Taxation Law Review Sababan Notes 1 PDF

Taxation law review notes
- Atty. Francis J. Sababan COVERAGE OF TAXATION LAW REVIEW

I.
Basic
Principles
of
Constitutional Limitations
a) Due process clause which
could
be
either
substantive due process
and
procedural
due
process clause
b) Equal protection clause
Read:
Ormoc
Sugar
Central vs. City Treasurer
22 SCRA 603
Tiu vs. CA 301

SCRA 178
c) Article III sec. 1 of the
1987 Constitution nonimpairment clause
d) Article III sec. 5 freedom
of religion
e) Article III sec. 20 nonpayment of poll tax
f) Article VI sec. 28 par. 2
flexible tariff clause
g) Article VI sec. 28 par. 3
exemption
from
real
property tax
Read:
Herrera
vs.
Quezon City 3 SCRA 186
Abra
vs.
Hernando 107 SCRA 104
Abra Valley vs.

Aquino 52 SCRA 106
Philippine
Lung
Center vs. Quezon City
433 SCRA 119
h) Article VI sec. 28 par. 4
qualified majority in tax
exemption
i) International
double
taxation
CIR vs. Johnson

309 SCRA 87
j)
Doctrine of equitable
recoupment
k)
Doctrine of Set-off or
compensation in taxation
Republic
vs.
Mambulao 4 SCRA 622
Domingo
vs.
Garlitos 8 SCRA 443
Francia vs. IAC 162 SCRA 753
Caltex vs. COA 208 SCRA 726
294 SCRA 687
Philex
vs.
CIR
II. Income Tax Law

Section 22-26 of the National Internal
Revenue Code
a) Read in the commentaries or magic
notes the different kinds of:
1. Income Taxpayers
2. Income Taxes
3. Sources of Income sec. 42 of NIRC
- Income Taxpayers
a) Individuals
b) Corporation
c) Estates and Trusts
-Individuals are classified
Resident Citizens sec. 23 (A),
sec 24 (A) (a)
Non-Resident Citizens sec 23
(B), 24 (A) (b) 22 (E)
Overseas Contract Workers Sec.
23 (C), 24 (A) (b)
Resident Aliens Rev. Reg. sec 5,
23 (D), 24 (A) (c)
Non-Resident Aliens Engaged in
trade or business sections 25
(A) (1)
Non-Resident Aliens Not
Engaged in trade or business
sec. 25 (B)
Aliens Employed in MultiNational Corporations sec. 25
(C) and Rev. Reg. 12-2001
Aliens Employed in Offshore
Banking Units sec 25 (D)
Aliens Employed in petroleum
Service Contractors &
Subcontractors sec. 25 (E)
-Corporate Income Taxpayers
Domestic Corporations sec. 23 (E),
and sec 27 of NIRC
Resident Foreign Corporations sec.
22 (H) and (28)A
Non-Resident Foreign Corporations
sec. 22 (1) and 28 (B)
-Estates and Trusts sec. 60-66 of
NIRC
Different Kinds of Income Tax
1. Net Income Tax secs. 24 (A), 25
(A) (1), 26, 27 (A) (B) (C), 28 (A)
up to 3rd par. 31 and 32 (A)
2. Gross Income Tax secs. 25 (B)
first part and 28 (B) (1)
3. Final Income Taxes sec. 57 (A)

- Atty. Francis J. Sababan 4. Minimum Corporate Income Tax
of 2% of the Gross Income secs.
27 (E), 28 (A) (2)
5. Improperly Accumulated
Earnings Tax of 10% of its
taxable income sec. 29 NIRC Rev.
Reg. 2-2001
Optional Corporate Income Tax
of 15% of its gross income
sections 27 (A) 4th to 10th par.
And 28 A(1) but only up to the 4th
paragraph
-Proceed to section 42 and 23 of the
NIRC
NDC vs. Comm 151 SCRA 472
Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
Comm. Vs. Manning 66 SCRA

14
Anscor vs. Comm. 301 SCRA

152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D)
(4); 28 (A) (7) (D); 32 B (7) (a)
Then you go to sec. 24 C, 25A (3); 25
B, C, D, E, 27 D (2); 28 (A) (7) (C); 28 B
(5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A)
(3); 25 (B) last par. 27 (D) (5)
China Bank vs. Court of Appeals
336 SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 131999
-
-Upon reading sec. 27 (A) go to sec. 22 (B)

Batangas vs. Collector 102 Phil. 822
Evangelista vs. Collector 102 Phil
140
Reyes vs. Comm. 24 SCRA 198
Ona vs. Bautista 45 SCRA 74
Obillos vs. Comm 139 SCRA 436
Pascua vs. Comm. 166 SCRA 560
Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the

LGC.
Pagcor vs. Basco 197 SCRA 52
Mactan vs. Cebu 261 SCRA 667
LRT vs. City of Manila 342 SCRA

692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28
(B) (5) (b)
Marubeni vs. CIR 177 SCRA 500
Proctor & Gamble vs. Comm 160
SCRA 560
Same case Proctor and Gamble on
the Motion for Reconsideration 204
SCRA 377
Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32
(B) (7) (a)
Read Mitsubishi vs. Comm 181
SCRA 214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read
sec. 85 par (e), sec. 108A and sec. 123 of
the NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see
Aguinaldo vs. Comm. 112 SCRA 136, RR
10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104

- Atty. Francis J. Sababan -
G and Cumulative methods of filing

donors tax returns sections 99 (A),
103 (A) (1) and RR 2-2003
Sections 100 and 85 (9)
V. Value Added Tax

- Sections 105-115
-Read RA 9337
-Read ABAKADA vs Comm.
GR 168056, Sept. 1, 2005
VI. Remedies Under the Internal
Revenue Code
-Sections 202-229
-RR 12-99
Phoenix vs Comm 14 SCRA 52
Basilan vs. Comm. 21 SCRA 17
Yabut vs. Flojo 115 SCRA 278
Union Shipping vs. Comm 185
SCRA 547
Comm. vs. TMX 205 SCRA 184
Comm. vs. Philamlife 244 SCRA
Comm. vs. CA & BPI 301 SCRA 435
BPI vs. Comm. 363 SCRA 840
-Prescription sections 203 and 222 of
NIRC, sec. 194 of the LGC, sec. 270 of
the LGC, sec. 1603 of Tariff and
Customs Code
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651
Co-relate sec. 139 and 147 of LGC

Under sec. 140 of the LGC see sec. 125
of the Internal Revenue Code
Under sec. 150 of the LGC read the
following:
Phil. Match vs.

Cebu 81 SCRA 99
Allied Thread vs.

Manila 133 SCRA 338
Sipocat vs. Shell

105 Phil. 1263
Iloilo Bottles vs.

Iloilo City 164 SCRA 607
VIII. Real Property Tax

Sections 197-294
Sec. 235
LRT vs. Manila

342 SCRA 692
Cebu City vs.

Mactan 261 SCRA 667
IX. Tariff & Customs Code
- Special Customs Duty sec. 301-304 of
TCC
- Regukar Customs Duty sec. 104 of TCC
- RA 7631
X. Court of Tax Appeals
- RA 1125 as amended by RA 9282
VII. Local Taxation

- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
Misamis vs. Cagayan de Oro
181 SCRA 38
Reyes vs. San Pablo City 305
SCRA 353
Meralco vs. Laguna 306 SCRA
750
PLDT vs. Davao City 363 SCRA
522


- Atty. Francis J. Sababan Rules in the Classroom:
1. do not be absent
if you are absent, you have to transcribe
what happened in class when you were
out.
The next meeting you attend class,
consider yourself a resident of balicbalic, babalikbalikan ka sa recit.
Exception: if you get married.
2. read the assignment. Wag zapote ang
aral.
3. holiday make up class probably on a
Sunday
4. allowed to glance at your notes, wag
lang pahalata/garapal
5. materials:
codal
commentaries (any author will do)
magic notes (Sababan Lecture and
Q&A)
Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional
Provisions
2. Income Tax
3. Estate Tax
4. Donors Tax
5. Remedies
6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage
of the Bar Exams, questions have been
asked since 1999)
Title 5,6 and 7 are always included in

the coverage
No computations in the bar
There are only 1 or 2 questions in the
Bar about Basic Principles
What are the favorite topics in the Bar?
12 questions on Income Tax
8-10 questions on remedies
8-10 questions allocated to the 7 topics
BASIC PRINCIPLES:
Taxation is an inherent power of the
State.
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in
the law, statute or constitution; it depends
on the existence of the state. No law or
legislation for the exercise of the power to

tax by the national government.
Q: Do local governments exercise this
inherent power?
A: No. Only the National Government
exercises the inherent power to impose
taxes.
Q: The taxing power of local governments
is a DELAGATED power. Delegated by
whom?
A: Delegated by Congress through law in
case of autonomous regions, and delegated
by the constitution in case of LGUs not
considered an autonomous region.
Cities, provinces and municipalities
power granted under Art. X Sec. 5&6 of the
Constitution
Autonomous Regions power conferred
by Congress through law. Art. X Sec. 20 #2
of the Constitution is a non-self-executing
provision. Thus the power is granted by
Congress because said provision requires
an enabling law.
Article X, Section 5 is self-executing thus
the power is granted by the constitution.
CONSTITUTIONAL LIMITATIONS
Due Process Clause
Q: why is it a limitation to the power to tax?
A: The due process clause as a limitation to
the power to tax refers both to substantive
and procedural due process. Substantive
due process requires that a tax statute
must be within the constitutional authority
of Congress to pass and that it be
reasonable, fair and just.
Procedural due process, on the other
hand, requires notice and hearing or at
least the opportunity to be heard.
Ex: On Substantive Due Process- when
the Congress passes a law exempting the
13th month pay from tax but with the
concurrence only of the majority of the
quorum law would be invalid because the
Constitution provides that any grant of tax
exemption shall be passed with the
concurrence of the majority of all the
members of the Congress.

- Atty. Francis J. Sababan Q: Does it follow that the adverse party
must always be notified?
A: No. As a rule, notice and hearing or the
opportunity to be heard is necessary only
when expressly required by law. Where
there is no such requirement, notice and
the
opportunity
to
be
heard
are
dispensable.
Ex. Before Oct. 1, 1995, you can secure
a TRO without notifying the adverse party.
If you are a suspect in a criminal case, you
have the right to have an opportunity to be
heard (if there is a law).
Before July 1, 1998, no notice need
be given to a party declared in default.
After the amendment, the party declared in
default has to be notified of subsequent
proceedings albeit without the right to
participate therein.
In the case of a search warrant, the
person to be searched was not notified.
The person searched cannot claim that
there was a violation of due process
because there is no law requiring that the
person to be searched should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON:
No provision of law requires notice to
the adverse party. If the adverse party is
notified, he may abscond. Thus, in
adversarial proceedings, in connection with
procedural due process, the adverse party
need not be notified all the time.
Equal Protection Clause
As a rule, taxpayers of the same footing
are treated alike, both as to privileges
conferred
and
liabilities
imposed.
Difference in treatment is allowed only
when based on substantial distinction.
Difference in treatment not based on
substantial distinction is frowned upon as
class legislation. This is violated when
taxpayers
belonging
to
the
same
classification are treated differently form
one another; and taxpayers belonging
different classifications are treated alike.
Requirements of Reasonable Classification:
1) There
must
be
substantial
distinctions that make a real
difference.
2) It must be germane or relevant to
the purpose of the law.
3) The distinction or classification must

apply not only to the present but
also to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex: In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of Olonggapo?
A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
The first led to the creation of the
Subic Special Economic Zone (SSEZ).
The latter set the limitations and
boundaries of the application of the
incentives (no taxes, local and national,
shall be imposed within SSEZ. In lieu
thereof, 3% of the Gross Income shall be
remitted to the national govt) to those
operating their businesses within the
said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside
the secured area. The petitioners
contended that the law in question was
violative of their right to equal
protection of laws since they are also
Filipino businessmen.
H:
The Supreme Court ruled that there
was no violation since the classification
was based on a substantial distinction.
The element invoked here is element
#1 that there must be substantial
distinction in the classification of
taxpayers on whom the tax will be
imposed.
The Court observed that those
foreign businessmen operating within

- Atty. Francis J. Sababan the secured area have to give a larger
capital to operate in the secured area
(to
spur
economic
growth
and
guarantee employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing
upon any and all centrifugal sugar
milled at the Ormoc Sugar Central a
municipal tax on the net sale of the
same to the United States and other
foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest,
then filed a complaint against the City of
Ormoc.
H:
The Supreme Court said there was a
violation of the equal protection clause.
The element invoked here was element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at bar,
there was a violation of element #3
because the law was worded in such a
way that it only applies to Ormoc Sugar
Central alone and to the exclusion of all
other sugar centrals to be established in
the future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
Q: What is the obligation contemplated in

this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant
to law, therefore, the obligation to pay
taxes is imposed by law, thus the nonimpairment clause does not apply.
You have to determine first the source
of obligation:
1. If the law merely provides for the
fulfillment of the obligation then the law is
not the source of the obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation
created by an act which may constitute a
contract, quasi-contract, delict, and quasidelict, and its only purpose is to regulate
such obligation, then the act itself is the
source of the obligation, not the law.
When the law establishes the obligation
and also provides for its fulfillment, then the
law itself is the source of the obligation
Q: So, in what instance does the nonimpairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise
agreement
with
the
government. In this instance, the obligation
to pay the tax is now based on the contract
between the taxpayer and the government
pursuant to their compromise agreement.
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise ones religion
3. prohibition
upon
the
national
government to establish a national religion
Take Note: the requirement for its

application: the parties are the government
and private individual.
Q: Which one limits the power to tax?

A: Prohibition
upon
the
national
government to establish a national religion
because this will require a special
appropriation of money coming from the
national treasury which is funded by the
taxes paid by the people.
Q: What is a poll tax?

A: It is a tax of a fixed amount on
individuals residing within a particular
territory, whether citizens or not, without
regard to their property or to the
occupation in which they may be engaged.
It is a tax imposed on persons without
any qualifications. persons may be allowed
to pay even if they are not qualified as to
age or property ownership.
Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Quasi-Delict.
Poll Tax
Example of Poll Tax: Community Tax

Certificate under Section 162 of the Local
Government Code.

- Atty. Francis J. Sababan Q: Why is it a limitation to the power to
tax?
A: It is a limitation to the power to tax
because Congress is prohibited from
passing a law penalizing with imprisonment
a person who does not pay poll tax. (funds
for sending a person to jail is taken from the
national treasury which is funded by the
taxes paid by the people)
Exemption
Estate Tax
from
payment
of
Real
Q: What is the requirement for exemption

from payment of real property tax under
the 1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution
Cemeteries, churches and parsonages or
convents appurtenant thereto, and all
lands, buildings and improvements used
EXCLUSIVELY for RELIGIOUS, CHARITABLE
or EDUCATIONAL purposes shall be exempt
for taxation.
Art. 8, Sec. 17 (3), 1973 Constitution
charitable
institutions,
churches,
parsonages
or
convents
appurtenant
thereto, mosque, and non-profit cemeteries,
and all lands, buildings, and improvements
ACTUALLY, DIRECTLY, and EXCLUSIVELY
used for RELIGIOUS and CHARITABLE
purposes shall be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution
charitable
institutions,
churches,
and
parsonages
or
convents
appurtenant
thereto, mosque, non-profit cemeteries, and
all lands, buildings, and improvements
ACTUALLY, DIRECTLY and EXCLUSIVELY
used for RELIGIOUS, EDUCATIONAL and
CHARITABLE purposes shall be exempt from
taxation.
HERRERA v. QC-BOARD OF ASSESSMENT
(1935 Constitution)
Q: What is involved in this case?
A:
A
charitable
institution,
St.
Catherines Hospital. The hospital was
previously exempt from taxation until it
was reclassified and subsequently
assessed for the payment of real
property tax.
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school
for midwifery and nursing, and a
dormitory. Since it is not exclusively
used for charitable purposes it is not

exempt from taxation.
H:
The Court ruled that petitioner is not
liable for the payment of real estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because they
are incidental to the primary purpose of
the hospital.
NOTE: this arose during the 1935
Constitution.
Exempted by virtue of incidental
purpose was merely coined by the
Supreme Court. Thus, it does not apply to
other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO
A
A religious institution was involved in
this case, the Roman Catholic Bishop of
Bangued, Inc. (bishop filed declaratory
relief after assessed for payment of tax).
The respondent judge granted the
exemption from taxes of said church
based only on the allegations of the
complaint
without
conducting
a
hearing/trial. The assistant prosecutor
filed a complaint contending that
petitioner was deprived of its right to
due process.
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause action arose under the 1973
Constitution,
not
under
the
1935
Constitution (note the difference). Tax
exemption is not presumed. It must be
strictly construed against the taxpayer and
liberally construed in favor of the
government.
ABRA VALLEY COLLEGE INC. v. AQUINO
A:
An educational institution is involved
in this case. The ground floor of the
school was leased to Northern Marketing
Corp., a domestic corporation. The 2nd
floor thereof was used as the residence
of the school director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the
school is now liable to pay real estate
tax.

- Atty. Francis J. Sababan H:
The Court held that the school is

PARTIALLY liable for real estate tax.
1. Residence exempt by virtue of
incidental purpose; justified because
it is necessary.
2. Commercial not exempt because it
is not pursuant to the primary
purpose;
not
for
educational
purposes.
Q: is the doctrine in the case of Herrera the

same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property
(hospital, school and dorm). But in this
case, the Supreme Court made a
qualification. The Supreme Court said it
depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided in
1988.
Q: At present, do we still apply the
exemption from tax by virtue of the
Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in
said case arose under the 1935 Constitution
and it does not apply to the provisions of
the 1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
A:
A charitable institution, a hospital. It
is provided in the charter of the Lung
Center of the Philippines is a charitable
institution. However, part of its building
was leased to private individuals and
the vacant portion of its lot was rented
out to Elliptical Orchids. Respondent
contends that since the hospital is not
used actually, directly, an d exclusively
for charitable purposes, it is liable to
pay real estate taxes.
H:
The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of
the
hospital
used
for
charitable
purposes (whether for pay or non-pay
patients), petitioner is exempt from
payment of real estate tax.
NOTE: petitioner contended that the profits
derived from the lease of its premises were
used for the operation of the hospital. The
Court held that the use of the profits does
not determine exemption, rather it is the

use of the property that determines
exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under
the
1987
Constitution.
The
requirements for exemption are different. In
the 1935 Constitution, the property must be
EXCLUSIVELY used for religious, educational
or charitable purposes. Under the 1987
Constitution, the property must be used
ACTUALLY, DIRECTLY, and EXCLUSIVELY for
religious,
educational
and
charitable
purposes.
Q: Was the doctrine laid down in Abra
Valley affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court reiterated
the ruling in the Abra Valley case which
arose under the 1935 Constitution. The
Supreme Court made a qualification, it held
that it depends on whether or not the use is
incidental to the primary purpose of the
institution.
NOTE: at present, exemption from tax by
virtue of incidental purpose is not
applicable to all taxes including real estate
tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax
treaty
3. implication of most favored nation
clause
Q: What is the corporation involved in this
case?
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered
into a license agreement with SC
Johnson and Sons U.S.A (Non-Resident
Foreign Corp, NRFC) whereby the former
was allowed to use the latters
trademark and facilities to manufacture
its products. In return, the DC will pay
the NRFC royalties as well as payment
of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently,
the DC should have paid only 10%
under the most favored nation clause.

- Atty. Francis J. Sababan H:
Q:
A:
Q:
A:
Q:
A:
The Supreme Court coined the term

International
Double
Taxation
or
International Juridical Double Taxation.
What prompted the SC to coin such
term?
Because a single income (tax
royalties paid by a DC) was subjected to
tax by two countries, the Philippines
income tax and the U.S. tax.
International
Juridical
Double
Taxation applies only to countries where
the tax liabilities of its nationals are
imposed on income derived from
sources coming from within and without.
Is
there
an
instance
where
international double taxation does not
apply?
Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
The controversy in the case at bar
involves the income tax paid in the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to 10%
under the most favored nation clause.
The question is: was the tax paid under
similar circumstances with that of the
RP-West Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to
the royalties in payment of income tax.
The Supreme Court ruled that the lower
courts interpretation of the phrase was
erroneous. Rather, the phrase applies to
the application of matching credit.
What is matching tax credit?
RP-Germany Treaty provides for that
20% of the tax paid in the Philippines
shall be credited to their tax due to be
paid in Germany.
The 10% does not apply because
there is no matching credit. Thus, there
is no similarity in the circumstances.
EQUITABLE
RECOUPMENT
DOCTRINE OF SET-OFF
AND
Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be
allowed to offset unsettled tax liabilities.
This is not allowed in this jurisdiction,

because of common law origin. If allowed,
both the collecting agency and the taxpayer
might be tempted to delay and neglect the
pursuit of their respective claims within the
period prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of
magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for this
to work, hence, the government is
preventing corruption)
There is no exception at all otherwise,
the BIR would be flooded with so many
claims.
Set-off
Presupposes mutual obligation between
the parties. In taxation, the concept of setoff arises where a taxpayer is liable to pay
tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
between the parties, and that they are
mutual creditors and debtors of each other.
In taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but
the government, for one reason or another,
is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A:
They are liable to pay forest charges
(under the old tax code).
NOTE: under our present tax code, the
NIRC, we do not have forest charges as
the same was abolished by President
Aquino.
Q: What did the lumber company do?
A:
The lumber company claimed that
since the government did not use the
reforestation charges it paid for
10

- Atty. Francis J. Sababan reforestation of the denuded land
covered by its license, the amount paid
should be reimbursed to them or at
least compensated or applied to their
liability to pay forest charges.
H:
The
Court
ruled
that
the
reforestation charges paid is in the
nature of taxes.
The principle of compensation does
not apply in this case because the
parties are not mutually creditors and
debtors of each other. A claim for taxes
is not a debt, demand, contract or
judgment as is allowed to be set-off
under the statute of set-off which is
construed uniformly, in the light of
public policy, to exclude the remedy in
connection or any indebtedness of the
State or any municipality to one who is
liable for taxes. Neither are they a
proper subject for recoupment since
they do not arise out of contract or the
same transaction sued on.
General Rule: no set-off is admissible
against demands for taxes levied in general
or local governmental purposes.
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer
and the government, but arises out of a
duty to, and are positive acts of the
government to the making and enforcing of
which, the consent of the individual is not
required.
Taxes cannot be the subject matter of
compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was
abolished by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A:
The surviving spouse suggested that
the
compensation
to
which
the
decedent was entitled to as an
employee of the Bureau of Lands be setoff from the estate and inheritance
taxes imposed upon the estate of the
deceased.
H:
Both the claim of the government for
estate and inheritance taxes and the
claim of the (intestate) for the services
rendered have already become overdue

hence demandable as well as fully
liquidated,
compensation
therefore
takes place by operation of law, in
accordance with Art. 1279 and 1290 of
the Civil Code and both debts are
extinguished to the concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain
sum of money to the estate of the
deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?
A:
Payment for real estate taxes for the
property of Francia. It appears that
petitioner was delinquent in the
payment of his real estate tax liability.
The same is being collected by the
Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A:
Suggested
that
the
just
compensation for the payment of his
expropriated property be set-off from
his unpaid real estate taxes. (the other
part of his property was sold at a public
auction)
H:
The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer
may have against the government. A
taxpayer cannot refuse to pay a tax on
the ground that the government owes
him an amount.
Internal Revenue taxes cannot be
the subject of compensation because
the government and the taxpayer are
not mutually creditors and debtors of
each other, and a claim for taxes is not
a debt, demand, contract or judgment
as is allowed to be compensated or setoff.
Furthermore, the payment of just
compensation was already deposited
with PNB Pasay, and the taxes were
collected by a local government, the
property was expropriated by the
national government. (diff parties, not
mutual creditors and debtors of each
other.)
11

- Atty. Francis J. Sababan CALTEX PHIL v. COA
Q: What is being collected?
A:
Caltexs contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking
the latter to settle its unremitted
collection stating that until the same is
paid, its claim for reimbursement from
the OPSF will be held in abeyance.
Q: Why
is
Caltex
entitled
to
reimbursement?
A:
Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
H:
The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely
acted
as
agent
of
the
government in collecting contributions
for the OPSF because such is being
shouldered by the consumers when they
purchase petroleum products of oil
companies, such as Caltex.
Taxation is no longer envisioned as a
measure merely to raise revenues to
support
the
existence
of
the
government. Taxes may be levied for
regulatory purposes such as to provide
means for the rehabilitation and
stabilization of a threatened industry
which is vested with public interest, a
concern which is within the police power
of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment
of excise taxes, which it wanted to be setoff from its pending claim for a VAT Input
credit/refund.
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results
of a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because

there is no prohibition in the Constitution or
statute.
Obnoxious double taxation
synonym of double taxation.
is
the
Elements of Double Taxation:

1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the
national government.
The two (2) are
different taxing authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government;
(2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform
Act of 1997, can levy tax upon GOCCs,
agencies and instrumentalities (Section 27
c)), although income received by the
Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
1. individual;
2. corporate;
3. estate and trust.
I.
INDIVIDUAL TAXPAYER
Q: How many kinds of individual taxpayers

are there?
A: There are seven (7). Namely:
1. Resident Citizen (23A and 24A);
2. Nonresident Citizen (23B and 24A);
3. OCW and Seaman (23C and 24A);
4. Resident Alien (22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade
or Business (22G, 23D and 25A)
12

6. Nonresident Alien NOT Engaged in

7.
Trade or Business (22G, 23D and

25B)
Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum
Service
Contractors
(25C,D and E)
Resident Citizen (RC)

Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
therein.
Q: If you are abroad, and you have the
intention to permanently reside therein, can
you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your physical
presence therein, you may still be
considered a RC.
OCW and Seamen
OCW was used and not OFW in the
CTRP, because the classification shall cover
only those Filipino citizens working abroad
with a contract. TNTs are not covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said seaman
is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays
most of the time during the taxable year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.
The importance of ascertaining whether
or not a seaman is a RC or a NRC, is that if
he is a RCm he is taxable on ALL income
derived from all sources within and without.
If he is a NRC, he is taxable only on income

derived form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works
abroad with a contract. It does not cover
TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a
contract and they have not manifested their
intention to permanently reside abroad.
(distinguish from an immigrant)
Requirements for a seaman to be
considered an OCW:
1. must be a member of the compliment of
a vessel;
2. the vessel must be exclusively engaged
in international trade or commerce.
Resident Alien (RA)
An individual whose residence is within
the Philippines and who is not a citizen
thereof.
Intention to reside permanently in the
Philippines is not a requirement on the part
of the alien.
The requirement under RR#2 is that he
is actually present in the Philippines, neither
a sojourner, a traveler, not a tourist.
Whether hes a transient or not is
determined by his intent as to the nature
and length of his stay.
Q: Is the intention to permanently reside in
the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged
Trade or Business (NRAETB)
in
A foreigner not residing in the

Philippines but who is engaged in trade or
business here.
RR 2-98 has expanded the coverage of
the term, engaged in trade or business to
include the exercise of a profession.
Furthermore, by the express provision of
13

- Atty. Francis J. Sababan the law, a NRA who is neither a
businessman nor a professional but who
come to and stays in the Philippines for an
aggregate period of more than 180 days
during any calendar year is deemed to a
NRAETB in the Philippines.
Status: either a RA or NRA depending on

their stay here in the Philippines.
Q: How many types?

