return, w h i c h ,
by itself, and without unquestionable evidence, cannot be the
basis for the grant of the refund. To award such refund, despite
the existence of the deficiency assessment, is an absurdity.
A taxpayer cannot be entitled to refund and at the s a m e
time be liable for a tax deficiency a s s e s s m e n t for the s a m e
year. ( C o m m . vs. Court of Appeals, 234 S C R A 348 [1994].)
(9) Thus, the Court of Tax A p p e a l s can deny a claim for
refund of income erroneously paid on the basis of its finding
that the taxpayer, b e c a u s e of erroneous deductions f r o m its
gross income, underpaid its income tax for the s a m e taxable
year w h e r e the a m o u n t of deficiency tax is higher t h a n t h e
tax refund sought. (United Airlines, Inc. v s . C o m m . , G.R. No.
178788, Sept. 2 9 , 2010.)
(10) There is erroneous p a y m e n t of tax w h e n a taxpayer
pays under a mistake of fact, a s , for instance, in a c a s e w h e r e
he is not aware of an existing e x e m p t i o n in his favor at t h e
time the payment w a s m a d e . T h e g r o u n d u p o n w h i c h t h e right
of recovery rests is that m o n e y paid t h r o u g h m i s a p p r e h e n s i o n
of facts belong in equity a n d in g o o d c o n s c i e n c e to t h e person
w h o paid it. Tax refunds are b a s e d on the principle of q u a s i -
contract or solutio indebiti. (see Arts. 2 1 4 2 , 2 1 5 4 , Civil C o d e . )
T h e g o v e r n m e n t is not e x e m p t e d f r o m the application of this
doctrine. ( C o m m . v s . Acesite [Phils.] Hotel Corporation, 516
S C R A 93 [2007].)
(11) T h e contention that a tax refund t a k e s on t h e nature

of a tax e x e m p t i o n does not apply w h e r e t h e claim for refund
is premised on e r r o n e o u s p a y m e n t of t h e tax. T h e r e is parity
between tax refund a n d tax e x e m p t i o n only w h e n t h e former
is based either on a tax e x e m p t i o n or a tax refund statute.
T h e g o v e r n m e n t should not enrich itself at t h e e x p e n s e of
the taxpayer. ( C o m m . vs. Fortune Tobacco, Corp., G.R. N o .
16727408, July 2 1 , 2008.)
(12) T h e submission of photo copies of p u r c h a s e invoices

and receipts is indispensable w h e n applying for tax credit or
refund. In fact, the original copy of the invoices or receipts must
be presented for cancellation prior to the issuance of a tax
credit certificate or refund, (see Altas Consolidated Mining &
Dev. Corp. vs. C o m m . , 534 S C R A 51 [2007].)
2. Meaning of tax credit. T h e term is not defined by the

Tax C o d e but Article 21 of Exec. Order No. 226 (The Omnibus
Investments C o d e of 1987 as a m e n d e d ) , defines a tax credit
as "any of the credits against taxes and/or duties equal to those
actually paid or w o u l d h a v e been paid to evidence which a tax
credit certificate shall be issued by the Secretary of Finance or his
representative, or t h e Board (of Investments), if so delegated by the
Secretary of Finance." Tax credits w e r e granted under EO No. 226
as incentives to e n c o u r a g e investments in certain businesses. A tax
credit generally refers to an a m o u n t that m a y be "subtracted directly
f r o m o n e ' s total tax liability." It is therefore an "allowance against the
tax i t s e l f or "a deduction f r o m w h a t is o w e d " by a taxpayer to the
g o v e r n m e n t . In Rev. R e g s . N o . 5-2000, a tax credit is defined as
"the a m o u n t d u e to a t a x p a y e r resulting f r o m an overpayment of
a tax liability or e r r o n e o u s p a y m e n t of a tax due." (Pilipinas Shell
Petroleum C o r p . v s . C o m m . , 541 S C R A 316 [2007].)
3. Tax credit certificate. It is "a certification, duly issued

to the taxpayer n a m e d therein, by the C o m m i s s i o n e r or his duly
authorized representative, reduced in a BIR Accountable Form in
a c c o r d a n c e with the prescribed formalities, acknowledging that the
grantee-taxpayer n a m e d therein is legally entitled to a tax credit,
the m o n e y value of w h i c h m a y be u s e d in payment or in satisfaction
of any of his internal revenue tax liability (except those excluded), or
m a y be converted as a c a s h refund, or m a y otherwise be disposed
of in the m a n n e r a n d in a c c o r d a n c e with the limitations, if any, as
m a y be prescribed by t h e provisions of these Regulations" (issued
by the Secretary of Finance on July 19, 2000).
(1) A T C C is an undertaking by the government through

the BIR or DOF, a c k n o w l e d g i n g that a taxpayer is entitled to
a certain a m o u n t of tax credit from either an overpayment of
income taxes, a direct benefit granted by law or other sources
and instances granted by law such as on specific unused input
taxes and excise taxes on certain goods. As such, tax credit
is transferable in accordance with pertinent laws, rules, and
regulations. Therefore, the T C C s are immediately valid and
effective after their issuance.
(2) It would be absurd to m a k e the payment of a TCC
d e p e n d e n t on a post-audit since there is no contemplation of
the situation wherein there is no post-audit. Does the payment
m a d e b e c o m e effective if no post-audit is conducted? Or does
the so-called suspensive condition still apply as no law, rule,
or regulation specifies a period w h e n a post-audit should or
ANNOTATED
could be conducted with a prescriptive period? Clearly, a tax

payment through a T C C cannot be both effective w h e n m a d e
and dependent on a future event for its effectivity.
(3) Moreover, if the T C C s are considered to be subject to
post-audit as a suspensive condition, the very purpose of the
T C C would be defeated as there would be no guarantee that
the T C C would be honored by the g o v e r n m e n t as payment for
taxes. No investor would take the risk of utilizing T C C s if these
were subject to a post-audit that may invalidate t h e m , without
prescribed grounds or limits as to the exercise of said post-
audit.
(4) T h e only conditions the T C C s are subjected to are
those found on its face. A n d these are:
(a) Post-audit a n d s u b s e q u e n t adjustment in the event
of computational discrepancy;
(b) A reduction for any outstanding account/obligation
of claimant with the BIR and/or B O C ; a n d
(c) Revalidation with the Center in c a s e t h e T C C is not

utilized or applied within o n e (1) y e a r f r o m d a t e of issuance/
date of last utilization.
T h e a b o v e conditions clearly s h o w that the post-audit

contemplated in t h e T C C s d o e s not pertain to their g e n u i n e n e s s
or validity, but on computational discrepancies that m a y have
resulted from the transfer a n d utilization of the T C C .
For e x a m p l e , C o m p a n y A has b e e n g r a n t e d a T C C in the

a m o u n t of P h P 500,000 t h r o u g h its export transactions, but it
has an outstanding excise tax liability of P h P 2 5 0 , 0 0 0 w h i c h
d u e to inadvertence w a s erroneously a s s e s s e d a n d paid at
PhP 225,000. On post-audit, with t h e finding of a deficiency of
PhP 2 5 , 0 0 0 , the utilization of t h e T C C is accordingly corrected
and the tax credit remaining in the T C C correspondingly
reduced by PhP 2 5 , 0 0 0 . This is a concrete e x a m p l e of a
computational discrepancy w h i c h c o m e s to light after a post-
audit is conducted on the utilization of the T C C . T h e s a m e holds
true for a transferee's use of the T C C in paying its outstanding
internal revenue tax liabilities.
Other e x a m p l e s of computational errors w o u l d include the

utilization of a single T C C to settle several internal revenue
tax liabilities of the taxpayer or transferee, w h e r e errors c o m -
mitted in t h e reduction of the credit tax running balance are

discovered in the post-audit resulting in the adjustment of the
T C C utilization and remaining tax credit balance.
(5) A transferee in g o o d faith a n d for value of a T C C w h o
has relied on the Center's representation of the genuineness
and validity of the T C C transferred to it m a y not be legally
required to pay again the tax covered by the T C C which has
b e e n belatedly declared null and void, that is, after the T C C s
h a v e b e e n fully utilized through settlement of internal revenue
tax liabilities. Conversely, w h e n the transferee is party to the
fraud as w h e n it did not obtain the T C C for value or w a s a party
to or has k n o w l e d g e of its fraudulent issuance, said transferee
is liable for t h e taxes a n d for the fraud committed as provided
for by law.
(6) T h e tax credit of a taxpayer e v i d e n c e d by a T C C is

used up or, in accounting parlance, debited w h e n applied to the
t a x p a y e r ' s internal revenue tax liability, and the T C C canceled
after t h e tax credit it represented is fully debited or used up.
A credit is a payable or a liability. A tax credit, therefore, is a
liability of t h e g o v e r n m e n t e v i d e n c e d by a T C C . T h u s , the tax
credit of a taxpayer e v i d e n c e d by a T C C is debited by the BIR
through a T D M , not only evidencing the payment of the tax by
the taxpayer, but likewise deducting or debiting the existing tax
credit with t h e a m o u n t of the tax paid.
For e x a m p l e , a transferee or the tax claimant has a T C C

of P h P 1 million, w h i c h w a s used to pay income tax liability of
P h P 5 0 0 , 0 0 0 , d o c u m e n t a r y s t a m p tax liability of PhP100,000,
a n d value-added tax liability of P h P 3 5 0 , 0 0 0 , for an aggregate
internal revenue tax liability of P h P 9 5 0 , 0 0 0 . After the payments
through the PhP1 million T C C have been approved and
accepted by t h e BIR through the issuance of corresponding
Tax Debit M e m o (TDM), the T C C m o n e y value is reduced to
only PhP50,000, that is, a credit balance of PhP50,000. In this
sense, the tax credit of the T C C has been canceled or used up
in t h e a m o u n t of PhP950,000. Now, let us say the transferee or
taxpayer has excise tax liability of PhP250,000, s/he only has
the remaining PhP 50,000 tax credit in the T C C to pay part of
said excise tax. W h e n the transferee or taxpayer applies such
payment, the T C C is canceled as the money value of the tax
credit it represented has been fully debited or used up. In short,
there is no more tax credit available for the taxpayer to settle
his/her other tax liabilities. (Ibid.)
ANNOTATED
4. Differences between tax refund and tax credit. Section

229 authorizes either a refund or credit as a means of recovery
of tax erroneously or illegally collected. It may be that there is no
essential difference between a tax refund and a tax credit since
both are modes of recovering taxes erroneously or illegally paid to
the government. Yet, there are unmistakable formal and practical
differences between the two m o d e s .
Formally, a tax refund requires a physical return of the s u m
-erroneously paid by the taxpayer, while a tax credit involves the
application of the reimbursable a m o u n t against any s u m that m a y
be due and collectible from the taxpayer. On the practical side,
the taxpayer to w h o m t h e tax is refunded w o u l d have the option,
a m o n g others, to invest for profit the returned s u m , an option not
proximately available if the taxpayer c h o o s e s instead to receive a
tax credit. ( C o m m . vs. Philippine P h o s p h a t e Fertilizer Corporation,
437 S C R A 4 5 2 [2004].)
5. Requirements for claim for refund or credit. It must be:
(1) in writing, stating clearly the basis or g r o u n d s for s u c h
claim; and
(2) filed by the taxpayer with t h e C o m m i s s i o n e r within t w o
(2) years after the p a y m e n t of the tax or penalty. (Sec. 2 0 4 [ C ] ;
see Annotation No. 2 to Sec. 230.)
It must be s h o w n in the return that t h e i n c o m e received w a s

declared as part of the gross i n c o m e . T h e fact of withholding m u s t
be established by a copy of the statement duly issued by t h e payor
to the payee s h o w i n g t h e a m o u n t paid a n d t h e a m o u n t of tax
withheld. T h e taxpayer has the b u r d e n of establishing the factual
basis of his claim. (Banco Filipino S a v i n g s a n d M o r t g a g e Bank v s .
Court of Appeals, 519 S C R A 93 [2007]; C o m m . v s . Far East Bank
& Trust Company, 6 1 5 S C R A 4 1 7 [2010].)
The "taxpayer" is t h e person entitled to claim a tax refund;

hence, the proper party to file a claim for refund or credit of taxes
alle-gedly illegality or erroneously collected. He is t h e "party a d -
versely affected" w h o is given the right to a p p e a l t h e decision or
ruling of the Commissioner. However, in c a s e t h e taxpayer d o e s
not file a claim for refund, the withholding agent m a y file t h e claim.
Thus, a withholding agent w a s considered a proper party to file
a claim for refund of the withheld taxes of its foreign parent c o m -
pany. ( C o m m . vs. Procter & G a m b l e Phil. Manufacturing C o r p o r a -
tion, 204 S C R A 377 [1991]; C o m m . vs. S m a r t C o m m u n i c a t i o n s ,
629 S C R A 342 [2010].) In the c a s e of indirect taxes (e.g., excise
taxes), the proper party to question, or seek a refund "is the statu-
tory taxpayer, the person on w h o m the tax is imposed by law and
w h o paid the s a m e e v e n if he shifts the burden thereof to another"
(Silkair [Singapore] Pte, Ltd. vs. C o m m . , 544 S C R A 100 [2008].)
T h e withholding agent, on t h e other h a n d , is required to deduct
and withhold the tax d u e a n d is m a d e personally liable for such tax.
(see Sec. 57.) His liability for the correct a m o u n t of tax is direct and
independent of that of t h e taxpayer.
6. Purpose of requirement to file claim for tax refund or credit.

T h e p u r p o s e of the written claim requirement before maintaining
a suit or p r o c e e d i n g in a n y court (i.e., appeal to the Court of Tax
A p p e a l s ) is to afford t h e C o m m i s s i o n e r an opportunity to correct the
mistake, if any, c o m m i t t e d by him or his subordinate officers. (Kiener
Co., Ltd. v s . D a v i d , 92 Phil. 945.) a n d t h e filing of the written claim
is also intended, first, to afford the C o m m i s s i o n e r on opportunity
to correct t h e action of subordinate officers; and s e c o n d , to notify
the g o v e r n m e n t that s u c h t a x e s h a v e b e e n questioned, and the
notice should t h e m be borne in m i n d in estimating the revenue
available for expenditure. ( B a m e j o vs. Coll., 87 Phil. 96 [1950];
C o m m . v s . A c o s t a , 5 2 9 S C R A 177 [2007].) T h e filing of the claim
is m a n d a t o r y a n d is a condition precedent a n d non-compliance
therewith precludes t h e C o m m i s s i o n e r of Internal Revenue from
exercising the authority t h e r e u n d e r given. T h u s , mere adjustments
by BIR e x a m i n e r s s h o w i n g an o v e r p a y m e n t of tax, without any
a c c o m p a n y i n g written claim for refund, will not authorize the
approval of the refund. (Vda. de A g u i n a l d o vs. C o m m . , 13 S C R A
269 [1965]; Republic v s . Limaco a n d De G u z m a n Commercial Co.,
Inc., 5 S C R A 990 [1962].)
7. Refund or credit by Commissioner without written claim.

T h e s e c o n d paragraph of Section 229 authorizes the Commissioner
to effect a refund or credit e v e n without a written claim therefor. This
is an exception to t h e written claim requirement.
8. Period for filing of appeal for refund or credit. The
subsequent appeal for refund or credit must also be filed within the
said two-year period. (Sec. 229.)
(1) If the Commissioner of Internal Revenue takes time in
deciding the claim and the period of two years about to end,
the suit or proceeding must be started in the Court of Tax
Appeals before the end of the two-year period without awaiting
the decision of the Commissioner. ( C o m m . vs. Victorias Milling
Co., Inc., L-24108, Jan. 3, 1968.) Here, there is no decision
to appeal f r o m , m u c h less is there an appeal, the provision of
ANNOTATED
Section 7(1) of Republic Act No. 1125 notwithstanding, (see

Appendix "X".)
The taxpayer need not pay under protest. T h e rule is
different under the Tariff and Customs C o d e , (see Sec. 2 3 0 8
thereof.)
(2) If the claim is denied by the C o m m i s s i o n e r within the
two-year period, the taxpayer has 30 days f r o m receipt of the
denial within which to appeal to the Court of Tax A p p e a l s . (Sec.
11, R.A. No. 1125.)
(3) T h e two-year period is not a jurisdictional requirement
but a prescriptive period. (College of Oral a n d Dental Surgery
vs. Court of A p p e a l s , 102 Phil. 912.) Even if it had already
lapsed, the s a m e m a y be s u s p e n d e d for reasons of equity and
other special circumstances. ( C o m m . v s . Philippine A m e r i c a n
Life Ins. Co., 2 4 4 S C R A 4 4 6 [1995].) It is subject to waiver in
the a b s e n c e of objection to claim filed after t w o (2) years.
(4) T h e t w o year prescriptive period is r e c k o n e d f r o m t h e

filing of the final adjustment return. ( C o m m . v s . P r i m e t o w n
Property G r o u p , Inc., 531 S C R A 4 3 6 [2007].)
9. Period for filing claim and appeal non-extendible. T h e

Tax C o d e provides that "in a n y c a s e , no s u c h suit or proceeding
(for the recovery of tax or penalty erroneously or illegally collected)
shall be begun after the expiration of t w o (2) years f r o m t h e date of
payment of the tax or penalty regardless of a n y s u p e r v e n i n g c a u s e
that m a y arise after payment." (Sec. 229.)
In view of the phrase "regardless of any s u p e r v e n i n g c a u s e

that m a y arise after p a y m e n t " (which w a s a d d e d by P.D. N o . 69.)
which forecloses any extension of t h e statutory period d u e to any
cause arising thereafter, t h e ruling that t h e running of t h e two-year
prescriptive period w a s s u s p e n d e d in the t w o c a s e s m e n t i o n e d
below is no longer g o o d law:
(1) w h e r e there is an a g r e e m e n t b e t w e e n the taxpayer

and the C o m m i s s i o n e r to wait for t h e result of a c a s e pending
in the S u p r e m e Court involving the s a m e issue (Panay Electric
C o . vs. Coll., 103 Phil. 819.); a n d
(2) w h e r e t h e C o m m i s s i o n e r a g r e e d to m a k e a refund a n d
later denied the claim. (Naguiat v s . A r a n e t a , 104 Phil. 962.)
10. Computation of the period. Article 13 of t h e Civil C o d e
provides that w h e n t h e law speaks of a year, it is understood to
be equivalent to 365 d a y s . In National Marketing Corporation v.

Tecson (29 S C R A 70 [1969].), the S u p r e m e Court ruled that a
year is equivalent to 365 d a y s regardless of w h e t h e r it is a regular
year or a leap year. However, in 1987, Exec. Order No. 2 9 2 or
the Administrative C o d e o f 1987 w a s e n a c t e d . Section 3 1 , Chapter
VIII, Book I thereof provides: "Sec. 3 1 . Legal Periods. "Year"
shall be u n d e r s t o o d to be twelve calendar m o n t h s ; " m o n t h " of thirty
d a y s , unless it refers to a specific calendar month in which case
it shall be c o m p u t e d according to the n u m b e r of d a y s the specific
m o n t h contains; "day," to a d a y of twenty-four hours a n d ; "night"
f r o m sunrise to s u n s e t . "
A calendar m o n t h is "a m o n t h d e s i g n a t e d in the calendar without

regard to t h e n u m b e r of d a y s it m a y contain." It is the "period of time
running f r o m the beginning of a certain n u m b e r e d day up to, but not
including, t h e c o r r e s p o n d i n g n u m b e r e d d a y of t h e next m o n t h , and
if there is not a sufficient n u m b e r of d a y s in the next m o n t h , then
up to a n d including t h e last day of that m o n t h . " To illustrate, one
calendar m o n t h f r o m D e c e m b e r 3 1 , 2 0 0 7 will b e from January 1,
2 0 0 8 t o J a n u a r y 3 1 , 2 0 0 8 ; o n e calendar m o n t h f r o m January 3 1 ,
2 0 0 8 will be f r o m February 1, 2 0 0 8 until February 2 9 , 2 0 0 8 . "
Under t h e Administrative C o d e of 1987, a year is c o m p o s e d

of 12 calendar m o n t h s . Under it, the n u m b e r of days is irrelevant.
Being t h e m o r e recent law, it g o v e r n s the computation of legal
periods. ( C o m m . v s . Primetown Property Group, Inc., 531 S C R A
4 3 6 [2007].)
11. Offsetting by taxpayer prior to Commissioner's approval.

If t h e taxpayer is clearly entitled to a refund and his right is
not contested by the Commissioner, he may deduct the amount
overpaid f r o m his existing tax liability although the Commissioner
has not yet a p p r o v e d the claim for refund. ( C o m m . vs. Itogon-
S u y o c Mines, Inc., L-25299, July 2 9 , 1969.) T h e Supreme Court
upheld the right of the taxpayer to deduct because of the provision
in Section 51(d) of the NIRC of 1939 (now Sec. 56[A].) that "if in any
preceding year, the taxpayer w a s entitled to a refund of any amount
due as tax, such amount, if not yet refunded, may be deducted
from the tax to be paid." T h e s a m e provision w a s omitted when the
NIRC of 1997 w a s enacted. Section 56(A), as now worded, does
not provide for any offsetting by the taxpayer of a claim not yet
approved.
T h e present rule is that a taxpayer cannot defer the payment
of taxes by raising the defense that he still has a pending claim for
ANNOTATED
refund or credit; otherwise, he shall be subject to the imposition of

surcharges and interest which is mandatory. (Philex Mining Corp.
vs. C o m m . of Internal Revenue, 294 S C R A 687 [1998].)
12. Government's liability for interest. As a rule, the
government is not liable to pay interest on refund of taxes. T h e
exceptions are: (1) w h e r e the tax w a s arbitrarily collected (Coll. vs.
Prieto, L-11976, A u g . 2 9 , 1961.); and (2) in case of taxes withheld
upon w a g e s under Section 79(C, 2).
13. Jurisdiction of the Court of Tax Appeals. T h e Court

of Tax Appeals is not a mere superior administrative a g e n c y or
tribunal but is a part of the judicial s y s t e m of t h e Philippines. It w a s
created by Congress pursuant to R.A. No. 1125 (effective J u n e 16,
1954) as a regular court, a centralized court, specializing in tax
cases. ( C o m m . vs. Court of A p p e a l s , 2 4 2 S C R A 2 8 9 [1995].) R.A.
No. 9282 e x p a n d e d the jurisdiction of t h e Court of Tax A p p e a l s ,
elevated its rank to the level of t h e Court of A p p e a l s , enlarging its
membership to include a Presiding Justice a n d eight (8) Associate
Justices, and a m e n d e d for t h e p u r p o s e Sections 1 - 7 , 1 0 - 1 1 , 1 3 , 1 8 ,
and 19 of R.A. No. 1125. (see A p p e n d i x "AA.")
T h e CTA is vested with exclusive appellate jurisdiction to review

by appeal tax cases arising out of t h e Tax C o d e a n d related laws
administered by the BIR.
14. Appeal from Local Board of Assessment Appeals to Central

Board of Assessment Appeals. U n d e r t h e Local G o v e r n m e n t
C o d e , the Central Board of A s s e s s m e n t A p p e a l s has jurisdiction
over appealed a s s e s s m e n t c a s e s d e c i d e d by t h e Local Board of
A s s e s s m e n t A p p e a l s of the province or city. T h e decision of the
Central Board of A s s e s s m e n t A p p e a l s is final a n d executory. (Sec.
229 thereof.)
T h e C o d e does not provide for t h e review of t h e Board's decision

by the S u p r e m e Court. Consequently, the only r e m e d y available
for seeking a review by the S u p r e m e Court of t h e decision of the
board is the special civil action of certiorari. (Aguinaldo Industries
Corp. vs. C o m m i s s i o n e r of Internal R e v e n u e , 114 S C R A 2 9 6 , M a y
3 1 , 1982.) Under the Constitution, it is expressly provided that the
S u p r e m e Court cannot be deprived of its jurisdiction to review on
appeal or certiorari final j u d g m e n t s and d e c r e e s of lower courts in
all cases involving the legality of any tax, impost, a s s e s s m e n t , or
toll, or any penalty i m p o s e d in relation thereto. (Art. VIII, Sec. 5[2, b]
thereof.) T h e Central Board of A s s e s s m e n t A p p e a l s is not a court.
Note: Under S u p r e m e Court Revised Administrative Circular

No. 1-95, j u d g m e n t s a n d final orders of the Central Board of
A s s e s s m e n t A p p e a l s a n d other quasi-judicial agencies except
j u d g m e n t s a n d final orders issued under t h e Labor C o d e , m a y be
appealed to t h e Court of A p p e a l s by filing a verified petition for
review w h e t h e r the appeal involves questions of fact or of law, or
mixed questions of fact and law.
15. Term "other matters" construed. In defining the cases

that m a y be reviewed by t h e Court of Tax A p p e a l s , the law begins
by e n u m e r a t i n g t h e m and t h e n adds a general clause pertaining to
other matters that m a y arise under t h e National Internal Revenue
C o d e a n d the C u s t o m s Law.
Applying t h e rule of construction k n o w n as ejusdem generis,

the "other matters" (e.g., questions involving rewards to informers;
retroactivity of BIR rulings; validity of forfeiture, distraint, or levy)
that m a y c o m e under the general clauses should be of the s a m e
nature as t h o s e that have p r e c e d e d t h e m . T h u s , the Court of Tax
A p p e a l s has jurisdiction to declare the order of distraint and levy by
the C o m m i s s i o n e r of Internal R e v e n u e a nullity as such act c o m e s
under the phrase "other matters." (see Pantoja vs. David, L-10765,
Feb. 2 8 , 1961.) Since the collection of taxes is o n e of the duties of
the BIR, the issue of prescription of t h e BIR's right to collect taxes
m a y be considered as c o v e r e d by the t e r m "other matters' over
which the Court of Tax A p p e a l s has appellate jurisdiction. ( C o m m .
vs. H a m b r e a c h t & Quist Philippines, Inc., 6 3 5 S C R A 162 [2010].)
(1) But it has b e e n held that the Court of Tax Appeals has
no jurisdiction over the question of unfair competition arising
from the use of simplified set of bookkeeping records as it has
nothing to do with any a s s e s s m e n t or refund of any tax, fee or
penalty. (Ollada vs. C.T.A., 9 Phil. 604.)
(2) Similarly, the decision of the Commissioner of Internal

Revenue relating to lease or real property taken or forfeited
to the government for non-payment of internal revenue taxes
involving as it does purely contractual rights and obligations,
does not c o m e within the purview of "other matters." (Morales
vs. Coll., C T A . Case No. 517, March 28, 1958.)
16. Requisites for appeal to Court of Tax Appeals from tax

assessment. T h e rule is that for the Court of Tax Appeals to
acquire jurisdiction, an assessment must first be disputed by the
taxpayer and ruled upon by the Commissioner of Internal Revenue
ANNOTATED
to warrant a decision from which a petition for review may be taken

to the Court of Tax Appeals. However, if the Commissioner does
not decide the request for reconsideration but instead goes to court
to collect the taxes or proceeds to collect the s a m e by distraint
or levy, this move on his part might amount to a decision denying
the reconsideration, and may be appealable to the Court of Tax
Appeals. (Ledesma vs. Court of Tax Appeals, 105 Phil. 1325.)
17. Effect of motion for reconsideration. W h e r e an adverse

decision or ruling has been rendered by the C o m m i s s i o n e r of
Internal Revenue with reference to a disputed a s s e s s m e n t (the
taxpayer has not paid the a m o u n t d e m a n d e d ) or a claim for refund
or credit (he has already paid the a m o u n t d e m a n d e d ) , the taxpayer
may appeal the s a m e within thirty (30) d a y s after receipt thereof or
after the expiration of the period fixed by law for action. (Sees. 7[a,
2], 11, R.A. No. 1125, as a m e n d e d . )
(1) A motion for reconsideration of the decision or ruling

suspends the running of the period for perfecting a p p e a l . T h e
period shall r e s u m e to run again t h e day following the receipt
by the taxpayer of the C o m m i s s i o n e r ' s denial of said motion or
request for reconsideration. It must a d v a n c e n e w g r o u n d s not
previously alleged to toll the reglementary period; otherwise,
it would be merely pro forma. ( R o m a n Catholic A r c h b i s h o p of
C e b u vs. Coll., L-16683, J a n . 3 1 , 1962.)
(2) While it is true that the t a x p a y e r should be given the

right to exhaust all administrative remedies before c o m i n g to
the Court (of Tax A p p e a l s ) for the purpose of e x p e d i e n c y and
to avoid u n n e c e s s a r y court e x p e n s e on his part, a n d the C o m -
missioner, on the other h a n d , should be given an opportunity to
correct his mistake, if any, has b e e n c o m m i t t e d in his original
assessment, this right of the taxpayer is not without limit. O n c e
the C o m m i s s i o n e r has m a d e clear to t h e t a x p a y e r that his d e c i -
sion is final, s u b s e q u e n t requests for reconsideration thereof
m a d e pro forma and for dilatory purposes should be ignored
for the purpose of c o m p u t i n g the 30-day period of a p p e a l . (Del
Rosario vs. Court of Tax A p p e a l s , L - 1 7 9 9 1 , Oct. 3 1 , 1962.)
(3) T h e running of the period prescribed cannot be left

entirely to the discretion of the taxpayer. (Ibid.) A taxpayer
cannot delay the collection of taxes by t h e simple expedient
of barely asking for a clarification or reconsideration, very
often unnecessary and u n w a r r a n t e d , without doing anything to
comply with the statutory and reglementary requirements for
. 229 REMEDIES 549
the reconsideration of t h e assessment. (Republic vs. M a r s m a n

Dev. Co., L-18956, April 2 7 , 1972.)
18. Effect of failure to appeal assessment to Court of Tax

Appeals. W h e n a taxpayer fails to appeal to the Court of Tax
A p p e a l s in d u e t i m e :
(1) T h e decision or assessment becomes final and

executory;
(2) T h e t a x p a y e r is thereafter barred, in action for collection

of the tax by t h e g o v e r n m e n t , f r o m alleging in his defense that
t h e a s s e s s m e n t is e x c e s s i v e or illegal or invoking any defense
that will in effect re-open the question of his liability on the
merits, including that of prescription;
(3) T h e a s s e s s m e n t is considered correct and all that is

necessary is for the C o m m i s s i o n e r to enforce the collection of
t h e tax by s u m m a r y r e m e d i e s or by judicial action;
(4) In fact, t h e t a x p a y e r m a y raise only questions of

jurisdiction, collusion b e t w e e n t h e parties, or fraud in the party
offering t h e record with respect to the proceedings. Thus,
in a proceeding for collection of a tax by judicial action, the
taxpayer's d e f e n s e s a r e similar to those of the defendant in a
c a s e for t h e e n f o r c e m e n t of a j u d g m e n t by judicial action under
Section 6, Rule 39 of the Rules of Court (Republic vs. Lim Tian
a n d S o n s , 16 S C R A 5 8 4 , M a r c h 3 0 , 1 9 6 6 ; Republic vs. General
Sales Supply Co., Inc., L-18543, Oct. 2 1 , 1968; Mambulao
L u m b e r C o . vs. Republic, 132 S C R A 1 [1984]; Dayrit vs. Cruz,
165 S C R A 571 [1988].); a n d
(5) T h e a s s e s s m e n t w h i c h has b e c o m e final and executory

cannot be s u p e r s e d e d by a new assessment, m u c h less one
with which is described as "provisional." (see Elegado vs. Court
of A p p e a l s , 173 S C R A 2 8 5 , M a y 12, 1989.)
It has b e e n held, however, that the government's failure
to question the right of the taxpayer to raise the defense
of prescription a m o u n t s to a waiver of the finality of the
assessment. (Republic vs. Kerr and Co., L-21609, Sept. 29,
1966.)
19. Right to contest tax before or after payment. The Tax
Code does not bar the right to contest the legality of the tax after the
taxpayer pays it. Under Section 229, he can pay the tax and claim a
refund therefor. A fortiori, his willingness to pay the tax is no waiver
ANNOTATED
to raise defense against the tax's legality. ( C o m m . vs. Gonzales,

L-19495, Nov. 24, 1966.)
20. An appeal from the decision of the Commissioner of
Internal Revenue in cases involving "disputed assessments" must
be distinguished from cases involving "refunds of internal revenue
taxes, fees or charges." (see Sec. 7, P.D. No. 1125, supra; see Sec.
229.)
In a case w h e r e the taxpayer already protested and refused to
pay the tax assessment, and paid the disputed a s s e s s m e n t s under
the protest before filing his petition for review with the Court of Tax
Appeals, only to forestall the sale of his properties that had been
placed under distraint, the S u p r e m e Court said:
"To hold that the taxpayer has n o w lost the right to appeal
from the ruling on the disputed a s s e s s m e n t but must prosecute
his appeal under Section 306 (now Sec. 229.) of t h e Tax C o d e ,
which requires a taxpayer to file a claim for refund of the taxes
paid as a condition precedent to his right to a p p e a l , w o u l d
in effect require him to go through a useless a n d needless
c e r e m o n y that w o u l d only delay t h e disposition of t h e c a s e , for
the Collector (now C o m m i s s i o n e r ) w o u l d certainly disallow the
claim for refund in t h e s a m e c a s e s as he disallowed t h e protest
against the a s s e s s m e n t . T h e law should not be interpreted as
to result in absurdities." ( R o m a n Catholic A r c h b i s h o p of C e b u
vs. Coll., 4 S C R A 2 7 9 [1962]; see V d a . de S a n Agustin v s .
C o m m . , 364 S C R A 8 0 2 [2001].)
2 1 . Final determination of disputed assessment.

(1) Duty of Commissioner. T h e S u p r e m e Court has laid
d o w n the dictum that the C o m m i s s i o n e r of Internal R e v e n u e
should always indicate to t h e taxpayer in clear a n d unequivocal
language w h a t constitutes his final determination of the disputed
assessment. Specifically, it ruled:
"x x x we d e e m it appropriate to state that the C o m -

missioner of Internal R e v e n u e should a l w a y s indicate to
the taxpayer in clear a n d unequivocal language w h e n -
ever his action on an a s s e s s m e n t q u e s t i o n e d by a
taxpayer constitutes his final determination on the disputed
assessment, as c o n t e m p l a t e d by Sections 7 and 11 of
Republic Act No. 1125, as a m e n d e d . On the basis of this
statement indubitably s h o w i n g that the C o m m i s s i o n e r ' s
c o m m u n i c a t e d action is his final decision on the contested
assessment, the aggrieved taxpayer w o u l d then be able
to take recourse to the tax court at the opportune time.

Without needless difficulty, the taxpayer would be able to
determine w h e n his right to appeal to the tax court accrues.
This rule of c o n d u c t w o u l d also obviate all desire
and opportunity on the part of the taxpayer to continually
delay t h e finality of t h e a s s e s s m e n t a n d , consequently,
the collection of t h e a m o u n t d e m a n d e d as taxes by
repeated requests for recomputation and reconsideration.
On the part of the Commissioner, this would encourage
his office to c o n d u c t a careful and thorough study of every
questioned a s s e s s m e n t a n d render a correct and definite
decision t h e r e o n in t h e first instance. This would also deter
the C o m m i s s i o n e r f r o m unfairly making the taxpayer grope
in t h e dark a n d speculate as to w h i c h action constitutes
t h e decision a p p e a l a b l e to the tax court. Of greater import,
this rule of c o n d u c t w o u l d meet a pressing need for fair
play, regularity, a n d orderliness in administrative action."
(Surigao Electric Co., Inc. vs. Court of Tax Appeals, 57
S C R A 5 2 3 , J u n e 2 8 , 1974; see C o m m . vs. Union Shipping
Corp., 185 S C R A 5 4 7 , M a y 2 1 , 1990.)
(2) Final demand letter for payment of delinquent taxes.

It m a y be c o n s i d e r e d a decision on a disputed or protested
assessment
(a) In Comm. vs. Isabela Cultural Corporation (361
S C R A 71 [2001].), "respondent received an assessment
letter dated February 9, 1990, stating that it had delinquent
taxes d u e ; and it subsequently filed its motion for
reconsideration on March 2 3 , 1 9 9 0 . In support of its request
for reconsideration, it sent to the CIR additional documents
on April 18, 1990. T h e next communication respondent
received w a s already the Final Notice Before Seizure
dated N o v e m b e r 10, 1994. In the light of the above facts,
the Final Notice Before Seizure cannot but be considered
as the Commissioner's decision disposing of the request
for reconsideration filed by respondent, w h o received no
other response to its request. Not only w a s the Notice the
only response received; its content and tenor supported the
theory that it w a s the CIR's final act regarding the request
for reconsideration. T h e very title expressly indicated that it
w a s a final notice prior to seizure of property. The letter itself
clearly stated that respondent w a s being given 'this LAST
O P P O R T U N I T Y ' to pay; otherwise, its properties would be
ANNOTATED
subjected to distraint and levy. How then could it have been

made to believe that its request for reconsideration w a s still
pending determination, despite the actual threat of seizure
of its properties?"
(b) In Comm. vs. Ayala Securities Corporation
(70 S C R A 204 [1976].), the S u p r e m e Court held: "The
letter of February 18, 1963 (Exh. G.), in the view of the
Court, is tantamount to a denial of the reconsideration or
[respondent corporation's] x x x protest o[f] the assessment
m a d e by the petitioner, considering that the said letter
[was] in itself a reiteration of the d e m a n d by the Bureau
of Internal R e v e n u e for the settlement of the a s s e s s m e n t
already m a d e , and for the i m m e d i a t e p a y m e n t of the s u m
of P758,687.04 in spite of t h e v e h e m e n t protest of the
respondent corporation o n April 2 1 , 1 9 6 1 . This certainly i s
a clear indication of t h e firm s t a n d of petitioner against the
reconsideration of the disputed assessment, in v i e w of the
continued refusal of the respondent corporation to execute
the waiver of t h e period of limitation u p o n t h e a s s e s s m e n t
in question. T h i s being so, t h e said letter a m o u n t e d ] to
a decision on a disputed or protested a s s e s s m e n t a n d ,
therefore, the court a quo did not err in taking c o g n i z a n c e
of this case."
(c) Similarly, in Surigao Electric Co., Inc. vs. Court

of Tax Appeals (57 S C R A 523 [1974].) it ruled: "x x x T h e
letter of d e m a n d dated April 2 9 , 1963 unquestionably
constitutes t h e final action t a k e n by t h e C o m m i s s i o n e r on
the petitioner's several requests for reconsideration a n d
recomputation. In this letter t h e C o m m i s s i o n e r not only
in effect d e m a n d e d that t h e petitioner pay t h e a m o u n t of
P11,533.53 but also g a v e w a r n i n g that in the event it failed to
pay, the said C o m m i s s i o n e r w o u l d be constrained to enforce
the collection thereof by m e a n s of t h e remedies provided
by law. T h e tenor of t h e letter, specifically the statement
regarding t h e resort to legal remedies, unmistakably
indicate[d] t h e final nature of the determination m a d e by
the C o m m i s s i o n e r of the petitioner's deficiency franchise
tax liability."
In Isabela, the s e c o n d notice received by private

respondent verily indicated its nature that it w a s final.
Unequivocably, therefore, it w a s t a n t a m o u n t to a rejection
of the request for reconsideration.
(d) Comm. vs. Alque (158 S C R A 9 [1988].) is not in

point here. In that c a s e , the warrant of Distraint and L e v y ,
issued to the taxpayer without any categorical ruling on its
request for reconsideration, w a s not d e e m e d equivalent
to a denial of the request. B e c a u s e such request could
not in fact be f o u n d in its records, the BIR cannot be
p r e s u m e d to have taken it into consideration. T h e request
w a s considered only w h e n the taxpayer g a v e a copy of
it, duly s t a m p - r e c e i v e d by the BIR. Hence, the Warrant
w a s d e e m e d p r e m a t u r e . In Isabela, the C o m m . of Internal
R e v e n u e , the petitioner, d o e s not deny receipt of private
respondent's protest letter. Having admitted as a fact,
private respondent's request for reconsideration, petitioner
must h a v e p a s s e d u p o n it prior to the issuance of the Final
Notice Before Seizure.
2 2 . Finality of findings of fact of the Court of Tax Appeals. It

is doctrinal that t h e findings of fact of t h e Court of Tax Appeals,
w h e n supported by substantial e v i d e n c e , will not be disturbed
on a p p e a l , unless it is s h o w n that it c o m m i t t e d gross error in the
appreciation of facts "Substantial e v i d e n c e " has been construed to
m e a n not necessarily preponderant proof as is required in ordinary
civil action, but such kind of "relevant e v i d e n c e as a reasonable
m a n might accept as a d e q u a t e in support of a conclusion." ( C o m m .
of Internal R e v e n u e v s . Manira Machinery and Supply Co., 135
S C R A 8 [1985]; C o m m . of Internal R e v e n u e vs. Arnaldus Carpentry
S h o p , Inc., 159 S C R A 199 [1988].)
T h e Court of Tax A p p e a l s is a highly specialized body specifically
created for the purpose of reviewing tax cases. Consequently, as
a matter of principle, the S u p r e m e Court or the Court of Appeals
"will not set aside the conclusion reached x x x by the Court of
Tax A p p e a l s which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of authority on its part, x x
x." ( C o m m . of Internal Revenue vs. Court of Appeals, 271 S C R A
605 [1997]; Phil. Refining Co. vs. Court of Appeals, 256 SCRA
667 [1996]; C o m m . vs. Manila Electric Company, 535 SCRA 399
[2007].)
23. Concept of exhaustion of administrative remedies. In a

case, the petitioner corporation had always implicitly admitted at
the administrative level that the profit it derived from the sale of its
corporate land w a s a taxable gain which w a s precisely the reason
ANNOTATED
why for tax purposes it deducted therefrom the questioned bonus

to its corporate officers as a supposed selling expense although
no service w a s actually rendered by said officers to effectuate the
sale which could be the basis of a grant to them of a bonus out
of the gain realized. The BIR, therefore, had no occasion to pass
upon the issue of tax exemption (that the profit w a s tax-exempt
income considering that petitioner's Fish Nets Division enjoyed tax
exemption as a new and necessary industry under R.A. No. 901)
which w a s raised for the first time in the Court of Tax Appeals after
a decision had been rendered disallowing the deduction.
A taxpayer cannot raise the issue that it is e x e m p t from tax for
the first time in the Court of Tax A p p e a l s b a s e d on the concept of
exhaustion of administrative remedies.
"To allow a litigant to a s s u m e a different posture w h e n

he c o m e s before the court and challenge the position he had
accepted at the administrative level w o u l d be to sanction a
procedure w h e r e b y the court w h i c h is s u p p o s e d to review
administrative determinations w o u l d not review, but
determine and decide for t h e first time, a question not raised
at the administrative f o r u m . This c a n n o t be permitted, for the
s a m e reason that underlies the requirement of prior exhaustion
of administrative remedies to give administrative authorities the
prior opportunity to decide controversies within its c o m p e t e n c e ,
and in m u c h the s a m e w a y that, on t h e judicial level, issues
not raised in t h e lower court c a n n o t be raised for the first time
on appeal." (Aguinaldo Industries C o r p . v s . C o m m i s s i o n e r of
Internal R e v e n u e , 112 S C R A 136 [1982]; s e e Atlas Consolidated
Mining and Dev. C o r p . vs. C o m m i s s i o n e r of Internal R e v e n u e ,
102 S C R A 2 4 6 [1981].)
24. Taxpayer's right to prove mistake in his records. T h e

right to prove mistakes in a t a x p a y e r ' s b o o k s a n d records cannot
be a one-sided affair.
(1) A n y a s s e s s m e n t of a deficiency tax based on t h e

"correctness of a taxpayer's books a n d r e c o r d s " w o u l d be
unjust if the taxpayer cannot be permitted to prove errors in the
s a m e books and records to s h o w a lesser tax.
(2) Moreover, Sections 204 a n d 2 2 9 w h i c h authorize
refunds or credits of internal revenue taxes erroneously or
illegally paid, w o u l d be but an e m p t y gesture on the part of
the Government, if taxpayers c a n n o t be permitted to prove
mistakes in their records to s h o w the erroneous p a y m e n t of
such taxes. (Reyes vs. Coll., 104 Phil. 1061.)
25. In a c a s e , the auditors of the C o m m i s s i o n on Audit

r e c o m m e n d e d to the Acting C h a i r m a n that franchise tax deficiency
of the petitioner corporation be brought to the attention of the
Bureau of Internal Revenue for immediate assessment and/or
collection. T h e S u p r e m e Court held that the t w o subsequent letters
of the acting C h a i r m a n , the first informing the petitioner of its liability
and the s e c o n d , reiterating "our o p i n i o n " on the rate of the franchise
tax to be applied (1 1/2%, not 1/2%) are not a "final a w a r d , order,
or decision" a p p e a l a b l e to the S u p r e m e Court for review under the
Rules of Court, t h e s a m e being a m e r e "opinion." Moreover, the
matter falls under t h e jurisdiction of the Bureau of Internal Revenue
w h o s e decision m a y be a p p e a l e d to t h e Court of Appeals. (Phil.
Telegraph a n d Telephone C o r p . v s . C o m m i s s i o n on Audit, 146
S C R A 190 [1986].)
S E C . 2 3 0 . Forfeiture of Cash Refund and of Tax Credit. -

( A ) Forfeiture of Refund. A refund check or warrant issued in
accordance with the pertinent provisions of this Code, which shall
remain unclaimed or uncashed within five (5) years from the date
the said warrant or check was mailed or delivered, shall be forfeited
in favor of the Government and the amount thereof shall revert to
the general fund.
(B) Forfeiture of Tax Credit. A tax credit certificate issued in
accordance with the pertinent provisions of this Code, which shall
remain unutilized after five (5) years from the date of issue, shall,
unless revalidated, be considered invalid, and shall not be allowed
as payment for internal revenue tax liabilities of the taxpayer, and
the amount covered by the certificate shall revert to the general
fund, (n)
(C) Transitory Provision. For purposes of the preceding
Subsection, a tax credit certificate issued by the Commissioner or
his duly authorized representative prior to January 1, 1 9 9 8 , which
remains unutilized or has a creditable balance as of said date, shall
be presented for revalidation with the Commissioner or his duly
authorized representative on or before June 3 0 , 1998. (n)
ANNOTATION
1. Subsection (A) is taken from Section 230, now Section

229, while Subsections (B) and (C) are new provisions added by
R.A. No. 8424.
ANNOTATED
2. Requisites for a claim for refund. They are the following:

(1) The claim which must be in writing w a s filed within the
two (2) years period as prescribed under Sections 204(C) and
229;
(2) The income upon which the taxes w a s withheld w e r e
included in the return of the recipient; and
(3) T h e fact of withholding is established by a copy of
a statement. (BIR Form 1743.1) duly issued by the payor
(withholding agent to be payment showing the a m o u n t paid and
the amount of tax withheld therefrom. ( C o m m . v s . P E R F Realty
Corporation, 557 S C R A 165 [2008]; see Sec. 10, Rev. Regs.
No. 6-85.)
3. For rules on the issuance of Tax Credit Certificate and t h e
conditions for their use, revalidation, a n d transfer, see A p p e n d i x
"W."
SEC. 231. Action to Contest Forfeiture of Chattel. - In

case of the seizure of personal property under claim of forfeiture,
the owner desiring to contest the validity of the forfeiture may, at
any time before sale or destruction of the property, bring an action,
against the person seizing the property or having possession thereof
to recover the same, and upon giving proper bond, may enjoin the
sale; or after the sale and within six (6) months, he may bring an
action to recover the net proceeds realized at the sale.
ANNOTATION
1. T h e action referred to is an ordinary civil action for recovery

of personal property (see Rule 6 0 , Rules of Court.) or the net
proceeds of its sale w h i c h must be brought in t h e ordinary courts.
2. T h e remedy granted to the t a x p a y e r under Section 231
applies to chattels forfeited under Sections 172 a n d 2 0 7 of the Tax
Code.
- oOo -
TITLE IX
COMPLIANCE REQUIREMENTS
CHAPTER I
KEEPING OF BOOKS OF ACCOUNTS
AND RECORDS
SEC. 232. Keeping of Books of Accounts. -

(A) Corporations, Companies, Partnerships, or Persons
Required to Keep Books of Accounts. All corporations, companies,
partnerships or persons required by law to pay internal revenue taxes
shall keep a journal and a ledger, or their equivalents: Provided,
however, That those whose gross quarterly sales, earnings, receipts
or output do not exceed Fifty thousand pesos (P50,000) shall keep
and use a simplified set of bookkeeping records duly authorized by
the Secretary of Finance wherein all transactions and results of
operations are shown and from which all taxes due the Government
may readily and accurately be ascertained and determined any
time of the year: Provided, further, That corporations, companies,
partnerships, or persons whose gross quarterly sales, earnings,
receipts or output exceed One hundred fifty thousand pesos
(P150,000), shall have their books of accounts audited and
examined yearly by independent Certified Public Accountants and
their income tax returns accompanied with a duly accomplished
Account Information Form (AIF) which shall contain, among others,
information lifted from certified balance sheets, profit and loss
statements, schedules listing income-producing properties and the
corresponding income therefrom and other relevant statements, (a)
(B) Independent Certified Public Accountant Defined. The
term "Independent Certified Public Accountant" as used in the
preceding paragraph, means an accountant who possesses the
independence as defined in the rules and regulations of the Board of
Accountancy promulgated pursuant to Presidential Decree No. 692,
otherwise known as the Revised Accountancy Law. (a)
557
ANNOTATED
ANNOTATION
1. Definition of terms. As used in Revenue Regulations No.

V - 1 , as a m e n d e d , otherwise known as "Bookkeeping Regulations,"
the following words and phrases m e a n as follows:
(1) Persons include natural persons and partnerships,
associations, companies or corporations, no matter how
created or organized;
(2) Books of accounts include the journal and the ledger
and their subsidiaries, or their equivalents;
(3) Journal is a book of original entry in which the
happenings or transactions affecting the business of a taxpayer
are recorded consecutively day by day as they occur;
(4) Ledger is a book of final entry to w h i c h are posted the

classified accounts or items of all transactions entered in the
journal on its equivalents, so as to s h o w the assets, liabilities,
1
capital and the operating a c c o u n t s . This will be t h e basis for
the preparation of the balance sheet a n d t h e profit a n d loss
statements covering the operation of the business; a n d
(5) Simplified set of bookkeeping records consists of:

(a) t h e record of daily sales a n d c a s h receipts;
(b) the record of daily purchases, e x p e n s e s a n d c a s h
disbursements;
(c) the record of t h e s u m m a r y of transactions; and
(d) the yearly s t a t e m e n t s of net w o r t h a n d operations,
which m a y be in c o m b i n e d f o r m or in s e p a r a t e booklets.
Said records should be specially d e s i g n e d for e a c h class,
or kind of trade, or business a n d prepared by a certified public
accountant, should c o n f o r m substantially with t h e f o r m illustrated
in Revenue Regulations N o . V-13, should be regularly b o u n d , a n d
may be printed, m i m e o g r a p h e d or typewritten. (Sec. 2, Rev. Regs.
No. V-1.)
'A general ledger is a record of a business entity's accounts which make up

its financial statements. Information contained in a general ledger is gathered from
source documents such as account vouchers, purchase orders and sales invoices. In
case of variance between the source document and the general ledger, the former is
preferred. ( R E P C O Philippines Corp. vs. Comm. of Internal Revenue, 608 S C R A 207
[2009].)
Sec. 232 COMPLIANCE REQUIREMENTS 559
Keeping of Books of Accounts and Records
2. Journal. It consists of the following:

(1) Sales journal. This is a book w h e r e b y sales on
account are recorded w h i c h are supported by sales invoices
and which are also the d o c u m e n t s that will serve as the basis
of recording the transactions in t h e books of accounts. Every
entry in the sales journal represents a debit to a customer's
account and a credit to sales to be posted in the general ledger;
(2) Purchase journal. This is a book used to record
exclusively all transactions involving the purchase or acquisition
of m e r c h a n d i s e on account. T h e business d o c u m e n t that serves
as e v i d e n c e of a p u r c h a s e transaction is the purchase invoice.
An entry to record c h a r g e p u r c h a s e s is a debit to Purchases
and a credit to A c c o u n t s Payable to be posted in the general
ledger; a n d
(3) Cash book. This is a book w h e r e b y all transactions

involving c a s h s u c h as c a s h receipts or cash disbursements
are r e c o r d e d . ( C h a p . IV-A, R A M O No. 1-2000.)
3. Taxpayers required to keep books and records. As a
rule, all corporations, c o m p a n i e s , partnerships or persons required
by law to pay internal revenue taxes are also required to keep books
of accounts a n d records (Sec. 232[A].) in a c c o r d a n c e with standard
accounting s y s t e m . T h e said b o o k s of accounts shall consist of a
journal and a ledger, or their equivalents, and shall contain alls
information necessary for the accurate determination of the internal
revenue taxes d u e on their business. (Sec. 3, Rev. Regs. No. V-1.)
(1) T h o s e e x e m p t e d by the C o m m i s s i o n e r from the

requirement to issue sales invoices or receipts (Sec. 237, par.
2.) are, nevertheless, required to keep books of accounts, if
they are, in proper c a s e s , subject to income tax.
(2) An o w n e r of a store w h o maintains a branch establish-
ment need not keep two sets of books of accounts, if the branch
store merely buys g o o d s or merchandise for the principal store
and no sale is effected in the former, provided that memoranda
of transaction therein are kept and duly taken up in the books
of accounts of the principal store; otherwise, the branch
establishment should be provided with separate books of
accounts, (see BIR Ruling, Sept. 12, 1955.)
(3) T h e fact that a taxpayer is exempt from the fixed and
sales tax (now VAT) does not relieve him from the duty of
keeping books of accounts, (see BIR Ruling No. 266, s. 1960.)
ANNOTATED
(4) A taxpayer w h o s e only source of income is his salary

need not keep and use any book of accounts. (BIR Ruling, Dec.
2, 1956.)
Marginal income earners (individuals not receiving c o m p e n -
sation as an employee w h o are self-employed and deriving gross
sales/receipts not exceeding P100,000 during any 12-month
period) are exempt from the requirements of maintenance of books
of accounts. (Sec. 4, Rev. Regs. No. 10-2000.) Non-stock, n o n -
profit educational institutions are not e x e m p t f r o m the requirement
of keeping books of accounts and payment of the annual registra-
tion fee. (Sec. 236 [B].) pursuant to Rev. M e m o . Cir. N o . 7 6 - 2 0 0 3 .
(BIR Ruling No. DA-682-07, Dec. 2 7 , 2007.)
4. T h e criterion in determining w h a t books of accounts a

taxpayer should keep is the a m o u n t of his gross quarterly sales
(increased by R.A. No. 8 4 2 4 f r o m P5,000/P25,000 to P50.000/
P150,000), receipts, earnings or output, and not t h o s e derived
during a given year.
(1) If his sales, receipts, earnings, or output do not e x c e e d
P50.000.00, he m a y use only t h e simplified set of b o o k k e e p i n g
records but unless he c h o o s e s the use of t h e latter books, he
must keep a journal a n d a ledger, or their equivalents. T h e use
of a simplified set of b o o k k e e p i n g records is not mandatory.
T h e taxpayer may, at his option, use instead a journal a n d a
ledger, or their equivalents.
(2) If the taxpayer realizes m o r e t h a n P 5 0 , 0 0 0 . 0 0 during

any quarter of the year, he is duty b o u n d to use t h e j o u r n a l and
ledger, or their equivalents, e v e n if his total sales for t h e year
do not e x c e e d P 2 0 0 . 0 0 0 . 0 0 .
5. Bookkeeping systems. B o o k k e e p i n g m a y be classified

into two (2) systems, namely:
(1) Single Entry System. This s y s t e m of b o o k k e e p i n g is
basically a type of "net w o r t h " m e t h o d of arriving at net i n c o m e .
It records only the debit or credit of e a c h transaction, or an
account with the debtor or creditor a n d a simple record of c a s h
receipts and disbursements.
(a) W h e n e v e r a s y s t e m of record keeping d o e s not

include equal debit and credit to asset, liability, proprietor-
ship, income a n d e x p e n s e accounts, it is referred to as a
"single entry s y s t e m . " T h e single entry is often u s e d by
comparatively simple ventures s u c h as small retail or c o m -
mission merchants, professional firms, estates and trusts.

