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TABLE OF CONTENTS

I. GENERAL PRINCIPLES………………………………………………………………………………………………………….9
A. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN…..10
B. INHERENT AND CONSTITUTIONAL LIMITATIONS OF TAXATION…………………………………………….11
C. REQUISITES OF A VALID TAXATION………………………………………………………………………………………18
D. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS……………………………………………..18
E. KINDS OF TAXES…………………………………………………………………………………………………………………..19
F. DOCTRINES IN TAXATION…………………………………………………………………………………………………….20
1. Construction and Interpretation of Tax Laws, Rules, and Regulations.........................................................20
2. Prospectivity of Tax Laws .............................................................................................................................21
3. Imprescriptibility Of Taxes ............................................................................................................................21
4. Double Taxation............................................................................................................................................21
5. Escape from Taxation ...................................................................................................................................22
6. Exemption from Taxation .............................................................................................................................24
7. Equitable Recoupment .................................................................................................................................25
8. Prohibition on Compensation and Set-Off ...................................................................................................25
9. Compromise and Tax Amnesty .....................................................................................................................25

II. NATIONAL TAXATION……………………………………………………………………………………………………….29

A. TAXING AUTHORITY……………………………………………………………………………………………………………..30
1. Jurisdiction, Power, and Functions of the Commissioner of Internal Revenue ............................................30
2. Rule-Making Authority of the Secretary of Finance .....................................................................................31
B. INCOME TAX………………………………………………………………………………………………………………………..33
1. Definition, Nature, and General Principles ...................................................................................................33
2. Income ..........................................................................................................................................................40
3. Gross Income ................................................................................................................................................44
4. Deductions from Gross Income ....................................................................................................................58
5. Income Tax on Individuals ............................................................................................................................71
6. Income Tax on Corporations ........................................................................................................................79
7. Withholding Tax............................................................................................................................................86
C. VALUE-ADDED TAX (VAT)…………………………………………………………………………………………………………..87
1. Concept and Elements of Vatable Transactions ...........................................................................................87
2. Impact and Incidence of Tax .........................................................................................................................88
3. Destination Principle and Cross-Border Doctrine .........................................................................................88
4. Imposition of Vat on Transfer of Goods by Tax Exempt Persons (Technical Importation)...........................88
5. Transactions Deemed Sale Subject to VAT ...................................................................................................88
6. Zero-Rated and Effectively Zero-Rated Sales of Goods or Properties ..........................................................89
7. VAT-Exempt Transactions .............................................................................................................................89
8. Input and Output Tax ...................................................................................................................................94
9. Tax Refund or Tax Credit ..............................................................................................................................95
10. Filing of Returns and Payment ..................................................................................................................98
D. TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE……………………………………………..98
1. Assessment of Internal Revenue Taxes ........................................................................................................98
2. Taxpayer’s Remedies ..................................................................................................................................107

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3. Government Remedies for Collection of Delinquent Taxes .......................................................................117

4. Civil Penalties ..............................................................................................................................................124

III. LOCAL TAXATION…………………………………………………………………………………………………………..127

A. LOCAL GOVERNMENT TAXATION……………………………………………………………………………………………..128
1. General Principles .......................................................................................................................................128
2. Nature and Source of Taxing Power ...........................................................................................................128
3. Scope of Taxing Power ...............................................................................................................................129
4. Specific Taxing Power of Local Government Units [CoSCoR] .....................................................................129
5. Common Revenue Raising Powers .............................................................................................................129
6. Community Tax ...........................................................................................................................................129
7. Common Limitations on the Taxing Powers of Local Government Units ...................................................130
8. Requirements for a Valid Tax Ordinance ....................................................................................................131
9. Taxpayer's Remedies ..................................................................................................................................131
10. Assessment and Collection of Local Taxes ..............................................................................................136
B. REAL PROPERTY TAXATION………………………………………………………………………………………………………140
1. Fundamental Principles ..............................................................................................................................140
2. Nature.........................................................................................................................................................140
3. Imposition ...................................................................................................................................................140
4. Appraisal and Assessment ..........................................................................................................................143
5. Collection ....................................................................................................................................................144
6. Taxpayer’s Remedies ..................................................................................................................................147

IV. JUDICIAL REMEDIES………………………………………………………………………………………………………154

A. COURT OF TAX APPEALS (CTA)……………………………………………………………………………………………154
1. Exclusive Original and Appellate Jurisdiction over Civil Cases....................................................................154
2. Exclusive Original and Appellate Jurisdiction Over Criminal Cases ............................................................156
B. PROCEDURES……………………………………………………………………………………………………………………..157
1. Filing of an Action for Collection of Taxes ..................................................................................................157
2. Civil Cases ...................................................................................................................................................157
3. Criminal Cases ............................................................................................................................................159
4. Appeal to the CTA En Banc .........................................................................................................................159
5. Petition for Review on Certiorari to the SC ................................................................................................160

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I. GENERAL PRINCIPLES GENERAL PRINCIPLES

Definition
TOPIC OUTLINE UNDER THE SYLLABUS
Taxation is the power inherent in every sovereign
A. POWER OF TAXATION AS DISTINGUISHED State to impose a charge or burden upon persons,
FROM POLICE POWER AND EMINENT properties, or rights to raise revenues for the use and
DOMAIN support of the government to enable it to discharge
its appropriate functions.
B. INHERENT AND CONSTITUTIONAL
LIMITATIONS OF TAXATION Power by which an independent State, through its
lawmaking body, raises and accumulates revenue
C. REQUISITES OF A VALID TAX from its inhabitants to pay the necessary expenses of
the government. (51 Am. Jur. 341)
D. TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS Merely a way or mode of apportioning the cost of
government among those who in some measures are
E. KINDS OF TAXES privileged to enjoy its benefits and must bear its
burdens. (71 Am. Jur. 2d 342)
F. DOCTRINES IN TAXATION
1. Construction and interpretation of tax laws,
Three Elements of Taxation:
rules, and regulations
1. It is an enforced proportional contribution
2. Prospectivity of tax laws
3. Imprescriptibly of taxes from persons and properties;
4. Double taxation 2. It is imposed by the State by virtue of its
5. Escape from Taxation sovereignty;
a. Shifting of Tax Burden 3. It is levied for the support of the government.
b. Tax Avoidance (PCGG v. Cojuangco, G.R. No. 147062-64,
c. Tax Evasion 2001)
6. Exemption from Taxation
7. Equitable recoupment Nature
8. Prohibition on compensation and set-off
9. Compromise and Tax Amnesty 1. The power of taxation is inherent in sovereignty
as an incident or attribute thereof, being essential
to the existence of independent government. It
exists apart from the Constitution and is not being
expressly conferred by the people.

2. It is generally legislative in character but may be

delegated to the executive or administrative
departments.

Exceptions where delegation is allowed:

• To Local Government Units (LGUs) with
respect to matters of local concern. (SecS.
5 & 20, Art. X, Constitution);
• When it is allowed by the Constitution (Sec.
28(2), Art. VI, Constitution) such as when the
President can set tariff rates; and
• When the delegation relates merely to an
administrative implementation that may call
for some degree of discretionary powers
under a set of sufficient standards
expressed by law (Pelaez v. Auditor
General, G.R. No. L-23825, 1965), or
implied from the policy and purpose of the

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law (Maceda v. Macaraig, G.R. No. 88291,

1993). 1. Primary or Revenue-Raising Purpose:
Taxation is the power by which the sovereign
3. It is subject to constitutional and inherent raises revenue to defray the necessary expenses
limitations. of government.

Characteristics Taxes provide the funds or property with which to

promote the general welfare and protection of the
1. It must be used for public purpose. A tax shall be whole citizenry.
considered to have been utilized for public
purpose if the welfare of the nation or the greater 2. Secondary or Non-Revenue/Special or
portion of its population has benefited from it. Regulatory or Sumptuary Purpose:
(Gomez v. Palomar, G.R. No. L-23645, 1968; Phil Taxation is also used for regulatory purposes. It
Guaranty Co., Inc. v. CIR, G.R. No. L-22074, is used to attain non-revenue objectives and
1965). pursue policy decisions.
2. It is the strongest of all the inherent powers of the
government. (Sison v. Ancheta, G.R. No. L- Example:
59431, 1984) However, this does not mean that • Regulation of activities - Taxation could be a
tool to implement the State’s police power,
it is superior to the other inherent powers of the
such as imposing a tax on sale, lease or
government.
disposition of videograms primarily to
3. It is territorial in operations. The power to tax can answer the need to regulate the video
only be exercised within the territorial jurisdiction industry due in part to rampant film piracy,
of a taxing authority (51 Am. Jur. 88), except violation of intellectual property rights and
when it is subject to international comity or there proliferation of pornography. (Tio v.
exists privity of relationship between the taxing Videogram Regulatory Board, G.R. No.
State and the object of tax. 75967, 1987).
4. It is comprehensive as it covers persons, things
or property, privilege, occupation, profession or Promotion of general welfare - Taxation is done not
business, and transactions or activities. merely to raise revenues to support the government,
5. It is generally pecuniary in nature (i.e., payable in but also to provide means for the rehabilitation and
money). stabilization of a threatened industry (like coco levy
6. It is plenary in nature. As a General rule, the funds), which is affected with public interest. (PCGG
scope of the legislative power to tax is unlimited v. Cojuangco, G.R. No. 147062-64, 2001). In Lutz v.
and plenary. Acknowledging in its very nature no Araneta, (G.R. No. L-7859, 1955) tax was imposed
limits, the principal check against its abuse is to for the protection and promotion of sugar industry,
be found only in the responsibility of the and so the Court held that its promotion, protection
legislature. (Creba Inc. v. Romulo, G.R. No. and advancement, redounds greatly to the general
160756, March 9, 2010) welfare, hence it is valid.

The legislature, therefore, basically determines: A. POWER OF TAXATION AS

• The subjects (persons, property, DISTINGUISHED FROM POLICE
occupation, exercises, or privileges to be POWER AND EMINENT DOMAIN
taxed);
• Method of collection;
POWER OF POLICE EMINENT
• Purpose for which the tax shall be levied;
• Apportionment of tax (whether for general TAXATION POWER DOMAIN
application or limited to a particular locality);
• Amount or rate; CONCEPT
• Kind of tax to be collected; and
Power to Power to make Power to take
• Situs of taxation.
enforce and implement private property
contribution laws for the for public use
Purpose to raise funds general Welfare

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POWER OF POLICE EMINENT POWER OF POLICE EMINENT

TAXATION POWER DOMAIN TAXATION POWER DOMAIN

for with just excises that excises that

Government Compensation may be may be subject
subject thereto
SCOPE thereto
Plenary, Broader in Merely a power SUPERIORITY OF CONTRACTS
comprehensi application; to “take” private
ve General power property for Contracts Contracts may
to make and public use may be be impaired
implement laws impaired
unless (a)
EXERCISING AUTHORITY government
National and National May be granted is party to
Local Government or to public contract
Governments political service granting
subdivisions companies or exemption; or
public utilities (b) involves
franchise
PURPOSE
BENEFITS RECEIVED
Raise Exercised to The taking of
revenues promote property for Protection No direct or Just
public welfare public use and general immediate compensation
through benefits from benefit but only equivalent to
regulation the such as may fair market
government arise from the value of the
AMOUNT OF IMPOSITION maintenance of property
a healthy
No limit Limited to the No limit economic
cost of imposed, but standard of
regulation, the amount society
issuance of should be
license, or based on the RELATIONSHIP TO CONSTITUTION
surveillance fair market
value of the Subject to certain constitutional limitations
property

EFFECT

Becomes Restraint on the Transfer of

B. INHERENT AND CONSTITUTIONAL
part of public injurious use of right to the
LIMITATIONS OF TAXATION
fund property property

PERSONS AFFECTED The power of taxation is the strongest of all the

powers of the government. Nevertheless, effective
Applies to all Applies to all Only particular limitations thereon may be imposed by the people
through the Constitution. Accordingly, no matter how
persons, persons, property is
broad and encompassing the power of taxation, it is
property, and property, and covered still subject to inherent and constitutional limitations.

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Inherent Limitations In the case of Abakada Guro v. Executive

Secretary Ermita, (G.R. No. 168056, 2005) the
Public Purpose Court held that the Congress does not abdicate
Test: Whether the proceeds will be used for its functions or unduly delegate its power when it
something which is the duty of the State to provide. describes what job must be done, who must do
it, and what is the scope of his authority. There is
The public purpose of the tax law must exist at the no undue delegation of legislative power but only
time of its enactment. The money raised by taxation of the discretion as to the execution of a law.
can be expended only for public purposes and not for
the advantage of private individuals. Therefore, since 3. Delegation to administrative agencies
the appropriation sought a private purpose, it is null Administrative agencies are authorized to fix
and void. (Pascual v. Secretary of Public Works, within specified limits, tariff rates, import or export
G.R. No. L-10405, 1960) quotas, tonnage and wharfage dues and other
duties or imposts.
Inherently Legislative
Power of taxation cannot be delegated – this Territorial (see discussions on territoriality
contemplates the power to determine kind, object, principle and situs of taxation below)
extent, amount, coverage, and situs of tax. It must be
distinguished from power to assess and collect which International Comity
is exercised by the Executive through the BIR. A state must recognize the generally accepted tenets
of international law, they must accord each other as
However, it may be exceptionally delegated when: sovereign equals. This limits the authority of a
1. The delegation shall not contravene any government to effectively impose taxes on a
constitutional provision or inherent limitations of sovereign state and its instrumentalities, as well as
taxation; on its property held, and activities undertaken, in that
2. It is effected either by the Constitution or by capacity. (Vitug) For example, a property of a foreign
validly enacted legislative measures or statute; State or government may not be taxed by another
State.
and
3. Except when expressly provided by the
A state that has contracted valid international
Constitution, it should only be in favour of the
obligations is bound to make in its legislations those
local legislative body of the local or municipal modifications that ensure granting of reliefs under tax
government concerned. treaties. (Deutsche Bank v. CIR, G.R. No. 188550,
2010)
General rule – The power to tax is exclusively vested
in the legislative body, hence, it cannot be delegated. Exemption of Government Entities, Agencies,
(Delegata potestas non potest delegari) and Instrumentalities
Rationale: If the government taxes itself or if Local
Exceptions: Government Units tax the national government, it
1. Delegation to local governments would be akin to taking money from one pocket to the
It is in line with the principle that the power to other. Entities or agencies exercising sovereign
create municipal corporations for purposes of functions (acta jure imperii) are tax exempt, unless
local self-government carries with it the power to expressly taxed. Agencies performing proprietary
confer the power to tax on such local functions are subject to tax, unless expressly
governments. exempted.

2. Delegation to the President Government owned and controlled corporation

Certain aspects of the taxing process that are not performing proprietary functions are subject to taxes,
legislative in character may be vested to him, e.g. except those exempted under Section 27(C) of RA
delegation of tariff powers by Congress to the 8424 as amended by RA 9337 and RA 10963,
President under the flexible tariff clause (Sec. namely:
28(2), Art. VI, Constitution), and delegation of 1. GSIS
emergency powers (Sec. 23(2), Art. VI, 2. SSS
Constitution) 3. HDMF
4. PHIC
5. the local water districts

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The amendment reduced the list of exempt entities • Delegated by the Congress
by excluding therein the Philippine Amusement and • Through a law; the Tariff and Customs Code
Gaming Corporation. has provided for what has been termed as
the “flexible tariff clause” authorizing the
Instrumentality of the National Government is exempt President to modify import duties (Sec. 401,
from real property tax. (MIAA v. CA G.R. No. 155650, TCC)
2006) However, an instrumentality of the National • Subject to Congressional limits and
Government can be subject to tax if there is a restrictions
statutory authority to do so and if there is no express • Within the framework of national
provision against such act. development program

Constitutional Limitations Prohibition against taxation of religious,

Provisions directly affecting Taxation: charitable and educational entities/Exemption
1. Prohibition against imprisonment for from real property taxes (Sec. 28 [3], Art. VI,
non-payment of poll tax (Sec. 20, Art. Constitution)
III, Constitution)
However, the taxpayer can still be made to pay fines Exemption under Sec. 28(3), Art. VI pertains only to
and penalties for non-payment. real property tax (RPT).

Poll tax: cedula/residence tax (but in the US, it Summary

usually means the payment of tax to exercise the
right of suffrage.) WHO WHAT HOW
Exempt as long as it
Taxpayer may be imprisoned for non-payment of
other kinds of taxes where the law so expressly is used actually,
provides. directly and
exclusively (ADE)
Revenues
2. Uniformity and equality of taxation for educational
(Sec. 28 (1), Art VI, Constitution) purposes,
Uniformity: all articles or properties of the same Non-stock regardless of its
class taxed at the same rate. (Eastern Theatrical Co. non-profit source. (Sec. 4[3],
v. Alfonso, G.R. No. L-1104, 1949) educational Art. XIV,
institutions Constitution; DLSU
Equality: apportionment must be more or less just in v. CIR, 2016)
the light of taxpayer’s ability to shoulder tax burden.
Exempt from RPT as
The equal protection clause refers to like treatment in long as they are
like circumstances. Assets used ADE for
educational
The uniformity and equality clause refers to the purposes. Id.
proper relative treatment for tax purposes of persons Exempt from income
in like circumstances. Section 28 (1), Art. VI provides tax if they are
that Congress shall evolve a progressive system of organized and
taxation. Hence, the Constitution does not really operated exclusively
prohibit a regressive system of taxation. A
for charitable
progressive system of taxation means that as
purposes and no
resources of the taxpayer become higher, the tax rate Revenues
likewise increases. It is based on the ability to pay. Non-stock part of its net income
non-profit or asset inures to the
hospitals benefit of any
member, organizer,
Grant by Congress of authority to the President etc. (Sec. 30[E],
to impose tariff rates (flexible tariff clause) (Sec. NIRC)
28 (2), Art. VI, Constitution)
• Includes import and export quotas, tonnage Income from real or
and wharfage dues aside from tariff rates personal properties

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WHO WHAT HOW WHO WHAT HOW

or from activities part of its net income
conducted for profit, or asset inures to the
regardless of the benefit of any
disposition made of member, organizer,
such income, shall etc. (Sec. 30[E],
be subject to income NIRC).
tax. (Sec. 30, last
par., NIRC)
Exempt from RPT as If the non-profit
long as they are hospital/education
used ADE for institution earns
Assets income from its for-
charitable purposes.
(Sec. 28[3], Art. VI, profit activities, it will
Constitution) retain its tax
exemption for its
Exempt provided
charitable activities,
that is organized and but the income from
operated exclusively for-profit activities
for charitable will be subject to the
purposes and no preferential tax rate,
part of its net income provided that its
or asset inures to the gross income from
Revenues unrelated trade,
benefit of any
member, organizer, business or activity
etc. (Sec. 30[E], does not exceed
50% of its total gross
NIRC).
income.
Other non-
Income from real or
stock non- Exempt as long as
personal properties
profit the property is ADE
or from activities
charitable used for educational
conducted for profit,
institutions or charitable
regardless of the Assets
purposes. (Sec.
disposition made of
28[3], Art. VI,
such income, shall
Constitution)
be subject to income
tax. (Sec. 30, last
par., NIRC)
Exempt as long as Rules on Preferential Tax Rates shall apply to:
1. Proprietary Educational Institutions
the property is it
2. Hospitals which are non-profit
ADE used for
Assets 3. Non-stock, Non-Profit Educational
charitable purposes. Institutions whose net income or assets
(Sec. 28[3], Art. VI, accrue to or benefit a specific person
Constitution)
Revenues Exempt from income Provided, the gross income from unrelated trade,
tax if they are business or activity does not exceed 50% of its total
Proprietary gross income.
organized and
educational
operated exclusively
institutions Date Preferential Tax Rate
for charitable
purposes and no Prior July 1, 2020 10%1

1
Section 27(B) of the NIRC

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July 1, 2020 until June 1%2 previous provision, (Sec. 28[3], Art. VI, Constitution),
30, 2023 which pertains only to real property tax exemption
After June 30, 2023 10%3 granted to real properties that are used for religious,
charitable, or educational purposes.
RPT exemption covers charitable institutions,
churches, and parsonages or convents appurtenant Distinguish tax treatment of:
thereto, mosques and non-profit cemeteries and all • Proprietary educational institutions
lands, buildings and improvements actually, directly (Preferential tax rate of 10%, but beginning
and exclusively used for charitable, religious and July 1, 2020 until June 30, 2023, preferential
educational purposes. tax rate is 1%); and
• Government educational institutions (Tax-
Definition of Terms: exempt, e.g., UP)
• Charitable institution – essentially provide
for free goods and services to the public (to Majority vote of Congress for grant of tax
an indefinite number of persons) which exemption (Sec. 28 [4], Art. VI, Constitution)
would otherwise falls on the shoulders of the • Includes amnesties, condonations and
government. (CIR. v. St. Luke’s, G.R. No. refunds
203514, 2017) • Involves majority of all members voting
• Exclusive - possessed and enjoyed to the separately
exclusion of others; debarred from • Relative majority (majority of quorum) is
participation or enjoyment; and 'exclusively' sufficient to withdraw exemption
is defined, 'in a manner to exclude; as
enjoying a privilege exclusively.' . . The Prohibition on use of tax levied for special
words ‘dominant use’ or ‘principal use’ purpose (Sec. 29 [3], Art. VI, Constitution)
cannot be equated with ‘used exclusively’ Revenues derived for a special fund shall be
(CIR v. St. Luke’s, G.R. No. 203514, 2017) administered for the purpose intended only.

As for the income tax exemption of charitable Once the purpose is achieved, the balance, if any, is
institutions under the NIRC, a charitable institution to be transferred to the general funds of the
does not lose its character as such and its exemption government.
from taxes simply because it derives income from
paying patients, whether outpatient, or confined in President’s veto power on appropriation,
the hospital, or receives subsidies from the revenue, and tariff bills (Sec. 27 [2], Art. VI,
government, so long as the money received is Constitution)
devoted or used altogether to the charitable object The President shall have the power to veto any
which it is intended to achieve; and no money inures particular item or items in an appropriation, revenue,
to the private benefit of the persons managing or or tariff bill, but the veto shall not affect the item or
operating the institution (CIR v. St. Luke’s, G.R. No. items to which he does not object.
203514, 2017)
Grant of power to the local government units to
Prohibition against taxation of non-stock, non- create its own sources of revenue (Sec. 5, Art. X,
profit [educational] institutions (Sec. 4[3&4], Art. Constitution)
XIV, Constitution) Each local government unit shall have the power to
create its own sources of revenues and to levy taxes,
Test: How both the revenues and assets will be fees and charges subject to such guidelines and
used. limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes,
Exempts from taxes all revenues and assets of non- fees, and charges shall accrue exclusively to the
stock, non-profit educational institutions actually, local governments.
directly and exclusively used for educational
purposes. Flexible tariff clause (Sec. 28 [2], Art. VI,
Constitution)
Exemption covers income, real estate tax, donor’s The Congress may, by law, authorize the President
tax, and customs duties (distinguished from the to fix within specified limits, and subject to such

2 3
Id. Revenue Regulations No. 3-2022.

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limitations and restrictions as it may impose, tariff

SUBSTANTIVE PROCEDURAL
rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the
Should not be harsh, No arbitrariness in
framework of the national development program of
the Government. oppressive or assessment and
confiscatory collection
No appropriation or use of public money for (reasonableness)
religious purposes (Sec. 29 [2], Art. VI,
By authority of valid law Right to notice and
Constitution)
hearing
No public money or property shall be appropriated,
applied, paid, or employed, directly or indirectly, for
Must be for a public
the use, benefit, or support of any sect, church,
purpose
denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister, other Imposed within territorial
religious teacher, or dignitary as such, except when
jurisdiction
such priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium. No state may tax anything not within its jurisdiction
without violating the due process clause; the taxing
Tax bills should originate exclusively in the power of a state does not extend beyond its territorial
House of Representatives (Sec. 24, Art. VI, limits, but within such it may tax persons, property,
Constitution) income, or business. (Manila Gas v. Collector, G.R.
All appropriation, revenue or tariff bills, bills No. L-24780, 1936)
authorizing increase of the public debt, bills of local
application, and private bills shall originate Equal protection (Sec. 1, Art. III, Constitution)
exclusively in the House of Representatives, but the All persons subject to legislation shall be treated
Senate may propose or concur with amendments. alike, under like circumstances and conditions both
in privileges conferred and liabilities imposed. (Sison,
It is not the law but the initiative for filing revenue, Jr. v. Ancheta, G.R. No. L-59431, 1984)
tariff, or tax bills, bills authorizing an increase of the
No violation of equal protection when there is proper
public debt, private bills and bills of local application
classification made.
that is required by the Constitution to “originate
exclusively” in the House of Representatives, but the Equality and uniformity of taxation means that all
Senate has the power not only to propose taxable articles or kinds of property of the same class
amendments, but also to propose its own version. be taxed at the same rate. The taxing power has the
(ABAKADA Guro Partylist v. Executive Secretary authority to make reasonable and natural
G.R. No. 168056, 2005) classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance
Judicial power to review legality of tax (Sec. 5 applies equally to all persons, forms and corporations
(2b), Art. VIII, Constitution) placed in similar situation. (Tolentino v. Secretary of
The Supreme Court shall have the power to review, Finance, G.R. No. 115455, 1995)
revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may A tax is uniform when it operates with the same force
provide, final judgments and orders of lower courts in and effect in every place where the subject of it is
all cases involving the legality of any tax, impost, found. Uniformity means that all property belonging
assessment, or toll, or any penalty imposed in to the same class shall be taxed alike The Legislature
relation thereto. has the inherent power not only to select the subjects
of taxation but to grant exemptions. Tax exemptions
have never been deemed violative of the equal
protection clause. (CIR v. Lingayen Gulf Electric
Power Co., Inc., G.R. No. L-23771, 1988)

Provisions indirectly affecting Taxation:

The classification to be valid must:
Due process (Sec. 1, Art. III, Constitution) 1. Rest on substantial distinctions;
2. Be germane to the purpose of the law;

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3. Not be limited to existing conditions only; that other corporations that are excluded from the list
and import food grade wheat; at the same time, it creates
4. Apply equally to all members of the an assumption that those who meet the criteria do not
same class. import feed grade wheat. In the first case, importers
are unnecessarily burdened to prove the
classification of their wheat imports; while in the
Examples:
second, the state carries that burden. (CIR v.
There are substantial differences between the big
Hypermix Feeds Corporation, G.R. No. 179579,
investors who are being lured to establish and
2012)
operate their industries in the special economic
zones and those business operators outside the
Religious freedom (Sec. 5, Art III, Constitution)
zones. One of these is that the former bring in billion-
The constitutional guaranty of the free exercise and
peso investments and thousands of new jobs. The
enjoyment of religious profession and worship carries
Supreme Court also stated that the equal protection
with it the right to disseminate religious information.
guarantee does not require territorial uniformity of
(American Bible Society v. City of Manila, G.R. No. L-
laws. The classification applies equally to all the
9637, 1957) Activities that are simply and purely for
resident individuals and businesses within the
propagation of faith are exempt.
"secured area." The residents, being in like
circumstances or contributing directly to the
Tax is unconstitutional if it operates as a prior
achievement of the end purpose of the law, are not
restraint on exercise of religion or favors a certain
categorized further. Instead, they are all similarly
religion (non-establishment of religion).
treated, both in privileges granted and in obligations
required. (Tiu v. CA, G.R. No. 127410,1999)
Income of religious organizations from any activity
conducted for profit or from any of their property, real
There is a valid classification of BIR and BOC
or personal, regardless of disposition of such income,
employees as public officers in R.A. 9335 since the
is taxable.
subject of the law is the revenue-generation
capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law Non-impairment of obligations of contracts (Sec.
should logically pertain to the said agencies. 10, Art. III, Constitution)
Moreover, the law concerns only the BIR and the Applies only when government is party to the contract
BOC because they have the common distinct primary granting exemption.
function of generating revenues for the national
government through the collection of taxes, customs Exception: In case of franchise tax. The Constitution
duties, fees and charges. Hence, the classification provides that franchise is subject to amendment,
and treatment fully satisfied the demads of equal alteration, or repeal by Congress.
protection. (BOCEA v. Teves, G.R. No. 181704,
2011) Contractual tax exemptions, in the real sense of the
term and where the non-impairment clause of the
There is substantial distinction between Constitution can rightly be invoked, are those agreed
compensation and taxable net income of to by the taxing authority in contracts, such as those
professionals and businessman. Taxpayers who are contained in government bonds or debentures,
recipients of compensation income practically have lawfully entered into by them under enabling laws in
no overhead expense and are not entitled to make which the government, acting in its private capacity,
deductions for income tax purposes. On the other sheds its cloak of authority and waives its
hand, in the case of professionals in the practice of governmental immunity. These contractual tax
their calling and businessmen, there is no uniformity exemptions, however, are not to be confused with tax
in the costs or expenses necessary to produce their exemptions granted under franchises. A franchise
income. It would not be just then to disregard the partakes the nature of a grant which is beyond the
disparities by giving all of them zero deduction and purview of the non-impairment clause of the
indiscriminately impose on all alike the same tax Constitution. (MERALCO v. Province of Laguna,
rates on the basis of gross income. (Sison, Jr. v. G.R. No. 131359, 1999)
Ancheta, G.R. No. L-59431, 1984)
A tax exemption may be modified or withdrawn at will
However, there is no valid classification of wheat that by the granting authority being a mere statutory
is classified as food grade or feed grade. The privilege. A tax exemption cannot be grounded upon
application of the regulation forecloses the possibility the continued existence of a statute which precludes
its change or repeal. The tax exemption contained in

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the Certificates of Registration may have been part reimbursement for the costs and expenses incurred
of the inducement for carrying the businesses, this in the construction, maintenance and operation of the
exemption, nevertheless, is far from being tollways, as well as to assure them a reasonable
contractual in nature in the sense that the non- margin of income. Although toll fees are charged for
impairment clause of the Constitution can rightly be the use of public facilities, therefore, they are not
invoked. (Republic v. Caguioa, G.R. No. 168584,
government exactions that can be properly treated as
2007)
a tax. Taxes may be imposed only by the government
C. REQUISITES OF A VALID under its sovereign authority, toll fees may be
demanded by either the government or private
TAXATION
individuals or entities, as an attribute of ownership.
(Diaz v. Secretary of Finance, G.R. No. 193007,
1. Must be for a public purpose;
2011)
2. Should be uniform and equitable;
3. Either the person or property taxed is within the
License Fee
jurisdiction of the taxing authority;
4. Complies with the requirements of due process; TAX LICENSE FEE
and
5. Does not infringe any constitutional or inherent Source of Exercise of Emanate from the
limitations. authority Taxing power police power of the
State
D. TAX AS DISTINGUISHED FROM Purpose Raise revenue Regulation
OTHER FORMS OF EXACTIONS
Object Persons, property Right to exercise a
Customs Duty/Tariff and privilege privilege
TAX CUSTOMS DUTY Amount No limit Only necessary to
carry out regulation
Coverage More Importation or
comprehensive export of goods
than customs Distinction lies in the primary purpose:
duty • The primary purpose of license fees is for
regulation and the excess of the amount
Object Persons, Goods imported or collected, from the cost to carry out the
property, etc. exported regulation, should be minimal and incidental.
• Tax’s primary purpose, or at least one of the
real and substantial purposes, is to raise
Toll revenue.
TAX TOLL • If amount is too high for regulation and/or the
amount levied is not related to costs of
Kind of Demand of Demand of regulation, it would be a tax.
demand sovereignty ownership
Purpose of distinction: limitations and exemptions
Purpose Support of Collection for the apply only to one and not to the other (ex. Exemption
government use of property from taxation does not include exemption from fees).

Amount No limit – Fair return of the Royalty fees are regulatory fees. Clark Special
depends on need cost of the property Economic Zone (“CSEZ”) imposes payments on the
movement of petroleum fuel to and from the
of the government or improvement
economic zone. Specifically, CSEZ provides for the
payment of accreditation fees, annual inspection
Tollway fees are not taxes. A tax is imposed under fees, royalty fees and gate pass fees. Chevron is a
the taxing power of the government principally for the domestic company located within the economic zone.
purpose of raising revenues to fund public CSEZ billed Chevron for royalty fees at 0.50/liter.
(Chevron Philippines v. BCDA, G.R. No.
expenditures. Toll fees, on the other hand, are
173863,2010)
collected by private tollway operators as

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Effect Imprisonment is No imprisonment

The imposition of capital contribution component of
sanction for non- for non-payment
P10 per bag was an exercise by the State of its
taxation power. While it is true that the power of payment
taxation can be used as an implement of police
power, the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if
E. KINDS OF TAXES
revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. 1. As to subject matter or object
(Planters Products, Inc. v. Fertiphil Corp., G.R. No. a. Personal, Capitation, or Poll Tax
166006, 2008) • Fixed amount
• Individuals residing within specified
There is no logic or justification in exacting territory
employment permit fee from aliens. The imposition is • Without regard to their property,
not regulatory but a revenue measure. It follows then occupation or business
that the permit fee is essentially a tax for the purpose
of raising money under the guise of regulation. Example: Community Tax (Cedula)
(Villegas v. Hiu Tsai, L-29646, 1978)
b. Property Tax
Special Assessment • Imposed on property, real or personal
• In proportion to its value or other
TAX SPECIAL
reasonable method of apportionment
ASSESSMENT
Example: Real estate tax
Imposed Persons, Only on land
on properties, etc. c. Excise/Privilege tax
• Imposed upon the performance of an
Why For public Public improvement
act, the enjoyment of a privilege or the
imposed purpose that benefits the engagement in an occupation,
regardless land profession or business
who/what will • This is different from the excise tax of
benefit Title VI of the NIRC

Purpose To support the Contribution to cost Example: Income tax, VAT, estate tax, donor’s tax or
general purposes of public basically all the taxes under the Tax Code
of government improvement
2. As to who bears the burden or incidence
When Regular exaction Exceptional as to a. Direct - imposed on the person who also
imposed time and locality bears the burden thereof
Basis Necessity Benefits obtained
Example: income tax, community tax, estate tax

Debt b. Indirect - imposed on the taxpayer who shifts

the burden of the tax to another (Maceda v.
TAX DEBT Macaraig, Jr., 1991)

Example: VAT, specific tax, percentage tax,

Source Law; legal Based on contract
customs duties
obligation
General rule: The proper party to seek a refund is
Nature Personal Assignable
the statutory taxpayer. (Silkair v. CIR, G.R. No.
Right to Generally not May be the subject 173594, 2008)
set-off subject to of compensation/
Exception: if the law confers exemption from both
compensation/ set-off direct or indirect taxes, claimant is entitled to a refund
set-off even if claimant is not the statutory taxpayer but only

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bears the economic burden of the tax. (Philippine

Airlines v. CIR, G.R. No. 198759, 2013) c. Flat - based on a fixed percentage of the
amount of the property, income or other
3. As to tax rates or determination of amount basis to be taxed
a. Specific - tax imposed and based on a
physical unit of measurement, as by head, Example: Real estate tax, VAT, percentage tax
number, weight, length or volume
d. Mixed - the tax rates are partly progressive
Example: Tax on distilled spirits, fermented liquors, and partly regressive.
cigars
F. DOCTRINES IN TAXATION
b. Ad Valorem - tax of a fixed proportion of the
value of property with respect to which the 1. Construction and Interpretation
tax is assessed; requires intervention of of Tax Laws, Rules, and
assessor. Regulations
Example: Real estate tax, excise tax on cars, non- Tax Laws
essential goods Tax laws must be construed strictly against the
government and liberally in favor of the taxpayer.
c. Mixed (MCIAA v. Marcos, G.R. No. 120082, 1996)

4. As to purposes Where the language of the tax statute is plain and

a. General, fiscal or revenue- imposed for the there is no doubt as to the legislative intent. In such
general purpose of supporting the case, the words employed are to be given their
government ordinary meaning.

Example: Income tax, percentage tax Taxes, being burdens, are not to be presumed
beyond what the statute expressly and clearly
b. Special or regulatory - imposed for a special declare.
purpose, to achieve some social or
economic objectives Tax statutes offering rewards are liberally construed
in favor of informers.
Example: Protective tariffs or customs duties
Tax Exemptions and Exclusions
5. As to scope or authority to impose General rule: Exemptions are not favored and are
a. National - imposed by the national construed strictissimi juris against the taxpayer.
government
An exemption from the common burden cannot be
Example: National internal revenue taxes, custom permitted to exist upon vague implication or
duties inference.

b. Municipal or local - imposed by the municipal Taxation is the rule while exemption is the exception.
corporations or local governments Therefore, whoever claims exemption must be able
to justify his claim or right thereto, by a grant
Example: Real estate tax, occupation tax expressed in terms “too plain to be mistaken and too
categorical to be misinterpreted.”
6. As to graduation of rate (three systems of
taxation) If not expressly mentioned by law, it must at least be
a. Progressive or graduated - tax rate within its purview by clear legislative intent.
increases as the tax base or bracket
increases Claims for refund partake of the nature of tax
exemptions and will not be allowed unless granted in
Example: Income tax, estate tax, donor’s tax the most explicit and categorical language.

b. Regressive - tax rate decreases as the tax Exceptions:

base increases

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1. When the law itself expressly provides implication not so intended by the legislative body.
for a liberal construction, that is, in case (People v. Martin, G.R. No. L-38019, 1980)
of doubt, it shall be resolved in favor of
exemption. 2. Prospectivity of Tax Laws
2. When the exemption is in favor of the
government itself or its agencies
This principle provides that a tax law must only be
because the General rule is that they are
applicable and operative prospectively.
exempt from tax
3. When the exemption refers to religious,
Taxes may be imposed retroactively by law, but
charitable and educational institutions
unless so expressed by such law, these taxes must
4. When there is an express mention or
only be imposed prospectively. (Hydro Resources v.
when the taxpayer falls within the
CA, G.R. No. 80276, 1990)
purview of the exemption by clear
legislative intent, the rule on strict
Ex post facto is not applicable for tax purposes.
construction does not apply.
However, when it comes to civil penalties like fines
and forfeiture (except interest), tax laws may provide
Tax Rules and Regulations and allow its application retroactively, unless it
The construction placed by the office charged with produces harsh and oppressive consequences which
implementing and enforcing the provisions of the violate the taxpayer’s constitutional rights regarding
NIRC should be given controlling weight unless such equity and due process. (Fernandez v. Fernandez,
interpretation is clearly erroneous. G.R. No. L-9141, 1956; CIR v. Filipinas Compañas
de Seguros, G.R. No. 14880, 1960)
Taxpayers cannot be deprived of their entitlement to
the benefit of a treaty for failure to strictly comply with 3. Imprescriptibility Of Taxes
an administrative issuance requiring the prior
application for tax treaty relief. At most, the
Although the NIRC provides for the limitation in the
application for a tax treaty relief from the BIR should
assessment and collection of taxes imposed, such
merely operate to confirm the entitlement of the
will only be applicable to those taxes where a tax
taxpayer to the relief. The denial of a tax relief based
return is required. The prescriptive period shall start
on a tax treaty due to the failure of a taxpayer to
from the time the taxpayer files the tax return and
comply with a RMO would impair the value of the tax
declares his liability. (Bisaya Land Transportation Co.
treaty and the State’s duty to comply in good faith
v. Collector of Internal Revenue, G.R. Nos. L-12100
with the tax treaty. (Deutsche Bank AG Manila v. CIR,
& L-11812, 1959).
G.R. No. 188550, 2013)
Unless otherwise provided by the tax law itself, taxes
Non-retroactivity of Rulings (Sec. 246) - Any
in general are imprescriptible. (CIR v. Ayala
revocation, modification or reversal of any of the rules
Securities Corporation, G.R. No. L-29485, 1976)
and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars
The law on prescription being a remedial measure
promulgated by the Commissioner shall not be given
should be interpreted liberally in favor of the taxpayer
retroactive application if the revocation, modification
in order to protect the taxpayer. (Republic v. Ablaza,
or reversal will be prejudicial to the taxpayers, except
G.R. No. L-14519, 1960)
in the following cases:
1. Where the taxpayer deliberately misstates
or omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
2. Where the facts subsequently gathered by
the Bureau of Internal Revenue are 4. Double Taxation
materially different from the facts on which
the ruling is based; or a. Direct Double Taxation (Strict sense)
3. Where the taxpayer acted in bad faith.
The same property is taxed twice when it should be
Penal Provisions of Tax Laws taxed only once.
Strict construction so as not to extend the plain terms
thereof that might create offenses by mere Both taxes must be imposed:

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• On the same property or subject matter; c. Tax treaties as relief from double taxation
• For the same purpose;
• By the same taxing authority; Modes of eliminating Double Taxation
• Within the same jurisdiction or taxing district 1. Provide for exemptions or allowance of deduction
and during the same period; and or tax credit for foreign taxes;
• They must be of the same kind or character 2. Enter into treaties with other states (e.g., former
of tax. (Villanueva v. City of Iloilo, G.R. No. Phil-Am Military Bases Agreements as to income
L-26521, 1968) tax); or
3. Apply the principle of reciprocity.
b. Indirect double taxation (Broad sense)
In the case of CIR v S.C. Johnson & Sons, Inc., (G.R.
It means indirect duplicate taxation. It extends to all
No. 127105, 1999), International Juridical Double
cases in which there are two or more pecuniary
Taxation is defined as an imposition of comparable
impositions. The Constitution does not prohibit the
taxes in two or more States on the same taxpayer in
imposition of double taxation in the broad sense.
respect of the same subject matter and for identical
periods. In order to eliminate double taxation, a tax
Constitutionality of Double Taxation
treaty is entered into by the two contracting States.
There is no constitutional prohibition against double
The apparent rationale for doing away with double
taxation (broad sense) in the Philippines. It is
taxation is to encourage the free flow of goods and
something not favored, but is permissible, provided
services and the movement of capital, technology
some other constitutional requirement is not thereby
and persons between countries, conditions deemed
violated, such as the requirement that taxes must be
vital in creating robust and dynamic economies.
uniform. (Villanueva v. City of Iloilo, G.R. No. L-
26521, 1968)
5. Escape from Taxation
Double taxation (strict sense) becomes obnoxious
only where the taxpayer is taxed twice for the benefit a. Shifting of tax burden
of the same governmental entity or by the same
jurisdiction for the same purpose but not in a case The imposition of tax is transferred from the statutory
where one tax is imposed by the State and the other taxpayer to another without violating the law.
by the city or municipality. (Pepsi-Cola v. Tanauan,
G.R. No. L-31156, 1976) Taxes that can be shifted
1. VAT
There is no double taxation in the following cases: 2. Percentage tax
• By taxing corporate income and 3. Excise tax on excisable articles
stockholders’ dividends from the same 4. Ad valorem taxes that oil companies pay to
corporation; BIR upon removal of petroleum products
• Tax imposed by the State and the local from its refinery
government upon the same occupation,
calling or activity; Meaning of impact and incidence of taxation
• License fees and taxes on sales of general • Impact of Taxation – point on which the tax
merchandise on the same business or is originally imposed or the one on whom the
occupation, or for selling the same article. tax is formally assessed.
(Compañia General De Tobacos De
Filipinas v. City of Manila, G.R. No. L-16619, • Incidence of Taxation – point on which the
1963); tax burden finally rests or settles down.
• Real estate tax and income tax collected on
the same real estate property leased for Example: VAT is originally assessed against the
earning purposes (Villanueva v. City of Iloilo, seller who is required to pay the said tax, but the
G.R. No. L-26521, 1968); and burden is actually shifted or passed on to the buyer.
• Taxes are imposed on taxpayer’s final
product and the storage of raw materials It is important to know where the impact of taxation
used in the production of the final product lies (i.e. who the statutory taxpayer is) because it will
(Procter and Gamble Philippines v. generally determine:
Municipality of Jagna, G.R. No. L-24265, 1. The proper party to claim a refund of
1979). erroneously imposed indirect taxes; and

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2. Whether the indirect taxes can be passed on Penalty Punishable by Not punishable by
to an exempt buyer. law law
Object To escape To minimize
b. Tax Avoidance payment of taxes payment of taxes

Tax avoidance – also called tax minimization, is a Willful Blindness Doctrine

tax saving device that is legally permissible An individual or corporation can no longer say that
the errors on their tax returns are not their
The Court held that tax avoidance is the use of a tax responsibility or that it is the fault of the accountant
saving device within the means sanctioned by law. they hired.
Any tax avoidance scheme should be used by the
taxpayer in good faith and at arm’s length (CIR v An act is willful if it is “voluntary, conscious and
Estate of Benigno Toda Jr., G.R. 147188, 2004) intentional.” Bad motive or intent to defraud need not
be shown. The only thing that needs to be shown is
When a merger or reincorporation is undertaken for that the taxpayer is aware of his/her obligation to file
a bona fide purpose and not solely for the purpose of annual income tax returns but “she nevertheless,
escaping the burden of taxation, it is not evasion. voluntarily, knowingly and intentionally failed to file
The questioned merger involved a pooling of the required returns.” (People v. Kintanar, CTA E.B.
resources aimed at the continuation and expansion No. 006, 2010, affirmed by the SC in 2012)
of business and so came under the intendment of the
NIRC exempting from the capital gains tax However, in the case of People v. Judy Ann Santos
exchanges of property effected under lawful (CTA Case No. 012, 2013), affirmed by the SC in
corporate combinations. (Commissioner v. Rufino, 2013, the CTA Division acquitted Santos although
G.R. No. L-33665-68, 1987) the BIR asserted the same arguments it made in the
Kintanar case. Santos was charged with failure to
c. Tax Evasion supply correct and accurate information in her ITR.
She claimed that by virtue of trust, respect and
Tax evasion – conNotes fraud through the use of confidence, she entrusted her finances to her
pretenses and forbidden devices to lessen or defeat manager since she was a child. Here, the CTA
taxes; must be willful and intentional Division found that the element of willfulness and
motive to commit fraud were wanting and that Santos
It conNotes the integration of three factors: was merely negligent. Unlike Santos, who did not
1. End to be achieved, i.e., the payment of less know any better, Kintanar was an experienced
than that known by the taxpayer to be legally businesswoman who ought to have known and
due, or the non-payment of tax when it is shown understood all the matters concerning her business,
that a tax is due; including knowledge and awareness of her tax
obligations concerning her business and should have
2. Accompanying state of mind which is
ensured the correct filing of her returns.
described as being "evil," in "bad faith," "willful,"
or "deliberate and not accidental"; and
People v. Kintanar People v. Santos
3. Course of action or failure of action, which
is unlawful. (Toda, Jr. v. CA, G.R. No. 78583, Tax evasion conNotes the integration of the three
1990). factors.
All elements are Lacks the element of
present willfulness
“Willful" in tax crimes The element of willful
means voluntary, failure to supply correct
Tax Evasion v. Tax Avoidance intentional violation of and accurate
a known legal duty, information must be fully
TAX EVASION TAX AVOIDANCE
and bad faith or bad established as a
Other Tax Dodging Tax Minimization
purpose need not be positive act or state of
Name
shown mind. It cannot be
Means Use Illegal Use legal means presumed nor attributed
means to mere inadvertent or
negligent acts.

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People v. Kintanar People v. Santos Nature of Tax Exemption

Involves non-filing of Involves failure to Exemption from taxes is personal in nature and
Income Tax Return. supply correct and covers only taxes for which the taxpayer-grantee is
directly liable. In any case, it cannot be transferred or
accurate information.
assigned by the person to whom it is given without
The elements of a Mere understatement of the consent of the State.
violation of Section 255 a tax is not itself proof of
of the NIRC for failure fraud for the purpose of Tax exemptions are strictly construed against the
to make or file a return tax evasion. taxpayer because such provisions are highly
are: disfavored and may almost be said to be odious to
The elements of a the law. (Manila Electric Company v. Vera, G.R. No.
1. The accused is a violation of Section 255 L-29987, 1975)
person required to of for failure to supply
make or file a return; correct and accurate Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
information are:
taxation, the exception.
2. The accused failed
to make or file the 1. That a person is General rule: Exemptions are not presumed.
return at the time required to supply Exception: When public property is involved (i.e.,
required by law; correct and accurate exemption is the rule, and taxation, the exception)
information;
3. The failure to make There can be no simultaneous exemptions under two
or file the return was 2. That there is failure to laws, one partial and the other total.
willful. supply correct and
accurate information at Kinds of Tax Exemption
1. Express (or affirmative) – when certain
the time or times
persons, property or transactions are, by
required by law or rules express provision, exempted from all or
and regulations; and certain taxes, either entirely or in part.

