TAXATION

GENERAL PRINCIPLES The power to tax includes the power to regulate even to the extent of
prohibition or destruction. The power to tax includes the power to
TAXATION destroy if it is used validly as an implement of the police power.
Taxation is the inherent power of the state, exercised through the Supreme Court Jurisdiction Over Tax Cases
legislature, to impose burdens upon subjects and objects within
Review, revise, reverse, modify, or affirm on appeal or certiorari in
its jurisdiction for the purpose of raising revenues or to carry out
all cases involving the legality of any tax, impost, assessment or toll,
the legitimate objects of government.
or any penalty imposed in relation thereto.
Mode of raising revenue for public purpose. Taxes are enforced
Judicial Review
proportional contribution from persons and property, levied by the
state by virtue of its sovereignty and for the support of the The judiciary may declare a tax law unconstitutional if destroy the
government and for all its public needs. natural and fundamental rights of a person.
Requisites of a Valid Tax CHARACTERISTICS AND NATURE OF TAXES
 For Public Purpose  Comprehensive
 The party being taxed must be within the jurisdiction of the
taxing authority. Taxation reaches every trade or occupation; every object of
industry, use or enjoyment; every species of possession; and it
 Tax must not impugn the inherent and constitutional
imposes a burden which in case of failure to discharge it, may be
limitations on the power of taxation.
followed by seizure and sale or confiscation of property.
Legislative in Nature
 Unlimited
The sole arbiter of the purposes for which taxes shall be levied is the
legislature if it is for public purpose. The legislature has the power Courts scarcely venture to declare that it is subject to any
to determine the nature, object, extent, situs, and coverage lies restrictions, except those that rest into the discretion of the
on the legislature. authority which exercises it.

 Must originate from the lower house  Plenary

 Rule requiring absolute majority intended to enact tax Taxation operates on all persons and property belonging to the
exemptions body politic, and it is granted by all for the benefit of all.
 Item Veto
 Supreme
The Power to Tax is the Power to Destroy

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No attribute of sovereignty is more pervading, and at no point TAXATION POLICE POWER
does the power of the government affect more constantly and Purpose Levied for the purpose Taking of property
intimately all the relations of life than through the exactions made of raising revenues. for public use.
under it. Compensation Payment of taxes accrue Just compensation
to the general benefit of is given the owner
DISTINCTION BETWEEN THE OTHER INHERENT the citizens. of the expropriated
POWERS OF THE STATE property.
Person Taxation applies to all Only particular
As Distinguished from Police Power Affected persons, property and property is affected
excises that may be and comprehended.
TAXATION POLICE POWER subject thereto.
Purpose Levied for the purpose Exercised to
of raising revenues. promote public THEORIES IN TAXATION
welfare through
regulation. A. Lifeblood Doctrine
Amount of The amount gathered in The exaction is
Exaction the exercise of Taxation limited to the cost “Taxes are what we pay for civilized society.”
contemplates of no of regulation,
limits. issuance of license, Taxation is a way of apportioning the cost of government. The power
or surveillance. of taxation is essential since the government can neither exist nor
Benefits No direct benefits No direct benefits endure without it. Hence, it is the lifeblood of the government,
Received received by the are received yet a and their prompt and certain availability is an imperious need.
taxpayer other than the healthy economic Collection of taxes must be without hindrance if the state is to
fact that the government standard of society maintain its orderly existence since the government’s ability to
secures to the citizen is maintained.
serve and protect the people depends largely upon taxes.
the general benefit.
Contract Taxation recognizes the Does not apply. B. Necessity Theory
Superiority obligations imposed by
contracts. The power to tax is an attribute of sovereignty emanating from
Transfer of Taxes paid form part of Allows merely necessity. It is a necessary burden to preserve the State’s
Property the public funds. restraint on the sovereignty and a mean to give the citizen an army to resist an
Rights exercise of property aggression, a navy to defend its shores from invasion, a corps of civil
rights.
servants to serve, public improvement designed for the enjoyment of
the citizens and those which come within the State’s territory, and
As Distinguished from Eminent Domain
facilities and protection which a government is supposed to provide.

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C. Benefits Protection Theory/ Doctrine of Symbiotic Taxation must be Equitable – Burden must fall on those better able
Relationship to pay the tax.

The doctrine bases the power of the State to demand and receive Taxation must be Progressive – Rate increases depending on the
taxes on the reciprocal duties of support and protection. The resource of the person affected.
citizen supports the State by paying the portion from his property
C. ADMINISTRATIVE FEASIBILITY
that is demanded in order that he may be secured in the enjoyment of
the benefits of an organized society. Tax laws must be capable of effective and efficient enforcement
and must not obstruct business growth and economic
 The obligation to pay taxes is involuntary and compulsory in
development. The law is principally aimed to rationalize the tax
exchange for the protection and benefits one receives from
system which enables it to be more equitable to attain economic
the government.
recovery.
 There is no special or direct benefit received by the taxpayer
other than the fact that the government secures to the citizen PHASES AND KINDS OF TAXATION
the general benefit.
A. Levy or Imposition
PRINCIPLE OF A SOUND TAX SYSTEM
This refers to the enactment of tax laws or statutes by the
A tax law will retain its validity even if it is not in consonance congress.
with the principles of fiscal adequacy and administrative
B. Assessment and Collection
feasibility because the Constitution does not expressly require so.
However, a tax law which violates the principle of theoretical The act of assessment and collection is administrative in character
justice shall render it unconstitutional since the Constitution and hence, can be delegated.
provides that taxation should be uniform and equitable.
Tax law must designate which agency will collect the taxes. (BIR,
A. FISCAL ADEQUACY DOF) The circulars and regulations issued by BIR and DOF must be
in accordance with the tax measure imposed by congress.
Sources of revenue must be adequate to meet the government
expenditures and other public needs. C. Payment
B. THEORETICAL JUSTICE Signifies an act of compliance by the taxpayer.
A sound tax system must take into consideration the taxpayer’s Kinds of Taxes
ability to pay. Taxes must be reasonable, just, fair, and
conscionable.  Poll/Capitation/Community Tax – Taxed based on the
residence of the taxpayer.

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 Property Tax A. SITUS
i. Real Property – Subject to taxation on the state or
The power to tax is exercised not only within the territorial
country where it is located.
jurisdiction of the State, but also over its citizens and residents.
ii. Personal Property – Subject to taxation on the place
where it was kept or on the owner’s domicile. (Mobilia B. PUBLIC PURPOSE
sequuntur personam/ Movables follow the person)
Public Purpose pertains not only to those purposes which are
 Excise Tax – Taxes imposed on the exercise of a right or
traditionally viewed as essentially governmental functions but also
privilege.
includes those purposes designed to promote social justice.
i. Income Tax
- Non-resident citizen, Resident and Non-resident alien, Taxes are exacted only for a public purpose and may not be used
and Resident and Non-resident foreign corporation – for purely private purposes since the power to tax exists for the
Taxed upon sources of income of resident and non-resident general welfare. The determination of public purpose is a
alien or corporation derived from sources within the legislative prerogative. Thus, if the ultimate result favors the
Philippines. welfare of the public in general, the appropriation of a public
- Resident citizens and Domestic Corporation – Taxed upon revenue is deemed done for a public purpose.
sources of income from inside and outside of the country.
C. INTERNATIONAL COMITY
 Donors Tax
- Non-resident alien – Taxed based upon properties situated The Constitution adopts the generally accepted principles of
within the Philippines. international law as part of law of the land.
- Resident alien and Resident and non-resident citizen –
Taxed based upon properties wherever situated.  Par in parem non habet imperium – equals do not have
 Estate Tax authority over one another. A sovereign power cannot exercise
- Non-resident aliens – Taxed on properties situated in the jurisdiction over another sovereign power.
Philippines. States find it mutually advantageous for themselves to create self-
- Resident alien and Resident and non-resident citizen – imposed restraints on their taxing powers especially with
Taxed on properties wherever situated. reference to the properties of foreign governments within their
 Value-Added tax – The place where the transaction is made. territorial domain. Hence, Tax law is passed imposing taxes on the
income and real property of foreign ambassadors is invalid since
INHERENT AND CONSITUTIONAL LIMITATIONS the imposition is a violation of the universal principles of
OF TAXATION international law. Foreign embassies are considered extensions of the
territoriality of the foreign states.
INHERENT LIMITATION ON THE POWER TO TAX

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D. NON-DELEGATION No state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating
The power to tax is exclusively vested in the legislative body. The
its federal responsibilities.
congress may delegate the power to tax subject to the following:
F. CONCEPT OF DOUBLE TAXATION
 Local government unit may create its own sources of
revenue, fees, and charges. There is double taxation where one tax is imposed by the State and
 The congress may authorize the President to impose tariff the other is imposed by the Local Government Unit. Generally,
rates and import and export quotas. double taxation is not forbidden by our Constitution.

Test in Determining the Validity of Delegation Direct Double Taxation – constitutes double taxation in the
objectionable or prohibited sense. This occurs when the same
Completeness Test – the law must be complete in all aspects and property is taxed twice when it should only be taxed once by the
the only thing left for is to implement the law. same State or Government.
Sufficiently Determinate Standards Test – There must exist i.e., Imposition of local business tax based on gross revenue by
sufficient standards which limits the boundaries of the delegate’s the Local Government Unit.
authority by defining legislative policy and the circumstances
under which it is to be pursued or implemented. Indirect Double Taxation – Allowed if the taxes are of different
nature or character, imposed by different taxing authority that
E. EXEMPTION FROM TAXATION OF GOVERNMENT are not of the same kind or character.
AGENCIES
Domestic Double Taxation – Arises when the taxes are imposed
Properties of the national government and local government by the local or national government.
units are not subject to tax.
International Double Taxation – Refers to the imposition of
 Agencies performing governmental functions are tax-exempt comparable taxes in 2 or more states on the same taxpayer in respect
unless expressly taxed. of the same subject matter.
 Agencies performing proprietary functions are subject to tax
unless expressly exempted. CONSTITUTIONAL LIMITATIONS ON THE POWER TO
TAX
Doctrine of Supremacy of the National Government over Local
Governments A. DUE PROCESS OF LAW