In m a n y c a s e s , the only record of income and deductions
consists of entries on the stubs of their checkbooks. S o m e
taxpayers maintain an income tax folder in which they
place d o c u m e n t s to support their income tax deductions.
(b) A single entry s y s t e m m a y be merely a chrono-
logical record of transactions posted in a notebook or
j o u r n a l . S o m e t i m e s , t h e records consist of a complete set
of journals (cash, sales, p u r c h a s e s and general journal)
a n d general ledger providing important accounts. (Chap.
Ill, R A M O No. 1-2000.)
(2) Double entry system. Under this system of book-

k e e p i n g , accounting recognizes the two-fold effect of every
recorded event, t h e debit a n d t h e credit or the object of the
e v e n t a n d t h e equitable interest in that object.
(a) Every recorded event affecting o n e side must
necessarily affect the other side. This can be presented in
an e q u a t i o n :
A s s e t s = Liabilities + Capital
This can be a n a l y z e d into its c o m p o n e n t elements
w h i c h s h o w that there are two distinct parties that have
right in the assets of t h e business, the creditors and the
o w n e r s . T h e rights of the creditors are the claims of such
creditors on t h e assets of the business which are referred
to as liabilities a n d the rights of the owners on the business
are referred to as capital.
(b) In this m e t h o d , any net increase and net decrease
in asset has a corresponding increase and decrease in
either liabilities or capital. (Chap. Ill-B, Ibid.)
T h e following formulae for reconstruction of income and
e x p e n s e s m a y be found useful:
1. Computation of Sales
Cash Sales (cash book)
A d d : Sales on account:
Collections from customers (cash book) xx
Less: Accounts receivable

(beginning balance) xx
Collections from sales for the period xx

562
ANNOTATED
A d d : Accounts receivable
(ending balance) xx xx
Total Sales xx
2. Computation of Purchases
Cash purchases (cash book) xx
Add: Purchases on account:
Payments to creditors (cash book) xx
Less: A c c o u n t s payable (beginning
balance) xx
Payments for purchases
for the period xx
A d d : A c c o u n t s payable (ending
balance) xx xx
Total Purchases L
3. Computation of Expenses
C a s h payments for allowable
e x p e n s e s (cash book) xx
A d d : Prepaid e x p e n s e s (beginning
balance) xx
A c c r u e d e x p e n s e s (ending
balance) xx xx
Total xx
Less: Prepaid e x p e n s e s (ending
balance) xx
A c c r u e d e x p e n s e s (beginning
balance) xx xx
Total E x p e n s e s xx
6. Financial statements. T h e y a r e reports signifying t h e

end result of the financial accounting process. T h e s e reports are as
follows:
(1) Income Statement. It is a report that s u m m a r i z e s

the business activities for a given period and reports t h e net
income or loss resulting f r o m operations a n d f r o m certain other
activities. It is variously called t h e earnings statement, the
statement of profit and loss, a n d the statement of operations.
It normally consists of the following sections or items:

(a) Sales This item reports the total sales to
c u s t o m e r s a n d fees received from clients for the period. All
sales transactions should be recorded and invoiced.
(b) Cost of goods sold It a refers to cost of goods
relating to sales w h e n m e r c h a n d i s e is acquired from
outsiders. This is the s u m of the beginning inventory,
p u r c h a s e s a n d all other buying, freight and storage costs
relating to the acquisition of g o o d s and subtracting the
ending inventory thereof. W h e n the g o o d s are manufactured
by t h e seller, the cost of g o o d s manufactured must first be
calculated. This is the s u m of the cost of goods in process
at t h e beginning, the cost of materials put into production,
the cost of labor applied and factory o v e r h e a d incurred.
T h e total cost as thus obtained represents the cost
of both c o m p l e t e d work and u n c o m p l e t e d work still in
production. T h e e n d i n g g o o d s in process inventory, then,
must be subtracted f r o m this total in arriving at the cost of
t h e product c o m p l e t e d and m a d e available for sale.
(c) Operating expenses They are expenses

incurred or utilized in the course of business or pursuant to
t h e practice of profession.
T h e y are generally reported in two categories:
1) Selling e x p e n s e s ; and
2) General and administrative expenses
In c a s e of self-employed individual taxpayers, profes-
sionals, non-resident aliens, estates and trusts engaged in
trade or business, general professional partnerships and
their individual partners, allowable expenses are subject
to the provisions of Section 34 of the Tax Code. However,
in lieu of the deductions allowed under the said section,
an individual subject to tax under Section 24, other than
non-resident aliens, may elect a standard deduction in an
amount not exceeding 1 0 % of his gross income.
(d) Other Income and Expenses They include items
identified with financial m a n a g e m e n t and miscellaneous
recurring activities. Other income include interest and
dividend income and income from rentals, royalties and
service fees. Other expenses include interest expenses
ANNOTATED
and expenses related to the miscellaneous income items

reported.
(2) Balance Sheet It is a report that shows the financial
position of the business unit as of a specified m o m e n t of time.
It is a status report rather than a flow report. It is variously
called statement of financial position, statement of condition,
statement of resources and liabilities and the statement of net
worth.
The balance sheet is the fundamental accounting state-
ment in the sense that every accounting transaction can be
analyzed in terms of its effect on the balance sheet. In order to
understand the information a balance sheet c o n v e y s and how
economic events affect the balance sheet, it is essential that
the reader be absolutely clear as to the m e a n i n g of its t w o sides
in the equation:
Assets = Liabilities + O w n e r ' s Equity
(a) Assets T h e y refer to the e c o n o m i c benefits
obtained or controlled by a particular entity as a result of
past transactions or events. T h e y include t h o s e costs that
have not been m a t c h e d with revenues in the past a n d are
expected to afford e c o n o m i c utility in the production of
revenue in the future. T h e y include both monetary assets,
such as c a s h , marketable securities and receivables
and non-monetary assets, those costs recognized as
recoverable; and h e n c e , properly assignable to revenues
of future period, such as inventories, prepaid insurance,
e q u i p m e n t and patents.
(b) Liabilities T h e y m e a s u r e the claims of creditors

against entity resources. T h e m e t h o d for settlement of
liabilities varies. Liabilities m a y call for settlement by c a s h
payment or settlement through g o o d s to be delivered or
services to be p e r f o r m e d .
(c) Owner's Equity It is the residual interest in t h e
assets of an entity that remains after deducting its liabilities.
It m e a s u r e s the interest of t h e o w n e r s h i p group in the
total resources of the enterprise. S u c h equities originally
arise as the result of contributions by the o w n e r s a n d the
equities c h a n g e with the c h a n g e in net assets resulting
from operations. (Chap. V I , R A M O No. 1-2000.)
Rev. M e m o . Cir. No. 9-2005 (Mar. 19, 2 0 0 5 ) clarifies

the term "financial s t a t e m e n t s " as defined in Rev. Regs. No.
4 - 2 0 0 5 . "Financial S t a t e m e n t s " (or FS) refer to Balance Sheet,

Statement of Income, Statement of C h a n g e s in Equity, and the
Statement of C a s h Flows, together with the Notes to Financial
Statements duly prepared a n d certified by an independent
external auditor duly accredited by the BIR pursuant to
Rev. R e g s . No. 15-99 a n d by t h e Securities and Exchange
C o m m i s s i o n (SEC).
Note: Re: U s e of foreign currency in financial statements,
s e e A n n o t a t i o n No. 8 under Section 5 1 , Vol. 1.
7. Audit by independent CPA. Taxpayers w h o s e gross
quarterly sales, earnings, receipts, or output e x c e e d P150,000
shall have their b o o k s of a c c o u n t s audited a n d e x a m i n e d yearly by
independent Certified Public A c c o u n t a n t s (CPA) and their income
tax returns, a c c o m p a n i e d with a duly accomplished Account
Information F o r m (AIF). (Sec. 232[A].) Financial statements audited
by i n d e p e n d e n t external auditors constitute the normal method of
proof of the profit a n d loss p e r f o r m a n c e of a company. In a case, a
corporation c l a i m e d that it w a s not required to file audited financial
statements under Section 2 3 2 but it failed to establish its exemption
through a n y e v i d e n c e s h o w i n g that its quarterly gross revenue did
not e x c e e d P 2 5 . 0 0 0 (now P150,000). It w a s ruled that its claim
that it did not h a v e its financial statements certified by a CPA w a s
without basis in fact and in law and did not e x c u s e it f r o m the usual
requirement. (Bogo-Medellin S u g a r C a n e Planters Assoc., Inc. vs.
National Labor Relations C o m m i s s i o n , 2 9 0 S C R A 108 [1998].)
8. Use of Account Information Form (AIF). In line with the

computerized tax s y s t e m , Rev. Regs. No. 8-97 prescribes the use
of t h e A c c o u n t Information F o r m (AIF) to a c c o m p a n y the income
tax returns required to be filed with t h e Bureau of Internal Revenue.
(1) Forms. T h e y are:
(a) 1701AIF-1 for Self-Employed and Pro-

fessionals engaged in the
practice of profession
(b) 1701AIF-2 for Estates and Trusts
(c) 1702AIF-1 for Corporations and Partner-
ships
(d) 1701AIF-2 for General Professional Part-
nerships
(e) 1702AIF-3 for Exempt Organizations
ANNOTATED
(2) Contents and attachments. T h e Account Information

Form (AIF) is a new form designed in line with the BIR Integrated
Tax Systems (ITS) which shall contain the taxpayer's business
profile, information and other relevant data, to be accomplished
and attached to the income tax return to be filed, together with
the duly certified balance sheet and profit and loss statements,
and schedules of income producing properties and the
corresponding income therefrom, in the case of estates and
trusts, in accordance with Section 232.
(3) How and where to file. T h e duly accomplished AIF,
together with the audited and certified financial statements,
shall be attached to the income tax return to be filed with the
authorized collecting agents in pilot computerized R e v e n u e
District Offices w h e r e the Integrated Tax S y s t e m (ITS) of the
BIR is already in operation. In other non-pilot R e v e n u e District
Offices w h e r e the ITS is not yet in operation, t h e regular audited
and certified financial statements shall be submitted together
with the income tax return filed.
(4) Penalty. T h e duly a c c o m p l i s h e d A I F shall be signed

by the taxpayer c o n c e r n e d , the heir or administrator of t h e
estate, or trustee in the c a s e of trusts, under the penalties
of perjury, and failure to attach the s a m e in the return filed
shall constitute a violation of t h e provision of t h e Tax C o d e ,
punishable under Section 2 7 4 of t h e s a m e C o d e . P a y m e n t
of the penalty provided shall not relieve t h e t a x p a y e r f r o m
submitting the required duly a c c o m p l i s h e d AIF.
Note: For purposes of simplifying c o m p l i a n c e with Section

232 which requires the filing of income tax returns (ITRs)
a c c o m p a n i e d by duly a c c o m p l i s h e d A c c o u n t Information
Form (AIF), corporations, c o m p a n i e s or persons w h o s e gross
quarterly sales, earnings, receipts or output e x c e e d P 1 5 0 , 0 0 0
may file their annual income tax returns a c c o m p a n i e d by
balance sheets, profit and loss statements, s c h e d u l e s listing
income-producing properties and the corresponding i n c o m e
therefrom, and other relevant statements duly certified by an
independent CPA, w h i c h shall be considered as sufficient
compliance with the filing and a c c o m p l i s h m e n t of the A I F as
required by Section 2 3 2 . ( R M C No. 6-2001.)
9. Requirement of AIF only for tax purposes. T h e require-
ment in Section 232 that the income tax returns be a c c o m p a n i e d
with duly accomplished A c c o u n t Information F o r m (AIF) w h i c h shall
contain, a m o n g others, information lifted from certified balance
sheets, etc., of corporations, etc., w h o s e quarterly gross earnings,

etc., e x c e e d P150,000.00 d o e s not apply to statements of income
and e x p e n s e s submitted to the court by the administrator in a spe-
cial proceeding for the settlement of the estate of a decedent. An
examination of the said legal provision s h o w s that the requirements
therein are only for tax purposes. T h e law accords protection to
any interested party through the b o n d posted by the administrator
conditioned u p o n his rendering true and just accounts of his a d m i n -
istration, (see Gonzales-Precilla v s . Rosario, et al., L-29306, May
2 9 , 1970.)
10. Audit by Commission on Audit. An examination and

audit of the books of a c c o u n t s of g o v e r n m e n t - o w n e d or -controlled
corporations including their subsidiaries by the C o m m i s s i o n on
Audit ( C O A ) auditors m a y be considered substantial compliance
with the requirements of Section 2 3 2 . T h e purpose of the periodic
c h e c k i n g of the b o o k s of a c c o u n t s of g o v e r n m e n t entities by the
C O A is to see to it that t h e expenditures of public funds and the
uses of property are not wasteful or irregular; hence, another audit
and e x a m i n a t i o n of t h e s a m e by independent CPA (private auditors)
as required under Section 2 3 2 is unnecessary, if not superfluous.
However, the examination of their tax returns for purposes of
determining their tax liabilities belongs to the Bureau of Internal
R e v e n u e . (BIR Ruling N o . 0 6 8 , M a y 2 7 , 1986.)
11. Computer-based accounting system. "All corporations,
c o m p a n i e s , partnerships, or persons required by law to pay internal
revenue taxes shall keep a journal and a ledger, or their equivalents
x x x."
(1) T h e r e is no distinction b e t w e e n the audit concepts
applicable to the c o m p u t e r - b a s e d accounting system or
the Electronic Data Processing S y s t e m s (EDPS) and those
applicable to manual systems which involve the use of the
traditional books, such as the journal and the ledger. "When
computers are introduced, generally accepted auditing
standards and their interpretations," legal liability and the basic
concepts of gathering evidence remain unchanged, (par. 1,
Rev. M e m o . Cir. No. 38-86.)
Such being the case, the traditional books of accounts could
be eliminated, provided a readable printout of the information/
accounting data are available or verifiable. (BIR Ruling No.
0 1 1 , Jan. 2 8 , 1988.)
(2) W h e r e a computer-based accounting system is adopted
by a company pursuant to a permit issued by the BIR (see Sec.
ANNOTATED
43.), the use of manual books parallel to the reports generated

by the computer is equivalent to the use of subsidiary books, in
which case, they form part of its accounting system and subject
to the same rules and regulations as keeping, translation,
production, and inspection as are applicable to the journal and
ledger (computer printouts). Hence, said manual books shall
b e preserved a s prescribed b y S e c t i o n 2 3 5 . ( B I R R u l i n g
No. 168, Sept. 3, 1990.)
(3) Under the system, information are fed into t h e computer
thus providing uniformity in the processing of transactions.
T h e types of this system are the following:
(a) Simple system. Here, transactions are easily
traced in a small computer s y s t e m w h e r e the primary
function performed is the sorting a n d manipulation of input
data and the printing of output reports. T h e r e is no loss of
audit trail;
(b) Complex system. This is characterized by t h e
batch processing m o d e , t h e existence of o n e Central
Processing Unit ( C P U ) and t h e extensive use of master files
on magnetic media in p r o c e s s i n g . In this t y p e of s y s t e m ,
processing is usually confined to calculations, extensions,
summarizations a n d t h e like. T h e r e is s o m e loss of audit
trail but the s a m e is not significant; a n d
(c) Sophisticated system. In this type of s y s t e m ,

transactions are initiated within t h e computer. T h e r e is
extensive data processing a n d consequently, a substantial
loss of audit trail. Most of the output is in m a c h i n e - r e a d a b l e
form.
Heavy reliance must be placed on internal control in the

audit of said s y s t e m . Since m a n y of t h e s e tests require IS skills
beyond the k n o w l e d g e of m o s t auditors, IS specialists are
usually called u p o n by t h e auditors. ( C h a p . IV-D, R A M O No.
1-2000.)
Note: Rev. M e m o . Order No. 2 1 - 2 0 0 0 provides t h e g u i d e -

lines and procedures on t h e processing a n d approval of tax-
payer's application for permit to adopt c o m p u t e r i z e d account-
ing system and its c o m p o n e n t s in a c c o r d a n c e with operation,
legal, and other technical requirements. Rev. M e m o . Cir. No.
19-2009 prescribes t h e procedures to be followed for the
reprinting, issuance a n d cancellation of the "Permit to U s e "
Sales m a c h i n e s , including the post-evaluation of Cash R e g -

ister Machines (CRM)/Point of Sale (POS)/Special Purpose
M a c h i n e s ( S P M ) a n d other similar sales machines (see Rev.
Regs. No. 11-2004 and Rev. M e m o . Order No. 12-2005.)
12. An independent certified public accountant is one w h o
is in fact independent. In other w o r d s , an accountant will not be
considered independent with respect to any person in w h o s e
business he has any financial interest, direct or indirect, or in which
he is, or w a s , during t h e period of report, connected as promoter,
underwriter, voting trustee, director, officer or e m p l o y e e .
(1) A certified public accountant w h o s e work is subject to
the control and supervision of the taxpayer, or w h o is employed
to k e e p t h e books of a c c o u n t s or to supervise the keeping of
t h e said a c c o u n t s c a n n o t audit the latter's books of accounts.
He must, therefore, be e m p l o y e d exclusively to audit the books
of a c c o u n t s of the t a x p a y e r a n d not for any other purpose, nor
bear to him any business or professional relationship which
m a y in any w a y affect the i n d e p e n d e n c e of his professional
actuations.
(2) A firm of certified public accountants, one of the

m e m b e r s of w h i c h is actually keeping or supervising the
keeping of the b o o k s of a c c o u n t s of a certain taxpayer cannot
audit or e x a m i n e the said books of the latter. (Sec. 2, Rev. Regs.
No. V - 1 , as a m e n d e d by Rev. Regs. No. V-20; see also Sec.
232[B].) R.A. No. 5 1 6 6 has b e e n repealed by Pres. Decree No.
6 9 2 , t h e Revised A c c o u n t a n c y Law."
13. Additional requirements for certification by independent

CPAs for internal revenue tax purposes. Revenue Regulations
No. 3-90 provides:
"These regulations are being issued to ensure proper and
full compliance with the additional requirements for certification
which shall be utilized as an effective means in plugging
loopholes that cause tax revenue losses. The independent
CPA is responsible for performing a verification of the extent
of compliance of the taxpayer-client on the requirements
prescribed in Section 2 in accordance with professional
standards. On the other h a n d , the taxpayer-client is primarily
responsible for compliance with these requirements.
S E C . 2. Additional requirements. In certifying as to the
compliance of taxpayer-client with these requirements, the
independent CPAs shall review the tax returns and perform the
ANNOTATED
necessary procedures to determine the correct tax obligation of

the taxpayer-client. In this respect, the independent CPAs shall
certify to the following:
i) That, substantially, the withholding taxes due on
income payments, whether final or creditable, except on
salaries and w a g e s , have been withheld, reconciled with
the financial statements attached to the return, and remitted
to the Bureau of Internal Revenue;
ii) That inventories of VAT-registered taxpayers at
the end of the taxable year are recorded in the books of
accounts net of input taxes;
iii) That input taxes for value-added tax (VAT) pur-
poses are duly covered by VAT invoices f r o m VAT-regis-
tered suppliers; and
iv) That items of income, deductions a n d exemptions
reflected in the income tax returns are substantially
in accordance with existing revenue laws, rules and
regulations.
In the event that an independent CPA discovers any
substantial deviation by the taxpayer-client f r o m t h e applicable
rules and regulations pertaining to t h e a b o v e items, he shall
qualify his opinion or m a k e a general statement to this effect.
T h e foregoing information shall be contained in o n e

certification to be called Certification of Taxpayer C o m p l i a n c e
(CTC) separate f r o m the standard certification being issued by
independent CPAs.
In addition to the a b o v e , the information prescribed in
Section 8-A(2) of the B o o k k e e p i n g Regulations, as a m e n d e d ,
shall henceforth be included in the C T C . This certification shall
be addressed to the C o m m i s s i o n e r of Internal R e v e n u e .
S E C . 3. Where and when to file certification. T h e

independent CPA shall file the certification together with the
taxpayer's return with the BIR Office w h e r e the corresponding
tax return of the taxpayer-client will be filed.
S E C . 4. Priority in investigation. Subject to certain

exceptions as determined by the C o m m i s s i o n e r of Internal
Revenue, taxpayers' returns a c c o m p a n i e d by an independent
CPA's certification as required under these regulations shall be
given last priority in the audit of tax returns.
S E C . 5. Penal provision. A n y independent Certified Public

Accountant w h o issues an unqualified Certification of Taxpayer
C o m p l i a n c e ( C T C ) with the full k n o w l e d g e of the fact that the
taxpayer-client w i t h h e l d , omitted or presented misleading
information, shall be held liable to penalties prescribed under
2
Sections 2 3 2 ( C ) , 2 5 6 a n d 2 7 4 of t h e Tax C o d e .
S E C . 6. Effectivity. T h e s e regulations shall take effect
immediately a n d apply to VAT returns covering months of
1990 a n d all s u b s e q u e n t y e a r s ; withholding tax returns for the
calendar year 1990 and all s u b s e q u e n t years; and income tax
returns for t h e t a x a b l e year e n d i n g D e c e m b e r 3 1 , 1 9 9 0 and all
s u b s e q u e n t years."
14. Filing of engagement letters. All independent certified

public a c c o u n t a n t s shall file the copy of the e n g a g e m e n t letter and
renewals or s u b s e q u e n t a g r e e m e n t s thereon with the Revenue
District Officer w h o has jurisdiction over the taxpayer's principal
place of b u s i n e s s or residence not later than two (2) months before
t h e beginning of t h e client's taxable year covered by the agreement.
In order to h a v e a c o m p l e t e master list and be able to monitor
all practicing a c c o u n t a n t s relative to the clientele, the Revenue
District Officers are required to s u b m i t a list of all e n g a g e m e n t letters
filed with their offices in a c c o r d a n c e with the format prescribed,
to t h e C o m m i s s i o n e r of Internal R e v e n u e , Attention: Assistant
Commissioner, A s s e s s m e n t Service, within twenty (20) days after
the e n d of t h e s e m e s t e r on or before January 20 and July 20 of
e a c h calendar year. T h e first semestral list, however, for the taxable
year 1995 shall be submitted on or before August 30, 1996. (Rev.
R e g s . N o . 9-95, a m e n d i n g Rev. R e g s . No. 6-90.)
15. Registration of manual books of accounts. Rev. Memo.
Cir. No. 82-2008 (Nov. 13, 2008.) clarifies the proper procedures
that revenue officers must observe for registration of manual books
of accounts based on existing provisions of the Bookkeeping
Regulations.
T h e following rules must be uniformly observed by revenue
officers w h o are in charge of registration of manual books of
accounts:
(1) Previously-registered manual books of accounts
w h o s e pages are not yet fully exhausted can still be used in the
succeeding years, without need of re-registering or re-stamping
2
This penal provision in Section 232 was deleted by R.A. No. 8424.
ANNOTATED
the same, provided that the portions pertaining to a particular

year should be properly labeled or marked by the taxpayer;
(2) The registration of a new set of manual books of
accounts shall only be m a d e w h e n the pages of the previously-
registered books have all been e x h a u s t e d . This means that it
is not necessary for a taxpayer to register a n e w set of manual
books of accounts e a c h and every year.
(3) The registration deadline of "January 30 of the following
year" as enunciated in Rev. M e m o . Order 2 9 - 2 0 0 2 applies only
to computerized books of accounts and not to manual books
accounts. T h e "15 d a y s after the e n d of the calendar year"
deadline under Rev. M e m o . Cir. 13-82 refers to loose-leaf
bound books of accounts and not to manual books of accounts;
(4) Newly-registered taxpayers shall, before use, present
the manual books of a c c o u n t s for approval a n d registration
to the R D O s w h e r e the place of business is located or to the
concerned office under the Large Taxpayer Service (LTS).
(5) Subsidiary m a n u a l books of a c c o u n t s to be u s e d by
taxpayers, in addition to t h e m a n u a l b o o k s of a c c o u n t s required
by the Tax C o d e and existing rules, shall likewise be registered
before use, following the s a m e rules m e n t i o n e d a b o v e .
(6) T h e Taxpayer Service Section of the R D O s or c o n -
cerned office under LTS has no authority to e x a m i n e w h e t h e r
the previously-registered b o o k s are c o m p l e t e and/or u p d a t e d
prior to the approval of t h e registration.
16. Maintenance retention and submission of electronic
records. Rev. Regs. No. 9-2009 define t h e requirements, obli-
gations and responsibilities i m p o s e d on t a x p a y e r s for electronic
record keeping and m a i n t e n a n c e of electronic b o o k s of a c c o u n t s ,
electronic records, a n d other sources of information under t h e
Tax C o d e . It is also the p u r p o s e of these regulations to a d d r e s s
the requirements for retention of records thru various processes
and systems, including but not limited to, c o m p u t e r electronic a n d
imaging processes. T h e s e regulations also provide t h e require-
ments for the access a n d s u b m i s s i o n of electronic records to
the BIR. T h e regulations m a k e it m a n d a t o r y for Large Taxpayers
classified under R e v e n u e Regulations No. 1-98 to maintain and/or
adopt a Computerized A c c o u n t i n g S y s t e m s (CAS).
(1) Electronic boardkeeping requirements in general.

(a) A taxpayer shall maintain all records that are
necessary for the determination of the correct tax liability
under Section 2 3 2 . All required records must be made

available on request by the C o m m i s s i o n e r of Internal
R e v e n u e or his authorized representatives.
(b) If a taxpayer retains records required to be kept
in both electronic a n d hard-copy formats, the taxpayer
shall m a k e the records available to the Bureau of
Internal R e v e n u e in electronic format u p o n request of the
C o m m i s s i o n e r or his authorized representative.
(c) A t a x p a y e r m a y d e m o n s t r a t e tax compliance with

traditional hard-copy d o c u m e n t s or reproductions thereof,
in w h o l e or in part, w h e t h e r or not such taxpayer also has
retained or has the capability to retain records on electronic
or other storage media but if regulation shall not relieve
t h e t a x p a y e r of t h e obligation to c o m p l y with his obligation
under (b) a b o v e . (Sec. 3, Rev. R e g s . No. 9-2009.)
(2) Requirements for large taxpayers. Rev. Regs. No.
9-2009 m a k e it m a n d a t o r y for large taxpayers classified under
Rev. R e g s . No. 1-96 to maintain and/or adopt a Computerized
Accounting System (CAS).
(a) All Large Taxpayers classified under Rev. Regs. No.

1-98 are required to maintain Computerized Accounting
S y s t e m s ( C A S ) or c o m p o n e n t s thereof. Accordingly, all
b o o k s of a c c o u n t s and accounting records shall be in
electronic formats.
(b) All Large Taxpayers w h o are currently maintaining
their books of accounts and accounting records in manual
f o r m are required to register their Computerized Accounting
S y s t e m s not later than D e c e m b e r 3 1 , 2 0 0 9 .
(c) A Large Taxpayer using commercial and/or custom-
ized software to keep books and records electronically is
not relieved of the responsibility to keep adequate electron-
ic records because of deficiencies in the software. (Sec. 4,
Ibid.)
(3) Requirements for electronic records.
(a) General record keeping requirements.
1) Electronic records used to establish tax
compliance shall contain sufficient transaction-level
detail information so that the details underlying the
electronic records can be identified and made available
ANNOTATED
to the BIR upon request. A taxpayer has discretion to

discharge duplicated records and redundant infor-
mation provided its responsibilities under these regu-
lations are met.
2) At the time of an examination, the retained
records must be capable of being retrieved and c o n -
verted to a standard record format in accordance with
Rev. Regs. No. 16-2006.
3) Taxpayers are not required to construct
electronic records other than those created in the
ordinary course of business. A taxpayer w h o does not
create the electronic equivalent of a traditional paper
d o c u m e n t in the ordinary c o u r s e of business is not
required to construct such a record for tax purposes.
(Sec. 5, Ibid.)
(b) Specific bookkeeping requirements. T h e s e refer
to requirements for electronic data interchange, electronic
data processing s y s t e m s , business process information;
transaction integrity a n d security s y s t e m s , controls a n d
c h a n g e s to business s y s t e m s . (Ibid.)
(c) Maintenance and location requirements.

1) T h e taxpayer's c o m p u t e r h a r d w a r e or software
shall a c c o m m o d a t e the extraction a n d conversion of
retained electronic records in a c c o r d a n c e with Rev.
Regs. No. 16-2006.
2) Records that are retained by c o p y i n g or backing

up the data to another m e d i u m must be d o n e so in
a c c o r d a n c e with the media manufacturers' s u g g e s t e d
procedures with particular attention given to the
suggested shelf life of t h e m e d i u m . Information recorded
on rewritable m e d i a s u c h as c o m p u t e r hard disks must
be b a c k e d up on C D - R / D V D - R , tape or other suitable
m e d i u m to avoid accidental loss, deletion, or erasure
of the recorded information. T h e media containing t h e
recorded information must be stored in an e n v i r o n m e n t
free f r o m hazards that could affect the m e d i a .
3) It is the taxpayer's responsibility to e n s u r e
that current and/or prior period data files have b e e n
archived or b a c k e d up properly a n d adequately to
meet books and recordkeeping obligations.
4) W h e n back-ups of electronic files are being

used as a m e t h o d of record retention, procedures must
be put in place to:
a) Ensure that the b a c k e d up data files can

be restored in a format that will be accessible and
useable by the BIR.
b) Ensure that the intended data is actually

being written to t h e m e d i u m being u s e d .
c) Ensure that the backup procedure does not

overwrite prior period b a c k u p s or logs, destroying
them.
d) Ensure that the m e d i u m is uniquely labeled

in a readily identifiable manner.
e) E n s u r e that a log is prepared to identify
w h a t records and data have been recorded on
such medium.
f) E n s u r e that the log states how long

this m e d i u m is to be retained before it can be
overwritten or d i s c a r d e d .
g) Ensure that t h e n a m e of the software and

the version n u m b e r used to create the records are
noted on the m e d i u m label and in the log.
h) E n s u r e that the proper electronic business
s y s t e m software and operating system are avail-
able to restore the backed up files to their original
environment.
i) Ensure that there is periodic testing of backed
up records to verify that the backed up records can
be restored into an electronically readable format.
5) Records must be kept at the taxpayer's place of
business in the Philippines or another place designated
by the Commissioner of Internal Revenue and must,
upon request, be m a d e available to Revenue Officers
of the BIR for audit purposes during business hours.
Records kept outside the Philippines and accessed
electronically from the Philippines are not considered to
be records in the Philippines. However, where records
are maintained electronically in a location outside the
Philippines, the BIR may accept a copy of the records,
ANNOTATED
provided these are made available in the Philippines

in an electronically readable and usable format for BIR
officials and they contain adequate details to support
the tax returns filed with the BIR.
6) All retained records must be clearly labeled
and stored in a secure environment in the Philippines.
Authorization to maintain records elsewhere may
be granted, subject to such terms and conditions
as the Commissioner m a y specify in writing. T h e
authorization m a y be obtained by writing to Office of
the Commissioner of Internal R e v e n u e or its authorized
representative.
7) Normally a back-up of the electronic records
are stored at a site other than the business location
for security and precautionary purposes (in c a s e of
fire, flood, theft, or other cause). T h e BIR requires
this business practice a n d back-up copies must be
maintained at a location within t h e Philippines.
8) Business that operate via t h e Internet a n d are
hosted on a server located outside of the Philippines
should be cognizant of their responsibility to maintain
their records within t h e Philippines. Internet b a s e d
businesses have t h e s a m e responsibilities related to
record retention as all other business operations. (Sec.
6, Ibid.)
(5) Access and submission requirements. T h e m a n n e r

in which the BIR is provided a c c e s s to electronic records
as required in No. (1)(b) m a y be satisfied through a variety
of m e a n s that shall take into a c c o u n t t a x p a y e r ' s facts and
circumstances through consultation with the taxpayer. S u c h
access will be provided in o n e or m o r e of t h e following m a n n e r s :
(a) T h e taxpayer m a y arrange to provide t h e BIR with
the hardware, software a n d personnel resources to access
the electronic records.
(b) T h e taxpayer m a y arrange for a third-party to
provide the hardware, software a n d personnel resources
necessary to access the electronic records.
(c) T h e taxpayer m a y convert t h e electronic records
to a standard record format specified by Rev. Regs. No.
16-2006, including copies of files, on a magnetic m e d i u m
that is agreed to by the BIR. T h e original files (unconverted
format or files in its native format) should also be submitted

along with the copies of the converted files.
(d) T h e taxpayer and the BIR m a y agree on other
m e a n s of providing access to the electronic records. (Sec.
7, Ibid.)
(6) Alternative storage media. For purposes of storage

and retention, taxpayers m a y convert hardcopy d o c u m e n t s
received or p r o d u c e d in the normal course of business and
required to be retained under Rev. R e g s . No. 9-2009 to micro-
film, microfiche or other storage-only imaging systems and
m a y discard the original hard-copy d o c u m e n t s , provided the
conditions e n u m e r a t e d in t h e regulations are met. D o c u m e n t s
w h i c h m a y be stored on t h e s e media include, but are not limited
to general books of a c c o u n t s , journals, voucher registers,
general a n d subsidiary ledgers, and supporting records of
details, s u c h as sales invoices, p u r c h a s e s invoices, exemption
certificates, a n d credit m e m o r a n d a .
Prior permit f r o m t h e BIR is required before use of microfilm,

microfiches a n d other storage-only imaging systems. (Sec. 8,
Ibid.)
(7) Retention and representation requirements.
(a) Taxpayers are not relieved f r o m the responsibility
to retain hard-copy records that are created or received in
the ordinary course of business as required by existing law
and regulations. Hard copy records m a y be retained on a
recordkeeping m e d i u m as provided in No. (6) above.
(b) If hard-copy records are not produced or received
in the ordinary course of transacting business (e.g., w h e n
the taxpayer uses electronic data interchange technology),
such hard-copy records need not be created.
(c) Hard-copy records generated at the time of a trans-
action using a credit or debit card must be retained unless
all the details necessary to determine correct tax liability
relating to the transaction are subsequently received and
retained by the taxpayer in accordance with the regulation.
(d) Computer printouts that are created for validation,
control, or other temporary purposes need not be retained.
(e) T h e BIR is not prevented from requesting hard-
copy print-outs in lieu of retained electronic records at the
time of examination.
ANNOTATED
(f) All records required to be retained under the regula-

tion shall be preserved pursuant to Section 235 unless the
BIR has provided in writing that the records are no longer
required.
(g) All computerized books of accounts, electronic
record keeping, electronic business systems and c o m -
ponents thereof shall be registered with t h e Bureau of
Internal Revenue in accordance with Rev. M e m o . Order
No. 29-2002 and all other pertinent issuances. (Sec. 1 1 ,
Ibid.)
SEC. 233. Subsidiary Books. All corporations, companies,

partnerships, or persons keeping the books of accounts mentioned in
the preceding Section may, at their option, keep subsidiary books as
the needs of their business may require: Provided, That where such
subsidiaries are kept, they shall form part of the accounting system
of the taxpayer and shall be subject to the same rules and regulations
as to their keeping, translation, production, and inspection as are
applicable to the journal and the ledger.
ANNOTATION
1. Accordingly, the requirement of registration a n d approval

prior to the use of the journal a n d ledger is applicable to subsidiary
books.
2. Control accounts. In t h e g e n e r a l ledger, a c c o u n t s are

usually transferred a n d g r o u p e d into certain a c c o u n t s to a subsidiary
book. This general ledger a c c o u n t is called "control account."
Control accounts in the general ledger contain s u m m a r i z e d
information that is recorded in detail in a subsidiary book or ledger.
It is, therefore, t h e control account w h i c h contains s u m m a r i z e d
information and the subsidiary ledger contains t h e s a m e information
but in detail.
T h u s , in order to relieve the g e n e r a l ledger of too m a n y indi-

vidual accounts, business c o n c e r n s having n u m e r o u s a c c o u n t s
with customers and creditors will transfer said a c c o u n t s to separate
ledgers one for c u s t o m e r s a n d another for creditors. For ex-
ample, the control account for the c u s t o m e r ' s subsidiary book will
be called "Accounts R e c e i v a b l e , " while t h e control account for the
creditor's subsidiary book will be called "Accounts P a y a b l e . " (Chap.
IV-C, Rev. Audit M e m o . Order No. 1-2000.)
Sees. 234-235 COMPLIANCE REQUIREMENTS 579
SEC. 234. Language in which Books are to be Kept;

Translation. All such corporations, companies, partnerships, or
persons shall keep the books or records mentioned in Section 232
hereof in a native language, English or Spanish: Provided, however,
That if in addition to the said books or records the taxpayer keeps
other books or records in a language other than a native language,
English or Spanish, he shall make a true and complete translation of
all the entries in such other books or records into a native language,
English or Spanish, and the said translation must be made by the
bookkeeper of such taxpayer, or in his absence, by his manager
and must be certified under oath as to its correctness by the said
bookkeeper or manager, and shall form an integral part of the
aforesaid books of accounts. The keeping of such books or records in
any language other than a native language, English or Spanish, is
hereby prohibited.
ANNOTATION
Note that t h e required b o o k s or records must be kept in a native

language, English or S p a n i s h . T h e keeping of such books or records
in any other language is prohibited. However, the taxpayer may
keep additional b o o k s or records in any other language, provided
the entries therein must have a true and complete translation into a
native language, English or S p a n i s h .
SEC. 235. Preservation of Books of Accounts, and Other

Accounting Records. All the books of accounts, including the
subsidiary books and other accounting records of corporations,
partnerships, or persons shall be preserved by them for a period
beginning from the last entry in each book until the last day
prescribed by Section 203 within which the Commissioner is
authorized to make an assessment. The said books and records
shall be subject to examination and inspection by internal revenue
officers: Provided, That for income tax purposes, such examination
and inspection shall be made only once in a taxable year, except in
the following cases:
(a) Fraud, irregularity or mistakes as determined by the
Commissioner;
(b) The taxpayer requests reinvestigation;
(c) Verification or compliance with withholding tax laws and
regulations;
ANNOTATED
(d) Verification of capital gains tax liabilities; and

(e) In the exercise of the Commissioner's power under Section
5(B) to obtain information from other persons, in which case, another
or separate examination and inspection may be made. Examination
and inspection of books of accounts and other accounting records shall
be done in the taxpayer's office or place of business or in the office
of the Bureau of Internal Revenue. All corporations, partnerships
or persons that retire from business shall, within ten (10) days
from the date of retirement or within such period of time as may be
allowed by the Commissioner in special cases, submit their books
of accounts, including the subsidiary books and other accounting
records to the Commissioner or any of his deputies for examination,
after which they shall be returned. Corporations and partnerships
contemplating dissolution must notify the Commissioner and shall
not be dissolved until cleared of any tax liability, (as amended by
Pres. Decrees No. 1705 and No. 1773.)
Any provision of existing general or special law to the contrary
notwithstanding, the books of accounts and other pertinent records
of tax-exempt organizations or grantees of tax incentives shall
be subject to examination by the Bureau of Internal Revenue for
purposes of ascertaining compliance with the conditions under
which they have been granted tax exemptions or tax incentives and
their tax liability, if any. (as amended by Pres. Decrees No. 1457 and
1959.)
ANNOTATION
1. Keeping/inspection of books of accounts. T h e books

of accounts shall be kept at all times at the place of business of
the taxpayer, subject to inspection of any internal revenue officer,
and upon d e m a n d the s a m e m u s t be immediately p r o d u c e d a n d
submitted for inspection. W h e n required by the inspecting officer,
the owner, bookkeeper, or m a n a g e r shall give t h e necessary
explanations regarding the items in t h e entries contained in said
books. (BIR Ruling No. 163, s. 1958.)
(1) Preservation of microfilm copies of accounting records

does not satisfy the requirements of Section 2 3 5 . Said provision
implies that the records to be preserved by the taxpayer for a
period of three (3) years f r o m t h e date of t h e last entry m a d e
thereon must be the originals thereof w h i c h are the best
evidence to prove entries m a d e t h e r e o n . (VAT Ruling N o . 2 0 3 ,
Oct. 1, 1991.)
(2) Gift certificates constitute part of the accounting

records w h i c h must be preserved, (see BIR Ruling No. 336,
series of 1960.) A g a i n , the records to be preserved must be the
originals thereof for they are the best evidence of the entries
m a d e t h e r e o n . Microfilms, therefore, cannot substitute because
a contrary rule will o p e n t h e d o o r to fraud, (supra.)
(3) T h e diskettes containing records, classification and

s u m m a r y of transactions shall be subject to examination
and inspection of internal r e v e n u e officers as if they are the
traditional b o o k s of a c c o u n t s , in a c c o r d a n c e with Section 235.
T h e records u s e d in a computer-based accounting system
should be preserved for a 3-year period f r o m the last entry in
e a c h record, pursuant to Section 2 7 5 , in relation to Section
2 0 3 . (BIR Ruling N o . 0 1 1 , J a n . 2 8 , 1988.)
(4) T h e rule is that in t h e absence of accounting records
of a taxpayer, his tax liability m a y be d e t e r m i n e d by estimation.
T h e C o m m i s s i o n e r is not required to c o m p u t e such tax liabilities
with mathematical e x a c t n e s s . A p p r o x i m a t i o n in the calculation
of the t a x e s d u e is justified. To hold otherwise w o u l d be
t a n t a m o u n t to holding that skillful c o n c e a l m e n t is an invincible
barrier to proof. However, t h e rule does not apply w h e r e the
estimation is arrived at arbitrarily a n d capriciously. ( C o m m .
vs. Hantex Trading C o . , Inc., 4 5 4 S C R A 301 [2005].)
(5) W h i l e a voucher d o e s not necessarily prove payment,
it is an acceptable d o c u m e n t a r y record of business transaction.
As s u c h , entries m a d e therein being entered in the ordinary or
regular course of business, enjoy the presumption of regularity.
(Basay v s . Hacienda C o n s o l a c i o n , 6 1 8 S C R A 4 2 2 [2010]; see
Rules of Court, Rule 130, Sec. 43.)
(6) Section 2 3 5 e n u m e r a t e s five (5) cases warranting
exceptions to the general rule that examination and inspection
by internal revenue officers of books of accounts and other
accounting records of taxpayers for income tax purposes
shall be only o n c e in a taxable year. T h e non-declaration of an
amount exceeding 3 0 % of the income declared in the tax return
is considered a substantial declaration which constitutes prima
facie evidence of fraudulent return. (Sec. 248[B].)
2. Section 5 of the Tax C o d e allows the BIR access to all
relevant or material records and data in the possession of the
taxpayer. T h e BIR can accept documents which cannot be admitted
in a judicial proceeding where the Rules of Court are strictly
ANNOTATED
observed. The consent of the taxpayer is not required otherwise,

it would defeat the intent of the law to help the BIR assess and
collect the correct amount of taxes. Nor does the lack of consent
preclude the BIR from assessing deficiency taxes on a taxpayer
based on documents obtained by the BIR. (Fitness By Design, Inc.
vs. C o m m . , 569 S C R A 788 [2008].)
Note: Rev. M e m o . Cir. No. 19-2010 adopts the taxpayers' life-
style check system (TLCS) and prescribes the policies and guide-
lines in the conduct of investigations on the lifestyle and assets
of individuals in order to properly determine their tax compliance
particularly w h e r e no direct evidence is available to establish an
individual's taxable income and yet it is clear that the taxpayer is
earning income. Section 6(C) of the Tax C o d e allows the BIR to
prescribe the m a x i m u m taxable b a s e for w h i c h internal revenue
taxes shall be determined.
3. Last entry. T h e t e r m , as used in Section 2 3 5 of the Tax

Code, refers to a particular business transaction or an item thereof
that is entered or posted last or latest in the books of accounts
w h e n the s a m e w a s closed. For purposes of determining the period
within which the books shall be kept, the s a m e shall be reckoned
from the date of the last entry in said books. (BIR Ruling No. 4 0 1 , s.
1958.)
T h e presentation of books of a c c o u n t s for the prescribed
period from the last entry until the last day prescribed for making an
assessment is mandatory. T h e C o m m i s s i o n e r is without authority
to shorten it. (BIR Ruling, J a n . 3 1 , 1975.) T h u s , if the last entry in
the 2004 records is D e c e m b e r 3 1 , 2 0 0 4 , a n d the return w a s filed
on April 15, 2 0 0 5 , the records must be preserved for three (3) years
from the last date or up to April 15, 2 0 0 8 .
4. Disposition/destruction of records. Pursuant to the first

sentence of Section 235 (see Sec. 203.) a n d having in mind the
meaning of the t e r m "last entry," a taxpayer can dispose of his
general ledgers, journals, subsidiary books a n d other accounting
records after three (3) years reckoned from the day following the
deadline in filing a return for the taxable year when the last entry
was made in the books of accounts, not f r o m the recording of the
entry or transaction in the books of a c c o u n t s or other records.
(1) As regards the invoices, receipts, v o u c h e r s and
returns, the s a m e may be d i s p o s e d of after three (3) years f r o m
the date appearing t h e r e o n . However, as entries in the books of
accounts have to be supported with the corresponding invoices,
. 235 COMPLIANCE REQUIREMENTS 583
receipts or vouchers, it is advisable to keep t h e m for three (3)

years f r o m the date of the last entry of the book in which they
have been entered instead of f r o m the date of their issuance.
In other w o r d s , said invoices, vouchers and receipts support
the entries or postings, in the books of accounts for at least
three (3) years c o u n t e d not f r o m the date of accomplishment or
issuance thereof but from the date of the last entry in the books
to which they relate. However, if a taxpayer has a pending tax
case and the b o o k s and records c o n c e r n e d are material to
the case, it is also advisable to keep such books and records
longer than the prescribed period of three (3) years until the
case is finally resolved. (BIR Ruling No. 0 8 1 , May 14, 1990.)
(2) Further, the accounting records w o u l d also be needed

if the taxpayer is investigated by the BIR for any falsity, fraud,
or omission in his returns. T h e investigation m a y be conducted
within ten (10) years after the discovery of the falsity, fraud, or
o m i s s i o n . (Sec. 222[a].)
(3) A taxpayer m a y destroy its u n u s e d and obsolete BIR

registered f o r m s / d o c u m e n t s w h i c h are not intended to be
used a n y m o r e , provided t h e destruction shall be witnessed
by a representative f r o m t h e national office and two (2)
representatives f r o m the regional office, o n e f r o m the Revenue
District Office and t h e other from the A s s e s s m e n t Branch w h o
shall likewise certify and report to the BIR the list/inventory
of f o r m s / d o c u m e n t s actually d e s t r o y e d . (BIR Ruling No. 0 0 1 -
2 0 0 0 , J a n . 03, 2000.)
5. A balance sheet, as that w o r d is uniformly used by book-
keepers and b u s i n e s s m e n , is a paper which shows "a summation
or general balance of all accounts," but not the particular items
going to m a k e up the several accounts. It may not be considered
as "entries m a d e in the ordinary course of business" (see Sec.
37, Rule 130, Rules of Court.) which means "that the entries have
been m a d e regularly as is usual in the m a n a g e m e n t of the trade
or business. It is essential, therefore, that there be regularity in
the entries." (Ibid., citing M o r a n , C o m m e n t s on the Rules of Court,
1963 Ed., p. 353.)
6. Admissibility and probative value of books of accounts.
In order to render admissible books of accounts, it must appear
that they are books of original entry, that the entries were made
in the ordinary course of business, contemporaneously with the
facts recorded, and by one w h o had knowledge of the facts. Books
ANNOTATED
of accounts may, therefore, be admissible under the rule. In tax

cases, however, the court appears not to place too high a probative
value on t h e m . Books of accounts do not prove per se that they
are veracious. In fact, they may be consistent than truthful. Indeed,
books of accounts may be used to carry out a plan of tax evasion.
(Consolidated Mines, Inc. vs. C.T.A., L-18843, A u g . 29, 1974.)
7. Regional Office with jurisdiction to examine books of
accounts. As a rule, the regional office within w h o s e territory
the taxpayer is residing and w h e r e his principal place of business
is located, and w h e r e he files his returns and pays his taxes has
jurisdiction to e x a m i n e the taxpayer's returns and books of accounts
and other records.
By w a y of illustration, s u p p o s e "A" c o m p a n y has its head office
located in Manila, and a factory at Q u e z o n City. In t h e desire of
said c o m p a n y to consolidate t h e filing of its income tax returns and
business tax, it filed t h e s a m e at t h e Regional Office in Manila.
Question: Is the Regional Office of Q u e z o n City totally deprived of
jurisdiction to look into the records of t h e factory w h i c h is located in
Q u e z o n City? T h e Manila regional office has the primary jurisdiction,
for tax purposes, over t h e c o m p a n y ' s business operations.
However, the Q u e z o n City regional office is not totally deprived
of jurisdiction to look into the records of t h e c o m p a n y located in
Q u e z o n City, if the examination of the records therein is necessary
to the determination of its tax liabilities, as t h e Manila regional office
can exercise its jurisdiction only within t h e limits of its territory. For
the purpose, therefore, of securing a n y a n d all information relative
to the operations of t h e factory located in Q u e z o n City, t h e regional
office thereat will naturally have to be utilized to undertake t h e w o r k
of examination a n d investigation. (BIR Ruling No. 2, s. 1964.)
8. Internal revenue agents and examiners may not examine
a taxpayer's books of accounts and other accounting records
without necessary authorization from the proper authority. A
letter of authority (LA) is a request to t h e t a x p a y e r to permit the
bearer thereof, a particular revenue e n f o r c e m e n t officer ( R E O ) ,
to conduct the necessary tax e x a m i n a t i o n a n d verification of
said books and records, a n d signed either by the C o m m i s s i o n e r
of Internal R e v e n u e , or a Deputy Commissioner, or an Assistant
Commissioner, specifically authorized by the Commissioner, or the
Regional Director of the regional district c o n c e r n e d .
(1) T h e authorization m a y be in the f o r m of m e m o r a n d u m

duly dated and signed by the BIR official c o n c e r n e d , stating
a m o n g other things, the agent's full n a m e and the corresponding

instruction or directive to be a c c o m p l i s h e d by the revenue
officer, (see BIR Field Cir. No. V-48.)
(2) T h e issuance of a m e m o r a n d u m or letter of authority is

dispensed with in cases requiring immediate action on the spot,
such as a p p r e h e n s i o n of m e r c h a n t s w h o do not issue sales
invoice receipts, or persons in possession of untaxed articles
subject to excise tax. (BIR Field Cir. No. V-70.)
(3) Only o n e letter of authority shall be issued for the

verification of the income a n d business tax liabilities of a
taxpayer. T h e authority m a y be issued to only o n e examiner,
except that w h e r e the complexity of a tax case so warrants,
t w o or m o r e e x a m i n e r s m a y be authorized to conduct the tax
investigation.
(4) An appropriate Termination Letter shall be issued

u p o n approval of t h e Report of Investigation submitted by the
investigating examiner.
(5) Letters of Authority (LA) shall be served to the taxpayer

within 30 d a y s f r o m the date of issue, and reports of investigation
on a tax c a s e shall be submitted by the R E O within 120 days
f r o m the date of issuance of the letter of authority. In case the
final c o m p l e t e d report c a n n o t be submitted by the R E O within
the required period, a progress report shall be submitted by him
to the head of the audit office and the letter of authority shall be
returned for revalidation. (Rev. M e m o . Cir. No. 28-83, Sept. 9,
1983.)
An LA b e c o m e s null and void if it is not served or presented
to the taxpayer within 30 d a y s f r o m the date of issue; after such
date, a taxpayer has the right to refuse its service.
Note: Rev. M e m o . Cir. No. 98-2010 prescribes the policies
and guidelines in handling unserved Letter of Notices (LNs), Tax
Verification Notices (TVNs), and Letter of Authority (LA) issued
to taxpayers due to failure to locate t h e m . Such taxpayers shall
be given the status of "Cannot Be L o c a t e d " (CBL) in the records
of the BIR. If the concerned taxpayer fails to contact the BIR
within 15 calendar days from the publication of the list in at
least two (2) newspapers of general circulation, the authorized
Revenue District Office shall recommend the cancellation of
the taxpayers' registration and invoicing privileges (Authority to
Print Invoices and Receipts). It shall also make an assessment
ANNOTATED
based on the discrepancies found in the LN or based on best

evidence obtainable, as the case m a y be.
(6) The revalidation of LAs is limited to only o n c e in the
regional offices and twice in the National Office after the
issuance of the original LA, meaning that if the LA has been
revalidated once or twice, as the case may be, it will no longer
be revalidated in the s a m e examiner or agent. T h e revalidation
is done by issuing a new LA attaching the superseded LA to the
new LA issued. A simple letter from the Division Head or the
BIR Officer concerned certifying that the LA is validly existing
and proper is no longer allowed. (Rev. M e m o . Order No. 38-88,
A u g . 24, 1988.)
(7) A taxpayer m a y refuse audit or examination of his
books of accounts w h e r e the revenue officer is not provided
with the required letter of authority, or w h e r e said officer fails or
refuses to show, u p o n request of the taxpayer, his identification
card, or w h e r e the examination is c o n d u c t e d in the presence of
unauthorized persons. (BIR Ruling N o . 4 8 6 , s. 1959.)
Note: Rev. M e m o . Order No. 56-99 requires a different

set of reporting requirements a n d procedures that w o u l d give
more e m p h a s i s a n d consideration on t h e distinct accounting
practices and business transactions of t h e industries covered
(i.e., banking, insurance a n d interrelated g r o u p of c o m p a n i e s ) .
Hence, the mandatory reporting requirements under Rev. M e m o .
Order No. 53-98 a n d t h e 120-day rule on the revalidation of LA
under Rev. M e m o . Order 38-88 shall no longer be applicable
to tax cases covered by Special Teams under t h e E n f o r c e m e n t
Service created primarily to study said industries and/or tax
loopholes in order to develop audit procedures and t e c h n i q u e s
that would properly take into account t h e specific industry's
peculiarities. Rev. M e m o . Order No. 5-2009 prescribes the
policies and guidelines to be o b s e r v e d in determining the
investigating office that shall have jurisdiction over the audit/
examination of taxpayers, a n d in the resolution of conflicts
of jurisdiction in o n g o i n g tax investigations. Rev. M e m o . Cir.
No. 23-2009 reiterates the policies and procedures for the
revalidation of LAs, issuance of subpoena duces tecum, a n d
review of cases by the A s s e s s m e n t Division of the BIR.
Department of Finance Order No. 11-09 revoked Depart-

ment Order No. 6-99 entitled "Defining the Authority of the
Commissioner of Internal R e v e n u e and Regional Directors
Re: Issuance of Letter of Authority and Taxpayers Investigation"
x x x "considering that there w e r e already existing issuances b y

the C o m m i s s i o n e r of Internal R e v e n u e dealing comprehensively
on Letter of Authority a n d Taxpayer's investigation pursuant to
Section 6(A) of the Tax C o d e . " (Rev. M e m o Cir. No. 15-2009.)
9. T h e r e must be a grant of authority before any revenue
officer can conduct an examination or a s s e s s m e n t , (see Sees.
6[A], 13.) Equally important is that the revenue officer so authorized
must not go b e y o n d t h e authority g i v e n , otherwise, the assessment
or examination is a nullity, as w h e r e t h e investigation w a s based
on records pertaining to a period not within the c o v e r a g e of the
LA. A LA authorizing "audit of unverified prior y e a r s " violates the
prohibition in Rev. M e m o . Order No. 4 3 - 9 0 w h i c h provides that a
LA should cover a taxable period not e x c e e d i n g one taxable year.
If t h e audit of t a x p a y e r shall include m o r e t h a n one taxable period,
the other periods or years should be specified in the LA. ( C o m m .
vs. S o n y Philippines, Inc., 6 3 5 S C R A 2 3 4 [2010].)
10. Classifications of audit or examination. There are four
(4) classifications of e x a m i n a t i o n listed under applicable revenue
m e m o r a n d u m orders of the C o m m i s s i o n e r :
(1) National Office Examination. It refers also to the
so-called "industry audit" a n d is conducted by the different
audit divisions of t h e National Office. T h e BIR National Office
prepares a n d k e e p s a list of taxpayers under the industry audit
classification selected for audit by its different audit divisions.
This list is a m e n d e d yearly by listing additional taxpayers a n d /
or delisting t h o s e in t h e previous year's list;
(2) Regional Office Examination. T h o s e not in the list
of the National Office examination fall under the jurisdiction of
the Regional Offices d e p e n d i n g on the location of the principal
place of business of the taxpayer. T h u s , if the taxpayer is
being served an LA issued by the National Office (or by the
Regional Office) and he is not listed in the list of taxpayers to
be e x a m i n e d , then the jurisdiction to examine him belongs to
the Regional Office (or National Office) and he can refuse any
examination or audit. T h e purpose of the procedure is to avoid
duplicity of examination as well as harassment of taxpayers.
T h e examination by the National Office or the Regional Office
is called primary audit jurisdiction to investigate the taxpayer.
A taxpayer served with an LA should, therefore, verify or

check whether he is listed for National Office or Regional Office
audit;
ANNOTATED
(3) Coordinated Examination. This is the so-called joint