3. That such failure to Examples of Statutory Tax Exemptions:

supply correct and • Intercorporate dividends by a domestic
accurate information is corporation from another domestic
done willfully. corporation4
• Dividends received by a domestic
6. Exemption from Taxation corporation from foreign-sourced
dividends subject to certain conditions
provided under Section 27(D)(4)5
Tax Exemption
• Section 234 of the Local Government
The grant of immunity to particular persons or
Code
corporations or to persons or corporations of a
particular class from a tax which persons and • Other special laws such as Omnibus
corporations generally within the same state or taxing Investment Code of 1987 and Philippine
district are obliged to pay. It is an immunity Overseas Shipping Act
or privilege; it is freedom from a financial charge or
burden to which others are subjected. (Greenfield v. 2. Implied (or by omission) – when a tax is
Meer, G.R. No. 156, 1946) levied on certain classes of person,
properties or transactions without

4
SEC. 27 (D) (4) Intercorporate Dividends. - Dividends foreign-sourced dividends were received and shall be
received by a domestic corporation from another domestic limited to funding the working capital requirements,
corporation shall not be subject to tax. capital expenditures, dividend payments, investment in
5
Conditions provided under Section 27(D)(4) to exepmt from domestic subsidiaries, and infrastructure project;
income tax corporate dividends received by Domestic 2. The domestic corporation holds directly at least 20% of
Corporation from Foreign Corporations: the outstanding shares of the foreign corporation
1. The funds from such dividends actually received or 3. The domestic corporation held the shareholdings for a
remitted into the Philippines are reinvested in the minimum of 2 years at the time of the dividends
business operations of the domestic corporation in the distribution.
Philippines within the next taxable year from the time the

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mentioning the other classes. Every tax is not allowed in the Philippines and is applied in
statute makes exemptions since all those common law countries.
not mentioned are deemed exempted. The
omission may either be accidental or 8. Prohibition on Compensation
intentional. and Set-Off
3. Contractual – those lawfully entered into by Taxes are not subject to set-off or legal
the government in contracts under existing compensation because the government and the
laws. These exemptions must not be taxpayer are not mutual creditor and debtor of each
confused with the tax exemptions granted other. (Republic v. Mambulao Lumber Co., G.R. No.
under franchises, which are not contracts L-17725, 1962; Caltex Phils. v. COA, G.R. No.
within the context of non-impairment clause 92585, 1992)
of the Constitution. (Cagayan Electic Co. v.
CIR, G.R. No. L-60126, 1985) Taxes are not subject to set-off or compensation for
the following reasons:
Rationale/grounds for exemption 1. Taxes are of distinct kind, essence and nature,
A presumption that the public interest will be and these impositions cannot be classed in
subserved by the exemption allowed. Grant of merely the same category as ordinary
exemption rests upon that such will benefit the body obligations;
of the people and not upon any idea of lessening the 2. The applicable laws and principles governing
burden of the individual owners of property. each are peculiar, not necessarily common, to
each other; and
Purpose is some public benefit or interest, which the 3. Public policy is better subserved if the integrity
law-making body considers sufficient to offset the and independence of taxes are maintained.
monetary loss entailed in the grant of exemptions. (Republic v. Mambulao Lumber Co., G.R. No. L-
17725, 1962)
Created in a treaty on grounds of reciprocity or to
lessen the rigors of the international double or A person cannot refuse to pay tax on the basis that
multiple taxation. the government owes him an amount equal to or
greater than the tax being collected. The collection
Equity is not a ground for tax exemption. of a tax cannot await the results of a lawsuit against
the government. (Philex Mining Corp. v. CIR, G.R.
Revocation of tax exemption No. 125704, 1998; Francia v. Intermediate Appellate
Tax exemption is generally revocable. The Court, G.R. No. L-67649, 1988)
congressional power to grant an exemption
necessarily carries with it the consequent power to In several cases, as an exception to offsetting, the
revoke the same. Court have allowed the determination of the
taxpayer’s liability in a refund case, thereby allowing
In order to be irrevocable, the tax exemption must be the offsetting taxes. In these cases, offsetting was
founded on a contract or granted by the Constitution. allowed because the determination of the taxpayer’s
liability is intertwined with the resolution for the claim
By way of exception, a contractual tax exemption of refund.
obtained from the State for a valid and material
consideration of a mutual nature cannot be revoked In the case of TPC, where in it filed a claim for refund
without impairing the obligation of contracts under the or credit under Sec. 112 of the NIRC while the issue
Constitution. (Mactan Cebu Int’l Airport Authority v. to be resolved is whether TPC is entitled of its
Marcos, G.R. No. 120082, 1996; MERALCO v. unutilized input VAT, the offsetting was not allowed.
Province of Laguna, G.R. No. 131359, 1999) The Court held that, since it is not a claim for refund
under Section 229 of the NIRC, the correctness of
7. Equitable Recoupment TPC's VAT returns is not an issue. Hence, the
determination of the taxpayer’s liability was not
When a taxpayer is entitled to a claim for refund but related with the resolution of the claim for refund or
he was not able to file a written claim within the credit offsetting was also not an issue. (CIR v. Toledo
prescribed time, the taxpayer is allowed to credit the Power Company, G.R. No. 196415, 2015)
amount for refund against his existing liability. This
9. Compromise and Tax Amnesty

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AMNESTY EXEMPTION
Compromise penalties
Generally allowed and enforceable when the subject under the
matter thereof is not prohibited from being NIRC (Rule V,
compromised and the person entering such Sec 10(1))
compromise is duly authorized to do so. To whom General To persons
granted pardon given exempted by
The BIR Commissioner as expressly authorized by to all law.
the NIRC subject to certain conditions is allowed to taxpayers.
compromise on behalf of the government. A freedom
from a charge
Tax Amnesty or burden to
It is the general or intentional overlooking by the which others
State of its authority to impose penalties on persons are subjected.
otherwise guilty of evasion or violation of a revenue Application Applies only to Generally
or tax law. It partakes of an absolute forgiveness or past tax prospective in
waiver of the Government of its right to collect. It is periods hence, application.
a way to give tax evaders who wish to relent and are retroactive
willing to reform a chance to do so. application.
Presence of Yes, there is None,
It refers to the articulation of the absolute waiver by a Actual revenue loss because there
sovereign of its right to collect taxes and power to Revenue since there was no actual
impose penalties on persons or entities guilty of Loss was actually taxes due as
violating a tax law. Tax amnesty aims to grant a taxes due but the person or
general reprieve to tax evaders who wish to come collection was transaction is
clean by giving them an opportunity to straighten out waived by the protected by
their records. Amnesty taxpayers may immediately government. tax exemption
enjoy the privileges and immunities under a Tax
Amnesty Law, provided they fulfill the suspensive “Shall cover all
conditions imposed therein. (CS Garment, Inc. v. national
CIR, G.R. No. 182399, 2014) internal
revenue taxes
A tax amnesty, much like a tax exemption, is never for the taxable
favored or presumed in law. The grant of a tax year 2005 and
amnesty, similar to a tax exemption, must be prior years”
construed strictly against the taxpayer and liberally in (Rule II, Sec 3)
favor of the taxing authority. (Asia International
Auctioneers v. CIR, G.R. No. 179115, 2012)
When enjoyment of the immunities and privileges
begins:
Distinguished from tax exemption
Neither the 2007 Tax Amnesty Law nor Department
AMNESTY EXEMPTION of Finance (DOF) Order No. 29-07 (IRR of the Tax
Scope of Immune from Immunity from Amnesty Law) imposes a waiting period of one year
immunity the payments civil liability before the applicant can enjoy the benefits of the Tax
of taxes, as only. Amnesty Law.
well as
additions It can be surmised from the provisions of the law that
thereto, and the law intended the immediate enjoyment of the
the immunities and privileges of tax amnesty upon
appurtenant fulfilment of the requirements.
civil, criminal
or The one-year period referred to in the law should thus
administrative be considered only as a prescriptive period within

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which third parties (i.e., "parties other than the BIR or

its agents") can question the SALN – not as a waiting
period during which the BIR may contest the SALN
and the taxpayer prevented from enjoying the
immunities and privileges under the law. (CS
Garment, Inc. v. CIR, G.R. No. 182399, 2014)

-- end of topic –

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II. NATIONAL TAXATION a. Concept of Return of Capital

b. Itemized Deductions vs. Optional
Standard Deduction
TOPIC OUTLINE UNDER THE SYLLABUS c. Items Not Deductible
5. Income Tax on Individuals
A. TAXING AUTHORITY a. Resident Citizens, Non-Resident
1. Jurisdiction, Power, and Functions of the Citizens, and Resident Aliens
Commissioner of Internal Revenue (1) Inclusions and Exclusions for
a. Interpreting Tax Laws and Deciding Tax Taxation on Compensation Income
Cases (2) Taxation of Business
b. Non-Retroactivity of Rulings Income/Income from Practice of
2. Rule-Making Authority of the Secretary of Profession
Finance (3) Taxation of Passive Income
(4) Taxation of Capital Gains
B. INCOME TAX (5) Capital Asset vs. Ordinary Asset
1. Definition, Nature, and General Principles b. Income Tax on Non-Resident Aliens
a. Criteria in Imposing Philippine Income Engaged in Trade or Business
Tax c. Income Tax on Non-Resident Aliens Not
b. Types of Philippine Income Taxes Engaged in Trade or Business
c. Taxable Period d. Individual Taxpayers Exempt from
d. Kinds of Taxpayers Income Tax
2. Income (1) Senior Citizens
a. Definition and Nature (2) Minimum Wage Earners
b. When Income is Taxable (3) Exemptions Granted Under
c. Tests in Determining Whether Income is International Agreements
Earned for Tax 6. Income Tax on Corporations
(1) Realization Test a. Income Tax on Domestic Corporations
(2) Economic Benefit Test, Doctrine of and Resident Foreign Corporations
Proprietary Interest (1) Branch Profit Remittance Tax
(3) Severance Test (2) Itemized Deductions vs. Optional
d. Tax-Free Exchanges Standard Deductions
e. Situs of Income Taxation b. Income Tax on Non-Resident Foreign
3. Gross Income Corporations
a. Definition c. Income Tax on Special Corporations
b. Concept of Income from Whatever d. Exemptions from Tax on Corporations
Source Derived e. Period Within Which to File Income Tax
c. Gross Income vs. Net Income vs. Return of Individuals and Corporations
Taxable Income f. Substituted Filing
d. Sources of Income Subject to Tax g. Failure to File Returns
(1) Compensation Income 7. Withholding Taxes
(2) Fringe Benefits a. Concept
(3) Professional Income b. Creditable vs. Withholding Taxes
(4) Income from Business
(5) Income from Dealings in Property C. VALUE-ADDED TAX (VAT)
(6) Passive Investment Income 1. Concept and Elements of VATable
(7) Annuities, Proceeds from Life Transactions
Insurance, or Other Types of 2. Impact and Incidence of Tax
Insurance 3. Destination Principle and Cross-Border
(8) Prizes and Awards Doctrine
(9) Pensions, Retirement Benefit, or 4. Imposition of VAT on Transfer of Goods by
Separation Pay Tax Exempt Persons
(10) Income from Any Source 5. Transactions Deemed Sale Subject to VAT
e. Exclusions 6. Zero-Rated and Effectively Zero-Rated
(1) Taxpayers Who May Avail Sales of Goods or Properties
(2) Distinguished from Deductions and 7. VAT-Exempt Transactions
Tax Credits 8. Input and Output Tax
4. Deductions from Gross Income 9. Tax Refund or Tax Credit

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10. Filing of Returns and Payment A. TAXING AUTHORITY

D. TAX REMEDIES UNDER THE NATIONAL 1. Jurisdiction, Power, and
INTERNAL REVENUE
Functions of the Commissioner
1. Assessment of Internal Revenue Taxes
a. Procedural Due Process in Tax of Internal Revenue
Assessments
b. Requisites of a Valid Assessment a. Powers and duties of the BIR: (Sec. 2)
c. Tax Delinquency vs. Tax Deficiency 1. To assess and collect national internal revenue
d. Prescriptive Period for Assessment taxes, fees and charges;
(1) False Returns vs. Fraudulent 2. To enforce all forfeiture, penalties, and fines
Returns vs. Non-Filing of Returns connected with the assessment and collection of
(2) Suspension of the Running of taxes, fees and charges;
Statute of Limitations 3. To execute judgment in all cases decided in its
2. Taxpayer’s Remedies
favor by the CTA and the ordinary courts; and6
a. Protesting an Assessment
4. To effect and administer the supervisory and
(1) Period to File Protest
(2) Submission of Supporting police powers conferred upon it by the NIRC and
Documents other special laws.
(3) Effect of Failure to File Protest
(4) Action of the Commissioner on the b. Powers of the Commissioner of Internal
Protest Filed Revenue (CIR)
b. Compromise and Abatement of Taxes 1. Power to interpret tax laws and decide tax cases
c. Recovery of Tax Erroneously or Illegally (Sec. 4)
Collected 2. Power to obtain information and to
3. Government Remedies for Collection of
summon/examine and take testimony of persons
Delinquent Taxes
(Sec. 5)
a. Requisites
b. Prescriptive Periods 3. Power to make assessments and prescribe
4. Civil Penalties additional requirements for tax administration
a. Delinquency Interest and Deficiency and enforcement (Sec. 6)
Interest
b. Surcharge a. Interpreting Tax Laws and
c. Compromise Penalty Deciding Tax Cases

The power to interpret the NIRC and other tax laws

is under the exclusive and original jurisdiction of the
CIR, subject to review by the Secretary of Finance
(Sec. 4)7

All rulings of first impression (i.e., without precedent)

shall be signed by the CIR.

The power to decide tax cases includes the power to

decide:
1. Disputed assessments;
2. Refunds of internal revenue taxes, fees or other
charges;
3. Penalties imposed in relation to the above; and
4. Other matters arising under the NIRC.

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Note: Decisions (quasi-judicial, such as decisions on financial position demonstrates a clear

assessment, refunds, and other matters) of the CIR inability to pay the tax assessed, his
are subject to the exclusive appellate jurisdiction of application shall not be considered unless
the CTA. and until he waives in writing his privilege
under Republic Act No. 1405 or under other
Those decided by the CIR/ other officers in the general or special laws, and such waiver
exercise of their interpretative (quasi-legislative) shall constitute the authority of the
powers are appealable before the Secretary of Commissioner to inquire into the bank
Finance. The decision then, of the Secretary, should deposits of the taxpayer.
it remain unfavorable, could fall under “other matters”
and shall now be appealable before the CTA. (See Revenue Issuances
discussion under CTA) Those issuances officially released by the CIR.

Power of the CIR to suspend the business Different kinds of revenue issuances:
operation of a taxpayer - See discussion under 1. Revenue Regulations (RRs) - formal
remedies. interpretations of the NIRC signed by the
Secretary of Finance upon the recommendation
Other powers of the CIR: of the CIR; have the force and effect of law and
1. Power to Prescribe Real Property Values can only be repealed, modified or amended by
● Authorized to divide the Philippines into another regulation or law; specify, prescribe or
different zones or areas define rules and regulations for effective
● Mandatory consultation with competent enforcement of the provisions of the NIRC and
appraisers both from public and private related statutes
sectors 2. Rulings - less formal interpretations by the CIR
● With prior notice to affected taxpayers or his authorized representatives involving tax
● The fair market value is subject to automatic provisions and regulations; include:
adjustment once every three years a. BIR Rulings;
● No adjustments in zonal valuation is valid b. VAT Rulings;
unless published in a newspaper of general c. Rulings issued by International Tax Affairs
circulation in the province, city or Division (ITAD); and
municipality, or in the absence thereof, shall d. Rulings issued thru delegated authorities or
be posted in the provincial capitol, city or unnumbered rulings
municipality and in two (2) other
conspicuous public places. b. Non-Retroactivity of Rulings
● The basis of any valuation, including the
records of consultations done, shall be While a government is not bound by the error of its
public records open to inquiry of any agents in issuing rulings, in the interest of justice and
taxpayer. fair play, such may not be given retroactive effect.
Hence, a VAT ruling subsequently issued to correct
2. Power to Inquire into Bank Deposits a prior one cannot be applied retroactively when
The Commissioner is authorized to inquire into taxpayers have already relied on the said erroneous
the bank deposits and other related information ruling. (CIR v. Benguet Corporation, G.R. Nos.
held by financial institution of: 134587 & 134588, 2005)

● A decedent to determine his gross estate 2. Rule-Making Authority of the

● Any taxpayer who has filed an application for Secretary of Finance
compromise of his tax liability under Section
204(A)(2) of this Code by reason of financial a. Authority of the Secretary of Finance to
incapacity to pay his tax liability. promulgate rules and regulations
● In case a taxpayer In case a taxpayer files The Secretary of Finance, upon recommendation of
an application to compromise the payment the CIR, shall promulgate all needful rules and
of his tax liabilities on his claim that his

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regulations for the effective enforcement of the In order to place Champion, Hope and More
provisions of this Code. (Sec. 244) cigarettes within the scope of RA 7654 and subject
them to an increased tax rate, RMC 37-93 was
The power of the Secretary of Finance to review issued. In so doing the BIR did not simply interpret
rulings issued by the CIR, which includes the power the law; verily it legislated under its quasi-legislative
to reverse, revise or modify, is limited only to rulings authority. The due observance of the requirement of
that are adverse to the taxpayers. notice, of hearing and of publication should not have
been ignored. The Supreme Court eventually found
Kinds of administrative issuances: that the hastily promulgated RMC 37-93 fell short of
1. Legislative rules a valid and effective administrative issuance. (CIR v.
• in the nature of subordinate legislation, CA, G.R. No. 119761, 1996)
designed to implement a primary legislation
by providing details thereof; generally Administrative rules and regulations are intended to
required that before a legislative rule is carry out, neither to supplant nor to modify, the law.
adopted there must be hearing (CIR v CA, ROH x Auto Products Phil, Inc. and CTA,
2. Interpretative rules. GR No. 108358, 1995) It is applied prospectively.
• designed to provide guidelines to the law (ABS-CBN v. CTA, G.R. No. 52306, 1981)
that the administrative agency is in charge of
enforcing. b. Specific provisions to be contained in rules
and regulations

Sec. 245 of the NIRC itemizes such provisions.8

8
SEC. 245 Specific Provisions to be Contained in Rules and of this Code prescribing the place of filing of returns and
Regulations. - The rules and regulations of the BIR shall, payment of taxes, the Commissioner may, by rules and
among other things, contain provisions specifying, prescribing regulations, require that the tax returns, papers and statements
or defining: that may be filed by the taxpayers in connection with the
(a) The time and manner in which Revenue Regional payment of the tax.
Director shall canvass their respective Revenue
Regions to discover of persons and property liable to Provided, however, That notwithstanding the other provisions
national internal revenue taxes; of this Code prescribing the place of filing of returns and
(b) The forms of labels, brands or marks to be required payment of taxes, the Commissioner may, by rules and
on goods subject to an excise tax, and the manner of regulations require that the tax returns, papers and statements
labelling; and taxes of large taxpayers be filed and paid, respectively,
(c) The condition that in which goods intended for through collection officers or through duly authorized agent
export, are not et exported would be subject to excise banks:
tax.
(d) Conditions under which goods intended for storage Provided, further, That the Commissioner can exercise this
in bonded warehouse be stored and record keeping power within six (6) years from the approval of Republic Act No.
thereof; 7646 or the completion of its comprehensive computerization
(e) The conditions under which denatured alcohol may program, whichever comes earlier:
be removed and dealt in, the character and quantity
of the denaturing material to be used, the manner in For the purpose of this Section, "large taxpayer" means a
which the process of denaturing shall be effected; taxpayer who satisfies any of the following criteria;
(f) The manner in which revenue shall be collected and (1) Value-Added Tax (VAT). - Business establishment with
paid, the revenue stamps be affixed and the mode of VAT paid or payable of at least One hundred thousand pesos
cancellation of the same; (P100,000) for any quarter of the preceding taxable year;
(g) The manner in which the proper books and records
be kept; (2) Excise Tax. - Business establishment with excise tax paid
(h) The manner in which internal revenue taxes, such as or payable of at least One million pesos (P1,000,000) for the
income tax, including withholding tax, estate and preceding taxable year;
donor's taxes, value-added tax, other percentage
taxes, excise taxes and documentary stamp taxes (3) Corporate Income Tax. - Business establishment with
shall be paid through the collection officers of the annual income tax paid or payable of at least One million pesos
Bureau of Internal Revenue or through duly (P1,000,000) for the preceding taxable year; and
authorized agent banks which are hereby deputized
to receive payments of such taxes and the returns, (4) Withholding Tax. - Business establishment with
papers and statements that may be filed by the withholding tax payment or remittance of at least One million
taxpayers in connection with the payment of the tax: pesos (P1,000,000) for the preceding taxable year.

Provided, however, That notwithstanding the other provisions Provided, however, That the Secretary of Finance, upon

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Sources of internal revenue taxes be shifted or passed on to the buyer,

1. Income tax– tax imposed on the net or the transferee or lessee of the goods, properties
gross income realized in a taxable year (CIR or services (CIR v. Seagate Technology,
v. Solidbank Corporation, G.R. No. 148191, G.R. No. 153866, 2005)
2003)
7. Documentary stamp tax – tax levied on the
2. Estate tax – tax that is levied, assessed, exercise by persons of certain privileges
collected, and paid upon the transfer of conferred by law for the creation, revision, or
estate of a decedent to his heirs9 termination of specific legal relationships
through the execution of specific
3. Donor’s tax–tax imposed on the gratuitous instruments (Philippine Home Assurance
transfer of property between two or more Corporation v. CA, G.R. No. 119446, 1999)
persons who are living at the time of the
transfer10 B. INCOME TAX
A tax on all yearly profits arising from property,
4. Percentage tax– tax measured by a certain professions, trades, or offices, or as a tax on a
percentage of the gross selling price or person’s income, emoluments, profits and the like.
gross value in money of goods sold, Income tax is a direct tax.
bartered or imported, or of the gross receipts
or earnings derived by any person engaged 1. Definition, Nature, and General
in the sale of services (CIR v. Solidbank Principles
Corporation, G.R. No. 148191, 2003)
Income Tax Systems
5. Excise tax–tax applicable to certain
specified or selected goods or articles i. Global
manufactured or produced in the Philippines The total allowable deductions are deducted from
for domestic sale or consumption or for any the gross income to arrive at the net taxable
other disposition and to things imported into income subject to the relevant income tax rate.
the Philippines (Silkair v. CIR, G.R. No.
184398, 2010) ii. Schedular
Different types of income are subjected to
6. Value-added tax–is a uniform 12% tax different sets of graduated or flat income tax
levied on every importation of goods, rates. The applicable tax rates will depend on the
whether or not in the course of trade or classification of the taxable income and the basis
business, or imposed on each sale, barter, could be gross income or net income (i.e. capital
exchange or lease of goods or properties or gains tax).
on each rendition of services in the course
of trade or business as they pass along the iii. Others
production and distribution chain, the tax Semi-Schedular or Semi-Global Tax System –
being limited only to the value added to such The compensation income, business or
goods, properties or services by the seller, professional income, capital gain and passive
transferor or lessor; an indirect tax that may income not subject to final tax, and other income

recommendation of the Commissioner, may modify or add to

10
the above criteria for determining a large taxpayer after SEC. 98. Imposition of Tax. - (A) There shall be levied,
considering such factors as inflation, volume of business, wage assessed, collected and paid upon the transfer by any person,
and employment levels, and similar economic factors. resident or nonresident, of the property by gift, a tax, computed
as provided in Section 99.
9
SEC. 84. Rates of Estate Tax. - There shall be levied,
assessed, collected and paid upon the transfer of the net estate (B) The tax shall apply whether the transfer is in trust or
as determined in accordance with Sections 85 and 86 of every otherwise, whether the gift is direct or indirect, and whether the
decedent, whether resident or nonresident of the Philippines, a property is real or personal, tangible or intangible.
tax based on the value of such net estate, as computed in
accordance with the following schedule: xxx

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are added together to arrive at the gross income a. Criteria in Imposing

and after deducting the sum of allowable Philippine Income Tax
deductions, the taxable income is subjected to
the relevant income tax rate. i. Citizenship – A citizen taxpayer is
subject to income tax: (a) on his
Note: Philippine income taxation is a combination of worldwide income if he resides in the
both systems but is more schedular for individuals Philippines; or (b) only on his income
while more global for corporations. from sources within the Philippines, if he
qualifies as a non-resident citizen.
ii. Residence – A resident alien is liable to
GLOBAL SYSTEM SCHEDULAR SYSTEM
pay income tax on his income from
A system which imposes A system which imposes sources within the Philippines but
income tax upon the various types of tax on exempt from tax on his income from
total income of the income producing sources outside the Philippines.
taxpayer activities iii. Source – A non-resident alien could be
subject to Philippine income tax if he
Most equitable in Because of its multiple derives income from sources within the
distributing tax burden, rates, the tax burden of a Philippines such as dividend, interest,
as burden of an person does not respond rent or royalty.
individual is closely to his income but rather
related to his resources fall fortuitously on the b. Types of Philippine Income
and his ability to pay type of his income Taxes
Administration is not Administration is simple 1. Net Income Tax/Taxable Income (GI –
quite as easy as being confined to each Deductions)
schedular because one transaction or activity 2. Gross Income Tax
has to consider all 3. Final Income Tax (on passive income and
income from whatever capital gains)
sources 4. Fringe Benefits Tax (amount of benefits to
managerial and supervisory employee paid by
Note: Another way of differentiating global and employer; employee is taxed but burden is on
schedular is that under the global system, there is no employer)
need for classification as all taxpayers are subjected 5. Capital Gains Tax (real property and shares of
to a single rate, while under the schedular system, stock not traded in stock market)
there are different categories of taxable income. 6. Corporate Income Tax
7. Minimum Corporate Income Tax income)
Features of the Philippine income tax law 8. Branch Profit Remittance Tax
i. Direct tax – Tax burden is borne by the
income recipient upon whom the tax is c. Taxable Period
imposed.
ii. Progressive tax – Tax rate increases as the General rule: The accounting period of a taxpayer is
tax base increases; direct taxes are to be a period of twelve (12) months.
preferred and as much as possible, indirect
taxes should be minimized. (Tolentino v. (1) Calendar Year – accounting period from
Secretary of Finance, G.R. No. 115455, January 1 to December 31 which is allowed if
1995) the:
iii. Comprehensive system – Adopts the ● Taxpayer is an individual
citizenship principle, residence principle, ● Taxpayer is a partnership
and the source principle.
iv. Semi-schedular or semi-global tax
system – As discussed above.

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o Under Section 52(B) of the NIRC,11 in d. Kinds of Taxpayers

relation to Section 22(B),12 a
“corporation” includes a “partnership – 1. Individual Taxpayers
no matter how created or organized.”
● Accounting period is other than a fiscal year i. Citizens
● Taxpayer has no accounting period (a) Resident Citizen (RC) – citizen of the
● Taxpayer does not keep books Philippines residing therein is taxable on all
● Taxpayer is an estate or trust income derived from sources within and without
the Philippines.
(2) Fiscal Year13 – Accounting period of twelve (12)
months ending on the last day of any month (b) Nonresident Citizen15 (NRC) – citizen of the
other than December which is allowed only for Philippines who is taxable only on his income
corporations. from sources within the Philippines if he:
● Establishes the fact of his physical presence
(3) Short Period14 – A taxpayer may have a taxable abroad with a definite intention to reside
period of less than twelve (12) months when: therein.
1. Taxpayer dies ● Leaves the Philippines during the taxable
2. Corporation is newly organized year to reside abroad, as immigrant or for
3. Corporation changes its accounting period employment on a permanent basis.
4. Corporation is dissolved ● Works & derives income from abroad &
whose employment requires him to be
physically present abroad most of the time
(i.e. not less than 183 days) during the
taxable year.

11
SEC. 52.(B) Taxable Year of Corporation. – A corporation last calendar year for which return was made and the date
may employ either calendar year or fiscal year as a basis for designated as the close of the fiscal year. If the change is from
filing its annual income tax return: Provided, That the one fiscal year to another fiscal year, a separate final or
corporation shall not change the accounting period employed adjustment return shall be made for the period between the
without prior approval from the Commissioner in accordance close of the former fiscal year and the date designated as the
with the provisions of Section 47 of this Code. close of the new fiscal year.
15
12
SEC. 22.(B) The term “corporation” shall include SEC. 22.(E). The term “nonresident citizen” means:
partnerships, no matter how created or organized, joint-stock (1) A citizen of the Philippines who establishes to the
companies, joint accounts (cuentas en participacion), satisfaction of the Commissioner the fact of his physical
associations, or insurance companies, but does not include presence abroad with a definite intention to reside therein.
general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction (2) A citizen of the Philippines who leaves the Philippines
projects or engaging in petroleum, coal, geothermal and other during the taxable year to reside abroad, either as an immigrant
energy operations pursuant to an operating or consortium or for employment on a permanent basis.
agreement under a service contract with the Government.
“General professional partnerships” are partnerships formed by (3) A citizen of the Philippines who works and derives income
persons for the sole purpose of exercising their common from abroad and whose employment thereat requires him to be
profession, no part of the income of which is derived from physically present abroad most of the time during the taxable
engaging in any trade or business. year.
13
SEC. 22.(Q). - The term “fiscal year” means an accounting
period of twelve (12) months ending on the last day of any (4) A citizen who has been previously considered as
month other than December. nonresident citizen and who arrives in the Philippines at any
14
SEC. 47. Final or Adjustment Returns for a Period of Less time during the taxable year to reside permanently in the
than Twelve (12) Months. – Philippines shall likewise be treated as a nonresident citizen for
the taxable year in which he arrives in the Philippines with
(A) Returns for Short Period Resulting from Change of respect to his income derived from sources abroad until the
Accounting Period. – If a taxpayer, other than an individual, with date of his arrival in the Philippines.
the approval of the Commissioner, changes the basis of
computing net income from fiscal year to calendar year, a (5) The taxpayer shall submit proof to the Commissioner to
separate final or adjustment return shall be made for the period show his intention of leaving the Philippines to reside
between the close of the last fiscal year for which return was permanently abroad or to return to and reside in the Philippines
made and the following December 31. If the change is from as the case may be for purpose of this Section.
calendar year to fiscal year, a separate final or adjustment
return shall be made for the period between the close of the

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● Was previously considered as nonresident Under SEC. 23.(D) An alien individual, whether
citizen & arrives in the Philippines at any a resident or not of the Philippines, is taxable
time during the taxable year to reside only on income derived from sources within the
permanently in the Philippines. Philippines;
Examples of non-resident citizens:
● Immigrant – one who leaves the Philippines One who comes to the Philippines for a definite
to reside abroad as an immigrant for which purpose which in its nature would require an
a foreign visa has been secured extended stay, and makes his home temporarily
● Permanent employee abroad – one who in the country, becomes a resident alien. The
leaves the Philippines and works abroad on length of stay is indicative of intention.
a more or less permanent basis
An alien actually present in the Philippines who
Note: is not a mere transient or sojourner is a resident
The taxpayer shall submit proof to the CIR to show of the Philippines for purposes of the income tax.
his intention of leaving the Philippines to reside Whether he is a transient or not is determined by
permanently abroad or to return to and reside in the his intentions with regard to the length and
Philippines as the case may be. nature of his stay.

Non-resident citizens who are exempt from tax with A mere floating intention, indefinite as to time, to
respect to income derived from sources outside the return to another country is not sufficient to
Philippines shall no longer be required to file constitute him a transient.
information returns from sources outside the
Philippines beginning 2001. (Rev. Regs. 05-01; BIR (b) Nonresident Alien (NRA) – an individual whose
Ruling No. DA-261-05) residence is not within the Philippines and who is
not a citizen thereof but doing business therein
(c) Contract Worker or Overseas Contract is taxable only on income from sources within.
worker (OCW) – one who leaves the Philippines
on account of a contract of employment which is (1) Engaged in trade or business (NRA-ETB)
renewed from time to time under such – an alien who comes and stays in the
circumstance as to require him to be physically Philippines for an aggregate period of more
present abroad most of the time. An OFW is than 180 days during any calendar year
considered a nonresident citizen on the day (2) Not engaged in trade or business (NRA-
he/she departs the Philippines. NETB) – an alien whose stay in the
Philippines is 180 days or less
Note:
For OCWs, the time spent abroad is not material for iii. Special Class of Individual Employees
tax exemption purposes. All that is required is for the (a) Minimum Wage Earner
worker’s employment contract to pass through and A worker in the private sector paid the statutory
be registered with the POEA. (BIR Ruling No. 33-00; minimum wage, or an employee in the public sector
BIR Ruling No. DA-428-04) with compensation income of not more than the
statutory minimum wage in the non-agricultural
ii. Aliens sector where he/she is assigned; 17
(a) Resident Alien16 (RA) – an individual whose
residence is within the Philippines and who is not His earnings (i.e. SMW, holiday, overtime, night-shift
a citizen thereof is taxable only on income differential and hazard pay) are exempt from income
derived from sources within the Philippines. tax pursuant to the provisions of the NIRC and other
laws, general or special.

16
SEC. 22 (F). The term 'resident alien' means an individual or to an employee in the public sector with compensation
whose residence is within the Philippines and who is not a income of not more than the statutory minimum wage in the
citizen thereof. non-agricultural sector where he/she is assigned.
17
SEC. 22.(H) The term ‘minimum wage earner’ shall refer to
a worker in the private sector paid the statutory minimum wage,

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Nonresident
(a) Aliens employed by regional or area Alien not
headquarters and regional operating engaged in Within the
headquarters of multinational companies in Gross Income
trade or Philippines
the Philippines. business (180
days or less)
The preferential tax rate of 15% is no longer
applicable, without prejudice to preferential rates
under existing tax treaties. 2. Corporations

(b) Aliens employed by offshore banking units. A corporation shall include partnerships, no matter
His gross income is no longer subject to the how created or organized. It includes joint stock
preferential tax rate of 15%, without prejudice to companies, joint accounts, associations, and
preferential rates under existing tax treaties. insurance companies.

But does not include, for the purpose of imposing the

(c) Aliens employed by petroleum contractors
30% regular corporate income tax (RCIT):
and subcontractors.
1. General professional partnerships; and
His gross income is no longer subject to the
2. Joint venture or consortium formed for the
preferential tax rate of 15%, without prejudice to
purpose of undertaking construction projects or
preferential rates under existing tax treaties.
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating
TAXABLE ON or consortium agreement under a service
TAXPAYER TAX BASE
INCOME contract with the government.18
Within and
Resident Taxable Kinds of Corporations
without the
Citizen Income (i) Domestic Corporation (DC) – created or
Philippines
organized in the Philippines or under its laws and
Nonresident Taxable Within the is liable for income derived from sources within
Citizen Income Philippines and without19
(ii) Foreign Corporation20 (FC) – organized and
Resident Taxable Within the existing under the laws of a foreign country,
Alien Income Philippines which includes:

Nonresident
Alien
engaged in
Taxable Within the
trade or
Income Philippines
business
(more than
180 days)

18
SEC. 22.(B) – The term “corporation” shall include “General professional partnerships” are partnerships formed by
partnerships, no matter how created or organized, joint-stock persons for the sole purpose of exercising their common
companies, joint accounts (cuentas en participacion), profession, no part of the income of which is derived from
associations, or insurance companies, but does not include engaging in any trade or business.
19
general professional partnerships and a joint venture or SEC. 22.(C) – The term “domestic,” when applied to a
consortium formed for the purpose of undertaking construction corporation, means created or organized in the Philippines or
projects or engaging in petroleum, coal, geothermal and other under its laws.
20
energy operations pursuant to an operating consortium SEC. 22.(D) – The term “foreign,” when applied to a
agreement under a service contract with the Government. corporation, means a corporation which is not domestic.

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Kinds of foreign corporations ● Undertaking construction projects; or

(i) Resident foreign corporation21 (RFC) – foreign ● Engaging in petroleum, coal, and other energy
corporation engaged in trade or business within operation under a service contract with the
the Philippines and is liable from sources within. government.

The term implies a continuity of commercial Partners in a business partnership are considered
dealings and arrangements, and contemplates, stockholders for tax purposes and their distributive
to that extent, the performance of acts or works shares are taxed as dividends, and thus subject to
or the exercise of some of the functions normally final income tax on their gross distributive share.
incident to, and in progressive prosecution of
commercial gain or for the purpose and object of b. General Professional Partnerships
the business organization.
Established solely for purpose of exercising common
In order that a foreign corporation may be profession and no part of income derived from
regarded as doing business within a State, there engaging in trade or business.
must be continuity of conduct and intention to
establish a continuous business, such as the As an entity, it is not subject to income tax.
appointment of a local agent, and not one of a
temporary character (CIR v. British Overseas Partners are liable for income tax on their distributive
Airways Corp, GR No. L-65773-74, 1987.) share (computed by dividing net income of GPP).24
Each partner shall report his distributive share as part
(ii) Nonresident foreign corporation22 – foreign of his gross income.
corporation not engaged in trade or business
Individual partners are subject to regular income tax
within the Philippines
rate on their taxable income
Joint Venture and Consortium
Joint venture is a commercial undertaking by two or NON-TAXABLE TAXABLE BUSINESS
more persons, differing from a partnership that it PARTNERSHIP PARTNERSHIP
relates to the disposition of a single lot of goods or
With regard to DISTRIBUTIVE SHARE:
the completion of a single project.
a. Distributive share is a partner’s computed and
Consortium is an association, typically of several
ascertained share in the net profits of the
business companies.
partnership,
a. Partnerships b. Whether actually distributed to the partners or
not
Taxed as a corporation23 Includes unregistered joint
Will form part of partner’s Partner’s distributive
ventures and business partnerships
gross income in the ITR share in the net income is
subject to the graduated subject to a final tax of
Exception: that joint ventures are not taxable as
income tax rates 10% 26(resident citizens,
corporations when the purpose is for:
nonresident citizens,

21
SEC.22.(H) - The term “resident foreign corporation” applies agreement under a service contract with the Government.
to a foreign corporation engaged in trade or business within the “General professional partnerships” are partnerships formed by
Philippines. persons for the sole purpose of exercising their common
22
SEC. 22.(I). - The term “nonresident foreign profession, no part of the income of which is derived from
corporation” applies to a foreign corporation not engaged in engaging in any trade or business.
24
trade or business within the Philippines. SEC. 26. Persons engaging in business as partners in a
23
SEC. 22.(B) – The term “corporation” shall include general professional partnership shall be liable for income tax
partnerships, no matter how created or organized, joint-stock only in their separate and individual capacities
26
companies, joint accounts (cuentas en participacion), SEC. 24.(B2) Cash and/or Property Dividends. – A final tax
associations, or insurance companies, but does not include at the rate of ten percent (10%) shall be imposed upon the cash
general professional partnerships and a joint venture or and/or property dividends actually or constructively received by
consortium formed for the purpose of undertaking construction an individual from a domestic corporation or from a joint stock
projects or engaging in petroleum, coal, geothermal and other company, insurance or mutual fund companies and regional
energy operations pursuant to an operating consortium operating headquarters of multinational companies, or on the

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Will be subjected to a OCWs, or resident There is co-ownership in the following instances:

creditable withholding aliens) or 20%27 ● Two or more heirs inherit an undivided property
tax of 15% (if income (NRAETB) from a decedent; or
payments exceed ● A donor makes a gift of an undivided property in
P720,000 for the current favor of two or more donees.
year) or 10% (if income
payments do not exceed It is not taxable when the activities are limited merely
P720,000 for the current to preservation of the co-owned property but the co-
year) to be withheld and owners are liable for income tax in their separate and
paid by the partnership to individual capacities.
the BIR25
It is taxable when the income of the co-ownership is
With regard to how the partnership is taxed invested by the co-owners in business creating a
partnership.
Still required to file an Deemed and treated as
annual information return corporations subject to
TAXABLE ON
on their incomes and the corporate income tax TAXPAYER TAX BASE
INCOME
expenses for the rate
purpose of ascertaining GPP itself is not
the partners’ taxable taxable,
shares General however,
Professional Not Taxable individual
c. Estate and Trusts Partnership partners will be
Estate – property, rights, and obligations of a person taxed depending
which are not extinguished by his death and those on classification
that accrue thereto
Same basis as
Trust – arrangement created by agreement under an individual
which title to property is passed to another for (depending on
Estate and
conservation or investment with the income and the Taxable Income classification of
Trust
corpus/principal distributed in accordance with the decedent, if
directions of the creator; to be taxable as a separate estate; trustor, if
entity, grantor must have absolutely and irrevocably trust)
given up control and benefit over the trust Within and
Domestic
Taxable Income without the
d. Co-ownership Corporation
Philippines
Exists whenever the ownership of an undivided thing
or right belongs to different persons; for income tax Resident
Within the
purposes, the individual co-owners are liable for the Foreign Taxable Income
Philippines
taxes due on their respective shares and the co- Corporation
ownership itself is not considered as a separate
taxable entity

share of an individual in the distributable net income after tax an individual from a domestic corporation or from a joint stock
of a partnership (except a general professional partnership) of company, insurance or mutual fund companies and regional
which he is a partner, or on the share of an individual in the net operating headquarters of multinational companies, or on the
income after tax of an association, a joint account, or a joint share of an individual in the distributable net income after tax
venture or consortium taxable as a corporation of which he is a of a partnership (except a general professional partnership) of
member or co-venturer which he is a partner, or on the share of an individual in the net
25
Revenue Regulation No. 11-2018 income after tax of an association, a joint account, or a joint
27
SEC. 24.(B2) Cash and/or Property Dividends. – A final tax venture or consortium taxable as a corporation of which he is a
at the rate of ten percent (10%) shall be imposed upon the cash member or co-venturer
and/or property dividends actually or constructively received by

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Non-Resident This principle requires that revenues must be earned

Within the before they are received. (Manila Mandarin Hotels v.
Foreign Gross Income
Philippines Commissioner, CTA Case No. 5046, 1997)
Corporation

Actual v. Constructive Receipt

2. Income
Actual Receipt Constructive Receipt
a. Definition and Nature
occurs when there is a occurs when the money
physical transfer of the consideration or its
Income, in the broad sense, means all wealth, which
money consideration or equivalent, is placed at
flows into the taxpayer other than as a mere return of
its equivalent to a the control of the
capital. It includes the forms of income specifically
person. person who rendered
described as gains and profits, including gains
the service without
derived from the sale or other disposition of capital
restrictions by the
assets. (Rev. Regs. Sec. 36)
payor.
The essential difference between capital and income
Examples:
is that capital is a fund; income is a flow. A fund of
● Deposits in banks which are made available to
property existing at an instant of time is called capital.
the seller of service without restrictions;
A flow of services rendered by that capital by the
payment of money from it or any other benefit ● Issuance by the payor of a notice to offset any
rendered by a fund of capital in relation to such fund debt or obligation and acceptance thereof by the
through a period of time is called an income. Capital seller as payment for services rendered; and
is wealth, while income is the service of wealth. ● Transfer of amounts retained by the payor for the
account of the seller. (Rev. Regs.16-05, Sec.
Property is a tree, income is the fruit; labor is a tree, 4.108-4)
income is the fruit; capital is a tree, income is the fruit.
iii. Recognition of income
“Income,” as here used, can be defined as “profits or Receipt of income for purposes of taxation may be
gains.” (Madrigal v. Rafferty, G.R. No. L-12287, actual or constructive. (CIR v. BPI, G.R. No. 147375,
1918) 2006)

The law thus recognizes “income” as taxable even in

b. When Income is Taxable
the absence of actual/physical receipt. In fact, Sec.
4(e) of RR No. 12-80 (on final tax) provides that
i. Existence of income
income could be recognized by the taxpayer either at
For a taxable income to exist, gain or profit is
the time of its actual receipt or its accrual, depending
necessary. As an example, the repayment of
on the accounting method used by the taxpayer. The
principal in a loan agreement is not income but the
NIRC, in turn, recognizes certain principal accounting
payment of interest will be considered as income as
methods in recognizing income or revenue. (Vitug
there is no gain or profit in the former but there is in
and Acosta)
the latter.

ii. Realization of income c. Tests in Determining Whether

Test of Realization: Under the Realization Income is Earned for Tax
Principle, revenue is generally recognized when Purposes
both of the following conditions are met:
1. The earning is complete or virtually complete; i. Realization Test
and While not new in Philippine jurisprudence, courts
2. An exchange has taken place. have not fully adopted the doctrine. (See discussion
on “Tests of Realization”)

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ii. Economic Benefit Test or Doctrine of Transfer to a controlled corporation

Proprietary Interest No gain or loss shall be recognized if property is
The Economic Benefit Theory provides that transferred to a corporation by a person, alone or
anything, which benefits a person materially or together with others, not exceeding four (4) persons,
economically in whatever way, is taxable under the in exchange for stock or unit of participation in such
law. (BIR Ruling No. 123-97) a corporation of which as a result of such exchange,
the transferor or transferors, collectively, gains or
As a General rule, in this jurisdiction, mere increase maintains control of said corporation.
in the value of property without actual realization,
either through sale or other disposition, is not taxable, For example, if Mr. A transfers his property to
the only exception being that even without sale or Corporation X in exchange for 51% of the shares of
other disposition, if by reason of appraisal, the cost stock of Corporation X, such transfer shall be
basis of property is increased and the resultant basis considered as a tax-free exchange.
is used as the new tax base for purposes of
computing the allowable depreciation expense, the Merger or Consolidation
net difference between the original cost basis and No gain or loss shall be recognized if in pursuance of
new basis due to appraisal is taxable under the a plan of merger or consolidation ---
economic-benefit principle. (BIR Ruling No. 029-98) a. a corporation, which is a party to a
merger or consolidation, exchanges
iii. Severance Test property solely for stock in a
Under the Severance Theory Test, income is corporation, which is a party to the
recognized when there is a separation of something merger or consolidation;
which is of exchangeable value. (Eisner v.
b. The acquisition by one corporation, in
Macomber, 252 U.S. 189, 1920) exchange solely for all or a part of its
voting stock, or in exchange solely for all
The annual increase in value of an asset is not or part of the voting stock of a
taxable income because such increase has not yet corporation which is in control of the
been realized. The increase in value i.e., the gain, acquiring corporation, of stock of
could only be taxed when a disposition of the another corporation if, immediately after
property occurred which was of such a nature as to the acquisition, the acquiring
constitute a realization of such gain, that is, a corporation has control of such other
severance of the gain from the original capital corporation whether or not such
acquiring corporation had control
invested in the property. The same conclusion
immediately before the acquisition; or
obtains as to losses. The annual decline in the value
of property is not normally allowable as a deduction. c. The acquisition by on corporation, in
Hence, to be allowable, the loss must be realized. exchange solely for all or a part of its
(BIR Ruling No. 206-90 citing Surre Warren, Federal voting stock or in exchange solely for all
Income Taxation or part of the voting stock of a
corporation which is in control of the
d. Tax-Free Exchanges acquiring corporation, of substantially all
of the properties of another corporation.
Tax-free exchanges refer to those instances In determining whether the exchange is
solely for stock, the assumption by the
enumerated in Section 40(C)(2) of the NIRC that are
acquiring corporation of a liability of the
not subject to Income Tax, Capital Gains Tax,
others shall be disregarded; or
Creditable Withholding Tax, Donor’s Tax,
Documentary Stamp Tax and/or Value-added Tax, d. Arrangement whereby the stock and
as the case may be. bonds of a corporation are readjusted
as to amount, income, or priority or an
In general, there are two kinds of tax-free exchange: agreement of all stockholders and
(1) transfer to a controlled corporation; and, (2) creditors to change and increase or
merger or consolidation. decrease the capitalization or debts of

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the of the corporation or both

INCOME TEST OF SOURCE OF INCOME
(recapitalization);

e. Formation of the same corporate dividends forms part of income

business with the same assets and
within.
stockholders under a new charter
(reincorporation); Services
(Compensation
e. Situs of Income Taxation for labor / Place of performance of service
personal
Factors that determine the situs of income tax (Sec.
services)
23)
1. Nationality Rentals Location of the property/interest in
2. Residency such property
3. Source of Income
Royalties Place of use or location of
Rules on source of income in determining intangibles (such as patents,
whether income is from sources within or without trademarks, etc.) giving rise to
the Philippines royalties

INCOME TEST OF SOURCE OF INCOME Gain on sale of

Location of property
real property

Interest Residence of Debtor Gain on sale of Place of sale

personal
Dividends a) From domestic corporation – property other • Manufactured outside PH,
income within than shares of Sold in PH or
b) From foreign corporation: stock in a Manufactured in PH, Sold
Income within if more than domestic outside PHDerived
50% of the gross income of o PARTLY from sources
corporation
such foreign corporation for the within and PARTLY
purchased in
3-yr. period ending with the from sources without
one country and the PH
close of the taxable year prior sold in another
to the declaration of dividends
• Purchased in PH, Sold
(or for such part of such period
outside PH or Purchased
as the corporation has been in outside PH, Sold in PH
existence) was derived from o Derived entirely from
sources within the Philippines sources with the country
in which it is SOLD.
Extent:
Phil. GI × Dividend = Income within Gain on sale of
Total GI shares of stock Philippines regardless of where
in a domestic sold
Income without, if less than corporation
50% of the gross income of
such foreign corporation for the Application:
3-yr. period ending with the
close of the taxable year prior I. Interest
to the declaration of dividends Party A, a resident of the Philippines, entered into a
was derived from sources loan agreement with Party B, a resident from USA.
within the Philippines. The loan agreement provides that Party A will pay the
Therefore, nothing of such loan after1 year with 2% interest p.a. Is the 2%
interest considered as income sourced within the
PH? Yes. Since the debtor (Party A) is a resident of

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the PH, then the interest of such debt is considered VI. Sale of Shares of Stocks in a Domestic Corp
as income derived within the Philippines. XYZ Corp decided to sell 20% of its common shares
to JKL, a Japanese Corp. The agreement was
II. Dividends accepted and signed in Japan. The proceeds from
X corporation, a foreign corporation with a licensed such shares are considered taxable income within
to do business in the Philippines thru a branch office. the Philippines because the shares are from a
It was organized solely for the purpose of engaging Domestic Corp.
business in the Philippines. X declares dividends to
A as the sole shareholder. The dividend is Note: Royalties (from property or use of property
considered an income sourced within the Philippines located in Philippines), include:
because 100% of the income of X Corporation is 1) Use of the right/privilege to use in the Philippines
derived from Philippines sources. any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark,
Suppose X corporation, engaged in the PH as a
branch, also operates in USA where it derived 40% trade brand or other like property or right
of its gross income from abroad and 60% of its gross 2) Use of/the right to use in the Philippines any
income in the Philippines. The dividend is still industrial, commercial or scientific equipment
considered an income sourced within the Philippines 3) Supply of scientific, technical, industrial or
because more than 50% of its income is derived from commercial knowledge or information
Philippines sources. 4) Supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of
III. Services enabling the application or enjoyment of, any
A, a Filipino student, worked as a part-time Virtual such property/right in 1. above, such equipment
Assistant for X Corp., a foreign corporation based in
in 2. above or knowledge/info in 3. above
the USA. Is the compensation received by A from
X Corp considered as an income within the 5) Supply of services by a nonresident person/his
Philippines? employees in connection with the use of
Yes, because the service was performed in the property/rights belonging to, or the installation or
Philippines. operation of any brand, machinery or other
apparatus purchased from such non-resident
IV. Rentals person
A, an OFW in Canada, lease her parcel of land in 6) Technical advice, assistance or services
Laguna to NOP Corp, a domestic corporation where rendered in connection with technical
she receives a monthly rental of 20,000. Is the mgmt./admin. of any scientific, industrial or
monthly rental taxable in the Philippines? Yes,
commercial undertaking, venture or project
because the property subject of lease agreement is
located in the Philippines. 7) The use of or the right to use:
● Motion picture films
V. Sale of Personal Property ● Films or video tapes for use in connection
A Chinese company sells goods that are with TV
manufactured in China. Subsequently, the company ● Tapes for use in connection with radio
sold the goods in China and were subsequently broadcasting
shipped to the Philippines. The income earned by
Chinese company is not taxable within the Deductions:
Philippines because the title was passed in China Expenses, losses and other deductions properly
and not in the Philippines.
allocated thereto and a ratable part of expenses,
Supposed, the parties agreed that the risk of loss interests, losses and other deductions effectively
shall be for the account of the Chinese company until connected with the business conducted exclusively
the goods arrived in the Philippine Port. Upon receipt within the Philippines which cannot definitely be
of the goods, the risk of loss is now transferred to the allocated to some items or class of gross income
buyer. Under this scenario, the income is now taxable
in the Philippines where the passage of title took Allowed only if fully substantiated by all
place. information/documents necessary for their
computation

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Exceptions – No deduction for interest paid/incurred 5. Compensation for services in whatever form
abroad shall be allowed unless: paid, including, but not limited to fees, salaries,
1. Indebtedness was actually incurred wages, commissions & similar items
2. Indebtedness must be that of the taxpayer 6. Annuities
3. Interest must be legally due and stipulated in 7. Royalties
writing 8. Dividend Income
4. Interest must be paid or incurred during the 9. Gains derived from dealings in property
taxable year 10. Pensions
5. Indebtedness must be in connection with the 11. Partner’s distributive share from the net income
conduct or operation of trade/business in the of the GPP (distributive share from ordinary
Philippines partnerships is taxable as dividends; in this
case, the ordinary partnership has already been
subject to ordinary corporate income tax)
PERSONAL PROPERTY INCOME
Example of transactions that may or may not result in
Manufacturing Business taxable income:
TRANSACTION TAXABLE?
Produced here and sold Income partly within,
without partly without Recovery of damages that merely
Produced here and sold Income within restores the taxpayer to his previous Not taxable
here position prior to an act that caused (akin to non-
the damages (compensation for taxable return
Produced abroad and Income partly within, injury; from tortious acts) (Raytheon of capital)
sold here partly without v. CIR, 144 F2nd 110, 1944)

Trading Business Recovery of damages pertaining to

recovery or return of loss income or Taxable
Purchased without and Income within profit
sold within
Recovery of items previously
Purchased within and Income without deducted from gross income (tax Taxable
sold without benefit rule)
Purchased within and Income within Forgiveness of indebtedness
sold within (of a stockholder is equivalent to Taxable
dividend distribution)
Taxpayer sells it abroad Income partly within,
through a sales office partly without Forgiveness of indebtedness
within the Philippines Taxable
(in exchange of a service performed)

Forgiveness of indebtedness
3. Gross Income Taxable (But
(gratuitously without any
Donor’s Tax)
consideration)
a. Definition
All income derived from whatever source, including Income derived from illegal business
(but not limited to the following items) (GRIP CARD Taxable
(gain)
GPP):
1. Gross income derived from the conduct of trade Recovery of lost earnings Taxable
or business or the exercise of a profession
2. Rent Income
3. Interest Income
4. Prizes & winnings

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b. Concept of Income from c. Gross Income vs. Net Income

Whatever Source vs. Taxable Income

“Income from whatever sources derived” means Gross Net Income Taxable
inclusion of all income not expressly exempted within Income Income
the class of taxable income under the laws described as means gross means the
irrespective of the voluntary or involuntary action of income from income less pertinent
the taxpayer in producing the gains, and whether whatever statutory items of gross
derived from legal or illegal sources. source, deductions. It income
including is referred to specified in
EXAMPLES OF INCOME EXAMPLES OF compensation as “Taxable this Code,
FROM LEGAL SOURCES INCOME FROM for services; the Income” less
ILLEGAL SOURCES conduct of trade under the deductions, if
or business or NIRC. any,
Employee’s salary, bonus, Gambling, kidnapping, the exercise of authorized for
and commissions/ rebates extortion, smuggling, profession; such types of
embezzlement dealings in income by this
property; Code or other
This includes: interests; rents; special laws.
● Income derived from illegal sources royalties; (Sec. 31)
Rationale: dividends;
1. Shouldn’t give tax benefit to thieves annuities;
when taxing law-abiding citizens. prizes and
2. Enforcement of non-tax criminal issues winnings;
pensions; and a
An unlawful gain, as well as a lawful one, partner's
constitutes taxable income when its recipient distributive
has such control over it that, as a practical share in the net
matter, he derives readily realizable economic income of a
value from it. Hence, money obtained by general
extortion is income taxable to the extortioner professional
only when he personally benefitted from the partnership.
funds. (Hobson v. Commisioner, U.S.14850-89, (NIRC, Sec. 32
1992) as cited in CIR
v. PAL, Inc.,
It is well settled that profits or gains earned G.R. No.
illegally constitute gross income. (James v. 180066, 2009)
United States 366 U.S. 213 1961)

However, in circumstances where d. Sources of Income Subject to

misappropriations do not enrich or benefit the Tax
misappropriator, and there is a consensual
(1) Compensation Income
recognition of an obligation to repay the funds,
In general, the term “compensation” means all
income does not arise. (Beasley v.
remuneration for services performed by an employee
Commissioner, U.S. 3729-85, 1989)
for his employer under an employer-employee
relationship, unless specifically excluded by the
● Compensation for damages if it represents
NIRC.
payment for loss of expected profits
Compensation Income Earners - individuals whose
● Those received by mistake (Javier v. CA, G.R.
source of income is purely derived from an employer-
78953, 1991)
employee relationship. (Rev. Regs. 08-18, Sec.2(a))

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(2) Fringe Benefits 4. Benefits received by virtue of a CBA and

Any good, service or other benefit furnished or productivity incentive schemes provided that the
granted in cash or in kind by an employer to an total annual monetary value received from both
individual employee (except rank and file employees) combined do not exceed P10,000 per employee
such as, but not limited to the following: per taxable year; (Rev. Regs. 01-15)
a. Housing 5. De minimis benefits;
b. Expense account 6. If the grant of fringe benefits to the employee is
c. Vehicle of any kind required by the nature of, or necessary to the
d. Household personnel (such as maid, driver and trade, business or profession of the employer; or
others) 7. If the grant of the fringe benefit is for the
e. Interest on loan at less than market rate to the convenience or advantage of the employer.
extent of the difference between the market rate
and actual rate De Minimis Benefits:
f. Membership fees, dues and other expenses 1. Monetized unused vacation leave credits of
borne by the employer for the employee in private employees not exceeding 10 days during
social & athletic clubs or other similar the year;
organizations 2. Monetized value of vacation and sick leave
g. Expenses for foreign travel credits paid to government officials and
h. Holiday and vacation expenses employees;
i. Educational assistance to the employee or his 3. Medical cash allowance to dependents of
dependents employees not exceeding P1,500 per employee
j. Life or health insurance and other non-life per semester or P 250 per month; (Rev. Regs.
insurance premiums or similar amounts in 11-18)
excess of what the law allows 4. Rice subsidy of P 2,000 or 1 sack of 50 kg rice
amounting to not more than P 2,000 per month;
Special Treatment of Fringe Benefits (Rev. Regs. 11-18)
Effective January 1, 2018 and onwards, a final tax of 5. Uniform and clothing allowance not exceeding
thirty-five percent (35%) is hereby imposed on the P6,000 per year; (Rev. Regs. 11-18)
grossed-up monetary value of fringe benefit 6. Actual yearly medical benefits not exceeding
furnished/granted to the employee by the employer, P10,000;
whether an individual or corporation. 7. Laundry allowance of P300 per month;
8. Employee achievement awards, for length of
Fringe benefit is an income of the employee subject service or safety achievement in the form of
to Fringe Benefit Tax (FBT) but is payable by the tangible personal property other than cash or gift
employer. Employer can deduct FBT from its taxable certificate, with an annual monetary value not
income. exceeding P10,000 received by the employee
under an established written plan which does not
Fringe benefits are only for corporate discriminate in favor of highly paid employees;
officers/management. For rank and file, it is called an 9. Gifts given during Christmas and major
“allowance.” Allowances (benefits to rank and file) anniversary celebrations not exceeding P5,000
are not subject to FBT but are rather treated as per employee per annum;
compensation subject to the regular income tax. 10. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the
Taxable and non-taxable fringe benefits basic minimum wage on a per region basis; and
Fringe benefits not subject to FBT: 11. Benefits received by virtue of a CBA and
1. Fringe benefit authorized and exempted from tax productivity incentive schemes provided that the
under special laws; total annual monetary value received from both
2. Contributions of employer for the benefit of the combined do not exceed P10,000 per employee
employee to retirement, insurance and per taxable year; (Rev. Regs. 01-15)
hospitalizations benefit plan;
3. Benefits given to the rank and file employees,
whether granted under a CBA or not;

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Convenience of the Employer Rule

When a fringe benefit is given solely for the In the case of sellers of services, gross income is
convenience of the employer, the fringe benefit is computed by deducting “cost of services” which
exempt from FBT because the employee does not pertains to all direct costs and expenses exclusively
recognize income from the benefit. and directly incurred in relation to the revenue
realized by such sellers. These refer to costs which
Example: Expenditure on housing of engineer within are considered indispensable to the earning of the
factory premises is not subject to FBT revenue such that without such costs, no revenue
can be generated. (Rev. Regs. 24-08)
General rule: If housing is located outside, it is
subject to FBT. (5) Income from Dealings in Property
Exception: If the nature of the employer’s business
Ordinary Asset v. Capital Asset
is hazardous to health of employee, housing can be
Ordinary Asset Capital Asset
located outside the factory without being subject to
assets that are used properties of a
FBT. primarily in the ordinary taxpayer other than
course of trade or ordinary assets
Example: If employee is given housing allowance in business
cash, this will constitute compensation of the Examples: Examples:
employee (income from whatever source). However, 1. Stock in trade of 1. Stock and
if it qualifies as a fringe benefit, then it will be subject taxpayer securities held
to FBT and the burden is shifted to employer. 2. Property which by taxpayers
would properly be other than
(3) Professional Income included in an dealers in
Income earned from the practice of profession inventory of the securities
provided there is no employer-employee relationship taxpayer, if on 2. Interest in
between him and his clients. hand partnership and
3. Merchandise joint venture
Profession is primarily any endeavor or work inventory 3. Goodwill
requiring specialized training in the field of learning, 4. Depreciable 4. Real property
art, or science engaged in as a means of livelihood assets used in not used in
or profit of an individual or group of individuals. the trade or
trade/business business like
Professional- a person formally certified by a 5. Real property residential
professional body belonging to a specific profession used in house and lot
b1, virtue of having competence a required trade/business 5. Investment
examination or course of studies and/or practice, property
whose competence can usually be measured against
an established set of standards. It also refers to a
person who engages in some art or sport for money, Ordinary Gain v. Ordinary Loss
as a means of livelihood, rather than as a hobby. Ordinary Gain Ordinary Loss
(Rev. Regs. 08-18, Sec. 2 (n) 2nd par) derived from the sale or the excess of business
exchange of ordinary expenses and losses
(4) Income From Business assets including gains over the business
In the case of manufacturing, merchandising, or from performance of income of the taxpayer
mining business, “gross income” means the total services and business; derived from the sale or
sales, less cost of goods sold, plus any income from included in the gross exchange of ordinary
investments and from incidental or outside income. assets; deductible from
operations or sources. In determining gross income, gross income.
deductions should not be made for depreciation,
depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of goods sold.