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

liberty, and property without due process. Due process is usually

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violated where the tax imposes for a private purpose as i. Must apply both to present and future conditions
distinguished from a public purpose. ii. Must apply equally to all members of the same class
iii. Must be germane to the purposes of the law
But a tax does not violate the due process clause as applied to a
iv. Must be based on substantial distinction
particular taxpayer although the purpose of the tax will result in
injury rather than a benefit to such taxpayer. Equal protection does not require equal rates of taxation on
different classes of property nor prohibit unequal taxation so long
 Substantive due process – Executive must only act pursuant to
as the inequality is not based upon arbitrary classification.
a valid law from the legislative
 Procedural due process – Notice to and opportunity to be heard C. UNIFROMITY
to the taxpayer
The rule of taxation shall be uniform and equitable.
The due process clause may be invoked where a taxing statute is so
Uniformity in taxation means that all taxable articles or kinds of
arbitrary that it finds no support in the Constitution. There must
property of the same class shall be taxed at the same rate.
be a clear and unequivocal breach of the Constitution and there
Different articles may be taxed at different amounts provided that
must be proof of arbitrariness.
the rate is uniform on the same class everywhere with all people.
 Tax amounts to confiscation of property D. PROGRESSIVE SYSTEM OF TAXATION
 The subject of confiscation is outside the jurisdiction of the
taxing authority Progressive taxation is built on the principle of the taxpayer’s
 The law imposed if for private purpose ability to pay. Taxation is said to be equitable when its burden falls
 The law imposing unjust and oppressive taxes are applied on those better able to pay. Taxation is progressive when its rate
retroactively goes up depending on the resources of the person affected.
 Where the law is in violation of inherent limitation. Regressive System of Taxation
For income to be taxable, there must be gain which is realized or The constitution does not prohibit the imposition of regressive
received, and not excluded by law. taxes but what it simply provides is that Congress should evolve a
B. EQUAL PROTECTION CLAUSE progressive system of taxation. Direct taxes are to be preferred
and indirect taxes should be minimized as much as possible. We
Equality of taxation is accomplished when the burden of the tax cannot avoid regressive taxes but only minimize them.
falls equally and impartially upon all persons and property
subject to it. E. NON-IMPAIRMENT CLAUSE

Valid Classification

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TAXATION
No law shall be passed impairing the obligation of contracts. Any originate exclusively in the House of Representatives. Only the
law which enlarges or changes the intention of the parties Lower House may propose tax measures. The Senate may concur
discoverable in it necessarily impairs the contract itself. The and propose amendments.
constitutional prohibition against the impairment of the obligation of
H. PRESIDENTIAL VETO POWER TO FIX TAX RATES
contracts only applies where it is claimed that the obligation of
the contract is impaired by a law of the state through statute or Power to Veto
constitutional provision.
The President shall have the power to veto any item on an
Revocability of Tax Exemption appropriation, revenue, or tariff bill but the veto shall not affect the
items which he did not object.
If the grant of an exemption does not constitute a contract, but is
merely a spontaneous concession by the legislature, it is The lower house and senate may reconsider the vetoed items. If at
REVOCABLE. least 2/3 of all the members agrees to pass the bill, it shall be sent to
the Senate wherein they will do the same. Afterwards, it shall
If the tax exemption constitutes a binding contract and for
become a law.
valuable consideration, it is IRREVOCABLE.
Power to Tax
The government cannot unilaterally revoke the tax exemption
especially when the government enters a contract since it The congress may authorize the President to fix tariff rates,
descends to the level of an ordinary individual. Therefore, it import and export quotas, tonnage and wharfage dues, and other
cannot invoke state immunity. duties subject to such limitation and restriction.
F. NON-IMPRISONMENT FOR NON-PAYMENT OF I. FREEDOM OF THE PRESS, RELIGION AND TAX
POLL TAX EXEMPTION
No person shall be imprisoned for non-payment of a debt or poll Freedom of the Press
tax. A person may be imprisoned for non-payment of other kinds of
taxes since taxes are not debts. No law shall be passed abridging the freedom of speech, expression,
or of the press. Note that the press is not immune from general
G. APPROPRIATION, REVENUE, AND TARIFF BILLS regulation by the State.
MUST ORIGINATE EXCLUSIVELY IN THE HOUSE
OF REPRESENTATIVES Freedom of Religion

All appropriation, revenue or tariff bills, bill authorizing the increase Free Exercise Clause – No tax laws should be passed which
of the public debt, bills of local application, and private bills shall supports a religion nor suppressed a particular law

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Non-Establishment Clause – Prohibition for appropriation or use of When the Constitution confers upon the legislature authority to
public money for religious purposes grant exemptions within certain limits, such statutes shall be valid
if they do not exceed the constitutional limits.
A tax on the sale of religious articles by a non-stock, non-profit
organization at minimal profit constitutes a curtailment of K. POWER OF TAXATION ON LOCAL GOVERNMENT
religious freedom. UNITS

Tax Exemption of Properties Used for Religious, Charitable, and Each local government unit shall have the power to create its own
Educational Purposes. source of revenues and to levy taxes, fees, and charges subject to
such limitations as the Congress may impose.
Charitable Institutions, churches, non-profit cemeteries, land
used for religious, educational, and charitable are exempt to The charter must plainly show an intent to confer the power to tax.
taxation. Tax exemption also covers non-stock or non-profit The power must also be construed in strictissimi juris. The Congress
educational institution. cannot abolish the local government’s power to tax as it cannot
abrogate what is expressly granted by the fundamental law.
Exemption only applies to real property taxation. Hence, such
institution is still subject to real income tax. However, Donations Doctrine of Pre-emption in Local Taxation
for educational purposes shall be exempt from Donor’s tax.
Pre-emption in the matter of taxation simply refers to an instance
 The land must be Actually, Directly, and Exclusively used for where the national government elects to tax a particular area,
educational, religious, and charitable purposes. impliedly denying from the local government the delegated
power to tax the same field.
i.e., A school property which is leased for commercial purposes
shall not be exempt from real property tax even if it is a non- ASSESSMENT AND COLLECTION OF TAXES
stock educational institution.
FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE
Exception: If the school was able to prove that the rental income is
being used for educational purposes such as scholarships, salaries, The BIR shall give effect to and administer the supervisory and
and upgrading of facilities. police powers conferred to it the laws. It shall be under the
supervision and control of the Department of Finance.
J. GRANT OF TAX EXEMPTIONS
Comprehend the assessment and collection of all national
In granting tax exemptions, an absolute majority vote of the internal revenue taxes, fees, and charges.
Members of the Congress is required. In the cases of withdrawal
of tax exemption, a relative majority vote is sufficient.  Exception to the collection of BIR

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- Local Internal Revenue – Taxes under the Local Rulings are non-retroactive to affect past transaction of the
Government Code; payable before local treasurer. taxpayer who requested the ruling except different statement of
- External Revenue – Exports and Imports; governed by facts given to BIR due to misrepresentation or error.
Bureau of Customs.
MODES OF COLLECTION BY THE BUREAU OF
Exclusive and Original Jurisdiction in interpreting the INTERNAL REVENUE
provisions of the NIRC and other tax laws
A. Self-Assessment (Voluntary Compliance Method)
 subject to review by the Secretary of Finance.
Mode of collection where the taxpayer fills out a return in which
Disputed assessments, refunds, or other matters are subject to the he declares his personal information for the enforcement of the
appellate jurisdiction of the Court of Tax Appeals through a law.
petition of review.
 The return is a sworn statement (violations are subject to
The BIR shall enforce all forfeitures, penalties, and fines as well as criminal prosecution)
judgments in all cases decided in its favor by the Court of Tax
The BIR may still authorize the examination of return of any
Appeals and the ordinary courts.
taxpayer and the determination of tax due.
Issuances of BIR
B. Enforced or Assessment Method
 Revenue Regulations – Equivalent to IRR of the tax laws. Must
Mode of collection wherein the government will compute the tax
be within the bounds of law.
for the taxpayer. Failure to make a return by the taxpayer will
 Revenue Memorandum Orders – Internal instructions
result to this mode of collection.
addressed to the employees or officers. Internal Policy is
published and made available to the Public. C. Withholding Method
 Revenue Memorandum Circulars – emphasizing, clarifying,
Mode of collection whereby taxes has already been deducted in
reiterating, or amplifying existing laws. (Issue in Taxing social
advance.
media influencers)
 BIR Rulings – Q&A; A ruling will only be applicable to the Taxpayer cannot withdraw a tax return that has been filed.
taxpayer who requested it. Other persons cannot use such ruling However, the return may be amended within 3 years from filing.
since the ruling is only applicable to the facts and claims of the
person who requested it. POWER TO OBTAIN INFORMATION

 Examine any book, paper, record, or any other document or

data which may be material to the audit. They may visit the

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premises and inspect the journal books and ledgers. BIR may Authority of the Commissioner to Prescribe Real Property
issue letter of authority in order to conduct audit. Provide what Values.
taxable year is being audited.
 Obtain on a regular basis from any person other than the The Commissioner is authorized to divide the Philippines into
different zones or areas and shall determine the fair market value of
taxpayer who is being investigated information. Third party
real properties located in each zone or area, subject to automatic
information or confirmation is also included. Except Sec. 6 adjustment once every three (3) years through rules and regulations
 Summon taxpayer and demand the production of documents. issued by the Secretary of Finance based on the current Philippine
(Subpoena powers) valuation standards:
 Power to take testimony of the person concerned, under
oath, as may be relevant or material to such inquiry. Provided, That no adjustment in zonal valuation shall be valid unless
published in a newspaper of general circulation in the province, city
 Power to terminate taxable period i.e., intending to leave the
or municipality concerned, or in the absence thereof, shall be posted
PH, retirement, in the provincial capitol, city or municipal hall and in 2 other
 Prescribe real property values. conspicuous public places therein: Provided, further, That the basis
 Power to accredit tax agents. of any valuation, including the records of consultations done, shall
be public records open to the inquiry of any taxpayer. [4] For purposes
POWER TO MAKE ASSESSMENTS AND PRESCRIBE of computing any internal revenue tax, the value of the property shall
ADDITIONAL REQUIREMENTS be, whichever is the higher of:

Power of the BIR to inquire into bank deposits.  The fair market value as determined by the Commissioner.
General Rule: Not allowed
 The fair market value as shown in the schedule of values of the
Exception: Provincial and City Assessors.

 Request by foreign tax authority – must comply with Philippine

and American law
COMPUTATION OF INCOME TAX
GROSS INCOME – DEDUCTIONS = NET TAXABLE
 Decedent in determining the gross estate left in banks
INCOME
 Taxpayer compromise with BIR
- Doubtful assessment GROSS INCOME
- Financial Incapacity
 Compensation for services in whatever form paid, including, but
When a report required by law should not be submitted by taxpayer, not limited to fees, salaries, wages, commissions, and similar
commissioner may assess the proper amount of tax based on the best items
evidence available.

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 Gross income derived from the conduct of trade or business or any action on his part to enter such contest and is not
the exercise of a profession required to render substantial future services as a condition.
 Gains derived from dealings in property - Prizes and Awards in sports competition
 Interests - 13th month pay, product incentives, Christmas Bonus and
 Rents other benefits not exceeding 90,000.
 Royalties - SSS, GSIS, Medicare, and other Contributions
- Gains from Sale of Bonds
 Dividends
- Gains from Redemption of Shares in Mutual Fund
 Annuities
- Income from Sale of Good pursuant to Small-scale Mining
 Prizes and winnings
Act
 Pensions
 Partner's distributive share from the net income of the general FRINGE BENEFIT
professional partnership.
A final tax of 35% is imposed on the grossed-up monetary value
Exclusions of fringe benefit furnished or granted to the employee by the
employer, except when the fringe benefit is required by the
 Proceeds of Life Insurance, whether in single sum or not nature of, or necessary to the trade, business or profession of the
 Amount Received by Insured as Return of Premium employer, or when the fringe benefit is for the convenience or
 Gifts, Bequests, and Devises advantage of the employer such as:
 Compensation for Injuries or Sickness through Accident or
Health Insurance or under the Workmen’s Compensation Act  Housing
 Income Exempt under Treaty  Expense account
 Retirement Benefits, Pensions, Gratuities  Vehicles
 Miscellaneous Items  Household personnel
- Income Derived from investments in the Philippines by  Interest on loan at less than market rate
Foreign Government  Membership fees, dues, and other expenses borne by the
- Income Derived from any public utility or from the exercise employer for the employee
of any essential governmental function accruing to the  Expenses for foreign travel
Philippines  Holiday and vacation expenses
- Prizes and Awards made primarily in recognition of  Educational assistance to the employees or his dependents
religious, charitable, scientific, educational, artistic, literary,  Life or health insurance and other non-life insurance
or civic achievement if the recipient was selected without
Non-Taxable Fringe Benefits

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 Those that are exempted from tax under special laws  Entertainment, amusement, and recreation expenses that are
 Contributions for the benefit of the employee to the retirement, directly connected or in furtherance to the development,
insurance and hospitalization benefit plan management, and operation of the trade, business, or profession,
 Benefits given to the rank-and-file employees provided that it is not contrary to law, morals, public order, or
 De minimis benefits public policy.

