Taxation LAW

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First part of Tax law
A. INTRODUCTION
1. General Principles –sources of tax laws
1. Constitution
2. NIRC
3. Other Tax Statutes
4. Revenue Regulations implementing NIRC
2. Constitutional Limitations

SISON V. COMMISSIONER
BP 135 was enacted amending sec 21 of the NIRC
1
. Petitioner Sison assails the amendment
claiming it would unduly discriminate against him by the imposition of higher tax rates upon
his income from the exercise of his profession vis-à-vis against those earning a fixed income.
He claims that the measure is arbitrary and violative of both the equal protection and due
process clauses of the constitution.

Held: The power to tax is inherent in sovereignty. However, it is not limitless. The
constitution sets forth its limitations. Adversely affecting as it does property rights, both the
due process and the equal protection clauses may properly be invoked to invalidate a revenue
measure. However, there has to be sufficient basis to support such a claim. The due process
clause may be invoked if the measure is so arbitrary that it finds no support in the
Constitution, as when it amounts to a confiscation of property or where it beyond the
authority of the taxing authority, or is not for a public purpose. As for equal protection, it is
sufficient if the law operates equally and uniformly on all persons under the same
circumstances or that all persons must be treated in the same manner, the conditions not being
different, both in privileges conferred and liabilities imposed.
In the case of BP 135, there is ample distinction to adopt a gross system of income
taxation to compensation income. In such law, the basis for classification is the
susceptibility of the income to the application of generalized rules removing all
deductible items for all tax payers whithin the class and fixing a set of reduced tax rates
to be applied to all of them.


3. Classification of Income taxpayers
- Individual
- Corporations or others with separate juridical personality

B. TAX ON INDIVIDUALS
1. Kinds of Individual Taxpayers
a) Individual Citizens- Taxable on all sources of income, whether within or without the
Philippines
b) Non-resident Citizen- Taxable only on income from within the Philippines
c) Individual Resident Aliens- Taxable only on income from within the Philippines
d) Non- Resident Aliens-taxable only on income from within the Philippines

2. Rates of Income Tax

A uniform tax rate schedule is used to determine tax liability of resident citizens, of non-
resident citizens, and of resident aliens, subject however to the rule set under no.1 above.

Not over P10,000…………………………………5%
Over P10,000 but not over P30,000………………P500 plus 10% of the excess
Over P10,000
Over P30,000 but not over P70.000……………….P2,500 plus 15% on the excess
Over P70,000 but not over P140,000……………...P8,500 plus 20% on excess
Over P140,000 but not over P250,000…………….P22,500plus 25% on excess
Over P250,000 but not over P500,000…………….P50,000plus 30% on excess
Over 500,000………………………………………P125,000plus 32% of excess

For married individuals, both shall compute their individual income tax based on their own
taxable income, provided however that if they do not derive income purely from compensation, they

1
Case did not state what the law says or how it amends the NIRC
shall file a return for the taxable year to include the income of both spouses. If is impractical to file
just one return, each spouse may file a separate return but such will be consolidated by the Bureau.
2


The taxable income subject to the rates above do not include the income derived from passive
income, capital gains from sales of shares of stock not traded in the stock exchange and capital gains
from sale of real property, the tax rates of which are as follows:

Passive income

Interest of Bank deposits, deposit substitutes, from trust funds………………….20%
Interest received by a resident under the expanded foreign
Currency deposit system
3
………………………………………………….7.5%
Interest from a long-term deposit or investment…………………….…… tax exempt
Interest from a preterminated long term deposit or investment
With a remaining maturity of 4 to less than 5yrs………………………..5%
3 to less than 4yrs………………………..12%
less than 3 yrs……………………………20%
Royalties except from books, etc………………………………………………...20%
Royalties from books, literary works and musical compositions………………..10%
Prizes up to P10,000………………………………………………..taxable as income
Prizes exceeding P10,000…………………………………………………………20%
Winnings other than fr sweepstakes or lotto……………………………………...20%
Sweepstakes and lotto winnings………………………………………………exempt
Cash or property dividends, actually or constructively received
fr a domestic corp, joint stock co., insurance or mutual fund co
and regional operating headquarters of multinationals or on the
share in the distributable net income after tax of a partnership
of which he is a partner, or of an association, a joint account
or a joint venture or consortium taxable as a corporation of which
he is a member or co-venturer………………………………………………10%

Capital Gains from shares

Gains from shares of stocks sold, bartered or exchanged outside the
Stock market if not more than P100,000……………………………………5%
If over P100,000…………………………………………………………………….10%

Capital Gains from the sale of Real Property

Tax rate is now 6% based on the gross selling price or current fair market value, whichever is
higher. However, if the sale is made to the government or any of its subdivisions or to any GOCC, it
may be taxed as part of the taxpayers income ( as set forth in the fist paragraph of this part), at the
option of the taxpayer. (RR 8-98)


EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and the
proceeds are used to purchase a new home, it shall be exempt provided:

- a return is filed with the Bureau within 30 days from the sale stating the intention to avail of
the exemption
- Proceeds are used within 18 months from sale to purchase a new residence
- The historical costs of the residence sold is carried over to the new home
- Exemption can only be availed of once every 10 years
- If proceeds are not fully utilized, portion of the gain is taxable using this formula: Taxable
gain= gsp or fmv (whichever is higher) x unutilized portion/gsp

Tax on Nonresident Aliens


2
SEC. 51(D) of the NIRC
3
Foreign currency deposit system- the conduct of banking transactions whereby any person whether natural or juridical may deposit
foreign currencies forming part of the Philippine international reserves , in accordance with RA 6462 ( RR 10-98)
A nonresident alien engaged in trade or business in the Philippines shall be taxed in the same
manner as an individual citizen and a resident alien individual on taxable income derived from
sources within the Philippines. A nonresident alien is one who shall come to the Philippines and stay
herein for an aggregate period of more than 180 days during a calendar year. Tax on their passive
income is likewise the same.

The rate of tax on income from all sources within the Philippines of a non resident alien NOT
engaged in business here shall be 25%, except for gains from sale of real property and sale or
exchange of stocks not thru the stock market.

An alien individual employed by the regional or area headquarters and regional operating
headquarters established in the Philippines by multinational companies shall be taxed 15% on his
gross income PROVIDED the same tax treatment is given to Filipinos employed in the same position
by the same multinational companies.

Those aliens employed by off shore banking units
4
established in the Philippines shall be taxed
15% on their gross income PROVIDED the same tax treatment is given to Filipinos employed and
occupying the same positions as aliens employed by these off shore banking units.

Aliens who are permanent residents of a foreign country but are employed and assigned in the
Phil by a foreign service contractor or subcontractor engaged in petroleum operations in the
Philippines shall be taxed 15% on their gross income PROVIDED that the same tax treatment is given
to Filipinos occupying the same positiona as aliens by the petroluem contractor or subcontractor.

3. Exemptions

Resident Citizens and Resident Aliens
The following personal exemptions are allowed for the purpose of determining the tax to be
imposed upon resident citizens and resident aliens:

For single individual or married individual judicially decreed as
Legally separated w/ no qualified dependents………………………P20,000
For head of the family……………………………………………………….P25,000
For each married individual…………………………………………………P32,000

In the case of married individuals where only one spouse is deriving gross income, only such
spouse shall be allowed the personal exemption

An additional exemption of P8,000 is also allowed for each dependent not exceeding four.
However, only one spouse may claim such exemption and in case of married individuals who are
legally separated, the one who has custody of the child/ children can claim such exemption.

Non-resident citizen

RR 1-79

Non resident citizens are allowed the following exemptions:

Personal exemptions:
Single or married but legally separated…………………………………………$2,000
Married or head of the family…………………………………………………...$4,000

Also, the total amount of the national income tax actually paid to the national government of
the foreign country of his residence shall be deducted from his taxable income.

Non-resident aliens engaged in business in the Philippines or in the exercise of a profession

These persons are entitled to personal exemptions in the amount equal to the exemptions
allowed in the income tax law of the country of which he is a citizen, to citizens of the Philippines not

4
a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Bangko Sentral Ng Pilipinas to
transact offshore banking business in the Philipiines in accordance with PD 1034
(RR 10-98)
residing in that country. Such amount shall not exceed the amount fixed in Sec 36 of the NIRC.
However, such nonresident alien shall file a true and accurate return of the total income received by
him from all sources within the Philippines.

4. Definitions

Head of the family- An unmarried or legally separated person with one or both parents, or with one
or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted
children living with and dependent upon him for their chief supposrt. Such brother, sister, or child
shall not be more than 21 yrs old, unmarried and not gainfully employed. If over 21 yrs of age but
incapable of self support because of mental or physical defect, they shall not be excluded.

Dependent- Means a legitimate, illegitimate or legally adopted child chiefly dependent upon and
living with the taxpayer if such dependent is not more than 21 yrs old unmarried and not gainfully
employed or if such dependent, regardless of age, is incapable of self support because of mental or
physical defect.

5. Change of status

If the taxpayer should change his or her status during the taxable year, he may claim the
corresponding additional exemptions in full for such year.

If the taxpayer dies during the taxable year, his estate may claim the personal and additional
exemptions for himself and his dependents as if he died at the close of such year.
If the spouse or any of his dependents dies or if any of such dependents marries, becomes 21
or becomes gainfully employed during the taxable year, the taxpayer may still claim the same
exemptions as if no such change had occurred.

6. Premium payments on health and/or hospitalization insurance

Premium payments of such nature paid during the taxable year, not exceeding P2,400 per
family OR P200 a month paid during the taxable year by the taxpayer for himself, incld his family,
shall be allowed as deductions from his gross provided that the gross income of the family does not
exceed P250,000 for the taxable year. For married couples, only the spouse claiming deductions for
the dependents may avail of such exemption.


PART 2
Part II
C. Tax On Corporations
Commissioner v. Batangas Tayabas Bus Co. (102 P 822)
Issue: W/n the 2 transportation companies are liable to payment of income tax as a corporation on
the theory that the Joint Emergency Operation organized & operated by them is a corporation w/in
the meaning of the Revised Internal Revenue Code.
Held:Yes, liable as a corporation.
In the present case, the 2 companies contributed money to a common fund to pay the sole gen.
manager, the accounts & office personnel attached to the office of said manager, as well as for
maintenance & operation of a common maintenance & repair shop. Said common fund was also
used to buy spare parts, & equipment for both companies, including tires. Said common fund was
also used to pay all the salaries of the personnel of both companies, & at the end of each year, the
gross income receipts of both companies were merged, & after deducting there from the gross
expenses of the 2 companies, also merged, the net income was determined & divided equally
between them, wholly disregarding the expenses incurred in the maintenance & operation of each
company & of the individual income of said companies.
From the standpoint of income tax law, this procedure & practice of determining the net
income of each company was arbitrary & unwarranted, disregarding as it did the real facts of the
case. Considering that Batangas Transportation & the Laguna Bus operated different lines, under
different franchises, w/ different equipment & personnel, it cannot possibly be true & correct to say
that at the end of each year, the gross receipts & income & the gross expenses of the 2 companies are
exactly the same for purposes of the payment of income tax. Therefore, the Joint Emergency
Operation in this case is a corporation under the Internal Revenue Code & is liable to income tax as a
corporation.

Ona vs CIR (25 Scra 74)
Ruling:For tax purposes, the co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties are used as a common fund with
intent to produce profits for the heirs in proportion to their respective shares in the inheritance.
From the moment of such partition, the heirs are entitled already to their respective definite shares of
the estate & the incomes thereof, for each of them to manage & dispose of as exclusively his own w/o
intervention of the heirs, & accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs under a
single management to be used with the intent of making profit thereby in proportion to his share,
there can be no doubt that even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed.
For purposes of tax on corporations, the NIRC, includes partnerships-with the exception of
only duly registered gen. co-partnerships—within the purview of the term corporation.

BIR Ruling No. 317-92
Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandum of Agreement
(MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA, they will contribute equal
amounts to the construction costs & ALI will own 60% of the building while API will own 40%, while
there is separate ownership, they will share common area expenses, real estate taxes, etc in the same
proportion. ALI & API now propose to enter into a another agreement, a Joint Venture
Agreement(JVA). Under the JVA,both ALI & API will contribute money as additional working
capital & ALI will be appointed as manager & will be responsible for leasing the floors.
HELD:
The MOA has not by itself created a taxable joint venture. However , the joint venture to be
subsequently entered into by & between ALI & API will create a joint venture subject to tax.

Obillos Jr. vs CIR
This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which they had
acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co &
transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children
resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children with
corporate income tax.

HELD:It is error to hold that petitioners(Obillos) have formed a taxable unregistered partnership
simply because they contributed in buying the lots, resold the same & divided the profit among
themselves. They are simply co-owners. They were not engaged in any joint venture by reason of
the isolated transaction. The original purpose was to divide the lots for residential purposes. The
division of the profit was merely incidental to the dissolution of the co-ownership.

Dept Order # 149-95
Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues and assets
used actually, directly, and exclusively for educational purposes. They shall, however be subject to
internal revenue taxes on income from trade, business or other activity the conduct of which is not
related to the exercise or performance by such educational institution of its educational purpose or
function.

BOAC v. CIR
BOAC maintained a general sales agent in the Phil. The gen sales agent was engaged in selling &
issuing tickets, breaking down the whole trip into series of trips, receiving fare from the whole trip &
allocating to the various airline companies the services rendered. In fact, the regular sales of ticket, its
main activity is the very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt that BOAC was engaged in business in the Phil thru a local
agent. It is a resident foreign corporation subject to tax upon its total net income from all sources
w/in the Phil.
Source of income is the property, activity or service that produced the income. For the source
of the income to be considered as coming from the Phil, it is sufficient that the income is derived from
activity within the Phil. In BOAC‘s case, the sale of tickets in the Phil is the activity that produces the
income. The tickets exchanged hands here & payments for fares were also made here in Phil
currency. The situs of the source of payment is the Phil. The absence of the flight operations to &
from the Phil is not determinative of the source of income or the situs of income taxation.

CIR v Procter & Gamble(including MR)
**** sorry, I can‘t do justice to these two cases. Please read the originals. This is a very important case,
specially on the computation part.

CIR v Wander Phils. (160 Scra 573)
Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A. Ltd. A Swiss
corp not engaged in trade or business in the Phil. In 1975&1976, Wander remitted to Glaro dividends
on which 35% was withheld & paid to the BIR. In 1977, Wander filed a claim for refund contending it
is liable only to 15% withholding tax in accordance with sec 24(b)(1) of the Tax Code.
Under the said provision, dividends received from a domestic corporation liable to tax shall be
15% of the dividends received, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to 20% w/c represents the
difference between the regular tax of 35% on corporations & the tax of 15% on dividends.
HELD:
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro.
The fact that Switzerland did not impose any tax on the dividends received by Glaro from the
Philippines should be considered as a full satisfaction of the given condition. Wander liable only to
withholding tax rate of 15% & is therefore entitled to refund.
As to the contention of the Commissioner that Wander is but a withholding agent of the
government & therefore can not claim reimbursement of the alleged overpaid taxes is UNTENABLE.
Wander is a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the
government, which was not by choice, cannot be considered as an abdication of its responsibility to
its mother company. As the Philippine counterpart, Wander is the proper entity who should claim
for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

PART 3


PART 4

A. Inclusions and Exclusions from Gross Income
Sec. 32 (see Code)
Secs. 39-60 Revenue Regulations No. 2 (see RR No. 2)

1. Definition of Gross Income
Sec. 32 (see Code)

2. Exclusions from Gross Income
Sec. 32 (B) (see Code)

Secs. 61-64 Revenue Regs. No. 2 (see RR No. 2)

a. REPUBLIC ACT NO. 4917: AN ACT PROVIDING THAT RETIREMENT BENEFITS OF
EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY,
EXECUTION, OR ANY TAX WHATSOEVER

The retirement benefits received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be
exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under
any legal or equitable process whatsoever except to pay a debt of the official or employee concerned
to the private benefit plan or that arising from liability imposed in a criminal action: Provided, That
the retiring official or employee has been in the service of the same employer for at least 10 yrs and is
not less than 50 yrs of age at the time of his retirement: Provided, further, That the benefits granted
under this Act shall be availed of by an official or employee only once: Provided, finally, That in case
of separation of an official or employee from the service of the employer due to death, sickness or
other physical disability or for any cause beyond the control of the said official or employee, any
amount received by him or by his heirs from the employer as a consequence of such separation shall
likewise be exempt as hereinabove provided.

The term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing
plan maintained by an employer for the benefit of some or all of his officials and employees, wherein
contributions are made by such employer or officials and employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the fund thus accumulated,
and wherein it is provided in said plan that at no time shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said
officials and employees. (June 17, 1967)

b. REPUBLIC ACT NO. 7641: AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL
DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE
PHILIPPINES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR
EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT

Art. 287 of the Labor Code is hereby amended to read as follows: "Art. 287. Retirement. — Any
employee may be retired upon reaching the retirement age established in the collective bargaining
agreement or other applicable employment contract.

―In case of retirement, the employee shall be entitled to receive such retirement benefits as he may
have earned under existing laws and any collective bargaining agreement and other agreements:
Provided, however, That an employee's retirement benefits under any collective bargaining and other
agreements shall not be less than those provided herein.

"In the absence of a retirement plan or agreement providing for retirement benefits of employees in
the establishment, an employee upon reaching the age of 60 years or more, but not beyond 65 years
which is hereby declared the compulsory retirement age, who has served at least five (5) years in the
said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half
(1/2) month salary for every year of service, a fraction of at least six (6) months being considered as
one whole year.

"Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean
fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more
than five (5) days of service incentive leaves.

"Retail, service and agricultural establishments or operations employing not more than (10)
employees or workers are exempted from the coverage of this provision. (December 9, 1992)


3. Exclusion of 13th Month Pay

a. REPUBLIC ACT NO. 7833: AN ACT TO EXCLUDE THE BENEFITS MANDATED
PURSUANT TO RA NO. 6686 AND PD NO. 851, AS AMENDED, AND OTHER BENEFITS FROM
THE COMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF
DETERMINING TAXABLE COMPENSATION INCOME, AMENDING FOR THE PURPOSE
SECTION 28(B)(8) OF THE NIRC, AS AMENDED

A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the end of Section
28(b)(8) of the National Internal Revenue Code, as amended, which shall read as follows:
"(F) 13th month pay and other benefits.
"(i) Benefits received by officials and employees of the national and local governments pursuant to
Republic Act No. 6686;
"(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Presidential Memorandum Order No. 28 dated August 13, 1986 (requiring all employers to pay all
their rank-and-file employees a 13th month pay not later than December 24 of every year);
(iii) Benefits received by officials and employees not covered by P.D. No. 851, as amended; and
(iv) Other benefits such as productivity incentives and Christmas bonus in an amount not
exceeding P12,000.00 which shall be integrated in the 13th month pay solely for purposes of R.A. No.
7833.
Provided, however, that the exclusion shall only apply to the first P30,000.00.

b. REVENUE REGULATIONS NO. 2-95: Implementing Republic Act No. 7833, An Act
to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No.
851, as Amended, and other Benefits from the Computation of Gross Compensation Income for the
Purposes of Determining Taxable Compensation Income, Amending for the Purpose Section 28 (b) (8)
of the National Internal Revenue Code, as Amended. (January 3, 1995)

Scope. — Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to Section 3 of Republic
Act No. 7833, these Regulations are hereby promulgated to implement the provisions of Section 28 (b)
(9) (6) of the NIRC, as amended, excluding from the computation of gross compensation income, for
purposes of determining taxable compensation income, the 13th month pay and other benefits.

Definition of Terms. — For purposes of these Regulations, the following definitions of words and
phrases are hereby adopted:
x x x
b) "Exclusions" — shall mean the total benefits which are not included in the computation of
gross compensation income for purposes of determining taxable compensation income and are,
therefore, exempt from the withholding tax on wages.
c) "Gross compensation income" — means all remunerations for services performed by an
employee for his employer, whether paid in cash or in kind, unless specifically excluded under Secs.
27 and 28 of the NIRC, as amended.
x x x
e) "Other benefits" — refer to all benefits other than the 13th month pay, such as, the annual
Christmas bonus given by private offices, 14th month pay, mid-year productivity incentive bonus,
gifts in cash or in kind and other similar benefits received by an official or employee for one calendar
year in an amount not exceeding Twelve Thousand Pesos (P12,000.00) as maximum limit.
x x x
g) "13th month pay" — refers to the mandatory one month basic salary of an official or employee
of the National Government, Local Government Units, agencies and instrumentalities, including
government-owned and -controlled corporations, and of private offices received after the 12th month
pay.
x x x

Benefits Exempted from Income Tax. — For purposes of determining the taxable compensation
income, the following benefits shall be excluded from the gross compensation income, viz:
a) 13th month pay equivalent to the mandatory 1 mo. basic salary of officials and employees of
the Government (whether national or local), including goccs, and of private offices received after the
12th month pay beginning CY 1994; and
b) Other benefits, such as, Christmas bonus given by, private offices to their officials and
employees, productivity incentives bonus, loyalty award, gifts in cash or in kind and other benefits of
similar nature actually received by officials and employees of both Government and private offices in
an amount not exceeding P12,000.00 for 1 calendar year.

The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued beginning January 1,
1994 but shall be limited only to an amount not exceeding P12,000.00 in the case of the "other
benefits" contemplated under paragraph (b) above, provided, however, that when added to the 13th
month pay, the total amount of tax exempt benefits shall not exceed P30,000.00.

(for illustrations see the original revenue regulations)

Refund/Credit of Taxes Withheld from employees Separated from Employment. — a) An employee
separate from the service of his previous employer but is presently employed by another employer
shall be refunded/credited the taxes withheld on his exempt 13th month pay and other benefits by
his present employer.

(b) An employee who has been separated from a previous employer but has no present
employment shall claim his refund of excess tax withheld on his 13th month pay and other benefits
by filing with the BIR a refundable income tax return for CY 1994, provided that the refundable ITR
for 1994 reflects the taxes withheld on his 13th month pay and other benefits.

Concurrent Multiple Employments. — An employee is employed by two or more employers at the
same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month
pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary.
The said main employer shall determine the maximum allowable 13th month pay and "other
benefits" received from both main and secondary employer/s in annualizing the taxable
compensation income at year-end adjustment. For this purpose, the secondary employer/s shall
furnish the main employer a certification as to the amount of the 13th month pay and other benefits
received by the employee.
x x x

Transitory Provision. — Employers who have already given the 13th month pay and "other benefits"
to their employees and had withheld and remitted the tax due thereon prior to the approval of R.A.
No. 7833 on December 8, 1994 shall, in annualizing and computing the annual income and the tax
due from their employees, exclude the 13th month pay and "other benefits", which shall be limited
only to an amount not exceeding P12,000.00 in the case of the "other benefits" contemplated under
Sec. 3, par, (b) of these Regulations and provided, further, that when the amount of these said "other
benefits" is added to the "13th month pay" contemplated under Sec. 3, par. (a) also of these
Regulations, the total amount of tax exempt benefits shall not exceed P30,000.00.

c. REVENUE MEMORANDUM CIRCULAR NO. 36-94: Publishing the full text of
Republic Act No. 7833 - an Act excluding the benefits mandated pursuant to Republic Act No. 6686
and Presidential Decree No. 851, as amended, and other benefits from the computation of gross
compensation income for purposes of determining taxable compensation income, amending for the
purpose Section 28 (b) (8) of the National Internal Revenue Code, as amended. (December 14, 1994 )

SALIENT FEATURES of RA 7833
1. Before the amendment of Section 28 (b) (8) of the NIRC by R.A. No. 7833, the benefits received
by officials and employees of both public (national and local) and private offices, viz:
(F) 13th month pay and other benefits.
a. Annual Christmas bonus equivalent to one (1) month basic salary and additional cash gift of
One Thousand Pesos (P1,000.00) received by National and Local Government officials and employees
starting CY 1988 in accordance with R.A. No. 6686;
b. Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential
Memorandum Order No. 28 dated August 13, 1986 requiring all employers to pay all their rank-and-
file employees a 13th month pay not later than December 24 of every year;
c. Benefits received by officials and employees not covered by P.D. No. 851, as amended; and
d. Other benefits such as productivity incentives and Christmas bonus in an amount not
exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrated in the 13th month pay
solely for purposes of R.A. No. 7833.

were taxable compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as
amended, subject to withholding tax under Revenue Regulations No. 6-82, as amended by Revenue
Regulations No. 4-93.

2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the
13th month pay and other benefits aforestated, received by officials and employees of the National
Government, LGUs and agencies, including GOCCs, as well as by officials and employees of private
corporations and entities, are exempt from income tax, and consequently from the withholding tax on
wages. Provided, that the exclusions/exemptions from gross compensation income shall cover the
13th month pay and "other benefits" in the aggregate amount not exceeding P30,000 received by the
officials and employees paid or accrued beginning January 1, 1994. (April 17, 1998).

d. REVENUE REGULATIONS No. 02-98

SECTION 2.78.1. Withholding of Income Tax on Compensation Income. —
x x x

(B) Exemptions from withholding tax on compensation. — The following income payments are
exempted from the requirement of withholding tax on compensation:
x x x

(11) Thirteenth (13th ) month pay and other benefits. —
(a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of
officials and employees of the government, (whether national or local), including government-owned
or controlled corporations, and or private offices received after the twelfth (12th) month pay; and
(b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in
cash or in kind and other benefits of similar nature actually received by officials and employees of
both government and private offices.
The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided
that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased
through rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering, among others, the effect on the same of the inflation rate at the end
of the taxable year.

(see original for further info.)

e. REPUBLIC ACT NO. 7459: Investors and Invention Incentives Act of the Philippines

Tax Incentives. — Inventors, as certified by the Filipino Inventors Society and duly confirmed by the
Screening Committee, shall be exempt from payment of license fees, permit fees and other business
taxes in the development of their particular inventions. This is an exception to the taxing power of the
local government units. The certification shall state that the manufacture of the invention is made on
a commercial scale. Inventors shall exempt from paying any fees involved in their application for
registration of their inventions.

Tax Exemption. — To promote, encourage, develop and accelerate commercialization of technologies
developed by local researchers or adapted locally from foreign sources including inventions, any
income derived from these technologies shall be exempted from all kinds of taxes during the first ten
(10) years from the date of the first sale, subject to the rules and regulations of the Department of
Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the
legal heir or assignee upon the death of the inventor. The technologies, their manufacture or sale,
shall also be exempt from payment of license, permit fees, customs duties and charges on imports.
(Approved: April 28, 1992)

Inventor refers to, for purpose of this Act, any patented machine, product, process including
implements or tools and other related gadgets of invention, utility model and industrial design
patents.
Investor refers to the patentee/s, heir/s, assignment/s, of an Invention letters patent, Utility Model
letters or Industrial Design letters patent.

B. Items of Gross Income

Sec. 32 (see Code)

1. Compensation for personal services

a. In money

b. In kind

i. Convenience of the employer rule

Henderson vs. Collector (1 SCRA 649)

Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c
represents a group of American cos. engaged in the business of general insurance (exc. in life
insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and utilities.
Although he and his wife are childless and are only two in the family, they lived in a large apartment
provided for by his employer. As company president, he and his wife had to entertain and put up
houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental and
utilities expenses.

Held: The exigencies of Henderson's high executive position, not to mention social standing,
demanded and compelled them to live in a more spacious and pretentious quarters like the ones they
had occupied. Because they had to entertain and put up houseguests, the employer had to grant him
allowances for rental and utilities in addition to his annual basic salary to take care of those expenses
for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live
or did not have to live in the apartment chosen by the employer is of no moment, for no part of the
allowance redounded to the benefit of the Hendersons. Neither was there an amount retained by
them. Their bills for rental were paid directly by the employer to the creditor.

ii.a. REVENUE REGULATIONS NO. 02-98

(A) Compensation Income Defined. — In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code.

The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director's fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits except those which are
subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and
other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a
percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.

Remuneration for services constitutes compensation even if the relationship of employer and
employee does not exist any longer at the time when payment is made between the person in whose
employ the services had been performed and the individual who performed them.

(1) Compensation paid in kind. — Compensation may be paid in money or in some medium other
than money, as for example, stocks, bonds or other forms of property. If services are paid for in a
medium other than money, the fair market value of the thing taken in payment is the amount to be
included as compensation subject to withholding. If the services are rendered at a stipulated price, in
the absence of evidence to the contrary, such price will be presumed to be the fair market value of the
remuneration received. If a corporation transfers to its employees its own stock as remuneration for
services rendered by the employee, the amount of such remuneration is the fair market value of the
stock at the time the services were rendered.
(2) Living quarters or meals. — If a person receives a salary as remuneration for services
rendered, and in addition thereto, living quarters or meals are provided, the value to such person of
the quarters and meals so furnished shall be added to the remuneration paid for the purpose of
determining the amount of compensation subject to withholding. However, if living quarters or
meals are furnished to an employee for the convenience of the employer, the value thereof need not
be included as part of compensation income.
(3) Facilities and privileges of a relatively small value. — Ordinarily, facilities and privileges (such
as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or
offered by an employer to his employees generally, are not considered as compensation subject to
withholding if such facilities or privileges are of relatively small value and are offered or furnished by
the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees.
Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for payment to
the Commissioner.
(4) Tips and gratuities. — Tips or gratuities paid directly to an employee by a customer of the
employer which are not accounted for by the employee to the employer are considered as taxable
income but not subject to withholding.
(5) Pensions, retirement and separation pay. — Pensions, retirement and separation pay constitute
compensation subject to withholding, except those provided under Subsection B of this section.
(6) Fixed or variable transportation, representation and other allowances —
(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are
received by a public officer or employee or officer or employee of a private entity, in addition to the
regular compensation fixed for his position or office, is compensation subject to withholding.
(b) Any amount paid specifically, either as advances or reimbursements for travelling,
representation and other bonafide ordinary and necessary expenses incurred or reasonably expected
to be incurred by the employee in the performance of his duties are not compensation subject to
withholding, if the following conditions are satisfied:
(i) It is for ordinary and necessary travelling and representation or entertainment expenses paid
or incurred by the employee in the pursuit of the trade, business or profession; and
(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with
the specific requirements of substantiation for each category of expenses pursuant to Sec. 34 of the
Code. The excess of actual expenses over advances made shall constitute taxable income if such
amount is not returned to the employer. Reasonable amounts of reimbursements/ advances for
travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an
employee while he is on an assignment or duty need not be subject to the requirement of
substantiation and to withholding.
(7) Vacation and sick leave allowances. — Amounts of "vacation allowances or sick leave credits"
which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation
or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation.
However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were
paid to the employee during the year are not subject to income tax and to the withholding tax.
(8) Deductions made by employer from compensation of employee. — Any amount which is
required by law to be deducted by the employer from the compensation of an employee including
the withheld tax is considered as part of the employee's compensation and is deemed to be paid to
the employee as compensation at the time the deduction is made.
(9) Remuneration for services as employee of a nonresident alien individual or foreign entity. —
The term "compensation" includes remuneration for services performed by an employee of a
nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien
individual or foreign entity is engaged in trade or business within the Philippines. Any person
paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign
corporation which is not engaged in trade or business within the Philippines is subject to all
provisions of law and regulations applicable to an employer.
(10) Compensation for services performed outside the Philippines. — Remuneration for services
performed outside the Philippines by a resident citizen for a domestic or a resident foreign
corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident
individual not engaged in trade or business in the Philippines shall be treated as compensation which
is subject to tax.
A non-resident citizen as defined in these regulations is taxable only on income derived from sources
within the Philippines. In general, the situs of the income whether within or without the Philippines,
is determined by the place where the service is rendered.

ii.b. REVENUE REGULATION NO. 03-98: Implementing Section 33 of the
National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special
Treatment of Fringe Benefits (January 1, 1998)

SPECIAL TREATMENT OF FRINGE BENEFITS

Imposition of Fringe Benefits Tax — A final withholding tax is hereby imposed on the grossed-up
monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except
rank and file employees as defined in these Regulations, whether such employer is an individual,
professional partnership or a corporation, regardless of whether the corporation is taxable or not, or
the government and its instrumentalities except when: (1) the fringe benefit is required by the nature
of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is
for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the
following rates: Effective 1/1/1998 - 34%; 1/ 1/1999 - 33%; 1/1/2000 - 32%.

Definition of Fringe Benefit — In general, except as otherwise provided under these regulations, for
purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit
furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual
employee (except rank and file employee as defined in these regulations) such as, but not limited to
the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate
and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social
and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows.

Coverage — These Regulations shall cover only those fringe benefits given or furnished to
managerial or supervisory employees and not to the rank and file.

The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither
managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines
"managerial employee" as one who is vested with powers or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees. "Supervisory employees" are those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent judgment.

Moreover, these regulations do not cover those benefits properly forming part of compensation
income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-
98.

Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these
Regulations.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary
value of the fringe benefit by the following percentages and in accordance with the following
schedule: Effective 1/1/1998 - 66%; 1/ 1/ 1999 - 67%; 1/ 1/2000 - 68%.

The grossed-up monetary value of the fringe benefit represents the whole amount of income realized
by the employee which includes the net amount of money or net monetary value of property which
has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but
paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section.

Determination of the Amount Subject to the Fringe Benefit Tax — In general, the computation of the
fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the
proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code
allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to
the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe
benefits which are "required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the employer" are not
subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the
employer and employee, the portion which shall be subject to the fringe benefits tax and the
guidelines for the valuation of fringe benefits are defined under these rules and regulations.

Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows:

(1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value
is the amount granted or paid for.
(2) If the fringe benefit is granted or furnished by the employer in property other than money and
ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair
market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of
the Commissioner to Prescribe Real Property Values).
(3) If the fringe benefit is granted or furnished by the employer in property other than money but
ownership is not transferred to the employee, the value of the fringe benefit is equal to the
depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or
business in the Philippines — A fringe benefit tax of twenty-five percent (25%) shall be imposed on
the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing
the monetary value of the fringe benefit by seventy-five per cent (75%).

Taxation of fringe benefit received by (1) an alien individual employed by regional or area
headquarters of a multinational company or by regional operating headquarters of a multinational
company; (2) an alien individual employed by an offshore banking unit of a foreign bank established
in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign
service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their
Filipino individual employees who are employed and occupying the same position as those occupied
or held by the alien employees. — A fringe benefit tax of fifteen per cent (15%) shall be imposed on
the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing
the monetary value of the fringe benefit by eighty-five per cent (85%).

Taxation of fringe benefit received by employees in special economic zones — Fringe benefits
received by employees in special economic zones, including Clark Special Economic Zone and Subic
Special Economic and Free Trade Zone, are also covered by these regulations and subject to the
normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.

(For further info. see the original RR 03-98)

C. Interest Income

1. Taxable

2. Not Taxable

3. Imputed interest on the inter-company loans/advances

a. Sec. 50 (see Code)

b. REVENUE MEMORANDUM ORDER NO. 63-99: Determination of Taxable
Income on Inter-Company Loans or Advances applying Sec. 50 of the NIRC, as amended

Coverage: This paper applies to all forms of bona fide indebtedness and includes:

1. Loans or advances of money or other consideration (w/n evidenced by a written instrmt);
2. Indebtedness arising in the ordinary course of business out of sales, leases, or the rendition of
services by or between members of the group,, or any other similar transaction;
3. But does not apply to alleged indebtedness w/c was in fact a contribution of capital or a
distribution by a corporation w/ respect to its shares.

This order adopts the arm's lengthThis order adopts the arm's lengththistribution by a corporation
w/ respect to its shares.

This order adopts the arm's lengthThis order adopts the arm's lengththistribution by a corporation
w/ respect to its shares.

This order adopts the armThThis orThis order adopts the arm's lengththistribution by a corporation
w/ respect to its shares.

This order adopts the arm's lengthThis order adopts the arm's lengththistribution by a corporation
w/ respect to its shares.

ThThThis order adopts the arm's leshall be the rate of interest w/c was charged or would have been
charged at the time the indebtedness arose in independent transaction w/ or between related
unrelated parties under similar circumstances. All relevant factors will be considered, incl. the
amount and duration of the loan, the security involved, the credit standing of the borrower, and the
interest rate prevailing at the situs of the lender or creditor for comparable loans. For domestic
transactions, the standard of interest rate is the Bank Reference Rate prescribed by the Central Bank.

Sec. 50 applies to both taxable entities and tax exempt organizations.


D. Income under Lease Agreements

Sec. 49, Revenue Regulations No. 2 (see RR No. 2)

1. Rent
2. Obligations of lessor to 3rd parties assumed and paid by lessee

3. Advance rental
4. Leasehold improvements



PART 5


PART 6

C. INTEREST

1. INTEREST DEDUCTIBLE FROM GROSS INCOME (Sec 34. B, NIRC)
-The amount of interest paid or incurred within a taxable year on indebtedness in connection
with the taxpayer's profession, trade or business shall be allowed as deduction from gross income
Provided, that the taxpayer's otherwise allowable deduction for interest expense shall
be REDUCED by an amount equal to the following percentages of interest income subject to final tax:
41% beginning January 1, 1998
39% beginning January 1, 1999
38% beginning January 1, 2000

2. INTEREST NOT DEDUCTIBLE
No deduction is allowed in respect of interest under the following:

a. ADVANCE INTEREST - 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 through
discount or otherwise
Provided, that such interest shall be allowed as a deduction in the year the indebtedness is paid.
Provided furhter, that if the indebtedness is payable in periodic amortizations the amount of
interest which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as a deduction in such taxable year.