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Capital Gain v. Capital Loss assets over the losses assets over the gains
Capital Gain Capital Loss from such sales or from such sales or
the excess of value the excess of the losses exchanges exchanges (Sec. 39
received over the from sales or (A)(3))
determined cost from exchanges of other Effect to Ordinary Gain
the sale or exchange of capital assets over the Added to ordinary gain Not deductible from
capital asset gains from such sales ordinary gain
or exchanges;
deductible only from (c) Special rules pertaining to income or loss from
capital gains. dealings in property classified as capital asset (loss
limitation rule, loss carry-over rule, holding period
Actual Gain v. Presumed Gain rule)
Actual Gain Presumed Gain
the amount realized the presumption of the Income from Dealings in Real Property Classified
from the sale of the law of the existence of a as Capital Assets Situated in the Philippines
asset in excess of the gain from sale of real
cost to the taxpayer. property which subjects General rule
the said sale to CGT of Involves the sale or other disposition of real property
6% based on the selling classified as capital asset located in the Philippines
price or FMV, whichever by a non-dealer in real estate.
is HIGHER. Acquisition
cost is not taken in to If the sale is made by a dealer in securities or if the
account real property is an ordinary asset, the resulting gain
or loss will be considered in the computation of
Long-term capital gain v. Short-term capital ordinary income.
gain28
In case of individuals, the percentages of gain or loss Tax Rate: 6%
to be taken into account shall be:
● 100% if the capital asset has been held for 12 Tax Base: The HIGHER between
months or less; and ● Gross selling price;
● 50% if the capital asset has been held for more ● Prescribed zonal value of real properties as
than 12 months determined by the CIR; or
● Fair market value as determined by the
In case of a corporation, the holding period is not provincial and city assessors.
applicable. The capital gain and loss are to be
reported in the full amount regardless of the number Note:
of years the capital asset is held. Gain or loss from the sale of a capital asset is
immaterial since there is a conclusive presumption of
Net Capital Gain v. Net Capital Loss gain.
NET CAPITAL GAIN NET CAPITAL LOSS
Meaning An individual taxpayer has the option to treat the
the excess of the gains the excess of the losses capital gain as subject to 6% CGT or 20-35%
from sales or from sales or graduated tax IF the buyer of the real property is the
exchanges of capital exchanges of capital Government or any of its political subdivisions or
GOCCs.29

28
SEC. 39.(B) Percentage Taken into Account. – In the case of (2) Fifty percent (50%) if the capital asset has been held for
a taxpayer, other than a corporation, only the following more than twelve (12) months;
29
percentages of the gain or loss recognized upon the sale or SEC. 24.(D) Capital Gains from Sale of Real Property. –
exchange of a capital asset shall be taken into account in (1) In General. – The provisions of Section 39(B)
computing net capital gain, net capital loss, and net income: notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
(1) One hundred percent (100%) if the capital asset has been accordance with Section 6(E) of this Code, whichever is higher,
held for not more than twelve (12) months; and is hereby imposed upon capital gains presumed to have been

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Exception: evidencing the transfer of said property. (Rev.

Capital gains presumed to have been realized from Regs. 13-99, as amended by Rev. Regs. 14-00)
the sale or disposition of their principal residence by
natural persons, the proceeds of which is fully utilized Dealings in shares of stock of Philippine
in acquiring or constructing a new principal residence corporations
within eighteen (18) calendar months from the date
of sale or disposition, may be exempt from the capital (a) Not listed and not traded in the stock
gains tax, subject to certain conditions. exchange (Capital Gains Tax)
Tax Rate — final tax at the rate of fifteen
Requisites:30 percent (15%)
1. Sale or disposition of the old actual principal
residence; Tax Base – net capital gains realized during the
2. By a citizen or resident alien; taxable year from the sale, barter, exchange or
3. Proceeds of which are utilized in acquiring or disposition of shares of stock not listed and not
constructing a new principal residence within 18 traded in the stock exchange.
calendar months from date of sale or
disposition; Net Capital Loss Carry-over
4. Notice to the CIR within 30 days from the date of Corporations cannot carry over a net capital loss.31
sale or disposition through a prescribed return of
his intention to avail tax exemption; If any taxpayer, other than corporations, sustained a
5. Can be availed of only once every 10 years; net capital loss in any taxable year, such loss is
6. The historical cost or adjusted basis of his old treated in the succeeding taxable year as a loss from
principal residence shall be carried over to the the sale/exchange of a capital asset held for not more
cost basis of his new principal residence; than 12 months (100% deduction)
7. If there is no full utilization, the portion of the
gains presumed to have been realized shall be Such net capital loss that should be carried over
subject to capital gains tax; and should not exceed the net income for the year
8. The 6% capital gains tax due shall be deposited Incurred (prior year’s net income)
with an authorized agent bank subject to release
upon certification by the RDO that the proceeds Example:
of the sale have been utilized. Net income in 2011 = P6,000
Net capital loss in 2011 = P10,000
The date of sale or disposition of a property refers to Amount deductible in 2012 is P6,000 only since it
the date of notarization of the document should not exceed the net income of the taxable year

realized from the sale, exchange, or other disposition of real Provided, further, That the Commissioner shall have been duly
property located in the Philippines, classified as capital assets, notified by the taxpayer within thirty (30) days from the date of
including pacto de retro sales and other forms of conditional sale or disposition through a prescribed return of his intention
sales, by individuals, including estates and trusts: Provided, to avail of the tax exemption herein mentioned: Provided, still
That the tax liability, if any, on gains from sales or other further, That the said tax exemption can only be availed of once
dispositions of real property to the government or any of its every ten (10) years: Provided, finally, that if there is no full
political subdivisions or agencies or to government-owned or - utilization of the proceeds of sale or disposition, the portion of
controlled corporations shall be determined either under the gain presumed to have been realized from the sale or
Section 24(A) or under this Subsection, at the option of the disposition shall be subject to capital gains tax. For this
taxpayer; purpose, the gross selling price or fair market value at the time
of sale, whichever is higher, shall be multiplied by a fraction
30
SEC. 24.(D) Capital Gains from Sale of Real Property. – which the unutilized amount bears to the gross selling price in
(2) Exception. – The provisions of paragraph (1) of this order to determine the taxable portion and the tax prescribed
Subsection to the contrary notwithstanding, capital gains under paragraph (1) of this Subsection shall be imposed
presumed to have been realized from the sale or disposition of thereon.
31
their principal residence by natural persons, the proceeds of SEC. 39.(D) Net Capital Loss Carry-over. – If any taxpayer,
which is fully utilized in acquiring or constructing a new principal other than a corporation, sustains in any taxable year a net
residence within eighteen (18) calendar months from the date capital loss, such loss (in an amount not in excess of the net
of sale or disposition, shall be exempt from the capital gains tax income for such year) shall be treated in the succeeding
imposed under this Subsection: Provided, That the historical taxable year as a loss from the sale or exchange of a capital
cost or adjusted basis of the real property sold or disposed shall asset held for not more than twelve (12) months.
be carried over to the new principal residence built or acquired:

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where the loss was incurred. Note that the allowable 4. Interest on any current bank
capital loss to be deducted in 2012 (i.e. P6,000) is deposit, yield or other monetary
only to the extent of the capital gain for 2012. benefits from deposit 20%
substitute, trust fund and
Net income should be understood as TAXABLE similar arrangement
income according E.O. 37.
5. Prizes (except if P10,000 or
Summary of Rules with regard to NOLCO less, which shall be subjected 20%
1. Allowed to any taxpayers, other than to graduated income tax rates)
corporations;
2. The net loss can be carried over only to the 6. Winnings (except Philippine
extent of net income for the year sustained (loss Charity Sweepstakes and Lotto
20%
limitation rule); winnings amounting to P10,000
3. The net loss carry-over is deductible only for the or less, which shall be exempt)
succeeding year (loss carry-over rule);
4. Capital asset must be held for not more than 12
months (holding period rule);
5. Do not apply to sale or disposition of the
following capital assets: 7. Cash or property dividend
a. shares of stock of a domestic corporation received from a domestic
not traded through the local stock corporation, or regional operating
exchange; and headquarter of an MNC
b. real property held as capital assets.
Note: Dividends from foreign
(6) Passive Investment Income corporation
10%
● Citizens – computed under
Passive income refers to income derived from any Sec. 24(a) tax table
[20% for
activity in which the taxpayer has no active ● Resident aliens – not
NRA-ETB]
participation or involvement. taxable (income derived
from abroad)
As a rule, passive income subjected to final tax is no
longer included in the computation of the annual
taxable income.

TAX RATE ON CERTAIN FINAL TAX

PASSIVE INCOME ON
8. Interest on long-term deposit
CITIZENS AND RESIDENT
or investment in banks (with
ALIENS Exempt
maturity of 5 years or more)
1. Interest under the expanded
foreign currency deposit
system
15%
TAX RATE ON DOMESTIC NRFC
[NRC: Exempt] CERTAIN PASSIVE AND RFC
[NRA-ETB: Exempt] INCOME ON
CORPORATIONS
2. Royalty from books, literary
works, and musical 10%
1. Interest on currency 20% 25%
compositions
bank deposit
3. Royalty other than above 20%
2. Yield or any other 20% 25%
monetary benefit from:

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● These are considered income in the amount

of the full market value as when received by
(1) Deposit substitutes
the stockholder.
(2) Trust funds, and
● If it was paid in stock of another corporation,
similar arrangements
it is not considered a stock dividend. It is still
Royalties 20% 25% considered property dividend.

Interest from a 15% Exempt Liquidating dividends: taxable

depositary bank under ● When a corporation distributes all its
the expanded foreign properties or assets in complete liquidation,
currency deposit the gain realized is taxable.
system ● Computation:
o When a corporation distributes all of its
Prizes Part of assets in complete dissolution and
25% liquidation, there is no dividend income
Income Tax
to the shareholder. Instead, there is a
sale or exchange of property. (Rev.
(a) Interest Regs. 02-40, Sec. 256)
Earned on currency bank deposits and yield or any o When a corporation is dissolved and in
other monetary benefit from deposit substitutes and process of complete liquidation and its
from trust funds and similar arrangement. shareholders surrendered their stock to
it and paid the sums in question to them
(b) Dividend in exchange, a transaction took place,
Any distribution made by a corporation to its which was no different in its essence
shareholders out of its earnings or profits and from a sale of the same stock to a third
payable to its shareholders, whether in money or in party. (Wise v. Meer, G.R. No. 48231,
other property. 1947)
▪ The gain is a capital gain, but
Stock dividends represent the transfer of surplus to subject to ordinary/regular
capital account and shall not be subject to tax. income tax (Sec. 9, Rev. Regs.
6-2008)
However, if a corporation cancels or redeems stock
issued as dividend at such time and in such manner Tax Treatment on Corporations of income
as to make the distribution and cancellation or derived from dividends:
redemption, in whole or in part, essentially equivalent (a) If the dividends are from a domestic corporation:
to the distribution of a taxable dividend, the amount Domestic and resident foreign corporations are
so distributed in redemption or cancellation shall be tax-exempt as they are treated as inter-corporate
considered as taxable income to the extent that it dividends.
represents a distribution of earnings or profits.
For non-resident foreign corporations, the
General rule: Cash and property dividends are dividend is subject to:
taxable. Stock dividends are not taxable. (1) Tax treaty rate, if applicable
(2) 15% if no tax treaty but satisfies the tax-
Property dividends: sparing provision32

32
SEC.28(B5) - Intercorporate Dividends. – A final withholding in the Philippines equivalent to twenty percent (20%), which
tax at the rate of fifteen percent (15%) is hereby imposed on represents the difference between the regular income tax of
the amount of cash and/or property dividends received from a thirty-five percent (35%) and the fifteen percent (15%) tax on
domestic corporation, which shall be collected and paid as dividends as provided in this subparagraph: Provided, That
provided in Section 57(A) of this Code, subject to the condition effective January 1, 2009, the credit against the tax due shall
that the country in which the non-resident foreign corporation is be equivalent to fifteen percent (15%), which represents the
domiciled, shall allow a credit against the tax due from the non- difference between the regular income tax of thirty percent
resident foreign corporation taxes deemed to have been paid (30%) and the fifteen percent (15%) tax on dividends;

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(3) 30% if no tax treaty and does not comply

with the tax-sparing provision
NRFC (RA NRA
(4) If the dividends are from a foreign
NO. 9337,
corporation:
Sec. 2)
The income shall form part of the gross income of Vessel 4.5% 25%
the corporation but the situs of the income
becomes material except for a domestic Aircraft, 7.5% 25%
corporation which is taxed on worldwide income. machineries,
Summary of Intercorporate Dividends and other
equipment
Payor Recipient Tax
Other assets 32% 25%
Domestic Domestic
Not Taxable
Corporation Corporation
Domestic Resident Lease of real property
Corporation Foreign Not Taxable The lease of real property shall be considered as
Corporation conduct of trade or business on the part of the lessor;
Domestic Non-Resident hence, the rental income therefrom shall be
Corporation Foreign 15% FWT considered as business income which shall be
Corporation included in the computation of the year-end gross
Foreign Domestic 100% of income of the lessor, and not as a passive investment
Corporation Corporation dividend is income subject to withholding tax
taxable and
included in the Improvements made by lessees are taxable as
ITR of the income on the part of the lessor provided that such
recipient buildings or improvements are not subject to the
removal by the lessee.
EXC: Such The lessor may either:
dividends shall ● Report the improvements as income at the time
be exempt when such improvements are completed based
when all the
on their fair market value [outright method]; or
requirements
under Sec. ● Spread over the life of the lease the estimated
27(D)(4) are depreciated value of the improvements at the
met.33 termination of the lease and report as income for
each year of the lease an aliquot part thereof
(c) Rental Income [spread-out method] (Rev. Regs. 02-40, Sec. 49)
Amount or compensation paid for the use or
enjoyment of a thing or a right and implies a fixed sum Any additional amount paid, directly or indirectly, by
or property amounting to a fixed sum to be paid at a the lessee in consideration for the lease is
stated time for the use of property. considered rental. Therefore, taxes paid by the
lessee on leased property are part of rental income
Lease of personal property of the landlord.
Rental income on the lease of personal property
located in the Philippines and paid to a nonresident Prepaid or advance rental is taxable income to the
taxpayer shall be taxed as follows: lessor in the year received, if so received under a

33
Requirements for income tax exemption of foreign-sourced (3) The DC directly holds at least 20% in value of the
dividends received by a DC: outstanding shares of the foreign corporation, and has held the
(1) Such dividends are reinvested in the business operations of same uninterruptedly for a minimum of 2 years (or for the entire
the DC in the Philippines within the next taxable year from existence of the foreign corporation if the foreign corporation
receipt thereof; has been in existence for less than 2 years) at the time of the
(2) The use thereof shall be limited to funding the working dividend distribution (Sec. 27(D)(4), NIRC as amended by RA
capital requirements, capital expenditures, dividend payments, No. 11534 which took effect April 11, 2021; Rev. Reg. No. 5-
investment in domestic subsidiaries, and infrastructure 2021).
projects, of the DC recipient; and

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claim-of-right and without restriction as to its use, and • Amount received by insured as return of
regardless of the method of accounting employed. premium received either during the term or
Security deposit applied to the rental of the terminal at the maturity of the terms or upon
month or period of contract must be recognized as surrender of the contract;
income at the time it is applied. Note: If such amounts are held by the
insurer under an agreement to pay interest,
Note: If the security deposit merely serves to ensure the interest payments shall be included in
compliance with the contract (security deposit with the gross income.
acceleration clause), it is not income to the lessor
until the lessee violates any provision of the contract. • Proceeds of life insurance policies paid to
the heirs/beneficiaries upon the death of the
Tax treatment of: insured; (See Sec. 32(B)(1))
● Income from Leasehold Improvements • If such amounts are held by the insurer
When the lessee erected or built permanent under an agreement to pay interest, the
improvements on the leased property, which will interest payments shall be included in the
become the property of the lessor upon the expiration gross income.
of the lease, the value of the improvements should
be reported as income of the lessor either through the Note: The insured must die to avail of total
outright method or the spread-out method. exemption. If he survives, there/s only partial
exemption to the extent that the proceeds
● Advance payment/long-term lease constitute return of capital (total amount of
If the advance payment is a prepaid rental without premiums previously paid).
restriction as to use, the entire amount is taxable in
the year it is received. (8) Prizes and Awards

If the advance payment is a security deposit which Prizes and awards made primarily in recognition of
restricts the lessor as to its use, such amount shall religious, charitable, scientific, educational, artistic,
be taxable only at the time it is applied. literary or civic achievement are excluded from the
gross income34, but only if:
If the advance payment is a loan deposit, or option ● Recipient was selected without any action on his
money for the property or a security deposit to ensure part; and
the faithful performance of certain obligations of the ● Recipient not required to render substantial
lessee, such amount shall not be taxable to the lessor future services as a condition of receiving the
unless the lessee violates the terms of the contract. prize/award.

(7) Annuities, Proceeds from Life Prizes/awards in a sports competition sanctioned by

Insurance, or Other Types of national sports associations whether held in the
Insurance Philippines or abroad are also excluded from the
gross income35
Annuity – installment payments of income or
pension by insurance companies during the life of a
person or for a guaranteed fixed period of time,
whichever is longer.
Amounts excluded from gross income:

34 35
SEC. 32 (B) (7) (C) Prizes and Awards. - Prizes and awards SEC. 32 (B) (7) (d) Prizes and Awards in sports
made primarily in recognition of religious, charitable, scientific, Competition. - All prizes and awards granted to athletes in
educational, artistic, literary, or civic achievement but only if: local and international sports competitions and tournaments
(i) The recipient was selected without any action on his part to whether held in the Philippines or abroad and sanctioned by
enter the contest or proceeding; and their national sports associations.
(ii) The recipient is not required to render substantial future
services as a condition to receiving the prize or award.

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(9) Pensions, Retirement Benefit, or (c) Receipt of tax refunds or credit

Separation Pay Taxes, when refunded or credited, shall be included
as part of gross income in the year of receipt to the
Lump sum payment or on a staggered basis in extent of income tax benefit of said deduction.37
consideration of services rendered given after an
individual reaches the age of retirement. The following are non-taxable tax refunds (i.e., non-
deductible taxes):
Amounts excluded from gross income: ● In general, Philippine income tax
1. Retirement benefits received under RA 7641 ● Final taxes, being in the nature of income tax
(Labor Code of the Philippines) ● Income tax imposed by authority of any foreign
2. Retirement benefits received under a reasonable country (except when the taxpayer signifies his
private benefit plan desire to avail of the tax credit for taxes of foreign
3. Amount received as a consequence of
countries)
separation for any cause beyond control (death,
sickness or other physical disability) ● Estate and donor’s taxes
4. Benefits received from a foreign government by ● Taxes assessed against local benefits of a kind
resident or nonresident citizens or aliens who tending to increase the value of the property
reside permanently in the Philippines assessed
5. Veterans benefits ● Special assessments
6. Benefits under SSS (d) Income from any source whatever
7. Benefits received from GSIS
Concept of income from whatever source derived
(10) Income from any Source “Income from whatever sources derived” means
inclusion of all income not expressly exempted within
(a) Condonation of indebtedness the class of taxable income under the laws
Pertains to forgiveness of indebtedness irrespective of the voluntary or involuntary action of
the taxpayer in producing the gains, and whether
A GIFT – if the forgiveness of the Not derived from legal or illegal sources.
debt is without any consideration Taxable
whatsoever EXAMPLES OF EXAMPLES OF
INCOME FROM INCOME FROM
A CAPITAL TRANSACTION – if Taxable
LEGAL SOURCES ILLEGAL SOURCES
the forgiveness of a stockholder is
equivalent to dividend distribution Employee’s salary, Gambling, kidnapping,
A TAXABLE INCOME – in Taxable bonus, and extortion, smuggling,
exchange of a service performed commissions/ rebates embezzlement

This includes:
(b) Recovery of accounts previously written off
● Income derived from illegal sources
Recovery of bad debts previously allowed as
Rationale:
deduction in the preceding years shall be included as
1. Shouldn’t give tax benefit to thieves when
part of gross income in the year of recovery to the
taxing law-abiding citizens.
extent of the income tax benefit of such deduction
2. Enforcement of non-tax criminal issues
(tax benefit rule)36

An unlawful gain, as well as a lawful one,

constitutes taxable income when its recipient
has such control over it that, as a practical

36
SEC. 34 (E) (1) In General. - Debts due to the taxpayer deduction in the preceding years shall be included as part of
actually ascertained to be worthless and charged off within the the gross income in the year of recovery to the extent of the
taxable year except those not connected with profession, trade income tax benefit of said deduction.
37
or business and those sustained in a transaction entered into SEC. 34 (C) (1) (d). Taxes assessed against local benefits of
between parties mentioned under Section 36 (B) of this Code: a kind tending to increase the value of the property assessed.
Provided, That recovery of bad debts previously allowed as

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matter, he derives readily realizable economic virtue of a law beforehand

value from it. Hence, money obtained by or treaty. but later
extortion is income taxable to the extortioner claimed as tax
only when he personally benefitted from the credits,
funds. (Hobson v. Commissioner, U.S.14850- hence, is
89, 1992) deducted
from the tax
It is well settled that profits or gains earned liability of the
illegally constitute gross income. (James v. taxpayer.
United States 366 U.S. 213 1961)

However, in circumstances where (a) Under the Constitution

misappropriations do not enrich or benefit the Income derived by the Government or its political
misappropriator, and there is a consensual subdivision, including government instrumentalities,
recognition of an obligation to repay the funds, from the exercise of any essential government
income does not arise. (Beasley v. function
Commissioner, U.S. 3729-85, 1989)
(b) Under the Tax Code
● Compensation for damages if it represents i. Proceeds Of Life Insurance Policies38
payment for loss of expected profits Proceeds of life insurance policies paid to the
● Those received by mistake (Javier v. CA, G.R. heirs/beneficiaries upon the death of the insured.
78953, 1991)
Insured must die to avail of total exemption. If he
e. Exclusions survives, there’s only partial exemption to the extent
that the proceeds constitute return of capital (total
(1) Taxpayers Who may Avail amount of premiums previously paid.)
All taxpayers may avail of exclusions from gross
income. However, if such amounts are held by the insurer
under an agreement to pay interest, the interest
(2) Distinguished from Deductions and payments shall be included in the gross income.
Tax Credits
EXCLUSION DEDUCTIONS TAX ii. Amount Received by Insured as Return of
CREDITS Premium39
not included these are these refers to The amount received by the insured, as a return of
in the included in the taxes paid premiums paid by him under life insurance,
computation gross income beforehand endowment or annuity contracts, either during the
of gross but are later but later term or at the maturity of the term mentioned in the
income; deducted to claimed as tax contract or upon surrender of the contract are
income compute the net credits, excluded from gross income.
received or income or hence, is
earned but is taxable income. deducted
not taxable as from the tax
income liability of the
because of taxpayer.
exemption by these refers to
taxes paid

38 39
SEC. 32 (B) (1) Life Insurance. - The proceeds of life SEC. 32 (B) (2) Amount Received by Insured as Return of
insurance policies paid to the heirs or beneficiaries upon the Premium. - The amount received by the insured, as a return
death of the insured, whether in a single sum or otherwise, but of premiums paid by him under life insurance, endowment, or
if such amounts are held by the insurer under an agreement to annuity contracts, either during the term or at the maturity of
pay interest thereon, the interest payments shall be included in the term mentioned in the contract or upon surrender of the
gross income. contract.

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iii. Gifts, Bequest, Devises40 be exempt to the extent of the amount of the actual
To be excluded from gross income, must be damage as return of capital.)
characterized by disinterested generosity and pure
liberality. Must be physical injury, not injury to rights.

However, income from such property shall be v. Income Exempt Under Treaty
included in gross income. To the extent required by any treaty obligation
binding upon the Philippine government42.
Difficult to establish gift situations if there is an
employer-employee relationship; a bonus/assistance vi. Retirement Benefits, Pensions, Gratuities43
in recognition of service rendered is not exempt. Retirement benefits received under RA 7641
(amending the Labor Code) and those received in
If given under: accordance with a reasonable private benefit plan.
a) constraining force of any moral or legal duty, or
b) from the incentive of an anticipated benefit of an “Under RA 7641”
economic nature; or Conditions:
c) where it is a return for services rendered, proceeds (a) At least 60 years old;
cannot qualify as a gift. (b) 5 years of service at time of retirement; and
(c) Retirement upon reaching the retirement age
Most critical is the giver’s intention or motive. Can be established in the CBA or other applicable
a gift if given on account of filial relationship. employment contract

iv. Amount Received Through Accident or Availed if there is no reasonable private benefit plan.
Health Insurance Plus Damages Received41
Received through Accident/Health Insurance or Limited exemption: ½ month salary for every year of
Workmen’s Compensation Act, as compensation for service; in a reasonable private benefit plan, all is
personal injuries/sickness + amount of damages excludable.
received on account of such injuries/sickness.
“Reasonable Private Benefit Plan”
Damages will be exempt only if they arise together Conditions:
with personal injury; however, if damages only (a) At least 50 years old; and
amount to return of capital, it is exempt (e.g. (b) In the service of same employer for at least 10
damages from car accident exempt only if claim years at time of retirement
includes compensation for personal injury; if no
personal injury, damages for car wreckage will only Must be approved by the BIR.

40
SEC. 32 (B) (3) Gifts, Bequests, and Devises. - The value reasonable private benefit plan maintained by the employer:
of property acquired by gift, bequest, devise, or descent: Provided, That the retiring official or employee has been in the
Provided, however, That income from such property, as well as service of the same employer for at least ten (10) years and is
gift, bequest, devise or descent of income from any property, in not less than fifty (50) years of age at the time of his retirement:
cases of transfers of divided interest, shall be included in gross
income. Provided, further, That the benefits granted under this
41
SEC. 32 (B) (4) Compensation for Injuries or Sickness. - subparagraph shall be availed of by an official or employee only
Amounts received, through Accident or Health Insurance or once.
under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages For purposes of this Subsection, the term 'reasonable private
received, whether by suit or agreement, on account of such benefit plan' means a pension, gratuity, stock bonus or profit-
injuries or sickness. sharing plan maintained by an employer for the benefit of some
42
SEC. 32 (B) (5) Income Exempt under Treaty. - Income of or all of his officials or employees, wherein contributions are
any kind, to the extent required by any treaty obligation binding made by such employer for the officials or employees, or both,
upon the Government of the Philippines. for the purpose of distributing to such officials and employees
43
SEC. 32 (B) (6) (a) Retirement Benefits, Pensions, the earnings and principal of the fund thus accumulated, and
Gratuities, etc. - wherein its is provided in said plan that at no time shall any part
(a) Retirement benefits received under Republic Act No. 7641 of the corpus or income of the fund be used for, or be diverted
and those received by officials and employees of private firms, to, any purpose other than for the exclusive benefit of the said
whether individual or corporate, in accordance with a officials and employees.

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A pension, gratuity, stock bonus or profit-sharing plan Income derived from any public utility or from the
maintained by an employer for the benefit of some or exercise of any essential governmental function
all of his officials/employees, wherein contributions accruing to the Government or to any political
are made by such employer for the subdivision.
officials/employees, or both, for the purpose of
(c) Prizes and Awards
distributing to such officials & employees the
earnings & principal of the fund thus accumulated; no In recognition of religious, charitable, scientific,
part of the income shall be used for/be diverted to any educational, artistic, literary or civic achievement, but
purpose other than for the exclusive benefit of the only if:
said officials & employees. 1. Recipient was selected without any action
on his part; and
Service must be continuous. 2. Recipient not required to render substantial
future services as a condition of receiving
Can be availed of only once (once one has availed of the prize/award
RPBP, he cannot avail of another RPBP); however,
he can avail of exemption under another ground such (d) Prizes and Awards in Sports Competition
as SSS or GSIS benefits.
The following are requisites for the exclusion of
The phrase “shall not have availed of the privilege prizes and awards in sports competition from gross
under a retirement benefit plan of the same or income:
another employer” found in Sec. 32(B)(6)(a) of the
NIRC means that the retiring official must not have 1. All Prizes and Awards
previously received retirement benefits from the 2. Granted to Athletes
3. In local and international sports tournaments
same or another employer who has a qualified
and competitions; and
retirement benefit plan. (BIR Ruling No. 125-98) 4. Sanctioned by their national sports
associations
vii. Miscellaneous Items
(a) Income Derived by Foreign Government (e) 13th Month Pay and Other Benefits

For an income derived by foreign government from Gross benefits received by officials and employees
investments in the Philippines be exempted from tax: of public and private entities.

1. It must be an income derived from Included in the said amount are the 13th month pay,
investments in the Philippines and all other employee benefits such as productivity
2. It must be derived from bonds, loans or other incentives, Christmas bonus, loyalty award, and
domestic securities, stocks or interests on other payments in cash or in kind. It does not cover
deposits in banks; basic salary and other allowances.
3. The recipient of such income from
investment in the Philippines must be a: Total exclusion shall not exceed Ninety Thousand
a. Foreign government pesos (P90,000) which shall cover:
b. Financing institutions owned, 1. Benefits received by officials and
controlled or financed by a employees of the national and local
foreign government; or government pursuant to R.A. 6686
c. Regional or international 2. Benefits received by employees
financing institutions pursuant to P.D. No. 851, as
established by a foreign amended by Memorandum Order
government No. 28,
3. Benefits received by officials and
The exclusion may be premised either on the employees not covered by P.D. No.
principle of comity or upon the principle of reciprocity. 851, as amended by Memorandum
Order No. 28,
(b) Income derived by the Government or its 4. Other benefits such as productivity
Political Subdivisions incentives and Christmas bonus.

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De minimis benefits are not included in the contributions, for the purpose of being invested solely
computation of the said P90,000 ceiling. De minimis in qualified/eligible PERA investment products.
benefits are, by themselves, a separate exclusion
from gross income. PERA contributions from the employer to the
employee’s PERA are excluded from the employee’s
(f) GSIS, SSS, Medicare and Other gross income. On the other hand, the employer can
Contributions claim the actual amount of his contribution as a
deduction from his gross income, but only to the
These cover only the mandatory/compulsory
contributions of the concerned employees to SSS, extent of his contribution that would complete the
GSIS, PHIC, and HDMF. maximum allowable PERA contribution of the
employee.
Voluntary contributions in excess to what the law
allows to these institutions are not excludible from the 4. Deductions from Gross Income
gross income of the taxpayer and not exempt from
income tax and withholding tax. (RMC 27-2011) To be deductible as a business expense:
1. The expense must be ordinary and
(g) Gains from the Sale of Bonds, Debentures necessary;
and Other Certificate of Indebtedness 2. It must be paid or incurred within the taxable
year;
By way of incentive for making such investments, the
law excludes from gross income “gains realized from 3. It must be paid or incurred in carrying on a
the sale or exchange or retirement of bonds, trade or business; (business test) and
debentures, and other certificates of indebtedness 4. It must be substantially proven by evidence
with a maturity of more than five (5) years. or records (Esso Standard Eastern, Inc. v.
CIR, G.R. No. L-28508-9, 1989)
(h) Gains from Redemption of Shares in Mutual
Fund Note: Any income payment which is otherwise
deductible under the NIRC shall be allowed as a
Gains realized by the investor upon redemption of deduction from the payor's gross income only if it is
shares of stock in a mutual fund company.
shown that the income tax required to be withheld
(i) Income derived from the sale of gold, has been paid to the BIR.44
pursuant to R.A. 7076
The “all events test” is used to determine when an
Income derived from the following transactions accrual of income or expense is permitted for
pursuant to R.A. 7076, otherwise known as the claiming deductions. It requires:
“People’s Small-scale Mining Act of 1991” 1. Fixing of a right to income or liability to pay;
and
1. Sale of gold to the Bangko Sentral ng 2. The availability of the reasonable accurate
Pilipinas by registered small-scale miners determination of such income or liability.
2. Sale of gold by registered small-scale
miners to accredited traders for eventual
sale to the Banko Sentral ng Pilipinas Under this test, the amount of deduction need not be
determined exactly as long as the same may be
determined with reasonable accuracy. The term
(c) Under Special laws
“reasonable accuracy” clearly implies something less
RA No. 9505: Personal Equity and Retirement than an exact or completely accurate amount. (CIR
Account (PERA) Act of 2008 (Rev. Regs. 17-11) v. Isabela Cultural Corporation, G.R. No. 172231,
2007)
PERA shall refer to an employee-contributor’s
voluntary retirement account established from the
contributor’s own contributions and/or his employer’s

44
SEC. 34 (K) Additional Requirements for Deductibility of allowed under this Section, shall be allowed as a deduction only
Certain Payments. - Any amount paid or payable which is if it is shown that the tax required to be deducted and withheld
otherwise deductible from, or taken into account in computing therefrom has been paid to the Bureau of Internal Revenue in
gross income or for which depreciation or amortization may be accordance with this Section 58 and 81 of this Code.

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Persons who are NOT Allowed to Claim 8. Charitable & other contributions
Deductions from Gross Income: 9. Pension trusts
10. Research & development
1. Subject to Final Tax on their gross income
derived from sources within the Philippines, Bad Debts
hence, no deductions allowed: Bad debts are debts due to the taxpayer ascertained
a. Non-Resident Alien Not Engaged in
to be worthless and charged off during the year may
Trade or Business
b. Non-Resident Foreign Corporation be claimed as a deduction.

2. Purely compensation income earners are Requisites for Deductibility:

not entitled to deductions: 1. There must be an existing indebtedness due
a. Resident Citizen to the taxpayer which must be valid and
b. Non-Resident Citizen legally demandable;
c. Resident Alien 2. It must be connected with the taxpayer’s
trade, business or practice of profession;
a. Concept of Return of Capital 3. It must not be sustained in a transaction
entered into between related parties;
Sale of inventory of goods by manufacturers and 4. It must actually be charged off in the books
dealers of properties – The portion of the receipt of accounts of the taxpayer as of the end of
representing the cost of goods manufactured and the taxable year;
sold (manufacturers) and cost of sales (dealers) are 5. It must actually be ascertained to be
deducted from the gross sales. worthless and uncollectible as of the end of
the taxable year (Rev. Regs. 05-99, as
Sale of stock in trade by a real estate dealer and
amended by Rev. Regs. 25-02)
dealer in securities – Generally, the return of capital
6. The bad debt must not be one contracted
is not allowed to be deducted from the gross sales.
with a related party.
Taxpayers are required to deduct the total cost
specifically identifiable to the real property or shares
Bad debts arising from transactions between related
of stock sold or exchanged.
parties are NOT deductible.
Sale of services – Generally, the return of capital is a. Between members of a family (includes only
not allowed to be deducted from the gross sales. brothers and sisters, spouse, ancestors, and
Thus, the entire gross receipts are treated as part of lineal descendants)
income. b. Between an individual & a corporation, more
than 50% in value of outstanding stock is
b. Itemized Deductions vs. owned by such individual (except in case of
Optional Standard distributions in liquidation)
Deductions c. Between 2 corporations more than 50% in
value of outstanding stock owned by same
Kinds of deductions: individual, if either one is a personal holding
1. Itemized deductions company or a foreign holding company
2. Optional standard deduction (OSD) during the taxable year preceding the date of
3. Special deductions sale/exchange
d. Between grantor and fiduciary of any trust
(1) ITEMIZED DEDUCTIONS (BELT-DID-CPR) e. Between fiduciary of a trust and the fiduciary
1. Bad debts of another if same person is a grantor to
2. Business Expenses each trust
3. Losses f. Between fiduciary and a beneficiary of a trust
4. Taxes
5. Depreciation Effects of Recovery of Bad Debts
6. Interest Tax Benefit Rule - Recovery of bad debts previously
7. Depletion of oil & gas wells & mines allowed as deduction in the preceding years shall be
included as part of gross income in the year of

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recovery to the extent of the income tax benefit of Expenses to be Deductible:

such deduction. (Rev. Regs. 05-99, Sec. 4) • Amount must be reasonable
• It must be substantiated
Example. A taxpayer incurred P50,000 bad debt • It is not contrary to law, public policy or morals
expense in 2018 out of which P20,000 was recovered • Tax required to be withheld must have been
in 2020. The P20,000 will be reverted back to gross paid to the BIR
income in 2020. Thus, taxable income shall be
P150,000 Substantiation Requirements
2018 2019 2020 Sufficient evidence (i.e. official receipts, financial
statements or other adequate records) to
NI before P100,000 P60,000 P130,000 substantiate:
bad debt • Amount of expense deducted; and
expense
• Direct connection/relation of the expense to the
(bad debt (50,000) - 20,000 development, management operation and/or
expense)/ conduct of the trade, business or profession of
recovery the taxpayer.
NI after BD P50,000 P60,000 P150,000
expense Classification of Expenses:
1. Ordinary expense – normal or usual in
Ascertainment of Worthlessness relation to the taxpayer’s business and the
Taxpayer did in fact ascertain the debt to be surrounding circumstances.
worthless in the year for which the deduction was 2. Necessary expense – appropriate and
sought. Worthlessness is not determined by an helpful in the development of taxpayer’s
inflexible formula or slide rule calculation but upon business and is intended to minimize losses
the exercise of sound business judgment. (Collector or to increase profits; day-to-day expense.
v. Goodrich, G.R. No. L-22265, 1967)
Note: While illegal income will form part of the
The determination of worthlessness must depend income of the taxpayer, expenses which
upon the particular facts and circumstances of the constitute bribe, kickback, and other similar
case. It must be uncollectible even in the future. payment, being against law and public policy
are not deductible from gross income.
That in so doing, he acted in good faith. Good faith
does not require that the taxpayer be an incorrigible 3. Business expense – expenditure related to
optimist but on the other hand, he may not be unduly the business that is deductible in the year
pessimistic. incurred.
4. Capital expense – expenditure that
Business Expenses improves or adds to the value of the
Requisites for Deductibility45 taxpayer’s property or equipment; not
1. Must be ordinary and necessary. immediately deductible, i.e., deductible over
2. Must have been paid or incurred during the time, taking into account depreciation.
taxable year.
3. Must have been paid or incurred in carrying Private educational institutions - in addition to the
on the trade or business of the taxpayer. expenses ordinarily allowed as deductions, a private
4. Must be supported by receipts, records or educational institution has the option to either (Sec.
other pertinent papers. (CIR v. General 34 (A)(2)):
Foods Phils. G.R. No. 143672, 2003)

45
SEC. 34 (A) Ordinary and Necessary Trade, Business or incurred during the taxable year in carrying on or which are
Professional Expenses. – directly attributable to, the development, management,
(a) In General. - There shall be allowed as deduction from gross operation and/or conduct of the trade, business or exercise of
income all the ordinary and necessary expenses paid or a profession xxx

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1. Deduct outright those otherwise considered as An advance payment is not deductible expense on
capital outlays of depreciable assets for the the part of the lessee until the same is used for the
expansion of school facilities; or relevant period, although the lessor may be required
2. Capitalize asset & deduct allowance for to report the amount when received.
depreciation
Repairs and Maintenance
Advertising Expense Incidental (minor) repairs are deductible from gross
There is yet to be a clear-cut criterion or a fixed test income. They do not materially add to the value of the
for determining the reasonableness of an advertising property nor appreciably prolong its life but keep it in
expense. There being no hard and fast rule, the right an ordinarily efficient operating condition.
to a deduction depends on a number of factors such
as but not limited to: the type and size of business in Major repairs (replacement) are not deductible from
which the taxpayer is engaged; the volume and gross income. They prolong the life of the asset and
amount of its net earnings; the nature of the thus should be capitalized.
expenditure itself; the intention of the taxpayer; and
the general economic conditions. (CIR v. General Expenses for Professionals
Foods Phils. G.R. No. 143672, 2003) Amounts expended for books, furniture, and
professional instruments and equipment, the useful
Salaries, Wages & Other Forms of Compensation life of which is short, may be deducted.
for Personal Services Actually Rendered
(Including Grossed-Up Monetary Value of Fringe However, amounts expended for books, furniture,
Benefit); but the Final Tax Should Have Been Paid and professional instruments and equipment of a
Must be reasonable. Must be for the personal permanent character are not allowable as deductions
services actually rendered. and are instead capitalized.

Travel Expenses, Here and Abroad, in Pursuit of Entertainment, Amusement & Recreation
Trade, Business/Profession Expenses directly connected to the development,
Travel expenses include transportation expenses, Management & operation & conduct of trade,
meals and lodging incurred solely on business. If business/profession
undertaken for other than business purposes, not Subject to a limit of:
deductible. (Rev. Regs. 02-40, Sec. 66) • For taxpayers engaged in sale of
goods/properties – one half of one percent
Cost of Materials (0.50%) of net sales (gross sales less sales
Taxpayers should include in expenses the charges returns/allowances/discounts)
for materials and supplies only to the amount that • For taxpayers engaged in sale of services,
they are actually consumed and used in operation exercise of profession – one percent (1%) of net
during the year for which the return is made, provided revenues (gross revenue less discounts)
that the cost of such materials and supplies has not • Engaged in both sale of goods/properties and
been deducted in determining the net income for any services – determined based on apportionment
previous year. (Rev. Regs. 02-40, Sec. 67) formula taking into consideration net
sales/revenue to total net sales/revenue, in
If the materials or supplies are used directly or which case shall not exceed maximum ceiling
indirectly in the production of the product, the related prescribed above. (Rev. Regs. 10-02, Sec. 5)
cost shall form part of the cost of the product and will
be deductible as such when the product is sold. Political Campaign Expenses
As a rule, campaign contributions are not included in
Rentals and/or Other Payments as Lessee, User the taxable income of the candidate to whom they
or Possessor were given.
On accrual basis, rent is deductible as expense when
liability is incurred during the period of use. On cash Unutilized campaign funds shall be subject to income
basis, rent is deductible when incurred and paid. tax.

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Any candidate (winner or loser) must file with the 7. Notice of loss must be filed with the BIR
COMELEC his/her statement of expenditures. If not, within 30 days but not more than 45 days
he/she will be precluded from using such from the date of discovery of the casualty or
expenditures as deductions from his/her campaign robbery, theft or embezzlement
contributions. As such, the entire amount of such
contributions will be directly subject to income tax. The taxpayer’s failure to record in his books the
(Rev. Regs. 07-11, Sec. 2) alleged loss proves that the loss had not been
suffered, hence, not deductible. (City Lumber v.
Training Expenses Domingo, G.R. No. L-18611, 1964)
Ordinary and necessary expenses for education and
training actually incurred by the taxpayer during the Note: A declaration of loss should be filed with the
taxable year may be deductible. BIR within 45 days after the occurrence of the
casualty, robbery, etc. Failure to submit the
An additional deduction from taxable income of one- declaration within the prescribed time will result in the
half (1/2) of the value of labor training expenses disallowance of the loss. However, the mere filing of
incurred for skills development of enterprise-based the declaration of loss does not automatically entitle
trainees enrolled in public senior high schools, public the taxpayer to deduct the alleged loss from gross
higher education institutions, or public technical and income. (Rev. Regs. 12-77, as amended by Rev.
vocational institutions and duly covered by an
Regs. 10-79)
apprenticeship agreement under Presidential Decree
No. 442, series of 1974, or the 'Labor Code of the
Philippines,' as amended, shall be granted to The amount of loss deductible is limited to the
enterprises. difference between the value of the property
immediately preceding the loss and its value
For the additional deduction for enterprise-based immediately thereafter but shall not exceed an
training of students from public educational amount equal of the cost or other adjusted basis of
institutions, the enterprise shall: the property, or depreciated cost reduced by any
1. secure proper certification from the DepEd, insurance or other compensation received.
TESDA, or CHED
2. such deduction shall not exceed ten percent
Losses are deductible only by the person sustaining
(10%) of direct labor wage46
them. They are purely personal and cannot be used
Allowable Training Expenses as deductions by another.
The training expenses shall be in the form of personal
services, travelling expenses, equipment, training The Supreme Court disallowed claims for deductions
tools, due to losses for failure to substantiate the losses. As
to the auction sale, the taxpayer merely relied on
Losses entries made in its books. As to the losses due to fire,
i. Requisites for Deductibility of Ordinary Loss: the taxpayer failed to submit a Sworn Declaration of
1. Must be of the taxpayer; Loss, which is required 45 days from the discovery of
2. Actually sustained during the taxable year; the loss. (Tambunting Pawnshop v. CIR)
3. Not compensated for by insurance or other
forms of indemnity; Other Types of Losses
4. Incurred in trade, business or profession OR (a) Capital losses – deductions allowed only to the
property connected with trade, business or extent of the gains from pertinent sales or
profession lost through fires, storm, exchanges of capital assets
shipwreck, other casualties, robbery, theft or • Losses from sale or exchange of capital
embezzlement; assets
5. Evidenced by a completed transaction; • Losses resulting from securities becoming
6. Not claimed as a deduction for estate tax worthless and which are capital assets
purposes; and • Losses from short sales of property

46
SEC. 34(A)(1)(v)

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• Losses due to failure to exercise privilege or under MCIT, or that the individual availed of the
option to buy or sell property Optional Standard Deduction.

(b) Securities becoming worthless For mines, other than oil & gas wells, if loss is
Loss resulting from securities47 becoming worthless incurred in any of the first 10 years of operation, it
shall be considered loss from the sale or exchange may be carried over for the next 5 years.
of capital asset.
Requirements:
Such loss shall be computed on the last day of the 1. The taxpayer was not exempt from income tax
taxable year. in the year of such net operating loss;
2. The loss was not incurred in a taxable year
General rule: securities becoming worthless are during which the taxpayer was exempt from
deductible income tax, and
3. There has been no substantial change in the
Exemption: not deductible in case of banks or trust ownership of the business or enterprise.
companies incorporated under the laws of the
Philippines, a substantial part of whose business is A merged with B, with A as the surviving corporation.
the receipt of deposits. (Rev. Regs. 05-99, Sec. 5) A cannot claim B’s prior losses as deductions
(PICOP v. CA, G.R. Nos. 106949-50 & 106984-85,
Losses from Wash Sales of Stock or Securities 1995).
Wash sale is a sale or other disposition of stock or
securities where substantially identical securities are There is no substantial change in the ownership of
acquired or purchased within a 61-day period, the business when:
beginning 30 days before the sale and ending 30 (ii) Not<75% in nominal value of outstanding issued
days after the sale. shares is held by same persons
(iii) Not<75% of paid up capital of corporation is held
General rule: not deductible by same persons

Exception: unless claim is made by a dealer in Note: No actual change in ownership occurs:
stock/securities and made in ordinary course of 1. in case the transfer involves change from
business direct ownership to indirect ownership, or
2. merger of the subsidiary into the parent
Wagering Losses company.
Allowed only to the extent of the gains from such
losses Taxes

Net Operating Loss Carry-Over (NOLCO) The term “taxes” refers to national and local taxes
Net operating loss refers to the excess of allowable
deductions over gross income of the business for any Deductible Taxes – All taxes, national or local, paid
taxable year, which has not been previously offset as or incurred during the taxable year in connection with
deduction from gross income. The net operating loss the taxpayer’s profession, trade or business, are
of a business shall be carried over as a deduction deductible from gross income.
from gross income for the next 3 consecutive taxable
years immediately following the year of such loss. Requisites for Deductibility:
i. It must be paid or incurred within the taxable
The 3-year period shall continue to run year;
notwithstanding that the corporation paid its taxes ii. It must be paid or incurred in connection with
the taxpayer’s trade, profession or business;

47
SEC. 22 (T). The term “securities" means shares of stock in certificates, or other evidence of indebtedness, issued by any
a corporation and rights to subscribe for or to receive such corporation, including those issued by a government or political
shares. The term includes bonds, debentures, Notes or subdivision thereof, with interest coupons or in registered form.