ALLOWABLE DEDUCTIONS An additional deduction from taxable income of ½ of the value of

labor training expenses incurred under the Labor Code.
Taxpayers must substantiate with sufficient evidence, such as
official receipt or other adequate evidence or records, the amount of Private Educational Institutions
the expense being deducted, and the direct connection or relation A private educational institution may, at its option, elect either to
of the expense being deducted. deduct expenditures otherwise considered as capital outlays of
Any payment made, whether directly or indirectly, to an employee depreciable assets incurred during the taxable year for the
of the government shall not be deducted from the gross income if expansion of school facilities, or to deduct allowance for
such payment constitutes a bribe or kickback. depreciation.

A. Expenses B. Interest

There shall be allowed as deduction from gross income all the The amount of interest paid or incurred on indebtedness in
ordinary and necessary expenses paid or incurred during the connection with the taxpayer's profession, trade or business shall
taxable year in carrying on or which are directly attributable to, be allowed as deduction from gross income provided, that the
the development, management, operation and/or conduct of the taxpayer's otherwise allowable deduction for interest expense
trade, business or exercise of a profession, including reasonable shall be reduced by 20% of the interest income subjected to final
allowance for: tax.

 Salaries, wages, and other forms of compensation for personal No deductions shall be allowed in respect of interest under the
services actually rendered. following:
 Travel expenses in the pursuit of trade, business, or profession.  If within the taxable year an individual incurs an indebtedness
 Rentals and/or other payments which are required as a on which an interest is paid in advance through discount.
condition for the continued use or possession for purposes of the  If both the taxpayer and the person to whom the payment has
trade, business, or possession, of property to which the taxpayer been made or is to be made are persons who has losses from
has not taken or is not taking title or in which he has no equity sales or exchange of property.
other than that of a lessee, user or possessor.

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 If the indebtedness is incurred to finance petroleum No loss shall be allowed as a deduction if at the time of the filing of
exploration. the return, such loss has been claimed as a deduction for estate tax
purposes in the estate tax return.
At the option of the taxpayer, interest incurred to acquire property
used in trade business or exercise of a profession may be allowed as
a deduction or treated as a capital expenditure.

C. Taxes
INCOME TAX ON INDIVIDUALS
TAX SUBJECTS IN INCOME TAXATION
Taxes paid or incurred in connection with the taxpayer's
profession, trade or business, shall be allowed as deduction,  Resident Citizens
except:  Non-Resident Citizens
 Resident Aliens
 Income Tax  Non-Resident Aliens
 Estate Tax - Non-Resident Aliens Engaged in Trade or Business Within
 Donor’s Tax the Philippines
 Taxes against local benefits tending to increase the value of the - Non-Resident Aliens Not Engaged in Trade or Business
property assessed. Within the Philippines
In case on non-resident alien individual engaged in trade or For married individuals, the husband and wife shall compute their
business or resident foreign corporations, deductions due to taxes individual income tax separately. If any income cannot be
paid or incurred shall only be allowed if and to the extent that they definitely attributed to or identified as income exclusively earned
are connected with income from sources within the Philippines. or realized by either of the spouses, the same shall be divided
equally between the spouses for the purpose of determining their
D. Losses
respective taxable income.
Losses actually sustained and not compensated for by insurance
Imposition of Income Tax
or other forms of indemnity shall be allowed as deductions:
Tax Subjects Income derived Income derived
 If incurred in trade, profession or business.
from Within the from outside of the
 Of property connected with the trade, business or profession, Philippines Philippines
if the loss arises from fires, storms, shipwreck, or other Resident Citizens Taxable Taxable
casualties, or from robbery, theft or embezzlement. Non-Resident Taxable Not Taxable
Citizens
Resident Aliens Taxable Not Taxable

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TAXATION
Non-Resident Taxable Not Taxable  Holiday pay
Aliens  Overtime pay
 Night shift differential pay
Self-Employed Individuals or Professionals
 Hazard pay
Self-employed individuals or professionals whose gross sales or
FINAL TAX ON PASSIVE INCOME
gross receipts does not exceed the VAT Threshold shall have the
option to avail: The following final tax on passive income shall be applicable to
Resident Citizens, Non-Resident Citizens, Resident Aliens, and
 8% tax on gross sales in excess of 250,000; or
Non-Resident Aliens Engaged in Trade or Business Within the
 Regular Income Tax Rate Philippines (only Non-resident aliens not engaged in Trade or
Mixed Income Earners Business within the Philippines shall not be subject to final tax):

Taxpayers earning both compensation income and income from A. Interests, Royalties, Prizes, and Other Winnings
business or practice of profession shall be subject to the following The following sources within the Philippines shall have a final tax
taxes: of 20%:
 Income tax from Compensation  Amount of interest from any currency bank deposit and from
 Income tax from business or practice of profession trust funds and similar arrangements.
- Regular Income Tax Rate; or  Royalties
- 8% income tax based on gross sales or receipts if such - Books, as well as other literary works and musical
gross sales or receipts does not exceed the VAT Threshold. compositions shall have a final tax of 10%.
Minimum Wage Earners and Other Employment Benefits  Prizes more than 10,000 pesos
- Prizes amounting to 10,000 pesos or less shall be subject to
Minimum wage earners are workers in the private sector paid the regular income tax.
statutory minimum wage or to an employee in the public sector  Other winnings
with compensation income of not more than the statutory - Winning amounting to 10,000 pesos or less from Philippine
minimum wage in the non-agricultural sector where he/she is Charity Sweepstakes and Lotto shall be exempt.
assigned.
Interest income received by a resident individual taxpayer from a
Minimum wage earners shall be exempt from the payment of depository bank under the expanded foreign currency deposit
income tax on their taxable income. system shall be subject to a final income tax of 15%.
The following benefits shall also be exempt from income tax: Interest from Long-Term Deposits

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TAXATION
Interest income from long-term deposits or investments in the A. Sale of Shares of Stock Traded in the PSE
form of savings, common or individual trust funds, deposit
A final tax at the rate of 15% is imposed upon the net capital
substitutes, investment management accounts and other investments
gains realized during the taxable year from the sale, barter,
shall be exempt from the tax.
exchange or other disposition of shares of stock in a domestic
However, should the holder of the certificate pre-terminate the corporation, except shares sold, or disposed of through the stock
deposit or investment before the 5th year, a final tax shall be exchange.
imposed on the entire income and shall be deducted and withheld by
In the case of a taxpayer, other than a corporation, only the following
the depository bank from the proceeds of the long-term deposit or
percentages of the gain or loss recognized upon the sale or exchange
investment certificate based on the remaining maturity thereof:
of a capital asset shall be taken into account:
 4 years to less than 5 years - 5%
 if the capital asset has been held for not more than 12 months
 3 years to less than 4 years - 12%
– 100%
 Less than 3 years - 20%
 if the capital asset has been held for more than 12 months –
Long-term deposits or investments must be evidenced by 50%
certificates prescribed by the BSP.
The term “net capital gain” means the excess of the gains from
B. Cash and/or Property Dividends sales or exchanges of capital assets over the losses from such sales
or exchanges.
A final tax at the rate of 10% shall be imposed upon the cash
and/or property dividends actually or constructively received: The term “net capital loss” means the excess of the losses from
sales or exchanges of capital assets over the gains from such sales
 by an individual from a domestic corporation or from a joint or exchanges.
stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies; or B. Sale of Shares of Stock not Traded in the PSE
 share of an individual in the distributable net income after A final tax at the rate of 15% is imposed upon the net capital
tax of a partnership of which he is a partner; or gains realized during the taxable year from the sale, barter,
- Exception: General professional partnership exchange or other disposition of shares of stock in a domestic
 share of an individual in the net income after tax of an corporation, except shares sold or disposed of through the stock
association, a joint account, or a joint venture or consortium exchange.
taxable as a corporation of which he is a member or co-
venturer. C. Sale or Disposition of Real Property

CAPITAL GAINS TAX

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TAXATION
A final tax of 6% based on the gross selling price or current fair If there is no full utilization of the proceeds of sale or disposition,
market value, whichever is higher, is imposed upon capital gains the portion of the gain presumed to have been realized from the
presumed to have been realized from the sale, exchange, or other sale or disposition shall be subject to capital gains tax.
disposition of real property located in the Philippines, classified
TAXATION ON NON-RESIDENT ALIENS
as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts. A. Non-Resident Aliens Engaged in Trade or Business
Within the Philippines
Sale or Disposition of Real Property to the Government
A nonresident alien individual engaged in trade or business in the
The tax liability, if any, on gains from sales or dispositions of real
Philippines shall be subject to an income tax in the same manner
property to the government or any of its political subdivisions or
as an individual citizen and a resident alien individual, on taxable
agencies or to government-owned or controlled corporations shall be
income received from all sources within the Philippines.
determined either:
Thus, Final Tax on Passive Incomes as well as Capital Gains Tax
 Regular Income Tax
shall also be applicable to them.
 Final tax of 6%
A 15% tax of gross income shall also be applied to salaries, wages,
Sale of Principal Residence
annuities, compensation, remuneration and other emoluments,
Capital gains presumed to have been realized from the sale or such as honoraria and allowances, from alien individuals employed
disposition of their principal residence by natural persons, the by:
proceeds of which is fully utilized in acquiring or constructing a
 Regional or Area Headquarters and Regional Operating
new principal residence within 18 calendar months from the date
Headquarters of Multinational Companies
of sale or disposition, shall be exempt from the capital gains tax
 Offshore Banking Units
imposed.
 Petroleum Service Contractor and Subcontractor
The historical cost or adjusted basis of the real property sold or
The same tax treatment shall apply to Filipinos employed and
disposed shall be carried over to the new principal residence built
occupying the same position as those of aliens employed by these
or acquired provided, that the Commissioner shall have been duly
multinational companies.
notified by the taxpayer within 30 days from the date of sale or
disposition through a prescribed return of his intention to avail of the B. Non-Resident Aliens Engaged in Trade or Business
tax exemption herein mentioned. The said tax exemption can only Within the Philippines
be availed of once every 10 years.
There shall be levied, collected and paid for each taxable year
upon the entire income received from all sources within the