**under this provision, the phrase "within the taxable year" assumes a modified meaning. For
example, a taxpayer using the cash basis method of accounting borrows money in which
interest is paid in advance through discount. He obtains a loan of P1,000,000 in October 1998
subject to 20% interest; hence, after paying the advance interest of P200,000 he receives only P
800,000.00 Can the borrower/taxpayer claim the deduction when he files his ITR in April
1999?
It depends on w/n the principal obligation had been paid.
ii. if the entire principal obligation had been paid, then the entire amount of interest can be
claimed as itemized deduction
iii. if only 1/2 of the obligation has been paid, only 1/2 interest can be claimed as itemized
deduction;
iv. if no payment had been paid on the principal obligation, the advance interest paid
cannot be claimed as deduction on the year that it was paid.

b. PERSONS UNDER 36b - if both the taxpayer and the person to whom the payment has
been made or is to be made are persons specified under section 36B, namely:
i. between members of a family
ii. between an individual and a corporation more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by or for such
individual; and
iii. between two corporations more than 50% in value of the outstanding stock of
each of which is owned, directly or indirectly, by or for the same individual;
iv. between the grantor and a fiduciary of any trust; or
v. between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust
vi. between a fiduciary or a trust and a beneficiary

c. PETROLEUM OPERATION - if the indebtedness is incurred to finance petroleum
operation.

3. PREPAID INTEREST OF INDIVIDUAL ON CASH METHOD OF ACCOUNTING

COMM. V. VDA DE PRIETO
(L-13912, Sept. 30, 1960, 109 Phils 592)

The respondents, V.E. Lednicky and Maria Valero Lednicky, are husband and wife, both American
citizens residing in the Philippines, and have derived all their income from Philippine sources for the
taxable years in question. In compliance with Phil tax law, they filed their income tax return for 1955
and 1956. In 1956, they filed an amended income tax return claiming a tax deduction for federal
income taxes which they paid to the United States in the year 1955. In 1959, they likewise claimed a
similar tax deduction for the 1956 return. Comm of IR failed to answer the claim for refund, thus
they filed a petition with the Tax Court.
Issue: whether a US citizen residing in the Philippines who derives income wholly from sources
within the Republic of the Philippines, may deduct from his gross income the income taxes he has
paid to the US government for the taxable year on the strength of sec 30 (c-1) of the Phil Internal
Revenue Code?
5


SC:
1. The wording of Sec 30 shows the code's intent that the right to deduct income taxes paid to
foreign government from the taxpayer's gross income is given only as an ALTERNATIVE to his
right to claim a tax credit for such foreign income taxes under Sec 30 so that unless the alien
resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the
foreign income taxes from his gross income. The law provides that the deduction shall be allowed
if the taxpayer in his return does not signify his desire to have the benefits of tax credits for taxes
paid to foreign countries. Thus, the statutes assumes that the taxpayer in question may also
signify his desire to claim a tax credit and waive the deduction.
2. No double credit (i.e, for claiming twice the benefits of his payment of foreign taxes, by deduction
from gross income and by tax credit) exists here. This danger cannot exist if the taxpayer cannot
claim benefit under either of these headings at his option, so that he must be entitled to a tax
credit (respondent here are NOT entitled to tax credit because all their income is derived from
Phil sources), or the option to deduct from gross income disappears altogether.
3. No double taxation exists. Double taxation become obnoxious only when the taxpayer is taxed
twice for the benefit of the same governmental entity. In the present case, although the taxpayer
would have to pay two taxes on the same income but the Philippine government only receives the
proceeds of one tax, there is no obnoxious double taxation.



D. TAXES

(Sec. 34, C, NIRC, Sec. 80-82, RR-2)

1.DEDUCTIBLE FROM GROSS INCOME

GENERAL RULE: Taxes paid or incurred within the taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as deduction.

** Import duties paid to the proper customs officers and business, occupation, license, privilege,
excise and stamp taxes and any other taxes of every name or nature paid directly to the Government
of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means
taxes proper and no deduction shall be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered
taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the
merchants sales tax imposed by law upon sales is not deductible by the individual purchasers even
though the tax may be billed to him as a separate item.

EXCEPTIONS:
a. Income tax
b. Income taxes imposed by authority of any foreign country (but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to
any extent the benefits of tax credits paid to foreign countries)

5
Sec. 30. Deductions from gross income- In computing net income there shall be allowed as deductions -
© Taxes - taxes paid or accrued within the taxable year, except -
B. income, war-profits, and excess profit taxes imposed by the authority of any foreign country; but this deduction shall be allowed
in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph 3 of this
subsection (relating to credit for foreign countries)
c. Estate and donor's taxes
d. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.

Provided, that the taxes allowed under this subsection, when refunded or credited shall be included as
part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

Others (under Sec 80-82, RR2):
e. Taxes paid by a nonresident alien individual and a foreign corporation - taxes are
deductible only if and to the extent that the taxes for which deduction is claimed are
connected with income from sources within the Philippines;
f. Income tax imposed by the Philippine government - the law does not allow the deduction
of the income tax paid to or accrued in favor of the government and in no case may the
taxpayer avail of such deduction;
g. income, war profits, and excess profits taxes imposed by the authority of a foreign country
- allowed as deductions only if the taxpayer does not signify in his return his desire to have
to any extent the benefits of the provisions of law allowing credits against the tax for taxes
of foreign countries. In the case of a citizen of a foreign country residing in the Philippines
whose income from sources within such foreign country is not subject to income tax, only
that portion of the taxes paid to such foreign country which corresponds to his net income
subject to the Philippine income tax shall be allowed as deduction.


** In computing the net income of an individual, no deduction is allowed for the tax is imposed upon
his interest as shareholder of a bank or other corporation, which are paid by the corps w/o
reimbursements from the taxpayer. The amount so paid should not be included in the income of the
shareholder.
** In case of corporate bonds or other obligations containing a tax-free covenant clause, the
corporation paying a tax or any part of it for someone else pursuant to its agreement is not entitled to
deduct such payment from gross income on any ground.

3. TAX CREDITS vs. TAX DEDUCTIONS


CIR vs. LEDNICKY
Gr l-18169, July 31, 1964)

4. FINES AND PENALTIES

GUTIERREZ vs. COLLECTOR
14 SCRA 33

E. LOSSES
(Sec. 93-101, RR-2)

1. KINDS OF TAXPAYERS AND THEIR LOSSES
a. INDIVIDUALS - losses sustained by individuals during the year not compensated for by
insurance or otherwise are FULLY deductible (except by nonresident aliens):-
a.1. If incurred in a taxpayer's trade or
a.2. if incurred in any transaction entered into for profit; or
a.3. of property not connected with the trade or business if arising from fires, storm,
shipwreck, or other casualty, or from robbery, theft or embezzlement. No loss shall,
however, be allowed as a deduction if at the time of filing of the return, such loss has
been claimed as deduction for estate or inheritance tax purposes in the estate or
inheritance tax return.
b. CORPORATIONS - Domestic corporations may deduct losses actually sustained and
charged off w/i the year and not compensated for by insurance or otherwise.
c. NONRESIDENT ALIENS and FOREIGN CORPORATIONS - are only allowed:
c.1. losses sustained in business or trade conducted within the Philippines
c.2. losses of property within the Philippines arising from fires, storms, shipwrecks, or
other casualty and from robbery, theft or embezzlement, and
c.3. losses actually sustained in transactions entered into for profit in the Philippines,
although not connected with their trade or business, not compensated by insurance or
otherwise.

***LOSSES IN GENERAL (SEC 34 d, NIRC, Sec. 96, RR2): must be:
a. actually sustained during the taxable year
b. not compensated for by insurance or other forms of indemnity
c. if incurred in trade, profession or business; or of property connected with trade,
business or profession, if the loss arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
d. evidenced by closed and completed transactions
- proper adjustment must be made in each case for expenditures or itmes of loss properly
chargeable to capital account, and for depreciation, obsolescence, amortization or
depletion.
- The amount of loss must be reduced by the amount of any insurance or other
compensation involved, and by the salvage value, if any of the property
- A loss on the sale of residential property is NOT deductible unless the property was
purchased or constructed by the taxpayer with a view to its subsequent sale for
pecuniary profit
- No loss is sustained by the transfer or property by gift or death
- Loss sustained in illegal transactions are not deductible

2. COMPLETED TRANSACTIONS

FERNANDEZ HERMANOS vs. CIR
29 SCRA 552

3. SPECIAL RULES ON LOSSES

A. VOLUNTARY REMOVAL OF BUILDINGS (Sec. 97. RR-2)
Loss due to the voluntary removal or demolition of old buildings, the scrapping of old
machinery, equipment, etc. incident to renewals and placements will be deductible from gross
income. When a taxpayer buys real estate upon which is located a building, w/c he proceeds
to raze with a view to erecting thereon another building, it will be considered that the taxpayer
has sustained no deductible expense on account of the cost of such removal, the value of the
real estate, exclusive of old improvements, being presumably equal to the purchase price of
the land and building plus the cost of removing the useless building.

B. LOSS OF USEFUL VALUE OF ASSETS (Sec. 98, RR-2)
When, through some change in business conditions, the usefulness in the business of some or
all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or
discards such assets permanently from use in such business, hey may claim as deduction, the
actual loss sustained.
In determining the amount of the loss, adjustment must be made for improvements,
depreciation, the salvage value of the property. This exception to the rule requiring a sale or other
disposition of property in order to establish a loss requires proof of some unforseen cause by
reason of which the property has been prematurely discarded, as for example,
1. where any increase in the cost or change in the manufacture of any product makes it necessary
to abandon such manufacture, to which special machinery is exclusively devoted, or
2. where legislation directly or indirectly makes the continued profitable use of the property
impossible.
This exception DOES NOT APPLY:
1. to a case where the useful life of property terminates solely as a result of those gradual process
for which depreciation allowance are authorized.
2. To inventories other than capital assets
This exception APPLIES to buildings only when they are permanently abandoned or permanently
devoted to a radically different use, and to machinery only when its use as such is permanently
abandoned.

C. SHRINKAGE IN VALUE OF STOCKS (Sec. 99, RR-2)
A person possessing stock of a corporation cannot subtract from gross income any amount
claimed as a loss merely on account of shrinkage in value of a stock through fluctuation of the
market or otherwise. The loss allowable in such case is that wholly suffered when the stock is
disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in
accordance with these regulations may be deducted by the owner in the taxable year in which the
stock became worthless, provided a satisfactory showing of its worthlessness is made, as in the
case of bad debts.

4.WAGERING LOSSES - allowed only to the extent of the gains from such transactions.

5. SUBSTANTATION OF LOSSES (Rev Reg 12-77)

6. FOREIGN EXCHANGE LOSSES
a. BIR Ruling 144-85, August 26, 1985
Issue: w/n foreign exchange losses which have accrued by reason of devaluation are deductible for
income tax purposes?
Ruling: foreign exchange losses which have accrued by reason of devaluation but where remittances have not
yet been made are not deductible for income tax purposes.
- the annual decrease in the value of property is not normally allowable as a loss. To be
allowable, the loss must be realized
- when foreign currency acquired in connection with a transaction in the regular course
of business is disposed of, ordinary gain or loss results from the fluctuations. The loss is
deductible only for the year it is actually sustained. It is sustained during the year in
which the loss occurs as evidenced by closed and completed transaction and as fixed by
identifiable events occurring in that year. A closed transaction is a taxable event which
has been consummated. No taxable event has as yet been consummated prior to the
remittance of the scheduled amortization. Accordingly, foreign exchange losses
sustained as a result of devaluation of the peso vis-à-vis the foreign currency, e.g., US
Dollar, but which remittance of scheduled amortization consisting of principal and
interests payments on a foreign loan has not actually been made are not deductible
from gross income for income tax purposes.

b. Rev. Memo Circ 26-85, July 15, 1985, Interbank guiding rate
- Beginning Jan 1, 1985, the conversion rate to be applied shall be the prevailing interbank
reference rate for the day of the transaction.
- In the event that the foreign exchange rate as stated in the above paragraph (a) is
impractical or not feasible, the average interbank reference during the year shall apply.
- For the purpose of converting the tax liability in US dollar to Philippine peso, the
prevailing interbank rate at the time of payment shall be applied when paid before the
due date of the tax or the prevailing interbank reference rate at the due date of tax when
paid on or after the due date of the tax.
- When currency involved is other than US Dollar, the foreign currency shall first be
converted to US dollar at the prevailing exchanges rate between the two currencies.
- This circular does not apply to transaction covered by RMC 30-84 dated October 19,
1984, regarding the imposition of additional 1% gross receipt tax on buying and selling
of foreign exchange of peso by bank, non-bank financial intermediaries and other
authorized foreign exchange dealers or agents and RMC 32-854 dated Nov 7, 1984, in
determining (for income tax purposes) the cost basis of certain commodities imported
beginning Jan 1, 1984, the value and prices thereof are quoted in the foreign currency.

7. ABANDONMENT LOSSES
A. If a contract area where petroleum operations are undertaken is partially or wholly abandoned,
ALL accumulated exploration and development expenditures pertaining thereto shall be allowed
as a deduction: Provided, that accumulated expenditures incurred in that area prior to Jan 1, 1979
shall be allowed as a deduction only form any income derived from the same contract area. In all
cases, notices of abandonment shall be filed with the Commissioner.
B. If a producing well is subsequently abandoned, the unamortized costs and the undepreciated
costs of equipment directly used therein, shall be allowed as a deduction in the year such well,
equipment or facility is abandoned by the contractor: Provided, that if such abandoned well is
registered and production is resumed, or if such equipment or facility is restored into service, the
said costs shall be included as part of gross income in the year of resumption or restoration and
shall be amortized or depreciated, as the case may be.

8. NET OPERATING LOSS CARRY-OVER:
A. THREE YEAR PERIOD: The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not been previously offset as
deduction from gross income shall be carried over as a deduction from gross income for the next
three consecutive taxable years immediately following the year of such loss.
Provided, that any net loss incurred in a taxable year during which the taxpayer was exempt from
income tax shall not be allowed as a deduction under this subsection.
B. NO SUBSTANTIAL CHANGE IN OWNERSHIP (75% rule)
Provided, further, that a net operating loss carry-over shall be allowed only if there has been no
substantial change in the ownership of the business or enterprise in that --
i. not less than 75% in nominal value of outstanding issued shares, if the business is in the
name of a corporation, is held by or on behalf of the same persons; or
ii. not less than 75% of the paid up capital of the corporation, if the business is in the name
of a corporation, is held by or on behalf of the same persons.
** "net operating loss" = excess of allowable deduction over gross income of the business in a taxable
year

Fernandez v CIR

FERNANDEZ HERMANOS, INC., petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Facts: Fernandez Hermanos, Inc., is a domestic-corporation organized for the principal purpose of
engaging in business as an "investment company". The CIR disallowed the following deductions
(most were sustained by the CTA):

1. losses in Mati Lumber Co. in 1950
2. losses or bad debts in Palawan Manganese Mines, I.nc. in 1951
3. losses in Balamban Coal Mines in 1950 and 1951
4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954

Held: The Supreme Court discussed the allowance or disallowance of each in the following manner:

1. Allowed. These losses represent the shares of stock (worth P8,050) pet. acquired from Mati
Lumber Co. in Jan. 1, 1948. The pet. was correct in writing off and claiming as a deduction in 1950 the
amount on the ground that the lumber company had ceased operations and became insolvent in that
year. The CIR was incorrect in arguing that since the company still owned a sawmill and some
equipment, the shares of stock still had value. The proper assessment would be to treat as income for
the year the proceeds the pet. would get from the liquidation of those assets.

2. Disallowed. These losses represent part of the loans extended by the pet. to its 100% owned
subsidiary. Pet. advanced financial assistance to Palawan Manganese Mines, Inc. from 1945 to 1952.
By way of payment, Palawan was to give pet. 15% of its net profits. Whether Palawan was able to pay
the loans or not because it continued to operate at a loss is immaterial. Pet. cannot properly claim as a
loss the advances given to Palawan in 1951 for that year. There can be no partial writing off as a loss
or bad debt under the Tax Code. Those losses or bad debts ascertained within the taxable year are
deductible in full or not at all. Pet. continued to give Palawan advances even beyond 1951. It was
only in 1956 when Palawan decided to cease operations.

3. Disallowed. These losses represent sums spent by the pet. for the operation of its Balamban
coal mines in 1950 and 1951. The pet. should have treated them as losses in 1952 when the mines were
abandoned, and not in 1950 and 1951 on the ground that the mines made no sales of coal during
those years.

4. Allowed. These losses represent sums spent by the pet. for the operation of the 2 Haciendas.
The amounts were properly reported as deductions for the correct years. The only reason why the
CIR disallowed them was on the ground that the farms were operated solely for pleasure or as a
hobby and not for profit. But the Supreme Court is not convinced, and being for business, the pet.
may properly deduct the same. (no factual details were mentioned to explain why)

Gutierrez vs CIR

The late LINO GUTIERREZ substituted by ANDREA C. VDA. DE GUTIERREZ, ANTONIO D.
GUTIERREZ, GUILLERMO D. GUTIERREZ, SANTIAGO D. GUTIERREZ and TOMAS D.
GUTIERREZ, petitioners, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

Facts: Lino Gutierrez was primarily engaged in the business of leasing real property for which he
paid real estate broker's privilege tax. He filed his income tax returns for the years 1951, 1952, 1953
and 1954.
He claimed as deductions, among others the ff: transportation expenses which petitioner
incurred to attend the funeral of his friends and the cost of admission tickets to operas, the cost of
furniture given as commission, expenses incurred in attending the National Convention of Filipino
Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners' Association, car
expenses, salary of his driver and car depreciation, ordinary repairs for the maintenance of rental
apartments, litigation expenses to collect apartment rentals, fines and penalties for late payment of
taxes, and contributions to an indigent family and various individuals.
On July 10, 1956 the Commissioner (formerly Collector) of Internal Revenue assessed against
Gutierrez the following deficiency income tax:
1951(P1,400.00),1952(672.00),1953(5,161.00),1954(4,608.00) or a Total of P11,841.00.

Held: To be deductible, an expense must be (1) ordinary and necessary; (2) paid or incurred within
the taxable year; and, (3) paid or incurred in carrying on a trade or business.
The transportation expenses which petitioner incurred to attend the funeral of his friends and
the cost of admission tickets to operas were expenses relative to his personal and social activities
rather than to his business of leasing real estate, thus not deductible.
According to the evidence, the taxpayer's car was utilized both for personal and business
needs. We therefore find it reasonable to allow as deduction one-half of the driver's salary, car
expenses and depreciation.
The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used
to repair the taxpayer's rental apartments, did not increase the value of such apartments, or prolong
their life. They merely kept the apartments in an ordinary operating condition. Hence, the expenses
incurred therefore are deductible as necessary expenditures for the maintenance of the taxpayer's
business.
Similarly, the litigation expenses defrayed by Gutierrez to collect apartment rentals and to
eject delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary
and necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay
their accounts.
Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of
taxes. While Section 30 of the Tax Code allows taxes to be deducted from gross income, it does not
specifically allow fines and penalties to be so deducted.
As regards the alms to an indigent family and various individuals, contributions to Lydia
Yamson and G. Trinidad and a donation consisting of officers' jewels and aprons to Biak-na-Bato
Lodge No. 7, the same are not deductible from gross income inasmuch as their recipients have hot
been shown to be among those specified by law. Contributions are deductible when given to the
Government of the Philippines, or any of its political subdivisions for exclusively public purposes, to
domestic corporations or associations organized and operated exclusively for religious, charitable,
scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans, or to societies
for the prevention of cruelty to children or animals, no part of the net income of which inures to the
benefit of any private stockholder or individual.

PART 7

PART 8
Calasanz vs. CIR

Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the
sale of the lots under Section 34 [b] [2] 3 of the Tax Code.

The theory advanced by the petitioners is that inherited land is a capital asset within the
meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot
be said to have engaged in the real estate business and may not be denied the preferential tax
treatment given to gains from sale of capital assets, merely because he disposed of it in the only
possible and advantageous way.

Petitioners averred that the tract of land subject of the controversy was sold because of their
intention to effect a liquidation. They claimed that it was parcelled out into smaller lots because its
size proved difficult, if not impossible, of disposition in one single transaction. They pointed out that
once subdivided, certainly, the lots cannot be sold in one isolated transaction, Petitioners, however,
admitted that roads and other improvements were introduced to facilitate its sale.
On the other hand, respondent Commissioner maintained that the imposition of the taxes in
question is in accordance with law since petitioners are deemed to be in the real estate business for
having been involved in a series of real estate transactions pursued for profit. Respondent argued
that property acquired by inheritance may be converted from an investment property to a business
property if, as in the present case, it was subdivided, improved, and subsequently sold and the
number, continuity and frequency of the sales were such as to constitute "doing business."
Respondent likewise contended that inherited property is by itself neutral and the fact that the
ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer did
with the property. Respondent concluded that since the lots are ordinary assets, the profits realized
therefrom are ordinary gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital
assets. Section 34]a] [1] of the National Internal Revenue Code broadly defines capital assets as
follows:
"[1] Capital assets. - The term 'capital assets' means property held by the taxpayer [whether
or not connected with his trade or business], but does not include, 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, or property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade or business, or property used in the
trade or business of a character which is subject to the allowance for depreciation provided in
subsection [f] of section thirty; or real property used in the trade or business of the taxpayer."

The statutory definition of capital assets is negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.
And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an
ordinary gain depending on the kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality
whether property sold by a taxpayer was held primarily for sale to customers in the ordinary course
of his trade or business or whether it was sold as a capital asset.
Although several factors or indices have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the absence of these factors
conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances.
Also a property initially classified as a capital asset may thereafter be treated as an ordinary
asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or
in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives
capital gain or loss even though the property has to be subdivided or improved or both to make it
salable. However, if the inherited property is substantially improved or very actively sold or both it
may be treated as held primarily for sale to customers in the ordinary course of the heir's business.
Upon an examination of the facts on record, We are convinced that the activities of petitioners
are indistinguishable from those invariably employed by one engaged in the business of selling real
estate.
One strong factor against petitioners' contention is the business element of development which
is very much in evidence. Petitioners did not sell the land in the condition in which they acquired it.
While the land was originally devoted to rice and fruit trees, it was subdivided into small lots and in
the process converted into a residential subdivision and given the name Don Mariano Subdivision.
Extensive improvements like the laying out of streets, construction of concrete gutters and
installation of lighting system and drainage facilities, among others, were undertaken to enhance the
value of the lots and make them more attractive to prospective buyers. The audited financial
statements submitted together with the tax return in question disclosed that a considerable amount
was expended to cover the cost of improvements. As a matter of fact, the estimated improvements of
the lots sold reached P170,028.60 whereas the cost of the land is only P4,742.66. There is authority that
a property ceases to be a capital asset if the amount expended to improve it is double its original cost,
for the extensive improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his business.

Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957.
The sizable amount of receivables in comparison with the sales volume of P446,407.00 during the
same period signifies that the lots were sold on installment basis and suggests the number, continuity
and frequency of the sales. Also of significance is the circumstance that the lots were advertised for
sale to the public and that sales and collection commissions were paid out during the period in
question. Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner, the American court in clear and categorical terms rejected the
liquidation test in determining whether or not a taxpayer is carrying on a trade or business. The court
observed that the fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The court enunciated
further:

"We fail to see that the reasons behind a person's entering into a business - whether it is to
make money or whether it is to liquidate - should be determinative of the question of whether
or not the gains resulting from the sales are ordinary gains or capital gains. The sole question
is - were the taxpayers in the business of subdividing real estate? If they were, then it seems
indisputable that the property sold falls within the exception in the definition of capital assets .
that is, that it constituted `property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business.'"

Additionally, in Home Co., Inc. vs. Commissioner, the court articulated on the matter in this
wise:

"One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may be
conducted in the most advantageous manner to the seller and he will not lose the benefits of
the capital gain provision of the statute unless he enters the real estate business and carries on
the sale in the manner in which such a business is ordinarily conducted. In that event, the
liquidation constitutes a business and a sale in the ordinary course of such a business and the
preferred tax status is lost."

In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners
engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary
income taxable in full.


BIR Riling No. 383-87

The above reorganization is a merger within the contemplation of Section 35(c)(2) and (5(b) of
the Tax Code because a corporation (DFI) acquired all of the properties of another corporation (EFI)
solely for stocks, the transaction undertaken being for a bona fide business purpose and not solely for
the purpose of escaping the burden of taxation.

Accordingly, the transfer by EFI of all its assets and liabilities to DFI solely, in exchange for the
latter's shares of stock shall not give rise to the recognition of gain or loss pursuant to Section 35(c)(2)
of the Tax Code. No gain or loss shall be recognized to EFI upon the distribution of DFI shares to EFI
stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain
or loss shall be recognized to EFI stockholders upon the exchange of their stocks solely for DFI stocks
under Section 35(c)(2) of the Tax Code.

The basis of the assets received by DFI shall be the same as it would be in the hands of EFI. The
basis of DFI stocks received by the stockholders of EFI shall be the same as the basis of the EFI stocks
surrendered in exchange therefor.

If the total liabilities to be assumed by DFI upon effective merger date exceed the historical or
original acquisition cost (cost basis) of the assets transferred by EFI, the excess shall be recognized as
gain of EFI. (Sec. 35(c)(4)(b), Tax Code, as amended by P.D. No. 1773)
It is understood, however, that upon the subsequent sale or exchange of the assets or shares of stocks
acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax.

The abovementioned transactions shall not be subject to the gift tax as there is no intention to
donate on the part of any of the parties.
However, in order that the above-described reorganization can be considered a merger under Section
35(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements:

A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the
adoption being shown by the acts of its duly constituted responsible officers and appearing upon the
official records of the corporation. Each corporation, which is a party to the reorganization, shall file,
as part of its return for the taxable year within which the reorganization occurred, a complete
statement of all facts pertinent to the non-recognition of gain or loss in connection with the
reorganization, including:
(1) A copy of the plan of reorganization, together with a statement executed under the
penalties of perjury showing in full the purposes thereof and in detail all transactions incident
to or pursuant to the Plan.
(2) A complete statement of the cost or other basis of all property, including all stocks or
securities, transferred incident to the plan.
(3) A statement of the amount of stock or securities and other property or money received
from the exchange, including a statement of all distributions or other disposition made thereof.
The amount of each kind of stock or securities and other property received shall be stated on
the basis of the fair market value thereof at the date of the exchange.
(4) A statement of the amount and nature of any liabilities assumed upon the exchange,
and the amount and nature of any liabilities to which any of the property acquired in the
exchange is subject.

B. Every taxpayer, other than a corporation a party to the reorganization, who received stock or
securities and other property or money upon a tax-free exchange in connection with a corporate
reorganization shall incorporate in his income tax return for the taxable year in which the exchange
takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such
exchange including:
(1) A statement of the cost or other basis of the stock or securities transferred in the
exchange; and
(2) A statement in full of the amount of stock or securities and other property or money
received from the exchange, including any liabilities assumed upon the exchange, and any
liabilities to which property received is subject. The amount of each kind of stock or securities
and other property (other liabilities assumed upon the exchange) received shall be set forth
upon the basis of the fair market value thereto at the date of the exchange.

C. Permanent records in substantial form shall be kept by every taxpayer who participates in a
tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the
transferred property or money received (including any liabilities assumed on the exchange, or any
liabilities to which any of the properties received were subject), in order to facilitate the
determination of gain or loss from a subsequent disposition of such stock or securities and other
property received from the exchange. (par. 9803-B, P-H 1963 ed., p.9611)

In addition to the foregoing requirements, permanent records in substantial form must be kept by the
corporations participating in the merger showing the information listed above in order to facilitate
the determination of gain or loss from a subsequent disposition of the stock received as a
consequence of the merger.


CIR vs. Rufino

We hold that the Court of Tax Appeals did not err in finding that no taxable gain was derived
by the private respondents from the questioned transaction. Contrary to the claim of the petitioner,
there was a valid merger although the actual transfer of the properties subject of the Deed of
Assignment was not made on the date of the merger. The Court finds no impediment to the
exchange of property for stock between the two corporations being considered to have been effected
on the date of the merger. That, in fact, was the intention, and the reason why the Deed of
Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all
transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on
January 1. 1959, when the Deed of Assignment became operative. The certificates of stock
subsequently delivered by the New Corporation to the private respondents were only evidence of the
ownership of such stocks. Although these certificates could be issued to them only after the approval
by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking,
was transferred to them on the date the merger took effect, in accordance with the Deed of
Assignment. Our ruling then is that the merger in question involved a pooling of resources aimed at
the continuation and expansion of business and so came under the latter and intendment of the
National Internal Revenue code, as amended by the above-cited law, exempting from the capital
gains tax exchanges of property effected under lawful corporate combinations.

The basis consideration, of course, is the purpose of the merger, as this would determine
whether the exchange of properties involved therein shall be subject or not to the capital gains tax.
The criterion laid down by the law is that the merger "must be undertaken for a bona fide" business
purpose and not solely for the purpose of escaping the burden of taxation."

The procedure for merger in question was prescribed in Section 28-1/2 of the old Corporation
Law which, although not expressly authorizing a merger by name (as the new Corporation Code now
does in its Section 77), provided that "a corporation may, be action taken at any meeting of its board
of directors, sell, lease, exchange, or otherwise dispose of all or substantially all of its property and
assets, including its goodwill, upon such terms and conditions and for such considerations, which
may be money, stocks, bonds, or other instruments for the payment of money or other property or
other considerations, as its board of directors deem expedient." The transaction contemplated in the
old law covered the second type of merger defined by Section 35 of the Tax Code as "the acquisition
by one corporation of all or substantially all of the properties of another corporation solely for stock."
which is precisely what happened in the present case.

The merger had merely deferred the clam for taxes, which may be asserted by the government
later, when gains are realized and benefits are distributed among the stockholders as a result of the
merger. In other words, the corresponding taxes are not forever foreclosed or forfeited but may at the
proper time and without prejudice to the government still be imposed upon the private respondents,
in accordance with Section 35(c) (4) of the Tax Code. Then, in assessing the tax, "the basis of the
property transferred in the hands of the transferee shall be the same as it would be in the hands of the
transferor, increased by the amount of gain recognized to the transferor on the transfer." the only
inhibition now is that time has not yet come.

The reason for this conclusion is traceable to the purpose of the legislature in adopting the
provision of law in question.. The basic idea was to correct the Tax Code which, by imposing taxes on
corporate combinations and expansions, discouraged the same to the detriment of economic
progress, particularly the promotion of local industry. Speaking of this problem, H.B. No. 7233, which
was subsequently enacted into R.A. No. 1921 embodying Section 35 as now worded, declared in the
Explanatory Note: "The exemption from the tax of the gain derived from exchanges of stock solely for
stock of another corporation resulting from corporate mergers or consolidations under the above
provisions, as amended, was intended to encourage corporations in pooling, combining or expanding
their resources conducive to the economic development of the country."


BIR Ruling No. 274-87

Pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No.
4522 and Presidential Decree Nos. 1705 and 1773, no gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for stock in such a corporation of which as a
result of such exchange, said person alone or together with others, not exceeding four persons, gains
control of said corporation. The term "control" shall mean ownership of stocks in a corporation
possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is
determined by the amount of stock received i.e., subscribed and paid-up, whether for property or for
services by the transferor or transferors. In determining the 51% stock ownership, only those persons
who transferred property for stock in the same transaction may be counted up to a maximum of five.

Accordingly, no gain or loss shall be recognized to each of the six (6) transferors, Messrs.
Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra, Jr., Benjamin T. Madlangsacay, Eric A.
Cruz and Mrs. Josefina Ablan Mendoza and the transferee corporation, Maray Maray Farms, Inc.,
considering that after the exchange and as a result of the said exchange not more than five (5) of the
transferors will gain control of the transferee corporation.

It should be emphasized, however, that Section 35 (c)(2)(c) of the Tax Code merely defers
recognition of gain or loss from such transaction, for in determining the gain or loss from a
subsequent transaction of the properties or of the stocks involved in the exchange, the original or
historical cost of the properties or the stock is considered. Thus, if the transferors later sell or
exchange the shares of stock acquired by them in exchange, they shall be subject to income tax on
gains derived from such sale or exchange taking into consideration that the cost basis of the shares of
stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the
properties exchange therefor; and that the cost basis to the transferee of the properties exchanged for
stocks shall be the same as it would be in the hands, of the transferors [Section 35 (c)(5)(a) and (b),
Tax Code, as amended by Presidential Decree No. 1773].

In this connection, you are further advised that in order that the parties to the exchange can
avail of the non-recognition of gains provided for in Section 35 (c)(2)(c) of the Tax Code, as amended,
they should comply with the requirements hereunder mentioned:

(a) The transferors must file with their income tax return for the taxable year in which the
exchange was consummated, a complete statement of all facts pertinent to the exchange,
including:
1. A description of the properties transferred, or of their interest in such properties,
together with a statement of the original acquisition cost or other basis thereof and the
adjusted cost basis at the time of the transfer;
2. The kind of stock received and preferences if any;
3. The number of shares of each class received; and
4. The fair market value per share of each class at the date of the exchange.

(b) On the other hand, the transferee corporation must file with its income tax return for
the taxable year in which the exchange was consummated the following:
1. A complete description of all properties received from the transferors;
2. A statement of the original acquisition cost or other basis of the properties in the
hands of the transferors and the adjusted cost basis thereof at the time of the transfer;
and
3. Information with respect to the capital stock of that corporation including:
a. The total issued and outstanding capital stock immediately prior to and
immediately after the exchange with a complete description of each class of
stocks;
b. The classes of stock and number of shares issued to the transferors in the
exchange, and
c. The fair market value as of the date of exchange of the capital stock issued
to the transferors.

In addition to the foregoing requirements, permanent records in substantial form must be kept
by the taxpayers participating in the exchange, showing the information listed above in order to
facilitate the determination of gain or loss from a subsequent disposition of stock/properties received
in the exchange.

Moreover, pursuant to Section 245 of the Tax Code, as amended, a conveyance or deed
whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based
on the consideration or value received or contracted to be paid for such realty. A stock in a
corporation is a valuable consideration for transfer of real property (Section 177 Documentary Stamp
Tax Regulations). Accordingly, if a parcel of land is exchanged with stocks in a corporation as in this
case, the latter is the consideration, the value of which shall be the basis of the documentary stamp
tax on the aforesaid deed.


BIR Ruling No. 203-85

Pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No.
4522 and Presidential Decree Nos. 1705 and 1773, no gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for stock in such a corporation of which as a
result of such exchange said person, alone or together with others, not exceeding four persons, gains
control of said corporation. The term "control" shall mean ownership of stocks in a corporation
possessing at least 51% of the total voting power of all classes of stock entitled to vote. Control is
determined by the amount of stock received, i.e., subscribed and paid-up, whether for property or for
services by the transferor or transferors. In determining the 51% stock ownership, only those persons
who transferred property for stock in the same transaction may be counted up to a maximum of five.

Accordingly, no gain or loss shall be recognized both to transferors and the transferee
corporation on the transfer by the spouses Demetrio A. Muñoz and Rosalina L. Muñoz of their real
properties in payment of their subscription for shares of stock of the Muñoz Land Development
Corporation considering that after the contemplated exchange of properties and as a result of the said
exchange the transferors will gain control of the said corporation.

It should be emphasized, however, that Section 35(c)(2)(c) of the Tax Code merely defers
recognition of gain or loss from such transaction, for in determining the gain or loss from a
subsequent transaction of the properties or of the stocks involved in the exchange, the original or
historical cost of the properties or the stocks is considered. Thus, if the transferors later sell or
exchange the shares of stock acquired by them in the exchange, they shall be subject to income tax on
the gains derived from such sale or exchange, taking into consideration that the cost basis of the
shares of- stock shall be the same as the original acquisition cost of adjusted cost basis to the
transferors of the properties exchanged therefor; and that the cost basis to the transferee of the
properties exchanged for stocks shall be the same as it would be in the hands of the transferors.
(Section 35(c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773)

In this connection, you are further advised that in order that the parties to the exchange can
avail of the non-recognition of gains provided for in Section 35(c)(2)(c) of the Tax Code, as amended,
they should comply with the requirements hereunder mentioned.

(a) The transferors must with their income tax return for the taxable year in which the exchange
was consummated a complete statement of all facts pertinent to the exchange, including:
1. A description of the properties transferred, or of their interest in such properties,
together with a statement of the original acquisition cost or other basis thereof and the
adjusted cost basis at the time of the transfer;
2. The kind of stock received and preference if any;
3. The number of shares of each class received; and
4. The fair market value per share of each class at the date of the exchange.

(b) On the other hand, the transferee corporation must file with its income tax return for the
taxable year in which the exchange was consummated the following:
1. A complete description of all properties received from the transferors;
2. A statement of the original acquisition cost or other basis of the properties in the hands
of the transferors and the adjusted cost basis thereof at the time of the transfer; and
3. Information with respect to the capital stock of the corporation including:
a. The total issued and outstanding capital stock immediately prior to and
immediately after the exchange, with a complete description of each class of stock;
b. The classes of stock and number of shares issued to the transferors in the
exchange; and
c. The fair market value as of the date of exchange of the capital stock issued to the
transferors.

In addition to the foregoing requirements, permanent records in substantial form must be kept
by the taxpayers participating in the exchange, showing the information listed above in order to
facilitate the determination of gain or loss from a subsequent disposition of stocks/properties
received in the exchange.

Moreover, pursuant to Section 245 of the Tax Code, as amended, a conveyance or deed
whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based
on the consideration or value received or contracted to be paid for such realty. A stock in corporation
is a valuable consideration for transfer of real properties (Section 177 Documentary Stamp Tax
Regulations). Accordingly, if a parcel of land is exchanged with stocks in a corporation as in this case,
the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on
the aforesaid deed.


REVENUE MEMORANDUM ORDER NO. 26-92

Subject : Prescribing the Requirements and Conditions precedent to the Non-Recognition
of Gain in transactions involving Transfer of Properties in Exchange for Shares of Stock under Section
34(c) (2) of the Tax Code, and the Procedure to be observed in monitoring compliance with said
conditions.

To : All Internal Revenue Officers and Others Concerned.

In order to facilitate the determination of whether transfer of properties by individual or corporation
in exchange for shares of stock of another corporation falls under Section 34(c) (2) of the National
Internal Revenue Code, the following requirements must be met, and the conditions complied with
by both transferor and transferee corporation.