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iii. It must be imposed directly on the taxpayer; Exception: When assessments are made for the
and purpose of maintenance or repair of local benefits,
iv. It must not be specifically excluded by law the taxpayer may deduct assessments paid as an
from being deducted from the taxpayer’s gross expense incurred in business, if the payment of such
income assessments is necessary to the conduct of his
business. (Rev. Regs. 02-40, Section 83)
Examples:
1. Percentage tax Tax Credit v. Deduction
2. Excise tax
3. Documentary Stamp tax Tax deduction is treated as a tax-deductible
4. Occupational tax expense that is subtracted from the gross income
5. License tax and results in a lower taxable income. It is an amount
that is allowed by law to reduce the income prior to
6. Fringe Benefit tax
the application of the tax rate to compute the amount
7. Local taxes except special assessment of tax which is due. Being a tax deduction, the
8. Community tax discount does not reduce taxes owed on a peso for
9. Municipal tax (Banggawan) peso basis but merely offers a fractional reductions
in taxes owed.
Non-Deductible Taxes:
1. Philippine income tax Tax credit is a peso-for-peso deduction from a
b. Final income tax taxpayer’s tax liability due to the government. (Carlos
c. Capital gains tax Superdrug Corp. v. DSWD, GR No. 166494, 2007)
d. Regular income tax
2. Income taxes imposed by authority of any Taxes, when refunded or credited, shall be included
foreign country except when the taxpayer as part of gross income in the year of receipt to the
does not signify in his return his desire to claim extent of income tax benefit of said deduction (tax
it as tax credit; benefit rule).
3. Estate and donor’s taxes
4. Special assessments, i.e., taxes assessed For NRA-ETB and RFC, taxes paid or incurred are
against local benefits of a kind tending to allowed as deductions only if and to the extent that
increase the value of the property assessed they are connected from income within the
5. VAT Philippines. (Rev. Regs. 02-40, Sec. 80)

Treatments of Surcharges/Interests/Fines for Tax Sparing Rule – a right of an income taxpayer to

Delinquency deduct from income tax payable the foreign income
tax he has paid to his foreign country subject to
i. Interest on taxes - incurred or paid by a certain limitations.
taxpayer on all unpaid business-related
taxes; fully deductible from gross income Who can Claim Taxes as Allowable Deductions
and shall not be subject to the 33%-limitation 1. Citizen
on deduction of interest expense. (Sec. 3, 2. Domestic Corporation
RA No. 9337) 3. Member of GPP
ii. Surcharges – non-deductible (Rev. Regs. 4. Beneficiary of an estate or trust
02-40, Sec. 80)
iii. Penalties or fines incident to delinquency Who Cannot Claim Taxes as Allowable
– non-deductible (Rev. Regs. 02-40, Sec. Deductions
80) 1. Alien individual (except resident aliens deriving
income from within & without the Philippines, if
Treatment of Special Assessments there is reciprocity)
General rule: Special assessments are not 2. Foreign corporation
deductible, even though an incidental benefit may
inure to the public welfare.

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Substantiation Requirements for Tax Credit Net Actual Philippin

The tax credit shall be allowed only if the taxpayer Particulars Income Foreign e Income
establishes to the satisfaction of the CIR the Tax Paid Tax Due
following: Total NI 200,000 29,000 60,000
1. The total amount of income derived from
sources without the Philippines; A. PER COUNTRY LIMITATION
2. The amount of income derived from each Country A: [(50,000/200,000 x 60,000)] = 15,000
country, the tax paid or incurred to which is Country B: [(40,000/200,000 x 60,000)] = 12,000
claimed as a credit under said paragraph, such ** maximum tax credit limit
amount to be determined under rules and
regulations prescribed by the Secretary of B. GLOBAL LIMITATION
Finance; and [(90,000/200,000x60,000)] = 27,700
3. All other information necessary for the
verification and computation of such credits Computation of allowable tax credit
Tax Due on P200,000 60,000
What Amount may be Taken as Tax Credit:
The amount of tax credit allowed is equivalent to the Less: Allowable Foreign Tax Credit
tax paid or incurred to a foreign country during the
taxable year but not to exceed the following limits: Country A P15,000
Country B 11,000 26,000
Per Country Limitation – Amount of credit to tax Tax Still Due P34,000
paid/incurred to any country shall not exceed same
proportion of the tax against which such credit is ** Cannot exceed maximum tax credit limit
taken
NOTE: For limitation A, Country A, 15K is lower than
Country TI per country Philippine the actual; Country B, 11K (actual) is the lower
Limit (outside) Income amount; get the total of all per country amounts. For
= x
TI from all Tax limitation B, 27.7K is lower than the total of the
sources actual amount. Comparing the total of limitation, A
v. B, the former is the lower amount so that is the
Global limitation – Total amount of credit shall not allowable tax credit.
exceed same proportion of tax against which such
credit is taken Depreciation
Refers to the gradual diminution in the service or
Global Total TI from Philippine useful value of tangible property due from
Limit = outside x Income exhaustion, wear and tear and normal obsolescence;
TI from all sources Tax also applies to amortization of intangible assets, the
use of which in trade or business is of limited
Note: Allowable tax credit shall be the LOWER of the duration.
actual tax paid to the foreign country, per country
limitation and global limitation. Requisites for Deductibility:
1. The allowance for depreciation must be
Example: reasonable;
Net Actual Philippin 2. It must be for property used for employment in
Particulars Income Foreign e Income trade or business or out of its not being used
Tax Paid Tax Due temporarily during the year;
Country A 50,000 18,000 3. The allowance must be charged off; and
Country B 40,000 11,000 4. Schedule on the allowance must be attached to
Phil-source 110,000 the return
income

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Interest Example: Year 2012

Requisites for Deductibility: Interest expense P 2,000
1. There must be an Indebtedness; Interest income 1,500
2. There should be an interest expense paid or Deductible interest expense P 1,505
Incurred upon such indebtedness; [P2,000-(1,500 x 33%)]
3. Indebtedness must be that of the Taxpayer;
4. Indebtedness must be Connected with the The objective of the limitation is to discourage tax
taxpayer’s trade, business or exercise of arbitrage on back-to-back loans, the proceeds of
profession; which are invested in income earning interest that is
5. Interest expense must have been paid or subject to 20% final tax.
Incurred during the taxable year;
6. Interest must have been stipulated in Writing; Tax Arbitrage - a method of borrowing without
7. Interest must be legally Due; entering into a debtor/creditor relationship, often to
8. Interest payment arrangement must not be resolve financing and exchange control problems; in
between Related taxpayers; tax cases, back-to-back loan is used to take
9. Interest must not be incurred to finance advantage of the lower rate of tax on interest income
Petroleum operations; and a higher rate of tax on interest expense
10. In case of interest incurred to acquire property deduction.
used in Trade, business or exercise of
profession, the same was NOT treated as a Deductible Interest Expense
capital expenditure; and Interest on taxes (discussed in the succeeding page),
11. The interest is not expressly disallowed by such as those paid for deficiency or delinquency,
Law to be deducted from gross income of the since taxes are considered indebtedness (provided
taxpayer (Rev. Regs. No. 13-00) that the tax is a deductible tax); however, fines,
penalties, and surcharges on account of taxes are
General rule on Deduction of Interest Expense 48 not deductible; interest on unpaid business tax shall
The amount of interest expense paid or incurred not be subjected to the limitation on deduction of
within a taxable year of indebtedness in connection 33%.
with the taxpayer’s trade, business, or exercise of
profession shall be allowed as a deduction from the Non-deductible Interest Expense
taxpayer’s gross income. No deduction shall be allowed in respect to the ff:
a. If within the taxable year an individual
Limitation on Deduction of Interest Expense taxpayer reporting income on the cash
A taxpayer’s otherwise allowable deduction for basis incurs an indebtedness on which an
interest expense shall be reduced by 33% effective 1 interest is paid in advance through
January 2009 of the interest income subjected to final discount or otherwise. Provided, that such
tax. (Sec. 34 (B)(1)) interest shall be allowed as a deduction in
the year that the indebtedness is paid.
Provided, further, that if the indebtedness
48
SEC. 34 (B) Interest. - in advance through discount or otherwise: Provided, That such
(1) In General. - The amount of interest paid or incurred within interest shall be allowed a a deduction in the year the
a taxable year on indebtedness in connection with the indebtedness is paid: Provided, further, That if the
taxpayer's profession, trade or business shall be allowed as indebtedness is payable in periodic amortizations, the amount
deduction from gross income: Provided, however, That the of interest which corresponds to the amount of the principal
taxpayer's otherwise allowable deduction for interest expense amortized or paid during the year shall be allowed as deduction
shall be reduced by an amount equal to the following in such taxable year; (b) If both the taxpayer and the person to
percentages of the interest income subjected to final tax: Forty- whom the payment has been made or is to be made are
one percent (41%) beginning January 1, 1998; Thirty-nine persons specified under Section 36 (B); or (c)If the
percent (39%) beginning January 1, 1999; and Thirty-eight indebtedness is incurred to finance petroleum exploration.
percent (38%) beginning January 1, 2000;
(3) Optional Treatment of Interest Expense. - At the option
(2) Exceptions. - No deduction shall be allowed in respect of of the taxpayer, interest incurred to acquire property used in
interest under the succeeding subparagraphs: (a) If within the trade business or exercise of a profession may be allowed as
taxable year an individual taxpayer reporting income on the a deduction or treated as a capital expenditure.
cash basis incurs an indebtedness on which an interest is paid

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is payable in periodic amortizations, the b. Capital expenditure (subject to amortization)

amount of interest which corresponds to
the amount of the principal amortized or Depletion
paid during the year shall be allowed as a Depletion expense is a provision for the periodic
deduction in such taxable year; return of capital investments in wasting assets such
b. If both the taxpayer and the person to as minerals, gas, and oil.
whom the payment has been made or is to
be made are: A reasonable allowance for depletion or amortization
i. Between members of a family computed in accordance with the cost-depletion
(includes only brothers and sisters, method shall be granted. Provided, That when the
spouse, ancestors, and lineal allowance for depletion shall equal the capital
descendants); invested no further allowance shall be granted:
ii. Between an individual and a Provided, further, That after production in commercial
corporation, more than 50% in value quantities has commenced, certain intangible
of outstanding stock is owned by exploration and development drilling costs: (a) shall
such individual (except in case of be deductible in the year incurred if such
distributions in liquidation); expenditures are incurred for non-producing wells
iii. Between 2 corporations more than and/or mines, or (b) shall be deductible in full in the
50% in value of outstanding stock year paid or incurred or at the election of the
owned by the same individual, if taxpayer, may be capitalized and amortized if such
either one is a personal holding expenditures incurred are for producing wells and/or
company or a foreign holding mines in the same contract area. (Sec. 34(G))
company during the taxable year
preceding the date of sale/exchange Charitable & Other Contributions
(except in case of distributions in Requisites for Deductibility (contributions
liquidation); subject to limitations):
iv. Between grantor and fiduciary of any 1. Contributions or gifts must be actually paid or
trust; made within the taxable year;
v. Between fiduciary of a trust and the 2. To or for the use of the government or its
fiduciary of another if same person is agencies or any political subdivision,
a grantor to each trust; exclusively for public purpose; or
vi. Between fiduciary and a beneficiary 3. To accredited domestic corporations or
of a trust (Sec. 34(B)(2)) associations organized and operated
c. If the indebtedness is incurred to finance exclusively for:
petroleum exploration; • Religious
d. Interest on preferred stock which in reality • Charitable
is dividend • Scientific
e. Interest on unpaid salaries and bonuses • Youth & sports development
f. Interest calculated for cost keeping on • Cultural or educational purposes
account of capital or surplus invested in • Rehabilitation of veterans
business which does not represent • Social welfare institutions
charges arising under interest-bearing
• NGOs
obligation
g. Interest paid when there is no stipulation
No part of net income inures to the benefit of any
for the payment thereof
private stockholder or individual in excess of the
following limitation:
Optional Treatment of Interest Expense
a. For individual: not more than 10% of taxable
At the option of the taxpayer, interest incurred to
income before deducting the charitable
acquire property used in trade or business or
contributions.
exercise of profession may be allowed as (Sec. 34
(B)(3)):
a. Expense (outright deduction) or

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b. For corporation: not more than 5% of taxable The level of administrative expense must
income before deducting the charitable conform with the rules and regulations
contributions. prescribed by the Secretary of Finance but
should not be greater than 30% of total
Amount that may be Deducted expenses.

Valuation Upon dissolution, assets would be distributed to

The amount of any charitable contribution of property another nonprofit domestic corporation organized for
other than money shall be based on the acquisition similar purpose or to the state for public purpose or
cost of said property. to another organization to be used in the same
purpose as the dissolved corporation.
Contributions subject to limitations
(see requisites for deductibility) Pension Trusts (Past Service Cost)49
Pension Trust Contributions – a deduction
Contributions Deductible in Full applicable only to the employer on account of his
• Donations to the government – to finance, to contributions to a private pension plan for the benefit
provide for, or to be used in undertaking priority of his employees; purely business in character.
activities in education, health, youth & sports
development, human settlements science & Normal Cost – the contributions during the taxable
culture & in economic development according to year to cover the pension liability accruing during
National Priority Plan determined by NEDA such taxable year; allowed as a deduction under Sec.
34(A)(1) of the NIRC as “expenses in general.”
If not in accordance with annual priority plan,
donation is subject to 10% / 5% limitation Past Service Cost – amount in excess of the above
contribution (covering pension liability pertaining to
• Donations to certain foreign institutions or old employees which accrued during the years
international organizations – in compliance with previous to the establishment of the pension trust);
agreements, treaties, or commitments entered allowed as deduction only if all of the requisites below
into by Philippine government and foreign concur.
institutions/international organizations or in
pursuance to special laws Requisites for Deductibility of Past Service Cost:
1. The employer must have established a pension
• Donations to accredited NGOs – Organized & or retirement plan to provide for the payment of
operated exclusively for scientific, educational, reasonable pensions to his employees;
character-building & youth & sports 2. The pension plan is reasonable and actuarially
development, health, social welfare, cultural or sound;
charitable purposes or combination thereof (no 3. The pension plan must be funded by the
part of net income inures to the benefit of any employer;
private individual) 4. The amount contributed must no longer be
subject to the control and disposition of the
Must be utilized not later than the 15th day of the employer;
3rd month after the close of the taxable year, 5. The payment has not yet been allowed as a
directly for the active conduct of activities deduction; and
constituting the purpose of the organization, 6. The deduction is apportioned in equal parts over
unless period is extended. a period of 10 consecutive years beginning with

49
SEC. 34 (J) Pension Trusts. - An employer establishing or this Section a reasonable amount transferred or paid into such
maintaining a pension trust to provide for the payment of trust during the taxable year in excess of such contributions,
reasonable pensions to his employees shall be allowed as a but only if such amount (1) has not theretofore been allowed as
deduction (in addition to the contributions to such trust during a deduction, and (2) is apportioned in equal parts over a period
the taxable year to cover the pension liability accruing during of ten (10) consecutive years beginning with the year in which
the year, allowed as a deduction under Subsection (A) (1) of the transfer or payment is made.

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the year in which the transfer of payment is intention to elect the OSD, he shall be considered as
made. having availed himself of the deductions in Secs.
34(A) to (K) of the NIRC as amended by TRAIN Law.
Nothing precludes the employer from making Such election when made in the return shall be
property contributions (other than monetary irrevocable for the taxable year for which the return is
contributions) to the pension plan for as long as no made. (Sec. 34(L))
part of the corpus or income of the fund shall be used
for, or be diverted to, any purpose other than for the Summary: Who can Claim OSD?
exclusive benefit of the employees. The transfer of All taxpayers who are subject to tax on taxable net
property to the pension plan is neither a sale nor a income (RC, NRC, RA, DC, RFC) can claim except
donation. (BIR Ruling No. DA-486-04) the following:
1. Those not subject to income tax in
Summary Rules on Retirement Benefits the Philippines
Plan/Pension Trust: a. NRA whether or not engaged in trade
or business in the Philippines
1. Exempt from Income Tax – employees’ trust b. NRFC
under Sec. 60(B) of the NIRC a. Individual taxpayers who are not entitled
2. Exclusion from Gross Income – amount to avail of the OSD and thus use only the
received by the employee from the fund upon itemized deduction method are as
compliance with certain conditions under Sec. follows:
32(B)(6) of the NIRC 1. Those exempt under the Tax Code,
3. Deduction from Gross Income as amended, and other special laws
If Normal Cost: as an expense under Section with no other taxable income [e.g.
34(A) of the NIRC. Barangay Micro Business
If Past Service Cost: as a pension trust under Enterprise (BMBE)];
Sec. 34(J) of the NIRC 2. Those with income subject to
special/preferential tax rates; and
(2) OPTIONAL STANDARD DEDUCTION (OSD) 3. Those with income subject to
(Sec. 34 (L)) income tax rate under Section 24 of
a. Individual other than a nonresident alien - may the Tax Code, as amended, and
elect a standard deduction of 40% of his gross also with income subject to
sales or gross receipts. special/preferential tax rates.
b. Corporation other than non-resident foreign
corporations- may elect a standard deduction of Illustration 1 (Rev. Regs. 08-18, Sec. 8)
40% of its gross income as defined in Section Ms. RPSV is an independent contractor who offers
32 of the NIRC. architectural and engineering services. Her total
c. General professional partnerships - GPP and gross receipts amounted to P4,250,000 for taxable
the partners comprising such partnership may year 2018. Her recorded cost of service and
avail of the OSD only once, either by the GPP operating expense were P2,150,000 and
or the partners comprising the partnership. P1,000,000, respectively. She opted to avail of the
40% OSD.
Note: No deductions shall be allowed to individual
taxpayers earning compensation income arising from Gross receipts P 4,250,000
personal services rendered under an employee- Multiply: OSD rate 40%
employer relationship and those who opted to be Deductible OSD P 1,700,000
taxed a 8% income tax rate on their income from Gross receipts P 4,250,000
business/practice of profession. (Rev. Regs. 08-18, Less: OSD (1,700,000)
Sec. 8) Net taxable income P 2,550,000

There is no need to substantiate OSD. Unless the

taxpayer signifies in his first quarter return his

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Illustration 2 (RR 08-18 Sec. 8) 1. Those exempt under the NIRC and other
The gross sales of GEAL Corporation for 2018 special laws, with no other taxable income
amounted to P6,000,000 with cost of sales (e.g. Barangay Micro Business Enterprise
amounting to P4,000,000. It incurred operating [BMBE]);
expense amounting to P1,000,000, and on the filing 2. Those with income subject to
of its first quarter ITR, it signified its intention to avail special/preferential tax rates; and
of the OSD. 3. Those with income partially subject to
income tax rate under Sec. 24 of the NIRC
Gross sales P 6,000,000 and partially subject to special/preferential
Less: Cost of sales (4,000,000) tax rates. (Rev. Regs. 02-14, Sec. 5)
Gross Income P 2,000,000
Less: OSD (2,000,000 x (800,000) c. Items Not Deductible
40%) General rule – An expense will be allowed as a
Taxable Income P 1,200,000 deduction only if the tax required to be deducted and
Multiply: Corporate tax 30% withheld therefrom has been remitted to the BIR;
Tax Due P 360,000
In computing net income, no deduction shall in any
(3) DEDUCTIONS UNDER SPECIAL LAWS case be allowed in respect to the ff (Sec. 36):
RA 10028: expenses incurred by a private health and 1. Personal, living or family expenses;
non-health facility to comply with the Breast Milk Act 2. Amounts paid out for new buildings or for
is deductible up to TWICE of the actual amount permanent improvements, or betterments made
incurred (RMC No. 47-10) to increase the value of any property or estate
(not applicable to intangible drilling and
RA 8502: additional deduction of 50% of expenses development costs incurred in petroleum
incurred in training schemes in the jewelry industry operation);
approved by the appropriate agency (RMC No. 33- 3. Any amount expended in restoring property or in
04) making good the exhaustion thereof for which an
allowance is or has been made;
RA 8525: additional deduction equivalent to 50% of 4. Premiums paid on any life insurance policy
expenses incurred in joining the Adopt-a-School covering the life of any officer or employee, or
program (Rev. Regs. 10-03aa) any person financially interested in trade or
business carried on by the taxpayer, individual or
RA 9999: for free legal assistance, taxpayers can corporate, when the taxpayer is directly or
deduct the amount that could have been collected indirectly a beneficiary under such policy;
from the client, or up to 10% of gross income derived 5. Losses from sales or exchanges of property
from the actual performance of legal services, indirectly or directly
whichever is LOWER
• Between members of a family. For purposes
RA 7277: private entities that employ disabled of this paragraph, the family of an individual
persons are entitled to an additional deduction shall include only his brothers and sisters
equivalent to 25% of the total amount paid as salaries (whether by the whole or half-blood),
and wages to disabled persons; private entities that spouse, ancestors, and lineal descendants;
improved or modify their physical facilities in order to or
provide reasonable accommodation for disabled • Except in the case of distributions in
persons shall also be entitled to an additional liquidation, between an individual and
deduction from their net taxable income, equivalent corporation more than fifty percent (50%) in
to 50% of the direct costs of the improvements or value of the outstanding stock of which is
modifications. owned, directly or indirectly, by or for such
individual; or
The following are individual taxpayers who are • Except in the case of distributions in
mandated to use only the itemized deductions: liquidation, between two corporations more
than fifty percent (50%) in value of the

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outstanding stock of which is owned, directly deductible as provided under Section 36 of

or indirectly, by or for the same individual if the NIRC but the gains are taxable;
either one of such corporations, with respect • Losses from exchanges of property in a
to the taxable year of the corporation corporate readjustment;
preceding the date of the sale of exchange • Losses from illegal transactions;
was under the law applicable to such taxable • Loss on voluntary removal of building on
year, a personal holding company or a land purchased with a view to erect another
foreign personal holding company; building (such shall form part of the cost of
• Between grantor and fiduciary of any trust; the new building to be erected). (Tabag)
• Between the fiduciary of and the fiduciary of 10. Losses from wash sales of stock or securities
a trust and the fiduciary of another trust if the (Sec. 38)
same person is a grantor with respect to
each trust; or 5. Income Tax on Individuals
• Between a fiduciary of a trust and
beneficiary of such trust. a. Resident Citizens, non-
6. Non-deductible interest, such as: resident Citizens and
• Interest on preferred stock, which in reality is Resident Aliens
dividend; Taxpayer Tax Base Taxable
• Interest on unpaid salaries and bonuses; Income
• Interest calculated for cost keeping; Resident Taxable Within and
• Interest paid where parties did not agree in Citizen Income without the
writing to pay interest; Philippines
• Interest paid on indebtedness between two Non-resident Taxable Within the
taxpayers; Citizen Income Philippines
• Interest on indebtedness paid in advance
and the taxpayer reports income on cash Resident Taxable Within the
basis; Alien Income Philippines
7. Interest expense, bad debts, and losses from
sales of property between related parties; The tax shall be computed in the following tax rates50:
8. Non-deductible taxes, such as: (Sec. 24 (A)(2))
• Income tax provided under the NIRC;
• Income taxes imposed by foreign authority, Tax Schedule Effective January 1, 2018 until
except when the taxpayer did not signify in December 31, 2022:
his return that he will avail of the tax credit;
Not over P250,000 0%
• Estate tax and donor’s taxes;
• Special assessments – taxes levied against Over P250,000 but not 20% of the excess over
any local upgrades which potentially over P400,000 P250,000
benefit/increase the value of the property Over P400,000 but not P30,000 + 25% of the
assessed; over P800,000 excess over P400,000
• Stock Transaction Tax Over P800,000 but not P130,000 + 30% of the
• Final Taxes over P2,000,000 excess over P800,00
• Presumed Capital Gains Tax P490,000 + 32% of the
• VAT Over P2,000,000 but excess over
9. Non-deductible losses, such as not over P8,000,000 P2,000,000
• Losses not incurred in trade, profession or P2,410,000 + 35% of
business or in any transaction entered into the excess over
profit; Over P8,000,000 P8,000,000
• Losses from sales or exchanges of property
entered into between related taxpayers (not

50
SEC. 24 (A)(2).

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Effective January 1, 2023 and onwards: (j) Inclusions – Monetary and Non-monetary
Not over P250,000 0% Compensation
Over P250,000 but not 15% of the excess over
over P400,000 P250,000 Monetary benefits
Over P400,000 but not P22,500 + 20% of the • Salaries, wages, emoluments and honoraria,
over P800,000 excess over P400,000 allowances, commissions (e.g. transportation,
Over P800,000 but not P102,500 + 25% of the representation, entertainment and the like);
over P2,000,000 excess over P800,00 • Fees including director's fees, if the director is, at
P402,00 + 30% of the the same time, an employee of the
Over P2,000,000 but excess over employer/corporation;
not over P8,000,000 P2,000,000 • Taxable pensions and retirement pay; and
P2,202,500 + 35% of • Other income of a similar nature
the excess over
Over P8,000,000 P8,000,000 Non-monetary Benefits
• Taxable bonuses and fringe benefits, except
1. Inclusions and Exclusions for Taxation on those which are subject to the Fringe Benefit Tax
Compensation Income (FBT) under Sec. 33 of the NIRC

Compensation Income Earner- individuals whose (ii) Exclusions/ Non-taxable Compensation

source of income is purely derived from an employer- a. Mandatory Deductions- include employees’
employee relationship. mandatory contribution to GSIS, SSS,
PhilHealth, HDMF, union dues
Individuals earning purely compensation income b. Exempt Benefits
shall be taxed based on the graduated tax rates. i. Renumeration received as incidents of
Taxable income is the gross compensation income employment
less non-taxable income/benefits such as but not 1. Exempt retirement benefits under RA
limited to the 13th month pay and other benefits 7641
(subject to limitations), de minimis benefits, and 2. Exempt termination benefits
employee’s share in the SSS, GSIS, PHIC, Pag-IBIG, 3. Benefits from United States Veterans
and union dues (Rev. Regs. 08-18 Sec. 3). Administration
4. Social Security, retirement gratuities,
Gross compensation income xx pensions, similar benefits from
NO deductions allowed - foreign government agencies
Taxable Income xx 5. Benefits from SSS
6. Benefits from GSIS
In general, the term “compensation” means all ii. De minimis benefits
remuneration for services performed by an employee iii. 13th month pay and other benefits not
for his employer under an employer-employee exceeding P90,000
relationship, unless specifically excluded by the iv. Certain benefits of MWEs
NIRC. 1. Holiday pay
2. Hazard pay
Types of Employees as to Taxability 3. Overtime pay
Minimum wage earners- exempt from income 4. Night shift differential pay
tax on compensation
Regular employees- subject to regular 2. Taxation on Business Income/Income from
progressive income tax Practice of Profession
Mixed earners
Income from Business
In the case of manufacturing, merchandising, or
mining business, “gross income” means the total
sales, less cost of goods sold.

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In the case of sellers of services, gross income is other non-operating

computed by deducting “cost of services” which income in excess of
pertains to all direct costs and expenses exclusively P250,000.
and directly incurred in relation to the revenue • Exceeds P3,000,000 – graduated rates52
realized by such sellers. These refer to costs which
are considered indispensable to the earning of the Note: Unless the taxpayer signifies the intention to
revenue such that without such costs, no revenue st
elect the 8% income tax rate in the 1 quarter
can be generated. (Rev. Regs. 24-08) percentage and/or ITR, or on the initial quarter return
of the taxable year after the commencement of a new
Professional Income business/practice of profession, the taxpayer shall be
Income earned from the practice of profession considered as having availed of the graduated rates.
provided there is no employer-employee relationship Such election, shall be irrevocable and no
between him and his clients. amendment of option shall be made for the said
taxable year.
Profession is primarily any endeavor or work
requiring specialized training in the field of learning,
The option to be taxed at 8% income tax rate is not
art, or science engaged in as a means of livelihood
available to a VAT-registered taxpayer, regardless
or profit of an individual or group of individuals.
of the amount of gross sales/receipts, and to a
(a) Schedular
taxpayer who is subject to Other Percentage Tax,
Income that are subjected to different sets of
graduated or flat income tax rates. except those subject under Sec. 116. Likewise,
partners of a General Professional Partnership
(b) Optional 8% income tax (GPP) by virtue of their distributive share from GPP
Self-employed individuals and/or professionals which is already net of cost and expenses cannot
whose gross sales/gross receipts and other non- avail of the 8% income tax rate option.
operating income does not exceed the VAT threshold
of P3,000,000 shall have the option to avail of an A taxpayer shall automatically be subject to the
eight percent (8%) tax on gross sales or gross graduated rates even if the flat 8% income tax rate
receipts and other non-operating income in excess of option is initially selected, when taxpayer’s gross
P250,000 in lieu of the graduated income tax rates sales/receipts and other non-operating income
and percentage tax.51 exceeded the VAT threshold during the taxable year.
(Rev. Regs. 08-18 Sec. 3)
Mixed Income Earner – an individual earning both
compensation income from employment and income Illustration 1 (Rev. Regs. 08-18)
from business, practice of profession and/or sources Ms. EBQ operates a convenience store while she
aside from employment shall be subject to the offers bookkeeping services to her client. In 2018,
following tax rates: her gross sales amounted to P800,000, in addition to
a. Compensation income – graduated rates her receipts from bookkeeping services of P300,000.
under Sec. 24(A)(2) of NIRC as amended; She signified her intention to be taxed at 8% income
and tax rate in her 1st quarter return.
b. Income from business or practice of Gross sales- convenience store P 800,000
profession Gross receipts- bookkeeping 300,000
• If Total Gross Sales and/or Gross Total Sales/Receipts P
Receipts and Other Non-Operating 1,100,000
Income does not exceed VAT threshold Less: Amount allowed as deduction (250,000)
(P3,000,000), the individual has the under Sec. 24(A)(2)(b)
option to be taxed at: Taxable income P 850,000
i. Graduated rates; OR Multiply: Tax rate 8%
ii. 8% income tax on gross Tax Due P 68,000
sales or gross receipts and

51 52
SEC. 24 (A)(2)(b). SEC. 24 (A)(2)(c).

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3. Taxation of Passive Income

Passive income subject to final tax
PASSIVE INCOME RESIDENT CITIZEN NRC RA NRA-ETB NRA-NETB
within PH Without Sources within PH
PH
Interest income from
currency bank
deposit and yield or 20% 20% to 20% 20% 20% 25%
any other monetary 35%
benefit from deposit graduated
substitutes and from rate
trust funds and
similar
arrangements
Royalties on books,
literary works, and 10% 10% 10% 10% 25%
musical
compositions
Royalties from
cinematographic 20% 20% 20% 25% 25%
films and similar
works
Other passive 20% 20% 20% 20% 25%
royalties
Prizes and other
winnings amounting 20% 20% 20% 20% 25%
to more than
P10,000
Prizes and other 20% to 35% 20% to 20% to 25%
winnings amounting 20% to 35% graduated 35% 35%
to P10,000 and graduated rate graduated graduated
below rate rate rate
PSCO and Lotto Exempt Exempt Exempt Exempt 25%
winning P10,000
pesos or less
PSCO and Lotto
winning exceeding 20% 20% 20% 20% 25%
P10,000
Interest Income from Exempt Exempt Exempt Exempt 25%
Long-Term Deposit
or investment (held
for 5 years or more)

In case of pre-
termination, if held
for: 5% 5% 5% 5% 25%
4 to less than 5 12% 12% 12% 12% 25%
years 20% 20% 20% 20% 25%
3 to less than 4
years
Less than 3 years

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PASSIVE INCOME RESIDENT CITIZEN NRC RA NRA-ETB NRA-NETB

Interest income from
depositary bank 15% Exempt 15% Exempt Exempt
under EFCDU
Cash and/or
Property Dividends 10% 10% 10% 20% 25%
from domestic
corporation
Cash and/or 20% to 35% 20% to 35% 20% to 20% to
Property Dividends graduated graduated 35% 35% 25%
from foreign rate rate graduated graduated
corporation rate rate

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4. Taxation of Capital Gains 5. Real property

General rule: Capital gains are subject to regular used in
income tax trade/business

Exception:
Gains on Dealings in Capital b. Income tax on Non-resident
Tax Rate Aliens Engaged in Trade or
Assets
Business (NRA-ETB)
Net capital gains from sale,
barter, exchange, or other 15% on net
disposition of shares of stock in capital gain Taxable On
Taxpayer Tax Base
a domestic corporation NOT (Sec. 24 (C)) Income
traded in the stock exchange
Sale, exchange, or other Non-resident Alien
disposition of real property engaged in trade or Taxable Within the
situated in the Philippines business (more Income Philippines
6% on capital than 180 days)
classified as capital asset
gains (Sec. 24
(D))
Tax base is higher of: Nonresident Alien53 (NRA) – an individual whose
1. Gross selling price or residence is not within the Philippines and who is not
2. FMV a citizen thereof but doing business therein is
Income from the sale, Graduated taxable only on income from sources within.
exchange or other disposition Income Tax
of other capital assets Rate Engaged in Trade or Business (ETB) – an alien
who comes and stays in the Philippines for an
5. Capital Assets vs. Ordinary Asset aggregate period of more than 180 days during any
calendar year
Ordinary Asset Capital Asset
assets that are used properties of a NRA-ETB shall be subject to an income tax in the
primarily in the ordinary taxpayer other than same manner as an in the same manner as an
course of trade or ordinary assets individual citizen and a resident alien individual, on
business taxable income received from all sources within the
Examples: Examples: Philippines.54
1. Stock in trade of 1. Stock and
taxpayer securities held by As for the capital gains, the following are the tax
2. Property which taxpayers other rate applicable:
would properly than dealers in
be included in an securities Tax Rates Of NRAETB on Capital Gains
inventory of the 2. Interest in
Capital gain from sale
taxpayer, if on partnership and
of shares of stock of a 15% on net capital
hand joint venture
domestic corporation gain (Sec. 25 (A)(3)
3. Merchandise 3. Goodwill
NOT traded through a with reference to Sec.
inventory 4. Real property not
local stock exchange 24 (C))
4. Depreciable used in trade or
assets used in business like
Sale, barter, exchange 0.6% of selling price or
the residential house
or other disposition of gross value in money
trade/business and lot
shares of stocks listed (Sec. 127 (A))
6. Investment
and traded in the Local
property
Stock Exchange

53 54
SEC. 22 (G). The term 'non-resident alien' means an SEC. 25 (A).
individual whose residence is not within the Philippines and
who is not a citizen thereof.

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(Stock Transaction not more than 180 days during the year.
Tax) (Banggawan)
Sale of real property in 6% of gross selling
the Philippines held as price, OR current General rules:
a capital asset market value at the a. NRA-NETBs are taxed 25% of the their
time of sale, whichever entire income within the Philippines.55
is higher. (Sec. 25 b. They are not entitled to any deductions.
(A)(3) with reference to c. Capital gains tax liabilities are the same with
Sec. 24 (D)) all other types of individuals.

General rules: d. Individual Taxpayers Exempt

from Income Tax
i. A nonresident alien individual who shall come
to the Philippines and stay therein for an
1. Senior Citizens
aggregate period of more than 180 days during
2. Minimum wage earners
any calendar year
3. Exemptions Granted Under International
ii. Shall be taxed on income earned within the Agreements
Philippines, in the same manner as an
individual citizen or a resident alien. i. Senior Citizens (SC)
iii. Except: a cinematographic film owner who shall 1. Any resident of the Philippines; and
be taxed at 25% on his gross income 2. At least 60 years old.
iv. The term “trade or business” includes the
performance of the functions of public office but General rule: Qualified Senior Citizens (SC)
does not include performance of services by the deriving income during the taxable year, whether
taxpayer as an employee. (Sec. 22 (CC)) from compensation or otherwise, are required to file
their income tax returns and pay the tax as they file
c. Income Tax on Non-Resident the return.
Aliens Not Engaged in Trade
or Business (NRA-NETB) Exceptions:
Tax Taxable On If income is in the nature of compensation income
Taxpayer and the SC qualifies as a MWE, he shall be exempt
Base Income
from income tax on said compensation income,
Nonresident Alien subject to the rules of RA 9504 and RR No. 10-08.
not engaged in Gross Within the
trade or business Income Philippines Note: The income tax exemptions granted, as
(180 days or less) stated above, to SCs does not extend to income
subject to final tax (e.g., interest income from bank
deposits, dividends, capital gains tax) (Expanded
NRA-NETB includes:
Senior Citizens Act of 2003; Rev. Regs. 07-10)
a. Aliens who come to the Philippines for a
definite purpose which in its nature may be
Compliance Requirements for Income Tax
promptly accomplished
Exemption:
b. Aliens who shall come to the Philippines
(i) Must first be qualified as such by the CIR or the
and stay therein for an aggregate period of
RDO by submitting a certified true copy of his
OSCA ID; and

55
SEC. 25 (B) Nonresident Alien Individual Not Engaged fixed or determinable annual or periodic or casual gains,
in Trade or Business Within the Philippines. – There shall profits, and income, and capital gains, a tax equal to twenty-
be levied, collected and paid for each taxable year upon the five (25%) of such income. Capital gains realized by a
entire income received from all sources within the Philippines nonresident alien individual not engaged in trade or business
by every nonresident alien individual not engaged in trade or in the Philippines from the sale of shares of stock in any
business within the Philippines as interest, cash, and/or domestic corporation and real property shall be subject to the
property dividends, rents, salaries, wages, premiums, income tax prescribed under Subsections (c) and (d) of
annuities, compensation, remuneration, emoluments, or other Section 24.

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(ii) Must file a sworn statement on or before excess of the statutory limit of P30,000. (Soriano v.
January 31 of every year that his annual taxable Secretary of Finance, G.R. No. 184450, 2017)
income does not exceed the poverty level.
MWEs receiving other income from other sources in
ii. Minimum Wage Earners (MWE) addition to compensation income, such as income
shall refer to a worker in the private sector paid the from other concurrent employers, from the conduct
statutory minimum wage, or to an employee in the of trade, business, or practice of profession, except
public sector with compensation income of not more income subject to final tax, are subject to income tax
than the statutory minimum wage in the non- only to the extent of income other than SMW,
agricultural sector where he/she is assigned. (Sec. holiday pay, overtime pay, night shift differential pay,
22(HH)) and hazard pay earned during the taxable year
(Rev. Regs. 02-98, Sec. 2. 7.8 as amended by R.A.
Definition of Statutory Minimum Wage (SMW) No. 9504).
Refers to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined Basis of Computation of Minimum Wage Rates
by the Bureau of Labor and Employment Statistics (Rev. Regs. 02-98, Sec. 2.78.5 as amended by Rev.
(BLES) of the Department of Labor and Employment Regs. 10-08, Sec. 2)
(DOLE); the RTWPB of each region shall determine
the wage rates in the different regions based on
The basis of the computation of the minimum wage
established criteria and shall be the basis of
rates prescribed by law shall be the normal working
exemption from income tax for this purpose.
time of eight (8) hours a day.
Compensation income of MWEs shall be exempt
from income tax and consequently from withholding The computation of wages shall be in accordance
tax on compensation if they work: with the Collective Bargaining Agreement (CBA), if
a. In the private sector and being paid the any, or the provisions of the Labor Code as
SMW; or implemented. Unless otherwise amended or
b. In the public sector and being paid repealed by subsequent pertinent laws, rules and
compensation of not more than the SMW in regulations, the holiday pay, overtime pay, night
the non-agricultural sector shift differential and hazard pay shall be understood
to be computed based on such agreement or labor
Other Income of MWEs which are Tax-Exempt law provisions.
(Sec. 24(2)(A)):
a. Holiday pay iii. Exemptions Granted Under International
b. Overtime pay Agreements56
c. Night shift differential pay and
d. Hazard pay Employee benefits of non-Filipino nationals and/or
non-permanent residents of the Philippines from
Additional compensation such as commissions, foreign governments, embassies or diplomatic
honoraria, fringe benefits, benefits in excess of the missions, and internationals organizations in the
allowable statutory amount of ₱90,000.00, taxable Philippines are exempt from income tax.
allowances, and other taxable income given to an
MWE by the same employer other than those which Filipino employees of foreign governments,
are expressly exempt from income tax shall be international missions and organizations are taxable
subject to withholding tax (Rev. Regs. 02-98, Sec. as rule except only to employee of the following
2.7.81 as amended by R.A. No. 9504) organizations:
• United Nations
Note: MWEs do not lose their tax-exempt status • World Health Organization
even though they have received other benefits in

56
SEC. 32 (B) (5) Income Exempt under Treaty. - Income of
any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.

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• Food and Agriculture Organization 2. Total assets NOT exceeding P100,000,000,

• United Nations Development Organization excluding land on which the particular business
• Specialized Agencies of the United Nations entity’s office, plant, and equipment are situated
• International Organization for Migration during the taxable year for which the tax is
• International Seabed Authority imposed.58
(Banggawan)
(1) Branch Profit Remittance Tax
6. Income Tax on Corporations TAX BASE TAX RATE

a. Income Tax on Domestic Based on total profits applied 15%

Corporations and Resident or earmarked for remittance
Foreign Corporations
Exception: Except those activities which are
Taxation in General registered with the Philippine Economic Zone
Corporation (Sec. 22(B)) Authority
Includes: partnerships, no matter how created or
organized, joint-stock companies, joint accounts, (2) Itemized Deductions vs. Optional
association, or insurance companies, Standard Deductions

Does not include: general professional i. Itemized Deductions

partnerships and a joint venture or consortium Pertains to the items in Sec. 34 of the NIRC as
formed for the purpose of undertaking construction discussed under Deductions from Gross Income
projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an ii. Optional Standard Deduction (OSD)
operating consortium agreement under a service In lieu of the itemized deductions, a corporation may
contract with the Government. elect to a standard deduction (OSD) in an amount
not exceeding forty percent (40%) of gross income
Domestic corporation - a corporation created or of corporations.
organized in the Philippines under its law.
A taxpayer who elected to avail of the OSD shall
Corporate tax scheme on regular corporations signify in his/its first quarter return such intention.
Domestic RCIT subject to MCIT57 Otherwise, he/it shall be considered as having
Corporation availed himself of the itemized deductions.
Resident RCIT subject to MCIT
Corporation Once the election to avail the OSD is signified in the
return, it shall be irrevocable for the taxable year for
Regular Corporate Income Tax (RCIT) which the return is made.
RCIT applies to all corporations in general. It covers
all taxable income of corporations that are not Who can claim OSD?
subject to final tax or capital gains tax. All corporations who are subject to tax on taxable
net income can claim except the following:
The regular domestic tax rates are: 25% (starting 2. NRFC
July 1, 2020) 3. Taxpayers mandated to use
itemized deductions
20% taxability if shown that corporation has:
1. net taxable income NOT exceeding P5,000,000; Minimum Corporate Income Tax (MCIT)
AND The MCIT is applicable to every corporation taxable
to the 25% regular corporate income tax including

57
Section 6 of the CREATE Law removed the option of 58 As amended by Section 6 of the CREATE Law.
domestic corporations to be taxed at 15% based on gross
income.

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non-profit, exempt, and special corporations with a. sale of goods- Gross sales less sales returns,
respect to their taxable income subject to the regular discounts, allowances, and cost of goods sold
corporate income tax, but not to the income subject b. sale of service- Gross receipts less sales returns,
to special tax rates. allowances, discounts, and cost of services.

Imposition of MCIT Cost of Goods Sold shall mean all business

Computed as 2% of gross income subject to expenses directly incurred to produce the
regular income tax (GI) merchandise to bring them to their present location
DATE APPLICABLE TAX RATE and use.

July 1, 2023 onwards 2% Cost of Services shall mean all direct costs and
expenses necessarily incurred to provide the
July 1, 2020 until June 30, 1%59 services required by the customers and clients.
2023
Excess MCIT Carry-over
Before July 1, 2020 2%
Excess of MCIT over the RCIT shall be carried
forward and credited against RCIT tax due in the
The MCIT is not a tax on capital. It is imposed on immediately succeeding three (3) years.
gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its Rules for MCIT Carry-over
goods, i.e., the cost of goods and other direct • Excess MCIT can be used as tax credit
expenses from gross sales. Clearly, the capital is against RCIT if RCIT is greater than MCIT.
not being taxed. Thus, MCIT is constitutional. • Excess MCIT cannot be deducted against
(Chamber of Real Estate and Builders’ MCIT tax due.
Associations, Inc. v. Romulo, G.R. No. 160756, • Unused MCIT at the end of the 3-year
2010) period shall expire and will no longer be
used.
When Applicable: Beginning on the 4th taxable
year from the year in which such corporation Illustration:
commenced its business operation, i.e. the year
when corporation registers with the BIR, regardless XYZ Domestic Corporation commenced its
of whether the corporation is using calendar or fiscal operations on January 1, 2019. Compute the
year. Thus, a corporation which started operations income tax due for the year 2021, 2022, and 2023.
on any day in 2012 will be covered by the MCIT in
2016. 2021 2022 2023

When Imposed: Gross 5,000,000 7,000,000 7,000,000

1. When the corporation has either Zero or Sales
negative taxable income or Cost of 2,500,000 3,000,000 3,500,000
2. when 2% of the corporation’s gross income is Goods
greater than 30% of its taxable income (MCIT Sold
> RCIT) Gross 2,500,000 4,000,000 3,500,000
Income
Rationale: Designed to prevent corporations from Operating (1,000,000) (2,500,000) (2,000,000)
escaping tax by including frivolous expenses in their Expenses
statement of income (e.g., over-statement of
depreciation expense). Net 1,500,000 1,500,000 1,500,000
Taxable
Concept of Gross Income for MCIT purposes Income
For corporations involved in

59
Introduced by Section 6 of the CREATE Law.

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Computation of RCIT b. Income Tax on Non-Resident

2021 2022 2023 Foreign Corporations
(NRFC)
Net 1,500,000 1,500,000 1,500,000
Taxable i. Taxation of NRFC in General
Income
Non-Resident Foreign Corporation refers to a
RCIT 25% 25% 25%
Rate foreign corporation not engaged in trade or business
RCIT 375,000 375,000 375,000 within the Philippines. (Sec. 22(I))

A foreign corporation not engaged in trade or

Computation of MCIT
business in the Philippines effective January 1,
2022 2023 2021, shall pay a tax equal to 25% of the gross
Gross Income 4,000,000 3,500,000 income60 received from all sources within the
MCIT Rate 1% 1% Philippines such as interests, dividends, rents,
MCIT 400,000 350,000 royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
Note: The MCIT is not applicable in 2021 since it determinable annual, periodic or casual gains,
has not yet reached the “fourth taxable year” profits and income, and capital gains, except capital
requirement. gains from sale of shares of stock not traded in the
stock exchange.
Determination of Tax Due and Payable
2021 2022 2023 Note: Special corporations are subject to a different
RCIT 375,000 375,000 375,000 tax rate
MCIT - 400,000 300,000 c. Income Tax on Special
excess - (25,000) 75,000 Corporations

Income Tax Due Special

Tax Rate Tax Base
Corporations
2021 2022 2023
Nonresident gross income
Higher of 375,000 400,000 375,000 Cinematographic from all
MCIT
Film Owner, sources within
and RCIT 25%
Lessor or the
MCIT - - (25,000)
excess Distributor Philippines
Tax Due 375,000 400,000 350,000
Nonresident gross rentals,
Relief from MCIT Owner or Lessor lease or
Upon recommendation of the CIR, MCIT may be of Vessels charter fees
suspended by the Sec. of Finance upon submission Chartered by from leases or
of proof that the corporation sustained losses on Philippine charters of to
account of: Nationals Filipino
• Prolonged labor dispute citizens or
4 1 /2 %
• Force majeure corporations,
• Legitimate business reverses as approved
by the
Maritime
Industry
Authority.

60
As amended by Section 7 of the CREATE Law.
Previous rate was 30%.

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Nonresident gross rentals 5. Nonstock corporation or association organized

Owner or Lessor or fees and operated exclusively for religious,
of Aircraft, 7 1/2%) of charitable, scientific, athletic, or cultural
Machineries and purposes, or for the rehabilitation of veterans, no
Other Equipment part of its net income or asset shall belong to or
inure to the benefit of any member, organizer,
Proprietary 10% Taxable officer or any specific person;
educational 1% income from 6. Business league chamber of commerce, or
institutions and Beginning all sources board of trade, not organized for profit and no
Hospitals July 1, part of the net income of which inures to the
2020 until benefit of any private stock-holder, or individual;
June 30, 7. Civic league or organization not organized for
202361 profit but operated exclusively for the promotion
Resident Gross of social welfare;
international 2.5% Philippine 8. A nonstock and nonprofit educational institution;
carrier Billings 9. Government educational institution;
Regional or Area Taxable 10. Farmers' or other mutual typhoon or fire
Headquarters 10% income from insurance company, mutual ditch or irrigation
and Regional all sources company, mutual or cooperative telephone
Operating RCIT62 Taxable company, or like organization of a purely local
Headquarters beginning income from character, the income of which consists solely of
January 1, all sources assessments, dues, and fees collected from
2022 members for the sole purpose of meeting its
expenses; and
d. Exemptions from Tax on 11. Farmers', fruit growers', or like association
Corporations organized and operated as a sales agent for the
purpose of marketing the products of its
The following organizations shall not be taxed under members and turning back to them the proceeds
this Title in respect to income received by them as of sales, less the necessary selling expenses on
such: the basis of the quantity of produce finished by
them;
1. Labor, agricultural or horticultural organization
not organized principally for profit; Note: The income of whatever kind and character of
2. Mutual savings bank not having a capital stock the foregoing organizations from any of their
represented by shares, and cooperative bank properties, real or personal, or from any of their
without capital stock organized and operated for activities conducted for profit regardless of the
mutual purposes and without profit; disposition made of such income, shall be subject to
3. A beneficiary society, order or association, tax. (Collector v. V.G. Sinco G.R. No. L-9276, 1956)
operating for the exclusive benefit of the
members such as a fraternal organization • Payment by a non-profit educational institution
operating under the lodge system, or mutual aid for services rendered (e.g., payment to teachers
association or a nonstock corporation organized and service providers) is not distribution of profit
by employees providing for the payment of life, • Charging of tuition does not make school profit-
sickness, accident, or other benefits exclusively making enterprise
to the members of such society, order, or • While acquisition of additional facilities, such as
association, or nonstock corporation or their buildings and equipment, may redound to the
dependents; benefit of the institution, it does not necessarily
4. Cemetery company owned and operated follow that the same will redound to the benefit
exclusively for the benefit of its members; of its shareholder (on the ground that assets will
be distributed to shareholders upon dissolution)

61 62
As amended by Section 6 of the CREATE Law. Introduced by Section 7 of the CREATE Law.

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The phrase “any of their activities conducted 2. An individual whose income tax has been
from profit” does not qualify the word correctly withheld by his employer, provided that
“properties” T
̈ his makes income from property of the such individual has only one employer for the
organization taxable, regardless of how that income taxable year — the Certi cate of Withholding led by
is used – whether for profit or for lofty non- profit the respective employers, duly stamped "Received"
purposes (CIR v. YMCA, G.R. No. 124043, 1998). by the Bureau, shall be tantamount to the
substituted filing of income tax returns by said
Imposition of 10% income tax on proprietary, non- employees; (Rev. Regs. 8-2018)
profit hospitals did not remove exemption of non-
stock corporation organized and operated 3. An individual whose sole income has been
exclusively for charitable or social welfare purposes. subjected to final withholding tax pursuant to
Moreover, revenues from paying patients are Section 57(A) of this Code. (Sec. 51 (A) (2))
income received from es from paying patients are
income received- profit hospital. (CIR v. St. Luke’s 4. An individual who is exempt from income tax
Medical Center G.R. No. 195509, 2012) pursuant to the provisions of this Code and other
laws, general or special. (Sec. 51 (A) (2))
e. Period Within Which to File
5. A minimum wage earner as defined in these
Income Tax Return of
regulations — The Certificate of Withholding led by
Individuals and Corporations
the respective employers, duly stamped "Received"
a. Individual Return by the Bureau, shall be tantamount to the
substituted ling of income tax returns by said
i. Who are the Individuals Required to File an employees. (Rev. Regs. 08-18)
Income Tax Return?63 (RNB-A2)
1. Resident Citizens iii. When and Where to File
2. Non-resident Citizens for the income Where Should an Individual File His/Her Income
earned within the Philippines Tax Return?
3. Non-resident alien engaged in trade or Except in cases where the Commissioner otherwise
business or in the exercise of profession in permits, the return shall be filed with an authorized
the Philippines agent bank, Revenue District Officer, Collection
4. Resident Aliens for income earned within Agent or duly authorized Treasurer of the city or
the Philippines municipality in which such person has his legal
5. Employees deriving compensation income residence or principal place of business in the
concurrently from two (2) or more Philippines, or if there be no legal residence or place
employers during the taxable year of business in the Philippines, with the Office of the
Commissioner. (Sec. 51 (B))
Note: A citizen of the Philippines and any alien
individual engaged in business or practice of When Should an Individual File His/Her Income
profession within the Philippines shall file an income Tax Return?
tax return, regardless of the amount of gross The return of any individual specified above shall be
income. (Sec. 51 (A) (2) (a)) filed on or before the fifteenth (15th) day of April of
each year covering income for the preceding taxable
Who are the Individuals NOT Required to File an year. (Sec. 51 (C)(1))
Income Tax Return? (250W-FEM)
b. Corporate Returns
1. An individual whose taxable income does not
exceed two hundred fifty thousand pesos Which Corporations are Required to File an
(P250,000) under Section 24(A)(2)(a). (Sec. 51 (A) Income Tax Return?
(2))

63
Sec. 51

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Every corporation subject to the tax herein imposed,

except foreign corporations not engaged in trade or ii. Final Adjustment Return
business in the Philippines, shall render, in Every corporation liable to tax under Section 27
duplicate, a true and accurate quarterly income tax shall file a final adjustment return covering the total
return and final or adjustment return in accordance taxable income for the preceding calendar or fiscal
with the provisions of Chapter XII of this Title. (Sec. year. If the sum of the quarterly tax payments made
52 (A)) during the said taxable year is not equal to the total
tax due on the entire taxable income of that year, the
Who Shall File For the Corporation? corporation shall either:
The income tax return shall consist of a maximum of "(A) Pay the balance of tax still due; or
four (4) pages in paper form or electronic form, be "(B) Carry-over the excess credit; or
filed by the president, vice-president or other "(C) Be credited or refunded with the excess amount
principal officer, shall be sworn to by such officer paid, as the case may be.
and by the treasurer or assistant treasurer. (Sec. 52
(A)) In case the corporation is entitled to a tax credit or
refund of the excess estimated quarterly income
Contents of the Corporate Income Tax Return taxes paid, the excess amount shown on its final
1. Corporate profile and information; adjustment return may be carried over and credited
2. Gross sales, receipts or income from services against the estimated quarterly income tax liabilities
rendered, or conduct of trade or business, except for the taxable quarters of the succeeding taxable
income subject to final tax as provided under this years. Once the option to carry-over and apply
Code; the excess quarterly income tax against income
3. Allowable deductions under this Code; tax due for the taxable quarters of the
4. Taxable income as defined in Section 31 of this succeeding taxable years has been made, such
Code; and option shall be considered irrevocable for that
5. Income tax due and payable. taxable period and no application for cash
refund or issuance of a tax credit certificate shall
Provided, That the foregoing provisions shall not be allowed therefor. (Sec. 76)
affect the implementation of Republic Act No. 10708
or TIMTA. iii. When and Where to File
Place of Filing
Taxable Year of a Corporation Except as the Commissioner otherwise permits, the
A corporation may employ either calendar year or quarterly income tax declaration required in Section
fiscal year as a basis for filing its annual income tax 75 and the final adjustment return required in
return: Provided, That the corporation shall not Section 76 shall be filed with the authorized agent
change the accounting period employed without banks or Revenue District Officer or Collection
prior approval from the Commissioner in Agent or duly authorized Treasurer of the city or
accordance with the provisions of Section 47. (Sec. municipality having jurisdiction over the location of
52 (B)) the principal office of the corporation filing the return
or place where its main books of accounts and other
i. Quarterly Income Tax data from which the return is prepared are kept.
Every corporation shall file in duplicate a quarterly (Sec. 77 (A))
summary declaration of its gross income and
deductions on a cumulative basis for the preceding Time of Filing
quarter or quarters upon which the income tax, as The corporate quarterly declaration shall be filed
provided in Title II of this Code, shall be levied, within sixty (60) days following the close of each of
collected and paid. The tax so computed shall be the first three (3) quarters of the taxable year. The
decreased by the amount of tax previously paid or final adjustment return shall be filed on or before
assessed during the preceding quarters and shall be the fifteenth (15th) day of April, or on or before the
paid not later than sixty (60) days from the close of fifteenth (15th) day of the fourth (4th) month
each of the first three (3) quarters of the taxable following the close of the fiscal year, as the case
year, whether calendar or fiscal year. (Sec. 75) may be. (Sec. 77 (B))

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Time of Payment the income tax of which has been withheld correctly
The income tax due on the corporate quarterly by the said employer (tax due equals tax withheld)
returns and the final adjustment income tax returns shall not be required to file an annual income tax
computed in accordance with Sections 75 and 76 return. The certificate of withholding filed by the
shall be paid at the time the declaration or return is respective employers, duly stamped 'received' by
filed in a manner prescribed by the Commissioner. the BIR, shall be tantamount to the substituted filing
of income tax returns by said employees. (Sec. 51-
iv. Return of Corporations Contemplating A)
Dissolution or Reorganization
Every corporation shall, within thirty (30) days after Who are not qualified for Substituted Filing?
the adoption by the corporation of a resolution or
plan for its dissolution, or for the liquidation of the The following individuals, however, are not qualified
whole or any part of its capital stock, including a for substituted filing and therefore, still required to
corporation which has been notified of possible file Income Tax Return in accordance with existing
involuntary dissolution by the Securities and regulations:
Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified (A) Individuals deriving compensation from two or
under oath, setting forth the terms of such resolution more employers concurrently or successively at any
or plan and such other information as the Secretary time during the taxable year.
of Finance, upon recommendation of the
Commissioner, shall, by rules and regulations, (B) Employees deriving compensation income,
prescribe. regardless of the amount, whether from a single or
several employers during the calendar year, the
"The dissolving or reorganizing corporation shall, income tax of which has not been withheld correctly
prior to the issuance by the Securities and (i.e., tax due is not equal to the tax withheld)
Exchange Commission of the Certificate of resulting to collectible or refundable return.
Dissolution or Reorganization, as may be defined by
rules and regulations prescribed by the Secretary of (C) Individuals deriving other non-business, non-
Finance, upon recommendation of the professional-related income in addition to
Commissioner, secure a certificate of tax clearance compensation income not otherwise subject to a
from the Bureau of Internal Revenue which final tax.
certificate shall be submitted to the Securities and
Exchange Commission. (Sec. 52 (C)). (D) Individuals receiving purely compensation
income from a single employer, although the income
tax of which has been correctly withheld, but whose
c. Return on Capital Gains Realized from Sale spouse falls under Section 2.83.4(A), 2.83.4(B) and
of Shares of Stock and Real Estate 2.83.4(C) of these regulations.

