Tax Sababan

Income Tax
1. Mr. X, resident citizen, derived the following items of income within the taxable period. Discuss on
whether or not he will include in his gross income the foregoing income in the filing of annual net
income tax return.
a. Sale of shares of stocks
We must distinguish.
The income derived from the sale of shares of stocks will not be included in the gross
income of Mr. X, provided that it is a share of stock in a domestic corporation which is
considered as a capital asset and it is not listed or traded in the local stock exchange. In
such case, it will be subject to final income tax and a separate return is to be
accomplished by the taxpayer.
On the other hand, if the shares of stock is merely an ordinary asset or it fails to meet
one or more of the requirements provided for by the law then it shall be included in the
gross income, provided that it is not listed or traded in the local stock exchange. (Refer
to Section 24 C of the NIRC)
b. Sale of Real Property
If the realty is a capital asset which is located within the Philippines, then Mr. X, being a
resident citizen, shall not include the income derived from the sale in his gross income.
In such case, the income derived from the sale of realty shall be subject to final income
tax and a separate return will be accomplished by the buyer.
On the other hand, if the realty is merely an ordinary asset or it fails to satisfy the
requirements provided for by the law, then Mr. X, being a resident citizen, shall include
in his gross income the income derived from the sale of real property. (Refer to Section
24-D1 of the NIRC)
2. A,B C and Associates is a general professional partnership of new lawyers belonging to the same law
class and fraternity. Aside from the receipt of income from exercise of common profession they receive
income from bank interest in a bank in Makati. The BIR assessed the said general professional
partnership of the corporate income tax on the part of the general professional partnership and net
income tax for the share of each partner.
a. Is the action of the BIR legally tenable?
With respect the assessment of the corporate income tax, the BIR is not legally correct
because the general professional partnership, in this case, remains exempt from
corporate income tax. The income derived by the general professional partnership from
a bank interest merely constitutes a passive income which is subject to a final income
tax and there is a separate return for this. Hence, the general professional partnership,
in this case, remains exempt from corporate income tax and the BIR is not correct in the
assessment.
However, with respect to the assessment of income tax for the share of each partner,
the BIR is legally correct because the general professional partnership is not taxable as a
corporation. Hence, the partners shall be liable to pay by way of net income tax in their
separate and individual capacity.
b. Will your answer be the same if the other income was derived from the sale of real property?
If the other income was derived from the sale of realty, it depends on whether the
realty is classified as a capital asset located within the Philippines.
Assuming that it is a capital asset and all other requirement provided for by law are
present, the answer will be the same. The general professional partnership, in this case,
remains exempt from corporate income tax because the income derived from the
transaction is subject to final income tax and a separate return is accomplished by the
taxpayer.
However, if the realty is an ordinary asset or one or more of the requirements provided
for by law are not satisfied, then the answer will not be the same. The general
professional partnership is no longer exempted from the corporate income tax because
their gross income is not anymore derived purely from the exercise of common
profession. Since it is now taxable as a corporation, the share of each partner will now
be treated as a dividend which is subject to final income tax. (Refer to Section 24-D1 and
Section 26 of the NIRC)
3. The widow and children of a passenger who died in an airplane crash were paid P1,000,000.00 by the
airline. This amount was reached after negotiation between the heirs of the deceased and the insurer of
the airline, the latter having received evidence that the deceased had a substantial income at the time
of his death and that the productive years would have insured financial stability for his family.
a. Is the P1,000,000.00 subject to income tax?
The amount of P1-M shall not be subject to income tax because it is an exclusion from
the gross income of the taxpayer.
Under the law, proceeds from a life insurance policy which is payable upon the death of
the insured-taxpayer shall not form part of his gross income and therefore exempted
from income tax. (Refer to Section 32-B1 of the NIRC)
b. Will your answer be different if the said passenger did not die but was only hospitalized?
If the passenger did not die but was merely hospitalized, the answer will still be the
same because it is still an exclusion. But this time, the amount received from the insurer
will be classified as a compensation for injury or sickness.
Under the law, any amount of compensation received by the taxpayer as a result of the
accident whether by suit or by an agreement, such compensation will still be excluded
from the gross income and therefore exempted from income tax. (Refer to Section 32-
B4 of the NIRC)
4. A took out a life insurance policy for P1,000,000.00 naming his wife as a beneficiary. Under the terms
of the policy, the insurer will pay A the amount of P1,000,000.00 after the 10
th
year of the policy and his
beneficiaries, should he die before that date, A outlived the policy and received P1,000,000.00. The
premiums paid on the policy was P100,000.00.
a. Is the P1-M received by A subject to tax? What about if he died before the 10
th
year? Is it
subject to income tax?
If the insured was able to outlive the policy, the P1-M is not entirely subject to tax. The
return on premium amounting to P100,000.00 will constitute as an exclusion from the P1-M.
However, if the insured died before the 10
th
year, then the entire P1-M will constitute as an
exclusion because it will considered as a proceeds from a life insurance policy which is
payable upon the death of the insured. Hence, the amount received by A shall be exempt
from income tax. (Refer to Section 32-B2 of the NIRC)
b. Is it subject to estate tax?
If the designation of the wife as a beneficiary is revocable, then the proceeds from the
insurance policy shall form part of the gross estate of the deceased and therefore subject to
estate tax.
However, if the designation of the wife as a beneficiary is irrevocable, then the proceeds
shall not form part of the gross estate of the deceased and therefore exempt from estate
tax. (Refer to Section 85-E of the NIRC)
5. In January 2003, X Corporation, a resident foreign corporation, declared cash dividends to its
stockholders, one of whom is Y Corporation, a non resident foreign corporation organized , established
and existing under the laws of B country. In B country, income derived outside B country is exempt from
income tax.
a. Will the cash dividends received by Y corporation be subjected to income tax law of the
Philippines? What kind of income tax? Will you consider the higher rate of 30% or the lower
preferential rate of 15%?
We must qualify.
If the dividend was received from a foreign corporation, it will only be subjected to the
income tax law of the Philippines provided that it is considered as an income from the
sources within the Philippines. A cash dividend from a domestic corporation shall only be
considered as an income derived from sources within the Philippines if at least 50% of the
gross income of such foreign corporation during the three(3) year period ending with the
close of taxable year preceding the declaration of such dividends was derived from sources
within the Philippines.
On the other hand, if the cash dividend is not considered as an income from sources within,
then such dividend is exempt because being a non-resident foreign corporation, Y
corporation can only be subject to tax on its income derived from sources within the
Philippines.
If the cash dividend is taxable under Philippine law, then it will be taxed by way of the
corporate income tax which is 30%.
b. Corporation is a domestic corporation.
Corporation is a domestic corporation.
Under the law, if a non-resident foreign corporation received a dividend from a domestic
corporation, then the lower rate of 15% shall be applied but subject to the rule on
reciprocity. This is otherwise known as the intercorporate dividends tax.
Corporation which is now a domestic corporation.
Since the country of Y corporation is granting an exemption from tax to non-resident foreign
corporation, then the more the reason that we have to apply the lower rate of 15% (Refer to
Section 28-5b of the NIRC)
6. Santo Antonio Law School is a private educational institution which is a domestic corporation. Santo
Antonio owns a 2-hectare lot. One half of which is used as Santo Antonio school campus while the other
half is vacant. To cope with the increasing operating costs and to upgrade its facilities, Santo Antonio
plans to lease to supermarket the vacant portion of the lot.
a. With regard to the income of the law school from tuition fees, discuss the income tax liability
as to the rate and kind of income tax or on whether or not it is liable to pay income tax.
With regard to its income from tuition fees, Santo Antonio Law School is exempt from
income tax if it is a non-stock and non-profit, considering that it is a private educational
institution and a domestic corporation.
If the said school is a private educational institution, but stock and non-profit, then it is
subject to a preferential rate of ten (10%) on its taxable income, provided that its income
from unrelated trade or business does not exceed fifty (50%) percent of its total income,
and that it is accredited by the DECS, CHED and the TESDA. Otherwise, if the foregoing
requirements or conditions are not met, then the said school is subject to the normal
corporate income tax, despite its being a private educational institution. (Refer to Section
27-B of the NIRC)
b. With regard to the lease of the vacant lot to the supermarket, can the rentals be exempted
from the income tax and real property tax on the ground of incidental purpose because the
rentals will be used to support educational institution?
The rentals cannot be exempted from income and real property tax.
The income derived from the lease of the vacant lot to the supermarket is subject to income tax.
Despite the fact that said school is private and maybe non-stock and non-profit, hence exempt
from paying income tax on the tuition fees, nonetheless its income from the said lease to
supermarket is subject to income tax. Inasmuch as the lease is considered as an income
generating activity apart from the primary source of the said school. Such being the case, the
said lease is not exempt from income tax.
On the other hand, the income derived from the lease is also subject to real property tax. The
school property is no longer actually, directly and exclusively used for educational purposes,
irrespective of whether or not the said lease is merely an incidental purpose because the rentals
will be used to support the school. (Refer to Section 30 of the NIRC)
7. A parcel of land which is a capital asset located in the Philippines was sold by the owner who is a
resident citizen.
a. Is it possible that he will be allowed to claim deductions in the payment of income for the sale
of the foregoing real property?
It is possible that the owner will be allowed to claim deductions in the payment of income
tax for the sale of the foregoing property.
If the real property classified as capital asset and located within the Philippines was sold to
the government or any of its political subdivisions or agencies or to government owned or
controlled corporations, then the seller has the option of whether he will be taxed by way of
net income tax or by way of final income tax on the sale of property.
If the seller opted to apply net income tax, then the gain from the sale of the said land will
form part of his gross income where deductions are allowed.
Hence, it is possible that the seller owner will be allowed to claim deductions in the
payment of income for the sale of the foregoing real property. (Refer to Section 24-D1 of
the NIRC)
b. Will your answer be the same if the seller taxpayer is a non-resident alien not engaged.
If the seller-taxpayer is a non-resident alien not engaged in trade or business in the
Philippines, then the answer will not be the same.
Basic is the rule that a non-resident alien not engaged in trade or business are not allowed
to claim deductions because they do not pay by way of net income tax but by the way of
gross income tax or final income tax, as the case may be.