The procedures outlined hereunder shall be observed in the monitoring and investigation of tax-free
exchange to ascertain compliance with the conditions set forth in the adjudication letter/ruling issued
by this Office, and in the consequent assessment of tax liabilities if any, due upon subsequent
disposition of the properties involved in the exchange.

I. DOCUMENTATION REQUIREMENTS. -
A. BIR Adjudication letter/ruling -
Any written request to be filed with the Legislative, Ruling and Research Division for a BIR Ruling on
the tax consequence of the transfer/exchange of properties described hereunder must be
accompanied by the following documents.

1) In the case of Merger or Consolidation -
(a) Plan of Corporate Merger or Consolidation;
(b) Statement of the amount and nature of any liabilities assumed upon the exchange, and
the amount and nature of any liabilities to which any of the property acquired in the exchange
is subject;
(c) Articles of Incorporation duly registered with SEC of the merging or consolidating
corporations; and
(d) Other pertinent documents.

2) In the case of transfer of property to a controlled corporation.
(a) Deed of Transfer/Assignment/Exchange;
(b) Articles of Incorporation duly registered with SEC of a corporate transferor and
transferee corporation;
(c) Copy of the corresponding Transfer Certificate of Titles;
(d) Copy of the corresponding Tax Declaration;
(e) Certification as to the original or historical cost of acquisition/adjusted cost basis of the
properties transferred; acd
(f) Certification of the fair market value or zonal value of the property involved in the
exchange;
(g) Certification by the corporate secretary of the transferee corporation of its authorized
capitalization and the par value of the shares of stock;
(h) Certification of percentage of ownership of the shares of stock by the transferor as a
result of the transaction; and
(i) Other pertinent documents.

B. Records to be kept and information to be filed. -
In order that the parties to the exchange can avail of the non-recognition of gains under Section 34(c)
(2) of the Tax Code, the following requirements must be complied with:

1) In the case of Merger or Consolidation. -
(a) The plan of reorganization should be adopted by each of the corporations, parties
thereto, the adoption being shown by the acts of its duly constituted responsible officers and
appearing upon the official records of the corporation. Each corporation, which is a party to
the reorganization, shall file, as part of its return for the taxable year within which the
reorganization occurred a complete statement of all facts pertinent to the non-recognition of
gain or loss in connection with the reorganization, including:

(1) A copy of the plan of reorganization, together with a statement, executed under
the penalties of perjury, showing in full the purposes thereof and in detail all
transactions incident to, or pursuant to the plan.
(2) A complete statement of the cost or other basis of all property, including all
stocks or securities, transferred incident to the plan.
(3) A statement of the amount of stock or securities and other property or money
received from the exchange, including a statement of all distribution or other
disposition made thereof. The amount of each kind of stock or securities and other
property received shall be stated on the basis of the fair market value thereof at the date
of the exchange.
(4) A statement of the amount and nature of any liabilities assumed upon the
exchange, and the amount and nature of any liabilities to which any of the property
acquired in the exchange is subject.

(b) Every taxpayer, other than a corporation, a party to the reorganization, who received
stock or securities and other property or money upon a tax-free exchange in connection with a
corporate reorganization shall incorporate in his income tax return for the taxable year in
which the exchange takes place a complete statement of all facts pertinent to the non-
recognition of gain or loss upon such exchange including:

(1) A statement of the cost or other basis of the stock or securities transferred in the
exchange; and
(2) A statement in full of the amount of stock or securities and other property or
money received from the exchange, including any liabilities assumed upon the
exchange, and any liabilities to which property received is subject. The amount of each
kind of stock or securities and other property (other liabilities assumed upon the
exchange) received shall be set forth upon the basis of the fair market value thereof at
the date of the exchange.
(c) Permanent records in substantial form shall be kept by every taxpayer who participates
in a tax-free exchange in connection with a corporate reorganization showing the cost or other
basis of the transferred property or money received (including any liabilities assumed on the
exchange, or any liabilities to which any of the properties received were subject), in order to
facilitate the determination of gain or loss from a subsequent disposition of such stock or
securities and other property received from the exchange.

In addition to the foregoing requirements, permanent records in substantial form must be kept by the
corporation participating in the merger showing the information listed above in order to facilitate the
determination of gain or loss from a subsequent disposition of the stock received as a consequence of
the merger.
In a merger or consolidation, one (1) of the corporations would necessarily be dissolved so that,
under Section 235 of the Tax Code, it should be subjected to an investigation for all tax purposes.
Proof should be submitted by any of the two (2) entities to the Legislative, Ruling and Research
Division that there was such an investigation conducted or is being conducted by the BIR.

2) In the case of transfer of property to a controlled corporation. -
(a) The transferor/s must file with his/their income tax return for the taxable year in which
the exchange was consummated, a complete statement of all facts pertinent to the exchange,
including:

(1) A Sworn Statement as to how the property was acquired;
(2) A description of the properties transferred, or of their interest in such properties,
with a statement of the original acquisition cost or other basis thereof and the adjusted
cost basis at the time of the transfer;
(3) The kind of stock received and preference, if any;
(4) The numbers of shares of each class received, and
(5) The fair market value per share of each class at the date of the exchange.

(b) On the other hand, the transferee corporation must file with its income tax return for
the taxable year in which the exchange was consummated the following:

(1) A complete description of all properties received from the transferor/s;
(2) A statement of the original acquisition cost or other basis of the properties in the
hands of the transferors and the adjusted cost basis thereof at the time of the transfer;
and
(3) Information with respect to the capital stock of the corporation including:
(i) The total issued and outstanding capital stock immediately prior to and
immediately after the exchange with a complete description of each class of
stock;

(ii) The classes of stocks and number of shares issued to the transferors in the
exchange; and

(iii) The fair market value as of the date of the exchange of the capital stock
issued to the transferors.

(c) Permanent records in substantial form must be kept by the taxpayers participating in
the exchange, showing the information listed above in order to facilitate the determination of
gain or loss from a subsequent disposition of stocks/properties received in the exchange.

(d) The parties shall cause to be annotated on the Transfer Certificates of Titles (in the case
of real property) or at the back of the Certificate of Stocks (in the case of shares of stock), the
date the deed of exchange was executed, the original or historical cost of acquisition of the
properties or shares of stock involved, and the fact that no gain or loss was recognized as a
result of the exchange.

II. CONDITIONS FOR THE ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION
(CAR). -
No CAR for the real property involved in the exchange shall be issued by the Revenue District
Officer/Authorized Internal Revenue Officer concerned unless a determination letter/ruling has
been issued by the Commissioner to the effect that the transaction qualifies as a tax-free exchange or
corporate reorganization under Section 34(c) (2) of the Tax Code.

The CAR to be issued shall specify among others that the transaction involved is a tax-free exchange
under Section 34(c) (2) of the Tax Code; the date of exchange; and the original or historical cost of
acquisition of the properties as verified.
Documentary stamp tax imposed under Section 196 of the Tax Code shall be determined and
collected based on the consideration received or contracted for such realty exchanged, i.e. the
corresponding value of the shares of stock; the original issues of Certificates of Stocks by the
transferee corporation shall be subject to documentary stamp tax imposed by Section 175 of the same
Code.

III. REQUIREMENTS FOR THE REGISTRATION OR
PROPERTIES. -

A. The Register of Deeds having jurisdiction of the place where the property exchanged is located
shall cause the registration/transfer of the Transfer Certificate of Title (TCT) in the name of the
transferee corporation only upon presentation of the CAR duly issued by the Revenue District
Officer/Authorized Internal Revenue Officer.
The Register of Deeds shall cause the annotation at the back of the TCT to be issued the statement
that the transfer of properties is a Tax-Free Exchange under Section 34(c) (2) of the Tax Code or the
fact that no gain or loss was recognized as a result of such exchange; the original or historical cost of
acquisition thereof, and the date of execution of the Deed of Transfer/Exchange.

B. The Corporate Secretary of the Transferee Corporation shall cause the registration in its stock
transfer book the name/names of the stockholders whose properties were exchanged for shares of
stock;

Documentary Stamp Tax imposed under Section 175 of the Tax Code shall be paid to and collected by
the Revenue District Officer concerned on the Certificate of stocks which are original issues by the
transferee corporation in exchange for the property of the transferor.

IV. MONITORING/INVESTIGATION OF TAX-FREE
EXCHANGES. -

A. The Legislative, Ruling and Research Division shall every now and then refer copy/copies of
adjudication letters/rulings issued in connection with tax-free exchange of properties to the
respective Revenue District Officers having jurisdiction of the place where the real property is
located, for verification and monitoring if the conditions set forth therein have been complied with.

B. Since under Section 34(c) (2) of the Tax Code there is merely a deferment of recognition of gain
or loss on the transfer/exchange of properties, any subsequent disposition of the properties involved
in the exchange shall be subject to the corresponding income tax on the gain or income derived by the
transferor or transferee corporation.

C. In determining the income and documentary stamp taxes due on subsequent disposition of the
properties involved in the exchange, the basis of the computation shall be the difference between the
original/historical or adjusted cost of acquisition of the property and the consideration of sale or the
fair market value/zonal value of the property, whichever is higher. On the other hand, the cost basis
of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the
transferor of the properties exchanged therefor.

V. REPEALING CLAUSE. -
All regulations, rules, orders or portions thereof contrary to or inconsistent with the provisions of this
Order are hereby modified and/or repealed accordingly.

VI. EFFECTIVITY. -
This Order shall take effect immediately.


Gregory vs. Helvering

Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the subject of gain or loss
resulting from the sale or exchange of property. Such gain or loss is to be recognized in computing
the tax, except as provided in that section. The provisions of the section, so far as they are pertinent to
the question here presented, follow:

'Sec. 112. ... (g) Distribution of Stock on Reorganization. If there is distributed, in pursuance of
a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock
or securities in such corporation or in another corporation a party to the reorganization,
without the surrender by such shareholder of stock or securities in such a corporation, no gain
to the distributee from the receipt of such stock of securities shall be recognized. ...


'(i) Definition of Reorganization. As used in this section ...


'(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its
assets to another corporation if immediately after the transfer the transferor or its stockholders
or both are in control of the corporation to which the assets are transferred. ... ' 26 USCA
2112(g), (i) (1).

It is earnestly contended on behalf of the taxpayer that since every element required by the
foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected;
and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or
make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected
within the meaning of subdivision ( B), the ulterior purpose mentioned will be disregarded. The legal
right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid
them, by means which the law permits, cannot be doubted. But the question for determination is
whether what was done, apart from the tax motive, was the thing which the statute intended. The
reasoning of the court below in justification of a negative answer leaves little to be said.

When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a
transfer made 'in pursuance of a plan of reorganization' (section 112(g) of corporate business; and not
a transfer of assets by one corporation to another in pursuance of a plan having no relation to the
business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of
taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we
find? Simply an operation having no business or corporate purpose-a mere device which put on the
form of a corporate reorganization as a disguise for concealing its real character, and the sole object
and accomplishment of which was the consummation of a preconceived plan, not to reorganize a
business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No
doubt, a new and valid corporation was created. But that corporation was nothing more than a
contrivance to the end last described. It was brought into existence for no other purpose; it
performed, as it was intended from the beginning it should perform, no other function. When that
limited function had been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to the terms of subdivision (B),
was in fact an elaborate and devious form of conveyance masquerading as a corporate
reorganization, and nothing else. The rule which excludes from consideration the motive of tax
avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain
intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the
statutory provision in question of all serious purpose.


REVENUE REGULATIONS NO. 04-99

SUBJECT : Further Amending Revenue Memorandum Order No. 29-86 dated September 3,
1986, as Amended by Revenue Memorandum Order No. 16-88 dated April 18, 1988, as Further
Amended by Revenue Memorandum Order No. 27-89 dated April 18, 1989, and as Last Amended by
Revenue Memorandum Order No. 6-92 dated January 15, 1992 Relative to the Payment of Capital
Gains Tax and Documentary Stamp Tax on Extra-Judicial Foreclosure Sale of Capital Assets Initiated
by Banks, Finance and Insurance Companies

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to Section 244 of the Tax Code of 1997, in relation to Sections
24(D)(1) and 27(D)(5) of the same Code, these Regulations are hereby promulgated amending
Revenue Memorandum Order No. 29-86, as last amended by Revenue Memorandum Order No. 6-92
and other relevant revenue regulations and issuances regarding the payment of capital gains tax and
documentary stamp tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance
and insurance companies. cda

SECTION 2. Foreclosure of Mortgage Provision Under Presidential Decree No. 1529, Otherwise
Known as "Property Registration Decree". — Section 63 of P.D. No. 1529, otherwise known as the
"Property Registration Decree" provides as follows:

"SECTION 63. Foreclosure of Mortgage. — (a) If the mortgage was foreclosed
judicially, a certified copy of the final order of the court confirming the sale shall be
registered with the Register of Deeds. If no right of redemption exists, the certificate of
title of the mortgagor shall be cancelled, and a new certificate issued in the name of the
purchaser.
"Where the right of redemption exists, the certificate of title of the mortgagor SHALL
NOT BE CANCELLED, but the certificate of sale and the order confirming the sale shall
be registered by a BRIEF MEMORANDUM thereof made by the Register of Deeds upon
the certificate of title. In the event the property is redeemed, the certificate or deed of
redemption shall be filed with the Register of Deeds, and a brief memorandum thereof
shall be made by the Register of Deeds on the certificate of title of the mortgagor.

"If the property is not redeemed, the final deed of sale executed by the sheriff in favor of
the purchaser at a foreclosure sale shall be registered with the Register of Deeds;
whereupon the title of the mortgagor shall be cancelled, and a new certificate issued in
the name of the purchaser.

"(b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the
officer who conducted the sale shall be filed with the Register of Deeds who shall make
a brief memorandum thereof on the certificate of title.

"In the event of redemption by the mortgagor, the same rule provided for in the second
paragraph of this section shall apply.

"In case of non-redemption, the purchaser at foreclosure sale shall file with the Register
of Deeds, either a final deed of sale executed by the person authorized by virtue of the
power of attorney embodied in the deed of mortgage, or his sworn statement attesting
to the fact of non-redemption; whereupon, the Register of Deeds shall issue a new
certificate in favor of the purchaser after the owner's duplicate of the certificate has been
previously delivered and cancelled."

It is clear from the above provision of the "Property Registration Decree" that where the right of
redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet
even if the property had already been subjected to foreclosure sale, BUT INSTEAD only a brief
memorandum shall be annotated at the back of the certificate of title, and the cancellation of the title
and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on
whether the mortgagor shall redeem or not the mortgaged property within one year from the
issuance of the certificate of sale. Thus, no transfer of title to the highest bidder can be effected yet
until and after the lapse of the one-year period from the issuance of the said certificate of sale.

SECTION 3. Capital Gains Tax. —
(1) In case the mortgagor exercises his right of redemption within one year from the issuance of
the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived
by the mortgagor and no sale or transfer of real property was realized. A certification to that effect or
the deed of redemption shall be filed with the Revenue District Office having jurisdiction over the
place where the property is located which certification or deed shall likewise be filed with the
Register of Deeds and a brief memorandum thereof shall be made by the Register of Deeds on the
Certificate of Title of the mortgagor.
(2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed under Secs.
24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest
bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6
of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the
expiration of the said one-year redemption period.

SECTION 4. Documentary Stamp Tax. —
(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to
the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land
or realty was sold or transferred for a consideration.
(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected
and paid by the person making, signing, issuing, accepting, or transferring the real property
wherever the document is made, signed, issued, accepted or transferred where the property is
situated in the Philippines; Provided, That whenever one party to the taxable document enjoys
exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for
the tax. The tax return prescribed under the Code shall be filed within ten (10) days after the close of
the month following the lapse of the one-year redemption period, and the tax due under Sec. 196 of
the Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid return is
filed.

SECTION 5. Tax Clearance Certificate/Certificate Authorizing Registration. — In case of non-
redemption, a tax clearance certificate (TCC) or Certificate Authorizing Registration (CAR) in favor of
the purchaser/highest bidder shall only be issued upon presentation of the capital gains and
documentary stamp taxes returns duly validated by an authorized agent bank (AAB) evidencing full
payment of the capital gains and documentary stamp taxes due imposed under Secs. 3 and 4 of these
Regulations on the sale of the property classified as capital asset. The AAB must be located at the
Revenue District Office having jurisdiction over the place where the property is located.

SECTION 6. Repealing Clause. — The provisions of any revenue regulations, revenue memorandum
order, revenue memorandum circular or any other revenue issuance inconsistent with these
Regulations are hereby repealed, amended, or modified accordingly.

SECTION 7. Effectivity Clause. — These Regulations shall take effect fifteen (15) days after
publication in any newspaper of general circulation.


PART 9
PART VII

II. SITUS OF TAXATION – SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES

Section 42 – Income from Sources Within the Philippines

(A) Gross Income from Sources Within the Philippines. – The following items of gross income
shall be treated as gross income from sources within the Philippines:
(1) Interests. – Interests derived from sources within the Philippines, and interests on
bonds, notes or other interest-bearing obligations of RESIDENTS, corporate or
otherwise;
(2) Dividends. – The amount received as dividends:
a. From a domestic corporation; and
b. From a foreign corporation, UNLESS less than 50% of the gross income of such
foreign corporation for the 3-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such
period as the corporation has been in existence ) was derived from sources
within the Philippines as determined under the provisions of this section; BUT
only in an amount which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources within the
Philippines bears to its gross income from all sources.
(3) Services. – Compensation for labor or personal services performed in the Philippines;
(4) Rentals & Royalties. – From property located in the Philippines or from any interest in
such property, including rentals or royalties for –
a. The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
b. The use of, or the right to use in the Philippines any industrial, commercial or
scientific equipment;
c. The supply or scientific, technical, industrial or commercial knowledge or
information;
d. The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment or, any such
property or right as is mentioned in paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
e. The supply of services by a nonresident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation
of any brand, machinery, or other apparatus purchased from such nonresident
person;
f. Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and
g. The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. – Gains, profits and income from the sale of real property located
in the Philippines; and
(6) Sale of Personal Property. – Gains, profits and income from the sale of personal
property, as determined in subsection (E) of this section.

(B) Taxable Income From Sources Within the Philippines. –
(1) General Rule. – From the items of gross income specified in subsection (A) of this
section, there shall be deducted the expenses, losses and other deductions properly
allocated thereto and a ratable part of expenses, interests, losses and other deductions
effectively connected with the business or trade conducted exclusively within the
Philippines which cannot definitely be allocated to some items or class of gross income;
PROVIDED, that such items of deductions shall be allowed only if fully substantiated
by all the information necessary for its calculation. The remainder, if any, shall be
treated in full as taxable income from sources within the Philippines.
(2) Exception. – No deductions for interest paid or incurred abroad shall be allowed from
the item of gross income specified in subsection (A) UNLESS indebtedness was actually
incurred to provide funds for use in connection with the conduct or operation of trade
or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. – The following items of gross income
shall be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in
paragraph (1) of subsection (A) of this section;
(2) Dividends other than those derived from sources within the Philippines as provided in
paragraph (2) of subsection (A) of this section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest
in such property including rentals or royalties for the use of or for the privilege of using
without the Philippines, patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.

(D) Taxable Income From Sources Without the Philippines. – From the items of gross income
specified in subsection (C) of this section, there shall be deducted the expenses, losses, and
other deductions properly apportioned or allocated thereto and a ratable part of any expense,
loss, or other deduction which cannot definitely be allocated to some items or classes of gross
income. The remainder, if any, shall be treated in full as taxable income from sources without
the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines. – Items of gross
income, expenses, losses and deductions, other than those specified in subsections (A) and (C)
of this section, shall be allocated or apportioned to sources within or without the Philippines,
under the rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner. Where items of gross income are separately allocated to sources within
the Philippines, there shall be deducted (for the purpose of computing the taxable income
therefrom) the expenses, losses and other deductions which cannot definitely be allocated to
some items or classes of gross income. The remainder, if any, shall be included in full as
taxable income from sources within the Philippines. In the case of gross income derived from
sources partly within and partly without the Philippines, the taxable income may first be
computed by deducting the expenses, losses or other deductions apportioned or allocated
thereto and a ratable part of any expense, loss or other deduction which cannot definitely be
allocated to some items or classes of gross income; and the portion of such taxable income
attributable to sources within the Philippines may be determined by processes or formulas of
general apportionment prescribed by the Secretary of Finance. Gains, profits and income from
the sale of personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced ( in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and
its sale without the Philippines, or from the purchase of personal property without and
its sale within the Philippines shall be treated as derived entirely from sources within
the country in which sold: PROVIDED HOWEVER, that gain from the sale of shares of
stock in a domestic corporation shall be treated as derived entirely from sources within
the Philippines regardless of where the said shares are sold. The transfer by a
nonresident alien or a foreign corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in its book UNLESS: (1) the
transferor has filed with the Commissioner a bond conditioned upon the future
payment by him of any income tax that may be due on the gains derived from such
transfer, or (2) the Commissioner has certified that the taxes, if any, imposed on this title
and due on the gain realized from such sale or transfer have been paid. It shall be the
duty of the transferor and the corporation the shares of which are sold or transferred, to
advise the transferee of this requirement.

(F) Definitions. – As used in this section, the words ”sale” or “sold” include exchange or
exchanged; and the word ―produced‖ includes created, fabricated, manufactured, extracted,
processed, cured or aged.

READ ALSO: Sections 152-165, Revenue Regulation-2
1. Gross Income From Sources Within the Philippines

CASE: CIR vs. British Overseas Airways Corporation (BOAC), 149 SCRA 395 (1987).
FACTS: BOAC is a 100% British government-owned corporation organized under the U.K. laws. It is
engaged in the international airline business and is a member-signatory of the Interline Air Transport
Association (IATA). It operates air transportation service and sells transportation tickets over routes
of the other airline members. During the periods covered by the disputed assessment, BOAC had no
landing rights for traffic purposes in the Philippines and was not granted a certificate of public
convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except
for a 9-month period, when it was granted a temporary landing permit by the CAB. Thus, it did not
carry passengers and/or cargo to or from the Philippines but it maintained a general sales agent in
the Philippines – Warner Barnes and Company, Ltd., and later Qantas Airways – responsible for
selling BOAC tickets covering passengers and cargoes.
(First CTA case) On 7 May 1968, CIR assessed BOAC for deficiency income taxes covering the
years 1959 to 1963. BOAC protested. After subsequent investigation, a new assessment was issued
for the years 1959 to 1967 amounting to P858K+, which BOAC paid under protest. On 7 October
1970, BOAC filed a claim for refund of the P858K, which claim was denied by the CIR. But before
said denial, BOAC had already filed a Petition for Review with the Tax Court, assailing the
assessment and praying for the refund of the amount paid.
(Second CTA case) On 17 November 1971, BOAC was assessed deficiency income taxes,
interests, penalty and compromise penalties. On 25 November 1971, BOAC requested that the
assessment be set aside, which the CIR denied. This prompted BOAC to file the 2
nd
case before the
Tax Court.
The Tax Court reversed the CIR. It held that the proceeds of the sales of BOAC passage tickets
in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the
period in question, do not constitute BOAC income from Philippine sources since no service of
carriage of passengers or freight was performed by BOAC within the Philippines and thus, said
income is not subject to Philippine income tax. The CTA‘s position was that the income from
transportation is income from services so that the place where the services are rendered determines
the source. Hence, the CIR filed a petition for review on certiorari.

ISSUE: 1) W/N the revenue derived by BOAC from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income from Philippine sources, and
thus, taxable YES
2) W/N the revenue sales by BOAC in the Philippines constitute income from Philippine
sources YES

HELD: 1) Under Section 20 of the 1977 Tax Code:
The term ―resident foreign corporation‖ applies to a foreign corporation engaged in trade or
business within the Philippines or having an office or place of business therein, while
The term ―non-resident foreign corporation‖ applies to a foreign corporation not engaged in
trade or business within the Philippines and not having any office or place of business therein.
BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes
‗doing‘ or ‗engaging in‘ or ‗transacting‘ business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of commercial gain or for
the purpose and object of the business organization. In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character.
BOAC maintained a general sales agent in the Philippines. That general sales agent was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips – each
trip in the series corresponding to a different airline company; (3) receiving the fare from the whole
trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement. Those activities were
in the exercise of the functions, which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was engaged in business in the
Philippines through a local agent. Thus, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources within the Philippines.
2) The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines. In BOAC‘s case, the sale of tickets in the Philippines
is the activity that produces the income. The tickets exchanged hands here and payments for fares
were also made here in the Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying
the protection accorded by the Philippine government. In consideration of such protection, the flow
of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth.
Section 37 (A) of the Tax Code, which enumerates items of gross income from sources within
the Philippines, does not mention income from the sale of tickets for international transportation.
However, that does not render it less an income from sources within the Philippines. Section 37, by
its language, does not intend the enumeration to be exclusive.
The absence of flight operations to and from the Philippines is not determinative of the source
of income or the situs of income taxation. BOAC was an off-line international airline at the time of
the case. The test of taxability is the ―SOURCE‖ and the source of the income is that activity xxx
which produced the income. The passage documentations were sold in the Philippines and the
revenue was derived from a business activity regularly pursued within the Philippines. Even if the
BOAC tickets sold covered the transport of passengers and cargo to and from foreign cities, it cannot
alter the fact that income from the sale of tickets was derived from the Philippines. The word
―SOURCE‖ conveys one essential idea, that of origin, and the origin of the income here is the
Philippines.

2. Taxable Income From Sources Within the Philippines

CASE: CIR vs. CTA and Smith Kline & French Overseas Co. (Philippine Branch), 127 SCRA 9
(1984)
FACTS: This is a case about the refund of a 1971 income tax amounting to P324K+. Smith Kline
and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is
licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of
pharmaceuticals, drugs and chemicals.
In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4M+ and paid P500K+
as tax due. Among the deductions claimed from GI was P501K+ as its share of the head office
overhead expenses. However, in its amended return filed on 1 March 1973, there was an
overpayment of P324K+ arising from underdeduction of home office overhead. Smith Kline made a
formal claim for the refund of the alleged overpayment.
In October 1972, Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in the unallocated overhead expenses
of the main office for the year ended December 1971 was actually P1.4M+.
On 2 April 1974, without awaiting the action of the CIR on its claim, Smith Kline filed a
petition for review with the CTA. The CTA ordered the commissioner to refund the overpayment or
grant a tax credit to Smith Kline. The Commissioner appealed to the SC.

HELD: The governing law is found in section 37 of the old NIRC, which reads:
xxx (b) Net income from sources in the Philippines. – From the items of the gross income specified in
subsection (a) of this section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expenses, losses or other
deductions which cannot definitely be allocated to some item or class of gross income. The
remainder, if nay, shall be included in full as net income from sources within the Philippines.
Revenue Regulation NO. 2 of the Department of Finance contains the following provisions on
the deductions to be made to determine the net income from Philippine sources:
Section 160. Apportionment of Deductions. – From the items specified in section 37 (a), as being
derived specifically from sources within the Philippines, there shall be deducted the expenses, losses
and other deductions properly apportioned or allocated thereto and a ratable part of any other
expenses, losses or deductions which cannot definitely be allocated to some item or class of gross
income. The remainder shall be included in full as net income from sources within the Philippines.
The ratable part is based upon the ratio of gross income from sources within the Philippines to the
total gross income.
Example: A non-resident alien individual whose taxable year is the calendar year, derived
gross income from all sources for 1939 of P180K, including therein:
Interest on bonds of a domestic
corporation……………………………………………………………P9,000
Dividends on stock of a domestic corporation……………
…………………………………………….4,000
Royalty for the use of patents within the
Philippines…………………………………………………..12,000
Gain from the sale of real property located within the
Philippines…………………………………….11,000
TOTAL ………………………………………………………………………………………………
P36,000
=====
that is, 1/5 of the total gross income was from sources within the Philippines. The remainder of the
gross income was from sources without the Philippines, determined under section 37 (c).
The expenses of the taxpayer for the year amounted to P78K. Of the expenses, the amount of
P8K is properly allocated to income from sources within the Philippines and the amount of P40K is
properly allocated to income from sources without the Philippines.
The remainder of the expense, P30K, cannot be definitely allocated to any class of income. A
ratable part thereof, based upon the relation of gross income from sources within the Philippines to
the total gross income, shall be deducted in computing net income from sources within the
Philippines. Thus, there are deducted from the P36K of gross income from sources within the
Philippines expenses amounting to P14K [representing P8K properly apportioned to the income from
sources within the Philippines and P6K, a ratable part (1/5) of the expenses which could not be
allocated to any item or class of gross income]. The remainder, P22K, is the net income from sources
within the Philippines.
Thus, it is manifest from the foregoing that where an expense is clearly related to the
production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine
personnel, rental of office building in the Philippines ), that expense can be deducted from the gross
income acquired in the Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which directly benefit its branches all over the
world, including the Philippines, fall under a different category however. These are items, which
cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971, the
parent company of Smith Kline spent $1,077,739. Under Section 37 (b) of the Revenue Code and
section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch‘s gross income to the total gross the ratio of the
local branch‘s gross income to the total gross income, worldwide, of the multinational corporation.
The weight of evidence bolsters its position that the amount of P1.4M+ represents the correct
ratable share, the same having been computed pursuant to section 37 (b) and section 160.
The refund or credit of the resulting overpayment is in order.

PLEASE READ ATTACHED HARD COPIES OF THE FF:

Revenue Audit Memo Order No. 1-86. Procedure for Tax Audit of Philippine Branches of Foreign
Corporations
On: Income from constructive trading of multinationals

Revenue Regulations No. 16-86. Amendment to Section 160 of the Income Tax Regulations (Revenue
Regulations NO. 2) regarding the basis of determining ratable part of overseas overhead expenses apportioned
under Section 37 (b) of the NIRC.

Revenue Audit Memo Order 4-86. Audit Guidelines in the Allocation of Home Office Overhead Expenses
Under Section 37 (b) of the NIRC
On: Allocation of head office overhead expenses

Revenue Audit Memo Order 1-95. Audit Guidelines and Procedures on the Proper Determination of the
Income Tax Liability of Philippine Branches and Liaison Offices of Multi-National Enterprises (MNEs)
Engaged in Soliciting Orders, Purchaser, Service Contracts, Trading, Construction and Other Activities in the
Philippines
On: Audit guidelines on determination of income tax of branches of multinationals

3. Gross Income From Sources Without the Philippines
4. Income From Sources Partly Within or Without the Philippines
5. Situs of sale of stocks in a domestic corporation
6. Definition of Royalties – Philamlife CA-GR Sp. NO. 31283, April 25, 1995 (NOT AVAILABLE)
- Includes services to investment, training and education accounting)

PART 10


PART 11

BPI v. CIR

RR 2-98 (super long, see hard copy)

RR 12-98
-This merely amends Section 2.57.2 of RR 2-98 (in order to streamline and make more efficient the
collection of the creditable withholding tax on income payments to medical practitioners)
 The old rule had no procedure laid down for these medical practitioners, the new procedure is
now as follows:
1. It shall be the DUTY and RESPONSIBILITY of the hospital/clinic to collect from any
patient admitted by such hospital/clinic, the professional fee of the attending medical
practitioner and to withhold the tax herein prescribed (10%)
2. It is the intent of this RR that the hospital/clinic shall, at all times, collect the
professional fee for and in behalf of the medical practitioner and to withhold there from
the tax herein prescribed.
3. All these rules apply also to rendering of medical services by medical practitioners
through a duly registered professional partnership, however, the rate if 5%.
A. IN GENERAL – it shall be presumed that the hospital/clinic has
collected the professional fee of the said medical practitioner and shall,
accordingly, be liable for the withholding of the tax vis-à-vis each and
every patient admitted into the hospital or clinic under the care of the
said medical practitioner.
B. EXCEPTION – the withholding tax does NOT apply whenever there is
proof that no professional fee has in fact been charged and paid by his
patient, PROVIDED, this fact is in a sworn declaration jointly executed
by the medical practitioner, the patient or his duly authorized rep., and
the administrator of the hospital/clinic. This sworn declaration shall
form part of the records of the hospital/clinic and made readily
available to any authorized CIR officer for tax audit purposes,
PROVIDED further, the administrator should inform the Revenue
District Office having jurisdiction over such hospital/clinic about any
medical practitioner who fails or refuses to execute the sworn
statement within 10 days from such event.




FILSYN v. CA
FACTS: this involves 2 consolidated cases---in both cases 2 corps received demand letters from the
CIR demanding payment of deficiency withholding tax. The two corporations say that the liability to
withhold and pay income tax withheld at source from certain payments due to a foreign corporation
is at the time of accrual and not at the time of the actual payment or remittance thereof (that for the 2
corporations, it is to be paid to the government when it is due, not when it was actually paid to them
[a later due date, parang ganon]). But the CIR and CTA say otherwise: that the liability of a taxpayer
to withhold and pay the income tax withheld at source from certain payments due to a non-resident
foreign corp attaches at the time of accrual payment or remittance thereof and the withholding
agent/corp is obliged to remit the tax to the govt since it already and properly belongs to the govt.
ISSUE: whether withholding tax due on payments to foreign corporations accrue on the date of actual
remittance or earlier, when the amount is paid to the corporation?
HELD: when it was first paid to the corporation, especially in the case at bar where the corporation
has already ―written-off‖ the amounts as business expense in its books (it already took advantage of
the benefit allowing for deductions…therefore, you cannot now claim that the withholding tax is due
later (when you actually remit it) when you have already ―used‖ its benefits
*the corp which is to withhold is considered both the agent of the taxpayer (when he files the papers)
and of the governement (when he actually withholds)
*the law sets no condition for the liability of the corp/govt agent to attach when the corp doesn‘t
withhold what he‘s supposed to withhold, reason is to compel the withholding agent to withhold
under all circumstances!! So he is no ordinary agent of the govt, his duty is utmost!

CIR vs. PROCTOR AND GAMBLE
(both cases, where the former was later on reversed)
*this was taken up already in Part II, so I‘ll just take up what‘s important re withholding tax.
 Here it was said the PG-Phils has no bearing to pay the taxes on the dividends of PG to be paid
to PG-USA, because they are different corporations. In the reversed version, PG-Phils has
capacity to pay because when they remit the money to USA, and USA pays here, it is the same
when they themselves pay for it.
 Anent that is the issue above, is whether PG-Phils is a ―taxpayer‖ who can withhold tax? Yes,
since the corp/withholding agent is directly and independently liable for the correct amount
of the tax that should be withheld from the dividend remittances. Ergo, a ―person liable for
tax‖ has been held to be a ―person subject to tax‖
 Now as to the withholding issue under the syllabus: TAX ―DEEMED PAID‖ ON Dividends---
the parent corp PG-USA is ―deemed to have paid‖ a portion of the phil corp income tax
although the tax was actually paid by its phils subsidiary, pg-phils, Not PG-USA. This
―deemed paid‖ concept merely reflects economic reality, since the phil corp income tax was in
fact paid and deducted from revenues earned in the phils, THUS REDUCING THE AMOUNT
REMITTABLE as dividends to PG-USA. In other words, US tax law treats the phil corp income
tax as if it came out of the pocket of PG-USA as a part of the economic cost of carrying on
business in the phils through its medium, PG-phils. What is, under US LAW, DEEMED PAID
by PG-USA are not ―phantom taxes‖ but instead phil corp income taxes actually paid here by
PG-phils, which are very real indeed.
 Now, re the ―deemed paid‖ tax credit: there is no statutory provision nor RR issued by the
secretary of finance requiring the ACTUAL grant of the ―deemed paid‖ tax credit by the US
internal revenue service to PG-usa BEFORE the preferential 15% dividend rate becomes
applicable (as opposed to the 35% rate).

CIR vs. PROCTOR & GAMBLE (204S377)


MARUBENI CORP vs. CIR
(Withholding tax on dividends)
FACTS: marubeni is a foreign corp, it has equity investments in AG&P, and so AG&P declared
dividends to marubeni and so was taxed on it. Because they asked for a ruling from the BIR on
whether or not the dividends marubeni received from AG&P are effectively connected with its
conduct or business in the phils as to be considered branch profits subject to 15% profit remittance tax
(sec24bNIRC). So the CIR replied: that the dividends received by marubeni are NOT income arising
from the business activity in which marubeni is engaged, therefore not branch profits subject to the
15% profit remittance tax because only profits remitted abroad by a branch office to its head office
which are effectively connected with its trade or business in the phils; and ―effectively connected‖
means it is not necessary that the income be derived from the actual operation of taxpayer‘s trade or
business; it is sufficient that the income arises from the business activity in which the corporation is
engaged. So since it‘s not subject to the tax, it asked for a refund. Which of course the CIR denied
saying although it‘s not subject to the 15%, it is subject to 25% by virtue to a tax treaty between Japan
and the phils. And since 25% less 10% withholding = 15%, Na credit na…offset! CTA affirmed this.
Appeal to SC.
ISSUE: is marubeni a resident or non-resident foreign corp?
HELD: A ―resident‖ foreign corp is one that is engaged in trade or business in the phils. Marubeni
says they are one and the same as AG&P, on the principal agent theory. SOLGEN says otherwise:
that theory does not apply here. SC says marubeni is NOT resident foreign corp because marubeni‘s
independent investment is attributable only to the head office. It was marubeni‘s own investment,
where it got its profits which was remitted by AG&P. BUT even if that is the case, the CIR & CA were
wrong in setting off the tax rates…it goes against basic rules in taxation.

CIR vs. CA, JOHNSON & SONS
(And the MfR)


PART 12
Estate Taxation- Reciprocity of Exemption

Collector vs. Fisher ( decided in 1961)
Facts
Stevenson is a resident California, U.S.A. He had real and personal properties (shares of stock
in 2 RP corporations and cash in bank) in the Republic of the Philippines. He died in the US leaving
his wife Beatrice as his sole heiress. Ancillary administration proceedings were instituted in Manila
for the settlement of the estate in RP. Beatrice assigned all her rights to her husband‘s estate to the
Fishers. The Fishers claim exemption from the payment of estate and inheritance taxes on the RP
corporation shares of stock owned by the estate. The basis of the Fishers‘ claim is the reciprocity
proviso of Sec. 122 of the NIRC. CIR denied the claim. The CTA allowed the claim hence this petition.