A: There are three (3) types, namely:
1.
NRA engaged in trade or
business (25a1);
2.
NRA
who
practices
a
profession (Revenue Regulation 298);
3.
foreigner who comes and
stays in the Philippines for an
aggregate period of MORE THAN 180
days during any calendar year.
Liable to pay 15% from Gross Income

received from their employer
Q: What is the status of a Chinese who

stays here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period
of more than 180 days during a calendar
year.
Q: What is the income tax applicable to
said taxpayer?
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines.
Non-Resident Alien Not Engaged in
Trade or Business
Q: How many kinds?
A: Only one.
The reason why the NRANETB are
included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.
Aliens Employed by Regional or
Area Headquarters & Regional
Operating
Headquarters
of
Multinational Companies/ Aliens
Employed by Offshore Banking
Units (Aliens Employed by MOP)
Their status may either be RA or NRA

because Section 25 C and D does not
distinguish.
Income earned from all OTHER sources

shall be subject to the pertinent income tax,
as the case may be.
Aliens Employed in Multinational
and Offshore Banking Units
Q: How are they classified?
A: If they derived income from other
sources aside from their employer, you may
classify them either as RA, NRAETB, or
NRANETB.
Aliens
Employed
in
Petroleum
Service
Contractors
and
Subcontractors
Status: ALWAYS NRA. If they derive
income from other sources, such income
shall be subject to the pertinent income tax,
as the case may be.
Income derived or coming from their
employer shall be subject to a tax of 15% of
the gross.
II.
CORPORATE TAXPAYER
1. Domestic Corporation (DC) created

2.
3.
or organized under Philippine laws.

Resident Foreign Corporation (RFC)
corporation created under foreign
law, and engaged in trade or
business.
Nonresident Foreign Corporation
(NRFC) created under foreign law,
and NOT engaged in trade or
business.
Q: What are deemed corporations under

the NIRC?
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts,
associations,
or
insurance
companies, but DOES NOT includes general
professional partnerships and a joint
14

- Atty. Francis J. Sababan venture or consortium formed of the
purpose
of
undertaking
construction
projects or operations pursuant to or
engaging in petroleum, coal, geothermal or
consortium agreement under a service
contract with the Government.
1. Partnerships and others no matter
how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no matter how created or
organized was interpreted.
Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule:
a partnership is a
corporation.
Exception:
General
Partnerships (GPP)
Professional
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their
profession, no part of the income of which
in derived from any trade or business. (what
if a partner has other businesses not related
to the GPP? > read section 26 quoted
hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and
engaged in trade or business a
corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPPs ITR)
This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment
of the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of
the individual partners of the GPP.
Section 26 (1st paragraph) provides: a
GPP as such shall not be subject to the Net
Income
Tax
however,
persons
engaging in business as partners in a GPP
shall be liable for income tax only in their
separate and individual capacities.
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP
will be included in the gross income of the
partner.
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income
tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and
X+Y. the joint venture has a separate and
distinct
personality
from
the
two
corporations.
Q: When is a joint venture not considered a
corporation?
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(construction?) project or engaging in
15

- Atty. Francis J. Sababan petroleum,
gas,
and
other
energy
operations pursuant to ? or consortium
agreement under a service contract with
the government.
Domestic Corporation
Is one created or organized in the
Philippines or under its laws.
Taxable on all income derived from
sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade
or business in the Philippines.
Taxable for income derived within the
Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in
trade or business in the Philippines.
Taxable for income derived within the
Philippines.
Both DC and RFC are liable for the
payment of the following:
1)
NIT Net Income
Tax
2)
FIT Final Income
Tax
3)
10% income tax on
corporations
with
properly
accumulated earnings.
4)
MCIT
(Minimum
Corporate Income Tax) of 2% of the
Gross Income
5)
Optional Corporate
Income Tax of 15% of the Gross
Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT Final Income Tax
III.
TRUST AND ESTATE
Q: How many for each?

A: Seven (7) kinds for each because the
trust or estate will be determined by the
status of the trustor, grantor, or creator, or
of the decedent.
The status of the estate is determined

by the status of the decedent at the time of
his death; so an estate, as an income
taxpayer can be a citizen or an alien.
When a person who owns property dies,
the following taxes are payable under the
provision of income tax law:
1) Income Tax for Individuals to cover
the period beginning January to
the time of death.
2) Estate Income Tax if the property
is transferred to the heirs.
3) If no partition is made, Individual or
Corporate
Income
Tax,
depending on whether there is or
there is no settlement of the
estate. If there is, depending on
whether the settlement is judicial
or extrajudicial.
Judicial Settlement
1) During
the
pendency
of
the
settlement, the estate through the
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
settlement, when the decision of the
court shall have become final and
executory, the heirs still do not
divide the property, the following
possibilities may arise:
a) If the heirs contribute to the
estate
money,
property
or
industry with the intention to
divide the profits between and
among
themselves,
an
UNREGISTERED PARTNERSHIP is
created and the estate becomes
liable for payment of CIT
(Evangelista vs. Collector (102
Phil 140))
b) If
the
heirs
without
contributing money, property or
industry to improve the estate,
simply divide the fruits thereof
between
and
among
themselves, a CO-OWNERSHIP is
created and Individual Income
Tax (IIC) is imposed on the
income derived by each of the
heirs, payable in their separate
and individual capacity (Pascual
vs. COMM (165 scra 560) and
16

- Atty. Francis J. Sababan Obillos vs. COMM (139 SCRA
436))
Extrajudicial
Settlement
Settlement
and
if
NO
Some possibilities may arise.

The
income tax liability depends on whether or
not the unregistered partnership or coownership is created.
Trust
Taxable Net Income Tax Credit =

Taxable Net Income Due
Net Income means Gross Income less
deductions and
Formula:
GI
- deductions
Net Income
x Tax Rate
Income Tax Due
Trusts can be created by will, by

contract or by agreement. The status of a
trust depends upon the status of the
grantor or trustor or creator of the trust.
Hence, a trust can also be a citizen or an
alien.
Q: What is the rate?

A: Individual: 32%
Corporation: 35%
Q: Where the trust earns income and such

income is not passive, who among the
parties mentioned is liable for payment of
income tax thereon?
A: The TRUST itself, through the trustee or
fiduciary but only if the trust is irrevocable.
If it is revocable, or for the benefit of the
grantor, the liability for the payment of
income tax devolves upon the trustor
himself in his capacity as individual
taxpayer.
Q: What are the other terms for NIT?

A: NIRC:
a. taxable income
b. gross income (wlang kasunod)
only income tax from improperly
accumulated earnings does not use this
term.
KINDS OF INCOME TAX

Q: How many kinds of income tax?
A: There are Six (6), namely:
1.
Net Income Tax (NIT);
2.
Gross Income Tax (GIT);
3.
Final Income Tax (FIT);
4.
Minimum Corporate Income
Tax of 2% of the Gross Income
(MCIT)
5.
Income Tax on Improperly
Accumulated Earnings subject to
10% of the Taxable Income;
6.
Optional Corporate Income
Tax of 15% on the Gross Income
I.
NET INCOME TAX
NOTE: the formula allows for deduction,

personal exemptions and tax credit.
1.
CFA: to be included in the
gross income
2.
Revenue Regulations and
Statutes:
a. ordinary
way
of
paying
income tax;
b. normal way of paying income
tax .
Characteristics:
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if
they derive income from other
sources;
Q: Is the taxable net income subject to
withholding tax?
A: It is subject to withholding tax if the law
says so.
Q: what is the formula?

A: Gross Income Deductions and Personal
Exemptions = Taxable Income
Q: What if the law is silent?

A: If the law is silent, it is not subject to
withholding tax.
Taxable Income x Tax Rate = Net

Income
Q: What is another term for withholding

tax?
17

- Atty. Francis J. Sababan A: It is also known as the creditable
withholding tax system under the income
tax law.
Q: Do we have to determine if there is an
actual gain or loss?
A: Yes because the formula for deductions,
etc.
Q: If you fail to pay, will you be held liable?
A: Yes, you will be held liable.
II.
GROSS INCOME TAX (GIT)
Q: What is the formula?

A: Gross Income x Rate
Q: How many taxpayers pay by way of the
gross?
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax
credit.
Characteristics:
NRANETB and NRFC, though not
engaged in trade or business, are liable to
pay by way of the gross for any income
derived in the Philippines. While not
engaged in trade or business, there is a
possibility that they may earn income in the
Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying
taxes depending on which side of the bench
you are.
III.
FINAL INCOME TAX (FIT)

A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where
you add all the income from all the sources
and multiply the sum thereof by the rate of
25% or 35%, as the case may be, in final
income tax, you cannot join all the income
in one group because each income has a
particular rate.

A: 35% as the case may be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax
credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
provided the requisites for its application
are present.
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double
taxation.
NOTE: as time passed by, the number of FIT
increased.
before 1979 proceeds from the sale of
real property not exempt, it is subject to NIT
or GIT, as the case may be.
after 1979 capital gains tax. Proceeds
from the sale of real property is exempt.
Q: If you fail to pay, will you be liable?
A: No. the withholding agent is liable to
pay FIT.
Case of Juday, Richard and Regine
For one to be liable for the payment of

NIT, the income must be derived on the
basis of an employer employee
relationship.
Employer Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
However, in the case of celebrities,
there is no employer employee
relationship, they are merely receiving
royalties. Royalties are subject to final
withholding tax, thus the agent is liable to
pay. (so, distinguish nature of income,
whether royalty or compensation)
RULE:
18

- Atty. Francis J. Sababan 1. for NIT, whether or not subject to
Creditable Withholding Tax (CWT),
the taxpayer is always liable if he
fails to pay.
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.
Q: Why is it that the rate of withholding is
always lower, and why is it that the rate of
GIT and FIT is always equal?
A:
1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Q: Do you have to determine whether
there is an actual loss or gain?
A: No need to determine because the
formula does not allow deductions. Gain is
presumed. No liability for final withholding
tax except for the sale of shares of stock.
(?)
IV.
MINIMUM
TAX (MCIT)
CORPORATE
INCOME

A: Gross Income x 2%
Q: Who pays this tax?
A: DC and RFC only.
Q: May it be applied simultaneous with
NIT?
A: No. there must be a computation of the
NIT first then apply which ever is higher.
The MCIT is paid in lieu of the NIT.
Reason: to discourage corporations from
claiming too many deductions.
V. OPTIONAL CORPORATE INCOME TAX
Q: Under what section is this found?
A: Section 27A 4th paragraph and Section
28 A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: To what kind of taxpayer does this
apply?
A: To DC and RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st five individual
taxpayers?
A: Only two (2) kinds are applicable out of

the six (6) kinds of income taxes.
1. NIT;
2. FIT;
Q: What kind of income tax will apply to
AEMOP?
A: Generally, only one kind, 15% FIT with
respect to income derived from their
employer.
Income from other sources:
1. Determine the status of the AEMOP;
a. NIT
b. FIT
2. NRANETB
a. GIT
b. FIT
Q: What kind of income tax applies to DC?
A: Only four (4) kinds will apply out of the
six (6)
1. NIT
2. FIT
3. MCIT
4. Improperly Accumulated Earnings
Q: May
all
of
these
be
applied
simultaneously?
A: No. only the NIT, FIT and Improperly
Accumulated
Earnings
be
applied
simultaneously. NIT and MCIT cannot be
applied simultaneously. Only one will apply,
whichever is higher between the two.
Q: What kind of tax will apply to NRFC?
A: Out of the six (6) kinds, only two (2) will
apply:
1. GIT
2. FIT
Q: What is the significance of knowing the
classification of these taxpayers?
A:
1. to determine the kind of income tax
applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for
income within and income without?
A: Only
1. RC
2. DC
The rest of the taxpayers will be liable
for income coming from sources within.
19

- Atty. Francis J. Sababan Income from sources
liability, therefore exempt.
without,
no
NOTE: The income taxpayer is not a RC or a

DC. Determine if the income came from
sources within or without to know the
taxpayers liability.
If the facts are specific, do not qualify
your answer. Answers must be responsive
to the question.
Q: Is section 42 relevant to all the
taxpayers?
A: NO. SECTION 42 IS NOT MATERIAL TO
ALL taxpayers, particularly the RC and DC
because these two are liable for both
income within and without.
Section 42 is applicable only to
taxpayers who are liable for income within,
the rest of the taxpayers are otherwise
exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A: It establishes two (2) kinds of interests,
namely:
1. interest derived from sources within
the Philippines.
2. interest on bonds, notes or other
interest
bearing
obligations
of
residents, corporate or otherwise.
Q: What is the determining factor in order
to know if the income is from within?
A:
1. location if the bank is from within
the Philippines (pursuant to a
Revenue Reg.)
2. residence of the obligor (whether an
individual or a corp.) contract of
loan with respect to the interest
earned thereon.
For example the borrower is a NRAETB,
he borrowed money from a RA. The interest
earned by the loan will be considered as an
income without. RA is not liable to pay tax
since RA is liable only for income within,
therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F:
The National Development Company
(NDC) entered into a contract with
several
Japanese
shipbuilding
companies for the construction of 12
ocean-going vessels. The contract was
made and executed in Tokyo.
The payments were initially in cash
and irrevocable letters of credit.
Subsequently, four promissory notes
were signed by NDC guaranteed by the
Government.
Later on, since no tax was withheld
from the interest on the amount due,
the BIR was collecting the amount from
NDC.
The NDC contended that the income
was not derived from sources within the
Philippines, and thus they are not liable
to withhold anything. NDC said that
since the contract was entered into and
was executed in Japan, it is an income
without.
H:
The governments right to levy and
collect income tax on interest received
by a foreign corporation not engaged in
trade or business within the Philippines
is not planted upon the condition that
the activity or labor and the sale from
which the income flowed had its situs in
the Philippines. Nothing in the law
(Section 42(1)) speaks of the act or
activity of nonresident corporations in
the Philippines, or place where the
contract is signed. The residence of the
obligor who pays the interest rather
than the physical location of the
securities, bonds or notes or the place of
payment is the determining factor of the
source of the income. Accordingly, if the
obligor is a resident of the Philippines,
the interest paid by him can have no
other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two corporations,
a DC and a RFC, and both corporations
declared dividends, what is the liability of
the Indonesian firm if the same received the
dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay
taxes. NRFC, under the law, is liable
if the income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firms liability will depend
on amount of gross income from
sources within the Philippines.
20

- Atty. Francis J. Sababan The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources
within;
2. the 1st requisite is for the three (3)
preceding taxable years from the
time of declaration of the dividends.
In the absence of any or both

requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income
tax.
Q: Same scenario, but this time the shares
of stock of the two corporations were being
disposed off. What is the tax liability of the
Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for the
payment of taxes because the
income is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he
liable for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in
HK under contract). The compensation he
received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
personal
services
performed
in
the
Philippines is considered an income within.
When it comes to services, it is the place
where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective
of the place of payment.
Q: Suppose a DC hired a NRFC to advertise
its products abroad. What is the liability of
the NRFC? Will there be a withholding tax
imposed?
A: The income is derived from sources
without since the services in this case were
performed abroad. As such, the NRFC is not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to

NIT, then it is not also subject to
withholding tax.
Q: What is the controlling factor?
A: The controlling factor is the place where
the services were performed and not where
the compensation therefore was received.
RENTALS AND ROYALTIES
income from sources within
Q: Granted by who?
A: NRFC
Q: Suppose you are the franchise holder,
how much is the withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how
much is the withholding?
A: 10% (NIT) and in some cases 15%
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM)
a. right of, or the right to use
copyright, patents, etc
b. industrial,
commercial,
scientific equipment
c. supply of knowledge
d. supply
of
services
by
nonresident
e. supply of technical assistance
f. supply of technical advice
g. right to use: motion picture
films, etc.
Q: What is the rule as regards the sale of
real property?
A: Gains, profits, and income from the sale
of real property located within the
Philippines considered income within.
Q: What about the sale of personal
property, what is the rule?
A: Determine first if the property is
produced or merely purchased.
1. it the property is manufactured in
the Philippines and sold abroad, or
vice-versa, it is an income partly
within and partly without.
2. if the property is purchased,
considered derived entirely from the
sources within the country where it
is sold.
21

- Atty. Francis J. Sababan EXCEPTION: shares of stock of domestic
corporation, it is an income within wherever
it is sold.
COMMISSIONER v. IAC
Q: What is the issue here?
A: They cannot determine if the business
expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is
not sure, will you disallow the
deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
1,000,000
= 10%
Hence, 10% is the ratable share in the
deduction. If the deduction being asked
is 100,000 not all of it will be allowed.
Only 10,000 or 10% of 100,000 will be
allowed as deduction.
CAPITAL GAINS AND LOSSES
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a
taxpayer which is not an ordinary asset.
The following are ordinary assets:
1. stock in trade of the taxpayer or
other property of a kind which would
properly be included in the inventory
of the taxpayer if on hand at the
close of the taxable year;
2. property held by the taxpayer
primarily for sale to customers in the
ordinary course of trade or business;
3. property used in trade or business of
a character which is subject to the
allowance for depreciation provided
in subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a capital
loss?
A: Capital gains are gains incurred or
received
from
transactions
involving
property which are capital assets. Capital
losses are losses incurred from transactions
involving capital assets.
Q: What is ordinary gain? Ordinary loss?

A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C,
and D apply to capital assets only.
1. time when property was held (39B)
(holding period applies only to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I.
CAPITAL ASSETS
Q: What is the holding period?

A: If capital asset is sold or exchanged by
an individual taxpayer, only a certain
percentage of the gain is subject to income
tax.
It is the length of time or the duration of
the period by which the taxpayer held the
asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual.
Section 39B states in case of a
taxpayer, other than a corporation..
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held
for not more than 12 months; (short term)
50% if the capital asset has been held
for more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not
traded in stock exchange(section
24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
A:
1. property is an ordinary asset
22

- Atty. Francis J. Sababan 2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
II. LIMITATION ON CAPITAL LOSSES
synonymous to 34D & loss capital rule
this applies to individual and corporate
taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may be
deducted only from capital gains, but losses
from the sale or exchange of ordinary
assets may be deducted from capital or
ordinary gains. (applies to individual and
corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter with
the rule that the loss should always be
connected with the trade or business,
capital losses are losses not connected to
the trade or business, thus it is not
deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it already
carries with it the deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately succeeding
year;
3. applies only to short term capital
gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: How does net capital loss carry-over

differ from net operating loss carry-over
under Section 34 D (3)?
A: Under the net capital loss carry-over
rule, the capital loss can be carried over in
the immediate succeeding year. In net
operating loss carry-over rule, capital loss
can be carried over to the next three (3)
succeeding calendar year following the year
when the loss was incurred.
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
In net operating loss carry-over there is
an exception to the 3 year carry-over
period. In case of mines other than oil and
gas wells, the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares
CALAZANS v. CIR
F:
The taxpayer inherited the property
fro her father and at the tie of the
inheritance it was considered a capital
asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale of
the lots.
I:
Was the property converted to
ordinary asset?
H:
The conversion from capital asset to
ordinary asset is allowed because
Section 39 is silent.
Q: Are you allowed to convert ordinary
asset to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of
the issuance of said Revenue Regulation.
Q: What is the conversion prohibited in the
Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D final income tax of 6% if
the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and 35%
if the taxpayer is a corporation.
23

- Atty. Francis J. Sababan Q: What are the properties involve in the
RR 7-2003?
A: 1. those property for sale by the realtors
2. real property use in trade or business
not necessary realtors
Q: That is the conversion allowed by the
Revenue Regulation? Is there an instance
when an ordinary asset may be converted
to capital asset?
A: Yes, provided that the property is an
asset other the real property, and it has
been idle for two (2) years.
Q: What
about
Resident
Foreign
Corporations?
A: Sec 28(l) it is subject to 35% Net Income
Tax
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: Not Subject to Net Income Tax but they
are liable for Gross Income tax.
SECTION 24
TAX ON INDIVIDUALS
Q: Do legally married husband and wife

need to file separately or jointly?
A: It depends if:
1. Pure compensation income- separate
2. Not Pure compensation income- joint
Q: What is the tax mentioned in section

24?
A: NIT
Passive Income
Interest, Royalties,
winnings
Q: What is taxable income?

A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or other
laws. It refers to NIT because it allows
deductions.
Interest
Q: What do you mean by the phrase other

than B, C, and D?
A: It means that if the elements of passive
income are present, the taxpayer has to
pay FIT.
Q: Who are the taxpayers mentioned in
section 24?
A:
1. RC
2. NRC
3. OCW
4. RA
Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB?

A: Section 25(1) NRAETB is subject to
income
tax in the same manner as
those individuals mentioned in Section 24.
Q: What about Domestic Corporations?
A:
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income
tax.
prizes
and
Other
Q: Bank Interest, what is the requirement?

A: The bank must be located in the Phils.
because the income must be derived from
sources w/in.
Q: Do you include this in your ITR?
A: No! because it is subject already to FIT.
The bank is the one liable for the payment
of this.
NOTE: Liability for NIT, GIT, and MCIT will
depend on the elements present.
Q: Who are liable for bank interest?
A:
1. RC }
2. NRC} Sec. 24 B1
3. RA }
4. NRAETB
5. NRANETB Sec. 25 (25%)
6. AEMOP
7. DC
8. RFC
9. NRFC
Q: What is the rate of interest?
A: FIT of 20%
Q: Is there a lower rate?
A: 7 % if under EFCDS
Q: What if the depositor is non resident
alien?
A:
24

- Atty. Francis J. Sababan -W/in FIT
- W/out- exempt
Q: What is the rule on pre- termination?
A: If it is pre terminated before 5th year a
FIT shall be imposed on the entire income
and shall be deducted and withheld by the
depositary bank from the proceeds of the
long term deposit based on the remaining
maturity thereof
a. 4 yrs to less than 5 yrs 5%
b. 3 yrs to less than 4 yrs- 12%
c. Less than 3 yrs- 20%
2.
3.
4.
5.
AEMPOP (NRANETB- GIT)

DC- NIT 27 D is silent
RFC NIT law is silent 28A7a
NRFC subject to GIT
Q: When can we apply NIT in Prizes?

A: 1. When the taxpayer is RC, RFC and
DC
2. For DC and RC it must be derived
from income abroad RFC it must be
derived from income w/in
3. amount is more than P10,000
Q: Does it apply to all individuals?

A: No! It does not apply to 10 NRFC and
NRA and NRAETB because they are liable to
GIT.
NOTE: If the prize is derived from sources

w/in but it is below P 10,000 it is not subject
to tax. If derived from sources abroad, most
of them are exempt except for RC and DC
who are liable w/in and w/out.
NOTE: if the depositary is a Non resident it

is exempt
Q; Is it possible for RC and DC to pay MCIT?

A: Yes if MCIT is higher than NIT.
Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)
Winnings
Q: If the money earns interest in abroad

who is liable?
A: RC and DC only by NIT, the rest are
exempt. No FIT abroad because we do not
have withholding agent abroad.
Q: MCIT applies to DC and RFC in relation
to bank interest?
A: If the bank interest is derived abroad,
RFC is exempt but DC is liable.
Impose NIT if it is higher than the MCIT,
otherwise apply MCIT if its higher than the
NIT
Prizes
Requirements:
1. Prizes must be derived from sources
w/in the Phils.
2. it must be more than P 10,000
Q: Who are liable? (FIT)
A:
1. RC
2. NRC
3. OCW
4. RA
5. NRAETB
6. AEMOP (RC, NRAETB)
Not Liable
1. NRANETB- liable for GIT at 25 %
Q: Do we apply the P10, 000 req.?

A: No, we do not apply it only applies to
prizes. It must not pertain to illegal
gambling.
Thus, the only requirement is it must be
derived from income w/in.
Q: Who are liable? (FIT)
A:
1. RC
2. NRC
3. OCW
4. RA
5. NRAETB
6. AEMOP (RA, NRAETB)
Not liable to FIT?
1 NRANETB- GIT
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT
4 RFC- law is silent
5 NRFC- GIT
Q: When does NIT apply to winnings?
A:
1. If Taxpayer is DC or RC
2. Income is derived abroad
3. Taxpayer is RFC and income w/in.
NOTE: If income abroad, most TP are
exempt except DC and RC
25

- Atty. Francis J. Sababan Q: MCIT applies when?
A: It is higher than the NIT
A: shares come from another shareholder

Q: What are the dividends included?
A: Sec. 24 refers to cash or property
dividend
H: For stock Dividends to be exempt it
must come from the profit of the
corporation.
Royalties
Requirement:
The income is from w/in
Rate? 20%. Lower rate? 10% on books,
literary works and musical compositions.
Q: You are a writer for Snoop Dogg are you
liable for FIT? What if for April Boy?
A: Liable for NIT if Income abroad like a
writer for Snoop. While FIT if for April Boy.
Q: Who are liable (FIT)?
A:
1. RC
2. NRC
3. OCW
4. RA
5. NRAETB
Not Liable?
1.
2.
3.
4.
5.
Stock Dividends it is the transfer of the

surplus profit from the authorized capital
stocks.
Q: Assuming that there are 5 Incorporators,
the Corporation has a P5 M Authorized
Capital stock. It distributed 1 M stock
dividends, is it taxable?
A: NO, the dividends did not go to the
Stock holder but to the Auth Capital Stock.
Only cash and Prop Stock go to the Stock
holder.
Sec 24 B does not mention stock
dividends because it is not subject to FIT
but it is subject to NIT under Section 73.
Q: Is there an exception when stock
dividends are not taxable?
A: YES, if the shares of stocks are
cancelled and redeemed meaning it was
reacquired by the corp.
NRANETB
AEMOP
DC
RFC
NRFC
NOTE: Lower rate of 10% applies to all

except NRANETB
ANSCOR CASE
the stockholders
payment of taxes
Q: When do we apply NIT to Royalties?

A:
1. TP is RC or DC
2. Income is from w/out
3. TP is RF and income is w/in
Requirement:
Gen Rule- the dividends must be distributed
by a DC.
Except- Regular operating- always a foreign
corp.
If income is from sources abroad all are

exempt except RC and DC
Dividends
Confined
dividends.
with
cash
and/or
property
Q: What are dividends?