Every corporation deriving capital gains from the (E) Non-resident aliens engaged in trade or
sale or exchange of shares of stock not traded thru business in the Philippines deriving purely
a local stock exchange shall file a return within thirty compensation income, or compensation income
(30) days after each transaction and a final and other non-business, non-professional-related
consolidated return of all transactions during the income. (Rev. Regs. 11-18)
taxable year on or before the fifteenth (15th) day of
the fourth (4th) month following the close of the g. Failure to File Returns
taxable year. (Sec. 52 (D))
Individuals
f. Substituted Filing Any person required to pay any tax, make a return,
keep any record, or supply correct and accurate
Individual taxpayers receiving purely compensation information, who wilfully fails to pay such tax, make
income, regardless of amount, from only one such return, keep such record, or supply such
employer in the Philippines for the calendar year, correct and accurate information, or withhold or

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remit taxes withheld, or refund excess taxes b. Creditable vs. Withholding

withheld on compensation, shall be liable by: Tax
Final Withholding Creditable
1. Fine of not less than P10,000
2. Imprisonment of not less than 1 year but not Tax Withholding Tax
more than 10 years
Amount of Tax Collected
Any person who attempts to make it appear for any
Full and final payment Intended to equal or at
reason that he or another has in fact filed a return or
of the income due from least approximate the
statement, or actually files a return or statement and
subsequently withdraws the same return or the payee on the said tax due from the said
statement after securing the official receiving seal or income payee on the said
stamp of an internal revenue office shall be income
punished by:
Who is Primarily Liable
1. Fine of not less than P10,000 but not more than
P20,000 Liability rests primarily Liability rests primarily
2. Imprisonment of not less than 1 year but not on the withholding on the taxpayer
more than 3 years agent

Corporations Need to File a Return

Any corporation, association or general co-
Payee is not required Income recipient is
partnership liable for any of the acts or omissions
to file an income tax still required to file an
penalized under this Code, in addition to the
return for the particular income tax return
penalties imposed herein upon the responsible
income and/or pay the
corporate officers, partners, or employees, shall,
difference between
upon conviction for each act or omission, be
the tax withheld and
punished by
the tax due on the
income.
1. a fine of not less than P50,000 but not more
than P100,000 Coverage

7. Withholding Tax a. All income subject Those income

to final taxes (i.e. payments covered by
a. Concept passive income, EWT (Rev. Regs. 02-
gross income of NRA- 98)
Withholding tax is a method of collecting income tax NETB)
in advance from the taxable income of the recipient Examples:
of income. b. Fringe benefit Professional fees,
talent fees, income
In the operation of the withholding tax system, the c. Informer’s reward payments to partners
payee is the taxpayer (the person on whom the tax to persons of GPP
is imposed), while the payor, a separate entity, acts instrumental to the
no more than an agent of the government for the discovery of violations
collection of the tax in order to ensure its payment. of the NIRC and the
(Bank of America v. Commissioner, G.R. No. discovery and seizure
103092, 1994) of smuggled goods

Timing of Withholding
Withholding tax shall be deducted and withheld by
the withholding agent when the income payment is Withholding Tax on Compensation
paid or payable or accrued or the income payment The withholding of tax on compensation income is a
is accrued or recorded as an expense or asset, method of collecting the income tax at source upon
whichever is earlier. receipt of the income. It applies to all employed

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individuals whether citizens or aliens, deriving C. VALUE-ADDED TAX (VAT)

income from compensation for services rendered in
the Philippines. The employer is constituted as the 1. Concept and Elements of
withholding agent. (Rev. Regs. 02-98, Sec. 2.78) Vatable Transactions

If the employee has other items of income that are Concept

subject to regular income tax such as income from • Value-Added Tax (VAT) is a tax on
business or professions, income from other consumption levied on the sale, barter,
employment or casual income, he must file a exchange or lease of goods or properties
consolidated income tax return to include such items and services in the Philippines and on
of income for the entire taxable year. The importation of goods into the Philippines.
withholding on compensation is credited against the • Seller is the one statutorily liable for the
total tax due in the consolidated income tax return. payment of the tax but the amount of the
(Banggawan) tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
Liability for Tax (Sec. 80) properties or services.
(A) Employer. - The employer shall be liable for the • In the case of importation, the importer is
withholding and remittance of the correct amount of the one liable for the VAT.
tax required to be deducted and withheld under this
Chapter. If the employer fails to withhold and remit
Characteristics of a VAT-Taxable Transaction
the correct amount of tax as required to be withheld,
(Mamalateo)
such tax shall be collected from the employer
a. It is a tax on the value added of a taxpayer.
together with the penalties or additions to the tax
b. It is a transparent form of sales tax meaning
otherwise applicable in respect to such failure to
that the amount of tax is segregated to be
withhold and remit.
apparent to/seen by the taxpayer.
c. It is a broad-based tax on consumption of
(B) Employee. - Where an employee fails or
goods, properties, or services in the
refuses to file the withholding exemption certificate
Philippines as it applies to all stages of
or willfully supplies false or inaccurate information
manufacture, production, and distribution of
thereunder, the tax otherwise required to be
goods and services.
withheld by the employer shall be collected from him
d. It is an indirect tax.
including penalties or additions to the tax from the
e. The Philippines adopted the “separate
due date of remittance until the date of payment. On
indication of tax method”.
the other hand, excess taxes withheld made by the
f. There is no cascading in the value added
employer due to:
tax system and is thus not considered a tax
(1) Failure or refusal to file the withholding
on tax.
exemption certificate; or

Elements of a VAT-taxable Transaction

(2) False and inaccurate information shall not be
(PSBPE): (Sec. 105)
refunded to the employee but shall be forfeited
in favor of the Government. a. It Involves any Person;
b. There must be a Sale (unless the same is
a “deemed sale” transaction), barter,
If the employer is the Government of the Philippines
exchange, lease of goods or properties, or
or any political subdivision, agency or
rendering of service;
instrumentality thereof, the return of the amount
c. It must be done in the ordinary course of
deducted and withheld upon any wage shall be
trade or Business;
made by the officer or employee having control of
d. The transaction is done in the Philippines.
the payment of such wage, or by any officer or
e. It must neither be VAT-Exempt or VAT
employee duly designated for the purpose. (Sec. 82)
zero-rated.

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2. Impact and Incidence of Tax a. The service is performed in the Philippines;

b. The service falls under any of the
The impact of VAT is on the seller because it is the categories provided in Section 108(B) of
one who is statutorily liable for the payment of the the Tax Code; and
tax. However, in the case of importation, the c. It is paid for in acceptable foreign currency
importer is the one liable for VAT. that is accounted for in accordance with
BSP rules. (CIR v. AMEX, G.R. No.
The incidence of the tax, on the other hand, is on 152609, 2005)
the final consumer where the tax comes to rest.
VAT is an indirect tax which may be shifted or 4. Imposition of Vat on Transfer of
passed on to the buyer, transferee or lessee of Goods by Tax Exempt Persons
goods, properties or services. (Sacdalan-Casasola) (Technical Importation)

VAT is an indirect tax levied on goods and services; In the case of tax-free importation of goods into the
not on persons, and ultimately paid by consumers in Philippines by persons, entities or agencies exempt
the form of higher prices. from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-
3. Destination Principle and Cross- exempt persons or entities.
Border Doctrine
The purchasers, transferees or recipients shall be
Destination Principle: VAT is imposed in the considered the importers thereof, who shall be
country in which the products or services are liable for any internal revenue tax on such
actually consumed or used (i.e., exports exempt, importation.
imports taxable).
The tax due on such importation shall constitute
Actual shipment of the goods from the Philippines to a lien on the goods, superior to all charges/or
a foreign country is a precondition of an export sale liens, irrespective of the possessor of said goods.
following the destination principle being adhered to (Rev. Regs. 16-05)
by our VAT system.
5. Transactions Deemed Sale
Origin Principle: only national taxpayers would be Subject to VAT
exposed to the tax, without distinguishing between
transactions “consumed” locally or abroad (i.e., The law deems the enumerated transactions below
like an actual sale, and hence subject to VAT on sale
Exports taxable, imports exempt; Situs: country of
of goods or properties.
production)
The following transactions shall be "deemed sale"
Cross-border Doctrine: No VAT shall be imposed pursuant to Sec. 106 (B) of the Tax Code:
to form part of the cost of goods sold destined for
consumption outside of the territorial border of the 1. Transfer, use or consumption NOT in the
taxing authority. course of business of goods or properties
originally intended for sale or for use in the
course of business. Transfer of goods or
General rule: The VAT system uses the destination
properties not in the course of business can
principle as a basis for the jurisdictional reach of the take place when VAT-registered person
tax. Goods and services are taxed only in the withdraws goods from his business for his
country where they are consumed. personal use;
2. Distribution or transfer to:
Exception: The supply of service shall be zero- i. Shareholders or investors share in the
rated when, among others, the following profits of VAT-registered person;
requirements are met:
Property dividends which constitute stocks in
trade or properties primarily held for sale or lease

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declared out of retained earnings and distributed c. Accounted for in accordance with the
by the company to its shareholders shall be rules and regulations of the BSP
subject to VAT based on the zonal value or fair
market value at the time of distribution, 2. Sale and delivery of goods to:
whichever is applicable. a. Registered enterprises within a
separate customs territory as provided
ii. Creditors in payment of debt or
obligation. under special laws; and
b. Registered enterprises within tourism
3. Consignment of goods if actual sale is NOT enterprise zones as declared by the
made within 60 days following the date Tourism Infrastructure and Enterprise
such goods were consigned. Consigned Zone Authority (TIEZA)
goods returned by the consignee within the
60-day period are not deemed sold; 3. Sale of raw materials or packaging materials by
a VAT-registered entity to a nonresident buyer
4. Retirement from or cessation of business a. For delivery to a resident local export-
with respect to all goods on hand, whether
oriented enterprise;
capital goods, stock-in-trade, supplies or
materials as of the date of such retirement b. Used in the manufacturing, processing,
or cessation, whether or not the business is packing, repacking in the Philippines of
continued by the new owner or successor. the said buyer’s goods;
The following circumstances shall, among c. Paid for in acceptable foreign currency;
others, give rise to transactions "deemed and
sale" for purposes of this Section; d. Accounted for in accordance with the
rules and regulations of the BSP
i. Change of ownership of the business.
There is a change in the ownership of
the business when a single 4. Sale of raw materials or packaging materials to
proprietorship incorporates; or the export-oriented enterprise whose export sales
proprietor of a single proprietorship exceed 70% of total annual production
sells his entire business. 5. hose considered export sales under the
ii. Dissolution of a partnership and Omnibus Investment Code of 1987 and other
creation of a new partnership which special laws
takes over the business. (Rev. Regs. 6. Sale of goods, supplies, equipment and fuel to
16-05) persons engaged in international shipping or
international air transport operations.
6. Zero-Rated and Effectively Zero-
Rated Sales of Goods or
7. VAT-Exempt Transactions
Properties

Refer to sale of goods or properties and/or services Refer to the sale of goods or properties and/or
that are subject to VAT at the rate of 0%, and the services and the use or lease of properties that are
seller is allowed to claim a tax credit (input tax) on not subject to VAT (output tax) and the seller is not
purchases. allowed any tax credit of VAT (input tax) on
purchases
The following sales by VAT-REGISTERED persons The person making the exempt sale of goods,
shall be subject to 0% rate: properties or services shall not bill any output tax to
his customers because the said transaction is not
1. The sale and actual shipment of goods from subject to VAT.
the Philippines to a foreign country
a. Irrespective of any shipping Exempt transactions, enumerated.
arrangement; a. Sale or importation of agricultural and
b. Paid for in acceptable foreign currency marine food products in their original state,
or its equivalent in goods or services; livestock and poultry of a kind generally
and used as, or yielding or producing foods for

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human consumption; and breeding stock d. Importation of professional instruments and

and genetic materials therefore implements, wearing apparel, domestic
animals, and personal household effects.
Livestock: cows, bulls and calves, pigs, sheep, • belonging to persons coming to settle
goats and rabbits in the Philippines, or Filipinos or their
families and descendants who are now
Poultry: fowls, ducks, geese and turkey residents or citizens of other countries,
such parties hereinafter referred to as
Does not include fighting cocks, race horses, zoo overseas Filipinos, in quantities and of
animals and other animals generally considered as the class suitable to the profession,
pets. rank or position of the persons
importing said items;
Marine food products: fish and crustaceans, such as • For their own use and not for sale,
but not limited to, eels, trout, lobster, shrimps, barter or exchange;
prawns, oysters, mussels and clams • Accompanying such persons or
arriving within a reasonable time;
Meat, fruit, vegetables and other agricultural and • Upon the production of evidence
marine food products are considered in their original satisfactory to the CIR that such
state even if they have undergone the simple persons are actually coming to settle in
process of preparation or preservation for the the Philippines;
market: freezing, drying, salting, broiling, roasting, • The change of residence is bona fide.
smoking or stripping, shrink wrappings in plastic,
vacuum packing, tetra-pack, and other similar e. Services subject to percentage tax
packaging methods
f. Services by agricultural contract growers
Polished and/or husked rice, corn grits and raw cane and milling for others of palay into rice, corn
sugar and molasses, ordinary salt and copra shall into grits and sugar into raw sugar
be considered as agricultural product in their original
state g. Medical, dental, hospital and veterinary
services, except those rendered by
b. Sale or importation of fertilizers, seeds, professionals
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds, including Laboratory services are exempted.
ingredients, whether locally produced or
imported, used in the manufacture of If the hospital or clinic operates a pharmacy or drug
finished feeds (except specialty feeds for store, the sale of drugs and merchandise is subject
race horses, fighting cocks, aquarium to VAT. However, sales of drugs to in-patients of
fishes, zoo animals and other animals hospitals are considered part of hospital services,
generally considered as pets) which are exempt from VAT.

c. Importation of personal and household A healthcare company which does not actually
effects belonging to residents of the provide medical and/or hospital services, but merely
Philippines returning from abroad and non- arranges for the same is not VAT-exempt. (CIR v.
resident citizens coming to resettle in the Philippine Health Care Providers, Inc., G.R. No.
Philippines 168129, 2007)

Such goods are exempt from customs duties under HMOs gross receipts shall be the total amount of
the Customs Modernization and Tariff Act. money or its equivalent representing the service fee
actually or constructively received during the taxable
period for the services performed for another

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person, excluding the value-added tax. (Maxicare importation of direct farm inputs,
Healthcare Corp. v. CIR, C.T.A Case No. 8441, May machineries and equipment, including
5, 2015) spare parts thereof, to be used directly and
exclusively in the production and/or
The contractual relationship is between the doctors processing of their produce
and hospitals on one hand, and the HMO, on the
other hand. The payments made by petitioner to Sale by agricultural cooperatives to non-members
doctors, hospitals and for other medical utilizations can only be exempted from VAT if the producer of
do not constitute "money in trust" in this case, it was
the agricultural products sold is the cooperative
established that earmarking/allocating of petitioner
is an act of ownership and management over the itself. If the cooperative is not the producer (e.g.,
funds, the entire disposition of which is surrendered trader), then only those sales to its members shall
to it by the members. which excludes gross receipts be exempted from VAT;
from VAT purposes. Thus, the gross receipts of
HMOs are subject to VAT. Id. However, the sale or importation of agricultural food
products in their original state is exempt from VAT
h. Educational services rendered by private irrespective of the seller and buyer
educational institutions duly accredited by
the DepED, CHED and TESDA and those m. Gross receipts from lending activities by
rendered by government educational credit or multi-purpose cooperatives duly
institutions. registered and in good standing with the
o Does not include seminars, in- CDA
service training, review classes
and other similar services n. Sales by non-agricultural, non-electric and
rendered by persons who are not non-credit cooperatives duly registered
accredited by the DepED, the with and in good standing with the CDA
CHED and/or TESDA
Share capital contribution of each member does not
i. Services rendered by individuals pursuant exceed 15,000 and regardless of the aggregate
to an employer-employee relationship capital and net surplus ratably distributed among the
members
j. Services rendered by regional or area HQ
established in the Philippines by
Importation of machineries and equipment,
multinational corporations which act as
including spare parts thereof, to be used by them
supervisory, communications and
are subject to VAT
coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific
Region and do not earn or derive income o. Export sales by persons who are not VAT-
from the Philippines registered

k. Transactions which are exempt under p. The following sales of real properties are
international agreements to which the exempt from VAT:
Philippines is a signatory, except those • Not primarily held for sale to customers
under PD 529 (Petroleum Exploration or held for lease in the ordinary course
Concessionaires under the Petroleum Act of trade or business
of 1949) • Sale of real properties utilized for low-
cost housing
l. Sales by agricultural cooperatives duly • A subdivision or a condominium
registered and in good standing with the registered and licensed by the HLURB
CDA to their members, as well as sale for • Undertaken by the government or
their produce, whether in its original state or private developers
processed form, to non-members their • Utilized for socialized housing

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• Residential lot valued at P1,919,500 and sale which is not devoted principally to
and below, or house and lot and other the publication of paid advertisements
residential dwellings valued at
P3,199,200 and below. (as amended The abovementioned provision does not include e-
by Rev. Regs. 16-11) books or e-journals. The terms “book,” “newspaper,”
“magazine,” “review” and “bulletin” shall refer to
If two or more adjacent residential lots are sold or printed materials in hard copies and do not
disposed in favor of one buyer, for the purpose of include those in digital or electronic format or
utilizing the lots as one residential lot, the sale shall computerized versions Hence, the same is not
be exempt from VAT only if the aggregate value of exempt from VAT(RMC No. 75-12)
the lots do not exceed 1.9195M. Such adjacent real
properties although covered by separate titles s. Transport of passengers by international
and/or separate tax declarations, when sold to one carriers doing business in the Philippines
and the same buyer, whether covered by one or (R.A. No. 10378)
separate deeds of conveyance, shall be presumed
as a sale of one residential lot, house and lot or The transport of cargo by international carriers is
residential dwelling. (as amended by Rev. Regs. VAT-exempt, but subject to percentage tax. (Rev.
16-11 and Rev. Regs. 13-12) Regs. 15-13)

The sale of parking lots in a condominium is a t. Sale, importation, or lease of passenger or

separate and distinct transaction and is not covered cargo vessels and aircraft, including
by the rules on threshold amount not being a engine, equipment and spare parts thereof
residential lot, house and lot, or a residential for domestic or international transport
dwelling. Thus, it is subject to VAT regardless of operations; Provided, however, that the
amount of selling price. (Rev. Regs. 13-12) exemption from VAT on the importation and
local purchase of passenger and/or cargo
Note: Beginning January 1, 2021, the VAT vessels shall be subject to the
exemption shall only apply to sale of real properties requirements on restriction on vessel
not primarily held for sale to customers or held for retirement program of Maritime Industry
lease in the ordinary course of trade or business, Authority (MARINA). (Rev. Regs. 13-18)
sale of real property utilized for socialized housing
as defined by Republic Act No. 7279, sale of house u. Importation of fuel, goods and supplies by
and lot, and other residential dwellings with selling persons engaged in international shipping
price of not more than Two million pesos or air transport operations
(₱2,000,000).
Shall be used exclusively or shall pertain to the
q. Lease of residential units transport of goods and/or passengers from a port in
Monthly rental: not exceeding P15,000 the Philippines directly to a foreign port without
stopping at any other port in the Philippines
Gross receipts from rentals exceeding P15,000 per
month per unit shall be subject to VAT if the Provided further, that if any portion of such fuel,
aggregate annual gross receipts from said units only goods or supplies is used for purposes other than
(not including the gross receipts from units leased that mentioned in this paragraph, such portion of
for not more than P15,000) exceed 3M, otherwise, fuel, goods and supplies shall be subject to 12%
these gross receipts are subject to 3% percentage VAT starting February 1, 2006 (Rev. Regs. 04-07)
tax.
v. Services of banks, non-bank financial
r. Sale, importation, printing or publication of intermediaries performing quasi-banking
books and any newspaper, magazine, functions, and other non-bank financial
review, or bulletin which appears at regular intermediaries subject to percentage tax
intervals with fixed prices for subscription

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production of personal protective

Money changers and pawnshops are treated as equipment components such as
non-bank financial intermediaries, hence they are coveralls, gown, surgical cap, surgical
VAT-exempt, but are subject to percentage tax. mask, N-95 mask, scrub suits, goggles
and face shield, double or surgical
(Rev. Regs. 04-07) (H. Tambunting Pawnshop, Inc.
gloves, dedicated shoes, and shoe
v. CIR, 2010) covers, for COVID-19 prevention;
2. All drugs, vaccines and medical
w. Sale or lease of goods and services to devices specifically prescribed and
senior citizens and persons with disability, directly used for the treatment of
as provided under Republic Act Nos. 9994 COVID-19;
(Expanded Senior Citizens Act of 2010) 3. Drugs for the treatment of COVID-19
and 10754 (An Act Expanding the Benefits approved by the Food and Drug
Administration (FDA) for use in clinical
and Privileges of Persons With Disability),
trials, including raw materials directly
respectively; necessary for the production of such
drugs
x. Transfer of property pursuant to Section
40(C)(2) of the NIRC, as amended; cc. Sale or lease of goods or properties or the
performance of services other than the
y. Association dues, membership fees, and transactions mentioned in the preceding
other assessments and charges collected paragraphs, the gross annual sales and/or
on a purely reimbursement basis by receipts do not exceed the amount of Three
homeowners’ associations and Million Pesos (P 3,000,000)
condominium corporations established
under Republict Act No. 4726 (The For purposes of the threshold of P3,000,000, the
Condominium Act), respectively; husband and wife shall be considered separate
taxpayers.
z. Sale of gold to the Bangko Sentral ng
Pilipinas (BSP); Rule on 8% Gross Income Tax
Self-Employed individuals and professionals
aa. Sale of drugs and medicines for: availing of the eight (8%) tax on gross sales and/or
i. Diabetes, high receipts and other non-operating income in lieu of
cholesterol and the graduated income shall also be exempt from the
hypertesnsion beginning payment of twelve (12%) VAT. (Revenue
January 1, 2020; and Regulations 13-2018)
ii. Cancer, mental illness,
tuberculosis, and kidney The Aggregation Rule for Each Taxpayer Shall
diseases beginning Apply
January 1, 2021;64 For instance, if a professional, aside from the
practice of his profession, also derives revenue from
Provided, that the DOH shall issue a list of approved
drugs and medicines within sixty (60) days. other lines of business which are otherwise subject
to VAT, the same shall be combined for purposes of
bb. Sale or importation of the following determining whether the threshold has been
beginning January 1, 2021 to December exceeded. Thus, the VAT-exempt sales shall not be
31, 2023: included in determining the threshold. (Rev. Regs.
1. Capital equipment, its spare parts and 04-07)
raw materials, necessary for the

64
As amended by Section 12 of the CREATE Law. Previous
date was January 1, 2023 as provided by Section 1 of RA No.
11467.

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Note: A VAT-registered person may elect that the by any person registered or required to register
exemption shall not apply to his sales of goods or under the Tax Code.
services or properties. Said choice is irrevocable
for a period of 3 years. Illustration:

LIST OF VAT EXEMPT TRANSACTIONS IS Formula: Output Tax - Input Tax = Net VAT Payable
EXCLUSIVE or Excess Input Tax
The Court ruled that the fact that the services
offered in a business engaged in tollway operations For the month of January 2023, A sold goods
is not in Section 109 is enough basis to impose VAT amounting to P112,000 to B. Within the same
on the same even if it is not covered under Section month, A purchased the goods for P56,000.
Compute VAT payable.
108 of the Code. This implies that Section 109 (i.e.,
VAT exempt transactions) is an exclusive list while To compute output tax:
Section 108 is not. (Diaz vs. Secretary of Finance, Selling Price (inclusive of VAT) P112,000
G.R. No. 193007, 2011) VATable gross sales (100,000)
(112,000/1.12)
8. Input and Output Tax Output VAT P12,000

a) Definition To compute input tax:

Purchase Price (inclusive of P56,000
The term "input tax" means the value-added tax VAT)
due from or paid by a VAT-registered person in the VATable gross purchase (50,000)
(112,000/1.12)
course of his trade or business on importation of
Input VAT P6,000
goods or local purchase of goods or services,
including lease or use of property, from a VAT- To compute VAT payable:
registered person. It shall also include the Output VAT P12,000
transitional input tax determined in accordance with Input VAT (6,000)
Section 111 of the NIRC. VAT Payable P6,000

The term "output tax" means the value-added tax

due on the sale or lease of taxable goods or b) Sources of input tax – The following are sources
properties or services by any person registered or of input VAT:
required to register under Section 236 of the NIRC. (1) Purchase or importation of goods:
i. For sale;
Input VAT or input tax represents the actual ii. For conversion into or intended to form part
payments, costs, and expenses incurred by a VAT- of a finished product for sale including
registered taxpayer in connection with his purchase packaging materials;
of goods and services. Thus, input tax means the iii. For use as supplies in the course of
value-added tax paid by a VAT-registered business;
person/entity in the course of his/its trade or iv. For use as materials supplied in the sale of
business on the importation of goods or local service; or
purchases of goods or services from a VAT- v. For use in trade or business for which
registered person. CIR v. Benguet Corp., (G.R. No. deduction for depreciation or amortization is
145559, 2006) allowed under this Code.

When that person or entity sells his/its products or The input tax on domestic purchase or importation
services, the VAT-registered taxpayer generally of goods or properties by a VAT-registered person
becomes liable for 12% of the selling price as output shall be creditable:
VAT or output tax. Hence, output tax is the value a. To the purchaser upon consummation of
added tax on the sale of taxable goods or services sale and on importation of goods or
properties; and

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b. To the importer upon payment of the value- Any VAT-registered person whose sales are zero-
added tax prior to the release of the goods rated or effectively zero-rated may within 2 years
from the custody of the Bureau of Customs. after the close of the taxable quarter when the sales
were made,
(2) Purchase of real properties for which a VAT a. apply for the issuance of a tax credit certificate or
has actually been paid b. refund of the creditable input tax due or paid
attributable to such sale.
(3) Purchase of services in which VAT has
actually been paid The creditable input tax allowed to be refunded does
not include transitional input tax.
(4) Transactions deemed sale
In case the taxpayer is engaged both in zero-rated
(5) Presumptive input tax and taxable or exempt sale, and the amount of
The following shall be entitled to a presumptive input creditable input tax due or paid cannot be directly
tax creditable against the output tax equivalent to and entirely attributed to any one of the transactions,
four percent (4%) of the gross value in money of it shall be allocated proportionately on the basis of
their purchases of primary agricultural products the volume of sales.
which are used as inputs to their production of firms
engaged in either: In the Luzon Hydro case, the Supreme Court
(a) processing of sardines, mackerel and milk; or reiterated the requisites for a claim for refund or tax
(b) manufacturing refined sugar and cooking oil. credit for unutilized input VAT, thus:
1. The taxpayer is VAT-registered;
Processing shall mean pasteurization, canning and 2. The taxpayer is engaged in zero-rated or
activities which through physical or chemical effectively zero-rated sales;
process alter the exterior texture or form or inner 3. The input taxes are due or paid;
substance of a product in such manner as to 4. The input taxes are not transitional input
prepare it for special use to which it could not have taxes;
been put in its original form or condition. 5. The input taxes have not been applied
against output taxes during and in the
(6) Transitional input: An input tax on the succeeding quarters;
beginning inventory of goods, materials and 6. The input taxes claimed are attributable to
supplies equivalent to two percent (2%) of the value zero-rated or effectively zero-rated
of such inventory or the actual value-added tax paid sales;
on such goods, materials and supplies, whichever is 7. For zero-rated sales under Section
higher, which shall be creditable against the output 106(A)(2)(1) and (2); 106(B); and 108(B)(1)
tax shall be allowed for: and (2), the acceptable foreign currency
(1) A person who becomes liable to VAT; or exchange proceeds have been duly
(2) Any person who elects to be a VAT-registered accounted for in accordance with the
person. rules and regulations of the Bangko
Sentral ng Pilipinas;
The transitional input VAT shall be subject to the 8. Where there are both zero-rated or
filing of an inventory according to rules and effectively zero-rated sales and taxable or
regulations prescribed by the Secretary of finance, exempt sales, and the input taxes cannot
upon recommendation of the Commissioner. be directly and entirely attributable to any of
these sales, the input taxes shall be
9. Tax Refund or Tax Credit proportionately allocated on the basis of
sales volume; and
Who may claim for refund/apply for issuance of 9. The claim is filed within two years after
tax credit certificates the close of the taxable quarter when such
sales were made. (Luzon Hydro
Corporation v. CIR, G.R. No. 188260,

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2013)
Otherwise, if after the 90-day period the, CIR fails to
In case of an erroneous pass-on of VAT to a PEZA- act on the application for tax refund/credit, the
registered enterprise, the right to recover the same remedy of the taxpayer is to appeal the inaction of
is against the supplier who erroneously passed-on the CIR to CTA within 30 days.
the VAT amount.
Hence, if the taxpayer filed with CTA before the 90-
Unutilized creditable input taxes attributable to zero- day period expires, CTA will dismiss the appeal on
rated sales can only be recovered through the the ground of prematurity. If filed with CTA after the
application for refund or tax credit. The practice of 120-day (90+ 30 days), CTA will dismiss for being
claiming as an outright (income tax) expense late. This only applies to creditable input tax
accumulated and unapplied input VAT credits after refunds.
the expiration of the 2-year period to process the
claim does not have any legal basis (RMC No. 57- Note: The 120-day period as discussed in the
13). actual case was modified to reflect 90 days to
incorporate the TRAIN amendment.
b. Period to file claim / apply for the issuances
of tax credit certificates General rule: Both the administrative and judicial
The CIR shall grant a TCC/refund for creditable claim must be filed within the two (2)-year
input taxes within 90 days from the date of prescriptive period from the date of payment.
submission of complete documents in support of the
application. Exception: VAT refunds. It is only the administrative
claim that must be filed within the two-year
prescriptive period.
Taxpayer may appeal to the CTA within 30 days
from receipt of said denial.
Two exceptions to the mandatory and jurisdictional
treatments of the 90-day period as pronounced in
If no action on the claim for refund has been taken
the Aichi case, as follows:
by the CIR after the 90-day period from the date of
i. If the Commissioner, through a specific
submission of the application with complete
ruling, misleads a particular taxpayer to
documents, the taxpayer may appeal to the CTA
prematurely file a judicial claim with the
within 30 days from the lapse of the 90-day period.
CTA. Such specific ruling is applicable only
Provided, however, That failure on the part of any
to such particular taxpayer.
official, agent, or employee of the BIR to act on the
ii. If the Commissioner, through a general
application within the 90-day period shall be
interpretative rule issued under Section 4 of
punishable under Section 269 of NIRC.
the Tax Code, misleads all taxpayers into
filing premature judicial claims with the
Note: The 120-day period is now changed to 90 days
CTA.
as amended by TRAIN.

CIR v. Aichi Forging Company (G.R. No. 184823, In these cases, the Commissioner cannot be
2010) allowed to later on question the CTA’s
The CIR has 90 days, from the date of the assumption of jurisdiction over such claim since
submission of the complete documents within which equitable estoppel has set in as expressly
to grant or deny the claim for refund/credit of input authorized under Section 246 of the Tax Code.
VAT.
Strict compliance with the 90+30 day period is
In case of full or partial denial by the CIR, the necessary for such claim to prosper, except for the
taxpayer’s recourse is to file an appeal before the period from the issuance of BIR Ruling No. DA-493-
CTA within 30 days from receipt of the decision of 03 on 10 December 2003 to 6 October 2010 when
the CIR. the Aichi doctrine was adopted, which again

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reinstated the 90+30 day periods as mandatory and

Q4 October 1- Dec. 31, Jan. 1-Dec.
jurisdictional.
Dec. 31, 2023 31, 2025
2023
The 30-day period given to the taxpayer within
which to file an appeal before the CTA need not
necessarily fall within the two-year prescriptive B. 90+30 Day Period
period on applying for TCC or refund, as long as the The taxpayer can file an appeal in one of two ways:
administrative claim is filed within the two-year 1. file the judicial claim within thirty days after the
prescriptive period. (Team Energy Corporation v. Commissioner denies the claim within the 90-
Commissioner of Internal Revenue, G.R. No. day period, or
190928, 2014) 2. file the judicial claim within thirty days from the
expiration of the 90-day period if the
SUMMARY OF RULES Commissioner does not act within the 90-day
period.
A. Two-Year Prescriptive Period
It is only the administrative claim that must be filed The taxpayers are reminded that that when the 90-
within the two-year prescriptive period. (Aichi) day period lapses and there is inaction on the part
of the CIR, they must no longer wait for it to come
The proper reckoning date for the two-year up with a decision thereafter. The CIR’s inaction
prescriptive period is the close of the taxable quarter is the decision itself. It is already a denial of the
when the relevant sales were made. (San Roque) refund claim. Thus, the taxpayer must file an
appeal within 30 days from the lapse of the 90-
The only other rule is the Atlas ruling, which is day waiting period.
applicable only from 8 June 2007 to 12 September
2008. Atlas states that the two-year prescriptive The 90-day period is counted from the submission
period for filing a claim for tax refund or credit of of complete documents and not from the filing of the
unutilized input VAT payments should be counted claim. (CIR vs. GST Phils., Inc., G.R. No. 190872,
from the date of filing of the VAT return and payment 2013)
of the tax. (San Roque)
Note: The 120-day period as discussed in the
Illustration: actual case was modified to reflect 90 days to
incorporate the TRAIN amendment.
Period to File
Claim
As of June 11, 2014, all claims must already attach
Close of (2 years
Quarter complete supporting documents and this fact must
Quarter AFTER close
of taxable be attested under oath. As such, the 90-day period
quarter) already runs on the date the claim is filed in all
instances. (Philippine Total Gas, Inc. v. CIR, G.R.
Q1 January 1 March 31, April 1-March No. 207112, 2015)
- March 2023 31, 2025
31, 2023 Note: The 120-day period as discussed in the
actual case was modified to reflect 90 days to
Q2 April 1- June 30, July 1-June
incorporate the TRAIN amendment.
June 30, 2023 30,2025
2023
The 30-day period always applies, whether there is
Q3 July 1- Sep. 30, Oct. 1-Sep.30 a denial or inaction on the part of the CIR.
September 2023 2025
30, 2023 As a General rule, the 30-day period to appeal is
both mandatory and jurisdictional. (Aichi and San
Roque)

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The exception is that premature filing is allowed only D. TAX REMEDIES UNDER THE
if filed between 10 December 2003 and 5 October NATIONAL INTERNAL REVENUE
2010, when BIR Ruling No. DA-489-03 was still in CODE
force. (San Roque)
1. Assessment of Internal Revenue
Late filing is absolutely prohibited, even during the Taxes
time when BIR Ruling No. DA-489-03 was in force.
(San Roque) Power of the Commissioner of Internal Revenue
to Make Assessments
c) Manner of giving refunds An assessment is relevant in the proper pursuit of
judicial and extrajudicial remedies to enforce
Refund shall be made upon warrants drawn by the taxpayer liabilities and certain matters that relate to
CIR or by his duly authorized representative without it, such as the imposition of surcharges and interest,
the necessity of being countersigned by the and in the application of statutes of limitations and
Chairman of COA. in the establishment of tax liens. (Tupaz v. Ulep,
G.R. No. 127777, 1999)
Refunds under this paragraph shall be subject to
Note: The Commissioner, under Sec. 6 of the NIRC,
post audit by the COA.
has the power to make assessments but is a power
that may be delegated.
10. Filing of Returns and Payment
After a return has been filed as required under the
Time of Filing and Payment provisions of this Code, the Commissioner or his
Every person liable to pay VAT shall file a quarterly duly authorized representative may authorize the
examination of any taxpayer and the assessment of
return within twenty-five (25) following the close of
the correct amount of tax.
each taxable quarter.
Failure to file a return shall not prevent the
However, VAT-registered persons shall pay the Commissioner from authorizing the examination of
value-added tax on a monthly basis. any taxpayer. (NIRC, Sec. 6[A])

Note: Beginning January 1, 2023, the filing AND Assessment: Any notice sent to the taxpayer
payment of VAT shall be done within twenty-five demanding payment of the tax liability within a
prescribed period is an assessment.
(25) days following the close of each taxable
quarter.
An assessment contains not only:
1. A computation of tax liabilities, but also;
Amounts reflected in the monthly VAT Declarations 2. A demand for payment within a prescribed
for the first 2 months of the quarter shall still be period. (CIR v. Pascor Realty & Dev’t Corp, G.R.
included in the quarterly VAT return which reflects No. 123895, 1999)
the cumulative figures for the taxable quarter.
The assessment must be in writing. (NIRC, Sec.
228)
Place of Filing and Payment
VAT Return should be filed and paid with: An assessment must be sent to and received by the
• Any authorized agent bank taxpayer, and payment of the taxes must be
• Revenue Collection Officer demanded within a prescribed period. (CIR v.
• Duly authorized City or Municipal Treasurer Pascor Realty & Dev’t Corp, G.R. No. 123895,
1999)
• Other place permitted by the Commissioner
An assessment must state the facts and law on
Note: must be within the RDO where the taxpayer which it is based. (CIR v. Spouses Magaan G.R.
is registered. 232663, 2021)

Kinds of Assessments

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a. Self-Assessment – one in which the tax is tax liabilities. (CIR v. Lancaster PH, CTA [En Banc]
assessed by the taxpayer himself. The tax EB No. 352, 2008)
payment system is self-assessing, i.e., “pay-as- It is valid for 120 days but can be extended through
you-file system.” Thus, if tax is properly paid, no revalidation. The revalidation is done by issuing a
deficiency assessment is necessary (NIRC, new LOA. (RR No. 38-88)
Sec. 56[A][1])
A LOA covers a taxable period not exceeding one
Examples: income tax, capital gains tax, estate taxable period. If the audit includes more than one
tax, donor’s tax, VAT, DST taxable period, the other periods must be
specifically indicated in the LOA.
2. Deficiency Assessment – made by tax
assessor whereby the correct amount of tax is Thus, if the LOA is issued “for the year ending
determined through examination or 2003 and unverified prior years”, then it is only
investigation (NIRC, Sec. 56[B]) valid for the year 2003. It is not entirely void. (CIR
v. DLSU, G.R. 196596, 2016)
3. Jeopardy Assessment – a tax assessment
made by an authorized Revenue Officer without [2] Notice of Discrepancy
the benefit of complete or partial audit (R.R. No.
30-2002, Sec. 3[1][a]) A Notice of Discrepancy is sent to the taxpayer
when he is found to be liable for deficiency tax or
4. Disputed Assessment – a taxpayer questions taxes in the course of an investigation conducted by
a deficiency assessment and asks the BIR to a Revenue Officer. It aims to fully afford the taxpayer
reconsider or cancel the assessment because with an opportunity to present and explain his side
he believes that he is not liable therefor (St. on the discrepancies found.
Stephen’s Ass’n v. CIR, G.R. No. L-11238,
1958). In short, an assessment that has been If the taxpayer disagrees with the
duly protested by the taxpayer by filing a request discrepancy/discrepancies detected during the
for reconsideration or request for reinvestigation audit/investigation, the taxpayer must present an
pursuant to Sec. 228 of the NIRC. explanation and provide documents to support his
explanation. The documents must be submitted
a. Procedural Due Process in during the discussion. Should the taxpayer need
Tax Assessments more time to present the documents, he may submit
such documents after the discussion. The taxpayer
Assessment Process, Generally must submit all necessary documents that support
• Issuance of a Letter of Authority his explanation within thirty (30) days after receipt of
the Notice of Discrepancy. (RR 22-2020)
• Tax Audit or Investigation
• Notice of Discrepancy
[3] Issuance of Preliminary Assessment Notice
• Issuance of Preliminary Assessment Notice
(PAN); General rule and Exceptions
• Issuance of Formal Letter of Demand/ Final
Assessment Notice (FAN) Preliminary Assessment Notice (PAN)
• Final Decision on Disputed A PAN is the communication issued by the BIR
Assessment/Inaction on Disputed informing a taxpayer of its findings after audit. The
Assessment PAN shall be in writing, and shall show in detail
the facts and the law, rules and regulations, or
[1] Letter of Authority and Tax Audit jurisprudence on which the assessment is based.
Otherwise, the assessment is void. (NIRC, Sec.
In a tax audit, revenue officers examine the books 228; R.R. No. 18-2013)
of account and other accounting records of
taxpayers to determine the correct tax liability, on Prior to the issuance of the PAN, the taxpayer may
the strength of a Letter of Authority. be allowed to make voluntary payments of probable
deficiency taxes and penalties. (R.M.C. No. 11-
Letter of Authority (LOA) 2014)
An official document that empowers a revenue
officer to examine and scrutinize a taxpayer’s books Under RR No. 12-99, it is clear that the sending of a
of accounts and other accounting records, in order PAN to taxpayer to inform him of the assessment
to determine the taxpayer’s correct internal revenue made is but part of the "due process requirement

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in the issuance of a deficiency tax assessment," the Formal Letter of Demand/Final Assessment
absence of which renders nugatory any assessment Notice (FLD/FAN)
made by the tax authorities. (CIR v. Metro Star A FLD/FAN is a formal letter of demand where a
Superama, G.R. No. 185371, 2010) declaration of deficiency taxes is issued to a
taxpayer who fails to respond to a PAN within 15
The assessment must have been conducted within days from receipt of the PAN, or whose reply to the
the scope of the authority given by a valid Letter of PAN was found to be without merit.
Authority. (CIR v. Sony, G.R. No. 178697, 2010)
Period for Issuance of FLD/FAN
Issuance of PAN as Pre-Requisite to FAN Within 15 days from the date of receipt by the
General rule: The BIR may not issue a FAN without taxpayer of the PAN, whether the same was
first issuing a PAN. Lack of PAN is fatal. protested or not. (R.M.O. No. 26-2016)

The use of the word “shall” in subsection 3.1.2 [of Modes of Services of PAN/FLD/FAN/FDDA
Rev. Regs. 12-99] describes the mandatory nature 1. Personal service;
of the service of a PAN” (CIR v. Metro Star 2. Substituted service; or
Superama, G.R. No. 185371, 2010) 3. Service by mail.
Exceptions: When PAN shall not be necessary and Service to the tax agent/practitioner, who is
an FLD/FAN (defined below) shall be issued appointed by the taxpayer under circumstances
outright: (MET DC) prescribed in the pertinent regulations on
1. When the finding for deficiency tax is a result of
accreditation of tax agents, shall be deemed
Mathematical error in the computation of tax
service to the taxpayer. (R.R. No. 12-99, Sec.
appearing on the face of the return;
2. Discrepancy is determined between the tax 3.1.6., as amended by R.R. 18-2013)
withheld and the amount actually remitted by the
withholding agent; Requirement to State the Facts and Law on
3. A taxpayer who opted to claim a refund or tax Which the Assessment is Based On
credit was determined to have Carried over and The FLD/FAN shall be issued by the CIR or his duly
applied the amount against succeeding tax authorized representative, and shall state the
liabilities; facts, the law, rules and regulations, or
4. Excise tax has not been paid; or jurisprudence on which the assessment is
5. An article locally purchased or imported by an based. Otherwise, the assessment shall be void.
exempt person has been sold, traded or (R.M.C. No. 18-2013)
Transferred to non-exempt persons (NIRC, Sec.
228) The law requires that the legal and factual bases of
the assessment be stated in the formal letter of
Scenarios After Issuance of PAN demand and assessment notice pursuant to RR
12-99. (CIR v. Enron Subic Power Corporation, G.R.
• Taxpayer may pay the assessment;
No. 166387, 2009)
• Taxpayer may file a reply; or
• Taxpayer may ignore PAN (i.e. not reply) The decision of the CIR or his duly authorized
representative shall state:
Reply/Protest to PAN 1. the facts, the applicable law, rules and
If the taxpayer disagrees with the PAN, he has 15 regulations, or jurisprudence on which such
days from receipt of the PAN to file a written reply decision is based (otherwise, the decision shall
to contest the proposed assessment. (R.R. No. 12- be void), and
99, Sec. 3.1.1., as amended by R.R. No. 18-2013) 2. that the same is his final decision. (RR No. 18-
13)
Failure to reply to the PAN will put the taxpayer in
default and will warrant the issuance of FLD and/or However: The taxpayer is not denied due process
FAN. (NIRC, Sec. 228, ¶ 3) when the FAN and demand letter issued were not
accompanied by a written explanation of the legal
Note: Taxpayer can still protest the FLD/FAN. and factual bases of the deficiency taxes assessed
but were instead explained at full length when
[4] Issuance of a Formal Letter of Demand (FLD) the CIR responded to the taxpayer’s protest.
and/or Final Assessment Notice (FAN) There is no violation of due process when the CIR
fully informed the taxpayer in writing the factual and

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legal bases of the assessment which enabled the 2. As a General rule, it may be issued only after a
taxpayer to file an “effective” protest. (Samar-I pre-assessment notice (PAN) has been served
Electric Cooperative v. CIR, G.R. No. 193100, 2014) upon the taxpayer;
3. It shall state, in writing, the law and the facts on
When FAN is Deemed Made which the assessment is made (NIRC, Sec.
General rule: FAN is deemed made on the date 228); and
when the demand letter or notice of assessment is 4. The assessment must be served on and
released, mailed, or sent, even if the same is received by the taxpayer (CIR v. Pascor Realty
actually received by the taxpayer after the expiration & Dev’t Corp, G.R. No. 128315, 1999)
of the prescriptive period. (Basilan Estates v. CIR, 5.
G.R. No. L-22492, 1967) The law requires that the legal and factual bases of
the assessment be stated in the formal letter of
Exception: However, if the taxpayer denies receipt demand and assessment notice.
of the FAN, the burden of proof is shifted to the BIR
to prove that the FAN was actually mailed within the BUT SEE: The Supreme Court ruled that when the
period and actually received (even if after the period legal and factual bases can be found in a series of
expires). (Republic v. CA, G.R. No. L-38540, 1987; correspondence between the BIR and the taxpayer,
Barcelon Roxas Securities v. CIR, G.R. No. 157604, there is substantial compliance with the
2006) requirements of Section 228. The BIR had fully
informed petitioner in writing of the factual and legal
While it is true that an assessment is made when the bases of the deficiency taxes assessment, which
notice is sent within the prescribed period, the enabled the latter to file an “effective” protest.
release, mailing, or sending of the same must still (Samar-I Electric Cooperative v. CIR, G.R. No.
be clearly and satisfactorily proved. (CIR v. GJM 193100, 2014)
PHL Manufacturing, G.R. No. 202695, 2016) 6.
Not all documents coming from the BIR containing a
Issuance of FLD/FAN as Disputed Assessment computation of tax liability can be deemed
The issuance of FLD/FAN reiterating immediate assessments. An affidavit, which was executed by
payment of assessment previously made in the PAN revenue officers stating the tax liabilities of a
is a denial of the PAN protest and is thus a decision taxpayer and attached to a criminal complaint for tax
on a disputed assessment which may be appealed. evasion, cannot be deemed an assessment that can
(R.R. No. 18-2013) be questioned before the CTA. (CIR v. Pascor
Realty and Development, G.R. No. 128315, 1999)
Scenarios After Issuance of FLD/FAN
• Taxpayer may pay the assessment; Assessment must be based on “actual facts”:
• Taxpayer fails to file a protest; or An assessment should not be based on mere
• Taxpayer may file a protest presumptions, no matter how logical said
presumptions may be. (CIR v. Benipayo, G.R. No.
[5] Disputed Assessment L-13656, 1962)

If the taxpayer disagrees with the PAN, he has 15 Sources of information may be from:
days from receipt of the PAN to file a written reply Examination of books, papers, records, or other
to contest the proposed assessment. data; subpoena duces tecum; subpoena ad
testificandum; tax mapping; examination of returns;
If the taxpayer disagrees with the FAN, he has 30 best evidence obtainable; inventory-taking,
days from receipt of the FAN to file a written protest surveillance, and presumptive gross sales and
to contest the proposed assessment. receipts; termination of taxable period; fixing of real
property values; inquiry of bank deposits;
b. Requisites of a Valid accreditation and registration of tax agents;
prescribe additional procedural or documentary
Assessment
requirements (NIRC, Sec. 5)
Requisites for Valid Assessment Authority to Issue Assessment Based on “Best
1. It must have been issued within the prescriptive Evidence Obtainable”
period for the issuance of assessment notices; CIR may use the best evidence obtainable to issue
an assessment under the following circumstances:

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1. When a report required by law as a basis for the 1. Entails failure to pay tax due on any return
assessment of any national internal revenue tax required to be filed, or tax due for which no
shall not be forthcoming within the time fixed by return is required;
laws or rules and regulations; or 2. Subject to administrative penalties such as 25%
2. When there is reason to believe that any such surcharge, interest and compromise penalty;
report is false, incomplete or erroneous (NIRC, and
Sec. 6[B]) 3. Can be immediately collected through
administrative action with the issuance of
Presumed Correctness of Tax Assessments distraint and levy and/or judicial action through
General rule: All presumptions are in favor of the filing of an action to collect before the regular
correctness of tax assessments. When the court.
assessment is made by the CIR or his duly
authorized agents, the same is presumed correct Tax Deficiency
and made in good faith. The taxpayer has the duty 1. Refers to the amount by which the tax imposed
to prove otherwise. (CIR v. Wyeth Suaco or required to be paid exceeds the amount
Laboratories, G.R. No. 76281, 1991) shown in the taxpayer’s return and/or paid by
him; the amount shown on the return shall be
Exception: The prima facie correctness of a tax increased by the amounts previously assessed
assessment does not apply to “naked as a deficiency, and decreased by the amount
assessments”, which are assessments without any previously abated, credited, return or repaid
foundation, the determination of the tax due is 2. If the taxpayer disagrees, he must go thru the
without rational basis (CIR v. Hantex Trading, G.R. process of filing a protest (administrative
No. 136975, 2005) remedy) and/or filing an action before the CTA
(judicial remedy)
Assessment is discretionary; not compellable
by mandamus. d. Prescriptive Period for
General rule: Mandamus will not lie for it will Assessment
constitute judicial encroachment on executive
functions. (Meralco Securities v. Savellano, G.R.
Sections 203 and 222 of the NIRC provide for a
No. L-36181, 1982)
statute of limitations on the assessment and
collection of internal revenue taxes, and exceptions
Exception: Mandamus will lie if the CIR acts with
therefrom, in order to safeguard the interest of the
grave abuse of discretion. (Meralco Securities v.
taxpayer against unreasonable investigation.
Savellano, G.R. No. L-36181, 1982)

Jeopardy Assessment
Construction of statutory provision on
A tax assessment made by an authorized Revenue
prescription
Officer without the benefit of complete or partial trial
The law on prescription, being a remedial measure,
in light of the Revenue Officer’s belief that
should be interpreted in a way conducive to bringing
assessment and collection of tax will be jeopardized
about the beneficent purpose of affording protection
by the delay caused by the taxpayer’s failure to:
to the taxpayer. (Phil. Journalists, Inc. v. CIR, G.R.
1. Comply with audit and investigation
No. 162852, 2004)
requirements; and
2. Substantiate any or all claims, deductions or
General rule: The assessment must be made 3
credits in his return. (R.R. No. 30-2002, Sec.
years after the date the return is filed or tax is due or
3[1][a])
the tax is actually paid, whichever is later.
7.
It is usually issued when statutory prescriptive
Note: A return filed before the last day prescribed
periods for the assessment or collection of taxes are
by law for filing shall be considered as filed on the
about to lapse due principally to the taxpayer’s fault.
last day. (NIRC, Sec. 203)
c. Tax Delinquency vs. Tax Example: If TP files his/her ITR on April 10, 2021,
Deficiency the government’s right to assess will prescribe on
April 15, 2024. When the return was filed BEFORE
Tax Delinquency the due date, then it is considered as filed on the last
day.