Issue: to reciprocate or not to reciprocate, that is the question

Held: Sec. 122 of the NIRC does not apply therefore, no reciprocity
Section 122 of our National Internal Revenue Code, in pertinent part, provides:
". . . And, provided, further, That no tax shall be collected under this Title in respect of intangible
personal property (a) if the decedent at the time of his death was a resident of a foreign country
which at the time of his death did not impose a transfer tax or death tax of any character in respect of
intangible personal property of citizens of the Philippines not residing in that foreign country or (b) if
the laws of the foreign country of which the decedent was a resident at the time of his death allow a
similar exemption from transfer taxes or death taxes of every character in respect of intangible personal
property owned by citizens of the Philippines not residing in that foreign country." (Emphasis
supplied.)
On the other hand, section 13851 of the California Inheritance Tax Law, insofar as pertinent,
reads:
"SEC. 13851, Intangibles of nonresident: Conditions. — Intangible personal property is exempt from
the tax imposed by this part if the decedent at the time of his death was a resident of a Territory or
another State of the United States or of a foreign state or country which then imposed a legacy,
succession, or death tax in respect to intangible personal property of its own residents, but either:
"(a) did not impose a legacy, succession, or death tax of any character in respect to intangible personal
property of residents of this State, or
"(b) Had in its laws a reciprocal provision under which intangible personal property of a non-
resident was exempt from legacy, succession, or death taxes of every character if the Territory or other State
of the United States or foreign state or country in which the non-resident resided allowed a similar exemption
in respect to intangible personal property of residents of the Territory or State of the United States or
foreign state or country of residence of the decedent." (Id.)
It is clear from both these quoted provisions that the reciprocity must be total, that is, with
respect to transfer or death taxes of any and every character, in the case of the Philippine law, and to
legacy, succession, or death tax of any and every character, in the case of the California law.
Therefore, if any of the two states collects or imposes and does not exempt any transfer, death, legacy,
or succession tax of any character, the reciprocity does not work. This is the underlying principle of
the reciprocity clauses in both laws.
In the Philippines, upon the death of any citizen or resident, or non-resident with properties therein,
there are imposed upon his estate and its settlement, both an estate and an inheritance tax. Under the
laws of California, only inheritance tax is imposed. On the other hand, the Federal Internal Revenue
Code imposes an estate tax on non-residents not citizens of the United States, but does not provide
for any exemption on the basis of reciprocity. Applying these laws in the manner the Court of Tax
Appeals did in the instant case, we will have a situation where a Californian, who is non-resident in
the Philippines but has intangible personal properties here, will be subject to the payment of an estate
tax, although exempt from the payment of the inheritance tax. This being the case, will a Filipino,
non-resident of California, but with intangible personal properties there, be entitled to the exemption
clause of the California law, since the Californian has not been exempted from every character of
legacy, succession, or death tax because he is, under our law, under obligation to pay an estate tax?
Upon the other hand, if we exempt the Californian from paying the estate tax, we do not thereby
entitle a Filipino to be exempt from a similar estate tax in California because under the Federal Law,
which is equally enforceable in California, he is bound to pay the same, there being no reciprocity
recognized in respect thereto. In both instances, the Filipino citizen is always at a disadvantage. We
do not believe that our legislature has intended such an unfair situation to the detriment of our own
government and people. We, therefore, find and declare that the lower court erred in exempting the
estate in question from payment of the inheritance tax.
We now declare that in view of the express provisions of both the Philippine and California
laws that the exemption would apply only if the law of the other grants an exemption from legacy,
succession, or death taxes of every character, there could not be partial reciprocity. It would have to
be total or none at all.

VAT

Tolentino v. Sec. of Finance- Legality of Evat
Facts
We all read the case. No need to go through all the details. Anyways, this is a consolidation of
9 cases attacking the validity of RA 7716 which widened the tax base of the VAT.

Issues:
1. Wh the Evat is regressive
2. Wh Evat impairs contractual obligations
3. Wh Evat violates the due process and equal protection clause

Held: EVAT constitutional.
1. Petitioners claim that the Evat contravenes the mandate of Congress to provide for a
progressive system of taxation because it imposes a flat rate of 10% and thus places the tax burden on
all taxpayers without regard to their individual ability to pay.
SC held that the Constitution does not prevent the imposition of indirect taxes which, like the
VAT are regressive. What it provides is that the Congress shall ―evolve a progressive system of
taxation.‖ This provision has been interpreted to mean simply that direct taxes are to be preferred
and indirect taxes should be minimized. Indeed, the mandate to Congress is not to prescribe but to
evolve a progressive system of taxation. Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult to avoid them. Evat minimizes the regressive effects of this imposition
by providing for zero rating in certain transactions while granting exemptions to other transactions.
2. 2. CREBA contends that since VAT is retroactive, it would impair lease contracts entered
into prior the effectivity of the law.
SC held that not only are existing laws read into contracts in order to fix obligations as
between the parties, but the reservation of essential attributes of sovereign power is also
read into contracts as a basic postulate if the legal order. The Contract Clause has never
been thought of as a limitation on the exercise of the State‘s power of taxation save only
where a tax exemption has been granted for a valid consideration.
3. 3. VAT is equitable. Equality and uniformity of taxation means that all taxable articles or
kinds or property of the same class be taxed at the same rate. The taxing power has reasonable
authority to make reasonable classification for purposes of taxation. To satisfy the statute, it is enough
that the statute or ordinance applies equally to all persons, forms, and corporations placed in similar
situation.
VAT does not violate due process clause. The harshness and arbitrariness and the
confiscatory nature of a tax law to show that it violates due process must be established
by sufficient facts. In this case, the petitioners failed to present empirical data to show
the harshness and oppressiveness of the tax measure.


PART 13

PART 14
EXCISE TAX

RA 8240 is the basis of Secs. 141, 142, 143, 145 (same provisions)

RA 7654. This is already inconsistent with Sec. 145.

REPUBLIC ACT NO. 7654
AN ACT REVISING THE EXCISE TAX BASE, ALLOCATING A PORTION OF THE
INCREMENTAL REVENUE COLLECTED FOR THE EMERGENCY EMPLOYMENT PROGRAM
FOR CERTAIN WORKERS, AMENDING FOR THE PURPOSE SECTION 142 OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES
Sec. 1. Section 142 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:
"Sec. 142. Cigars and cigarettes. -
"(a) Cigars. - There shall be levied, assessed and collected on cigars a tax of ten (10%) of the
constructive manufacturer's or importer's wholesale price or the actual manufacturer's or importer's
wholesale price, whichever is higher.
"(b) Cigarettes packed by hand. - There shall be levied, assessed and collected on cigarettes packed
by hand a tax of fifteen percent (15%) of the constructive manufacturer's wholesale price or the actual
manufacturer's wholesale price, whichever is higher.
"(c) Cigarettes packed by machine. - There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price, whichever is higher:
"(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five
percent (55%) or the exportation of which is not authorized by contract or otherwise, fifty-five percent
(55%) provided that the minimum tax shall not be less than Five pesos (P5.00) per pack.
"(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum
tax shall not be less than Three pesos (P3.00) per pack. cdtai
Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only
be packed in twenties.
When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price
whichever is higher of existing brands of cigarettes, including the amounts intended to cover the
taxes, of cigarettes packed in twenties does not exceed Four pesos and eighty centavos (P4.80) per
pack, the rate shall be twenty percent (20%).
"(d) Imported cigarettes. - If the cigarettes are of foreign manufacture, regardless of the contents
per pack, there shall be levied, assessed and collected a tax of fifty-five percent (55%) of the
constructive importer's wholesale price or the actual importer's wholesale price, whichever is higher.
"For purposes of this section, the term "constructive manufacturer's or importer's wholesale price"
shall mean the price including the amount intended to cover the tax imposed in paragraphs (a), (b),
(c) or (d) hereof and the amount intended to cover the value-added tax imposed under Title IV of this
Code at which locally manufactured or imported cigars or cigarettes are offered for sale to the
wholesalers or distributors as fixed by the manufacturer or importer and registered with the Bureau
of Internal Revenue plus a mark up of twenty percent (20%) of such price. The term "actual
manufacturer's or importer's wholesale price" shall mean the price at which the purchaser actually
pays or is obligated to pay to the manufacturer or importer in consideration of the sale, barter, or
exchange of cigars and cigarettes.
"The twenty percent (20%) mark up and the minimum taxes provided in this section shall be
automatically increased in 1996 by ten percent (10%). cdasia
"Manufacturers and importers of cigars and cigarettes shall, within thirty (30) days from the
effectivity of this Act, submit to the Commissioner of Internal Revenue a sworn statement of the
manufacturer's or importer's wholesale price of each particular brand of their products, and
periodically thereafter, a sworn written notification of any change thereof.
"Any downward reclassification of present categories, for tax purposes, of existing brands of cigars or
cigarettes duly registered with the Bureau of Internal Revenue at the time of the effectivity of this Act
or any reduction or undervaluation of the manufacturer's or importer's registered wholesale price or
any violation of this section which will reduce the tax imposed herein, or the payment thereof, shall
be prohibited.
"Any manufacturer or importer who, in violation of this section, knowingly misdeclares or
misrepresents in his or its sworn statement herein required any pertinent data or information or
reduces or undervalues or downgrades the classification of any existing brand of cigars and cigarettes
duly registered with the Bureau of Internal Revenue at the time of the effectivity of this Act shall,
upon discovery, be penalized by a summary cancellation or withdrawal of his or its permit to engage
in business as manufacturer or importer of cigars or cigarettes.
"Any corporation, association, or partnership liable for any of the acts or omissions in violation of this
section shall be fined treble the amount of deficiency taxes, surcharges, and interests which may be
assessed pursuant to this section.
"Any person liable for any of the acts or omissions prohibited under this section shall be criminally
liable and penalized under Section 253 of this Code. Any person who willfully aids or abets in the
commission of any such act or omission shall be criminally liable in the same manner as the principal.
cdtai
"If the offender is not a citizen of the Philippines, he shall be deported immediately after serving the
sentence without further proceedings for deportation."
Sec. 2. The wholesale price of cigars and cigarettes at which they are offered for sale to the
wholesalers or distributors and registered with the Bureau of Internal Revenue as of December 31,
1992 shall be deemed the manufacturer's or importer's registered wholesale price until the
submission by the manufacturer or importer of the sworn statement as required under Section 1 of
this Act: Provided, That a variant of an existing brand of cigars or cigarettes that shall be
manufactured after the effectivity of this Act shall be taxed at the same level as the main brand
regardless of its declared wholesale price: Provided, further, That to prevent any underpayment of
taxes, any new brand of cigars or cigarettes with comparable quality, blend, cost of production and
other relevant facts as brands with a registered wholesale price of Three pesos (P3.00) or more per
pack, and which shall be manufactured after the effectivity of this Act, shall be taxed at the highest
rate regardless of its declared wholesale price. For the purpose of this section, cigars or cigarettes
registered with the Bureau of Internal Revenue after May 31, 1993 shall be treated as new brands.
Sec. 3. Fifty percent (50%) of the increment in total revenue collected under this Act for a period of
one (1) year from its effectivity shall be allocated and disbursed solely for purposes of providing
emergency productive employment to workers displaced by the present electricity power crisis. For
this purpose, the Secretary of Labor and Employment, in consultation with the Secretary of Finance,
shall promulgate the necessary rules and regulations for the effective implementation of this section.
cdt
Provided, likewise, That twenty-five percent (25%) of the increment in total revenue collected under
this Act in 1995 shall be collected and segregated as a trust fund to be disbursed solely for funding
the national health insurance program as may be hereafter mandated by law.
Sec. 4. The incremental revenue collected under this Act shall be excluded from the revenue bases as
provided under Republic Act No. 7171.
Sec. 5. The Secretary of Finance shall, upon the recommendation of the Commissioner of Internal
Revenue, promulgate the necessary rules and regulations within six (6) months from the effectivity of
this Act.
Sec. 6. The Bureau of Internal Revenue shall adopt any or all of the following measures:
(1) Affixture of internal revenue fuson stamps. - Internal revenue fuson stamps without
denomination or class, shall be firmly and conspicuously affixed on any part of the packages
containing the cigarettes as the manufacturer may deem it fit before said packages are packed in cases
for removal from the factory. The affixture must be done in such a manner that will prevent said
fuson stamps from being removed and re-used by washing or any other means and from covering
any warning that may be hereafter required by law to be printed on cigarette packages.
(2) Control of cigarette paper. -
(a) No person shall be permitted to import or manufacture cigarette paper without first securing
the required permit therefor from the Commissioner of Internal Revenue; cdasia
(b) Only duly registered cigarette manufacturers are authorized to buy from a permittee for use in
their factories, but before effecting a sale, it shall be obligatory upon the seller of the cigarette paper to
secure a written authority from the Commissioner of Internal Revenue, accompanied by a written
confirmation of the buyer;
(c) All cigarette manufacturers shall keep a manufacturer's cigarette paper registry book showing
the following information:
(1) Debit Entries:
(i) The date the cigarette paper is received;
(ii) The date of the authority issued by the Commissioner of Internal Revenue;
(iii) name and address of the person from whom received; and
(iv) The number, brand, and color of bobbins or rolls received, showing also the length in meters
of each.
(2) Credit Entries:
(i) The date of disposal or use; and
(ii) The number, brand, and color of bobbins or rolls disposed of or used, showing also the length
in meters of each.
(3) Keeping of subsidiary books. - Local manufacturers of cigars and cigarettes shall keep and
maintain subsidiary books covering the following: cdtai
(a) Inventories of imported leaf tobacco showing its volume and value;
(b) Inventories of local leaf tobacco showing its volume and value;
(c) Cost of manufacture for each brand of cigarettes; and
(d) Inventories of cigarettes produced on a per brand basis showing their respective volumes and
values.
The amount that may be needed to implement this provision relative to the monitoring of production
and volume of removals of cigarette paper and the printing of fuson stamps shall be included in the
General Appropriations Act.
Sec. 7. Separability Clause. - If any provision of this Act is subsequently declared unconstitutional,
the validity of the remaining provisions hereof shall remain in full force and effect.
Sec. 8. Repealing Clause. - All laws, decrees, executive orders, rules and regulations, and other
issuances inconsistent with this Act are hereby repealed or modified accordingly.
Sec. 9. Effectivity Clause. - This Act shall take effect after fifteen (15) days from its publication in the
Official Gazette or in at least two (2) national newspapers of general circulation whichever comes
earlier. cda
Approved: June 14, 1993

RA 7729 has been the basis of Sec. 151

RR 1-97
SECTION 5. Computation of Excise Tax.
1. Manner of Computing the Specific Tax. —
(a) For cigars, multiply the number of cigars by P1.00 to arrive at the specific tax due.
(b) For cigarettes packed by hand, multiply the number of packs by P0.40 to arrive at the specific
tax due.
(c) For cigarettes packed by machine —
i) Existing Brands:
1) If an existing brand with a net retail price of over P10.00 per pack (excluding VAT and excise
tax), multiply the number of packs by P12.00 to arrive at the specific tax due. However, if the amount
of specific tax due from one pack of cigarettes is lower than the ad valorem tax due from such brand
as shown in the above list, the latter amount is the specific tax per pack for such brand;
2) If an existing brand with a net retail price of over P6.50 but not over P10.00 per pack
(excluding VAT and excise tax) multiply the number of packs by P8.00 to arrive at the specific tax
due. However, if the amount of specific tax due from one pack of cigarettes is lower than the ad
valorem tax due from such brand as shown in the above list, the latter amount is the specific tax per
pack for such brand.
3) If an existing brand with a net retail price of P5.00 but not over P6.50 per pack (excluding VAT
and excise tax), multiply the number of packs by P5.00 to arrive at the specific tax due. However, if
the amount of specific tax due from one pack of cigarettes is lower than the ad valorem tax due from
such brands as shown in the above list, the latter amount is the specific tax per pack for such brand.
4) If an existing brand with a net retail price of below P5.00 per pack (excluding VAT and excise
tax), multiply the number of packs by Pl.00 to arrive at the specific tax due. However, if the amount
of specific tax due from one pack is lower than the ad valorem tax due from such brand as shown. in
the above list, the latter amount is the specific tax per pack for such brand.
ii) New Brands
1) If marketed nationwide, determine the current net retail price of such brands in 20 major
supermarkets or retail outlets in Metro Manila and applying the tax classification and rates indicated
in Section 3 of these regulations, multiply the appropriate tax rates depending on the net retail price
per pack (exclusive of VAT and excise tax) by the number of packs to arrive at the specific tax due;
2) If marketed only in the region. determine the current net retail price per pack of such brands in
five (5) major supermarkets located in that region and applying the tax classification indicated in
Section 4 of these regulations, multiply the appropriate tax rates depending on the price per pack
(exclusive of VAT and excise tax) by the number of packs to arrive at the specific tax due.
In the meantime that the current net retail price has not yet been established, the suggested net retail
price shall be used within the three (3) months survey period.
2. Illustrations
5.2.1 ON DULY REGISTERED EXISTING BRAND OF CIGARS AND CIGARETTES.
ILLUSTRATION NO. 1 — Specific tax due per Pack is lower than the
ad valorem tax due Per Pack as of October
1, 1996.
A manufacturer will remove 100 cases of "AAA Cigarettes" from his place of production. Each case
contains 500 packs of cigarettes. These are locally manufactured cigarettes packed by machine. As of
October 1, 1996, the ad valorem tax due per pack is P5.85 and the net retail price set forth herein is
P5.55. The excise tax due shall be computed as follows:
Step 1. Determine the tax classification of the subject brand of cigarettes.
The tax classification falls under the P5.00 specific tax category, since the net retail price of P 5.55 is
higher than P5.00 but lower that P6.50.
Step 2. Compare the ad valorem tax due per pack as of October 1, 1996 to the specific tax due,
prescribed under R.A. 8240 whichever is higher and apply the higher tax in the computation of excise
tax due. Then determine the percentage (70%) of excise tax due per pack and if the result is more than
seventy percent (70%) of the increase, then the increase shall take effect in two tranches.
Ad valorem tax due per pack as of October 1, 1996 P5.85
Specific tax due per pack prescribed under R.A. 8240 5.00
———
Increase none
Percent of increase none
Step 3. Compute the excise tax due.
In as much as the prescribed specific tax due per pack is lower than the existing ad valorem tax due
per pack, the latter shall apply.
Volume of Removals (100 cases x 500 packs) P50,000
Multiplied by applicable new specific tax rate per pack x P5.85
—————
EXCISE TAX DUE P292,500
=========
ILLUSTRATION NO. 2 — Specific tax due per pack is higher than
the ad valorem tax due per pack as of
October 1, 1996.
A manufacturer will remove 100 cases of "BBB Cigarettes" from his place of production. Each case
contains 500 packs of cigarettes. There are locally manufactured cigarettes packed by machine. As of
October 1, 1996, the ad valorem tax due per pack is P6.51 and the net retail price set forth therein is
P6.78. The excise tax due shall be computed as follows:
Solution: Follow the same procedures in Illustration 1.
1) The tax classification of the subject brand of cigarettes falls under P8.00 specific tax category,
since the net retail price of P6.78 is higher than P6.50 but lower than P10.00.
2) Ad valorem tax due per pack as of October 1, 1996 P6.51
Specific tax due per pack prescribed under R.A. 8240 8.00
———
Increase P1.49
Percent of Increase 22.89%
======
3) Compute the excise tax due.
In as much as the prescribed specific tax due per pack is higher than the existing ad valorem tax due
per pack, the former shall apply.
Volume of Removals (100 cases x 500 packs) 50,000
Multiplied by Specifics tax due per pack x P8.00
EXCISE TAX DUE P 400,000
========
ILLUSTRATION NO. 3 — Increase in excise tax due per pack is
more than seventy percent (70%).
A manufacturer will remove 100 cases of "CCC Cigarettes" from his place of production. Each case
contains 500 packs of cigarettes. These are locally manufactured cigarettes packed by machine. As of
October 1, 1996, the ad valorem tax due per pack is P2.54 and the net retail price set forth herein in
P7.00. The excise tax due shall be computed as follows:
Solution. Follow the same procedure in Illustration 1.
1) The tax classification of the subject brand of cigarettes falls under P8.00 specific tax category,
since the net retail price of P7.00 is higher than P6.50 but lower than P10.00.
2) Ad valorem tax due per pack as of October 1, 1996 P2.54
Specific tax due per pack prescribed under R.A. 8240 8.00
———
Increase P5.46
Percent of Increase 214.96%
=======
3) Determine the effective tax rate.
In as much as the increase in excise tax is more than seventy percent (70%), fifty percent (50%) of the
increase in excise tax rate shall be affected in 1997 and one hundred percent (100%) of the increase in
excise tax rate shall be effected in 1998.
a) 1st Tranche — 1997
Amount of increase per pack P5.46
Multiplied by effective rate x .05
———
Specific tax due 2.73
Add: Ad valorem tax due per pack as
of October 1, 1996 2.54
———
Total effective specific tax rate P5.27
=====
b). 2nd Tranche — 1998
Amount of increase per pack P5.46
Multiplied by effective rate x 100%
———
Specific tax due 5.46
Add: Ad valorem tax due per pack
as of October 1, 1996 + 2.54
———
Total effective specific tax rate P8.00
=====
4) Compute the excise tax due.
a). 1st Tranche — 1997
Volume of removals (100 cases x 500 packs) 50,000
Multiplied by effective specific tax due x P5.27
———
EXCISE TAX DUE P263,500
=======
b). 2nd Tranche — 1998
Note: Assuming same volume removed by the subject manufacturer in 1998. the excise tax will be
computed as follows:
Volume of removals (100 cases x 500 packs) 50,000
Multiplied by effective rate (100%) x P8.00
EXCISE TAX DUE P400,000
=======
5.2.2 On New Brands of Cigarettes
ILLUSTRATION — A manufacturer or importer will remove from place of production or cause of the
release from customs custody 100 cases of "EEE Menthol 100". Each case contains 500 packs of
cigarettes. These are the cigarettes packed by machine to be introduced in the market. The suggested
net retail price declared by the manufacturer or importer is P5.50. The excise tax shall be computed
as follows:
Solution. Follow the same procedures in Illustration 1.
1) The tax classification of the subject cigarettes falls under P5.00 specific tax category, since the
suggested net retail price is higher that P5.00 but lower than P6.50.
2) Compute the excise tax due.
Volume Removals/Customs Releases 50,000
Multiplied by specific tax rate x P5.00
————
EXCISE TAX DUE P250,000
========
Three (3) months after date of introduction in the market the survey was conducted with the
following results determined;
Case I — The Current Net Retail Price of P7.00 is higher than the Suggested Net Retail Price of P5.50.
The excise tax due shall be computed as follows:
Solution:
1. Compare the Suggested Net Retail Price to the Current Net Retail Price, whichever is higher
and apply the higher amount in the determination of tax classification.
Suggested Net Retail Price P5.50
Current Net Retail Price 4.95
2. Determine the tax classification of the subject brand of cigarette.
In as much as the Suggested Net Retail Price is higher than the Current Net Retail Price, the former
shall apply.
3. The tax classification of the subject brand falls under P8.00 specific tax category, since the
Current Net Retail Price of P7.00 is more than P6.50.
4. Compute the excise tax due:
Volume of Removals/Customs Releases 50,000
Multiplied by specific tax rate P8.00
———
Excise Tax Due P400,000
Less: Excise tax paid based on Suggested Net
Retail Price (P50,000 x P5.00) 250,000
————
Deficiency Excise Tax Due 150,000
Add: Surcharge 25% xxx
Interest P.A. 20% xx.
Compromise xxx
———
TOTAL DEFICIENCY EXCISE TAX DUE P150,000
=======
Case II — The Current Net Retail Price if P4.95 per pack is lower than the Suggested Net Retail Price
per pack of P5.50. The excise tax due shall be computed as follows:
Solution:
1. Compare the Suggested Net Retail Price to the Current Net Retail Price whichever is higher
and apply the higher amount in the determination of tax classification.
Suggested Net Retail Price P 5.50
Current Net Retail Price 4.95
2. In as much as the Suggested Net Retail Price is higher than the Current Net Retail Price, the
former shall apply.
The tax classification of the subject brand falls under P5.00 specific tax category, since the Suggested
Net Retail Price of P5.50 is higher than P5.00 but lower than P6.50.
3. Compute the excise tax due:
Volume of Removals/Customs Releases
100 cases x 500 packs) 50,000
Multiplied by specific tax rate P5.00
————
EXCISE TAX DUE P250,000
=======



RR 2-97 has been the basis of Secs. 141 and 142

SECTION 3. Rates and Bases of Tax. — There shall be levied, assessed and collected on alcohol
products excise tax as follows:
I. Distilled Spirits
(a) If produced from sap of nipa, coconut, cassava, camote, or buri palm or from the juice, syrup,
or sugar of the cane, provided such materials are produced commercially in the country where they
are processed into distilled spirits, proof liter, Eight pesos (P 8.00); Provided, That if produced in a
pot still or other similar primary distilling apparatus by a distiller producing not more than 100 liters
a day, containing not more than fifty percent (50%) of alcohol by volume, PER PROOF LITER, FOUR
PESOS (P 4.00);
(b) If produced from raw materials other than those enumerated in the preceding paragraph, the
tax shall be in accordance with the net retail price per bottle of seven hundred fifty milliliter (750 ml.)
volume capacity (excluding the excise tax and the value-added tax) as follows:
(1) Less than two hundred and fifty pesos (P250.00) — SEVENTY-FIVE PESOS (P75.00), per proof
liter;
(2) Two hundred and fifty pesos (P250.00) up to Six hundred and seventy-five pesos (P675.00) —
ONE HUNDRED AND FIFTY PESOS (P150.00), per proof liter; and
(3) More than Six hundred and seventy-five pesos (P675.00) — THREE HUNDRED PESOS
(P300.00), per proof liter.
(c) Medicinal preparations, flavoring extracts, and all other preparations, except toilet
preparations, of which, excluding water, distilled spirits form the chief ingredient, shall be subject to
the same tax as such chief ingredient.
This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits, and
the tax shall attach to this substance as soon as it is in existence as such, whether it be subsequently
separated as pure or impure spirits, or transformed into any other substance either in the process of
original production or by any subsequent process.
II. Wines — On wines, there shall be collected per liter of volume capacity, the following taxes:
(a) Sparkling wines/champagnes regardless of proof, if the net retail price per bottle (excluding
the excise tax and the value-added tax) is:
(1) Five hundred pesos (P500.00) or less — ONE HUNDRED PESOS (P100.000; and
(2) More than Five hundred pesos (P500.00) — THREE HUNDRED PESOS (P300.00);
(b) Still Wines containing fourteen percent (14%) of alcohol by volume or less, TWELVE PESOS
(P12.00);
(c) Still Wines containing more than fourteen percent (14%) but not more than twenty-five percent
(25%) of alcohol by volume, TWENTY-FOUR PESOS (P24.00).
"Fortified wines containing more than twenty-five percent (20%) of alcohol by volume shall be taxed
as distilled spirits. Fortified wines shall me natural wines to which distilled spirits are added to
increase their a alcoholic strength.
III. Fermented Liquor — On beer, lager, beer, ale, porter and other fermented liquors except tuba,
basi, tapuy and similar domestic fermented liquors in accordance with the following schedule:
(a) If the net retail price (excluding the specific tax and value-added tax) per liter of volume
capacity is less than Fourteen pesos and fifty centavos (P14.50), tax shall be SIX PESOS AND
FIFTEEN CENTAVOS (P6.15) per liter;
(b) Still Wines containing fourteen percent (14%) of alcohol by volume or less, TWELVE PESOS
(P12.00);
(c) If the net retail price (excluding the specific tax and the value-added tax) per liter of volume
capacity is more than twenty-two pesos (P22.00), the tax shall be TWELVE PESOS FIFTEEN
CENTAVOS (P12.15) per liter.
(d) For fermented liquor which are brewed and sold at micro-breweries or micro-breweries or
micro brew pubs, the tax shall be TWELVE PESOS AND FIFTEEN CENTAVOS (P12.15) per liter:
IV. Beginning January 1,2000, the rates of specific tax on distilled spirits, wine and fermented
liquor under paragraphs (I) (II) and (III) hereof shall be increased by twelve percent (12%).



REVENUE REGULATIONS NO. 14-99

SUBJECT : Amending Section 2 of Revenue Regulations No. 14-97, Otherwise Known as
Revenue Regulations Governing the Imposition of Excise Taxes on Automobiles and Other Motor
Vehicles

SECTION 1. Scope. — Pursuant to the provisions of Section 244, in relation to Section 243 of the
National Internal Revenue Code of 1997, these regulations are hereby promulgated to implement the
provisions of Section 149 of Title VI, Chapter VI of the said Code, imposing excise taxes on
automobiles and other motor vehicles. LexLib
SECTION 2. Amended provisions. — Section 2 of Revenue Regulations No. 14-97 is hereby amended
and shall now read as follows:
a. AUTOMOBILE — shall be defined as a four (4) or more wheeled vehicle other than trucks or
passenger jeepneys, as defined under R.A. 4136 and R.A. 1138, which is propelled by gasoline, diesel,
electricity or any other motive power, and specially designed to transport persons and not primarily
to transport freight or merchandise. It shall include utility or light commercial vehicles designed for
passenger use with seats for less than ten (10) passengers, including the driver. The number of seats
shall be determined in accordance with the rules stated in the fifth paragraph below.
Provided, that the manufacturer's technical specifications as stated in the manufacturer's certification
and manufacturer's catalogue or brochure must show that the vehicle has met the requirements of
these regulations on the number of seats, seatbelts, seat and feet space measurements and must
likewise contain the model code of the vehicle. Vehicles that do not have manufacturer's certification
and manufacturer's catalogues or brochures or whose manufacturer's certification and manufacturer's
catalogues or brochures do not contain the required information, or show that the vehicle do not meet
the requirements of this regulation shall be subject to tax under Section 149 of the Tax Code as an
automobile.
Provided, further, that ocular inspection must be conducted in all cases, taking careful consideration
of several factors, particularly the seat and feet space measurement, for the proper determination as
to whether said vehicle is an automobile. A written report of each ocular inspection must be prepared
by the inspecting officer to enable the reviewing officer to determine whether the vehicle inspected
meets the criteria of an automobile as defined in these regulations. LexLib
Provided, further, that notwithstanding any contrary rule, closed or covered four-wheel drive
vehicles, primarily designed to carry passengers, regardless of the number of seats, shall he
considered and taxed as an automobile for purposes of these regulations starting February 1, 2000.
For the uniform application of the number of seats criterion, the passenger seats must conform to the
following rules and area specifications:
1. Each seat shall be a horizontal rectangular area with seat and feet space of not less than thirty-
five centimeters (35 cm.) wide and sixty centimeters (60 cm.) long for each passenger and fifty
centimeters (50 cm.) wide and sixty centimeters (60 cm.) long for the driver or operator.
2. The requirements of the Seatbelts Use Act of 1999 (R.A. 8753) must be complied with for a seat
to be counted as such for purposes of these regulations.
3. In all cases where there is a variance in the determination of the correct number of seats, the
number of seats shown in the manufacturer's certification and catalogue or brochure shall prevail.


DOCUMENTARY STAMP TAX


CIR v. Construction Resources of Asia 145 SCRA 673

On the question of whether or not the certificate of stocks, to be subject to the documentary stamp
tax, must be delivered to the respective stockholders. the Supreme Court ruled that delivery, either
actual or constructive, is not necessary. The certificates of stocks only need to be issued but not
delivered. A documentary stamp tax is in the nature of an excise tax because it is levied upon the
privilege. It may be levied only once upon the original issue of the certificate.

Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in
the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the
attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the
dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the
actual or constructive possession of the stockholder, is considered issued because it is with value and
hence the documentary stamp tax must be paid.


Phil. Consolidated Coconut Ind. v. CIR 70 SCRA 22

Petitioner is registered with the Securities and Exchange Commission (SEC) with an authorized
capital of P70,000,000 of which P14,375,000 was subscribed. Of this worth of shares of stock, upon
suggestion of the Secretary of Justice to protect the investing public, petitioner deposited P14,000,000
with the SEC, on condition that no sale or transfers shall be made from said deposited shares until
such time as the Commission may deem such release justisfied. Later, under a permit granted by the
SEC, shares of stock worth P791,400.00 were transferred to various persons. The Collector of Internal
Revenue assessed and imposed documentary stamp tax not only on the transfer issues but on the
certificate or stock held on mandatory deposit by the Securities and Exchange Commission. The
Court of Tax Appeals sustained the assessment. On appeal, the Supreme Court reversed the decision
of the Court of Tax Appeals holding that the certificate of stocks deposited with the Securities and
Exchange Commission and temporarily subject to the suspensive conditions imposed by the
Commission shall be liable to said tax only when released from said conditions, for then and only
then shall they truly acquire any practical value for their owners.

It is the Government itself, thru the SEC, which required the petitioner's incorporators-subscribers to
deposit with said Commission P14,000.000 worth of shares of stock out of the P14,375,000 shares
outstanding in their names (Certificates of Stock Nos. 1 to 15) with the aforestated condition. It is very
manifest that in so far as the fifteen (15) certificates of stocks are concerned, they nominally appear in
the names of the incorporators-subscribers appearing therein but actually none among them can
exercise any attribute of ownership over said stocks until the SEC decides otherwise. If it is an act of
the Government that temporarily deprived these fifteen (15) certificates of stocks of any value in
favor of their owners, We cannot see Our way clear as to why that same Government shall consider
said certificates issued and with practical value for the purpose of imposing the documentary stamp
tax. Certainly, the Government cannot declare those fifteen (15) certificates of stocks without value to
their owners temporarily to protect the investing public and in the same breath claim that they have
value for purposes of taxation. We do agree, however, that at any time those fifteen (15) certificates of
stock are released by the Securities and Exchange Commission from the condition imposed which
deprives their owners momentarily of the rights of ownership over the stocks appearing therein, then
they shall be considered as originally issued and subject to the documentary stamp tax.


REVENUE MEMORANDUM CIRCULAR NO. 44-86

Subject : Documentary stamp tax on instrument of sale or conveyance of real property.
To : All Internal Revenue Officers and others concerned.
1. Background. — Stamp taxes on taxable documents, including instrument of sale or
conveyance of real property, shall be paid by any of the parties to the taxable document at the time
the act is done or transaction had. Whenever one of the parties enjoys exemption from the tax, the
other party who is not exempt shall be the one directly liable (Sec. 186, NIRC, as amended). Section 2
of Presidential Decree No. 1045, as implemented by Section 6 of Revenue Regulations No. 9-76,
requires that if the amount of the stamp tax due is ten pesos (P10.00) or more, the stamp tax shall be
paid to the Bureau of Internal Revenue or through its authorized agent bank, after which a
corresponding official receipt evidencing payment shall be issued and a notation of such payment
shall be made on the original and every copy of the document, as follows: (a) Amount of stamp tax
paid; (b) Official receipt number; (c) Date of payment; and (d) Name and signature of the payor. If the
amount of stamp tax due is below ten pesos (below P10.00), rather than the said official receipt, actual
stamp shall be issued by the BIR - the stamp shall be affixed in the taxable document and after
affixture shall be cancelled in order that payment of the tax may be effected. Section 214 of the Tax
Code provides that a taxable document shall not be recorded nor shall it or any copy thereof or any
record of transfer of the same be admitted or used in evidence in any court unless the corresponding
stamp tax due thereon had been paid and that a notary public is prohibited from adding his jurat or
acknowledgment to any taxable document unless the proper documentary stamp tax had been paid.
aisa dc
2. Stamp tax on instrument of sale/conveyance of real property. — Section 209 of the Tax Code
imposes a documentary stamp tax on all conveyances, deeds, instruments or writings bearing on the
sale or other disposition of real property for a consideration. The tax shall be based on the amount of
consideration, or value received or contracted to be paid or the fair market value of the real property,
whichever is higher.
3. Procedure for determination and collection of stamp tax on instrument of sale or conveyance
of real property. —
3.1 The stamp tax on the said document shall be paid through the Revenue District Office having
jurisdiction over the locality where the real property sold/disposed is located.
3.2 The stamp tax referred hereunder applies only if the instrument is a sale or other conveyance
of real property for a consideration in money or money's worth.
3.3 Since the basis of the tax is either (a) the consideration as shown in the said document or (b)
the fair market value of the real property, whichever is higher, the taxpayer shall present to the
Revenue District Officer for verification (a) the original and every other copy/ies of the said
document and (b) a true copy of the latest Tax Declaration of the said real property, duly certified by
the corresponding City/Municipal Assessor. aisa dc
From the said documents, the Revenue District Officer shall determine the actual amount of stamp
tax due on the said taxable document.
3.4 Payment Order shall be issued by the said Revenue District Officer to effect payment of the
stamp tax due.
3.5 After payment, the Revenue District Officer shall cause the notation on the taxable document
of the following information: (a) Amount of stamp tax paid; (b) Official Receipt number; (c) Date of
payment; and (d) Name and signature of the payor.
At the bottom of the foregoing notations, the following shall also be shown:
"AMOUNT OF STAMP TAX PAID ON THIS
DOCUMENT CERTIFIED CORRECT:
__________________
Revenue District Officer
3.6 A notary public shall not add his jurat or acknowledgment on the taxable document unless
evidence of payment of the tax as provided in paragraph 3.5 hereof is shown on the said document.
3.7 The Register of Deeds shall not record the transaction and cause transfer of title to the real
property unless the evidence of payment of the tax as provided in paragraph 3.5 hereof is shown on
the said document.
This requirement shall be in addition to the certification of the Revenue District Officer in case of a
sale, exchange or other disposition of real property, classified as capital asset, made by an individual,
estate or trust, pursuant to the provisions of Batas Pambansa Blg. 37, as amended. cdt
3.8 The stamp tax referred herein shall be due and payable on every instrument of sale or
conveyance of real property, regardless of the parties to the taxable document, whether an individual,
estate, trust, a corporation or a partnership and regardless of the class of the real property, whether
capital or ordinary business asset in the hands of the vendor/transferor.