Hence, a seller-taxpayer who is a non-resident alien not engaged in trade or business cannot
in any way claim any deductions. (Refer to Section 25-B of the NIRC)
8. X is a domestic corporation which is engaged in business of the manufacture of garments. In order to
improve its business, it engaged an American Corporation which is a resident foreign corporation to look
customers in the United States and to sell its products to the customers. X will pay the American firm a
commission based on the volume of sales in the USA. X also entered into an agreement with the same
American firm whereby the latter will render technical knowledge, information or assistance to X to
enable it to meet the international export standards for the American firm will be paid a royalty.
a. State whether the royalties and commissions payable to said American firm is subject to
Philippine income tax? What kind of income tax?
The royalties payable to the American firm, being a resident foreign corporation, shall be
subject to final income tax of twenty (20%) percent as the said royalties are earned by said
corporation from sources within the Philippines, and considered as a passive income.
On the other hand, the commissions payable to the American corporation is not subject to
Philippine income tax as the said commissions are income from without the Philippines
because the foreign corporation can only be held liable to pay income tax only on income
derived from sources within the Philippines. (Refer to Section 24-B1 of the NIRC)
b. In the foregoing, will your answer be the same if instead of the American firm , the domestic
corporation hired the services of a resident citizen? What kind of income tax?
If the domestic corporation hired the services of a resident citizen, the answer will not be
the same.
Both the royalties and the commissions payable to a resident citizen are subject to
Philippine income tax since it is a basic rule that a resident citizen shall be liable to pay
income tax on income derived from sources within and without the Philippines.
The royalties, being a passive income earned within the Philippines will be subject to final
income tax of twenty (20%) percent while the commissions will form part of the gross
income subject to net income tax (Refer to Section 24 A and 24-B of the NIRC)
9. A taxpayer receives bank interest :
a. Illustrate the application on net income tax and final income tax.
If a corporation, either a domestic corporation or resident foreign corporation earns bank
interest income which is not passive or even if passive income but earned without the
Philippines in the case of domestic corporation, then the said bank interest income will form
part of the gross income subject to net income tax.
In such case, the corporation may be held liable to pay income tax by way of minimum
corporate income tax of two percent (2%) of the gross income, provided that the said tax is
imposed upon the corporation on its fourth year from the commencement of the operations
wherein said tax is greater than that of the net income tax had the latter been imposed.
(Refer to Section 27-E1 and Section 28-A2 of the NIRC)
b. Illustrate the application of net income tax and final income tax.
Net income tax is imposed on bank interest income if such income is not passive income, or
even if passive income but earned outside the Philippines in the case of resident citizen and
domestic corporation, hence not subject to final income tax and imposed upon all taxpayers
except non-resident alien not engaged in trade or business in the Philippines and non-
resident foreign corporation, in which they are liable to pay gross income tax.
Interest income for long term deposit or investment shall form part of the gross income
subject to net income tax of the domestic corporation and resident foreign corporation. If
the taxpayer is an individual, then such income is exempt from income tax. This rule applies
if the said income is not preterminated in five (5) years.
On the other hand, final income tax is imposed on bank interest income if such income is a
passive income and earned within the Philippines, and is imposed on all the taxpayers
except non-resident alien not engaged in trade or business in the Philippines and non-
resident foreign corporation (Refer to Section 24-B of the NIRC)
10. X, an American citizen not engaged in trade or business in the Philippines. He is a stockholder of a
domestic corporation and a stockholder also of a resident foreign corporation. In 2003 both the
domestic corporation and resident foreign corporation declare cash dividend.
a. Is X liable to pay income tax in the Philippines from the receipt of cash dividend issued by
domestic corporation and resident foreign corporation? What kind of income tax?
With respect to the cash dividend received from the domestic corporation, X shall be liable
to pay income tax. The amount received from a domestic corporation shall be considered as
an income derived from the sources within the Philippines. Being an American citizen who is
not engaged in trade or business in the Philippines, X can only be held liable to pay income
tax on income derived from sources within. Hence, X shall not be held liable to pay income
tax on cash dividend received from the domestic corporation.
With respect to the dividend received from the resident foreign corporation, X shall be liable
to pay income tax provided that such cash dividend is considered as an income derived from
sources within the Philippines. A cash divided can only be considered as an income derived
from sources within the Philippines if at least fifty percent (50%) of the gross income of such
foreign corporation for the three (3) year period ending with the close of its taxable year
preceding the declaration of such dividends was derived from sources within the
Philippines. If it is not considered as income from sources within the Philippines, X shall be
exempt from income tax. (Refer to Section 42-A2b of the NIRC)
b. Will your answer in the foregoing facts be the same if the stockholder is a non-resident
foreign corporation?
If the stockholder is a non-resident foreign corporation, the answer will not be the same.
With respect to the cash dividend received from the domestic corporation, an
intercorporate dividend tax at the rate of 15% shall be imposed but subject to the rule on
reciprocity.
With respect to the cash dividend received from a resident foreign corporation, the non-
resident foreign corporation will be subject to tax provided that such cash dividend is
considered as an income derived from sources within the Philippines. In order to be
considered as income from sources within the Philippines, it is required that at least fifty
percent (50%) of the gross income of such foreign corporation, was derived from sources
within the Philippines. If such cash dividend was not considered as an income from sources
within the Philippines, then the non-resident foreign corporation shall be exempt. (Refer to
Section 28-B5b and Section 42 A2b of the NIRC)
11. X bought a jewelry in January 1999 for P100,000.00. He sold the same property in December 2000
for P180,000.00
a. If the said property is a capital asset, how much is the taxable income that should be reported
by X in the computation of net income tax?
If the jewelry is a capital asset, then the taxable income that should be reported by X in the
computation of the income tax should be fifty percent (50%) of the net capital gain he
derived from the sale.
The law provides that if a capital asset has been held by the taxpayer for a period of not
more than twelve (12) months prior to the sale or exchange, then only fifty (50%) of the gain
is taxable.

If Tonio is a rank and file worker, then the management cannot claim itemized deduction
the premium paid to the insurance company. When the premium paid by the management
for the life insurance of a rank and file employee, it is not considered as a deductible
expense under the law.
On the other hand, if Tonio is a managerial employee, then the answer will not be the same.
If a fringe benefit, like a life insurance is granted to a managerial employee, the company
can only claim it as an itemized deduction provided that the company has already paid the
final income tax imposed on the gross monetary value of the fringe benefit. (Refer to
Section 34-A1 and 36-A4 of the NIRC)
16. The Philippine embassy in Australia hired the service of Kylie Minougue, non-resident alien not
engaged in trade or business in the Philippines, to perform for two (2) nights at the Philippine embassy
in Australia. Minougue was paid P50,000.00.00 Australian dollars a night.
a. What are the taxes applicable under the NIRC? Was the income derived from sources within
the Philippines?
Since Kylie Minogue is a non-resident not engaged in trade or business in the Philippines,
the applicable taxes under the NIRC could either be gross income tax or final income tax?
The income derived can be considered as derived from sources within the Philippines. When
it comes to compensation for the services, the income derived shall be considered as an
income from sources within the Philippines, provided that such services was performed
within the Philippines. In this case, the Philippine Embassy in Australia can be considered as
an extension of the Philippine territory. Hence, the income derived by Kylie Minogue from
her performance in the Philippine Embassy from Australia can be considered an income
derived from Philippine source. (Refer to Section 42-A3 of the NIRC)
b. Will your answer be the same if the artist was April Boy Regino? Is there a difference in your
answer?
If the artist was April Boy Regino, the answer will not be the same.
As far as resident citizens are concerned, it is immaterial whether the service was performed
within or outside the Philippines because a resident citizen is taxable on all income derived
from sources within or without the Philippines.
Regardless of the place where April Boy Regino performed his concert, it shall always be
taxable.
Hence, the answer will not be the same. (Refer to Section 24-A1b of the NIRC)
17. X, domestic corporation, issued cash dividend. One of the recipients is an alien employed in a
petroleum service contractor.
a. Is the said non-resident alien liable to pay income tax? What kind of income tax?
If an alien employed by a petroleum service contractor is a non-resident alien engaged in
trade or business within the Philippines, then the cash dividends he received from the
domestic corporation X shall be taxed by way of final income tax.
On the other hand, if an employed by a petroleum service contractor is non-resident alien
not engaged in trade or business within the Philippines, then the cash dividend he received
from the domestic corporation X shall be taxed by way of gross income tax.
b. Will your answer be the same if the taxpayer is employed in an offshore banking unit?
If the taxpayer is employed in an offshore banking unit, then the answer will not be the
same.
An alien employed in an offshore banking unit could either be a resident alien or a non-
resident alien, whether or not engaged in trade or business within the Philippines.
If the alien employed in an offshore banking unit is a resident alien, then the cash dividend
received from a domestic corporation X shall be taxed by way of the final income tax.
On the other hand, if the alien employed in an offshore banking unit is a non-resident alien,
we have to further qualify. If the non-resident is engaged in trade or business, then the final
income tax shall be applied while if the non-resident alien is not engaged in trade or
business, then the gross income tax shall be applied. (Refer to Section 24-B2, 25-A2 and 25-
B of the NIRC)
18. During the year, a domestic corporation derived the following items of gross income. If you were the
responsible officer of the corporation, are you to include in the ITR of the corporation the said profit or
income?
a. Profit from the sale of parcel of land.
If the realty is a capital asset which is located within the Philippines, then I shall not include
the income derived from the sale in the income tax return of the corporation. In such case,
the income derived from the sale of realty shall be subject to final income tax and a
separate return shall be accomplished by the buyer.
On the other hand, if the realty is merely an ordinary asset or it fails to satisfy the one or
more of the requirements provided for by the law, then I shall include in his gross income
the income derived from the sale of real property. (Refer to Section 24-D1 of the NIRC)
b. Gains from stock transactions through Philippine Stock Exchange.
If I were the responsible officer of the corporation, then I will not include in the income tax
return of the corporation the gains derived from the stock transactions.
When the sale of shares of stocks is listed or traded through the local stock exchange or through
initial public offering, then net income tax will not apply. But instead, the applicable tax is
percentage tax which is being paid in lieu of the net income tax.
In this case, the gains from the stock transactions through Philippine Stock Exchange shall be
subject to the percentage tax.