A: Any distribution made by Corporation to
its stockholders outside of its earnings or
profits and payable to its stockholders
whether in money or in property (Sec. 73)
COMM. vs. MANNING
Q: Where did it come from?
cannot
escape
the
What rate: 10% FIT
Q: Who are liable?

A:
1. RC
2. NRC
3. OCW
4. RA
5. NRAETB
Not liable?
1. NRANETB
2. AEMOP
3. DC
4. RFC
26

- Atty. Francis J. Sababan 5. NRFC
Shares of association and partnership is
taxable
Q: Determine the tax liability of the
following?
A:
1. DC a Stockholder of DC= Exempt
2. RFC stockholder of DC= Exempt also
3. DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of
Stock Not Traded (24C)
1.
Subj to FIT
2. Determine whether there is a loss or
3.
4.
a gain because the tax is impose

upon the net capital gains realized
from the sale, barter, or exchange or
other disposition of the shares of
stock in a domestic corp.
It is uniformly imposed on all
taxpayer
not subj to w/holding tax.
Requirements:
1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the stock
market
25 R last part: Capital Gains realized by
NRANETB in the Phils. from the sale of
shares of stock in any DC and real prop
shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.
SEC. 24 B 1&2: If the elements are
present NRANETB and NRFC are liable to
pay GIT.
Except: under 24 C for NRANETB. What do
you mean by the phrase the provisions of
39 notwithstanding?
It refers to the holding period. When it
comes to capital gains from sale of shares
of stock not traded and capital gains from
the sale of real prop. The holding period
does not apply because the basis will be
those provided in 24 C & D and not under
39B (GSP or FMV)
ELEMENT #1 The share is a share in DC
Q: What if the share is from foreign corp?
A: Determine the income considered. If

income w/in read Sec. 42 (E)
If the shares sold are that of a foreign
corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in regardless
where it was sold.
Q: Shares of Foreign Corp sold in Phils.
Whos liable? What tax?
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB,
AEMOP (RA, NRAETB) will pay NIT. DC and
RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN
THE STOCK MARKET
if sold in the stock market- it is not subj
to FIT
if sold in the stock market, it will be subj
to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital
asset.
Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
27

- Atty. Francis J. Sababan a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1.
Sale of shares of stock of a
Foreign corp in the Phil.
2.
sale of shares of stock of DC
which are ordinary asset
DC and RFC are subj to MCIT which may
be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From
Property (24D)
Sale
of
Real
In 39 B the holding period does not

apply because the basis of income tax is
the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher- 6%
FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
RFC not liable for FIT but liable to pay
NIT if all the elements are present.
NRFC liable to pay GIT and not FIT
NRANETB liable to pay FIT are all

elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are
capital asset.
Q: What
present?
if
all
the
elements
are
not
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if theres a
loss or a gain.
If theres a gain choose to be taxed at
6% FIT. In this case the gain is always
presumed.
If theres a loss choose to be taxed at
32% because losses may be considered an
allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage
contract and the mortgagee is a bank or
financial inst, the FIT does not apply
because the property is not yet transferred
because theres a period of redemption
If after a year the mortgagor failed to
redeem the property that is the only time
that the FIT will apply because theres now
a change of ownership. If redeemed w/in 1
yr period FIT will not apply because theres
no change of ownership.
If the mortgagee is an individual the FIT
is imposed whether or not there is a
transfer of ownership.
Exceptions (24(D2))
Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
Requirements:
1. The purpose of the seller is to
acquire new residential real prop
2. the privilege must be availed of w/in
18 mos. From the sale
28

- Atty. Francis J. Sababan 3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
4. the adjusted basis or historical cost
of the residence sold shall be carried
over to the new residence.
5. the privilege must be availed only
once every 10 yrs
6. Certification of the brgy. Capt where
the taxpayer resides that indeed the
prop sold is the principal residence
of the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to
the unused portion or profit?
A: If the proceeds are not fully utilized, the
portions of the gain is subj to FIT
SEC. 27A RATES OF INCOME TAX
Q: How many income taxes are paid by a
DC?
A:
1. NIT
2. MCIT
3. FIT
4. 10%Improperly
Accumulated
Earnings
5. Optional corporate income tax of
15% of the gross
DC liable for five, but the optional is not
yet applicable so only 4.
Q: How
many
can
be
applied
simultaneously? A: ONLY 3
1.
NIT, FIT and 10% IAE
2.
MCIT, FIT, 10% IAE
SEC.
27
(B)
PROPRIETARY
EDUCATIONAL INST. & HOSP.
Who are the taxpayers?
1.
Non- Profit Proprietary Educl.
Inst and
2.
Non
Profit
Proprietary
Hospital
Q: What if the school or hospital is non
profit only, is it exempt?
A: No, subject to 10% on their taxable
income except those covered by subsection
(D)
PROVIDED that gross income from
unrelated business, trade or activity must
not exceed 50% of its total gross income
derived by such educational inst or hospital

from all sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross income
derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS,
TESDA, or CHED
Q: What do you mean by unrelated trade
business or activity?
A: It means any trade, Business, or activity
which is not substantially related to the
exercise or performance by such entity of
its primary purpose or performance
Q: May a school or hospital be exempt from
paying tax? What are the req?
A:
1. It must be non- stock and non- profit
2. the assets property and revenues
must be used actually, directly, and
exclusively fro the primary purpose
Q: Under what law? Is it the constitution or
the NIRC which provides fro the exemption?
A:
It is under Sec. 30 of NIRC and not
under Sec.4 Art. 14 of the Constitution. The
provision of the NIRC is the specific law
which prevails over the Constitution which
is the general law.
exempt from all taxes and custom
duties
Q:
What about exemption from real
property tax?
A:
Art. 6 Sec. 28 of the Constitution:
charitable institution churches, .and all
lands buildings, actually directly and
exclusively used for religious, charitable,
and educational purposes shall be exempt
from taxation.
Not Sec. 4 of Art. 14 of the
Constitution.
Q: You donated a property to a school will
you be liable for donors tax?
A: not liable if it falls under Sec. 101 (3) of
the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
29

1. it must be non-stock, non-profit

educational inst.
2. not more than 30% of the prop
donated shall be used by such donee for
admin purposes.
3. paying no dividends
4. governed by trustees who dont
receive any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov
Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local
taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
SEC. 23: GOCC, AGENCIES, INST of the
GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
PAGCOR no longer included.
A:
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on
itself?
A: It depends on who the taxing authority
is. If the taxing authority is the National
Govt. as a rule, YES.
Exceptions
1. those entities enumerated under 27
C
2. those GOCC falling under 32b7b
If the taxing authority is the local
government units, as a rule NO. LGUs are
expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
3. local government units
Exception: Sec 154 of LGC says that LGUs
may fix rate for the operation of public
utilities owned and maintained by the
within their jurisdiction.
PAL CASE July 20 2006
H:
The SC used 133 (o)an exception to
pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law
Sec. 133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.
Q: If the GOCC is not one of those

enumerated does it follow all of its income
is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise
of essential government function accruing
to the Govt of the Phils or to any political
subd. Are therefore exempt from income
tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Mactan- Cebu Airport case
NOTE: Pagcor vs. Basco case
Q: When it comes to bank interest, what is

the difference if the taxpayer is an
individual or corporation?
Q: What is the difference between Sec. 27

C and 32 b7b?
SEC. 27 D(1)
Q: How many possible incomes were
mentioned?
A: Two (2): bank interest and royalties
REQ:
1. Bank interest must be received by a
Domestic Corp
2. Royalties derived from sources
within
30

- Atty. Francis J. Sababan A: If individual, they may be exempt from
the payment of interest in case of long term
deposit except NRANETB
If DC, they are not exempt from long
tem deposit.
Q: What about royalties?

A: If individual, have a lower rate of 10%on
books,
other
literary
and
musical
compositions. DC have no lower preferential
rate.
Q: Derived from whom?

A: Depositary Bank under EFCDS
SEC 27 D2: CAPITAL GAINS FROM SALE

OF SHARES NOT TRADED
Q: What is the difference between 24 b1

from 27 D3
A: In 24 B1, NR is exempt only from bank
interst derived from EFCDS while 27D3
exempts NR from any income from
transactions with depositary bank under
EFCDS
SEC 27 D3: EFCDS

Q: What is the expanded foreign currency?
A: It is a bank authorized by the BSP to
transact business in the Philippine Currency
as well as acceptable foreign currency or
both.
Q: What is the tax to be paid?
A: Normally it is NIT because it is subj
under Sec 27 D3 and 28 A
Q: Who is the income earner?
A: Depositary banks
Q: Exempt from what kind of transaction?
A: From foreign currency transaction. If it
involves foreign currency transaction it is
not exempt but subject to 35 % NIT
Q: Who are the other parties?
A:
1. Off shore banking units
2. branches of foreign banks
3. local commercial bank
4. Other depositary banks under EFCDS
5. Non- residents
if the above enumeration are the
parties, then depositary bank will be
exempt from paying the NIT
Foreign Currency Loan
Q: Who is the lender? Borrower?
A: Lender- EFCDS
Borrower- RC
EXEMPT
Offshore banking units
Other depositary banks under EFCDS
exemption of NR from EFCDS:
Q: Who is the income earner?

A: Non Residents whether individual or
Corporations
NOTE: Sec. 24 B Nonresident exempt from

bank interest under EFCDS
SEC. 27 D(4)- Inter-corporate dividendsexempt

27 D5 Capital Gains from sale of Real
Prop.
Q: What is the tax?
A: 6% FIT
Q: What is the difference if the seller is an
individual and a DC?
A: Individual can sell all kinds of real
property
DC can only dispose land and/or
buildings.
SEC 27 (E) MCIT
Q: Applicable to whom?
A: DC and RFC
Q: Can it be applied simultaneously with
NIT?
A: NO, imposed in lieu of the NIT,
whichever is higher.
Q: What is the Rationale?
A: to prevent corporations from claiming
too many deductions
Q: When will it be imposed?
A:
1. On the 4th year immediately ff
the year in which such corp
commenced its business.
2. When the MCIT is higher than the
NIT
31

- Atty. Francis J. Sababan Q: What is the carry over rule?
A: Sec 27 E2 states the carry over rule.
In order to avail: only in the year where
the MCIT is greater than the NIT.
Sec 28 A1
Q: What Kinds of taxes are paid by the
RFC?
A: NIT
MCIT
Sec. 28 B2 MCIT on RFC
same with Sec. 27
Sec. 28 A3- INTL CARRIER

Kind:
1. Air carrier
2. ships
An intl. carrier doing business in the
Phils. shall pay 2 % on its Gross Phil
Billings (GPB)
Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
28 A3
GPB is in the nature of FIT, applies only
if all the requirements are present.
RFC will be liable for NIT, hence a RFC
engaged in common carriage does not pay
GPB but NIT
Income without: EXEMPT
International Carrier:
GPB refers to the amount of revenue
derived from: carriage of persons, excess
baggage, cargo and mail originating from
the Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or
issue and the place of payment of the
tickets or passage document.
REQ:
1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or

issue and the place of the payment
of tickets or passage document.
Q: Do you consider landing rights to
determine liability? (RR 15-2002)
A:
1.
If originates from the Phils
and has landing rights- ONLINE- RFC
2.
No landing rights- OFFLINENRFC
Q: If there are stopovers, is it still
uninterrupted?
A: YES, provided that the stopover does
not exceed 48 hrs.
Q: When will the place of sale of tickets
matter as to the taxpayers liability?
A: The place of tickets is material only if
the two other elements are not present to
be able to know if its subj to NIT or exempt.
Revalidated, exchanged or indorsed
tickets
REQ:
1. The passenger boards a plane in a
port or point in the Phils.
2. The tickets must be revalidated,
exchanged, or indorsed to another
airline.
Q: What if its the same airline but different
plane?
A: GPB does not apply, it must be to
another airline
Q: What if it did not originate from the
Phils.?
A: Determine if its income within or
without.
if ticket was purchased in the Phils. it is
income within hence apply NIT
if purchased outside, it is income
without, hence exempt
Transshipment
REQ:
flight originates from the Phils
transshipment of passenger takes place
at any port outside the Phils.
the passenger transferred on another
airline
Q: How do you apply GPB?
32

- Atty. Francis J. Sababan A: Only the aliquot portion of the cost of
the ticket corresponding to the leg flown
from the Phils to the point of transshipment
shall from part of the GPB.
Q: Is it liable for the whole flight?
A:
From the Phils to the point of
transshipment, it is income w/in
From transshipment to final destination,
its income w/out- EXEMPT
International Shipping
GPB means gross revenue whether from
passenger, cargo, mail
REQ:
it must originate from the Phils.
up to final destination
- regardless of the place of sale or
payments of passenger or freight
documents
Sec28 A(4) OFF SHORE BANKING UNITS
OBUs
1. only acceptable foreign currencies

2. always a foreign corporation (subj to
NIT) except #3
3. Exempt if income is derived by the
OBU from EFCDS
4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils.
Difference with EFCDS:
EFCDS
1. Acceptable foreign currency, Phil.
Currency or both
2. Can be a domestic or foreign
corporation
3. Exempt if income derived by DC or
RFC from EFCDS
4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils
e) Other banks under EFCDS
FOREIGN CURRENCY LOAN
If: Lender- OBU

Borrower- Resident Citizen
EXCEPT:
1. OBU
2. Local Commercial Banks
Transactions of Non Residents:
1. Income earner: Non- Residents
2. Lender: OBUs
NOTE:
Non
resident
exempt
transactions with OBUs and EFCDS
from
SEC. 28 A5 TAX ON BRANCH PROFITS,

REMITTANCES
profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
Subj to 15% tax
Except: those activities which are registered
with PEZA
NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
profits, income and capital gains
received by a foreign corporation during
each taxable year from all sources
within shall not be treated as branch
profits UNLESS the same are effectively
connected with the conduct of its trade
or business.
Branch Profit Remittance
Two ways to receive income (FC)
1. Branch
2. Subsidiaries
NOTE:
1. When a FC establishes branch, it is
always a FC
2. When a FC establishes DC, it is a
RFC
Q; It is in addition to NIT- Why?
A: NIT because it is RFC
Q; What kind of tax is imposed under 28
A5? A: 15% FIT
Q: How do you apply the rate?
A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
10% FIT
33

- Atty. Francis J. Sababan It applies for branches that are:
1. the profit remitted is effectively
connected with the conduct of its
trade or business in the Phils.
2. One not registered with PEZA
MARUBENI CASE
F: A branch was established with AG&P,
there was investment with AG&P
Q: Did the petitioner participate with the
negotiation?
A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax
(BPRT)
10% Intercorporate Dividends
Q: Whats the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same
was asking for a refund of tax
erroneously paid.
1. Gen. Administration and Planning

2. Business Planning and Coordination
3. Sourcing and procurement of Raw
materials and components.
4. Corporate Finance and Advisory
Services
5. Marketing
Control
and
sales
promotion
6. Training and personal management
7. logistic services
8. research and development services
and product development
9. technical support and maintenance
10. data processing and communication
and business development
Rationale: Why liable? Because the claim
for exemption of resident airlines shall
be minimized
SEC. 28A7a Interests and Royalties:
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
20%FIT
Interests under EFCDS= 7 %
To be liable for BPRT

1. It is a RFC
2. Branch did
negotiations
Sec. 28A7b
EFCDS
not
participate
in
SEC. 28 A6a
Regional or area headquarters (Sec. 22
DD) shall not be subject to tax exempt from
income tax if the requisites are present.
Q: What are the requisites?
A:
1. the HQ do not earn or derive income
from the Phils.
2. Acts
only
as
supervisory,
communications, coordinating centre
for their affiliates, subsidiary or
branches in the Asia- Pacific Region
and other foreign markets.
SEC. 28 A6b
Regional Operating HQ are taxable and
liable to pay 10% taxable income.
Regional Operating HQ is a branch
established in the Phils by a multinational
company engaged in any of the services:
Income
derived
under
1. Income derived from foreign currency

transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the
EFCDS
As a Gen Rule: the above transaction is
Exempt
EXCEPTION: Income from such transaction
as may be specified by the secretary of
Finance, upon recommendation by the
Monetary Board to be subject to regular
income tax payable by any banks.
2. Interest income from foreign currency
loans
granted by depository bank under said
EFCDS to others shall be subject to 10% FIT
Exempt if granted to:
1. Other OBU in the Phils, and
2. Other depository bank under the
EFCDS
34

- Atty. Francis J. Sababan
SEC. 28 A7c: Capital Gains from

Shares of Stocks not Traded in the
Stock exchange
5% or 10% as the case maybe
SEC
28A7d:
DIVIDENDS
INTERCORPORATE
DC- RFC= EXEMPT, not subj to tax
SEC 28 B1
Q: What kind of tax?
A: 35% GIT on the ff income
1. Interest
2. Dividends
3. Rents
4. Royalties
5. Salaries
6.
Premiums(
except
reinsurance
premiums)
7. annuities
8. emoluments
9. Other fixed and determinable Gains,
profits and income.
SEC
28
B2
Non
Resident
Cinematographic film owner, lessor or
distributor
liable for 25% GIT
SEC 28 B3 Non Resident owner or

lessor
of
Vessels
chartered
by
Philippine Nationals.
liable for 4 GIT
Elements:
1. Chartered to Filipino
Corporations
2. Approved by MARINA
Citizens
or
SEC. B(4) Non Resident Owner or

Lessor of Aircraft, Machiniries, and
other Equipments.
liable for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans
Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is

1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is
an exclusion (Sec 32 b7a: income
derived by a foreign govt from

investments in the Phils on loans,
stocks, bond, and other domestic
securities or from interest on
deposits in banks by:
a) Foreign govt.
b) Financing
inst
owned
controlled
or
enjoying,
refinancing from foreign govt;
and
c) Inter nation or Regional
financial inst established by
foreign govt.
COMMISIONER OF INTERNAL REV. vs.
MITSUBISHI METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and
Sales Contract with Mitsubishi Metal
Corp. ( A Japanese Corp.) for the
purposes of projected expansion of the
productivity capacity of the formers
mines in Cebu. The contract provides
that Mitsibushi will extend a loan to
Atlas in the amount 20 M dollar, so that
Atlas will be able install a new
concentrator for copper production.
-Mitsubishi to comply with its
obligation, applied for a loan from
Export- Import Bank of Japan (Exim
Bank) and from consortium of Japanese
banks.
Pursuant to the contract Atlas paid
interst
to
Mitsubishi
where
the
corresponding 15% tax thereon was
withheld and only remitted to the Govt.
Subsequently Mitsubishi filed a claim
for tax credit requesting that the same
be used as payment for its existing
liabilities despite having executed a
waiver and disclaimer of its interest in
favor of Atlas earlier on. It is the
contention of Mitsubishi that it was the
mere agent of Exim Bank which is a
financing inst owned and controlled by
the Japanese Govt.
The status of Eximbank as a
government controlled inst became the
basis of the claim fro exemption by
Mitsubishi for the payment of interest on
loans.
I: WON Mitsubishi is a mere agent of
Eximbank
H: NO. The contract between the parties
does not contain any direct reference to
Exim Bank, it is strictly between
Mitsubishi as creditor and Atlas as the
seller of copper. The bank has nothing
35

- Atty. Francis J. Sababan to do with the sale of copper to
Mitsubishi. Atlas and Mitsubishi had
reciprocal obligations- Mitsubishi in
order to fulfill its obligations had to
obtain a loan, in its independent
capacity with Exim bank. Laws granting
exemption from tax are construed
strictly against the taxpayer and
liberally in favor of the taxing authority.
SEC.
28 D5
DIVIDENDS:
INTERCORPORATE
FIT 15% imposed on the amount of cash

and or prop dividends received from a
domestic corporation.
SUBJ TO THE CONDITION: the country where
the NRFC is domiciled allows a credit
against the tax due from the NRFC taxes
deemed paid or deemed to have been paid
in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the tax deemed
paid rule/ reciprocity rule/ tax sparring rule
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said
liable only to 25% because of the tax treaty
You cannot refund right away 15%
BPRT and 10% Inter-corporate Dividends
tax has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to
the BIR
What did they discover? (after paying)
- they discovered that they are liable
only for 15% so they have a refund
of 20%
Q: In the 1st case did the SC allowed the

refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the tax deemed
paid rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1.
Income tax is FIT: the
withholding agent is the proper party
because he is liable to pay said
taxes
2.
actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
The rate will only be 15% if theres a law
recognizing the same but this refers to the
case of those belonging to the first
category.
WANDER CASE
Q: Who are the parties?
A:
DC(Wander) and FC (Glaxo)- they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
credit
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent15%
3. law is silent because there is no law15%
4. law is silent because theres no law
because the subj matter is not
taxable- 15%
SEC. 29 IAET
A: 10% of the gross
income)
income
(taxable
36

- Atty. Francis J. Sababan It is imposed upon the improperly
accumulated taxable income of the
corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified
as closely held corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel
corporation to declare dividends.
the
Q: Why?
A: because if profits are distributed to the
shareholders, they will be liable for the
payment of Dividends tax. Now, if the
profits are undistributed the shareholders
will not incur liability on taxes with respect
to the undistributed profits of the Corp.
- In a way it is in the form of deterrent
to the avoidance of tax upon
shareholders who are supposed to
pay dividends tax on the earnings
distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)
A) Corporations failure to declare dividends
because of reasonable needs of business
reasonable needs means are construed
to mean immediate needs of the business
including reasonable anticipated needs
Q: What
constitutes
reasonable
accumulation of the corporations earnings?
Examples?
A:
1. allowance for the increase in the
accumulation of earnings up to
100% of the paid- up capital of the
corporation.
2. earnings reserved for the definite
corporate expansion projects or
programs approved by the Board
3. Earnings reserved fro buildings,

plants, or equipment, acquisition
approved by the Board
4. Earnings reserved for compliance
with any loan agreement or preexisting obligations
5. Earnings required by law or other
applicable statutes to be retained.
6. In case of subsidiaries of foreign
corporation,
all
undistributed
earnings or profits intended or
reserved for investments
NOTE: the corporations belonging in the 1st
group are normally liable but they can show
that the accumulation of earnings is
justified for reasonable needs of business,
they incur no liability and exempt from
payments of the same.
B) Corporations which are exempt whether
or not it is for reasonable needs of the
business:
1. Banks, and other non- bank financial
intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of
1992 (RA 9227)
c) Special Economic Zone declared by
law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value
of the outstanding capital stock or at least
50% of the total combined voting power all
classes of stock entitled to vote is owned
directly, or indirectly by or for not more
than 20 individuals
NOTE: Publicly held Corp. has more than 20
shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.
2006 is the grace period. You will pay on
January 2007.
Q: If youre not mentioned to be exempted,
will you still be liable?
37

- Atty. Francis J. Sababan A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
Determine the Corporations exemptions
under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not be
taxed under this title (tax on
income) in respect to income receive
by them as such.
2. Sec 27, the corporations enumerated
are always exempt. Thus exemption
is unconditional
3. Sec 22B GPP, as a general rule is not
a corporation
4. except if it earns income from other
business
Joint Venture w/ service contract w/
government not a corporation, otherwise, it
is liable.
Assignment: Sec. 35
August 21, 2006 Midterms
August 14, 2006
Q: What is the reason for not including the
corporations exempt under section 27C and
Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under Section
27 C is absolute and without any conditions.
In addition, Section 22B provides that a
joint venture is generally taxable unless it
has a service contract with the government,
a generally taxable corporation cannot be
joined with the group as generally not
taxable corporation. General Professional
Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
exemption to the exemption: income of
whatever kind and character of the
foregoing organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations

under Section 30; What is the requirement?
A:
1. Labor, agricultural or horticultural
organization
not
organized
principally for profit;
2. Mutual savings bank not having a
capital stock represented by shares,
and cooperative bank without capital
stock organized and operated for
mutual purpose and without profit;
3. a beneficiary society, order or
association,
operating
for
the
exclusive benefit of the members
such
as
fraternal
organization
operating under lodge system.
(lodge system: operating world wide)
or a mutual old association or a nonstock corporation:
a. organized by employees;
b. providing for the payment of life,
sickness, accident or other exclusive
benefits to its employees and their
dependents;
4. Cemetery (a) company owned and
(b) operated exclusively for the
benefit of its members;
5. Non-stock corporation or association
organized and operated exclusively
for Religious, Charitable, Scientific,
Artistic or Cultural purposes, or for
the
Rehabilitation
of
Veterans
(RCSACR), no part of its net income
or asset shall belong ot or inure to
the
benefit
of
any
member,
organizer, officer, or any specific
person;
6. Business
league,
chamber
of
commerce, or Board of trade, (a) not
organized for profit and (b) no part
of the net income of which inures to
the benefit of any stock holder or
individual;
7. Civil league or organization not
organized for profit but operated
exclusively for the promotion of
social welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
A: last paragraph of Section 30, because
YMCA was conducting an activity for
profit.
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley
38

- Atty. Francis J. Sababan case which involves an exemption from
the payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the
last paragraph of Section 30.
YMCA Is exempt from the payment
of property tax, but not to income tax
on rentals from its property.
The tax code specifically mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.
8.
a non-stock and non profit

educational institution;
9. govt educational institution;
10. Farmers or other mutual typhoon or
fire insurance company, mutual
ditch or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members
for the sole purpose of meeting its
expenses;
11. Farmers, fruit growers or like
association organized and operated
as a sales agent for the purpose of
marketing the products of its
members and turning back to them
the proceeds of sales, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them.
TAKE NOTE: income of sales agent is
exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF GROSS

INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these
taxable income? Are these included in the
gross income? Is it included in the ITR? Is it
subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT.
The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically
included in the GIT?
A: No, Section 32 A states Except when
otherwise provided in this title
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2.
Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
they do not pay NIT, they pay by way of
GIT.
Q: What are included in the Gross income?
A:
1.
Compensation for services in
whatever form paid including but nor
limited to fees, salaries, wages,
commissions, and similar items. [Sec.
32 A (1)]
Q: What is compensation?
A: all remuneration for services performed
by an employee for his employer under an
employer-employee relationship.
TAKE NOTE: compensation is included in
the ITR if the taxpayer is not liable for NIT.
Thus, if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries
of a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore
banking,
and
petroleum
companies.
2.
Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
3.
Gains derived from dealings in
property. [Sec. 32 A (3)]
39

- Atty. Francis J. Sababan Q: Did the law distinguished?
A: No, the law did not distinguished
between real and personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
if the elements are present, subject to
FIT. Thus, it is not included in the ITR, the
withholding agent will be responsible for
this.
Q: Income form the sale of property, do
you include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the forms
subject to FIT if the following
elements are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
Elements are not present, like when
the real prop. is an ordinary asset or when it
is capital asset if the taxpayer is RFC.
TAKE NOTE: R-R 17-2003
Real property sale subject to FWT, the
buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest
from bank deposit which does not
constitute passive income.
Bank interest from sources, without or
abroad.
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or considered
an income within, thus subject to FIT. Thus,
not included in the ITR.
5. Rents. [Sec. 32 A (5)]
subject to NIT, included in the ITR.
Q: What is being referred to here?