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TAXATION
Philippines by every nonresident alien individual not engaged in - General Professional Partnership
trade or business within the Philippines as interest, cash and/or  Foreign Corporation
property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or Tax Subjects Income derived Income derived
from Within the from outside of the
determinable annual or periodic or casual gains, profits, and income,
Philippines Philippines
and capital gains, a tax equal to 25% of such income. Domestic Taxable (25%) Taxable (25%)
Capital Gains realized by a nonresident alien individual not engaged Corporation
Resident Foreign Taxable (25%) Not Taxable
in trade or business in the Philippines from the sale of shares of stock
Corporation
in any domestic corporation and real property shall be subject to the Non-Resident Taxable (25%) Not Taxable
same rules in Capital Gains Taxes. Foreign
Corporation
Final Withholding Tax on Alien Individuals Employed by an
Offshore Gaming Licensee and Service Providers
RATES OF INCOME TAX ON DOMESTIC CORPORATIONS
Alien individuals regardless of residency and who are employed
An income tax rate of 25% is imposed upon the taxable income
and assigned in the Philippines, regardless of the term and class of
derived during each taxable year from all sources within and
working or employment permit or visa, by an offshore gaming
without the Philippines by domestic corporations.
license or its service provider, shall pay a final withholding tax of
25% on their gross income. If a corporation has a total asset not exceeding 100,000,000 pesos,
excluding land on which the particular business entity's office, plant,
That the minimum final withholding tax due for any taxable month
and equipment, and has a net taxable income not exceeding
from said persons shall not be lower than 12,500 pesos.
5,000,000 pesos, the same shall be taxed at 20%.
In computing the final withholding tax for these aliens, gross income
Minimum Corporate Income Tax
shall include basic salary/wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and A minimum corporate income tax of 2% of the gross income as of
allowances, received from such service provider or offshore gaming the end of the taxable year is imposed on a corporation when the
license. minimum income tax is greater than the tax computed. Any excess of
the minimum corporate income tax over the normal income tax
INCOME TAX ON CORPORATIONS shall be carried forward and credited against the normal income
TAX SUBJECTS IN INCOME TAXATION tax for the 3 immediately succeeding taxable years.

 Domestic Corporation

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TAXATION
The Secretary of Finance may suspend the imposition of minimum The minimum corporate income tax shall also be applicable to
corporate income tax on any corporation that suffers losses on resident foreign corporations.
account of:
Tax on International Carriers
 Prolonged labor dispute
An international carrier doing business in the Philippines shall pay a
 Force majeure
tax of 2% on its Gross Philippine Billings.
 Legitimate business reverses
Gross Philippine Billings
Applicability on GOCCs
A. Air Carrier
Income tax on domestic corporations shall also be applicable to all
corporations, agencies, or instrumentalities owned or controlled The amount of gross revenue derived from the carriage of
by the Government except the GSIS, SSS, HDMF,PHIC, and local persons, excess baggage, cargo, and mail originating from the
water districts. Philippines in a continuous and uninterrupted flight, irrespective of
the place of sale or issue of payment of the ticket or passage
Proprietary Educational Institutions and Hospitals document.
Proprietary educational institutions and hospitals which are Tickets revalidated, exchanged, and/or indorsed to another
nonprofit shall pay a tax of 10% on their taxable income except international airline shall form part of the Gross Philippine
those considered as passive incomes. Billings if the passenger boards a plane in a port or point in the
 Unrelated Trade, Business or other Activity – Refers to any Philippines.
trade, business or other activity, the conduct of which is not For a flight that originates from the Philippines, but the
substantially related to the exercise or performance of its transshipment of passenger takes place at any part outside of the
primary purpose or function. Philippines on another airline, only the aliquot portion of the cost
If the gross income from unrelated trade, business, or other of the ticket corresponding to the leg flown from the Philippines
activity exceeds 50% of the total gross income derived by such to the point of transshipment shall form part of Gross Philippine
educational institutions or hospitals from all sources, a 20% tax Billings.
shall be imposed on the entire taxable income. B. Shipping
TAX ON RESIDENT FOREIGN CORPORATIONS The gross revenue, whether for passenger, cargo, or mail
Any resident foreign corporations shall be subject to an income originating from the Philippines up to the final destination,
tax of 25% from all sources within the Philippines. regardless of the place of sale or payment of the passage of freight
documents.

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TAXATION
Branch Profit Remittance local commercial banks, including branches of foreign banks, shall
be exempt from all taxes except net income from such
Any profit remitted by a branch to its head office shall be subject to
transactions.
15% tax, which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax Interest income from foreign currency loans granted by such
component, except activities that are registered with the PEZA. depository banks under said expanded system to residents other
than offshore banking units in the Philippines or other depository
 Regional or Area Headquarters – exempt
banks under the expanded system shall be subject to a final tax of
 Regional Operating Headquarters – 10% of their taxable 10%.
income; regular corporate income tax effective January 1, 2022.
Income of non-resident corporations from transactions with
TAX ON CERTAIN PASSIVE INCOME FOR DOMESTIC depository banks under the expanded system shall be exempt.
AND RESIDENT FOREIGN CORPORATIONS
B. Sale of Shares of Stock Not Traded in the PSE
A. Deposits and Yield or any other Monetary Benefit from
Deposit Substitute A final tax at the rate of 15% is imposed upon the net capital
gains realized during the taxable year from the sale, barter,
A final tax rate of 20% is hereby imposed upon the amount on exchange or other disposition of shares of stock in a domestic
currency bank deposits and yield or any other monetary benefit corporation, except shares sold or disposed of through the stock
from deposit substitutes and from trust funds and similar exchange
arrangements received by domestic corporations, and royalties
derived from sources within the Philippines. C. Intercorporate Dividends

Income Derived under the Expanded Foreign Currency Deposit Dividends received by a domestic corporation shall not be subject
System to tax.

Interest income derived by a resident foreign corporation from a Foreign-Sourced Dividends

depository bank under the expanded foreign currency deposit
For foreign-sourced dividends to be exempt, the funds from such
system shall be subject to a final income tax at the rate of 15% of
dividends received or remitted into the Philippines must be
such interest income.
reinvested in the business operations of the domestic corporation
For Depository Banks in the Philippines within the next taxable year from the time the
foreign-sourced dividends were received.
Income derived by a depository bank under the expanded
foreign currency deposit system from foreign currency transactions
with nonresidents, offshore banking units in the Philippines, and

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TAXATION
The Domestic Corporation must directly hold at least 20% of the A final withholding tax at the rate of 15% is imposed on the
outstanding shares of the foreign corporation for a minimum of amount of cash and/or property dividends received from a
2 years at the time of the dividend declaration. domestic corporation, subject to the condition that the country in
which the nonresident foreign corporation is domiciled shall
D. Capital Gains from Sale, Exchange, or Disposition of
allow a credit against the tax due from the nonresident foreign
Lands and/or Buildings
corporation taxes deemed to have been paid in the Philippines
A final tax rate of 6% is imposed on the gain presumed to have equivalent to 15% which represents the difference between the
been realized on the sale, exchange, or disposition of lands and/or regular income tax and the 15% tax on dividends.
buildings that are not actually used in the business of a
Effective July 1, 2020, the credit against the tax due shall be
corporation and are treated as capital assets, based on the gross
equivalent to the difference between the regular income tax rate
selling price or fair market value, whichever is higher.
and the 15% tax on dividends.
TAX ON NON-RESIDENT FOREIGN CORPORATION
C. Sale of Shares of Stock not Traded in the PSE
A non-resident foreign corporation shall pay a tax equal to 25% of
A final tax at the rate of 15% is hereby imposed upon the net
the gross income received from all sources within the Philippines.
capital gains realized during the taxable year from the sale,
 Cinematographic Film Owner, Lessor or Distributor – 25% barter, exchange or other disposition of shares of stock in a
of its gross income from all sources within the Philippines. domestic corporation, except shares sold, or disposed of through the
 Owner or Lessor of Vessels Chartered by Philippine stock exchange.
Nationals – 4.5% of gross rentals, lease or charter fees from EXEMPTION FROM TAX ON CORPORATIONS
leases or charters to Filipino citizens or corporations, as
approved by the Maritime Industry Authority.  Labor, agricultural or horticultural organization not
 Owner or Lessor of Aircraft, Machineries, and Other organized principally for profit.
Equipment – 7.5% of gross rentals or fees from rentals,  Mutual savings bank not having a capital stock and
charters, and other fees. cooperative bank without capital stock.
 A beneficiary society, order or association, operating for the
Tax on Certain Incomes of Non-Resident Foreign Corporation
exclusive benefit of the members such as a fraternal
A. Interest on Foreign Loans organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by
A final withholding tax at the rate of 20% is imposed on the employees providing for the payment of life, sickness, accident,
amount of interest on foreign loans. or other benefits exclusively to the members of such society,
B. Intercorporate Dividends

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TAXATION
order, or association, or nonstock corporation or their VAT is a form of sales tax – a tax on consumption levied in the sale,
dependents. barter, exchange, lease of goods or properties and services in the
 Cemetery company owned and operated exclusively for the Philippines and on importation of goods into the Philippines.
benefit of its members.
SUBJECT OF VAT
 Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or Any person, whether registered or unregistered, who, in the
cultural purposes, or for the rehabilitation of veterans. course of trade or business, sells, barters, exchanges, leases goods
 Business league chamber of commerce, or board of trade, not or properties, renders services, and any person who imports
organized for profit. goods shall be subject to the VAT imposed, if the aggregate amount
 Civic league or organization not organized for profit but of actual gross sales exceed 3,000,000.
operated exclusively for the promotion of social welfare.
The following persons shall also be subject to VAT:
 A nonstock and nonprofit educational institution.
 Government educational institution.  VAT-registered persons, regardless if their gross sales exceed
 Farmers' or other mutual typhoon or fire insurance 3,000,000 or not.
company, mutual ditch or irrigation company, mutual or  Unregistered persons whose gross sales exceeds 3,000,000.
cooperative telephone company, or like organization of a purely  Persons who are required to register but are not registered.
local character, the income of which consists solely of
A person cannot revoke his registration for the next 3 years.
assessments, dues, and fees collected from members for the sole
purpose of meeting its expenses. A non- registered person cannot claim for any creditable VAT.
 Farmers', fruit growers', or like association organized and Likewise, no carry-over shall also be allowed for non-registered
operated as a sales agent for the purpose of marketing the persons.
products of its members and turning back to them the proceeds
In the Course of Trade or Business
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them. Regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
The income of whatever kind and character of the foregoing
regardless of whether such person engaged is a non-stock, non-
organizations from any of their properties, real or personal, or
profit private organization, or government entity.
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed. Ex. Educational Institution – revenues from lease in their property
not related to education – subject to VAT. They must prove that it is
SUBJECT OF VALUE ADDED TAX directly and exclusively used for education to be exempted.