Hence, I will not include in the income tax return of the corporation the gains derived from the
stock transactions. (Refer to Section 127 of the NIRC)
19. Pedro, a Filipino citizen, has immigrated to the US where he is now a permanent resident. He
receives income from his employment in the US on which the US income tax is paid. He owns certain
income-earning real property in the Philippines from which he has paid income tax under the Philippine
Income Tax law.
a. From his income from employment in the USA, is he liable to pay income tax under the
Philippine income tax law?
Pedro cannot be held liable to pay income tax under the Philippine law.
Basic is the rule that a non-resident citizen shall only be held liable for derived from sources
within the Philippines.
In this case, the income derived by Pedro from his employment in the US shall be
considered as an income derived from sources without the Philippines.
Hence, Pedro cannot be held liable to pay income tax under the Philippine law. (Refer to
Section 24-A1b of the NIRC)
b. In the payment of net income tax in the Philippines, can he claim tax credit pursuant to the
income tax paid in the USA?
Pedro cannot claim as tax credit the income tax he paid in the USA.
Under the law, the taxpayer allowed to claim tax credit are resident citizen and domestic
corporation.
In this case, Pedro is now a non-resident citizen.
Hence, Pedro cannot claim as tax credit the income tax that he paid in the USA (Refer to
Section 34-2a of the NIRC)
20. Mr. X, resident citizen, while relaxing in his living room, picked up the telephone which had just rung.
The voice at the other end, after asking for the name and address of Mr. X announced that he, Mr. X had
just won a prize of P500,000.00. Within the week, his prize arrived through the mails. The program was
sponsored by a charitable institution. Mr. X did not apply to join the contest. Is the prize considered part
of gross income, subject to net income tax?
The prize cannot be considered as part of gross income.
Under the law, a prize which was made primarily in recognition of a charitable institution
shall be exempt from tax provided that the recipient is not required to render substantial
future services as a condition to receiving the prize or award.
In this case, the program which gives the award is sponsored by a charitable institution and
the winner Mr. X did not apply to join the contest.
Hence, the prize cannot be considered as part of gross income. (Refer to Section 32-B7c of
the NIRC)
21. A domestic corporation has insured the life of his two workers. One is a managerial worker, and the
other is a rank and file worker. The said life insurance shall mature upon death of both workers.
a. Do the premiums paid by the management constitute itemized deduction to be deducted
from the gross income?
With respect to the insurance premium paid in favor of a rank and file worker, it cannot be
considered as an itemized deduction on the part if the management.
With respect to the insurance premium paid in favor of a managerial employee, it can be
considered as an itemized deduction provided that the final income tax imposed on the
gross monetary value of the fringe benefit has already been paid. (Refer to Section 34-A1ai
and 36-A4 of the NIRC)
b. If both of the workers died, are the proceeds of their life insurance subject to estate tax?
We must qualify.
If the beneficiary of the life insurance is the estate, then the proceeds of the life insurance
shall be subject to estate tax, regardless of whether the designation is revocable or
irrevocable.
If the beneficiary is other than the estate, it will depend on whether the designation is
revocable or irrevocable. If the designation of the beneficiary is irrevocable, then the
proceeds will no longer be subject to estate tax. On the other hand, if the designation of the
beneficiary is revocable, then the proceeds shall be subject to estate tax. (Refer to Section
85-E of the NIRC)
22. SSC Company, a non-resident foreign corporation is a stockholder of a domestic corporation and a
resident foreign corporation. Due to worldwide restructuring of SSC Company, it decided to sell all its
shares in domestic and resident foreign corporation. The negotiations and the signing of the contract of
sale were done in the Philippines. Is the income derived from that sale subject to the income tax law of
the Philippines? What kind of income tax?
With respect to the sale of the shares of stock in a domestic corporation, the income
derived from the sale shall be subject to income tax law of the Philippines. The law
provides that an income derived from the sale of shares of stock in the domestic
corporation shall be treated as derived entirely from sources within the Philippines. In
such case, the income from the sale shall be taxed by way of final income tax provided
that it is a capital asset and it is not listed or traded in the local stock exchange.
With respect to the sale of shares of stock in a foreign corporation, it shall also be
subject to the Philippine income tax. When it comes to the sale of shares of stock in a
foreign corporation, it shall be considered as an income from within if it is sold within
the Philippines. In this case, the signing of the contract of sale was done in the
Philippines. Hence, the income derived from the sale shall be taxed by way of gross
income tax since SSC Company is a non-resident foreign corporation. (Refer to Section
24-D2 and Section 25-B of the NIRC)
23. X, a non-resident foreign corporation, is a stockholder of a resident foreign corporation. In the year
2000, the resident foreign corporation declared cash dividends out of the profit earned in 1999.
a. Is the said cash dividend an income from sources within the Philippines? Is X liable to pay
income tax in the Philippines for the receipt of the said cash dividend?
We have to qualify.
The cash dividend received by X from the resident foreign corporation shall be considered
an income from sources within the Philippines provided that at least fifty (50%) of the gross
income of such foreign corporation for the three (3) year period ending with the close of its
taxable year preceding the declaration of such dividends was derived from sources within
the Philippines. If the said requirements provided for by law has not been satisfied, then
such cash dividend is considered as an income derived from sources outside the Philippines.
Being a non-resident foreign corporation, X can only be liable to pay income tax provided
that the cash dividend is considered as an income derived from sources within the
Philippines. If it is derived from sources outside the Philippines, then X shall be exempt from
tax. (Refer to section 42-A2a of the NIRC)
b. Will your answer be the same if the resident foreign corporation declared stock dividend?
If the resident foreign corporation declared stock dividend, then the answer will not be the
same.
It is a general rule that stock dividends are exempt from income tax, except: (a) where the
treasury shares are canceled and redeemed by the corporation in such time and manner as
to make such cancellation and redemption essentially equivalent to the distribution of
taxable dividends as it now represents a distribution of earnings or profits; or (b) where the
controlling interest or the ownership of each shareholder is no longer uniform after the
declaration of the stock dividend.
Hence, the answer will not be the same if a stock dividend was declared by the resident
foreign corporation.
24. A insured his life for P1-M naming his wife as beneficiary. Under the terms of the life insurance
policy, the insurer will pay A the amount of P1-M after 20
th
year of the policy should he outlive the
policy or to his beneficiary should he die before that date. A died before the 20
th
year and the
beneficiary received P1-M. The premiums paid on the policy was P150,000.00
a. If A is receiving income which is pure compensation income, is he allowed to claim the
premiums he has paid to be a deduction from his gross income?
A shall not be allowed to claim the premiums he has paid to be a deduction from his gross
income.
The law provides that pure compensation income earner can only claim premium payments
on health or hospitalization insurance as an allowable deduction. It does not include
premiums paid on a life insurance policy.
In this case, the

Estate/Donors Tax
1. John, an American citizen domiciled in USA, died in 2001. He left shares of stock in San Miguel
Corporation (domestic corporation). John is a non-resident alien at the time of his death. Is it possible
that the estate of John shall be exempted from the payment of estate tax in the Philippines?
Under the law, the estate of a nonresident alien shall be exempt from payment of estate tax if at
the time of his death he is a resident of a foreign country where no transfer tax of any character
is imposed on the intangible personal property of the citizen of the Philippines not residing in
such foreign country which allows similar exemption on the transfer of intangible personal
property of Filipinos not residing in the Philippines.
Hence, even if the shares of stock in a domestic corporation considered as a property located
within the Philippines, the estate of John can be exempted from estate tax provided that the
foreign country to which John is a resident does not impose a transfer tax or allows a similar
exemption to the intangible property owned by Filipino citizens.
2. Mr. X, resident citizen, died in 2001. The gross value of the estate is only P175,000.00.
a. As an administrator or executor, are you obliged to file notice of death? Within what period?
I will be obliged to file a notice of death If I were the administrator or executor.
Under the law if the value of the gross estate of the decedent exceeds P20,000, then the
executor, administrator or any other legal heirs; as the case may be, shall file notice of death
before the Commissioner of Internal Revenue.
The notice of death shall be filed within a period of two (2) months from the date of the
decedents death or within a like period after qualifying as an executor or administrator (Refer
to Section 89 of the NIRC)
c. As an executor or administrator, are you obliged to file estate tax return? Within what
period?
It depends.
If the estate consists of registered or registrable property such as real property, shares of stok or
other similar property from which s clearance from the BIR is required as a condition precedent
for the transfer of ownership thereof, then he will be obliged to file an estate tax return
regardless of the gross value of the estate.
However, because the gross value of the estate is lower than P200,000.00 (Refer to Section 90
par.A of the NIRC)
3. Mr. X, resident citizen, has sold a parcel of land located in the Philippines worth Php2M for only
Php1.5M. The selling price is way below the fair market value because the buyer is a relative by
consanguinity.
a. Is the difference of Php500,000 subject to donors tax? Why?
It depends whether the parcel of land is a capital or an ordinary asset.
If the parcel of land is considered as a capital asset located within the Philippines, the difference
of Php500,000 can never be subject to donors tax. In such case a final income tax of 6% on sale
of realty shall be imposed and the basis could either be the gross selling price or the fair market
value, whichever is higher. (Refer to Section 100 of the NIRC)
On the other hand, if the parcel of land is merely an ordinary asset, the difference of
Php500,000 shall be subject to donors tax provided that the motive of Mr.X for selling the
property for less than the adequate consideration is his generosity.
b. Will your answer be the same if the motive of transferring the property for less than the
adequate consideration is in contemplation of death?
The answer will not be the same.
If the transferring of the property for less than the adequate consideration is in contemplation
of death, the difference of Php500,000 shall be subject to estate tax provided that the parcel of
land is not a capital asset located within the Philippines.
Hence, the answer will not be the same if the motive of Mr. X for selling his property for less
than adequate consideration is in contemplation of death.
4. John died in September 2000 in Australia, at the time of his death, John was a citizen of USA and a
resident of Makati, Philippines, John left the following property: shares of stock in a foreign
corporation; house and lot in USA and shares of stock in domestic corporation.
a. Which of the following property are subject to Philippine estate tax?
Since John is a resident alien, then all his property, real or personal, wherever situated shall be
subject to Philippine estate tax. (Refer to Section 85 of the NIRC)
b. Will your answer be the same if the taxpayer is a non-resident alien ?
If the taxpayer is a non-resident alien, the answer will not be the same.