RA 7690 is the basis for most of the Sections for the DST. Same provisions as with the NIRC.

RR No. 9-94

Sec. 12. PENALTY CLAUSE. - (a) In case of late payment of the documentary stamp tax due,
there shall be imposed a surcharge equivalent to
twenty-five percent (25%) of the basic tax due. In case of failure to pay the basic tax and twenty-five
percent (25%) surcharge within the time prescribed in the notice and demand, there shall be further
assessed and collected a twenty percent (20%) interest per annum, computed on the basis of the
aforesaid basic tax and surcharge.
(b) Any other violation of the provisions of these regulations shall be punishable under the
pertinent provisions of Title X, Chapter II of the Tax Code, as amended.

PART 15
Ty vs. Trampe G.R. No. 117577. December 1, 1995 (250 SCRA 500)

FACTS: Ty is a resident of and registered owner of lands and buildings in Pasig City. In January
1994, the Assessor sent him a notice of assessment concerning his real properties in Pasig. In
response, Ty filed a Petition for Prohibition with prayer for TRO and/or writ of preliminary
injunction at the sala of Judge Trampe to declare void the new tax assessments and to enjoin the
collection of realty tax based on such assessments. Ty argued that the assessments were void because
it did not conform to P.D. 921 which requires that the schedule of assessments shall be prepared
JOINTLY by the city assessors of the District. The Assessor argued that P.D. 921 has been repealed by
R.A. 7160 (the Local Government Code) because P.D. 921 is merely an implementing law of P.D. 464,
which was expressly repealed by R.A. 7160 in Section 534. Judge Trampe denied Ty's petition for
lack of merit and ruled that the assessments were correct. Thus Ty filed this petition with the
Supreme Court.

HELD: The Supreme Court ruled in favor of Ty. It held that RA 7160 has a repealing provision and if
the intention of the legislature was to repeal PD 921, it would have expressly included PD 921 in such
repealing clause. The SC then compared the aims of the PD 921 and RA 7160 to determine if they
were so incompatible as to constitute an implied repeal. After comparison, the SC found that the two
laws are not co-extensive and mutually inclusive in their scope and purpose. While RA 7160 covers
almost all governmental functions delegated to local government units all over the country, PD 921
embraces only the Metro Manila are and is limited to the administration of financial services therein,
especially the assessment and collection of real estate and some other local taxes. Thus, there was no
implied repeal. PD 921 remains effective. Trampe's decision was set aside. The Schedule of Market
Values for Pasig and the assessments based thereon were declared null and void. Ty won.


Drilon vs. Lim G.R. No. 112497, August 4, 1994 (235 SCRA 135)

FACTS: An ordinance of the City of Manila known as the Manila Revenue Code was enacted by the
council of Manila and Mayor Lim. Four oil companies and a taxpayer who were affected by the
Manila Revenue Code questioned the legality of its enactment with Drilon, then the Secretary of
Justice. They alleged that the ordinance was void for non-compliance with the prescribed procedure
in Section 187 of the Local Government Code for the enactment of ordinances and for containing
certain provisions contrary to law and public policy. Drilon declared the ordinance void. The City of
Manila filed a petition for certiorari with the RTC of Manila which revoked Drilon's resolution and
sustained the ordinance. The RTC judge also declared Sec. 187 of the LGC unconstitutional insofar as
it empowered the Secretary of Justice to review tax ordinances and, inferentially, to annul them. He
cited the distinction between control and supervision, the first being "the power of an officer to alter
or modify or set aside what a subordinate had done in the performance of duties and to substitute the
judgment of the former for the latter," while the second is "the power of a superior officer to see to it
that the lower officers perform their functions in accordance with law." Hence Drilon filed this
petition for review on certiorari.

HELD: The SC held in favor of Drilon. The SC explained that Sec. 187 authorizes the Secretary of
Justice to review only the constitutionality or legality of the tax ordinance and, if warranted, to
revoke it on either or both these grounds. When he alters or modifies or sets aside a tax ordinance, he
is not also permitted to substitute his own judgment for the judgment of the local government that
enacted the measure. Secretary Drilon DID set aside the Manila Regulation Code, but he DID NOT
REPLACE it with his own version of what the Code should be. He did not pronounce the ordinance
unwise or unreasonable as basis for its annulment. He did not say that in his judgment it was a bad
law. What he found only was that it was illegal. All he did in reviewing the said measure was
determine if the petitioners were performing their functions in accordance with law, that is, with the
prescribed procedure for the enactment of tax ordinances and the grant of powers to the city
government under the LGC. The SC held that this was an act of mere supervision, not control. The
SC reversed the judgment finding Sec. 187 of the LGC unconstitional but affirmed the RTC's finding
that there was proper observance of procedure in enacting the Manila Revenue Code.


Philippine Match Co., Ltd. vs. City of Cebu G.R. No. L-30745, January 18, 1978 (81 SCRA 99)

FACTS: The Philippine Match Co., Ltd., whose principal office is in Manila, is engaged in the
manufacture of matches. Its factory is located at Punta, Sta. Ana, Manila. It ships cases or cartons of
matches from Manila to its branch office in Cebu City for storage, sale, and distribution within the
territories and districts under its Cebu-branch or the whole Visayas-Mindanao region. Cebu City
itself is just one of the eleven districts under the company's Cebu City branch office. Pursuant to an
ordinance, the Cebu City Assessor assessed taxes on the company's out-of-town deliveries of
matches, to wit: (1) sales of matches booked and paid for in Cebu City but shipped directly to
customers outside of the city; (2) transfers of matches to salesmen assigned to different agencies
outside of the city; and (3) shipments of matches to provincial customers pursuant to salesmen's
instructions. The company paid under protest and filed a complaint with the Court of First Instance
seeking refund of the taxes. The trial court sustained the tax on #(1) and held that the sales were
consummated in Cebu city because delivery to the carrier in the city is deemed to be a delivery to the
customers outside of the city. However, it ordered a refund of #(2) and #(3). The trial court
characterized the tax on #(2) and #(3) as "storage tax" and not sales tax. It assumed the the sales were
consummated outside of the city and hence, beyond the city's taxing power. The company appealed
the portion of the decision regarding #(1) to the Supreme Court.

HELD: The SC held that the appeal is devoid of merit because the city can validly tax the sales of
matches to customers outside of the city as long as the orders were booked and paid for in the
company's branch office in the city. Those matches can be regarded as sold in the city, as
contemplated in the ordinance, because the matches were delivered to the carrier in Cebu City.
Generally, delivery to the carrier is delivery to the buyer (Art. 1523, Civil Code; Behn, Meyer & Co.
vs. Yangco, 38 Phil. 602). A different interpretation would defeat the tax ordinance in question or
encourage tax evasion through the simple expedient of arranging for the delivery of the matches at
the outskirts of the city though the purchases were effected and paid for in the company's branch
office in the city. Moreover, the municipal board of Cebu City is empowered to provide for the levy
and collection of taxes for general and special purposes in accordance with law. The taxing power
validly delegated to cities and municipalities is defined in the Local Autonomy Act (now Local
Government Code).


Local Finance Circular No. 1-93
June 16, 1993

Subject : Prescribing the guidelines governing the power of municipalities and cities to
impose a business tax on banks and other banking institutions pursuant to Sections 143 (f) and 151 of
Republic Act No. 7160 of 1991, and its Implementing Rules and Regulations (IRR)
To : All Regional Directors, Bureau of Local Government Finance; District Treasurers of
Metropolitan Manila; Provincial, City and Municipal Treasurers; and Others Concerned.

Pursuant to the provisions of Sections 143 (f) and 151 of the Republic Act No. 7160, otherwise known
as the Local Government Code of 1991 (LGC), as implemented by Article 232 (f) and 237 of the
Implementing Rules and Regulations (IRR), municipalities and cities may impose taxes on
businesses, including banks and banking institutions. aisa dc
Accordingly, the following guidelines are hereby prescribed in accordance with Article 287 of the
IRR, to ensure the proper and effective exercises by cities and municipalities of their taxing powers
under the LGC, as implemented under Rule XXX of the IRR, for guidance and compliance of all
concerned.
Sec. 1. Coverage. (a) As used herein, the term "banks and other banking institutions" shall refer to
persons or entities engaged in the lending of funds obtained from the public through the receipt of
deposits or the sale of bonds, securities or obligations of any kind and all entities regularly
conducting such operations. The terms "banks" and "banking institutions" are synonymous and
interchangeable.
For purposes of this Circular, banks shall be classified as follows:
(1) Commercial banks;
(2) Thrift banks composed of -
(i) Savings and Mortgage banks;
(ii) Stock savings and loan associations;
(iii) Private development banks
(3) Regional unit banks consisting of rural banks;
(4) Specialized and unique Government banks like the Development Bank of the Philippines,
which are governed by their respective charters.
(5) Other classes of banks as may be authorized by the Monetary Board of the Central Bank of the
Philippines; and
(6) Branches of the above-cited banks which have been authorized to be established nationwide
by the Monetary Board of the Central Bank of the Philippines.
Banking institutions include the following:
(1) Entities regularly engaged in the lending of funds or purchasing of receivables or other
obligations with funds obtained from the public through the issuance, endorsement or acceptance of
debt instruments of any kind for their own account, or through the issuance of certificates of
assignments or similar instruments with recourse, trust certificates, or of reproaches agreements,
whether any of these means of obtaining funds from the public is done on a regular basis or only
occasionally;
(2) Entities regularly engaged in the lending of funds which receive deposits only occasionally;
and
(3) Trust, companies, building and loan associations, non-stock savings and loan associations. acd
(b) Head Office — shall refer to the main office of the banking institution indicated in the
pertinent documents submitted to the Securities and Exchange Commission (SEC) and to other
appropriate agencies; the city or municipality specifically mentioned in the Articles of Incorporation
and other official registration papers as being the official address of said "Head Office" hall be
considered as the site thereof.
(c) Branch — a fixed place in a locality established as a branch of a banking institution, as
authorized by the Monetary Board of the Central Bank of the Philippines. However, a regional or
extension offices of banks and banking institutions shall not be considered as a branch.
Sec. 2. Tax on the Gross Receipts of Banks and Banking Institutions. (a) The tax on banks and banking
institutions may be levied on their gross receipts for the preceding calendar year, as follows:
(1) By municipalities, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross
receipts for the preceding calendar year; and
(2) By cities including municipalities within the Metropolitan Manila area, at a rate not exceeding
seventy five percent (75%) of one percent (1%) of the gross receipts for the preceding calendar year.
(b) For this purpose, gross receipts shall only include the following:
(1) Interest from loans and discounts — this represents interest earned and actually collected on
loans and discounts. The following is a breakdown: cdt
(i) Discounts earned and actually collected in advance on bills discounted;
(ii) Interest earned and actually collected on demand loans;
(iii) Interest earned and actually collected on time loans, including the earned portions of interest
collected in advance;
(iv) Interest earned and actually collected on mortgage contracts receivables;
(2) Interest earned and actually collected on inter-bank loans.
(3) Rental of property — this represents the following rental income:
(i) Earned portion of rental collected in advance from lessees of safe deposit boxes;
(ii) Rental earned and actually collected from lessees on bank premises and equipment.
(4) Income earned and actually collected from acquired assets.
(5) Income from sale or exchange of assets and property.
(6) Cash dividends earned and received on equity investments.
(7) Bank commissions from lending activities.
(8) Income component of rentals from financial leasing.
(c) All other income and receipts of banks and banking institutions not otherwise enumerated
above shall be excluded from the taxing authority of the LGU concerned, such as:
(1) Interest earned under the expanded foreign currency deposit system.
(2) Interest accumulated by lending institutions on mortgages insured under Republic Act No.
580, as amended, otherwise known as Home Financing Act.
(3) Receipts from filing fees, service and other administrative charges.
In view thereof, the provisions of Art. 242 of the IRR requiring a person or entity to get a separated
mayor's permit for each business activity shall not apply to the banking activities, as defined above.
Sec. 4. Procedures for the Enactment of Tax Ordinances. — (a) The tax on banks and banking
institutions as provided herein may be imposed by a city or municipality only through an
appropriate ordinance enacted by the Sangguniang Panlungsod or Sangguniang Bayan, as the case
may be. Such ordinance shall be enacted and approved in accordance with Arts. 107, 108, 275 and 276
of the IRR. cd i
(b) Pursuant to the procedures on the conduct of public hearings as prescribed in Art. 276 (b) of
the IRR, the Sanggunians concerned shall cause the sending of written notices of public hearings for
proposed ordinances to the branch manager or the highest officer of the Head Office of affected
banks and banking institutions within their territorial jurisdictions.
(c) Any tax ordinance which does not comply with the above provisions shall be deemed null and
void. Enforcement of such ordinance shall be a ground for disciplinary action against the officials or
employees responsible therefore as provided for in Art. 280 of the IRR.
Sec. 5. Situs of the Tax. — For purposes of collection of the tax, the following shall apply - (a) All
transactions filed with or negotiated in the branch shall be recorded in said branch and the gross
receipts derived from said transactions shall be applied to:
(1) transactions negotiated with and approved by the branch manager under his own authority;
or
(2) transactions filed and negotiated in the branch but being beyond the approving authority of
the branch manager, are forwarded to the Head Office for final approval.
(b) The gross receipts derived from transactions made by the Head Office, except gross receipts
recorded in the branches, shall be taxable by the city or municipality where said Head Office is
located.
(c) In case there is a transfer or relocation of the Head Office or of any branch to another city or
municipality, the bank shall give due notice of such transfer or relocation to the chief executives of
the cities or municipalities concerned within fifteen (15) days after such transfer or relocation is
effected.
Sec. 6. Time of Payment. — The tax on banks due and accruing to the LGUs shall be payable within
the first twenty (20) days of January or of each subsequent quarter, as the case may be, unless
otherwise fixed in the corresponding local tax ordinance.
Sec. 7. Examination of Books of Accounts and Pertinent Records. — (a) The Treasurer of the LGU
concerned or through his deputies duly authorized in writing may examine the books of accounts
and other pertinent records of banks in order to ascertain, assess, and collect to correct amount of tax
due.
(b) The examination shall be made during regular office hours not oftener than once a year for
every tax period, which shall be limited to verifying the summary of transactions contained in the
prescribed form (see Annex "A") submitted by the bank upon which the declaration of gross receipts
for the preceding calendar year has been based and the tax paid thereon. Such examination shall be
certified by the examining official, which certification shall be made of record in the books of
accounts of the bank examined.
Sec. 8. Repealing Clause. — All rules, regulations, orders, and/or circulars which are contrary to, or
inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly.
Sec. 9. Effectivity. — This circular shall take effect immediately.
The Regional Directors of the Bureau of Local Government Finance and District Treasurers of
Metropolitan Manila Area are hereby instructed to disseminate the contents of this Circular to all
Provincial, City and Municipal Treasurers within their respective jurisdiction for their information
and guidance.


Local Finance Circular No. 2-93
June 16, 1993

Subject : Prescribing the guidelines governing the power
of municipalities and cities to impose a business tax on insurance companies pursuant
to Sections 143 (f) and 151 of Republic Act No. 7160 of 1991, and its Implementing Rules and
Regulations (IRR)
To : All Regional Directors, Bureau of Local Government Finance; District Treasurers of
Metropolitan Manila; Provincial, City and Municipal Treasurers; and Others Concerned.
Pursuant to the provisions of Sections 143(f) and 151 of the Republic Act No. 7160, otherwise known
as the Local Government Code of 1991 (LGC), as implemented by Article 232(f) and 237 of the
Implementing Rules and Regulations (IRR), cities and municipalities may impose taxes on banks and
other financial institutions which may include insurance companies. aisa dc
Accordingly, the following guidelines are hereby prescribed in accordance with Article 287 of the
IRR, to ensure the proper and effective exercise by cities and municipalities of their taxing powers
over insurance companies for the guidance and compliance of all concerned.
SECTION 1. Coverage. (a) As used herein, the term "insurance companies" shall mean those formed
or organized to save any person or persons or other corporations harmless form loss, damage or
liability, arising form any unknown or future or contingent event, or to indemnify or to compensate
any person or persons or other corporations for any such loss, damage or liability, or to guarantee the
performance of or compliance with contractual obligations or the payment of debts of others.
The term "insurance companies" shall include all individuals, partnerships, associations, or
corporations including government owned or controlled corporations or entities, engaged as
principals in the insurance business, including their branches, except mutual benefit associations and
purely cooperative insurance associations organized under the laws on cooperatives. The term shall
also include professional reinsures.
(b) Domestic insurance company - shall refer to companies formed, organized, or existing under
the laws of the Philippines.
(c) Foreign insurance company shall include companies formed, organized, or existing under any
laws other than those in the Philippines.
(d) Branch — a fixed place in a locality established as a branch of an insurance company as
authorized by the Insurance Commission.
(e) General Agent — is any person duly licensed so to act by the Insurance Commission, who for
compensation solicits or obtains insurance in behalf of any insurance company or transmits for a
person other than himself an application for a policy or contract of insurance to or from such
company, or offers or assumes to act in the negotiation of such insurance and empowered by such
company to do such other acts and things for and on its behalf in the conduct of its business as
specified in the general agency agreement executed by and between them. In property and liability
insurance, a general agent can bind a risk and thereby make insurance effective immediately and
prior to the actual delivery of the policy; a limited agent has restricted powers and must operate
within the scope of the authority delegated to him.
(f) Head Office — shall refer to the principal office of the insurance company appearing in its
article of incorporation.
(g) Insurance Policy — is a written instrument in which a contract of insurance is set forth.
For purposes of this Circular, insurance policies shall be classified as follows:
(1) Life insurance policies which may be -
(i) Individual life
(ii) Group life
(iii) Health, accident and disability insurance
(2) Non-life insurance contracts which may be -
(i) Marine
(ii) Fire
(iii) Casualty
(3) Contracts of suretyship or bonding
(h) Insurance Premium — is the agreed price for assuming and carrying the risk, i.e., the
consideration is paid to an insurer for undertaking to identify the insured against a specified peril, as
indicated in the insurance contract.
(i) Insurance Agent — any person who for compensation solicits or obtains insurance in behalf of
any insurance company or transmits for a person other than himself or application for a policy or
contract of insurance to or from such company, or offers or assumes to act in the negotiating of such
insurance.
(j) Insurance Broker — any person who for any compensation, commission or other thing of
value acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance
contract or in placing risk or taking out insurance, on behalf of the insured other than himself.
SECTION 2. Tax on the Gross Receipts of Insurance Corporations. — (a) The tax on insurance
companies may be levied on their gross receipts for the preceding calendar year as follows:
(1) By municipalities, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross
receipts for the preceding calendar year; and cdasia
(2) By all cities and municipalities within the Metropolitan Manila area, at a rate not exceeding
seventy five percent (75%) of one percent (1%) of the gross receipts for the preceding calendar year.
(b) For this purpose, "gross receipts" shall include only the following:
(1) Insurance premiums actually collected, except the following:
(i) Premiums collected before the effectivity of the ordinance enacted by the city or municipality
imposing the tax;
(ii) Two percent (2%) of all premiums for the sake of fire, earthquake, and explosions hazard
insurance pursuant to P.D. 1185, otherwise known as Fire Code of the Philippines;
(iii) Premiums refunded within six (6) months after payment of account;
(iv) Reinsurance premiums by a company that has already paid the tax:
(v) Premiums collected or received by any branch of a domestic corporation, firm, or association
doing business outside the Philippines on account of any life insurance of the insured who is non-
resident.
(vi) Premiums collected or received on account of any reinsurance, if the risk insured against
covers property located outside the Philippines, or the insured, in the case of personal insurance,
resides outside the foreign country where the original insurance has been issued or perfected;
(vii) Portions of the premiums collected or received by insurance companies pertaining to variable
contracts; and
(viii) The excess of the amounts necessary to insure the lives of variable contracts.
However, the aforementioned tax-exempt premiums shall be recorded and declared separately.
(2) Interest earnings on loans and discounts actually collected;
(3) Rentals actually collected from property owned by insurance companies.
(4) Income actually collected from acquired assets.
(5) Cash dividends received on equity investments.
(c) As used herein, "gross receipts" shall not include the following:
(l) All other income are receipts not otherwise enumerated in the preceding guidelines shall be
excluded from the taxing authority of the city or municipality concerned.
(2) Service fees received from fire, earthquake, and explosion preinsurance adjustment business
directly to agents, pursuant to P.D. No. 1185, otherwise known as the Fire Code of the Philippines.
(d) At the time of the annual payment of the tax due, the Head Office or branch of an insurance
company, shall submit to the LGU concerned, a breakdown of the declared gross receipts for the
preceding calendar year.
(e) Commissions and other means of earnings of insurance agents and service representatives and
insurance brokers shall not be taxable; however, these persons may be levied an occupation fee
pursuant to Sec. 147 of the LGC;
(f) The gross receipts of insurance brokers may, however be levied the tax on contractors and/or
independent contractors pursuant to Sec. 143(e) of the LGC. cdtai
SECTION 3. Non-separability of Insurance Business. — Activities which are inherent, related,
necessary or incidental to the insurance business shall treated as one business activity subject to the
same tax rate under Section 2(a) hereof. The amount of tax thereon shall be computed on the basis of
the combined gross receipts of all said insurance activities.
In view thereof, the provisions of Art. 242 of the IRR requiring a person or entity top get a separate
mayor's permit for each activity shall not apply to the insurance activities, as defined above.
SECTION 4. Procedures for the Enactment of Tax Ordinances. — (a) The tax on insurance companies
as provided herein may be imposed by a city or municipality only through an appropriate ordinance
enacted by the Sangguniang Panlungsod or Sangguniang Bayan, as the case may be. Such ordinance
shall be enacted and approved in accordance with Arts. 107, 108, 276 of the IRR.
(b) Pursuant to the procedures on the conduct of public hearings as prescribed in the Art. 276 (b)
of the IRR, the Sanggunians concerned shall cause the sending of written notices of public hearings
for proposed ordinances to the branch manager or the highest officer of the Head Office of affected
insurance companies within their territorial jurisdictions.
(c) Any tax ordinance which does not comply with the above provisions shall be deemed null and
void. Enforcement of such ordinance shall be a ground for disciplinary action against the officials or
employees responsible therefore as provided in Art. 280 of the IRR.
SECTION 5. Situs of the Tax. — For purposes of collection of the tax, the following shall apply — (a)
Insurance contracts/policies issued by the Head Office or branch shall be recorded in said office or
branch as the case may be and the premiums and/or gross receipts due on such contracts/policies
shall be taxable by the city or municipality where such Head Office or branch to which such
premiums or gross receipts were actually paid is located. This rule shall be applied irrespective of
whether the insurance contracts/policies were solicited or negotiated by insurance agents, or brokers
who are not residents of the city or municipality where the branch is located or affiliated with or
assigned to such branch:
(b) The offices of an insurance agent or broker, shall not be considered a branch and shall not be
subject to the situs of taxation rule.
(c) All insurance premiums and/or gross receipts from transactions not recorded in the branches
of the insurance companies in accordance with paragraph (a) above shall be recorded in the Head
Office and taxable by the city or municipality where said Head Office is located.
(d) In case there is a transfer or relocation of the Head Office or of any branch to another city or
municipality, the insurance companies shall give due notice of such transfer or relocation to the chief
executives of the cities or municipalities concerned within fifteen (15) days after such transfer or
relocation is effected.
SECTION 6. Time of Payment. — The tax on insurance companies accruing the LGU's shall be paid
within the first twenty (20) days of January or of each subsequent quarter, as the case may be, unless
otherwise fixed in the corresponding local tax ordinance. cd i
SECTION 7. Examination of Books of Accounts and Pertinent Records. —
(a) The Treasurer of the LGU concerned or through any of his deputies duly authorized in writing
may examine the books of accounts and other pertinent records of insurance companies in order to
ascertain, assess, and collect the correct amount of the tax due.
(b) The examination shall be made during regular office hours not oftener than once a year for
every tax period, which shall be the year immediately preceding the transactions submitted by the
Head Office or branch of the insurance companies being audited, upon which the declaration of gross
receipts for the preceding calendar year has been based and the tax paid thereon. Such certification
shall be made of record in the books of accounts of the insurance company examined.
SECTION 8. Repealing Clause — All rules, regulations, orders, and/or circulars which are contrary
to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly.
SECTION 9. Effectivity. — This circular shall take effect immediately.
The Regional Directors of the Bureau of Local Government Finance and District Treasurers of
Metropolitan Manila Area are hereby instructed to disseminate the contents of this Circular to all
Provincial, City and Municipal Treasurers within their respective jurisdictions for their information
and guidance.


Local Finance Circular No. 3-93
June 16, 1993

Subject : Prescribing the guidelines governing the power
of municipalities and cities to impose a business tax on financing companies pursuant
to Sections 143 (f) and 151 of Republic Act No. 7160 of 1991, and its Implementing Rules and
Regulations (IRR)
To : All Regional Directors, Bureau of Local Government Finance; District Treasurers of
Metropolitan Manila; Provincial, City and Municipal Treasurers; and Others Concerned.
Pursuant to the provisions of Section 143 (f) and 151 of the Republic Act No. 7160, otherwise known
as the Local Government Code of 1991 (LGC), as implemented by Article 232 (f) and 237 of the
Implementing Rules and Regulations (IRR), municipalities and cities may impose a tax on businesses,
which may include financing companies.
Accordingly, the following guidelines are hereby prescribed in accordance with Article 287 of the
IRR, to ensure the proper, efficient, and effective exercise of the aforesaid taxing powers of cities and
municipalities for guidance and compliance of all concerned.
SECTION 1. Coverage. (a) As used herein, the term "financing companies" shall refer to corporations
or partnerships, except those regulated by the Central Bank of the Philippines, Insurance Commission
and the Cooperatives Development Authority, which are primarily organized for the purpose of
extending credit facilities to consumers and to industrial, commercial or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivable, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of indebtedness, or by leasing of motor
vehicles, heavy equipment and industrial machinery, business and office machines and equipment,
appliances and other movable property;
(b) "Credit" shall mean any loan, mortgage, deed of trust, advance, or discount; and conditional
sales contract, any contract to sell, or sale or contract of sale of property or service, either for present
or future delivery, under which, part or all of the price is payable subsequent to the making of such
sale or contract; any rental-purchase contract; any option, demand, lien, pledge, or other claim
against, or for the delivery of, property or money, any purchase or other acquisition of or any credit
upon the security of, any obligation or claim arising out of foregoing; and transaction or series of
transaction having a similar purpose or effect;
(c) "Purchase discount" is the difference between the value of the receivable purchased or credit
assigned, and the net amount paid by the finance company for such purchase or assignment,
exclusive of fees, service charges, interests and other charges incident to the extension of credit;
(d) "Head Office" shall refer to the main office of the financing company indicated in the pertinent
documents submitted to the Securities and Exchange Commission or to the Monetary Board of the
Central Bank of the Philippines; the city or municipality specifically mentioned in the Articles of
Incorporation and other official registration papers as being the official address of said Head Office;
(e) "Branch" is a fixed place in a locality established as a branch of a financing company, as
authorized by the Securities and Exchange Commission. However, a regional or extension office of
financing companies shall not be considered as a branch.
SECTION 2. Tax on the Gross Receipts of Financing Companies. — (a) The tax on financing
companies may be levied on their gross receipts for the preceding calendar year, as follows:
(1) By municipalities, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross
receipts for the preceding calendar year; and
(2) By cities and municipalities within the Metropolitan Manila area, at a rate not exceeding
seventy five percent (75%) of one percent (1%) of the gross receipts for the preceding calendar year.
(b) For this purpose, "gross receipts" shall include only the following:
(1) Interest from loans and discounts — this represents interest earned and actually collected on
loans and discounts. The following is a breakdown: cdt
(i) Discounts earned and actually collected on the portion of interest collected in advance on bills
discounted;
(ii) Interest earned and actually collected on demand loans;
(iii) Interest earned and actually collected on time loans, including the earned portion of interest
collected in advance;
(iv) Interest earned and actually collected on mortgage contracts receivable;
(2) Interest earned and actually collected on inter-bank loans.
(3) Rental of property — this represents the following rental income:
(i) Earned portion of rental collected in advance from lessees of safe deposit boxes;
(ii) Rental earned and actually collected from lessees on bank premises and equipment.
(4) Income earned and actually collected from acquired assets.
(5) Income from sale or exchange of assets or property.
(6) Cash dividends earned and received on equity investments.
(7) Income components of rentals from financial leasing.
At the time of the annual payment of the tax due, the Head Office or branch of the financing
company shall submit to the LGU concerned, a breakdown of the declared gross receipts for the
preceding calendar year.
(c) All other income and receipts of financing companies not otherwise enumerated above shall be
excluded from the taxing authority of the LGU concerned.
SECTION 3. Non-separability of Financing Company Business. — Activities which are inherent,
related, necessary or incidental to the financing company business shall be treated as one business
activity subject to the same tax rate under Section 2 (a) hereof. The amount of tax thereon shall be
computed on the basis of the combined gross receipts of all said financial activities.
In view thereof, the provisions of Art. 242 of the IRR requiring a person or entity to get a separated
mayor's permit for each business activity shall not apply to the banking activities, as defined above.
SECTION 4. Procedures for the Enactment of Tax Ordinances. — (a) The tax on banks and banking
institutions as provided herein may be imposed by a city or municipality only through an
appropriate ordinance enacted by the Sangguniang Panlungsod or Sangguniang Bayan, as the case
may be. Such ordinance shall be enacted and approved in accordance with Arts. 107, 108, 275 and 276
of the IRR. cda
(b) Pursuant to the procedures on the conduct of public hearings as prescribed in Art. 276 (b) of
the IRR, the Sanggunians concerned shall cause the sending of written notices of public hearings for
proposed ordinances to the branch manager or the highest officer of the Head Office of affected
banks and banking institutions within their territorial jurisdictions.
(c) Any tax ordinance which does not comply with the above provisions shall be deemed null and
void. Enforcement of such ordinance shall be a ground for disciplinary action against the officials or
employees responsible therefore as provided for in Art. 280 of the IRR.
SECTION 5. Situs of the Tax. — For purposes of collection of the tax, the following shall apply - (a)
All transactions filed with or negotiated in the branch shall be recorded in said branch and the gross
receipts derived from said transactions shall be applied to:
(1) transactions negotiated with and approved by the branch manager under his own authority;
or
(2) transactions filed and negotiated in the branch but being beyond the approving authority of
the branch manager, are forwarded to the Head Office for final approval.
(b) The gross receipts derived from transactions made by the Head Office, except gross receipts
recorded in the branches, shall be taxable by the city or municipality where said Head Office is
located.
(c) In case there is a transfer or relocation of the Head Office or of any branch to another city or
municipality, the bank shall give due notice of such transfer or relocation to the chief executives of
the cities or municipalities concerned within fifteen (15) days after such transfer or relocation is
effected.
SECTION 6. Time of Payment. — The tax on banks due and accruing to the LGUs shall be payable
within the first twenty (20) days of January or of each subsequent quarter, as the case may be, unless
otherwise fixed in the corresponding local tax ordinance.
SECTION 7. Examination of Books of Accounts and Pertinent Records. — (a) The Treasurer of the
LGU concerned or through his deputies duly authorized in writing may examine the books of
accounts and other pertinent records of banks in order to ascertain, assess, and collect the correct
amount of tax due.
(b) The examination shall be made during regular office hours not oftener than once a year for
every tax period, which shall be limited to verifying the summary of transactions submitted by the
financing company upon which the declaration of gross receipts for the preceding calendar year has
been based and the tax paid thereon. Such examination shall be certified by the examining official,
which certification shall be made of record in the books of accounts of the Head Office or branch of
the financing company being examined.
SECTION 8. Repealing Clause. — All rules, regulations, orders, and/or circulars which are contrary
to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly.
cda
SECTION 9. Effectivity. — This circular shall take effect immediately.
The Regional Directors of the Bureau of Local Government Finance and District Treasurers of
Metropolitan Manila Area are hereby instructed to disseminate the contents of this Circular to all
Provincial, City and Municipal Treasurers within their respective jurisdictions for their information
and guidance.


Memo Circular No. 92-02 - Jan. 16, 1992 issued by Department of the Interior and
Local Government - MISSING


Local Finance Circular No. 5-93
October 22, 1993

Subject : Prescribing the Guidelines Governing the Power of Municipalities and Cities to
Impose a Business Tax on BOI-Registered Enterprises Pursuant to Section 133 (g) of Republic Act No.
7160, Otherwise Known as the Local Government Code of 1991 (LGC), and its Implementing Rules
and Regulations (IRR)
To : All Regional Directors, Bureau of Local
Government Finance; District Treasurers of Metropolitan Manila; Provincial, City and
Municipal Treasurers; and Others Concerned.

Pursuant to Section 133 (g) of Republic Act No. 7160, otherwise known as the Local Government
Code of 1991 (LGC), the exercise of the taxing powers of the Local Government Units (LGUs) shall
not extend to the levy of local business tax (LBT) on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, from the
date of registration;
Accordingly, the following guidelines are hereby prescribed in accordance with Art. 287 of the IRR to
prescribe the limitations, manner, and procedures for the imposition of supplement Article 221 (g) of
the IRR with a view of further clarifying the implementation of said provision consistent with
Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, Republic Act
No. 7042, otherwise known as the Foreign Investment Act of 1991 and other related laws and national
policies;
SECTION 1. COVERAGE. — This Circular prescribes the guidelines governing the powers of cities
and municipalities to impose business taxes on BOI-registered enterprises as provided for in Sec. 133
(g) of the LGC.
SECTION 2. Definition of Terms. — As used herein, the following terms shall mean — acd
(a) Registered Enterprise — shall mean any individual, partnership, cooperative, corporation or
other entity incorporated and/or organized and registered with the Board of Investments (BOI) in
accordance with Book I of Executive Order No. 226; Provided, however that the term "registered
enterprise" shall not include commercial banks, savings, and mortgage banks, rural banks, savings
and loans associations, development banks, trust companies, investment banks, finance companies,
brokers and dealers in securities, consumer cooperatives and credit unions and other business
organizations whose principal purpose or principal source of income is to receive deposits, lend or
borrow money, buy and sell or otherwise deal, trade or invest in common or preferred stocks,
debentures, bonds or other marketable instruments generally recognized as securities, or discharge
other similar intermediary, trust or fiduciary functions. {Art. 11, E.O. 226}
(b) Pioneer enterprise shall mean a BOI-registered enterprise (i) engaged in the manufacture,
processing or production, and not merely in the assembly or packaging of goods, commodities or raw
materials that have not been or are nor being produced in the Philippines on a commercial scale, or
(ii) which uses a design, formula, scheme, method, process or system of production or transformation
of any element, substance or raw materials into another raw material or finished goods which is new
and untried in the Philippines, or (iii) engaged in the pursuit of agricultural, forestry and mining
activities and/or services including the industrial aspects of food processing whenever appropriate,
pre-determined by the BOI to be feasible and highly essential to the attainment of the national goal, in
relation to a declared specific national food and agricultural program for self-sufficiency and other
social benefits of the project, or (iv) which produces non-conventional sources of energy or uses or
converts to coal or other non-conventional fuels or manufacturers equipment which utilize non-
conventional fuels or sources of energy in its production, manufacturing or processing operations:
Provided, that the final product in any of the foregoing instances, involves or will involve substantial
use and processing of domestic raw materials, whenever available; taking into account the risks and
magnitude of investment. cd
(c) Non-pioneer enterprise shall include all BOI-registered producer enterprises other than
pioneer enterprises.
(d) Expansion shall include modernization and rehabilitation and shall mean increase of existing
volume or value of production or upgrading the quality of the registered product or utilization of
inefficient or idle equipment under such guidelines as the BOI may adopt.
SECTION 3. Exemption of pioneer and non-pioneer enterprises.
(a) Pursuant Sec. 133 (g) of the LGC and Art. 221 (g) of its IRR, business enterprises certified to
and registered with the Board of Investments (BOI) as pioneer to non-pioneer shall be exempt from
local business taxes for a period of six (6) and four (4) years respectively, from the date registration;
(b) Starting January 1, 1992, pioneer and non-pioneer enterprises registered with the BOI prior to
the effectivity of the LGC shall be exempt from local business taxes until the end of their six (6) and
four (4) years exemption from the date of registration.
(c) Pioneer and non-pioneer enterprises registered with the BOI on or after the effectivity of the
LGC shall be exempt from local business taxes for a period of six (6) and four (4) years, respectively,
starting from the date indicated in the certificate of registration issued by the BOI; and
(d) In the case of registered expanding firms, the gross sales or receipts directly arising from such
expansion shall be exempt from local business taxes for a period stated in (a) or (b) above.
SECTION 4. Availment of the Exemption. (a) Within sixty (60) days -
(i) from the receipt of the Certificate of Registration from the BOI, or
(ii) from the effectivity of the tax ordinance or revenue measure imposing a tax on business, or
(iii) from the effectivity of these guidelines,
whichever comes later, the President or any duly authorized representative of the registered
enterprise, shall submit a BOI-certified true copy of said Certificate of Registration to the local
treasurer concerned together with a request for a Certificate of Exemption for the appropriate period,
as indicated in Sec. 3 above.
(b) Within fifteen (15) days from the submission of its BOI Certificate of Registration by the
registered enterprise, the local treasurer concerned shall, after due verification of the documents
submitted, issue a Certificate of Exemption, in the form hereto attached as Annex "A", to the
registered enterprise. cd i
SECTION 5. Business tax on BOI-registered Enterprises. - For business enterprises registered with
the BOI not covered or no longer exempt under Sec. 3 above and whose goods or products are sold
abroad and/or domestically, the said enterprises shall be subject to the business tax as follows:
(a) the gross sales/receipts on goods or products sold domestically shall be subject to the business
tax at rates prescribed under paragraphs (a), (b) and (d) of Sec. 143 of the LGC;
(b) the amount of export sales as defined in Sec. 2(b) shall be subject to the business tax at rates
not exceeding one-half (1/2) of the rates stated in paragraph (a) of this Section;
For this purpose, the amount of export sales shall be excluded and declared separately from the total
sales and shall be subject to the rates prescribed in (b) above. Failure to make this separate declaration
of export sales shall subject the total sales to the rates prescribed in (a) hereof.
(c) Upon expiration of the period of exemption of BOI-registered enterprises as provided for in
the preceding Sec. 3 hereof, the situs of the tax shall be determined in accordance with Sec. 150 of the
LGC and Art. 243 of the IRR.
(d) In case of manufactures or produces which engage the services of an independent contractor to
produce or manufacture some of their products, the rules on situs of taxation shall apply except that
the factory or plant and warehouse of the contractor utilized for the production and storage of the
manufacturer's products shall be considered as the factory or plant and warehouse of the
manufacturer; the independent contractor under Sec. 143 (e) of the LGC, as implemented under Art.
232 (e) of its IRR.
SECTION 6. Non-separability of business enterprises registered with the BOI. — The provisions of
Art. 242 of the IRR requiring a person or entity to get a separate mayor's permit for each business
activity shall not apply to business enterprises registered with the BOI, with respect to activities
inherent, necessary and incidental to its business operations.
SECTION 7. Transfer or Relocation — In case there is a transfer or relocation of the principal office or
of any of its branch to another city or municipality, due notice of such transfer or relocation shall be
given to the chief executives of the cities or municipalities concerned within fifteen (15) days after
such transfer or relocation is effected.
(b) The tax due and accruing to the city or municipality shall be paid within the first twenty (20)
days of January or of each subsequent quarter, as the case may be.
SECTION 8. Examination of Books of Accounts and Pertinent Records. —
(a) The Treasurer of the LGU concerned or through his deputies duly authorized in writing may
examine the books of accounts and other pertinent records of banks in order to ascertain, assess, and
collect the correct amount of tax due.
(b) The examination shall be made during regular office hours not oftener than once a year for
every tax period, which shall be the year immediately preceding the examination and shall be
certified by the examining official. Such certification shall be made of record in the books of accounts
of the business enterprise examined. casia
SECTION 9. Repealing Clause. — All rules, regulations, orders, and/or circulars which are contrary
to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly.
SECTION 10. Effectivity. — This circular shall take effect immediately.
This circular has been approved and recommended by the Oversight Committee for issuance by the
Secretary of Finance in accordance with Art. 287 of the IRR.
The Regional Directors of the Bureau of Local Government Finance and District Treasurer of
Metropolitan Manila Area are hereby instructed to disseminate the contents of this Circular to all
Provincial, City and Municipal Treasurers within their respective jurisdiction for their information
and guidance.