A: royalties which does not constitute
passive income.
Royalties derived from
income without. subject to NIT. Thus not
included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and
the rest are exempt.
1. RC
2. DC
7. Dividends. [Sec. 32 A (7)]
Q: What kind of dividends?
A: one that does not constitute a passive
income.
TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC DC & RFC = EXEMPT
3. DC NRFC = FWT
only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included
in the computation of the gross income.
Thus, included in the ITR.
8. Annuities. [Sec. 32 A (8)]
Q: What kind of annuities?
A: annuities which are not exempt from tax
are included in the computation of the gross
income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute
passive income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive Income
1. Prizes derived from sources within
and over 10,000.00
2. Winnings derived from sources
within.
Exempt:
a. winnings: PCSO and Lotto winnings.
b. prizes:
6. Royalties; [Sec. 32 A (6)]
40

- Atty. Francis J. Sababan those primarily for recognition of
(1)religious,
(2)charitable,
(3)scientific,
(4)educational,
(5)artistic,
(6)literary,
(7)civic
achievement
are
exempt
PROVIDED:
1. the recipient was selected without
any action on his part to enter the
contest or proceedings; and
2.
the recipient is not required to
render substantial future services as
a condition to receiving the prize or
award.
prizes and awards granted to athletes
are also exempted provided:
1. local
or
international
sports
competition or tournament;
2. held in the Philippines or abroad;
and
3. sanctioned by the national sports
association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or
RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or
RC.
10. Pensions [Sec. 32 A (10)]
Q: What kind of pension?
A: Included in the gross income if not
exempt
never subject to fit (?)
11. Partners distributive share from
the net income of the general
professional partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment of corporate
income tax
shares of partners subject to NIT Sec.
26
SEC 32 B EXCLUSIONS FROM GROSS
INCOME
Q: What do you mean by exclusions? Are
these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.
TAKE NOTE:
Exemptions, exclusions,
deductions, have the same characteristics
all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
A: only one requirement for exemption:
that the proceeds of the life insurance be
payable upon the death of the insured.
Q: Does it matter who the beneficiary is or
paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer
under an agreement to pay interest
thereon, the interest payment shall be
included in the gross income.
2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a
certain time, say 10 years and thereafter
the insured did not die, how much will be
excluded?
A: only the amount received by the insured
as a return of the premiums.
Ex. 1 M 100 thousand = capital
It is exempt (100K)
900K is taxable.
Q: Why is it excluded?
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec.
85 E? do we have the same requirement?
A: no, the requirement for exemption is not
the same under Section 85 E.
3.
Proceeds of life insurance:
decedent insured himself, inclusion
or exclusion will depend on who the
beneficiary is.
a. the beneficiary is the estate.
subject to Estate tax, included in the
gross estate regardless of whether or
not the designation of the beneficiary is
revocable or irrevocable.
b. the beneficiary is a third person other
than the estate.
41

- Atty. Francis J. Sababan b.1 Revocable Designation subject to
estate tax, included in the gross estate.
Reason: because of the insureds power
to modify or change the beneficiary.
b.2 Irrevocable Designation not
subject to Estate tax, not included in the
gross estate.
Reason: the insured loses the power to
control,
modify
and
change
the
beneficiary.
A: The term injury includes death, even if

not injured, if the person dies this will be
available.
Q: Is it subject to VAT?
A: 1. Non-life insurance yes, subject to
VAT under 108 (A).
2. Life insurance NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
Q: Why is it considered an exclusion?

A: because this is just an indemnification
for the injuries or damages suffered.
4. Gifts, Bequest and Devises [Sec.

32 B (3)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.
Q: Why is the donee exempt from income

tax?
A: Because the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the value of
property acquired by gift, bequest or
devise
TAKE NOTE:
A. GIFTS are excluded because they are
subject to donors tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
gift, bequest, devise or descent of
income from any property in case of
transfers of divided interest.
5. Compensation for injuries
sickness [Sec. 32 B (4)]
or
Q: is this the same as those provided under

the workmens compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those
under workmens compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q: What does injury include?
Q: when will the damages recovered be

exempt?
A: General Rule: all damages awarded are
tax exempt.
Exception: damages representing loss of
income.
6. Income exempt under a treaty

[Sec. 32 B (5)]
7. Retirement benefits, pensions,

gratuities [Sec. 32 B (6)]
Q: Why do we need to distinguish
retirement pay, separation pay and terminal
leave pay?
A: because
they
have
different
requirements for exemption.
Q: What is retirement pay?
A: the sum of money received upon
reaching the maximum age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved
by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the time
of retirement; and
4. the official or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at
least 60 years old but not more than
65 years old;
2. the employee or official must have
served the company for at least 5
years;
entitled to 15 days salary and of the
13th month pay for every year of service.
42

- Atty. Francis J. Sababan TAKE NOTE: the retirement benefits under
RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
SEC. 32 B(6)(c)
retirement benefits given by foreign
government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications automatic
exclusions.
SEC. 32 B(6)(d,e,f)
retirement benefits given by the
Philippine Govt through the GSIS, SSS and
PVAO
are
exempt
without
further
qualifications = automatic exclusions.
August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
ANSWERS = MIDTERMS
Gross Income include both capital and
ordinary gains, Sec. 31 says gross incomedeductions, that which is ordinary loss.
- may be deducted from capital gains and
ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from
the service because of (1) illness, (2)death,
(3) physical incapacity or injury, or (4)
causes beyond the control of the employee.
Q: Are
there
any
requirement
for
separation pay granted by foreign govt or
corp?
A: None, the separation pay granted by the
aforementioned institutions are exempt
without further qualifications (other similar
benefits).
Q: is
separation
pay
an
exclusion,
therefore, exempt?
A: No.
GENERAL RULE: Separation pay not
exempt (?)
Exception:
1. Automatic exclusions, thus exempt if
due to:
a. illness
b. death
c. physical incapacity or injury.
2. Conditional exclusion
a. causes beyond the control of the
employee- excluded
b. within employees control included.
Examples:
1. registration
CBA
provides
separation pay, within the control =
included.
2. installation of labor saving devises or
bankruptcy beyond the control =
excluded.
Q: What is terminal leave pay?
A: the accumulated vacation leave and
sick leave benefits converted to cash or
money to be given either every year or
upon retirement or separation.
Terminal
Leave
Pay
granted
upon
retirement or separation:
uder PD220, TLP in the Govt or in
the Private Sector shall be exempt from
income tax if given or granted upon
retirement or separation.
TLP granted on a yearly basis:
1. employee in the private sector:
a. accumulated sick leave subject
to income tax.
b. Accumulated vacation leave: if
more than 10 days (meaning 11
pataas) subject to income tax;
If 10 days or less exempt.
2. Govt Employee:
governing law: EO 291 of Pres. Estrada,
RMC 16-2000.
Rule: Govt workers (both officers or nonofficers) granted TLP on a yearly basis
exempt from income tax.
there is no qualification as to vacation or
sick leave.
Take Note of 3 cases.
be reminded of EO 291, Sec. 2. 78.2
par. 97, RR2-98, RR16-200 (3).
Case of Zialcita
retired from DOJ, contention: TLP should
be exempt from income tax pursuant to the
old law.
SC: on a different ground TLP is exempt
because it is similar to Retirement pay, thus
43

- Atty. Francis J. Sababan exempt but the rulings application
limited only to DOJ employees.
is
Borromeo case:
Same as the Zialcita case
Issues: WON the TLP is subject to income
tax and WON COLA and RATA are included?
SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ
officers but also to CSC commissioners.
COMMISSIONER v. CASTAEDA
- Castaeda DFA officer in Phil. Embassy in
England.
1. TLP is exempt.
2. Ruling applies to DFA officers.
Q: Does the rule or decision applies to
Govt officials only?
A: No. PD220: Exemption applies to both
private and public sectors(?)
it does not matter if TLP is vacation or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
JAN, 1998 the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
Officer in govt receiving TLP is always
exempt whether or not vacation or sick
leave is granted.
Modified RR2-98:
TLP will only apply to private sectors
if granted on a yearly basis may be
subject to tax: VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B
(7)
(a) income derived by foreign Govt
[Sec. 32 B (7) (a)]
Q: What kind of income?
A:
1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in the
Philippines.
Q: Who are income earners?
A:
1. foreign government
2. financing
institutions
owned,
controlled or enjoying re-financing
from foreign govts; and
3. intl or regional financial institutions
established
by
foreign
govts
(established in the Philippines)
TAKE NOTE: if plain foreign corp., subject to
FIT 20%.
EXAMPLES of exclusions:
a. Brunei
Govt
earns
interest
by
depositing money in Makati Bank
Exclusion.
b. SMC- Stock dividends to 3. Brunei Govt.
exclusion
c. Income derived by the Govt or its
political subdivisions (Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential govt
function.
accruing to the govt.
d prizes and awards (Sec. 32 B 7 c)
primarily for religious, charitable,
scientific, educational, artistic, literary
or civic achievements:
1. recipient was selected without any
action on his part to enter the
contest or proceedings;
2. the recipient was not required to
render substantial future services as
a condition to receive the prize or
award.
D. prizes and awards in sports (Sec. 32B 7
d)
1. granted to athletes;
2. local or intl competitions;
3. held here or abroad;
4.
sanctioned
by
the
natl
sports
associations.
E. 13th month pay and other benefits (Sec.
32B 7 e)
Q: Do you include Christmas bonus in your
ITR?
A: No, because the law says 13th month pay
and other benefits/similar benefits
xmas bonus is included in the category.
Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
Q: Applicable to whom?
A:
44

- Atty. Francis J. Sababan 1. govt; and
2. Private institutions.
F. GSIS, SSS, Medicare and other
contributions (Sec. 32 B 7 f)
must be deducted from the GI not NIT
because it is an exclusion.
-creditable withholding tax is an exclusionmust be deducted first from the GI before
you compute the NIT. Otherwise, you are
including in the GI something that is
excluded from the same.
Sec. 34 A EXPENSES
1. For those business expenses not
enumerated under A. You need to prove
that it is an ordinary and necessary
expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during
the taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
G. Gains from the Sale of bonds,

debentures,
or
other
Certificate
of
indebtedness. (Sec. 32 B 7 g)
Q: Did the law define what is reasonable?

A: No. for salaries and wages all that is
required by law is for it to be reasonable.
Q: Why 5 years?
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- for other forms of compensation, there

must be services actually rendered.
- Sec. 32 B 7 g is similar or the same as 24

B in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
TAKE NOTE:
for taxpayers liable for income within
and without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
for taxpayers who are liable only for
income within, they can claim a
deduction for expenses incurred within
the Philippines.
AGUINLDO Case
F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
there was substantial profits gained from
the sale of a land which was sold by a
broker. The profit was in turn given to the
workers as special bonus.
the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually
rendered.
in this case, it was proven that the sale
was not made by the employees, no effort
or services actually rendered by them
because the sale was made through a
broker.
Q: Reasonable Travel Expenses, What is the

requirement?
A:
1. Travel must be in pursuit of business,
trade or profession.
2.
Travel expense while away from
home.
Q: Is there a travel expense which was not
in pursuit of business?
45

- Atty. Francis J. Sababan A: yes, those which are considered as
fringe benefits (FB), expenses for foreign
travel is considered a FB only if it is not in
pursuit of the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)
(ii)?
A: No, you can claim it under Sec. 34 A (1)
(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
1. required as a condition for the
continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.
Q: Reasonable allowance for entertainment,
amusement and recreation expenses, what
is the requirement?
A:
1. connected with the development,
management, and operation of the
trade (DOM);
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks
will not pass the requirement of (i) ordinary
and (ii) necessary hence not deductible
EXPENSES ALLOWABLE TO
EDUCATIONAL INSTITUTION
PRIVATE
Q: Why only private educational institution

is mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational
Institution
given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3.
if the amount of capital outlay is
substantial, it cannot accommodate all of
the expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses
incurred.
taxpayers allowable deduction for

interest expense shall be deducted
by an amount equal to 42% (RR 102000) of the interest income subject
to FIT.
Q: Who claims this deduction?

A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
interest on debt - when one borrows
money to finance his business interest in
connection with the taxpayers profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2
a)
a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not
the principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid the entire
amount of interest can be claimed as
itemized deduction.
2. if only of the obligation had been paid,
then the entire amount of of that interest
can be claimed as a deduction.
EXCEPTION: Private Educ. Institution can

claim it under Sec. 34 A (2)
3. if no payment had been paid on the

principal obligation, the advance interest
paid cannot be claimed as a deduction on
the years that it was paid.
BUSINESS EXPENSE vs. ALLOWANCE

FOR DEPRECIATION
REQUIREMENTS FOR REDISCOUNTING OF

PAPERS:
46

- Atty. Francis J. Sababan 1. incurred within the taxable year.
2. individual taxpayer reporting income on a
cash basis.
No deduction shall be allowed in

respect to the following interest:
1. if within the taxable year an individual

taxpayer reporting income on the cash
basis incurs an indebtedness on which an
interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36
(B):
a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or
for such individual;
c. Bet. 2 corp., more than 50% in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for the
same individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary
of such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related
parties.
Q: What if half-brother?
A: not allowed to claim deduction for
interest.
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL
TREATMENT
OF
INTEREST
EXPENSE:
1. interest incurred to acquire property
used in trade, business or exercise of
profession can be claimed a an itemize

deduction
a. on interest; or
b. depreciation
(as
capital
expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR132000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest
of 20%
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank,
it earned a bank interest subject to FIT
worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the
amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
tax deduction is allowed if the taxes were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim it?
47

- Atty. Francis J. Sababan A: those liable to pay NIT. (Tax credit only
for NIT)
Q: What is a tax credit?
A: refers to the taxpayers right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under
NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: suppose you paid the 100K NIT to US,
can you claim as a deduction the whole
100K? what is the formula?
same
foreign
foreign
foreign
procedure for (1) income tax paid to

country; (2) estate tax paid to
country; and (3) Donors tax paid to
country.
A: Formula:
STEP 1
GI from sources w/in
NIT: _____________________
GI from entire world
STEP 2
Quotient x RATE = amount w/c can be
claimed as a deduction
A: you cannot claim the whole 100K, you
can only claim the product of the quotient
times the rate
TAKE NOTE: deduct at the bottom of the
formula ( sa computation ng GI)
Q: Suppose you are a RC, you pay NIT to

US, will you be able to claim it as a tax
deduction?
A: 1. generally, you can claim it as tax
credit.
2. you can claim under Sec. 34 C (1) b
if the taxpayer did not signify in his return
his intention to avail himself of the benefit
of tax credit for taxes paid to foreign
country.
taxes incurred not related to the trade or
business, you have the option to:
a. claim it as tax credit; or
b. claim it as a deduction
law gives you this privilege.
Q:
When is taxes not allowed as a
deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of
any foreign country;
3. Estate and Donor tax; and
4. taxes assessed against local benefits
of a kind tending to increase the value of
the property.
Q: Who are not allowed to claim

deductions?
A: Under 34 C (3) - NRC, NRA; and N/RFC
TAKE NOTE:
1. NRAE and NFC allowed deduction only if
and to the extent that they are connected
with income from sources within the Phils.
2. Taxes that had been allowed as
deduction but are later in refunded should
be treated as part of the gross income
during the year that it is received (34 1 last
paragraph)
Q: Which would you choose? Tax credit or
deduction?
A: tax credit because it is deducted from
the taxable income while deductions are
deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME x
RATE = TAXABLE NET INCOME TAX
CREDIT)
34 D LOSSES
48

- Atty. Francis J. Sababan Q: Is always a requirement that it is
incurred in pursuit of trade, bus. or
profession?
A: No. Sec. 34 D(1) provides for 2 kinds of
losses:
a. incurred in pursuit of trade, bus. or
profession;
b. property connected with t,b,p, if the
loss arises from fire, storms, shipwrecks
or other casualties or from robbery,
theft or embezzlement (arising from
natural
calamity).
A:
1. Loss actually sustained during the
taxable year
2. Not compensated for by insurance or
other forms of indemnity.
3. Not claimed as a deduction for estate
tax purposes.
Q: This is your itemized deduction which
can
be claimed as a deduction from?
A: Gross income
TAKE NOTE:
The itemized
deduction of losses,
however, is not confined to section 34B. it is
also found under section 86A (1) (e) which
also pertains to deductions available under
the estate tax law.
Losses within six (6) months after the
death of the decedent can be claimed as
itemized deduction of losses under Section
34B. However, may be claimed as
deduction under estate tax return provided
that the same are not claimed as itemized
deduction of losses under Section 34B.
Q: How many carry-overs do we have under
the Code?
A: 3. Namely:
1. Section 27 E (32) Carry forward of
excess minimum Tax
2. Section 39 D Net Capital Loss Carryover
3. Section 39 D 3 Net Operating Loss
Carry-Over.
KINDS OF LOSSES AND THEIR CARRYOVERS:
A. ORDINARY LOSS NOLCO ( #3 above)
Q: Why is there a need for a carry over

under Sec. 34 D # when you can claim the
loss from both capital and ordinary loss?
A: if the loss exceeds the income for the
taxable year, you cannot deduct the entire
amount of loss from your income for that
year so the excess may be deducted for the
taxable year following the loss.
B. CAPITAL LOSS NET CAPITAL LOSS
CARRY OVER ( # 2 above)
NET
LOSS
OVER
CAPITAL
CARRY-
NET OPERATING
LOSS
CARRYOVER
1. taxpayers is an
individual only not
corporation.
1. taxpayer may be
an individual or
corp;
2.
involves
capital loss
net
2. losses incurred
or connected with
T or B;
3. carry-over as loss
from sale of capital
asset in the next
succeeding year
3. Business losses
not previously offset as a deduction
from the GI carried
over as such for
the
next
3
consecutive years;
4. can be deducted
from capital gains
and/or
ordinary
gains.
4. can only be
deducted
from
capital gains.
NET OPERATING LOSS CARRY

REQUIREMENTS:
1.Net operating loss of the business or
enterprise incurred w/in the taxable year
2. not previously off-set as a deduction from
the GI
3. carried over as a deduction from the GI
for the next 3 consecutive taxable years
immediately following the year of such loss.
Q: Can the period be extended?
A: yes, for mines other than oil and gas
well.
1. net operating loss w/out the benefit
incentives provided by law;
2. incurred in any of the first 10 years of
operation.
49

- Atty. Francis J. Sababan 3. carried over as a deduction from the
GI for the next 5 years following such loss.
4. no substantial change in the
ownership
of the business or enterprise.
Q: What is the limit?
A: 75% of the nominal value of outstanding
shares is held by or on behalf of the same
persons/ corporation
individual no problem, problem lies with
corporations or enterprises.
ABANDONMENT LOSSES
1.
contract
area
where
petroleum
operations are undertaken is partially or
wholly abandoned;
all (1) accumulated exploration and (2)
development
expenditures
pertaining
thereto shall be allowed as a deduction.
2. a producing well is subsequently
abandoned:
unamortized cost and undepreciated cost
of equipment directly used therein shall be
allowed as a deduction in the years it was
abandoned.
TAKE NOTE:
1. if abandoned well is reentered and
production is resumed; or
2. if equipment or facilities are restored into
service in the year of resumption or
restoration
and
shall
amortized
or
depreciated.
Q: What is the Tax benefit rule?
A: Last Par. of Sec. 34 E (1): recovery of
bad debts previously allowed as deduction
in the preceding year shall be included as
part of the gross income in the year of
recovery to the extent of the income tax
benefits of said deduction.
Q: What is a Bad Debt?
A: Bad debts shall refer to those debts
resulting from the worthlessness or
incollectibility in whole or in part of
amounts due the taxpayer by others,
arising
from
money
lent
or
from
uncollectible amounts of income from goods
sold and services rendered.
CHINA BANK VS. CA
bad debts can only be claimed

pursuant to a contract of loan
- no bad debts for loss of instruments.
if
Q: Who claims it?

A: a. creditor
b.money lender
Q: What year can it be claimed?
A: can be claimed in the year it was
actually sit ascertained to be worthless and
charged off, meaning cancelled in the books
of account.
Q: Do you need to file an action before you
can claim?
A: No, all you have to do is prove that you
did exert effort to claim or recover the
same.
Q: What cannot be deducted as bad debts?
A:
1. debts not incurred in connection
with the trade, business and profession
of taxpayer.
2.
transactions, mered into between
parties mentioned under Section 36 (B)
namely.
a) between members of the family
b) between an individual who owns
more
than 30% of outstanding
capital stock of a
corporation
and that corporation
c) between two (2) corporations more
that 50% of the outstanding capital
stock of which is owned by or for the
same individual
d) between a grantor and fiduciary of
any trust
e) between two (2) fiduciaries of two
(2)
trusts who has the same
grantor
f) between a fiduciary of a trust and
above fiduciary of such trust
SECURITIES BECOMING WORTHLESS
1. ascertained
to be worthless and
charged off within the taxable year
2. capital asset
3. taxpayer, other than a Bank or trust
company incorporated under Phil. Laws
4. substantial part of business is the
receipt of deposit
5. considered as a loss from the sale of
capital assets on the last day of such
taxable year
50

- Atty. Francis J. Sababan 34 F DEPRECIATION
Q: What is depreciation?
A: It is the gradual dimension in the service
or useful value of tangible property due
from exhaustion, wear and tear and normal
obsolescence.
Q: What kind of property is involved?
A: 1. Real property except parcel of land
2. Personal Property
REQUISITES:
1. depreciation deduction must be
reasonable
2. for the exhaustion, wear and tear,
including reasonable allowance for
obsolescence
3. property used in the trade of
business
Q: What do you mean by reasonable
allowance?
A: it shall include, but not limited to, an
allowance computed in accordance with
rules and regulations prescribed by the
Secretary
of
Finance,
upon
recommendation of the Commissioner,
under any of the following methods:
1.Straight-line method
2.Declining balance method
3.Sum-of-the-year-digital method; and
4.any other method which may be
prescribed by the Secretary of Finance
upon
recommendation
of
the
Commissioner
DEPRECIATION OF PROPERTIES USED
IN PETROLEUM OPERATIONS
1. properties directly related to production
of petroleum
2. allowed under (1) straight line or (2)
declining balance method
3. useful life of properties used or related
to production of petroleum shall be ten
(10)
years or such shorter life as
may be
permitted
by
the
Commissioner.
4. for property not used directly in the
production of petroleum (1) depreciated
under the straight line method, and
useful life is only five (5) years
DEPRECIATION OF PROPERTIES USED
IN MINING OPERATIONS
ALLOWANCE FOR DEPRECIATION:

1.all properties used in mining operations
other than petroleum operations shall be
computed as follows:
a. if the expected life is ten (10) years or
less normal rate of depreciation
b. if the expected life is more than ten (10)
years depreciated over any number of
years between five (5) years and the
expected life.
REQUIREMENTS:
1. depreciation is allowed as a deduction
from 61; and
2. contractor notifies the Commissioner at
the beginning of the depreciation period
which depreciation rate shall be used.
DEPRECIATION DEDUCTIBLE BY NRAETB OR
RFC
reasonable
allowance
for
the
deterioration of property
1.
arising out of its use or
employment
2.
or non-use in the business,
trade or profession
3.
property is located in the
Philippines
34 G DEPLETION OF OIL and GAS
WELLS and MINES
only deduction which is a not self
executing deduction
Q: What is depletion?
A: the exhaustion wear and tear of natural
resources as in mines, oil, and gas wells
the natural resources called wasting
assets
DEPRECIATION vs DEPLETION
1.involves
property
2. ordinary wear
and
tear
of
equipments
1. involves natural
resources
2. ordinary wear
and tear of natural
resources
TAKE NOTE:
Equipment used in mining operation is
deductible in depreciation
Q: Method for computing depletion?
51

- Atty. Francis J. Sababan A: cost depletion method
Q: to whom allowed?
A: only mining entities owning economic
interest in mineral deposits
Economic interest: capital investments in
mineral deposits
34H CHARITABLE & OTHER
CONTRIBUTIONS
TAKE NOTE:
1.unique because deducted from the
taxable net income and not from the gross
income
second step of the formula deduction
Q: Who is claiming the deduction?
A: the donor
Q: Who are the Donees?
A: 1.Government of the Philippines or any
of its agencies or any political subdivision
thereof exclusively for public purpose
2. Accredited Domestic corporation or
association organized and operated
exclusively for religions, lion, charitable,
scientific,
youth
and
sports
development,
cultural or educational
purposes or for
the
rehabilitation of
veterans, or to social welfare institution,
or to non
government organization and
no part of
its net income inures to the
benefit of
any private stock holder or
individual
Q: How many kinds of deduction?
A: Two (2) kinds:
1.partial deduction
10% of taxable income in case of
an
individual
5% of taxable income in case of
corporations
2. full /total deduction
Q: Which of the two kinds is the General
Rule?
A: General Rule: Partial deduction
Exception: Total /Full deduction
Q: Suppose Mr. A made a cash donation of
P1M.
How much can he claim as a
deduction?
A: First determine the taxable income of Mr
A since he is an individual, he can only
deduct 10% of his taxable income.
Q: What if the Donee is not one of those

mentioned under the law, can he claim a
deduction?
A: No.
TAKE NOTE: Donee is never an individual.
Q: If the Donor is a pure compensation
income earner and he donates P100,000 to
the church, can he claim it as a deduction?
A: No. pure compensation income earner
can only claim a deduction under Sec 34 M
Q: If Donee is the Philippine Government,
what is the requirement?
A: it must be made exclusively for public
purposes
Q: What if the Donee is a province?
A: there must be a qualification that it is for
public purpose
Q: If the Donee is a Domestic Corporation,
what is the requirement?
A: no part of its income inures to the
benefit of any private shareholder or
individual
Q: What are those contributions which can
be
deductible in full?
A: 1.Donations to the Government no
conflict
with
partial
(different
requirement)
Partial donated for exclusively public
purposes
Full, used in undertaking priority
activities of NEDA
2.Donations
to
certain
Foreign
Institutions
or
International
Organizations
in compliance with agreement, treaties
or commitment entered into by the
Philippine Government and such donees
3.Donations
to
Accredited
Non
government
organizations
Non
government organization, non profit
domestic corporation
REQUIREMENTS:
1. organized and operated exclusively for
scientific, research, educational, character
building and youth and sport development,
52

- Atty. Francis J. Sababan health, social welfare, cultural or charitable
purposes or a combination thereof
2. no part of the net income of which inures
to the benefit of any private individual
3. uses the contributions directly for the
active conduct of the activities constituting
the purpose or function for which it is
organized and operated
4. annual administrative expense does not
exceed 30% of the total expenses and
5. in case of dissolution, the assets of which
would be distributed to:
a)
another
non
profit
domestic
corporation
organized
for
similar
purpose or purposes
b) to the state for public purpose
c) distributed by the court to another
organization to be used in such a
manner which would accomplish the
general purpose for within the dissolve
organization was organized
34I RESEARCH AND DEVELOPMENT
In the old law, this is not allowed as a
deduction. To remedy this, they felt that
those should be a separate deduction for
research and development.
REQUISITES:
tax payer may treat research and
development expenditures as ordinary and
necessary expenses provided:
1. it is paid or incurred during the taxable
year
2. incurred in connection with trade,
business or profession; and
3. not chargeable to capital account.
Q: Treated as such when?
A: during the taxable year it is paid or
incurred
AMORTIZATION OF CERTAIN RESEARCH
AND DEVELOPMENT EXPENDITURES
at the election of the taxpayer, the
following shall or may be treated as
deferred expenses:
a. paid or incurred by the taxpayer in
connection with his trade, business or
profession;
b. not treated as expenses under par 1
and
c. chargeable to capital account but not

chargeable to property of a character
which is subject to depreciation or
depletion
Q: How to compute taxable income:
A: deferred expenses shall be allowed as
deduction ratably distributed over a period
of not less than 10 months as may be
elected by the taxpayer (beginning with the
month the
taxpayer first
expenditures.)
realizes
benefits
from
the election or option may be exercised

for any taxable year after the effectivity of
the code but not later than the time
prescribed by law for filing the return for
such taxable year.
LIMITATION ON DEDUCTION
Q: When not deductible?
A: 1.Any expenditure for the
(1) acquisition or improvement of land
or (2) for the improvement of property to
be used in connection with research and
development of a character which is
subject to depreciation and depletion
and
office site
2. Any expenditure paid or incurred for
the purpose of undermining the
existence, location, extent or quality of
any deposit of one or other mineral
including oil or gas.
not for mineral exploration
34 J PENSION TRUST
Q: Claimed by Whom?
A: the employer
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer
on account of its contribution to a private
pension plan for the benefit of its employee
deduction is purely business in character.
Q: Requisites?
A:
1.the employer must have established a
pension or retirement plan to provide for
the payment or reasonable pension of his
employees
2. pension plan must be reasonable and
actually sound;
53

- Atty. Francis J. Sababan 3. it must be funded by the employer
4. the amount contributed must no longer
be subject to his control or disposition
5. the amount has not yet been allowed as
a deduction and
6. the amount has or is apportioned in
equal parts over a period of 10 consecutive
years beginning with the year in which the
transfer or payment is made.
34 K ADDITIONAL REQUIREMENTS FOR
DEDUCTIBILITY OF CERTAIN PAYMENTS
allowed as a deduction only if shown that
the tax required to be deducted and
withheld there from has been paid to the
BIR in accordance with Section 58 and
Section 81
34 L OPTIONAL STANDARD DEDUCTION
KINDS OF DEDUCTIONS:
1.Itemized deduction
2.Optional Standard Deduction
3.Personal /Additional Deduction
Q: Who can claim this deduction?