or concurrent examination. A division coordinates with the
division having primary audit jurisdiction. Thus, the former has
a functional audit jurisdiction. Although a particular taxpayer is
under the primary jurisdiction of a particular division, the nature
of the business activities may involve a line of business or
industry, or certain types of tax incentives or exemption which
would require the expertise or k n o w - h o w of another division.
Thus, the Industry Audit Division, through its Investment
Incentives Section, is the division that has the expertise in the
examination of taxpayers enjoying tax incentives, while the
International Tax Affairs Division is the division that has the
know-how in the examination of multinational or international
companies and overseas workers and contractors; and
(4) Other special examinations. T h e y are examinations

by the so-called "Special Investigation Teams" or g r o u p s of
examiners especially organized a n d a s s i g n e d by the C o m -
missioner himself to audit specific c a s e s and as a general rule,
report directly to him. Their LAs w o u l d h a v e to comply with the
requirements of the valid LA. T h e y w o u l d normally be signed
by the C o m m i s s i o n e r himself, (see Rev. M e m o . Cir. No. 32-83,
Oct. 18, 1983.)
After an examination has b e e n t e r m i n a t e d , a termination

letter is issued upon approval of the report of the examiner. It is
signed by the Commissioner, or a Deputy C o m m i s s i o n e r or a
designated Assistant Commissioner, for c a s e s investigated by
the National Office and by t h e Regional Director or Assistant
Regional Director for c a s e s within the jurisdiction of the region.
Briefly, the letter states that t h e report s u b m i t t e d , r e c o m m e n d i n g
no deficiency or an a m o u n t of tax liability, has b e e n a p p r o v e d
and upon payment of the deficiency, if any, t h e records bearing
on the case will be filed for future reference. T h e latter will
close the c a s e for all practical p u r p o s e s . A n y t h i n g short of the
termination letter w h i c h m a k e s a categorical disposition of the
case still leaves the case o p e n for further scrutiny or review by
higher authority, (see Ibid.)
In the cases e n u m e r a t e d in Section 2 3 5 (a to e), a taxpayer

may be subject to multiple audits.
T h e C o m m i s s i o n e r of Internal R e v e n u e is granted by
Sections 7 and 16 of the Tax C o d e certain powers relative to
tax audit or examination.
11. T h e BIR has a d o p t e d the package audit policy in the

examination of the various tax liabilities of t h e taxpayer. Package
audit involves t h e examination at the s a m e time of all returns filed
by a business or a taxpayer or all of his business transactions for
the s a m e taxable period. If t w o or m o r e authorities are issued for
different years to different e x a m i n e r s , the e x a m i n e r s assigned the
latest year shall be given the right to consolidate the investigation.
Authorities not served u p o n the taxpayer within thirty (30) days
after issuance shall be c a n c e l l e d . (Par. VII[A], Rev. A d m . Order No.
12-70.) This type of examination has b e e n discontinued.
12. Separate LA for each type of internal revenue tax. As

provided in R e v e n u e M e m o r a n d u m Order ( R M O ) No. 10-89, tax
audit shall be c o n d u c t e d simultaneously for all internal revenue tax
liabilities of a taxpayer, with the exception under certain conditions
(infra.), of t h e v a l u e - a d d e d tax, withholding tax, capital gains tax,
estate tax, and excise tax.
(1) In issuing LA, e a c h type of internal revenue tax shall be

specifically stated in the LA. Subject to t h e limitations prescribed
below, any of the following categories of internal revenue taxes
shall be indicated in the LA:
(a) Income tax (including withholding tax liability
of taxpayer as withholding agent, unless covered by a
separate LA), e x c e p t capital gains tax on sales of real
property and shares of stock i m p o s e d under Title II of the
Tax C o d e ;
(b) Transfer taxes (estate and donor's tax) imposed
under Title III of the Tax C o d e ;
(c) Value-added tax imposed under Title IV of the Tax
Code;
(d) Other percentage taxes imposed under Title V of
the Tax C o d e ;
(e) Excise taxes imposed under Title VI of the Tax
C o d e ; and
(f) Documentary stamp tax imposed under Title VII of
the Tax C o d e .
(2) As a general rule, separate LAs should be issued for
VAT.
(a) However, in the revenue regions, if the annual
gross sales or receipts declared in the income tax return
do not exceed P10 million and the revenue officer (RD) to
ANNOTATED
w h o m the income tax return is assigned for audit is also

qualified to audit VAT liabilities, only one LA shall be issued
for all internal revenue taxes to be specifically indicated in
the LA. The requirement that separate LA should be issued
for income tax and VAT audit if the gross sales or receipts
exceed P10 million pesos, shall be strictly observed.
(b) In the Special Operations Service (SOS), separate
LAs should be issued for VAT. T h e VAT liabilities for
taxpayers listed under the jurisdiction of the S O S shall be
audited by the VAT Division or by a group of revenue officers
to be designated therefor by the Assistant Commissioner
(SOS).
(3) Examination of excise tax liability should be covered by
a separate LA.
(4) Separate LAs should be issued for the audit of the estate
tax and other internal revenue tax liabilities of t h e d e c e d e n t
and the examination shall be c o n d u c t e d in a c c o r d a n c e with
Revenue M e m o r a n d u m Order No. 4 0 - 8 3 .
(5) Unless otherwise ordered by the Commissioner, the
audit of withholding tax liability is included in t h e audit of t h e
income tax liability of the taxpayer. T h e C o m m i s s i o n e r m a y
designate any office and/or g r o u p of R O s to c o n d u c t an audit
of the withholding tax liabilities of a taxpayer separately f r o m
its other internal revenue tax liabilities. (Rev. M e m o . Order No.
43-90.)
13. Policies re Letters of Authority, demand letters, etc. As

defined in Rev. M e m o . Order No. 6 2 - 9 9 :
(1) All letters of authority shall be issued by the C o m -

missioner.
(2) Reports of investigation shall be reviewed by the

Enforcement Service. However, audit reports shall not be
considered final until after the final review a n d approval by the
Commissioner.
(3) T h e C o m m i s s i o n e r shall be the approving officer for all

reports of investigation.
(4) Pre-assessment notices, letters of d e m a n d or a s s e s s -

ment notices shall be prepared and issued by the Enforcement
Service for duly a p p r o v e d reports of investigation categorically
stating (a) the facts; and (b) the law, jurisprudence, rules
and regulations on w h i c h the r e c o m m e n d e d deficiency tax

a s s e s s m e n t is b a s e d .
(5) Protests and requests for reinvestigation/recon-

sideration shall be filed with the Enforcement Service. The
Enforcement Service shall resolve w h e t h e r or not the protest is
in a c c o r d a n c e with the provisions of Section 228 and its imple-
menting regulations; or w h e t h e r or not the protest involves a
question of fact or of law or both.
(a) If the protest involves a question of fact which fact

is available f r o m the d o c k e t of the case, the Enforcement
Service shall resolve the protest; otherwise, it shall be
referred to the investigating officer w h o r e c o m m e n d e d the
deficiency a s s e s s m e n t .
(b) If t h e protest involves a question of law, the same
m a y be acted u p o n by t h e investigating officer, unless it
involves difficult questions of law in which c a s e it shall be
referred to the Legal Service for resolution of the legal
issues.
(c) If the protest involves both a question of fact and
of law, the question of fact shall first be resolved before the
question of law applying the a b o v e - m e n t i o n e d procedures.
(6) Form 4 0 . 0 0 (Monthly S u m m a r y of Taxes Assessed)
and F o r m 1758 (Authority to Cancel A s s e s s m e n t ) shall be
a c c o m p l i s h e d by the Enforcement Service. A copy of these
reports shall be furnished to the A s s e s s m e n t Service for
recording and to the Collection Service for enforcement.
14. Reports of investigation.
(1) Upon termination of audit, a Conference Letter signed
by the Assistant C o m m i s s i o n e r (ACIR) of Enforcement Service
or the Division Chief of the investigating office concerned shall
be issued to the taxpayer inviting him/her for a conference
thereby giving him/her the chance to know the nature of the
findings and to refute the s a m e . Should the taxpayer needs
more time to study and consolidate his position or gather
documentary evidences to substantiate his claim, a second
conference may be granted.
(2) After due consideration of the taxpayer's explanations
or of the documents submitted during the conference, the
revenue officer concerned shall submit a report of investigation
which shall include a duly accomplished "Revenue Officer's
ANNOTATED
Audit Report (BIR Form 1717 or 0500 Series)." The audit report
shall include the basic reporting requirements prescribed under
applicable audit manuals and other regulations.
(3) If, after the conference, the taxpayer is agreeable to
the audit findings or s o m e items in the audit findings, he shall
be required to execute an A g r e e m e n t Form specifying the
kind of tax, the nature of findings and the amount involved.
An Authority to Accept Payment (ATAP) shall then be issued
by the A C I R , Enforcement Service to cover the payment. For
taxpayers under computerized District Offices, Payment Order
Form 0605 shall be used in lieu of ATAP.
(4) A copy of the receipt of p a y m e n t a n d a g r e e m e n t form

shall form part of the docket of the case.
(5) In case the taxpayer fails to a p p e a r during the
conference, a report of investigation shall be prepared at
once for submission to the immediate supervisor within 15
days from failure of the taxpayer to appear, unless the A C I R
for Enforcement or the Division Chief c o n c e r n e d a g r e e d , u p o n
request of the taxpayer, to extend the c o n f e r e n c e period. (Rev.
M e m o . Order No. 62-99.)
15. Review and approval of reports and service of pre-
assessment notices.
(1) All reports of investigation shall be reviewed by t h e

Enforcement Service subject to final approval by t h e Office of
the Commissioner.
(2) T h e E n f o r c e m e n t Service, after having reviewed t h e

report of investigation, shall s e n d a p r e - a s s e s s m e n t notice to
the taxpayer, indicating therein the factual and legal basis of the
assessment, a n d a definite time f r a m e (15 d a y s f r o m receipt)
within which he m a y protest the s a m e , if he is not agreeable.
T h e "Revenue Officer's Audit Report (BIR F o r m 1717 or
0 5 0 0 ) " prepared by the investigating officer, as reviewed a n d
corrected by the Enforcement Service, shall be the basis of the
pre-assessment notice.
(3) If the taxpayer files his protest within 15 d a y s f r o m
receipt of the pre-assessment notice, the s a m e reviewing office
shall likewise decide w h e t h e r the protest c o n f o r m s with the
existing requirements and w h e t h e r or not to give d u e course to
the protest. T h e reviewing office shall then act on the protest
following the guidelines under 2.4 of this Order a n d inform the
taxpayer in writing of the result of his protest and the actions

taken.
(4) If the pre-assessment notice is not protested within the
prescribed period, the reviewing office shall then forward the
report of investigation to the Office of the C o m m i s s i o n e r for
final review a n d approval.
(5) After final review and approval of the report, the Office
of the C o m m i s s i o n e r shall forward the docket of the case to the
E n f o r c e m e n t Service for issuance of a letter of d e m a n d and
a s s e s s m e n t notice.
(6) No report shall be considered a p p r o v e d unless all

questions of the reviewing offices h a v e b e e n resolved by the
investigating officer and a g r e e d to by the reviewing offices. T h e
reviewing office ( E n f o r c e m e n t Service/CIR Office) shall return
the docket to the investigating officer for inclusion in the report
any findings/corrections m a d e during the review. (Ibid.)
16. Preparation of demand letters and assessment notices.

( 1 ) All letters of d e m a n d a n d a s s e s s m e n t notices shall be
p r e p a r e d , a p p r o v e d a n d issued by the Enforcement Service
stating completely t h e facts and the law, jurisprudence, rules
a n d regulations on w h i c h said a s s e s s m e n t is b a s e d .
(2) D e m a n d letters a n d a s s e s s m e n t notices shall be based

on the " R e v e n u e Officer's Audit Report (BIR Form 1717/0500)"
as reviewed by t h e E n f o r c e m e n t Service and a p p r o v e d by the
Office of t h e Commissioner.
(3) T h e original copy of the d e m a n d letters and assessment
notices shall be sent to the taxpayer by mail or by personal
delivery. T h e duplicate copy shall be attached to the docket and
shall be s t a m p e d with the actual date of mailing. It shall then be
posted in BIR Form 4 0 . Refer to 3.5 of this Order.
(4) A s s e s s m e n t notices and d e m a n d letters forwarded to
the Records Division shall be covered by a transmittal letter
which shall contain, a m o n g others, n a m e , address and TIN of
taxpayer, taxable period covered by the assessment, kind of
tax and a m o u n t of deficiency tax (itemized). (Ibid.)
17. Letter of protest and requests for reinvestigation or recon-
sideration.
(1) Letters of protest or requests for reinvestigation or
reconsideration shall be filed with the Enforcement Service. If,
ANNOTATED
by mistake, received in any other office authorized to receive

communications, they shall be referred to the Enforcement
Service for proper action.
(2) Assessments may be protested administratively by
filing a request for reconsideration or reinvestigation within
fifteen (15) days from receipt of pre-assessment notice and
within thirty (30) d a y s from receipt of the a s s e s s m e n t notice
and letter of d e m a n d .
(3) Upon receipt of the letter of protest or request for
reinvestigation or reconsideration, the Enforcement Service
shall record such d o c u m e n t s and attach the s a m e to the
corresponding docket. It shall also act on t h e protest following
the guidelines prescribed above.
(4) Within sixty (60) d a y s f r o m filing of t h e protest, all
the relevant supporting d o c u m e n t s must be submitted to the
Enforcement Service; otherwise, the a s s e s s m e n t shall b e c o m e
final. However, an e x t e n d e d period m a y be g r a n t e d by the
Enforcement Service, provided it shall not e x c e e d thirty (30)
days from the lapse of the 60-day requirement.
(5) T h e Enforcement Service shall h a v e 180 d a y s f r o m
the submission of the d o c u m e n t s within w h i c h to decide on the
protest. For this p u r p o s e , all protests referred to t h e investigating
officers or the Legal Service, as t h e c a s e m a y b e , shall be
submitted to the E n f o r c e m e n t Service within 150 d a y s f r o m
receipt of the protest in order to give time to t h e E n f o r c e m e n t
Service to prepare the c o m m u n i c a t i o n to t h e taxpayer.
(6) If the d o c u m e n t s w h i c h are the subject of t h e protest
have in fact b e e n submitted as w h e n s u c h d o c u m e n t s h a v e
been attached to the protest letter or w h e r e t h e taxpayer
alleges that the issues raised are purely legal in nature, the
protest may be acted u p o n without waiting for t h e lapse of the
60-day period. (Ibid.)
See Annotation under Section 6(A), (B). (Vol. 1)
18. Preparation of BIR Form 40.00.
(1) BIR Form 4 0 . 0 0 shall be p r e p a r e d in five (5) copies

and shall reflect the disputed a s s e s s m e n t separate f r o m the
final and executory collectible accounts.
(2) If the reviewing office d o e s not receive a protest letter

within sixty (60) d a y s f r o m the date of mailing of the a s s e s s m e n t
notice and letter of d e m a n d , the a s s e s s m e n t becomes final

a n d executory. It shall then be posted in BIR Form 40.00 as a
"collectible a c c o u n t . "
(3) At the s a m e t i m e , the duplicate copy of the assessment

notice shall also be s t a m p e d with the w o r d s "Posted in BIR
Form 4 0 . 0 0 as a collectible a c c o u n t . " This fact shall also be
recorded in t h e a f o r e m e n t i o n e d taxpayers' tax account on file
with the reviewing office.
(4) If the a s s e s s m e n t is protested by the taxpayer

pursuant to Section 2 2 8 and its implementing regulations, the
a s s e s s m e n t shall be recorded in BIR F o r m 4 0 . 0 0 as a "duplicate
a s s e s s m e n t . " This fact shall be recorded on the duplicate copy
of t h e a s s e s s m e n t notice by s t a m p i n g the w o r d s "Posted in the
BIR F o r m 4 0 . 0 0 as a disputed a s s e s s m e n t . " It shall also be
recorded in the a f o r e m e n t i o n e d taxpayers' tax accounts on file
with t h e reviewing office.
(5) A duly a c c o m p l i s h e d Form 4 0 . 0 0 shall be furnished

to t h e Information S y s t e m s Operations Service, A s s e s s m e n t
Service, Collection Service and o n e to be retained by the
E n f o r c e m e n t Service. (Ibid.)
19. Preparation of authority to cancel assessment.
(1) T h e Authority to C a n c e l A s s e s s m e n t (ATCA) shall

be issued w h e n e v e r an a s s e s s m e n t is cancelled or w h e n a
previously a s s e s s e d deficiency tax is reduced as a result of a
reinvestigation or reconsideration requested by the taxpayer.
(2) T h e A T C A shall be prepared only after the report of

reinvestigation has b e e n approved by the Commissioner. The
A T C A shall be prepared at the s a m e time that the a m e n d e d
notices are prepared and shall be approved by the Assistant
Commissioner, Enforcement Service. (Ibid.)
20. Issuance of Termination Letters.

(1) For approved report of investigation, the Enforcement
Service shall issue Termination Letter signed by the C o m -
missioner in the following cases:
(a) W h e r e the deficiency tax/es is/are paid immediately
after investigation and the review yields no discrepancy;
(b) W h e r e the deficiency assessment is paid after
issuance of the pre-assessment notice but before issuance
of final assessment notice;
: THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. 235
ANNOTATED
(c) Where the deficiency assessment is paid within

thirty (30) days from issuance of assessment notice and
letter of d e m a n d .
(2) Said Termination Letter shall be mailed to the taxpayer.
In all cases, the payment receipt and a copy of the Termination
Letter shall be attached to the docket. (Ibid.)
See Annotation under Section 6(A), (B). (Vol. 1)
2 1 . Transmittal of dockets.
(1) Dockets with findings of "No Discrepancy," or w h e r e
the assessment is paid before issuance of a s s e s s m e n t notices
and letter of d e m a n d , or w h e r e the tax a s s e s s m e n t is paid
within thirty (30) days from issuance of a s s e s s m e n t notice and
letter of d e m a n d shall be batched separately, e a c h batch with a
m a x i m u m o f t e n (10) dockets, a n d shall be transmitted directly
to the Records Division for file.
(2) Dockets of "collectible a c c o u n t s " shall be b a t c h e d ,
each batch with a m a x i m u m of ten (10) dockets, a n d shall be
transmitted by the Enforcement Service to t h e R e c o r d s Division
for microfilming, if w a r r a n t e d , t h e n to t h e Collection Service for
collection enforcement.
(3) For disputed a s s e s s m e n t s , t h e dockets shall be referred
to the offices m e n t i o n e d . T h e office to w h i c h it w a s assigned
shall be indicated in F o r m 4 0 . 0 0 on "disputed a s s e s s m e n t . "
(4) T h e dockets in the batch shall be listed in t h e "Trans-
mittal List of Tax D o c k e t s " to be prepared in five (5) copies. T h e
original copy shall a l w a y s remain with t h e batch until action on
all dockets is c o m p l e t e d . If a n y tax c a s e is r e m o v e d f r o m the
batch for further action, s u c h action shall be indicated in the
original and all other copies still with t h e batch. (Ibid.)
22. Issuance of letters of authority (LAs) by the Regional

Director. Under Rev. M e m o . Order No. 3 6 - 9 9 :
(1) T h e R e v e n u e Regional Director shall a p p r o v e and sign
Letters of Authority (LAs) for all audit c a s e s within his regional
jurisdiction, except:
(a) cases involving civil or criminal tax fraud w h i c h

fall under the jurisdiction of t h e Tax Fraud Division of the
Enforcement Service; a n d
(b) policy cases under audit by the Special Teams in
the National Office.
LAs will be issued only for tax returns which corre-

s p o n d i n g with t h e existing Audit Program.
(2) T h e Regional Director shall issue the corresponding
Letter of Authority if indications of fraud have been established,
a n d t h e s a m e has b e e n confirmed by the Regional Tax Fraud
C o m m i t t e e ( R T F C ) , c o m p o s e d of the following:
(a) Regional Director C h a i r m a n ;
(b) Assistant Regional Director Vice-Chairman;
(c) Chief, Special Investigation Division (SID)
Member;
(d) Chief, A s s e s s m e n t Division Member; and

(e) Chief, Legal Division Member.
(3) W h e r e t h e S I D has f o u n d substantial evidence of fraud
against subject t a x p a y e r but the evidence gathered, under
t h e "best e v i d e n c e rule," is not sufficient to warrant criminal
prosecution, the investigation shall nevertheless be pursued
and report of the investigation shall be submitted to the
A s s e s s m e n t Division for appropriate review prior to approval
by t h e Regional Director and issuance of d e m a n d letter and
a s s e s s m e n t notice, w h e n e v e r applicable.
(4) T h e R e v e n u e Regional Directors shall approve the

a s s e s s m e n t notices a n d d e m a n d letters including the reports
of investigation, for cases falling within their respective
jurisdictions. Likewise, the Regional Directors shall issue
Termination Letters as specified under Section III.H of Rev.
M e m o . Order No. 37-94.
(5) T h e following additional guidelines on the issuance of
LAs shall be o b s e r v e d :
(a) All LA forms for use by the Revenue District Offices
and Special Investigation Divisions shall be requisitioned
by the Regional Director from the Accountable Forms
Division in the National Office.
(b) O n e LA shall be issued for each taxable year to
include all internal revenue tax liabilities of the taxpayer.
However, for purposes of verifying tax liabilities of a
decedent, one consolidated LA shall be issued to cover
the estate tax liability and the income tax liability for the
immediately preceding year up to the time of the death of
the taxpayer.
ANNOTATED
(c) LAs shall be issued only w h e n the duplicate

copy of the tax return of the taxpayer for the taxable year
covered by the LA is attached thereto. W h e r e the return
of a taxpayer selected for audit cannot be located, the LA
shall be issued only w h e n there is a certification to that
effect by the Head-Revenue Data Center for taxpayers
covered by ITS R D O s , and by the Assistant Commissioner,
Information Systems Operations Service for taxpayers
covered by non-ITS R D O s .
(d) T h e s a m e Revenue Officer/Group Supervisor
shall not be allowed to audit the s a m e taxpayer for two
consecutive years.
(e) LAs shall be revalidated only by the Regional
Director w h e n there is an attached progress report of the
investigating Revenue Officer duly noted by his G r o u p
Supervisor and a p p r o v e d by the R e v e n u e District Officer/
Chief, SID.
(f) T h e Regional Director shall maintain an LA Regis-
ter for all LAs issued by h i m . All issuances, revalidations,
cancellations, case closures, a s s e s s m e n t s and other mat-
ters in relation to LAs should be entered in the LA Register.
Entries in the LA Register must be c o m p l e t e and u p d a t e d .
Note: Rev. M e m o . Cir. No. 9 8 - 2 0 1 0 prescribes t h e
policies and guidelines to be o b s e r v e d in handling u n s e r v e d
letters of notices (LNs), L A s , a n d Tax Vertification Notices
(TVNs) w h e r e the c o n c e r n e d taxpayers c a n n o t be located.
A m o n g others, the taxpayer shall be given t h e "Cannot
Be Located ( C B C ) status, the c o n c e r n e d BIR office shall
r e c o m m e n d the cancellation of registration a n d invoicing
privileges (Authority to Print Invoices and Receipts), and
deficiency tax a s s e s s m e n t s shall be issued b a s e d on the
discrepancies noted or the best e v i d e n c e obtainable in the
case.
23. Electronic issuance of letters of authority. Rev. M e m o .

Order No. 4 4 - 2 0 1 0 provides the policies a n d guidelines in t h e
electronic issuance of LAs.
(1) All c o n c e r n e d BIR officials and e m p l o y e e s shall m a k e

use of the facilities of Letter of Authority Monitoring S y s t e m
(LAMS) in the filing, processing, a n d approval of requests for
issuance of electronic LAs as well as the generation/printing of
the s a m e .
(2) T h e electronic LA shall contain a notation stating that

the taxpayer is requested to verify the validity of the LA with the
authorized BIR official, at the address and contact information
provided therein.
(3) T h e electronic LA shall be served by any one of the
R O s w h o s e n a m e s a p p e a r on the LA.
(4) In the event that, in the course of the processing of
a request for issuance of an electronic LA submitted by an
investigating office, it should be determined that a valid LA
has b e e n previously issued by another investigating office for
the s a m e taxpayer covering the s a m e tax type(s) and taxable
period, the resolution of w h i c h investigating office shall handle
t h e audit shall be d e t e r m i n e d by the C o m m i s s i o n e r of Internal
R e v e n u e , or the d e s i g n a t e d official.
(5) Beginning J u n e 1, 2 0 1 0 , the rule on the need for

revalidation of LAs for failure of the revenue officials to complete
the audit within the prescribed period shall be withdrawn.
Accordingly, there is no n e e d for revalidation of the LA even if
t h e prescribed audit period has b e e n e x c e e d e d . However, the
failure of the RO to c o m p l e t e the audit within the prescribed
period shall be subject to t h e applicable administrative
sanctions.
Rev. M e m o . Order No. 6 2 - 2 0 1 0 provides supplemental

guidelines on the electronic issuance of Letters of Authority
(eLAs) and related audit policies and procedures. Starting July,
2 0 1 0 , the manual i s s u a n c e of LAs and Tax Verification Notices
(TVNs) shall be discontinued for all investigating offices under
the Large Taxpayer Service (LTS), the Enforcement Services
(ES), and the various Task Forces and Special Teams authorized
by the C o m m i s s i o n e r to conduct audit/investigation. Rev.
M e m o . Cir. No. 61-2010 s u s p e n d e d temporarily the issuance of
e L A s (except by the Commissioner) and revoked the issuance
of manual T V N s for One-Time Transaction (ONETT) cases
subject to estate tax, donor's tax, and transfers of properties
subject to CGT, CWT, and DST. Further, Rev. M e m o . Order No.
64-2010 w a s issued to address security features of the eLAs
forms.
Rev. M e m o . Order No. 69-2010 superseded Rev. Memo.
Cir. No. 61-2010 and a m e n d e d certain provisions of Rev.
M e m o . Order No. 62-2010 (as a m e n d e d by R M O No. 64-2010)
specifically on the issuance of eLAs, and TVNs. Under Rev.
Memo. Order No. 69-2010, starting August 16, 2010, BIR Form
ANNOTATED
No. 1966 (replacing No. 1965) shall be issued by the BIR for
the audit/investigation of tax liabilities, except estate cases
for which T U N s shall be issued until December 3 1 , 2010. All
previous LAs shall be retrieved and replaced with the new
Form. The R M O also provides policies and procedures in the
verification, review of tax returns, and issuance of Certificate
Authorizing Registration (CAR) prescribed under Rev. M e m o .
Order No. 15-2003, for O N E T T cases covered by T V N s .
Rev. M e m o . Cir. No. 80-2010 clarifies t h e rules on the
issuance of eLAs pursuant to Rev. M e m o . Order No. 6 9 - 2 0 1 0
which requires the use of BIR Form No. 1966 in the printing of
eLAs issued under the L A M S .
24. Issuance of notices of informal conference. Rev. M e m o .
Order No. 55-2010 revises the procedures on the issuance of LAs.
(1) The issuance of notices of informal conference m a y
immediately c o m m e n c e e v e n without t h e prior issuance of
an LA, as required in certain situations a n d as prescribed in
existing R M O s on the Letter Notice (LN) s y s t e m .
(2) This is in o b s e r v a n c e of the Court of Tax A p p e a l s (CTA)
decision in CTA C a s e No. 7 0 9 3 (Feb. 2 2 , 2 0 0 6 ) upholding the
provisions of Rev. M e m o . Cir. No. 4 0 - 2 0 0 3 on t h e treatment
of the LN as a "notice of audit or investigation in t h e a b s e n c e
of evident error or clear a b u s e of d i s c r e t i o n " a n d in order to
expedite the processing of LN c a s e s .
Note: Rev. M e m o . Order N o . 5 5 - 2 0 1 0 a m e n d s t h e pertinent
provisions of R M O No. 7-2010; all previous R M O s concerning
the Tax Reconciliation S y s t e m ( R M O N o . 2 8 - 2 0 0 7 , as a m e n d e d
b y R M O No. 4-2008); the R E L I E F / S L S P S y s t e m ( R M O No.
30-2003, a s a m e n d e d b y R M O Nos. 4 2 - 2 0 0 3 , 2 4 - 2 0 0 4 , 3 2 -
2005, 32-2007 a n d 36-2008); and t h e Third-Party M a t c h i n g -
B O C Data P r o g r a m ( R M O No. 3 4 - 2 0 0 4 , a s a m e n d e d b y R M O
Nos. 4 6 - 2 0 0 4 , 32-2005 a n d 32-2007); a n d all other relevant
issuances.
25. Requirements from banks and financial intermediaries

3
under audit or examination.
(1) For Income TaxA/Vithholding Taxes.
3
Rev. Memo. Order N o . 56-99 requires a different set of reporting requirements
and procedures applicable to banking, insurance, and interrelated group of compa-
nies taking into account the specific industry's peculiarities, (see Note to Annotation
No. 8[7].)
(a) Income Tax Return ( R B U and F C D U ) ;

(b) Certified Financial Statements, including compara-
tive Profit a n d Loss Statement with Statement of Cost of
G o o d s M a n u f a c t u r e d a n d S o l d , if applicable;
(c) Proof of claimed tax credit/s, if applicable;
( d ) Bangko Sentralng Pilipinas (BSP) approval of bad
debts;
( e ) X e r o x copy of used Tax Credit Certificate with
annotation of issued Tax Debit M e m o . ( T D M ) at the back, if
applicable;
(f) Reconciliation of "Book Income" and "Taxable

Income;
(g) Proof of payment of deficiency tax, if any/
applicable:
1) current year;
2) previous year; a n d
(h) reports submitted to applicable regulatory agency
that reflect the financial condition and result of operation of
t h e taxpayer, if applicable (e.g., Statement of Condition and
Statement of Income a n d E x p e n s e s B a n g k o Sentral ng
Pilipinas). (Annex A, Rev. M e m o . Order No. 50-99.)
(2) For Other Percentage Taxes:

(a) Proof of claimed tax credits;
(b) Proof of payment of the tax;
(c) Xerox copy of used Tax Credit Certificate (TCC)

with annotation of issued Tax Debit M e m o (TDM) at the
back; a n d
(d) Proof of payment of deficiency tax:
1) current year;
2) previous year. (Ibid.)
(3) For Documentary Stamp Tax:
(a) Proof of payment of the tax;

(b) Xerox copy of used Tax Credit Certificate (TCC)
with annotation of issued T D M at the back, if applicable;
and
ANNOTATED
(c) Proof of payment of deficiency tax, if any:

1) current year;
Note: Banking and financial intermediaries are n o w
subject to VAT.
26. Requirements from insurance companies under audit
or examination.
(1) For Income Tax.
(a) Income Tax Return;
(b) Certified Financial Statements, including c o m p a r a -
tive Profit and Loss Statement with S t a t e m e n t of Cost of
G o o d s Manufactured a n d S o l d , if applicable;
(c) Proof of claimed tax credit/s, if applicable;
(d) Xerox copy of u s e d Tax Credits Certificate with a n -
notation of issued T D M at the back, if applicable;
(e) Reconciliation of "Book I n c o m e " a n d "Taxable In-
come";
(f) Proof of p a y m e n t of deficiency tax, if any/applica-
ble:
1) current year;
(g) reports submitted to applicable regulatory a g e n c y
that reflect the financial condition a n d result of operation
of the taxpayer, if applicable (e.g., A n n u a l S t a t e m e n t
from Insurance C o m m i s s i o n / X e r o x c o p i e s of pertinent
information necessary in t h e c o m p u t a t i o n of p r e m i u m tax,
value-added tax and d o c u m e n t a r y s t a m p tax. (Annex B,
Ibid.)
(2) For Value-Added Tax.

(b) Proof of Tax C o m p l i a n c e Certificates applied;
(c) Xerox copy of u s e d Tax Credit Certificate ( T C C )
with annotation of issued T D M at the back, if applicable;
(d) Proof of p a y m e n t of deficiency tax, if any:
1) current year;
.235 COMPLIANCE REQUIREMENTS 603
(e) Certification of t h e appropriate government agency

as to taxpayer's entitlement to tax incentives, if applicable
(Ibid.)
(3) For Documentary Stamp Tax.
(a) Proof of p a y m e n t of the tax;
(b) X e r o x c o p y of used Tax Credit Certificate (TCC)

with annotation of issued Tax Debit M e m o . (TDM) at the
back, if applicable; and
(c) Proof of p a y m e n t of deficiency tax, if any:

1) current year;
(4) For Other Percentage Taxes.
(a) Proof of c l a i m e d tax credits;
(b) Proof of p a y m e n t of t h e tax;
(c) X e r o x c o p y of u s e d Tax Credit Certificate (TCC)
with annotation of issued Tax Debit M e m o . ( T D M ) at the
back; and
(d) Proof of p a y m e n t of deficiency tax:

1) current year;
27. Requirements from interrelated group of companies under
audit or examination:
(1) For Income Tax.
(b) Certified Financial Statements, including compara-
tive Profit and Loss Statement with Statement of Cost of
G o o d s Manufactured and Sold, if applicable;
(c) Proof claimed tax credit/s, if applicable;
(d) Xerox copy of used Tax Credit Certificate with
annotation of issued Tax Credit M e m o . (TDM) at the back,
if applicable;
(e) Reconciliation of "Book Income" and "Taxable
Income"; and
(f) Proof of payment of deficiency tax, if any/applica-
ble:
ANNOTATED
1) current year;
2) previous year. (Annex C, Ibid.)
(2) For Value-Added Tax:
(b) Proof of Tax Compliance Certificates applied;
back, if applicable;
(d) Proof of payment of deficiency tax, if any:
1) current year;
2) previous year;
(e) Certification of t h e appropriate g o v e r n m e n t agency
as to taxpayer's entitlement to tax incentives, if applicable;
and
(f) S a m p l e invoice/s for "Export/Exempt Sales" if
applicable. (Ibid.)
(3) Same. For audit involving claim for tax refund/TCC
Additional general requirements:
(a) three (3) copies of "Application for VAT Credit/
Refund"
(b) s u m m a r y List of Local P u r c h a s e s specifying t h e
following:
Registered VAT # of Invoice Date of OR Date Amount Input Total
N a m e of supplier Number Invoice No. of of Tax Invoice
Supplier OR Purchases Amount
(c) photocopies of VAT p u r c h a s e invoices for p u r c h a s e

of g o o d s a n d official receipts for p u r c h a s e of services (The
invoices/official receipts must be a r r a n g e d according to the
s u m m a r y list);
(d) s u m m a r y of importations m a d e during the period

with the following details:
Date of Supplier Item AWB/ Date of Total Date of OR. VAT

l n v o i c e
BL No Arrival Value Payment No.
(e) photocopies of invoices, import entry d o c u m e n t s ,

official receipts or confirmation receipts evidencing
payment of VAT. (Segregate d o c u m e n t s paid by cash from

those paid by Tax Debit M e m o ) ;
(f) VAT Returns filed for the quarter showing that the
a m o u n t applied for refund/TCC has been reflected as a
deduction f r o m the total available input tax, as well as VAT
Return for the s u c c e e d i n g quarter;
(g) Certification of taxpayer s h o w i n g the amount of

Zero-rated Sales, Taxable Sales, and Exempt Sales.
(h) A S t a t e m e n t s h o w i n g t h e a m o u n t and description
of the sate of g o o d s and services, n a m e s of persons or
entities (except in c a s e of exports) to w h o m the goods or
services w e r e sold a n d dates of the transactions, w h e r e the
applicant's zero-rated transactions are regulated by certain
government agency;
(i) Article of Incorporation for first time filers;
(j) B O I Certificate of Registration;
(k) BIR Certificate of Registration;
(I) Certification f r o m B O I , DOF, B O C , EPZA, etc.,
that subject taxpayer has not filed similar claim for refund
covering t h e s a m e period;
(m) S w o r n statement that e n d i n g inventory as of the
close of the period covered by the Claim has been used
directly or indirectly in the products subsequently exported
as supported by export d o c u m e n t s , if the applicant is 1 0 0 %
exporter;
(n) D o c u m e n t s of liquidation evidencing the actual
utilization of the raw material in the manufacture of goods
at least 7 0 % of which has been actually exported, if the
applicant is an indirect exporter; and
(o) Copy of the ITR and Certified Financial Statements,
if applicable. (Ibid.)
(4) Same. Additional specific requirements for export
sales (semi-conductor companies, garments, food, etc.);
(a) sales invoice number, name of buyer, airway
bill/bill of lading number, lading date, amount of sales in
foreign currency, peso value of sales, conversion rate,
date of remittance, bank credit m e m o number, and amount
remitted in pesos;
ANNOTATED
(b) photocopies of export documents:

1) invoices/receipts evidencing sale of goods, as
well as the name of the person to w h o m the goods w e r e
delivered with respect to foreign currency denominated
sales; and
2) export declaration/permit; and
(c) accredited agent bank showing that the proceeds
of the sale in acceptable foreign currency had been
inwardly remitted and accounted for in accordance with
B S P rules and regulations. T h e statement should also
s h o w the a m o u n t in foreign currency of the export proceeds
or consideration, date of export, date of inward remittance,
conversion rate into Philippine currency and the total peso
value thereof. (Ibid.)
(5) Same. Additional specific requirements for zero-
rated sale of services (contractors, mining, etc.);
(a) Authenticated copy/files of t h e contract/s, s h o w i n g
the person/s for w h o m services w e r e r e n d e r e d , a m o u n t of
consideration, description of the services and d o c u m e n t s
evidencing actual p a y m e n t s ;
(b) Photocopies of official receipts a n d billing together

with a s u m m a r y of t h e date of billing, n a m e of principal,
official receipt number, date of receipt, a m o u n t in foreign
currency and the corresponding value thereof, date of
remittance, n a m e of bank, bank credit m e m o n u m b e r and
a m o u n t remitted in pesos; and
(c) Bank credit m e m o r a n d a a n d certificate f r o m the

B S P with information similar to 4-c (export sales). (Ibid.)
In addition to the a b o v e , for m a n n i n g services:
(a) Monthly B S P report on income of a g e n c y received;
and
(b) B r e a k d o w n of gross foreign receipts specifying

the nature of foreign currency received (e.g., c o m m i s s i o n ,
allotment, m a n n i n g fee, a g e n c y fee, a d v a n c e s , etc.)
showing the total foreign currency value with its peso
equivalent bank credit m e m o number, n a m e of bank, a n d
date of remittance. (Ibid.)
(6) Same. A d d i t i o n a l specific requirements for effectively
zero-rated sale of g o o d s (mining, etc.)/services (contractors,
etc.):
(a) S u m m a r y of sales invoices/receipts showing the

n a m e of the p e r s o n entity to w h o m the g o o d s or services sold
w e r e delivered, order of delivery, amount of consideration
and description of g o o d s or services delivered (Rev. Regs.
No. 6-89 a n d Rev. M e m o . Cir. No. 2-90.);
(b) Reconciliation of billings against payment; and

(c) E v i d e n c e of actual receipt of g o o d s and services.
(Ibid.)
In addition to the a b o v e , for mining c o m p a n i e s :
(a) Reconciliation of billings against actual collection;
and
(b) Operating a g r e e m e n t with o w n e r of mining claims,
if applicable.
(7) Same. P u r c h a s e of capital g o o d s :
(a) Local. Original copies of invoices/receipts
s h o w i n g the date of p u r c h a s e , purchase price, a m o u n t
of v a l u e - a d d e d tax paid a n d description of the capital
e q u i p m e n t locally p u r c h a s e d ;
(b) Imported. P h o t o c o p y of import entry documents
and official receipts/confirmation receipts of payment
issued by the B u r e a u of C u s t o m s for value-added tax paid.
(Ibid.)
(8) For Documentary Stamp Tax:
(a) Proof of p a y m e n t of the Tax;
back, if applicable; and
(c) Proof of payment of deficiency tax, if any:
1) current year;
(9) For Other Percentage Taxes:
(b) Proof of payment of the tax;
back; and
(d) Proof of payment of deficiency tax:
ANNOTATED
1) current year;
28. Requirements from all other taxpayers under audit or

examination.
(1) For Income Tax.
(b) Certified Financial Statements, including c o m p a r a -
tive Profit and Loss Statement with Statement of Cost of
G o o d s Manufactured and S o l d , if applicable;
(c) Proof claimed tax credits/s, if applicable;
(d) Xerox copy of used Tax Credit Certificate with
annotation of issued Tax Debit M e m o ( T D M ) at t h e back, if
applicable;
(e) Reconciliation of "Book Income" and "Taxable
Income"; and
(f) Proof of payment of deficiency tax, if any/
applicable:
1) current year;
2) previous year. (Annex D, Ibid.)
(2) For Value-Added Tax.
(a) Proof of c l a i m e d tax credits;
(b) Proof of Tax C o m p l i a n c e Certificates applied;
(c) X e r o x c o p y of u s e d Tax Credit Certificate ( T C C )
with annotation of issued Tax Debit M e m o ( T D M ) at the
(d) Proof of p a y m e n t of deficiency tax, if a n y :

1) current year;
2) previous year;
(e) Certification of the appropriate g o v e r n m e n t a g e n c y
as to taxpayer's entitlement to tax incentives, if applicable;
and
(f) S a m p l e invoice/s for "Export/Exempt Sales," if

applicable. (Ibid.)
(3) Same. (Audit involving claim for refund/TCC).

Additional general requirements:
(a) T h r e e (3) copies of "Application for VAT Credit/

Refund"
(b) S u m m a r y List of Local Purchases specifying the

following:
Registered VAT # of Invoice Date of OR Date Amount Input Total

N a m e of supplier Number Invoice No. of of Tax Invoice
Supplier OR Purchases;
(c) photocopies of VAT p u r c h a s e invoices for purchase

of g o o d s a n d official receipts for purchase of services (The
invoices/official receipts must be arranged according to the
s u m m a r y list.);
(d) s u m m a r y of importations m a d e during the period

with the following details:
Date ofSupplier Item AWB/ Date of Total Date of O.R. VAT
Invoice BLNo. Arrival Value Payment No.
(e) photocopies of invoices, import entry d o c u m e n t s ,

official receipts or confirmation receipts evidencing
p a y m e n t of VAT. (Segregate d o c u m e n t s paid by cash from
those paid by Tax Debit M e m o . ) ;
(f) VAT Returns filed for the quarter showing that the
a m o u n t applied for refund/TCC has been reflected as a
deduction f r o m the total available input tax, as well as VAT
Return for the succeeding quarter;
(g) Certification of taxpayer showing the amount of

Zero-rated Sales, Taxable Sales and Exempt Sales;
(h) A Statement showing the a m o u n t and description

of the sate of g o o d s and services, n a m e of persons or
entities (except in case of exports) to w h o m the goods or
services w e r e sold and date of the transaction, where the
applicant's zero-rated transactions are regulated by certain
government agency;
(i) Article of Incorporation for first time filers;

G) BOI Certificate of Registration;
(k) BIR Certificate of Registration;

ANNOTATED
(I) Certification from B O I , DOF, B O C , EPZA, etc.,

that subject taxpayer has not filed similar claim for refund
covering the same period;
(m) Sworn statement that ending inventory as of the
close of the period covered by the Claim has been used
directly or indirectly in the products subsequently exported
as supported by export d o c u m e n t s , if the applicant is 1 0 0 %
exporter;
(n) D o c u m e n t s of liquidation evidencing the actual
utilization of the raw material in the manufacture of g o o d s
at least 7 0 % of which has b e e n actually e x p o r t e d , if the
applicant is an indirect exporter; and
(o) C o p y of the ITR and Certified Financial Statements,
if applicable. (Ibid.)
(4) Same. Additional specific requirements for export
sales/(semi-conductor c o m p a n i e s , g a r m e n t s , f o o d , etc.):
(a) sales invoice number, n a m e of buyer, airway
bill/bill of lading number, lading date, a m o u n t of sales in
foreign currency, peso value of sales, conversion rate,
date of remittance, bank credit m e m o n u m b e r a n d a m o u n t
remitted in peso;
(b) photocopies of export d o c u m e n t s :
1) invoices/receipts e v i d e n c i n g sale of g o o d s , as
well a s the n a m e o f t h e person t o w h o m t h e g o o d s w e r e
delivered with respect to foreign currency d e n o m i n a t e d
sales;
2) export declaration/permit;
(c) accredited agent bank s h o w i n g that t h e proceeds
of the sale in a c c e p t a b l e foreign currency had b e e n
inwardly remitted a n d a c c o u n t e d for in a c c o r d a n c e with
B S P rules a n d regulations. T h e s t a t e m e n t should also
s h o w the a m o u n t in foreign currency of t h e export proceeds
or consideration, date of export, d a t e of inward remittance,
conversion rate into Philippine currency a n d the total peso
value thereof. (Ibid.)
(5) Same. Additional specific requirements for z e r o -

rated services (contractors, m i n i n g , etc.):
( a ) Authenticated copy/files of t h e contract/s, s h o w i n g
the person/s for w h o m services w e r e r e n d e r e d , a m o u n t of
consideration, description of the services and documents

evidencing actual p a y m e n t s ;
(b) Photocopies of official receipts and billing together

with a s u m m a r y of the date of billing, n a m e of principal,
official receipt number, date of receipt, a m o u n t in foreign
currency a n d t h e c o r r e s p o n d i n g value thereof, date of
remittance, n a m e of bank, bank credit m e m o number and
a m o u n t remitted in pesos; a n d
(c) Bank credit m e m o r a n d a and certificate from the

B S P with information similar to 4-c (export sales). (Ibid.)
In addition to t h e a b o v e , for m a n n i n g services:
(a) Monthly B S P report on income of agency received;
and
(b) B r e a k d o w n of gross foreign receipts specifying the
nature of foreign currency received (e.g., c o m m i s s i o n , al-
lotment, m a n n i n g fee, a g e n c y f e e , a d v a n c e s , etc.) show-
ing the total foreign currency value with its peso equiva-
lent bank credit m e m o number, n a m e of bank, and date of
remittance. (Ibid.)
(6) Same. A d d i t i o n a l specific requirements for effectively

zero-rated sale of g o o d s (mining, etc.)/services (contractors,
etc.):
(a) S u m m a r y of sales invoices/receipts showing the
n a m e of the person entity to w h o m the g o o d s or services sold
w e r e delivered, order of delivery, a m o u n t of consideration
and description of g o o d s or services delivered (Rev. Regs.
No. 6-89 and Rev. M e m o . Cir. No. 2-90.);
(b) Reconciliation of billings against payment; and
(c) Evidence of actual receipt of goods and services.
(Ibid.)
In addition to the a b o v e , for mining companies:
(a) Reconciliation of billings against actual collection;
and
(b) Operating agreement with owner of mining claims,
if applicable.
(7) Same. Purchase of Capital Goods:
(a) Local. original copies of invoices/receipts
showing the date of purchase, purchase price, amount
ANNOTATED
of value-added tax paid and description of the capital

equipment locally purchased;
(b) Imported. photocopy of import entry documents
and official receipts/confirmation receipts of payment
issued by the Bureau of C u s t o m s for value-added tax paid.
(Ibid.)
(8) For Documentary Stamp Tax.
(a) Proof of payment of the tax;
(c) Proof of p a y m e n t of deficiency tax, if any:
1) current year;
(9) For Other Percentage Taxes.
(b) Proof of p a y m e n t of the tax;
(c) X e r o x copy of used Tax Credit Certificate ( T C C )
with annotation of issued Tax Debit M e m o ( T D M ) at the
back; and
(d) Proof of p a y m e n t of deficiency tax:
1) current year;
29. Guidelines re production of books of accounts and issuance
of subpoena duces tecum. Rev. M e m o . Order No. 4 5 - 1 0
prescribes the guidelines for the production of b o o k s of accounts
and/or records and d o c u m e n t s , and t h e issuance of subpoena
duces tecum for failure of taxpayers to c o m p l y with requests to
submit records.
(1) After 10 calendar d a y s f r o m receipt by the taxpayer of

(a) the LA and checklist of presentation of requirements for
the audit or (b) access to records request, the revenue officer
(RO) shall send a F I R S T notice signed by himself and/or his
group supervisor, d e m a n d i n g the taxpayer to furnish the RO
the requirements previously requested.
(2) If the taxpayer ignores the First Notice and continues
to disregard the d e m a n d for the submission of the required
. 235 COMPLIANCE REQUIREMENTS 613
d o c u m e n t s , a S e c o n d and Final Notice, signed by the Head

of Office c o n c e r n e d , shall be sent to the taxpayer after 10
calendar d a y s f r o m receipt of the First Notice.
(3) If, after the taxpayer's receipt of the S e c o n d and

Final Notice, t h e t a x p a y e r still refuses to comply with the
requirements of t h e notice, the Head of Office shall request
for t h e issuance of a subpoena duces tecum f r o m the Legal
Service (National Office), Legal Division (Regional Office), or
a n y other authorized office, after 10 calendar d a y s from receipt
of t h e S e c o n d a n d Final Notice.
(4) T h e RO must immediately serve the subpoena duces

tecum on the t a x p a y e r a n d shall return a served copy of the
subpoena duces tecum to t h e office which issued the s a m e
within five (5) calendar d a y s f r o m the issuance thereof.
(5) If t h e taxpayer refuses to c o m p l y with the s u b p o e n a , the
c o n c e r n e d BIR legal office shall take the following courses of
action:
(a) File a criminal c a s e against the taxpayer for
violation of Section 5 in relation to Sections 14 and 266 of
the Tax C o d e ; and/or
(b) Initiate proceedings to cite the taxpayer for c o n -

t e m p t under Section 3(f), Rule 71 of the Revised Rules of
Court.
(6) If the t a x p a y e r subsequently requests for the dismissal

of the case filed in court and submits the requested information,
the c o n c e r n e d BIR office shall concur with such request for
dismissal upon the submission of the requested document/s
and the p a y m e n t by the taxpayer of penalty in the amount of
P10,000 for the delayed compliance and violation of pertinent
provisions of t h e revenue regulations.
30. Tax liability of a dissolved corporation. T h e indebtedness

of a corporation to the g o v e r n m e n t for taxes is not extinguished by
its dissolution. It has b e e n stated: "That the hands of the government
cannot, of course, collect taxes from a defunct corporation, it loses
thereby none of its rights to assess taxes which had been due from
the corporation and to collect t h e m from persons, w h o by reason
of transactions with the corporation, hold property against which
the tax can be enforced, and that the legal death of the corporation
no more prevents such action than would the physical death of an
individual prevent the government from assessing taxes against him
ANNOTATED
and collecting them from his administrator w h o holds the property

which the decedent had formerly possessed." (Tan Tiong Bio vs.
Comm., 4 S C R A 986, April 23, 1962, citing W o n d e r Bakeries Co.
vs. U.S. [1934], Ct., C1.6 F. Supp. 288.)
3 1 . Corporate reorganization plan calls for transfer of all assets

of Philippine Branch of a foreign corporation to a subsidiary to be
organized under Philippine laws. Such reorganization results in
the dissolution of the branch and the formation of the subsidiary. It
arises even if the change of status f r o m a branch to a subsidiary did
not result in the distribution of net assets a n d earnings of a branch
to the parent company. Under Section 235(3), it is clear that a
branch contemplating dissolution will return f r o m business; h e n c e ,
its books of accounts should be e x a m i n e d before a tax clearance
shall be issued. (BIR Ruling No. 0 0 5 , J a n . 3, 1990.)
32. Tax-exempt organizations. Before the amendment
by Presidential Decree No. 1457 of Section 2 3 5 (addition of last
par.), tax-exempt organizations or entities, particularly foundations
registered with the National Science D e v e l o p m e n t B o a r d , w e r e not
investigated by the BIR. For this r e a s o n , the BIR could not k n o w
as to whether c o m p l i a n c e with the conditions i m p o s e d for the tax
exemptions w e r e m a d e , i.e., entities enjoying tax e x e m p t i o n s are
required to keep book of accounts, file i n c o m e tax return, etc. (Rev.
M e m o . Cir. No. 89-78.)
- oOo -
CHAPTER II
ADMINISTRATIVE PROVISIONS
SEC. 236. Registration Requirements.