III. TARIFF AND CUSTOMS CODE
I. Concept

A. The Tariff and Customs Code (R.A. No. 1937, June 22, 1957)

B. The Bureau of Customs

Duties, Power, and Jurisdiction

II. Articles Subject to Duty

A. Export (suspended except on logs) and import duties

B. Meaning of Importation - Sec. 1201, 1202
SECTION 1201. Articles to Be Imported Only Through Customhouse. — All articles imported into the
Philippines, whether subject to duty or not, shall be entered through a customhouse at a port of entry.
SECTION 1202. When Importation Begins and Deemed Terminated. — Importation begins when the
carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein.
Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the
articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been
granted, or in case said articles are free of duties, taxes and other charges, until they have legally left
the jurisdiction of the customs.

C. Classes of Importation

a. Dutiable importation - Sec. 101
SECTION 101. Imported Articles Subject to Duty. — All articles, when imported from any foreign
country into the Philippines, shall be subject to duty upon each importation, even though previously
exported from the Philippines, except as otherwise specifically provided for in this Code or in other
laws.

b. Prohibited importations - Sec. 102, 1207
SECTION 102. Prohibited Importations. — The importation into the Philippines of the following
articles is prohibited:
a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons of war, and
detached parts thereof, except when authorized by law.
b. Written or printed article in any form containing any matter advocating or inciting treason,
rebellion, insurrection or sedition against the Government of the Philippines, of forcible resistance to
any law of the Philippines, or containing any threat to take the life of or inflict bodily harm upon any
person in the Philippines.
c. Written or printed articles, photographs, engravings, lithographs, objects, paintings, drawings
or other representation of an obscene or immoral character.
d. Articles, instruments, drugs and substances designed, intended or adapted for preventing
human conception or producing unlawful abortion, or any printed matter which advertises or
describes or gives directly or indirectly information where, how or by whom human conception is
prevented or unlawful abortion produced.
e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or
mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes or other
articles when such distribution is dependent upon chance, including jackpot and pinball machines or
similar contrivances. acd
f. Lottery and sweepstakes tickets except those authorized by the Philippine Government,
advertisements thereof and lists of drawings therein.
g. Any article manufactured in whole or in part of gold silver or other precious metal, or alloys
thereof, the stamps brands or marks of which do not indicate the actual fineness or quality of said
metals or alloys.
h. Any adulterated or misbranded article of food or any adulterated or misbranded drug in
violation of the provisions of the "Food and Drugs Act."
i. Marijuana, opium poppies, coca leaves, or any other narcotics or synthetic drugs which are or
may hereafter be declared habit forming by the President of the Philippines, any compound,
manufactured salt, derivative, or preparation thereof, except when imported by the Government of
the Philippines or any person duly authorized by the Collector of Internal Revenue, for medicinal
purposes only.
j. Opium pipes and parts thereof, of whatever material.
k. All other articles the importation of which is prohibited by law.

SECTION 1207. Jurisdiction of Collector Over Articles of Prohibited Importation. — Where articles
are of prohibited importation or subject to importation only upon conditions prescribed by law, it
shall be the duty of the Collector to exercise such jurisdiction in respect thereto as will prevent
importation or otherwise secure compliance with all legal requirements.

c. Conditionally-Free Importation - Sec. 105
SECTION 105. Conditionally Free Importations. — The following articles shall be exempt from the
payment of import duties upon compliance with the formalities prescribed in, or with the regulations
which shall be promulgated by the Commissioner of Customs with the approval of the department
head:
a. Animals and plants for scientific, experimental, propagation, botanical, breeding, zoological
and national defense purposes: Provided, That no live trees, shoots, plants and moss, and bulbs,
tubers and seeds for propagation purposes may be imported under this section, except by order of
the Government of the Philippines or other duly authorized institutions: Provided, further, That the
free entry of animals for breeding purposes shall be restricted to animals of a recognized breed, duly
registered in the book of record established for that breed: And provided, finally, That certificate of
such record, and pedigree of such animal duly authenticated by the proper custodian of such book of
record, shall be produced and submitted to the Collector of Customs, together with affidavit of the
owner or importer, that such animal is the identical animal described in said certificate of record and
pedigree. cd i
b. Aquatic products (e.g., fish, crustaceans, mollusks, marine animals, seaweed, fish oil, roe),
including preparations or manufactures thereof, caught or gathered by vessels of Philippine registry:
Provided, That they are imported in such vessels or in crafts attached thereto: And provided, further,
That they have not been landed in any foreign territory or, if so landed, they have been landed solely
for transhipment without having been advanced in condition.
c. Samples of the kind, in such quantity and of such dimensions or construction as to render
them unsalable or of no appreciable commercial value, models not adapted for practical use and
samples of medicine properly marked "physicians' samples not for sale".
Commercial samples, except those that are not readily and easily identifiable (e.g., precious and semi-
precious stones, cut or uncut, and jewelry set with precious or semi-precious stones), the value of any
single importation of which does not exceed ten thousand pesos, upon the giving of a bond in an
amount equal to one and one-half times the ascertained duties, taxes and other charges thereon,
conditioned for the exportation of said samples within six months from the date of the acceptance of
the import entry, or in default thereof, the payment of the corresponding duties, taxes and other
charges. If the value of any single consignment of such commercial samples exceeds ten thousand
pesos, the importer thereof may select any portion of same not exceeding in value ten thousand pesos
for entry under the provisions of this subsection, and the excess of the consignment may be entered
in bond, or for consumption, as the importer may elect.
d. Articles, including binnacles, propellers, and the like, the character of which, as imported,
prevents their use for other purposes than the construction, equipment, or repair of vessels and
aircraft, and life-preservers and life buoys, related equipment and parts and accessories thereof,
which are necessary for the take-off and landing and for the safe navigation of vessels and aircraft.
e. Equipment for use in the salvage of vessels or aircraft, upon identification and the giving of a
bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges
thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and
other charges within six months from the date of acceptance of the import entry: Provided, That the
Collector of Customs may extend the time for exportation or payment of duties, taxes and other
charges for a term not exceeding six months from the expiration of the original period.
f . Cost of repairs made in foreign countries upon vessels or aircraft documented, registered or
licensed in the Philippines, upon proof satisfactory to the Collector of Customs (1) that adequate
facilities for such repairs are not afforded in the Philippines, or (2) that such vessels or aircraft, while
in the regular course of her voyage or flight was compelled by stress of weather or other casualty to
put into a foreign port to make such repairs in order to secure the safety seaworthiness or
airworthiness of the vessel or aircraft to enable her to reach her port of destination.
g. Articles brought into the Philippines for repair, processing or reconditioning to be re-exported
upon completion of the repair, processing or reconditioning: Provided, That the Collector of Customs
may, in his discretion, require the giving of a bond in an amount equal to one and one-half times the
ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or
payment of the corresponding duties, taxes and other charges within six months from the date of
acceptance of the import entry.
h. Medals, badges, cups and other small articles bestowed as trophies or prizes, or those received
or accepted as honorary distinctions.
i. Wearing apparel and household effects, including those articles provided for under
subsections "j" and "k", and belonging to residents of the Philippines returning from abroad, which
were exported from the Philippines by such returning residents upon their departure therefrom or
during their absence abroad, upon the identity of such articles being established to the satisfaction of
the Collector of Customs; personal and household effects brought into the Philippines by returning
residents, the export value of which does not exceed five hundred pesos, solely for personal or
household use but not imported for the account of any other person nor intended for barter, sale or
hire: Provided, That such returning residents have not received the benefit of any exemption
hereunder within one hundred and eighty days from and after the date of the last exemption granted:
And provided, further, That in the event the total export value of the imported article or articles
exceeds the amount of five hundred pesos, such article or articles shall be subject to duty only on the
amount in excess of five hundred pesos; articles of the same kind and class purchased in foreign
countries by residents of the Philippines during their absence abroad and accompanying them upon
their return to the Philippines, or arriving within a reasonable time which in no case shall exceed
ninety (90) days before or after the owner's return, upon proof satisfactory to the Collector of
Customs that same have been in their use abroad for more than one year; articles in any single
shipment consigned to any single person when the total export value of such shipment does not
exceed one hundred pesos: Provided, That when the export value exceeds the amount of one
hundred pesos, only the amount in excess of one hundred pesos shall be subject to duty.
j. Wearing apparel, articles of personal adornment, toilet articles, portable tolls and instruments,
theatrical costumes, and similar personal effects, accompanying travelers or tourists in their baggage
or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the
owners, in use of and necessary and appropriate for the wear or use of such persons according to
their profession or position for the immediate purposes of their journey and their present comfort
and convenience: Provided, That this exemption shall not be held to apply to articles intended for
other persons or for barter, sale or hire: Provided, further, That the Collector of Customs may, in his
discretion, require a bond in an amount equal to one and one-half times the ascertained duties, taxes
and other charges upon articles classified under this subsection, conditioned for the exportation
thereof or payment of the corresponding duties, taxes and other charges, within six months from the
date of acceptance of the import entry: And provided, finally, That the Collector of Customs may
extend the time for exportation or payment of duties, taxes and other charges for a term not
exceeding six months from the expiration of the original period. cdasia
k. Vehicles, horses, harness, bed and table linen, table service, furniture, musical instruments and
personal effects of like character, owned and imported by travelers or tourists for their convenience
and comfort, upon identification and the giving of a bond in an amount equal to one and one-half
times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof
or payment of the corresponding duties, taxes and other charges within six months from the date of
acceptance of the import entry: Provided, That the Collector of Customs may extend the time for
exportation or payment of duties, taxes and other charges for a term not exceeding six months from
the expiration of the original period.
l. Professional instruments and implements, tools of trade, occupation or employment, wearing
apparel, domestic animals, and personal and household effects, including those of the kind and class
provided for under subsections "j" and "k" and belonging to persons coming to settle in the
Philippines, in quantities and of the class suitable to the profession, rank or position of the person
importing them, for their own use and not for barter or sale, accompanying such persons, or arriving
within a reasonable time, in the discretion of the Collector of Customs, before or after the arrival of
their owners, upon the production of evidence satisfactory to the Collector of Customs that such
persons are actually coming to settle in the Philippines, that the articles are brought from their former
place of abode, that change of residence is bona fide, and that the privilege of free entry under this
subsection has never been previously granted to them: Provided, That neither merchandise of any
kind, nor machinery or other articles for use in manufacture, shall be classified under this subsection.
m. Animals, vehicles, portable theaters, circus and theatrical equipment, including musical
instruments, sceneries, panoramas, properties, saddlery, wax figures and similar objects for public
entertainment, and other articles for display in public expositions, or for exhibition or competition for
prizes, and devices for projecting pictures and parts and appurtenances therefor, upon identification
and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes
and other charges thereon, conditioned for exportation thereof or payment of the corresponding
duties, taxes and other charges within six months from the date of acceptance of the import entry:
Provided, That the Collector of Customs may extend the time for exportation or payment of duties,
taxes and other charges for a term not exceeding six months from the expiration of the original
period; and technical and scientific films when imported by technical, cultural and scientific
institutions, and not to be exhibited for profit: Provided, That if any of the said films is exhibited for
profit, the proceeds therefrom shall be subject to confiscation, in addition to the penalty provided
under section three thousand six hundred and ten of this Code. cda
n. Articles (e.g., photographic, sound recording, electrical and other equipment, vehicles,
animals, costumes, apparel, properties, supplies, unexposed motion picture films) brought by foreign
producers for making or recording motion pictures on location in the Philippines, upon identification
and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes
and other charges thereon, conditioned for exportation thereof or payment of the corresponding
duties, taxes and charges within six months from the date of acceptance of the import entry.
Unexposed motion picture films allowed free entry under bond for exportation falling within this
subsection and subsequently exposed, whether or not developed, may be reexported free of import
duties, taxes and other charges.
Negative films, undeveloped, exposed outside the Philippines by resident Filipino citizens or by
producing companies of Philippine registry where the principal actors and artists employed for the
production are Filipinos, upon affidavit by the importer that such exposed films are the same films
previously exported from the Philippines. As used in this paragraph, the terms "actors" and "artists"
include the persons working the photographic camera or other photographic and sound recording
apparatus by means of which the film is made.
o. Costumes, regalia and other articles, including office supplies and equipment, imported for
the official use of members and attaches of foreign embassies, legations, consular officers and other
representatives of foreign government: Provided, That the country which any such person represents
accords like privileges to corresponding officials of the Philippines.
Articles imported for the personal or family use of the members and attaches of foreign embassies,
legations, consular officers and other representatives of foreign governments: Provided, That such
privilege shall be accorded under special agreements between the Philippines and the countries
which they represent: And provided, further, That the privilege may be granted only upon specific
instructions of the Department of Finance in each instance which will be issued only upon request of
the Department of Foreign Affairs. acd
p. Regalia, gems, statuary, specimens or casts of sculptures imported for the bona fide use and by
the order of any society incorporated or established solely for religious, philosophical, educational,
scientific or literary purposes, or for the encouragement of the fine arts, or for the use and by the
order of any institution of learning, public library, museum, orphan asylum or hospital, and not for
barter, sale or hire: Provided, That the term "regalia" shall be held to embrace only such insignia of
rank or office or emblems as may be worn upon the person or borne in the hand during public
exercises or ceremonies of the society or institution, and shall not include articles of furniture or
fixtures, or ordinary wearing apparel, nor personal property of individuals.
q. Musical organs imported for the bona fide use and by the owner of any society incorporated or
established for religious or educational purposes, or, expressly for presentation thereto.
r. Scientific apparatus, instruments and utensils specially imported for the bona fide use and by
the order of any society or institution incorporated or established solely for educational, scientific, or
charitable purposes, or for the encouragement of the fine arts, or for the bona fide use and by the
order of any institution of learning in the Philippines, and not for barter, sale or hire.
s. Philosophical, historical, economic, scientific, technical and vocational books specially
imported for the bona fide use and by the order of any society or institution, incorporated or
established solely for philosophical, educational, scientific, charitable or literary purposes, or for the
encouragement of the fine arts, or for the bona fide use of and by the order of any institution of
learning in the Philippines: Provided, That the provisions of this subsection shall apply to books not
exceeding two copies of any one work when imported by any individual for his own use, and not for
barter, sale or hire.
Bibles, missals, prayerbooks, koran, ahadith and other religious books of similar nature and extracts
therefrom, hymnal and hymns for religious uses, specially prepared books, music and other
instrumental aids for the deaf, mute or blind, and textbooks prescribed for use in any school in the
Philippines: Provided, That complete books published in parts in periodical form shall not be
classified herein. cdasia
t. Newsprint, whenever imported by or for publishers for the exclusive use in the publication of
newspapers.
u. Articles donated to public or private institutions established solely for educational, scientific,
cultural, charitable, health, relief, philanthropic or religious purposes, for free distribution among, or
exclusive use of, the needy.
v. Food, clothing, house-building and sanitary-construction materials, and medical, surgical and
other supplies for use in emergency relief work, when imported by or directly for the account of any
victim, sufferer, refugee, survivor or any other person affected thereby, or by or for the account of
any relief organization, not operated for profit, for distribution among the distressed individuals,
whenever the President shall, by proclamation, declare an emergency to exist by reason of a state of
war, pestilence, cholera, plague, famine, drought, typhoon, earthquake, fire, flood and similar
conditions: Provided, That the importation free of duty of articles described in this herein subsection
shall continue only during the existence of such emergency, or within such limits and subject to such
conditions as the President may, by his proclamation, deem necessary to meet the emergency.
w. Philippine articles previously exported from the Philippines and returned without having
been advanced in value or improved in condition by any process of manufacture or other means, and
upon which no drawback or bounty has been allowed, and foreign articles when returned after
having been loaned and exported for use temporarily abroad solely for exhibition, examination or
experimentation, for scientific or educational purposes, and foreign containers packed with exported
Philippine articles and returned empty if imported by or for the account of the person or institution
who exported them from the Philippines and not for sale, subject to identification: Provided, That any
Philippine article falling under this subsection upon which drawback or bounty has been allowed
shall, upon re-importation thereof, be subject to a duty under this subsection equal to the amount of
such drawback or bounty.
x. Large containers (e.g., demijohns, cylinders, drums, casks and other similar receptacles of
metal, glass or other material) which are, in the opinion of the Collector of Customs, of such a
character as to be readily identifiable may be delivered to the importer thereof upon identification
and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes
and other charges thereon, conditioned for the exportation thereof on payment of the corresponding
duties, taxes and other charges within one year from the date of acceptance of the import entry.
y. Supplies or ship stores listed as such for the use of the vessel; supplies which are intended for
the reasonable requirements of the vessel in her voyage outside the Philippines, including such
articles transferred from a bonded warehouse in any collection district to any vessel engaged in
foreign trade, for use or consumption of the passengers or its crew on board such vessel as sea stores;
or articles purchased abroad for sale on board a vessel as saloon stores or supplies: Provided, That
any surplus or excess of such ship, sea or saloon stores arriving from foreign ports shall be dutiable
according to the corresponding heading or subheading.
z. Articles and salvage from vessels recovered after the period of two years from the date of
filing the marine protest or the time when the vessel was wrecked or abandoned as determined by
the Collector of Customs, or such part of Philippine vessel or her equipment, wrecked or abandoned
in Philippine waters or elsewhere: Provided, That articles and salvage recovered within the said
period of two years shall be dutiable according to the corresponding heading or subheading.
aa. Articles of easy identification exported from the Philippines for repairs abroad and
subsequently reimported: Provided, That the cost of the repairs made to any such article shall pay a
rate of duty of twenty-five per cent ad valorem.
bb. Coffins or urns containing human remains, bones or ashes, and all articles for ornamenting
said coffins or urns and accompanying same; used personal and household effects, not merchandise,
of deceased persons, upon identification as such, satisfactory to the Collector of Customs.

III. Rates of Duty

A. General Rules - Sec. 104
SECTION 104. Rates of Import Duty. — There shall be levied, collected and paid upon all imported
articles the following rates of duty, except as otherwise specifically provided for in this Code.

B. Basis of Duty - Sec. 201, 202, 204, 205, 1308-10, 1313
Customs Administrative Order No. 2-96, June 14, 1996 - MISSING
R.A. No. 8181 - Transaction Value

SECTION 201. Basis of Dutiable Value. — Whenever an imported article is subject to an ad valorem
rate of duty, the duty shall be assessed upon the market value or price at which, at the time of
exportation, the same, like or similar article is freely offered for sale in the principal markets of the
exporting country for exportation to the Philippines, in the usual wholesale quantities and in the
ordinary course of trade (excluding internal excise taxes to be remitted or rebated), plus ordinary
expenses prior and incidental to the lading of such article on board the vessel or aircraft at the port of
export (including taxes or duties, if any) and freight paid as well as insurance premium paid covering
the transportation of such article to the port of entry in the Philippines.
When the value of the article cannot be ascertained in accordance with the preceding paragraph, the
value shall be the domestic wholesale market value or selling price of the same, like or similar
imported article in the principal market of the Philippines on the date of exportation of the article
under appraisement, in the usual wholesale quantities and in the ordinary course of trade, minus the
import duty and other taxes as well as a commission not exceeding six per centum if any has been
paid or contracted to be paid on goods secured otherwise than by purchase, and profits not to exceed
eight per centum and a reasonable allowance for general expenses not to exceed eight per centum on
purchased goods, and all other expenses incidental to the delivery from the port of importation to the
principal market in the Philippines.
SECTION 202. Bases of Dutiable Weight. — On articles that are subject to specific rate of duty, based
on weight, the duty shall be ascertained as follows:
a. When articles are dutiable by the gross weight, the dutiable weight thereof shall be the weight
of same, together with the weight of all containers, packages, holders and packings, of any kind, in
which said articles are contained, held or packed at the time of importation.
b. When articles are dutiable by the legal weight, the dutiable weight thereof shall be the weight
of same, together with the weight of the immediate containers, holders and/or packing in which such
articles are usually contained, held or packed at the time of importation and/or, when imported in
retail packages, at the time of their sale to the public in usual retail quantities: Provided, That when
articles are packed in single container, the weight of the latter shall be included in the legal weight.
c. When articles are dutiable by the net weight, the dutiable weight thereof shall be only the
actual weight of the articles at the time of importation, excluding the weight of the immediate and all
other containers, holders or packing in which such articles are contained, held or packed.
d. Articles affixed to cardboard, cards, paper, wood or similar common material shall be dutiable
together with the weight of such holders.
e. When a single package contains imported articles dutiable according to different weights, or to
weight and value, the common exterior receptacles shall be prorated and the different proportions
thereof treated in accordance with the provisions of this Code as to the dutiability or non-dutiability
of such packing.

SECTION 204. Rate of Exchange. — For the assessment and collection of import duty upon
imported articles and for other purposes, the value and prices thereof quoted in foreign currency
shall be converted into the currency of the Philippines at the current rate of exchange or value
specified or published, from time to time, by the Central Bank of the Philippines.
SECTION 205. Effective Date of Rates of Import Duty. — Imported articles shall be subject to the
rate or rates of import duty existing at the time of entry, or withdrawal from warehouse in the
Philippines, for consumption.
On and after the day when this Code shall go into effect all articles previously imported, for which no
entry has been made, and all articles previously entered without payment of duty and under bond
for warehousing, transportation, or any other purpose, for which no permit of delivery to the
importer or his agent has been issued, shall be subject to the rates of duty imposed by this Code and
to no other duty, upon the entry, or withdrawal thereof from warehouse, for consumption.
On articles abandoned or forfeited to, or seized by, the government, and then sold at public auction,
the rate of duty and the tariff in force on the date of the auction shall apply: Provided, That duty
based on the weight, volume and quantity of articles shall be levied and collected on the weight,
volume and quantity at the time of their entry into the warehouse or the date of abandonment,
forfeiture and/or seizure.

SECTION 1308. Invoice — Contents of . — Invoice of articles imported into the Philippines shall set
forth —
a. The place where, the date when, and the person by whom and the person to whom the articles
are sold or agreed to be sold, or if to be imported otherwise than in pursuance of a purchase, the
place from which shipped, the date when, and the person to whom and the person by whom they are
shipped;
b. The port of entry to which the articles are destined;
c. A detailed description of the articles in customary terms or commercial designation, including
the grade or quality, numbers, marks or symbols under which sold by the seller or manufacturer,
together with the marks and numbers of the packages in which the articles are packed;
d. The quantities in the weights and measures of the country or place from which the articles are
shipped, or in the weights and measures of the Philippines;
e. The purchase price of each item in the currency of the purchase and in the unit of the quantity
in which the articles were bought and sold in the place or country of exportation, if the articles are
shipped in pursuance of a purchase or an agreement to purchase;
f. The kind of currency; whether gold, silver or paper;
g. If the articles are shipped otherwise than in pursuance of a purchase or an agreement to
purchase, the value for each item in the unit of quantity in which the articles are usually bought and
sold, and in the currency in which the transactions are usually made, or, in the absence of such value,
the price in such currency which the manufacturer, seller, shipper or owner would have received, or
was willing to receive, for such articles if sold in the ordinary course of trade and in the usual
wholesale quantities in the country of exportation;
h. All charges upon the articles itemized by name and amount when known to the seller or
shipper; or all charges by name (e.g., commission, insurance, freight, cases, containers, coverings and
cost of packing) included in invoice prices when the amounts for such charges are unknown to the
seller or shipper;
i. All discounts, rebates, drawbacks and bounties separately itemized, allowed upon the
exportation of the articles, all internal and excise taxes applicable to the home market;
j. The current price at which same, like or similar article is offered for sale for exportation to the
Philippines, on the date the invoice is prepared or the date of exportation; and
k. Any other facts deemed necessary to a proper examination, appraisement and classification of
the articles which the Commissioner may require.
SECTION 1309. Certification of Invoice. —
a. Consular Certification Required. — Invoice required by the preceding section shall, at or
before the shipment of the articles or as soon thereafter as conditions will permit, be produced for
certification to the consular officer of the Philippines of the consular district in which the articles were
manufactured or purchased, or from which they are shipped, as the case may be: Provided, That in
the absence of a Philippine consul in the country of exportation, such invoice may be certified by the
consul of any friendly country in the country of exportation, or by any responsible official of the
country of exportation. acd
b. Declaration. — Every invoice prescribed above shall contain a declaration signed by the
purchaser, manufacturer, seller, owner or agent setting forth that the invoice is in all respects correct
and true and was made at the place whence the articles are exported to the Philippines; that it
contains, if the articles were obtained by purchase or an agreement to purchase, a true and full
statement of the date when, the place where, the person from whom the same were purchased and
the purchase price and unit of quantity thereof, and of all charges thereon; and that no discounts,
bounties or drawbacks are contained in the invoice except such as have been allowed thereon; and
when obtained in any other manner than by purchase or an agreement to purchase, the market value
on wholesale price thereof at the time of exportation to the Philippines in the principal market of the
country from which exported; that such market value is the price in the unit of quantity at which the
articles described in the invoice are freely offered for sale to all purchasers in said market for
exportation to the Philippines, and that it is the price which the manufacturer, seller, owner or agent
making the declaration would have received and was willing to receive for such articles when sold in
the ordinary course of trade in the usual wholesale quantities, and that it included all charges
thereon; that the number, weight, measurement or quantity stated is correct, and that no invoice of
the articles described different from the invoice so produced has been or will be furnished to anyone.
If the articles were purchased, or shipped otherwise than in pursuance of a purchase or an agreement
to purchase, the declaration shall also contain a statement that the amount in the unit of quantity
shown is that which was paid, or the price in the unit of quantity that the shipper would have
received, or was willing to receive, for such articles, and that the currency stated in such invoice is the
currency of the purchase, or in which the transaction is usually made.
c. Making and Signing. — The invoice to be certified in accordance with the provisions of this
section shall be made out in five copies and signed by the manufacturer or seller if the articles have
been purchase, or by the manufacturer, shipper or owner thereof if the same have been procured or
obtained otherwise than by purchase, or by the duly authorized agent of such manufacturer, seller,
shipper or owner.
d. Purchases in Different Consular Districts. — When articles have been purchased in different
consular districts for shipment to the Philippines and are assembled for shipment and embraced in a
single invoice which is produced for certification under the provisions of this section, there shall be
attached to the consular invoice the original bills or invoices certified by the manufacturer or seller
and received by the shipper showing the prices paid or to be paid for such articles. The consular
officer to whom the invoice is so produced for certification may require that any such original bill or
invoice be certified by the consular officer for the district in which the articles were purchased.
e. Disposition. — The original and the quintuplicate of the invoice shall be delivered to the
exporter, the former to be forwarded to the consignee for use in making entry of the articles. The
duplicate shall be filed in the office of the consular officer by whom the invoice was certified there to
be kept until the Secretary of Foreign Affairs authorizes its destruction. The triplicate shall be
promptly transmitted by the consular officer to the Collector of the port of entry named in the
invoice, and the quadruplicate to the Tariff Commission, through the Department of Foreign Affairs.
SECTION 1310. Invoice to Accompany Every Importation over P500 in Export Value. — Except in
case of personal and household effects accompanying a passenger as baggage, or arriving within a
reasonable time which in no case shall exceed ninety days before or after the owner's return, or in
case of other articles brought in for personal use, no importation of articles exceeding five hundred
pesos in export value shall be admitted to entry without the production of a duly certified invoice of
the kind hereinabove described, or the filing of an affidavit made by the owner, importer or
consignee before the Collector, showing why it is not possible to produce such invoice, together with
a bond, conditioned upon the production of such invoice within a reasonable time, in an amount
prescribed by law, rules or regulations. In the absence of such invoice, no entry shall be made based
on the aforesaid affidavit unless the same be accompanied by a commercial invoice signed by the
manufacturer or seller or a statement in the form of an invoice showing the purchase price of such
articles in the unit of quantity and currency of the purchase, if same were purchased, or if obtained
otherwise than by purchase, the market value or wholesale price thereof at the time of exportation to
the Philippines at which sold or offered for sale in the principal markets of the country from whence
imported for export to the Philippines, and in the currency and unit of quantity in which the
transaction is usually made. This statement shall be verified by the oath of the owner, importer,
consignee or agent desiring to make the entry, taken before the Collector and it shall be lawful for
that official to examine the deponent under oath regarding the source of his knowledge, information
or belief, concerning any matter contained in his affidavit, and to require him to produce any
correspondence, document or statement of account in his possession or under his control, which may
assist the customs authorities in ascertaining the value of the importation or of any part thereof; and
in the event of his failure to produce such correspondence, document or statement of account when
so required, such owner, importer, consignee or agent shall thereafter be barred from producing such
correspondence, document or statement for the purpose of avoiding the imposition of additional
duty, penalty or forfeiture incurred under this Code or any other Act in force in the Philippines
unless it is shown to the satisfaction of the Collector that it was not in his power to produce the same
when so demanded; but no articles shall be admitted to entry under the provisions of this section
unless the Collector shall be satisfied that the failure to produce the required invoice is due to causes
beyond the control of the owner, importer, consignee or agent: Provided, That whenever it is shown
to the satisfaction of the Collector that it is impossible to produce the consular invoice required by
this section, the entry of the articles may be effected upon the filing of a commercial or pro forma
invoice and the payment of a surcharge provided by section twenty-five hundred and two of this
Code.

SECTION 1313. Information Furnished Prior to Entry. — a. As to Classification. — When an article
imported or intended to be imported is not specifically mentioned in this Code, the interested party,
importer or foreign exporter may submit to the Tariff Commission a sample together with a full
description of its component materials and uses, and request it in writing to indicate the heading
under which the article is or shall be dutiable, and the Tariff Commission shall comply with such
request if it is satisfied that the application is made in good faith, in which case classification of the
article in question, upon the particular importation involved, shall be made according to the heading
indicated by the Tariff Commission.
b. As to Value. — Upon written application of the consignee or his agent, the Collector shall
furnish any importer the latest information in his possession as to the value of the articles to be
entered at his port, after arrival or upon satisfactory evidence that they have been exported and are
enroute to the Philippines: Provided, that the information shall be given only if the Collector is
satisfied after questioning the importer and examining all pertinent papers presented to him, such as
invoices, contracts of sale or purchase, and orders, that the importer is acting in good faith and is
unable to obtain proper information as to the value of the articles on the date of exportation due to
unusual conditions: And provided, further, That the information so given is in no sense an appraisal
or binding upon the Collector's action on appraisal.