With respect to the shares of stock in a domestic corporation, it will be subject to
Philippine estate tax since it is a personal intangible property which is considered as
located within the Philippines;
With respect to the house and lot in the USA, it will not be subject to Philippine estate
tax since it is located outside the Philippines; and
With respect to the shares of stock in a foreign corporation, it will not be subject to
Philippine estate tax provided that 85% of the business of such corporation is located
within the Philippines or such share has acquired a business situs within the Philippines.
(Refer to Section 104 of the NIRC)
5. X, a non-resident alien, donated shares of stock in a foreign corporation to his Filipino girlfriend.
Considering that the donor is a non-resident alien and that the donee is a Filipino.
a. Is the donors tax of the Philippines applicable?
It depends.
Since X is a non-resident alien, the shares of stock in a foreign corporation donated by X to his
Filipino girlfriend shall only be subject to donors tax law provided that:
85% of the business of such foreign corporation is located within the Philippines; or in
the alternative
Such corporation has acquired a business situs within the Philippines.
If neither of these requirements have been met, then the shares of stock donated by X to his
Filipino girlfriend shall not be subject to donors tax since it cannot be considered as an
intangible property located within the Philippines. (Refer to Section 104 of the NIRC)
b. Will your answer be the same if the donor is a foreign corporation?
If the donor is a foreign corporation, the answer will be the same.
The donation of shares of stock by a foreign corporation shall only be subject to donors tax
provided that 85% of the business of such foreign corporation is located within the Philippines,
or in the alternative such foreign corporation has acquired a business situs within the
Philippines.
6. Pedro is leaving for Los Angeles, California, USA in May 2005. He and his wife desire to settle in Los
Angeles, California, USA. He has real property in Metro Manila which he intends to donate to someone.
He is considering to donate said real property to his brother-in-law and to a domestic corporation.
a. If you were the lawyer of Pedro, will you advice the splitting method of donating property or
cumulative way of donating property?
If I were the lawyer of Pedro, I will tell him that it is immaterial on whether he avails of the
splitting or cumulative way of donating his properties to his brother-in-law or a domestic
corporation.
Under the law, a donation made to a stranger is always subject to a flat rate of 30%. For the
purpose of donors tax, a stranger is a person who is not a: a) brother, sister (whether by whole
or half blood), spouse, ancestor and lineal descendant; or b) relative by consanguinity in the
collateral line within the fourth degree of relationship.
In this case, the brother-in-law and a domestic corporation can be considered as a stranger.
Hence, I will tell Pedro that it is immaterial on whether he avails of the cumulative or splitting
way of donation. (Refer to section 99-B of the NIRC)
b. Will your answer be the same if the donees are the sister of his wife and his first cousin?
If the donees are the sister of his wife and his first cousin, the answer will not be the same.
With respect to a donation made to a first cousin, the splitting mode of donation is necessary if
the thing donated is valued for more than P100,000.00 This shall be done in different calendar
year and the purpose is to avoid or to reduce the amount of donors tax that will be paid.
With respect to the donation made to the sister of his wife, it is immaterial whether the
donation is made by splitting or cumulative method. Being a stranger, the donation made to the
sister of his wife is always subject to the flat rate of 30%. (Refer to Section 99-B of the NIRC)
7. Mr. X, a resident citizen, has sold a parcel of land located in Metro Manila worth P3 million because
the buyer is a relative by affinity.
a. Is the difference of P1-M pesos subject to donors tax? Why?
If the parcel of land which was sold is a capital asset, then the donors tax will not apply with
respect to the difference of P1-M pesos because the sale shall be subject to final income tax
imposed on the sale of real property.
On the other hand, if the parcel of land is merely an ordinary asset, then the difference of P1-M
shall be subject to donors tax because the sale for less than the adequate consideration is made
for the reason that the buyer is a relative by affinity. (Refer to Section 24 D1 and 100 of the
NIRC)
b. Will your answer be the same if the subject matter of the sale is a shares of stock?
If the subject of the sale is a shares of stock, then the answer will not be the same.
Under the law, if the subject matter of the sale for less than adequate consideration is other
than real property considered as capital asset, then the difference between the fair market
value and the amount of the consideration shall be subject to donors tax provided that the
purpose of the sale is mere liberality.
In this case, the selling of the shares of stock for less than adequate consideration is for the
reason that the buyer is a relative by affinity.
Hence the difference of P1-M is dubject to donors tax. (Refer to Section 100 of the NIRC)

VALUE ADDED TAX
1. X is a seller of vegetables in a supermarket in the City of Makati. The gross receipts of X in a
period of one year exceed P550,000. X is engaged in the regular sale of fresh vegetables.
a. Is it possible that he is liable to pay VAT?
It will not be possible for X to be subject to VAT.
Under the law, the sale of agricultural food products shall be exempt from VAT
provided that the product was sold in its original state.
In this case, X is selling fresh vegetables which can be considered as an agricultural
food product in its original state.
Hence, X can never be subject to the payment of VAT even if the gross receipts for
his sale exceeds P550,000.00 (Refer to Sec. 109 par. c)
b. Will your answer be the same if he is engaged in the regular sale of petroleum products?
As a rule, the sale of petroleum products is exempt from VAT. However, if the
petroleum products consist of lubricating oil, processed gas, grease, wax and
petroleum then the transaction shall not be exempt.
Hence, if X is in the regular sale of petroleum products that are not exempt from
VAT, then he will be liable for the payment of VAT. (Refer to Section 109 par. e)
2. In the sale of real property, is it subject to VAT?
It depends.
If the real property is merely an ordinary asset and the sale was made in the regular
course of business, then the sale transaction shall be subject to VAT.
However, if the real property is a capital asset or it is a real property utilized for low
cost or socialized housing, then the transaction shall be exempt from VAT. (Refer to
Section 109 par. w)
3. A cooperative under RA 6938 is requesting the BIR to exempt it from the payment of VAT on its
purchase of commodities from manufacturers on the ground that it is exempt from all taxes
including VAT under RA 6938, the Cooperative Code of the Philippines.
a. Is the cooperative exempt from VAT? Will your answer be the same if the cooperative is the
seller?
The cooperative shall not be exempt from VAT.
Being an indirect tax, a VAT may be shifted by the manufacturers to the consumers
of their goods, properties or services.
However, the answer will not be the same if the cooperative is the seller itself. In
such case, the cooperative may claim exemption from VAT provided that it is duly
registered with the Cooperative Development Authority.
b. If the seller of an agricultural product is a cooperative, is the cooperative exempt from VAT?
The cooperative is exempt from VAT if it is a seller of an agricultural product,
provided that it is duly registered with the Cooperative Development Authority.
4. X is an operator of a restaurant subject to VAT. In the course of the operation of the restaurant,
X has accumulated thousands of bottles of RufinaPatis. Once a year, X sold said bottles.
a. Is he liable to VAT for sale of bottles?
The sale of the bottles shall be subject to VAT.
Under the law, the phrase in the ordinary course of trade or business means the
regular conduct of pursuit of a commercial or economic activity, including
transactions incidental thereto, by a person.
Even if the sale of the bottles by X is not his primary business, the selling of the
thousands of bottles shall be subject to VAT. (Refer to Section 105-3 par)
b. Is he liable to pay VAT if the gross receipt or the operation of the said restaurant did not
exceed P550,000.00?
X shall not be liable to VAT if the gross receipt for the operation of said restaurant
did not exceed P550,000.00.
Under the law, if the transaction is other than those transactions that are exempted
from VAT, then such transaction shall be exempt from VAT provided that their
annual gross receipts do not exceed P550,000.00
Hence, X shall not be liable for the payment of VAT (Refer to Section 109 par. w)
5. X, a licensed recruitment agency, receives income from abroad. The income is in the form of
foreign currency remittances paid by foreign employers in payment of services rendered by the
said licensed recruitment agency. The service of the said agency is to send Filipino workers in
abroad. The BIR send a notice of assessment obliging the recruitment agency to pay VAT?
a. Is the recruitment agency liable to pay VAT?
The recruitment agency is not liable to pay VAT.
When the services rendered is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the
BangkoSentralngPilipinas, then the transaction shall be VAT exempt.
In this case, the income of a licensed recruitment agency for its services rendered is
paid in the form of foreign currency remittances by foreign employers.
Hence, the recruitment agency is not liable to pay VAT. (Refer to Section 108 B2 of
the NIRC)
b. What will be the proper rate of VAT?
X, a licensed recruitment agency shall be subject to zero (0%) percent rate of Vat
because the services rendered by the recruitment agency is subject to a zero-rated
transaction.
6. Mr. X is an accountant but is exclusive employed in a private company. His only income is the
salary he received from his employer.
a. In line with the present RR 1-2003 that all professionals are now liable to pay VAT, is X liable
to pay VAT?
X shall not be liable to pay VAT.
The law provides that the service of individuals shall be exempt from VAT if it is
rendered pursuant to employer-employee relationship.
Notwithstanding the fact that all professionals are now liable to pay VAT under RR
1-2003, X as an accountant is rendering his service as an employee of a private
company.
Hence, X shall not be liable to pay VAT. (Refer to Section 109 par. o of the NIRC)
b. What is the period to within which to file the VAT and pay the VAT in general?
The VAT return shall be filed quarterly within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer and the payment of the
VAT shall be made on a monthly basis (Refer to Section 114-A of the NIRC).
7. a. X, a resident citizen, is an importer of non-food agricultural products. Is he liable to pay VAT?
b. X, a resident citizen, is an importer of newspaper and magazine. Is he liable to pay VAT?
a. X shall be liable to pay VAT. When it comes to non-food agricultural products, the law
only exempts sale transaction and not importation. In this case, X is engaged in the
importation of non-agricultural products. Such transaction shall be subject to VAT.
(Refer to Section 109 par. a of the NIRC).
b. It depends. If the importation of the magazine or newspapers appears at regular
intervals with fixed prices for subscription and sale and which is not devoted principally
to the publication of paid advertisements, then such importation is exempt from VAT.
However, if the said requirements provided for by law has not been met, then the
importation by X of newspaper and magazine shall be subject to VAT. (Refer to Section
par. y of the NIRC)
8. X, government corporation, purchased manufactured products from B corporation which B
passed on the VAT to X. X claims it should not pay the VAT because it is exempt from the
payment of all taxes under its charter.
a. Is the claim of X tenable?