A: all individual taxpayers except non
resident alien not engaged in trade or
business (NRANETB)
Reason: he is not liable to pay by way of the
NIT, thus, follows he cannot claim this
deduction because he is liable to pay by
way of GIT.
personal
and
Q: Who can avail of this deduction?

A: 1.individual taxpayer earning purely
compensation income during the year;
2. individual taxpayer availing itemized
or optional standard deduction; and
3. individual taxpayer earning both
compensation income and income from
business
SECTION
35
ALLOWANCE
PERSONAL
EXEMPTION
INDIVIDUAL TAXPAYER
OPTIONAL STANDARD DEDUCTION:

can be availed of by an individual who
may elect a standard deduction in an
amount not exceeding 10% of his gross
income
may apply in
lieu of the other
deductions under Section 34
the taxpayer must signify in his return his
intention to elect the optional standard
deduction,
otherwise,
he
shall
be
considered as having availed of the
itemized deduction.
TAKE NOTE:
can co-exist with
additional exemption
REQUIREMENTS:
1. amount of premiums, paid by taxpayer
for himself and members of his family,
2. amount of premiums should not exceed
(1) P2,400 per family or (2) P200 a
month
3. gross income of the family for the
taxable year is not more than P250,000
or
34 M PREMIUM PAYMENTS ON HEALTH

AND /OR HOSPITALIZATION INSURANCE
OF AN INDIVIDUAL TAXPAYER
for (1) Health and /insurance
(2) Hospitalization
FOR
FOR
Q: When do we apply this?

A: apply if individual taxpayer is paying by
way of NIT
Q; Who are taxpayer?
A: those mentioned under Section 24 (A)
1. RC
2. NRC
3. OCW
4. RA
all can claim both personal and
additional exemption
Q: Why not include NRAETB? Can the latter
claim any exemption?
A: NRAETB is not included because Section
35 A refers to Section 24 A
NRAETB can claim personal deductions
but not additional exemptions pursuant to
Sec 35 D
REQUIREMENTS:
1.NRAETB should file a true and accurate
return
2. the amount to be claimed as personal
exemptions should not exceed the
amount provided for under Philippine
Laws
TAKE NOTE:
AEMOP: can be a RA or NRAETB
54

- Atty. Francis J. Sababan BASIC PERSONAL EXEMPTIONS:
1.
20, 000
Single
individual;
or
individual
judicially
decreed
as
legally
separated
with
no
qualified dependents.
2.
For head of the family

can be single or legally
separated with qualified
dependents.
3.
For
each
married
individual if only one of
the spouse, earns or
derives
gross
income,
only such spouse can
claim
the
personal
exemption.
25, 000
Section 35 A but can claim under sec

35B
widower, married or used to be married
MARRIED INDIVIDUALS
each legally married individuals can claim
the personal exemption. Husband and wife
= P64,000
Q: Who are allowed to claim?
A: Normally , it is the husband who claims
unless he executes a waiver that the
wife
will claim the same (RR2-98)
Additional Exemptions: (35B)
32, 000
Q: Who is the head of the family?
A: 1.unmarried or legally separated man or
woman
2. With (1) one or both parties or
(2) With one or more brothers and
sisters
(3) with one or more legitimate,
recognized, natural or legally adopted
children
3. living with and dependents upon him
for their chief support
4. whose such brother or sisters or
children are
(1) not more than 11 years old and
(2) not gainfully employed,
(3) unmarried
5. OR, regardless of age, the same are
incapable of self support because of
mental or physical defect.
Q: Why do we have to determine who the
head of the family is?
A: only legally separated individuals can
claim additional exemptions if they have
qualified dependents.
TAKE NOTE:
R.A. 7432 and RR 2-98: a senior citizen
can also be a dependent.
Q: Can a widower claim exemptions?
A: exemptions must be strictly construed,
widower not included in the list under
-additional exemption of P8,000 for each

dependent not execeeding four (4)
Q: Who can claim the same?
A: 1.Married couples: only one of the
spouses can claim it;
2.legally separated individuals: can be
claimed by the spouse who has custody
of the child or children
the additional exemption claimed by
both shall not exceed the maximum
additional exemption herein allowed.
Q: Define dependents
A: legitimate, illegitimate or legally adopted
child chiefly dependent upon and living
with the taxpayer if such dependent is (1)
not more than 21 years of age, (2)
unmarried, and (3) not gainfully employed
or (4) if such dependent, regardless of
age is incapable of self support because
of mental or physical defect.
Q:
What if widower has illegitimate

children,
can claim additional
exemption?
A: can claim, can be considered as head of
the family w/ dependent
Q: What if the children are temporarily
away
from the parents?
A: still considered living with parents, can
claim exemption
CHANGE OF STATUS: (SEC 35 C)
Q: Reckoning Period?
A: end of the year or close of such year
when
such change of status
occurred.
TAKE NOTE:
55

- Atty. Francis J. Sababan always choose the higher amount of
exemption if you are filing a return covering
the period within which the change of
status occurred
1. if the taxpayer should (1) marry or
have additional dependents during
taxable
year,
he
may
claim
corresponding exemption in full for
year.
(2)
the
the
the
Illustration:
1.Single Jan 1, 2005
2.Married June 1, 2005 on April 15, 2006
status: legally married can claim P 32,000
2. if the taxpayer should die during the
taxable year, estate can claim personal
exemption.
Illustration
1.Jan. 25, 2005 taxpayer married w/ one
child
can claim on April 15, 2006
P32,000+
P8,000
} P40,000
In this case, as if the change of status

occurred at the close of taxable year. If
taxpayers spouse or child dies within the
taxable year or the dependents became (1)
gainfully employed (2) got married or (3)
became 21 as if the change as status
occurred at the close of taxable year.
Illustration:
1. Taxpayers tragic story wife died Jan. 25,
2005 and child died the next day then
another child eloped and get married.
2. Taxpayer despite the tragedy can claim
ton of money on April 15, 2006.
P 32,000
P 16,000 (8,000 per child)
48,000
Section 36. Items not Deductible
36 A. General Rule: In computing net
income, no deduction shall be allowed:
(1) Personal, living or family expenses not
related to trade or business
(2) Section 36 A (2) and Section 36 A (3)
General Rule: No deductions allowed for
1. Any amount paid out for new buildings
or for permanent improvements, or
betterments, made to increase the value
of any property or estate
2. Any amount expanded in restoring

property or in making good the
exhaustion thereof for which an allowance
is or has been made.
Exceptions:
1. Option
granted
to
Private
Educational Institution to deduct the
same as capital outlays.
TAKE NOTE:
Amount paid for new buildings, can be
deducted if it involves intangible drilling
and
development
cost
incurred
in
petroleum operations (Sec 34 6 (A)
PREMIUMS PAID ON LIFE INSURANCE
POLICY :
1. covering the life of any officer or

employee or any person financially
invested in any trade of business
carried on by the taxpayer.
2. taxpayer is directly or indirectly the
beneficiary under such policy.
LOSSES FROM SALES OR EXCHANGES
OF PROPERTY (between related parties)
1) between family members
Q: Who is considered the family of the
taxpayer?
A: a. brothers and sister (whole is
blood)
b. spouses
c. ancestors
d. lineal descendants
Q: are uncles or nieces included?
A: no
IN DONORS TAX
Relatives
includes
relatives
by
consanguinity within the 4th civil code.
Nephew is a stranger and relative ang
nephew.
2) individual and corporations
Gen. Rule: NO DEDUCTION
Except: distribution in liquidation or
less than 50% of the outstanding
capital stock
3)
4)
5)
6)
Two corporations
Grantor or Fiduciary
Two fiduciaries of two trust
Fiduciary and beneficiary of trust
56

- Atty. Francis J. Sababan Sec. 37 Special provisions regarding
deductions of insurance companies.
Codal Provisions
Section 38: Losses From Wash Sales of
Stock or Securities
Q: What is a wash sale?
A: It is a sales or other disposition of stock
securities where substantially identical
securities are purchased within 61 days,
beginning 30 days before the sale and
ending 30 days after the sale.
Q: What period?
A: 61 day period beginning 30 days before
and ending 30 days after the sale
Q: Jan 20 you purchased share of stock, and
disposed of the same on Feb 5, 2005. Is
this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but
losses are non-deductible
Exception:
unless claim is made by a dealer in stock
or securities and with respect to a
transaction made in the ordinary course of
the business of such dealer
Q: Reason why losses in wash sale cannot
be deducted?
A:
1. to avoid too much speculation
in
the
market
2. taxpayer not telling the truth,
because he may say he
incurred
a
loss instead of a
gain
Section 40. Determination of Amount
and Recognition of Gain or Loss
GENERAL
RULE:
This is totally
irrelevant if the income is subject to fit.
In fit gain is presumed.
EXCEPT: sale of shares of stock where
you have to determine actual gain or
loss
Q: When is there a gain?
A: excess of the amount realized over the
basis or adjusted basis for determining
gain. (amount realized from the sale or
other disposition of property)
Q: When is there a loss?

A: the amount realized is not in excess of B
or AB
Illustration: 1987 Bar (Juan dela Cruz
sold jewelry for 300,000 ) contract of
sale
amount realized is 300,000
Q: What will be the basis of the gain?
A: Sec. 40 B (1), property was acquired
by purchase
Cost: purchase price + expenses
Q: If there is a gain, is the whole gain
subject to income tax?
A: it depends
if ordinary asset = 100% is subject to
income tax
if capital assets
a. short term(less than 12 months) :
100% taxable
b. long term (more than 12 months):
50% taxable
Q: suppose property sold is a parcel of land
will the rule be the same?
A: No, and it depends
ordinary asset: apply the cost
capital asset: 6% FMV or selling price
which ever is higher
Q: Do we apply the holding period?
A: No, holding period does not apply to the
sale of real property. This is an absolute
rule:
If realty is ordinary holding period
does not apply.
If realty is capital asset 6% FMV or
selling price applies.
Holding period applies only to sale of
personal property which is a capital asset
except sale of shares of stocks.
Holding period also do not apply to
corporations.
Q: If the property is acquired through
inheritance, what is the basis?
A: Sec 40 B (2) fair market value or price
as of the date of acquisition.
Q: Suppose it was a sale of personal
property, do we apply the same
principles?
57

- Atty. Francis J. Sababan A: No.
Q: What if it involves a sale of real
property?
A: Apply the same principles
Suppose it was a result of
swindling,
theft, robbery or estafa, do we apply
the same principles?
A: Law is silent, take note of the old CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a
jewelry in Sept your GG breaks up with
you. GG request the jewelry be returned
but you already sold it for P200,000.
Will the entire P200,000 be included in
gross income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did
not acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4)
what is the basis?
1. Property was acquired for
less
than
an
adequate
consideration
in
money
or
moneys worth: the basis would
be the amount paid by the
transferee for the property.
Q: Section 40 B (5) what is the basis? A: 40
C (5)
if the property was acquired in a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges property solely for
stocks in another corporation, also a party
to the merger or consolidation
b.
is a party to the merger or
consolidation, solely for the stocks of
another corporation also a party to the
merger or consolidation, or
c. Security holder of a corporation,
party to a merger or consolidation,
exchanges his securities solely for
stock or security in another
corporation, also a party to the
merger or consolidation. person
transfers property to corporation to
gain control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of

property, the control amount of gain or loss
shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss shall
be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract
of exchange
2. the parties are members of the
merger or consolidation
3. the subject matter is only limited or
confined with the one provided for
by law
Merger and Consolidation in corporation
code and tax code are not the same.
Sec 40 (2) (a)
a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation
which is a party to the merger or
consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not
taxble gain P300,000
If other property received by transferee
(40 C (3) (a) TRANSFEREE
if the party receives not just the
subject matter permitted to be received:
lie if the party receives money and /or
property, the gain, if any, but not the
loss, shall be recognized (meaning
taxable) but in an amount not in excess
of the sum of the money and the FMV of
such other property received.
(40 C (3) (b) TRANSFEROR
1.Transferor corporation receives money
and / or property, distributes it pursuant to
the merger or consolidation plan
no gain to the corporation shall be
recognized
2. Transferor corporation receives money
and / or property, does not distribute it
pursuant to the merger or consolidation
plan
58

- Atty. Francis J. Sababan the gain shall be recognized but in an
amount not in excess of the sum of such
money and the FMV of such other property
so received.
Q: What is the rule?
A: 40 C (3) (a)
1. gain taxable
2. loss not deductible
40 C (3) (b)
It depends on how distributed:
1. pursuant
to
the
merger
consolidation plan:
gain exempt
loss not deductible
2. not pursuant to merger
consolidation plan:
gain taxable
loss not deductible.
or
or
Sec 40 C (1) (b)

a shareholder exchanges stock in a
corporation which is a party to a merger
or consolidation, solely for the stock of
another corporation which is a party to
the merger or consolidation
Sec 40 C (2) (c)
a security holder of a corporation
which is a party to the merger or
consolidation, exchanges his securities
in such corporation, solely for stock
securities in another corporation.
The rule is similar in 40 C (3), (a), (b) and
(c) although different property are involve,
that is why the last paragraph of 40 C is a
separate paragraph.
Therefore, Sec 40 C (3) (a,b,c) the rule is
1. gain exempt
2. loss not deductible
40c last paragraph
the transferee becomes a stockholder,
parties are not members of the merger
the individual wants to be a
shareholder but does not want to
purchase shares but willing to give up
property as a result of the exchange ,
the person gains control of the
corporation
The rule is:
a. gain is exempt
b. loss not deductible

Requisites:
1. There is A contract of
exchange where property was
transferred by the person in
exchange of stock or unit of
participation in a corporation.
2. As a result, the person alone
or together with others (not
exceeding of 4 persons) gains
control of the corporation.
Q: What is control?
A: ownership of stocks in a corporation
possessing at least 51% of total voting
power.
Sec 40 B (5)
non applicability of income tax is only
temporary
Reason : Basis will be 40 C (5)
1. 40 C (5) (a) Transferor
basis of stock or securities received by
the transferor: same as the basis of the
property,
stock
or
securities
exchanged:
decreased by the (1) money and (2)
FMV of the property received; and
increased by (a) amount treated as
dividend and (b) amount of gain
recognized
2. 40 C (5) (b) Transferee
as it would be in the hands of
transferor increased by the amount of
gain recognized.
Sec 40 (c) (4) Assumption of
Liability
1. Taxpayer, in connection with the
exchanges described receives
securities or stocks permitted (no
gains recognized) it is sole
consideration of the same the
other party assumes liability of the
same the acquisition of liability not
treated as money and / or other
property the exchange still falls
within the exceptions.
2. If amount of liabilities assumed +
amount of liabilities to which
property is subjected to exceeds adjusted basis of the property
transferred the excess shall be
considered a gain from the sale of a
capital asset or of property which is
59

- Atty. Francis J. Sababan not a capital asset, as the case may
be.
SECTION 41 INVENTORIES
Purpose: Change of inventory to determine
clearly the income of any taxpayer/ to
reflect the true income.
Limitation:
1. once every 3 years
2. approval of the secretary of finance
Section 43 Accounting Periods
1. Fiscal year
2. use of calendar year
a. no annual accounting
b. does not keep books of account
c. individuals
Use of method as in the opinion of the
commissioner clearly reflects the income:
1. no accounting method has been
employed
2. the method does not clearly reflect
the income
Sec 44 Period in which items of Gross
Income included and Sec 45 Period for
which Deductions and Credit Taken
Under Sec 44 amount of all items of
gross income shall be included in the
gross income for the taxable year in
which they are received by the taxpayer
Under Sec 45 deductions shall be
taken for the taxable year in which
paid or accrued or paid or incurred.
Sec 44 and Sec 45 are mentioned in the
code because of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of the
year
January 1, 2006 June 15, 2006
June 26, 2006 to Dec 31, 2006 the
estate is the taxpayer
So the income and deductions from Jan
1 to June 25,, included in the
computation
Section 46 Change of Accounting
Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than
individual)
Q: What kinds of accounting period?

A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
with
the
approval
of
the
Commissioner, net income shall be
computed on the basis of the new
accounting period.
Q: Calendar to calendar, correct?
A: not correct statement
Section 47 (A)
Taxpayer: Corporation
1. Fiscal to calendar
separate final or adjusted return shall
be made for the period between the so
close of the last fiscal year for which the
return was made and (2) the following
Dec 31.
2. Calendar to Fiscal
be made for the period between the
close of the last calendar year and the
date designated as the close of the
fiscal year.
3. Fiscal to fiscal
be made for the period between the
close of the former fiscal year and the
date designated as the close of the new
fiscal year.
File return indicating the change in
accounting method
Section 48 Accounting for Long Term
Contracts
Q: Who are the professionals involved?
A: applies to architects and engineers
Q: What is a long term contract?
A: it means building, installation or
construction contracts covering a period in
excess of one (1) year.
Q: Basis of income?
A: a. persons whose gross income is
derived in whole or in part from such
60

- Atty. Francis J. Sababan contract shall report such income upon
the basis of percentage of consumption.
H: Initial payment exceeds 25% installment

basis is not applicable
b. the return shall be accompanied by a

certificate of architects or engineers
showing the percentage of completion
RR 2; Section 175: In payment by way of

installment promissory note, bills of
exchange and checks will not be considered
in computing the 25% initial downpayment.
c. deduction of expenditures made

during the taxable year, on account of
the contract is allowed
Q: Is it important to know if the property is

personal or real?
A: Yes
Section 50 Allocation of Income and

Deductions
tremendous
power
of
the
Commissioner to allocate the income
and deduction of several corporations
having the same interest.
Q: Same interest?
A: stockholders substantially the same
Q: Sale of Real Property is it important to

know if it is a casual sale or regular
sale?
A: No
Q: Limitations?
A: None
That is why it is a great source of
corruption
Requirement: The initial payments do not

exceed 25% of the selling price.
Q: If the initial payment exceeds 25% what
do you call it?
A: called deferred sale
Section 51 Individual Returns

Who are required to file? (ITR)
1. RC
2. NRC
3. RA
4. NRAETB sources within
Q: Consequence?
A: you must pay the whole amount of the
tax
Q: Who is not mentioned in Sec 51 but

liable to pay by way of NIT?
A: OCW/ seaman
Q: Sale of Personal Property, is it important

to know if it is a casual or regular sale?
A: Yes
Exception:
RC OR ALIENS: engaged in trade or practice
of profession in Phil. Shall file ITR regardless
of the amount of gross income.
Section 49 Installment Basis

contemplates a seller of the property
Casual Sale has Requirements:

1. selling price exceeds P1,000
2. initial payment not exceeding
25% selling price
Regular sale no requirements
Case of Baas
1. subject matter
2. sold by way
3. agreement
4. cash deposit
5. post dated
promissory notes
(installments)
3. 1st installment promissory note was
disconnected
4. 2nd installment exchanged with cash
- these two exceeds the selling price
5. you only compute cash
Q: If OFW is exempt from filing a return,

what is he required to file?
A: Information Return
Q: who are not required to file a return?
A:
a. an individual whose gross income
does not exceed his total personal
and
additional
exemptions
for
dependents
b. worker
(compensation
income
earners) regardless of the amount of
compensation shall not required to
file ITR because the management
files it. (RR 3-2002)
c. individuals whose sole income is
subject to FIT
61

- Atty. Francis J. Sababan d. individuals who are exempt from
income tax
Exception: IT
1. the management files an incorrect
return
2. the employee has two or more
employer
51 A (3)
A: not required to file ITR may be required
to file information return
51 B - Where to file?
1. authorized agent bank
2. revenue district officer
3. collection agent
4. duly authorized treasurer of the city
or municipality where taxpayer resides
or has principal place of business
5. office of commissioner if no legal
residence or place of business in Phil
51 C
Q: When to file?
A: filed on or before the 15th day of
each year
April
51 C (1) NIT Payers using CY

two days provided (calendar)
1. on April 15; or
2. before April 15 (January, Feb or March)
not December because the calendar year
is not yet over
Fiscal year: 15th day of the 4th month
following the close of the fiscal year.
51 C (2) individuals subject to tax on
capital gains
Exception: General Rules Sec 58
1. Sale of shares of stocks
return filed within 30 days after each
transaction and
Final consolidated return on or before
April 15
2.Sale of Real Property
return filed within 30 days following each
sale
51 D Husband and Wife
1. Pure compensation income earner
separate return RR 3-2000 pure
compensation income earner regardless of
amount of income not file ITR.
2. Not pure compensation: joint return
51 E. Return of Parent to Include

Income of Children
unmarried minor receives income from
property received from living parent
included in the parents ITR.
Exception:
1.Donors tax has been paid
2.Property exempt from donors tax
51 F. Persons Under Disability
Q: Who makes the return?
A:
1.duly authorized agent
2. duly authorized representatives
3. guardians
4.other persons charged with the care
of his person or property
both incapacitated taxpayer and agent
will be liable for:
1.erroneous return
2. false or fraudulent return
51 G Signature Presumed Correct
prima facie evidence the return was
actually signed by the taxpayer
Section 52 Corporation Return
go back to Sec 51 A (2)
General Rule: Sec 58 Final Income
Tax
return and creditable withholding tax
return is filed monthly
Exception: Sale of Shares of Stocks
(Sec 51 A (2)) Sale of Real Property
RR -17-2003: Sale of Real Property
subject to final withholding tax, the
buyer is deemed the agent.
Sale of Shares of Stocks
Q: Reasons for filing Final Income tax or
Final Consolidated Return?
A: Reasons:
1.
FIT whose actual determination of
gain or loss
2.
in connection with Sec 24 C the
basis of the tax is not the gross
income but the net capital gains
realized.
In connection with Sec 40:
actual determination of loss or gain
62

- Atty. Francis J. Sababan file a return within 30 days from date of
transaction
TAKE NOTE: In all other income subject to
FIT, the gains are presumed
2.Render a correct return verified under

oath setting form:
a. forms of the resolution or plan;
b. such other information prescribed
INCOME OF MINORS
Q: Minor below 18: Will it be included in the
Minors ITR?
A: it depends
1. income from property received from
parents included in parents ITR
Except:
a.Donors tax paid
b.Property exempt from donors tax
3.Secure a tax clearance from the BIR and

file it with the SEC
2. income from minors own industry

Minors ITR accomplished by guardian
or parents
Section 53 Extension of Time to File

Returns
Q: if the individual is exempt from income

tax, can be required to file a return?
A: General Rule: No
Exceptions:
1.engaged in trade or business; or
2.exercise of profession Sec 51 A (2)
SEC 52 CORPORATION RETURNS
A.Requirements
Taxpayer: DC or RFC (except NRFC)
ITR Filed: 1. TRUE AND ACCURATE
a. quarterly income tax return
b. final or adjusted income tax return
Filed by:
1.President;
2.Vice President
3. Other principal officer
ITR must be sworn by such officer and the
treasurer or assistant treasurer
B. Taxable Year
1. fiscal; or 2. calendar
corporation cannot change accounting
method employed without the approval or
prior approval of the commissioner (Sec 47)
C. Return of Corporation Contemplatory
Dissolution or Recognition
1.Within 30 days after:
a. the adoption by the corporation of a
resolution or plan for its dissolution; or
b. liquidation of the whole or any part of
its capital stock, including a corporation
which has been notified of possible
involuntary dissolution by the SEC; or
c. for its reorganization
4.Thereafter, SEC issued a Certificate of