REPUBLIC ACT NO. 8181
AN ACT CHANGING THE BASIS OF DUTIABLE VALUE OF IMPORTED ARTICLES SUBJECT TO
AN AD VALOREM RATE OF DUTY FROM THE HOME CONSUMPTION VALUE (HCV) TO
TRANSACTION VALUE (TV), AMENDING FOR THE PURPOSE SECTION 201 OF TITLE II, PART
1 OF PRESIDENTIAL DECREE NO. 1464, OTHERWISE KNOWN AS THE TARIFF AND CUSTOMS
CODE OF THE PHILIPPINES, AS AMENDED, AND FOR OTHER PURPOSES
SECTION 1. Section 201 of Title II, Part 1 of the Tariff and Customs Code of the Philippines, as
amended, is hereby further, amended to read as follows:
"Sec. 201. Basis of Dutiable Value. — The dutiable value of an imported article subject to an ad
valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable
for the goods when sold for export for the Philippines, adjusted by adding the following to the extent
that they are incurred by the buyer but are not included in the price actually paid or payable for the
imported goods:
(a) Commissions and brokerage fees (except buying commissions); cost of containers; and the
cost of packing, whether for labour or materials;
(b) The value of materials, components, parts and items incorporated in the imported goods; tools,
dies, moulds and similar items used in the production of the imported goods; and engineering,
development, artwork, design work, and plans and sketches undertaken elsewhere than in the
Philippines and necessary for the production of imported goods, where such goods and services are
supplied directly or indirectly by the buyer free of charge or at a reduced cost for use in connection
with the production and sale for export of the imported goods, to the extent that such value has not
been include in the price actually paid or payable;
(c) The amount of royalties and license fees that the buyer must pay, either directly or indirectly, in
connection with the goods being valued, as a condition of sale of the goods that accrues directly or
indirectly to the seller;
(d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported
goods that accrues directly or indirectly to the seller;
(e) The cost of transport of the imported goods from the port of exportation to the port of entry in the
Philippines;
(f) Loading, unloading and handling charges associated with the transport of the imported goods
from the country of exportation to the port of entry in the Philippines; and
(g) The cost of insurance.
Where the Commissioner of Customs has reason to doubt the truth or accuracy of the declaration
or particulars or documents provided in support of declared value of the importation, he may require
the importer to give further explanation thereof and to submit additional documents or other
evidence to show that the declared value represents the total amount paid or payable for the
imported goods.
If after receiving the explanation of the importer the Commissioner of Customs still has reasonable
doubt as to the accuracy of the declared value, the Commissioner of Customs may proceed with the
alternative methods specified hereafter, as follows:
The dutiable value shall be the transaction value of identical goods sold for export to the
Philippines at or about the date of exportation of the goods being valued;
If the dutiable value still cannot be determined through the successive application of the two
immediately preceding methods, the order of succession of the following methods may be reversed
upon request of the importer unless the Commissioner of Customs deems that he will experience real
difficulties in determining the dutiable value by using the computed value, in which case the
Commissioner of Customs may refuse such a request subject to the provisions of the General
Agreement on Tariffs and Trade (GATT) 1994 and the Uruguay Round Final Act, in which event the
valuation of the imported goods shall be determined as indicated hereunder;
(1) The unit price at which the imported goods or identical or similar imported goods are sold
domestically, in the same condition as when imported, in the greatest aggregate quantity, to persons
not related to the seller, at or about the time of the importation of the goods being valued, subject to
the applicable deductions as provided under the GATT 1994 and the Uruguay Round Final Act; or
(2) The computed value which shall be the sum of:
(a) The cost or value of raw materials employed in producing the imported goods;
(b) The amount for profit and general expenses equal to the amount for profit and general
expenses as reflected in the sale of goods of the same class or kind as the goods being valued which
are made by producers in the country of exportation for the Philippines; and
(c) The freight, insurance fees and other transportation expenses for the importation of the goods;
If the dutiable value cannot be determined under any of the preceding methods described
above, it shall be determined by using other reasonable means consistent with the principles and
general provisions of GATT 1994, the agreement on the implementation of Article VII of the General
Agreement on Tariffs and Trade as contained in the Uruguay Round Final Act, and on the basis of
data available in the Philippines.
The correct dutiable value of the imported goods referred to above shall be ascertained by the
Commissioner of Customs from reports of revenue or commercial attaches or other Philippine
diplomatic officers and from such other sources of information as may be available and published by
the Commissioner of Customs from time to time, and such values shall be binding upon the
importers and the Bureau of Customs until changed and new value or values are similarly
established and published.
Values shall be published in at least one (1) newspaper of general circulation and other
publications readily available to the public. Any importer or other interested party who is dissatisfied
with the published value shall have fifteen (15) days from the date of publication of such published
value the opportunity to file a protest on the questioned value and the Commissioner of Customs
shall resolve the protest within fifteen (15) days from receipt of such protest, either by amending the
published value or retraining the same. Whatever his decision may be must likewise be published.
If, in the course of determining the dutiable value of imported goods, it becomes necessary to
delay the final determination of such dutiable value, the importer may secure the release of the
imported goods upon the filing of a bond which shall solely be in cash, in an amount equivalent to
the imposable duties and taxes on the imported goods in question plus twenty-five percent (25%)
thereof, conditioned upon the payment of customs duties and taxes for which the imported goods
may be liable: Provided, however, That goods the importation of which is prohibited by law shall not
be released under any circumstances whatsoever.
For purposes of the preceding paragraph, the terms:
(1) "Reasonable" shall refer to any condition that creates a probable cause to make the Commissioner
of Customs believe in the accuracy of the invoice value of imported goods as reflected by the
importer in his customs declaration, for valuation purposes. Such condition may include but is not
limited to any of the following situations:
(a) If the sale or price is subject to some consideration for which a value cannot be determined with
respect to the goods being valued such as:
(i) When the seller fixes the price of the imported goods on condition that the buyer will also
buy other goods in specified quantities;
(ii) When the price of the imported goods is dependent upon the price or prices at which the
buyer of the imported goods sells other goods to the seller;
(iii) When the price is established on the basis of a form of payment extraneous to the imported
goods, such as where the imported goods are semi-finished goods which have been provided by the
seller on the condition that he will receive a specified quantity of finished foods;
(b) Or, if part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer
will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in
accordance with the provisions of Article 8 of the agreement in the implementation of Article VII of
the General Agreement on Tariffs and Trade as contained in the Uruguay Round Final Act; and
(c) If the buyer and the seller are related to one another, and such relationship influenced the price
of the goods. Such persons shall be deemed related if:
(i) They are officers or directors of one another's businesses;
(ii) They are legally recognized partners in business;
(iii) Note : There is no number three in the original.
(iv) Any person directly or indirectly owns, controls or holds five percent (5%) or more of the
outstanding voting stock or shares of both seller and buyer;
(v) One of them directly or indirectly controls the other;
(vi) Both of them are directly or indirectly controlled by a third person;
(vii) Together they directly or indirectly control a third person; or
(viii) They are members of the same family including brothers and sisters, (whether by whole
or half blood) spouse, ancestors, and lineal descendants.
(2) "Identical goods" shall mean goods which are the same in all respects, including physical
characteristics, quality and reputation. Minor differences in appearances shall not preclude goods
otherwise conforming to the definition from being regarded as identical.
(3) "Similar goods" shall mean goods which, although not alike in all respects, have like
characteristics and like component materials which enable them to perform the same functions and to
be commercially interchangeable. The quality of the goods, their reputation and the existence of a
trademark shall be among the factors to be considered in determining whether goods are similar.
SECTION 2. Transitory Provisions. — Upon the effectivity of this Act and until such time when the
Congress authorizes the shift to transaction value before January 1, 2000 as provided under Section 3
of this Act, the dutiable value of an imported article subject to an ad valorem rate of duty shall be
based on the export value at which at the time of exportation, the same or identical, like, or similar
article is freely offered for sale in the principal export markets of the exporting country for
exportation to the Philippines, in the usual wholesale quantities and in the ordinary course of trade
(excluding internal excise taxes to be remitted or rebated) or where there is none on such date, then
on the export value nearest to the date of exportation, including the value of all containers, coverings
and/or packings of any kind and all other expenses, costs and charges incident to placing the article
in a condition ready for shipment to the Philippines, and freight, as well as insurance premium
covering the transportation of such articles to the port of entry in the Philippines.
Where the export value of the article cannot be ascertained thereat or where there exists a
reasonable doubt as to the fairness of such value, then the export value of the article for exportation
to the Philippines shall be the export value of the article in the principal export markets of the country
of manufacture or origin, if such country is not the country of exportation.
Where the dutiable value cannot be ascertained as provided in the preceding paragraphs, or
where there exists a reasonable doubt as to the dutiable value of the imported article declared in the
entry, the dutiable value shall be the domestic wholesale selling price of such or similar article in
Metro Manila or other principal markets in the Philippines on the date the duty becomes payable on
the article under appraisement, in the usual wholesale quantities and in the ordinary course of trade,
minus:
(a) Not more than twenty-five percent (25%) of the domestic wholesale selling price for expenses and
profits; and
(b) Duties and taxes paid thereon.
The correct dutiable value of imported articles shall be ascertained by the Commissioner of Customs
using for that purpose reports of Revenue or Commercial Attaches or other Philippine diplomatic
officers or such other sources of information that may be available to the Bureau of Customs. Such
values shall be published from time to time.
Values shall be published in a manner that will make them readily available to the public. Any
importer or other interested party who is dissatisfied with the published value shall have fifteen (15)
days from the date of publication of such published values the opportunity to file protest on the
questioned value, and the Commissioner of Customs shall resolve the protest within fifteen (15) days
from such protest either by amending the published value or retaining the same. Whatever his
decision may be must likewise be published.
If, in the course of determining the dutiable value of imported goods, it becomes necessary to delay
the final determination of such dutiable value, the importer may secure the release of the imported
article upon the filing of a bond which shall solely be in cash in an amount equivalent of the
imposable duties and taxes on the imported goods in question plus twenty-five percent (25%) thereof,
conditioned upon the payment of customs duties and taxes for which the imported goods may be
liable: Provided, however, That imported goods the importation of which is prohibited by law shall
not be released under any circumstances whatsoever.
SECTION 3. In the interest of national economy, general welfare and/or national security, the
Congress shall, upon recommendation of the President, by joint resolution, order the shift to
transaction value, as provided under Section 1 of this Act, as the basis of dutiable value of an
imported article subject to an ad valorem rate of duty even before January 1, 2000.
SECTION 4. The Secretary of Finance shall, upon the recommendation of the Commissioner of
Customs, promulgate the necessary rules and regulations for the effective implementation of this Act.
SECTION 5. The Commissioner of Customs may delegate his power to determine dutiable values and
to release imported goods under cash bond as provided in this law in cases where there are no
established and published values covering the importation: Provided, That in such cases, the
Collector of Customs concerned shall immediately render a complete report to the Commissioner of
Customs and the latter shall, without delay, establish and publish the correct dutiable value or values
for the importation, after which all Collector of Customs shall be guided accordingly in the
assessment of import duties and taxes on similar or like importations.
SECTION 6. The Commissioner of Customs shall create such body or bodies to receive and hear
protests regarding published values. Such body or bodies shall hear and receive the evidence and
shall submit its or their recommendations to the Commissioner of Customs. The hearing body shall
submit its report in writing and shall convey to all interested parties whatever decision reached by
the commissioner thereon. During the effectivity of any published values, any interested party may
petition the Commissioner of Customs for a review of the published value for the purpose of raising
or lowering such value.
SECTION 7. All laws, decrees, executive orders, rules and regulations and other issuances or parts
thereof which are inconsistent with this Act are hereby repealed or modified accordingly.
SECTION 8. This Act shall take effect fifteen (15) days after its complete publication in the Official
Gazette or in at least two (2) newspapers of general circulation, whichever date comes earlier.
Approved: March 28, 1996

C. Special duties

a. Dumping - Sec. 301
SECTION 301. Dumping Duty. —
a. Whenever the Secretary of Finance (hereinafter called the Secretary") has reason to believe,
from invoices or other papers or from information made available to him by any government agency
or interested party, that a specific kind or class of foreign article, whether dutiable or duty-free, is
being sold or is likely to be sold for exportation to, or in, the Philippines, at a price less than its fair
value, as hereinafter defined, the importation or sale of which might injure, or prevent the
establishment of, or is likely to injure an industry in the Philippines, he shall so advise the Tariff
Commission (hereinafter called the "Commission").
b. The Commission, upon receipt of such advice from the Secretary, shall conduct an
investigation to —
1. Verify if the kind or class of articles in question is being sold or is likely to be sold for
exportation to, or in, the Philippines at a price less than its fair value;
2. Determine if, as a result thereof, an industry in the Philippines is being injured or is likely to be
injured or is prevented from being established by reason of the importation or sale of such kind or
class of article into the Philippines; and
3. Ascertain the difference, if any, between the purchase price or, in the absence thereof, the
exporter's sales price, and the fair value of the article. The Commission shall submit its findings to the
Secretary within one month after receipt of the aforesaid advice.
c. The Secretary shall, within fifteen days from the report of the Commission, decide whether the
article in question is being imported in violation of this section and shall give due notice of such
finding and shall direct the Commissioner of Customs to cause the dumping duty, to be levied,
collected and paid, as prescribed in this section, in addition to any other duties, taxes and charges
imposed by law on such article.
d. The "dumping duty" as provided for in subsection "e" hereof shall be equal to the difference
between the purchase price or, in the absence thereof, the exporter's sales price, and the fair value of
the article.
e. For the purpose of this section —
1. The "fair value" of an article shall be its foreign market value, or, in the absence of such value,
its cost of production.
2. The "purchase price" of an imported article shall be the price at which such article has been
purchased or agreed to be purchased, prior to the time of exportation, by the person by whom or for
whose account the article is imported, plus, when not included in such price —
(a) The cost of all containers and coverings and all other costs, charges and expenses incident to
placing the article in condition, packed ready for shipment to the Philippines;
(b) The amount of any export tax paid in the country of exportation on the exportation of the
article to the Philippines;
(c) The amount of any import duties imposed by the country of exportation which have been
rebated, or which have not been collected, by reason of the exportation of the article to the
Philippines; and
(d) The amount of any taxes imposed in the country of exportation upon the manufacturer,
producer or seller, in respect to the manufacture, production or sale of the article, which have been
rebated, or which have not been collected, be reason of the exportation of the article of the
Philippines.
Any additional costs, charges and expenses incident to bringing the article from the place of shipment
in the country of exportation to the place of delivery in the Philippines and Philippine customs duties
imposed thereon shall not be included. cda
3. The "exporter's sale price" of an imported article shall be the price at which such article is sold
or agreed to be sold in the Philippines, before or after the time of exportation, by or for the account of
the exporter, including —
(a) The cost of all containers and coverings and all other costs, charges and expenses incident to
placing the article in condition, packed ready for shipment to the Philippines;
(b) The amount of any import duties imposed by the country of exportation which have been
rebated, or which have not been collected, by reason of the exportation of the article to the
Philippines; and
(c) The amount of any taxes imposed in the country of exportation upon the manufacturer,
producer or seller in respect to the manufacture, production or sale of the article, which have been
rebated, or which have not been collected, by reason of its exportation to the Philippines. The
following amount, if included, shall be deducted —
(1) The amount of costs, charges and expenses, and Philippine customs duties, incident to
bringing the article from the place of shipment in the country of exportation to the place of delivery
in the Philippines;
(2) The amount of commissions, if any, for selling in the Philippines the particular article under
consideration;
(3) An amount equal to the expenses, if any, generally incurred by or for the account of the
exporter in the Philippines in selling identical or substantially identical article; and
(4) The amount of any export tax paid in the country of exportation on the exportation of the
article to the Philippines.
4. The "foreign market value" of an imported article shall be the price, at the time of exportation
of such article to the Philippines, at which such or similar article is sold or freely offered for sale to all
purchasers in the principal markets of the country from which exported, in the usual wholesale
quantities and in the ordinary course of trade for home consumption (or, if not sold or offered for sale
for home consumption, then for exportation to countries other than the Philippines), including the
cost of all containers and coverings and all other costs, charges and expenses incident to placing the
article in condition packed ready for shipment to the Philippines, except that in the case of articles
purchased or agreed to be purchased by the person by whom or for whose account the article is
imported, prior to the time of exportation, the foreign market value shall be ascertained as of the date
of such purchase or agreement to purchase. In the ascertainment of foreign market value for the
purpose of this section, no pretended sale or offer for sale, and no sale or offer for sale intended to
establish a fictitious market, shall be taken into account.
5. The "cost of production" of an imported article shall be the sum of —
(a) The cost of materials of, and of fabrication, manipulation or other process employed in
manufacturing or producing, identical or substantially identical article, at a time preceding the date
of shipment of the particular article under consideration which would ordinarily permit the
manufacture or production of the particular article under consideration in the usual course of
business;
(b) The usual general expenses not less than 10 per cent of such cost, in the case of identical or
substantially identical articles;
(c) The cost of all containers and coverings, and all other costs, charges and expenses incident to
placing the particular article under consideration in condition, packed ready for shipment to the
Philippines; and
(d) An addition for profit not less than 8 per cent of the sum of the amounts determined under
subparagraphs (a) and (b) hereof, equal to the profit which is originally added, in the case of articles
of the same general character as the particular article under consideration, by manufacturers or
producers in the country of manufacture or production who are engaged in the same general trade as
the manufacturer or producer of the particular article under consideration.
f. For the purposes of this section the "exporter" of an imported article shall be the person by
whom or for whose account the article is imported into the Philippines —
1. If such person is the agent or principal of the exporter, manufacturer or producer; or
2. If such person owns or controls, directly or indirectly, through stock ownership or control or
otherwise, any interest in the business of the exporter, manufacturer or producer; or
3. If the exporter, manufacturer or producer owns or controls, directly or indirectly, through
stock ownership or control or otherwise, any interest in any business conducted by such persons; or
4. If any person or persons, jointly or severally, directly or indirectly, through stock ownership or
control or otherwise, own or control in the aggregate 20 per cent or more of the voting power or
control in the business carried on by the person by whom or for whose account the article is imported
into the Philippines, and also 20 per cent or more of such power or control in the business of the
exporter, manufacturer or producer.
g. Pending investigation and final decision of the case, the article in question, and articles of the
same specific kind or class subsequently imported under similar circumstances, shall be released to
the owner, importer, consignee or agent upon the giving of a bond in an amount equal to the double
the estimated value thereof. Articles which may have been delivered under the provision of section
fifteen hundred and three of this Code prior to the institution of the investigation provided in this
section shall, pending final decision, be ordered returned to the custody of the collectors of customs
unless released under bond in accordance with this section.
h. Any aggrieved party may only appeal the amount of dumping duty that is levied and
collected by the Commissioner of Customs to the Court of Tax Appeals in the same manner and
within the same period provided for by law in the case of appeals from decisions of the
Commissioner of Customs.
i. (1) The article, if it has not been previously released under bond as provided in subsection "g"
hereof, shall be released after payment by the party concerned of the corresponding dumping duty in
addition to any other duties, taxes and charges, if any, or re-exported by the owner, importer,
consignee or agent, at his option and expense, upon the filing of a bond in an amount equal to double
the estimated value of the article, conditioned upon the presentation of a landing certificate issued by
a consular officer of the Philippines at the country of destination; or
(2) If the article has been previously released under bond, as provided in subsection "g" hereof,
the party concerned shall be required to pay the corresponding dumping done in addition to any
other duties, taxes and charges, if any.
j. Any investigation to be conducted by the Commission under this section shall include a
hearing or hearings where the owner, importer, consignee or agent of the imported article, the local
producers of a like article, other parties directly affected, and such other parties as in the judgment of
the Commission are entitled to appear, shall be given an opportunity to be heard and to present
evidence bearing on the subject matter.
k. It shall be the duty of collectors of customs at all ports of entry to levy and collect the dumping
duty in accordance with subsection "d" hereof on the specific kind or class of article as to which the
Secretary has made a decision of dumping.
It shall also be their duty to bring to the attention of the Secretary, thru the Commissioner of
Customs, any case coming within their notice which may, in their opinion, require action as provided
in this section.
l. The Secretary shall promulgate all rules and regulations necessary to carry out the provisions
of this section.

b. Countervailing - Sec. 302
SECTION 302. Countervailing Duty. —
a. On articles dutiable under this Code, upon the production, manufacture or export of which
any bounty, subsidy or subvention is directly or indirectly granted in the country of origin and/or
exportation, and the importation of which has been determined by the Secretary, after investigation
and report of the Commission, as likely to materially injure an established industry, or prevent or
considerably retard the establishment of an industry in the Philippines, there shall be levied a
countervailing duty equal to the ascertained or estimated amount of such bounty, subsidy or
subvention: Provided, That the exception of any exported article from a duty or tax imposed on like
articles when destined for consumption in the country of origin and/or exportation or the refunding
of such duty or tax, shall not be deemed to constitute a grant of a bounty, subsidy or subvention
within the meaning of this section; however, should an article be allowed drawback by the country of
origin and/or exportation, only the ascertained or estimated excess of the amount of the drawback
over the total amount of the duties and/or internal taxes, if any, shall constitute a bounty, subsidy or
subvention.
b. The Commission, on its own motion or upon application of any interested party, when in its
judgment there is good and sufficient reason therefor, shall ascertain, determine or estimate the net
amount of such bounty, subsidy or subvention and shall transmit to the Secretary the amounts so
ascertained, determined or estimated, if any. Wherever it is ascertained that the conditions which
necessitated the imposition of the countervailing duty have ceased to exist, and the Commission shall
so certify to the Secretary, the latter shall take the necessary steps to suspend or discontinue the
imposition of such duty.
c. The Secretary shall make all rules and regulations necessary to carry out the provisions of this
section.

c. Marking - Sec. 303
SECTION 303. Marking of Imported Articles and Containers. —
a. Marking of Articles. — Except as hereinafter provided, every article of foreign origin (or its
container, as provided in subsection "b" hereof) imported into the Philippines shall be marked in any
official language of the Philippines and in a conspicuous place as legibly, indelibly and permanently
as the nature of the article (or container) will permit in such manner as to indicate to an ultimate
purchaser in the Philippines the name of the country of origin of the article. The Commissioner of
Customs shall, with the approval of the department head, issue rules and regulations to —
(1) Determine the character of words and phrases or abbreviations thereof which shall be
acceptable as indicating the country of origin and prescribe any reasonable method of marking,
whether by printing, stenciling, stamping, branding, labeling or by any other reasonable method, and
a conspicuous place on the article or container where the marking shall appear;
(2) Require the addition of any other words or symbols which may be appropriate to prevent
deception or mistake as to the origin of the article or as to the origin of any other article with which
such imported article is usually combined subsequent to importation but before delivery to an
ultimate purchaser; and cd
(3) Authorize the exception of any article from the requirements of marking if —
(a) Such article is incapable of being marked;
(b) Such article cannot be marked prior to shipment to the Philippines without injury;
(c) Such article cannot be marked prior to shipment to the Philippines, except at an expense
economically prohibitive of its importation;
(d) The marking of a container of such article will reasonably indicate the origin of such article;
(e) Such article is a crude substance;
(f) Such article is imported for use by the importer and not intended for sale in its imported or
any other form;
(g) Such article is to be processed in the Philippines by the importer or for his account otherwise
than for the purpose of concealing the origin of such article and in such manner that any mark
contemplated by this section would necessarily be obliterated, destroyed or permanently concealed;
(h) An ultimate purchaser, by reason of the character of such article or by reason of the
circumstance of its importation, must necessarily know the country of origin of such article even
though it is not marked to indicate its origin;
(i) Such article was produced more than twenty years prior to its importation into the
Philippines; or
(j) Such article cannot be marked after importation except at an expense which is economically
prohibitive, and the failure to mark the article before importation was not due to any purpose of the
importer, producer, seller or shipper to avoid compliance with this section.
b. Marking of Containers. — Whenever an article is excepted under subdivision (3) of subsection
"a" of this section from the requirements of marking, the immediate container, if any, of such article,
or such other container or containers of such article as may be prescribed by the Commissioner of
Customs with the approval of the department head, shall be marked in such manner as to indicate to
an ultimate purchaser in the Philippines the name of the country of origin of such article in any
official language of the Philippines, subject to all provisions of this section, including the same
exceptions as are applicable to articles under subdivision (3) of subsection "a".
c. Marking Duty for Failure to Mark. — If at the time of importation any article (or its container,
as provided in subsection "b" hereof), is not marked in accordance with the requirements of this
section, there shall be levied, collected and paid upon such article a marking duty of 5 per cent ad
valorem, which shall be deemed to have accrued at the time of importation, except when such article
is exported or destroyed under customs supervision and prior to the final liquidation of the
corresponding entry.
d. Delivery Withheld until Marked. — No imported article held in customs custody for
inspection, examination or appraisement shall be delivered until such articles and/or their
containers, whether released or not from customs custody, shall have been marked in accordance
with the requirements of this section and until the amount of duty estimated to be payable under
subsection "c" of this section shall have been deposited. Nothing in this section shall be construed as
excepting any article or its container from the particular requirements of marking provided for in any
provisions of law.
e. The failure or refusal of the owner or importer to mark the articles as herein required within a
period of thirty days after due notice shall constitute as an act of abandonment of said articles and
their disposition shall be governed by the provisions of this Code relative to abandonment of
imported articles.

d. Discriminatory - Sec. 304
SECTION 304. Discrimination by Foreign Countries. —
a. The President, when he finds that the public interest will be served thereby, shall by
proclamation specify and declare new or additional duties in an amount not exceeding 50 per cent of
the existing rates as hereinafter provided upon articles wholly or in part the growth or product of, or
imported in a vessel of, any foreign country whenever he shall find as a fact that such country —
(1) Imposes, directly or indirectly, upon the disposition in, or transportation in transit through or
re-exportation from such country of any article wholly or in part the growth or product of the
Philippines any unreasonable charge, exaction, regulation or limitation which is not equally enforced
upon the like articles of every foreign country; or
(2) Discriminates in fact against the commerce of the Philippines, directly or indirectly, by law or
administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee,
charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to
place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign
country.
b. If at any time the President shall find it to be a fact that any foreign country has not only
discriminated against the commerce of the Philippines, as aforesaid but has, after the issuance of a
proclamation as authorized in subsection "a" of this section, maintained or increased its said
discriminations against the commerce of the Philippines, the President is hereby authorized, if he
deems it consistent with the interests of the Philippines, to issue a further proclamation directing that
such product of said country or such articles imported in its vessels as he shall deem consistent with
the public interests, shall be excluded from importation into the Philippines.
c. Any proclamation issued by the President under the authority of this section shall, if he deems
it consistent with the interests of the Philippines, extend to the whole of any foreign country or may
be confined to any subdivision or subdivisions thereof; and the President shall, whenever he deems
the public interests require, suspend, revoke, supplement or amend any such proclamation.
d. All articles imported contrary to the provisions of this section shall be forfeited to the
Government of the Philippines and shall be liable to be seized, prosecuted and condemned in like
manner and under the same regulations, restrictions and provisions as may from time to time be
established for the recovery, collection, distribution and remission of forfeiture to the government by
the tariff and customs laws. Whenever the provision of this section shall be applicable to importations
into the Philippines of articles wholly or in part the growth or product of any foreign country, they
shall be applicable thereto whether such articles are imported directly or indirectly. cdtai
e. It shall be the duty of the Commission to ascertain and at all times to be informed whether any
of the discriminations against the commerce of the Philippines enumerated in subsections "a" and "b"
of this section are practiced by any country; and if and when such discriminatory acts are disclosed, it
shall be the duty of the Commission to bring the matter to the attention of the President, together
with recommendation.
f. The Secretary shall make such rules and regulations as are necessary for the execution of such
proclamation as the President may issue in accordance with the provisions of this section.
g. The authority granted herein to the President shall be exercised only when Congress is not in
session.

D. Flexible Tariff rates - Sec. 401
SECTION 401. Flexible Clause. —
a. The President, upon investigation by the Commission and recommendation of the National
Economic Council, is hereby empowered to reduce by not more than fifty per cent or to increase by
not more than five times the rates of import duty expressly fixed by statute (including any necessary
change in classification) when in his judgment such modification in the rates of import duty is
necessary in the interest of national economy, general welfare and/or national defense.
b. Before any recommendation is submitted to the President by the Council pursuant to the
provisions of this section, the Commission shall conduct an investigation in the course of which it
shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be
present, to produce evidence and to be heard. The Commission may also request the views and
recommendations of any government office, agency or instrumentality, and such office, agency or
instrumentality shall cooperate fully with the Commission.
c. The President shall have no authority to transfer articles from the duty-free list to the dutiable
list nor from the dutiable list to the duty-free list of the tariff.
d. The power of the President to increase or decrease rates of import duty within the limits fixed
in subsection "a" shall include the authority to modify the form of duty. In modifying the form of
duty the corresponding ad valorem or specific equivalents of the duty with respect to imports from
the principal concerning foreign country for the most recent representation period shall be used as
basis.
e. The Commissioner of Customs shall regularly furnish to the Commission a copy each of all
customs import entries containing every pertinent information appearing in the collectors' liquidated
duplicates, including the consular invoice and/or the commercial invoice. The Commission or its
duly authorized agents shall have access to and the right to copy all the customs import entries and
other documents appended thereto as finally in the General Auditing Office.
f. The Commission is authorized to adopt such reasonable procedure, rules and regulations as it
may deem necessary to carry out the provisions of this section.
g. Any order issued by the President pursuant to the provisions of this section shall take effect
thirty days after its issuance.
h. The provisions of this section shall not apply to any article the importation of which into the
Philippines is or may be governed by Section 402 of this Code.
i. The authority herein granted to the President shall be exercised only when Congress is not in
session.

IV. Imposition of Duties

A. Persons liable - Sec. 1203-1205
SECTION 1203. Owner of Imported Articles. — All articles imported into the Philippines shall be
held to be the property of the person to whom the same are consigned; and the holder of a bill of
lading duly indorsed by the consignee therein named, or, if consigned to order, by the consignor,
shall be deemed the consignee thereof. The underwriters of abandoned articles and the salvors of
articles saved from a wreck at sea, along a coast or in any area of the Philippine may be regarded as
the consignees.
SECTION 1204. Liability of Importer for Duties. — Unless relieved by laws or regulations, the
liability for duties, taxes, fees and other charges attaching on importation constitutes a personal debt
due from the importer to the government which can be discharged only by payment in full of all
duties, taxes, fees and other charges legally accruing. It also constitutes a lien upon the articles
imported which may be enforced while such articles are in custody or subject to the control of the
government.
SECTION 1205. Importations by the Government. — Except as otherwise specifically provided, all
importations by the government for its own use or that of its subordinate branches on
instrumentalities, or corporations, agencies or instrumentalities owned or controlled by the
government, shall be subject to the duties, taxes, fees and other charges provided for in this Code:
Provided, however, That upon certification of the head of the department or political subdivision
concerned, with the approval of the Auditor General, that the imported article is actually being used
by the government or any of its political subdivision concerned, the amount of duty, tax, fee or
charge shall be refunded to the government or the political subdivision which paid it.

B. Declaration - Sec. 1302-1307
SECTION 1302. Import Entries. — All imported articles, except importation admitted free of duty
under subsection "o", section one hundred and five of this Code, shall be subject to a formal or
informal entry. Articles of a commercial nature intended for sale, barter or hire, the dutiable value of
which is five hundred pesos or less, and personal and household effects or articles, regardless of
value, imported in passenger's baggage mail, or otherwise, for personal use, may be cleared on an
informal entry whenever duty, tax or other charges are collectible. acd
The Collector may, when he deems it necessary for the protection of the revenue, require a formal
entry regardless of value.
A formal entry may be for immediate consumption, or under bond for:
a. Placing the articles in warehouse;
b. Constructive warehousing and immediate transportation to other ports of the Philippines
without appraisement; or
c. Constructive warehousing and immediate exportation.
Import entries under bond shall be subject to the provisions of Title V, Book II of this Code.
SECTION 1303. Entry of Articles in Part for Consumption and in Part for Warehousing. — Import
entries of articles covered by one bill of lading may be made simultaneously for both consumption
and warehouse. Where an intent to export the articles is shown by the bill of lading and invoice, the
whole or a part of a bill of lading (not less than one package may be entered for warehouse and
immediate exportation. Articles received at any port from another port of the Philippines on any
entry for immediate transportation without appraisal may be entered at the port of delivery either for
consumption or warehouse.
SECTION 1304. Declaration of the Import Entry. — Except in case of informal entry, no entry of
imported article shall be effected until there shall have been submitted to the Collector a written
declaration, in such form as shall be prescribed by the Commissioner, containing statements of
substance as follows:
a. That the entry delivered to the Collector contains a full and true statement of all the articles
which are the subject of the entry.
b. That the invoice and entry contain a just and faithful account of the actual cost of said articles,
including and specifying the value of all containers or coverings, and that nothing has been omitted
therefrom or concealed whereby the Government of the Republic of the Philippines might be
defrauded of any part of the duties lawfully due on the articles.
c. That, to the best of declarant's information and belief, the invoice and all bills of lading relating
to the articles are the only ones in existence relating to the importation in question and that they are
in the state in which they were actually received by him; and, furthermore,
d. That, to the best of the declarant's information and belief, the entry, invoice and bill of lading,
and the declaration thereon are in all respects genuine and true, and were made by the person by
whom the same purport to have been made, respectively.
SECTION 1305. By Whom to be Signed. — The declaration shall be signed by the importer, consignee
or holder of the bill, by or for whom the entry is effected, if such person is an individual, or in case of
a corporation, firm or association, by its manager, or by a licensed customs broker duly authorized to
act for either of them. When it is impracticable to obtain a declaration thus signed, the Collector may
allow it to be signed by some person in interest having first and best knowledge of the facts. A
Collector may also, in his discretion, require that the declaration shall be sworn to by the person
signing the same.
SECTION 1306. Form and Contents of Import Entry. — Import entries shall be in the required
number of copies in such form as prescribed by regulations. They shall be signed by the person
making the entry of the articles, and shall contain the names of the importing vessel and master, port
of departure and date of arrival, the number and marks of packages, or the quantity, if in bulk, and
the nature of the articles contained therein, and its value as set forth in a proper invoice to be
presented in duplicate with the entry.
SECTION 1307. Description of Articles. — The description of the articles in the import entry shall be
in customary terms or communal designation, or, if feasible and practical, in tariff terms, and in the
currency of the invoice; and the values of the several classes of articles shall be separately declared
according to their respective rates of duty, and the totals of each class duly shown.

C. Examination, Appraisal, and Classification - Sec. 1405-1408
SECTION 1405. Proceedings and Report of Appraisers. — Appraisers, shall by all reasonable ways
and means, ascertain, estimate and determine the value or price of the articles as required by law, any
invoice or affidavit thereto or statement of cost, or of cost of production to the contrary
notwithstanding, and after revising and correcting the reports of the examine as they may judge
proper, shall report in writing on the face of the entry the value so determined, irrespective of
whether such value is equal, higher or lower than the invoice and/or entered value of the articles.
Appraisers shall describe all articles on the face of the entry in tariff and such terms as will enable the
Collector to pass upon the appraisal and classification of the same, which appraisal and classification
shall be subject to his approval or modification, and shall note thereon the measurements and
quantities, and any disagreement with the declaration.
SECTION 1406. Appraisers' Samples. — Appraisers shall see that representative and sufficient
samples of all kinds of articles which may be readily sampled are taken under proper receipt and
retained for official purposes; but samples of articles identical in quality, material and values shall not
be retained, if their return is desired, longer than may be required for use in contested cases.
The quantity and value of the samples taken shall be noted on the face of the entry. Such samples
shall be duly labelled as will definitely identify them with the importation for which they are taken.
SECTION 1407. Readjustment of Appraisal, Classification or Return. — Such appraisal, classification
or return as finally passed upon and approved or modified by the Collector shall not be altered or
modified in any manner, except:
a. Within one year after payment of the duties, upon statement of error in conformity with
section seventeen hundred and seven hereof, approved by the Collector.
b. Within fifteen days after such payment, upon request for reappraisal and/or reclassification
addressed to the Commissioner by the Collector, if the appraisal and/or classification is deemed to be
low.
c. Upon request for reappraisal and/or reclassification, in the form of a timely protest addressed
to the Collector by the interested party if the latter should be dissatisfied with the appraisal or return.
SECTION 1408. Assessment of Duty on Less Than Entered Value. — Duty shall not be assessed in
any case upon an amount less than the entered value, unless by direction of the Commissioner in
cases in which the importer certifies at the time of entry that the entered value is higher than the
market value and that the articles are so entered in order to meet increases made by the appraised on
similar cases then pending reappraisement; and the lower assessment shall be allowed only when the
importer's contention is sustained by final decision, and shall appear that such action of the importer
was taken in good faith after due diligence and inquiry on his part.

D. Assessment of Taxes

E. Liquidation - Sec. 1601-1603
SECTION 1601. Liquidation and Record of Entries. — If the Collector shall approve the returns of the
appraiser and the report of the weights, gauge or quantity, the liquidation shall be made on the face
of the entry showing the particulars thereof, initiated by the liquidating clerk, approved by the chief
liquidator, and recorded in the record of liquidations.
A daily record of all entries liquidated shall be posted in the public corridor of the customhouse,
stating the name of the vessel or aircraft, the port from which she arrived, the date of her arrival, the
name of the importer, and the serial number and date of the entry. A daily record must also be kept
by the Collector of all additional duties, taxes and other charges found upon liquidation, and notice
shall promptly be sent to the interested parties.
SECTION 1602. Tentative Liquidation. — If to determine the exact amount due under the law in
whole or in part some future action is required, the liquidation shall be deemed to be tentative as to
the item or items affected and shall to that extent be subject to future and final readjustment and
settlement. The entry in such case shall be stamped "Tentative liquidation".
SECTION 1603. Finality of Liquidation. — When articles have been entered and passed free of duty
or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or
settlement of duties will, after the expiration of one year, from the date of the final payment of duties,
in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of
the import entry was merely tentative.

V. Remedies of the Government

A. Extrajudicial

1. Enforcement of Tax Lien - Sec. 1506
SECTION 1506. Customs Expenses Constituting Charge on Articles. — All expenses incurred by the
customs service for the handling or storage of articles and other necessary operations in connection
therewith, or incident to its seizure, shall be charged against such articles, and shall constitute a lien
upon it.

2. Seizure and Forfeiture - Sec. 2205, 2301-2316
SECTION 2205. Exercise of Power of Seizure and Arrest. — It shall be within the power of a customs
official or person authorized as aforesaid, and it shall be his duty, to make seizure of any vessel,
aircraft, cargo, articles, animal or other movable property when the same is subject to forfeiture or
liable for any fine imposed under customs and tariff laws, and also to arrest any person subject to
arrest for violation of any customs and tariff laws, such power to be exercised in conformity with the
law and the provisions of this Code.

SECTION 2301. Warrant for Detention of Property — Bond. — Upon making any seizure, the
Collector shall issue a warrant for the detention of the property; and if the owner or importer desires
to secure the release of the property for legitimate use, the Collector may surrender it upon the filing
of a sufficient bond, in an amount to be fixed by him, conditioned for the payment of the appraised
value of the article and/or any fine, expenses and costs which may be adjudged in the case: Provided,
That articles the importation of which is prohibited by law shall not be released under bond.
SECTION 2302. Report of Seizure To Commissioner and Auditor. — When a seizure is made for any
cause, the Collector of the district wherein the seizure is effected shall immediately make report
thereof to the Commissioner and to the Auditor General.
SECTION 2303. Notification to Owner or Importer. — The Collector shall give the owner or importer
of the property or his agent a written notice of the seizure and shall give him an opportunity to be
heard in reference to the delinquency which was the occasion of such seizure.
For the purpose of giving such notice and of all other proceedings in the matter of such seizure, the
importer, consignee or person holding the bill of lading shall be deemed to be the "owner" of the
article included in the bill.
For the same purpose, "agent" shall be deemed to include not only any agent in fact of the owner of
the seized property but also any person having responsible possession of the property at the
(missing) of the seizure, if the owner or his agent in fact is unknown or cannot be reached.
SECTION 2304. Notification to Unknown Owner. — Notice to an unknown owner shall be effected
by posting a notice for fifteen days in the public corridor of the customhouse of the district in which
the seizure was made, and, in the discretion of the Commissioner, by publication in a newspaper or
by such other means as he shall consider desirable.
SECTION 2305. Description and Appraisal and Classification of Seized Property. — The Collector
shall also cause a list and particular description of the property seized to be prepared and an
appraisement or classification of the same at its wholesale value in the local market in the usual
wholesale quantities to be made by at least two appraising officials, if there are such officials at or
near the place of seizure; in the absence of such officials, then by two competent and disinterested
citizens of the Philippines, to be selected by him for that purpose, residing at or near the place of
seizure, which list and appraisement shall be properly attested to by such Collector and the persons
making the appraisal.
SECTION 2306. Proceedings in Case of Property Belonging to Unknown Parties. — If, within fifteen
days after the notification prescribed in section twenty-three hundred and four of this Code, no
owner or agent can be found or appears before the Collector, the latter shall declare the property
forfeited to the government to be sold at auction in accordance with law.
SECTION 2307. Settlement of Case by Payment of Fine or Redemption of Forfeited Property. — If, in
any seizure case, the owner or agent shall, while the case is yet before the Collector of the district of
seizure, pay to such Collector the fine imposed by him or, in case of forfeiture, shall pay the
appraised value of the property, or, if after appeal of the case, he shall pay to the Commissioner the
amount of the fine as finally determined by him, or, in case of forfeiture, shall pay the appraised
value of the property, such property shall be forthwith surrendered, and all liability which may or
might attach to the property by virtue of the offense which was the occasion of the seizure and all
liability which might have been incurred under any bond given by the owner or agent in respect to
such property shall thereupon be deemed to be discharged.
Redemption of forfeited property shall not be allowed in any case where the importation is absolutely
prohibited or where the surrender of the property to the person offering to redeem the same would
be contrary to law.
SECTION 2308. Protest and Payment upon Protest in Civil Matters. — When a ruling or decision of
the Collector is made whereby liability for duties, fees, or other money charge is determined, except
the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision by
presenting to the Collector at the time when payment of the amount claimed to be due the
Government is made, or within thirty days thereafter, a written protest setting forth his objections to
the ruling or decision in question, together with the reasons therefor. No protest shall be considered
unless payment of the amount due after final liquidation has first been made.
SECTION 2309. Protest Exclusive Remedy in Protestable Case. — In all cases subject to protest, the
interested party who desires to have the action of the Collector reviewed, shall make a protest,
otherwise, the action of the Collector shall be final and conclusive against him, except as to matters
correctible for manifest error in the manner prescribed in section one thousand seven hundred and
seven hereof.
SECTION 2310. Form and Scope of Protest. — Every protest shall be filed in accordance with the
prescribed rules and regulations promulgated under this section and shall point out the particular
decision or ruling of the Collector to which exception is taken or objection made, and shall indicate
with reasonable precision the particular ground or grounds upon which the protesting party bases
his claim for relief.
The scope of a protest shall be limited to the subject matter of a single adjustment or other
independent transaction; but any number of issue may be raised in a protest with reference to the
particular item or items constituting the subject matter of the protest.
"Single adjustment", as hereinabove used, refers to the entire content of one liquidation, including all
duties, fees, surcharges or fines incident thereto.
SECTION 2311. Samples to be Furnished by Protesting Parties. — If the nature of the articles permit,
importers filing protests involving questions of fact must, upon demand, supply the Collector with
samples of the articles which are the subject matter of the protests. Such samples shall be verified by
the custom official who made the classification against which the protest are filed. cda
SECTION 2312. Decision or Action by Collector in Protest and Seizure Cases. — When a protest in
proper form is presented in a case where protest in required, the Collector shall reexamine the matter
thus presented, and if the protest is sustained, in whole or in part, he shall enter the appropriate
order, the entry reliquidated if necessary.
In seizure cases, the Collector, after a hearing, shall in writing make a declaration of forfeiture or fix
the amount of the fine or take such other action as may be proper.
SECTION 2313. Review by Commissioner. — The person aggrieved by the decision or action of the
Collector in any matter presented upon protest or by his action in any case of seizure may, within
fifteen days after notification in writing by the Collector of his action or decision, give written notice
to the Collector of his desire to have the matter reviewed by the Commissioner. Thereupon the
Collector shall forthwith transmit all the records of the proceedings to the Commissioner, who shall
approve, modify or reverse the action or decision of the Collector and take such steps and make such
orders as may be necessary to give effect to his decision.
SECTION 2314. Notice of Decision of Commissioner. — Notice of the decision of the Commissioner
shall be given to the party by whom the case was brought before him for review, and in seizure cases
such notice shall be effected by personal service if practicable.
SECTION 2315. Supervisory Authority of Commissioner And of Department Head in Certain Cases.
— If in any case involving the assessment of duties the importer shall fail to protest the ruling of the
Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and
unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the
Commissioner in any unprotested case should, in the opinion of the department head, be erroneous
and unfavorable to the Government, the department head may require the Commissioner to order a
reliquidation.
Except as in the preceding paragraph provided, the supervisory authority of the department head
over the Bureau of Customs shall not extend to the administrative review of the ruling of the
Commissioner in matters appealed to the Court of Tax Appeals.