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If TP files ITR files his/her ITR on April 20, 2021, the was received by the addressee. (CIR v. GJM
government’s right to assess will prescribe on April Manufacturing, Inc. G.R. No. 202695, 2016)
20, 2024. When the return was filed beyond the
period prescribed by law (April 15), then the period Computing the Prescriptive Period
shall be counted from the day the return was filed. The Administrative Code, not Art. 13 of the Civil
Code, governs. A year is composed of 12 months
Burden of Proof that Return was Filed to Apply and the number of days is irrelevant. (CIR v.
3-Year Prescriptive Period Primetown Property Group, G.R. No. 162155, 2007)
The taxpayer has the burden to prove that a return
had been filed by him in order that the 3-year period Example: One calendar month from December 31,
can apply. (Republic v. Marsman Dev’t, G.R. No. L- 2021 will be from January 1, 2022 to January 31,
18956, 1972) 2022; one calendar month from January 31, 2022
will be from February 1, 2022 until February 29,
Prescription of the government’s right to assess 2022.
taxes is an affirmative defense. (Tagaliman Lumber
v. CIR, G.R. No. L-15716, 1962) Amendment of Tax Return

When to Raise the Defense of Prescription General rule:

A taxpayer can raise the defense of prescription for 1. Substantial Amendment – The counting of
the first time on appeal to CTA En Banc, Rule IX, the prescriptive period shall be reckoned on
Section 1 of the Revised Rules on Civil Procedure the date the substantial amendment was
provides that if the pleadings and evidence on made.
record show that the claim is barred by prescription,
the court must dismiss the claim on the ground of Example: Amendment of an original income
prescription. (Rule IX, Section 1 of the Revised tax return showing a net loss to show more
Rules on Civil Procedure; China Banking losses (CIR v. Phoenix Assurance, G.R. No. L-
Corporation vs. CIR, G.R. No. 172509, 2015) 19727, 1965)

When an Assessment is Deemed Made 2. Superficial Amendment – The counting of

An assessment is deemed made when notice to this the prescriptive period shall still be the original
effect is released, mailed or sent to the taxpayer period (CIR v. Phoenix Assurance, G.R. No. L-
within the 3-year period. It is not required that the 19727, 1965)
notice be received by the taxpayer within the
prescribed period. But the sending of the notice Exception: If the return is sufficiently complete to
must clearly be proven. (Basilan Estate v. CIR, G.R. enable the CIR to intelligently determine the proper
No. L-22492, 1967) amount of the tax to be assessed, the prescriptive
period for assessment starts from the filing of the
Example: TP filed his/her ITR on April 15, 2021. The original return (A.L. Ammen Transportation v.
BIR mailed the notice of assessment to TP on April Collector, CTA Case No. 540, 1965)
10, 2024. However, the TP only received the notice
on April 20, 2024. In this case, the assessment is Note: If a return for a different tax is filed, the
deemed made on April 10, 2024, when the notice is effect is as if NO RETURN was filed, and thus, the
mailed to the TP which is within the 3-year period. applicable prescriptive is 10 years from discovery of
Hence, the government’s right to assess has not yet the omission to file a return, rather than the 3-year
prescribed. prescriptive period (Butuan Sawmill, Inc. v. CTA,
G.R. No. L-20601, 1966)
If the taxpayer denies having received the
assessment, the CIR must then prove by competent Exceptions to the general prescriptive period
evidence that such notice was indeed received by 1. False/fraudulent return or no return – 10-year
the addressee. The onus probandi has shifted to the prescriptive period (NIRC, Sec. 222[a])
BIR to show by contrary evidence that the taxpayer 3. Suspension of prescriptive period – CIR is
indeed received the assessment. While a mailed prohibited from assessing and collecting and for
letter is deemed received by the addressee in the 60 days thereafter in the following instances:
course of mail, this is merely a disputable the taxpayer requests for a reinvestigation
presumption, the direct denial of which shifts the which is granted by the Commissioner
burden to the sender to prove that the mailed letter the taxpayer cannot be located in the address
given by him in the return filed unless he

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informs the CIR of any change in the Deviation from the truth Intentional/deceitful
address whether intentional or entry with intent to
warrant of distraint or levy is duly served not evade tax due
the taxpayer is out of the Philippines (NIRC,
Sec. 223) Taxpayer is not subject Taxpayer may be subject
4. Waiver of prescriptive period (NIRC, Sec. to criminal penalty to criminal penalty
222[b])

i. False Returns vs. Fraudulent 50% surcharge penalty applies to both

Returns vs. Non-Filing of Returns
10-year prescriptive period applies to both
Prescriptive Periods
1. Failure to file return: 10 years from date of
discovery of the omission to file the return Failure to File Return – Instances
2. False return or fraudulent return with A deficient return which prevented the CIR from
intention to evade the tax: 10 years from the computing taxes due; such return is the same as if
date of the discovery of the falsity or fraud no return is filed at all (CIR v. Gonzales, G.R. No. L-
19495, 1966)
Note: The law should be interpreted to mean a
separation of the three different situations of false Failure to report income in the returns which were
return, fraudulent return with intent to evade tax, and clearly not exempted from tax – CTA did not treat it
failure to file a return is strengthened immeasurably as a simple omission since it involved substantial
by the last portion of the provision which segregates sums (Standard Chartered Bank v. CIR, CTA EB
the situation into three different classes, namely Case No. 731, 2012)
"falsity," "fraud," and "omission." (Aznar v. CTA,
G.R. No. L-20569, 1974) Note: Nothing in Sec. 222(A) shall be construed to
authorize the examination and investigation or
False Return inquiry into any tax return filed in accordance with
Contains wrong information due to mistake, the provisions of any tax amnesty law or decree.
carelessness, or ignorance (Aznar v. CIR, G.R. No.
L-20569, 1974) ii. Suspension of the Running of
Statute of Limitations
A substantial under-remittance of withholding tax on
compensation constitutes falsity to warrant the 10- The running of the statute of limitations on the
year prescriptive period (Samar-I Electric making of assessment or commencing of collection
Cooperative v. CIR, G.R. No. 193100, 2014) shall be suspended, and for sixty days thereafter:
3. When the CIR is prohibited from making the
Fraudulent Return assessment or beginning the distraint or levy or
Fraud must be alleged and proved as a fact. It must a proceeding in court – during such period and
be the product of a deliberate intent to evade taxes. for 60 days thereafter;
It may be established by:
1. Intentional and substantial understatement of the When a case is on appeal to the CTA, the CIR
taxpayer’s sales, receipts or income by more is prevented from filing an ordinary action to
than 30%; or collect the tax in the regular courts; the filing of
2. Intentional and substantial overstatement of the petition for review in the CTA interrupts the
deductions by more than 30%. (NIRC, Sec. running of the prescriptive period for collection,
248[B]) until its termination in the Supreme Court.
(Republic v. Ker, G.R. No. L-21609, 1966)
Such fact in a fraud assessment which has already
become final and executory shall be judicially taken 4. When the taxpayer requests for a
cognizance of in a civil or criminal action for the reinvestigation which is granted by the CIR;
collection thereof. (NIRC, Sec. 222[a]) there must be a request for reinvestigation
(which is granted and interpreted by
False vs. Fraudulent Return jurisprudence as “acted upon”); not merely a
request for reconsideration. (CIR v. Philippine
FRAUDULENT Global Commc’n, G.R. No. 167146, 2006)
FALSE RETURN
RETURN

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CIR must have granted or acted upon the General rule: Taxpayer and CIR may agree to
request for reconsideration. (BPI v. CIR, G.R. waive the prescriptive period if they comply with the
No. 174942, 2008) requirements of a valid waiver.

Note: The burden of proof that the taxpayer’s Only upon a written agreement between the CIR
request for reinvestigation had been actually and the taxpayer executed before the expiration of
granted is with the CIR. (BPI v. CIR, G.R. No. the three-year period (NIRC, Sec. 222[b])
139736, 2005)
Requirements of a Valid Waiver of the Statute of
The grant may be expressed in communications Limitations (R.M.O. 14-2016)
with the taxpayer or implied from the actions of 1. The waiver may not necessarily be in the form
the BIR Commissioner or his/her prescribed by RMO 20-90 or RDAO 05-01,
representatives in response. Jurisprudence provided that the following conditions are
considers the following as instances of complied with:
express/implied grants: a. The waiver is executed before the
1. Sending a tax examiner to conduct a expiration of the period to assess or to
reinvestigation after receiving protest collect taxes;
letters; b. The waiver is signed by the taxpayer
2. Denying a petition and subsequently himself, his duly authorized
filing a collection suit against the representative, or by any of the
taxpayer; responsible officials for corporations;
3. Ordering a reinvestigation resulting in and
the issuance of an amended c. The expiry date of the period agreed
assessment; and upon to assess/collect the tax after the
4. Granting the request and duly notifying three-year period of prescription.
the taxpayer of the date when
reinvestigation would be held – even 2. The waiver need not specify the taxes to be
when the taxpayer did not appear on assessed nor the amount thereof except in cases
the given date. (BPI v. CIR, G.R. No. of waiver for collection of taxes. It may simply
139736, 2005) state “All internal revenue taxes” except for
waiver of collection of taxes which shall
5. When the taxpayer cannot be located in the indicate the particular taxes assessed.
address given by him in the return, unless he
informs the CIR of any change in his address; 3. The taxpayer has the burden to ensure that the
this rule does not apply even if the taxpayer waiver is validly executed by its authorized
failed to follow the process for the notification on representative. The waiver cannot thereafter be
the change of address as long as there is proof invalidated on the ground that the taxpayer’s
that BIR is in fact aware of the whereabouts of representative who participated in the conduct of
the taxpayer. (CIR v. BASF Coating + Inks the audit is not authorized to sign the waiver.
Phils., Inc., G.R. No. 198677, 2014)
4. Notarization of the waiver is now optional.
6. When the warrant of distraint or levy is duly However, it is sufficient that the waiver is in
served (not merely issued), and no property is writing as specifically provided by the NIRC, as
located; and amended.

7. When the taxpayer is out of the Philippines. The waiver shall take legal effect and be binding
(NIRC, Sec. 223) on the taxpayer upon its execution and
acceptance of the waiver by the relevant BIR
Waiver/Extension of Prescriptive Period Officer. The BIR officer shall indicate acceptance
by signing the same. Both the execution of
Nature of Waiver of Statute of Limitations waiver and the acceptance must be done
A waiver of the statute of limitations, it being a prior to the expiration of the period to assess
derogation of the TP’s right to security against or collect.
prolonged and unscrupulous investigations, must be
carefully and strictly construed (CIR v. Philippine 5. There are only two dates that need to be present
Daily Inquirer, G.R. No. 213943, 2017) on the waiver, namely:
a. The date of execution; and

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b. The expiry date of the period the Transition Optical Philippines, Inc., G.R. No.
taxpayer waives the statute of 227544, 2017)
limitations.

6. Before the expiration of the period set on the

previously executed waiver, the period earlier set Partial Payment
may be extended by subsequent waiver made in Partial payment of the assessment issued within the
accordance with this Order. (R.M.O. No. 14- extended period to assess as provided in the Waiver
2016) of Defense of Prescription is an implied admission
of the validity of the waiver. (RCBC v. CIR, G.R. No.
A waiver of the statute of limitations, [it] being a 170257, 2011)
derogation of the TP’s right to security against
prolonged and unscrupulous investigations, BUT SEE: A taxpayer, by paying the other tax
must be carefully and strictly construed (CIR v. assessments covered by a Waiver of the Statute of
Philippine Daily Inquirer, G.R. No. 213943, 2017) Limitations, is not estopped from questioning the
validity of said waiver (on the basis that CIR did
The waiver must be signed by the taxpayer himself not sign it and some dates were lacking) with
or his duly authorized representative. respect to the other covered but unsettled
• In case of a corporation, the waiver must be assessments. In this case, the taxpayer did not
signed by any of its responsible officials. waive the prescription of the other deficiencies as it
• In case the authority is delegated by the continued to raise the issue of prescription in its Pre-
taxpayer to a representative, such Trial Brief, Joint Stipulations, direct testimonies, and
delegation should be in writing and duly Memorandum filed. (CIR v. Standard Chartered
notarized. The waiver should be duly Bank, G.R. No. 192173, 2015)
notarized. (CIR v. Kudos Metal Corp., G.R.
No. 178087, 2010) Collection Process
Exceptions to Waiver Requisites of Collection via Assessment
1. There must be a valid assessment made;
Doctrine of Equitable Estoppel (CIR v. Next
Mobile, G.R. No. 212825, 2015)
In civil action, such assessment must be final,
CTA found the following flaws in multiple waivers
executory, and demandable; while in
executed by the taxpayer: (i) lack of notarized board
summary/administrative remedies of distraint or
authority; (ii) dates of acceptance by the BIR not
levy, even if such assessment is not yet final and
indicated; (iii) fact of receipt by the TP not indicated.
executory, the BIR may enforce collection provided
However, SC ruled that the waivers were valid, in
that the protest has already been denied in whole or
contrast to its ruling in Kudos Metal.
in part; and
Note: The BIR may even issue a Warrant of
Both parties knew the infirmities of the waivers yet
Distraint and Levy to enforce collection while the
they continued dealing with each other based on
TP is appealing the decision denying the protest
these documents. The waiver should have been
to the CTA. (R.A. No. 1125, as amended by R.A.
void for being defective but due to peculiar
No. 9282, Sec. 11)
circumstances, this is an exception and the waivers
are valid because the parties are in pari delicto. (CIR
2. Collection must be made within 5 years
v. Next Mobile, Inc., G.R. No. 212825, 2015)
following the finality of the assessment of
the tax.
Estoppel applies if both the BIR and the
taxpayers are at fault. The TP’s act of impugning Instances When Assessed Tax Becomes
its waivers after benefitting from them was Collectible
considered an act of bad faith. Likewise, the BIR The government can collect when the assessment
was at fault when it accepted Transitions’ Waivers becomes final and executory for:
despite their non-compliance with the requirements • Failure to protest FLD/FAN within the
in the RMO. TP is then estopped. However, since prescribed period;
the FAN was issued beyond the extended period, • Failure to appeal Final Demand on
prescription had nevertheless set in. (CIR vs. Disputed Assessment (FDDA) within the
prescribed period; or

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• Failure to appeal an adverse decision of the 2. Failure or omission to file return (NIRC, Sec.
court within the prescribed period 222[a]); or
3. Execution of waiver in writing executed within
the 5-year period (NIRC, Sec. 222[d]).

How Tax May Be Collected Regular return was False, Fraudulent, or

1. Summary Remedies: Distraint and Levy Made Failure to file a Return
Distraint and levy proceedings are validly begun Assessment
by issuance of warrant and service thereof on 3 years 10 years from discovery
the taxpayer (BPI v. CIR, G.R. No. 139736, Collection after assessment
2005) 5 years from 5 years from
2. Judicial Remedies: Civil or Criminal assessment by assessment.
Judicial remedies: When the government files summary and/or
the complaint with the proper regular trial court, judicial
or where the assessment is appealed to the Collection without assessment
CTA, by filing an answer to the taxpayer’s 10 years from
petition for review wherein payment of the tax is discovery.
prayed for. (PNOC v. CA, G.R. No. 109976,
2005) They are, however,
limited to purely
Collection via Court Proceedings judicial remedies.
General rule: No proceeding in court without (Sec. 222[a])
assessment for the collection of tax shall be
commenced (NIRC, Sec. 203) Suspension of Running of Statute of Limitations
– see discussion above on Section 223.
Exception: A proceeding in court for the collection
of tax may be filed without prior assessment in the 2. Taxpayer’s Remedies
following cases:
1. False or fraudulent return with intent to evade a. Protesting an Assessment
the tax; or
2. Failure to file return (NIRC, Sec. 222[a]) Protest in General
A protest is a vital document which is a formal
Note: When the exception applies, only judicial declaration of resistance of the taxpayer. It is a
remedies are available – to the exclusion of repository of all arguments. It is also the formal act
summary remedies such as warrant of distraint or of the taxpayer questioning the official actuations of
levy. the CIR. This is equivalent to a pleading.
Once assessment is made against the taxpayer, the
government cannot avail of the 10-year period in
Sec 222(A) Requisites of a Valid Protest
A protest is considered valid if it satisfies the
An assessment against the taxpayer takes the case following conditions:
out of provisions of Sec 222(A) and places it under 1. It is made in writing, addressed to the CIR and
Sec 222 (C) which gives the government only five made within the prescribed time (i.e., 30 days
(5) years from the date the assessment was made from receipt of the FAN);
to collection. (Republic v. Ret, G.R. No. L-13754, 2. It contains the information required by Sec. 6 of
March 31, 1962) RR No. 12-85, thus:
(a) Name of the taxpayer and address for the
If an assessment is made, then the period to collect immediate past 3 taxable years;
is 5 years from assessment, not 10 years. (b) Nature of request (i.e., whether for
reinvestigation or reconsideration,
Prescriptive Periods specifying newly discovered evidence he
General rule: 5 years from date of Final intends to present if it is a request for
assessment (NIRC, Sec. 222[c]) reinvestigation);
(c) The taxable periods covered;
Exception:10 years (d) FAN number;
1. False or fraudulent returns (NIRC, Sec. 222[a]); (e) Date of receipt of FAN;

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(f) Itemized statement of the findings to which collection of the assessed tax, while the latter
the taxpayer agrees as a basis for cannot. (BPI v. CIR, G.R. No. 181836,2014)
computing the tax due, which amount
should be paid immediately upon the filing
of the protest; for this purpose, the protest 1. Period to File Protest
shall not be deemed validly filed unless
payment of the agreed portion of the tax is A written request for reinvestigation or
paid first;and reconsideration must be filed within 30 days from
(g) Statement of facts and/or law in support of receipt of the FAN. (R.R. No. 12-99, as amended by
the protest. (R.R. No. 12-85, as amended R.R. No. 18-2013)
by)
Failure to file any protest to the FAN shall render the
Effect of Non-Compliance with Requirements assessment final, executory and demandable.
Otherwise, his protest shall be considered void
and without force and effect. 2. Submission of Supporting Documents

Request for Reconsideration v. Request for Submission of Documents After Protest

Reinvestigation Only applies to requests for reinvestigation, i.e., the
60-day period for submission of all relevant
REQUEST FOR REQUEST FOR supporting documents shall not apply to requests for
RECONSIDERATION REINVESTIGATION reconsideration (R.R. No. 18-2013)

A plea of re-evaluation Relevant Supporting Documents

of an assessment on The taxpayer shall submit all relevant supporting
A plea of re-evaluation of the basis of newly documents in support of his request for
an assessment on the discovered or additional reinvestigation within 60 days from date of filing of
basis of existing records evidence that a such written request. Otherwise, the FAN shall
without need of taxpayer intends to become final. (NIRC, Sec. 228, R.R. No. 18-2013)
additional evidence. present in the
reinvestigation. “Relevant supporting documents” refers to those
It may involve a question documents necessary to support the legal and
of fact or of law or both. It may involve a factual bases in disputing a tax assessment as
question of fact or of law determined by the taxpayer. (R.R. No. 18-2013)
or both.
The relevant supporting documents mentioned in
Taxpayer does not need Taxpayer has to the law refer to such documents which the taxpayer
to present additional present relevant feels would be necessary to support his protest and
evidence supporting documents not what the CIR feels should BIR’s action on the
protest to the FAN be submitted. Otherwise, the
Statute of limitations is taxpayer would always be at the mercy of the CIR
tolled, provided the which may require production of such documents
Statute of limitations is request is granted (i.e., which taxpayer could not produce. (Standard
not tolled acted upon) by the CIR Chartered Bank v. CTA, CTA Case No. 5696, 2001)
(BPI v. CIR, G.R. No.
139736, 2005) The BIR cannot demand what type of supporting
documents should be submitted (CIR v. First
180-day period Express Pawnshop Company, G.R. No. 172046,
180-day period
commences from the 2009). This means that the taxpayer may validly not
commences from the
submission of complete submit any supporting documents to support its
filing of the protest
supporting documents protest.

Note: Undoubtedly, a reinvestigation, which entails Effect of Non-Submission of Relevant

the reception and evaluation of additional evidence, Supporting Documents
will take more time than a reconsideration of a tax The assessment becomes final (R.R. No. 12-99, as
assessment, which will be limited to the evidence amended by R.R. No. 18-2013)
already at hand. This justifies why the former can
suspend the running of the statute of limitations on

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In the case at bar, petitioner failed to submit It is true that the Commissioner is not obliged to
supporting documents contrary to what was jointly accept the taxpayer's explanations. However, when
stipulated by the parties. Hence, the reckoning of the Commissioner rejects these explanations, he or
the one hundred eighty (180)-day period would be she must give some reason for doing so. He or she
the day the protest was filed (Oceanic Wireless must give the particular facts upon which his or her
Network, Inc. v. Commissioner of Internal Revenue, conclusions are based, and those facts must appear
CTA Case No. 6111, 2004) in the record. Further, the Court ruled that the
presumption of regularity rule cannot be applied
3. Effects of Failure to File Protest here given that it was shown that there were
evidence that the CIR did not exert utmost efforts to
Within 60 days from filing of protest, all relevant review. Thus, the assessment was deemed null and
supporting documents should have been submitted, void. (CIR vs. Avon Products Manufacturing, Inc.,
otherwise, the assessment shall become final G.R. Nos. 201398-99, 2018)
and unappealable subject to exceptional
circumstance under the First Express decision. Indirect Denial: (without FDDA)
(NIRC, Sec. 228) Examples of Indirect Denial
1. Civil collection instituted during pendency
4. Action of the Commissioner on the Protest of protest (CIR v. Union Shipping, G.R. No.
Filed 66160, 1990; Yabes v. Flojo, G.R. No.
46954, 1982)
Scenarios After Protest Filed: 2. Issuance of warrant of distraint and levy to
1. CIR denies the protest to the FAN (directly enforce collection (CIR v. Int’l
or indirectly); or Pharmaceuticals, CTA E.B. No. 608, 2011)
2. Does not act on such protest. 3. Referral by the CIR of request for
reinvestigation to Solicitor General
Direct Denial: Final Decision on Disputed (Republic v. Lim Tian Teng Sons, G.R. No.
Assessment (FDDA) L-21731, 1966)
The nomenclature of the BIR’s denial of the protest 4. Final demand for payment of delinquent
to the FAN could vary. It may be called a Final taxes
Decision on a Disputed Assessment (FDDA),
among others. (R.M.C. No. 18-13) This Court has considered the following
communications sent by the CIR or his duly
Requisites of a Valid FDDA authorized representative to taxpayers as
1. Must be issued by the CIR or his duly authorized embodying rulings appealable to the CTA:
representative; 1. A letter which stated the result of the
2. Must contain the facts, law, and rules on reinvestigation requested by the taxpayer
which the assessment is based; this is the and the consequent modification of the
same rule applied for the assessment itself assessment;
although it is clear that the assessment and the 2. A letter which denied the request of the
decision are two distinct documents taxpayer for the reconsideration,
3. Must be served to the taxpayer through (i) cancellation, or withdrawal of the original
personal service, (ii) substituted service, and (iii) assessment;
service by mail; service to the tax 3. A letter which contained a demand on the
agent/practitioner, who is appointed by the taxpayer for the payment of the revised or
taxpayer under circumstances prescribed in the reduced assessment; and
pertinent regulations on accreditation of tax 4. A letter which notified the taxpayer of a
agents, shall be deemed service to the taxpayer; revision of previous assessments
and
4. Must state that the same is his final decision Inaction by the CIR or Duly Authorized
(R.R. No. 12-99, as amended by R.R. No. 18- Representatives – Void FDDA constitutes
2013) inaction
Rationale: To avoid any confusion that could If the FDDA itself does not conform to the
adversely affect the rights and interests of the requirements. It is as if no decision was rendered.
taxpayer (Allied Banking Corporation v. CIR, The effect therefore is that what is appealable to
G.R. No. 175097, 2010) the CTA is the inaction of the CIR or the duly

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authorized representative. (CIR v. Liquigaz void. assessment is

Philippines Corporation, G.R. No. 215557, 2016) void.
An assessment becomes a disputed assessment 15 days to reply 30 days to file 30 days to
after a taxpayer has filed its protest to the protest after appeal to CTA
assessment in the administrative level. Thereafter, receipt of FAN
the CIR either issues a decision on the disputed
assessment or fails to act on it and is, therefore, Response is Protest must
considered denied. The taxpayer may then appeal general due to be
the decision on the disputed assessment or the shorter time. comprehensive
inaction of the CIR. As such, the FDDA is not the does not that explains
only means that the final tax liability of a taxpayer is necessarily the legal and
fixed, which may then be appealed by the taxpayer. tackle specific factual basis
Clearly, a decision of the CIR on a disputed findings why the
assessment differs from the assessment itself. assessment is
Hence, the invalidity of one does not necessarily wrong and
result to the invalidity of the other — unless the law must present
or regulations otherwise provide. (CIR v. Liquigaz all
Philippines Corporation, G.R. No. 215534, 2016) documentary
evidences
Differences between PAN, FAN and FDDA
PAN FAN FDDA
Filing of reply is Filing of protest
A A declaration of Decision of the directory is mandatory
communication deficiency CIR or his duly
issued by the taxes issued to authorized Non-filing of Failure to file
Regional a taxpayer who representative reply will warrant protest to FAN
Assessment fails to respond that states the issuance of Final will make the
Division or by the to a PAN within facts and the Assessment assessment
CIR or his duly the prescribed law, rules and Notice (FAN) final and
authorized period, or regulations or executory and
representative whose reply is jurisprudence the taxpayer
informing the found to be on which the loses its right to
taxpayer who without merit decision is seek judicial
has been based; remedy.
audited of the otherwise, it is
findings of the void.
Revenue Officer
following the Period provided for the protest to be acted upon
review and or decide on protest filed
evaluation of
these findings Protest for Reconsideration
One hundred and eighty (180) days from filing of the
Shall be in Shall be in protest.
writing and shall writing and
show in detail shall show in Protest for Reinvestigation
the facts and the detail the facts If the protest is denied in whole or in part, or is not
law, rules and and the law, acted upon within one hundred and eighty (180)
regulations or rules and days from submission of supporting documents, the
jurisprudence on regulations or taxpayer adversely affected by the decision or
which the jurisprudence inaction may appeal to the CTA within thirty (30)
proposed on which the days from receipt of the said decision, or from the
assessment is proposed lapse of one hundred eighty (180)-day period;
based; assessment is otherwise, the decision shall become final,
otherwise, the based; executory and demandable. (NIRC, Sec. 228)
assessment is otherwise, the

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Taxpayer’s Remedies from BIR’s Denial on documents, the taxpayer adversely affected may
Protest to FAN (FDDA) appeal to the CTA within 30 days from the lapse of
the 180-day period. Thus, the tax assessment
Denial by FDDA Issued by CIR’s Authorized cannot be considered as final, executory and
Representative demandable. (CIR v. First Express Pawnshop
1. Judicial appeal to CTA within 30 days from Company, Inc., G.R. No. 172045-46, 2009)
receipt of FDDA; or
2. Administrative appeal to CIR within 30 days Motion to Suspend Collection of Tax During
from receipt of the FDDA through request for Protest
reconsideration; While the TP is appealing the decision denying the
• If the protest or request for protest to the CTA, and the BIR issues a Warrant of
reconsideration is still denied by the Distraint and Levy to enforce collection, the
CIR, appeal to the CTA within 30 days Taxpayer may file a “Motion to Suspend Collection
from date of receipt of said decision. of Tax” on the ground that the collection of the tax
will jeopardize the interest of the TP (RA 1125 § 11)
Note: MR will not toll the 30-day period to appeal to and post bond in an amount not more than twice the
CTA. amount being collected

No request for reinvestigation shall be allowed in Rule on Prior Payment When Protesting
administrative appeal, and only issues raised in the Assessment
decision of the CIR’s duly authorized representative General rule: No prior payment of assessed
shall be entertained by the CIR (R.R. No. 12-99, as internal revenue tax is required when protested or
amended) disputed.

The administrative appeal filed with the CIR will toll Exception: when there are several issues involved
the 30-day period to the CTA. but the taxpayer only disputes or protests against
the validity of some of the issues raised, the
Inaction by CIR or Duly Authorized taxpayer shall be required to pay the deficiency tax
Representative or taxes attributable to the undisputed issues. No
1. Appeal to the CTA within 30 days from lapse of action shall be taken on the taxpayer's disputed
180-day period; or issues until the taxpayer has paid the deficiency tax
or taxes attributable to the said undisputed issues.
2. Await the decision of the CIR’s authorized (R.R. No. 12-99)
representative, in which case the taxpayer may
appeal to the CTA within 30 days from receipt of Preservation of Books
the BIR’s decision or elevate the protest through All taxpayers are required to preserve their books of
motion for reconsideration to the CIR within 30 accounts, including subsidiary books and other
days from receipt of the BIR’s decision (i.e., accounting records, for a period of ten (10) years
administrative appeal) reckoned from the day following the deadline in filing
Note: In case of inaction on protested FAN, the a return, or if filed after the deadline, from the date
option of the taxpayer to either file a petition in the of the filing of the return, for the taxable year when
CTA or await the decision of the CIR’s authorized the last entry was made in the books of accounts.
representative or of the CIR are mutually • First five (5) years: The taxpayer shall
exclusive. Resort to one bars the application of the retain hardcopies of the books of accounts,
other. (Lascona Land v. CIR, G.R. No. 171251, including subsidiary books and other
2012) accounting records.
• Subsequent five (5) years: The taxpayer
Compliance with requirements to dispute an may retain only an electronic copy of the
assessment – assessment not final, hardcopy (paper) of the books of accounts,
executory and demandable subsidiary books and other accounting
After the company submitted its letter-reply stating records in an electronic storage system.
that it would not comply with the presentation of the (R,R, No. 17-2013, Sec. 2, as amended by
proof of DST payment, no reply was then heard from R.R. No. 5-2014)
the CIR. The company has complied with the
requisites in disputing an assessment, which Note: Failure to meet the requirements on electronic
provides that in case the protest is not acted upon data storage system requires the taxpayer to
within 180 days from the submission of the

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maintain the original hardcopy. (R,R, No. 17-2013,

Sec. 2, as amended by R.R. No. 5-2014)

Effect of Failure to Appeal – Effect of Failure to

Appeal to CTA: The decision shall be final,
executory and demandable.

Summary of Appeals: Assessments If the BIR denies the protest in whole or in part:

BIR denial of protest in whole Preliminary Assessment Notice

or in part (PAN)

Apeal to CTA in division in 30

days Final Assessment Notice (FAN)

File MR in 15 days
Protest in 30 days

CTA in division denial of MR Submit supporting documents in

60 days
• If "request for reinvestigation"

Appeal to CTA en banc in 15

days
BIR Action within 180 days

CTA en banc decision

Petition for Review with SC or

Motion for Extension to File
Petition within 15 days

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b. Compromise and Abatement

of Taxes Instances when the CIR may compromise taxes
1. Doubtful validity of the assessment; and
a) Compromise 2. Financial incapacity. (NIRC, Sec. 204)

Authority of the CIR to Compromise Taxes Moreover, no offer of compromise shall be

1. Criminal cases, other than those already filed in entertained unless and until the taxpayer waives
court or those involving tax fraud in writing his privilege of the secrecy of bank
(a) Before the complaint is filed with the deposits under RA 1405 or under other general or
prosecutor’s office, the CIR has full special laws, and such waiver shall constitute as the
discretion to enter into a compromise. authority of the CIR to inquire into the bank deposits
(b) After the complaint is filed with the of the taxpayer.
prosecutor’s office but before the
information is filed with the court, the Taxpayers seeking a compromise settlement of
CIR can still enter into a compromise, unsettled tax obligations must now pay the
provided the prosecutor gives consent. compromise offer upfront before their applications
(c) After information is filed with the court, are processed. No application for compromise
the CIR is no longer permitted to enter into settlement shall be processed without the full
a compromise, with or without the consent settlement of the offered amount. (R.R. No. 09-13)
of the prosecutor. (People v. Magdaluyo,
G.R. No. 16235, 1961) Cases that may NOT be Subject of Compromise
3. Withholding tax cases, unless the applicant-
2. Civil cases taxpayer invokes provisions of law that cast
(a) The CIR is expressly authorized by the doubt on the taxpayer's obligation to withhold;
NIRC to compromise taxes subject to 4. Criminal tax fraud cases confirmed as such by
certain conditions. (NIRC, Sec. 204 A) CIR or his duly authorized representative;
(b) The compromise settlement shall be subject 5. Criminal violations already filed in court;
to the following minimum amounts: 6. Delinquent accounts with duly approved
schedule of installment payments;
7. Cases where final reports of reinvestigation or
GROUND MIN. COMPROMISE RATE reconsideration have been issued resulting to
reduction in the original assessment and the
Financial taxpayer is agreeable to such decision;
10% of the basic assessed tax
Incapacity 8. Cases which become final and executory after
final judgment of a court, where compromise is
Other Cases 40% of the basic assessed tax
requested on the ground of doubtful validity of
the assessment; and
Instances When the Compromise shall be 9. Estate tax cases where compromise is
Subject to the Approval of the Evaluation Board requested on the ground of financial incapacity
(composed of the CIR and 4 Deputy of the taxpayer. (R.R. No. 30-02)
Commissioners):
1. The basic tax involved exceeds Php 1 million; b) Abatement
or
2. The settlement offered is less than the Abatement (NIRC, Sec. 204 B)
prescribed minimum rates. the diminution or decrease in the amount of tax
imposed,” such that to abate is “to nullify or reduce
Leave of Court Required in value or amount.” “In abatement or cancellation,
It is possible, at any stage of litigation before final no mutual concessions between the taxpayer and
judgment, to compromise taxes, provided there is the CIR are made.” (People v. Sandigayanbayan,
leave of court. (Pampanga Sugar Dev. Corp v. CIR, G.R. No. 152532, 2005)
G.R. No. L-13178, 1961)
Coverage of Abatement
Compromise cannot be entered into after final General rule: Surcharge and compromise penalties
judgment. only
Reason: By virtue of such final judgment, the
Government had already acquired a vested right. Exception: In meritorious instances, the CIR may
(Rovero v. Amparo, G.R. No. L-5482, 1952) abate the interest as well as basic tax assessed,

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provided, however, that cases for abatement, Certificate is issued by

cancellation of tax, penalties, and/or interest by the government in favor of
CIR shall be coursed through certain officials (R.R. the claimant, as
No. 13-01, Sec. 4) recognition of
payments not due but
Grounds for Abatement already made, which
1. The tax or any portion thereof appears to be can be applied by the
unjustly or excessively assessed; or taxpayer to his
2. The administration and collection costs involved subsequent tax
do not justify the collection of the amount due. liabilities.
(NIRC, Sec. 204[B])
Grounds, Requisites, and Period for Filing a
c. Recovery of Tax Erroneously Claim for Refund or Issuance of a Tax Credit
or Illegally Collected Certificate

Nature of Erroneously Paid Tax or Illegally Grounds for Filing a Claim for Refund
Assessed or Collected Tax Taxpayer files in writing with the CIR a claim for tax
A tax is deemed erroneously paid when: refund for:
1. The said tax is paid under a mistake of
fact, such as when the taxpayer is not 1. Taxes erroneously or illegally received;
aware of an existing exemption in his
favor at the time the payment is made; 2. Penalties imposed without authority;
or
2. The payment of tax is done under 3. Any sum alleged to have been excessively or in
duress. any manner wrongfully collected (CIR v.
Pilipinas Shell, G.R. No. 188497, 2012);
Erroneous or illegal tax is a tax levied without
statutory authority. (CIR v. PNB GR 129130) 4. Value of internal revenue stamps when returned
in good condition by the purchaser; and
Refund of Taxes
Taxes erroneously or illegally received by the 5. Value of unused stamps rendered unfit for use
government, or tax penalties imposed without any upon proof of destruction, in the discretion of the
legal basis, must be refunded by the CIR in favor of CIR.
the taxpayer (Sec 204(C)).
Requisites for Claims for Tax Refund
Note: Refunds for input VAT are NOT in the nature
of erroneously paid tax/illegally assessed/collected. 1. Necessity of written claim for refund;
(CIR v. Aichi Forging Company of Asia, Inc., G.R.
No. 184823, 2010) Exceptions: No written claim is needed
(a) A return filed showing an overpayment shall
For remedies associated with VAT, please refer be considered as a written claim for credit or
to the VAT portion of the Syllabus. refund (NIRC, Sec. 204[C])
(b) On the face of the return upon which the
The refund can be in the form of a claim for cash payment was made, such payment appears
refund or tax credit (Sec 204C). clearly to have been erroneously paid
(NIRC, Sec. 229)
Comparison of Tax Refund and Tax Credit
Tax Refund Tax Credit 2. Claim must contain a categorical demand for
Actual reimbursement Amount due to a reimbursement (Bermejo v. CIR, G.R. No. L-
3029, 1950); and
of taxes upon written taxpayer resulting from
claim for the return of an overpayment of a 3. Filing of administrative claim for refund and the
cash for taxes tax liability or suit/proceeding before the CTA both within 2
overpaid, or erroneous or illegal years from date of payment regardless of
erroneously or illegally payment of a tax due. any supervening cause.
paid by the taxpayer.
A Tax Credit

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Note: The suit may be maintained whether or Taxpayer must not wait for CIR decision to
not such tax/penalty/sum has been paid under file appeal regarding refund claim
protest; When the 90-day period lapses and there is inaction
on the part of the CIR, the taxpayer must no longer
If proven that the entity is tax exempt, then the wait for it to come up with a decision thereafter. The
previously paid tax can be refunded but the claim is CIR’s inaction is the decision itself. It is already a
still subject to the prescriptive period of 2 years. denial of the refund claim. Thus, the taxpayer must
(CIR vs. Manila Electric Company, G.R. No. file an appeal within 30 days from the lapse of the
181459, 2014) 90-day waiting period.” (Rohm Apollo
Semiconductor v. CIR, G.R. 168950, 2015)
Prescriptive Period for Filing Claims for General
Tax Refund Start of Two-Year Prescriptive Period

ADMINISTRATIVE CLAIM General rule: From the payment of tax.

File With BIR Exception:

Period to Generally, within 2 years from
File payment of tax
JUDICIAL CLAIM CASE START OF 2-YEAR
PERIOD
File With CTA
Period to BIR decides Inaction of the From date tax was paid
File adversely on the BIR on the Tax is illegally or (CIR v. Victorias
claim for refund claim for refund erroneously collected Milling, G.R. No. L-
Taxpayer must TP need not 24108, 1968)
file an appeal wait for a
with the CTA, decision and From date of the last
whichever is must file an If the tax is paid in or final installment
earlier between: appeal with the installment or only in or (CIR v. Prieto,
CTA when the part G.R. No. L-13912,
[1] within 30 2-year period is 1960)
days from about to lapse. If the taxpayer merely From conversion of the
receipt of the Failure to made a deposit deposit to payment
decision, or appeal bars
[2] within the 2- recovery From date it falls due at
year period (Gibbs v. CIR, If tax has been withheld
the end of the taxable
under Sec. 229 G.R. No. L- from source (through
year (Gibbs v CIR,
of the NIRC 13453, 1960) the withholding tax
G.R. No. L-17406,
system)
1965)
Verily, the primary purpose of filing an administrative
claim was to serve as a notice of warning to the CIR At the earliest, on the
that court action would follow unless the tax or date of the actual filing
penalty alleged to have been collected erroneously of the adjusted final
or illegally is refunded. To clarify, Section 229 of the Corporate taxpayer return at the end of the
Tax Code, however, does not mean that the taxable year (CIR v.
taxpayer must await the final resolution of its CA, G.R. No. 117254,
administrative claim for refund, since doing so would 1999)
be tantamount to the taxpayer’s forfeiture of its right
to seek judicial recourse should the 2-year
NOTE: If a Rev. Reg. provides for a prescriptive
prescriptive period expire without the appropriate
period different from the NIRC, then the regulation
judicial claim being filed. (CIR v. Goodyear
is invalid and the NIRC period should be used.
Philippines, Inc., G.R. No. 216130, 2016)
(PBCom v. CIR, G.R. No. 112024, 1999)

The 2-year prescriptive period commences to run

from the time the refund is ascertained, i.e., the date

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such tax was paid, and not upon the discovery by for appeal must file an necessarily
the taxpayer of the erroneous or excessive payment with the CTA appeal with the fall within the
of taxes. (Metropolitan Bank and Trust Company v. CTA when the 2-year period
CIR, G.R. No. 182582, 2017) 2-year period is – as long as
about to lapse. the
Comparison of prescriptive period between Failure to administrative
General Tax Refund and VAT Refund appeal bars claim is filed
GENERAL TAX VAT recovery (Gibbs within the 2-
REFUND REFUND v. CIR, G.R. No. year
Instances 1. Erroneously or 1. Zero-rated L-13453, 1960) prescriptive
where one illegally and period. (Team
can avail of assessed or effectively- Energy
refund collected zero rated Corporation v.
internal sales; CIR, G.R. No.
revenue taxes 2. Unutilized 190928,
(NIRC, Sec. input tax 2014)
72); paid on
2. Penalties capital Option for Corporate Taxpayers
imposed goods In case of corporate taxpayers, if the sum of the
without purchased quarterly tax payments made during the taxable
authority 3. Cessation year exceeds the total tax due on the entire taxable
(NIRC, Sec. of business; income of that year, the corporation shall either:
229); or or 1. File a claim for refund;
3. Any sum 4. Cessation 2. Avail a tax credit; or
alleged to of VAT- 3. Carry over the excess credit in the succeeding
have been status taxable periods.
excessive or in (NIRC, Sec.
any manner 112) Once the option to carry-over and apply the excess
wrongfully quarterly income tax against income tax due for the
collected. taxable quarters of the succeeding taxable years
(NIRC, Sec. has been made, such option shall be considered
229) irrevocable for that taxable period and no application
When to file Within two (2) Within two (2) for cash refund or issuance of a tax credit certificate
an years from the years after shall be allowed therefor. (NIRC, Sec. 76)
Administrative date of payment the close of
Claim of the tax or the taxable
penalty quarter when Necessity of Proof for Claim or Refund
regardless of the sales Prior payment of the tax must be proven. There
any were made, must be actual collection and receipt by the
supervening or within two government of the tax sought to be recovered and
cause that may (2) years from this requires factual proof. (CI v. Li Yao, G.R. No. L-
arise after the date of 11861, 1963)
payment. (Sec. cancellation
229) of VAT- The burden of proof is on the taxpayer claiming the
registration refund that he is entitled to the same. (CIR v. Tokyo
due to Shipping Ltd., G.R. No. L-68252, 1995)
cessation of
business or A tax refund partakes of the nature of an exemption
cessation of and is strictly construed against the claimant. (CIR
VAT-status v. Tokyo Shipping Ltd., G.R. No. L-68252, 1995)
(NIRC, Sec.
112). Rules Re: Submission of Supporting Documents
Requisite of Required. Not required. for Claims of Unutilized Input VAT
the 90-30 day For claims filed before June 11, 2014:
period falling TP need not 30-day period 1. If the claimant has no additional supporting
within the 2- wait for a to appeal documents, then the 120-day period begins to
year period decision and need not run on the date the claim is filed;

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2. Claimant has 30 days from filing of the claim to Other Considerations Affecting Tax Refunds –
submit supporting documents unless the CIR Payment Under Protest is NOT Necessary Under
extends the period; and the NIRC
3. Upon filing of the supporting documents or upon A suit or proceedings for tax refund may be
expiry of the period provided, the CIR has 120 maintained whether or not such tax, penalty or sum
days to act on the claim; and has been paid under protest or duress.
4. In all cases, the claim must be completed within Similarly, payment under protest is not necessary in
the 2-year period. refund for local taxes. (LGC, Sec. 196)

For claims filed after June 11, 2014: However, payment under protest is necessary in
All claims must already attach complete supporting certain cases real property taxes (LGC, Sec. 252)
documents and this fact must be attested to under
oath. As such, the 120-day period already runs on Note: The CIR may, even without a written claim,
the date the claim is filed in all instances.(Pilipinas refund or credit a tax, where on the face of the return
Total Gas, Inc. v. CIR, G.R. No. 207112, 2015) upon which payment was made, payment appears
to be erroneous.
Proper Party to File Claim for Refund or Tax
Credit Question: If a taxpayer had lost his right to dispute
A claim for tax refund or issuance of a tax credit the validity of a tax assessment in view of his failure
certificate may be filed by: to appeal the CIR’s decision to CTA, may he be
1. Taxpayer; granted a refund?
2. Statutory taxpayer; or
3. Withholding agent. Answer: No. The expediency of an appeal from a
denial of a tax request for cancellation of warrant of
The proper party to seek a refund of an indirect tax distraint and levy cannot be utilized for the purpose
is the statutory taxpayer, the person whom tax is of testing the legality of an assessment, which had
imposed by law and who paid the same – even if he become conclusive and binding on the taxpayer,
shifts the burden thereof to another. there being no appeal, the procedure set forth in
Section 306 (now Sec. 204 (C) and Sec. 229) of the
However, this rule does not apply to instances NIRC is not available to revive the right to contest
where the law grants the party to which the the validity of an assessment once the same had
economic burden of the tax is shifted an exemption been irretrievably lost not only by the failure to
from both direct and indirect taxes. In which case, appeal but likewise by the lapse of the reglementary
such party must be allowed to claim the tax refund period within which to appeal could have been
or tax credit even if it is not considered as the taken. (CIR v. Concepcion, G.R. No. L-23912, 1968)
statutory taxpayer under the law. (Philippine
Airlines, Inc. v. Commissioner of Internal Revenue, 3. Government Remedies for
G.R. No. 198759, July 1, 2013) Collection of Delinquent Taxes
Examples:
Remedies Available to the Government (NIRC,
Silkair filed an application for refund on excise taxes
Sec. 205)
as part of the purchase price it has paid on the jet
1. Administrative Remedies; and
fuel purchased from Petron. Silkair is exempt only
a. Distraint; and
from direct taxes. The application should be
b. Levy
denied. (Silkair (Singapore) Pte. Ltd. v.
Commissioner of Internal Revenue, G.R. No.
Note: Distraint and levy are unavailable when
173594, [February 6, 2008], 568 PHIL 92-105)
tax liability is not more than P100.
PAL filed an application for refund on excise taxes
2. Judicial Remedies
as part of the purchase price it has paid on the jet
a. Civil; and
fuel purchased from Caltex. PAL is exempt from
b. Criminal Actions
both direct and indirect taxes. The application
should be granted. (Philippine Airlines, Inc. v.
Commissioner of Internal Revenue, G.R. No.
198759, [July 1, 2013])

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Pursuing Sec. 205 Remedies Simultaneously Administrative Remedies

The above remedies may be pursued singly or a) Tax Lien (NIRC, Sec. 219)
simultaneously at the discretion of the revenue
authorities (NIRC, Sec. 205) Definition
A legal claim or charge on property, either real or
Must the Assessment be Final and Executory personal, established by law as a security in default
Before the CIR may Collect the Tax Deficiency? of the payment of taxes (The Hongkong and
Shanghai Bank v. Rafferty, G.R. No. L-13188, 1918)
It depends on the remedy sought.
1. Summary Remedies of Distraint and Levy: Nature of Tax Lien
The assessment need not be final and A lien in favor of the Government of the Philippines
executory (R.A. No. 1125, as amended) when a person liable to pay a tax neglects or refuses
to do so upon demand (NIRC, Sec. 219)
2. Civil Case for Collection: The assessment
must be final and executory (Yabes v. Flojo, Duration
1982; San Juan v. Vasquez, 1961; R.A. No. Lien exists from the time assessment is made by the
1125 as amended, Sec. 7(b)(2)(c)) CIR until paid, with interests, penalties and costs
that may accrue in addition thereto; generally, it
Note: In the case of a false or fraudulent return with attaches to the property irrespective of ownership or
intent to evade tax or of failure to file a return... a transfer thereof.
[civil or criminal] proceeding in court for the
collection of such tax may be filed without Extent of Lien
assessment (NIRC, Sec. 222[a]) Upon all property and rights to property belonging to
the taxpayer
a. Requisites
1. The taxpayer failed to pay the tax due on the due Effectivity Against Third Persons
date stated in the Final Assessment Notice Not valid against any mortgagee, purchaser, or
(FAN)/Formal Letter of Demand (FLD) and did not judgment creditor until notice of such lien is filed by
file a protest (either a request for reconsideration or the CIR in the Register of Deeds in the province/city
reinvestigation) within thirty days from receipt of the where the property is situated
FAN/FLD;
Note: A tax lien is superior to a judgment claim of a
2. The taxpayer did not file an appeal with the Court private person
of Tax Appeals (CTA) or an administrative appeal
with the Commissioner of Internal Revenue (CIR) b) Distraint and Levy
within thirty days from receipt of the decision
denying the protest; and (1) Summary Remedy of Distraint of Personal
Property Including Garnishment
3. In case an administrative appeal was filed with the
CIR, the taxpayer failed to appeal to the CTA within Distraint
30 days from receipt of the CIR’s decision denying Involves the seizure by the government of personal
the taxpayer’s administrative appeal. property, tangible or intangible, to enforce payment
of taxes; followed by the public sale of such
b. Prescriptive Periods property, if the taxpayer fails to pay the taxes
Taxes due may only be collected if the collection voluntarily.
effort is made within 3 years (or 5, if there is a finding
of fraud or failure to file tax return) from the date of A remedy whereby the collection of delinquent taxes
the issuance of the assessment notice. Otherwise, is enforced on the goods, chattels, or effects and
the taxpayer may raise the defense of prescription. other personal property of whatever character of the
taxpayer. (NIRC, Sec. 205[a])

Kinds of Distraint

1. Actual Distraint – resorted to when there is

actual delinquency in tax payment (NIRC, Sec.
207[A]). It consists in the actual seizure of the

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personal property of the taxpayer. If tax due is in

excess of P1 Million, the CIR will commence the Real property may be levied upon before,
proceeding; otherwise, for tax due less than P1 simultaneously or after the distraint of personal
Million, it shall be the Revenue District Officer. property. (NIRC, Sec. 207[B])