( A ) Requirements. Every person subject to any internal
revenue tax shall register once with the appropriate Revenue
District Officer:
(1) Within ten (10) days from date of employment, or
(2) On or before the commencement of business, or
(3) Before payment of any tax due, or
(4) Upon filing of a return, statement or declaration as required
in this Code.
The registration shall contain the taxpayer's name, style, place of
residence, business, and such other information as may be required
by the Commissioner in the form prescribed therefor.
A person maintaining a head office, branch or facility shall
register with the Revenue District Officer having jurisdiction over
the head office, branch or facility. For purposes of this Section, the
term "facility" may include but not be limited to sales outlets, places
of production, warehouses or storage places.
(B) Annual Registration Fee. An annual registration fee
in the amount of Five hundred pesos (P500) for every separate or
distinct establishment or place of business, including facility types
where sales transactions occur, shall be paid upon registration
and every year thereafter on or before the last day of January:
Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas
workers are not liable to the registration fee herein imposed.
The registration fee shall be paid to an authorized agent bank
located within the revenue district, or to the Revenue Collection
Officer, or duly authorized Treasurer of the city or municipality
where each place of business or branch is registered.
615
ANNOTATED
(C) Registration of Each Type of Internal Revenue Tax. Every

person who is required to register with the Bureau of Internal
Revenue under Subsection (A) hereof, shall register each type of
internal revenue tax for which he is obligated, shall file a return
and shall pay such taxes, and shall update such registration of any
changes in accordance with Subsection (E) hereof.
(D) Transfer of Registration. In case a registered person
decides to transfer his place of business or his head office or
branches, it shall be his duty to update his registration status by
filing an application for registration information update in the form
prescribed therefor.
(E) Other Updates. Any person registered in accordance with
this Section shall, whenever applicable, update his registration
information with the Revenue District Office where he is registered,
specifying therein any change in tax type and other taxpayer details.
(F) Cancellation of Registration.
(1) General Rule. The registration of any person who ceases
to be liable to a tax type shall be cancelled upon filing with the
Revenue District Office where he is registered, an application for
registration information update in a form prescribed therefor;
(2) Cancellation of Value-Added Tax Registration. A VAT-
registered person may cancel his registration for V A T if:
(a) He makes written application and can demonstrate to
the Commissioner's satisfaction that his gross sales or receipts
for the following twelve (12) months, other than those that are
exempt under Section 109(A) to ( U ) , will not exceed One million
five hundred thousand pesos (PI,500,000); or
(b) He has ceased to carry on his trade or business, and does
not expect to recommence any trade or business within the next
twelve (12) months.
The cancellation of registration will be effective from the first
day of the following month, (as amended by RA. No. 9337.)
(G) Persons Required to Register for Value-added Tax.
(1) Any person who, in the course of trade or business, sells,
barters or exchanges goods or properties, or engages in the sale or
exchange of services, shall be liable to register for value-added tax if:
(a) His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under Section 109 ( A )
to (U), have exceeded Pl,500,000; or
Administrative Provisions
(b) There are reasonable grounds to believe that his gross

sales or receipts for the next twelve (12) months, other than
those that are exempt under Section 109(A) to (U), will exceed
Pl,500,000.
(2) Every person who becomes liable to be registered under
paragraph (1) of this Subsection shall register with the Revenue
District Office which has jurisdiction over the head office or branch
of that person, and shall pay the annual registration fee prescribed
in Subsection (B) hereof. If he fails to register, he shall be liable to
pay the tax under Title IV as if he were a VAT-registered person,
but without the benefit of input tax credits for the period in which
he was not properly registered, (as amended by R.A. No. 9337.)
(H) Optional registration for value-added tax of exempt person.
(1) Any person who is not required to register for value-added
tax under Subsection (G) hereof may elect to register for value-
added tax by registering with the Revenue District Office that
has jurisdiction over the head office of that person, and paying the
annual registration fee in Subsection (B) hereof, (as amended by
R.A. No. 9337.)
(2) Any person who elects to register under this Subsection
shall not be entitled to cancel his registration under Subsection (F)
(2) for the next three (3) years, (as amended by R.A. No. 9337.)
For purposes of Title IV of this Code, any person who has regis-
tered value-added tax as a tax type in accordance with the provi-
sions of Subsection (C) hereof shall be referred to as VAT-registered
person who shall be assigned only one Taxpayer Identification Num-
ber.
( I ) Supplying of Taxpayer Identification Number (TIN). Any
person required under the authority of this Code to make, render
or file a return, statement or other document shall be supplied with
or assigned a Taxpayer Identification Number ( T I N ) which he shall
indicate in such return, statement or document filed with the Bureau
of Internal Revenue for his proper identification for tax purposes,
and which he shall indicate in certain documents, such as, but not
limited to, the following:
(1) Sugar quedans, refined sugar release order or similar
instruments;
(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds or
Assessor's Office;
ANNOTATED
(4) Registration certificate of transportation equipment by land,

sea or air;
(5) Documents to be registered with the Securities and Exchange
Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or
other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of
Trade and Industry; and
(10) Such other documents which may hereafter be required
under rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
In cases where a registered taxpayer dies, administrator or
executor shall register the estate of the decedent in accordance with
Subsection ( A ) hereof and a new Taxpayer Identification Number
( T I N ) shall be supplied in accordance with the provisions of this
Section.
In the case of a nonresident decedent, the executor or admi-
nistrator of the estate shall register the estate with the Revenue
District Office where he is registered: Provided, however, That in
case such executor or administrator is not registered, registration
of the estate shall be made with and the Taxpayer Identification
Number ( T I N ) supplied by the Revenue District Office having
jurisdiction over his legal residence.
Only one Taxpayer Identification Number ( T I N ) shall be
assigned to a taxpayer. Any person who shall secure more than one
Taxpayer Identification Number shall be criminally liable under the
provisions of Section 2 7 5 on "Violation of Other Provisions of this
Code or Regulations in General." (a)
ANNOTATION
1. T h e a m e n d m e n t s by R.A. No. 8 4 2 4 a r e as follows:

(1) Subsections (A), (C), (D), a n d (E) are n e w ;
(2) Subsection (B) a n d the other provisions of Subsection
(A) are taken f r o m former Sections 107 (Registration of
Value-Added Taxpayers) a n d 2 3 7 (Registration of n a m e or
style with the revenue district officer or collection agent) with

amendments;
(3) Subsections (F), (G), (H), and (I) are taken from former
Section 107, with a m e n d m e n t s ; and
(4) Subsection (J) is taken from former Section 236
(Indication of Taxpayer Identification Number), with substantial
amendments.
(5) Provision is n o w m a d e for the registration of the estate

of a d e c e a s e d taxpayer. (2nd a n d 3rd pars, f r o m last.)
2. Section 236 provides for registration of every person
subject to any internal revenue tax including those w h o sell, etc.
g o o d s , properties or services (i.e., w h o m a k e taxable sales, etc.
under Sees. 106 a n d 108) in t h e c o u r s e of trade or business. Those
not subject to VAT are, likewise, required to register as non-VAT
taxpayers pursuant to Section 2 3 6 .
(1) Local g o v e r n m e n t s h a v e no power to require business

establishments to register their sales invoices with the city or
municipal treasurer. T h e registration of business establishments
is a function exclusively granted to the BIR pursuant to the
b o o k k e e p i n g regulations in relation to Section 232 of the Tax
C o d e . (Dept. of Finance Ruling, 1976.)
(2) Pursuant to R e v e n u e M e m o r a n d u m Circular No. 4-98
s u p p l e m e n t i n g Rev. Regs. No. 7-95, the t e r m "in the course
of business," w a s further qualified in the light of the declared
policy of the g o v e r n m e n t to provide, as m u c h as possible, an
equitable relief to a greater n u m b e r of taxpayers in order to
improve levels of disposable i n c o m e and increase economic
activity. T h e BIR held that "any business or businesses pursued
by an individual w h e r e the aggregate gross sales or receipts do
not e x c e e d P100,000.00 during any 12-month period shall be
considered principally for subsistence or livelihood and not in
the course of business." Although still required to register, they
shall nevertheless be e x e m p t e d f r o m the payment of registration
fee as prescribed under Section 236(B), and from the payment
of value-added tax and percentage taxes, in accordance with
Rev. M e m o . Cir. No. 4-98 dated January 2 1 , 1998. (BIR Ruling
No. 073-00, Dec. 22, 2000.)
(3) Non-stock, non-profit educational institutions are not
exempt from the requirement of keeping books of accounts and
payment of the annual registration fee pursuant to Rev. Memo.
Cir. No. 76-2003. BIR Ruling No. 159-98 (Nov. 11, 1998.)
ANNOTATED
has become ineffective in respect of the non-requirement of

keeping of books of accounts and exemption from the annual
registration fee by non-stock, non-profit educational institutions.
(BIR Ruling No. DA-682-07, Dec. 2 7 , 2007.)
3. Primary registration of taxpayers. T h e term "primary
registration" means the process by which a person whether an
individual, including estates and trusts, or a corporation and
other juridical entities, upon application and full compliance with
the registration requirements prescribed in these Regulations,
is registered with the consequently included in the registration
database of the Bureau of Internal R e v e n u e (BIR).
It may involve one or two stages d e p e n d i n g on the purpose of

the taxpayer applying for registration.
(1) The initial stage in the primary registration process

involves the application and the issuance of the Taxpayer
Identification N u m b e r (TIN). All persons w h o are subject to any
internal revenue tax or required to render a return, statement,
or other d o c u m e n t as required by t h e provisions of the C o d e ; or
w h o have been m a n d a t e d by other laws to secure T I N for the
execution of certain d o c u m e n t s must u n d e r g o this stage.
(2) T h e s e c o n d stage is t h e s u b s e q u e n t registration of the

employment, business, profession and/or undertaking w h i c h
the p e r s o n , natural or juridical, intends to p u r s u e on account
of which he/it is e x p e c t e d to regularly file tax returns, pay taxes
and fees prescribed by t h e Tax C o d e . (Sec. 2[A], Rev. R e g s .
No. 11-2008.)
Note: Rev. R e g s . No. 11-2008 consolidates a n d updates

all existing revenue regulations relative to primary registration,
particularly on the following: registration u p d a t e s and cancella-
tion procedures; d o c u m e n t a r y requirements; registration f o r m s ;
annual registration fee; certification fee; a n d penalties for r e g -
istration-related violations. Rev. R e g s . No. 5-2010 a m e n d e d
Sections 3 ( D , a n d 12 of Rev. R e g s . No. 11-2008 pertaining to
the issuance of T I N C a r d a n d t h e transfer of registration. T h e
provisions of the Consolidated VAT Regulations (Rev. Regs.
No. 16-2006) for registration are contained in Sections 9.236-1
to 9.236-6. (see A p p e n d i x S.) Rev. M e m o . Order No. 2 6 - 2 0 0 9
prescribes the policies and procedures in t h e implementation
of the Registration S y s t e m ( E n h a n c e d eTIN); Rev. M e m o . Cir.
No. 66-2009 (Dec. 7, 2009)circularizes the full implementation
of the eRegistration S y s t e m .
4. General rules in the application and issuance of TIN.

T h e taxpayer Identification N u m b e r (TIN) pertains to the reference
index n u m b e r issued a n d assigned by the BIR to e a c h and every
person registered in its d a t a b a s e . In all of the business and/or
personal transactions of t h e registered person whether these be
with g o v e r n m e n t offices or otherwise, this reference index number
is required to be indicated.
T h e T I N c o m p r i s e s of a 9 to 13 digit numeric c o d e where the

first 9 digits is the T I N proper and the last 4 digits is the branch code
(in case of business entities). (Sec. 2[B], Ibid.)
(1) This reference index number, o n c e assigned to a

particular taxpayer, is nontransferable;
(2) In c a s e of natural persons, the T I N , o n c e assigned,

stays with the t a x p a y e r permanently regardless of the
cessation a n d cancellation of business registration with the
BIR. Nevertheless, for juridical persons, the TIN is cancelled
at the time of t h e dissolution, merger or consolidation resulting
to termination of their corporate existence through the eventual
cancellation of their registration with the BIR;
(3) Only o n e T I N shall be assigned to the taxpayer. Once

assigned with a T I N , a t a x p a y e r is precluded f r o m applying for
another T I N . Multiple T I N acquisition shall be subject to the
penalty prescribed under Section 20 of these regulations;
(4) A T I N for the estate of a d e c e a s e d person under judicial

settlement and/or a trust under an irrevocable trust agreement
shall be secured separate f r o m the T I N of the deceased person
and/or trustee;
(5) Except for banks with both Regular Banking Unit

(RBU) and with Foreign Currency Deposit Unit (FCDU) that are
assigned with different TINs, there should never be an instance
w h e n a taxpayer can be a holder of multiple TINs;
(6) Neither should there be an instance where two or

several taxpayers are holders of just one identical T I N ;
(7) Once a TIN is assigned to the person, the BIR shall
likewise issue such person a T I N card at the very same time the
TIN is supplied to the taxpayer. However, this policy shall not
apply if the TIN is secured on a venue other than the revenue
district offices;
ANNOTATED
(8) Issuance of TIN card for the first time shall be free of
charge, but subject to the provisions of Section 3 (D) of these
regulations;
(9) Minors w h o are earning and w h o are under the
circumstances prescribed under Executive Order No. 98 shall
be supplied with T I N .
(10) Upon submission of Notice of Death and the Death
Certificate of the decedent, the BIR shall immediately tag as
"cancelled" the T I N of the said decedent and proceed with the
processing and issuance of the TIN of the estate. T h e new
TIN shall be used in the filing of the estate tax return of the
decedent, as well as in the filing of other tax returns if the estate
is under judicial settlement. In case the d e c e d e n t is e n g a g e d
in business, the T I N of decedent shall only be cancelled upon
submission of notice of death and short-term income tax
return covering the period January 1 to the date of his death.
T h e said return shall be filed within sixty (60) d a y s f r o m the
date of d e a t h , unless the heirs/authorized representative/
administrator/executor shall request for an extension to file the
s a m e , but not to e x c e e d six m o n t h s or April 15 of the following
year, whichever is earlier.
(11) In c a s e of business c o m b i n a t i o n s , the T I N of the

dissolved juridical persons shall be t a g g e d as "cancelled". If
one of the parties survived, its T I N must be retained, however,
if a new corporation shall be established, a n e w T I N shall be
issued to such n e w juridical entity.
Note: T h e former t a x p a y e r a c c o u n t n u m b e r (TAN)

system a d o p t e d the so-called S o u n d e x S y s t e m w h i c h is
basically a m e t h o d of generating a set of n u m b e r s based
on the s o u n d of the key letters of a w o r d , specifically of
the n a m e of the taxpayer. (1) Temporary: xxxxxxx (2) O l d :
xxxx-xxx-x T h e tax n u m b e r i n g s y s t e m s a d o p t e d for use
by the BIR w e r e f o u n d technically deficient for effective
computerized data processing. In order to facilitate the
processing of returns a n d other data/information regarding
taxpayers, a Taxpayer Identification N u m b e r (TIN) has b e e n
designed and a d o p t e d by the BIR for implementation under
Rev. M e m o . Order ( R M O ) No. 2 3 - 9 1 . A p e r m a n e n t T I N for
each taxpayer is d e s i g n e d to facilitate the identification
of a taxpayer and his tax records and the processing a n d
recording of tax p a y m e n t s m a d e by him.
5. Persons required or who may secure TIN.

(1) Every person subject to any national internal revenue
tax namely: income tax, estate and donor's taxes, value-
a d d e d tax, percentage tax, excise tax, and documentary stamp
tax, including its branches (for purposes of securing branch
code);
(2) A n y person w h o , although e x e m p t f r o m the imposition
of the taxes i m p o s e d under the C o d e , as a m e n d e d , is
nevertheless required to withhold taxes on account of his/its
income p a y m e n t s m a d e to taxable individuals or entities;
(3) A n y p e r s o n required under Section 236(J) of the tax

Code.
"Such other d o c u m e n t s " on w h i c h the T I N shall be indicated
are the following:
(a) Official receipts, invoices and vouchers required
to be issued by persons e n g a g e d in business, non-
g o v e r n m e n t a l organizations, including non-stock, non-
profit organizations or foundations;
(b) Application for franchise f r o m the Land Transporta-

tion and Franchising Regulatory Board (LTFRB), Maritime
Industry Authority ( M A R I N A ) a n d other g o v e r n m e n t regula-
tory authorities;
(c) Application for accreditation with the Department
of Education (DepEd), C o m m i s s i o n on Higher Education
( C H E D ) a n d other agencies;
(d) Application for tax exemption and registration as
d o n e e institution;
(e) Application for tax clearance from internal revenue
tax liabilities;
(f) Application for business or travel passport with the
Department of Foreign Affairs (DFA) of persons who are
gainfully e m p l o y e d ;
(g) Application for Community Tax Certificate with
a local government unit of persons w h o are gainfully
employed;
(h) Bid forms for government contracts; and
(i) Such other documents similar to any of the above
or as may hereafter be required.
ANNOTATED
(4) As prescribed by Exec. Order No. 98, persons, whether

natural or juridical, dealing with all government agencies
and instrumentalities, including G o v e r n m e n t - O w n e d and/or
Controlled Corporations ( G O C C s ) , and all Local Government
Units (LGUs), are thereby required to incorporate the Taxpayer
Identification Number (TIN) in all forms, permits, licenses,
clearances, official papers and d o c u m e n t s which they secure
from these government agencies, instrumentalities, including
G O C C s and LGUs.
However, diplomatic missions and international organiza-

tions, as identified by the DFA, together with their accredited
foreign personnel, w h i c h , pursuant to Executive Order No. 3 1 ,
are e x e m p t e d from the requirements of the T I N w h e n they a p -
ply for any government permit, license, clearance, official paper
or document, it shall be sufficient that their request for a b o v e -
n a m e d documentation is a c c o m p a n i e d by t h e corresponding
endorsement of the DFA, w h i c h shall include t h e official identity
card issued by the Office of Protocol of the Department, for
the purpose of establishing the bona fides of s u c h entities and
individuals. (Sec. 3[B], Ibid.)
Note: For BIR F o r m , Basic Information required, d o c u m e n -

tary requirements, securing of T I N t h r o u g h other facilities/agen-
cies, and v e n u e for s u b m i s s i o n of application a n d d o c u m e n t a r y
requirements, see Section 3(C) thereof. O n c e application is
approved and a T I N is a s s i g n e d , t h e c o r r e s p o n d i n g T I N C a r d
shall be issued. Rev. M e m o . Cir. N o . 7 2 - 2 0 0 8 (Nov. 3, 2008)
prescribes the guidelines and procedures in t h e issuance of
TIN to Securities & E x c h a n g e C o m m i s s i o n ( S E C ) registrants,
pursuant to the M e m o r a n d u m of A g r e e m e n t ( M O A ) b e t w e e n
the S E C and the BIR in relation to the implementation of Rev.
M e m o . Cir. No. 3 0 - 2 0 0 5 .
6. Registration of employment, business, and other undertak-

ings. To complete the registration pursuant to Section 236(A),
the following persons are required to proceed to t h e s e c o n d stage
of primary registration:
(1) Employees;
(2) Self-employed individuals, professionals, estates and
trusts, and their branches or facilities, if any;
(3) Corporations, partnerships, cooperatives, associations
(whether taxable or nontaxable) and their branches a n d
facilities, if any; and
(4) G o v e r n m e n t agencies and instrumentalities (GATs),

g o v e r n m e n t - o w n e d or - c o n t r o l l e d corportions ( G O C C s ) , local
g o v e r n m e n t units ( L G U s ) , and their branches and faciltities, if
any.
This stage pertains to the subsequent registration of
relevant information of persons e n u m e r a t e d a b o v e through the
a c c o m p l i s h m e n t of prescribed registration f o r m , together with
the submission of the required d o c u m e n t s .
Except for e m p l o y e e s a n d facilities, it is the stage where

the registrants are required to:
(1) pay registration fee, if applicable;
(2) secure Certificate of Registration ( C O R ) ;
(3) get "Ask for Receipt" notice, if applicable; and
(4) attend t h e taxpayer's initial briefing to be conducted
by the BIR for n e w registrants in o r d e r t o apprise t h e m of
their rights a n d duties/responsibilities. (Sec. 5, Ibid.)
7. When to complete registration. Every person subject to
any internal r e v e n u e tax, w h i c h is e x p e c t e d to be paid periodically,
shall proceed to this stage to c o m p l e t e its registration with the BIR:
(1) Employees: within 10 days from date of employment.
This applies to individuals w h o are registering with the BIR
for the first time by reason of e m p l o y m e n t . T h e submission of
the fully-accomplished registration forms to BIR m a y either be
d o n e by t h e e m p l o y e r or t h e e m p l o y e e . However, in the case
of e m p l o y e e s of large taxpayers/TAMP corporations, w h o s e
T I N s w e r e secured through t h e latter, the prescribed registra-
tion form for e m p l o y m e n t shall likewise be submitted through
the employer. In c a s e of failure to register in accordance with
the herein prescribed time, the person required to submit the
prescribed registration f o r m to BIR shall be imposed a penalty
for such violation as prescribed in these regulations.
(2) Self-employed individuals, professionals, estate and
trusts and their branches, if any; branches of corporations: On
or before the commencement of business. C o m m e n c e m e n t
of business, in the case of pursuit shall be reckoned as defined
in Section 2 (supra). A person shall be considered to have
violated this provision w h e n he proceeded to this stage after the
lapse of thirty (30) working days from the day the corresponding
Mayor's Permit/PTR is issued to the taxpayer by the concerned
L G U or have had its sales transaction prior to its registration.
ANNOTATED
(3) Corporations (Taxable or Non-taxable): Before pay-

ment of any tax due. In the case of corporations w h e r e d o c u -
mentary stamp tax (DST) is required to be paid on the original
issuance of shares of stock to the shareholders or subscription
of shares of stock, within five (5) days after the close of the
month when any taxable transaction occurred, such corpora-
tions must proceed to the second stage of registration.
E X A M P L E : A B C corporation w a s issued the S E C Certifi-
cate of Registration on June 2, 2008. Immediately thereafter, it
secured TIN with the BIR. It has a subscribed capital stock of
P1,000,000 and therefore required to pay D S T of P5.000 on or
before July 5, 2 0 0 8 . In this case, the s e c o n d stage BIR registra-
tion shall be d o n e on or before payment of D S T d u e . If it failed
to register on or before July 5, 2 0 0 8 , it shall be considered late
in registration, thus, subject to penalty.
Partnerships, Associations, Cooperatives, Government

Agencies and instrumentalities: Before or upon filing of any
applicable tax return, statement or declaration as required by
the Tax Code.
E X A M P L E : A General Professional Partnership ( G P P )
w a s issued T I N on M a y 2, 2 0 0 8 . T h e following day it paid
its a d v a n c e office rental a m o u n t i n g to P 2 0 . 0 0 0 . 0 0 w h e r e an
a m o u n t of P1,000.00 w a s withheld and m u s t be remitted to t h e
BIR on or before J u n e 10, 2 0 0 8 . Under this scenario, the G P P
must register with the prescribed R D O on or before the d u e
date for the remittance of the tax that w a s withheld.
A n y person is not precluded f r o m proceeding with this

stage right after securing t h e T I N , provided t h e requirements
are fully complied w i t h .
For those persons not c o v e r e d by Nos. (1) to (4) a b o v e but

w h o , under certain c i r c u m s t a n c e s are required to file a return,
statement or declaration w h e r e the registration with the BIR
is required, c o m p l i a n c e with t h e provisions prescribed with
Section 3 (Initial Stage of Primary Registration: Application
and Issuance of T I N ) of these Regulations is t a n t a m o u n t to
the observance of the registration requirement prescribed by
Section 236 (A).
In any case, the C o m m i s s i o n e r of Internal R e v e n u e may,

for administrative and meritorious reasons, d e n y or revoke any
application for registration. (Sec. 5, Ibid.)
8. Where to file prescribed registration form. T h e prescribed

application for registration shall be filed with the s a m e R D O as
provided in Section 3(C)(4) of these Regulations. However, for
individuals w h o w e r e previously issued T I N under EO 98, O N E T T
or d u e to e m p l o y m e n t , and will e n g a g e in the practice of profession
or sole proprietorship, the submission of the prescribed registration
update form shall be with the R D O having jurisdiction over the place
of business/principal office. If the R D O having jurisdiction over the
business is different f r o m the R D O that previously issued the T I N ,
the T I N shall be transferred by the old R D O to the new R D O upon
request of t h e latter or t h e taxpayer. After w h i c h , all updates on
taxpayer's information shall be filed with the new R D O .
In the c a s e of registration of facility, the registration form shall

be filed with t h e R D O having jurisdiction over its physical location,
using facility c o d e . (Sec. 6, Ibid.)
9. BIR Form and additional documentary requirements.
T h e registration f o r m s shall generally contain the taxpayer's
n a m e , T I N , S E C / C D A 7 D T I / H L U R B Registration Number, date of
registration, registered a d d r e s s , taxpayer type, tax types, business
style, place of residence (for individual), line of business, and such
other information as m a y be required by the C o m m i s s i o n e r in the
f o r m prescribed therefor to be filled out in two (2) copies, properly
labeled and indicated thereon the specific purpose of the copy, i.e.,
"taxpayer's copy" and "BIR's copy."
T h e s e f o r m s to be prescribed by the BIR shall be submitted
together with the required d o c u m e n t s , namely:
For self-employed, professionals, mixed income earners -
Photocopy of:
(a) Mayor's Business Permit/PTR issued by the L G U ;
(b) Lease Contract, if applicable;
(c) DTI Certificate of Registration of Business Name, if
a business trade n a m e shall be used;
(d) Certificate of Authority if Barangay Micro Business
Enterprises ( B M B E ) registered-entity, if applicable;
(e) Proof of Registration/Permit to Operate with Board
of Investment (BOI)/ Board of Investment for Autonomous
Region for Muslim Mindanao ( B O I - A R M M ) , Philippine
Export Zone Authority (PEZA), Bases Conversion Develop-
ment Authority (BCDA) & Subic Bay Metropolitan Authority
(SBMA), if applicable;
628 THE N A T I O N A L I N T E R N A L R E V E N U E C O D E Sec. 236
ANNOTATED
(f) Franchise Agreement, if applicable;

(g) Sworn Statement of Capital, if applicable;
(h) Working Permit for non-resident;
(i) Waiver of husband to claim additional exemption, if
applicable;
(j) Marriage Contract, if applicable; and
(k) Birth Certificates of declared dependents, if
applicable.
A mixed income earner refers to a compensation earner
w h o , at the s a m e time is e n g a g e d in business or practice of
profession.
(1) For Trust In addition to the requirements under N o .
(1), (a) to (g) photocopy of the trust a g r e e m e n t ;
(2) For Estate (under judicial settlement) In addition to
the requirements under a. 1 (1 to 7), photocopy of t h e Death
Certificate of the d e c e a s e d .
(3) For individuals earning purely compensation income
(local employment). T h e BIR F o r m to be prescribed by the
BIR, together with t h e following a t t a c h m e n t s :
(a) Birth Certificate of declared d e p e n d e n t s , if any;
(b) Waiver of h u s b a n d on his right to claim additional
exemptions, if wife will claim; a n d
(c) Marriage Contract, if applicable.
If the h u s b a n d w a n t s to reacquire f r o m his wife the privilege
of claiming the additional e x e m p t i o n for the d e p e n d e n t children,
he shall execute a cancellation of the previously-executed
waiver of the privilege to claim additional e x e m p t i o n s in favor of
the wife, w h i c h Notice of Cancellation of W a i v e r of the Privilege
of Claiming the Additional E x e m p t i o n s shall be filed separately,
together with the registration update f o r m , with the R D O s
having jurisdiction over t h e registration of the h u s b a n d a n d of
the wife.
(4) For corporations/partnerships (taxable/non-taxable)

including GAIs and LGUs - T h e F o r m to be prescribed by the
BIR shall be a c c o m p l i s h e d a n d submitted together with t h e
photocopy of the following:
(a) Copy of S E C Registration and Articles of Incorpo-
ration/Articles of Partnerships, as the case m a y be;
(b) DTI Registration of business trade name, if

applicable;
(c) Lease Contract, if applicable;
(d) Certificate of Authority, if BMBE-registered entity;
(e) Franchise A g r e e m e n t , if applicable;
(f) License to Do Business in the Philippines, in case
of resident foreign corporation;
(g) Proof of Registration/Permit to Operate with BOI,

S B M A , B C D A , P E Z A , if applicable.
(5) For GAIs and LGUs T h e prescribed form together

with t h e p h o t o c o p y of t h e Unit or A g e n c y ' s Charter;
(6) For Cooperatives T h e prescribed f o r m together with

the p h o t o c o p y of C D A Certificate of Registration.
(7) In the case of registration of branch/facility. The

prescribed F o r m together with t h e photocopy of the following.
(a) C o p y of t h e C O R of t h e h e a d office;
(b) M a y o r ' s Permit;
(c) DTI Certificate, if applicable; a n d
(d) L e a s e Contract, if applicable. (Sec. 8, Ibid.)
10. Certificate of Registration.
(1) Persons entitled. T h e Certification of Registration
shall only be issued to individuals e n g a g e d in business or the
practice of profession and to juridical persons (whether taxable
or exempt) by t h e R e v e n u e District Officer ( R D O ) concerned
(i.e., R D O of head office/branch/facility) upon compliance with
the requirements for registration. Issuance of C O R , whether
upon registration or u p o n update of taxpayer's information,
is not subject to the payment of Certification Fee, unless the
taxpayer requested for a certified copy of said C O R , in which
case, the s a m e shall be subject to the payment of Certification
Fee.
(2) Person not covered. Employees, Employees, one-
time taxpayers, and/or persons w h o have secured TIN under
EO 98 with the BIR shall not be issued a C O R .
(3) Information contained. T h e C O R shall contain the
information pertinent but not limited to the matters enumerated
in Section 8(c) of Rev. Regs. No. 10-2008.
ANNOTATED
(4) Issuance to head office, branch and facility. Each

head office, branch or facility shall be issued with a C O R within
eight (8) working hours from receipt of application and complete
requirements.
(5) Posting. Persons mentioned in No. (1) above shall
post or exhibit its/his C O R and duly validated Registration
Fee Return at a conspicuous place in its/his principal place of
business and at each branch and/or facility in a w a y that is
clearly and easily visible to the public. (Sec. 8, Ibid.)
11. Denial of application and/or registration. T h e C o m m i s -
sioner may deny any application for T I N and/or registration, includ-
ing updates thereto, for any of the following reasons:
(1) Deliberate misrepresentation or omission by the
taxpayer of material facts in the application;
(2) Non-submission by the taxpayer of material supporting
d o c u m e n t s required of him by t h e BIR;
(3) T h e filing of the application is on its face erroneous or
fraudulent;
(4) T h e taxpayer applying for T I N already has a previously
issued T I N .
In the event of denial by t h e C o m m i s s i o n e r of Internal
Revenue of an application for TIN/registration, including up-
dates thereto, the taxpayer applicant must be advised in writing
of the denial of his application a n d the g r o u n d s thereof. (Sec. 9,
Ibid.)
12. Annual registration fee. A n annual registration f e e (RF)

in the a m o u n t of Five H u n d r e d Pesos (P500.00) for every separate
or distinct establishment or place of business shall be paid u p o n
registration and every year thereafter on or before J a n u a r y 31 by
every person subject to any internal revenue tax.
(1) Exemptions. T h e following shall be e x e m p t f r o m t h e
imposition of annual registration fee:
(a) Cooperatives duly registered with the C D A ;

(b) Individuals earning purely c o m p e n s a t i o n i n c o m e
whether locally or a b r o a d ;
(c) O v e r s e a s Workers;
(d) GAIs, in the discharge of their governmental
functions;
(e) Marginal Income Earners;
(f) L G U s , in the discharge of their governmental

functions;
(g) Tax e x e m p t persons such as those enumerated

under Section 30 of the C o d e , as a m e n d e d , in pursuance
of tax-exempt activities;
(h) Non-stock/non-profit organizations not engaged in

business;
(i) Persons subject to tax under one-time transactions;

and
(j) Facility/ies w h e r e no sales transactions occur.

T h e e x e m p t i o n f r o m the payment of RF by GAIs,
L G U s , non-stock/non-profit organizations and other tax-
e x e m p t entities is predicated on the notion that their
undertakings/endeavors are not directed nor intended to
generate income/profit. T h u s , any profit-oriented activity
pursued by a G A I s , L G U s and/or tax-exempt entity which
already partakes the nature of an activity similar to those
undertaken by those e n g a g e d in business shall be treated
as an activity in p u r s u a n c e of a business for which the
p a y m e n t of annual registration fee must be imposed.
(2) Imposition on transactions not on a regular basis.
T h e imposition of annual registration f e e shall likewise apply in
cases w h e r e part of the activities or undertakings conducted in
a facility of the business involve sales transactions regardless
of the frequency of the occurrence thereof. Sales transactions
need not be c o n d u c t e d on a regular basis. T h u s , even if the
w a r e h o u s e or place of production is predominantly used for
storage, w a r e h o u s e or production purposes, a single conduct of
sale c o n s u m m a t e d thereat is e n o u g h to warrant the imposition
of the annual registration fee thereon.
(a) T h e registration fee shall be paid to an Authorized

A g e n t Bank (AAB) located with the R D O , or to the Revenue
Collection Officer, or duly authorized Treasurer of the City
or Municipality w h e r e each place of business or branch is
registered, subject to the Electronic Filing and Payment
System (EFPS) rules and regulations, if applicable.
(b) T h e annual registration fee shall be paid in its full
amount. Registration occurring during the interim period of
ANNOTATED
the initial year shall be imposed with the same full amount
of P500 as registration fee.
(c) W h e n any individual w h o has paid the RF dies,
and the s a m e business is continued by the person or
persons interested in his estate, no additional payment
shall be required for the residue of t h e t e r m of which the tax
w a s paid: Provided, however, that the person or persons
interested in the estate should, within thirty (30) days from
the death of the decedent, submit to the concerned R D O
inventories of g o o d s or stocks had at the time of such
death. This requirement shall also be applicable in the case
of transfer of ownership or c h a n g e of n a m e of the business
establishment. (Sec. 10, Ibid.)
13. Requirement for registration of each type of internal

revenue tax. Every person w h o is required to register with the
BIR shall register e a c h type of internal revenue tax for which he/it
is obligated, file a return, pay taxes d u e t h e r e o n , and update such
record of any c h a n g e s in t h e registration information.
(1) Tax types/fees. Generally, registration of tax types/
fees by a business entity w o u l d consist of t h e following internal
revenue taxes/fees:
(a) Income tax;
(b) VAT and/or p e r c e n t a g e tax;
(c) Withholding tax on c o m p e n s a t i o n ;
(d) Creditable withholding tax at s o u r c e on certain
income p a y m e n t s ;
(e) Final withholding tax on certain i n c o m e p a y m e n t s ;
(f) D o c u m e n t a r y s t a m p tax;
(g) Excise tax; a n d
(h) A n n u a l registration fee.
(2) Type of taxes that should be registered. T h e nature
of the business to w h i c h the taxpayer belongs should be taken
into consideration in determining the type of taxes that should
be registered. In order to avoid the generation of invalid "stop-
filer" cases in t h e BIR's d a t a b a s e , in t h e registration of type
of internal revenue tax, only those taxes that t h e taxpayer is
expected to periodically pay should be registered.
T h e registration of income tax as a tax type d o e s not

automatically carry with it the registration of VAT and/or per-
centage tax as a tax type. An e x a m p l e of this is the seller of

agricultural food products. Such seller although subject to
income tax is e x e m p t f r o m the imposition of either VAT or
percentage tax, pursuant to the provisions of Section 109 of
the Tax C o d e .
For those enjoying income tax holidays, or exemption
f r o m other taxes for a certain limited period of time, as granted
pursuant to special laws, the types of the taxes the taxpayer is
e x e m p t f r o m paying on account thereof shall not be included
in the registration of tax types he is obligated to pay for the
m e a n t i m e that t h e e x e m p t i o n period is effective. However,
s u c h e x e m p t i o n period must be noted and upon the expiration
thereof, it shall be the duty of t h e R D O to automatically update
the registered tax types of the taxpayer. T h e taxpayer must be
duly informed in writing of s u c h update m a d e .
(3) Rules to determine business tax type applicable. For

purposes of determining w h a t business tax type (i.e., whether
VAT or other percentage taxes) is applicable to the nature of
t h e business activity of the taxpayer, the following rules shall
apply:
(a) VAT registration in general. A n y person w h o , in
the c o u r s e of trade or business, sells, barters, exchanges
g o o d s or properties, or e n g a g e s in the sale of services
subject to VAT i m p o s e d in Sections 106 and 108 of the Tax
C o d e , shall register the VAT tax type with the R D O having
jurisdiction over t h e h e a d office.
(b) Mandatory VAT registration. A n y person w h o , in
the course of trade or business, sells, barters or exchanges
g o o d s or properties or e n g a g e s in the sale or exchange of
services shall be liable to register the VAT tax type if:
1) His gross sales or receipts for the past twelve
(12) months, other than those that are exempt under
Sec. 109(1)(A) to (U) of the Tax Code, have exceeded
P1,500,000.00; or
2) There are reasonable grounds to believe
that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under
Sec. 109(1)(A) to (U) of the Tax Code, will exceed
P1,500,000.00.
Every person w h o becomes liable to VAT under
paragraph (b) of this section shall register with the
ANNOTATED
RDO which has jurisdiction over the head office of that

person. If he fails to register, he shall be liable to pay
the output tax under Sees. 106 and/or 108 of the C o d e ,
as a m e n d e d , as if he w e r e a VAT-registered person,
but without the benefit of input tax credits for the period
in which he w a s not properly registered. Moreover,
franchise grantees of radio and television broadcasting,
w h o s e gross annual receipt for the preceding calendar
year exceeded P10,000,000.00, shall register as VAT
taxpayer within 30 days from the end of the taxable
year.
(c) Non-VAT registration. T h e following are not

required to register the VAT tax type:
1) T h o s e persons subject to other percentage
taxes under Title V of the Tax C o d e , as a m e n d e d ;
2) T h o s e w h o s e transactions are VAT-exempt as
e n u m e r a t e d under Sec. 109 of the C o d e , as a m e n d e d ;
3) Marginal i n c o m e earners, referring to c o m p e n -
sation earners, w h o at the s a m e time are e n g a g e d in
business or practice of profession.
(d) Optional registration of value added tax of VAT-
exempt person.
1) A n y person w h o is VAT-exempt under Sec.
109(1 )(V) of the Tax C o d e , as a m e n d e d , i.e., sale or
lease of g o o d s or properties or t h e p e r f o r m a n c e of
services other than the transactions m e n t i o n e d in Sec.
109(1)(A) to (U) of the Tax C o d e , the gross annual
sales and/or receipts do not e x c e e d t h e a m o u n t of
P1,500,000.00 not otherwise required to register for
VAT m a y elect to be VAT-registered by registering with
the R D O that has jurisdiction over t h e h e a d office of
that p e r s o n .
2) A n y person w h o is VAT-registered but enters

into transactions w h i c h are e x e m p t f r o m VAT (mixed
transactions) m a y opt that the VAT apply to his
transactions w h i c h w o u l d h a v e b e e n e x e m p t under
Sec. 109(1) of the Tax C o d e .
3) Franchise grantees of radio and/or televi-

sion broadcasting w h o s e annual gross receipts of
the preceding year do not e x c e e d Ten million pesos
(P10,000,000.00) derived f r o m the business covered

by the law granting the franchise m a y opt for VAT reg-
istration. This option, o n c e exercised, shall be irrevo-
cable.
A n y person w h o elects to register under Nos. 1) and 2)
above shall not be allowed to cancel his registration for the
next three (3) years.
T h e a b o v e taxpayers m a y apply for VAT registration
not later t h a n 10 d a y s before the beginning of the taxable
quarter and shall pay the registration fee prescribed
by Sec. 10 hereof, unless they have already paid at the
beginning of t h e year. In any case, the Commissioner of
Internal R e v e n u e may, for administrative reason deny
any application for registration. O n c e registered as a VAT
p e r s o n , t h e t a x p a y e r shall be liable to output tax and be
entitled to input tax credit beginning on the first day of the
m o n t h following registration.
(e) In the case of documentary stamp tax/excise tax.

In the c a s e of d o c u m e n t a r y s t a m p tax, this tax type shall
only be registered in respect to t h o s e taxpayers w h o are
e x p e c t e d to be liable to the p a y m e n t thereof on a periodic
basis. Insurance c o m p a n i e s and banks are examples of
industry w h e r e b y the p a y m e n t of d o c u m e n t a r y stamp tax
is periodically e x p e c t e d in the ordinary course of their
business, h e n c e , in addition to income tax, VAT and/or
percentage tax, withholding tax (creditable and final), the
tax type of d o c u m e n t a r y s t a m p tax should likewise be
registered.
T h e registration f e e of the tax type of excise tax shall

only be applicable to those taxpayers subject to it pursuant
to Title VI of the Tax C o d e .
(f) Tax-exempt entities. T h e tax types to be
registered for t h e National G o v e r n m e n t Agencies (NGAs)
and/or L G U s shall only be those pertinent to withholding
taxes. T h e s a m e holds true for certain tax-exempt entities,
provided that the s a m e , including the N G A s , LGUs are not
e n g a g e d in any profit-oriented activity. Otherwise, the tax
types applicable to the profit-oriented activity shall likewise
be registered.
(g) Business entities with branches. The following
rules on the registration of tax types shall be observed:
ANNOTATED
1) Income tax Registration shall be with the

Head Office only;
2) VAT Registration shall be with the Head
Office only;
3) Percentage tax Taxpayer has the option to
register the tax type in the head office w h e r e only one
consolidated percentage tax return pertinent to all the
sales of the branches are reported; or to register the
tax type not only in the head office but in the respective
branches as well, w h e r e filing of percentage tax returns
and payment of percentage taxes are d o n e separately
by the head office and the branches;
4) Withholding tax on compensation Taxpayer
similar to item (c) a b o v e , has the option to register the
tax type in e a c h and every branch or to just register
such tax type in its head office;
5) Creditable withholding tax at source on certain
income payments Taxpayer similar to item (c)
a b o v e , has the option to register t h e tax type in e a c h
and every branch or to just register s u c h tax t y p e only
in respect to its h e a d office;
6) Final withholding tax on certain income pay-
ments Taxpayer similar to item (c) a b o v e , has t h e
option to register t h e tax type in the h e a d office as well
as in e a c h and every branch or to just register s u c h tax
type only in respect to its h e a d office;
7) Documentary stamp tax Taxpayer similar to
item (c) a b o v e , has t h e option to register t h e tax type
in h e a d office as well as in e a c h a n d every branch or
to just register s u c h tax t y p e only in respect to its h e a d
office;
8) Excise tax Taxpayer similar to item (c)

a b o v e , has the option to register t h e tax type in h e a d
office as well as in e a c h a n d every branch or to just
register s u c h tax type only in respect to its h e a d office;
9) Annual registration fee to be registered in
head office and in all the b r a n c h e s , facilities with sales
transaction.
However, in case the taxpayer is a large taxpayer, the a b o v e
rules giving the taxpayer the option to register the tax type in the
branch/es shall not apply since existing rules and regulations

prescribe that large taxpayers file tax returns and pay tax due
thereon, through E F P S facilities, if applicable; otherwise, filing shall
be d o n e manually but, in all instances, reflecting the R D O Code
under the Large Taxpayers Service. VAT, Percentage Tax, Income
Tax and withholding taxes are required to be filed on consolidated
basis, while excise tax a n d d o c u m e n t a r y stamp tax can be filed not
on consolidated basis, provided filing and payment must still be
m a d e following the aforesaid rules. In the case of payment of RF, it
can also be paid through E F P S , provided, the payment form must
reflect the actual R D O having jurisdiction over the physical location
of the respective b r a n c h e s . (Sec. 11, Ibid.)
14. Transfer of registration. In case a registered person

decides to transfer his registered a d d r e s s or business address of
his h e a d office or b r a n c h e s , it shall be his duty to inform the R D O
w h e r e he is registered by filing t h e prescribed BIR Form specifying
therein the R e v e n u e District Office w h e r e he intends to transfer.
(a) Transfer of registration of non-business individuals

(without or with registered tax type due to ONETT. Taxpayers
initially issued T I N s for O n e - T i m e transactions ( O N E T T ) and
pursuant to EO 98 (individuals issued T I N s for transacting with
g o v e r n m e n t agencies), w h o subsequently applies for business
registration or b e c o m e s e m p l o y e d , shall submit the proper
Application F o r m to t h e R D O w h e r e the applicant intends to
establish his/her business address or at his employer's R D O or
at the R D O w h i c h has jurisdiction over his place of residence,
w h i c h e v e r is applicable. T h e transfer of registration (TIN
records) of such taxpayers shall be initiated by the R D O which
received the application.
(b) Transfer of registration of individuals registered as
local employee.
1) Individuals earning purely compensation income.
In case of transfer d u e to change of employer, it shall
be the responsibility of the n e w employer to notify its
R D O by submitting the duly accomplished Application for
Registration Information Update of the employee. The
transfer of registration (TIN records) of such employee shall
be initiated by the R D O which received the application.
2) Registered employee who intends to engage in
business or practice of profession. An individual who is
registered as an employee in one R D O but subsequently
ANNOTATED
applies for registration as a business taxpayer/professional

using an address under a different R D O , shall submit the
proper Application Form to the R D O having jurisdiction
over his new business address. T h e transfer shall then be
performed by the R D O w h e r e the Application Form w a s
submitted.
The above procedures shall be observed o n c e the
Integrated Tax S y s t e m (ITS) has b e e n e n h a n c e d to
provide for the required facility. In the interim, the taxpayer
shall submit his /her request for transfer to the old R D O
either personally or by fax. T h e old R D O , upon receipt
of the request, shall immediately execute the transfer of
taxpayer's registration records to the n e w R D O .
3) Transfer of employees of transferring employers.

Registration of e m p l o y e e s of the transferring employer
shall simultaneously be transferred to the e m p l o y e r ' s new
R D O once the transfer of registration of s u c h employer is
c o m p l e t e d . T h e transferring e m p l o y e r shall require all its
e m p l o y e e s (who are purely c o m p e n s a t i o n i n c o m e earners)
to accomplish the proper BIR F o r m , except e m p l o y e e s with
multiple e m p l o y m e n t s w h e r e the transferring e m p l o y e r is
not his or her main employer. T h e a c c o m p l i s h e d BIR F o r m
of the e m p l o y e e s shall be submitted to t h e n e w R D O by the
transferring employer.
A list of e m p l o y e e s shall likewise be s u b m i t t e d together

with the Application for Registration Information Update by
the transferring e m p l o y e r to t h e n e w R D O , excluding those
e m p l o y e e s w h o have b e e n separated prior to the transfer.
In c a s e the e m p l o y e r hires n e w e m p l o y e e s in its n e w

location, applications for e m p l o y e e s ' T I N shall be submitted
for T I N issuance to the n e w R D O .
(c) Transfer of business taxpayers (individual/non-

individual)
1) Branches/Facilities. Request for transfer of

registration of branch/facility, with no registered tax types
other than RF, shall be c o m p l e t e d by the old R D O within
five (5) d a y s f r o m receipt of request for transfer.
Branches with other registered tax types shall observe
the procedures in transferring a Head Office.
2) Head Office. T h e following policies are to be

o b s e r v e d with respect to the transfer of registration of head
office:
T h e taxpayer requesting for transfer shall file the

Application for Registration Information Update Form to
the old R D O , together with the required attachments as
prescribed under existing regulations, in addition to the
applicable d o c u m e n t s listed below.
T h e Update F o r m , for submission to the previous/old

R D O , shall be a c c o m p a n i e d with any of the following:
a) C o p y of A m e n d e d S E C / D T I Certificate bearing
the taxpayer's new address;
b) A c o p y of the proof of p a y m e n t of Mayor's
permit f r o m the L G U in the place w h e r e the taxpayer is
transferring his profession/business;
c) B a r a n g a y C l e a r a n c e to operate in the new
place w h e r e the business/practice of profession will be
conducted;
d) Board Resolution approving the transfer of
business a d d r e s s , if applicable; or
e) C o p y of L e a s e Contract executed for the new
place of business, if applicable.
T h e n e w R D O shall be furnished by the taxpayer with
a copy of t h e Update Form duly received by the old R D O .
T h e n e w R D O shall issue the C O R immediately after the
transfer of t h e taxpayer's registration by the old R D O . T h e
C O R , Sales Invoice/Official Receipt (SI/OR) used in the
old business location can still be used in the new business
location without penalty, until a new C O R and ATP is
issued by the n e w R D O ; provided, that the taxpayer can
s h o w a copy of duly received Update Form filed with the
old R D O ; provided, further, that the taxpayer shall stamp
the n e w address on the old SI/OR w h e n the same is to be
issued in the newly transferred business site. In case the
SI/OR is c o n s u m e d prior to the transfer of registration of
the taxpayer in the Bureau's database, the taxpayer shall
still apply with the old R D O for an Authority To Print (ATP)
Receipts and/or Invoices for the new sets of receipts.
T h e filing of tax returns and payment of taxes to the

new R D O shall c o m m e n c e following the issuance of the
ANNOTATED
new COR. The New R D O shall be responsible for notifying

the taxpayer concerned that the transfer of registration has
already been completed. (Sec. 12, Ibid., as a m e n d e d by
Rev. Regs. No. 5-2010.)
Note: Rev. M e m o . Cir. No. 66-2008 prescribes guidelines to
address certain issues relative to the venue of the filing of tax
returns and payment of internal revenue taxes of newly transferred
taxpayers w h o s e transfer of registration is still in process. BIR
Bank Bulletin is No. 2008-17 allows taxpayers transferring to
new Revenue District Offices (RDO's to file their returns and pay
their taxes with authorized agent banks (AABs) servicing their
new R D O s although their application with the n e w R D O is still in
process. Rev. M e m o Cir. No. 4 7 - 2 0 0 8 prescribes the procedure in
handling taxpayers' request for transfer of registration.
15. Other registration updates. " U p d a t e s " m e a n s the process
by which the information supplied during the primary registration
process are c h a n g e d either u p o n taxpayer's or BIR's initiative.
A n y person registered in a c c o r d a n c e with Section 4 hereof
shall, w h e n e v e r applicable, update his registration information with
the R D O w h e r e he is registered using BIR Form to be prescribed
by the BIR.
Instances w h e r e taxpayer shall update his/its registration

information:
(1) A person's business has b e c o m e e x e m p t in a c c o r d a n c e

with Sec. 109 (1) of t h e C o d e , as a m e n d e d ;
(2) A c h a n g e in t h e nature of t h e business itself f r o m sale
of taxable g o o d s and/or services to e x e m p t sales of g o o d s a n d /
or services;
(3) A person w h o s e transactions a r e e x e m p t f r o m VAT w h o

voluntarily registered under VAT s y s t e m , w h o after t h e lapse
of three years after his registration, applies for cancellation of
his registration as s u c h . However, the optional registration as a
VAT taxpayer of a franchise grantee of radio and/or television
broadcasting w h o s e gross receipts for the preceding year did
not e x c e e d P10,000,000.00 shall not be revocable;
(4) A VAT-registered person w h o s e gross sales or receipts
for three consecutive years did not e x c e e d P1,500,000.00
beginning July 1, 2 0 0 5 , w h i c h a m o u n t shall be adjusted to its
present value every three years using the C o n s u m e r Price
Index, as published by the N S O . U p o n updating his registration,
the taxpayer shall b e c o m e liable to the percentage tax imposed

in Sec. 116 of the C o d e . A short period return for the remaining
period that he w a s VAT-registered shall be filed within 25 days
f r o m the date of cancellation of his registration; and
(5) A n y other c h a n g e s / u p d a t e s in registration information

previously supplied, including cancellation or change in any tax
types. (Sec. 13, Ibid.)
16. Cancellation of registration. "Cancellation" means the

process by w h i c h t h e information supplied during the primary
registration of a taxpayer is t a g g e d as "cancelled" but nevertheless
remains as part of the BIR's registration data base.
T h e cancellation of registration m a y either pertain to cancellation

of T I N and/or business registration. T h e cancellation of business
registration shall not automatically cancel the T I N of the person.
(1) Cancellation of TIN. T h e T I N is cancelled upon:
(a) Death of an individual;
(b) Dissolution, merger or consolidation of juridical
person;
(c) Discovery of a taxpayer having multiple TINs; and
(d) P a y m e n t of estate tax by the heirs, administrator or

executor (TIN of t h e Estate). However, in case of additional
properties u n c o v e r e d after p a y m e n t of estate tax, the TIN
previously issued for such estate shall be re-activated
in order to facilitate t h e filing of the a m e n d e d estate tax
return a n d shall be cancelled upon full settlement of the tax
liabilities of the estate.
(2) Cancellation of business registration. It may be
granted on the following instances:
(a) Closure/Cessation of business operation;
(b) Dissolution of corporation/partnership;
(c) Merger/Consolidation;
(d) Death of an individual.
(3) Filing of notice of closure or cessation of business.
Cancellation of business registration due to any of the above
instances requires the filing of a notice of closure or cessation
of business to the R D O w h e r e registered, by accomplishing
the prescribed registration updates f o r m . Upon filing of the
ANNOTATED
duly-accomplished form, the taxpayer is required to submit a

list of ending inventory of goods, supplies, including capital
goods; and an inventory/list of unused sales invoices/official
receipts (SI/OR) and all other unutilized accounting forms (e.g.,
vouchers, debit/credit m e m o s , delivery receipts, purchase
orders, etc.). T h e unused sales invoices/official receipts and all
other unutilized accounting forms shall be physically submitted
to the R D O w h e r e the head office (HO) is registered or w h e r e
the Authority to Print (ATP) w a s secured. T h e taxpayer shall
also surrender all business notices and permits as well as the
C O R for cancellation. In case of cancellation of a b r a n c h , the
submission of the u n u s e d SI/OR for destruction shall be d o n e
with the BIR office w h e r e the ATP w a s issued.
(4) Duty of RDO. T h e R D O , u p o n receipt of the notice,

registration update, inventory list of g o o d s , inventory list of
unused sales invoices/official receipts/other accounting f o r m s ,
and the u n u s e d sales invoices/official receipts a n d all other
unutilized accounting f o r m s , shall:
(a) "End date" the tax types of t h e taxpayer;
(b) Destruct, in the p r e s e n c e of the taxpayer or his
authorized representative, the unutilized S I / O R s and other
accounting f o r m s by cutting t h e m crosswise a n d lengthwise
at the middle thereof so that t h e s a m e shall be divided into
four (4), ensuring that t h e s a m e will no longer be used as
originally intended; a n d
(c) Return to taxpayer the destructed S I / O R s a n d other

accounting f o r m s for burning and/or proper disposition.
(5) In case of merger or consolidation. T h e a b o v e rules
shall also apply to t h e dissolved entity ( H O a n d branches).
However, w h e r e the registered b r a n c h e s of t h e dissolved entity
now b e c o m e branches of the surviving entity, it shall be the
responsibility of the surviving entity's h e a d office to provide
t h e m with S I / O R s for their use while t h e n e w set of S I / O R s
(with the new n a m e a n d T I N of t h e branch) is in process. In this
case, the HO shall ask t h e BIR office, w h e r e HO is registered,
for a permit for this p u r p o s e .
T h e R D O of the HO of the dissolved entity shall inform

all the other R D O s, w h e r e the branches are registered, of
the closure/cessation of the business. Likewise, the R D O of
the head office shall submit a monthly report on cessation
or closure of business to the Taxpayer Assistance Service,

Attn: Chief, Taxpayer Service Programs Monitoring Division
( T S P M D ) , for the issuance of R e v e n u e M e m o r a n d u m Circular
( R M C ) circularizing the n a m e s of taxpayers w h o have ceased
business operations for the m o n t h .
Generally, the cancellation of HO registration shall result to
the cancellation of business registration of the branch. This is
true if branches are using s a m e trade n a m e being used by the
H O , otherwise, t h e t a x p a y e r shall file an application for update,
m a k i n g o n e of its/his existing branches to be the HO. If the
location of t h e b r a n c h selected to be the HO is under a different
R D O , the rule on transfer of registration shall apply.
(6) Determination of taxpayer's tax liabilities. All

taxpayers w h o filed for cancellation of registration due to
closure/cessation or termination of business shall be subjected
to i m m e d i a t e investigation by the BIR office concerned
to d e t e r m i n e the taxpayer's tax liabilities. T h e immediate
investigation of the BIR shall not be d o n e if it involves
cancellation of business of a person's registered branch. (Sec.
14, Ibid.)
Note: Rev. M e m o . Cir. No. 56-2008 clarifies the procedure

on t h e handling of a taxpayer's application for cancellation of
business registration, and issues warning on the use of official
receipts/sales invoices of dissolved businesses on purposes of
claiming input tax.
17. Certification fee. A n y request for certification that
m a y be requested by a taxpayer f r o m the R D O w h e r e he is
registered on matters relating to his registration shall be
charged with a f e e in an a m o u n t not exceeding one hundred
pesos (P 100.00), in addition to the documentary stamp tax
imposed under Section 188 of the Tax Code.
T h e Certification Fee shall be collected on per document
and/or per set basis regardless of the number of pages of such
document/set. T h u s , if a taxpayer would request for a certified
true copy of his Certificate of Registration and his properly filled
out BIR Registration Form filed with the BIR, he would then
have to pay a total amount of P200.00 of certificate fee since
his request pertains to two types of document. Moreover, if
he would request for additional two more sets of certified true
copies of his Certificate of Registration, an additional payment
of P200.00 for certification fee shall be paid. (Sec. 15, Ibid.)
ANNOTATED
18. Meaning of other terms

(1) Head office (HO). It refers to the declared specific or
identifiable principal place/head office of business as stated in
the Articles of Incorporation/Articles of Partnership/Department
of Trade and Industry Certificate of Registration, as the
case maybe, or, in the absence thereof, the place w h e r e the
complete books of accounts are kept. It is one which occupies
a fixed place of business, whether rented or o w n e d , regardless
of whether or not the product/services being sold are actually
located or displayed thereat. For persons w h o conduct business
in a nomadic or roving manner, such as peddlers, mobile stores
operators, etc., their place of residence shall be considered as
the head office.
(2) Branch. It m e a n s a separate or distinct establishment

or place of business w h e r e sales transactions are c o n d u c t e d
independently from the head office, w h i c h b r a n c h , like the H O ,
needs to be registered in the R e v e n u e District Office ( R D O )
having jurisdiction over its physical location and is subject to
the payment of Registration Fee (RF).
For purposes of these regulations, branch shall include the

following:
(a) Sales outlet or establishment c o v e r e d by o n e

business/trade n a m e situated in o n e location or building;
(b) Every line of business of an individual covered by

a separate business n a m e a p p r o v e d by DTI e v e n t h o u g h
situated in o n e a n d the s a m e location;
(c) Facility with administrative office;
(d) Each franchise/Certificate of Public C o n v e n i e n c e

(CPC) which the transportation operator o w n s or operates,
regardless of the n u m b e r of units under e a c h franchise/
CPC;
(e) Real properties for lease with administrative office;
Each "exit/entry" gate, regardless of the n u m b e r of booths

accepting toll fees thereat;
(f) U n m a n n e d sales outlets/service e q u i p m e n t s s u c h

as automated vending m a c h i n e s (AVMs), a u t o m a t e d ticket
dispensing m a c h i n e s , a u t o m a t e d teller machines (ATMs),
and the like;
(g) Mobile store/stall/booth/kiosk which do not main-

tain a fixed place of business;
(h) Other separate or distinct establishments which
conduct sales transactions independent of the H O .
Different lines of business e n g a g e d in by a person
located in a single place shall not be considered a branch
if they are under o n e single "business name". Moreover,
t e m p o r a r y makeshift stalls/booths/kiosks/ AVMs/ATMs, set
up by business establishments w h i c h are already registered
with the BIR, for the m e r e purpose of participating in trade
exhibit to s h o w c a s e their products for a limited period of
less than o n e m o n t h shall not be considered as a branch,
but will be required to s e c u r e a permit f r o m the R D O having
jurisdiction over the place w h e r e it shall be conducted.
Before a p e r s o n can register a branch or facility, it should

h a v e registered first its H e a d Office. Moreover, branch
a n d facility situated a b r o a d of a domestic corporation or
resident citizen shall be registered with the R D O having
jurisdiction over the H O .
(3) Separate or distinct establishment. It refers to an
establishment w h e r e business transactions occur at a place
other t h a n w h e r e t h e h e a d office is located. Nevertheless, the
s a m e shall likewise refer to any of the various lines of business
pursued by a taxpayer w h i c h are operated and conducted at
the s a m e address a n d are individually covered with business
trade n a m e s secured f r o m the Department of Trade and
Industry (DTI) notwithstanding the fact that such undertakings
are o w n e d by o n e and the s a m e person and/or individual. In
such a case, said "separate or distinct establishment" shall be
treated as a branch as defined in item (G) above whereby RF
of P 5 0 0 shall be i m p o s e d .
Example: Ms. G is e n g a g e d in various lines of business

under the following business trade names which are all located
at R m . 501 M. B u i l d ^ g , M. dela Fuente Street, Sampaloc,
Manila:
(1) GV Internet Cafe 13 -53 -53 -0000