Dissolution or Reorganization.
D. Sale of Stocks ITR
look at the previous notes about it
Q: To whom granted?
A: Corporations
Grounds: Meritorious case
subject to the provisions of Sec 56
Time Extension
Section 54 Returns or Receivers,
Trustees in Bankruptcy or Assignees
the aforementioned persons shall
make returns of net income as and for
such corporation in the same manner
and form as such organization is
required to make.
Section
55
Returns
of
General
Professional Partnership
file a return of its income setting forth
1. items of gross income and of
deductions allowed by this title (Title
II Tax on Income)
2. Names of partners
3. Taxpayer identification number (TIN)
4. address of partners
5. shares of each partners
GPP is exempt from corporate income tax
Q: Why is the GPP obliged to file a return?
A: to determine the shares of each partners
Section 56 Payment and Assessment of
Income
Tax
for
Individuals
and
Corporations
A. Payment of Tax
Q: Who pays the tax of tramp vessels?
63

- Atty. Francis J. Sababan A:
1.the shipping agents and or the

husbanding agent
2.in their absence, the captains thereof
those people are required to file a return
and pay the tax due before departure
Q: What is the effect of failure to file the
return and pay the tax due?
A: 1.Bureau of Customs may hold the
vessel and prevent its departure until:
a. proof of payment of tax is
presented; or
b. a sufficient bond is filed to answer
for the tax due.
Installment Payments
Tax due: more than P2,000
Taxpayer: individuals only (other than
corporation)
Elect to pay the tax in two (2) equal
installments
a. 1st installment: paid at the time the

b.
return is filed
2nd installment on or before July 15
following the close of the calendar
year
Q: What is the effect of non payment on the

date fixed?
A: The whole amount of tax unpaid
becomes due and demandable together
with the delinquency penalties.
Payment of capital gains tax :
Q: Paid when?
A: on the date the return is filed
Avail exemption for capital gains:
a. no payments shall be required;
b. if you fail to qualify for exemption
tax due shall immediately become
due and payable and subject to
penalties
c. seller pays tax submit intention or
proof of intent within six (6) months
from the registration of document
transferring
Q: when is the real property entitled to
refund?
A: upon verification of compliance
with
the requirements for exemption.
Report gains on installments under Sec
49 tax due from each installment
payment shall be paid within 30 days
from the receipt of such payments.
No
registration
of
document
transferring real property
1. without
a
certification
from
commissioner or his duly authorize
representative that
a. transfer has been reported
b. tax has been paid
B. Assessment and Payment of Deficiency
Tax
Return is filed, the commissioner
examiner and assess the correct amount of
tax
tax deficiency discovered shall be paid
upon notice and demand from the
commissioner.
3 INSTANCES CONTEMPLATED
1. file the return and pay the tax
2. file the return but not pay the tax
3. not file the return and not pay the tax
Section
Source
57
Withholding
of
Tax
at
A. Withholding of Taxes
subject to the Rules and Regulations the
Section of Finance may promulgate, upon
recommendation
of
commissioner:
Require the filing up of certain income tax
return by certain income payees.
Q: Enumeration is all about what?
A; Enumer ation about Final Income Tax
Except: Gross Income Tax
1. 25 B (NRANETB)
2. 28 B (NRFC)
B. Withholding of Creditable Tax at Source
The
Sec.
of
Finance,
upon
recommendation of the commissioner
require the withholding of a tax on the
items of income payable to natural or
juridical persons, residing in the Phil,
by payor-corporation/ person the
same shall be credited against the
income tax liability of the taxpayer for
the taxable year. At the rate of not
less than 1% but not more than 32%
thereof.
Q: What is the maximum?
A: Maximum: now 35% pursuant to RA
9337
Q: When will you allow withholding beyond
15%?
A:
64

- Atty. Francis J. Sababan For NIT 15% is the maximum
1. FIT the amount of withholding is
totally
2. GIT - equal to the amount of tax
Tax Free Covenant Bond
the bonds, mortgages, deeds of trust or
other similar obligations of
DC or RFC
contains a contract or provision where the
obligor (debtor) agrees to pay the tax
imposed herein
normally between the creditor and debtor
Q: Who pays the tax?
A: Creditor pays the tax by virtue of an
agreement the debtor assumes the liability
and the creditor is now free from payment
of tax before it can transfer the property to
the buyer.
Section 58 Returns and Payment of
Taxes Withheld at Source
A. Quarterly Returns and Payment of Taxes
Withheld at Source
1. covered by a return and paid to:
a. authorized agent bank
b. revenue district officer
c. collection agent
d. duly authorized treasurer of city or
municipality where withholding agent
has:
1. his legal residence; or
2. principal place of business; or
3. if
corporation
,
where
principal office is located
2.Tax deducted and withheld
held as a special fund in trust for the
government until paid to the collecting
officers.
3.Return for final withholding tax
filed and paid within 25 days from the
close of each calendar quarter
4.Return for Creditable withholding taxes
filed and paid not later than last day of the
month following the close of the quarter
during which withholding was made
5. Commissioner, with approval of Sec
Finance
require withholding agents to pay or
deposit taxes at more frequent intervals
where necessary to protect the interest of

the government
B. Statement of Income Payments Made
and Taxes Withheld
Withholding agent shall furnish payee
a written statement showing:
1. income or other payments made by
WHA during such quarter or year and
2. amount of tax deducted and
withheld
statement given simultaneously upon
payment at the request of the payee.
Creditable withholding taxes
1. corporate payee not later than the
20th day following the close of the
quarter
2. individuals payee not later than
March 1 of the following year
Final Withholding taxes
the statement should be given to the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
Withholding agent shall submit to the
commissioner an annual information return
containing :
1. the list of payees and income
required
2. amount of taxes withheld from each
payees
3. other pertinent information required
Final Withholding Tax: AIR
filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
not later than March 1 of the year
following the year for which the annual
report is being submitted
Commissioner may grant WHA reasonable
extension of time to furnish and submit the
return required herein.
D. Income of Recipient
1. Income upon which any creditable
tax is required to be withheld at
source shall be included in the
return of its recipient.
65

- Atty. Francis J. Sababan 2. the excess of the amount of tax so
withheld over the tax due on his
return shall be refunded
3. income tax collected at source is
less than the tax due on his return
difference shall be paid
4. all taxes withheld
1. considered trust fund
2. maintained in separate account
3. not commingled with other funds
of WHA
E. Registration with Register of Deeds
No registration of any document
transferring real property shall be
effected by the Register of Deeds unless
the commissioner or his duly authorize
representative has certified that the
transfer (1) has been reported and (2)
tax due has been paid
Register of Deeds requires payment of
tax before transfer of property
Section 59 Tax on Profits Collectible
from Owner of other Persons
Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid by
virtue of the foregoing
shall be assessed by personal return
Intent and Purpose of this Title
1. All gains, profits and income of a
taxable class shall be charged and
assessed with the corresponding tax.
2. Said tax be paid by the owner of the
gains, profit or income or the person
having the receipt, custody, control
or disposal of the same
Determination of Ownership:
determined as of the year for which a
return is required to be filed
CHAPTER X: ESTATES AND TRUSTS
Income taxpayer is the Estate:

income of the estate pending partition
or no partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual income tax
2. corporation corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is individual
b.Impose
income
as
if
TP
is
corporation
c.Impose income as if estate itself
depends whether there is a (1) judicial
(2)extra judicial partition or (3) no partition
at all
When there is a judicial settlement which is
final and executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
Income of the Estate: corporate income
tax
2.Creation of Co-ownership
Income of the Estate: Income tax on
individual
-co-owner liable in their individual company
Ponce Case:
H: After finality heirs did not divide the
property, the applicable income tax is
corporate income tax because they
contributed money to engage in real estate.
SECTION
61
TAXABLE
INCOME
(Important)
Taxable income of the estate or trust shall
be computed in the same manner and on
the same basis as ill the use of an
individual.
Section 60: Imposition of Tax

1. Estate property of the decedent
created by an agreement, trust or
by last will and testament
2. Trust agreement, contract or last
will and testament
Section 62: Applies during Pendency of

Extra Judicial Settlement
Personal Exemption (P20,000)
Individual it will depend whether
he/she is classified as single, head of
the family or married
Estate regardless
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Special deductions:Income distributed to

the heirs
66

- Atty. Francis J. Sababan if you distribute nothing you cannot
claim this special deductions
if there is a distribution, the heir shall
be liable to pay whether individual
capacity
if there is no distribution, heirs are not
liable to pay anything
Special deduction not apply if individual
tax is paid by the Estate itself.
Payment: made by executor, administrator,
to creditor to preserve the estate
Sec. 61 and Sec 62
does not apply if estate is subject to
income or corporate income tax
it applies if the estate pays itself
during the pendency of the judicial
settlement
Basis: Sec 60 C
during the period of administration or
settlement of the estate.
Taxpayer is a Trust:
Q; When liable to pay income tax?
A: If the trust is revocable (if revocable, Sec
61 and 62 also apply)
Parties:
1.Grantor /creator /trustor
2.fiduciary / trustee
3.beneficiary / Les Qui trust
Q: Who is liable to pay tax:
A: If trust revocable:
obligation of the trustee
liability of trust itself and not personal
Liability of trustee:
If trust irrevocable
obligation of the grantor
personal liability of the grantor as an
individual
TWO WAYS OF REPORTING INCOME:
PURSUANT TO RR2 (1949)
1. report only once
(building paid once)
2. after the span of 25 years
(payment of building divided per year)
ESTATE TAX:
1.Sec 60
2.Real Estate Tax
3. Estate Tax
transfer tax impose on the Net Estate

for the transfer of property to the heirs
or beneficiary whether real, personal,
tangible or intangible
3 KINDS OF TRANSFER TAX:
1.Estate Tax
2. Donors Tax
3. Sec 135 of LGU Transfer of Real
Property
Q: We dont have inheritance tax and
donees tax, why?
A: 1973 Marcos issued P.D. 69
Explain: Sec 84, rate is max of 20% of net
before the rate is 60% plus additional
amount.
resulted to many gimiks through tax
avoidance scheme, like creating a family
corporation
(only
taxable
is
the
stockholders which is exempt)
Congress enacted RA 7449 decreased
60% to 35% and then RA 8424 35% to
20%
Q: Now is it safe to create a family
corporation?
A: No more.
Q: Now: Iba na ang scheme which is
better sale or donation?
A:
1.Sale of RP considered capital assets
6% to 1.5% doc. Tax
7.5 % better
2.Sale of RP considered ordinary asset
5% to 52% as per use may be
3.Donation if given to all compulsory heir
relative lower than 20% which is 15%
stranger: 30% so go with 20%
Q: Who are the taxpayers?
A: Sec 104 Estate and Donors
1.Estate
a. RC
b.NRC
c. RA
d. NRA
2. Donors Tax
a. RC
b.NRC
c. RA
d. NRA
e. DC
f. FC
A corporation cannot die of a natural
death.
67

- Atty. Francis J. Sababan Q: What is the reason for classifying the
taxpayers?
A:
1. NRA and Estate
2. NRA and FC Donors = property
outside Phil exempt
3. all, other than these 3 taxable w in
and w/out
Q: Is Section 104 relevant to all taxpayers?
A: No, material only to NRA and FC
Section 104 speaks of intangible personal
property located in the Philippines.
1.Franchise which must be exercised in
the Philippines;
2.S.O.B.
issued
by
a
Domestic
corporation;
3.S.O.B. issued by foreign corporation at
least 85% of the business of which is
located in the Philippines. do not
confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which
acquired a business situs in Phil
5.S.R. in business, partnership or
industry established in the Phils
Q: What if citizen of one country and

resident of another country will the
exemption apply?
A: No, law requires that he must be a
citizen and resident of the foreign
country.
Q: NRA, German donates SOS of FG to

Filipina gf, is it subject to donors tax?
A: it depends (you must qualify)
1.Subject to donors tax if:
1.S.O.B. FG at least 85% of business
located in the Phil
2.S.O.B. FG which acquired a business
situs in Phil
2.Exempt
1.personal property outside of Phil;
or
2.intangible personal property net taxable
if following requisites concern:
Q: What is the formula for Estate tax?

A: Gross Estate (Sec 85)
- Deductions (Sec 86)
-------------Net Estate
x Rate
------------Taxable net income
- Tax credit
--------------------Tax due
Gross estate (define) Sec 104
gross estate include real and personal
property, whether tangible or intangible,
or mixed, wherever situated
NRA: Decedent / Donor property
situated outside of Philippines not
included on the gross estate
A decedent at the time of his death or the

donor at the time of donation was a citizen
and resident.
1.of a foreign country which at the time of
his death or donation did not impose a
transfer tax of any manner, in respect of
intangible personal property of citizens of
Philippines not residing in that foreign
country; or
2. the laws of the foreign country allows
a similar exemption from transfer or
death taxes of every character or
description in respect of intangible
personal property owned by citizens of
the Philippines not residing in that
foreign country.
Campos Rueda Case:

F: NRA died married to Moroccan man, so
she was a Moroccan resident.
Donated SS in DC administrator claims
exemption,
ground:
In
Morocco,
intangible personal property of Filipinos
not residing therein is exempt from
transfer tax.
BIR contends: Morocco is not a country
but a colony of Spain.
H: claim granted even if it is not a full
pledged state, or its a mere colony,
what matter is that the foreign law
provides for an exception.
SECTION 84 RATES OF ESTATE TAX
Section 85 Gross Estate (inclusion)

A.Decedents interest
includes property (1) owned at the time of
death and (2) property not owned at the
time of death
Classic example: Usufruct
Q:
if terminated by the death of

usufructuary, is it subject to estate tax?
A: Not subject to estate tax
68

- Atty. Francis J. Sababan Reason: Exempt Transmission under
Sec 87 (a)
merger of the usufruct in the owner of
the naked title
Q: is there a conflict between Sec 88 a and
Sec 87 a? How do you reconcile?
A: No conflict
1.Section 87 a contemplates a situation
where the usufruct is terminated.
2.Section 88a contemplates a usufruct
for a fixed period. Ex contract of lease
Q: How do you determine the value of
usufruct?
A: Sec. 88 a provides to determine the
value of the right of usufruct, take into
account the probable life of the
beneficiary.
Q: Why definition of gross estate is longer
than definition of gross gift?
A: transfer occurring after death. estate
tax absolute
Transfer during the life time
Normally Donors tax
However there are exceptions:
1.transfer in contemplation of death
(85B)
2.revocable transfer (85 C)
3.transfer for insufficient consideration
B. Transfer in contemplation of death
Roces case:
F: during lifetime, the following document
were
instituted
or
executed
simultaneously
1.will and 2. donation
The heirs insisted to pay Donors tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs
in the last will and testament
Donees wanted to pay donors tax
because it is always lower than the estate
tax except when the donee is a stranger
H: this is a transfer in contemplation of
death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days thereafter
son claims Donors tax
H:Transfers in contemplation of death
Q:
What are transfers deemed in

contemplation of death?
A: 1.Property was transferred during the
lifetime but the decedent:
a. retains possession or receive
income or fruits of property; or
b.retains the right to designate
persons who will possess the property
or the right to receive fruits or income
c.Revocable Transfers
1.revocable transfers are included in the
gross estate
Reason:
the
decedent
retains
tremendous power and control over the
property
2.Irrevocable transfers are not included
in the gross estate: exempt
Reason: the decedent losses control
over the property
Notice Not Required because the person
has the control over the property
D. Property passing under general power of
appointment
same with fidel commissary substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE NOTE: To determine whether included
in Estate or not, know who has the choice to
designate the 2nd heir:
if decedent instructs the 1st heir that he
can transfer the property to whomever he
wants included in gross estate
1st heir choice included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd person
revocable included
irrevocable not included
F. Prior Interest
important only due to the codification of
the tax code B,C,E, included whether
before or after the effectivity of the code
G. Transfer for insufficient consideration
69

- Atty. Francis J. Sababan Q: Similar provision in Sec 100 (Donors
tax) can you apply the two (2)
provisions simultaneously?
A: No, alternative application, one or the
other but not both.
The application will depend on the time
of transfer or motive:
1.If transferred because of impending
death
estate tax
2.If transfer because of generosity
Donors tax
Q: Parcel of land was sold for less than
adequate consideration (adequate) to
relative for P600,000 when FMV is 1
million pesos. Is this subject to transfer
tax? Is it subject to Donors tax?
A: No, Sec 100 provides the property
should be other than real property
referred to in Section 24 (D)
Not subject to Donors tax, the
applicable tax is 6% FIT
Q: Will your answer be the same if
SOS
are sold?
A: No, answer not the same, SOS not
property contemplated in Sec 24 D (1)
in this case, the amount by which the
FMV of prop exceeds the value of the
consideration shall be deemed a gift and
included in the computation of the gross
gift: subject to Donors Tax
Q: What is the subject matter in 85 G?
A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
correlate with Sec 86 C
both speak of legally married individual
pertains to the separate property of
spouse who survived
capital used in its generic sense
surviving spouse may be man or woman
Section 86 (c)
to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value
is at least P200,000 (Sec 90)
4.to determine if gross value is at
least 42 M
Q: Who are the taxpayers under 86 A?

A: 1.RC
2.NRC
3.RA
Q: Who is the taxpayer under 86 B?
A: NRA
Q: Why do we need to know this?
A: NRA cannot avail of the following
deductions:
1.family income
2.standard deduction
3.hospitalization
4.retirement pay under RA 4917
A. Deductions Allowed to the Estate of
a Citizen or Resident
1.ELIT (expenses, losses, indebtedness
and taxes)
a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
apply whichever is lower
Limitation:
a)amount equal to 5% of gross estate
should not exceed P200,000 (basis is
the gross value)
b) Judicial Expenses
no limitation
Pajonar vs Commissioner
I: Whether or not extra-judicial expenses
may be allowed as a deduction
H: This law has been copied from U.S. In
US, expenses to be claimed as a
deduction both judicial and extra judicial
expenses.
Claims against the estate
Estate is the debtor
Requirements:
1.at the time the indebtedness was
incurred the debt instrument was duly
notarized;
2.loan contracted within 3 days before
death;
3.the administrator or executor shall
submit a statement showing the
disposition of the proceeds of the loan
Claims of the deceased against insolvent
person
70

- Atty. Francis J. Sababan Estate is the creditor
5. 1 year -100%
Requirement:
the only requirement is that the (only)
amount of loan is included in the gross
estate
notarization
and
certification
not
required
Q: Suppose the person died within 1 year

and it was inherited by son, suppose the
son also died within 1 year or may be 2
years, should we apply the vanishing
deductions?
A: No more (last par Sec 86 A2)
Unpaid Mortgage, taxes and losses

Q: In unpaid mortgage who is the
mortgagor?
decedent mortgagor
1. Unpaid mortgage
1.value of the decedents interest in the
property is undiminished by such
mortgage;
2.included in the value of the gross
estate;
Illustration:
1 million FMV but mortgage is only
600,000 you include 1 million
2.Estate tax
3.Losses
Transfer for Public Use

amount of all bequest, legacies, devises
or transfers
Recipient:government or any
political
subdivision
exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is
not a
requirement
Requirements:
1.losses incurred during the settlement
of the estate;
2.arising from fire, storms, shipwreck or
other casualties, or from robbery, theft
or unbezzlement
3.losses not compensated by insurance
4.losses not been claimed as a
deduction for income as purpose
5. losses incurred not better than the
last day for the payment of the estate
tax
Property Previously Taxed
Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue
of donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be acquired
by inheritance or donation
2.Estate tax or Donors tax already paid
by the Estate of the Decedent (1st par)
3.Any person who died within five (5)
years prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years 20%
2.4years 40%
3.3 years -60%
4. 2years 80%
FAMILY HOME
amount equivalent to the current FMV
of the Family Home of decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the
decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
automatic: RR 2-2003 no requirement
provided the decedent is the one in 86 (A)
(RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to his
death.
must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once
71

- Atty. Francis J. Sababan TAKE NOTE: This is a deduction in the
nature of exemption, all other retirement
plan is excluded
B. Deductions Allowed to Non resident
Estates
1.ELIT
2.Property Previously taxed
3.Transfers for public use
C. Shares in the Conjugal Property
D. Miscellaneous Provisions
For NRA: No deduction allowed unless
include in the return the value at the time
of his death that part of his gross estate
not situated in the Philippines. For proper
deduction must include E. below
E. Tax Credit for Estate Tax Paid to
Foreign Country
SECTION 87 EXEMPTION OF CERTAIN
ACQUISITION AND TRANSMISSIONS
1. Merger of usufruct in the owner of the
naked title;
2. transmission
or
delivery
of
the
inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
3. transmission from the first heir, legatee
or legacy donee in favor of another
beneficiary, in accordance with the
desire of the predecessor;
4. All bequest, devises, legacies or
transfers to (1) social welfare (2)
cultural and (3) charitable institution
Requirements:
1.no part of the net income insures to the
benefit of any individual;
2.not more than 30% of donation (BDL)
shall be used by such institutions for
administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Usufruct
1.Determine value of right of usufruct:
consider the probable life of the
beneficiary based on the latest Basic
Standard Mortality Table
B.Properties
fair market value of the Estate at the time
of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the

Provincial or City Assessors
SECTION 89 NOTICE OF DEATH TO BE
FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values
of the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1. after decedents death
2.same period after qualifying as executor
or administrator
give a written notice
Q: If the Net Estate is at least P16,000 will
you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX RETURNS
Q: When required to file return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross
value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
transfer of ownership in the name of
the transferee
return must set forth the following:
1.value of the gross estate at time of
death
2.deductions allowed
3.information necessary to establish
correct taxes
Q: What if Estate is exempt, is it required
to file a return?
A: General Rule: No
Exception:
a. gross value exceeds P200,000
b.estate contains registrable property
Q: if the estate or gross estate exceeds 2
million, what is the requirement?
72

- Atty. Francis J. Sababan A: return must be duly certified by a CPA
B. Time of Filing
filed within 6 months from decedents
death
within 30 days for filing the return
within 30 days after promulgation of such
order
1.certified copy of the schedule of
partition and
2.order of court approving the same
C. Extension of Time
Time: 30 days
Grounds: meritorious cases
Who grants: Commissioner
D. Place of filing:
return shall be filed with:
1.authorized agent bank
2.revenue district officer
3. collection officer
4. duly authorized treasurer
city or municipality in which decedent
was domiciled at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with the
office of the commissioner.
Q: Let us say there are 3 compulsory heirs,
namely A, B, and C. A renounces his
inheritance coming from the parents, but A
renounces his inheritance in favor of his 2
siblings, brother and sister B and C. Is this
subject to donors tax?
A: NO. It is exempt.
Q: But if in the given example, A said I am
renouncing my inheritance, but I am giving
it to my sister B, is this subject to donors
tax?
A: YES.
Renunciation
is
to
the
disadvantage of the brother.
TAXATION
UNDER
GOVERNMENT CODE:
1. Local Tax
2. Real Property Tax
THE
LOCAL
LOCAL TAXATION (186, 187, then go to

151, 128 down)
Q: Mayor Binay of Makati ordered the
collection of elevator tax (for elevator in the
city hall).
Is the order of Mayor Binay
legally tenable?
A: NO.
There should always be a tax
ordinance after conducting a public hearing.
(186)
tax ordinance
Q: Can BIR collect the tax even in the
absence of a revenue regulation?
A: YES.
Q: Can a province, city, municipality or
barangay collect the tax if there is no tax
ordinance?
A: NO.
Q: Why is it that there should be a tax
ordinance as required by 186?
A: The rationale is not mentioned in 186,
but if you read the other provisions of the
LGC, you will come to set of conclusions of
the reason why there must be a tax
ordinance.
In most of these provisions, it always
say: one-half if the town or municipality
shall collect a tax of not exceeding 1% of
the gross receipt.
TAKE NOTE: There is no exact amount;
hence, it is the tax ordinance which will fix
the exact amount.
public hearing
In Congress, the requirement is not
absolute (by discretion only). Under local
taxation (last phrase of 186), the
requirement is ABSOLUTE.
REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just
beside Mandaluyong) there was a tax
ordinance passed. Reyes, a resident,
claims that there was no public hearing
conducted, he maintains that under
186 last phrase, there should always
be a public hearing.
H: The SC said: yes, that requirement is
an absolute one, but since the petitioner
failed to produce evidence to support
his allegation, if there is no proof
presented
other
than
his
own
statement, we hereby rule that the
73

- Atty. Francis J. Sababan ordinance was passed in accordance to
the procedure mandated by law. While
it is true that a public hearing is an
absolute requirement, he who alleges,
must prove the same.
Q: If you dont agree with the validity or
the constitutionality of the tax ordinance,
what will be your remedy?
A: Within 30 days from the effectivity of
the ordinance, the taxpayer should file an
appeal with the office of the Secretary of
the DOJ (187)
REYES vs. SECRETARY (320 SCRA 486)
F: Reyes asserted the validity and
constitutionality of the tax ordinance
only after the lapse of thirty (30) days
(perhaps his lawyer was thinking that an
ordinary statute may be contested
anytime with the RTC, CA or SC).
H: With regard to a tax ordinance, w have
a specific rule, failure to assail the
validity with the specific period of time,
is fatal to the taxpayer. Since it was
filed beyond the 30day period, we do
not disturb the validity of the ordinance.
Q: Within what period should the Sec. of
Justice decide?
A: Within 60 days from the time the appeal
was filed. Failure to decide within this time,
the taxpayer has the remedy to file an
action with the regular courts.
If the decision was made within the 60
day period, and receives the decision, his
remedy is to file an appeal within 30days
form the receipt of the decision to court of
competent jurisdiction RTC.
Beginning April 23, 2004, from the
ruling of the RTC, pursuant to RA 9282 (the
law uplifting the standards of the CTA), the
ruling of RTC on local tax cases, is
appealable to the CTA en banc.
TWO APPEALS DECIDED BY THE CTA EN
BANC:
1. decisions of RTC involving local tax
cases
2. decision of the Central Board of
Assessment Appeals.
From CTA en banc, the appeal must be
file with the SC within 15days.
Go to 151:
The city could impose the tax already
imposed by the province of by the
municipality.
Q: What are the numerous taxes imposable
by the province which a city now allowed to
impose?
A: Those enumerated in 135 to 141 of
the LGC
Reasons why a municipality wanted to be
converted
into
a
city:
1. 151
2. 233 (real estate tax)
In addition, the law says that the city
could increase the rate of the tax by not
more than 50% of the maximum EXCEPT
those enumerated in 139:
a) professional tax
b) amusement tax
A. General Principles (128-130)
reiteration
provisions
of
the
constitutional
tax
notice that the constitutional limitations

on taxation do not only apply to the
national government but also to local
government units.
B. Definitions (132)
Local Taxing Authority (132)
for a province, it is the provincial
board or the provincial council
(sangguniang panlalawigan)
for a city, we have the city council
(sangguniang panlusod)
for the municipality, we have the
municipal
council
(sangguniang
pangbayan)
for the barangay or barrio, we have
the barangay council.
C. Common limitations on the taxing
power of the LGUs (133)
Under the old law this was 5 of the
Local Tax Code.
Q: Why common?
A: Because the limitations or prohibitions
apply to all LGUs, the provinces, cities,
municipalities and barangays.
74