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TAXATION
CIR v. CA Mindanao II’s business is to convert the steam supplied to it
by PNOC-EDC into electricity and to deliver the electricity to
VAT is a tax on transactions, imposed at every stage of the
NPC. In the course of business, Mindanao II bought and
distribution process on the sale, barter, exchange of goods or
eventually sold a Nissan Patrol. Prior to the sale, the Nissan
property, and on the performance of services, even in the
Patrol was part of Mindanao II’s property, plant and
absence of profit attributable.
equipment. Therefore, the sale of the Nissan Patrol is an
A domestic corporation that provided technical, research, incidental transaction made in the course of business which
management, and technical assistance to its affiliated should be liable for VAT.
companies and received payments on a reimbursement-of-cost
Transactions Deemed Sale
basis, without any intention of realizing profit, was subject to
VAT on services rendered. From the term itself, they are not actual sale, but they are treated
as sale transactions in which case VAT are collected in these
CIR v. Magsaysay Lines
transactions. They are not actual sales but for purposes of reporting
The fact that the sale was not in the course of the trade or VAT liability, they are treated as sales to avoid tax leakage. The
business of NDC is sufficient in itself to declare the sale as following shall be considered as transactions deemed sale:
outside the coverage of VAT. The tax is levied only on the sale,
 Transfer, use, or consumption not in the course of business of
barter or exchange of goods or services by persons who engage
goods or properties originally intended for sale or for use in
in such activities, in the course of trade or business
the course of business.
In this case, the sale was involuntary and made pursuant to - Donation of relief goods coming from the inventory of the
the declared policy of Government for privatization. The donor (VAT exempt if donation is made to an accredited or
involuntary sale of vessels by a taxpayer not engaged in the exempt government/done institutions).
sale of vessels pursuant to the government policy of  Distribution or transfer to shareholders or investors as
privatization is not subject to VAT because the sale was not shares in the profits of the VAT-registered persons or
made in the course of trade or business. Creditors in payment of debt.
 Consignment of goods if actual sale is not made within 60
Mindanao Geothermal Partnership v. CIR
days following the date such goods were consigned. Consigned
The Sale of Nissan patrol is considered as an isolated goods returned by the consignee within the 60-day period shall
transaction since it is not used for its operation. However, it not be deemed sold.
does not follow that it cannot also be an incidental  Retirement from or cessation of business, with respect to
transaction. inventories of taxable goods existing as such retirement or
cessation.

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TAXATION
Transaction Subject to VAT if:  Membership fees, assessment dues, and the like
 Sale of Goods or Properties In the ordinary course of trade  Subsidies
 Sales of Services Rendered or business or if a real property  Isolated Transactions
in the Philippines is primarily held for sale or for
 Sale or Lease of Properties lease. Association of Non-Profit Clubs, Inc. v. BIR
 Importation of Goods Within the Philippines in the
ordinary course of trade or Membership fees, assessment dues, and the like are not
business. subject to VAT because in collecting such fees, the club is not
selling its services to the members. Hence, there is no economic
Destination Principle/Cross-Border Doctrine or commercial activity to speak of as these dues are devoted
for the operations and maintenance of the facilities of the
VAT shall be imposed on goods consumed or services rendered in
organization.
the Philippines. Thus, VAT shall not be imposed to form part of
the cost of the goods destined for consumption outside the BIR v. First E-Bank Tower
territorial border of the taxing authority.
The collection of association dues, membership fees, and
CIR v. American Express International, Inc. other assessments/charges is not a result of the regular
conduct or pursuit of a commercial or an economic activity,
The issuance of a credit card allows the holder to obtain goods
or any transactions incidental thereto since it is only for the
and services on credit from certain establishments. Hence, the
benefit of the owners.
company issuing credit cards will pay for the purchases of
the credit card holders by redeeming the drafts. Association dues, membership fees, and other
assessments/charges are not subject to income tax because
As a general rule, the VAT system uses the destination
they do not constitute profit or gain. They are collected purely
principle. However, the VAT law provides for a clear
for the benefit of the condominium owners and are incidental
exception, under which the sale of service performed in the
consequence of a condominium.
Philippines shall be zero-rated when rendered to a person
engaged in business conducted outside of the Philippines Gross Sales
(exportation) or to a nonresident person not engaged in
The total amount of money or its equivalent value in money
business who is outside the Philippines (transactions outside
which the purchaser pays or is obligated to pay to the seller in
of the Philippines) when the services are performed.
consideration of the sale, barter or exchange of the goods or
Sources of Income Not Subject to VAT properties, excluding the value-added tax.

 Sales not in the ordinary course of business VAT on Importation

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TAXATION
Every importation of goods shall be subject to a value-added tax Output – Input = -300,000 VAT Payable – carry over
equivalent to 12% based on the total value used by the Bureau of
OUTPUT VAT
Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges. Such tax must be VAT collected by a VAT-registered person from its customers on
paid by the importer prior to the release of such goods from the sale of goods or services is known as output VAT.
customs custody.
The value-added tax due on the following:
Transfer of Goods by Tax-exempt Persons to Non-exempt
Persons  Sale of Goods or Properties
 Sale of Services and Use or Lease of Properties
In the case of tax-free importation of goods into the Philippines
by persons, entities or agencies exempt from tax where such Regular Output Vat
goods are subsequently sold, transferred or exchanged in the Transactions which will be subject to 12% VAT.
Philippines to non-exempt persons or entities, the purchasers,
transferees or recipients shall be considered the importers For Sale Returns, Allowances, and Discount, the net amount shall
thereof, who shall be liable for VAT on such importation. be the basis of the 12% VAT. Tax shall be paid by the seller or
transferor.
VALUE ADDED TAX RATES
 Gross Selling Price – Agreed consideration for the transaction.
Formula: - Tax Base for Sale of Goods or Property
 Gross Receipt – portion of the total consideration which is
Output VAT – Input VAT = VAT Payable
already paid whether in kind or in money.
 If Output=Input – no VAT Payable, walang creditable - Tax Base for Sale of Services or Lease of Property
 If the Output Tax exceeds the Input Tax, the difference shall
Advance rental and security deposit in lease of properties shall
be paid.
not be considered as part to actual receipt subject to VAT except if
 If the Input Tax exceeds the Output Tax, the excess shall be the security deposit shall be used as payment for rentals.
carried over to the succeeding quarter or quarters. If it is
related to zero-rated sales, a refund may be done. INPUT VAT

e.g., VAT paid on purchased assets for the regular course of business.

Purchase = 10,000,000 x 12% = 1,200,000 (Input VAT) The value-added tax due from or paid by a VAT-registered person in
the course of his trade or business from a VAT-registered person on:
Sale = 7,500,000 x 12% = 900,000 (Output VAT)

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TAXATION
 Purchase of Goods or Properties A person engaged in the processing of sardines, mackerel, and
 Purchase of Services and Use or Lease of Properties milk, and in refined sugar and cooking oil, shall be allowed a
 Importation of Goods presumptive input tax, creditable against the output tax,
 Transitional Input Tax equivalent to 4% of the gross value in money of their purchases
 Presumptive Input Tax of primary agricultural products which are used as inputs to their
production.
The input VAT will be recognized on the month which the capital
good was purchased. ZERO-RATED TRANSACTION

CIR v. Sony Philippines Must be VAT registered

A subsidy should not be subject to VAT. The Subsidy is an Refers to the export sale of goods and supply of services wherein
assistance or aid in view of the respondent’s dire or adverse the applicable tax rate (output tax) is set at 0. When applied to the
economic conditions and was only “equivalent to the latter’s tax base, it results obviously results in no tax chargeable against the
advertising expense.” There must be a sale, barter, or purchaser.
exchange of goods or properties before any VAT may be  May file for refund on purchases es attributed on 0 rated
levied. transaction
Transitional Input Vat  carry over

A person who becomes liable to VAT or any person who elects to The seller of such transactions charges no output tax and may
be a VAT-registered person shall, subject to the filing of an claim a refund of a tax credit certificate for the VAT previously
inventory, be allowed input tax on his beginning inventory of charged. Excess Input VAT may be carried forward in the next
goods, materials, and supplies equivalent to 2% of the value of succeeding quarters or may be refunded.
such inventory or the actual VAT paid on such goods, materials, The recipient of the service must be doing business outside the
and supplies, whichever is higher, which shall be creditable against Philippines for the transaction to qualify for a zero rating.
the output tax.
It primarily benefits the exporter where its sales are not made subject
Entitlement to Transitional Input VAT is not based on the payment to VAT while its input tax on its VAT purchases are allowed to be
of VAT in the previous taxable quarters. They are entitled to it claimed for refund.
simply because they are transitioning.
Services Performed in the Philippines
Presumptive Input VAT
The following shall be considered as export services when the
following requisites concur:

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TAXATION
 Services are performed in the Philippines in favor of an Hence, it benefits the local purchaser/exporter since no VAT will be
individual or entity outside of the Philippines. shifted to it by the local supplier.
 Fees are paid in acceptable foreign currency.
Sales Subject to Zero Percent VAT
Thus is will be considered as a Zero-Rated Transaction.
 Export Sale/Constructive Export Sales
Persons Subject to Zero-Rated VAT  Sales Covered by Special Laws

To come within the purview of Sec. 108 of the NIRC, it is not I.e., Renewable Energy Developers under R.A. No. 9513,
enough that the recipient of the service be proven to be a foreign International Rice Research Institute, Asian Development Bank
corporation; rather, it must be specifically proved to be a
Constructive Export
nonresident foreign corporation.
Refers to the sale of goods or supply or service to eco-zones and
 Tax residency certificate
freeport zones, which are considered foreign territory.
 Negative certificate from SEC certifying that such entity is not
registered as doing business CIR v. American Express International, Inc.

CIR vs Seagate Respondent is a VAT-registered person who facilitates the

collection and payment of receivables belonging to its non-
Zero-rated transactions generally refer to the export sale of
resident foreign client, for which it gets paid in acceptable
goods and supply of services. The seller of such transactions
foreign currency. Certainly, the service rendered by Amex in
charges no output tax, but can claim a refund of or a tax
the Philippines should be zero-rated.
credit certificate for the VAT previously charged by
suppliers. Registered Export Enterprise

Effectively Zero-Rated Transactions Any entity registered with an IPA engage in manufacturing,
assembling, or processing activity, and services such as Information
Refers to the sale of goods or supply of services to persons or
Technology (IT) activities and Business Process Outsourcing
entities whose exemption under special law or international law
(BPO), and resulting in the direct exportation, and/or sale of its
agreements to which the Philippines is a signatory effectively
manufactured, assembled, or processed product or ITIBPO
subjects such transactions to a zero-rated.
services to another registered export enterprise.
No direct contact between the local supplier and the customer
Only the purchases of goods and services that are directly and
outside of the Philippines.
exclusively used in the registered project or activity of the
registered export enterprise shall be zero rated. RBEs which are

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categorized as domestic market enterprises are not entitled to  Sale or importation of prescription drugs and medicines for
VAT zero rating on local purchases. diabetes, high cholesterol, and hypertension, cancer, mental
illness, tuberculosis, and kidney diseases.
 Export Entity – 70% of total production is exported.
 Association dues, membership fees, and other assessments and
 Domestic Entity – less than 70%; subject to 12% regular vat.
charges collected by homeowners’ associations and
Direct and Exclusive Use in the Registered Project or Activity condominium corporations.
 Lease of residential unit with a monthly rental not exceeding
Refers to raw materials, supplies, equipment, goods, packaging
15,000.
materials, services, including provision of basic infrastructure,
 Sale or lease of goods or properties or the performance of
utilities, and maintenance, repair and overhaul of equipment, and
services where the gross annual sales and and/or receipts do not
other expenditures directly attributable to the registered project
exceed the amount of 3,000,000.
or activity without which the registered project or activity
cannot be carried out. Input tax may be apportioned if a part of the sale is exempt.