(2) LSM Computer Supplies 13 -53 -53 -0001
(3) RV Bookkeeping 13 -53 -53 -0002
(4) JRR Janitorial 13 -53 -53 -0003
ANNOTATED
All of the above businesses have secured DTI-approved

business trade names. The first business registered by Ms. G
was the GV Internet Cafe for which she w a s issued TIN 135-536-
536-0000. In this case, said Internet Cafe shall be considered
as the head office while the three subsequent registered
businesses shall be considered as the branches which shall be
assigned each with 4-digit extension branch c o d e as illustrated
above.
In the example, each of the said businesses owned by Ms.
G shall be imposed with RF of P 5 0 0 . If M s . G d e c i d e s to put
up a n o t h e r Internet C a f e in Q u e z o n City, s u c h internet c a f e
shall be considered as another branch and therefore, shall
be a s s i g n e d a b r a n c h c o d e of "0004" a n d be required to pay
another RF.
T h e above illustration shall also apply to an individual

w h o earns income f r o m the simultaneous practice of differ-
ent professions/undertakings. However, if the said various
professions/undertakings pursued by o n e a n d the s a m e indi-
vidual are of such a type that will not require the registration
of DTI-approved business trade n a m e , and c o n d u c t e d in t h e
s a m e business place or location, only o n e registration m a y be
required to cover all the pursuits, otherwise, e a c h of the profes-
sions/undertakings shall be treated as a separate or distinct
establishment.
(4) Facility. It m a y i n c l u d e but n o t l i m i t e d t o p l a c e of

p r o d u c t i o n , w a r e h o u s e , storage place, garage, bus terminal,
or real property for lease, which is required to be registered as
a facility in a revenue district office having jurisdiction over its
physical location. Facility registration is not subject to p a y m e n t
of Registration Fee.
(5) Administrative office. It refer to an office w h e r e

records of sales a n d /or c a s h collections are kept w h i c h m a y
form part of the h e a d office or b r a n c h . W h e n located in t h e
facility, the latter b e c o m e s a branch for purposes of these
regulations and therefore subject to a n n u a l registration fee. In
the case of real properties for lease, g a r a g e s , or bus terminals
and other similar establishments, this refers to the particular
space or office set up in the area which does not only facilitate
the expediency of operations conducted thereat, including the
maintenance and upkeep of the premises, but w h i c h , in certain
instances, also functions as the cashier to which all revenues

g e n e r a t e d thereat are remitted on periodic basis or also
maintains records of transactions on a limited scale.
19. Tax briefings. It shall be the duty of the R D O s to conduct

tax briefings u p o n those taxpayers newly registered in their
respective districts. Basic or f u n d a m e n t a l rules on taxation as well
as taxpayers' rights a n d obligations must be relayed to taxpayers in
the simplest of t e r m s for easy understanding and comprehension.
Flyers or leaflets for this p u r p o s e shall be provided. Tax updates
shall likewise be periodically held in order that taxpayers are kept
abreast of the c h a n g e s in the tax rules a n d regulations. (Sec. 16,
Ibid.)
2 0 . Violations related to primary registration. The following

violations shall be penalized:
(1) Failure to register (those w h o are found unregistered

during Tax C o m p l i a n c e Verification Drive) Subject to the
penalties under prevailing r e v e n u e issuances;
(2) Late Registration (those w h o are voluntary registering,

but b e y o n d the prescribed period as indicated in these
regulations) C o m p r o m i s e penalty of P1,000, in addition to
the unpaid RF a n d penalties d u e thereon for the years the
person is already operating;
(3) Late p a y m e n t of annual registration fee subject to

2 5 % surcharge a n d 2 0 % interest and P 2 0 0 penalty;
(4) Failure to register a branch or facility subject to

penalty of P1.000 per unregistered branch or facility;
(5) Acquisition of Multiple T I N aside from the criminal

liability that m a y be i m p o s e d , P1.000 for every TIN acquired in
excess of o n e ;
(6) Failure to and/or erroneous supply of information
P1.000 for every error/omission, but not to exceed P25.000;
(7) In c a s e of erroneous encoding of material information,

the R D O personnel w h o committed the error shall be liable to a
penalty of P1,000/error.
Any violation of the provisions of these regulations shall be
subject to penalties provided in Sections 254 and 275, and other
pertinent provisions of the Tax Code. (Sec. 20, Ibid.)
ANNOTATED
Note: Rev. M e m o . Cir. No. 12-2008 reiterates the requirement for

the submission of TIN and BIR-prescribed documents as condition
for the issuance/renewal of mayor's permit/license/privilege tax
receipt by the concerned local government unit. T h e documents are
for (1) initial application T I N , BIR-issued certificate of registration
and proof of annual registration fee (P500) payment; (2) renewal
in addition to above d o c u m e n t s , proof of filing of annual income
tax return and monthly/quarterly VAT declarations on monthly
percentage tax returns, whichever is applicable for the preceding
year and payment of the corresponding taxes.
21. Registration of place/premises where inventory of goods

for sale are kept. T h e following regulations are intended to
effectively monitor, for tax purposes, acquisition and disposition of
inventory of g o o d s (see Sees. 6[c], 245[e].) by certain taxpayers:
(1) Registration requirements. A n y taxpayer w h o sells

goods in the course of his trade or business shall register t h e
place/premises w h e r e his inventory of g o o d s for sale or for use
in his business are kept.
(2) Where and when to register.
(a) Where to register. T h e taxpayer's places/

premises w h e r e his inventory of g o o d s are kept shall
be registered with the R e v e n u e District Office having
jurisdiction over t h e location of t h e said places/premises.
If t h e aforesaid t a x p a y e r maintains t w o or m o r e places/
premises for inventory k e e p i n g , all t h e aforesaid places/
premises shall be registered with t h e R e v e n u e District
Office or offices having jurisdiction over t h e location of the
aforementioned places/premises.
(b) When to register. T h e places/premises w h e r e

the taxpayer's inventory of g o o d s are kept shall be
registered by t h e t a x p a y e r within thirty (30) d a y s f r o m the
date the aforesaid places/premises has b e e n u s e d by the
aforesaid taxpayer for storage or keeping of his inventory
of g o o d s .
(3) Record of inventories. Section 13 of R e v e n u e

Regulations No. V - 1 , a s a m e n d e d , otherwise k n o w n a s the
Bookkeeping Regulations, has b e e n a m e n d e d as follows:
"Section 13. Record of inventories. A n y p e r s o n ,
natural or juridical, e n g a g e d in the sale of g o o d s in the
course of his trade or business shall keep, in addition to the
other books and records prescribed in these regulations, a

book of inventories, in w h i c h shall be recorded in detail the
quantity, description, unit cost, and the total cost of every
item of their stocks-in-trade, materials, supplies and all
other g o o d s found in the premises of their establishments
at the time they start business and at the close of the
taxable year, w h e t h e r a calendar year or fiscal year. T h e
inventory at the beginning shall be m a d e and submitted
to the R e v e n u e District Office having jurisdiction over the
taxpayer's principal place of business within ten days after
starting the business, and the subsequent inventories
not later than thirty d a y s after the close of the accounting
period e m p l o y e d , w h e t h e r a calendar year or fiscal year.
T h e book of inventories referred to in this Section shall,

before use by the taxpayer, be first registered with the
corresponding revenue district office, in accordance with the
existing provisions of law and regulations."
(4) Penal provisions. A n y person required by these
regulations to register and k e e p a book of inventories w h o
fails to register a n d k e e p s u c h book shall be penalized under
Section 274 of the Tax C o d e . (Rev. Regs. No. 5-94.)
2 2 . Engaging in business. "To e n g a g e " is to embark on a
business or to e m p l o y oneself therein. T h e w o r d " e n g a g e d " connotes
m o r e t h a n a single act or a single transaction; it involves some
continuity of action. "To e n g a g e in b u s i n e s s " is uniformly construed
as signifying an e m p l o y m e n t or occupation which occupies one's
time, attention, and labor for the purpose of a livelihood or profit.
T h e expressions "engage in b u s i n e s s , " "carrying on business"
or "doing b u s i n e s s " do not have different meanings, but separately,
or connectedly convey the idea of progression, continuity, or
sustained activity. " E n g a g e d in b u s i n e s s " means occupied or
e m p l o y e d in business; "carrying on b u s i n e s s " does not mean the
performance of a single disconnected act, but means conducting,
prosecuting, and continuing business by performing progressively
all the acts normally incident thereto; while "doing business" con-
veys the idea of business being done, not from time to time, but all
the time. ( C o m m . of Internal Revenue vs. Court of Appeals, 242
S C R A 289 [1995].)
2 3 . Carrying a business without any sequence of acts. The
foregoing notwithstanding, it has likewise been ruled that one act
may be sufficient to constitute carrying on of a business according
ANNOTATED
to the intent with which the act is done. A single sale of liquor by one
w h o intends to continue selling is sufficient to render him liable for
"engaging in or carrying o n " the business of a liquor dealer.
There may be a business without any sequence of acts, for if
an isolated transaction, which if repeated would be a trans-action in
a business, is proved to have been undertaken with the intent that
it should be the first of several transactions, that is, with the intent
of carrying on a business, then it is a first transaction in an existing
business.
Thus, w h e r e the end sought is to m a k e a profit, the act cons-
titutes "doing business." This is not without basis. T h e t e r m
"business," as used in the law imposing a license tax business,
trades and so forth, ordinarily m e a n s business in the trade or
commercial sense only, carried on with a view to profit or livelihood.
It is thus restricted to activities or affairs w h e r e profit is t h e purpose,
or livelihood is the motive. Since the t e r m " b u s i n e s s " is being
used without any qualification in Tax C o d e , it s h o u l d , therefore, be
construed in its plain and ordinary m e a n i n g , restricted to activities
for profit or livelihood. (Ibid.)
24. Business registered but not commenced. T h e taxpayer's

obligation to register arises u p o n t h e c o m m e n c e m e n t of business,
which m e a n s conducting c o m m e r c i a l activity habitually a n d with t h e
intention of making profits. Preparatory acts by the taxpayer, i.e.,
registering a business n a m e or style with t h e D e p a r t m e n t of Trade
and Industry, without actually conducting or starting any business
activity will not give rise to any obligation by the t a x p a y e r to register
with the BIR. No penalty, therefore, m a y be i m p o s e d on a taxpayer
w h o merely registers a business or style without actually starting a
business. (BIR Ruling N o . 0 7 5 , April 2 9 , 1991.)
25. Business taxes for the privilege of engaging in business.

Business taxes paid in the current year, although c o m p u t e d
on the basis of the previous year's gross sales or gross receipts,
represent business taxes for t h e privilege of e n g a g i n g in business
for the current year.
Imposed in the exercise of police p o w e r for regulatory purposes,

business taxes are paid for the privilege of carrying on a business
in the year the tax w a s paid. It is paid at the beginning of t h e year
as a fee to allow the business to operate for t h e rest of the year.
It is d e e m e d a prerequisite to the conduct of business. (Mobile
Philippines, Inc. vs. T h e City Treasurer of Makati, G.R. No. 154092,
July 14, 2005.)
2 6 . When manufacturer considered engaged in separate

business of selling. For tax purposes, a manufacturer does not
necessarily b e c o m e e n g a g e d in the separate business of selling
simply b e c a u s e it sells the products it manufactures. T h e right to
manufacture implies the right to sell/distribute the manufactured
products. In certain c a s e s , however, a manufacturer may also
be considered as e n g a g e d in the separate business of selling its
products d e p e n d i n g on its marketing s y s t e m s or sales operations.
(1) Under t h e first s y s t e m , the manufacturer enters into
sales transactions and invoices the sales at its main office
w h e r e p u r c h a s e orders are received and approved before
delivery orders are sent to the c o m p a n y ' s w a r e h o u s e s , where,
in turn, actual deliveries are m a d e . No w a r e h o u s e sales are
m a d e ; nor are s e p a r a t e stores maintained w h e r e products may
be sold independently f r o m the main office. T h e w a r e h o u s e
only serves as storage sites a n d delivery points of the products
earlier sold at the main office.
(2) Under the s e c o n d s y s t e m , sales transactions are

entered into a n d perfected at stores or w a r e h o u s e s maintained
by t h e c o m p a n y w h i c h serve as selling centers.
Entities operating under t h e first s y s t e m are not considered
e n g a g e d in the separate business of selling; those under the
s e c o n d s y s t e m are considered so e n g a g e d . A c o m p a n y which
distributes its softdrinks by m e a n s of a fleet of delivery trucks
w h i c h go directly to c u s t o m e r s in different places and serve as
selling units independently of transactions in the main office
falls under the s e c o n d category. It is e n g a g e d in the separate
business of selling or distributing softdrinks independently of its
business of bottling t h e m . (Iloilo Bottlers, Inc. vs. City of lloilo,
164 S C R A 6 0 7 , A u g . 19, 1988.)
2 7 . Where activity is merely incidental to main business.
W h e r e a taxpayer is e n g a g e d in a distinct business and, as
a feature thereof, in an activity merely incidental which serves no
other purpose or business, the incidental activity should not be
separately or additionally taxed. (Standard-Vacuum Oil Co. vs.
Antigus, 96 Phil. 909; City of Manila vs. Fortune Enterprises, Inc.,
108 Phil. 1058; O p o n vs. Caltex Phil., Inc., 22 S C R A 755 [1968].)
Thus, w h e r e the extraction or removal by the taxpayer of limestone
from its mineral lands is a mere incident in its copper mining
operations for which it is already taxed (see Sec. 151.), to impose
another set of tax on said limestone which has no commercial
ANNOTATED
value would be tantamount to double taxation. ( C o m m . vs. Court of

Appeals, 204 S C R A 182 [1991].)
28. Principle that company should be taxed only on main
business. The principle applies only to business taxes and not
to taxes such as the sand and gravel tax imposed by the provincial
government. The reasoning is that the incidental activity case
cannot be treated as a business separate and distinct from the
business of the taxpayer. T h e s a n d and gravel tax is an excise
tax imposed on the privilege of extracting s a n d and gravel which
provincial governments can levy on quarry resources independently
from the national government. (Lepanto Consolidated Mining Co.
vs. Ambaloc, G.R. No. 180639, June 29, 2010.)
SEC. 237. Issuance of Receipts or Sales or Commercial

Invoices. All persons subject to an internal revenue tax shall, for
each sale or transfer of merchandise or for services rendered valued
at Twenty-five pesos (P25.00) or more, issue duly registered receipts
or sales of commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity unit cost and description
of merchandise or nature of service: Provided, however, That where
the receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which shall
show the name, business style, if any, and address of the purchaser,
customer or client. (As amended by RA. No. 9337.)
The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is effected,
who, if engaged in business or in the exercise of profession, shall keep
and preserve the same in his place of business for a period of three
(3) years from the close of the taxable year in which such invoice or
receipt was issued, while the duplicate shall be kept and preserved
by the issuer, also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any
person subject to an internal revenue tax from compliance with the
provisions of this Section.
ANNOTATION
1. In general. Duly registered sales invoices or receipts

must be issued for e a c h p a y m e n t of g o o d s , property or service,
including professional service.
(1) A sales or commercial invoice is a written account of
goods sold or services rendered, issued by the seller indicating
the prices c h a r g e d therefor or a list by whatever name it

is k n o w n w h i c h is used in the ordinary course of business
evidencing sale and transfer or a g r e e m e n t to sell or transfer
g o o d s a n d services.
(2) A receipt, on the other h a n d , is a written and signed
a c k n o w l e d g m e n t of the fact of p a y m e n t in m o n e y or other
settlement b e t w e e n seller and buyer of goods, debtor or
creditor, or p e r s o n rendering services and client or customer.
(3) A voucher is a d o c u m e n t a r y record of a business trans-
action. It is not a receipt. (Adrian Wilson International Associ-
ates, Inc. v s . T M X Philippines, Inc., 6 2 5 S C R A 321 [2010].)
2. Probative value of sales invoice.
(1) Sales invoices or receipts issued by the supplier
are necessary to substantiate the actual a m o u n t or quantity
of g o o d s sold a n d their selling price, and taken collectively
are the best m e a n s to prove the input VAT payments.
( C o m m . v s . Manila Mining Corporation, 4 6 8 S C R A 571
[2005], citing Deoferio M a m a l a t e o , the Value-Added Tax in
the Philippines, pp. 2 7 9 - 2 8 0 , 1st ed., 2000.)
(2) F r o m t h e point of v i e w of a seller, an invoice is a
sales invoice. F r o m t h e point of view of a buyer, an invoice
is a p u r c h a s e invoice. T h e d o c u m e n t indicates the buyer
and seller, but the t e r m "invoice" indicates money is owed
or o w i n g . T h e context of t h e t e r m "invoice" is usually used
to clarify its m e a n i n g , s u c h as "We sent t h e m an invoice"
(they o w e us m o n e y ) or "We received an invoice from
t h e m " (we o w e t h e m money). (Royal Cargo Corporation vs.
D F S Sports Unlimited, Inc., 573 S C R A 414 [2008].)
(3) From the a b o v e definitions, an invoice in and by

itself, and as o p p o s e d to a receipt, may not be considered
evidence of payment. In addition, it does not mean that
possession by a debtor of an invoice raises the presumption
that it has already paid its obligation. An invoice is simply a
list sent to a purchaser, factor, consignee, etc., containing
the items, together with the prices and charges, of
merchandise sent or to be sent to him; a mere detailed
statement of the nature, quantity and cost or price of the
things invoiced. (Ibid.) In the opinion, however, of the BIR,
a sales invoice is not merely an evidence of a sale but
necessarily an evidence of payment. This is obvious from
the provisions of Section 237 to the effect that the issuance
of an invoice is required the moment there is already a sale
ANNOTATED
or transfer of merchandise or services rendered. In other

words, a sales invoice is ordinarily issued to a purchaser
only upon payment by the latter of the price of the goods
purchased. (BIR Ruling No. 046, May 27, 1989.)
(4) A sales invoice is nothing more than a deleted
statement of the nature, quantity, and cost of the thing
sold, and has been considered not a bill of sale. An invoice
naming a person as the purchaser of goods, does not
absolutely foreclose the probability of another being liable
for the a m o u n t s reflected thereon. T h e facts contained
in the sales invoice are not conclusive. T h e y m a y be
contradicted by oral testimony. (Lazaro v s . Brewmaster
International, Inc., 628 S C R A 574 [2010].)
(5) There is no requirement in Section 237 that a
sales invoice should accurately state the nature of all the
businesses of the seller; h e n c e , the fact that the seller d e -
scribed itself in its sales invoice as an importer, wholesaler
and retailer d o e s not preclude its being a manufacturer.
(E.Y. Industrial Sales, Inc. vs. S h e n Dar Electricity a n d M a -
chinery Co., Ltd., 6 3 4 S C R A 363 [2010].)
3. Persons required to issue BIR registered receipts. T h e y
are only those e n g a g e d in business a n d subject to internal revenue
tax:
(1) T h o s e w h o s e sales or transfers of m e r c h a n d i s e or
w h o s e services rendered are valued at P 2 5 . 0 0 or m o r e ; a n d
(2) T h o s e w h o receive p a y m e n t m a d e a s rentals, c o m -
missions, c o m p e n s a t i o n s or fees, regardless of a m o u n t
received (plus the additional requirement of indicating thereon
the n a m e , business style, if any, a n d a d d r e s s of purchaser,
customer or client).
4. Persons not required to issue receipts:
(1) T h o s e w h o s e sales or transfers of m e r c h a n d i s e or
w h o s e services rendered are valued below P25.00. In s u c h
case, a receipt or invoice n e e d not be issued, but unless it is
issued, the transaction must be recorded immediately at the
time it is effected in a registered petty c a s h book, t h e entries in
which shall be s u m m a r i z e d at t h e e n d of the day a n d the total
thereof transferred on the s a m e to a sales receipt or invoice
clearly indicating thereon that the s a m e is t h e "petty sales" for
the day; and
(2) T h o s e e x e m p t e d by the C o m m i s s i o n e r of Internal

Revenue.
It is the seller's or professional's obligation to issue an

invoice/receipt, w h e t h e r or not the customer or client asks for
o n e . T h e failure of the customer or client to d e m a n d a receipt/
invoice will not relieve the violator f r o m liability.
5. Persons may be exempted from issuing receipts. Pur-

suant to the authority granted under Section 237 (par. 2.), the
following h a v e b e e n e x e m p t e d f r o m complying with the requirement
of issuing receipts or sales invoices:
(1) Vendors/stallholders inside markets on their sales of

d o m e s t i c food products, e v e n if they also sell articles for which
they are required to issue sales receipts or invoices. On their
sales of d o m e s t i c non-food products and imported products of
w h a t e v e r kind, including dry g o o d s , they are, however, required
to issue receipts or sales invoices; and
(2) Eateries or "carinderias" located inside markets. (Rev.

M e m o . Cir. No. 77-78.)
6. Exemption of public market vendors. T h e term "public

market" refers not only to those markets which are operated by
the g o v e r n m e n t but also to those w h i c h are o w n e d by private
individuals. (BIR Ruling N o . 74-005, March 2 8 , 1974; see The
A r r a n q u e Market Ext. v s . De la Fuente, L-2127, Sept. 20, 1950.)
Note that the e x e m p t i o n f r o m issuing sales invoices or receipts is
e x t e n d e d only to those v e n d o r s selling exclusively domestic food
products.
T h e t e r m "market" refers to w h a t is traditionally known as "pa-
lengke" or to a place designated as such by the local governments,
w h e r e vendors sell their w a r e s in stalls and w h e r e the public buy
and sell primarily domestic food and non-food products and such
other items as are necessary for subsistence. It does not include
supermarkets, superstores, malls, shopping centers, department
stores, groceries, fast food centers, and other similar establish-
ments. (Rev. M e m o . Cir. No. 77-78.)
Before the a m e n d m e n t by Presidential Decree No. 2006, market
vendors selling exclusively food products w e r e exempted from the
requirement of issuing receipts or sales invoices without need of
exemption granted by the Commissioner of Internal Revenue.
7. Retail trading establishments not otherwise subject to any
percentage tax, like supermarkets, department stores, drug stores,
bookstores and groceries, having voluminous transactions daily
which render it extremely difficult and inconvenient for them to
comply with the requirement of issuing sales invoices/receipts for
ANNOTATED
every transaction may, upon previous application with the Revenue

District Officer of the place w h e r e the business is located and
approval thereof by the Regional Director having jurisdiction, be
allowed to use cash register machines with two roll tapes, one to
serve as customer's receipts in lieu of the regular sales invoices,
and the other to be kept by the establishment for audit and internal
revenue tax verification purposes.
A xerox copy of the BIR permit is required to be glued or taped
at the back of the machine to which it refers, to signify that the
use of said machine in lieu of the sales invoices or receipts is duly
authorized.
Proprietors, owners or operators of business establishments
may use cash register m a c h i n e s of any type for "internal control
purposes," provided that duly registered sales invoices or receipts
are issued for every sale. However, such proprietors or business
operators must first notify the proper R D O of their intention to use
such machines solely for internal control a n d shall secure a poster
from said Office which shall be securely attached at the back of
the machine. (Rev. Regs. No. 4-80.) T h u s , the operator/owner of a
business establishment m a y lease s p a c e s for business purposes
for a m i n i m u m fixed rental fee a n d as a condition to t h e contract
of lease, the lessees are required to h a v e c a s h register m a c h i n e s
for said purposes, a n d that the lessees issue official invoices or
receipts for every sale. (BIR Ruling N o . 2 2 6 , A u g . 2 0 , 1992.)
For rules on the use of c a s h register a n d point-of-sale m a c h i n e s

in lieu of registered sales invoices or receipts, see Rev. R e g s . No.
10-99.
8. Non-stock, non-profit educational institution. If its income
is derived from and used actually, directly, a n d exclusively for its
educational activities, it is e x e m p t f r o m keeping BIR registered
books of accounts (Sec. 232.), registration of business n a m e (Sec.
236.), and issuance of BIR-registered sales invoices a n d receipts.
(Sees. 237-238.) T h e constitutional tax e x e m p t i o n (Art. XIV, Sec.
4[3].) is not applicable if the educational institution e n g a g e s in any
business activity or transaction. (BIR Ruling No. 159-98, Nov. 1 1 ,
1998.)
9. Registration and renewal, etc. Persons required to keep

books of accounts, internal revenue books, records of receipts
and disbursements, additional registers and other records, for
recording their transaction as prescribed in the regulations shall,
before using any of the aforesaid books, records, a n d registers, first
present them to the Revenue Collection A g e n t w h e r e his principal
place of business is located for approval and registration. In the

c a s e of renewal of registration of books of accounts, the applicant-
registrant shall present to the said R e v e n u e Collection Agent his
duly registered books of a c c o u n t s used during the immediately
preceding taxable year as a condition precedent for the registration
of his books of a c c o u n t s for the current taxable year.
If it is s h o w n that the said books of accounts used during the

said preceding taxable year has not b e e n duly registered or no such
books of a c c o u n t s have, in fact, b e e n u s e d , registration applied for
the current books of a c c o u n t s shall be effected by the said revenue
collection agent, subject to p a y m e n t by the applicant-registrant of
the corresponding penalty for the said violation. T h e amount of
penalty shall be d e t e r m i n e d in a c c o r d a n c e with the corresponding
schedules of c o m p r o m i s e penalty prescribed by regulations. This
requirement shall not, however, apply with respect to a registrant-
applicant only e n g a g i n g in business for the first time since he w a s
not required to k e e p duly registered books of accounts with respect
to s u c h prior period. (Sec. 1[a], Rev. R e g s . No. V - 1 , as a m e n d e d by
Rev. R e g s . N o . 11-89.)
10. Registration of receipts before use. Persons required to

issue receipts or sales or c o m m e r c i a l invoices are required under
Section 2 3 7 to register the s a m e with the BIR. T h e words "duly
registered" w e r e deleted by Presidential Decree No. 1994 after the
w o r d " i s s u e " (4th line.) in Section 2 3 7 but restored by R.A. No.
7 7 1 6 , the E x p a n d e d VAT Law.
H e n c e , the requirement under Rev. Regs. No. 2-78 that receipts/

invoices shall be registered with and s t a m p e d by the corresponding
R e v e n u e District Office before the s a m e m a y be used and issued to
customers or clients is again in force.
Rev. Regs. No. 2-90 restored the requirement to register and
stamp receipts and invoices prior to their use, repealing in effect
R M O No. 25-86, by a m e n d i n g Section 19 (par. 4.) of Rev. Regs.
No. V - 1 , otherwise known as the "Bookkeeping Regulations," as
a m e n d e d by Revenue Regulations No. 2-78, as follows:
" S E C . 19. Authentication and registration of books, regis-

ters, or records; authority to print receipts, sales or commer-
cial invoices; and registration and stamping of receipts and
invoices.
Registration and stamping of receipts and invoices.
Before being used, the printed receipts, sales or commercial
ANNOTATED
invoices shall be registered with the revenue district officer

where the principal place of business of the taxpayer is located
within thirty (30) days from the date of printing the same. T h e
registration of the printed receipts or invoices shall be evidenced
by an appropriate stamp on the face of the taxpayer's copy of
the authority to print as well as on the front cover, on the back of
the middle invoice or receipt and on the back of the last invoice
or receipt of the registered booklet or pad, authenticated by the
signature of the officer authorized to place the stamp thereon."
An unregistered receipt a n d a copy of a lease contract

cannot be used as supporting d o c u m e n t s for rental e x p e n s e
and/or input VAT. A b s e n c e of the appropriate s t a m p is prima
facie evidence that the receipts and invoices are not registered.
(BIR Ruling No. 0 9 3 - 9 8 , J u n e 15, 1998.)
Note: Rev. Regs. No. 2 6 - 2 0 0 3 modifies the procedure of

registering manually printed receipts or sales/commercial invoices
prior to their use revoking the requirement of BIR registration on
every booklet of manually printed a n d issued receipts invoices
under Rev. Regs. No. 2-90. In lieu of such requirement, the printer
shall issue to the taxpayer a BIR-regulated "Printers Certificate of
Delivery of Receipts a n d I n c o m e s " ( P C D ) w h i c h should be m a d e
available and ready for inspection by the BIR.
Rev. Regs. No. 17-2006 prescribes t h e rules accrediting regis-

tering, and using "taximeter issuing receipts" (TIE) s y s t e m s a n d /
or models and other similar types of m a c h i n e s generating official
receipts. T h e TIR shall be used by taxis to g e n e r a t e receipts for
issuance to passengers or c u s t o m e r s in lieu of manually issued or
other forms of official receipts.
11. Use of more than one form of receipt. W h i l e there is

nothing in the Tax C o d e that prohibits a taxpayer f r o m using more
than one form of receipt, reason dictates that it is difficult to monitor
a taxpayer using two or more f o r m s of receipts. Otherwise, it will
defeat one of the purposes of an official receipt; that is, to h a v e an
orderly record of its transactions. Allowing a taxpayer to use t w o
or more forms of receipts can be a tool for deceit or e n c o u r a g e a
taxpayer to c o m m i t a w r o n g . (BIR Ruling No. 0 3 5 - 2 0 0 0 , Sept. 0 5 ,
2000.)
12. Delivery receipts m a y be issued to a c c o m p a n y deliveries

followed by the issue of the corresponding sales invoice
immediately after acceptance of the g o o d s by the customer. Such
a practice conforms substantially with the requirements of Section

2 3 8 . Delivery receipts are, like regular invoices or receipts, a part
of the accounting records a n d , therefore, subject to registration and
approval before the actual use of the s a m e . Said requirement being
mandatory, the failure to comply therewith constitutes a violation of
Section 2 6 3 . (BIR Ruling No. 108, M a y 2 9 , 1990.)
13. Debit and/or credit memos are m e m o r a n d a issued in

n u m b e r e d f o r m to customers/clients to indicate that the latter's
account with the issuer/seller has been increased (credited) or
d e c r e a s e d (debited), respectively, to the extent of the particular
a m o u n t d e s c r i b e d therein. Since debit and credit m e m o s represent
e v i d e n c e of transfer of g o o d s and/or sale of service, they are as
vital as receipts a n d invoices in evidencing business transactions.
T h u s , these m e m o s have the s a m e use as receipts and invoices
w h i c h are required to be registered pursuant to Rev. Regs. V - 1 , the
B o o k k e e p i n g R e g s . (BIR Ruling No. 364, Dec. 2 1 , 1992.)
14. Marginal income earners. T h e y refer to individuals

not otherwise deriving c o m p e n s a t i o n as an e m p l o y e e under an
e m p l o y e r - e m p l o y e e relationship but w h o are self-employed and
deriving gross sales/receipts not exceeding P100,000.00 during
any 12-month period. (Sec. 3, Rev. Regs. No. 10-2000.)
Such earners w h o are possible income tax filers and recipients

or payors of income p a y m e n t s subject to withholding tax and
registered with the B u r e a u of Internal Revenue, shall be entitled to
t h e following privileges and m i n i m u m tax compliance requirements:
(1) Exemption from the payment of registration fee as pre-

scribed under Section 236(B) of t h e Tax Code upon registration
with the Bureau of Internal R e v e n u e after submission of mini-
mal basic d o c u m e n t a r y requirements;
(2) Issuance of Taxpayer Identification Number (TIN) with

TIN card;
(3) Exemption from compliance with the issuance of
registered receipts or sales/commercial invoices prescribed
under Section 237 of the Tax Code of 1997;
(4) Exemption from the requirements of maintenance of

books of accounts; and
(5) Exemption from attaching Financial Statements or
Account Information Form to the filed Income Tax Return.
ANNOTATED
Those earners required to file the annual income tax return

from whatever source may or may not be liable to any income tax
depending upon the existence of net taxable income. (Sec. 4, Ibid.)
15. Exhibition of notice at place of business. Rev. Regs. No.
4-2000 prescribes the posting of a notice on the requirement for
the issuance of sales/commercial invoice and/or official receipts by
persons e n g a g e d in trade or business, including the exercise of
profession.
(1) Persons required to issue sales/commercial invoices
and official receipts under existing rules shall cause to be
posted in their places of business, including branches and
mobile stores, in such area conspicuous to the public, a notice
containing and showing in bold letters the following;
NOTICE TO THE PUBLIC:
This business establishment is required by L a w to issue

sales/commercial invoice/official receipt. Violation hereof is
punishable by fine and/or imprisonment. Please report any
violation to the B u r e a u of Internal R e v e n u e .
(Issuance of sales/commercial invoice and/or official

receipt is not required for every sale valued at P25 or below by
a Non-VAT taxpayer).
C o m m i s s i o n e r of Internal R e v e n u e
At no time shall the a b o v e notice be d e t a c h e d , r e m o v e d or

covered f r o m public view. For uniformity, t h e size specification
of the notice shall be 12 inches in w i d t h a n d eight (8) inches in
length.
(2) T h e following acts or o m i s s i o n s shall, u p o n conviction,

be punished by a fine of not m o r e t h a n P1,000 or imprisonment
of not more than six (6) m o n t h s , or both, pursuant to the
provisions of Section 2 7 5 ;
(a) Failure a n d neglect to post the required notice;

and/or
(b) Deliberate removal of the notice.

(3) In case of corporations, partnerships or associations,
the penalty shall be i m p o s e d on t h e president, partner, general
manager, branch manager, officer-in-charge and/or e m p l o y e e s
responsible for the violation. (Sees. 3-5, Rev. Regs No

4-2000.)
(4) For the purpose of e n h a n c i n g accomplishment of the
objectives o f Rev. R e g s . N o . 2-2000, Rev. Regs. N o . 7-2005
provides a n e w f o r m a t for the notice to be exhibited at place of
business, to c o n f o r m strictly to t h e following:
BIR
ASK FOR 2 TO 4 YEARS IMPRISONMENT

RECEIPT FOR N O N ISSUANCE OF RECEIPT
This will ensure REPORT VIOLATORS TO A N Y OF
that the taxes on FOLLOWING:
your purchases
will be remitted to *BIR CONTACT CENTER (02)981-8888
the government. It *commissioner@bir.gov.ph
will be used for the *BIR DISTRICT OFFICES
development of the
Philippines. (Name of Business Establishment)
(TIN)
R R : T h i s N O T I C E shall c a u s e to be posted in place of business,

including branches a n d mobile stores in such area conspicuous to
the public view.
SEC. 238. Printing of Receipts or Sales or Commercial

Invoices. All persons who are engaged in business shall secure
from the Bureau of Internal Revenue an authority to print receipts
or sales or commercial invoices before a printer can print the same.
No authority to print receipts or sales or commercial invoices
shall be granted unless the receipts or invoices to be printed are
serially numbered and shall show, among other things, the name,
business style, Taxpayer Identification Number ( T I N ) and business
address of the person or entity to use the same, and such other
information that may be required by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of
the Commissioner.
All persons who print receipt or sales or commercial invoices
shall maintain a logbook/register of taxpayers who availed of their
ANNOTATED
printing services. The logbook/register shall contain the following

information:
(1) Names, Taxpayer Identification Numbers of the persons or
entities for whom the receipts or sales or commercial invoices were
printed; and
(2) Number of booklets, number of sets per booklet, number of
copies per set and the serial numbers of the receipts or invoices in
each booklet, (a)
ANNOTATION
1. Authority from BIR to print receipts. Under Section 2 3 8 ,

the printer must secure prior BIR authority to print receipts or sales
or commercial invoices containing the required information, (par.
2.) T h e provision seeks to eliminate t h e use of unregistered and
double or multiple sets of receipts by striking at the very root of the
problem the printer.
(1) Failure of a person e n g a g e d in business to secure an

ATP f r o m the BIR prior to printing of invoices or receipts m a k e s
him liable under Section 2 6 4 .
(2) There is no law or BIR rule or regulation requiring that
the BIR authority to print (ATP) to be reflected or indicated
in the receipts or invoices. (Intel-Technology Phils., Inc. vs.
C o m m . , 522 S C R A 6 5 7 [2007].) However, since t h e ATP is
not so indicated, t h e only w a y to verify w h e t h e r t h e invoices
or receipts are duly registered is by requiring t h e t a x p a y e r to
present the ATP. W i t h o u t the ATP, t h e invoices or receipts h a v e
no probative value, e.g., for the p u r p o s e of tax refund or credit.
(Silicon Philippines, Inc. vs. C o m m . , G.R. No. 172378, J a n . 17,
2011.)
Violations of Section 2 3 8 are penalized under Section 2 6 4 .

(1) Printer is any p e r s o n , w h e t h e r natural or juridical,

e n g a g e d in the process or business of producing any printed
matter.
(2) Receipt is a written admission or a c k n o w l e d g m e n t of

the fact of p a y m e n t s in m o n e y or other settlement b e t w e e n
seller and buyer of g o o d s , debtor and creditor, or person
rendering services and client or customer.
(3) Sales or commercial invoice is a written account

of g o o d s sold or services rendered and the prices charged
therefor, or a list of g o o d s c o n s i g n e d a n d the value at which
the c o n s i g n e e is to receive t h e m or any other list by whatever
n a m e it is k n o w n w h i c h is used in the ordinary course of
business evidencing sale a n d transfer or agreement to sell or
transfer g o o d s a n d services, e.g., purchase orders; j o b orders;
provisional a n d t e m p o r a r y receipts, etc. except: (a) freight stub
receipts; (b) p a s s a g e tickets; and (c) a m u s e m e n t tickets and
other similar receipts w h i c h are g o v e r n e d by Rev. Regs. No.
V - 1 , as a m e n d e d . (Sec. 2, Rev. Regs. No. 2-78.)
3. Logbook/register of taxpayers. As a m e n d e d by R.A. No.
8 4 2 4 , printers of receipts or sales or c o m m e r c i a l invoices are now
required to maintain a logbook/register of taxpayers w h o availed
of their printing services, containing t h e information mentioned,
(par. 3.) T h e s u b m i s s i o n to t h e BIR of quarterly reports is no longer
provided, (see Sec. 264.)
4. Centralized procedure for securing authority to print.

Rev. M e m o . Order N o . 2 8 - 2 0 0 2 provides an updated procedure in
t h e filing a n d processing of Application for Authority to Print (ATP)
Receipts/Invoices (BIR F o r m N o . 1906.) and adopts a Centralized
procedure of securing A T P to eliminate delay in the issuance of
Authority to Print Receipts/Invoices (BIR Form 1921.) and the
problems being e n c o u n t e r e d by c o m p a n i e s with branch offices
throughout t h e Philippines in securing A T P f r o m each Revenue
District Office ( R D O ) or c o n c e r n e d office under LTS where the
branches are located.
Centralized procedure refers to a process wherein all applica-

tions for authority to print receipts, sales or commercial invoices
shall be filed with and the corresponding ATP issued at the RDO or
concerned office under the Large Taxpayers Service having juris-
diction over the taxpayer's Head Office for receipts and invoices to
be issued or used by the Head Office and its branch/es;
(1) T h e processing of the application for Permit to Print
Receipts, Sales or Commercial Invoices to be used or issued
at the business premises of the taxpayer's Head Office and all
its branches nationwide as well as the issuance of such permit
shall be at the Revenue District Office or concerned office
under the Large Taxpayers Service having jurisdiction over the
taxpayer's Head Office. However, each establishment (head
office or branch) shall be covered by one application for permit
ANNOTATED
to print receipts/invoices and be issued one and separate

permit to print receipts/invoices with mention of the range of the
serial numbers that would be printed on the invoices/receipts.
In short, each establishment will have its o w n independent
series of invoices/receipts serial number;
(2) In all cases, the Application for Authority to Print
Receipts/Invoices, the Permit or Authority to Print Receipts/
Invoices as well as the printed receipts/invoices shall always
reflect the exact address of the b r a n c h , the T I N , and the branch
code attached to the T I N with parenthetical description of the
branch referred to in the application for A T P ;
(3) Taxpayer-applicant w h o has b e e n issued "Permit to

Use Computerized A c c o u n t i n g S y s t e m and/or its C o m p o n e n t s
T h e r e o f under existing policies and procedures shall adhere
to the terms and conditions and procedures e m b o d i e d in the
above-mentioned permit. However, possessors of the a b o v e -
mentioned permit are required to secure A T P for manual
receipts and invoices to be issued to c u s t o m e r s in c a s e s of
systems non-availability or for p r e - n u m b e r e d receipts/invoices
that will be used by a c o m p u t e r i z e d s y s t e m that does not
generate n u m b e r for receipts/invoices;
(4) Under the Centralized Application e n u n c i a t e d in the

Order, the T I N , branch c o d e (if applicable) and a d d r e s s of t h e
head office must be reflected in t h e printed receipts, sales
or commercial invoices to be issued or u s e d in the business
premises o f the H e a d Office, w h e r e a s , t h e T I N , branch c o d e
(if applicable) and a d d r e s s of the branch must be indicated
in the printed receipts, sales or c o m m e r c i a l invoices to be
issued or used in the business p r e m i s e s of its branch/es. T h u s ,
receipts and invoices to be issued in t h e h e a d office shall
bear the address, T I N a n d branch c o d e (if applicable) of the
head office, w h e r e a s receipts a n d invoices to be issued in a
particular branch shall bear t h e a d d r e s s , T I N a n d branch c o d e
(if applicable) of the issuing b r a n c h ;
(5) Under t h e Centralized Application Procedure, e a c h

branch shall maintain a sequential range of serial n u m b e r s
separate a n d distinct f r o m that of t h e H e a d Office a n d other
branches for easy monitoring purposes;
(6) T h e taxpayer's branch office shall give to the R D O

having jurisdiction over said branch a copy of t h e A T P for the
branch issued by the appropriate BIR office having jurisdiction

over taxpayer's h e a d office;
(7) All appropriate BIR office shall keep and maintain

separate register or record of ATPs for business establishments
within their jurisdiction with issued A T P by the BIR office having
jurisdiction over taxpayer's head office;
(8) U p o n completion of all t h e requirements, the applied

A T P shall be issued immediately to the taxpayer so as not
to h a m p e r t h e s m o o t h flow of his/its business transactions.
Existence of o p e n c a s e s (stop-filer [RCS] cases, audit cases,
a c c o u n t s receivable [AR] c a s e s , etc.) in the n a m e of the
applicant-taxpayer should not be a hindrance to the issuance
of the A T P ;
(9) Taxpayers h a v e t h e privilege to c h o o s e the printers of

their invoices/receipts;
(10) Invoices a n d receipts to be printed should clearly

indicate t h e b r a n c h c o d e attached to the T I N of the taxpayer
with parenthetical description of the branch and mention of
b r a n c h exact a d d r e s s as reflected in the issued ATP, in addition
to other information that should be reflected in the invoice/
receipt as required under the prevailing laws/regulations;
(11) Existing policies on registration and stamping of

receipts/invoices and other accounting records/documents
under pertinent issuances are still applicable under this Order.
In other w o r d s , invoice/receipt registration evidenced by
stamping of BIR seal on the invoice/receipt (front cover, middle
back page, and back cover) shall still be d o n e at the BIR office
having jurisdiction over the establishment which will issue the
invoice/receipt. T h e registering BIR office shall get a copy of
the Authority to Print Receipts/Invoices issued for the branch
by the BIR office having jurisdiction over taxpayer's head
office (which BIR office issued said "Authority to Print Invoices/
Receipts" to taxpayer's head office);
(12) Manually issued ATP shall be tracked/recorded using

office automation tools and other appropriate manual record
tracking procedures;
(13) T h e R D O or concerned office under the Large Tax-
payers Service shall keep and file chronologically a file copy of
the ATP issued to the taxpayer (head office and branches);
ANNOTATED
(14) Application for a taxpayer with Head office under a

computerized RDO/BIR Office. All ATPs shall be system-
generated, whether the branch is under a computerized
RDO or not, or whether the branch's R D O is the s a m e as the
head office's RDO provided the branch information exists at
the National Office database. In this situation, the T I N shall
show the correct or appropriate branch code for the branch.
Nonetheless, the ATP for the branch shall be manually issued
w h e n the branch information does not exist at the National Office
database. The branch code to be attached to the T I N is "000"
or the branch code for the head office but with parenthetical
description of the branch referred in the application for ATP;
(15) Application for a taxpayer with Head Office under a

non-computerized RDO. All A T P s shall be manually issued
whether the branches are under the c o m p u t e r i z e d R D O s or not
since the head office's R D O is not capable of ITS generation of
ATPs. T h e Application for ATP, the ATP, and the printed receipts/
invoices shall reflect the exact a d d r e s s of t h e establishment or
the branch, the T I N , and the correct branch c o d e attached to
the T I N , with parenthetical description of the branch referred
to in the application for ATP. For t h e establishment that is not
found at NO d a t a b a s e , the branch c o d e "000" shall be attached
to the T I N , with parenthetical description of t h e branch referred
to in the application for ATP.
5. Use of BIR printed receipts. U n d e r Rev. M e m o . Order

13-2003, taxpayers w h o had b e e n c a u g h t violating BIR rules on
issuing registered receipts a n d t h o s e w h o c h o o s e to use BIR
printed receipts (BPRs) in lieu of receipts printed by independent
printers are allowed to use said receipts.
(a) c o m p a n i e s a p p r e h e n d e d by t h e bureau for t h e first

time over their failure to register with the BIR and their failure to
issue duly registered receipts;
(b) those w h o are registered with the BIR but do not have
the required receipts; or
(c) those w h o have unregistered or fake receipts, multiple

sets of receipts, and unregistered cash registers.
T h e B P R s will only be used as provisional receipts and

only until the firms secure the authority to print receipts and
invoices from the BIR or a permit to use cash registers.
Sees. 239-241 COMPLIANCE REQUIREMENTS 667
They (firms) shall be issued B P R s to be used for a period

of at least 10 d a y s but in no c a s e to e x c e e d 30 days.
All registered taxpayers w h o are required by law to issue
duly registered receipts or sales and/or commercial invoices
may, at their option, use the B P R s provided these taxpayers
have business transactions that will require the use of not more
than o n e booklet of 50 p a g e s in o n e taxable period.
T h e B P R s will be printed by BIR revenue district offices and

will be priced according to its printing cost, which is currently at
P50 per booklet of 50 pages.
For those w h o c h o o s e to be covered by B P R s , the cost will

be paid u p o n application. For t h o s e m a n d a t e d to use the B P R s
as provisional receipts, the cost will be paid upon issuance of
the receipts.
SEC. 2 3 9 . Sign to be Exhibited by Distiller, Rectifier, Com-

pounder, Repacker, and Wholesale Liquor Dealer. Every
person engaged in distilling or rectifying spirits, compounding
liquors, repacking wines or distilled spirits, and every wholesale
liquor dealer, shall keep conspicuously on the outside of his place of
business a sign exhibiting, in letters not less than six centimeters
(6 cms.) high, his name or firm style, with the words "Registered
Distiller," "Rectifier of Spirits," "Compounder of Liquors," "Repacker
of Wines or Distilled Spirits," or "Wholesale Liquor Dealer," as the
case may be, and his assessment number.
SEC. 2 4 0 . Sign to be Exhibited by Manufacturer of Pro-

ducts of Tobacco. Every manufacturer of cigars, cigarettes, or
tobacco, and every wholesale dealer in leaf tobacco or manufactured
products of tobacco shall place and keep on the outside of the build-
ing wherein his business is carried on, so that it can be distinctly
seen, a sign stating his full name and business in letters not less
than six centimeters (6 cms.) high and also giving his assessment
number.
SEC. 2 4 1 . Exhibition of Certificate of Payment at Place

of Business. The certificate or receipts showing payment of
taxes issued to a person engaged in a business subject to an annual
registration fee shall be kept conspicuously exhibited in plain view
in or at the place where the business is conducted; and in case of a
peddler or other persons not having a fixed place of business, shall
ANNOTATED
be kept in the possession of the holder thereof, subject to production

upon the demand of any internal revenue officer.
SEC. 242. Continuation of Business of Deceased Person.

When any individual who has paid the annual registration fee
dies and the same business is continued by the person or persons
interested in his estate, no additional payment shall be required
for the residue of the term of which the tax was paid: Provided,
however, That the person or persons interested in the estate should,
within thirty (30) days from the death of the decedent, submit to
the Bureau of Internal Revenue or the Regional or Revenue District
Office inventories of goods or stocks had at the time of such death.
The requirement under this Section shall also be applicable in
the case of transfer of ownership or change of name of the business
establishment.
SEC. 243. Removal of Business to Other Location. Any

business for which the annual registration fee has been paid may,
subject to the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be removed
and continued in any other place without the payment of additional
tax during the term for which the payment was made.
ANNOTATION
A m e n d m e n t s by R.A. No. 8 4 2 4 : "a privilege t a x " in Section

2 4 1 , c h a n g e d to "an annual registration f e e ; " "paying business t a x "
in Section 2 4 2 , to " w h o has paid t h e a n n u a l registration f e e " ; a n d
"privilege tax" in Section 2 4 3 , to "annual registration f e e . "
- oOo -
CHAPTER III
RULES AND REGULATIONS
SEC. 2 4 4 . Authority of Secretary of Finance to Promulgate

Rules and Regulations. The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions
of this Code.
ANNOTATION
1. Deleted: S e c o n d paragraph of Section 244 which reads:

"The authority of t h e Secretary of Finance to determine articles
similar to or a n a l o g o u s to those subject to a rate of sales tax under
a certain category e n u m e r a t e d in Section 163 (now Sec. 150) of this
C o d e shall be without prejudice to the power of the Commissioner
of Internal R e v e n u e to m a k e rulings or opinions in connection with
the implementation of the provisions of internal revenue laws,
including rulings on the classification of articles for sales tax and
similar p u r p o s e s . "
2. Nature of power:
(1) T h e power to m a k e regulations is not the power to
legislate in the true sense, and under the guise of regulation,
legislation m a y not be e n a c t e d . T h e statute which is being
administered may not be altered or added to by the exercise
of the power to m a k e the regulations thereunder. (42 A m . Jur.
428.) Regulations in conflict with the law are null and void.
(2) Regulations partake of administrative interpretations
of tax laws. They are entitled to great respect from the courts
especially if followed for s o m e considerable period. But they
are not conclusive upon the courts and will be ignored if
judicially found to be erroneous. (Molina vs. Rafferty, 39 Phil.
169; People vs. Hernandez, 59 Phil. 272.)
669
ANNOTATED
Similarly, as head of the government agency charged

with the enforcement of the law, the opinion or ruling of the
Commissioner of Internal Revenue in the absence of any
showing that it is plainly w r o n g , is entitled to great weight.
(Misamis Oriental Asso. of Coco Traders, Inc. vs. Dept. of
Finance Secretary, 238 S C R A 63 [1994].)
3. The Secretary of Finance has the power to revoke, repeal
or abrogate the acts for previous rulings of his predecessors in
office. The reason for this is that the construction of the statute by
those administering it is not binding on their successors if thereafter
the latter b e c o m e s satisfied that a different construction should be
given. (Hilado vs. Coll., 100 Phil. 288.)
SEC. 245. Specific Provisions to be Contained in Rules

and Regulations. The rules and regulations of the Bureau of
Internal Revenue shall, among other things, contain provisions
specifying, prescribing or denning:
(a) The time and manner in which Revenue Regional Directors
shall canvass their respective Revenue Regions for the purpose of
discovering persons and property liable to national internal revenue
taxes, and the manner in which their lists and records of taxable
persons and taxable objects shall be made and kept;
(b) The forms of labels, brands, or marks to be required on goods
subject to an excise tax, and the manner in which the labelling,
branding, or marking shall be effected;
(c) The conditions under which the manner in which goods
intended for export, which if not exported would be subject to excise
tax, shall be labelled, branded, or marked;
(d) The conditions to be observed by revenue officers, respecting
the institutions and conduct of legal actions and proceedings; (a)
(e) The conditions under which goods intended for storage
in bonded warehouses shall be conveyed thither, their manner
of storage, and the method of keeping the entries and records
in connection therewith, also the books to be kept by Revenue
Inspectors and the reports to be made by them in connection with
their supervision of such warehouses;
(f) The conditions under which denatured alcohol may be
removed and dealt in, the character and quantity of the denaturing
material to be used, the manner in which the process of denaturing
shall be effected, so as to render the alcohol suitably denatured and
Rules and Regulations
unfit for oral intake, the bonds to be given, the books and records to
be kept, the entries to be made therein, the reports to be made to
the Commissioner, and the signs to be displayed in the business or
by the person for whom such denaturing is done or by whom, such
alcohol is dealt in;
(g) The manner in which revenue shall be collected and paid,
the instrument, document or object to which revenue stamps shall
be affixed, the mode of cancellation of the same, the manner in which
the proper books, records, invoices, and other papers shall be kept
and entries therein made by the person subject to the tax, as well as
the manner in which licenses and stamps shall be gathered up and
returned after serving their purposes; (a)
(h) The conditions to be observed by revenue officers, respecting
the enforcement of Title I I I imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as on gifts and such
other rules and regulations which the Commissioner may consider
suitable for the enforcement of the said Title I I I ; (a)
(i) The manner in which tax returns, information and reports
shall be prepared and reported and the tax collected and paid, as
well as the conditions under which evidence of payment shall be
furnished the taxpayer, and the preparation and publication of
income tax statistics;
(j) The manner in which internal revenue taxes, such as income
tax, including withholding tax, estate and donor's taxes, value-added
tax, other percentage taxes, excise taxes, and documentary stamp
taxes shall be paid through the collection officers of the Bureau of
Internal Revenue or through duly authorized agent banks which
are hereby deputized to receive payments of such taxes and the
returns, papers, and statements that may be filed by the taxpayers
in connection with the payment of the tax: Provided, however, That
notwithstanding the other provisions of this Code prescribing the
place of filing of returns and payment of taxes, the Commissioner
may by rules and regulations, require that the tax returns, papers
and statements and taxes of large taxpayers be filed and paid,
respectively, through collection officers or through duly authorized
agent banks: Provided, further, That the Commissioner can exercise
1
this power within six (6) years from the approval of R.A. No. 7646
or the completion of its comprehensive computerization program,
whichever comes earlier: Provided, finally, That separate venues for
'Approved January 16,1993.