2. Constructive Distraint (NIRC, Sec. 206) – a Procedure for Distraint and Garnishment/Levy
preventive remedy which aims at forestalling a DISTRAINT AND LEVY
possible dissipation of the taxpayer’s assets GARNISHMENT
when delinquency sets in – hence, no actual 3. 1. Issuance of Warrant of
delinquency in payment is necessary Distraint/Levy
4. 2. Report on the distraint/levy by the
Effecting Constructive Distraint distraining/levying officer within 10 days from
Constructive distraint of personal property shall the receipt of the warrant
be effected by requiring the taxpayer or any 5.
person having possession or control of such (a) Distraint – By the distraining officer to the
property: Revenue District Officer, and to the Revenue
(a) To sign a receipt covering the property Regional Director
distrained; and (b) Levy – By the distraining officer to the
(b) To obligate himself to preserve the same Commissioner or his duly authorized
intact and unaltered and not to dispose of representative
the same in any manner whatever, without
the express authority of the CIR. (NIRC, The order of distraint may be lifted by the CIR or
Sec. 206) his duly authorized representative. (NIRC, Sec.
207[A])
Instances when the CIR can place property 6. 3. Service of 3. Service of warrant
of a taxpayer under constructive distraint: warrant of of levy
(a) Delinquent taxpayer; distraint The certificate shall be
(b) Taxpayer is retiring from any business (a) Goods, chattels, served upon:
subject to tax; effects, or other (a) the delinquent
(c) Taxpayer is intending to leave the personal taxpayer, or
Philippines; property (b) if he be absent from
(d) Taxpayer is intending to remove his Copy of warrant the Philippines, to
property from the Philippines; left either with the his agent or the
(e) Taxpayer is intending to hide or conceal his owner or person manager of his
property; or from whom the business to which
(f) Taxpayer is intending to perform any act property was the liability arose, or
tending to obstruct the proceedings for taken, or at the (c) if there be none, to
collecting the tax due or which may be due dwelling or place the occupant of the
from him. of business of property in question;
such person and It is mailed to or served
Summary Remedy of Distraint is Available with someone of upon the Register of
Pending Appeal suitable age and Deeds of the province
The BIR may issue a Warrant of Distraint and Levy discretion; or city where the
to enforce collection while the TP is appealing the property is located.
decision denying the protest to the CTA. No appeal Together with a
taken to the CTA . . . shall suspend the payment, statement of the
levy, distraint and/or sale of any property of the sum demanded
taxpayer for the satisfaction of his tax liability (R.A. and Note of the
No. 1125, as amended by R.A. No. 9282, Sec. 11) time and place of
sale
(2) Summary Remedy of Levy on Real Property (b) Stocks and
other securities
Levy Copy of warrant
Involves the seizure by the government of real served upon the
property to enforce payment of taxes; followed by taxpayer AND
the public sale of such property, if the taxpayer fails upon the
to pay the taxes voluntarily president,

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manager, notice to the owner or general circulation

treasurer or other possessor of the in the municipality or
responsible officer property as above city where the
of the issuing specified and the property is located.
corporation publication or posting
(c) Debts and of such notice. One
credits place for the posting of
Copy of warrant such notice shall be at
left with the the Office of the Mayor
person owing the of the city or
debts or having in municipality in which
his possession the property is
such credits or his distrained.
agent 8. 5. Purchase 5. Forfeiture of
(d) Bank accounts by Government at Government at Levy
Copy of warrant Distraint (Grounds) for Want of Bidder
served upon the (a) The amount bid is (Grounds)
taxpayer AND not equal to the (a) There is no bidder
upon the tax (b) Highest bid is for an
president, (b) The amount bid is amount insufficient
manager, very much less to pay the taxes,
treasurer or other than the actual penalties, and costs
responsible officer market value of
of the bank the property
6. Discontinue of Proceedings (Optional)
The bank shall At any time before the day fixed for the sale, the
turn over to the taxpayer may discontinue all proceedings by
CIR so much of paying the amount due. (NIRC, Sec. 213)
the bank accounts 7. Redemption of
as may be property sold or
sufficient to satisfy forfeited
the claim of the
government If the sale proceeds, the
(NIRC, Sec. 208) taxpayer or any one for
7. 4. Posting of 4. Advertisement him may redeem the
notice; sale through notice and property within 1 year
(a) Notice shall publication; sale from the date of sale or
specify the time Advertisement shall be forfeiture. Breakdown of
and place of sale made within 20 days amount to be paid shall
and the articles after the levy, and for a be:
distrained. period of at least 30 1. Taxes, penalties
(b) The posting shall days. It shall be effected and interest
be made in not by: computed from the
less than 2 public (a) Posting a notice at date of delinquency
places in the city the main entrance of to the date of sale;
or municipality the municipal and
where the distraint building or the city 2. Interest on above
is made, one of hall and in public purchase price at
which shall be the and conspicuous the rate of 15% per
office of the mayor place in the barrio or annum from the
of such city or district where the date of sale to the
municipality. property is located; date of redemption.
(NIRC, Sec. 209) and
(b) By publication once The owner shall not be
The time of sale shall a week for 3 deprived of the
not be less than consecutive weeks possession of the
twenty (20) days after in newspaper of property and shall be

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entitled to the rents and property. Otherwise, the forfeiture shall become
other income thereof absolute. (NIRC, Sec. 215)
until the expiration of
the redemption period. When Property to be Sold or Destroyed
(NIRC, Sec. 214) Forfeited property shall not be destroyed until at
8. Final deed of sale to least 20 days from seizure. (NIRC, Sec. 225)
the purchaser
If the property is not
redeemed, a final deed d) Suspension of Business Operations
of sale shall be issued • The CIR or his authorized representative may
to the purchaser. suspend the business operations and
9. Further levy temporarily close the business establishment
The remedy by distraint/levy may be repeated if of a VAT-registered person for failure to issue
necessary until the full amount due, including all receipts or invoices, or failure to file VAT
expenses, is collected. (NIRC, Sec. 217) returns, or understatement of taxable sales or
receipts by 30%
c) Forfeiture of Personal/Real Property • CIR is also empowered to suspend the
business operations of any person for failure
Definition of Forfeiture to register as required under Sec. 236
Forfeiture is the divestiture of property without • Duration of temporary closure shall be for a
compensation, in consequence of a default or period of not less than 5 days
offense. • Closure shall be lifted upon compliance with
the requirements in the closure order (NIRC,
Enforcement of the Remedy of Forfeiture Sec. 115)

Forfeiture of Personal Property: enforced by e) Non-availability of Injunction to Restrain

seizure and sale/destruction of the property Collection of Tax

Forfeiture of Real Property: enforced by a General rule: No court can issue an injunction to
judgment of condemnation and sale in a legal action restrain collection of tax. (NIRC, Sec. 218)
(NIRC, Sec. 224)
Exception: When in the opinion of the CTA, the
In case of forfeiture of personal property, the collection of tax may jeopardize the interest of the
owner desiring to contest the validity of such government and/or the taxpayer, the CTA may
forfeiture may: (a) before the sale/destruction of the suspend said collection and require the taxpayer to
property, may bring an action to recover the same, deposit the amount claimed or file a surety bond
and upon giving bond, may enjoin the (R.A. No. 9282, Sec. 11)
sale/destruction; or (b) after the sale and within 6
months, may bring an action to recover the net Note: CTA has the power to provide injunctive relief
proceeds realized at the sale. (NIRC, Sec. 231) and dispense with the bond requirement in cases
where the court determines that the method
Forfeited property shall not be destroyed until at employed by the CIR in the collection of tax is not
least 20 days after seizure. (NIRC, Sec. 225) sanctioned by law. However, the CTA must
preliminarily determine if the collection is compliant
Forfeiture to Government for Want of Bidder with the law. (Sps. Pacquiao v. CTA & CIR, G.R. No.
In case: (a) there is no bidder; or (b) the highest bid 213394, 2016)
is insufficient to pay the amount due, the revenue
officer shall declare the property forfeited to the Judicial Remedies
government in satisfaction of the claim.
Civil and Criminal Actions
Title to the forfeited property shall be transferred to 1. Must be brought in the name of the Government
the government without the necessity of an order of the Philippines;
from a competent court. 2. Must be conducted by legal officers of the BIR;
3. In case of actions for recovery of taxes or
Within 1 year from the date of forfeiture, the enforcement of a fine, penalty or forfeiture, must
taxpayer or any one for him may redeem the

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be filed with the approval of the CIR (NIRC, Sec. 2. The accused failed to make or file the return at
220) the time required by law; and
3. The failure was willful
a) Civil Action
In cases of a decision against the BIR in Petitions Elements: Failure to Supply Correct Information
for Review brought by a taxpayer on disputed 1. The accused is a person required under the
assessment before the CTA, the remedy of the BIR NIRC or by rules and regulation to pay any tax,
is appellate – it may appeal the decision of the CTA make a return, keep any record or supply correct
in Division to the CTA En banc via a Petition for and accurate information;
Review. If the CTA En Banc still renders a decision 2. The accused failed to supply correct and
against the BIR, the BIR may appeal the same with accurate information; and
the SC through a Petition for Review on Certiorari 3. Such failure was willful
under Rule 45 of the Rules of Court.
“Willful Blindness” Doctrine
However, BIR may initiate collection proceedings “Willful” in tax crimes means voluntary, intentional
with the regional trial courts. violation of a known legal duty, and bad faith or bad
purpose need not be shown
BIR can file a civil action for collection pending
decision of the administrative protest. The civil suit The “Willful Blindness” doctrine means neglect or
will in effect be a denial of the question for omission (to ensure filing of ITR, to know how much
reinvestigation and reconsideration (CIR v. Union taxes are due, or inquire on the facts surrounding
Shipping, G.R. No. L-66160, 1990) the ITR) is tantamount to “deliberate ignorance or
conscious avoidance.
b) Criminal action
Criminal actions may only be initiated through a Thus, an experienced businesswoman’s reliance on
recommendation of the filing of an Information by her husband to file their ITRs is not a valid reason to
the DOJ for offenses found in the NIRC. justify her non-filing, considering that she knew from
the start that she and her husband are mandated by
Criminal Cases law to file their ITRs (People v. Kintanar, CTA EB
All violations of any provision of the NIRC shall Crim No. 006, 2010)
prescribe after 5 years. (NIRC, Sec. 281)
“Willfulness” cannot be presumed from mere
Prescriptive Period – When It Begins To Run inadvertent or negligent acts. While the TP is
1. From the day of the commission of the violation negligent, such is enough to convict.
of the law; or
2. If the same not be known at the time, from the Example: TP entered showbiz at 8 yrs. old; at 12
discovery thereof AND the institution of judicial yrs., engaged services of Tito Alfie Lorenzo as
proceedings for the investigation and manager. TP entrusted all her transactions to
punishment (NIRC, Sec. 281) manager, e.g., contract negotiations, signing,
handling of fees, etc. Signed contracts without
Interruption of Prescriptive Period reading them; checks were issued in the name of
1. When proceedings are instituted against the manager, so TP had no idea how much she was
guilty persons; or earning per project (she simply trusted manager to
2. When the offender is absent from the Philippines make proper accounting). As custodian of records,
(NIRC, Sec. 281); or manager took care of all financial matters, including
compliance with tax obligations (People v. Judy
Examples of Punishable Crimes Anne Santos, CTA Crim. Case No. O-012, 2013).
1. Attempt to evade or defeat tax (NIRC, Sec. 254);
and Filing of Criminal Action Against the Taxpayer
2. Failure to file return, supply correct and accurate • A criminal action may be filed during the
information, pay tax, withhold and remit tax and pendency of an administrative protest in the
refund excess taxes withheld on compensation BIR.
(NIRC, Sec. 255) • It is not a requirement for the filing thereof that
there be a precise computation and
Elements: Non-Filing of Tax Return assessment of the tax, since what is involved
1. The accused was a person required to make or in the criminal action is not the collection of
file a return; tax but a criminal prosecution for the violation

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of the NIRC, provided, however, that there is c) To pursue judicial proceeding to

a prima facie showing of a willful attempt to collect
evade taxes. d) To compromise, abate, or cancel
An assessment of a deficiency is not taxes
necessary to a criminal prosecution for willful e) To enforce tax liens
attempt to defeat and evade the income tax. f) To enforce statutory penal
A crime is complete when the violator has provisions
knowingly and willfully filed a fraudulent g) To enforce forfeiture or property
return with intent to evade and defeat the tax.
The perpetration of the crime is grounded 2) Judicial Remedies
upon knowledge on the part of the taxpayer i. Civil and criminal
that he has made an inaccurate return, and
the government's failure to discover the error Miscellaneous Item – Informer’s Reward (NIRC,
and promptly to assess has no connections Sec. 282)
with the commission of the crime. (Ungab v.
Cusi, G.R. No. 41919-24,1980; CIR v. Pascor For violations of the NIRC
Realty, G.R. No. 128315, 1999) • 10% of the revenues, surcharges or fees
recovered and/or fine or penalty imposed and
Note: The CIR does not always have to approve the collected; or
filing of tax criminal cases. The Tax Code • One million pesos (P1,000,000), whichever is
requirement of having the CIR approve the filing of lower.
civil and criminal cases is a delegable power. As the • Any person who voluntarily gives definite and
filing in this case was done after recommendation by sworn information, not yet in the possession of
the Regional Director who is at least the rank of a the BIR – resulting in the recovery of revenues,
division chief, the requirement is deemed complied surcharges and fees and/or the conviction of the
with. (People v. Valeriano, G.R. No. 199480, 2016) guilty party and/or the imposition of any fine or
penalty
Summary of Tax Remedies for Taxpayers and • Reward shall also be given to an informer where
the Government the offender has offered to compromise and his
offer has been accepted by the CIR and
Remedies of the Taxpayer collected from the offender
• Informer shall not be entitled to a reward when
Before Payment of Taxes no revenue, surcharges or fees have been
1) Administrative Remedies actually collected
i. Protest against assessment
• Information shall not refer to a case already
ii. Compromise
pending or previously investigated
iii. Redemption of property after sale at
public auction
2) Judicial Remedies
Disqualified persons:
i. Ordinary civil action
1. BIR official or employee or any other incumbent
ii. Filing of petition before the CTA
public official or employee
2. Relative within the 6th civil degree of
After Payment of Taxes
consanguinity of a BIR official or employee
1) Administrative Remedies
3. BIR officials or employees or other public
i. Claim for refund or tax credit
officials who acquired information in the course
2) Judicial Remedies
of the performance of their duties during their
i. Filing of Petition before the CTA
incumbency, though already retired or
separated from service
Remedies of the Government
1) Administrative Remedies
Note: Cash rewards of informers shall be
i. To make deficiency assessments
subject to income tax: Final withholding tax of
within 3 or 10 years
10%.
ii. To enforce deficiency assessments
and collect taxes within 5 years –
a) To effect distraint of personal
property
b) To effect levy on real property

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4. Civil Penalties fully paid. The 12% interest is the double of the legal
interest rate for loans or forbearance of any money
a. Delinquency Interest and as set by the BSP (Currently 6% per BSP Circ No.
Deficiency Interest 799 Series of 2013).

A higher rate of deficiency interest may be

Collection of interest is not punitive in nature, but
prescribed by rules and regulations.
compensatory; it is compensation to the State for
the delay in the payment of the tax. (Republic v.
Note: The deficiency and the delinquency
Heras, G.R. No. 26742, 1970)
interest cannot be imposed simultaneously.
(NIRC, Sec. 249)
ACCRUAL
TAX % OF
TYPE OF Example: TP did not file his/her ITR on April 15,
BASE INTEREST
INTEREST 2021. On May 15, 2021, the TP realized that his/her
taks liability amounts to 10 million. On June 15,
Basic Tax 12% p.a. 2021, BIR demands balance/total to be paid on or
Due date
+ imposed in before July 15, 2021. TP only paid on August 1,
appearing in
Accrued case of 2021.
the notice
Delinquen (249[B]) failure to pay
and demand
cy Interest Interest + a deficiency The computation of deficiency interest starts on April
(i.e.,
(249[C]) Surcharg tax, or any 15, 2021 and ends on July 15, 2021. While
FAN/FLD),
e surcharge or delinquency interest starts on July 16, 2021 and
until full
interest ends on August 1, 2021.
payment
thereon
b. Surcharge
12% p.a. Accrues Surcharge Penalty
interest from the date 25% of the amount due, in addition to the tax
Deficiency imposed on prescribed required to be paid, in case of the following: (RID2)
Interest Basic Tax the for its 1. Failure to file any Return and pay the tax on the
(249[B]) deficiency in payment date prescribed; or
the basic tax until full 2. Filing a return with an Internal revenue officer
due payment other than those with whom the return is
required to be filed, unless otherwise authorized
by the CIR; or
3. Failure to pay the Deficiency tax within the time
Delinquency Interest prescribed for its payment in the notice of
Delinquency interest shall be imposed in case of assessment; or
failure to pay: 4. Failure to pay on or before the Date prescribed
1. Tax due on any return required to be filed, or for its payment:
2. Tax due for which no return is required, or (a) The full or part of the amount of tax shown
3. A deficiency tax, or any surcharge or interest on any return required to be filed; or
thereon on the due date appearing in the notice (b) The full amount of tax due for which no
and demand of the CIR. return is required to be filed.
Delinquency interest shall be at the rate of 12% per Surcharge Penalty
annum on the unpaid amount until the amount is 50% of the amount due in case of: (FiFa)
fully paid. Interest shall form part of the tax. 1. Willful neglect to File the return within the period
prescribed; or
Note: Pursuant to Sec. 249 of the NIRC, the 2. False or fraudulent return is willfully made, in
imposition of interest on delinquency is mandatory. case any payment has been made on the basis
(Jamora v. Meer, G.R. No. L-48129, 1942) of such return before the discovery of the falsity
or fraud.
Deficiency Interest
A deficiency interest at the rate of 12% per annum The following shall be prima facie evidence of a
shall be imposed on any unpaid amount of tax from false or fraudulent return:
the date prescribed for payment until the amount is

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(a) Substantial under-declaration of taxable

sales, receipts or income – failure to report
sales, receipts or income in an amount
exceeding 30% of that declared per return;
or
(b) Substantial over-statement of deductions –
claim of deductions in an amount
exceeding 30% of actual deductions.

c. Compromise Penalty

Compromise Penalties
Imposed in all cases of criminal violations of the
NIRC, not involving commission of fraudulent act

Violations which are commonly resorted to by

taxpayers as means of tax evasion are deleted from
the coverage of compromise penalties, for having
met the requirements of the definition of fraudulent
acts. (RMO No. 07-15)

-- end of topic –

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III. LOCAL TAXATION (1) Appeal to the Central

Board of Assessment
Appeals
TOPIC OUTLINE UNDER THE SYLLABUS (2) Effect of Payment of Taxes
c) Compromise of Real Property Tax
A. Local Government Taxation Assessment
1. General Principles
2. Nature and Source of Taxing Power
a) Grant of Local Taxing Power
Under the Local Government
Code
b) Authority to Prescribe Penalties
for Tax Violations
c) Authority to Grant Local Tax
Exemptions
d) Withdrawal of Exemptions
3. Scope of Taxing Power
4. Specific Taxing Power of Local
Government Units
5. Common Revenue Raising Powers
6. Community Tax
7. Common Limitations on the Taxing
Powers of Local Government Units
8. Requirements for a Valid Tax Ordinance
9. Taxpayer's Remedies
a) Protest
b) Refund
c) Action before the Secretary of
Justice
10. Assessment and Collection of Local Taxes
a) Remedies of Local Government
Units
b) Prescriptive Period

B. Real Property Taxation

1. Fundamental Principles
2. Nature
3. Imposition
a) Power to Levy
b) Exemption from Real Property
Tax
4. Appraisal and Assessment
a) Classes of Real Property
b) Assessment Based on Actual Use
5. Collection
a) Date of Accrual
b) Periods to Collect
c) Remedies of Local Government
Units
6. Taxpayer’s Remedies
a) Contesting an Assessment
(1) Payment Under Protest;
Exceptions
(2) Contesting a Valuation of
Property
b) Appeal to the Local Board of
Assessment Appeals

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A. LOCAL GOVERNMENT TAXATION 2. Nature and Source of Taxing

Power
1. General Principles
a. Grant of Local Taxing Power
Local Taxation [ULIPE] Under the Local Government
The following fundamental principles shall govern Code
the exercise of the taxing and other revenue-raising
powers of local government units: Note: The power of the local government units is a
1. Taxation shall be Uniform in each local delegation from the Constitution but the Local
government unit; Government Code sets the limits.
2. Taxes, fees, charges, and other
impositions shall [EPuJuL]:
Power To Levy Taxes
a. Be Equitable and based as far as
1. LGUs may exercise the power to levy
practicable on the taxpayer's
taxes, fees or charges on any base or
ability to pay;
subject not otherwise specifically
b. Be levied and collected only for
enumerated or taxed:
Public purposes;
a. in the LGC; or
c. Not be unJust, excessive,
b. under the provisions of the NIRC;
oppressive, or confiscatory;
or
d. Not be contrary to Law, public
c. other applicable laws.
policy, national economic policy, or
2. The taxes, fees, or charges shall not be
in the restraint of trade;
unjust, excessive, oppressive, confiscatory
3. Collection of local taxes, fees, charges
or contrary to declared national policy
shall not be Let to any private person;
3. The ordinance levying such taxes, fees or
4. The revenue collected shall Inure solely to
charges shall not be enacted without any
the benefit of the local government unit
prior public hearing conducted for the
levying the tax, fee, charge or other
purpose. (LGC, Sec. 186)
imposition unless otherwise specifically
provided herein; and,
5. Each local government unit shall, as far as Authority to Issue Local Tax Ordinance
practicable, evolve a Progressive system of The power to impose a tax, fee or charge or to
taxation. (LGC, Sec. 130) generate revenue is exercised by the sanggunian of
the LGU concerned through an appropriate
Equality and uniformity in local taxation means that ordinance. (LGC, Sec. 132)
all taxable articles or kinds of property of the same 1. Sangguniang Panlalawigan – for
class shall be taxed at the same rate within the provinces
territorial jurisdiction of the taxing authority or local 2. Sangguniang Panglungsod – for cities
government unit. In fine, uniformity is required only 3. Sangguniang Bayan – for municipalities
within the geographical limits of the taxing authority. 4. Sangguniang Barangay– for barangays /
(Punsalan v. City of Manila, G.R. No. L-4817, 1954, barrios (LGC, Sec. 48)
J. Reyes)
The exercise of power to tax by the local legislative
The grant of the power to tax to chartered cities is assembly is subject to the veto power of the Local
sufficiently plenary to cover 'everything, excepting Chief Executive (LCE) (LGC, Sec. 55).
those which are mentioned' therein, subject only to
the limitation that the tax so levied is for public A municipal tax ordinance which prescribes a set
purposes, just and uniform'. (In re: Ormoc Sugar ratio between the amount of the tax and the volume
Co., Inc. v. Municipal Board of Ormoc City, G.R. No. of sales of the taxpayer imposes a sales tax and is
24322, 1967, J. Fernando) null and void for being beyond the power of a
municipality to enact. (Arabay, Inc. V. CFI of
Zamboanga, G.R. No. L-37684, 1975, J. Castro)

b. Authority to Prescribe
Penalties for Tax Violations

The Sanggunian of a local government unit is

authorized to prescribe fines or other penalties for

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violation of tax ordinances. Such fine or other 3. Community Tax (LGC, Secs. 156); and
penalty, or both, shall be imposed at the discretion 4. Residual taxing powers (LGC, Secs. 186).
of the court. (LGC, Sec. 516)
5. Common Revenue Raising
c. Authority to Grant Local Tax Powers
Exemptions
LGUs may:
An LGU have the power to grant tax exemptions, 1. May impose and collect such reasonable
incentives or reliefs through ordinances (LGC, Sec. fees and charges for services rendered
192) (LGC, Sec. 153)
2. May fix
d. Withdrawal of Exemptions a. Reasonable fees and charges for
services rendered
General rule: Tax exemptions or incentives granted b. Public utility charges (LGC, Sec.
to, or presently enjoyed by all persons, whether 154)
natural or juridical, including GOCCs, were i. For the operations of public
withdrawn upon the enactment of LGC. utilities owned, operated and
maintained by them within their
Exception: jurisdiction
1. Those provided by the LGC c. Toll fees or charges (LGC, Sec. 155)
2. Local Water Districts i. For the use of any public road,
3. Cooperatives duly registered under R.A. pier, or wharf, waterway, bridge,
6938, and ferry or telecommunication
4. Non-stock and non-profit hospitals and system FUNDED and
educational institutions (LGC, Sec. 193) CONSTRUCTED by the LGU
concerned
Indicative of the legislative intent to carry out the
Constitutional mandate of vesting broad tax powers Note: No such toll fees or charge shall be collected
to local government units, the LGC has effectively from:
withdrawn tax exemptions or incentives theretofore 1. Officers and enlisted men of the Armed
enjoyed by certain entities. (Manila Electric Forces of the Philippines and members of
Company v. Province of Laguna, G.R. No. 131359, the Philippine National Police on mission,
May 5, 1999) 2. Post office personnel delivering mail,
3. Physically-handicapped and disabled
3. Scope of Taxing Power citizens, and
4. Citizens who are sixty-five (65) years or
1. Local Taxation older.
Imposition of license taxes, fees, and other
impositions, including community tax, as a 6. Community Tax
means to create its own sources of revenue
(LGC, Secs. 128-196) IMPOSITION OF COMMUNITY TAX
Only the cities and municipalities may levy
2. Real Property Taxation community tax
System of levy on real property imposed on
a country-wide basis, but, authorizing the WHO ARE LIABLE TO PAY COMMUNITY TAX
local governments to vary the rates of 1. Individuals
taxation to a limited extent and within a. 18 years and above who are either
certain parameters (LGC, Sec. 197-283) i. Regularly employed for at least
thirty (3) consecutive working
4. Specific Taxing Power of Local days during the calendar year,
ii. Engaged in a business or
Government Units [CoSCoR]
occupation,
1. Common revenue-raising powers (LGC, iii. Owns real property with more
Secs. 153-155); than P1,000 assessed value
2. Specific powers (LGC, Secs. 135-143; iv. required to file an income tax
147-149,151-152); return

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2. Corporations d. Customs duties, registration fees of vessel and

wharfage on wharves, tonnage dues, and all
EXEMPTION FROM COMMUNITY TAX other kinds of customs fees, charges and dues,
1. Absolute except wharfage on wharves constructed and
a. Diplomats maintained by the local government unit
b. Consular representatives concerned;
2. Exempt for the rest of the current taxable e. Taxes, fees and charges and other impositions
year upon Goods carried into or out of, or passing
a. Transient visitors who stay not more through, the territorial jurisdictions of local
than three months government units in the guise of charges for
b. Persons who come to reside in the wharfage, tolls for bridges or otherwise;
Philippines on or after July 1 f. Taxes, fees or charges on Agricultural and
c. Persons who become 18 years of age aquatic products when sold by marginal
on or after July 1 farmers or fishermen;
d. Corporations established and g. Taxes on business enterprises certified to by
organized on or after July 1 the Board of Investments as:
● pioneer – 6 years from registration or
PAYMENT OF COMMUNITY TAX ● non-pioneer – 4 years from
Where Paid registration;
a. Individual - In the residence of the individual h. Excise taxes on articles enumerated under the
b. Corporation- in the place where the office or NIRC, as amended and taxes, fees, and
the juridical entity is located charges on Petroleum products;

7. Common Limitations on the The language of Section 133(h) makes plain that the
Taxing Powers of Local prohibition with respect to petroleum products
Government Units extends not only to excise taxes thereon, but all
"taxes, fees and charges." While local government
LGUs cannot levy [P3IT MADE IN BGC2]: units are authorized to burden all such other class
a. Income tax, except on banks and other of goods with "taxes, fees and charges", excepting
financial institutions; excise taxes, a specific prohibition is imposed
barring the levying of any other type of taxes with
Section 131(e) defines “banks and other financial respect to petroleum products. (Petron Corporation
institutions,” which excludes holding companies. v. Tiangco, 2008, J. Tinga)
Section 3.A.02(h) of the Revised Makati Revenue
Code imposes an LBT on the dividend income of i. Percentage or VAT on sales, barters or
banks and other financial institutions. Section exchanges or similar transactions on goods or
3.A.02(p), however, makes holding companies, services except as otherwise provided;
such as MHI, liable for the same business tax.
Section 3.A.02(p) of the Revised Makati Revenue A tax that bears a direct relation to the volume of
Code violates the limit set by Section 133(a) of the sales (or when there is a set ratio on the volume of
LGC, which prohibits the imposition of income tax sales and the amount of tax) may not be imposed
except when levied on banks and other financial by the local government since these amounts to
institutions. The said provision is therefore an ultra percentage tax on sales. (Serafica v. Treasurer of
vires exercise of local taxing power that cannot be Ormoc City, G.R. No. L-24813, 1969, C.J.
given effect without violating the principle that an Concepcion)
ordinance must conform with and can neither Section 140 is an example of an exception.65 The
amend nor repeal a statute. (Michigan Holdings, province may levy an amusement tax to be
Inc. v City Treasurer of Makati, CTA Case No. collected from the proprietors, lessees, or
1093, 2015) operators of theaters, cinemas, concert halls,
circuses, boxing stadia, and other places of
b. Documentary stamp tax; amusement at a rate of not more than 30% of the
c. Estate Tax, Inheritance, gifts, legacies and gross receipts from admission fees. (LGC, Sec.
other acquisitions mortis causa, except as 140) Provinces are not barred from levying
otherwise provided; amusement taxes even if amusement taxes are a

Ingles, Tax Made Less Taxing: A Reviewer with

65

Codals and Cases, 2021.

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form of percentage taxes. Section 133 (i) of the Substantive test:

LGC prohibits the levy of percentage taxes "except 1. Must not contravene the Constitution or any
as otherwise provided" by the LGC. (Pelizloy Realty statute;
Corp. v. Province of Benguet, G.R. No. 183137, 2. Must not be unfair or oppressive;
2013, J. Leonen) 3. Must not be partial or discriminatory;
4. Must not prohibit, but may regulate trade;
j. Taxes on the gross receipts of Transportation 5. Must be general and consistent with public
contractors and persons engaged in the policy; and
transportation of passengers or freight by hire 6. Must not be unreasonable. (City of
and common carriers by air, land or water, Batangas v. Philippine Shell Petroleum
except as provided in the LGC; Corporation, G.R. No. 195003, 2017, J.
Caguioa)
Section 133 of the LGC prohibits LGUs from
imposing taxes on the gross receipts of 9. Taxpayer's Remedies
transportation contractors, persons engaged in the
transportation of passengers or freight by hire, and a. Protest
common carriers by air, land, or water. This is an
exception to the grant of taxing power given to Protest of Assessment
municipalities and cities per Section 143(h) of the 1. The Local Treasurer or his duly authorized
LGC. (City of Manila v. Colet, G.R. No. 120051, representative shall issue a notice of
2014) assessment stating the nature of the tax, fee, or
charge, the amount of deficiency, surcharges,
k. Taxes on Premiums paid by way of interests and penalties if he finds that correct
reinsurance or retrocession; taxes, fees, or charges have not been paid.
l. Taxes, fees or charges for the registration of 2. Within 60 days from the receipt of the notice of
Motor vehicles and for the issuance of all kinds assessment, the taxpayer may file a written
of licenses or permits for the driving thereof, protest with the Local Treasurer contesting the
except tricycles; assessment, otherwise the assessment shall
m. Taxes, fees, or other charges on Philippine become final and executory.
products actually Exported, except as 3. The Local Treasurer shall decide the protest
otherwise provided; within 60 days from the time of filing of the
n. Taxes, fee, or charges, on Countryside and written protest.
Barangay Business Enterprises and 4. The taxpayer has 30 days from the receipt of the
cooperatives duly registered under R.A. 6810 denial of the protest or from the lapse of the 60-
and R.A. 6938 (Cooperative Code of the day period within which to appeal with the court
Philippines); and of competent jurisdiction, otherwise the
o. Taxes, fees or charges of any kind on the assessment becomes conclusive and
National Government, its agencies and unappealable. (LGC, Sec. 195)
instrumentalities, and local government units.
(LGC, Sec. 133) Note: Unlike a disputed real property tax
assessment where payment under protest is
This is not an absolute rule. The real property generally required, a protest against a disputed
owned by the Republic of the Philippines or any of Notice of Assessment for deficiency local tax need
its political subdivisions is not exempted from RPT not be preceded or accompanied by payment
when the beneficial use of the real property has under protest.
been granted, for consideration or otherwise, to a
taxable person. (LGC, Sec. 234) Where payment was made, the taxpayer may
maintain a a court action protesting the assessment
8. Requirements for a Valid Tax (LGC, Sec. 195) and at the same time and seeking
Ordinance a refund of the taxes (LGC, Sec. 196) (City of
Manila v. Cosmos Bottling Corporation, G.R. No.
Requirements of a Valid Ordinance 196681, 2018)
Formal test:
1. Must be within the corporate powers of the Jurisdiction of Courts Over Local Taxation
LGU to enact; and Cases
2. Must be passed according to the procedure With the amendment brought by RA No. 9282, the
prescribed by law. Court of Tax Appeals now has appellate jurisdiction

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over local taxation cases decided by the RTC in the What determines the appropriate remedy between
exercise of its appellate or original jurisdiction. Sec. 195 and Sec. 196 is the local government's
basis for the collection of the tax. It is explicitly stated
The case which arose from the dispute between in Sec. 195 that it is a remedy against a notice of
Napocor and the Provincial Government of Bataan assessment issued by the local treasurer, upon a
over the purported franchise tax delinquency of finding that the correct taxes, fees, or charges have
Napocor is a local tax case that is within the not been paid. Here, no notice of assessment for
exclusive appellate jurisdiction of the CTA, not the deficiency taxes was issued by the City Treasurer.
CA. Although the complaint filed with the trial court While the receipts state the amount and nature of
is a Petition for declaration of nullity of foreclosure the tax assessed, they do not contain any amount of
sale with prayer for preliminary mandatory deficiency, surcharges, interests, and penalties due
injunction, a reading of the petition shows that it from Corp A. They cannot be considered the "notice
essentially assails the correctness of the local of assessment" required under Sec. 195.
franchise tax assessments. In order for the trial court Consequently, Section 196 applies. (International
to resolve the complaint, the issues regarding the Container Terminal Services v. City of Manila, G.R.
correctness of the tax assessment and collection No. 185622, 2018)
must also necessarily be dealt with. Hence, the CA
correctly dismissed the appeal for lack of Corp A sent letters of claims for refund for the first
jurisdiction. (NAPOCOR v. Provincial Government three quarters it paid taxes due to alleged double
of Bataan, G.R. No. 180654, 2014) taxation, but the City Treasurer failed to act upon the
same. Corp A no longer sent letters for the
Injunction – if irreparable damage would be subsequent quarters because it would essentially
caused to the taxpayer and no adequate remedy is just reiterate the same arguments it made in the
available. former letters. Due to the City Treasurer’s inaction,
it filed a Petition for Certiorari and Prohibition with
Unlike the NIRC, the Local Tax Code does not prayer for TRO before the RTC. Is Corp A entitled to
contain any specific provision prohibiting courts refund it paid subsequent to third quarter?
from enjoining the collection of local taxes. Such
statutory lapse or intent may have allowed Answer: Yes. To be entitled to a refund under Sec.
preliminary injunction where local taxes are 196, the taxpayer must comply with the following
involved. But it cannot negate the procedural rules procedural requirements:
and requirements under Rule 58 of the Rules of 1. File a written claim for refund or credit with
Court (Valley Trading Co. v. CFI of Isabela, 171 the local treasurer; and
SCRA 501, 1989) 2. File a judicial case for refund within 2 years
from the payment of the tax, fee, or charge,
b. Refund or from the date when the taxpayer is
entitled to a refund or credit.
A written claim for refund or credit must be filed with In this case, while the corporation admittedly failed
the Local Treasurer for the recovery of any tax, fee, to file claims for refund for the taxes subsequent to
or charge erroneously or illegally collected. the third quarter, this failure was warranted under
the circumstances. First, the filing of the subsequent
The claim must be filed within 2 years from: written claims would have yielded the same result
a. date of the payment of such tax, fee, or every time. Second, the issue of the Corp A’s claim
charge, or for refund is a question of law (double taxation).
b. date the taxpayer is entitled to a refund When the issue raised by the taxpayer is purely
or credit. (LGC, Sec. 196). Thus, a tax legal and there is no question concerning the
paid pursuant to an ordinance that was reasonableness of the amount assessed, then there
judicially declared invalid may still be is no need to exhaust administrative remedies.
recovered within two years from finality (International Container Terminal Services v. City of
of the judgment. (ICTSI v. City of Manila, G.R. No. 185622, 2018)
Manila, CTA AC No. 11, 2021)
Tax Credit
Note: Actual payment is required under Sec. 196, It shall only be applied to future tax obligations of the
unlike in Sec. 195 that can be resorted to even same taxpayer for the same business and not
without payment. refundable in cash.

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If a taxpayer has no other tax obligation payable to Treasurer has 60 Unlike Section 195,
the LGU during the year, his tax credits shall be days to decide said however, Section 196
applied in full during the first quarter of the next protest. does not expressly
calendar year for the same business. provide a specific
period within which the
Any unapplied balance of the tax credit shall be local treasurer must
refunded in cash in the event that he terminates decide the written
operation of the business involved within the locality. claim for refund or
(IRR of LGC, Art. 286) credit. It is, therefore,
possible for a taxpayer
In the event that the protest is finally decided in to submit an
favor of the taxpayer, the amount or portion of the administrative claim for
tax protested shall be refunded to the taxpayer, or refund very early in the
applied as tax credit against his existing or future 2-year period and
tax liability. It is not necessary for petitioner to move initiate the judicial
for the issuance of the writ of execution because claim already near the
the remedy has already been provided by law. end of such 2-year
(Coca-Cola Bottlers Philippines, Inc. v. City of period due to an
Manila, 721 SCRA 1, 2014) extended inaction by
the local treasurer. In
Difference between Sec. 195 (Protest) and Sec. this instance, the
196 (Refund/Tax Credit) taxpayer cannot be
SEC. 195 SEC. 196 required to await the
Protest – contesting Refund/Tax Credit – decision of the local
an assessment recovery of treasurer any longer,
erroneously paid or otherwise, his judicial
illegally collected tax action shall be barred
File a written protest File a written claim with by prescription.
with the treasurer. the treasurer. (City of Manila v. Cosmos Bottling Corporation, G.R.
Actual payment is not Actual payment is No. 196681, 2018; International Container Terminal
required. required. Services v. City of Manila, G.R. No. 185622, 2018)
Notice of assessment Notice of assessment
is required. is not required as long c. Action before the Secretary
as the grounds are the of Justice
following:
• erroneous Protest Against a Newly Enacted Ordinance
payment Any question on the constitutionality or legality of
• invalid collection tax ordinances or revenue measures may be raised
Taxpayer has 60 Taxpayer must first file on appeal within 30 days from the effectivity thereof
days from receipt of a written claim for to the Secretary of Justice.
notice of assessment refund before bringing
to protest it for being a suit in court which The SOJ shall render a decision within 60 days
erroneous. Then the must be initiated within from the date of receipt of the appeal. (LGC, Sec.
treasurer shall decide two years from the 187)
within 60 days. He date of payment.
shall thereafter have Effect of Appeal
30 days from the The appeal will not suspend the effectivity of the
receipt of the denial ordinance and the accrual and payment of the tax,
of the protest or from fee, or charge levied therein.
the lapse of the 60-
day period of inaction The aggrieved party may file appropriate
within which to proceedings with a court of competent jurisdiction
appeal with the court (RTC):
of competent a. within 30 days after receipt of the decision;
jurisdiction. or
b. after the lapse of the 60-day period without
the SOJ acting upon it. (LGC, Sec. 187)

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notice of
The SOJ can declare an ordinance void for not assessment;
having followed the requirements of the law but he 3. The treasurer
cannot replace it with his own law or he cannot say shall decide
that is unwise. When the SOJ alters or modifies or within 60
sets aside a tax ordinance, he is not allowed to days from the
substitute his own judgment for the judgment of the time of its
LGU that enacted the measure since he only filing;
exercises supervision and not control. (Drilon v. 4. Appeal with
Lim, G.R. No. 112497, 1994) the court of
competent
SOJ dismissed an appeal assailing the jurisdiction
constitutionality of the tax ordinances of the within 30
Municipality of San Juan on the ground that it was days from:
filed out of time. The failure of the petitioners in the • receipt of
case to appeal to the Secretary within 30 days from denial, or
the date of effectivity is fatal to their cause. (Reyes • lapse of the
v. CA, G.R. No. 118233, 1999) 60-day
period.
While the appeal to the DOJ is mandatory and fatal 5. Taxpayer will
to the taxpayer if not availed of, if the issue is on then appeal
pure questions of law, the appeal to the DOJ is not to the CTA
mandatory and the case can be brought straight to within 30
the RTC. (Alta Vista Golf and Country Club v. days
Cebu, G.R. No. 180235, 2016) CLAIM FOR Taxes File a written
Under Section 187 of the Local Government Code REFUND OR erroneously claim for
of 1991, aggrieved taxpayers who question the TAX CREDIT paid and refund/tax credit
validity or legality of a tax ordinance are required to (LGC, Sec. illegally with the local
file an appeal before the Secretary of Justice before 196) collected. treasurer within
they seek intervention from the regular courts. (Aala 2 years from:
v. Uy, G.R. No. 202781, 2017) • Date of
payment; or
If the 30-day period lapses without any direct action • Date when
being filed with the SOJ to question the taxpayer is
constitutionality or legality of the tax ordinance or entitled to a
revenue measure, it does not preclude the taxpayer refund or
from questioning the constitutionality or legality of credit.
the tax ordinance or revenue measure in an indirect QUESTION Any 1. Appeal within
or collateral attack as an affirmative defense in a THE NEWLY question on 30 days from
protest under Sec. 195 or as a ground for a claim ENACTED the effectivity of
for refund under Sec. 196. ORDINANCE constitution the ordinance
(LGC , Sec. ality or to the SOJ;
Summary of Remedies 187 & 188) legality of 2. SOJ shall
REMEDIES GROUNDS PROCEDURE tax decide within
PROTEST The 1. Local ordinances 60 days from
AGAINST AN correctness treasurer will or revenue receipt of the
ASSESSMEN of the issue a notice measures appeal;
T (LGC, Sec. amount of of 3. Within 30
195) the assessment; days from
assessment 2. File a written receipt of the
protest with decision or
the local the lapse of
treasurer the 60 day
within 60 period
days from the without any
receipt of the action from
the SOJ, the

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aggrieved Summary of Protest Procedures

taxpayer may
go to court. Protest of Assessment

Notice of Assessment shall be issued by the

local treasurer

Within 60 days from receipt of notice, file a

written protest with the local treasurer

Treasurer shall decide within 60 days from

receipt of protest

Granted Denied/No action

Cancel the Within 30 days

assessment from receipt of
decision or 30
days after the 60
days of inaction,
appeal to
MTC/RTC

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Application for Refund/Credit Surcharges and Penalties on Unpaid Taxes,

Fees, or Charges
The Sanggunian may impose the following:
Payment
a. Surcharge - not exceeding 25% of the
unpaid taxes, fees or charges not paid on
time.
b. Interest - not exceeding 2% per month of the
Within 2 years from payment, unpaid taxes, fees or charges including
file a written claim for refund/credit surcharges, until such amount is fully paid
with the local treasurer but in no case shall the total interest on the
unpaid amount exceed 36 months. (LGC,
Sec. 168)
c. On any other source of revenue, LGUs are
authorized to impose an interest of a
maximum of 2% per month, maximum of 36
Treasurer shall decide. Take Note
months, on the amount unpaid. (LGC, Sec.
that there is no period required by
169)
LGC for the local treasurer to decide.
Thus, as clarified by jurisprudence,
Authority of the Local Treasurer
the taxpayer may resort to judicial
1. All local taxes, fees and charges shall be
action even before the 2-year period
collected by the provincial, city, municipal or
expires.
barangay treasurer, or their duly authorized
deputies.

The provincial, city or municipal treasurer

10. Assessment and Collection of may designate the barangay treasurer or his
Local Taxes deputy to collect local taxes, fees or charges.
In case a bond is required for the purpose,
Tax Period the provincial city or municipal government
The tax period shall be the calendar year, unless shall pay premiums in addition to the
otherwise provided in the LGC. (LGC, Sec. 165) premiums of the bond that may be required
under LGC. (LGC, Sec. 170)
Manner of Payment
It may be paid in quarterly installments. (LGC, Sec. City Treasurer cannot be compelled by
165) mandamus to accept payment of taxes, if in
his reasoning and assessment, the payment
Accrual of Tax is incorrect or deficient. (San Juan v. Castro,
GR: It shall accrue on the January 1 of each year, 541 SCRA 526, 2007)
unless otherwise provided in the LGC.
2. He may examine the books of accounts and
Exception: New taxes, fees or charges, or pertinent records of businessmen in order to
changes in the rates thereof, shall accrue on the 1st ascertain, assess, and collect the correct
day of the quarter next following the effectivity of amount of taxes, fees, and charges.
the ordinance imposing such new levies or rates.
(LGC, Sec. 166) The examination shall be made during
regular business hours not oftener than once
Time of Payment a year for every tax period, which shall be the
It charges shall be paid within 20 days of January year immediately preceding the
or of each subsequent quarter, as the case may be, examination, and shall be certified by the
unless otherwise provided in the LGC. The examining official. Such certification shall be
Sanggunian may, for a justifiable cause, extend the made of record in the books of accounts of
time for payment of such taxes without surcharges the taxpayer examined.
or penalty for a period not exceeding 6 months. (LGC, Sec. 171)
(LGC, Sec. 167)

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a. Remedies of Local Distraint of Personal Property – Process (LGC,

Government Units Sec. 175)

Local Government's Lien

Local taxes, fees, charges and other revenues Deficiency
constitute a lien, superior to all liens, charges or
encumbrances in favor of any person, enforceable
by appropriate administrative or judicial action,
Certificate of delinquency shall be issued by
upon:
the local treasurer
1. Any property or rights therein which may be
subject to the lien; and
2. Property used in business, occupation,
practice of profession or calling, or exercise Seizure of personal property
of privilege with respect to which the lien is
imposed.

The lien may only be extinguished upon full payment Accounting for distrained goods. A copy of which
of the delinquent local taxes fees and charges shall be left with the owner/dwelling place/place
of business
including related surcharges and interest. (LGC,
Sec. 173)

Civil Remedies: Publication

1. By administrative action:
a. Distraint of personal property; and
b. Levy upon real property;
2. Judicial action. After 20 days from publication, sale at public
auction
Note: Either of these remedies or all may be
pursued concurrently or simultaneously at the
discretion of the LGU concerned. (LGC, Sec. 174) Within 5 days after sale, the local treasurer
shall report to the Sanggunian

Any excess shall be returned to the owner but if

insufficient to satisfy the claim, other property
may be distrained until fully collected

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Levy on Real Property – Process (LGC, Sec. Purchase of Property by the LGU for Want of
176, 178, 179, 180, 181, 182) Bidder: If there is no bidder for the real property, or
if the highest bid is for an amount insufficient to pay
the taxes, fees, or charges, related surcharges,
Deficiency interests, penalties and costs, the local treasurer
shall purchase the property in behalf of the LGU to
satisfy the claim.

Certificate of delinquency shall be Treasurer shall purchase the property in behalf

prepared by the local treasurer of the LGU

Service of warrant of levy to the owner,

assessor, and RD
Within 2 days, report the proceedings

Within 10 days from the receipt of warrant,

the levying officer shall report the levy to
the Sanggunian
Upon registration, RD shall transfer the title to
LGU without need of court order
Within 30 days from service of warrant,
the sale shall be advertised by posting
and publication

Within 1 year from forfeiture, the owner may

redeem the property
Sale at public auction

Within 30 days from sale, the treasurer If the property is not redeemed after the 1-year
shall report such sale to Sanggunian period, the LGU may sell the property at public
auction

Resale of Real Estate Taken by the LGU: The

Treasurer shall deliver the certificate of Sanggunian may, by ordinance, and upon notice of
sale to the buyer
not less than 20 days, sell and dispose of the real
property acquired. The proceeds of the sale shall
accrue to the general fund of the LGU.
Proceeds of sale in excess of tax
liability, including interest and expenses, Exemption of property from distraint or levy:
shall be remitted to the owner a. Tools and the implements necessarily used by
the delinquent taxpayer in his trade or
employment;
b. 1 horse, cow, carabao, or other beast of
Within 1 year, the owner may redeem the burden, such as the delinquent taxpayer may
property
select, and necessarily used by him in his
ordinary occupation;
c. His necessary clothing, and that of all his
After 1 year from sale and if the property is family;
not redeemed, the treasurer shall execute d. Household furniture and utensils necessary for
a deed of conveyance to the buyer housekeeping and used for that purpose by the

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delinquent taxpayer, such as he may select, of Suspension of Prescriptive Periods

a value not exceeding P10,000; a. When the treasurer is legally prevented from
e. Provisions, including crops, actually provided making the assessment of collection;
for individual or family use sufficient for 4 b. When the taxpayer requests for a
months; reinvestigation and executes a waiver in
f. The professional libraries of doctors, writing before expiration of the period within
engineers, lawyers and judges; which to assess or collect; and
g. One fishing boat and net, not exceeding the c. When the taxpayer is out of the country or
total value of P10,000, by the lawful use of otherwise cannot be located. (LGC, Sec.
which a fisherman earns his livelihood; and 194)
h. Any material or article forming part of a house
or improvement of any real property. (LGC, Appeal to Court of Competent Jurisdiction
Sec. 185)

Judicial Action RTC

MTC
The LGU may enforce the collection of delinquent
taxes, fees, charges or other revenues by civil
action in any court of competent jurisdiction which
shall be filed by the local treasurer within the period
prescribed in Sec. 195 (protest) of the LGC. (LGC, CTA division
Sec. 183) RTC
(Rule 42)
Further Distraint or Levy
The remedies by distraint and levy may be repeated
if necessary until the full amount due is collected.
(LGC, Sec. 184) CTA En Banc (Rule 43)

b. Prescriptive Period

Prescriptive Period for Assessment Supreme Court

GR: Local taxes, fees, or charges shall be assessed
5 years from the date they became due. No action
for the collection of such taxes, fees, or charges,
whether administrative or judicial, shall be instituted
after the expiration of such period.

Exceptions:
But those which have accrued before the effectivity
of the LGC may be assessed within a period of 3
years from the date they became due.

In case of fraud or intent to evade the payment of

taxes, fees, or charges, the same may be assessed
within 10 years from discovery of the fraud or intent
to evade payment. (LGC, Sec. 194)

Prescriptive Period for Collection

GR: Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action. No such action shall
be instituted after the expiration of said period.

Exceptions: But those which have assessed before

the effectivity of the LGC may be collected within a
period of 3 years from the date of assessment.
(LGC, Sec. 194)

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B. REAL PROPERTY TAXATION 3. Imposition

1. Fundamental Principles For taxation purposes, real property consists of:

1. The list of immovables in Art. 415 of the
Real Property Taxation [CUANE] Civil Code, and
The appraisal, assessment, levy and collection of 2. The definition of machinery under Section
real property tax shall be guided by the following 1999(O) clarified by the DOF Local Finance
fundamental principles: Circular 001-2002
a. CURRENT and fair market value is the basis
of appraisal a. Power to Levy
b. UNIFORMITY in classification in each local
government unit should be observed Authority to levy RPT [PC-MM]
c.ACTUAL USE of the property shall be the LGUs, through their sanggunian, that may levy RPT
basis of classification are the following:
d. Appraisal, assessment, levy and collection 1. Province;
should NOT BE LET to any private person 2. City; and
e. EQUITABLE appraisal and assessment 3. Municipality within Metro Manila Area
(LGC, Sec. 198) (MMA) (LGC, Sec. 200, 232)

Actual Use Note: Municipalities outside MMA cannot levy RPT

It refers to the purpose for which the property is but they can impose special levies.66 (LGC, Sec.
principally or predominantly utilized by the person in 240)
possession thereof. (LGC, Sec. 199(b))
LGUs have the power to levy RPT and fix the rates.
Real property shall be classified, valued and (LGC, Sec. 232, 233)
assessed on the basis of its actual use regardless
of where located, whoever owns it, and whoever RATES OF LEVY
uses it. (LGC, Sec. 217) The following may levy an annual ad valorem tax
on real property such as land, building, machinery,
2. Nature and other improvement not specifically exempted:
1. Province – not exceeding 1% of the assessed
Nature of Real Property Tax [LiLIPAD] value of real property
a. Direct tax on the ownership or privilege to 2. City or a municipality within the MMA – not
use of real property exceeding 2% of the assessed value of real
b. Ad Valorem tax - the assessed value is the property (LGC, Sec. 233)
tax base
c. Proportionate - the tax is calculated on the SPECIAL EDUCATION FUND (SEF)
basis of a certain percentage of the value of A province or city, or a municipality within Metro
the property assessed Manila may levy an additional annual tax of one
d. Indivisible single obligation percent (1%) of the assessed value for SEF (LGC,
e. Local Tax - with respect to LGUs, it is levied Sec. 213)
thru a delegated power
f. Lien - It attaches on the property and is SPECIAL LEVY
enforceable against it. A special levy may be imposed on lands within an
LGU’s territorial jurisdiction which are especially
Ad Valorem Tax benefited by public work projects or improvements
It is a levy on real property determined on the basis funded by the LGU
of a fixed proportion of the value of the property.
(LGC, Sec. 199(c)) Rate shall NOT exceed sixty percent (60%) of the
total cost of the government improvements

Ingles, Tax Made Less Taxing: A Reviewer with

66

Codals and Cases, 2021.