- Atty. Francis J. Sababan Two Common Crimes (under 133)
1. absolute prohibition
2. relative prohibition
It shall be unlawful for the LGUs to collect:
I. Income Tax EXCEPT when levied on
banks and other financing institutions
(133(A))
the term other financing institution
shall include money changer, lending
investor, pawnshop (131(E))
rate of tax:
does not mention rate
of tax, so long as it is fair, just and
reasonable
It cannot be prohibited taxation,
because the element of imposed by the
same taxing power is not present. One
is imposed by the national government
and the other is by the LGU.
II. Documentary Stamp Tax (133(B))
absolute prohibition
III. Estate tax, inheritance, donations inter
vivos, donations mortis causa EXCEPT in
135 (133(C))
transfer tax on the transfer of realty
to be imposed by provinces and cities
(135)
NOTE: this is not a real estate tax,
this is a local tax.
IV. Custom duties, charges or fees for the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the wharf
had been established, maintained and
operated by the locality (133(D))
wharfage due is a custom fee
imposed on the weight of the cargoes.
wharf a pier
special levy on public works (240)
allows
provinces
cities
and
municipalities to impose a special real
estate tax known as special levy or
public works
let
us
say
the
municipality
established a pier for a minimal value of
P10M; out of P10M, under 240, 60% of
this may be recovered; the other 40%
may be recovered by warfage due.
v. Tax, fee or charge for goods or
commodities coming out or passing through
the territorial jurisdiction even if in the
guise of a toll or a fee (133(E))
an absolute prohibition
commodities marketed in a public
market, lets say in the city of Pasig,
where the commodities came from
Laguna then to Tanay, Cainta, Taytay;
just imagine if each of the towns will

impse 1peso for every head of a chicken
or 50cents for every bundle of
vegetable.
PALMA
DEVT
CORP
v.
MALANGAS
ZAMBOANGA DEL SUR (113 SCRA 572)
F: Municipal
council
passed
a
tax
ordinance entitled police surveillance
fee which provide that ALL motor
vehicle passing through a particular
street in the town proper of Malangas
which will lead to the pier or wharf will
pay a certain sum of money whether it
is camote, copra, palay,or rice. One of
the owners of the motor vehicle is Palma
Devt Corp. carrying copra, banana and
coconut to be loaded in a ship docked at
pier of Malangas. The lawyer of
petitioner assailed the validity of the
ordinance stating that it is a clear
violation of 133(E).
H: It is not the title of the ordinance which
is controlling but it is the essence of the
substance of the tax ordinance. The tax
ordinance clearly violated 133(E),
therefore, the SC had no option but to
declare the tax ordinance null and void
for being in violation of the law.
VI. Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen (133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled in
Davao City, employed thousands of
workers in the different banana
plantation. Can the LGU impose tax on
the agricultural product which is a
banana?
A: YES. The LGU can impose because
Don Antonio is not a marginal farmer. It
is only prohibited if it is sold by a
marginal farmer.
Marginal Farmer a farmer or a
fisherman for subsistence only, whose
immediate members are the immediate
members of the family (131(P))
VII. Tax, fee or charge on pioneer and nonpioneer enterprise duly registered with the
board of investments for a period of 6yrs
and 4yrs respectively (133(G))
relative prohibition because after the
period, the LGU concerned may now
impose the tax.
VIII. Excise tax on articles and tax, fees
and charges on petroleum products
(133(G))
75

- Atty. Francis J. Sababan relative prohibition since under
143(H), it says there that taxes which
are prohibited such as excise tax,
percentage tax and value added tax
nonetheless, the LGU may impose a tax
not exceeding 2% of the gross receipt
(for cities 3%).
My former student an assistant in
the city legal attorney in a city in Metro
Manila, received a summon from the
RTC (on complaint of a supermarket in
Metro Manila) questioning the validity of
the tax ordinance under 143(H) since
the rate imposed was 3%
I said, ineng, una file kayo ng
motion to dismiss. Nak ng puta, absent
ka na naman ata eh, you invoke 151
stating that a city can impose a tax
higher than the rate provided for by law
not more than 50% of the maximum
(50% of the maximum of 2% is 1,
therefore, 2+1 is 3%)
BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which
interpreted both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of 138 of
the LGC. The problem is that the
ordinance applies to ALL entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged to
pay the tax, argued that under 138 of
the LGC, the tax on quarrying on which
the province may be allowed shall only
be with regard to quarrying private land,
and not only that but under 133(H),
there is a prohibition to impose excise
tax and tax on quarrying under the IRC
is an excise tax.
H: The tax on quarrying allowed to
provincial governments shall only be
with regard to lands which are public
lands, and since this is a private tax on
quarrying refers to a lot without any
distinction. Hence, if the LGC made a
qualification as to the kind of land
(where it says it should be public land),
by implication, it should refer to private
land under 151 (although the law did
not distinguish); and since it is a tax by
the national government, it should be
collected by the BIR (not the LGU), and
also the SC agreed that it is an excise
tax where LGUs are prohibited from
collecting; thus, the SC declared the tax
ordinance null and void for being

contrary to law.
Sir, why is it a problem when the law
is clear that under 138, it shall only
apply to public land?
Perhaps
the
provincial
council
thought that the subject matter of the
tax ordinance may be a subject matter
provided in any book including the IRC,
or worse, that it may impose a tax on a
subject matter not mentioned in any
book.
Moral lesson: although
a
tax
ordinance may be passed even if the
subject matter is not provided for in any
law, it has to comply with the
limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law
under 5 (now 133) of the local tax code
(PD 231)
F: Petron has a factory/plant in Penilla
where the raw materials petroleum
products are being converted into
refined
petroleum
products.
The
municipal council of Penilla imposed a
tax by way of a tax ordinance saying
that they are invoking the old 19 (now
143(A)) stating that municipalities are
authorized to impose tax of the
manufacture of any commodity, hence,
since it is manufacture of a petroleum
product, the LGU must e authorized.
However, Petron objected since under
5 (now 133(H)), the prohibition
includes the prohibition to impose
excise tax and not only that, under this
par., the tax on petroleum products is
an excise tax. Under this par., the law is
clear it does not only prohibit the
imposition of tax, fee or charge over
petroleum products.
H: The controlling provision here the old
19 (now 143(A)) that LGUs are
authorized to impose the business tax
for the manufacturing over any kind of
commodity by and petroleum product is
any kind of commodity.
Q: What do you think?
A: I dont agree with this ruling because
between 133(H) and 143(A), it is the
former which is more specific.
IX. Value added tax and percentage
(133(I) EXCEPT 143(H)
Relative prohibition.
X. Tax, fee or charge on common carriers
whether by land, water or air (133(J))
76

- Atty. Francis J. Sababan FIRST HOLDING CO. v.BATANGAS CITY (300
SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.
F: This revealed to the public the existence
of 2 very big oil pipelines coming form
Batangas City with a distance of more
than 100km, one going to Pandacan Oil
Depot and the other one is going to
Brgy. Bicutan, Taguig. The Batangas
City council deemed it necessary to
impose a tax on the gross receipt of the
1st holding company for the operation of
the oil pipeline, but the operator argued
that the oil pipeline is not a common
carrier.
H: The SC reasoned out like in the case of
Pajunar v. Comm (328SCRA666), saying
that we have copied the code of carrier
law form the US where the definition of
a common carrier is one habitually
carrying
not
only
individuals
or
passengers
but
also
goods
or
commodities, and since the oil pipelines
is
habitually
carrying
petroleum
products which is a commodity, we rule
this as a common carrier which is under
133(J), LGU is prohibited from imposing
tax on common carriers, and not only
that but under 170 of the LGC, the law
is very explicit, that ALL LGUs are
prohibited to impose percentage tax on
common carriers. With that, the tax
ordinance passed was declared null and
void for being contrary to law.
XI. Premiums on re-insurance (133(K))
absolute prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of
license and permit for driving thereof
EXCEPT tricycles. (133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the
LGU? The LTO registering motor vehicles
or the LTFRB granting franchise and
regulation of common carriers?
H: Under 133(L), the function of the LTO is
prohibited, an therefore what may be
delegated to the LGU is the function of
LTFRB.
XIII. Tax, fee or charge on exportation of
products and is actually exported EXCEPT
under 143(C) where the LGU is authorized
to impose business tax on exportation
(133(M))
XIV. Tax, fee or charge on cooperatives
duly registered under the cooperative cod
(RA 6938) and Business Kalakalan (RA

6810) (133(N))
A cooperative is exempt from local
tax, provided it is duly registered with
the
cooperative
code
and
the
cooperative development authority or
Business Kalakalan (not kalkalan)
XV.
Tax, fee or charge over the national
government, political subdivisions and
agencies and instrumentalities of the
government (133(O))
Relative prohibition since it admits of
an exception under 154 of the LGC
where it says that a LGU may be
authorized to impose a fee or charge for
the operation of a public utility provided
it is owned, maintained and operated by
such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport.
Paranaque being a LGU cant impose tax
on
a
government
instrumentality.
Airport owned by the government is not
an agency, it being an instrumentality.
Q: May the government tax itself it the
taxing power is the local government?
A: NO. The local government cannot
impose tax on the national government,
and with more reason that it cannot
impose a tax with equal LGU.
D. Taxes that can either be imposed
by Provinces or Cities
I. tax on transfer of realty (135)
Note that this is not a real estate tax,
this is a local tax for the simple reason that
it is not provide for under the topic of real
estate tax (198-280)
Law says it should not exceed of 1%
of the consideration (NOTE: do not use
zonal value since this is used only under the
IRC, not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding of 1%), is it violative of the
equal protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering the
status of the province.
Q: Why is that Makati fix the rate of 75% or
3/4 of 1%?
77

- Atty. Francis J. Sababan A: Because cities are authorized to
increase the rate of 50% of the maximum,
that is 50% of is 25% (50+25 is 75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) this is the
Comprehensive Agrarian Reform Program
this is exempt.
II. tax on printing an publication (136)
Normally, a province cannot impose this
because the tax on business can only be
imposed by a city or municipality EXCEPT
this one, on printing and publication of
magazines and periodicals.
III. franchise tax (137)
The old national franchise tax under the
old tax code was already abolished.
We still have franchise tax other than
this one, known as national franchise tax
provided for in the republic act granting
franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC 137)
2. national franchise tax (provided for
in the statute or republic act
authorizing the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many
supreme court decisions and also 193 of
the LGC.
Under 193, it says there unless
especially provided for in this code,
exemptions granted to natural juridical
persons are hereby withdrawn (abolished)
EXCEPT:
1. local water districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock educational
institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax ordinance
imposing tax on PAGCOR, an agency of
the government. PAGCOR objected
saying that the local city is prohibited
under the old local authority act to
impose tax on an agency of the
government.
H: The SC declared null and void the tax

ordinance saying Manila cannot do that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect
real estate tax from the Mactan airport
(note: real property tax is a territorial
tax, meaning it should only be collected
within its territorial jurisdiction). Lawyers
of Mactan airport argued that under
13(O), Cebu, a LGU, cannot impose tax
on an agency of the government, and
they also invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid of
any merit at all, it is 100% erroneous
since the real estate tax is not a local
tax, hence, why invoke a SC ruling and
codal provision which can only be
applied to local tax. Therefore, Mactan
airport should pay Real Property Tax.
Before the codification in 1991 (to take
effect January 1, 1992), local taxation was
embodied in a separate book known as
Local Tax Code (PD 231) while real property
tax was provided for in a separate book
known as Real Property Tax Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to
collect real property tax but the
management of the LRT said no you
cannot do that to us since it is
exclusively for public use.
H: NO, you are not exclusively for public
use since every time a person wants to
use the LRT he has to pay.
Q: Why not use the defense that it is
owned by the government?
A: Because in real estate tax, the defense
that it is owned by the government is not a
defense.
The LGC in 199(B) and in 217, both
provisions says that the basis for the
imposition of real estate tax is the ACTUAL
USE of anybody who is using that (maybe in
the concept of usufructuary or in the
concept of a lessee, or in the concept of an
owner); the basis is not ownership.
in 134, the taxes here must not only be
imposed by provinces, it may also be
imposed by cities in line with 151 those
enumerated in 135 to 141.
78

- Atty. Francis J. Sababan CAGAYAN DE ORO ELECTRIC CO. v.
MISAMIS OCCIDENTAL (181 SCRA 38)
* This was the prevailing rule for more than
10years from 1988
H: In the franchise or the republic act,
there are only two (2) kinds of franchise,
one is a franchise which provide for a
condition that this tax (referring to the
franchise tax) shall be in lieu of all other
taxes, and the other franchise is the one
which do not provide for such provision;
the province or the city can impose local
franchise tax if the franchise belong to
the second example.
REYES v. SAN PABLO CITY (305 SCRA 353)
* Here the SC uniformly ruled
H: A provision on exemption under 193
dont only refer to exemptions provided
for by different statutes, but it includes
those which claim exemptions by virtue
of the case of Cagayan de Oro (because
SC decisions are also laws).
PLDT v. DAVAO (363 SCRA 750)
F: The franchise holders of Smart and
Globe are claiming exemptions from the
local franchise tax because they are
saying that they are holding a franchise
which says that it is a franchise enacted
by the house of Congress in 1995 which
carries with it an exemption form local
franchise tax.
H: By the very explicit provision of 193,
the removal of exemptions granted by
different statutes and also by SC
decisions applies only to statutes and
decided by the SC on or before Jan. 1,
1992, because 193 says upon
effectivity of this law. For exemptions
covered by 193 therefore, Smart and
Globe
are
authorized
to
claim
exemptions because the statue (RA
7082) was enacted on 1995.
IV. tax on sand, gravel and other quarry
resources (138)
We are through with that in the case of
Bulacan
V. professional tax (139)
this must be correlated with the tax
under 147.
NOTE that this is an exemption to the
rule that a city may increase the rate of the
tax under 151 of the LGC, the increase is

not allowed.
both 139 and 147 are taxes imposed
on persons exercising professional calling.
Section 139
are to be imposed
by provinces and
cities
are applicable to
workers who must
pass
a
government
examination (e.g.
engineers,
physicians, etc)
there
is
a
maximum (P300)
NOTE: it is not
always 300, since
the exact amt
must be fixed by
the ordinance.
Section 147
are to be imposed
by municipalities
and cities
are applicable to
persons who are
working but are
not required to
take government
examinations
It
does
not
provide for any
amount, the only
requirement
is
that it must be
reasonable
VI. amusement tax (140)

under the IRC, there is also amusement
tax under 125.
PBA v. QUEZON CITY (137 SCRA 358)
F: The city government enacted a tax
ordinance trying to collect amusement
tax including amusement tax on the PBA
(in Araneta, Cubao); but PBA and no,
we are already paying amusement tax
to the national government through the
BIR because of 125 of the IRC
H: QC government can no longer collect on
the ground that it is already being
collected by the national government
and secondly, in the enumerations of
amusement under 140, you will never
see professional basketball. Most of all,
it is the intention of the author that it is
only the national government.
*nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974 when
we dont have any professional basketball..
since professional basketball was born May
1975.
* ano ba dapt tama diyan? both the
national
government
and
the
QC
government can collect. There is no
violation of the prohibited double taxation,
because the taxing powers are different,
and not only that 140 speaks of
79

- Atty. Francis J. Sababan amusement tax on admission fee but under
125, it is abut gross receipts.
VII. delivery van (141)
Q: What if not a delivery van, but sako
lang?
A: The applicable tax is under 143(G)

(peddlers
tax,
one
imposed
by
municipalities and cities.
If may dalang sasakyan, yari siya ng
province sa tax.
NOTE: 135-141, these are taxes that can
be imposed by PROVINCES and CITIES.
143-150 are taxes to be imposed by
MUNICIPALITIES, which can also be imposed
by CITIES.
E. Taxes that can either be imposed
by Municipalities or Cities
I.
Business Tax (143(A-H))

a. manufacturing,
repacking,
processing,
including
the
manufacturer of permitted liquor
and also its dealer
b. wholesaling
c. exportation
d. retailing
e. contractors tax
f. tax on banking institution and
financing institution
g. peddlers tax
h. the exemption under 133(i)
Q: If you have two branches, how many

business taxes do you have to pay?
A: You pay only one business tax (146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164
SCRA 607)
F: Ilo-ilo Bottlers was already paying a
business tax on manufacturing under
143(A) to the city government by virtue
of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax
ordinance imposing business tax on
wholesaling. Naturally, Ilo-ilo Bottlers
argued, how could it be, if you
manufacture, it necessary follows that
you sell the commodity so, with the
payment of the business tax on
manufacturing, it carries with it the

business of wholesaling.
H: NO, you have to determine the
marketing system of the company. If
wholesaling is also being done in the
place of manufacture, the business tax
on wholesaling should no longer be paid
it should only be the business tax on
manufacturing. But if the marketing
system of the company provides that
wholesaling shall be done in a separate
place (maybe several kilometers away),
the manufacturer must still pay the
business tax on wholesale because now
it could be argued that they have the
separate business of wholesaling.
Q: On the business of retailing, should the
business tax of retailing be imposed by the
city or by the municipality OR by the
barangay in the city or the barrio in the
municipality?
A: 143(D) must be correlated with 152,
the tax to be imposed by the barangay.
It depends:
a. city
if the gross receipt of the retailer
exceeds P50T in a minimum of
one year, it is the right and
privilege of a city to impose the
business tax on retailing.
b. barangay
did not exceed P50T, it is the
barangay council where the
business of retailing is located.
c. municipality
did not exceed P30T within a
period of one year.
d. barrio
did not exceed P30T within a
period of one year.
NOTE: These distinctions do not apply in
wholesaling. These are only for retailing.
Paragraph H: for the imposition of
excise tax, percentage tax and value added
tax, the municipality may impose a tax not
exceeding 2% of the gross receipt (with
regard to a city, it may go as far as 3%)
II. Municipalities in Metro Manila who can
increase their rate (144)
80

- Atty. Francis J. Sababan Right
now
municipalities:
1. San Juan
2. Pateros
there
are
only
two
III. Professional Tax (147)
we are through with that
IV. Fees for sealing and licensing of weights

and measures (148)
V. Fishery rentals, fees and charges (149)
F. Situs of Tax (150)
The tax referred to in here is the
business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities, one
of them is Swift hotdogs, this is being sold
not only in Mandaluyong, Metro Manila, but
also to the inter country from Batanes to
Tawi-tawi. Where should the business tax of
wholesaling or the business tax of retailing
be paid? Should it be in the principal office
(Mandaluyong) or the place where the
commodities are sold?
A: It will be paid in the place where it had
been sold PROVIDED there is a branch office
or a sales outlet (150(A)).
If it so happens that the company has a
factory different from the place where the
principal office is located 30% should be
pain in the principal office and 70% in the
municipality or city where the branch is
located.
PHIL MATCHES v. CEBU (81 SCRA 99)
F: Phil
Matches
were
produced
in
Nagtahan, Manila. In Cebu city, there
was a warehouse where the matches
were stored. Many of the customers, by
way of wholesale in the warehouse in
Cebu City, they came from different
towns of the Visayan Region. May the
business tax ordinance of Cebu be
imposed on those transactions even if
the buyers did not come from the
territorial jurisdiction of Cebu?
H: Since in this case the contract booked
and paid, meaning, it was negotiated
perfected and consummated in the
warehouse where it was located in Cebu
City, the Cebu City government has the
right to collect business tax.
Q: What if there is an agreement that

commodities would be delivered and that
the buyer would be waiting in some other
town, is the answer still the same?
A: YES, the answer is still the same
because delivery to the carrier is delivery to
the buyer where delivery has been termed
within the territorial jurisdiction of Cebu.
SHELL v. CEBUCOT, CAMARINES SUR (105
PHIL 1063)
F: The petroleum products were purchased
at the motor vehicle traversing the
neighboring towns of Cebucot like
Bason, Dimalaon, all towns in Camarines
Norte. The contract of sale was
negotiated and perfected in different
municipalities where the motor vehicle
of Shell was traveling.
H: Although the oil depot was located in
Cebucot, the said municipality cannot
impose tax on that because the contract
of sale was negotiated and perfected in
the
different
nearby
towns
of
Camarines.
Q: Is there a conflict with the case of Shell
and Phil Matches?
A: NONE. As a matter of fact, these two
decisions complement each other.
G. Taxing
(152)
Only
a
reasonable)
Powers
minimal
of
the
sum
Barangay
(fair
and
Power to impose tax:

1. On commercial breeding of fighting
cocks, cockfights and cockpits
must be for commercial purposes
2. On places of recreation which charge
administration fee
3. On billboards, signboards, neon signs
and outdoor advertisements
especially for the barrios and
barangays along the highway
4. For barangay clearance
if you want to engage in the
business of retailing or wholesaling
if barangay captain will not
approve that within 7days go to
the municipal hall or city hall for
approval
5. For the use of barangay property
81

- Atty. Francis J. Sababan
for instance the barangay has a

plaza.
H. Common Revenue Raising Powers

(153-155)
Q: Why common?
A: All the LGU could impose the same. But
it does not follow that all the provinces,
cities, municipalities could impose the
same. Only the LGU which operate,
establish, maintain the entity
If established by the province, it should
only be the province.
These are:
1. service fee and charges
for services rendered
2. public utility charges
provided
owned,
operate
and
maintained by them
3. toll fees and charges
tax or toll for the use of a bridge or a
street
Padua filed a civil action in the

MakatI RTC trying to stop the government
form collecting a toll free in the South
Express including the North expressway
alleging that he is affected as a taxpayer
because he is from Paranaque. He argued
that if you use the property of the
government like a street or a public plaza,
you do not pay. He made the analogy, that
if you go to Luneta, you do not pay the city
government of Manila.
The Makati RTC, the CA and SC had
a uniform ruling that the operator should be
prohibited from collecting further toll fess
because if the operator had already
recovered his investment and earned an
income already, he should be stopped. As
argue by the SC, it copied the argument of
the lawyer (re: Luneta).
NOTE: that Res Judicata do not apply
here.
When the ruling became final an
executory in 1993, the North and South
Express were totally dismantled and totally
destroyed by the DPWH to give way to the
final and executory ruling of the Court, that
It should no longer be collected.
After
several
months,
the
government announced in the radio that
the party in the case of Padua, mutually
agreed that the collection shall be resumed
in order to have money for the maintenance

and repair of the highway.
Exceptions to 155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering mail
4. physically handicapped
5. disabled citizens 65 years and older.
I.
Community Tax (156)
In the old days, known as residence tax

certificate.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?
A: NO, because the basis of imposition of
this tax is whether or not you are an
inhabitant of the Philippines. Meaning you
are a resident of the Philippines.
Q: What about a foreigner residing in the
Philippines (RA)?
A: YES. You have to pay unless the
foreigner is a trans-investor for not more
than 3months.
This is applied to both natural and
juridical persons.
Requirements:
1. for a natural person at least 18
years of age
2. for corporations upon registration
with the SEC
Q: What if you become 18 in the month of
January or November or December?
A: For those who celebrated their birthday
before July 1 (that is up to June 30), they
are liable to pay the tax, for this year.
For those who celebrated their birthday
on or after July 1, they are not yet liable to
pay this year, but have to wait until next
year.
Q: Is there a difference for those who
reached 18 in the months of Jan-Feb-March
and those who reached 18 in the months of
April-May-June?
A: YES. For those who celebrated birthdays
in the months of Jan-Feb-March, they have a
grace period of 20days within which to pay.
Those who celebrated their 18th birthday in
the month of April-May-June, they do not
82

- Atty. Francis J. Sababan have any grace period at all, they have to
pay the tax immediately.
Q: If you have a community tax certificate
for this year (2006), can it be used only
until December 31, 2006?
A: NO. It shall be valid up to April 15, 2007.
(163(C))
J.
Accrual of the Tax (166)
January 1
Q: What if the tax was only approved in the

month of May 2006, do you have to wait
until January 2007?
A: NO. You have the right to collect that in
July 1, because the law is saying that it
should be collected in the next succeeding
quarter (167)
Mayor Binay had a tax ordinance in May,
sabi ng mga bata niya: bosing, collect na
tayo ng June.
Binay: hindi nga pupwede, maghintay
pa tayo ng July 1.
Q: What if the tax ordinance had been
existing for several years already?
A: The time of accrual will always be
January 1.
REMEDIES
UNDER
REVENUE CODE
THE
INTERNAL
1. Remedies of the Government

2. Remedies of the Taxpayer
Remedies of the government:
1. Assessment
2. Collection
Under the NIRC, assessment and collection
have 2 kinds:
1. Normal/Ordinary assessment and
collection Sec. 203, NIRC
2. Abnormal/Extraordinary assessment
and collection Sec. 222, NIRC
I. Normal/Ordinary assessment and
collection
There was a return filed and

it is not fraudulent and not false
II. Abnormal/Extraordinary assessment

and collection
There was:
1. an omission or failure to file
the return;
2. if there was a return filed, it
was fraudulent, or;
3. the return was false
Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove
that the return was false and fraudulent lies
against the government through the BIR.
The mere fact that the return is
erroneous will not make the return
fraudulent, it must be proven by the BIR.
Q: Why is it important to know whether the
assessment is under normal or abnormal
condition?
A: It is important to know because the
prescriptive period between normal and
abnormal assessment differ.
Prescriptive Period for Assessment
1. Normal/Ordinary Assessment 3
years from the time the return has been
filed (not the payment of the tax) (Sec.
203, NIRC)
3 Ways of filing the return under Sec.
203, NIRC:
1. filed before the deadline (for
any tax under NIRC)
2. filed on the date of deadline
3. filed after the deadline
2 Ways of counting the 3 year period of
Assessment:
1. if return is filed before or on
the day of the deadline, the
prescriptive period starts on
the date of the deadline;
2. if return is filed after the
deadline, the prescriptive
period starts on the date the
return has been filed.
For the calendar year of 2004, a return
must be filed and paid for Net Income Tax
on or before April 15, 2005. Since he was
not able to meet the deadline, the taxpayer
is now being assessed for tax due for 2004.
To minimize interest and surcharges, it has
been suggested by the BIR that the
taxpayer file a late return. Supposed he
filed his return covering 2004 on April 1,
2006. In this example, the reckoning point
83

- Atty. Francis J. Sababan is the deadline of April 15, 2005.
The
starting point of the counting the 3 yr.
period is on the date the return is filed
which is April 1, 2006.
Suppose it is not a late filing of return,
the counting of the period is on the date of
the deadline which is April 15.
2. Abnormal/Extraordinary Assessment
the government has 2 options:
a. Assess and Collect
the prescriptive period for

assessment shall be 10 years from
the discovery of none filing or false
or fraudulent return (Sec. 222, par.
o, NIRC)
the prescriptive period for

collection shall be 5 years from the
date of final assessment (Sec. 222,
par c, NIRC)
b. Collect
Without
Assessment
through Judicial Action
since there is no assessment
there is no prescriptive period for
assessment
prescriptive
period
for
collection shall be 10 years from
the date of discovery of none filing
of return or false or fraudulent
return.
These options are available only if
the
Assessment
is
under
the
Abnormal/Extraordinary Conditions.
These are not available under
Normal/Ordinary Assessment
Prescriptive Period for Collection