ANNOTATED
the Luzon, Visayas, and Mindanao areas may be designated for the
filing of tax returns and payment of taxes by said large taxpayers.
For purposes of this Section, "large taxpayer" means a taxpayer
who satisfies any of the following criteria:
(1) Value-Added Tax (VAT) Business establishment with VAT
paid or payable of at least One hundred thousand pesos (P100,000)
for any quarter of the preceding taxable year;
(2) Excise Tax Business establishment with excise tax paid or
payable of at least One million pesos (P1,000,000) for the preceding
taxable year;
(3) Corporate Income Tax Business establishment with
annual income tax paid or payable of at least One million pesos
(PI,000,000) for the preceding taxable year; and
(4) Withholding Tax Business establishment with annual
withholding tax payment or remittance of at least One Million pesos
(PI,000,000) for the preceding taxable year:
Provided, however, That the Secretary of Finance, upon recom-
mendation of the Commissioner, may modify or add to the above
criteria for determining a large taxpayer after considering such
factors as inflation, volume of business, wage and employment
levels, and similar economic factors.
The penalties prescribed under Section 248 of this Code shall be
imposed on any violation of the rules and regulations issued by the
Secretary of Finance upon recommendation of the Commissioner
prescribing the place of filing of returns and payments of taxes by
large taxpayers.
ANNOTATION
1. Deleted: Subsections (d) a n d (h) "provincial fiscals and

other officials" after "revenue officers."
Section 245 w a s formerly Section 4.
2. Promulgation of rules and regulations. T h e Secretary
of Finance, u p o n r e c o m m e n d a t i o n of the C o m m i s s i o n e r of Internal
Revenue, shall promulgate all needful rules and regulations for the
effective enforcement of t h e provisions of the C o d e . (Sec. 2 4 4 ; see
Sec. 275.) T h e interpretation of the provisions of the Tax C o d e and
other tax laws are m a d e through t h e issuance of either w h a t are
known as "Revenue Regulations" or "BIR Rulings." (see Sec. 4.)
Revenue regulations are t h e formal interpretations by the Secretary
of Finance u p o n the r e c o m m e n d a t i o n of the Commissioner while

BIR rulings are less formal interpretations of provisions of tax laws
a n d revenue regulations by the Commissioner. It is essential that
the procedure fixed for their promulgation is followed.
T h e Secretary of Finance has the power to revoke, repeal or
abrogate t h e acts or previous rulings of his predecessors in office
as s u c h rulings are not binding on h i m . (see Hilado vs. Coll., 100
Phil. 288.)
3. Force and effect of regulations. In general, rules and
regulations issued by administrative or executive officers pursuant to
t h e procedure or authority conferred by law upon the administrative
a g e n c y h a v e t h e force a n d effect, or partake of the nature, of a
statute. T h e reason is that statutes express the policies, purposes,
objectives, r e m e d i e s a n d sanctions intended by the legislature in
general t e r m s . T h e details a n d m a n n e r of carrying t h e m out are
oftentimes left to the administrative a g e n c y entrusted with their
e n f o r c e m e n t . ( C o m m . v s . Solidbank Corporation, 4 1 6 S C R A 4 3 6
[2003].)
4. Requisites for validity of revenue regulations are:
(1) T h e y are necessary to t h e proper enforcement of the
law;
(2) T h e y are not contrary to law and the Constitution; and
(3) T h e y must be published in the Official Gazette.
Valid regulations are just as binding as if they had been written
in the law itself, (see Art. 7, Civil Code.) However, regulations are not
conclusive upon the courts although they have strong persuasive
force.
Note: Under Presidential Decree No. 1603, such rules and
regulations shall be subject to approval by the President and shall
take effect upon such approval, but if they do "not involve merely
matters of internal administration but necessary for the effective
implementation of essential government policies as certified by the
President," they shall take effect 15 days after their publication in
the Official Gazette.
5. Scope of revenue regulations. T h e first requisite for the
validity of revenue regulations is that they are necessary to the
proper enforcement of the law. Even if the courts may not be in
agreement with its stated policy or innate w i s d o m , it is nonetheless
valid, provided that its scope is within the statutory authority or
standard granted by the legislature. Specifically, the regulation
ANNOTATED
must (1) be germane to the object and purpose of the law; (2) not
contradict, but conform to, the standards the law prescribes; and
(3) be issued for the sole purpose of carrying into effect the general
provisions of our tax laws. ( C o m m . vs. Solidbank Corporation,
supra.)
6. Manner of payment of taxes. Subsection (j) gives the
legal basis for the payment of taxes through authorized banks, (see
Sec. 6[C].) It authorizes the Commissioner of Internal R e v e n u e to
prescribe the place and time for payment of internal revenue taxes
by large taxpayers.
(1) A large taxpayer is a taxpayer w h o has been classified
as such and duly notified by the BIR as having satisfied any
or a combination of the criteria e n u m e r a t e d in Subsection (j)
for the year 1990 and/or succeeding years relative to taxes
paid. Under Rev. Regs. No. 1-98, a taxpayer with an aggregate
annual d o c u m e n t a r y s t a m p taxes of at least P1,000,000, or
with percentage taxes of at least P 1 0 0 , 0 0 0 per quarter, is also
classified as a large taxpayer.
(2) As to financial condition a n d results of operations, any

taxpayer with a total annual gross sales/receipts of P1 Billion,
and with a total net worth at t h e close of e a c h calendar or fiscal
year of at least P 3 0 0 million is classified by Rev. R e g s . No.
1 -98 as a large taxpayer.
(3) O n c e a taxpayer has b e e n identified a n d notified

as a large taxpayer by t h e BIR (as to tax p a y m e n t or as to
financial condition and results of operations), it shall continue
to be classified as s u c h until notified otherwise by t h e
Commissioner. Without a notification through a letter duly
signed by the C o m m i s s i o n e r that a t a x p a y e r has satisfied any
or a combination of the required criteria, t h e t a x p a y e r will still
not qualify as a large taxpayer.
(4) All large taxpayers shall file all internal revenue tax
returns, information returns or declarations, a n d either required
d o c u m e n t s at the Large Taxpayers Division, BIR National Office
and pay the taxes thereon at the designated b a n k s located at
the s a m e place. This constitutes an exception to the place of
filing and p a y m e n t as provided in Sections 5 8 , 77, 8 1 , 1 1 4 , 1 2 8 ,
130, and 2 0 0 of t h e Tax C o d e .
(5) P a y m e n t s m a y be m a d e only through any or a c o m b i -

nation of the following m o d e s :
(a) Bank debit m e m o / a d v i c e against the taxpayer's

a c c o u n t with the D B P or L B P or designated bank; and
(b) Tax debit m e m o applied by the taxpayer against
the unutilized portion of duly issued tax audit certificates for
all taxes, except withholding taxes. (Sec. 4, Rev. Regs No
1-98.)
(6) T h e withholding tax referred to in Subsection (j, 4)
covers all kinds of withholding taxes, i.e., on compensation,
e x p a n d e d , final taxes, a n d on g o v e r n m e n t money
p a y m e n t s . (Rev. R e g s . N o . 12-93.)
(7) Neither Section 245(j) n o r Rev. Regs. No. 1-98

m a k e any distinction b e t w e e n individual or corporate
t a x p a y e r s , unlike under t h e provision of Rev. Regs. No. 12-
93 before R.A. No. 8424, w h i c h specifically defined a large
t a x p a y e r as "a corporate taxpayer."
Note: Rev. M e m o . Cir. N o . 92-2010 re-implements

the monthly sales reporting on pilot m o d e (which was
temporarily s u s p e n d e d ) on all taxpayers-users of C R M ,
D O S m a c h i n e s a n d other sales machines as required
under Rev. R e g s . N o . 5-5005.
Under t h e e S a l e s pilot, all Large Taxpayers registered

under t h e Large Taxpayers Service-Regular and Large
Taxpayers Service-Excise using C R M , P O S machines, and
other similar sales m a c h i n e s generating a receipt/invoice
for every sale shall n o w submit monthly sales reports per
m a c h i n e to the BIR only through the w e b channel. All other
existing policies and procedures prescribed under Rev.
R e g s . N o . 5-2005 shall be followed.
7. Classification of taxpayer as a Large Taxpayer. A Large

Taxpayer is a taxpayer, individual or corporate regardless of its
location in the country, which has been classified and notified in
writing by the C o m m i s s i o n e r as one that has satisfied the criteria
for determining large taxpayers.
(1) Taxpayers classified and notified as Large Taxpayers
by the Commissioner shall continue as such, and shall be cov-
ered by Rev. Regs. N o . 17-2010, unless notified by the C o m -
missioner in writing of their delisting.
(2) T h e Commissioner will conduct periodic review on the
coverage, and any, or all of the criteria in the enlisting/delisting
of Large Taxpayers, taking into consideration such factors as
ANNOTATED
inflation, volume of business, nature of business and affiliation,

tax payments, financial condition and results of operation, w a g e
and employment levels, and other economic factors.
(3) The following taxpayers shall be automatically classi-
fied as candidate to be a Large Taxpayer and will be notified in
writing as such by the Commissioner:
(a) All branches of a taxpayer under the Large Tax-
payers Service;
(b) Subsidiaries, affiliates and entities of conglo-
merates/group of c o m p a n i e s of a large taxpayer initially
listed as of the effectivity of the Regulations;
(c) T h e surviving company, in c a s e of merger/conso-
lidation involving a large taxpayer;
(d) A n y corporation that absorbs the operation/busi-
ness in case of spin-off/s of any large taxpayer;
(e) Corporations with an authorized capitalization of
at least P 3 0 0 million registered with the Securities a n d
Exchange Commission (SEC);
(f) Multi-national enterprises ( M N E s ) with an author-
ized capitalization or a s s i g n e d capital of at least P 3 0 0
million;
(g) Publicly-listed corporations;

(h) Universal, c o m m e r c i a l , a n d foreign banks. T h e
Regular Banking Unit ( R B U ) a n d the Foreign Currency
Deposit Unit (FCDU)/Offshore Banking Unit ( O B U ) of a
bank shall be c o n s i d e r e d as o n e t a x p a y e r for purposes of
classifying it as a Large Taxpayer, e v e n if t h e said units are
assigned different Taxpayer Identification N u m b e r s (TINs);
(i) axpayers with an authorized capitalization of at

least P 1 0 0 million belonging to the following industries:
banks, insurance, t e l e c o m m u n i c a t i o n , utilities, petroleum,
t o b a c c o , a n d alcohol; and
(j) Corporate taxpayers e n g a g e d in t h e production of

metallic minerals.
(4) Additional Large Taxpayers m a y be selected and

notified by the Commissioner, and c o v e r e d by the Regulations,
such as but not limited to taxpayers not yet listed in (3) (b)
above.
(5) Taxpayers already classified and notified as Large

Taxpayer by the C o m m i s s i o n e r are mandatorily covered by
the Electronic Filing a n d P a y m e n t S y s t e m (EFPS) in filing
and paying their internal revenue tax liabilities, including the
a c c o m p a n y i n g schedules and attachments as prescribed
under existing r e v e n u e issuances.
(6) All withholding tax remittances a n d information returns

of t h e H e a d Office and/or any branch/unit of a Large Taxpayer
shall be contained in a consolidated return.
(7) All existing Large Taxpayers must have a d o p t e d , and

be maintaining, a w o r k i n g a n d duly-accredited Computerized
A c c o u n t i n g S y s t e m ( C A S ) by 31 D e c e m b e r 2 0 1 0 . Newly-
identified Large Taxpayers, on the other h a n d , must have
a d o p t e d , a n d s e c u r e d t h e accreditation of, the required C A S
within six (6) m o n t h s after having b e e n officially notified, in
writing, of their status as Large Taxpayers. (Sec. 4, Rev. Regs.
2
N o . 17-2010 .)
8. Criteria for determination of Large Taxpayers. In

addition to taxpayers e n u m e r a t e d in No. 7(3) a b o v e , a taxpayer
shall be classified as candidate to be a Large Taxpayer and will be
notified in writing as s u c h by t h e C o m m i s s i o n e r if it satisfies any or
a combination of t h e following criteria:
(1) As to payment:
(a) Value-added tax A n y taxpayer with net VAT
paid or payable of at least P200.000.00 per quarter for the
preceding year;
(b) Excise tax A n y taxpayer with an annual excise
tax paid or payable of at least P1 million for the preceding
year;
(c) Income tax A n y taxpayer with annual income
tax paid or payable of at least P1 million for the preceding
year;
(d) Withholding tax A n y taxpayer with annual
withholding tax payment/remittance from all types of
2
I t consolidates all issuances relating to the identification and administration
of Large Taxpayers by incorporating and amending Rev. Regs. Nos. 1-98, 1-94, and
12-93 which were issued pursuant to R.A. Nos. 7646 and No. 8424, also known as the
T a x Reform Act of 1997."
ANNOTATED
withholding taxes {i.e., on compensation, expanded, final

and government money payments) of at least P1 million
(For taxpayers, business establishments and government
offices with branches/units, the basis is the total annual
taxes withheld by the Head Office and all the branches/
units);
(e) Percentage taxesAny taxpayer with percentage
taxes paid or payable of at least P200,000,00 per quarter
for the preceding year; and
(f) Documentary stamp taxes A n y taxpayer with
aggregate annual documentary s t a m p taxes of at least P1
million.
(2) As to financial condition and results of operation:
(a) Gross sales/receipts A n y taxpayer with total
annual gross sales/receipts of at least P1 billion for the
preceding year;
(b) Net worth A n y taxpayer with a total net worth at
the close of e a c h calendar or fiscal year of at least P 3 0 0
million;
(c) Gross purchases A n y taxpayer with total annual
gross purchases of at least P 8 0 0 million for t h e preceding
year; and
(d) Top corporate taxpayers listed and published by
the Securities a n d E x c h a n g e C o m m i s s i o n . (Sec. 5, Ibid.).
SEC. 246. Non-Retroactivity of Rulings. Any revocation,

modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification, or
reversal will be prejudicial to the taxpayers, except in the following
cases:
(a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based; or
(c) where the taxpayer acted in bad faith.
ANNOTATION
1. Non-retroactivity of revocation, etc. Except in the cases

mentioned in Section 2 4 6 , the revocation, etc., of any of the rules,
etc. shall h a v e prospective effect only. However, if the revocation it
is d u e to the fact that the rule or regulation is erroneous or contrary
to law, s u c h revocation shall h a v e retroactive operation as to affect
past transactions, b e c a u s e a w r o n g construction of the law cannot
give rise to a v e s t e d right that can be invoked by a taxpayer, (see
Art. 2 2 5 4 , Civil C o d e . )
2. Non-retroactivity of rulings, etc. Rulings, circulars, and

rules a n d regulations p r o m u l g a t e d by the C o m - m i s s i o n e r of Internal
R e v e n u e h a v e no retroactive application w h e r e to so apply them
w o u l d be prejudicial to t a x p a y e r s . ( C o m m . v s . Telefunken S e m i -
c o n d u c t o r Phils., Inc., 2 4 9 S C R A 4 0 1 [1995].)
(1) T h u s , a n e w Circular (Rev. M e m o . Cir. No. 4-71.)
revoking a previous circular ( G e n . Cir. No. V-344.), holding
that t h e latter w a s "erroneous for lack of legal basis" because
"the tax therein prescribed should be based on gross income
without deduction whatever" cannot apply to a taxpayer w h o
w a s no longer in a position to withhold taxes d u e from foreign
corporations under t h e n e w Circular because it had already
withheld and remitted pursuant to the previous Circular
the a m o u n t of 3 0 % of 1/2 of film rentals paid by it to foreign
corporations not e n g a g e d in trade or business in the Philippines
and no longer had any control over t h e m w h e n the new Circular
w a s issued three years after the taxpayer had withheld taxes.
( A B S - C B N Broadcasting Corp. vs. Court of Appeals, 108 S C R A
142 [1981].)
(2) Similarly, w h e r e the provision of the Tax Code on the
1 5 % branch profit remittance tax (see Sec. 28[A, 5].) had been
interpreted by t h e BIR (on J a n . 2 1 , 1980) to mean that "the tax
base upon which the tax shall be imposed is the profit actually
remitted abroad," a subsequent M e m o r a n d u m Circular (No.
82, dated March 17, 1982) making the tax base "the amount
actually applied for by the branch with the Central Bank as
profit to be remitted abroad," should not be given retroactive
effect in the light of Section 246 where the branch office of a
foreign corporation is claiming tax credit for overpaid branch
profit remittance tax because the profit actually remitted was
less than the profit actually applied for; otherwise, prejudice
would result to the taxpayer corporation which remitted the tax
ANNOTATED
in question (on March 1 4 , 1 9 7 9 ) before the repeal or revocation

of the ruling by M e m o r a n d u m Circular No. 8-82. ( C o m m . vs.
Burroughs Limited, 142 S C R A 324 [1986]; see C o m m . vs.
Mega G e n . M d s g . Corp., 166 S C R A 166 [1988].)
(3) In another case, w h e r e the dispute arose from the
discrepancy in the taxable base on which the excise tax is
to apply on account of two (2) incongruous BIR Rulings, one
which excluded the VAT f r o m the tax base in computing the
15% excise tax due, and a later one w h i c h included back the
VAT, the revocation w a s not given retroactive application as it
would prejudice the private respondent (taxpayer) w h o w o u l d
thereby be a s s e s s e d deficiency excise tax. ( C o m m . of Internal
Revenue vs. Court of A p p e a l s , 267 S C R A 557 [1997].)
3. Where ruling or circular a nullity. While it is true that
"deductions are wholly and exclusively within the power of the
lawmaking body to grant, condition or deny; a n d w h e r e the statute
imposes a tax equal to a specified rate or percentage of the gross
or entire a m o u n t received by the taxpayer, t h e authority of s o m e
administrative officials to modify or c h a n g e , m u c h less reduce, the
basis or m e a s u r e of the tax should not be read into t h e law," a n d
the provision on non-retroactivity is inapplicable w h e r e a circular
is a nullity b e c a u s e , in effect, it c h a n g e s the law on the matter,
and consequently, a taxpayer c a n n o t acquire a n y v e s t e d right
thereunder, this principle c a n be upheld only w h e r e the circular is
clearly without legal basis or contrary to law w h i c h is too plain and
simple to understand but not w h e r e t h e provision of law covered
by the circular is not easy to c o m p r e h e n d and is susceptible to
different interpretations. ( C o m m . v s . B u r r o u g h s Limited, supra.)
A m e m o r a n d u m circular of a b u r e a u h e a d could not operate

to vest a taxpayer with a shield against judicial action. For there
are no vested rights to s p e a k of respecting a w r o n g construction of
the law by an administrative official a n d s u c h w r o n g interpretation
could not place the G o v e r n m e n t in estoppel to correct or overrule
the s a m e . Moreover, the n o n - r e t r o a c t i v i t y of rulings by the C o m -
missioner of Internal R e v e n u e is not applicable w h e r e the nullity
of a revenue m e m o r a n d u m circular w a s declared by the court a n d
not by the C o m m i s s i o n e r of Internal R e v e n u e . (Philippine Bank of
C o m m u n i c a t i o n s v s . C o m m . , 3 0 2 S C R A 241 [1999].)
4. Estoppel on the part of the government. T h e g o v e r n m e n t
is never e s t o p p e d f r o m collecting taxes b e c a u s e of mistakes or
errors on the part of its agents. But, like other principles of law,
this also admits of exceptions in the interest of justice and fair play.
T h e C o m m i s s i o n e r of Internal R e v e n u e is precluded from adopting
a position inconsistent with o n e previously taken w h e r e injustice
w o u l d result therefrom, or w h e r e there has b e e n a misrepresentation
to the taxpayer. (Ibid.)
5. Where taxpayer acted in bad faith. Bad faith imports

dishonest p u r p o s e or s o m e moral obliquity and conscious doing
of w r o n g . It partakes of the nature of f r a u d , a breach of a known
duty t h r o u g h s o m e motive of interest or ill-will. In the cited case of
Comm. of Internal Revenue vs. Court of Appeals, in No. 3(3) above,
private respondent, as a sign of g o o d faith, immediately reverted to
t h e computation m a n d a t e d by t h e s e c o n d ruling upon knowledge
of its issuance. "The [first] ruling w a s clear and categorical, thus
leaving no r o o m for interpretation. T h e failure of private respondent
to consult t h e BIR did not imply bad faith on the part of the former."
- oOo -
TITLE X
STATUTORY OFFENSES
AND PENALTIES
Chapter I
ADDITIONS TO THE TAX
SEC. 247. General Provisions.

(a) The additions to the tax or deficiency tax prescribed in this
Chapter shall apply to all taxes, fees and charges imposed in this
Code. The amount so added to the tax shall be collected at the same
time, in the same manner and as part of the tax.
(b) If the withholding agent is the Government or any of its
agencies, political subdivisions or instrumentalities, or a government-
owned or -controlled corporation, the employee thereof responsible
for withholding and remittance of the tax shall be personally liable
for the additions to the tax prescribed herein.
(c) The term "person," as used in this Chapter, includes an
officer or employee of a corporation who as such officer, employee,
or member is under a duty to perform the act in respect of which the
violation occurs.
SEC. 248. Civil Penalties. - ( A ) There shall be imposed, in

addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as
required under the provisions of this Code or rules and regulations
on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a
return with an internal revenue officer other than those with whom
the return is required to be filed; or
682
Sees. 247-248 STATUTORY OFFENSES A N D PENALTIES 683
Additions to the Tax
(3) Failure to pay the deficiency tax within the time prescribed
for its payment in the notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown
on any return required to be filed under the provisions of this Code
or rules and regulations, or the full amount of tax due for which no
return is required to be filed, on or before the date prescribed for its
payment.
(B) In case of willful neglect to file the return within the period
prescribed by this Code or by rules and regulations, or in case a false
or fraudulent return is willfully made, the penalty to be imposed
shall be fifty percent ( 5 0 % ) of the tax or of the deficiency tax, in
case any payment has been made on the basis of such return before
the discovery of the falsity or fraud; Provided, That a substantial
underdeclaration of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the Commissioner
pursuant to the rules and regulations to be promulgated by the
Secretary of Finance, shall constitute prima facie evidence of a false
or fraudulent return: Provided, further, That failure to report sales,
receipts or income in an amount exceeding thirty percent (30%) of
that declared per return, and a claim of deductions in an amount
exceeding thirty percent ( 3 0 % ) of actual deductions, shall render the
taxpayer liable for substantial underdeclaration of sales, receipts or
income or for overstatement of deductions, as mentioned herein, (a)
ANNOTATION
1. T h e a m e n d m e n t s in Section 248 by R.A. No. 8424 consist

in the insertion of the following: "and pay the tax due thereon," in
Subsection (A, 1); "Unless otherwise authorized by the C o m m i s -
sioner," in Subsection (A, 2); "deficiency" and "in the notice of as-
s e s s m e n t " in Subsection (A, 3); "or part of t h e " in Subsection (A, 4);
and the provisos in Subsection (B).
Aside from Subsection (d) (Surcharge and Interest for Failure to
Affix Proper Documentary Stamps), R.A. No. 8424 also deleted the
following provision f r o m Section 248: "(c) T h e penalties imposed
hereunder shall f o r m part of the tax and the entire amount shall be
subject to the interest prescribed in Section 2 4 9 . " However, Section
247(A) provides that "the amount [additions to the tax or deficiency
tax] so added to the tax shall be collected at the same time, in the
s a m e manner and as part of the tax."
Note: Rev. M e m o . Order No. 4-2008 (Jan. 8, 2008.) prescribes
additional policies in the collection of deficiency taxes uncovered
ANNOTATED
through computerized data matching and reflected in the Tax

Reconciliation System-Letter Notices (TRS-LNs), Rev. Memo.
Order No. 5-2008 (Jan. 8, 2008) supplements the policies provided
in Rev. Memo. Order No. 38-2007 regarding the offices which will
handle the enforcement activities on taxpayers included in the
Taxpayer Account M a n a g e m e n t Program (TAMP) w h o are subjects
of confidential information.
2. Surcharge is an overcharge or exaction imposed by law as
addition to the main tax required to be paid.
(1) It is not really a penalty as used in criminal law but a
civil administrative sanction provided primarily as a safeguard
for the protection of the State revenue and to reimburse the
government for the e x p e n s e s in investigating and the loss
resulting from taxpayer f r a u d . (Helvering vs. Mitchell, 303 U.S.
390; Spies vs. U.S., 314 U.S. 492.)
(2) T h e imposition of surcharge is mandatory. T h e C o m -

missioner of Internal R e v e n u e has no authority to w a i v e or
dispense with the collection thereof. Even the g o o d faith of the
taxpayer in failing to pay t h e tax u p o n advice of counsel is not
sufficient justification for seeking e x e m p t i o n f r o m the p a y m e n t
of surcharges. ( C o m m . v s . Royal Interocean Lines a n d C.T.A.,
L-20506, July 30, 1970.) Bad faith is not essential for the
imposition of the 2 5 % surcharge.
3. Basis of surcharge. U n d e r Section 2 4 8 , "the penalty is

equivalent to 2 5 % of the a m o u n t d u e , i.e., "the tax d u e , " or "the tax
s h o w n on any return," or "the deficiency t a x " a s s e s s e d .
(1) If an a m o u n t has b e e n paid, t h e s u r c h a r g e is based on

the deficiency tax; otherwise, on t h e a m o u n t of t h e tax i m p o s e d
by law. T h u s , if the tax d u e and payable is P 1 0 , 0 0 0 , a n d only
P6.000 is paid u p o n filing the return, the penalty of 2 5 % is
based on the unpaid a m o u n t of P4,000; if no a m o u n t is paid,
the basis of the penalty is P 1 0 , 0 0 0 .
(2) For tax delinquency, t h e 2 5 % s u r c h a r g e m a y only be

imposed in c a s e (a) the tax d u e as s h o w n on the return filed,
or (b) the tax d u e for w h i c h no return is required to be filed, or
(c) the tax d u e for return required to be filed w a s not filed, is not
paid on or before the date prescribed by law for its p a y m e n t , or
(d) the return is filed with an internal r e v e n u e officer other than
o n e it is required to be filed. Interest shall also be a s s e s s e d
and collected except in c a s e of improper filing (d) w h e r e there
is no delay in the filing of the return and payment of the tax due
thereon.
(3) In c a s e of a deficiency tax assessment, the 2 5 %

surcharge m a y only be i m p o s e d if said tax is not paid on or
before t h e date prescribed for its p a y m e n t as s h o w n in the
notice of assessment. In any case, deficiency tax is always
subject to interest.
In c a s e of willful neglect to file the return within the pres-

cribed period, or a false or fraudulent return is willfully filed,
the s u r c h a r g e is 5 0 % . (Subsec. B.) If the return w a s filed and
the tax paid after notice f r o m t h e BIR, the failure is considered
already d u e to willful neglect.
4. W h e r e the a s s e s s m e n t a p p e a r s to be highly controversial

(e.g., the C o m m i s s i o n e r himself at the outset w a s not certain as to
taxpayer's tax liability), the taxpayer should be held liable only for
tax proper a n d should not be held liable for surcharge and interest.
( C a g a y a n Electric P o w e r a n d Light Co., Inc. vs. C o m m . , 138 S C R A
6 2 9 , Sept. 2 5 , 1985.)
5. Cumulative surcharges. If the taxpayer filed his return

on the date prescribed by law, but paid t h e tax due after said date,
the penalty is 2 5 % . If he filed the return and paid the tax after said
date, t h e total penalty imposable is also 2 5 % . Both the failure
to file return a n d the failure to pay the tax s h o w n on such return
is considered as a single offense. But if, in addition, he filed his
return with the w r o n g internal revenue officer, the total penalty to be
imposed is 5 0 % . (Subsection [A, 1, 2].)
Under Section 2 0 4 ( B , 1), the Commissioner of Internal

R e v e n u e m a y abate or cancel a tax liability w h e n the tax or any
portion thereof appears to be unjustly or excessively assessed.
6. Liability for surcharge after assessment notice has been
issued. It has been administratively ruled that the civil penalty
equivalent to 2 5 % of the a m o u n t d u e , in addition to the tax required
to be paid, shall be imposed w h e r e a formal assessment notice
has been issued therefor. Such being the case, a deficiency tax
ascertained after investigation but paid by the taxpayer before an
assessment notice is issued, does not c o m e under Subsection (A,
3). Accordingly, the s a m e is not subject to the civil penalty of 2 5 % .
(BIR Ruling No. 283, Oct. 6, 1988.)
The above ruling has been revoked on the ground that "a
deficiency tax assessed after field investigation presupposes that
ANNOTATED
the taxpayer failed to pay the correct amount of tax within the time
prescribed for its payment; hence, the deficiency. Accordingly, the
penalty equivalent to 2 5 % of the amount due in addition to the
tax required to be paid shall be imposed not only to a deficiency
tax where a formal assessment notice has been issued therefor
but even to a deficiency tax ascertained after investigation." (BIR
Ruling No. 129, J u n e 19, 1989.) Note, however, that the phrase "in
the notice of a s s e s s m e n t " w a s not in Subsection (A, 3) before its
a m e n d m e n t by R.A. No. 8424.
Under Section 56(B), after the return is filed, the Commissioner

of Internal Revenue shall e x a m i n e it and assess the correct a m o u n t
of tax. T h e tax or deficiency income tax so discovered shall be paid
upon notice and d e m a n d f r o m the Commissioner. Under Section
248(A, 3), the civil penalty equivalent to 2 5 % of the a m o u n t due
shall be imposed in addition to the tax required to be paid in case
of "failure to pay the deficiency tax within t h e time prescribed for its
payment in the notice of assessment." H e n c e , no surcharge shall
be imposed if the deficiency tax is paid within t h e date fixed in the
notice.
7. An e x a m p l e of a tax for w h i c h no return is required to be

filed is deficiency tax a s s e s s e d by the BIR. (Subsection [A, 4].)
Under Section 2 0 0 , d o c u m e n t a r y s t a m p tax m a y be paid in lieu
of filing a tax return a n d p a y i n g t h e tax at t h e s a m e time, either
through purchase a n d actual affixture of the s t a m p or by imprinting
the stamp through a metering m a c h i n e on t h e taxable d o c u m e n t .
8. T h e statute is not unconstitutional in so far as it i m p o s e s a
penalty for a false or fraudulent return. It d o e s not invest t h e officer
with power to s e n t e n c e anybody, nor e v e n allow him any discretion
as to the penal increase of t h e tax but merely authorizes him to
inquire whether the return is false or fraudulent a n d if so finds,
requires him to add the surcharge prescribed to t h e tax. (Doll vs.
Evans, 3 Fed. Stat. A n n . 2 n d E d . 1007.)
9. When return fraudulent. It is not e n o u g h that the taxpayer

failed to file the required tax return or that t h e return is false to justify
the imposition of the 5 0 % surcharge for f r a u d . It must a p p e a r that
the taxpayer had an intention to e v a d e t h e p a y m e n t of tax in filing a
false return. T h e willful neglect to file t h e required tax return or the
fraudulent intent to e v a d e the p a y m e n t of taxes, considering that
the s a m e is a c c o m p a n i e d by legal c o n s e q u e n c e s , is not p r e s u m e d .
( C o m m . vs. Air India, 157 S C R A 648 [1988].)
(1) T h e fraud c o n t e m p l a t e d by law is actual, not cons-

tructive. To warrant the imposition of the 5 0 % fraud penalty, the
conclusion regarding t h e existence of fraudulent intent to evade
taxes must be b a s e d on e v i d e n c e establishing a willful filing of
false and fraudulent returns and not merely on a presumption
that fraud can be d e d u c e d f r o m the substantial difference
b e t w e e n the net i n c o m e as reported and the net income as
d e t e r m i n e d b y t h e inventory m e t h o d . (Aznar vs. C T A . and
Coll., A u g . 2 3 , 1974.)
(2) Fraud is never imputed and the courts never sustain

findings of fraud u p o n c i r c u m s t a n c e s w h i c h , at most create
only suspicion a n d t h e m e r e understatement of a tax is not it-
self proof of fraud for the p u r p o s e of tax evasion. It also neces-
sarily follows that a m e r e mistake cannot be considered as a
fraudulent intent. (Yutivo S o n s H a r d w a r e C o . vs. Court of Tax
A p p e a l s , 1 S C R A 160 [1961]; A z n a r vs. Court of Tax Appeals,
supra.)
In a c a s e , the issue is w h e t h e r or not a taxpayer w h o merely
states as a footnote in his income tax return that a s u m of money
that he erroneously received a n d already spent is the subject of
a pending litigation a n d , therefore, did not declare it as income,
is liable to pay t h e 5 0 % penalty for filing a fraudulent return.
"The S u p r e m e Court is p e r s u a d e d considerably by the private
respondent's (Javier's) contention that there is no fraud in the
filing of the return a n d a g r e e s fully with the Court of Tax Appeals'
interpretation of Javier's notation in his income tax return filed
on March 15, 1978, thus: T h e taxpayer w a s the recipient of
s o m e m o n e y f r o m abroad w h i c h he presumed to be a gift but
turned out to be an 'error and is now subject of litigation,' that
it w a s an 'error or mistake of fact or law' not constituting fraud,
that such notation w a s practically an invitation for investigation
and that Javier had literally 'laid his cards on the table.'
"x x x A fraudulent return is always an attempt to evade

a tax, but a merely false return may not b e . " ( C o m m . vs.
Javier, Jr., 199 S C R A 824 [1991].)
(3) W h e t h e r or not fraud w a s committed is an issue
of fact to be inferred from the evidence and surrounding
circumstances. T h e acts of the taxpayer in declaring as his
income for three years representing only small fractions of his
actual incomes justify the finding that there has been fraud.
(Avelino vs. Coll., L-17715, July 3 1 . 1963.) Claiming fictitious
ANNOTATED
expenses as deductions is a proof of falsity or fraud. (Tan Guan

vs. C.T.A., L-23673, April 22, 1967.)
(4) The finding as to its non-existence or existence by the
Court of Tax Appeals is conclusive upon the Court of Appeals or
Supreme Court, unless clearly s h o w n to be erroneous. (Castro
vs. Collector, supra; C o m m . vs. Ayala Securities Corp. & C.T.A.,
L-29485, March 3 1 , 1976.)
(5) Negligence, whether slight or gross, is not equivalent
to the fraud with intent to evade the tax contemplated by law.
It must amount to intentional w r o n g d o i n g with the sole object
of evading the tax. (Aznar v s . Court of Appeals, supra.) T h u s ,
where the taxpayer believed in g o o d faith that it need not file the
tax return for it had no taxable income then as it w a s claimed
to have been derived f r o m sources outside the Philippines, the
element of fraud is lacking. At most, only negligence may be
imputed to the taxpayer for not ascertaining the dispensability
of filing the tax return and as s u c h , it m a y be subject only to the
2 5 % surcharge. ( C o m m . vs. J a p a n Air Lines, Inc., 2 0 2 S C R A
4 5 0 [1991].)
(6) Prima facie evidence of a false or fraudulent return.

T h e proviso in Section 2 4 8 re substantial underdeclaration
of receipts and substantial overstatement of deductions under
Subsection (B) is new, a d d e d by R.A. N o . 8 4 2 4 . It is c o m m i t -
ted w h e n , for e x a m p l e , a corporation reports an i n c o m e of
P100,000 but fails to include P 3 5 . 0 0 0 ( 3 5 % difference) i n c o m e ,
or reports deductions a m o u n t i n g to P 2 8 . 0 0 0 ( 4 0 % difference)
but the actual deductions a m o u n t only to P 2 0 , 0 0 0 , the differ-
ence of P35.000 or P8.000, as t h e c a s e m a y b e , shall, in a d d i -
tion, be subject to tax ( 3 0 % ) a n d t h e resulting a m o u n t to 5 0 %
surcharge. So the additional a m o u n t payable will be P15,750
(P35.000 x 3 0 % + 5 0 % ) or P3.600 (P8.000 x 3 0 % + 5 0 % ) .
In the first situation, the corporation should h a v e paid

P40.500 ( P 1 3 5 , 0 0 0 x 3 0 % ) income tax but paid only P30.000
(P100,000 x 3 0 % ) or a difference of P10,500 (P35.000 x
3 0 % ) which is subject to 5 0 % surcharge of P5.250, thereby,
increasing its liability to P 1 5 , 7 5 0 ( P 1 0 , 5 0 0 + P5.200). In the
s e c o n d situation, the corporation paid only P 2 1 . 6 0 0 ( P 1 0 0 . 0 0 0
- P28.000 = P72.000 x 3 0 % ) income tax, w h e n it should
have paid P24.000 ( P 1 0 0 , 0 0 0 - P 2 0 . 0 0 0 = P80.000 x 3 0 % )
or a difference of P2.400 (P8.000 x 3 0 % ) w h i c h is subject to
5 0 % surcharge of P1.200, thereby making it liable to pay the
additional a m o u n t of P3.600, (P2.400 + P1.200).
10. Methods of proving fraud. Fraud in criminal and civil tax

fraud cases m a y be proved by the:
(1) Direct approach method or by direct evidence. It is

also called specific item cases. Here, proof of fraudulent acts is
s h o w n by specific items of transactions without any inference
or p r e s u m p t i o n ; and
(2) Indirect approach method. This method relies upon

circumstantial e v i d e n c e w h i c h tends to prove the existence
of fraud by proof of other facts. However, the circumstances
must be proved by direct e v i d e n c e a n d cannot themselves be
inferred.
Note: For t h e indirect a p p r o a c h to determine income or

assets see Section 4 3 .
11. Direct approach re income tax. T h e following are

e x a m p l e s of proof of fraudulent acts without the necessity of
inference or p r e s u m p t i o n :
(1) Omission or understatement of taxable income:
(a) Failure to file income tax return;
(b) Items of income a n d e x p e n s e s , or assets or
liabilities h a v e b e e n o m i t t e d , or falsely claimed in the
accounting records or return in order to minimize or reduce
taxes;
(c) Misclassification of accounts Income taken
up and classified as liabilities; erroneous classification of
income f r o m taxable to exempt; ordinary gains classified
as capital gains; non-deductible expenses disguised as
deductible items; and capital expenditures classified as
deductible items;
(d) Sales/Income of domestic branches purportedly
s h o w n as income of the foreign head office;
(e) Keeping t w o sets of invoice or receipts one
set registered with the BIR and sales or income recorded
thereon are the ones posted in the accounting records;
w h e r e a s , the other set is not reported for tax purposes;
(f) Keeping two sets of books of accounts records
one set registered with the BIR and the other set reflects
the correct transactions and not registered and reported to
the BIR;
(g) Non-issuance of receipts to customers; and
ANNOTATED
(h) Sales invoices or receipts issued to customers

reflect the correct transactions, but invoices or receipts
recorded for tax purposes reflect much smaller amounts.
(2) Utilization of other persons or entities:
(a) Establishment of several entities corporations,
partnerships, or proprietorships, by a person by making it
appear that sales are m a d e by the different entities created
w h e n in fact such sales are only m a d e by o n e person;
(b) Allocating income and e x p e n s e s to other persons
in order to reduce or minimize taxes by a controlling person;
and
(c) Establishment of a registered partnership or corpo-
ration using d u m m y partners or stockholders.
(3) Improper claims of costs of sales and deductible
expenses:
(a) Fictitious purchases, or padding of purchases, or
that proceeds are diverted to t h e personal benefit of the
taxpayer or his assign;
(b) False or fictitious claims of deductions;
(c) Misclassification of d e d u c t i o n s
Investments or major repairs or i m p r o v e m e n t s claimed
as nominal e x p e n s e s ;
(d) Dividend declarations classified as e x p e n s e s or
salaries;
(e) Withdrawalsclaimedasexpensesorcompensation;
(f) Claim of depreciation of non-existing assets
or already fully d e p r e c i a t e d , or on assets w h i c h w e r e
appraised higher for credit p u r p o s e s ;
(g) Claim of p u r c h a s e s f r o m non-VAT s o u r c e s as VAT
purchases and claiming tax credits t h e r e o n ; and
(h) Improper claims of tax credits without having paid
the input taxes p a s s e d on by the seller.
(4) Claims of false personal exemptions:
(a) Claiming e x e m p t i o n s as married by an unmarried
individual or head of the family by single persons w h o do
not actually support their parents; a n d
(b) Claiming false additional e x e m p t i o n s of alleged
children, or children w h o are already of a g e or w h o are not
physically incapacitated, (see A n n e x "A," to Rev. M e m o

Order No. 15-95.)
12. Direct approach re value-added and percentage taxes.
E x a m p l e s are:
(1) Omission or understatement of taxable sales/income:
(a) Non-filing of VAT returns or Percentage Tax
Returns;
(b) K e e p i n g falsified books of accounts;
(c) N o n - i s s u a n c e of sales invoices, or under-recording
of sales or non-recording of true sales or income;
(d) Claiming fictitious tax credits;
(e) Crediting sales against items of expenses or costs
of sales to conceal the a m o u n t of sales subject to business
taxes on VAT;
(f) Deducting against sales or income discounts which
w e r e g r a n t e d subsequently a n d not in the sales invoice;
(g) Deducting returned sales which w e r e not actually
returned.
(2) Misclassification of sales or income:
(a) Classifying sales as e x e m p t w h e n in fact they are
tax-able;
(b) Misclassification of sales of g o o d s subject to VAT
as only subject to percentage taxes;
(c) Claiming domestic sales as export sales w h e n in
fact the g o o d s w e r e sold in the domestic market; and
(d) Sales in the local market which are made to appear
as sales by the foreign head office.
(3) Claim of fictitious tax credits:
(a) Claiming tax credits on purchases of goods from
Non-VAT registered enterprises; and
(b) Claiming fictitious tax credits on non-existing
invoices.
(4) Non-payment of VAT on materials imported for re-
export:
Materials w e r e applied against goods originally imported
for re-export, but which w e r e used instead on goods sold in the
local market. (Ibid.)
ANNOTATED
13. Direct approach re estate tax. Examples are:

(1) Failure to file estate tax return;
(2) Filing of estate tax returns in different jurisdictions
to avoid payment of the higher graduated tax, as in the
case where the d e c e a s e d - o w n e d properties in various
places;
(3) Willful under-valuation of the market values of the
properties of the estate;
(4) Willful omission of s o m e properties especially
those located in places other than the residence of the
d e c e a s e d ; and
(5) Claim of fictitious items funeral e x p e n s e s , claims
against the estate, judicial and testamentary e x p e n s e s .
(Ibid.)
14. Direct approach re donor's tax. E x a m p l e s are:
(1) Failure to file d o n o r ' s tax return;
(2) Filing of returns within t h e s a m e year in various
jurisdictions to e v a d e the p a y m e n t of the higher graduated tax;
(3) Willful omissions of prior donation m a d e during the
s a m e taxable year;
(4) Willful undervaluation of t h e market value of the
property d o n a t e d ; a n d
(5) Insufficient consideration on sales of property, the
difference b e t w e e n the m a r k e t value f r o m t h e consideration
agreed u p o n , considered as subject to t h e d o n o r ' s tax. (Ibid.)
15. Direct approach re excise taxes. E x a m p l e s are:

(1) Misclassification of articles subject to excise tax by
making it a p p e a r that a particular m a n u f a c t u r e d article falls
within a lower tax classification;
(2) Illegal m a n u f a c t u r e of articles subject to excise tax;
(3) Unlawful possession or removal of articles subject to
excise tax, and for w h i c h no tax has b e e n paid;
(4) Unlawful use of d e n a t u r e d alcohol;
(5) Unlawful possession of cigarette papers in bobbins,
etc.; and
(6) Shipment or removal of liquor or t o b a c c o products

under false n a m e s or brands or as an imitation of any existing
or otherwise k n o w n product n a m e or brand. (Ibid.)
16. Direct approach re documentary stamps and withholding

taxes. E x a m p l e s are:
(1) N o n affixture of t h e correct documentary stamps on

pertinent d o c u m e n t s or papers; and
(2) Failure to withhold the correct taxes as withholding

agent under t h e pertinent provisions of the Tax C o d e . (Ibid.)
17. Sources of fraud cases:
(1) From routine examination of returns:
(a) K e e p i n g no records or inadequate records despite
substantial transactions reflected in t h e returns;
(b) S t a n d a r d of living of t h e taxpayer, such as the
p o s s e s s i o n of e x p e n s i v e cars a n d jewelries; or staying in
a luxurious m a n s i o n , and o w n e r s h i p of properties w h o s e
values far e x c e e d his probable sources of income as
declared per return;
(c) R e c o r d s verified, w e r e not properly declared for
tax p u r p o s e s ; and
(d) False v o u c h e r s and receipts which w e r e verified in
t h e c o u r s e of the routine e x a m i n a t i o n .
(2) From information furnished by:
(a) An informant w h o has k n o w l e d g e of the trans-
actions of the taxpayers w h i c h w e r e not properly declared
for tax p u r p o s e s ; a n d
(b) Referrals f r o m other government offices or from
other investigating units of the BIR;
(3) Thru other sources:
(a) From newspaper reports;
(b) T h r u research of available government records
such as f r o m offices of the Register of Deeds, Department
of Public W o r k s and Highways, and other government
offices; and
(c) In relation to an investigation of another tax-payer,
w h e r e certain transactions were not declared for tax
purposes. (Ibid.)
18. Indications of fraud. The following are, among others,
considered by the BIR as indications of fraud:
(1) Maintaining two sets of books and records;
THE N A T I O N A L INTERNAL R E V E N U E CODE Sees. 247-248
ANNOTATED
(2) Concealment of assets;

(3) Destruction of books and records;
(4) Large or frequent currency transactions;
(5) Payments to fictitious c o m p a n i e s or persons;
(6) False or altered entries and d o c u m e n t s ;
(7) Overdeclaration of purchases or under declaration of
sales;
(8) Use of false names or n o m i n e e s ;
(9) Large c o m p a n y loans to e m p l o y e e s or other persons;
(10) Payee n a m e s on checks left blank and inserted at a
later date;
(11) Excessive billing accounts;
(12) Excessive spoilage or defects;
(13) Double p a y m e n t on billing;
(14) An individual negotiating c h e c k s m a d e payable to a
corporation;
(15) S e c o n d or third e n d o r s e m e n t on corporate c h e c k s ;

(16) Excessive use of exchange checks or clearing
accounts;
(17) Personal e x p e n s e s paid with corporate f u n d ;
(18) An understatement of i n c o m e attributable to specific

transactions a n d denial by t h e taxpayer of t h e receipt of the
income or inability to provide a satisfactory explanation for its
omission;
(19) Substantial unexplained increases in networth over a

period of years;
(20) Failure to file a return, especially for a period of

several years although substantial a m o u n t s of i n c o m e w e r e
received;
(21) C o n c e a l m e n t of bank accounts, brokerage accounts,

and other property;
(22) Inadequate explanation for dealing in large s u m s

of currency, or the unexplained expenditure of currency,
(especially w h e n in a business not calling for large a m o u n t of
cash);
(23) Failure to deposit receipt to business account contrary

to normal practices;
(24) Claiming fictitious or improper deductions;
(25) Substantial amount of personal expenditures
d e d u c t e d as business e x p e n s e s ;
(26) False entries or alterations m a d e on the books and
records, b a c k d a t e d or postdated d o c u m e n t s , false entries or
invoices or statements, or other false d o c u m e n t s ;
(27) Failure to k e e p records, especially if put on notice
by the BIR as a result of prior e x a m i n a t i o n , concealment of
records or refusal to m a k e certain records available;
(28) Distribution of profits to fictitious partners;
(29) False statements, especially if m a d e under oath
about a material fact involved in the investigation;
(30) A t t e m p t s to hinder the investigation. Failure to answer
pertinent questions or repeated cancellations of appointments.
Avoiding t h e investigator;
(31) T h e taxpayers k n o w l e d g e of taxes and business
practices w h e r e n u m e r o u s questionable items appear on the
returns;
(32) Destruction of books and records, especially after the
investigation w a s started;
(33) Transfer of assets for purposes of concealment;
(34) Involvement in illegal activity (illegal income);
(35) Failure to disclose all relevant facts;
(36) Unsubstantiated or unexplained wealth;
(37) Mental handling of one's affair to avoid keeping
records usual in transactions of the s a m e kind;
(38) Keeping no records or inadequate records despite
substantial transactions in the return;
(39) A n y conduct, the likely effect of which would be to
mislead or to conceal material facts. (Ibid.)
19. When there is willful neglect. There is willful neglect in

the case of a taxpayer w h o , being liable to file a return, knowingly
delays the filing of such return.
(1) W h e r e the filing of the return has been delayed for a
considerable length of time, the delinquency will be presumed
to be due to willful neglect.
ANNOTATED
(2) Whether or not reasonable cause exists to justify

the non-imposition of surcharge, will depend upon the
circumstances of each case. As a general rule, if the taxpayer
exercised ordinary business care and prudence and w a s
nevertheless unable to file the return within the prescribed
time, the delay will be considered as being due to a reasonable
cause. (Sec. 236, Rev. Regs. No. 2.)
Under Rev. Regs. No. 12-99, the t e r m "willful neglect
to file the return within the period prescribed by the C o d e , "
shall not apply in c a s e the taxpayer, without notice f r o m the
commissioner or his duly authorized representative, voluntarily
files the said return in w h i c h c a s e , only 2 5 % surcharge shall be
imposed for late filing a n d late p a y m e n t of the tax in lieu of the
5 0 % surcharge which shall be i m p o s e d in c a s e t h e taxpayer
files his return after prior notice in writing. (Sec. 4 thereof.)
SEC. 2 4 9 . Interest. -
(A) In General. There shall be assessed and collected on any
unpaid amount of tax, interest at the rate of twenty percent (20%)
per annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the amount
is fully paid.
(B) Deficiency Interest. Any deficiency in the tax due as
the term is defined in this Code, shall be subject to the interest
prescribed in Subsection ( A ) hereof, which interest shall be assessed
and collected from the date prescribed for its payment until the full
payment thereof.
(C) Delinquency Interest. In case of failure to pay:
(1) The amount of the tax due on any return required to be filed,
or
(2) The amount of the tax due for which no return is required,
or
(3) A deficiency tax, or any surcharge or interest thereon on the
due date appearing in the notice and demand of the Commissioner,
there shall be assessed and collected on the unpaid amount, interest
at the rate prescribed in Subsection ( A ) hereof until the amount is
fully paid, which interest shall form part of the tax.
(D) Interest on Extended Payment. If any person required
to pay the tax is qualified and elects to pay the tax on installment
under the provisions of this Code, but fails to pay the tax or any
Sec. 249 STATUTORY OFFENNKH AND I'KNAI/l'IKf I
AdditionH In MIK Tux
installment hereof, or any part of rnjch urrioiint or i n H t a l l m e n t

on or before the date prescribed for its puyment, or where the
Commissioner has authorized an extension of time within which
to pay a tax or a deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate hereinabove prescribed
on the tax or deficiency tax or any part thereof unpaid from the date
of notice and demand until it is paid.
ANNOTATION
1. Delinquency is the failure of the taxpayer to pay the tax due

on the date fixed by law or indicated in the a s s e s s m e n t notice or
letter of d e m a n d . It is to be distinguished from deficiency which is
t h e a m o u n t still d u e a n d collectible f r o m a taxpayer upon audit or
investigation.
2. T h e deficiency or delinquency interest of 2 0 % or such

higher rate as m a y be provided by rules a n d regulations, shall be
a s s e s s e d a n d collected for its p a y m e n t until the unpaid a m o u n t of
tax is fully paid. In the case of e x t e n d e d payment, the interest on
t h e unpaid a m o u n t of tax shall be c o m p u t e d from the date of notice
a n d d e m a n d until the a m o u n t is fully paid. T h e interest shall form
part of the tax.
3. Deficiency interest. Under Subsection (B), w h e r e the
taxpayer paid a tax of P 1 0 , 0 0 0 a n d w a s assessed a deficiency
tax of P4.000 with 5 0 % penalty for filing a fraudulent return, if the
deficiency is paid after six (6) months from date prescribed by law
for payment of the tax, the total a m o u n t payable is computed as
follows:
Deficiency tax P4.000

Plus: 5 0 % surcharge 2,000
Basis of interest P6.000
Interest for 6 months
(P4.000 x 2 0 % x 1/2) 400
P6.400
T h e basis of interest is P4.000, not P6.000. Under Subsection

(A), the interest "shall be assessed and collected on any unpaid
amount of tax;" and under Subsection (B), the deficiency tax "shall
be subject to the interest prescribed in Subsection (A)." However, in
case of failure to pay "a deficiency tax, or any surcharge or interest
ANNOTATED
thereon, on the due date appearing in the notice and demand of the
Commissioner," the interest shall be based on the unpaid amount,
i.e., the s u m of the deficiency tax, surcharge, and interest unpaid.
(infra.)
4. Delinquency interest in case of late filing and payment.
Under Subsection (C, 1), w h e r e the taxpayer filed his tax return
and paid the tax due thereon in the a m o u n t of P10,000 six (6)
months after the date prescribed by law, the total a m o u n t payable
is computed as follows:
A m o u n t of tax due P10.000

Interest for 6 months
(P10,000x20%x1/2) 1,000
Surcharge for late filing and
payment (P10,000 x 2 5 % ) 2,500
P13,500
Note: Both the failure to file return a n d t h e failure to pay the tax
per such return should be considered as a single offense for w h i c h
only one 2 5 % surcharge m a y b e a s s e s s e d .
Under Subsection (C, 2), w h e r e no return is required to be filed
for the a m o u n t of the tax d u e in the preceding illustration, t h e basis
of the interest is also P 1 0 , 0 0 0 .
5. Delinquency interest in case deficiency tax paid after
notice and demand. Under Subsection (C, 3), a s s u m i n g that t h e
taxpayer filed his tax return a n d paid tax on t h e prescribed date
on April 15, and he received a notice a n d d e m a n d for p a y m e n t of
P10,000 on J u n e 15, to be paid on or before July 15. If the deficiency
is paid on October 15, the total a m o u n t payable is c o m p u t e d as
follows:
Deficiency tax P10,000

Interest for 3 m o n t h s (4/16-7/15)
( P 1 0 , 0 0 0 x 2 0 % x 1/4) 500
Surcharge ( 2 5 % x P10,000) 2,500
Basis of interest P 13,000
Interest for 3 months (7/16-10/15)
( P 1 3 , 0 0 0 x 2 0 % x 1/4) 650
P13.650
Sec. 249 STATUTORY OFFENSES A N D PENALTIES 699
T h e interest (7/16-10/15) in this c a s e is based on the sum of

t h e deficiency tax, surcharge (for late payment), and interest up to
July 15 b e c a u s e of t h e failure of the taxpayer to pay within the time
s h o w n in the notice a n d d e m a n d . But surcharge is always based on
t h e tax d u e or payable exclusive of interest, (see Annotation No. 3
to Sec. 248.)
If t h e deficiency is paid on (or before) July 15 (the due date

appearing in the notice and d e m a n d ) , and the return is not false
or fraudulent, the interest will be b a s e d on the deficiency tax of
P10,000 c o m p u t e d f r o m the d a t e prescribed by law for payment
until it is fully paid. T h u s , the total a m o u n t payable would be:
Deficiency tax P10,000

Interest for 3 m o n t h s 500
P10,500
No s u r c h a r g e or penalty shall be i m p o s e d in the computation of

t h e deficiency tax a s s e s s m e n t b e c a u s e it w a s paid on or before the
date prescribed in t h e notice a n d d e m a n d .
Under S u b s e c t i o n (c,3), e v e n if an a s s e s s m e n t w a s later reduced
by the court, a delinquency interest should still be imposed from the
time d e m a n d w a s m a d e by the Commissioner. T h e imposition of
additional c h a r g e s a n d interests incident to delinquency is justified
as the nature of s u c h c h a r g e s is c o m p e n s a t o r y and not a penalty.
Indeed, it is only equitable for t h e g o v e r n m e n t to collect interest
f r o m a taxpayer w h o , by the government's error, received a refund
w h i c h w a s not d u e h i m , e v e n t h o u g h he did not request the refund
m a d e to h i m . (Bank of t h e Phil. Islands vs. C o m m . , 4 9 6 S C R A 601
[2006].)
6. Interest on extended payment of deficiency tax. Under
the s e c o n d portion of Subsection (D), suppose in the first example
under No. (5) a b o v e , the taxpayer, after receiving the notice and
d e m a n d to pay on or before July 15, requested for an extension
until October 15 within which to pay which request w a s granted, but
he paid the deficiency tax only on December 15. The total amount
payable is c o m p u t e d as follows:
Deficiency tax P10,000.00

3 months interest
(4/16-7/15) 500.00
P10,500.00
ANNOTATED
3 months interest (7/16-10/15)

( P 1 0 , 5 0 0 x 2 0 % x 1/4) 525.00
P11,025.00
Surcharge ( 2 5 % x P10,000) 2,500.00
Basis of interests P13,525.00
2 months interest (10/16-12/15) 450.83
P13,975.83
The taxpayer is liable to pay surcharge for his failure to pay

within the period of extension. T h e s a m e rule applies w h e r e no
extension is granted a n d the deficiency tax is not paid within the
date appearing in the notice a n d d e m a n d .
If the deficiency tax is paid on October 15, or within t h e period of
extension, t h e n , no surcharge shall be i m p o s e d since the deadline
for payment has been e x t e n d e d . T h e basis of the interest is P10,000
for the first three (3) m o n t h s up to July 15 a n d P 1 0 , 5 0 0 for t h e next
three (3) months up to October 15. T h u s , the total a m o u n t payable
on October 15 is P11,025.00.
7. Interest on extended payment by a qualified person who
elects to pay in installments. In connection with t h e first part
of Subsection D, Section 56(A, 2) provides that "if a n y installment
[second installment on or before July 15 following t h e close of t h e
calendar year of individual i n c o m e tax in e x c e s s of P2.000 to be paid
in two (2) equal installments] is not paid on or before t h e date fixed
for its payment, the w h o l e a m o u n t of t h e tax unpaid b e c o m e s d u e
and payable, together with t h e delinquency penalties." Delinquency
penalties should include both s u r c h a r g e a n d interest in v i e w of
Sections 248(A, 4) and 249(A).
See Section 56(A, 3), 2 n d p a r a g r a p h a n d Section 4 9 .