The claim of X is not tenable.
When the charter of a government corporation exempts it from all forms of taxes, it
presumed to cover only those taxes which it is liable to pay directly. It does not
cover indirect taxes such as VAT. Ion such case, the remedy of the government
corporation is to deduct and withhold the VAT liability at the rate of 3% of the gross
payment for the purchase of goods.
In this case, X cannot claim exemption from VAT and his remedy is to exercise his
withholding of creditable value added tax.
Hence, the claim of X is not tenable (Refer to Section 115-c of the NIRC and Maceda
vs. Macaraig, June 8, 1993.)
b. In the abovementioned transactions, can B claim exemption from VAT due to the fact
that the buyer is exempt from VAT?
B cannot claim exemption from the value-added tax even if the buyer is exempt.
Being an indirect tax, the value-added tax is really a tax against the seller and not
against the buyer. In such case, the seller should carry the burden of paying the VAT.
Since the government corporation X is not exempt from the payment of the VAT,
then with more reason that it should be held liable to pay the VAT.
Hence, B cannot claim exemption from the Vat even if the buyer is exempt.
LOCAL TAXES
1. The Municipal Council of Bian, Laguna passed a tax ordinance levying or imposing amusement
tax. Assume that there was a public hearing conducted.
a. Is this imposition of amusement tax tenable?
The imposition of amusement tax is not tenable.
Under the LGC, municipalities are not authorize to impose amusement taxes;
Hence, the imposition of amusement tax by the municipality of Bian is not tenable.
b. Will you answer be the same if the amusement tax imposed was levied b y the province of
Laguna?
If the amusement tax imposed is levied by the province, the answer will not be the
same.
Under the LGC, the province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement at the rate of 30% of the gross
receipts from admission fees.
Hence, the levy of amusement tax by the Province of Laguna will now be tenable.
(Refer to Section 140 of the LGC)
2. In the foregoing question no. 1, if you were the concerned taxpayer and you did not agree with
the validity of the tax:
a. What will be your remedy? Within what period of time should the remedy be exercised?
If I were the concerned taxpayer, I will file an appeal before the Office of the
Secretary of Justice.
The appeal shall be made within the period of thirty (30) days from the date of the
effectivity of the tax ordinance and the Secretary of Justice has a period of sixty (60)
days to a make a decision from the receipt of the appeal. (Refer to Section 187 of
LGC)
b. Will your answer be the same if you received notice of assessment reclassifying your parcel
of land under the real property taxation? Within what period of time should the remedy be
exercised? What office should the remedy be filed?
If I did not agree with the notice of assessment reclassifying my parcel of land under
the real property taxation, my remedy is to file an appeal before the Local Board of
Assessment Appeals.
The appeal shall be made within a period of sixty (60) days from the receipt of the
notice of assessment. (Refer to Section 226 of the LGC)
3. Victory Liner, a transportation company with a garage for its buses, maintains said garage, a
repair shop, machineries and equipment which can be moved around in the repair shop. The
treasurer imposes a real estate tax but the transportation company did not agree with the
treasurer arguing that the property is a movable property.
a. Is the treasurer legally correct in the imposition of the real estate tax?
The treasurer is legally correct in the imposition of the real estate tax.
Under the law, if a movable property is actually, directly and movable property shall
be considered as real property for the purposes of real property taxation.
Even if the machineries and equipment are movable properties by nature, they are
considered as real property for the purpose of real property taxation because they
are actually, directly and exclusively used to meet the needs of the Victory Liner.
Hence, the imposition of the real estate tax by the treasurer is legally tenable. (Refer
to Section 198 par. of the LGC)
b. Will your answer be the same if the personal property is a typewriter?
If the personal property is a typewriter, the treasurer will not be legally correct in
the imposition of the real estate tax.
A typewriter is not indispensable for the needs of the business since it is not
actually, directly and exclusively use in order to meet the needsof the transportation
company. In fact a bus company may exist even without a typewriter (same
provision).
4. An ordinance of the City of Iloilo levies or imposes taxes on taxpayers selling goods at wholesale
or retail. A manufacturer of softdrinks sells at its plants or factory the softdrinks it manufactures
at wholesale or retail:
a. Is said manufacturer subject to tax for selling softdrinks under such ordinance?
The manufacturer will not be subject to tax for selling softdrinks under such
ordinance.
If the selling of the softdrinks was done by the manufacturer at its plants or factory,
then such wholesaling orretailing shall be considered as included in the
manufacturing. It can no longer be held liable for a separate tax on wholesaling or
retailing.
Since the manufacturer sells at its plant or factory the softdrinks that it
manufactures in wholesale or retail, then it can no longer be subject to tax fort
selling such softdrinks. (Refer to Section 143 of the LGC and the case of Iloilo
Bottlers vs. Iloilo City, 164 SCRA 607).
b. Will your answer be the same if the manufacturer maintains separate establishments or
stores apart from its factory?
If the manufacturer maintains separate establishments or stores apart from its
factory, then the selling of such softdrinks cannot be considered as included in the
manufacturing. It shall be liable for a business tax on wholesaling or retailing aside
from the business tax on manufacturing. (same legal basis)

8. Mr. X, resident citizen, received a notice of assessment from the city government obliging him to pay
business tax under local taxation. The business tax being collected is P100,000.00 He believes in good
faith that his liability is only P45,000.00.
a. What will be his remedy?
The remedy of Mr. X is to file a written protest with the local treasurer protesting the
assessment within the period of sixty (60) days from the receipt of the notice of assessment. In
such case the local treasurer is given a period of sixty (60) days within which to decide the
protest from the time of its filing.
b. What will be his remedy if his remedy availed of was denied? Within what period of time?
If the protest is denied, the remedy of Mr. X is to file a protest before the RTC within the period
of thirty (30) days from the receipt of the denial of the protest or from the lapse of sixty (60) day
period by the inaction of the local treasurer. (Refer to Section 195 of the LGC)
9. Pedro, resident citizen is engaged in banana plantation on his 50 hectare farm. He employed 300
workers in the plantation. He purchased his farm in 1985 for only P500,000.00. On this day, it has a fair
market value of P10,000,000.00 Pedro now intends to transfer his 50 hectare farm to X, Inc. an existing
domestic corporation in which Pedro will be given shares of stocks worth P12,000,000.00 Pedro now
consults you concerning the income tax consequences of this transaction.
a. Will he be liable to pay income tax for the gain of P2,000,000.00? Will the local government unit
concerned be authorized to levy or impose a local tax on the bananas?
If Pedro gains control of the said domestic corporation as a result of the transfer, then Pedro
shall not be liable for the gain of P2-M because the gain is not recognized under the law.
However, if Pedro did not gain control of the said domestic corporation or he did not acquire
ownership of the stocks possessing at least fifty-one (51%) percent of the voting power then
Pedro shall be taxed for the gain of P2-M. (Refer to Section 40-C of the LGC)
The local government unit is authorized to levy or impose a local tax on the bananas. When it
comes to agricultural products, the local government unit is authorized to impose local tax
except when such agricultural products are being sold by marginal farmers. In this case, Pedro is
not a marginal farmer since he is not engaged in subsistence farming. He is in fact an owner of
big plantation of bananas with an area of fifty (50) hectares. Hence, the local government unit is
authorized to levy or impose local tax on the bananas. (Refer to Section 40-B of the NIRC and
Section 133-g of the LGC)
b. What will be the income tax liability if Pedro did not exchange the property with shares of stock
but instead Pedro sold the property to the government for P12,000,000.00? What will be your
advice? Should he pay the net income tax or final income tax? Will he be allowed to use cost as a
basis for determining gain or loss? Is the holding period applicable?
If Pedro sold the property to the government, then Pedro shall be taxable on the gain by way of
the net income tax.
Since the land is being used in the business of banana plantation by the taxpayer then such
property is merely considered as an ordinary asset. The proceeds derived from the sale of such
property are subject to net income tax and not final income tax.
For the purpose of determining whether there is a gain or a loss, then cost shall be used since
the property was acquired by purchase in 1985 which is after March 1, 1913.
The holding period is not applicable because it is merely an ordinary asset. Even if the land is a
capital asset, it will constitute as an exception to the rule on holding period because the final
income tax shall not be imposed on the gain but whichever is higher between the actual selling
price and the fair market value. (Refer to Section 40-B and 24-D of the NIRC)
10. A coastal town passed a tax ordinance imposing tonnage due and wharfage due on vessels mooring
or berthing at its municipal wharf.
a. Is the municipal government authorized to pass those tax ordinances?
The municipal government is authorized to pass those tax ordinances.
Under the law, the imposition of tonnage due and wharfage due is an absolute limitation upon
the taxing power of the local government units. By way of exception, the local government unit
may impose wharfage dues upon wharfage on wharves constructed and maintained by the local
government unit concerned.
In this case, the tax ordinance imposes tonnage due and wharfage due on vessels mooring or
berthing at its municipal wharf is an exception. .
Hence, the municipal government is authorized to pass those tax ordinances.
b. Will your answer be the same if the tax ordinance imposes income tax?
If the tax ordinance imposes income tax, the local government unit is not also absolutely
prohibited under the law. By way of exception to the rule, a local government unit may impose
taxes on banks and other financial institutions.
Hence, the answer will not be the same if the tax ordinance imposes income tax. (Refer to
Setion 133 par. a and d of the LGC).
11. If a real estate owner is not satisfied with the assessment of his property issued by the assessor,
what will be the remedy and within what period should he exercise the remedy?
If a real estate owner is not satisfied with the assessment of his property issued by the assessor,
the remedy is to file an appeal before the Local Board of Assessment Appeals within a period of
sixty (60) days from the receipt of the written notice of assessment. (Refer to Section 226 of the
LGC)
12. If a businessman received an assessment from the city treasurer regarding his local tax liability, what
will be his remedy and within what period of time should he exercise the remedy?
If a business man received an assessment from the city treasurer regarding his local tax liability
and he wanted to contest the said assessment, then the remedy is to file a protest before the
said city treasurer within a period of sixty (60) days from the receipt of the notice of assessment.
(Refer to Section 195 of the LGC)
13. Distinguish between taxpayers remedies in connection with his tax assessment issued by the local
treasurer under local taxation and assessment issued by the assessor under Real Property Taxation.