VAT EXEMPT Zero-Rated Transactions vs. VAT-exempt Transactions

Exempt Transactions In both instances of zero rating, there is total relief for the
purchaser from the burden of tax. But in an exemption, there is
 Services subject to percentage tax
only partial relief since the purchaser is not allowed any tax
 Medical, dental, hospital, and veterinary services, except those refund or credit for input taxes paid.
rendered by professionals
 Educational services rendered by private educational institutions, Exempt Transaction vs Exempt Party
duly accredited by DepED, CHED, TESDA, and those rendered An exempt transaction involves good or services which, by their
by government educational institutions. nature, are specifically listed in and expressly exempted from
 Services rendered by individuals pursuant to an employer- VAT under the Tax Code, without regard to the tax status of the
employee relationship. other party to the transaction. Such transaction is not subject to
 Services of bank, non-bank financial intermediaries performing VAT, but the seller is not allowed any tax refund of or credit of
quasi-banking functions, and other non-bank financial any input taxes.
intermediaries.
 Sale or lease of goods and services to senior citizens and persons An exempt party, on the other hand, is a person or entity granted
with disabilities. VAT exemption under the Tax Code, a special law, or
 Transfer of property. international agreement to which the Philippines is a signatory.
Such party is also not subject to VAT but may be allowed a tax

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refund or credit for input taxes paid depending on the registration foreign tax jurisdiction shall also be given certain benefits or
as VAT or non-VAT taxpayer. exception from the Philippine Tax.

ESTATE TAX Reciprocal Rule shall only be considered if the following requisites
are present:
 Taxes imposed on properties on the transfer of properties by way
of succession. They are considered as Excise Tax since taxation  Decedent is an NRA
applies over the right to transfer the property.  Their property is an intangible personal property in the PH

Estate Tax is governed by the statute in force at the time of death Inclusions:
of the decedent. Estate tax accrues as of the death of the decedent  Decedent’s Interest
and the accrual of the tax is distinct from the obligation to pay tax.
 Transfer in Contemplation of Death – transfer shall take effect
FORMULA: only upon the death of the decedent (there’s an actual planning)
 Revocable Transfer – there is transfer but the testator reserved or
Gross Estate – Deductions = net estate/tax rate (6%) retained the right to revoke the transfer
SITUS OF ESTATE TAX  Property passing under general power of appointment –

RC, NRC, RA – all property, real or personal, wherever situated, Exception to item no. 2 – 4: in case of a bona fide sale for an
shall be subject to Philippine Estate Tax. adequate and full consideration in money or money’s worth.

NRA – Only that part of the entire gross estate which is situated in  Fictitious Sale - Determine the fair market value at the time of
the PH shall be taxable. the transfer vs consideration – insufficient consideration. The
Difference shall be included in the gross estate.
 XPN: If reciprocity rule applies, no tax shall be collected with  Proceeds of Life Insurance
respect of intangible personal property. The following property
- Beneficiary is estate, executor/admin – part of the gross
shall be subject to estate tax:
estate
- Real Property in the PH
- Other beneficiaries
- Tangible Personal Property in the PH
a. If designation is revocable – part of the gross estate
Reciprocity Rule b. If designation is Irrevocable – not part of the gross estate
 Transfer for Insufficient Consideration – included in the gross
 If the foreign tax jurisdiction is providing for certain benefits or estate only the excess of the fair market value at the time of the
exception for Filipino citizens, the nationals (NRA) of such death of the testator

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Gross Estate Exemptions Lorenzo v Posadas

 Merger of usufruct (decedent) in the owner of the naked title Inheritance Tax is distinct from the obligation to pay the same. The
 Transmission or delivery of the inheritance or legacy by the tax is upon transmission or the transfer or devolution of property of a
fiduciary heir or legatee to the fideicommissary. decedent, made effective by his death.
 The transmission from the first heir, legatee, or donee, in favor If death is the generating source from which the power of the
of another beneficiary, in accordance with the desire of the state to impose inheritance taxes its being and it, upon the death of
predecessor. the decedent, succession takes place and the right of the state of
 All bequests, devises, legacies, or transfers to social welfare, tax vest instantly, the tax should be measured by the value of the
cultural and charitable institutions, no part of the net income of estate as it stood at the time of the decedent’s death, regardless of
which injures to the benefit of any individual; provided, any subsequent contingency affecting value or any subsequent
however, that no more than 30% of said bequests, devises, increase or decrease in value.
legacies, or transfers, shall be used by such institutions for
administration purposes. A statute should be considered as prospective in its operation,
whether it enacts, amends, or repeals an inheritance tax, unless
VALUATION the language of the statute clearly demands or presses that it shall
Fair Market Value at the time of death for real property – have a retroactive effect.
whichever is higher: DEDUCTION AGAINST THE GROSS ESTATE
 Fair Market Value as determined by the Commissioner (For RC, NRC and RA)
 Fair Market Value as shown in the schedule of values fixed by
the provisional and city assessors A. Casualty Losses, Indebtedness, and Taxes

For shares of stocks – fair market value shall depend on whether the Casualty Losses
shares are listed or unlisted Refers to losses incurred during the settlement of the estate
 Unlisted common shares – value at book value arising from fires, storms, shipwreck, or other casualties, or from
robbery, theft, or embezzlement which is not compensated by
 Unlisted preferred shares – value at par value
insurance and not been claimed as deduction for income tax.
 Shares which are listed in the PSE (common or preferred) –
valued at the arithmetic mean between the highest and lowest  Incurred not later that the last day of the payment of the estate
quotation at a date nearest the date of death, if none is tax
available, on the date of death itself.
Indebtedness

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This includes claims against the estate, claims of the deceased D. Family Home
against insolvent persons, and Unpaid Mortgages.
If the current fair market value of the decedent’s family home
 Date-of-death Valuation Rule exceeds 10 million pesos, the excess shall be subject to estate tax.
If the value of the property is less than 10 million pesos, the
Dizon v CA decedent may not avail the said deduction.
Claims existing at the time of death should be made the basis of the E. Standard Deduction (5 million)
determination of allowable deductions. Thus, post-death
developments are not material in determining the amount of the No substantiation requirement to claim the deduction
deduction.
F. Amount Received by Heirs under R.A. 4917 (Retirement
Taxes benefit of employee of a private firm)

Accrued as of the death of the decedent which were unpaid as of (For NRA)
the time of death. Income tax arising and accruing after death
A. Losses, taxes, and indebtedness prorated based on the
shall be excluded.
ratio if the gross estate situated in the Philippines over
B. Vanishing Deduction the total gross estate situated worldwide.

The following requisites must be present: e.g.,

 The Property must be part of the gross estate of the decedent Total Losses, Indebtedness, and Taxes: 1 million
in the Philippines Gross Estate in the Philippines: 400,000 (40%)
 The property must be transferred through succession or Gross Estate Worldwide: 1 million
donation to the decedent within 5 years prior to his death. Gross Estate in the PH = 40% * Total Losses, Indebtedness,
 Donor’s tax or estate tax imposed in the transfer of the property Taxes
to the decedent must have been paid. Gross Estate Worldwide
 No vanishing deduction on the immediately preceding
transfer has been claimed. B. Vanishing Deduction
C. Transfer for Public Use C. Transfer for Public Use
D. Standard Deduction (500,000)
The amount of all bequests, legacies, devises, or transfers to or for
the use of the Government or any political subdivision for (For all Decedents)
exclusively public purposes. A. Share in Conjugal Property

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The net share of the surviving spouse in the conjugal property as legacy or inheritance, unless a certification from the
diminished by the obligations properly chargeable to such Commissioner that the taxes have been paid is shown.
property shall be deducted from the net estate of the decedent.
If a bank has knowledge of the death of a person, who maintained a
TAX ESTATE COMPUTATION AND ADMINISTRATIVE bank deposit account alone, or jointly with another, it shall allow
PROVISIONS any withdrawal from the said deposit account, subject to 6%
final withholding tax. For this purpose, all withdrawal slips shall
Tax Rate: 6%
contain a statement to the effect that all of the joint depositors are
Tax Base: Net Estate at the time of death
still living at the time of withdrawal by any one of the joint
Tax Credit: credited with the amount of any estate tax imposed by
depositors and such statement shall be under oath by the said
the authority of a foreign country
depositors.
Time of Filing: Within 1 year from decedent’s death
Place of Filing: Authorized agent bank or Revenue District Officer DONOR’s TAX
in the municipality in which the decedent was domiciled at the time
of his death. Lladoc v. Commissioner of Internal Revenue
Time of Payment: Pay as you file
Donor’s tax is an excise tax imposed on the privilege of
Extension of Payment transferring property by way of a gift inter vivos based on pure
act of liberality without any or less than adequate consideration and
When the Commissioner finds that the payment on the due date of without any legal compulsion to give.
the estate tax would impose undue hardship upon the estate or any
of the heirs, he may extend the time for payment not to exceed 5 Donor’s Tax shall not apply unless and until:
years, in case the estate is settled through the courts, or 2 years in
 Donor knows of the acceptance by the donee
case the estate is settled extrajudicially.
 It is completed by the delivery, either actually or
No extension shall be granted if taxes are assessed by reason of: constructively, of the donated property to the decree

 Negligence The law in force at the time of the perfection/completion of the

 intentional disregard of rules and regulations donation shall govern the imposition of the donor’s tax.
 or fraud on the part of the taxpayer
RULE ON SITUS AND VALUATION
Certificate Authorizing Registration
Same as estate taxation.
There shall not be transferred to any new owner any share,
GROSS GIFT
obligation, bond or right by way of gift inter vivos or mortis causa,

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Where property, other than real property referred to in Section  Gifts in favor of an educational and/or charitable, religious,
24(D), is transferred for less than an adequate and full cultural, or social welfare corporation, institution, foundation,
consideration in money or money's worth, then the amount by trust, or philanthropic organization or research institution or
which the fair market value of the property exceeded the value of organization: Provided, that not more than 30% of said gifts
the consideration shall be deemed a gift and shall be included in shall be used by such donee for administration purposes.
computing the amount of gifts made during the calendar year.  Any contribution in cash or in kind to any candidate,
political party, or coalition of parties for campaign purposes
Provided, however, that a sale, exchange, or other transfer of
shall be governed by the Election Code.
property made in the ordinary course of business (a transaction
which is a bona fide, at arm’s length, free from any donative intent), DONOR’S TAX COMPUTATION AND ADMINISTRATIVE
will be considered as made for an adequate and full PROVISIONS
consideration in money or money’s worth.
Computed at 6% based on the total gifts in excess of 250,000
Rules on Renunciation exempt gift made during the calendar year.
Renunciation by the surviving spouse of his/her share in the Tax Credit – donor’s tax upon a donor who was a citizen or a
conjugal partnership or absolute community after the dissolution of resident at the time of donation shall be credited with the amount of
the marriage in favor of the heirs of the deceased spouse or any any donor’s tax of any character and description imposed by the
other person/s is subject to donor’s tax. authority of a foreign country.
General Renunciation by an Heir, including the surviving spouse, Time and Place of Filing and Payment
of his/her share in the hereditary estate left by the decedent is not
subject to donor’s tax, unless specifically and categorically done The return of the donor shall be filed within 3 days after the date
in favor of identified heir/s to the exclusion or disadvantage of the gift is made and the tax due shall be paid at the time of filing.
the other co-heirs in the hereditary estate. The return shall be filed and the tax paid to an authorized agent
EXEMPTION OF CERTAIN GIFTS bank, the Revenue District Officer, Revenue Collection Officer
or duly authorized Treasurer of the city or municipality where
The following shall be exempted: the donor was domiciled at the time of the transfer, or if there be
no legal residence in the Philippines, with the Office of the
 Gifts made to or for the use of the National Government or
Commissioner.
any entity created by any of its agencies which is not conducted
for profit, or to any political subdivision of the said In the case of gifts made by a nonresident, the return may be filed
Government. with the Philippine Embassy or Consulate in the country where he