8. Interest in case of partial or installment payment by
corporations in meritorious cases. This is authorized by Section
53.
ILLUSTRATION:
Before April 15, the date prescribed by law for p a y m e n t of

tax in the a m o u n t of P 5 0 0 . 0 0 0 , X Y Z Corporation, d u e to financial
incapacity, requested for an extension of the period within w h i c h to
pay the s a m e , p a y m e n t to be m a d e in five (5) monthly installments,
which request w a s granted pursuant to Section 53.
T h e p a y m e n t shall be c o m p u t e d as follows:
P500.000.00
100.000.00 1st installment (4/15)

P400.000.00
6,666.67 interest f r o m 4/16-5/15
( P 4 0 0 . 0 0 0 x 2 0 % - 12)
P406,666.67
106,666.67 2 n d installment (5/15)

P300.000.00
5,000.00 interest f r o m 5/16-6/15

P305.000.00
105,000.00 3rd installment (6/15)
P200.000.00
3,333.33 interest f r o m 6/16-7/15
P203.333.33
103,333.33 4th installment (7/15)
P100,000.00
1,666.67 interest f r o m 7/16-8/15
P101,666.67 5th installment (8/15)
No surcharge shall be imposed for late payment since the

deadline for p a y m e n t has been duly extended. The interest is
c o m p u t e d based on the diminishing balance of the tax, inclusive
of interests, (see Sec. 5.6, Rev. Regs. No. 12-99.)
If the request is m a d e after the deadline prescribed for
payment, the 2 5 % surcharge shall be imposed; so the amount
payable in installments, if allowed, will be P625.000 (P500.000
+ P125,000)
9. Surcharge and interest in case of partial payment of tax
due without prior BIR authorization of extended payment.
ILLUSTRATION:
GHI Corporation did not file its final adjustment income tax
return for the calendar year 2010 which w a s due on April 15,
2 0 1 1 . The BIR informed the corporation of its failure to file its said
ANNOTATED
tax return and required that it file the s a m e , inclusive of the 2 5 %

surcharge and 2 0 % interest per annum penalties incident to the
said omission. On May 15, 2 0 1 1 , it advised that its income tax due
for the said year amounts to P1,000,000.00. Due to its adverse
financial condition, GHI would be unable to pay the entire amount,
inclusive of the delinquency penalties. Hence, on May 15, 2 0 1 1 , it
made a partial payment of P400,000.00.
Assuming that the BIR d e m a n d e d p a y m e n t of the unpaid
balance of its tax obligation payable by J u n e 15, 2 0 1 1 , the unpaid
balance of the corporation's delinquent income tax shall be
computed as follows:
Calendar Year 2 0 1 0
Income tax due per return P1,000,000.00
A d d : 2 5 % surcharge for late filing
and late p a y m e n t P250.000.00
2 0 % interest per annum f r o m
4-16-11 to 5-15-11
(P1,000,000.00
times 0.0166667) 16,666.70 266,666.70
A m o u n t d u e as of 5-15-11 P1,266,666.70
Less: Partial p a y m e n t on 5-15-11 400,000.00
Balance as of 5-15-11 P866.666.70
A d d : 2 0 % interest per annum f r o m
5-16-11 to 6-15-11
(P866.666.70
times 0.0166667) 14,444.47
A m o u n t still d u e (exclusive of the
suggested c o m p r o m i s e penalty
for late filing a n d late p a y m e n t ) P881,111.17
If the said taxpayer fails to pay t h e a m o u n t of P881.111.17 by

June 1 5 , 2 0 1 1 , no further 2 5 % s u r c h a r g e for late p a y m e n t of the tax
shall be imposed instead, only the 2 0 % interest per annum shall be
imposed against the taxpayer, c o m p u t e d f r o m d u e date thereof (i.e.,
June 15, 2011) until paid. If said taxpayer pays the s a m e on partial
payment basis, the 2 0 % interest per annum shall be c o m p u t e d on
the diminishing balance thereof. (Sec. 5, Rev. R e g s . No. 12-99.)
Note: T h e 2 0 % interest should be c o m p u t e d f r o m 4/16/11 (not
4/15/11) and 5/16/11 (not 5/15/11). F r o m 4/16/11 to 6/15/11 cover
two (2) months.
Sec. 249 STATUTORY OFFENSES AND PENALTIES 703
10. Compromise penalty. Section 204(A) provides that

"all criminal violations m a y be c o m p r o m i s e d except (a) those
already filed in court; or (b) those involving f r a u d . " An extra-judicial
settlement of the taxpayer's liability for late filing of return and/or late
p a y m e n t of tax m a y be a g r e e d u p o n by the BIR and the taxpayer.
T h e extra-judicial settlement of t h e taxpayer's criminal liability and
the a m o u n t of the c o m p r o m i s e penalty shall c o n f o r m with Revenue
M e m o r a n d u m O r d e r No. 1-90 (Appendix "W.") which provides the
s c h e d u l e of c o m p r o m i s e penalties for violations of the Tax C o d e .
C o m p r o m i s e penalties are only a m o u n t s suggested in

settlement of criminal liability a n d m a y not be imposed or collected
without the conformity of the taxpayer in w h i c h case the BIR should
file a criminal action to enforce the penalty for the violation. In
c a s e an extra-judicial settlement is a g r e e d u p o n , the c o m p r o m i s e
penalties shall be paid in addition to interest and surcharge.
11. Tax base to be used in computation of interest. Section

2 4 9 ( D ) requires t h e collection of interest on a deficiency tax, the
time for p a y m e n t of w h i c h has b e e n e x t e n d e d at the rate of 2 0 %
per annum for the period of e x t e n s i o n . This m e a n s that the interest
chargeable on the deficiency should spread over an entire year.
W h e n , therefore, a t a x p a y e r m a k e s a series of partial

amortizations on his tax liability during the year, the amount of
interest that he must pay should be c o m p u t e d on the basis of
the actual n u m b e r of d a y s that h a v e elapsed between every
two consecutive amortization p a y m e n t s , using as tax base the
remaining s u m then d u e a n d payable, (see C o m m . vs. C u Unjieng,
66 S C R A 1 [1975].)
12. Collection of penalty and interest mandatory. It is
mandatory to collect penalty a n d interest at the stated rate in
case of delinquency. Strong reasons of public policy support a
strict observance of the rule regarding the payment of tax. The
intention of the law is to discourage delay in the payment of taxes
due the G o v e r n m e n t a n d , in this sense, the penalty and interest
are not penal but compensatory for the concomittant use of the
funds by the taxpayer b e y o n d the date w h e n he is supposed to
have paid t h e m . If delays in tax payments are to be condoned for
light reasons, the law imposing penalties for delinquencies would
be rendered nugatory and the maintenance of the government and
its multifarious activities would be as precarious as taxpayers are
willing or unwilling to pay their obligations to the State on time.
(Republic vs. Phil. Bank of C o m m e r c e , 34 S C R A 361 [1970]; Phil.
ANNOTATED
Refining C o . vs. Court of Appeals, 256 S C R A 667 [1996]; Jamora

vs. Meer, 74 Phil. 22 [1942].)
13. Justification for non-liability for surcharges and interest.
Given justifiable circumstances, the BIR m a y grant the request of a
taxpayer for the waiver of payment of surcharges and penalties but
not the payment of interest imposed under Section 248. (BIR Ruling
No. 055-00, Oct. 30, 2000; see also BIR Ruling No. 012-00, J a n .
7, 2000.) Thus, w h e r e a corporation failed to file t h e corresponding
returns and pay the tax within the period prescribed by law due to a
labor strike which w a s b e y o n d its control and the taxpayer notified
the BIR of its failure and displayed zeal in fulfilling its duty under
the law, the waiver of the payment of surcharge and c o m p r o m i s e
penalty m a y be granted but not t h e p a y m e n t of interest under
Section 249. (BIR Ruling No. 001-01, J a n . 8, 2001.)
Good faith and honest belief that o n e is not subject to tax b a s e d
on the previous interpretation of the g o v e r n m e n t instrumentality
tasked to implement the tax law are sufficient justification for a
taxpayer to be spared of interest and s u r c h a r g e s . ( A n t o m P a w n s h o p
Corp. v s . C o m m . , 566 S C R A 54 [2008].) In t h e cited case, e v e n
the Court of Tax A p p e a l s sustained the interpretation of the BIR
favoring the taxpayer's position.
SEC. 250. Failure to File Certain Information Returns.

In the case of each failure to file an information return, statement
or list, or keep any record, or supply any information required by
this Code or by the Commissioner on the date prescribed therefor,
unless it is shown that such failure is due to reasonable cause and
not to willful neglect, there shall, upon notice and demand by the
Commissioner, be paid by the person failing to file, keep or supply
the same, One thousand pesos (PI,000) for each such failure:
Provided, however, That the aggregate amount to be imposed for all
such failures during a calendar year shall not exceed Twenty-five
thousand pesos (P25.000). (a)
SEC. 251. Failure of a Withholding Agent to Collect and
Remit Tax. Any person required to withhold, account for, and
remit any tax imposed by this Code or who willfully fails to withhold
such tax, or account for and remit such tax, or aids or abets in any
manner to evade any such tax or the payment thereof, shall, in
addition to other penalties provided for under this Chapter, be liable
upon conviction to a penalty equal to the total amount of the tax not
withheld, or not accounted for and remitted, (a)
ANNOTATION
A withholding agent m a y not hold the remittance of withholding

taxes collected by it a n d apply the s a m e to a m o n e y obligation due
to him f r o m t h e g o v e r n m e n t . Taxes c a n n o t be the subject of set-off
or c o m p e n s a t i o n .
SEC. 252. Failure of a Withholding Agent to Refund Excess

Withholding Tax. Any employer/withholding agent who fails or
refuses to refund excess withholding tax shall, in addition to the
penalties provided in this Title, be liable to a penalty equal to the
total amount of refunds which was not refunded to the employee
resulting from any excess of the amount withheld over the tax
actually due on their return.
- oOo -
CHAPTER II
CRIMES, OTHER OFFENSES
AND FORFEITURES
SEC. 253. General Provisions. (a) Any person convicted of

a crime penalized by this Code shall, in addition to being liable for
the payment of the tax, be subject to the penalties imposed herein:
Provided, That payment of the tax due after apprehension shall not
constitute a valid defense in any prosecution for violation of any
provision of this Code or in any action for the forfeiture of untaxed
articles.
(b) Any person who willfully aids or abets in the commission
of a crime penalized herein or who causes the commission of any
such offense by another, shall be liable in the same manner as the
principal.
(c) If the offender is not a citizen of the Philippines, he shall
be deported immediately after serving the sentence without further
proceedings for deportation. If he is a public officer or employee,
the maximum penalty prescribed for the offense shall be imposed
and, in addition, he shall be dismissed from the public service and
perpetually disqualified from holding any public office, to vote and
to participate in any election. If the offender is a Certified Public
Accountant, his certificate as a Certified Public Accountant shall,
upon conviction, be automatically revoked or cancelled.
(d) In the case of associations, partnerships or corporations,
the penalty shall be imposed on the partner, president, general
manager, branch manager, treasurer, officer-in-charge, and
employees responsible for the violation.
(e) The fines to be imposed for any violation of the provisions
of this Code shall not be lower than the fines imposed herein or
twice the amount of taxes, interests, and surcharges due from the
taxpayer, whichever is higher, (as added by RA. No. 7642.)
706
Crimes, Other Offenses and Forfeitures
SEC. 2 5 4 . Attempt to Evade or Defeat Tax. Any person

who willfully attempts in any manner to evade or defeat any tax
imposed under this Code or the payment thereof shall, in addition
to other penalties provided by law, upon conviction thereof, be
punished by a fine of not less than Thirty thousand pesos (P30,000)
but not more than One hundred thousand pesos (P100,000) and
suffer imprisonment of not less than two (2) years but not more than
four (4) years: Provided, That the conviction or acquittal obtained
under this Section shall not be a bar to the filing of a civil suit for the
collection of taxes, (a)
ANNOTATION
1. T h e proviso is a d d e d by R.A. No. 7 4 2 4 .

2. Necessity of assessment prior to criminal prosecution for
tax evasion. "An a s s e s s m e n t of a tax deficiency is not necessary
to a criminal prosecution for tax e v a s i o n . T h e crime is complete
w h e n t h e t a x p a y e r has knowingly a n d willfully filed a fraudulent
return with intent to e v a d e a n d defeat t h e tax. T h e perpetration of
t h e crime is g r o u n d e d u p o n k n o w l e d g e on the part of the taxpayer
that he has m a d e an inaccurate return a n d the government's failure
to discover the error a n d to promptly assess the s a m e has no
connection with t h e c o m m i s s i o n of the c r i m e . " (Ungab vs. Cusi, 97
S C R A 877 [1980]; C o m m . v s . G o n z a l e s , 6 3 2 S C R A 139 [2010]; see
Annotation No. 11 under Sec. 2 2 8 ; see C o m m . vs. Pascor Realty
and D e v e l o p m e n t Corp., 309 S C R A 4 0 2 [1999], under Sec. 222.)
In C o m m i s s i o n e r of Internal R e v e n u e vs. Court of Appeals

257 S C R A 200 [1996].), however, the S u p r e m e Court qualified the
Ungab ruling: "In plain w o r d s , for criminal prosecution to proceed
before assessment, there must be a prima facie showing of willful
attempt to e v a d e taxes. T h e r e w a s a willful attempt to evade tax in
Ungab because of the taxpayer's failure to declare in his income
tax return 'his income derived from banana saplings.' In the mind
of the trial court and the Court of Appeals, Fortune's [taxpayer's]
situation is quite apart factually since the registered wholesale price
of the g o o d s approved by the BIR is presumed to be the actual
wholesale price, a n d , therefore, not fraudulent and unless and until
the BIR has m a d e final determination of what is supposed to be the
correct taxes, the taxpayer should not be placed in the crucible of
criminal prosecution."
Dissenting: "The lack of final determination of respondents'
[Fortune's] exact or correct tax liability is not a bar to criminal
prosecution for fraudulent tax evasion. While a precise computation
ANNOTATED
and assessment is required for a civil action to collect a tax

deficiency, the National Internal Revenue Code does not require
such computation and assessment prior to criminal prosecution
for fraudulent tax evasion, x x x In the case at bar, the complaints
filed before the Department of Justice for investigation charge
private respondents with fraudulent concealment of the actual
wholesale price of products sold through declaration of registered
wholesale prices lower than the actual wholesale prices, resulting in
underpayment of income, ad valorem and value-added taxes. Both
cases involve, therefore, fraudulent s c h e m e s to e v a d e payment to
the Government of correct t a x e s . "
In Commissioner of Internal Revenue vs. Bank of the Philippine
Islands (411 S C R A 4 5 6 [2003].), the S u p r e m e Court ruled: "Since
there w a s a failure to effect a timely a s s e s s m e n t , the period for
filing a criminal case for [respondent corporations] tax liabilities
had prescribed by the petitioner instituted the criminal against its
former offices, thus, [said officers] w e r e correctly acquitted by the
trial court.
Note: Rev. M e m o . Order No. 15-95 provides the policies a n d
rules in the investigation of tax fraud c a s e s . Exec. Order No. 646
mandates accessibility of taxpayer information b e t w e e n t h e BIR
and local g o v e r n m e n t units ( L G U s ) for the purpose of ascertaining,
assessing, and collecting t h e correct a m o u n t of local taxes, fees or
charges, or any internal revenue tax, as t h e c a s e m a y be, for w h i c h
such taxpayer is liable.
3. Litis pendentia as a g r o u n d for the dismissal of a civil action
refers to that situation wherein another action is pending b e t w e e n
the s a m e parties for the s a m e c a u s e of action, s u c h that the s e c o n d
action b e c o m e s u n n e c e s s a r y and vexatious. T h e conviction of the
accused in a criminal c a s e and t h e collection of unpaid taxes in
the civil c a s e are totally unrelated c a u s e s of action that will not
justify the application of t h e rule on litis pendentia. (Proton Pilipinas
Corporation vs. Republic, 504 S C R A 528 [2006].)
4. It is settled that taxes are t h e lifeblood of the g o v e r n m e n t
and their prompt a n d certain availability is an imperious n e e d .
T h e g o v e r n m e n t should not and must not await the result of the
criminal proceeding in court before it can collect unpaid taxes for
such will unduly restrain the G o v e r n m e n t in doing its functions. T h e
machineries of the G o v e r n m e n t will not be able to function well if
the collection of taxes will be delayed so m u c h so if its collection will
depend on the o u t c o m e of any criminal proceedings on t h e guise
that the issue of collection of taxes is a prejudicial issue that need
to be first resolved before enforcing its collection. (Ibid.)
Sees. 255-257 STATUTORY OFFENSES A N D PENALTIES
SEC. 255. Failure to File Return, Supply Correct and

Accurate Information, Pay Tax, Withhold and Remit Tax
and Refund Excess Taxes Withheld on Compensation.
Any person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return, keep any
record, or supply any correct and accurate information, who willfully
fails to pay such tax, make such return, keep such record, or supply
such correct and accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on compensations at the
time or times required by law or rules and regulations shall, in
addition to other penalties provided by law, upon conviction thereof,
be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more
than ten (10) years, (as amended by RA. No. 7497.)
Any person who attempts to make it appear for any reason that
he or another has in fact filed a return or statement, or actually files
a return or statement and subsequently withdraws the same return
or statement after securing the official receiving seal or stamp of
receipt of an internal revenue office wherein the same was actually
filed shall, upon conviction therefor, be punished by a fine of not
less than Ten thousand pesos (P10,000) but not more than Twenty
thousand pesos (P20,000) and suffer imprisonment of not less than
one (1) year, but not more than three (3) years, (as amended by RA.
No. 7642.)
SEC. 256. Penal Liability of Corporations. Any corpora-

tion, association or general co-partnership liable for any of the acts
or omissions penalized under this Code, in addition to the penalties
imposed herein upon the responsible corporate officers, partners or
employees, shall, upon conviction, for each act or omission be fined
not less than Fifty thousand pesos (P50,000) but not more than One
hundred thousand pesos (P100.000). (as amended by RA. No. 7642.)
SEC. 257. Penal Liability for Making False Entries,

Records or Reports, or Using Falsified or Fake Accountable
Forms.
(A) Any financial officer or independent Certified Public Account-
ant engaged to examine and audit books of accounts of taxpayers
under Section 232(A) and any person under his direction who:
(1) Willfully falsifies any report or statement bearing on any
examination or audit, or renders a report, including exhibits,
statements, schedules or other forms of accountancy work which has
ANNOTATED
not been verified by him personally or under his supervision or by

a member of his firm or by a member of his staff in accordance with
sound auditing practices; or
(2) Certifies financial statements of a business enterprise
containing an essential misstatement of facts or omission in respect
of the transactions, taxable income, deduction and exemption of his
client; or
(B) Any person who:
(1) Not being an independent Certified Public Accountant
according to Section 232(B) or a financial officer, examines and
audits books of accounts of taxpayers; or
(2) Offers to sign and certify financial statements without audit;
or
(3) Offers any taxpayer the use of accounting book-keeping
records for internal revenue purposes not in conformity with the
requirements prescribed in this Code or rules and regulations
promulgated thereunder; or
(4) Knowingly makes any false entry or enters any false or
fictitious name in the books of accounts or records mentioned in the
preceding paragraphs; or
(5) Keeps two (2) or more sets of such records or books of
accounts; or
(6) In any way commits an act or omission in violation of the
provisions of this Section; or
(7) Fails to keep the books of accounts or records mentioned
in Section 232 in a native language, English, or Spanish, or to
make a true and complete translation as required in Section 234
of this Code, or whose books of accounts or records kept in a native
language, English or Spanish, and found to be at material variance
with books or records kept by him in another language; or
(8) Willfully attempts in any manner to evade or defeat any tax
imposed under this Code, or knowingly uses fake or falsified revenue
official receipts, Letters of Authority, certificates authorizing
registration, Tax Credit Certificates, Tax Debit Memoranda and
other accountable forms shall, upon conviction for each act or
omission, be punished by a fine of not less than Fifty thousand
pesos (P50,000) but not more than One hundred thousand pesos
(P100,000) and suffer imprisonment of not less than two (2) years
but not more than six (6) years.
If the offender is a Certified Public Accountant, his certificate

as a Certified Public Accountant shall be automatically revoked or
cancelled upon conviction.
In the case of foreigners, conviction under this Code shall result
in his immediate deportation after serving sentence, without further
proceedings for deportation, (a)
ANNOTATION
1. Elements of violation of Section 255. T h e y are:

(1) T h e a c c u s e d is the person required by law to pay the
tax;
(2) T h e a c c u s e d failed to pay such tax at the time required
by law; a n d
(3) T h e failure to pay s u c h tax w a s willful.
T h e act or o m i s s i o n is "willfully" d o n e if d o n e voluntarily and
intentionally and with specific intent to do something that the law
forbids, or with specific intent to fail to do something that the law
requires to be d o n e , that is, with bad purpose to either disobey
or disregard t h e law. A willful act m a y be described as one done
intentionally, knowingly, a n d purposely without justifiable excuse
in violation of a k n o w n legal duty. Bad faith or bad purpose need
not be s h o w n . (People v s . Kintanar, CTA Criminal Case No. 0-030,
A u g . 1 1 , 2010.)
2. Proof of guilt beyond reasonable doubt. T h e guilt of the
accused must be proved b e y o n d reasonable doubt. (People vs. De
los A n g e l e s , CTA, Criminal case No. 0-027, Nov. 25, 2009.)
In the cited case, the accused upon learning that a case was
filed against her, immediately responded to the subpoena, offered
to settle her tax obligations, and tried to avail of the tax amnesty
program of the BIR. S h e likewise asked her daughter, the wife of
the true owner of Repletion International Trading, to represent her
before the BIR. From the evidence presented, it is clear that there
w e r e affirmative acts on the part of the accused to pay her tax
obligations, which negate a deliberate or voluntary intention not to
pay her tax liabilities.
3. Offense not considered malum prohibitum. The offense
charged in Section 255 is not considered malum prohibitum. The
index of whether or not a crime is malum prohibitum is not its form,
that is, whether or not, it is found in the Revised Penal Code or in
ANNOTATED
a special penal statute, but the legislative intent that underlies its
continuing existence as part of the law of the land. Since Section
255 requires that willful or deliberate intent to violate the law be
present in order to be liable, the s a m e cannot be considered malum
prohibitum. Accordingly, if willfulness is not s h o w n , accused cannot
be guilty of the said crime. However, an accused acquitted of a
criminal charge may be held civilly liable in the s a m e case w h e r e
the facts established by the evidence so warrant. (Ibid.)
4. Liability for penalties. T h e imposition of the penalties
prescribed in Section 255 for failure to file the required returns
is mandatory. However, if the delay in filing the returns is clearly
caused by circumstance b e y o n d the control of the taxpayer, the
BIR m a y exempt the taxpayer f r o m the penalties. (BIR Ruling No.
DA-063-08, Feb. 1, 2008.)
5. Identity of informer. T h e taxpayer c a n n o t be allowed to
escape criminal prosecution under Sections 254 a n d 2 5 5 by mere
imputation of a "fictitious" or disqualified informant under Section
282. T h e BIR has the right to maintain the confidentiality of the
identity and personal c i r c u m s t a n c e s of the "informer." ( C o m m . vs.
Gonzales, 6 3 3 S C R A 139 [2010].)
6. Liability of financial officer or independent CPA. T h e
a m e n d m e n t s by R.A. N o . 8 4 2 4 of Section 2 5 7 include "using falsi-
fied or fake accountable f o r m s " (par. 1.) as a m o n g t h e acts subject
to penal liability a n d a n y "financial officer" w h o m a y be liable, and
adding No. (8) a n d t h e last t w o p a r a g r a p h s of Section 2 5 7 .
Note: T h e implementation has b e e n m a d e the subject of Rev.

Regs. 15-99, as a m e n d e d by Rev. R e g s . No. 11-2006 in relation to
Section 6 (G), providing for t h e a c c e p t a b l e n o r m s of c o n d u c t of a
tax practitioner a n d t h e imposition of t h e penalties of s u s p e n s i o n or
cancellation of the certificate of accreditation of t h e tax practitioner in
addition to the penalties provided for under the pertinent provisions
of the Tax C o d e .
S E C . 2 5 8 . Unlawful Pursuit of Business. Any person who

carries on any business for which an annual registration fee is imposed
without paying the tax as required by law shall, upon conviction for
each act or omission, be punished by a fine of not less than Five
thousand pesos (P5,000) but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than six (6) months
but not more than two (2) years: Provided, That in the case of a
person engaged in the business of distilling, rectifying, repacking,
compounding or manufacturing any article subject to excise tax, he

shall, upon conviction for each act or omission, be punished by a fine
of not less than Thirty thousand pesos (P30,000) but not more than
Fifty thousand pesos (P50.000) and suffer imprisonment of not less
than two (2) years but not more than four (4) years, (a)
ANNOTATION
Amended: "A privilege t a x " is c h a n g e d to "an annual registration

fee."
SEC. 259. Illegal Collection of Foreign Payments. Any

person who knowingly undertakes the collection of foreign payments
as provided under Section 67 of this Code without having obtained
a license therefor, or without complying with its implementing rules
and regulations, shall, upon conviction for each act or omission, be
punished by a fine of not less than Twenty thousand pesos (P20,000)
but not more than Fifty thousand pesos (P50,000) and suffer
imprisonment of not less than one (1) year but not more than two (2)
years.
SEC. 260. Unlawful Possession of Cigarette Paper in Bob-

bins, or Rolls, Etc. It shall be unlawful for any person to have in
his possession cigarette paper in bobbins or rolls, cigarette tipping
paper or cigarette filter tips, without the corresponding authority
therefor issued by the Commissioner. Any person, importer,
manufacturer of cigar and cigarettes, who has been found guilty
under this Section, shall, upon conviction of each act or omission, be
punished by a fine of not less than Twenty thousand pesos (P20,000)
but not more than One hundred thousand pesos (P100,000) and
suffer imprisonment for a term of not less than six (6) years and one
day but not more than twelve (12) years.
SEC. 261. Unlawful Use of Denatured Alcohol. - Any person

who, for the purpose of manufacturing any beverage, uses denatured
alcohol or alcohol specially denatured to be used for motive power
or withdrawn under bond for industrial uses or alcohol knowingly
misrepresented to be denatured to be unfit for oral intake, or who
knowingly sells or offers for sale any beverage made in whole or in
part from such alcohol, or who uses such alcohol for the manufacture
of liquid medicinal preparations taken internally, or knowingly sells
or offers for sale such preparations containing as an ingredient such
alcohol, shall, upon conviction for each act or omission, be punished
ANNOTATED
by a fine of not less than Twenty thousand pesos (P20,000), but

not more than One hundred thousand pesos (PIOO.OOO), and suffer
imprisonment for a term of not less than six (6) years and one (1) day
but not more than twelve (12) years.
Any person who shall unlawfully recover or attempt to recover
by distillation or other process any denatured alcohol or who
knowingly sells or offers for sale, conceals or otherwise disposes
of alcohol so recovered or redistilled shall be subject to the same
penalties imposed under this Section.
SEC. 262. Shipment or Removal of Liquor or Tobacco

Products Under False Name or Brand or as an Imitation
of any Existing or Otherwise Known Product Name or
Brand. Any person who ships, transports or removes spirituous,
compounded or fermented liquors, wines or any manufactured
products of tobacco under any other than the proper name or
brand known to the trade as designating the kind and quality of
the contents of the cask, bottle, or package containing the same or
as an imitation, of any existing or otherwise known product name
or brand, or causes such act to be done, shall, upon conviction for
each act or omission be punished by a fine of not less than Twenty
thousand pesos (P20,000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment for not less than six (6)
years and one (1) day but not more than twelve (12) years.
SEC. 263. Unlawful Possession or Removal of Articles

Subject to Excise Tax without Payment of the Tax. Any
person who owns and/or is found in possession of imported articles
subject to excise tax, the tax on which has not been paid in accordance
with law, or any person who owns and/or is found in possession of
imported tax-exempt articles other than those to whom they are
legally issued shall be punished by:
(a) A fine of not less than One thousand pesos (PI,000) but not
more than Two thousand pesos (P2.000) and suffer imprisonment
of not less than sixty (60) days but not more than one hundred
(100) days, if the appraised value, to be determined in the manner
prescribed in the Tariff and Customs Code, including duties and
taxes of the articles does not exceed One thousand pesos ( P I ,000);
(b) A fine of not less than Ten thousand pesos (P10.000)
but not more than Twenty thousand pesos (P20,000) and suffer
imprisonment of not less than two (2) years but not more than four
(4) years, if the appraised value, to be determined in the manner

prescribed in the Tariff and Customs Code, including duties and
taxes, of the articles exceeds One thousand pesos (PI,000) but does
not exceed Fifty thousand pesos (P50,000);
(c) A fine of not less than Thirty thousand pesos (P30,000) but not
more than Sixty thousand pesos (P60,000) and suffer imprisonment
of not less than four (4) years but not more than six (6) years, if the
appraised value, to be determined in the manner prescribed in the
Tariff and Customs Code, including duties and taxes, of the articles
is more than Fifty thousand pesos (P50,000) but does not exceed
One hundred fifty thousand pesos (P150,000); or
(d) A fine of not less than Fifty thousand pesos (P50,000) but
not more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than ten (10) years but not more than
twelve (12) years, if the appraised value, to be determined in the
manner prescribed in the Tariff and Customs Code, including duties
and taxes, of the articles exceeds One hundred fifty thousand pesos
(P150.000).
Any person who is found in possession of locally manufactured
articles subject to excise tax, the tax on which has not been paid
in accordance with law, or any person who is found in possession
of such articles which are exempt from excise tax other than those
to whom the same is lawfully issued shall be punished with a fine
of not less than ten (10) times the amount of excise tax due on the
articles found but not less than Five hundred pesos (P500) and suffer
imprisonment of not less than two (2) years but not more than four
(4) years.
Any manufacturer, owner, or person in charge of any article
subject to excise tax who removes or allows or causes the unlawful
removal of any such articles from the place of production or bonded
warehouse, upon which the excise tax has not been paid at the time
and in the manner required, and any person who knowingly aids or
abets in the removal of such articles as aforesaid, or conceals the
same after illegal removal shall, for the first offense, be punished
with a fine of not less than ten (10) times the amount of excise tax
due on the articles, but not less than One thousand pesos (PI,000)
and suffer imprisonment of not less than one (1) year but not more
than two (2) years.
The mere unexplained possession of articles subject to excise
tax, the tax on which has not been paid in accordance with law, shall
be punished under this Section.
ANNOTATED
SEC. 264. Failure or Refusal to Issue Receipts or Sales or

Commercial Invoices, Violations Related to the Printing of
such Receipts or Invoices and Other Violations.
(a) Any person who, being required under Section 237 to issue
receipts or sales or commercial invoices, fails or refuses to issue
such receipts or invoices, issues receipts or invoices that do not
truly reflect and/or contain all the information required to be shown
therein or uses multiple or double receipts or invoices, shall, upon
conviction for each act or omission, be punished by a fine of not less
than One thousand pesos (Pl.OOO) but not more than Fifty thousand
pesos (P50,000) and suffer imprisonment of not less than two (2)
years but not more than four (4) years.
(b) Any person who commits any of the acts enumerated
hereunder shall be penalized in the same manner and to the same
extent as provided for in this Section:
(1) Printing of receipts or sales or commercial invoices
without authority from the Bureau of Internal Revenue; or
(2) Printing of double or multiple sets of invoices or receipts;
or
(3) Printing of unnumbered receipts or sales or commercial
invoices, not bearing the name, business style, taxpayer account
number, and business address of the person or entity, (a)
ANNOTATION
Deleted: No. (4), to wit: "4. Fails to submit t h e quarterly report

required in Section 239," n o w Section 238.
SEC. 265. Offenses Relating to Stamps. Any person

who commits any of the acts enumerated hereunder shall, upon
conviction thereof, be punished by a fine of not less than Twenty
thousand pesos (P20,000) but not more than Fifty thousand pesos
(P50,000) and suffer imprisonment of not less than four (4) years but
not more than eight (8) years:
(a) Making, importing, selling, using or possessing without
express authority from the Commissioner, any die for printing or
making stamps, labels, tags or playing cards;
(b) Erasing the cancellation marks of any stamp previously
used, or altering the written figures or letters or cancellation marks
on internal revenue stamps;
(c) Possessing false, counterfeit, restored or altered stamps,

labels or tags or causing the commission of any such offense by
another;
(d) Selling or offering for sale any box or package containing
articles subject to excise tax with false, spurious or counterfeit
stamps or labels or selling from any such fraudulent box, package or
container as aforementioned; or
(e) Giving away or accepting from another, or selling, buying or
using containers on which the stamps are not completely destroyed,
(a)
SEC. 266. Failure to Obey Summons. Any person who,

being duly summoned to appear to testify, or to appear and produce
books of accounts, records, memoranda, or other papers, or to furnish
information as required under the pertinent provisions of this Code,
neglects to appear or to produce such books of accounts, records,
memoranda, or other papers, or to furnish such information, shall,
upon conviction, be punished by a fine of not less than Five thousand
pesos (P5,000) but not more than Ten thousand pesos (P10,000) and
suffer imprisonment of not less than one (1) year but not more than
two (2) years.
ANNOTATION
T h e failure to comply with a subpoena or subpoena duces

tecum is irrelevant to a charge of tax evasion. A violation of Section
266 involves a separate offense; hence, litis pendencia is not
present considering that the o u t c o m e of a charge under Section
266 is not determinate of the issue of whether probable cause
exists to charge the taxpayer with violation of Section 254 or 255.
For the charge of tax evasion in particular, non-compliance by the
taxpayer with the s u m m o n s , if any, had been issued is not relevant.
( C o m m . vs. Gonzales, G.R. No. 177279, Oct. 13, 2010.)
SEC. 267. Declaration under Penalties of Perjury- - Any

declaration, return and other statements required under this Code,
shall, in lieu of an oath, contain a written statement that they are
made under the penalties of perjury. Any person who willfully files a
declaration, return or statement containing information which is not
true and correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the Revised
Penal Code.
ANNOTATED
SEC. 268. Other Crimes and Offenses.

(A) Misdeclaration or Misrepresentation of Manufacturers
Subject to Excise Tax. Any manufacturer who, in violation of
the provisions of Title VI of this Code, misdeclares in the sworn
statement required therein or in the sales invoice, any pertinent
data or information shall be punished by a summary cancellation or
withdrawal of the permit to engage in business as a manufacturer of
articles subject to excise tax.
(B) Forfeiture of Property Used in Unlicensed Business or Dies
Used for Printing False Stamps, Etc. All chattels, machinery, and
removable fixtures of any sort used in the unlicensed production
of articles subject to excise tax shall be forfeited. Dies and other
equipment used for the printing or making of any internal revenue
stamp, label or tag which is in imitation of or purports to be a lawful
stamp, label or tag shall also be forfeited.
(C) Forfeiture of Goods Illegally Stored or Removed. Unless
otherwise specifically authorized by the Commissioner, all articles
subject to excise tax should not be stored or allowed to remain in a
distillery, distillery warehouse, bonded warehouse, or other place
where made, after the tax thereon has been paid; otherwise, all such
articles shall be forfeited. Articles withdrawn from any such place
or from customs custody or imported into the country without the
payment of the required tax shall likewise be forfeited.
- oOo -
CHAPTER III
PENALTIES IMPOSED
ON PUBLIC OFFICERS
SEC. 269. Violations Committed by Government Enforce-

ment Officers. Every official, agent or employee of the Bureau
of Internal Revenue or any other agency of the Government charged
with the enforcement of the provisions of this Code, who is guilty
of any of the offenses hereinbelow specified, shall, upon conviction
for each act or omission, be punished by a fine of not less than Fifty
thousand pesos (P50.000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment of not less than ten (10)
years but not more than fifteen (15) years and shall likewise suffer
an additional penalty of perpetual disqualification to hold public of-
fice, to vote, and to participate in any public election (as amended by
RA. No. 7642.):
(a) Extortion or willful oppression through the use of his office
or willful oppression and harassment of a taxpayer who refused,
declined, turned down or rejected any of his offers specified in
paragraph (d) hereof;
(b) Knowingly demanding or receiving any fee, other or greater
sums than are authorized by law or receiving any fee, compensation
or reward, except as by law prescribed, for the performance of any
duty;
(c) Willfully neglecting to give receipts, as by law required, for
any sum collected in the performance of duty or willfully neglecting
to perform any other duties enjoined by law;
(d) Offering or undertaking to accomplish, file or submit a report
or assessment on a taxpayer without the appropriate examination
of the books of accounts or tax liability, or offering or undertaking
to submit a report or assessment less than the amount due the
Government for any consideration or compensation, or conspiring
719
ANNOTATED
or colluding with another or others to defraud the revenues or

otherwise violate the provisions of this Code;
(e) Neglecting or by design permitting the violation of the law
by any other person;
(f) Making or signing any false entry or entries in any book, or
making or signing any false certificate or return;
(g) Allowing or conspiring or colluding with another to allow
the unauthorized retrieval, withdrawal or recall of any return,
statement or declaration after the same has been officially received
by the Bureau of Internal Revenue;
(h) Having knowledge or information of any violation of this
Code or of any fraud committed on the revenues collectible by the
Bureau of Internal Revenue, failure to report such knowledge or
information to their superior officer, or failure to report as otherwise
required by law; and
(i) Without the authority of law, demanding or accepting or
attempting to collect, directly or indirectly, as payment or otherwise
any sum of money or other thing of value for the compromise,
adjustment or settlement of any charge or complaint for any violation
or alleged violation of this Code.
Provided, That the provisions of the foregoing paragraph
notwithstanding, any internal revenue officer for which a prima
facie case of grave misconduct has been established shall, after due
notice and hearing of the administrative case and subject to Civil
Service Laws, be dismissed from the revenue service: Provided,
further, That the term "grave misconduct," as defined in the Civil
Service Law, shall include the issuance of fake letters of authority
and receipts, forgery of signature, usurpation of authority and
habitual issuance of unreasonable assessments, (a)
ANNOTATION
1. A m e n d m e n t s by R.A. N o . 8 4 2 4 include t h e insertion of "or

willful oppression and harassment, etc. hereof" in Subsection (a),
"offering, etc. x x x c o m p e n s a t i o n , o r " in Subsection (d), and the
proviso.
2. W h a t is punished in paragraph (d), last clause, is the act

of conspiring and colluding to defraud the g o v e r n m e n t of revenues.
"It is well entrenched in our j u r i s p r u d e n c e that conspiracy must be
shown to exist as clearly and as convincingly as the c o m m i s s i o n of
the offense itself. A b s e n t any act or circumstance f r o m which m a y
Penalties Imposed on Public Officers
be logically inferred the existence of a common design among the

accused to commit the crime, the theory of conspiracy remains a
speculation not a fact." (Evangelista vs. People, 113 SCAD 296
315 SCRA 525 [1999].)
SEC. 270. Unlawful Divulgence of Trade Secrets. - Except

as provided in Section 6(F) and Section 71 of this Code and Section
1
26 of Republic Act No. 6388, any officer or employee of the Bureau
of Internal Revenue who divulges to any person or makes known
in any other manner than may be provided by law information
regarding the business, income, or estate of any taxpayer, the
secrets, operation, style or work, or apparatus of any manufacturer
or producer, or confidential information regarding the business
of any taxpayer, knowledge of which was acquired by him in the
discharge of his official duties, shall, upon conviction for each act
or omission, be punished by a fine of not less than Fifty thousand
pesos (P50,000) but not more than One hundred thousand pesos
(P100,000), or suffer imprisonment of not less than two (2) years but
not more than five (5) years, or both.
Any officer or employee of the Bureau of Internal Revenue who
divulges or makes known in any other manner to any person other
than the requesting foreign tax authority information obtained from
banks and financial institutions pursuant to Section 6(F), knowledge
or information acquired by him in the discharge of his official duties,
shall, upon conviction, be punished by a fine of not less than Fifty
thousand pesos (P50,000) but not more than One hundred thousand
pesos (P100,000), or suffer imprisonment of not less than two (2)
years but not more than five (5) years, or both. (As added by RA. No.
10021.)
ANNOTATION
1. Protection of taxpayer against unfair competition.
Sections 270 and 278 of the Tax Code are designed merely to
protect the legal rights of the taxpayer against unfair competition
'The Election Code of 1971 ( R . A . N o . 6388.) was repealed by Pres. Decree No.
1296, the 1978 Election Code which, in turn, was repealed by B.P. Big. 881, the Omni-
bus Election Code of the Philippines. Section 26 of R.A. No. 6388 requires a candidate
upon the filing of his certificate of candidacy to state his income and deductions as
well as exemptions and tax payments for the last two (2) years preceding the election.
The certificate shall include a waiver of the privilege from public disclosure of his
income tax return, such waiver to be effective only during the period of his candidacy.
ANNOTATED
and privacy. The prohibition w a s never intended to protect him from

divulgence of crimes or their unlawful behaviors, (see O p . of the
Sec. of Justice, s. of 1965; BIR Ruling, 1972.) Income tax returns
are considered public records a n d , therefore, are o p e n to inspection
only under prescribed rules and regulations.
(1) Section 71 (Disposition of income tax returns) and
Section 282 (Informer's Reward) are exceptions to the
provisions of Section 270.
(2) T h e third paragraph of Section 270 gives authority to
the Commissioneer to supply tax information obtained f r o m
banks and other financial institutions to a foreign tax authority
which requested it with respect to a specific taxpayer or
taxpayers subject of the request, (see Annotation No. 3 1 , Sec.
6[F].)
2. Penal sanctions. Section 2 7 0 i m p o s e s penal sanctions
upon any BIR official or e m p l o y e e w h o discloses "information
regarding the business, etc." k n o w l e d g e of w h i c h w a s obtained by
him in the discharge of his official duties, unless such disclosure
c o m e s within the purview of Section 7 1 . T h e disclosure to a
congressional c o m m i t t e e is not a m o n g those instances w h e n a
divulgence of an individual i n c o m e tax return m a y be permitted
without being penalized under Section 2 7 0 . ( O p . of t h e Sec. of
Justice, No. 72, Series of 1991.)
3. Requisites to constitute violation. To constitute a violation

of Section 2 7 0 , the following requisites m u s t concur:
(1) T h e BIR official or e m p l o y e e obtains information regard-
ing a taxpayer's business, i n c o m e , or estate, or the secrets,
operation, style of w o r k , or apparatus of any manufacturer or
producer, or confidential information regarding t h e business of
any taxpayer, in the discharge of his official duties;
(2) He divulges or m a k e s k n o w n s u c h information to a n -

other person; and
(3) T h e divulgence is not authorized by law.

4. Purpose of prohibition. Implicit in Section 2 7 0 is the
prohibition to divulge information to another person not in any w a y
officially related to the BIR. It is evident that the purpose of the
prohibition is to protect the taxpayer f r o m the improper or unlawful
divulgence of his trade secrets or other confidential information to
those w h o do not have a legitimate interest in it. As t h e Tax C o d e
compels taxpayers to disclose to the BIR certain data regarding
their business for the sole purpose of enabling internal revenue

officers to a s s e s s the a m o u n t of tax that such taxpayers should pay,
so does the law prohibit internal revenue officers from disclosing
s u c h information to private persons or the public in general. Without
the prohibition on disclosure, taxpayers w o u l d be discouraged from
giving to internal revenue officers information about their business
which they are generally unwilling to furnish to private persons or
the public in general if s u c h information could be used against them
in other matters that h a v e nothing to do with the payment of taxes.
T h e provision has b e e n d e s i g n e d to protect a taxpayer's legal rights
against unfair competition a n d invasion of his right to privacy. (Op.
of Sec. of Justice No. 4, Series of 2001.)
5. Disclosure of income tax returns, etc.

(1) I n c o m e tax returns cannot be divulged or disclosed to
all and sundry BIR officials a n d e m p l o y e e s but only to those
w h o s e official duties require such inspection. Aside from being
allowed to the returns of questioned taxpayers, they are also
permitted to m a k e and take a copy thereof or a m e m o r a n d u m
or data contained therein. (Sec. 13, Rev. Regs. No. 33.)
(2) Information as to w h e t h e r or not a taxpayer availed of
the tax a m n e s t y m a y be disclosed to government offices outside
of the BIR. However, before disclosing the information, the
request of the office c o n c e r n e d must be in writing signed by the
H e a d of said Office and specify the nature of the investigation
to which t h e taxpayer will be subjected to. (BIR Ruling, May 27,
1974.)
(3) A file copy of residence certificate (now community
tax certificate) class " B " cannot be produced for the reason
that said certificate contains information on the income of the
taxpayer n a m e d therein, the divulgence of which is prohibited
by Section 2 6 9 . (BIR Ruling, May 15, 1972.)
6. Inspection of individual returns. As provided in Section
4 of Regulations No. 33, the return of an individual shall be open to
inspection as follows:
(1) By the officers and employees of the Bureau of Internal
Revenue w h o s e official duties require such inspection;
(2) By the person w h o made the return, or by his duly
constituted attorney-in-fact;
(3) By the administrator, executor, or trustee of the tax-
payer's estate or by the duly constituted attorney-in-fact of
ANNOTATED
such administrator, executor, or trustee, w h e r e the maker of

the return has died; and
(4) In the discretion of the Collector (now Commissioner)

of Internal Revenue, by one of the heirs of law or next of kin of
such deceased person upon showing that he has a material
interest which will be affected by the information contained in
the return, (see BIR Ruling No. 144-98, Sept. 30, 1998.)
7. Production in court of income tax returns. This is

governed by Section 11 of Regulations No. 33 w h i c h provides that:
(1) T h e original income tax return m a y be furnished by the

Commissioner of Internal R e v e n u e "for use as evidence in liti-
gation in any court, w h e r e the G o v e r n m e n t " "is interested in the
result, or for use in the preparation of s u c h litigation, to provin-
cial or city fiscal (now prosecutor) or any attorney c o n n e c t e d
with the Bureau (now Department) of Justice designated to
handle such matters, u p o n written request of t h e Solicitor G e n -
eral, or an assistant attorney acting on his behalf."
(2) "Neither the original nor a copy of an i n c o m e tax return

desired for use in litigation in court w h e r e t h e G o v e r n m e n t is
not interested in t h e result and w h e r e s u c h use might result
in making public the information c o n t a i n e d therein, will be
furnished, except as provided in Section 12 of Regulations No.
33, which refers to t h e furnishing of copies of t h e income tax
returns to the taxpayer." (see Vera v s . C u s i , Sr., 91 S C R A 152,
June 29, 1979.)
Despite court order, copies of i n c o m e tax returns cannot

be furnished to any private party in v i e w of t h e prohibition
contained in Section 2 6 9 e x c e p t to representatives of the
government w h e n s u c h returns are to be u s e d as e v i d e n c e in
court litigation w h e r e t h e g o v e r n m e n t is interested in the result
as in criminal c a s e s . (Cu Unjieng v s . P o s a d a s , 58 Phil. 3 6 0 ;
BIR Ruling, March 2 4 , 1972.)
8. Other persons given right to inspect. A s i d e f r o m

authorized officers a n d e m p l o y e e s of the BIR, or prosecutors or
any attorney connected with the Department of Justice designated
to handle litigation in any court, w h e r e the G o v e r n m e n t is interested
in the result u p o n written request of the Solicitor G e n e r a l , or an
assistant attorney acting in his behalf, a return shall be o p e n to
inspection as follows:
(1) by either s p o u s e or his/her duly constituted attorney-in-

fact or legal representative, in c a s e of a joint return;
(2) by any m a n a g i n g partner, or if there are no managing

partners, by any m e m b e r (or his duly constituted attorney-in-fact
or legal representative), in the c a s e of a general partnership, or
by a n y general m e m b e r in t h e c a s e of a limited partnership;
(3) by any individual or his duly constituted attorney-in-fact

or legal representative, w h o is a beneficiary under such trust;
and
(4) by the president, vice-president, secretary, treasurer or

any of the m e m b e r s of t h e board of directors, or any executive
or principal officer of s u c h corporation. (BIR Ruling No. 91-97.)
T h e O m b u d s m a n a n d other investigating officer other than those

stated in Rev. R e g s . N o . 3 3 , e v e n in c o m p l i a n c e with a subpoena
duces tecum, are prohibited under Section 2 7 0 to inspect, make,
and take a copy of i n c o m e tax returns of taxpayers without referral/
clearance f r o m t h e Office of t h e C o m m i s s i o n e r or from the BIR's
Legal Service. (Ibid.)
9. Management and operation of BIR's computerization project

by a private contractor. "In a contractual relation b e t w e e n the BIR
and a private person involving t h e BIR's computerization project,
the disclosure of information regarding a taxpayer's business may
be necessary or inescapable. We do not think, however, that this is
the kind of disclosure or divulgence of information contemplated by
Section 2 7 0 . In this situation, t h e private contractor would have a
legitimate interest in t h e information b e c a u s e it is a vital component of
t h e project w h e r e the BIR is the interested party and the beneficiary.
In short, t h e disclosure or divulgence of information to the private
contractor w o u l d not be unlawful or illegal because the information
will not be used by the private contractor for any unlawful purpose
but for the sole purpose of establishing an information technology
system and infrastructure of the BIR pursuant to a contract validly
executed in accordance with law.
T h e BIR's computerization project is being proposed to be
undertaken under the Build-Operate-Transfer scheme authorized
under R.A. No. 6957, as a m e n d e d . The "Build-Operate-Transfer"
scheme means a contractual arrangement whereby the project
proponent undertakes the construction, including financing, o f a g i v e n
infrastructure facility, and the operation and maintenance thereof.
It includes a supply and operate situation which is a contractual
ANNOTATED
arrangement whereby the supplier of equipment and machinery for

a given infrastructure facility, if the interest of the government so
requires, operates the facility providing in the process technology
transfer and training to Filipino nationals. T h e project proponent
transfers the facility to the government agency concerned at the
end of the fixed term which shall not e x c e e d 50 years. (Sec. 2[b],
R.A. No. 6957, as amended.) Information technology network and
database infrastructure is one of the infrastructure or development
projects that may be undertaken under the Build-Operate-Transfer
arrangement. (Section 2[a], R.A. No. 6 9 5 7 , as a m e n d e d . )
Allowing a private contractor to m a n a g e , maintain, and operate

the IT system under t h e Build-Operate-Transfer s c h e m e will not
violate Section 270 b e c a u s e it will not involve unlawful disclosure
of information penalized therein. W h a t Section 2 7 0 prohibits is the
act of disclosing information regarding a taxpayer's business, etc.,
knowledge of w h i c h w a s obtained by the disclosing BIR official or
employee in the performance of his duties for t h e illegal purpose of
defeating the noble objective of the prohibition. It d o e s not prevent
the BIR from undertaking a legitimate activity with the private sector
intended to modernize revenue a n d tax collection. Penal statutes
cannot be enlarged or e x t e n d e d by intendment, implication, or
any equitable consideration. (People v s . G a r c i a , 8 5 Phil. 6 5 1 , 656
[1950].)
Notwithstanding the foregoing, the BIR w o u l d be well-advised

to include a stipulation in its contract w h e r e b y the private contractor
shall undertake to hold strictly confidential any information regarding
a taxpayer's business and all other matters c o v e r e d by Section 2 7 0
of the 1997 Tax C o d e , to refrain f r o m using s u c h information to
obtain any a d v a n t a g e that m a y tend to prejudice any taxpayer, and
to be subject to prosecution under Section 2 7 0 Tax C o d e a n d other
existing laws in c a s e of breach thereof." (Opinion of t h e Sec. of
Justice, No. 5, Series of 2001.)
SEC. 2 7 1 . Unlawful Interest of Revenue L a w Enforcers

in Business. Any internal revenue officer who is or shall
become interested, directly or indirectly, in the manufacture, sale
or importation of any article subject to excise tax under Title VI
of this Code or in the manufacture or repair or sale, of any die for
the printing, or making of stamps, or labels shall, upon conviction
for each act or omission, be punished by a fine of not less than Five
thousand pesos (P5,000) but not more than Ten thousand pesos
(P10,000), or suffer imprisonment of not less than two (2) years and
one (1) day but not more than four (4) years, or both.
S E C . 272. Violation of Withholding Tax Provision. -

Every officer or employee of the Government of the Republic of
the Philippines or any of its agencies and instrumentalities, its
political subdivisions, as well as government-owned or -controlled
corporations including the Bangko Sentral ng Pilipinas (BSP)
who, under the provisions of this Code or rules and regulations
promulgated thereunder, is charged with the duty to deduct
and withhold any internal revenue tax and to remit the same in
accordance with the provisions of this Code and other laws is guilty
of any offense hereinbelow specified shall, upon conviction for each
act or omission, be punished by a fine of not less than Five thousand
pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or
suffer imprisonment of not less than six (6) months and one (1) day
but not more than two (2) years, or both:
(a) Failing or causing the failure to deduct and withhold any
internal revenue tax under any of the withholding tax laws and
implementing rules and regulations;
(b) Failing or causing the failure to remit taxes deducted and
withheld within the time prescribed by law, and implementing rules
and regulations; and
(c) Failing or causing the failure to file return or statement
within the time prescribed, or rendering or furnishing a false or
fraudulent return or statement required under the withholding tax
laws and rules and regulations, (a)
ANNOTATION
1. Rev. M e m o . Order N o . 88-99 prescribes the policies

and procedures in the verification and monitoring of compliance
by g o v e r n m e n t offices or officials designated as withholding tax
agents with the withholding tax requirements under the Tax Code.
It prescribes uniform reporting requirements to effectively monitor
such compliance.
2. A local government unit may not hold remittance of
withholding taxes collected by it and apply them to the revenue
allotment share (see Sees. 283, 287, 288, 289.) due it and which
has not been released by the National Government. Taxes cannot
be the subject of set-off or compensation.
ANNOTATED
SEC. 273. Penalty for Failure to Issue and Execute

Warrant. Any official who fails to issue or execute the warrant
of distraint or levy within thirty (30) days after the expiration of
the time prescribed in Section 207 or who is found guilty of abusing
the exercise thereof by competent authority shall be automatically
dismissed from the service after due notice and hearing.
- oOo -
Chapter IV
OTHER PENAL PROVISIONS
SEC. 2 7 4 . Penalty for Second and Subsequent Offenses.