The distinction between the taxpayers remedies in connection with his tax assessment issued
by the local treasurer under local taxation and assessment issued by the assessor under the Real
Property Taxation are as follows:
With respect to tax assessment issued by the local treasurer, the remedy of the taxpayer is to
file a protest before such local treasurer within a period of sixty (60) days from the receipt of the
notice of assessment. The local treasurer is given a period of sixty (60) days within which to
decide the protest. In case the local treasurer denied the protest, the taxpayer shall file an
appeal before the RTC within a period of thirty (30) days from the receipt of the denial. On the
other hand, with respect to the tax assessment issued by the assessor, the remedy of the
taxpayer is to file an appeal before the Local Board of Assessment Appeals within the period of
sixty (60) days from the receipt of the assessment. The Local Board of Assessment Appeals has a
period of one hundred twenty (120) days within which to decide the appeal. In case the Local
Board o0f Assessment Appeals affirmed the assessment, then the taxpayer may file an appeal
before the Central Board of Assessment Appeals within a period of thirty (30) days from the
receipt of the decision of the board. (Refer to Section 195, 226 and 229 of the LGC)
14. The city council passed a local tax ordinance levying or imposing taxes on persons or entities
engaged in the wholesale of sugar. ABC, Inc., a sugar central with principal office in the city is a
manufacturer and wholesaler of sugar. The city seeks to tax both the business of manufacturing and
wholesaling.
a. If the manufacturer does not want to pay business tax of wholesaling because it is already paying
business tax of manufacturing, can it be legally sustained?
If ABC, Inc., is maintaining a place for wholesaling which is separate and distinct from the place
of manufacturing, then ABC, Inc. cannot legally refuse to pay business tax on wholesaling. In
such case, the activity of the wholesaling shal;l be taxed separately from the activity of
manufacturing.
On the other hand, ABC inc. is doing its wholesaling activity within the place where their
manufacturing activity also takes place, then ABC Inc. can legally refuse to pay tax on
wholesaling because in such case, wholesaling is deemed included in the manufacturing. In such
case, the tax paid on manufacturing already includes wholesaling. (Refer to Iloilo Bottlers vs.
Iloilo City, 164 SCRA 607)
b. Assume that the wholesaling of sugar is being done in the entire country, where should the
business tax of wholesaling be paid?
If the wholesaling of sugar is being done in the entire country, then the business tax on
wholesaling shall be paid to the municipality where the branch or sales outlet is located. But
if there is no such branch or sales outlet, then the business tax on wholesaling shall be paid
to the municipality where the principal office is located. (Refer to Section 150 of the LGC).
15. Assume that you are now a lawyer, where and when will you pay your occupation tax before you
practice your profession? What local government unit shall impose or levy the same?
Professional tax shall be payable annually on or before the thirty first (31
st
) of January.
It shall be paid at the province where I practice my profession or at the province where I
maintain my principal office in case I practice my profession in several places.
The local government unit authorized top levy or impose the same are the province and the
city. (Refer to Section 139 b, d and Section 151 of the LGC)

TARIFF AND CUSTOMS CODE
1. Explain the nature and the government officers authorized to levy the following: (a) Marking
duty; (b) Discriminatory duty; (c) Dumping duty; and (d) Countervailing duty.
a. Marking duty refers to a special customs dusty imposed by the customs commissioner upon
an imported commodity which is not marked or nor properly marked. The rate of which is
equivalent to n5% of the goods;
b. Discriminatory duty is a special customs duty imposed by the President upon an imported
commodity because the foreign country from which the imported commodities came
discriminates the goods coming from the Philippines;
c. Dumping duty is a special customs duty imposed by the tariff commissioners upon an
imported commodities which is being sold at a very low price in the Philippines by reason of
overproduction by the foreign country from which the imported goods came; and
d. Countervailing duty is a special customs duty imposed by the tariff commissioner upon the
imported goods which is being sold at a very low price in the Philippines by reason of the
subsidy being enjoyed by foreign manufacturer from their country.
2. In a forfeiture case, the collector of customs decided against the taxpayer importer.
a. What will be the remedy of the importer? Within what period should the remedy be
exercised?
The remedy of the importer in case the decision of the collector of customs is
adverse to him is to elevate the case before the Commissioner of Customs within
fifteen (15) days after notification in writing by the Collector of Customs of his
action or decision. (Refer to Article 2312 of the Tariff and Customs Code)
b. Will your answer be the same if the collector ruled in favor of the importer? Within what
period should the remedy exercised? To what office should the remedy be filed?
If the Collector of Customsruled in favor of the importer, the answer will not be the
same.
The decision of the Collector of Customs which is adverse to the government shall
be automatically elevated to the Commissioner for review. If such decision is
affirmed by the Commissioner, then the case shall be elevated and finally reviewed
by the Secretary of Finance within a period of thirty (30) days from the receipt of
the decision of the Commissioner. (Refer to Section 2135 of the Tariff and Customs
Code)
3. Has the Regional Trial Court of Manila acquired jurisdiction over cases involving illegal
importation which are the subject of seizure proceedings by the collector of customs? Why?
How do you call that principle?
The Regional Trial Court of Manila has not yet acquired jurisdiction over cases involving
illegal importation subject to seizure proceedings.
When it comes to cases involving forfeiture and seizure of illegal importation, the
Collector of Customs has the exclusive jurisdiction. This is also called the principle of
primary jurisdiction whereby the Collector of Customs assumes jurisdiction to the
exclusion of the Regional Trial Courts.
Hence, the Regional Trial Court of Manila has not yet acquired jurisdiction over cases
involving illegal importation subject to seizure proceedings (Refer to AuyongHian vs. CTA
19 SCRA 10)
4. Explain the similarities between anti-dumping duty and countervailing duty.
The similarities between anti-dumping duty and countervailing duty are as follows:
Both are special customs duty imposed by the tariff commissioners; and
These special customs duties are being imposed because the imported products
are being sold at a very low price in the Philippines to the disadvantage of locally
produced goods.

SECOND PART: THIS IS AN ITEMIZED PRESENTATION OF TAXATION LAW
TAX: PART I (IMPORTANT POINTERS)
I. General Principles
1. Taxation; Definition; Nature
The inherent power of the state to collect enforced proportional contribution to support
the expenses of the government.
It is inherent; legislative in nature, civil and not political in character; and they are not
penal in nature.
2. Assuming that the new Constitution drafted by the delegates and ratified by the people to provide for
the enactment of the law imposing taxes, may the legislative body created by the same constitution
enact tax laws? Explain.
Yes, the legislative body may enact tax laws. Taxation is an inherent power of sovereign state
and can be exercised whether or not the constitution provides for it. Absence of any
Constitutional limitation, the taxing power becomes unlimited provided that revenues raised
therein are for public purpose.
3. Taxes are the lifeblood of the nation; Meaning
The primary purpose of taxes is for the government to generate funds for the State finance the
needs of the citizenry and to advance the common wealth. (PBCom vs. CIR; Jan. 28, 1999)
4. Uniformity of Taxation; Meaning
It means that all property belonging to the same class shall be taxed alike. (CIR vs. Lingayen Gulf;
Aug. 4, 1998)
5. Charitable Institution; Tax Exemption
A charitable institution may claim tax exemption under the constitution but only with respect to
real property taxes; provided that such real properties are actually, directly and exclusively used
for charitable purposes. (NOTE: the same rule with respect to religious and educational
institution.)
6. Global System vs. Schedular System
A Global System of taxation refers to a tax structure where only one (1) tax rate is applied across
the tax base; while
Schedular System of taxation refers to the imposition of graduated rates of taxes in scalar range
or a layered set of tax bases.
7. NIRC; System of Taxation
The NIRC uses both global and scheduler system of taxation.
It uses the global system with respect to the Corporate Income Tax Rate and the 10% VAT rate.
On the other hand, it uses scheduler system with respect to the Income tax table for Individual
Taxpayers.
8. Direct Taxes vs. Indirect Taxes; Examples
Direct Taxes are those that are demanded from the very person, who, it is intended or desired,
should pay them (e.g. Income Taxes, Estate and Donors Taxes and the Community Tax)
Indirect taxes are those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone else. (e.g. VAT, Real
Properties and Customs Duties) --- (Pollock vs,., Farmers; 1957 US 429
9. Double Taxation; Not a valid defense; Method of Relief
There is double taxation when there is an imposition of two (2) or more taxes upon the same
person, the same property or subject matter, for the same purpose by the same State,
Government or taxing authority, within the same jurisdiction or taxing district, during the same
taxing period and of the same kind or character of tax.
Double taxation is not a valid defense against the legality of a tax. There is no constitutional
prohibition against double taxation. A tax enactment cannot be illegal simply because it results
to double taxation; and
Relief from double taxation can be obtained either by exemption method or credit method. In
exemption method, the income or capital is taxable in the state of source or situs but is
exempted in the state of residence while in credit method, the income or capital is taxed both in
the state of source and in the state of residence and the tax paid in the former is credited
against the tax levied in the latter.
10. X, a lessor of a property, pays real estate tax on the premises , a real estate dealers tax based on
rental receipts, and income tax on rentals. X claims that this is double taxation. Decide.
There is no double taxation. The three (3) types of taxes have different purposes/nature and are
imposed by different taxing authorities.
Real estate tax is imposed on the property itself by the Local Governments. Real estate dealers
tax is imposed on the dealers privilege to engage in the buy and sell of real property . And
finally, the income tax on the rental income is imposed on the businessmans privilege to earn
income and is under the National Governments BIR.
11. Due Process; Taxation
Due process of law under the Constitution does not require judicial proceeding in tax cases. This
must necessarily be so because it is upon taxation that the government chiefly relies to obtain
the means to carry on its operations. (PBCom vs. CIR; January 28, 1999)
However, due process requires that the taxpayer be informed of the law and the facts on which
the assessment is made. Otherwise, the assessment is void. \
12. Tax Evasion vs. Tax Avoidance
Tax evasion is the use of fraudulent or forbidden schemes or devices to lessen or defeat the
taxpayers tax obligation; while
Tax avoidance is the legal method of reducing or altogether avoiding the tax liability by finding
and availing of valid and legitimate shortfalls of the law.