1. Normal/Ordinary Collection Sec.
203 did not provide for the prescriptive
period for the collection
- Intention of the author: 5 years
from the date of final assessment
Reasons: (Sababan agrees with the 5 year
prescriptive period)
Prescriptive period of collection
under 1st option on Abnormal
Assessment is 5 years from final
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939,
1977,
and
1985,
if
the
prescriptive period for collection
under abnormal is 3 years, then
the
prescriptive
period
for
collection under normal is also 3
years. If now a days, it is 5 years

in abnormal, the prescriptive
period for normal should also be
5 years.
2. to say that there is a prescriptive
period
for
collection
under
Abnormal and there is none
under Normal is too abnormal. It
should be the other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect 5 years from
the final assessment
b. collect
without
assessment
through judicial action 10 years
from date of discovery of none
filing, or false, or fraudulent
return.
Q: How
to
apply
these
periods?
A: Annual net income tax return filed by
individual using a calendar year. The return
should be filed on or before April 15, 2000.
It was filed on April 15, 2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A: Under normal condition, first determine
the date of final assessment. If the BIR
finally assessed the tax in November 2001,
then 2007 is way beyond the 5year period
to collect. Count the prescriptive period for
collection from the date of final assessment.
Q: (same facts) Supposed it was finally
assed on March 2003, can it be collected in
2007?
A: Yes, because it is within the prescriptive
period of 5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment was
given within the period but it was
received by the taxpayer outside the
period.
I: Whether or not the assessment is within
the period of 3 years.
H: Yes. It is within the period. If the notice
is sent through registered mail, the
running of the prescriptive period is
stopped. What matters is the sending
of the notice is made within the period
of prescription.
It is the sending of the notice and not
the receipt that tolls the prescriptive period.
84

- Atty. Francis J. Sababan Q: What if the return has been amended,
how would you compute the period of
assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is
substantial
as
distinguished
from
superficial, the counting of the prescriptive
period is also amended. The prescriptive
period shall be reckoned on the date the
substantial amendment was made. If the
amendment is superficial, the counting of
the prescriptive period is still the original
period.
Procedure for Assessment (Sec. 228,
NIRC; RR 12-99)
Steps of assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice
to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of
informal conference, file a reply
within 15 days from receipt of
notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice of
Informal Conference or
b. BIR will send a Preliminary Notice
of Assessment
3. Upon
receipt
of
Preliminary
Assessment Notice (PAN), file a reply
within 15 days from receipt
4. Failure to file a reply will result in
either:
a. BIR will repeat PAN
b. Declare the taxpayer in default,
and send you a Final Assessment
Notice (FAN)
5. Upon receipt of FAN, taxpayer may
file a protest within 30 days.
Q: Is FAN the one appealable to the Court

of Tax Appeals (CTA)?
A: NO. This is because 228, NIRC and RR
12-99
requires
the
exhaustion
of
administrative remedy of protest. After the
receipt of FAN or formal demand within
30days must file a protest before the office
of the commissioner of internal revenue.
FORMS OF PROTEST
1. Local
Tax
(Sec.
125,
Local
Government Code (LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313,
RA 7651)
In all protest under the different codes,
payment under protest is only necessary
under the Real Estate Tax.
RR 12-99
If the taxpayer receives 2 final
assessments, one under the Net Income
Tax (NIT) and the other in VAT. If the
taxpayer dont want to file protest under
VAT but want to file a protest under NIT.
The taxpayer in order to be allowed to file a
protest under the NIT must first pay the VAT
where he does not intend to file a protest.
This is not payment under protest
because, payment under protest is the one
mentioned in Real Property Tax under Sec.
252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a
protest?
A: Count 60days is the period to file the
necessary documents and receipts in
support of the protest.
Q: What is the effect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting documents within the 60day
period, to be counted on the day the protest
is filed, the final assessment shall become
final and executory.
On the 51st day you filed the necessary
document, you have to count another
85

- Atty. Francis J. Sababan period, which is 180 days from the day you
filed the necessary documents.
Relevance of the 180 Days:
180 days is
the time given to the BIR to decide the case
Q: Supposed it did not decide the case
within 180days?
A: Do not invoke the Lascano case because
it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have lapsed,
you have to wait for the BIR to take positive
action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of the
CTA has been amended by RA 9282.
RA 9282 provides that in case of
inaction of the commissioner after the lapse
of 180days, remedy is to file an appeal.
RR 12-99 says that after lapse of
180days but within 30days after 180days,
that is the time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting in
division.
Q: Supposed the CTA decided not in your
favor?
A: File a motion for reconsideration within
15days to the same division deciding the
case.
Q: Supposed the CTA, in division decided
not in you favor?
A: File an appeal to the CTA sitting en
banc.
Q: Supposed the CTA en banc decided not
in
your
favor?
A: File an appeal within 15days from
receipt of decision to Supreme Court.
Q: During the pendency of the protest in
the office of the Commissioner, supposed
you receive a notice of collection, levy and/
or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150 SCRA
278)
2. UNION
SHIPPING
LINES
v.
COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F:
The taxpayer receives a notice of

collection while waiting for the decision
of his protest. He then filed an appeal
with the CTA contending his protest has
been denied because he did not receive
a decision but receive a notice of
collection. Simultaneously, the BIR filed
before the CFI an ordinary civil action
for the collection of sum of money.
When the judge of the CFI, was about to
conduct the hearing of the case, the
taxpayer filed an injunction with the SC
to prohibit the judge of the CFI
contending that a single cause of action
is pending in two courts, one in the CTA
and another in CFI.
H: Injunction was granted prohibiting the
Judge of the CFI and requiring the Judge
to transfer the records to the CTA saying
that the remedy made by the taxpayer
was the correct remedy.
Q: Was the appeal made on time?
A: Yes, when the BIR filed an ordinary
action, the protest is deemed denied. Hence
an appeal is a proper remedy.
UNION SHIPPING LINES v. COMMISSIONER
F:
The taxpayer was waiting for the
decision of his protest. But instead, he
received
a
notice
of
collection.
Immediately, he filed a Motion for
Reconsideration and Clarification asking
whether his protest has been denied.
The BIR did not reply or answer but
instead filed an Ordinary Civil Action
before the CFI.
When the taxpayer
received summons, he did not answer
but instead filed an Appeal before the
CTA.
I: Whether or not the remedy of Appeal was
the correct remedy and Whether or not
it was filed on time.
H: Yes. The remedy of appeal is the
correct remedy and the appeal was filed
on time. The reckoning period within
which to file an appeal is the time the
taxpayer received the summons.
While an Appeal is pending before the CTA,
the CTA will determine:
1. If the decision was made within 180
days, whether the appeal was made
within 30 days from the receipt of
the said decision, or
2. if there was no decision after the
lapse of 180 days, whether the
86

- Atty. Francis J. Sababan appeal was made within 30 days
upon the expiration or the lapse of
the 180-day period.
PROTEST UNDER REAL PROPERTY TAX

(Secs. 226, 230, and 252)
Remedy shall be the same
Q: Pending appeal with the CTA, can the

BIR amend the final assessment?
A: 2 SCHOOLS OF THOUGHT:
1. GUERRERO v. COMMISSIONER
(19 SCRA 25)
2. BATANGAS v. COLLECTOR (102
PHIL 822)
Sec. 252, LGC

If the taxpayer receives a Notice of
Assessment from municipal, city, or
provincial treasurer, the remedy is to
file a protest but there must be first
Payment Under Protest.
- This is the only instance where
payment
under
protest
is
necessary
GUERRERO v. COMMISSIONER (19 SCRA 25)

H: No. Because it is no longer the disputed
assessment.
BATANGAS v. COLLECTOR (102 PHIL 822)
H: Yes. In order to avoid multiplicity of
suits
ACCORDING TO JUSTICE VITUG:
BATANGAS v. COLLECTOR (102 PHIL 822) is
the better ruling
PROTEST UNDER LOCAL TAX (Sec. 195,
LGC)
Under NIRC, protest is filed in the Office
of the Commissioner
Under LGC, protest is filed with the
same City or Provincial or Municipal
Treasurer who issued the assessment
Period to file Protest
60 days from receipt of assessment
Q: If the treasurer did not decide within a
60day period, remedy?
A: Go to the court of competent jurisdiction
(RTC)
Q: If the RTC decided not in you favor?
A: File an appeal with CTA en banc
(beginning April 23, 2004)
Q: If the CTA decided not in your favor?
A: Appeal to the SC.
NOTE:
Pursuant to RA 9282, direct appeal to CTA
en banc can be made from:
1. Decision of the RTC involving local
taxation
exercising
appellate
jurisdiction
2. Decision of the Central Board of
Assessment
Appeal
exercising
appellate jurisdiction.
Q: How is payment under protest made?

A: At the back of the receipt there will be
an annotation that there was a payment
under protest within 60days from receipt of
the notice of assessment within the same
treasurer who issued the assessment.
Q: If the treasurer rules against the
taxpayer,
remedy?
A: The remedy is to file an appeal to the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board of
Assessment?
A: Appeal should be made to the Central
Board of Assessment Appeal.
Beginning April 23, 2004, the ruling of
the Central Board of Assessment Appeal is
no longer final. It can now be appealed to
the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)
Formerly, the automatic appeal under
the TCC applied only to protest; but now a
days, the automatic appeal applies to both
protest and forfeiture.
For Forfeiture Under the Tariff and Customs
Code
Refers to the Order of the Collector
confiscating
the
imported
goods
or
commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture of
the imported commodities the order of the
Collector shall be to the exclusion of all
government offices and authority.
87

- Atty. Francis J. Sababan Importer of Chemical, under the TCC,
the custom duties is only P27 but the
collector says it should be P52.
The
importer will then file a protest with the
Office of the Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest. But under RA 7651, the
remedy of automatic appeal is applicable to
both protest and forfeiture.
I. In both cases of protest and forfeiture, if
the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Office of
the Commissioner.
From the ruling of the Commissioner,
the importer should file an appeal
within 30 days before the CTA,
sitting in division.
From the ruling of the CTA in
division, the importer should file an
MR within 15 days before the same
division hearing the case.
From the ruling of the CTA in
division, deciding on the MR, the
importer should file an appeal within
15 days before the CTA sitting en
banc.
From the CTA en banc, appeal to SC
within 15 days.
II. If the importer-taxpayer wins the case,
the government lose the case, Sec. 2313 of
TCC as amended by RA 7651, there shall be
an automatic review within 15 days.
Q: Where should the automatic review be
made?
A: It depends. Publish the value of the
commodity.
1. IF P5 MILLION OR MORE
AUTOMATIC REVIEW SHALL BE
BEFORE THE SECRETARY OF THE
DEPT. OF FINANCE.
2. IF LESS THAN P5 MILLION
AUTOMATIC REVIEW SHALL BE
BEFORE THE OFFICE OF THE
COMMISSIONER
Q: Suppose the commissioner decide or did
not decide within 30days, what happens?
A: If the commissioner reverses the ruling
of the collector, the ruling is final and
executory.
If the commissioner affirms or did not

decide within 30days, there shall be an
automatic appeal before the sec. of finance.
Q: Between the two which will be appealed
to the CTA?
A: The decision of the secretary which
passes
through
the
office
of
the
commissioner (RA 9282)
But not all the decision of the secretary
which passes the office of the commissioner
affirms or did not decide within 30days and
appealed before the secretary of finance
will appeal to the CTA be allowed.
There are 3 instances when the Secretary of
Finance renders a decision appealable to
the CTA:
1. decision of the Secretary by virtue of
automatic review passing through
the Commissioner
2. cases of anti-dumping duty, where
the anti-dumping duty was ordered
by the Secretary
3. decision of the Secretary of Finance
on countervening duty.
COMPROMISE (Sec. 204, NIRC)
3 Questions asked in 2004 BAR:
1. May the Government compromise
criminal cases and civil cases?
2. Supposed the corporation is already
dissolved, can the stockholder be
obliged to pay?
3. Suppose the civil case filed by the
BIR is final and executor, can it be
subject to compromise?
CAN THERE BE COMPROMISE IN:
1. CIVIL CASES?
- YES, IN ANY STAGE OF THE
PROCEEDING
- EXCEPT WHEN THE CIVIL CASE IS
ALREADY FINAL AND EXECUTORY
BECAUSE IT WILL BE VIOLATIVE
OF THE SEPARATION OF POWERS
2. CRIMINAL CASES?
- YES, EXCEPT:
a. IF ALREADY FILED IN COURT
(RTC) OR;
b. IF IT INVOLVES FRAUD
3. IF THE CORPORATION IS ALREADY
DISSOLVED, CAN THE STOCKHOLDER BE
HELD LIABLE TO PAY TAX?
- GENERAL RULE: NO
- EXCEPT:
88

- Atty. Francis J. Sababan a. IF IT IS PROVEN THAT THE
ASSETS OF THE COPORATION
IS
TAKEN
BY
ONE
STOCKHOLDER OR;
b. IF THE STOCKHOLDER DID
NOT
PAY
HIS
UNPAID
SUBSCRIPTION
the case, because the right of the

government to collect is limited in case of
abnormal
assessment/collection
under
222. Under the second option, the right of
the government is limited to judicial action
either civil or criminal.
Administrative
remedies such as distraint, levy, or tax lien
is not available under such condition.
Minimum Amount to be Compromised (Sec.

204)
1. If the ground is financial incapacity
of the taxpayer, the minimum shall
not be less than 10% of the original
assessment.
2. If based on other grounds, the
minimum amount shall not be lower
than 40% of the original assessment.
Q: In distraint, levy or tax lien, is the 10

year period of collection applicable?
A: No, only the 5year period should apply.
Q: Can it be lower than that prescribed by

law?
A: As a rule, no. EXCEPT, if allowed by the
evaluation board consisting of the:
a) commissioner; and
b) deputy commissioner.
Instances when the Final Assessment
becomes final and executor:
1. If the taxpayer did not file the
protest on time
2. Failure to submit the supporting
documents within the 60-day period
3. After the lapse of the 180-day
period, you did not file an appeal
within the 30-day period to the CTA
4. An appeal was filed but made
beyond the reglementary period to
appeal
METHODS OF COLLECTION (SEC. 205)
1. Judicial Action
a. Civil
b. Criminal
2. Administrative Action
a. Distraint
b. Levy
c. Tax lien
Q: Why is it important to know whether the
final assessment is under normal or
abnormal conditions?
A: It is important because of the
requirement under 222.
If the final
assessment becomes final and executory,
the government (BIR) can exercise the
remedies under 205 in any order or
simultaneously (207). But it is not always
Distraint
Kinds:
1. Constructive (Sec. 206)
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec.
209)
1. Constructive Distraint
The distraining officer shall make a list
of the personal property of the property to
be distraint in the presence of the owner of
the property or the person in possession of
the property.
The owner shall be requested to sign
the receipt.
Q: What if the owner refuses to sign the
receipt?
A: Sec. 206: The distraining officer shall
require
2
individuals
within
the
neighborhood with the warning that they
should not allow the taxpayer to dispose,
transfer, or sell the property subject of
distraint.
Grounds for Constructive Distraint (Sec.
206):
1. The taxpayer intends to leave the
Philippines
2. The taxpayer leaves the Philippines
3. The taxpayer ceases or retires from
business
4. The taxpayer obstructs the collection
of the tax.
THESE GROUNDS ALSO ANSWER THE
QUESTION:
WHAT ARE THE TAXABLE
PERIOD LESSER THAN 12 MONTHS?
2. Distraint of Intangible Property
89

- Atty. Francis J. Sababan Limited to
1.
2.
3.
3 Intangible Properties:
Shares of stocks
Bank accounts
Credits and debits
Share of stocks
Warrant of distraint furnished to the
taxpayer
or
the
officer
of
the
corporation with the warning that the
property is subject of distraint and it
should not dispose of it.
Bank Accounts
taxpayer or the officer of the bank with
the warning that the taxpayer should
not be allowed to withdraw.
Debits and Credits
debtor and creditor
3. Actual Distraint
Personal property shall be physically
taken by the distraining officer.
Within 10 days from the receipt of
the warrant, a report of the distraint
shall be submitted to the BIR (Sec. 207,
par a last par.)
The property subject of distraint
shall be sold at a public auction EXCEPT
bank accounts and debits and credits.
Notice of sale shall be by posting
in 2 conspicuous place, stating the
date and the place of the sale (No
publication requirement)
Sec. 211: after the sale and within 2
days, a report shall be made to the BIR
Q: If the property sold is a personal
property, is there a right of redemption?
A: NO. The rule is absolute.
Q: If the property is a personal property, is
there a right of preemption?
A: SEC. 210: Before the scheduled sale,
the taxpayer is allowed to recover the
property by paying all the property by
paying all the proper charges as well as the
interest, cost and penalties.
During the Scheduled Auction Sale, 2
Things may happen:
1. There is bidder and the bid is
enough
2. There is no bidder or there is a

bidder but the bid is not enough
Q: What is the relevance of knowing the
difference?
A: 1. If there is a bidder and the bid is
enough
In case of insufficiency, there shall
be further distraint to cover the liability.
(217)
In case of excess, the excess shall
be returned to the taxpayer.
2. If there is no bidder or the bid is not
enough.
It
will
be
purchase
by
the
government and the later sold in a
public auction again (212)
In case of insufficiency, no further
distraint, 217 applies only if there was
a bidder.
In case of excess, the excess shall
not be returned to the taxpayer but
shall be remitted to the national
treasury.
Levy
Other than the delinquent taxpayer,
warrant of levy is served to the register
of deeds having jurisdiction over the
real property (Sec. 213)
Within 10 days from the receipt of
the warrant, a report of the levy shall be
submitted to the BIR (Sec. 207 (b) last
par)
Notice of Sale in Public Auction:
1. Posting in 2 conspicuous places
2. Publication in newspaper of general
circulation once a week for 3
consecutive weeks.
Q: Is there a right of pre emption?
A: Yes, 213.
Q: Is there
A: Yes.
right
of
redemption?
2 Things may happen in a Public Auction:

1. There is a bidder and the bid is
enough
2. There is no bidder or the bid is not
enough
Q: What if there is no bidder or the bid is
not
enough?
A: Forfeiture shall be made (215)
90

- Atty. Francis J. Sababan 3 Definitions of Forfeiture under the Internal
Revenue Code
1. Violation of Excise Tax Law (Sec.
224)
2. If there is no bidder or the bid is not
enough (Sec. 215)
3. The order of the Collector to
confiscate imported commodities
(Sec. 2313, TCC)
Relevance of the Choice of Words:
Under sec. 212, the law says
purchase
Under sec. 215, the law says
forfeiture
under 215:
the real property
shall be automatically registered in
the name of the Government
(forfeiture)
under 212: the real property is
not automatically registered in the
name of the Government (purchase)
Q: If sold at a private sale, what is the
requirement?
A: There must be an approval of the
Secretary of Finance (216)
Q: After sale, if there was deficiency?
A: There shall be no further levy, because
215 says that it shall be to the total
satisfaction of the taxpayer.
Q: After sale, if there was an excess?
A: It shall not be returned to the taxpayer
but shall be remitted to the national
treasury.
Sec. 217: this is only true if there was no
bidder or the bid was not enough because
of the provisions of the Secs. 212, 215, and
216
Sec. 218:
no court shall issue an
injunction to restrain the collection of tax
under this code
Determine what kind of injunction is
referred to here:
1. Prohibitory referred in Sec. 218
because it restrains the collection of
tax.
2. Mandatory
Q: Is the provision limited to tax under
this code?
A: Limited to internal revenue taxes.

EXCEPT: CTA (Regular Court) RA 1125
and 9282: CTA is authorized to issue
injunction to restrain the collection of taxes
or fees collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A: Yes, local tax.
175 for DISTRAINT
176 for LEVY
Q: How
about
real
property
tax?
A: No, distraint is not authorized (256,
LGC), because the remedy is only Judicial
Action and Levy.
Tax Lien
Non payment of tax, the government
has the right to claim a lien over the
property of the taxpayer
1. NIRC Sec. 219, NIRC
2. Local Tax Sec. 173, NIRC
3. Real Property Tax Sec. 257,
NIRC
Q: Supposed a parcel of land is about to be
levied by the government, but the same is
being foreclosed by the mortgagee, which
of the 2 obligee, the government or the
mortgagee shall be preferred?
A: 219, last portion:
The government is
the preferred one if the lien is annotated
and recorded in the registry of deed. In the
absence of annotation in the registry of
deeds, the mortgagee is preferred.
Q: Do we have the same rule under Local
Tax and Real Property Tax?
A: NO.
Both
173
and
257,
the
government is always the preferred one.
The lien can only be removed by payment
of tax, interest and penalty.
Sec. 220: approving of filing an ordinary
civil action for violation of the internal
revenue code
The approval must be made by the
Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of
the tax code was filed in the city of San
Fernando.
But the filing was only
approved by the Revenue Regional
91

- Atty. Francis J. Sababan Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by
the Commissioner and the Revenue RD.
H: Sec. 220 should be read with Sec. 7 of
the NIRC
General Rule:
powers and
functions of the Commissioner may
be delegated but not to a position
lower than a Division Chief
Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to issue
rules and regulation
b) Power to decide a case of fist
impression
c) Power to enter into a
compromise agreement
d) Power to assign BIR officer in
the place of production
subject to income tax
Since the case does not fall
under the prohibited delegation, the
filing of the case is legal and
tenable.
Decision of the Commissioner of Internal
Revenue (CIR) is appealable to CTA.
Q: When is a decision of the cir appealable
to the Secretary of Finance?
A: 4, on matters of interpretation of tax
laws.
SEC. 223:
SUSPENSION OF THE
RUNNING OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada,
after 15years he went back, he is being
assessed by the BIR under normal
assessment.
Has the right of the
government to asses the tax already
prescribed?
A: NO. When he went to Canada, the
running of the prescribed period is
suspended.
Q: What if the change of address is within
the Philippines, say only from manila to
Pasay City, is the running of the prescriptive
period
suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district office,
223 provides that the taxpayer must send
a written notice of change of address to the

BIR.
In the absence of the written notice, the
period will be suspended.
Q: Change of address is from Philippines to
abroad?
A: The period will be suspended.
Other Grounds for Suspension:

1. During collection if there is no
property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
3. In distraint of levy, the BIR officer
cant locate the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom
Written claim for refund under the
input tax (Sec. 112)
Period is also 2 years from the close of
the taxable quarter when the transaction
was made
Q: Can
we
apply
229
to
VAT?
A: Yes, because there is no conflict. 112 is
refund under input tax system.
229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
The period to claim refund is 2years.
Doctrine of Equitable Recoupment

If a taxpayer is entitled to a written
claim for refund but the prescriptive period
to claim has lapsed, the taxpayer is allowed
to credit his written claim for refund which
he failed to recover to his existing tax
liability.
Computed from;
92

- Atty. Francis J. Sababan a. Individual counted on the day the
tax has been paid
1. paying by way of withholding tax
system, the reckoning point is
the end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam
life (244 SCRA 446)
- 1998, Commissioner v. CTA (301
SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner (363
SCRA 840)
1. Existing the counting of the
prescriptive period is 2 years on the
day the annual adjusted return is
filed, because it is at that day that
the tax liability is known.
2. Non-existing the counting of the
prescriptive period should also be
reckoned on the day the annual
return is filed. But the corporation is
no longer required to wait till the
taxable period is over to file the
return.
Upon receipt of a notice
from the SEC to dissolve the
corporation,
within
30
days
thereafter, a return should be filed.
A: Appeal within 30days from the decision,

provided it is still within the 2 year period.
Q: Suppose there is only 21days remaining
after receiving the decision, when to file an
appeal?
A: Within 21days before the end of the 2
year period.
A written claim for refund should be filed
within 2 years
Sec 204 (c) last phrase: in case of over
payment a written claim is not necessary
because a return constitutes a written claim
for refund.
Q: May the commissioner of internal
revenue open the bank account of a
taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the
estate; and
2. To
enter
into
a
compromise
agreement. (under 204(A))
The written claim for refund to
determine the gross value of the estate
because the taxpayer is already dead
In case of compromise, there must be
consent.
Q: Suppose there is a supervening event,

and the taxpayer was not able to file a
written claim of refund within the period?
A: Regardless of supervening event, a
written claim for refund must be filed within
2years.
Q: Suppose the 2 year period is about to
expire and there is no decision yet as to
your refund?
A: Remedy is to file an appeal before the
CTA (deemed a denial)
Q: Suppose the BIR decided within 2 years
against
the
refund?
93

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- Atty. Francis J. Sababan COVERAGE OF TAXATION LAW REVIEW

Tiu vs. CA 301

Abra Valley vs.

CIR vs. Johnson

Francia vs. IAC 162 SCRA 753

Caltex vs. COA 208 SCRA 726

294 SCRA 687

II. Income Tax Law

Taxation law review notes

Comm. Vs. Manning 66 SCRA

Anscor vs. Comm. 301 SCRA

-Upon reading sec. 27 (A) go to sec. 22 (B)

sec. 133 par (o) of LGC, sec. 154 of the

Pagcor vs. Basco 197 SCRA 52

Mactan vs. Cebu 261 SCRA 667

LRT vs. City of Manila 342 SCRA

Taxation law review notes

G and Cumulative methods of filing

V. Value Added Tax

Co-relate sec. 139 and 147 of LGC

Phil. Match vs.

Allied Thread vs.

Sipocat vs. Shell

Iloilo Bottles vs.

VIII. Real Property Tax

LRT vs. Manila

Cebu City vs.

VII. Local Taxation

Taxation law review notes

Taxation law review notes

Title 5,6 and 7 are always included in

legislation for the exercise of the power to

Taxation law review notes

3) The distinction or classification must

Taxation law review notes

Q: What is the obligation contemplated in

Take Note: the requirement for its

Q: Which one limits the power to tax?

Q: What is a poll tax?

Example of Poll Tax: Community Tax

Taxation law review notes

Q: What is the requirement for exemption

used for charitable purposes it is not

Taxation law review notes

The Court held that the school is

Q: is the doctrine in the case of Herrera the

not determine exemption, rather it is the

Taxation law review notes

The Supreme Court coined the term

This is not allowed in this jurisdiction,

Taxation law review notes

rendered have already become overdue

Taxation law review notes

Double taxation is allowed because

Elements of Double Taxation:

Q: How many kinds of individual taxpayers

Taxation law review notes

6. Nonresident Alien NOT Engaged in

Trade or Business (22G, 23D and

Resident Citizen (RC)

If he is a NRC, he is taxable only on income