In the case of reincidence, the maximum of the penalty prescribed
for the offense shall be imposed.
SEC. 2 7 5 . Violation of Other Provisions of this Code or

Rules or Regulations in General. Any person who violates
any provision of this Code or any rule or regulation promulgated by
the Department of Finance, for which no specific penalty is provided
by law, shall, upon conviction for each act or omission, be punished
by a fine of not more than One thousand pesos (P1,000) or suffer
imprisonment of not more than s i x (6) months, or both.
ANNOTATION
1. Instances under Section 2 7 5 are Sections 201 (par. 2.) and

235(e) (last t w o sentences).
2. It is a s s u m e d that the regulations m a d e are valid.
3. Unless authorized by law, regulations may not provide
penalties for their violation. (Sees. 7 9 - R a n d 5 5 1 , Rev. A d m . Code.)
4. Under Presidential Decree No. 1603, which empowers
each department, bureau or office of the Government to promulgate
rules and regulations necessary for the effective implementation of
the provisions of laws, decrees, orders or instructions pertaining
to such department, bureau or office or which it is charged in
enforcing, any person w h o shall violate any rule or regulation
promulgated pursuant to said decree which does not involve merely
matters of internal administration but necessary for the effective
implementation of essential government policies as certified by
the President, shall be liable to imprisonment not exceeding one
(1) year or fine not exceeding P20.000.00, or both such fine and
imprisonment.
729
ANNOTATED
SEC. 276. Penalty for Selling, Transferring, Encumbering,

or in any Way Disposing of Property Placed under
Constructive Distraint. Any taxpayer whose property has
been placed under constructive distraint, who sells, transfers,
encumbers, or in any way disposes of said property, or any part
thereof, without the knowledge and consent of the Commissioner,
shall, upon conviction for each act or omission be punished by a fine
of not less than twice the value of the property so sold, encumbered
or disposed of, but not less than Five thousand pesos (P5.000), or
suffer imprisonment of not less than two (2) years and one (1) day
but not more than four (4) years, or both.
SEC. 277. Failure to Surrender Property Placed under

Distraint and Levy. Any person having in his possession or
under his control any property or rights to property, upon which
a warrant of constructive distraint or of actual distraint and levy
has been issued shall, upon demand by the Commissioner or any
of his deputies executing such warrant, surrender such property or
right to property to the Commissioner or any of his deputies, unless
such property or right is, at the time of such demand, subject to
an attachment or execution under any judicial process. Any person
who fails or refuses to surrender any of such property or right shall
be liable in his own person and estate to the Government in a sum
equal to the value of the property or rights not so surrendered but not
exceeding the amount of the taxes (including penalties and interest)
for the collection of which such warrant had been issued, together
with costs and interest, if any, from the date of such warrant. In
addition, such person shall, upon conviction for each act or omission,
be punished by a fine of not less than Five thousand pesos (P5,000)
or suffer imprisonment of not less than six (6) months and one (1)
day but not more than two (2) years, or both.
SEC. 278. Procuring Unlawful Divulgence of Trade

Secrets. Any person who causes or procures an officer or employee
of the Bureau of Internal Revenue to divulge any confidential
information regarding the business, income, or inheritance of any
taxpayer, knowledge of which was acquired by him in the discharge
of his official duties, and which it is unlawful for him to reveal, and
any person who publishes or prints in any manner whatever, not
provided by law, any income, profit, loss, or expenditure appearing
in any income tax return shall be punished by a fine of not more
than Two thousand pesos (P2,000) or suffer imprisonment of not less
than six (6) months nor more than five (5) years, or both.
Other Penal Provisions
ANNOTATION
See Section 270.
SEC. 279. Confiscation and Forfeiture of the Proceeds or

Instruments of Crime. In addition to the penalty imposed for
the violations of the provisions of Title X of this Code, the same
shall carry with it the confiscation and forfeiture in favor of the
government of the proceeds of the crime or value of the goods and the
instruments or tools with which the crime was committed: Provided,
however, That if in the course of the proceedings, it is established
that the instruments or tools used in the illicit act belong to a third
person, the same shall be confiscated and forfeited after due notice
and hearing in a separate proceeding in favor of the Government
if such third person leased, let, chartered or otherwise entrusted
the same to the offender: Provided, further, That in case the lessee
subleased, or the borrower, charterer or trustee allowed the use of
the instruments or tools to the offender, such instruments or tools
shall, likewise, be confiscated and forfeited: Provided, finally, That
property of common carriers shall not be subject to forfeiture when
used in the transaction of their business as such common carrier,
unless the owner or operator of said common carrier, was at the
time of the illegal act, a consenting party or privy thereto, without
prejudice to the owner's right of recovery against the offender in
a civil or criminal action. Articles which are not subject of lawful
commerce shall be destroyed.
SEC. 280. Subsidiary Penalty. If the person convicted for

violation of any of the provisions of this Code has no property with
which to meet the fine imposed upon him by the court, or is unable
to pay such fine, he shall be subject to a subsidiary personal liability
at the rate of one day for each Eight pesos and fifty centavos (P8.50),
subject to the rules established in Article 39 of the Revised Penal
Code.
SEC. 281. Prescription for Violations of any Provision

of this Code. All violations of any provision of this Code shall
prescribe after five (5) years.
Prescription shall begin to run from the day of the commission
of the violation of the law, and if the same be not known at the time,
from the discovery thereof and the institution of judicial proceedings
for its investigation and punishment.
ANNOTATED
The prescription shall be interrupted when proceedings are

instituted against the guilty persons and shall begin to run again
if the proceedings are dismissed for reasons not constituting jeo-
pardy.
The term of prescription shall not run when the offender is
absent from the Philippines.
ANNOTATION
The provisions of the Revised Penal C o d e on prescriptions

are not applicable to violations of the Tax C o d e and other laws
administered by the BIR. (People v s . Ching Lak, [Unrep.] 103 Phil.
1149.)
SEC. 282. Informer's Reward to Persons Instrumental

in the Discovery of Violations of the National Internal Rev-
enue Code and in the Discovery and Seizure of Smuggled
Goods.
(A) For Violations of the National Internal Revenue Code.
Any person, except an internal revenue official or employee, or other
public official, or his relative within the sixth degree of consanguinity,
who voluntarily gives definite and sworn information, not yet in the
possession of the Bureau of Internal Revenue leading to the discovery
of frauds upon the internal revenue laws or violations of any of the
provisions thereof, thereby resulting in the recovery of revenues,
surcharges and fees and/or the conviction of the guilty party and/
or the imposition of any fine or penalty, shall be rewarded in a sum
equivalent to ten percent (10%) of the revenues, surcharges or fees
recovered and/or fine or penalty imposed and collected or One million
pesos (PI,000,000) per case whichever is lower. The same amount of
reward shall also be given to an informer where the offender has
offered to compromise the violation of law committed by him and his
offer has been accepted by the Commissioner and collected from the
offender: Provided, That should no revenue, surcharges or fees be
actually recovered or collected, such person shall not be entitled to
a reward: Provided, further, That the information mentioned herein
shall not refer to a case already pending or previously investigated
or examined by the Commissioner or any of his deputies, agents
or examiners, or the Secretary of Finance or any of his deputies or
agents: Provided, finally, That the reward provided herein shall be
paid under rules and regulations issued by the Secretary of Finance,
upon the recommendation of the Commissioner, (a)
(B) For Discovery and Seizure of Smuggled Goods. To encour-

age the public to extend full cooperation in eradicating smuggling,
a cash reward equivalent to ten percent (10%) of the fair market
value of the smuggled and confiscated goods or One million pesos
(PI,000,000) per case whichever is lower, shall be given to persons
instrumental in the discovery and seizure of such smuggled goods.
The cash rewards of informers shall be subject to income tax,
collected as a final withholding tax, at the rate of ten percent (10%).
The provisions of the foregoing Subsections notwithstanding,
all public officials, whether incumbent or retired, who acquired the
information in the course of the performance of their duties during
their incumbency, are prohibited from claiming informer's reward.
(a)
ANNOTATION
1. T h e a m e n d m e n t s by R.A. No. 8 4 2 4 reduce the reward

to 1 0 % f r o m 1 5 % "or P1,000,000 per case, whichever is lower;"
delete "and law-enforcement p e r s o n n e l " between "public" and "to
e x t e n d " in Subsection (B); subject the reward to final withholding
tax of 1 0 % ; a n d expressly prohibit all public officials from claiming
the informer's r e w a r d .
2. Condition for payment of informer's reward. Informer's

reward is contingent upon the p a y m e n t and collection of unpaid or
deficiency taxes.
(1) An informer is entitled by w a y of reward only to a
percentage of taxes actually assessed and collected. Where
no a s s e s s m e n t m u c h less any collection has been made, a
judge's writ for the Commissioner to pay the informer's reward
is gross error and without factual nor legal basis. (Meralco
Securities Corp. vs. Savellano, 117 S C R A 804 [1982].)
(2) For an informer to claim a reward, he should have
been able to furnish the BIR a definite and sworn information
of any fraud or violation committed under the provisions of the
Tax C o d e . Since a BIR ruling can never be a basis of granting
an informer's reward, the collection of professional fee at 10%
(reward) of the supposed fine for the alleged violations of the
withholding tax regulations lacks legal basis. Furthermore,
payment and collection of professional fee (or reward) pre-
supposes that the informer w a s able to furnish a definite and
ANNOTATED
sworn information, not yet in possession of the BIR, leading to

the discovery of frauds upon internal revenue law or violation of
any of the provisions thereof. (BIR Ruling No. 071-2000, Dec.
18, 2000.)
(3) The informer must have given information w h o s e
direct, logical, and necessary c o n s e q u e n c e is the payment of
the deficiency tax. (BIR Ruling No. 050-05, Feb. 1, 2005.)
(4) Section 282 does not m a k e any distinction as to the
manner the tax liability w a s collected whether it w a s through
voluntary payment by the taxpayer or through garnishment of
his property. W h e n the law d o e s not distinguish, we should
not distinguish. (Philippine National Oil C o m p a n y v s . Court of
Appeals, 4 5 7 S C R A 32 [2005].}
3. Construction of informers' reward statutes. Statutes
offering rewards must be liberally construed in favor of informers
and with regard to the purpose for w h i c h they are intended, w h i c h
were technically yielding to t h e substantive purpose of the law.
Otherwise, the g o v e r n m e n t w o u l d lose a positive a n d effective
means of checking the a n o m a l i e s that are c o m m i t t e d to the
detriment of the finances of the State.
Accordingly, w h e r e the inclusion of a firm a m o n g those inves-

tigated and a s s e s s e d deficiency taxes w a s the direct logical a n d
necessary c o n s e q u e n c e of the information given by the petition-
ers (informers), it w a s held that t h e a m o u n t paid by t h e firm w h i c h
w a s not included in the confidential list furnished by the informers
should be included in the c o m p u t a t i o n of t h e reward as s u c h inclu-
sion of the a m o u n t w a s within the intendment a n d s c o p e of the law.
However, it w o u l d be stretching the law too far to allow the petition-
ers a share in the taxes w h i c h a c c r u e d after the year (1962) w h e n
the information on the violation w a s f u r n i s h e d , w h e r e the delay in
the collection of deficiency taxes during t h e period (1963 to 1965)
w a s due to the p e n d e n c y of a protest c a s e . (Penid v s . Virata, 121
S C R A 166, March 25 [1983].)
4. Rules for informer's reward involving violations of the Tax

Code. Pursuant to the last proviso in Section 2 8 2 ( A ) , Rev. Regs.
No. 16-2010 provides the guidelines, rules a n d procedures in the
filing of confidential information involving violations of the Tax C o d e
and the investigation of c a s e s arising t h e r e f r o m .
(1) Disqualifications of Informers for reward. The

following are disqualified to avail of the Informer's R e w a r d :
Sec. 282 STATUTORY OFFENSES AND PENALTIES 735
(a) A BIR official or e m p l o y e e or any other incumbent

public official or e m p l o y e e ;
(b) Relative within the sixth (6th) civil degree of
consanguinity of a BIR official or e m p l o y e e , or other public
official or e m p l o y e e ; a n d
(c) T h o u g h already retired or otherwise separated

f r o m service, BIR officials or e m p l o y e e s or other public
officials w h o acquired the information in the course of the
p e r f o r m a n c e of their duties during their incumbency. (Sec.
3, Rev. R e g s . No. 16-2010
(2) Filing of the informer's confidential information.

Confidential Information against the d e n o u n c e d taxpayer shall
be under oath a n d shall be personally e x e c u t e d and filed by the
informer before t h e Chief, Prosecution Division, BIR National
Office on the following violations:
(a) A t t e m p t to E v a d e or Defeat Tax (Sec. 254.);
(b) Failure to File Return, Supply Correct and Accurate
Information, P a y Tax, Withhold and Remit Tax and Refund
E x c e s s Taxes Withheld on C o m p e n s a t i o n (Sec. 255.);
(c) Failure or Refusal to Issue Receipts or Sales or
C o m m e r c i a l Invoices, Violations Related to the Printing of
s u c h Receipts or Invoices or Other Violations (Sec. 264.);
(d) Unlawful Pursuit of Business (Sec. 258.);
(e) Use of multiple Tax Identification Number/s (TINs);
(f) Making False Entries , Records or Reports or
Using Falsified or False Accountable Forms (Sec. 257.);
and
(g) Other violations of the NIRC of 1997.
If the estimated liability arising f r o m the alleged violation
is less than P1,000,000.00, the confidential information should
be filed before the Chief, Legal Division of the Revenue Region
having jurisdiction over the taxpayer being denounced.
T h e format of the duly sworn Confidential Information shall be
in accordance with the sample attached as Annex "A" to the
Regulation. (Sec. 4, Ibid.)
(3) Requisites of a valid confidential information.
Pursuant to Section 282, a Confidential Information shall be
treated as valid only if it meets ALL the following requisites:
ANNOTATED
(a) The Informer is not disqualified as provided under

No. (1) above. A s i d e from stating his n a m e and address,
the Informer's duly sworn Confidential Information shall
definitely state that he is not related within the sixth (6th)
civil degree of consanguinity to any official or employee of
the BIR, or any other public official or e m p l o y e e . Otherwise,
his Confidential Information shall be treated as invalid. If
the Informer withheld such information in his Confidential
Information and as a result of which he w a s paid the
Informer's reward, he shall, u p o n discovery of such fact, be
liable to the penalty of perjury a n d , in addition, he shall also
be required to restitute to the BIR the a m o u n t of reward
wrongfully obtained, inclusive of the legal interest thereon.
(Sec. 5, Ibid.)
(b) The Informer voluntarily provides sworn information

on the tax fraud or violation allegedly committed by the
denounced taxpayer. T h e facts mentioned in the
information constituting t h e alleged tax evasion or violation
of the Tax C o d e , must be definite, concise and credible,
and not merely a general statement. It must specify:
1) t h e n a m e and address of the taxpayer
committing t h e violation;
2) taxable period w h e n the fraud or violation w a s
committed;
3) t h e internal r e v e n u e law allegedly violated;
4) the a d d r e s s of w i t n e s s e s , if any; and
5) other facts pertinent to t h e violation.
Also, it must be s u p p o r t e d by "substantial e v i d e n c e " or
that a m o u n t of relevant e v i d e n c e w h i c h a reasonable mind
might accept as a d e q u a t e to justify a conclusion, such as
the following d o c u m e n t s :
1) BIR's Certificate of Registration;
2) Income Tax Returns;
3) D e e d of A b s o l u t e Sale;
4) License to O p e r a t e Business in the Philippines,
as issued by the Securities a n d E x c h a n g e C o m m i s s i o n
(SEC);
5) General information Sheet (GIS) obtained
f r o m the S E C ;
6) A u d i t e d Financial Statements; and

7) Other relevant d o c u m e n t s
T h e foregoing d o c u m e n t s a n d other "substantial evi-

d e n c e " to be submitted by t h e Informer must consist of
certified true copies. For this p u r p o s e , a certified true copy is
a c o p y w h i c h is authenticated and signed by the authorized
officer of t h e a g e n c y having custody of the original thereof.
However, for p u r p o s e s of evaluation, mere photocopies of
d o c u m e n t s which are within the custody of the denounced
taxpayer (i.e., private records) m a y be a c c e p t e d .
If t h e Informer d o e s not h a v e possession or control of

s u c h d o c u m e n t s , records, or books but he has knowledge
of t h e p e r s o n w h o has t h e custody, possession or control
thereof, or t h e place w h e r e they are kept, he shall state in
his s w o r n information t h e person w h o has the possession
thereof and/or the location w h e r e such d o c u m e n t s , records
a n d b o o k s are kept. (Ibid.)
(c) 77?e said information is not yet in the possession

of the BIR. In t h e course of the evaluation of the
Informer's Confidential Information, the Chief, Prosecution
Division or t h e Chief, Legal Division, as the case may
b e , shall determine f r o m the records of the BIR whether
the information being submitted is already reasonably in
the p o s s e s s i o n of t h e BIR [e.g., the information offered
by t h e Informer is already available f r o m the BIR's Third
Party Information (TPI) S y s t e m or the s a m e is of public
k n o w l e d g e as w h e n it is already the subject of a newspaper
publication or report, television or radio broadcast, etc.], or
will reasonably c o m e into the possession of the BIR in the
course of its operations.
Unless it is established that the information offered by

the Informer is not available from the records of the BIR,
the information shall not be treated as valid. (Ibid.)
(d) 77je said information does not refer to a case al-
ready pending or previously investigated or examined by
the Commissioner of Internal Revenue or any of his depu-
ties, agents or examiners, or by the Secretary of Finance or
any of his deputies or agents. Any information provided
in the said Confidential Information, which had already
been filed with the Department of Finance and any of its
ANNOTATED
attached agencies, including the BIR, shall not be treated

as a valid Confidential Information. (Ibid.)
(e) The said information does not refer to or is not
exactly similar to a previous information Tiled by another
informer covering the same taxpayer describing the same
scheme or information covering the same taxable year
or period. (Ibid.). T h e processing of the confidential
information's and the conduct of the preliminary investigation
shall be m a d e by the National Office or the R e v e n u e
Regional Office, as the c a s e m a y be the investigation shall
be confidential, (see Sec. 270.)
(f) The information given must lend to the discovery
of violation of law. In order for an Informer to be entitled
to a r e w a r d , the Confidential Information given must
lead to or be instrumental in the discovery of t h e fraud
or violation of the provisions of the N I R C , or special laws
being administered by t h e BIR, a n d t h e s a m e must result
in the actual recovery or collection of r e v e n u e s , surcharges
and f e e s , and/or t h e conviction of t h e guilty party or parties,
and/or the imposition of any fine or penalty or the actual
collection of a c o m p r o m i s e a m o u n t , in c a s e of amicable
settlement. (Sec. 1 1 , Ibid.)
(4) Rules where there are two or more informers. W h e r e

there are t w o (2) or m o r e Informers in t h e s a m e c a s e , the o n e
w h o g a v e the information in full satisfaction of t h e conditions
herein outlined shall be entitled to t h e r e w a r d .
In the event that e a c h Informer m e e t s all conditions fully,
the Informer w h o first furnished t h e information shall be entitled
to the r e w a r d .
In c a s e t w o (2) or m o r e p e r s o n s jointly filed t h e Confidential

Information w h o are qualified for the r e w a r d , they shall divide
the reward equally a m o n g t h e m s e l v e s , (bid.)
(5) Compromise of tax liability. Taxes a s s e s s e d as a re-
sult of a valid confidential information, if involving a c o m m i s s i o n
of criminal fraud established b e y o n d reasonable doubt, shall
not be c o m p r o m i s e d pursuant to Section 2 0 4 . (Sec. 13, Ibid.)
- oOo -
TITLE XI
ALLOTMENT OF INTERNAL REVENUE
CHAPTER I
DISPOSITION AND ALLOTMENT
OF NATIONAL INTERNAL
REVENUE IN GENERAL
SEC. 283. Disposition of National Internal R e v e n u e .

National internal revenue collected and not applied as hereinabove
provided or otherwise specially disposed of by law shall accrue to the
National Treasury and shall be available for the general purposes
of the Government, with the exception of the amounts set apart by
way of allotment under Republic Act No. 7160, otherwise known as
the Local Government Code of 1991.
In addition to the internal revenue allotment as provided in
the preceding paragraph, fifty percent (50%) of the national taxes
collected under Sections 106, 108 and 116 of this Code in excess of
the increase in collection for the immediately preceding year shall
be distributed as follows:
(a) Twenty percent (20%) shall accrue to the city or municipality
where such taxes are collected and shall be allocated in accordance
with Section 150 of R.A. No. 7160, otherwise known as the Local
Government Code of 1991; and
(b) Eighty percent (80%) shall accrue to the national Govern-
ment, (a)
ANNOTATION
While the BIR raises and collects internal revenue taxes for the
government, the National Treasury immediately takes control of the
funds that shall be disposed and allocated to the various branches
of the government in consultation with the Department of Budget
and Management. (BIR Ruling No. 016-03. (Nov. 24, 2003.)
739
ANNOTATED
SEC. 284. Allotment for the Commission on Audit.

One-half of one per cent (1/2 of 1%) of the collections from national
internal revenue taxes not otherwise accruing to special accounts
in the general fund of the national government shall accrue to the
Commission on Audit as a fee for auditing services rendered to local
government units, excluding maintenance, equipment, and other
operating expenses as provided for in Section 21 of Presidential
Decree No. 898.
The Secretary of Finance is hereby authorized to deduct from
the monthly internal revenue tax collections an amount equivalent
to the percentage as herein fixed, and to remit the same directly to
the Commission on Audit under such rules and regulations as may
be promulgated by the Secretary of Finance and the Chairman of
the Commission on Audit.
SEC. 285. Allotment for the Bureau of Internal Revenue.

An amount equivalent to five percent (5%) of the excess of actual
collections of national internal revenue taxes over the collection goal
shall accrue to the special fund of the Bureau of Internal Revenue
and shall be treated as receipts automatically appropriated. Said
amount shall be utilized as incentive bonus for revenue personnel,
purchase of necessary equipment and facilities for the improvement
of tax administration, as approved by the Commissioner; Provided,
That the President may, upon recommendation of the Commissioner,
direct that the excess be credited to a Special Account in the National
Treasury to be held in reserve available for distribution as incentive
bonus in subsequent years.
The Secretary of Finance is hereby authorized to transfer from
the Treasury an amount equivalent to the percentage as herein fixed
and to remit the same directly to the Bureau of Internal Revenue
under such rules and regulations as may be promulgated by the
Secretary of Finance, (as amended by Pres. Decree No. 1991.)
- oOo -
CHAPTER II
SPECIAL DISPOSITION OF CERTAIN
NATIONAL INTERNAL REVENUE TAXES
SEC. 286. Disposition of Proceeds of Insurance Premium

Tax. Twenty-five percent (25%) of the premium tax collected
under Section 123 of this Code shall accrue to the Insurance Fund
1
as contemplated in Section 418 of Presidential Decree No. 612
which shall be used for the purpose of defraying the expenses of
the Insurance Commission. The Commissioner shall turn over and
deliver the said Insurance Fund to the Insurance Commission as
soon as the collection is made.
SEC. 287. Shares of Local Government Units in the

Proceeds from the Development and Utilization of the
National Wealth. Local government units shall have an
equitable share in the proceeds derived from the utilization and
development of the national wealth, within their respective areas,
including sharing the same with the inhabitants by way of direct
benefits.
(A) Amount of Share of Local Government Units. Local
government units shall, in addition to the internal revenue allotment,
have a share of forty percent (40%) of the gross collection derived by
the national government from the preceding fiscal year from excise
taxes on mineral products, royalties, and such other taxes, fees or
charges, including related surcharges, interests or fines, and from
its share in any co-production, joint venture or production sharing
agreement in the utilization and development of the national wealth
within their territorial jurisdiction, (a)
(B) Share of the Local Governments from Any Government
Agency or Government-owned or -controlled Corporation. Local
'Now, Presidential Decree N o . 1460, T h e Insurance Code of 1978."
741
ANNOTATED
government units shall have a share, based on the preceding

fiscal year, from the proceeds derived by any government agency
or government-owned or -controlled corporation engaged in the
utilization and development of the national wealth based on the
following formula, whichever will produce a higher share for the
local government unit:
(1) One percent (1%) of the gross sales or receipts of the
preceding calendar year; or
(2) Forty percent (40%) of the excise taxes on mineral
products, royalties, and such other taxes, fees or charges,
including related surcharges, interests or fines the government
agency or government-owned or -controlled corporation would
have paid if it were not otherwise exempt, (a)
(C) Allocation of Shares. The share in the preceding Section
shall be distributed in the following manner:
(1) Where the natural resources are located in the province:
(a) Province twenty percent (20%);
(b) Component city/municipality forty-five percent
(45%); and
(c) Barangay thirty-five percent (35%).
Provided, however, That where the natural resources are located
in two (2) or more provinces, or in two (2) or more component cities
or municipalities or in two (2) or more barangays, their respective
shares shall be computed on the basis of (1) Population seventy
percent (70%); and (2) Land area thirty percent (30%).
(2) Where the natural resources are located in a highly
urbanized or independent component city:
(a) City sixty-five percent (65%); and
(b) Barangay thirty-five percent (35%).
Provided, however, That where the natural resources are located
in two (2) or more cities, the allocation of shares shall be based on
the formula on population and land area as specified in Subsection
(C)(1) hereof, (a)
SEC. 288. Disposition of Incremental Revenues.

( A ) Incremental Revenues from Republic Act No. 7660. - The
incremental revenues from the increase in the documentary stamp
taxes under R.A. No. 7660 shall be set aside for the following
purposes:
Sec. 288 A L L O T M E N T OF I N T E R N A L R E V E N U E
Special Disposition of Certain National Internal Revenue Taxes
(1) In 1994 and 1995, twenty-five percent (25%) thereof

respectively, shall accrue to the Unified Home-Lending Program
under Executive Order No. 90 particularly for mass-socialized
housing program to be allocated as follows: fifty percent (50%) for
mass-socialized housing; thirty percent (30%) for the community
mortgage program; and twenty percent (20%) for land banking and
development to be administered by the National Housing Authority:
Provided, That not more than one percent (1%) of the respective
allocations hereof shall be used for administrative expenses;
(2) In 1996, twenty-five percent (25%) thereof to be utilized
for the National Health Insurance Program that hereafter may be
mandated by law;
(3) In 1994 and every year thereafter, twenty-five percent (25%)
thereof shall accrue to a Special Education Fund to be administered
by the Department of Education, Culture and Sports for the
construction and repair of school facilities, training of teachers, and
procurement or production of instructional materials and teaching
aids; and
(4) In 1994 and every year thereafter, fifty percent (50%) thereof
shall accrue to a Special Infrastructure Fund for the construction
and repair of roads, bridges, dams and irrigation, seaports and
hydroelectric and other indigenous power projects: Provided,
however, That for the years 1994 and 1995, thirty percent (30%),
and for the years 1996,1997, and 1998, twenty percent (20%), of this
fund shall be allocated for depressed provinces as declared by the
President as of the time of the effectivity of R.A. No. 7660: Provided,
further, That availments under this fund shall be determined by the
President on the basis of equity.
Provided, finally, That in paragraphs (2), (3) and (4) of this
Section, not more than one percent (1%) of the allocated funds thereof
shall be used for administrative expenses by the implementing
agencies.
(B) Incremental Revenues from Republic Act No. 8240. Fifteen
percent (15%) of the incremental revenue collected from the excise
tax on tobacco products under R.A. No. 8240 shall be allocated and
divided among the provinces producing barley and native tobacco
2
in accordance with the volume of tobacco leaf production. The fund
2
Rev. Regs. N o . 15-2008 (Nov. 21, 2008) prescribes the manner of computing
the incremental revenue to be used as basis for the 15% share of the beneficiary prov-
inces producing burley and native tobacco in the excise tax collection from tobacco
products under R.A. no. 8240.
ANNOTATED
shall be exclusively utilized for programs in pursuit of the following

objectives:
(1) Cooperative projects that will enhance better quality of
agricultural products and increase income and productivity of
farmers;
(2) Livelihood projects, particularly the development of alter-
native farming system to enhance farmer's income; and
(3) Agro-industrial projects that will enable tobacco farmers
to be involved in the management and subsequent ownership
of projects; such as post-harvest and secondary processing like
cigarette manufacturing and by-product utilization.
The Department of Budget and Management, in consultation
with the Oversight Committee created under said R.A. No. 8240,
shall issue the corresponding rules and regulations governing the
allocation and disbursement of this fund, (a)
(C) Incremental Revenues from the Excise Tax on Alcohol and
Tobacco Products.
(1) Two and a half percent (2.5%) of the incremental, revenue
from the excise tax on alcohol and tobacco products starting January
2005 shall be remitted directly to the Philippine Health insurance
Corporation for the purpose of meeting and sustaining the goal of
universal coverage of the National Health Insurance Program; and
(2) Two and a half percent (2.5%) of the incremental revenue
from the excise tax on alcohol and tobacco products starting January
2005 shall be credited to the account of the Department of Health
and constituted as a trust fund for its disease prevention program.
The earmarking provided under this provision shall be observed
for five (5) years starting from January 2005.
(D) Incremental Revenue from the Value-added Tax. Fifty
percent (50%) of the local government unit's share from the
incremental revenue from the value-added tax shall be allocated
and used exclusively for the following purposes:
(1) Fifteen percent (15%) for public elementary and secondary
education, to finance the construction of buildings, purchases of
school furniture and in-service teacher trainings;
(2) Ten percent (10%) for health insurance premiums of enrolled
indigents as a counterpart contribution of the local government to
sustain the universal coverage of the national health insurance
program;
Sec. 289 A L L O T M E N T OF I N T E R N A L R E V E N U E
Special Disposition of Certain National Internal Revenue Taxes
(3) Fifteen percent (15%) for environmental conservation to

fully implement a comprehensive national reforestation program;
and
(4) Ten percent (10%) for agricultural modernization to finance
the construction of farm-to-market roads and irrigation facilities.
Such allocations shall be segregated as separate trust funds
by the national treasury and shall be over and above the annual
appropriation for similar purposes.
(E) The amount of Fifteen million pesos (P15,000,000) shall
be allocated for a Public Information and Education Program to
be administered by the Bureau of Internal Revenue, explaining
clearly to businesses their registration, invoicing and reporting
requirements under the value-added tax rules. Such program should
include seminars and visits to taxpayers to familiarize them with
the tax, and the development and publication of easy-to-read guides
on the value-added tax.
SEC. 289. Special Financial Support to Beneficiary

Provinces Producing Virginia Tobacco. The financial support
given by the National Government for the beneficiary provinces shall
be constituted and collected from the proceeds of fifteen percent
(15%) of the excise taxes on locally manufactured Virginia-type of
cigarettes.
The funds allotted shall be divided among the beneficiary pro-
vinces pro-rata according to the volume of Virginia tobacco produc-
tion.
Provinces producing Virginia tobacco shall be the beneficiary
3
provinces under Republic Act No. 7171: Provided, however, That to
qualify as beneficiary under R.A. No. 7171, a province must have an
average annual production of Virginia leaf tobacco in an amount not
less than one million kilos: Provided, further, That the Department
of Budget and Management (DBM) shall each year determine the
beneficiary provinces and their computed share of the funds under
R.A. No. 7171, referring to the National Tobacco Administration
( N T A ) records of tobacco acceptances, at the tobacco trading centers
for the immediate past year.
The Secretary of Budget and Management is hereby directed to
retain annually the said funds equivalent to fifteen percent (15%) of
3
A n Act to promote the development of the farmers in the Virginia Tobacco-
Producing Provinces. It took effect on January 9,1992.
746 THE NATIONAL INTERNAL REVENUE CODE Sec. 289
ANNOTATED
excise taxes on locally manufactured Virginia-type cigarettes to be

remitted to the beneficiary provinces qualified under R.A. No. 7171.
The provisions of existing laws to the contrary notwithstanding,
the fifteen percent (15%) share from government revenues mentioned
in R.A. No. 7171 and due to the Virginia tobacco-producing provinces
shall be directly remitted to the provinces concerned.
Provided, That this Section shall be implemented in accordance
with the guidelines of Memorandum Circular No. 61-A, dated
November 28, 1993, which amended Memorandum Circular No. 61,
entitled "Prescribing Guidelines for Implementing Republic Act No.
7171," dated January 1, 1992.
Provided, further, That in addition to the local government
units mentioned in the above circular, the concerned officials in the
province shall be consulted as regards the identification of projects
to be financed, (a)
- oOo -
TITLE XII
OVERSIGHT COMMITTEE
SEC. 290. Congressional Oversight Committee.

A Congressional Oversight Committee hereinafter referred to
as the Committee, is hereby constituted in accordance with the
provisions of this Code. The Committee shall be composed of the
Chairmen of the Committee on Ways and Means of the Senate
and House of Representatives and four (4) additional members
from each house, to be designated by the Speaker of the House of
Representatives and the Senate President, respectively.
The Committee shall, among others, in aid of legislation:
(1) Monitor and ensure the proper implementation of Republic
Act No. 8240;
(2) Determine that the power of the Commissioner to compromise
and abate is reasonably exercised;
(3) Review the collection performance of the Bureau of Internal
Revenue; and
(4) Review the implementation of the programs of the Bureau of
Internal Revenue.
In furtherance of the hereinabove cited objectives, the Committee
is empowered to require of the Bureau of Internal Revenue,
submission of all pertinent information, including but not limited
to: industry audits; collection performance data; status reports on
criminal actions initiated against persons; and the submission of
taxpayer returns: Provided, however, That any return or return
information which can be associated with, or otherwise identify,
directly or indirectly, a particular taxpayer shall be furnished the
Committee only when sitting in Executive Session unless such
taxpayer otherwise consents in writing to such disclosure, (n)
747
ANNOTATED
ANNOTATION
Rev. Regs. No. 7-2001 implements Sections 7(c), 204(A) and

290 on compromise settlement of internal revenue tax liabilities. It
provides for the cases which may and may not be c o m p r o m i s e d ,
the basis for acceptance of c o m p r o m i s e settlement, the prescribed
minimum percentages of c o m p r o m i s e settlement, and the
documentary requirements. Rev. Regs. No. 6-2000 provides for
that creation of the National Evaluation Board (NEB) in the National
Office and a Regional Evaluation Board (REB) in e a c h Revenue
Region, (see Sec. 204.)
"The C o m m i s s i o n e r shall submit to the Congressional Oversight

Committee through the C h a i r m e n of the C o m m i t t e e s of W a y s and
Means of both the S e n a t e a n d H o u s e of Representatives every six
(6) months of e a c h calendar year, a report on t h e exercise of his
powers to c o m p r o m i s e the tax liabilities of t a x p a y e r s . In this regard,
the R E B should submit to the C o m m i s s i o n e r all t h e necessary
reports and data in d u e time for t h e latter to be able to submit the
required reports to the Congressional Oversight C o m m i t t e e " (Sec.
7, Rev. Regs. No. 7-2001.), to e n a b l e t h e Congressional Oversight
Committee, in aid of legislation to "determine that t h e power of t h e
C o m m i s s i o n e r to c o m p r o m i s e a n d abate is reasonably e x e r c i s e d . "
(Sec. 290[2].)
- oOo -
TITLE XIII
REPEALING PROVISIONS
SEC. 291. In General. All laws, decrees, executive orders,

rules and regulations or parts thereof which are contrary to or
inconsistent with this Code are hereby repealed, amended or
modified accordingly.
- 0O0 -
749
TITLE XIV
FINAL PROVISIONS
SEC. 292. Separability Clause. If any clause, sentence,

paragraph or part of this Code shall be adjudged by any Court of
competent jurisdiction to be invalid, such judgment shall not affect,
impair or invalidate the remainder of said Code, but shall be confined
in its operation to the clause, sentence, paragraph or part thereof
directly involved in the controversy.
Other provisions of R.A. No. 8424

"SEC. 4. The Secretary of Finance shall, upon the recom-
mendation of the Commissioner of Internal Revenue, promul-
gate and publish the necessary rules and regulations for the ef-
fective implementation of this Act.
SEC. 5. Transitory Provisions. Deferment of Effectivity
of the Imposition of VAT on Certain Services. The effectivity of
the imposition of the value-added tax on services as prescribed
in Section 17(a) and (b) of Republic Act No. 7616 as amended by
Republic Act No. 8241, is hereby further deferred until December
31, 1999, unless Congress deems otherwise: Provided, That the
said services shall continue to pay the applicable tax prescribed
under the present provisions of the National Internal Revenue
Code, as amended.
SEC. 6. Separability Clause. If any provision of this
Act is subsequently declared unconstitutional, the validity of
the remaining provisions hereof shall remain in full force and
effect.
SEC. 7. Repealing Clauses. ( A ) The provision of Section
17 of Republic Act No. 7906, otherwise known as the "Thrift
Banks Act of 1995" shall continue to be in force and effect only
until December 31, 1999.
750
Sec. 292 FINAL PROVISIONS 751
Effective January 1, 2000, all thrift banks, whether in

operation as of that date or thereafter, shall no longer enjoy
tax exemption as provided under Section 17 of R.A. No. 7906,
thereby subjecting all thrift banks to taxes, fees and charges
in the same manner and at the same rate as banks and other
financial intermediaries.
(B) The provisions of the National Internal Revenue Code, as
amended, and all other laws, including charters of government-
owned or -controlled corporations, decrees, orders or regulations
or parts thereof, that are inconsistent with this Act are hereby
repealed or amended accordingly.
SEC. 8. Effectivity. This Act shall take effect on January
1, 1998."
- oOo -
T H E
N A T I O N A L I N T E R N A L
R E V E N U E C O D E
A N N O T A T E D
(PX>. No. 1158, as amended up to I L A . No. 10021.)
Volume 2
By
HECTOR S. DE LEON
LL.B., University of the Philippines
Author: Philippine Constitutional Law: Principles and Cases (2 Vols.);
Aklat-Aralin sa Bagong Konstitusyon, etc.
Co-Author: Comments and Cases on Succession;
Comments and Cases on Property;
Comments and Cases on Obligations and Contracts;
Comments and Cases on Sales and Lease;
Comments and Cases on Partnership, Agency, and Trusts;
Comments and Cases on Credit Transactions;
Comments and Cases on Torts and Damages;
Administrative Law: Text and Cases;
The Law on Public Officers and Election Law;
The Corporation Code of the Philippines Annotated;
The Insurance Code of the Philippines Annotated;
The Philippine Negotiable Instruments Law (and Allied Laws) Annotated;
The National Internal Revenue Code Annotated (vol. 1); etc.
and
HECTOR M. DE LEON, JR.

A.B. LL.B. University of the Philippines
LL.M. University of Michigan
Partner, SyCip Salazar Hernandez & Gatmaitan
Co-Author: Comments and Cases on Succession;
Comments and Cases on Property;
Comments and Cases onw Obligations and Contracts;
Comments and Cases on Sales and Lease;
Comments and Cases on Partnership, Agency, and Trusts;
Comments and Cases on Credit Transactions;
Comments and Cases on Torts and Damages;
Administrative Law: Text and Cases;
The Law on Public Officers and Election Law;
The Corporation Code of the Philippines Annotated;
The Insurance Code of the Philippines Annotated;
The Philippine Negotiable Instruments Law (and Allied Laws) Annotated;
The National Internal Revenue Code Annotated (vol. 1); etc.
NINTH EDITION
2011
Published & Distributed by

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Philippine Copyright, 2 0 1 1
by
HECTOR/ S. DE L E O N
a rid
H E C T O R M . D E L E O N , JR.
ISBN 978-971-23-6010-7
No portion of this book may be copied or

reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, copied
in different electronic devices or in any other form, for
distribution or sale, without the written permission
of the author except brief passages in books, articles,
reviews, legal papers, and judicial or other official
proceedings with proper citation.
Any copy of this book without the correspond-

ing number and the signature of either of the authors
on this page either proceeds from an illegitimate
source or is in possession of one who has no authority
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ALL RIGHTS RESERVED

BY THE AUTHORS
M 1605
ISBN 978-971-23-6010-7
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Printed by
PREFACE
This volume which is now on its ninth edition, aims to provide

a compact and handy reference on the National Internal Revenue
Code, as amended. Towards this end, it explains briefly and in a
simple manner the different sections of the Code, incorporating when
relevant, provisions of related statutes, decrees, and regulations on
taxation. It does not only enumerate, distinguish, correlate, and
analyze. Formulas which can serve as useful aids in the solution of
problems involving tax computations are also given.
The author is grateful to Atty. Jovencio F. Cinco, CPA, Presi-
dent, Penta Capital Investment Corporation and Penta Finance
Corporation, and Rachel T. Santamaria, Partner, Velayo & Teodoro
Santamaria, CPAs, for their suggestions.
HECTOR S. DE L E O N
HECTOR M. DE L E O N , JR.
June 2011
CONTENTS
The National Internal Revenue Code

(Pres. Decree No. 1158, as amended
up to R.A. No. 10021.)
Pres. Decree No. 1158, as amended up to R.A. No. 9224 i

Preface iii
SECTION
Old N e w
TITLE IV. V A L U E - A D D E D TAX
Chapter I. Imposition of Tax
99 105 Persons Liable 1

100 106 Value-added Tax on Sale of Goods
or Properties 17
101 107 Value-added Tax on Importation of Goods 42
102 108 Value-added Tax on Sale of Services
and Use or Lease of Properties 49
103 109 Exempt Transactions 102
104 110 Tax Credits 127
105 111 Transitional/Presumptive Input Tax Credits 147
106 112 Refunds or Tax Credits of Input Tax 150
Chapter II. Compliance Requirements
108 113 Invoicing and Accounting Requirements

for VAT-Registered Persons 160
110 114 Return and Payment of Value-added Tax 168
111 115 Power of the Commissioner to Suspend
the Business Operations of
a Taxpayer 185
SECTION
Old New
TITLE V. OTHER PERCENTAGE TAXES
112 116 Tax on Persons Exempt from Value-added

Tax (VAT) 193
115 117 Percentage Tax on Domestic Carriers
and Keepers of Garages 195
** 118 Percentage Tax on International Carriers 196
117 119 Tax on Franchises 221
118 120 Tax on Overseas Dispatch, Message
or Conversation Originating from
the Philippines 224
119 121 Tax on Banks and Non-bank Financial
Intermediaries Performing Quasi-Banking
Functions 226
120 122 Tax on Other Non-Bank Financial
Intermediaries 237
121 123 Taxes on Life Insurance Premiums 241
122 124 Tax on Agents of Foreign Insurance
Companies 242
123 125 Amusement Taxes 252
124 126 Tax on Winnings 256
** 127 Tax on Sale, Barter or Exchange of Shares
of Stock Listed and Traded Through the
Local Stock Exchange or Through Initial
Public Offering 258
125 128 Returns and Payment of Percentage Taxes 269
TITLE VI. EXCISE TAXES ON CERTAIN GOODS
Chapter I. General Provisions
126 129 Goods Subject to Excise Taxes 274

127 130 Filing of Return and Payment of Excise
Tax on Domestic Products 277
128 131 Payment of Excise Taxes on Imported
Articles 280
129 132 Mode of Computing Contents of Cask
or Package 281
Chapter II. Exemption or Conditional Tax-Free

Removal of Certain Articles
130 133 Removal of Wines and Distilled Spirits

for Treatment of Tobacco Leaf 289
131 134 Domestic Denatured Alcohol 289
vi
SECTION
Old New
132 135 Petroleum Products Sold to International
Carriers and Exempt Entities
or Agencies 289
133 136 Denaturation, Withdrawal and Use
of Denatured Alcohol 290
134 137 Removal of Spirits Under Bond
for Rectification 290
135 138 Removal of Fermented Liquors to Bonded
Warehouse 290
136 139 Removal of Damaged Liquors Free
of Tax 291
137 140 Removal of Tobacco Products Without
Pre-payment of Tax 291
Chapter III. Excise Tax on Alcohol

Products
138 141 Distilled Spirits 297

139 142 Wines 304
140 146 Fermented Liquors 309
Chapter IV. Excise Tax on Tobacco

Products
141 144 Tobacco Products 313

142 145 Cigars and Cigarettes 314
143 146 Inspection Fee 319
144 147 Definition of Terms 320
Chapter V. Excise Tax on Petroleum

Products
145 148 Manufactured Oils and Other Fuels 322
Chapter VI. Excise Tax on Miscellaneous

Articles
3 2 9
* 149 Automobiles
* 150 Non-essential Goods 341
Chapter VII. Excise Tax on Mineral Products

3 4 3
* 151 Mineral Products
vii
SECTION
Old New
Chapter VIII. Administrative Provisions Regulating

Business of Persons Dealing in Articles Subject
to Excise Tax
* 152 Extent of Supervision Over Establishments

Producing Taxable Output 353
* 153 Records to be Kept by Manufacturers;
Assessment Based Thereon 356
* 154 Premises Subject to Approval
by Commissioner 357
* 155 Manufacturers to Provide Themselves
with Counting or Metering Devices
to Determine Production 357
* 156 Labels and Form of Packages 357
* 157 Removal of Articles After the Payment
of Tax 358
* 158 Storage of Goods in Internal-revenue
Bonded Warehouses 358
* 159 Proof of Exportation; Exporter's Bond 358
* 160 Manufacturers' and Importers' Bond 359
* 161 Records to be Kept by Wholesale Dealers 359
* 162 Records to be Kept by Dealers
in Leaf Tobacco 359
* 163 Preservation of Invoices and Stamps 359
164 Information to be Given by Manufacturers,
Importers, Indentors, and Wholesalers
of any Apparatus or Mechanical Contrivance
Specially for the Manufacture of Articles
Subject to Excise Tax and Importers,
Indentors, Manufacturers or Sellers of
Cigarette Paper in Bobbins, Cigarette
Tipping Paper or Cigarette Filter Tips 360
* 165 Establishment of Distillery Warehouses 360
* 166 Custody of Distillery or Distillery
Warehouse 360
* 167 Limitation on Quantity of Spirits Removed
from Warehouse 361
* 168 Denaturing Within Premises 361
* 169 Recovery of Alcohol for Use in Arts
and Industries 361
* 170 Requirements Governing Rectification
and Compounding of Liquors 362
viii
SECTION
Old New
171 Authority of Internal Revenue Officer
in Searching for Taxable Articles 362
172 Detention of Package Containing
Taxable Articles 363
TITLE VII. DOCUMENTARY STAMP TAX
173 Stamp Taxes Upon Documents, Loan

Agreements, Instruments and Papers 364
174 Stamp Tax on Original Issue of Shares
of Stock 372
175 Stamp Tax on Sales, Agreements to Sell,
Memoranda of Sales, Deliveries or Transfer
of Shares or Certificates of Stock 376
176 Stamp Tax on Bonds, Debentures, Certificates
of Stock or Indebtedness Issued in Foreign
Countries 380
177 Stamp Tax on Certificates of Profits or Interests
in Property or Accumulations 381
178 Stamp Tax on Bank Checks, Drafts, Certificates
of Deposits not Bearing Interest, and Other
Instruments 381
179 Stamp Tax on all Debt Instruments 382
180 Stamp Tax on All Bills of Exchange or Drafts 388
181 Stamp Tax Upon Acceptance of Bill
of Exchange and Others 388
182 Stamp Tax on Foreign Bills of Exchange
and Letters of Credit 388
183 Stamp Tax on Life Insurance Policies 392
184 Stamp Tax on Policies of Insurance
Upon Property 394
185 Stamp Tax on Fidelity Bonds and Other
Insurance Policies 396
186 Stamp Tax on Policies of Annuities
and Pre-Need Plans 396
187 Stamp Tax on Indemnity Bonds 399
4 0 0
188 Stamp Tax on Certificates
189 Stamp Tax on Warehouse Receipts 403
190 Stamp Tax on Jai-alai, Horse Race Tickets,
Lotto, or Other Authorized Numbers
4 0 3
Games
191 Stamp Tax on Bills of Lading or Receipts 404
4 0 4
192 Stamp Tax on Proxies
4 0 4
193 Stamp Tax on Powers of Attorney
ix
SECTION
Old New
* 194 Stamp Tax on Leases and Other Hiring

Agreements 405
* 195 Stamp Tax on Mortgages, Pledges,
and Deeds of Trust 405
* 196 Stamp Tax on Deeds of Sale and Conveyance
of Real Property 409
* 197 Stamp Tax on Charter Parties and Similar
Instruments 421
* 198 Stamp Tax on Assignments and Renewals
of Certain Instruments 422
* 199 Documents and Papers not Subject
to Stamp Tax 422
* 200 Payment of Documentary Stamp Tax 425
* 201 Effect of Failure to Stamp Taxable
Document 435
TITLE VIII. REMEDIES
Chapter I. Remedies in General
* 202 Final Deed to Purchaser 438

* 203 Period of Limitation Upon Assessment
and Collection 438
* 204 Authority of the Commissioner to Compromise,
Abate, and Refund or Credit Taxes 443
Chapter II. Civil Remedies for Collection of Taxes
* 205 Remedies for the Collection of Delinquent

Taxes 471
* 206 Constructive Distraint of the Property
of a Taxpayer 473
* 207 Summary Remedies 475
* 208 Procedure for Distraint and Garnishment 478
* 209 Sale of Property Distrained and Disposition
of Proceeds 478
* 210 Release of Distrained Property upon
Payment Prior to Sale 479
* 211 Report of Sale to Bureau of Internal
Revenue 479
* 212 Purchase by Government at Sale Upon
Distraint 480
X
SECTION
Old New
214 213 Advertisement and Sale 481
215 214 Redemption of Property Sold 482
216 215 Forfeiture to Government for Want
of Bidder 483
217 216 Resale of Real Estate Taken for Taxes 483
218 217 Further Distraint or Levy 483
219 218 Injunction not Available to Restrain
Collection of Tax 490
220 219 Nature and Extent of Tax Lien 493
221 220 Form and Mode of Proceeding in Actions
Arising under This Code 495
222 221 Remedy for Enforcement of Statutory
Penal Provisions 497
223 222 Exceptions as to Period of Limitation of
Assessment and Collection of Taxes 498
224 223 Suspension of Running of Statute
of Limitations 507
225 224 Remedy for Enforcement of Forfeitures 514
226 225 When Property to be Sold or Destroyed 514
227 226 Disposition of Funds Recovered in Legal
Proceedings or Obtained from
Forfeitures 515
228 227 Satisfaction of Judgment Recovered Against
Any Internal Revenue Officer 516
Chapter III. Protesting an Assessment,

Refund, Etc.
229 228 Protesting of Assessment 517

230 229 Recovery of Tax Erroneously or Illegally
Collected 535
** 230 Forfeiture of Cash Refund and of Tax
5 5 5
Credit
* 231 Action to Contest Forfeiture of Chattel 556
TITLE EX. COMPLIANCE REQUIREMENTS
Chapter I. Keeping of Books of Accounts and Records

5 5 7
* 232 Keeping of Books of Accounts
5 7 8
* 233 Subsidiary Books
* 234 Language in which Books are to be Kept;
5 7 9
Translation
xi
SECTION
Old New
* 235 Preservation of Books of Accounts, and Other
Accounting Records 579
Chapter II. Administrative Provisions
107 236 Registration Requirements 615

238 237 Issuance of Receipts or Sales or Commercial
Invoices 652
239 238 Printing of Receipts or Sales or Commercial
Invoices 661
240 239 Sign to be Exhibited by Distiller, Rectifier,
Compounder, Repacker, and Wholesale
Liquor Dealer 667
241 240 Sign to be Exhibited by Manufacturer of
Products of Tobacco 667
242 241 Exhibition of Certificate of Payment at Place
of Business 667
243 242 Continuation of Business of Deceased
Person 668
244 243 Removal of Business to Other Location 668
Chapter III. Rules and Regulations
245 244 Authority of Secretary of Finance to

Promulgate Rules and Regulations 669
4 245 Specific Provisions to be Contained in Rules
and Regulations 670
* 246 Non-Retroactivity of Rulings 678
TITLE X. STATUTORY OFFENSES

AND PENALTIES
Chapter I. Additions to the Tax
* 247 General Provisions 682

* 248 Civil Penalties 682
* 249 Interest 696
* 250 Failure to File Certain Information
Returns 704
* 251 Failure of a Withholding Agent to Collect
and Remit Tax 704
251-A 252 Failure of a Withholding Agent to Refund
Excess Withholding Tax 705
xii
SECTION
Old New
Chapter II. Crimes, Other Offenses and

Forfeitures
252 253 General Provisions 706

253 254 Attempt to Evade or Defeat Tax 707
254 255 Failure to File Return, Supply Correct and
Accurate Information, Pay Tax, Withhold
and Remit Tax and Refund Excess Taxes
Withheld on Compensation 709
255 256 Penal Liability of Corporations 709
256 257 Penal Liability for Making False Entries,
Records or Reports, or Using Falsified
or Fake Accountable Forms 709
257 258 Unlawful Pursuit of Business 712
258 259 Illegal Collection of Foreign Payments 713
259 260 Unlawful Possession of Cigarette Paper
in Bobbins, or Rolls, Etc 713
260 261 Unlawful Use of Denatured Alcohol 713
261 262 Shipment or Removal of Liquor or Tobacco
Products Under False Name or Brand
or as an Imitation of any Existing
or Otherwise Known Product Name
or Brand 714
262 263 Unlawful Possession or Removal of Articles
Subject to Excise Tax without Payment
of the Tax 714
263 264 Failure or Refusal to Issue Receipts or Sales
or Commercial Invoices, Violations Related
to the Printing of such Receipts or
Invoices and Other Violations 716
264 265 Offenses Relating to Stamps 716
265 266 Failure to Obey Summons 717
266 267 Declaration Under Penalties of Perjury 717
267 268 Other Crimes and Offenses 718
Chapter III. Penalties Imposed on

Public Officers
268 269 Violations Committed by Government

Enforcement Officers 719
269 270 Unlawful Divulgence of Trade Secrets 721
270 271 Unlawful Interest of Revenue Law Enforcers
7
in Business ^6
xiii
SECTION
Old New
271 272 Violation of Withholding Tax Provision 727
272 273 Penalty for Failure to Issue and Execute
Warrant 728
Chapter IV. Other Penal Provisions
273 274 Penalty for Second and Subsequent Offenses 729

274 275 Violation of Other Provisions of this Code
or Rules or Regulations in General 729
275 276 Penalty for Selling, Transferring, Encumbering,
or in Any Way Disposing of Property
Placed Under Constructive Distraint 730
276 277 Failure to Surrender Property Placed under
Distraint and Levy 730
277 278 Procuring Unlawful Divulgence
of Trade Secrets 730
278 279 Confiscation and Forfeiture of the Proceeds
or Instruments of Crime 731
279 280 Subsidiary Penalty 731
280 281 Prescription for Violations of any Provision
of this Code 731
281 282 Informer's Reward to Persons Instrumental
in the Discovery of Violations of the NIRC
and in the Discovery and Seizure
of Smuggled Goods 732
TITLE XL ALLOTMENT OF INTERNAL

REVENUE
Chapter I. Disposition and Allotment of National

Internal Revenue in General
282 283 Disposition of National Internal Revenue 739

283 284 Allotment for the COA 740
284 285 Allotment for the BIR 740
Chapter II. Special Disposition of Certain

National Internal Revenue Taxes
285 286 Disposition of Proceeds of Insurance

Premium Tax 741
286 287 Shares of LGUs in the Proceeds from
Development and Utilization of the
National Wealth 741
xiv
SECTION
Old New
** 288 Disposition of Incremental Revenues 742
** 289 Special Financial Support to Beneficiary
Provinces Producing Virginia Tobacco 745
TITLE XII. OVERSIGHT COMMITTEE
** 290 Congressional Oversight Committee 747

TITLE XIII. REPEALING PROVISIONS
287 291 In General 749
TITLE XIV. FINAL PROVISIONS
288 292 Separability Clause 750
APPENDICES
S Consolidated Value-Added Tax Regulations of 2005

(Rev. Regs. No. 16-2005) 752
T Revised Tax Rates on Alcohol and Tobacco Products
(Rev. Regs. No. 3-2006) 803
U Excise Taxation of Petroleum Products
(Rev. Regs. No. 8-96) 841
V Consolidated Revised Schedule of Compromise
Penalties (Rev. Memo. Order No. 19-2007) 856
W Manner of Issuance of Tax Credit Certificates,
and Conditions for Their Use, Revalidation
and Transfer (Rev. Regs. No. 5-2000) 872
X - Energy Tax on Electric Power (B.P. Big. 36) 876
Y - List of BIR Forms 878
Z An Act Creating the Court of Tax Appeals
(R.A. No. 1125, as amended
by R.A. No. 9282 and No. 9503) 894
AA Revised Rules of the Court of Tax Appeals
(as amended) 901
BB - Attrition Act of 2005 (R.A. No. 9335) 919
- oOo -
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TITLE IV

SECTION 105. Persons Liable. Any person who, in the

1. Value-added tax (VAT) is a percentage tax imposed at

lease of goods, or properties and on the performance of service

(5) Under the Tax C o d e , t h e p e r f o r m a n c e of service for a

( 6 ) T h e dissolution of the c o - o w n e r s h i p and the partition of

'The Local Government Code ( R . A . No. 7160.) defines "business" as "trade or

( 7 ) S o m e h o m e o w n e r s ' associations of subdivisions

(8) T h e a s s i g n m e n t by a c o m p a n y e n g a g e d in the real

(9) T h e allocation of c o n d o m i n i u m units to partners of a

(1) A sale transaction is d e e m e d to be d o n e in the

4. Transactions incidental to pursuit of commercial or eco-

5. VAT is an indirect tax. As s u c h , it can be shifted to the

T h u s , for the VAT-registered purchaser, the tax burden passed

In the VAT s y s t e m , it is only in t h e c a s e of a non-VAT purchaser

6. As a general rule, the VAT s y s t e m , uses the destination

7. Some basic principles governing VAT VAT is ultimately

(1) It is the end user of c o n s u m e r g o o d s or services which

(2) T h e VAT system assures fiscal adequacy through the

(3) VAT is not a singular-minded tax on every transactional

8. Shifting of VAT. T h e VAT taxpayer m a y choose to absorb

(2) T h e VAT, as an indirect tax, can be p a s s e d on to VAT-

(3) While VAT is an indirect tax a n d c a n be shifted to the

(4) T h e sale of g o o d s and services to a government agency

(6) T h e sale of services by stock transfer agents to

(7) A foreign contractor, w h i c h is organized under the laws

(1) T h e w h o l e of the sales v a l u e of c o n s u m e r g o o d s ,

levied at e a c h stage only on the value added at o n e point. At

(2) T h e v a l u e - a d d e d tax (VAT) is a multi-stage or multi-

T h e former s u b s e q u e n t turnover tax w a s also a multi-point

This m e t h o d of c o m p u t i n g the sales tax is known as the "cost

(2) On July 1, 1978, by virtue of Pres. Decree No. 1358,

Under t h e tax credit m e t h o d , the tax on sales is first

Sales tax payable P 4,000

Considering that the tax credit method of calculating the

on first sellers, i.e., manufacturers, producers and importers.

T h e Tax C o d e (Sec. 110[A].) a d o p t e d t h e c o n s u m p t i o n type

Our VAT system w h i c h is invoice-based (see Sec. 113.) is

15. Differences between former crude form of VAT and present

(1) Coverage or scope. T h e present VAT covers

t h e m by preceding sellers or suppliers. Sellers of services were

(3) Number of rates. T h e present VAT has only two

Zero-rated sales are considered taxable sales but subject

thereby providing a more accurate audit trail or evidence for

(4) Taxable sale refers to t h e sale, barter, e x c h a n g e , a n d /

(3) T h e sale must be m a d e by a taxable person in the

(1) G o v e r n m e n t entities a n d instrumentalities including

nonprofit organizations (par. 3.) are subject to VAT if in the

(2) T h e r e is no automatic exemption from value-added

(3) T h e sale by a company, a dealer of scrap materials, of

(4) Similarly, the sale of scrap vessels by a company

services (as well as importation of goods) from VAT registered

(b) A joint venture for t h e p u r p o s e of undertaking

(c) Receipt by a condominium corporation of d u e s f r o m

21. "In the course of trade or business." T h e phrase

SEC. 106. Value-added Tax on Sale of Goods or Proper-

(i) Value-added tax collection as a percentage of Gross

(a) Export Sales. The term "export sales" means:

(1) Transfer, use or consumption not in the course of business

1. Rate and base of tax on sale of goods or properties.

(1) T h e rate of tax is n o w 1 2 % based on gross selling price

(2) Receipts derived f r o m the sale of blocked television

(3) Under Section 106, there must be a sale, barter, or