13. Tax Amnesty vs. Tax Exemption
Tax amnesty is the Governments absolute forgiveness, waiver, exercise of general pardon or
intentional condonation of its right to collect past due and unpaid tax collectibles, including
imposable penalties on persons guilty of evasion or violation of a revenue or tax law, giving tax
evaders who wish to relent and are willing to reform a chance to do so.
14. Tax exemption; Strictly construed against the taxpayer; Rationale
The right of taxation will not be surrendered unless the intention to surrender is too plain to be
mistaken; the state cannot strip itself of the most essential power of taxation by doubtful words;
it cannot be deprived of this higherst attribute of sovereignty. So, when exemption is claimed, it
must be shown indubitably to exist, for every presumption is against it, and well founded doubt
is fatal to the claim. (Farrington vs. Tennessee, 95 US 679)
15. Networth method; Definition
It is a method of determining the taxable income of a taxpayer and it is accomplished by
comparing the taxpayers Net Assets at the beginning versus the ending of the current taxable
year.
II. INCOME TAX
Tax on Individuals
1. Gross Income; Definition; Inclusions
It refers to all income derived from whatever source.
These includes (but not limited to) compensation for services, including fees, commissions and
similar items; gross income from business; gains derived from dealings in property; interest;
rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive
share of the gross income of general partnership.
2. Income vs. Capital
Income Capital
It means any wealth which flows into the taxpayer
other than return of capital.
It is the investment that brings about income.
It is the wealth. It is the fund.
It is the fruit It is the tree.
3. Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation,
what are the tax implications? Explain.
Mr. Y will be liable for income tax on the services he rendered using the fair market value
received for the valuation.
4. Tax treatment of certain incomes
Gross receipts from a trading business --- TAXABLE
Interests from money placements in the banks --- EXCLUDED Since interests are subject to a final
withholding tax at source;
Dividends from its stocks investments in domestic corporations --- EXCLUDED, since dividends re
subject to final withholding tax at source;
Gains derived from stock transactions through the Philippine Stock Exchange --- EXCLUDED,
since capital gains are subject to final withholding tax at source;
Proceeds under insurance policy on the loss of goods --- EXCLUDED there proceeds are
exclusions under the tax code.
5. X was hired by Y to watch over Ys fishponds with a salary of P10,000.00. To enable him to perform his
duties well, he was also provided with a small hut, which he could use as his residence, in the middle of
the fishponds. Is the fair market value of the use of the small hut by X a fringe benefit that is subject to
the 32% tax imposed by Section 33 of the NIRC? Explain.
No, the fair market value of the use of the small hut is not subject to 32% tax as a fringe benefit.
The use of said hut is not taxable under the Employer Convenience Rule. Xs use of the hut is for
the convenience of his employer and intrinsically for his personal benefit.
6. 13
th
month pay and other benefits
It shall be an exclusion from the gross income only to the extent of P30,000.00 and these include
Christmas bonus and productivity incentives.
7. Separation Benefits; Exclusion
Separation benefits shall only be an exclusion provided that it is received by an employee or his
heirs as result of death, sickness, permanent disability or for any cause which is beyond the
employees control of such as retrenchment, redundancy or closure of business.
8. Retirement Benefits; Tax-Exempt
Retirement benefits received by officials and employees of private firms are not subject to
income tax provided:
The retirement payment comes from the employers reasonable private benefit plan;
The retiring employee has been in the service with the employer for at least ten (10)
years;
Said employee is not less than fifty (50) years old; and
The employee has not availed of any similar tax free plan in the past.
For employee which has no funded retirement plan, the retirement benefits shall be exempt
provided:
The retiring employee is at least sixty (60) years old;
The employee has served the employer for at least five (5) years; and
The employee has not availed of any similar tax-free plan in the past.
9. Ordinary Asset vs. Capital Asset
Capital Asset is a taxpayers property other than his ordinary assets. Under the tax code,
ordinary assets shall include inventory on stock in trade; property primarily held for sale in the
ordinary course of business; depreciable property used in the trade of business; and real
property used in the trade or business of the taxpayer.
10. Sale of real property classified as capital assets to the government or any of its political subdivisions
The taxpayer has the option on whether he will be taxed either by way of the final income tax of
6% or by way of the scheduler rates for individuals.
11. Wash Sale of Stocks; Definition; Deductibility
It is the taxpayers scheme to recognize a deductible loss in his Tax Return by selling shares at a
loss where the shares sold are substantially identical with the shares he purchased thirty (30)
days after said sale ( a 60 day window)
The loss suffered within the 60-day window is not entitled as a tax deduction. Only dealers in
securities can deduct loss on wash sales.
Personal/Additional Exemptions and Deductions
1. Basic Personal Exemptions Allowed Table
Taxpayer Basic Exemption
Individual with no qualified dependents 50,000 (20K)
Married individuals judicially decreed separated 50,000 (20K)
Head of Family 50,000 (25K)
Each married individual 50,000(32K)

2. Additional Exemptions; Rules
Only one (1) spouse can claim in the case of married individuals;
The spouse in custody of the child can claim in case of legally separated spouses;
Mother of an illegitimate child , living with her and chiefly dependent upon her, can claim
additional deduction on the childs account; and
An additional exemption cannot exceed four (4) dependent children or P32,000.00
3. Deductions; General Rule
Taxpayers earning purely compensation income, arising from personal services under an
employer-employee relationship, are not allowed deductions. However, the only deductions
that they are allowed is premium payments on health and/or hospital insurance amounting to
P2,400.00 per year.
Individual taxpayers engaged in business or the practice of professions and Corporate taxpayers
can claim deductions.
4. Allowable Deductions vs. Personal Exemptions
Allowable deductions are deductions from gross income to arrive at the Net Taxable Income of
taxpayers engaged in business. An example of an allowable deduction is ordinary and necessary
expenses; while
Personal exemptions are deductions from Gross Income strictly allowed for natural and not
juridical taxpayers in lieu of personal, family and living expenses. An example is the personal
exemption of P32,000 given to individual taxpayer.
5. Expenses; Requisites for Deductibility
It must be ordinary and necessary;
It must be paid or incurred within the taxable year; and
It must be paid or incurred in carrying on a trade or business.
6. X is the manager of Mang Douglas Hamburger, Inc. X had dinner with Y, owner of a chain of
restaurants to convince the latter to carry Mang Douglas hamburgers. After Y agreed, both went their
separate ways. X celebrated by going to a singles bar. He picked up a partner and consumed a bottle of
beer. He drove home at 3:00 a.m. On his way home, he sideswiped a pedestrian, who died as a result of
the accident. X amicably settled the case by paying the heir of the pedestrian. The money however came
from Mang Douglas Hamburger, Inc. Discuss whether the reward given to the heir can be claimed by
Mang Douglas Hamburger, Inc. as an expense deductible in its income tax return.
The reward given to the heir cannot be an expense deductible for Mang Douglas Hamburger,
Inc. The damage which X caused upon the pedestrian is not ordinary, necessary and normal
expense in the conduct of the hamburger business. X was no longer performing his regular task
when he inflicted the damage.
7. Losses; Requisites of Deductibility
The loss was actually sustained during the taxable year;
The said loss was not compensated for by insurance or other indemnity;
Loss was incurred in trade, profession or business; and
For loss of property connected with business and said loss arises from fires, storms, shipwreck
or other casualties or the loss is from robbery, theft or embezzlement.
8. Bad debts; Requisites for Deductibility
There must be a valid and subsisting debt;
The debt must be actually ascertained to be worthless and uncollectible during the taxable year;
The debt must be charged off during the taxable year; and
The debt must arise from the business or trade of the taxpayer.
Tax on Corporations
1. Minimum Corporate Income Tax; Rule
It shall be equivalent to 2% of the Gross Income.
It can only be imposed upon a corporate Income taxpayer on the fourth taxable year after its
business operations when their income tax due is less than 2% of their gross income.
This is imposed in lieu of the net income tax.
2. Improperly Accumulated Earning Tax
This applies to all corporations formed on availed of to avoid income tax of its shareholders of
the corporation by permitting its earnings to accumulate instead of being distributed to the
stockholders.
This is not applicable to publicly-held corporations, banks and other non-bank financial
institutions and insurance companies.
When a corporation is a mere holding company or when its earnings are permitted to
accumulate beyond its reasonable needs are indications of improper accumulation of income.
3. Preferential Corporate Tax of 10%; Proprietary Educational Institution
A proprietary educational institution can enjoy the preferential rate of 10% provided that it is a
private school maintained and administered by private individuals and private groups and it has
an issued permit to operate from the DECS, CHED and the TESDA.
FILING OF TAX RETURNS
1. Individuals required tofile Income Tax Returns
Resident Filipino Citizens
Non-Resident Citizens but only on income from Philippine sources;
Resident aliens but only on income from Philippine sources; and
Non-resident alien engaged in trade, business or profession within the Philippines
2. Individuals not required to file Income Tax Returns
Individual taxpayer whose gross income does not exceed his total personal and additional
exemptions except:
Filipino citizen engaged in the business or practicing his profession in the Philippines;
An alien individual engaged in business or practicing his profession in the Philippines; and
Individual taxpayer earning pure compensation income except, a taxpayer deriving
compensation concurrently from two or more employers and a taxpayer whose pure
compensation income from Philippine sources exceeds P60,000.00
Individuals whose sole income is subjected to final withholding tax.
Individual exempt from income tax under the law.
3. A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time
basis with a salary of P3,500 a month. He then received the 13
th
month pay. In September 1996, he
accepted another part-time job from Corporation B from which he received a total compensation of
P14,500.00 for the year 1996. The correct total taxes were withheld from both earnings. With the
withholding taxes already paid, would he still be required to file an income tax return for his 1996
income?
He is required to file an income tax return even when his total annual compensation does not
exceed P60,000. An individual deriving compensation concurrently from two or more employers
shall file an income tax return.
TAX: PART II (IMPORTANT POINTERS)
I. Estate/Donors Tax
1. Gross Estate Composition
Decedents interest (ownership) in all types of properties;
Properties transferred in contemplation of death;
Revocable transfer of properties;
Properties given under a General Power of Appointment;
Proceeds of a Life Insurance with Revocable Beneficiary; and
Properties transferred for an inadequate consideration.