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is domiciled at the time of the transfer, or directly with the Office of - The BIR will issue through the CIR’s authorized
the Commissioner. representative a Final Decision on Disputed Assessment
denying the protest.
TAX ASSESSMENT PROCESS
In case of Denial by Inaction
OVERVIEW OF THE TAX ASSESSMENT PROCESS
 Within 30 days from the expiration of the 180-day period, the
1. Letter of Authority – Gives authority to the BIR examiners to taxpayer may either:
conduct examination of the accounting records and books of the - file a judicial protest to the CTA Division.
taxpayer. - await the decision of the BIR’s authorized representative
2. The initial findings will be communicated to the taxpayer even if it may go beyond the 180 days. 30 days from the
through the issuance of Notice of Discrepancy. receipt of the decision, the taxpayer may appeal to the
3. Within 10 days from the conclusion of the discussion on the CTA Division.
discrepancies, there will be endorsement for the issuance of
Preliminary Assessment Notice (PAN) – contains the In case of Denial by the BIR’s Authorized Representative
preliminary findings of the BIR; more formal then the notice of  Within 30 days from the receipt of the final decision, the
discrepancies. taxpayer may file a judicial protest with the CTA Division.
4. From receipt of the PAN, the taxpayer is given 15 days to  Within 30 days from the receipt of the final decision, the
respond, protest, or reply. taxpayer may file an appeal to the CIR in the form of a
5. After protesting against the notice, the BIR will issue the Final Request for Reconsideration.
Assessment Notice (FAN) – contains the demand to pay.
6. Within 30 days from the receipt of the FAN and Formal Letter Appeal to the CIR will not extend the 180-day period for the BIR
of Demand (FLD), the taxpayer is provided 30 days to file an to decide on the administrative protest. If the 180-day period lapse
Administrative Protest (Request for Investigation or Request without the decision of the CIR, the remedy is to:
for Reconsideration)
 file a judicial protest to the CTA Division.
- Request for Investigation – Calls from presentation of
 await the decision of the BIR’s authorized representative even if
new evidence. The taxpayer is given additional 60 days to
it may go beyond the 180 days. 30 days from the receipt of the
submit relevant supporting documents.
decision, the taxpayer may appeal to the CTA Division.
- Request for Reconsideration – Calls for reevaluation of
the law and facts already stated in the protest. Any deviation or violation of the Tax Assessment Process may be
7. BIR is provided 180 days to decide on the admin protest. used by the taxpayer to question the validity of assessment.
- The BIR may either ignore the admin protest in which after
180 days, there will be a deemed Denial by Inaction. DUE PROCESS

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Cir V. Benipayo If a taxpayer is found to be liable for deficiency tax in the course of
investigation conducted by a Revenue Officer, the taxpayer shall
Assessment should not be based on mere presumptions no matter
be informed through a Notice of Discrepancy. This notice aims to
how reasonable or logical said presumption may be. Assessment
fully afford the taxpayer with the opportunity to present and
must be based on actual facts. The presumption of correctness of
explain his side on the discrepancies found.
an assessment being a mere presumption cannot be made to rest on
another presumption. Discussion of discrepancy shall not exceed 30 days from receipt of
the Notice. If after being afforded the opportunity to present his side
A. LETTER OF AUTHORITY (LOA)
through the Discussion of Discrepancy, it is still found that the
Authority given to the appropriate revenue officer assigned to taxpayer is still liable for deficiency tax and the taxpayer does
perform assessment functions. It empowers or enables said revenue not address the discrepancy through payment of the deficiency
officer to examine the accounting records and books of the taxes or the taxpayer does not agree with the findings, the
taxpayer for the purpose of collecting the correct amount of tax. investigating office, shall endorse the case for issuance of
Preliminary Assessment Notice within 10 days from the
Period of LOA conclusion of the discussion.
The LOA should be furnished to the taxpayer 30 days from the C. PRELIMINARY ASSESSMENT NOTICE (PAN)
date of its issuance. Otherwise, the examination and resulting
assessment may be considered ineffective. The LOA gives the A written communication issued by the CIR or his duly
revenue officer only a period of 120 days from receipt of LOA to authorized representative informing a taxpayer who has been
conduct his examination of the taxpayer. audited of the findings of his deficiency tax, showing in detail the
facts and the law, rules and regulations, and/or jurisprudence on
A LOA should cover a taxable period not exceeding one taxable which assessment is based.
year. The issuance of LOAs covering audit of “unverified prior
years is prohibited. A taxpayer shall respond within 15 days from date of receipt.
Otherwise, he shall be considered in default and a FLD/FAN shall
Letter of Notice (LN) be issued calling for payment.
A LOA addressed to a revenue officer is specifically required Protest
under the NIRC before an examination of a taxpayer may be held.
The LN is not found in the NIRC and is only for the purpose of A taxpayer has 15 days from receipt to file a protest with the BIR
notifying the taxpayer that a discrepancy is found based on the through a request for reconsideration or reinvestigation. Within
BIR’s RELIEF System and to afford the taxpayer to explain. 60 days from filing, the taxpayer must submit all relevant
supporting documents. Otherwise, the assessment shall become
B. NOTICE OF DISCREPANCIES (ND) final.

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If the protest is denied, in whole or in part, or is not acted upon It is a written demand to pay deficiency taxes issued to taxpayer
within 180 days from submission of documents, a taxpayer may who fails to respond to a PAN within the prescriptive period of
appeal the same to the CTA within 30 days from receipt of the time, or whose reply to the PAN was found to be without merit,
said decision of from the lapse of the 180-day period. Otherwise, whether in full or in part.
the decision shall become final and executory.
A FLD/PAN calling for payment of the taxpayer’s deficiency tax
Instances Where the Issuance of PAN Is Not Required shall state the facts, law, rules and regulations, or jurisprudence
on which the assessment is based. Otherwise, the FLD/FAN shall
 When the filing of any deficiency tax is the result of
be void. The definite amount and due dates must also exist in the
mathematical error in the computation.
FAN.
 When a discrepancy has been determined between tax
withheld and the amount actually remitted by the withholding An assessment contains not only a computation of tax liabilities, but
agent. also a demand for payment within a prescribed period. To enable
 When a taxpayer who opted to claim a refund or tax credit of taxpayer to determine he's remedies, due process requires that it must
excess creditable withholding tax for a taxable period was be served on and received by the taxpayer. The FLAN must also
determined to give carried over and automatically applied contain a demand to pay.
the same amount claimed. Under Sec. 222, there can be a direct criminal complaint without
 When the excise tax due on excisable articles has not been undergoing the process of assessment.
paid.
 When an article locally purchased or imported by an exempt Mandatory Requirement for Alleging the Factual and Legal
person, such as, but not limited to vehicles, capital equipment, Basis for the Assessment
machineries and spare parts, has been sold, traded or CIR v. Fitness by Design, Inc.
transferred to non-exempt persons.
The rationale behind the requirement that taxpayers should
Mandatory Service of PAN be informed of the facts and the law on which the assessments
The sending of PAN to taxpayer to inform the taxpayer of are based conforms with the constitutional mandate of due
assessment made is but part of the “due process requirement in process.
the issuance of a deficiency tax assessment”, the absence of which The purpose of the written notice requirement is to aid the
renders any assessment made by tax authorities nugatory. taxpayer in making a reasonable protest, if necessary. Merely
D. FORMAL LETTER OF DEMAND/FINAL notifying the taxpayer of his/her liability without details is
ASSESSMENT NOTICE (FLD/FAN) not enough.

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CIR v. Enron Subic Power Corp. from receipt. Otherwise, the Commissioner of Internal Revenue will
finalize an assessment and issue a FAN.
Inclusion of factual bases of an assessment in the advice,
preliminary letter, and audit working papers is not sufficient. On the other hand, a FAN contains not only a computation of tax
Hence, the advice of tax deficiency given by CIR, as well as the liabilities but also a demand for payment within a prescribed
preliminary five-day letter, were not valid substitute for the period. It also signals the time when penalties and interests begin
mandatory notice in writing of the legal and factual bases of the to accrue against the taxpayer.
assessment.

The law requires that the legal and factual bases of the
ADMINISTRATIVE PROTEST
assessment be stated in the formal letter of demand and
assessment notice. The alleged “factual bases” in the advice, Request for Reconsideration
preliminary letter, and “audit working paper” is insufficient.
Refers to a plea for re-evaluation of an assessment on the basis of
CIR v. Avon Products existing records without need of additional evidence. It may
involve a question of fact or of law or both.
It is true that the Commissioner it's not obliged to accept the
taxpayer’s explanations. However, when the Commissioner Request for Reinvestigation
rejects these explanations, he or she must give some reason
for doing so. The Commissioner must give the particular Refers to a plea for re-evaluation of an assessment on the basis of
facts upon which his or her conclusions are based. newly discovered evidence or additional evidence that a taxpayer
intends to present in the reinvestigation. It may involve a question of
The Commissioner’s inaction and omission to give due fact or of law or both.
consideration to the arguments and evidence submitted before
her by Avon are deplorable transgressions of Avon’s right to CIR v. Liquigaz Philippines
due process. The right to be heard, which includes the right to A Final Decision on Disputed Assessment (FDDA) without any
present evidence, is meaningless if the commissioner can details on the specific transactions which gave rise to its
simply ignore the evidence without reason. supposed tax deficiencies would invalidate the FDDA. It is
PAN vs. FAN tantamount to denial by inaction by the CIR, which may still
be appealed before the CTA.
A PAN merely informs the taxpayer of the initial findings of the
Bureau of Internal Revenue. It does not contain a demand for Denial or Inaction
payment but usually requires the taxpayer to reply within 15 days If the protest is denied, in whole or in part, the taxpayer may either:

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 Appeal to the CTA within 30 days from the date of receipt of  File for Tax Amnesty if available
the said decision or  File a Petition for Review with the CTA if there is a valid ground
 Elevate his protest through request for reconsideration to the raised.
Commissioner within 30 days from the date of receipt of the
said decision. No re-investigation shall be allowed in REMEDIES FOR COLLECTION
administrative appeal and only issues raised in the decision shall
COMPROMISE, ABATEMENT, AND REFUND
be entertained.
A. Compromise
If the protest is not acted upon within 180 days from the date of the
filing of protest or submission of the required documents within The Commissioner may compromise the payment of any internal
60 days from the date of filing in case of a request for revenue tax when a reasonable doubt as to the validity of the
reinvestigation, the taxpayer may: claim against the taxpayer exists (doubtful validity) or when the
final position of the taxpayer demonstrates a clear inability to pay
 Appeal to the CTA within 30 days after the expiration of the
the assessed tax (financial incapacity).
180-day period or
 Await the final decision of the Commissioner’s representative  Financial Incapacity – a minimum compromise rate equivalent
on the disputed assessment. to 10% of the basic assessed tax shall be deducted.
 Doubtful Validity – a minimum compromise rate equivalent to
Estoppel as a Defense
40% of the basic assessed tax shall be deducted.
Allied Banking Corp. vs CIR
Where the basic tax involved exceeds 1,000,000, or where the
Exception to the rule of Exhaustion of Administrative settlement offered is less than the prescribed minimum rates, the
Remedies. The FLD issued by the CIR indicated that “it is the compromise shall be subject to the approval of the Evaluation
CIR’s final decision, and that the petitioner may appeal the Board which shall be composed of the Commissioner and the 4
final decision”. The court ruled that the language used, and the Deputy Commissioners.
tenor of the demand letter indicate that it is the final decision
The penalty from criminal violations may also be compromised
of the respondent on the manner. The CIR must indicate in a
except those cases already filed in court or fraud cases.
clear and unequivocal language whether his action on a
disputed assessment constitutes final determination. B. Abatement or Cancellation

Remedies after the FLD Becomes Final and Executory The Commissioner may abate or cancel a tax liability when the tax
or any portion thereof appears to be unjustly or excessively
 Pay the full amount.
 Apply for Compromise

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assessed or the administration and collection costs involved do  Commissioner or his duly authorized representative – if
not justify the collection of the amount due. amount involved is more than 1,000,000.
 Revenue District Officer – if the amount involved is 1,000,000
C. Credit or Refund
or less.
The Commissioner may credit or refund taxes erroneously or
Constructive Restraint
illegally received or penalties imposed without authority. Credit
or refund of taxes on penalties shall not be allowed unless the The commissioner may place under constructive distrait the
taxpayer files in writing with the Commissioner a claim for property of a delinquent taxpayer who is:
credit or refund within 2 years after the payment of the tax or
penalty. A return filed showing an overpayment shall be  Retiring from any business subject to tax
considered as a written claim for credit or refund.  Intending to leave the Philippines
 Intending to remove his property
No suit or proceeding shall be maintained in any court for refund  Intending to hide or conceal his property
or credit until a claim for refund or credit has been duly filed
 Intending to performing any act tending to obstruct the
with the Commissioner.
proceedings for collecting the tax due.
CIVIL REMEDIES
Constructive restraint shall be effected by requiring the taxpayer
The civil remedies for the collection of internal revenue taxes, fees, or any person having possession or control of such property to
or charges resulting from delinquency shall be: sign a receipt covering the property distrained and obligate himself
to preserve and not to dispose the same.
 By distraint of personal property and levy upon real property
and interest in rights to real property. If such person fails to sign the receipt, the revenue officer shall
 By civil or criminal action. proceed to prepare a list of such property and leave a copy
thereof in the premises in the presence of 2 witnesses.
Either of remedies may be pursued simultaneously at the discretion
of the authorities charged with the collection of such taxes. The B. Levy of Real Property
remedies of distraint and levy shall not be availed of where the After the expiration of the time required to pay the delinquent
amount of tax is not more than 100 pesos. tax, real property may be levied upon, before simultaneously or
A. Distraint of Personal Property after the distraint of personal property. Any internal revenue
officer designated by the Commissioner, or his duly authorized
Upon failure to pay the delinquent tax, any personal property shall representative shall prepare a duly authenticated certificate
be seized and distraint by the: showing the name of the taxpayer and the amounts of the tax
and penalty due from him.

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Such certificate shall be mailed to or served upon the Register of
Deeds and upon the delinquent taxpayer or his agent or occupant
of the property in question.

In case the warrant of levy on real property is not issued before

or simultaneously with the warrant of distraint and the personal
property is insufficient to satisfy the delinquency, the
Commissioner shall, within 30 days after the execution, proceed
with the levy.

EFFECT OF INJUNCTION

No court shall have the authority to grant an injunction to

restrain the collection of any revenue tax, fee, or charged imposed
under the NIRC. Prohibition shall apply to all collection activities
of the BIR on disputed assessments.

Exception: Motion for Suspension of the Collection of the Tax

Liability

A motion may be filed together with the Petition for Review or

with Answer at any stage of the proceedings based on the following
grounds:

 When the collection of tax may prejudice the interest of the

government or the taxpayer.
 Taxpayer is willing to deposit the amount claimed or to file a
surety bond for no more than double the amount to be fixed by
the court.

The Court may grant the Motion provided that the petitioner
deposit with the Court an amount in cash equal to the value of
the property or goods under dispute or filing a surety bond.

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TAX ASSESSMENT PROCESS FLOW
A

RC – Resident Citizen RA – Resident Alien

NRA – Non-resident Alien NRC – Non-resident Citizen
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PRESCRIPTIVE PERIOD FOR ASSESSMENT to prove by competent evidence that such notice was indeed
received by the addressee.
AND COLLECTION
Why did this true that an assessment is made when the notice is
3-YEAR PRESCRIPTIVE PERIOD FOR ASSESSMENT AND sent within the prescriptive period, release, mailing, or sending
COLLECTION of the same must still be clearly and satisfactorily proved. No
Internal Revenue taxes shall be assessed within 3 years, whichever proceeding in court without assessment for the collection of such
comes later: taxes shall be begun after the expiration of 3-year prescriptive
period for the assessment except in case of false or fraudulent
 after the last day prescribed by law for the filing of the return or failure to file a return.
return
Exception to the 3-Year Prescriptive Period
 from the day the return was actually filed
In case of False or Fraudulent Return or Failure to File a Return.
CIR v. Phoenix Assurance

If the return originally filed is amended substantially, the  The tax may be assessed, or a proceeding court for the
counting for the 3-year period starts from the date the amended collection of such tax may be filed without assessment, at any
return was filed. time within 10 years after the discovery of the falsity, fraud,
or omission.
Basilan Estates, Inc. v. CIR  Any Internal Revenue tax which has been assessed within the
period of limitation (10-year prescriptive period) maybe
The assessment is deemed made when notice to this effect is
collected within 5 years following the assessment of the tax.
released, mail, or sent by the Bureau of Internal Revenue to the
taxpayer, and it is not required that the notice be received by the There is prima facie evidence of false or fraudulent return when
taxpayer within the prescriptive period. the taxpayer substantially underdeclared his taxable sales,
receipts or income, or substantially overstated his deductions.
CIR v. GJM Phil. Manufacturing
The taxpayers failure to report sales, receipts or income in an
When an assessment is made within the prescriptive period,
amount exceeding 30% of that declared per return, and a claim
receipt by the taxpayer may or may not be within said period.
of deduction in an amount exceeding 30% of actual deduction
But the rule does not dispense with the requirement that the
shall render the taxpayer liable for substantial under declaration
taxpayer should actually receive the assessment notice, even
and over declaration and will justify the imposition of the 50%
beyond the prescriptive period. If the taxpayer denies having
surcharge on the deficiency tax due from the taxpayer.
received the assessment, it then becomes incumbent upon the BIR
False Return – deviation from the truth, whether intentional or not.

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Fraudulent Return – implies intentional or deceitful entry with  The waiver should be duly notarized.
intent to evade taxes due.  The CIR or the revenue official authorized by him must sign
the waiver indicating that the BIR has accepted and agreed to
Grounds for Suspension of the Running of Statute of Limitation
the waiver. The date of such acceptance by the BIR should be
 For the period during which the Commissioner is prohibited indicated.
from making the assessment or beginning the strength or levy or  Both the date of execution by the taxpayer and the date of
proceeding in court and for 60 days. acceptance by the Bureau should be before the expiration of
 When the taxpayer request for a reinvestigation which is granted the period of prescription or before the lapse of the period
by the Commissioner. agreed upon in case a subsequent agreement is executed.
 When the taxpayer cannot be located in the address given by him  The waiver must be executed in three copies, the original copy
in the return filed except if the taxpayer informs the to be attached to the docket the case, the second copy for the
Commissioner of any change in address. taxpayer, and the third copy for the office accepting the waiver.
 When the war rant of the strange levy his duty serve upon the
JEOPARDY ASSESSMENT
taxpayer and no property could be located.
 when the taxpayer is out of the Philippines. Tax assessment made by an authorized Revenue Officer without
the benefit of complete or partial audit, in light of the officer’s
WAIVER
belief that the assessment and collection of a deficiency tax will be
A taxpayer, believing that he cannot present his books of accounts jeopardized by delay caused by the Taxpayers’ failure to:
or records, who intends to request for more time to present these
 Comply with audit and investigation requirements to present
documents may execute what is referred to as a Waiver of the
his books of accounts or pertinent records
Defense of Prescription under the Statute of Limitations. These
 Substantiate all or any of the deductions, exemptions, or
records do not apply when a subpoena duces tecum has already
credits claimed in his return.
been issued.
BEST EVIDENCE OBTAINABLE RULE
Requisites
The BIR may resort to any document material to the inquiry,
 The waiver must be in the proper form prescribed by the BIR.
information from government offices, and testimony of other
Expiry date should be indicated.
persons when the report or records requested from the taxpayer is
 The waiver must be signed by the taxpayer himself or his duly
not forthcoming, or the reports submitted are false, incomplete, or
authorized representative.
erroneous.
 In the case of incorporation, the waiver must be signed by any
of its responsible officials.

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SUMMARY ON RULES ON PRESCRIPTIVE PERIODS FOR Filing of protest against final assessment notice in the form of
CLAIMING REFUND OR CREDIT OF INPUT VAT request for investigation or reconsideration, the BIR is given a
period of 180 days to decide.
A. Two-Year Prescriptive Period
- It is only administrative claims may be filed within two- Remedy: Within 30 days from the receipt of decision from BIR
year prescriptive period. denying the refund or expiration of 180 days period of decision.
- The proper reckoning date for the two-year prescriptive Need to wait for the decision.
period is the close of the taxable quarter when the relevant
sales were made.
- The two-year prescriptive period for filing a claim for tax COLLECTION OF DELINQUENT ACCOUNTS
refund or credit of unutilized input VAT payments
should be counted from the date of filing of the VAT
return and payment of tax.

Remedy: Within 30 days from the receipt of decision from BIR

denying the refund or expiration of 90 days period of decision,
the next recourse is to file for a petition for review in the CTA (no
need to wait for decision).

B. 120+30 Day Period

An administrative claim must be filed with the CIR within 2

years after the close of the taxable quarter when the zero-rated or
effectively zero-rated sales were made.

The CIR has 120 days from the date of submission of complete
documents in support of the administrative claim within which
to decide whether to grant a refund or issue a tax credit certificate.
The 120-day period may extend beyond the two-year period from
the filing of the administrative claim.

If the 120-day period expires without any decision from the CIR,
then the administrative claim may be considered to be denied by
inaction.

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NRA – Non-resident Alien NRC – Non-resident Citizen