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b. Exemption from Real leased out for commercial purposes are subject to
Property Tax (Go-WatCh- real property tax. (Lung Center of the Philippines v
ECo) (LGC, Sec. 234) Quezon City, GR No. 144104, June 29, 2004, J.
Callejo)
1. Owned by the Government or any of its
political subdivisions. Take Note that this provision was lifted from the
1987 Constitution, which reads:
Exceptions:
a. Properties owned by GOCCs (except Charitable institutions, churches and personages
those engaged in water or electric supply) or convents appurtenant thereto, mosques, non-
are subject to RPT since they are not profit cemeteries, and all lands, buildings, and
enumerated herein, unless they fall under improvements, actually, directly, and exclusively
other exceptions. used for religious, charitable, or educational
purposes shall be exempt from taxation. (1987
b. When beneficial use has been granted to Constitution, Art. VI, Sec. 28 (3))
a taxable person.
Therefore, machinery is not included in this
Parcels of land owned by the State but exemption. Improvements do not include
leased to a private commercial machinery. As such, machinery that is permanently
establishment are subject to RPT since attached to land and buildings is subject to RPT,
private commercial establishments are the even though this is actually, directly, and
taxable beneficial users of the parcels of exclusively used for religious, charitable or
land owned by the State. (City of Pasig vs. educational purposes. (Local Finance Circular No.
Republic of the Philippines, G.R. No. 01-2001)
185023, 2011, J. Carpio)
However, there is an issue as to the machinery of
The Mactan-Cebu International Airport non-stock, non-profit educational institutions used
Authority, is a government instrumentality actually, directly, and exclusively for educational
and not a GOCC. Thus, its properties purposes because of another constitutional
actually, solely and exclusively used for provision, which reads:
public purposes, consisting of the airport
terminal building, airfield, runway, taxiway All revenues and assets of non-stock, non-profit
and the lots on which they are situated, are educational institutions used actually, directly, and
exempt from RPT. However, the portions exclusively for educational purposes shall be
of the land leased to taxable persons like exempt from taxes and duties. (1987 Constitution,
private parties are subject to RPT. (Mactan Art. XIV, Sec. 4(3))
Airport Authority vs. City of Lapu- Lapu,
G.R. No. 181756, June 15, 2015, J. Therefore, machinery (which is an asset) of non-
Leonardo-De Castro) stock, non-profit educational institutions used
actually, directly, and exclusively for educational
2. Charitable institutions, churches, parsonages, purposes is exempt from RPT. (CIR v. DLSU, G.R.
convents appurtenant thereto, mosques, non- No. 196596, Nov. 8, 2016, J. Brion; Local Finance
profit or religious cemeteries, lands, buildings Circular No. 01-2002)
and improvements actually, directly and
exclusively used for religious, charitable or 3. Machinery and equipment actually, directly,
educational purposes and exclusively used by local Water districts
and GOCCs engaged in the supply and
A charitable institution does not lose its character distribution of water and/or generation and
and its exemption simply because it derives income transmission of electric power
from paying patients so long as the money received
is devoted to the charitable object it was intended Requisites: [MAWE]
to achieve, and no money inures to the benefit of a. This exemption only covers Machinery
persons managing the institution. However, a and equipment;
hospital, even though it was a charitable institution, b. Actually, directly, and exclusively used by
was not exempt from real property tax on the local water districts used by local water
portions of its property not actually, directly, and districts and GOCCs; and
exclusively used for charitable purposes. Those c. Local water districts and GOCCs must be

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engaged in the supply and distribution of Puno)

Water and/or generation and transmission
of Electric power. 5. Machinery & equipment for pollution control
and Environment protection
The privilege of exemption from RPT granted to
NPC cannot be extended to another contracting Under Section 234(e) of the 1991 LGC, the tax
party by entering into an agreement. (Fels energy, exemption of machineries and equipment used for
Inc. v. Province of Batangas, GR No. 168557, pollution control and environmental protection is
February 16, 2007, J. Callejo) based on usage, i.e., direct, immediate and actual
application of the property itself to the exempting
The contractual provision would appear to make purpose. (Provincial Assessor of Marinduque v.
the NPC liable and give it standing to protest the Court of Appeals, GR No. 170532, 30 Apr. 2009, J.
assessment. But the real property tax liability Austria-Martinez)
imposed is the liability arising from law that the local
government unit can rightfully and successfully Classifications of RPT Exemptions [OCU]
enforce, not the contractual liability that is 1. Ownership Exemptions
enforceable between the parties to a contract. By
law, the tax liability rests on Mirant based on its Exemptions from real property taxes on the basis
ownership, use, and possession of the plant and its of ownership are real properties owned by:
machineries, not on NAPOCOR. (NAPOCOR v. ● Republic;
Province of Quezon, G.R. No. 171586, July 15, ● Province;
2009, J. Brion) ● City;
● Municipality;
In a contract wherein one party assumes the tax ● Barangay; and
liabilities of another, and the latter operates and ● Registered cooperatives
uses the property in question, the former does not
have legal interest to protest the tax imposed by 2. Character Exemptions
law on the latter. (NAPOCOR v. Province of Exempted from real property taxes on the basis of
Quezon, G.R. No. 171586, January 25, 2010, J. their character are:
Brion) ● Charitable institutions;
● Houses and temples of prayer like
4. Real property owned by duly registered churches, parsonages or convents
Cooperatives under RA 6938 appurtenant thereto, mosques; and
● Non-profit or religious cemeteries
Section 234 of the LGC exempts all real property
owned by cooperatives without distinction. Nothing 3. Usage exemptions.
in the law suggests that the real property tax Exempted from real property taxes on the basis of
exemption only applies when the property is used the actual, direct and exclusive use to which they
by the cooperative itself. Leasing of the property to are devoted are:
another is not a ground for withdrawal of tax ● All lands buildings and improvements
exemption. (Provincial Assessor of Agusan Del Sur which are actually, directed and
v. Filipinas Palm Oil Plantation, Inc., G.R. No. exclusively used for religious, charitable
183416, 2016, J. Leonen) or educational purpose;
● All machineries and equipment actually,
PHILRECA, a cooperative registered under P.D. directly and exclusively used or by local
269, complained that 1991 LGC provision violated water districts or by government-owned
the equal protection clause for limiting its coverage or controlled corporations engaged in the
with cooperatives registered under R.A. 6938. But supply and distribution of water and/or
the Supreme Court ruled that such provision generation and transmission of electric
permits reasonable classification as these power; and
exemptions are not limited to existing conditions ● All machinery and equipment used for
and apply equally to all members of the same class. pollution control and environmental
Exemptions from local taxation (LGC, Sec. 193), protection. To help provide a healthy
including real property tax (LGC, Sec. 234), are environment in the midst of the
granted to all cooperatives covered by R.A. No. modernization of the country, all
6938. (PHILRECA v. Secretary of Interior and Local machinery and equipment for pollution
Government, GR No. 143076, 10 June 2003, J. control and environmental protection may

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not be taxed by local governments. b. In all other cases: the fair market
(Mactan Cebu International Airport value shall be determined by
Authority v. Marcos, G.R. No. 120082, dividing the remaining economic
September 11, 1996) life of the machinery by its
estimated economic life and
Note: All exemptions previously granted (not falling multiplied by the replacement or
within the above enumeration) are withdrawn upon reproduction cost.
the effectivity of the LGC. (LGC, Sec. 234) i. Depreciation allowance
shall only be 5% of
Persons may likewise be exempt from payment of original cost for each year
real properties if their charters, which were enacted of use
or reenacted after the effectivity of the Local ii. If the machinery is still
Government Code, exempt them from payment of useful and operational,
real property taxes. (City of Lapu-Lapu v. PEZA, the value shall not be less
G.R. No. 184203, November 26, 2014, J. Leonen) than 20% of its original
value
Proof of Tax Exemption
File with the local assessor within 30 days from a. Classes of Real Property
date of declaration of real property sufficient
documentary evidence in support of such claim (i.e. A. Ordinary (LGC, Sec. 215)
corporate charters, title of ownership, articles of a. Residential
incorporation, contracts, affidavits, etc.) (LGC, Sec. b. Agricultural
206) c. Commercial
d. Industrial
If the required evidence is not submitted, the e. Mineral
property shall be listed as taxable in the assessment f. Timberland
roll. However, if the property shall be proven to be B. Special (LGC, Sec. 216)
tax exempt, the same shall be dropped from the a. Lands, buildings, and other
assessment roll. (LGC, Sec. 206) improvements actually, directly,
and exclusively used for hospitals,
Difference between local business taxes and cultural, or scientific purposes, and
real property taxes in terms of the power of LGU b. Those owned and used by local
to grant exemption: water districts and GOCCs
a. For real property tax - the LGU cannot add rendering essential public services
to the exemptions stated in the LGC. in the supply and distribution of
b. For local business taxes, the LGU are free water and electricity.
to grant exemptions.
Duty to declare real property
4. Appraisal and Assessment GR: Owner or Administrator or Acquirer of the Real
Property Sec. 202 and 203, LGC)
Appraisal • Sworn statement declaring the true
1. Real Property - All real property shall be value of their property
appraised at the current and fair market • Shall contain a description of the
value prevailing at the locality where the property sufficient in e ai to enable the
property is situated. (LGC, Sec. 201) assessor or his deputy to identify the
2. Machinery - same for assessment purposes.
a. If brand-new machine: Acquisition EXCEPTION: Assessor, if the owner or
cost (AC) administrator refuses or fails for any reason to make
i. If imported: AC includes such declaration within the time prescribed
freight, insurance, bank
and other charges, Filing of Sworn Declaration
brokerage, arrastre and 1. If by the owner or administrator
handling, duties and a. Every three (3) years during the
taxes, plus cost of inland period of January 1 to June 30
transportation, handling, commencing with the calendar
and installation charges year 1992
at the present site. 2. If by the acquirer

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a. Earlier between b. Barangay treasurer, if deputized by the

i. Completion or occupancy treasurer and upon filing a bond; (LGC, Sec.
of the improvement or 247) and
ii. Within Sixty (60) days c. Provincial treasurer, at the option or
after the acquisition of convenience of the owner. (IRR of LGC, Art.
such property or upon, 338)
whichever comes earlier.
Other Duties of the Local Treasurer
Idle Lands (Sec. 237, LGC) The local treasurer shall:
1. Agricultural land 1. Prepare a certified list of all RPT
a. With more than one (1) hectare in delinquencies which remained uncollected
area or unpaid for at least 1 year in his
b. Suitable for cultivation, dairying, jurisdiction;
inland fishery, and other 2. Statement of the reason for such non-
agricultural uses collection or non-payment; and
c. One-half (½) remain uncultivated 3. Submit the list to the Sanggunian on or
or unimproved before December 31st of the year
2. Other than agricultural immediately succeeding the year in which
a. Located in a city or municipality the delinquencies were incurred, with a
b. With more than one-thousand request for assistance in the enforcement
(1,000) square meters in area of the remedies for collection. (LGC, Sec.
c. One-half (½) remain uncultivated 269)
or unimproved
Notice of Time for Collection of Tax
A province or city, or a municipality within the a. Basic RPT: on or before January 31 each year
Metropolitan Manila Area, may levy an annual tax b. Additional tax for SEF: on or before January
on idle lands at the rate not exceeding five percent 31 each year
(5%) of the assessed value of the property which c. Other additional RPT: date prescribed by the
shall be in addition to the basic real property tax Sanggunian
(Sec. 236, LGC).
The city or municipal treasurer shall post the notice
b. Assessment Based on of the dates when the tax may be paid without
Actual Use interest at a conspicuous and publicly accessible
place at the city or municipal hall. Said notice shall
Real property shall be classified, valued, and likewise be published in a newspaper of general
assessed based on the Actual Use of the property, circulation in the locality once a week for two (2)
regardless of where located, who owns it, and consecutive weeks. (LGC, Sec. 249)
whenever uses it. (LGC, Sec. 217)
Special Rules on Payment
Unpaid real estate taxes attach to the property and a) Payment in Installments
are generally chargeable against the owner of the
property at the time the tax accrues. (Herarc Realty 4 equal installments:
Corp. v. Provincial Treasurer of Batangas, G.R. No. • 1st: on or before March 31
210736, September 5, 2018) • 2nd: on or before June 30
• 3rd: on or before September 30
The contractual assumption to pay real property tax, • 4th: on or before December 31 (LGC, Sec.
by itself, is not sufficient to make one legally 250)
compellable by the government to pay the taxes
due; the person liable must also have use and Note: This scheme is only for Basic RPT and
possession of the property. additional tax for SEF. For special levy and other
RPT, the payment of which shall be governed by
5. Collection ordinance of the Sanggunian. (LGC, Sec. 250)

Collecting Authority Payments of RPT shall first be applied to prior

a. City or municipal treasurer; years’ delinquencies, interests, and penalties, and
only after said delinquencies are settled may tax

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payments be credited for the current period. (LGC, b. Judicial action. (LGC, Sec. 256)
Sec. 250)
a. Administrative Remedies
b) Interests on unpaid RPT 1. Levy on real property, and
In case of failure to pay upon the expiration of the 2. Sale of real property at public auction.
periods, or when due, the taxpayer shall be subject (IRR of LGC, Art. 347)
to the payment of interest.
Issuance of Notice of Delinquency
RATE: 2% per month on the unpaid amount but in 1. When the RPT becomes delinquent, the
no case shall the total interest exceed 36 months. treasurer shall immediately post a notice of the
(LGC, Sec. 255) delinquency at the main hall and in a publicly
accessible and conspicuous place in each
c) Tax Discount for Advanced and Prompt barangay of the LGU. It shall also be published
Payment once a week for 2 consecutive weeks in a
The Sanggunian may grant a discount for the newspaper of general circulation in the
following: province, city, or municipality.
• Advanced payment – discount not exceeding 2. Specify the date upon which the tax became
20% of annual tax due (LGC, Sec. 251) delinquent.
• Prompt payment - discount not exceeding 3. State that personal property may be distrained
10% of annual tax due (IRR of LGC, Art. 342) to effect payment unless the tax liabilities be
paid before such distraint.
Note: This rule only applies to basic RPT and SEF 4. If not paid, the delinquent real property will be
tax. sold at public auction, except when the notice
of assessment or special levy is contested.
a. Date of Accrual 5. However, the sale is subject to right of
redemption within 1 year from the date of such
Date of Accrual sale. (LGC, Sec. 254)
The RPT for any year shall accrue on the 1st day of
January. It shall constitute a lien from such date Local Governments Lien
and shall only be extinguished upon payment of the The RPT constitutes a lien on the property subject
delinquent tax. (LGC, Sec. 246) to tax, superior to all liens, charges or
encumbrances in favor of any person, irrespective
b. Periods to Collect of the owner or possessor, and may only be
extinguished upon payment of the tax and the
Periods to Collect related interests and expenses. (LGC, Sec. 257)
GR: Within 5 years from the date they become due;
EXCEPTION: Within 10 years from discovery, in Levy on Real Property
case of fraud or intent to evade. (LGC, Sec. 270) Note: The process for Levy on Real Property for
Real Property Taxes is substantially similar with the
When Period of Prescription Shall be process on Levy for Local Government Taxes in
Suspended General. Please refer to the illustrations above.
a. When local treasurer is legally prevented from
collecting the tax; Sale of Real Property at Public Auction
b. Owner or the person having legal interest Advertisement: Within 30 days after service of the
requests for reinvestigation and executes a warrant of levy, the local treasurer shall proceed to
waiver in writing before the expiration of the publicly advertise for sale or auction the property to
period; satisfy the tax delinquency and expenses of sale.
c. Owner or the person having legal interest is out The advertisement shall be effected by posting a
of the country or cannot be located. (LGC, Sec. notice at the main entrance of the provincial, city or
270) municipal building, and in a publicly accessible and
conspicuous place in the barangay where the real
c. Remedies of Local property is located, and by publication once a week
for 2 weeks in a newspaper of general circulation in
Government Units the province, city or municipality where the property
is located. The advertisement shall specify the
Remedies, In General [A-Ju]
following: [DaDe-APO]
a. Administrative action thru levy on real property;

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1. Amount of the delinquent tax, the interest due

thereon and expenses of sale, Possession of the Real Property Prior to
2. Date and Place of sale, Redemption
3. Name of the Owner of the real property or From the date of sale until the expiration of the
person having legal interest therein, and period of redemption, the delinquent real property
4. Description of the property to be sold. shall remain in possession of the owner or person
having legal interest therein who shall be entitled to
By ordinance, the local treasurer may advance an the income and other fruits thereof. (LGC, Sec. 261)
amount sufficient to defray the costs of collection.
(LGC, Sec. 260) Purchase of Property by the LGU for Want of
Bidder
Redemption of Property Sold In case there is no bidder, the local treasurer shall:
Within 1 year from the date of sale, the owner of the • Purchase the real property advertised for sale
delinquent real property or person having legal in behalf of the LGU to satisfy the claim, if there
interest therein shall have the right to redeem the is no bidder.
property upon payment to the local treasurer of the • Make a report of his proceedings within 2 days.
amount of the following:
• delinquent tax, The Registrar of Deeds, upon registration, shall
• interest due, transfer the title of the forfeited property to the LGU
• expenses of sale from the date of without the necessity of an order from a competent
delinquency to the date of sale court. (LGC, Sec. 263)
• interest of not more than 2% per month on
the purchase price from the date of sale to Note: The sale is still subject to 1 year right of
the date of redemption. (LGC, Sec. 261) redemption. If the property is not redeemed, the
ownership shall be vested on the LGU. (LGC, Sec.
The period of redemption of tax delinquent 263)
properties should be counted not from the date of
registration of the certificate of sale, but on the date Resale by LGU
of sale of the tax delinquent property (City of Davao The Sanggunian may, upon notice of not less than
v Intestate Estate of Amado Dalisay, G.R. No. 20 days, sell and dispose of the real property
207791, 2015) acquired. The proceeds of the sale shall accrue to
the general fund of the LGU. (LGC, Sec. 264)
However, a special law prevails over a general law.
Thus, the Quezon City Revenue Code of 1993 Further Distraint or Levy
prevailed over the 1991 Local Government Code in Levy may be repeated if necessary until the full
that the redemption period was reckoned, not from amount due, including all expenses, is collected.
the date of sale of the property, but from the date (LGC, Sec. 265)
of annotation of sale of the property at the proper
registry as stated in the QC Revenue Code. (City Take Note that distraint is expressly allowed by Sec.
Mayor of Quezon City v. Rizal Commercial Banking 254(b), which reads:
Corporation, GR No. 171033, 2010)
Such notice shall specify the date upon which the
Effects of Redemption tax became delinquent and shall state that personal
1. It shall invalidate the certificate of sale property may be distrained to effect payment.
issued to the purchaser. The local treasurer
shall return to the purchaser the entire
amount paid by him plus interest of not
more than 2% per month;
2. The owner of the delinquent real property
or person having legal interest therein shall
be entitled to a certificate of redemption
which shall be issued by the local treasurer;
and
3. The property shall be free from lien of such
delinquent tax, interest due thereon and
expenses of sale. (LGC, Sec. 261)

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6. Taxpayer’s Remedies
Summary of Administrative Actions
a. Contesting an Assessment
1) Lien – the RPT constitutes a lien on the
property subject to tax, superior to all liens, Erroneous Assessment vs. Illegal Assessment
charges or encumbrances. (LGC, Sec. 257) An erroneous assessment presupposes that the
2) Levy on real property – real property subject taxpayer is subject to the tax but is disputing the
to such tax may be levied upon through the correctness of the amount assessed. With an
issuance of a warrant. Levy may be repeated erroneous assessment, the taxpayer claims that the
if necessary until the full amount due, local assessor erred in determining any of the items
including all expenses, is collected. (LGC, for computing the real property tax, i.e., the value of
Secs. 258 & 265) the real property or the portion thereof subject to the
3) Distraint – personal property may be tax and the proper assessment levels. In case of an
distrained to effect payment. (LGC, Sec. 254) erroneous assessment, the taxpayer must exhaust
4) Sale of real property at public auction (LGC, the administrative remedies provided under the
Sec. 260) LGC.
5) Purchase of real property for want of bidder
(LGC, Sec. 263) On the other hand, an assessment is illegal if it was
made without the authority under the law. In case of
an illegal assessment, the taxpayer may directly
b. Judicial Remedies resort to judicial action without paying under protest
The judicial remedy is availed of in the court of the assessed tax and filing an appeal with the Local
appropriate jurisdiction. These remedies are and Central Boards of Assessment Appeals. (City of
cumulative, simultaneous and unconditional, that Lapu- Lapu v. PEZA, G.R. Nos. 184203 and
is, any or all of the remedies or combination thereof 187583, 2014)
may be resorted to and the use or non-use of one
remedy shall not be a bar against the institution of File Protest with Treasurer
the others. Formal demand for the payment of the Where to file: To the local treasurer
delinquent taxes and penalties due is not a pre- When to file: Within 30 days from payment of the
requisite to such remedies. The notice of tax
delinquency shall be sufficient. (IRR of LGC, Art. Period to decide: 60 days from receipt (LGC, Sec.
347) 252)
Civil Action Refunds or Credits of RPT
The LGU may enforce the collection of the RPT by If the protest is granted, the amount or portion of
civil action in any court of competent jurisdiction. It the tax protested shall be:
shall be filed by the local treasurer within the period a) Refunded to the protestant, or
required. (LGC, Sec. 266) b) Applied as tax credit against his existing or
future tax liability.
Who Shall File
Provincial attorney or city or municipal legal officer If the protest is denied or upon the lapse of the 60-
shall file, within 15 days after the receipt of the day period to decide, the taxpayer may appeal in
documents provided by the local treasurer, the civil accordance with the rules on appeal below. (LGC,
action in the name of the province, city, or Sec. 252)
municipality in the proper court of competent
jurisdiction. (IRR of LGC, Art. 357) Repayment of Excessive Collections
When an assessment is found to be illegal or
Duty of the local treasurer erroneous and the tax is accordingly reduced or
The local treasurer shall furnish the following to the adjusted, the taxpayer may file a written claim for:
provincial attorney or city or municipal legal officer: a) Refund; or
1. a certified statement of delinquency; and b) Credit for taxes and interests. (LGC, Sec. 253)
2. exact address of the defendant where he
may be served with summons. (IRR of Where to file: To the local treasurer.
LGC, Art. 357) When to file: Within 2 years from the date the
taxpayer is entitled to such reduction or adjustment.
Period to decide: Within 60 days from receipt.

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In case of denial, the taxpayer may appeal in accordance with the remedies provided in the LGC.
accordance with the rule on appeal below. (Republic vs. City of Kidapawan, G.R. No. 166651,
2005)
i. Payment Under Protest; Exceptions
A day before the scheduled sale at public auction
Payment Under Protest of the properties of MWSS, it filed before the CA,
No protest shall be entertained unless the taxpayer instead in RTC, a Petition for Certiorari and
pays the tax first. There shall be annotated on the Prohibition with Prayer for the Issuance of a TRO
tax receipts the words "paid under protest". The tax and/or Writ of Preliminary Injunction. The CA ruled
paid under protest shall be held in trust by the that MWSS need not exhaust administrative
treasurer. (LGC, Sec. 252) remedies since the issue involved a purely legal
question. It Noted, however, that the Petition
EXCEPTIONS: should have been first filed before the RTC, which
a. Prior payment is not required when the shares concurrent jurisdiction with the CA over
taxpayer is questioning the very authority and petitions for certiorari and prohibition. Nonetheless,
power of the assessor to impose the it proceeded to resolve the case on its merits. The
assessment and of the treasurer to collect the SC agreed. (MWSS v. The Local Government of
tax. (Jardine Davies Insurance Brokers, Inc. v. Quezon City, G.R. No. 194388, 2018)
Aliposa, 398 SCRA 176, 2003);
b. Posting a surety bond that covers the tax in Actions by the LBAA
question is substantial compliance of the Quantum of evidence required: Substantial
requirement of payment under protest. evidence – such relevant evidence on record as a
(Meralco v. City Assessor and City Treasurer reasonable mind might accept as adequate to
of Lucena City, G.R. No. 166102, 2015); support the conclusion.
c. In case of illegal assessment, the taxpayer
may directly resort to judicial action without Period to decide: 120 days from the date of receipt
paying under protest the assessed tax. (City of appeal
of Lapu- Lapu v. PEZA, G.R. Nos. 184203 and
187583, 2014) In the exercise of its appellate jurisdiction, the LBAA
shall have the following powers:
b. Contesting a Valuation of a. Summon witnesses,
Property b. Administer oaths,
c. Conduct ocular inspection,
i. Appeal to the Local Board of Assessment d. Take depositions, and
Appeals (LBAA) e. Issue subpoena and subpoena duces
tecum.
Who can file an appeal: Any owner or person
having legal interest in the property who is not The proceedings of the LBAA shall be conducted
satisfied with the assessment of his property solely for the purpose of ascertaining the facts
Where to file: without necessarily adhering to technical rules
1. LBAA of the provincial or city; (LGC, Sec. applicable in judicial proceedings.
226) or
2. Municipal Board of Assessment Appeals If the provincial or city assessor concurs in the
(MBAA) – in case of municipalities within revision or the assessment, he shall notify the
MMA (IRR of LGC, Art. 317) owner or the person having legal interest of such
When to file: Within 60 days from the date of fact. (LGC, Sec. 229)
receipt of the written notice of assessment
How: By filing a petition under oath, together with ii. Appeal to the Central Board of Assessment
copies of the tax declarations and such affidavits or Appeals (CBAA)
documents submitted in support of the appeal.
Who can appeal: Those who were not satisfied
Failure to appeal within the statutory period renders with the decision of the LBAA, either: [OA]
the assessment final and unappealable. (Victorias • Owner or the person having legal interest or
Milling v. CTA, G.R. No. L-24213, 1968) • Assessor
Where to file: CBAA
Filing of a petition for injunction before the RTC When to file: Within 30 days after receipt of the
upon the issuance of a warrant of levy is not in decision of the LBAA (LGC, Sec. 229)

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Note: The decision of the CBAA shall be final and tax delinquency, should not be required of NHA,
executory. (LGC, Sec. 229) being a tax-exempt entity, before it can bring suit
assailing the validity of the auction sale. Hence, its
Effect of Appeal on the Payment of RPT tax exemption extends to RPT. (National Housing
It does not suspend the collection of the RPT as Authority v. Iloilo City, GR No. 172267, 2008)
assessed by the provincial or city assessor, without
prejudice to subsequent adjustment depending Taxpayer's Remedies Against Special Levy
upon the final outcome of the appeal. (LGC, Sec. Any owner of real property affected by a special levy
231) or any person having a legal interest therein may,
upon receipt of the written notice of assessment of
Appeal to CTA En Banc the special levy, appeal to LBAA. (LGC, Sec. 244)
The Court of Tax Appeals En Banc shall exercise
exclusive appellate jurisdiction to review by appeal iii. Effect of Payment of Taxes
the decisions of the CBAA in the exercise of its
appellate jurisdiction over cases involving the Extinguishment of Lien on Real Property
assessment and taxation of real property originally The RPT constitutes a lien on the property subject
decided by the provincial or city board of to tax, superior to all liens, charges or
assessment appeals. (Revised Rules of the CTA, encumbrances in favor of any person, irrespective
Rule 4, Sec. 2(e)) of the owner or possessor, and may only be
extinguished upon payment of the tax and the
A party adversely affected by a decision or ruling of related interests and expenses. (LGC, Sec. 257)
the CBAA and the RTC in the exercise of their
appellate jurisdiction may appeal to the CTA en Payments of RPT shall first be applied to prior years’
banc by filing before it a petition for review under delinquencies, interests, and penalties, and only
Rule 43 of the ROC within 30 days from receipt of after said delinquencies are settled may tax
a copy of the questioned decision or ruling. payments be credited for the current period. (LGC,
(Revised Rules of the CTA, Rule 8, Secs. 3(c), 4(c)) Sec. 250)

Appeal to Supreme Court Payment under Protest (LGC, Sec. 252)

Appeal must be filed within 15 days from receipt of (See above)
decision of the CTA en banc (Rules of Court, Rule
45) Sale of Real Property at Public Auction
If the owner of the real property pays the delinquent
Other Remedies tax, the interest due and the expenses before the
intended sale, the sale at public auction shall be
Action Assailing Validity of Sale at Public stayed. (LGC, Sec. 260)
Auction
No court shall entertain any action assailing the Payment of Delinquent Taxes on Property
validity or any sale at public auction of real property Subject of Controversy
until the taxpayer shall have deposited with the court In any action involving the ownership or possession
the amount for which the real property was sold plus of, or succession to real property, the court may,
interest of 2% per month from the date of sale to the motu propio or upon representation of the local
time of the institution of the action. treasurer, award such ownership, possession, or
succession to any party to the action upon payment
Purpose: The amount so deposited shall be paid to to the court of the taxes with interest due on the
the purchaser at the auction sale if the deed is property and all other costs that may have accrued,
declared invalid but it shall be returned to the subject to the final outcome of the action. (LGC,
depositor if the action fails. Sec. 268)

The court can only declare a sale at public auction c. Compromise of Real
invalid if the substantive rights of the delinquent Property Tax Assessment
owner or the person having legal interest have been
impaired, and not just by reason of irregularities or Condonation or Reduction of RPT and Interest
informalities. (LGC, Sec. 267) [SaP]
1) By the Sanggunian
However, the bond mandated in Section 267, The Sanggunian, by ordinance passed prior to
whose purpose it is to ensure the collection of the January 1 of any year, and upon recommendation

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of the Local Disaster Coordinating Council, may follow the LBAA

condone or reduce the real property tax and and CBAA
interest for the succeeding years in the city or rules on appeal
municipality affected by the following instances: above.
• General failure of crops
• Substantial decrease in the price of APPLICA- Appeal 1. If unsatisfied
agricultural or agri-based products BLE TO with the
• Calamity. (LGC, Sec. 276) BOTH decision of the
REMEDIES CBAA, appeal
2) By the President ABOVE to the CTA En
The President may condone or reduce the real Banc within 30
property tax and interest when public interest so days from
requires. (LGC, Sec. 277) receipt of
decision.
Whenever the local assessor sends a notice to the 2. If still
owner or lawful possessor of real property of its unsatisfied,
revised assessed value, the former shall thereafter appeal to SC
no longer have any jurisdiction to entertain any within 15 days
request for a review or readjustment. The from the receipt
appropriate forum where the aggrieved party may of decision.
bring his appeal is the LBAA, as provided by law.
(Callanta v. Office of the Ombudsman, GR Nos.
115253-74, 1998)

Summary of Taxpayer’s Remedies

REMEDIES GROUNDS PROCEDURE
REMEDY To question 1. Appeal to the
AGAINST the valuation LBAA within 60
ASSESS- of the real days from date
MENT property of receipt of the
written notice of
assessment
2. The LBAA has
120 days from
receipt of the
appeal to decide
3. If still
unsatisfied,
appeal to the
CBAA within 30
days from
receipt of the
decision
PAYMENT To question 1. Pay under
UNDER the protest
PROTEST assessment 2. File a protest
AND TAX with the local
REFUND (i.e., reason- treasurer within
OR nableness or 30 days from
CREDIT correctness payment
of the 3. Treasurer has
amount 60 days to
assessed) resolve the
protest
4. In case of
denial or lapse
of 60 days,

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Questioning the Valuation of Real Property Protesting the Assessment of RPT

Pay the tax under protest Declaration of real property once every 3 years

Within 30 days from payment, file a written

protest with the Treasurer
Assessor prepares the Assessment Rolls

Treasurer shall decide within 60 days from

receipt of protest
Within 30 days from the assessment, the
assessor sends notice of assessment to the
owner

Granted Denied/No action

Within 60 days from receipt of notice, the

owner may appeal the assessment to LBAA

Within 2 years Within 60 days

from entitlement from receipt of
to reduction or decision or after
adjustment, file 60 days of
inaction, appeal to LBAA shall decide within 120 days from the
a written claim receipt of protest
for refund or tax LBAA – 120 days
credit to decide

If denied by LBAA, within 30 days from receipt

Within 30 days of decision, the owner may appeal to CBAA
Treasurer shall from receipt of
decide within 60 notice of adverse
days from decision, appeal to
receipt of claim CBAA If denied by CBAA, within 30 days from receipt
of decision, the owner may appeal to CTA en
banc

Granted Denied Within 30 days

from receipt of If denied by the CTA en banc, within 15 days
decision, appeal to from receipt of decision, the owner may
CTA en banc appeal to SC
Refund/ Follow
Credit the rules Levy of Real Property and Procedures If There
on is No Bidder Upon Sale at Public Auction
appeal Within 15 days
to LBAA from receipt of Process is similar to Levy on Local Taxes and
decision, appeal to Procedure for no bidder respectively, please refer to
SC the previous diagrams.

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Judicial Remedies for Collection

Treasurer shall furnish the provincial

attorney/city or municipal legal officer the
following:

a. Certified statement of delinquency

b. Exact address of the defendant where to
serve the summons

Within 15 days after receipt of the documents,

the provincial attorney/city or municipal legal
officer shall file the civil action in the name of the
province, city, or municipality in the court of
competent jurisdiction

-- end of topic –

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IV. JUDICIAL REMEDIES A. COURT OF TAX APPEALS (CTA)

Features of the CTA

TOPIC OUTLINE UNDER THE SYLLABUS 1. A highly specialized body specifically created
for the purpose of reviewing tax cases.
A. COURT OF TAX APPEALS (CTA) (Philippine Refining Company v. CA, G.R. No.
1. Exclusive Original and Appellate 118794, 1996)
Jurisdiction Over Civil Cases 2. A Court of special or limited jurisdiction, and as
2. Exclusive Original and Appellate such, it can only take cognizance of such matter
Jurisdiction over Criminal Cases clearly within its jurisdiction (Ker v. CTA, G.R.
No. L-12396, 1962)
B. PROCEDURES 3. Proceedings are judicial in nature, although the
1. Filing of an Action for Collection of Taxes CTA is not bound by the technical rules of
a. Internal Revenue Taxes evidence (R.A. No. 1125, as amended, Sec. 8)
b. Local Taxes
2. Civil Cases Declaratory Relief in Tax Cases
a. Who May Appeal, Mode of Appeal, and In CIR v. Standard Insurance Co., Inc., G.R. No.
Effect of Appeal 219340, November 17, 2018, Respondent filed a
b. Suspension of Collection of Taxes declaratory relief action in the RTC to determine the
c. Injunction Not Available to Restrain constitutionality of Sections 108 and 184 of the Tax
Collection Code with respect to taxes paid by non-life
3. Criminal Cases insurance companies.
a. Institution and Prosecution of Criminal
Action One of the elements for a proper declaratory relief is
b. Institution of Civil Action in Criminal that adequate relief is not available through other
Action means. However, the correct remedy was to appeal
c. Period of Appeal the assessment with the CTA. The Court ruled that
4. Appeal to the CTA En Banc the RTC did not have jurisdiction as the declaratory
5. Petition for Review on Certiorari to the SC relief action was procedurally improper as a remedy.

1. Exclusive Original and Appellate

Jurisdiction over Civil Cases

Cases Within the Jurisdiction of the Court En

Banc

1. Decisions or resolutions on MRs or MNTs of the

Court in Division in the exercise of its exclusive
appellate jurisdiction over:

a. Cases arising from administrative

agencies;
b. Local tax cases decided by the RTCs in the
exercise of their original jurisdiction;
c. Tax collection cases decided by RTCs in
the exercise of their original jurisdiction
involving final and executory assessments
for taxes, fees, charges, and penalties,
where the principal amount of taxes and
penalties claimed is less than
P1,000,000; or
d. Criminal offenses arising from violations of
the NIRC or TCC and other laws
administered by the BIR or BOC.

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2. Decisions, resolutions or orders on MRs or In case the CIR fails to act on the disputed
MNTs of the Court in Division in the exercise of assessment within the 180-day period from date
its exclusive original jurisdiction over: of submission of documents, a taxpayer can
either:
a. Tax collection cases; or 1. File a petition for review with the CTA
b. Cases involving criminal offenses arising within 30 days after the expiration of the
from violations of the NIRC or TCC and 180-day period, or
other laws administered by the BIR or BOC 2. Await the final decision of the
Commissioner or the disputed
3. Decisions, resolutions or orders of the RTCs in assessments and appeal such final
the exercise of its appellate jurisdiction over: decision to the CTA within 30 days after
receipt of a copy of such decision.
a. Local tax cases
b. Tax collection cases; or However: These options are mutually
c. Criminal offenses arising from violations of exclusive, and resort to one bars the application
the NIRC or TCC and other laws of the other.
administered by the BIR or BOC
Definition of “Other Matters”
Real property tax cases decided by the RTC are not The term other matters is limited only by the
under the CTA’s jurisdiction. Decisions, orders, and qualifying phrase that follows it. The appellate
resolutions of the RTC in local tax cases do not jurisdiction of the CTA is not limited to cases
include real property tax which is an ad valorem tax. which involve decisions of the CIR on matters
The jurisdiction of the CTA involves only those real relating to assessments or refunds. The second
property tax cases originally decided by the CBAA part of the provision covers other cases that arise
in the exercise of its appellate jurisdiction (Habawel out of the NIRC or related laws administered by
v. CTA, GR No. 174759, 2011) the BIR. (CIR v. Hambrecht & Quist PHL, G.R.
No. 169225, 2010)
4. Decisions of the CBAA in the exercise of its
appellate jurisdiction over cases involving 2. Decisions, orders or resolutions of the RTCs
assessment and taxation of real property in local tax cases decided or resolved by them
originally decided by the provincial or city board in the exercise of their original jurisdiction
of assessment appeals. (Sec. 2, Rule 4, A.M.
No. 05-11-07-CTA) 3. Decisions of the Commissioner of Customs

Cases Within the Jurisdiction of the Court in a. In cases involving liability for customs
Divisions duties, fees, or other money charges,
1. Decisions of or inaction of the CIR seizure, detention or release of property
a. In cases involving disputed assessments, affected, fines, forfeitures of other penalties
refunds of internal revenue taxes, fees or in relation thereto; or
other charges, penalties in relation thereto; b. Other matters arising under the Customs
or Law or other laws administered by the
b. Other matters arising under the NIRC or Bureau of Customs
other laws administered by the BIR
4. Decisions of the Secretary of Finance on
CTA Jurisdiction Covers CIR Inaction customs cases elevated to him automatically for
The jurisdiction of the CTA has been expanded review from decisions of the Commissioner of
to include not only decisions or rulings but also Customs which are adverse to the Government
inaction as well of the CIR. (RCBC v. CIR, G.R. under Section 2315 of the TCC.
No. 168498,2007)
5. Decisions of the DTI Secretary in the case of
The inaction by the CIR within the 180-day period non-agricultural product, commodity or article
under Sec. 228 of the NIRC is deemed a denial and the DA Secretary in case of agricultural
for purpose of allowing the taxpayer to appeal product, commodity or article, involving dumping
with the CTA but it does not necessarily and countervailing duties under Sections 301
constitute the CIR’s formal decision (Revised and 302 of the TCC and safeguard measures
Rules of the Court of Tax Appeals “RRCTA”, under the Safeguard Measures Act (RA 8800)
Sec. 3[a][2], Rule 4) where either party may appeal the decision to

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impose or not to impose said duties. (Rule 4, judicial or quasi-judicial functions. Thus, the same is
A.M. No. 05-11-07-CTA, Section 3[a]) outside the scope of a petition for certiorari. The
Court lastly ruled that it shall not entertain a direct
CTA Jurisdiction Over a Special Civil Action for resort to them unless there are exceptional and
Certiorari Assailing an Interlocutory Order compelling circumstances. (Clark Investors and
While RA 9282 does not contain a categorical Locators Association, Inc. v. CIR, G.R. No. 200670,
statement which vests to the CTA jurisdiction over 2015)
petitions for certiorari on orders by the RTC on local
tax cases, the grant of appellate jurisdiction on local Tax Cases NOT filed with the CTA but with SOJ
tax cases leads to an assumption that the law P.D. 242 expressly provides that all disputes and
intended to transfer also such power as is deemed claims solely between governmental agencies and
necessary if not indispensable in aid of such offices, including GOCCs, shall be administratively
appellate jurisdiction. The Court pointed out that to settled or adjudicated by the SOJ, the Solicitor
confer the power over certiorari petitions to the General, or the Government Corporate Counsel,
Court of Appeals would create a “split-jurisdiction” depending on the issues and government agencies
situation which is anathema to the orderly involved. As this case only involves questions of
administration of justice. Thus, the power of the CTA law, the SOJ has jurisdiction. This rule applies when
to rule on petitions for certiorari on interlocutory there are no private parties involved. As the
orders issued by the RTC in local tax cases is President has control over all executive
included in the powers granted by the Constitution departments, intra-government disputes are beyond
as well as inherent in the exercise of its appellate the scope of judicial review and courts, including the
jurisdiction. (City of Manila v. Grecia-Cuerdo, G.R. CTA, cannot intrude in the executive function. The
No. 17523, 2014) fact that P.D. 242 is a special law and the Tax Code
is a general law is also basis to apply the former.
DOJ Resolution in a Preliminary Investigation The decision of the SOJ is appealable to the Office
Involving Tax and Tariff Offenses of the President and then onwards to the Court of
Under RA 9282, the rule on where to appeal Appeals but the Supreme Court nevertheless
decisions of the Secretary of the DOJ is no longer decided on the issue to not further delay the
clear. However, as stated in Grecia-Cuerdo, split- disposition of the same. (PSALM vs. CIR, G.R. No.
jurisdiction is frowned upon and such principle 198146, 2017)
should be interpreted to carry forward to a DOJ However, the CTA has exclusive appellate
resolution in a preliminary investigation involving jurisdiction to decide the dispute between the BIR
tax and tariff offenses. The oversight and a Constitutional Commission, such as the
notwithstanding, the Court relaxed the rule given COMELEC, on deficiency tax assessment. (CIR vs.
that the Grecia-Cuerdo decision just came out COMELEC, G.R. No. 244155, 2021))
recently but instead of remanding the case to the
CTA, the Court decided to rule on the same. (BOC 2. Exclusive Original and Appellate
v. Devanadera, G.R. No. 193253, 2015) Jurisdiction Over Criminal
Cases
Regulatory Fees Not Within CTA Jurisdiction
The primary reason for the CTA’s lack of jurisdiction
is that what was imposed under the questioned Exclusive Original Jurisdiction
ordinance are not taxes but are instead regulatory The CTA shall exercise exclusive original
fees, specifically to address the environmental jurisdiction over all criminal cases where the
depredation of the said special projects. As such, principal amount involved of taxes and fees is
the case that originated from the RTC is not P1,000,000 or more, exclusive of charges and
considered a local tax case over which the CTA has penalties, arising from violations of the NIRC, TCC
jurisdiction. (Smart Communication v Municipality of and other laws administered by the BOC or the BIR.
Malvar, G.R. No. 204429, 2014)
Exclusive Appellate Jurisdiction
A Taxpayer Cannot File a Petition For Certiorari Appeals from judgments, resolutions or orders of the
Under Rule 65 Directly to the Supreme Court to RTCs in tax cases originally decided by them in their
Question a Revenue Regulation respective territorial jurisdiction; and
The CIR and the Secretary of Finance issued the
regulations on the excise tax on importation of Petitions for review of the judgments, resolutions or
petroleum products into the BCDA in the exercise of orders of the RTCs in the exercise of their appellate
their quasi-legislative or rule-making powers, not

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jurisdiction over tax cases originally decided by the over tax collection cases originally decided by
MeTCs, MTCs or MCTCs. MTC.

Summary Prescriptive Period

Appealable to the CTA --- A party adversely affected by a decision, ruling or
• Ruling of SOF on RRs, RMCs, rulings, the inaction of the Commissioner of Internal
etc. Revenue on disputed assessments or claims for
• Interlocutory orders by RTC on local tax refund of internal revenue taxes, or by a decision or
cases ruling of the Commissioner of Customs, the
• Tax collection cases (of duties) from Secretary of Finance, the Secretary of Trade and
RTC Industry, the Secretary of Agriculture, or a Regional
• SOJ’s decision dismissing filing of Trial Court in the exercise of its original jurisdiction
criminal case under TCCP may appeal to the Court by petition for review filed
within 30 days after receipt of a copy of such
Appealable to the SC --- decision or ruling, or expiration of the period
fixed by law for the CIR to act on the disputed
• Ruling of SOF if there are compelling
assessments.
circumstances
• Pure question of law (Alta Vista case
In case of inaction of the Commissioner of Internal
supra)
Revenue on claims for refund of internal revenue
taxes erroneously or illegally collected, the taxpayer
SOF has jurisdiction to review COC’s issuance
must file a petition for review within the two-year
(CMC) as an exercise of quasi-legislative function
period prescribed by law from payment or collection
of the taxes.
In local tax collection cases, the amount of the
claim determines where the case should be filed.
See earlier discussion under Protesting an
(China Banking Corporation v. City Treasurer of
Assessment for Taxpayer’s Remedies.
Manila, G.R. No. 204117, 2015)
• When the claim does not exceed
Judicial Claim to CTA for VAT Return
P300,000 (or P400,000 in Metro Manila),
See earlier discussion under Refund or tax credit of
the case should be filed in the MTC, not
excess input tax.
the RTC.
• The RTC exercises appellate jurisdiction
b. Local Taxes
in those cases.
See discussion under the chapter of Local
B. PROCEDURES Taxes)

1. Filing of an Action for Collection 2. Civil Cases

of Taxes
a. Who may Appeal, Mode of
a. Internal Revenue Taxes Appeal, and Effect of Appeal

The CTA has exclusive jurisdiction over the Who may Appeal
following cases involving tax collection: 1. Any party adversely affected by a
1. Original jurisdiction in tax collection cases decision, ruling, or the inaction of:
involving final and executory assessments for • CIR
taxes, fees, charges and penalties where the • COC
principal amount of taxes and fees, exclusive of • DOF Secretary
charges and penalties, claimed is P1,000,000 or • DTI Secretary
more. • DA Secretary
2. Appellate jurisdiction over appeals from the • RTC (in the exercise of its original
judgment, resolutions or orders of the RTC in tax jurisdiction)
collection cases originally decided by them 2. A party adversely affected by a decision
within their respective jurisdiction. or resolution of a Division on a MR or
3. Over petitions for review of the decisions of the MNT
RTC in exercise of their appellate jurisdiction

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3. A party adversely affected by a decision or CBAA or RTC in the exercise of its

ruling of the CBAA and the RTC in the appellate jurisdiction
exercise of their appellate jurisdiction.
4. Under Section 11 of RA 1125, the In case the decision of the Division is adverse:
government or any of its agencies, • File MR with same Division within 15 days
instrumentalities or officials has no from notice thereof
right to appeal. When a taxpayer refuses
to pay the tax or protests an assessment In case resolution of Division on the MR or motion
and contests its validity before the CTA, the for new trial is still adverse:
government can either impose distraint or • File petition for review with CTA En Banc
levy of property or enforce the collection by
judicial remedy before the regular court. In case the decision of the CTA En Banc is adverse,
The only time the government can initiate file a review on certiorari with the SC pursuant to
any action is when it appeals the decision Rule 45 of Rules of Court
of the CTA which is adverse to the
government, pursuant to Rule 45 of the Appealing a Decision of a Local Assessment
Rules of Court. Board (Sec. 9, R.A. No. 9282)
• To the CBAA and not yet to the CTA
Mode and Effect of Appeal • It is only after the CBAA has ruled that an
Petition for review under Rule 42 to be acted upon appeal may be made to the CTA
the CTA in division with respect to a decision, ruling • In which case, the appeal shall be by
or inaction of: petition for review to the CTA En Banc
• CIR (on disputed assessments or claim for
refund of internal revenue taxes b. Suspension of Collection of
erroneously or illegally collected) Taxes
• COC
• DOF Secretary General rule: No injunction to restrain collection of
• DTI Secretary taxes
• DA Secretary Exception: Under Section 9 of RA 9282,
• RTC (in the exercise of their original suspension is allowed when the following conditions
jurisdiction) concur:
• Period to file: 30 days • It is an appeal to the CTA from a decision
of CIR, COC or the RTC, provincial,
Petition for review under Rule 43 to be acted upon municipal treasurer, or the Secretary of
the CTA En Banc with respect to a decision or Finance, Secretary of Trade and Industry or
resolution of the Court in Division on a MR or MNT. Secretary of Agriculture, as the case may
• Period to file: 15 days. It may be extended be; and
to an additional period not exceeding 15 • In the opinion of the Court, the collection by
days. the aforementioned government agencies
may jeopardize the interest of the
Petition for review under Rule 43 to be acted upon Government and/or taxpayer.
by the CTA En Banc with respect to the decisions or
rulings of: In case of suspension, what is the taxpayer
• CBAA required to do?
• RTCs (in the exercise of their appellate The taxpayer will be required to either deposit the
jurisdiction) amount claimed or file a surety bond for not more
• Period to file: 30 days (Sec. 11, R.A. No. than double the amount with the Court.
1125, as amended by RA 9282)
c. Injunction not Available to
Appeal within 30 days from receipt of decision or Restrain Collection
period of inaction of CIR, COC, Secretary of
Finance, Secretary of Trade and Industry or General rule: No injunction to restrain collection of
Secretary of Agriculture, or the CBAA or the RTC: taxes
• Generally, appeal will be to a Division Exception: Suspension is allowed when the
• Exception: Appeal by filing a petition for following conditions concur:
review to En Banc in case of decisions of 1. There is an appeal to the CTA, and

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2. In the opinion of the court, the collection by public prosecutor. (Sec. 2, Rule 9, A.M. No. 05-11-
the government agencies may jeopardize 07-CTA)
the interest of the Government and/or the
taxpayer, and For violations of the NIRC and other laws enforced
3. Taxpayer either to deposit the amount by the BIR and violations of the TCC and other laws
claimed or to file a surety bond for not more enforced by the BOC, their respective duly
than the double the amount with the Court. deputized legal officers may conduct the
prosecution.
Motion for Reconsideration/Motion for New Trial
Any aggrieved party may seek a reconsideration or b. Institution of Civil Action in
new trial of any decision, resolution or order of the Criminal Action
court
The criminal action and corresponding civil action
The period to file the MR or MNT is 15 days. for the recovery of civil liability for taxes and
penalties shall be deemed jointly instituted in the
No second MR or MNT is allowed (Sec. 7, Rule 15, same proceeding. The filing of the criminal action
A.M. No. 05-11-07-CTA) shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such civil
The filing of the MR or MNT shall suspend the action separately from the criminal action shall be
running of the period within which an appeal may be allowed. (Sec. 12, Rule 9, A.M. No. 05-11-07-CTA)
perfected.
c. Period to Appeal
Grounds for filing a MR or MNT
• Fraud, accident, mistake or excusable Modes of appeal with respect to criminal cases:
negligence (FAME) which ordinary • Notice of Appeal pursuant to Sections
prudence could not have guarded against 3(a) and 6, Rule 122 of the Rules of Court
and by reason of which such aggrieved to the CTA in Division with respect to an
party has probably been impaired in his appeal from criminal cases decided by
rights or the RTC in the exercise of its original
• Newly discovered evidence which he jurisdiction
could not, with reasonable diligence, have • Petition for Review under Rule 43 to the
discovered and produced at the trial and CTA En Banc with respect to criminal
which, if presented, would probably alter cases decided by:
the result. ▪ CTA in Division in the exercise of
its appellate jurisdiction
3. Criminal Cases ▪ RTC in the exercise of its
appellate jurisdiction. (Sec. 9,
a. Institution and Prosecution Rule 9,A.M. No. 05-11-07-CTA)
of Criminal Action ▪ In both cases, the period to
file is 15 days.
All criminal actions before the CTA in Division in the
exercise of its original jurisdiction shall be instituted The Solicitor General shall represent the People and
by the filing of an information in the name of the government officials sued in their official capacity in
People of the Philippines. (Sec. 2, Rule 9, A.M. No. all cases brought to the CTA in the exercise of its
05-11-07-CTA) appellate jurisdiction.

The institution of the criminal action shall interrupt 4. Appeal to the CTA En Banc
the running of the period of prescription.
Who may file an appeal to the CTA En Banc:
For violations of the NIRC and other laws enforced • A party adversely affected by a resolution of a
by the BIR, the CIR must approve the filing. Division of the CTA on a MR or MNT may file
For violations of the TC and other laws enforced by a petition for review with the CTA En Banc
the BOC, the COC must approve the filing. • A party adversely affected by a decision or
ruling of the CBAA or the RTC in the exercise
The criminal actions shall be conducted and of their appellate jurisdiction (Sec. 1, R.A. No.
prosecuted under the direction and control of the 1125)

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Summary of Appeals: Assessments

A decision or order of a Division cannot be directly
appealed to the CTA En Banc. There must first be a
timely filing of MR or MNT. (Sec. 1, Rule 8, A.M. No. BIR denial of protest in
whole or in part
05-11-07-CTA)

The mandatory provisions of Rule 8, Section 1 of the

Revised Rules of the CTA require that “the petition Apeal to CTA in division in
for review of a decision or resolution of the Court in 30 days
Division must be preceded by the filing of a timely
motion for reconsideration or new trial with the
Division.” The word “must” clearly indicates the
mandatory -- not merely directory -- nature of a File MR in 15 days
requirement. The rules are clear. Before the CTA En
Banc could take cognizance of the petition for
review concerning a case falling under its exclusive
appellate jurisdiction, the litigant must sufficiently CTA in division denial of MR
show that it sought prior reconsideration or moved
for a new trial with the concerned CTA division.
(COC v. Marina Sales, Inc., G.R. No. 183868, 2010)
Appeal to CTA en banc in 15
5. Petition for Review on Certiorari days
to the SC

Any party adversely affected by a decision or ruling

of the Court En Banc may appeal to the Supreme CTA en banc decision
Court. (Sec. 1, R.A. No. 1125; Sec. 19, Rule 16,
A.M. No. 05-11-07-CTA)
Petition for Review with SC
The mode of appeal is a petition for review on or Motion for Extension to
certiorari under Rule 45. File Petition within 15 days

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If protest denied in whole or in part:

Preliminary Assessment Notice

(PAN)

Final Assessment Notice (FAN)

Protest in 30 days

Submit supporting documents in

60 days
• If "request for reinvestigation"

BIR Action within 180 days

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