2. Proceeds of Life Insurance; Part of the Gross Estate
If the beneficiary is the estate --- it is included in gross estate regardless of whether the
designation is revocable or irrevocable;
If beneficiary is other than the estate --- it is included in the gross estate provided that the
designation is revocable. (NOTE: If the decedent did not indicate the type of designation, then
the designation shall be considered as revocable under the present Insurance Law).
3. Allowable Deductions from Gross Estate for Citizens and Residents
Expenses, Losses, Interest and Taxes;
Property Previously Taxed (Vanishing Deduction Return);
Transfers for Public Use;
Family Home but only to the extent of P1-M;
Medical Expenses but only to the extent of P500,000 and it must be incurred within one (1) year
prior to the death; and
The amount received by heirs from the decedents employer as a consequence of the death of
the decedent employee.
4. Intangible Personal Property deemed located within the Philippines
Franchise which must be exercised in the Philippines;
Shares, obligations or bonds issued by any corporation or sociedadanonima
organized/constituted in the Philippines;
Shares, obligations or bonds by any foreign corporation eighty-five (85%) percent of the
business located within the Philippines; and
Shares, obligations or bonds issued by a foreign corporation if such shares, obligations, or bonds
have acquired a business situs in the Philippines.
5. Cumulative Donation vs. Splitting Donation
Donation is cumulative when it is made on the same calendar year. On the other hand, it is
splitting when donation is made on different calendar year.
Whether donation is cumulative or splitting is relevant only if the donee is a relative. It must not
apply if the donee is a stranger since the donors tax applicable shall be a flat rate of 30%.
6. Gifts that are exempt from Donors Tax
Dowries or gifts made on account of marriage.
The gift was given before the marriage celebration or one year after.
The gift must be given by the parent to his children, whether legitimate, natural or
adopted children, on account of the latters marriage and up to P10,000.00
Gifts to the National Government, any entity created by any of its agencies not conducted for
profit;
Gifts to an educational or charitable or religious or cultural or social welfare institutions,
provided that the donee cannot use more than 30% of said gifts for administration purposes;
and
Gifts to religious corporate sole (e.g. Roman Catholic Archbishop of Manila)
III. REMEDIES
1. Remedies of the Government and the Taxpayer
Government Taxpayer
Distraint or Levy (Administrative Remedies) Request for Reconsideration within 30 days after
receiving the assessment
Civil Action (Judicial Remedies) Request for Reinvestigation within 30 days after
receiving the assessment
Criminal Action (Judicial Remedies) NOTE: Assessment becomes final after 60 days
from the filing of the protest when supporting
documents are submitted.

2. Period of Appeal to the CTA
Within thirty (30) days from the receipt of the denied protest; and
After the lapse of 180 days when the Commissioner fails to act on the protest.
3. Authority of the BIR Commissioner to inquire into bank deposits; instances
To determine the gross estate of the decedent; and
When the taxpayer applies for a compromise of his tax liability by reason of financial incapacity
(NOTE: The BIR Commissioners authority to inquire into the taxpayers deposits is an exception
to the Secrecy Law.)
4. Assessment of Taxes; Different Prescriptive Periods
Under the NIRC: The assessment shall be made within three (3) years from the last day of filing
the return or when the return was filed after the last day, the three (3) year period shall be
reckoned from the actual date of filing.
Under the Tariff and Customs Law: There is no prescriptive period for the payment of customs
duties. The importer cannot get his importation from customs custody unless the import duties
are met.
Under the Local Government Code: The assessment shall be made within five (5) years from the
date they became due.
5. Guidelines on the Recovery of Tax Erroneously or Illegally Collected
No suit/proceeding shall be filed after two (2) years from the payment of the tax or penalty;
There is no extension of such two (2) year period of recovery regardless of any supervening
cause that may arise after the payment;
A claim for tax refund/ tax credit must be previously filed with the BIR Commissioner before a
suit is instituted.
6. May a taxpayer who has pending claims for VAT input credit or refund set off said claims against his
other tax liabilities? Explain.
No, the taxpayer may not set off his other tax liabilities against his pending claims for VAT
refund. The VAT refund is not certain because there is still doubt as to its refundability. Said
refund is also not liquidated because the amount to be refunded is still to be determined.
Jurisprudence requires that both the tax liability and the refund must certain and liquidated.
IV. LOCAL AND REAL PROPERTY TAXATION
1. Fundamental Principles on Local Taxes
It shall be uniform in each LGUs;
It must be equitable; levied and collected only for public purpose; must not be unjust,
oppressive or confiscatory; and it must not be contrary to law, public policy, national economic
policy.
The collection shall in no case be left to any private person; and
Each LGU shall, as far as practicable, evolve a progressive system of taxation.
2. Limitations of the Taxing Power of LGUs
Income tax except when levied on banks and other financial institutions;
Documentary stamp tax;
Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa;
Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and all
other kinds of customs duties, except wharfage on wharves constructed and maintained by LGU
concerned;
Taxes, fees and charges and other imposition upon goods carried into or out of or passing
through the territorial jurisdictions of the LGUs in the guise of charges for wharfage , tolls for
bridges or otherwise, other taxes, fees or other charges in any form whatsoever;
Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers and
fishermen;
Taxes on business enterprises certified to by the BOI as pioneer or non-pioneer for a period of
six and four years, respectively from the date of registration;
Taxes on premiums paid by way of reinsurance or retrocession;
Taxes, fees or charges for registration of motor vehicles, except tricycles;
Taxes, fees or other charges on Countryside and Barangay Enterprises duly registered under the
law; and
Taxes, fees and charges of any kind of the National Government, its agencies and
instrumentalities and LGUs.
3. Under Article 415 of the CC, in order for machinery and equipment to be considered as real property,
they must be placed by the owner of the land and in addition, must directly meet the needs of the
industry or works carried by the owner. Oil companies, such as Caltex and Shell, install underground
tanks in the gasoline station located on land leased by oil companies from others. Are those
underground tanks, which were not placed by the owner of the land but which were instead placed
there by the lessor of the land considered real property for purposes of real property taxation under the
LGC? Explain.
Yes, the underground oil tanks of oil companies constitute machinery for Real Property Tax
purposes. It is the beneficial use of the tanks that make it part of the taxable real property. In
addition, said tanks are used actually and directly in the business of petroleum retailing.
4. Real Property Tax Basis; Actual Use and not Ownership
Under the New Real Property Tax Code, the taxing of real property is on the basis of actual use,
even if the user is not the owner.
5. Exemptions from Real Property Taxation
a. Real property owned by the RP or any of its political subdivisions, except when the
beneficial use has been granted to a taxable person;
b. Charitable institutions, churches, personages and all lands, buildings and improvements
actually, directly and exclusively used for religious educational purposes;
c. All machinery and equipment that are actually, directly and exclusively used by the local
water districts and GOCCs engaged in the supply and distribution of water and/or
generation and transmission of electric power;
d. All real property owned by duly registered cooperatives; and
e. Machinery and equipment used for pollution control and environmental protection.
V. TARIFF AND CUSTOMS LAW
1. Article Subject to Seizure; Rules
Articles subject to seizure do not have to be goods imported from a foreign country;
The provisions of Tariff and Customs Code refer to unmanifested articles found on vessels or
aircraft engaged in the coastwise trade;
The customs authorities do not have to prove to the satisfaction of the CFI that the articles on
board a vessel were imported from abroad or are intended to be shipped abroad before they
may exercise the power to effect customs, searches, seizures, or arrests provided by law and to
continue with the administrative hearings on whether or not the law may have been violated.
2. Seizure and Forfeiture; Exclusive Jurisdiction
The exclusive jurisdiction over seizure and forfeiture cases is vested in the Collector of Customs
when sitting in forfeiture proceedings constitutes a tribunal expressly vested by law with
jurisdiction to hear and determine the subject matter of such proceedings without any
interference from the CFI.
KINDS OF CUSTOMS DUTIES
1. Regular Duties
a. Ad Valorem Duty This is a duty based on the value of the imported particle.
b. Specific Duty This is a duty based on the dutiable weight of goods, the weight thereof being
either the gross weight, legal weight or net weight.
2. Special Duties
a. Dumping Duty - This is a duty levied on imported goods where it appears that a specific kind
or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at
a price less than its fair value.
b. Countervailing Duty This is the duty equal to the ascertained or estimated amount of the
subsidy or bounty or subvention granted by the foreign country on the production, manufacture
or exportation into the Philippines or retard or considerably retard the establishment of such
industry.
c. Marking Duty This is a duty on an ad valorem basis imposed for improperly marked articles.
The law requires that the foreign importations must be marked in any official language of the
Philippines with the name of the country of origin of the article.
d. Discriminatory or Retaliatory Duty This is a duty imposed on imported goods whenever it is
found as fact that the country of origin discriminates against the commerce of the Philippines at
a disadvantage compared with the commerce of any foreign country.
FORFEITURE OF COMMON CARRIERS
Common Carriers are generally not subject to forfeiture although if the owner has knowledge of
its use in smuggling and was a consenting party, it may also be forfeited.
If a motor vehicle is hired to carry smuggled goods but has no Certificate of Public Convenience,
it is not a common carrier. It is thus subject to forfeiture, and lack of personal knowledge of the owner
of the carrier is not a defense to forfeiture.
TERRITORIAL JURISDICTION OF THE BOC
All seas within the jurisdiction of the Philippines and over all coasts, ports, harbors,
bays, rivers and inland waters whether navigable or not from the sea.(Sec. 603, Tariff and Customs
Code.)
FUNCTIONS OF THE BOC
1. Assessment and collection of lawful revenues from imported articles all other dues, fees,
charges, fines and penalties accruing under the tariff and customs laws;
2. The prevention and suppression of smuggling and other frauds upon the customs;
3. The supervision and control over the entrance and clearance of vessels and aircrafts engaged in
foreign commerce;
4. The enforcement of tariff and customs laws and all other laws, rules and regulations relating to
the tariff and customs administration;
5. The supervision and control over the handling of foreign mails arriving in the Philippines for the
purpose of the collection of the lawful duty on the dutiable articles thus imported and the
prevention of smuggling through the medium of such mails.
6. Supervise and control all import and export cargoes, landed or stored in piers, airports, terminal
facilities, including container yards and freight stations, for the protection of the government
revenue; and
7. Exercise exclusive original jurisdiction over seizure and forfeiture cases under the tariff and
customs laws.

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