B. Judicial

VI. Remedies of the Taxpayer

A. Refund - Sec. 1707-1708
SECTION 1707. Correction of Errors — Refund of Excess Payments. — Manifest clerical errors made
in an invoice or entry, errors in return of weight, measure and gauge, when duly certified to by the
surveyor or examining official (when there are such officials at the port), and errors in the
distribution of charges on invoices not involving any question of law and certified to by the
examining official, may be corrected in the computation of duties, if such errors be discovered before
the payment of duties, or, if discovered within one year after the final liquidation, upon written
request and notice of error from the importer, or upon statement of error certified by the Collector.
For the purpose of correcting errors specified in the next preceding paragraph the Collector is
authorized to reliquidate entries and collect additional charges, or to make refunds on statement of
error within the statutory time limit.
SECTION 1708. Claim for Refund and Mode of Payment. — All claims for refund of duties shall be
made in writing, and forwarded to the Collector to whom such duties are paid, who upon receipt of
such claim shall verify the same by the records of his office, and if found to be correct and in
accordance with law, shall certify the same to the Commissioner with his recommendation together
with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim
he shall cause the same to be paid if found correct.

B. Protest - Sec. 2308, 2309, 2310, 2312
SECTION 2308. Protest and Payment upon Protest in Civil Matters. — When a ruling or decision of
the Collector is made whereby liability for duties, fees, or other money charge is determined, except
the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision by
presenting to the Collector at the time when payment of the amount claimed to be due the
Government is made, or within thirty days thereafter, a written protest setting forth his objections to
the ruling or decision in question, together with the reasons therefor. No protest shall be considered
unless payment of the amount due after final liquidation has first been made.
SECTION 2309. Protest Exclusive Remedy in Protestable Case. — In all cases subject to protest, the
interested party who desires to have the action of the Collector reviewed, shall make a protest,
otherwise, the action of the Collector shall be final and conclusive against him, except as to matters
correctible for manifest error in the manner prescribed in section one thousand seven hundred and
seven hereof.
SECTION 2310. Form and Scope of Protest. — Every protest shall be filed in accordance with the
prescribed rules and regulations promulgated under this section and shall point out the particular
decision or ruling of the Collector to which exception is taken or objection made, and shall indicate
with reasonable precision the particular ground or grounds upon which the protesting party bases
his claim for relief.
The scope of a protest shall be limited to the subject matter of a single adjustment or other
independent transaction; but any number of issue may be raised in a protest with reference to the
particular item or items constituting the subject matter of the protest.
"Single adjustment", as hereinabove used, refers to the entire content of one liquidation, including all
duties, fees, surcharges or fines incident thereto.
SECTION 2312. Decision or Action by Collector in Protest and Seizure Cases. — When a protest in
proper form is presented in a case where protest in required, the Collector shall reexamine the matter
thus presented, and if the protest is sustained, in whole or in part, he shall enter the appropriate
order, the entry reliquidated if necessary.
In seizure cases, the Collector, after a hearing, shall in writing make a declaration of forfeiture or fix
the amount of the fine or take such other action as may be proper.

C. Abandonment - Sec. 1801-1803
SECTION 1801. Abandonment, Kinds and Effect of . — Abandonment is express when it is made
direct to the Collector by the interested party in writing, and it is implied when, from the action or
omission of the interested party, an intention to abandon can be clearly inferred. The failure of any
interested party to file the import entry within fifteen days or any extension thereof from the
discharge of the vessel or aircraft, shall be implied abandonment. An implied abandonment shall not
be effective until the article is declared by the Collector to have been abandoned after notice thereof is
given to the interested party as in seizure cases.
Any person who abandons an imported article renounces all his interests and property rights therein.
SECTION 1802. Abandonment of Imported Articles. — The owner or importer of any articles may,
within ten days after filing of the import entry, abandon to the Government all or a part of the articles
included in an invoice, and, thereupon, he shall be relieved from the payment of duties, taxes and all
other charges and expenses due thereon: Provided, That the portion so abandoned is not less than ten
per cent of the total invoice and is not less than one package, except in cases of articles imported for
personal or family use. The article so abandoned shall be delivered by the owner or importer at such
place within the port of arrival as the Collector shall designate, and upon his failure to so comply, the
owner or importer shall be liable for all expenses that may be incurred in connection with the
disposition of the articles.
Nothing in this section shall be construed as relieving such owner or importer from any criminal
liability which may arise from any violation of law committed in connection with the importation of
the abandoned article.
SECTION 1803. Right to Reclaim Article. — The owner or importer of an article impliedly abandoned
may, at any time before it is sold or otherwise disposed of, reclaim such article provided all legal
requirements regarding its importation are complied with and the corresponding duties, taxes and
other charges as well as all expenses incurred as a consequence of the abandonment, are paid.

PART 16

Revenue Regulation 12-99

Section 1. Scope. - Pursuant to the provisions of Section 244, in relation to Section 245 of the
NIRC of 1997, these Regulations are hereby promulgated to implement the provisions of Sections 6, 7,
204, 228, 247, 248 and 249 on assessment of national internal revenue taxes, fees and charges and to
provide the rules governing the extra-judicial settlement of a taxpayer‘s criminal violation of the said
Code or any of its implementing Regulations through payment of a suggested compromise penalty.

Section 2. General Principles. -
2.1 The surcharge and/or interest herein prescribed shall apply to all taxes, fees and
charges imposed under the Code which shall be collected at the same time, in the same manner, and
as part of the tax.

2.2 In case the tax due from the taxpayer is paid on a partial or installment basis, the
interest on the deficiency tax or on the delinquency tax liability of the taxpayer shall be imposed from
due date of the tax until full payment thereof. The interest shall be computed based on the
diminishing balance of the tax, inclusive of interests.

Section 3. Due process requirement in the issuance of a deficiency tax assessment. -
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. - The Revenue Officer who audited the
taxpayer‘s records shall, among others, state in his report whether or not the taxpayer agrees
with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not
amenable, based on the said Officer‘s submitted report of investigation, the taxpayer shall be
informed, in writing, by the Revenue District Office or by the Special Investigation Division, as
the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned
(in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer‘s
payment of his internal revenue taxes, for the purpose of ―Informal Conference,‖ in order to
afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to
respond within fifteen (15) days from date of receipt of the notice for informal conference, he
shall be considered in default, in which case, the Revenue District Office or the Chief of the
Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the
National Office, as the case may be, shall endorse the case with the least possible delay to the
Assessment Division of the Revenue Regional Office or to the Commissioner or his duly
authorized representative, as the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as the case
may be, it is determined that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a
Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the
facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is
based. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN,
he shall be considered in default, in which case, a formal letter of demand and assessment
notice shall be caused to be issued by the said Office, calling for payment of the taxpayer‘s
deficiency tax liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. - The notice for informal
conference and the preliminary assessment notice shall not be required in any of the following
cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer‘s
deficiency tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically
applied the same amount claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded
or transferred to non-exempt persons.

3.1.4 Formal Letter of Demand and Assessment Notice. - The formal letter of demand
and assessment notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the taxpayer‘s deficiency tax or
taxes shall state the facts, the law, rules and regulatins, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice shall be
void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. If
sent by personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the
following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of
the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d)
date of receipt thereof.

3.1.5 Disputed Assessment. - The taxpayer or his duly authorized representative may
protest administratively against the aforesaid formal letter of demand and assessment notice
within thirty (30) days from date of receipt thereof. If there are several issues involved in the
formal letter of demand and assessment notice but the taxpayer only disputes or protests
against the validity of some of the issues raised, the taxpayer shall be required to pay the
deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter
shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the
applicable surcharge and/or interest. No action shall be taken on the taxpayer‘s undisputed
issues. The prescriptive period for assessment or collection of tax or taxes attributable to the
disputed issues shall be suspended.
The taxpayer shall state the facts, the applicable law, rules and regulations, or
jurisprudence on which his protest is based, otherwise, his protest shall be considered void
and without force and effect. If there are several issues involved in the disputed assessment
and the taxpayer fails to state the facts, the applicable law, rules and regulations, or
jurisprudence in support of his protest against some of the several issues on which the
assessment is based, the same shall be considered undisputed issue or issues, in which case,
the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable
thereto.
The taxpayer shall submit the required documents in support of his protest within sixty
(60) days from date of filing of his letter of protest, otherwise, the assessment shall become
final, executory and demandable. The phrase ―submit the required documents‖ includes
submission or presentation of the pertinent documents for scrutiny and evaluation by the
Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his
report of investigation.
If the taxpayer fails to file a valid protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof, the assessment shall
become final, executory and demandable.
If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may
appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said
decision, otherwise, the assessment shall become final, executory and demandable.
In general, if the protest is denied, in whole or in part, by the Commissioner or his duly
authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty
(30) days from date of receipt of the said decision, otherwise, the assessment shall become
final, executory and demandable: Provided, however, that if the taxpayer elevates his protests
to the Commissioner‘s duly authorized representative, the latter‘s decision shall not be
considered final, executory and demandable, in which case, the protest shall be decided by the
Commissioner.
If the Commissioner or his duly authorized representative fails to act on the taxpayer‘s
protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the
required documents in support of his protest, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the
assessment shall become final, executory and demandable.

3.1.6 Administrative Decision on a Disputed Assessment. - The decision of the
Commissioner or his duly authorized representative shall (a) state the facts, the applicable law,
rules and regulations, or jurisprudence on which such decision is based, otherwise, the
decision shall be void, in which case, the same shall not be considered a decision on a disputed
assessment; and (b) that the same is his final decision.

3.1.7 Constructive Service. - If the notice to the taxpayer herein required is served by
registered mail, and no response is received from the taxpayer within the prescribed period
from date of the posting thereof in the mail, the same shall be considered actually or
constructively received by the taxpayer. If the same is personally served on the taxpayer or his
duly authorized representative who, however, refused to acknowledge receipt thereof, the
same shall be constructively served on the taxpayer. Constructive service thereof shall be
considered effected by leaving the same in the premises of the taxpayer and this fact of
constructive service is attested to, witnessed and signed by at least two (2) revenue officers
other than the revenue officer who constructively served the same. The revenue officer who
constrictively served the same shall make a written report of this matter which shall form part
of the docket of this case.

Section 4. Civil Penalties:
4.1 Twenty-Five Percent (25%) Surcharge. - There shall be imposed, in addition to the
basic tax required to be paid, a penalty equivalent to twenty-five percent (25%) thereof, in any of the
following cases:

4.1.1 Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or

4.1.2 Unless otherwise authorized by the Commissioner, filing a return with an
internal revenue officer other than those with whom the return is required to be filed; or

4.1.3 Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or

4.1.4 Failure to pay the full or part of the amount of tax shown on any return required
to be filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.

4.2 Fifty Percent (50%) Surcharge:
4.2.1 In case of willful neglect to file the return within the period prescribed by the
Code, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall
be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on
the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial
underdeclaration of taxable sales, receipts or income, or a substantial overstatement of
deductions, as determined by the Commissioner or his duly authorized representative, shall
constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to
report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared
per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual
deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts
or income or for overstatement of deductions, as mentioned herein: Provided, further, that the
term ―willful neglect to file the return within the period prescribed by the Code‖ shall not apply in
case the taxpayer, without notice from the Commissioner or his authorized representative,
voluntarily files the said return, in which case, only 25% surcharge shall be imposed for late
filing and late payment of the tax in lieu of the above 50% surcharge. Conversely, the 50%
surcharge shall be imposed in case the taxpayer files the return only after prior notice in
writing from the Commissioner or his duly authorized representative.

4.2.2 Section 6 (A) of the Code provides that any tax return filed by a taxpayer ―may be
modified, changed or amended‖ by the taxpayer ―within three (3) years from the date of such filing‖
provided, however, that ―no notice for audit or investigation of such return, statement or declaration
has, in the meantime, been actually served upon the taxpayer.‖ Thus, if upon investigation, it is
determined that the taxpayer‘s originally filed tax return is false and fraudulent, such taxpayer
shall remain liable to the 50% civil penalty regardless that the taxpayer has filed his amended
tax return, if the said amended tax return, however, has been filed only after issuance of the
Letter of Authority for the investigation of the taxpayer‘s tax return or such amendment has
been made in the course of the said investigation.

Section 5. Mode of Procedures in Computing for the Tax and/or Applicable Surcharge. -
Shown hereunder are illustrative cases for the computation and assessment of the tax, inclusive of
surcharge (if applicable) and interest:

5.1 Late filing and late payment of the tax. - Illustration: Income tax return for the
calendar year 1998 was due for filing on April 15, 1999 but the taxpayer voluntarily filed his
tax return, without notice from the BIR, only on June 30, 1999. The tax due per return amounts
to P100,000. In this case, the taxpayer shall be liable for delinquency penalties consisting of
25% surcharge, plus 20% interest per annum, computed from due of the tax until date of
payment, computed as follows:

Calendar Year 1998

Income tax due per return P100,000.00
Add: 25% surcharge for late filing and late
payment (100,000 x 25%) 25,000.00
20% int. p.a. from 4-15-99 to 6-30-99
(100,000 x .0415524) 4,155.24 29,155.24

Total amount due (excluding suggested compromise
for late filing and late payment of the tax) P129,155.24

Only one 25% surcharge shall be imposed for late filing of the return and the late payment of
the tax.

5.2 The tax return is filed on time but filed through an internal revenue officer
other than with whom the return is required to be filed. - Illustration: The taxpayer‘s 1998
income tax return is required to be filed through the authorized agent bank under the
jurisdiction of RDO East Makati. But, without prior authorization from the BIR, the taxpayer
filed his tax return and paid the tax through the authorized agent bank under the jurisdiction
of RDO Davao City. Tax due and paid return is P100,000.00.

Calendar Year 1998

Income tax due per return P100,000.00
Add: 25% surcharge 25,000.00
Total amount due P125,000.00
Less: Amount paid 100,000.00

Amount still due P 25,000.00

5.3 Late filing and late payment due to taxpayer’s wilfull neglect.- Illustration: The
taxpayer did not file his income tax return for the calendar year 1997 which was due for filing
on April 15, 1998. He was notified by the BIR of his failure to file the tax return, for which
reason, he filed his tax return and paid the tax, only after the said notice, on June 30, 1999. The
tax due per return is P100,000.00.

Calendar Year 1997

Income tax due per return P100,000.00
Add: 50% surcharge for willful neglect to
file the return and late payment of the tax
(P100,000 x 50%) 50,000.00

20% int. p.a. fr 4-15-98 to 6-30-99
(P100,000 x .2415524) P24,155.24 P 74,155.24

Total amount due (excluding suggested compromise
for late filing and late payment of the tax) P174,155.24

5.4 Penalty or penalties for deficiency tax. - As a rule, no surcharge is imposed on
deficiency tax and on the basic tax. However, if the amount due inclusive of penalties is not
paid on or before the due date stated on the demand letter, the corresponding surcharge shall
be imposed.

Illustration No. 1: Taxpayer filed on time his income tax return for calendar year 1997
and paid P100,000.00 on April 15, 1998. Upon pre-audit of his return, it was disclosed that he
erroneously computed the tax due. The correct amount of tax due is P120,000.00. The taxpayer
is assessed for deficiency income tax in a letter of demand and assessment notice issued on
June 30, 1999.

Calendar Year 1997

Tax due per pre-audit P120,000.00
Less: Amount assessed and paid per tax return filed P100,000.00
Deficiency income tax P 20,000.00
Add: 20% int. p.a. fr 4-15-98 to 6-30-99
(20,000 x .2415524) P 4,831.05

Amount still due P 24,831.05

Illustration No. 2: ABC CORPORATION filed its income tax return for calendar year
1997 and paid on time its income tax shown thereunder, amounting to P100,00. Said taxpayer
was investigated. Upon verification of its accounting records, it was disclosed that its
deduction, from gross income, of representation expenses in the amount of P200,000.00 did not
meet all the statutory requisites for deductibility. The corporation was duly notified of the said
discrepancy through a Preliminary Assessment Notice. Based on the 35% income tax rate on
corporations applicable in the year 1997, the income tax due after investigation amounts to
P170,000.00 After deduction of income tax paid per return filed, the basic deficiency income
tax amounts to P70,000, excluding penalties. Failing to protest on time against the preliminary
assessment notice, a formal letter of demand and assessment notice was issued on May 31,
1999, requiring payment of the assessment not later than June 30, 1999.

Calendar Year 1997

Tax due per investigation P170,000.00
Less: Income tax paid per return P100,000.00
Deficiency income tax P 70,000.00
Add: 20% int. p.a. fr 4-15-98 to 6-30-99
(20,000 x .2415524) P 16,908.67
Total amount still due P 86,908.67

Illustration No. 3: XYZ CORPORATION filed its income tax return for calendar year
1997 with a net taxable income of P500,000.00. At the applicable income tax rate of 35% for the
year 1997, its income tax amounted to P175,000.00. However, upon investigation, it was
disclosed that its income tax return was false or fraudulent because it did not report a taxable
income amounting to another P500,000.00. On its net income of P1,000,000.00, per
investigation, the income tax due is P350,000.00. Deducting its payment per return filed, the
deficiency, excluding penalties, amounted to P175,000.00. It was duly informed of this finding
through a Preliminary Assessment Notice. Failing to protest on time against the preliminary
assessment notice, a formal letter of demand and assessment notice was issued on May 31,
1999 calling for payment of the deficiency income tax on or before June 30, 1999.
In this case, said corporation is liable for the civil penalties of 50% surcharge for having
filed a false or fraudulent return, plus 20% interest per annum on the deficiency, computed as
follows:

Calendar Year 1997

Tax due per investigation P350,000.00
Less: Income tax paid per return P175,000.00
Deficiency income tax P175,000.00
Add: 50% surcharge for filing a fraudulent or false
return (175,000 x 50%) P 87,500.00
20% int. p.a. fr 4-15-98 to 6-30-99
(20,000 x .2415524) P 42,271.67 P129,771.67

Total amount due P304,771.67

5.5 Late payment of a deficiency tax assessed. - In general, the deficiency tax
assessed shall be paid by the taxpayer within the time prescribed in the notice and demand,
otherwise, such taxpayer shall be liable for the civil penalties incident to late payment.
Illustration: Based on the above Illustration No. 3, Scenario 4, assuming that the
calendar year 1997 deficiency income tax assessment against XYZ CORPORATION, in the
amount of P304,711.67, is not paid by June 30, 1999, the deadline for payment of the
assessment, and assuming further that this assessment has already become final and
collectible. In this case, such corporation shall be considered late in payment of the said
assessment. Assuming, further, that the corporation pays its tax assessment only by July 31,
1999, the civil penalties for late payment shall be computed as follows:

Calendar Year 1997

Total deficiency income tax assessed on May 31, 1999 P304,771.67
Add: surcharge for late payment
(304,771.67 x 25%) P76,192.92
20% int. p.a. fr 7-1-99 to 7-31-99
(304,771.67 x .0166667) P 5,079.54 P 81,272.46

Total amount due (excluding suggested compromise
penalty for late payment) P386,044.13

5.6 Computation of 20% interest per annum in case of partial or installment
payment of a tax liability. - Illustration No. 1: In case extended payment of the tax is duly
authorized. - DEF CORPORATION, due to financial incapacity, requested that it be allowed to
pay its income tax liability per return for calendar year 1998, in the amount of P1,000,000.00, in
four (4) monthly installments, starting April 15, 1999. Its request has been duly approved
pursuant to Sec. 53 if the Tax Code.
In this case, no 25% surcharge shall be imposed for late payment of the tax since its
deadline for payment has been duly extended. However, 20% interest per annum for the
extended payment shall be imposed, computed based on the diminishing balance of the
“unpaid amount”, pursuant to the provisions of Section 249 (D) of the Code.
No 25% surcharge on extended payment shall be imposed provided, however, that the
taxpayer‘s request for extension of the period within which to pay is made on or before the
deadline prescribed for payment of the tax due. Conversely, it such request is made after the
deadline prescribed for payment, the taxpayer shall already be treated late in payment, in
which case, the 25% surcharge shall be imposed, even if payment of the delinquency be
allowed in partial amortization.

Example:

Calendar Year 1998

Income tax due per return P1,000,000.00
Less: 1
st
installment of the tax on or before 4-15-99 P 250,000.00
Balance as of 4-15-99 P 750,000.00
Add: 20% int. p.a. from 4-15-99 to 5-15-99
(750,000 x .0166667) P 12,500.03
Amount due on 5-15-99 P 762,500.03
Less: 2
nd
installment on 5-15-99
(250,000 + 12,500.03 interest) P 262,500.03
Balance as of 5-15-99 P 500,000.00
Add: 20% int. p.a. from 5-15-99 to 6-15-99
(500,000 x .0166667) P 8,333.35
Amount due on 6-15-99 P 508,333.35
Less: 3
rd
installment on 6-15-99
(250,000 + 8,333.35 interest) P 258,333.35
Balance as of 6-15-99 P 250,000.00
Add: 20% int. p.a. from 6-15-99 to 7-15-99
(250,000 x .0166667) P 4,166.68
4
th
and final installment on 7-15-99 P 254,166.68

Illustration No. 2: Computation of tax delinquency in case of partial payment of the
tax due without prior BIR authorization for extended payment. -

Example: GHI CORPORATION did not file its final adjustment income tax return for
the calendar year 1998 which was due on April 15, 1999. The BIR informed the corporation of
its failure to file its said tax return and required that it file the same, inclusive of the 25%
surcharge and 20% interest per annum penalties incident to the said omission. On May 15,
1999 it advised that its income tax dye for the said year amounts to P1,000,000.00 but, however,
due to its adverse financial condition at the moment, it will be unable to pay the entire
amount, inclusive of the delinquency penalties. Hence, on May 15, 1999, it made a partial
payment of P400,000.00. Assuming that the BIR demanded payment of the unpaid balance of
its tax obligation payable by June 15, 1999, the unpaid balance of the corporation‘s delinquent
income tax shall be computed as follows:

Calendar Year 1998

Income tax due per return P1,000,000.00
Add: 25% surcharge for late filing and
late payment P250,000.00
20% int. p.a. from 4-15-99 to 5-15-99
(1,000,000 x .0166667) P 16,666.70 P 266,666.70
Amount due as of 5-15-99 P1,266,666.70
Less: partial payment on 5-15-99 P 400,000.00
Balance as of 5-15-99 P 866,666.70
Add: 20% int. p.a. from 5-15-99 to 6-15-99
(866,666.70 x .0166667) P 14,444.47
Amount still due (exclusive of the suggested compromise
penalty for late payment) P 811,111.17

If the said taxpayer fails to pay the amount of P811,111.17 by June a5, 1999, no further
25% surcharge for late payment of the tax shall be imposed. Instead, only 20% interest per
annum shall be imposed against the taxpayer, computed from the due date thereof (i.e., June
15, 1999) until paid. If said taxpayer pays the same on partial payment basis, the 20% interest
per annum shall be computed on the diminishing balance thereof, pursuant to the procedures
in the preceding Illustration No. 1, Section 6.6. hereof.
Section 6. Suggested Compromise Penalty in Extra-judicial Settlement of a Taxpayer’s
Criminal Violation. - Section 204 of the Tax Code of 1997 provides that “All criminal violations may
be compromised except: (a) those already filed in court, or (b) those involving fraud.” This means
that, in general, the taxpayer‘s criminal liability arising from his violation of the pertinent provision
of this Code may be settled extra-judicially instead of the BIR instituting against a taxpayer a criminal
action in Court. A compromise in extra-judicial settlement of the taxpayer‘s criminal liability for his
violation is consensual in character, hence, may not be imposed on the taxpayer without his consent.
Hence, the BIR may only suggest settlement of the taxpayer‘s liability through a compromise.
The extra-judicial settlement of the taxpayer‘s criminal liability and the amount of the
suggested compromise penalty shall conform with the schedule of compromise penalties provided
under Revenue Memorandum Order No. 1-90 or as hereafter revised.



REPUBLIC OF THE PHILIPPINES V. CA, AND NIELSON & CO., INC.
149 SCRA 351

FACTS:
In a demand letter, dated 16 July 1955, the Commissioner of Internal Revenue assessed
Nielson & Co. deficiency taxes for years 1949 to 1952. CIR reiterated its demand for payment through
2 subsequent letters (24 April 1956 and 9 Feb 1960). Nielson did not contest the assessment in the
Court of Tax Appeals. On the theory that the assessment had become final and executory, the CIR
filed a complaint for collection of the said amount against Nielson. However, for failure to serve
summons upon Nielson, the complaint was dismissed without prejudice. In 1962, the case was re-
filed. The Court of First Instance rendered a decision against Nielson. On appeal, the Court of
Appeals reversed.
The CIR claims that the demand letter showed an imprint indicating that the original thereof
was released and mailed on 4 August 1955 by the Chief, Records Section of the BIR, and that the
original letter was not returned to said Bureau; thus, said demand letter must be considered to have
been received by the private respondent. According to the CIR, if service is made by ordinary mail,
unless the actual date of receipt is shown, service is deemed complete and effective upon the
expiration of five (5) days after mailing. As the letter demand dated 16 July 1955 was actually mailed
to Nielson, there arises the presumption that the letter was received by Nielson in the absence of
evidence to the contrary.

ISSUE: Whether Nielson is liable for deficiency taxes

HELD:
While the contention of the CIR is correct that a mailed letter is deemed received by the
addressee in the ordinary course of mail, still, this is merely a disputable presumption, subject to
controversion, and a direct denial of the receipt thereof shits the burden upon the party favored by
the presumption to prove that the mailed letter was indeed received by the addressee.
Since the CIR has not adduced proof that Nielson had in fact received the demand letter dated
16 July 1955, it cannot be assumed that Nielson received said letter. Records, however, show that the
CIR wrote Nielson a follow-up letter reiterating its demand for the payment of taxes as originally
demanded in the first letter. This follow-up letter is considered a notice of assessment in itself which
was duly received by Nielson in accordance with its own admission.
The taxpayer‘s failure to appeal within 30 days from receipt of the letter with the Court of Tax
Appeals, makes the assessment final, executory and demandable. Nielson is now barred from
disputing the correctness of the assessment or from invoking any defense that would reopen the
question of its liability on the merits.



COLLECTOR OF INTERNAL REVENUE V. BAUTISTA
105 PHIL 1326

FACTS:
The spouses Bautista filed and paid their income tax separately. Upon investigation by the
BIR, the returns were consolidated and a deficiency was assessed against them which was mainly
based on the alleged under declaration of the proceeds of the sale of the wife‘s share in the Tabora
property and the overvaluation of the cost thereof. On appeal, the Court of Tax Appeals, overruled
their defense of prescription and ordered the spouses to pay the deficiency income tax.

ISSUE: Whether the spouses are liable for the deficiency tax

HELD:
Yes. The income tax returns of the spouses for 1947 are deemed filed as of March 1, 1948. The
Tax Code provides that the deficiency assessment must be made within 5 years after the return was
filed, and the assessment is deemed made when the notice to this effect is released, mailed or sent by
the Collector to the taxpayer, for the purpose of giving effect to said assessment. The Code does not
require that the notice be received by the taxpayer within the said period of 5 years. In the case at bar,
the Collector assessed the deficiency tax on January 21, 1953 and notice to this effect was sent or given
due course prior to March 1, 1953, for it was received in the Office of the City Treasurer of Quezon
City, on February 13, 1953, and hence, before the expiration of said period.

REPUBLIC OF THE PHILIPPINES V. RICARTE
140 SCRA 1

FACTS:
On 2 March 1959, Ricarte filed his income tax return for the year 1958. On 6 April 1959, the
Office of the Collector of Internal Revenue made the corresponding assessment and fixed at P222 the
defendant‘s income tax liability. Defendant paid his income tax in 2 equal installments.
On 20 June 1959, RA 2343 took effect which provides that the taxpayer assesses himself, files
his return and pays the tax as shown in his return upon filing thereof.
In 1961, the BIR, after investigation, found that Ricarte had a deficiency in his income tax for
1958. An assessment notice with the corresponding audit sheet and letter of demand was mailed to
Ricarte on January 25, 1961. For failure to pay his deficiency income tax, a complaint with the City
Court of Cebu was filed. The trial court dismissed the case on the ground of prescription because the
assessment was made by the BIR on April 6, 1959, but the case was filed only on January 14, 1966 or
more than 5 years.

ISSUE: Whether the deficiency income tax can still be collected thru a judicial proceeding

HELD:
Although a subsequent notice of assessment was allegedly made and sent to Ricarte on 19 Jan
1961, there was no evidence presented by the Collector that Ricarte actually received a copy of the
assessment notice regarding the alleged deficiency tax. Even in the stipulation of facts entered into
between the parties, there is no stipulation showing that the appellant actually received the
subsequent notice of assessment. Thus, the prescriptive period should be counted from 6 April 1959,
the date when the BIR assessed the income tax return of Ricarte. From the said date until the filing of
the case on Jan 14, 1966, 6 years and nine months had elapsed. Verily, the action had already
prescribed.


ADVERTISING ASSOCIATES, INC. V. CA
133 SCRA 765

FACTS:
Advertising Associates alleged that it sold in 1949 its advertising agency business to Philippine
Advertising Counsellors, that its business is limited to the making, construction and installation of
billboards and electric signs and making and printing of posters, signs, handbills, etc. It contends
that it is a media company, not an advertising company.
It paid sales taxes for selling billboards, electric signs, calendars, posters, realty dealer‘s tax for
leasing billboards and electric signs and 3% contractor‘s tax for repairing electric signs. The CIR
subjected to 3% contractor‘s tax its rental income from billboards and electric signs. The CIR required
Advertising to pay contractor‘s tax for 1967-1972, including 25% surcharge on its income from
billboards and neon signs.
Advertising contested the assessments in its letters of June 25, 1973 (for the 1967-1971
deficiency taxes) and March 7, 1974 (for the 1972 deficiency). The Commissioner reiterated the
assessments in his letters of July 12 and Sept 16, 1974. The taxpayer requested the cancellation of the
assessments in its letters of Sept 13 and Nov 21, 1974. Inexplicably, for about 4 years there was no
movement in the case. Then, on March 31, 1978, the CIR resorted to the summary remedy of issuing 2
warrants of distraint. These were served upon the taxpayer on April 18 and May 25, 1978. More than
a year later, the Acting Commissioner Plana wrote a letter dated May 23, 1979 in answer to the
requests of the taxpayer for the cancellation of the assessments and the withdrawal of the warrants of
distraint on the ground that the rental income of Advertising constituted fees or compensation for its
advertising services and requested the taxpayer to pay the deficiency taxes within 10 days from
receipt of the demand. The letter was received by Advertising on June 18, 1979. Nineteen days later,
it filed its petition for review. In its resolution, the Tax Court enjoined the enforcement of the
warrants of distraint. The Tax Court dismissed the petition and did not resolve the case on the
merits. It ruled that the warrants of distraint were the Commissioner‘s appealable decisions. Since
Advertising appealed from the decision of May 23, 1979, the petition for review was filed out of time.
Advertising contends that the collection of the tax had already prescribed based on the Tax
Code which provides that the tax may be collected by distraint or levy or by a judicial proceeding
begun ―within 5 years after the assessment of the tax.‖

ISSUE: Whether the tax has already prescribed

HELD:
The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments. The
warrants of distraint were served upon it on April 18 and May 25, 1978 or within five years after the
assessment of the tax. Obviously, the warrants were issued to interrupt the five-year prescriptive
period. Its enforcement was not implemented because of the pending protests of the taxpayer and its
requests for withdrawal of the warrants which were eventually resolved in Commissioner Plana‘s
letter.
It should be noted that the Commissioner did not institute any judicial proceeding to collect
the tax. He relied on the warrants of distraint to interrupt the running of the statute of limitations. He
gave the taxpayer ample opportunity to contest the assessments but at the same time safeguarded the
Government‘s interest by means of the warrants of distraint.


PART 17


PART 18
7. Regulations

a) Revenue Regulations No. 12-85

Procedure covering administrative protests
on assessments of the BIR
May 27, 1985

1) Post-reporting notice –
a. A report is made
b. The taxpayer is given notice for an informal conference.
c. The notice contains a summary of findings as basis for the informal conference.
d. The report is forwarded to the higher authorities

* If the taxpayer agrees to the proposed assessment in writing OR the proposed assessment has
been paid, the required notice may be dispensed with.

2) Pre-Assessment notice -
a. Commissioner/ duly authorized representative finds that taxes should be assessed.
b. Taxpayer is again notified of the Commissioner‘s findings
i. Notice shall be made in writing
ii. Sent to the taxpayer at the address indicated in the return, or his last known
address as stated in his notice of change of address.

* If the taxpayer agrees to the proposed assessment in writing OR the proposed assessment has
been paid, the required notice may be dispensed with.

3) Taxpayer‘s reply: Time period -
a. 15 days from receipt of the pre-assessment notice.
b. An extension of not more than 10 days can be granted if:
i. There is a written request by the taxpayer
ii. The case is meritorious

4) Taxpayer‘s reply: Venue -
a. In Regional Office cases – with the Assessment branch.
b. In National Office cases – with the Sector Audit Review Division or the National Audit
Review Division, as the case may be.
c. If sent by the Withholding Tax Division – then file with the *@#!! Withholding Tax Division

5) If the taxpayer replies:
a. The taxpayer or his representative shall be allowed to examine the records of the case
b. The taxpayer can present his arguments in writing protesting the proposed assessment
c. The Commissioner will then decide whether or not to approve the report.

6) If the taxpayer fails to reply: - report of the investigation is given due course.

7) PROTEST

a. Definitions of grounds:
i. Request for Reconsideration: refers to a plea of re-evaluation of the assessment
on the basis of existing records without need of additional evidence. It may
involve both a question of fact or of law or both
ii. Request for Reinvestigation – refers to a plea of re-evaluation of an assessment
on the basis of newly discovered or additional evidence that a taxpayer
intends to present in the reinvestigation. It may also involve a question of
fact or law or both.

b. Effect of failure to file protest – The assessment is final and appealable and the
taxpayer is precluded from disputing the assessment.
c. When to file – within 30 days from receipt of assessment.
d. Where to file –
i. In Regional office cases: Collection Branch of the region
ii. National Office cases: Collection office
e. Payment of the portions of the tax to which taxpayer agrees. This is also stated in
the written request (see vi. of the next part). The protest shall not be deemed validly filed
unless payment of the agreed portion of the tax is paid first.
f. Contents of the written request:
i. Name of taxpayer and address for the immediate past 3 taxable years
ii. Nature of request (whether reinvestigation or reconsideration) specifying
newly discovered evidence he intends to present if it is a request for
investigation.
iii. The taxable periods covered
iv. The assessment number
v. Date of receipt of assessment notice or letter of demand
vi. Itemized statement of the findings to which the taxpayer agrees as a basis for
computing the tax due, (this is the amount which should be paid immediately
upon filing of the protest)
vii. The itemized schedule of the adjustments with which the taxpayer does not
agree.
viii. A statement of facts and/or law in support of the protest.

g. Submit a Waiver of the Statute of Limitations in favor of the Government.

8) Appeal – within 30 days. (I guess from receipt of decision)

9) Change of Address -
a. Written notice must be given to the District Revenue Officer of the district
having jurisdiction over his former legal residence and/or place of business
b. Copy furnished to
i. the Revenue District Officer having jurisdiction over his new legal
residence or place of business;
ii. the Revenue Computer Center; and
iii. the Receivable Accounts Division, BIR, National Office, Quezon City.
c. Failure to do so, any communication referred to in these regulations previously
sent to his former legal residence or business address as appearing on his tax return for the
period involved shall be considered valid and binding for purposes of the period within
which to reply.




b) Revenue Regulation No. 2-90

Restoring the requirement to register and stamp
receipts and invoices prior to their use
May 25, 1990

―Bookkeeping Regulations‖ – Registration and stamping of receipts and invoices

1) Before being used, the printed receipts, sales or commercial invoices shall be registered with
the revenue district officer where the principal place of business of the taxpayer is located.
2) This should be done within 30 days from the date of printing of the same.
3) When you register, an appropriate stamp is placed to evidence the registration. The stamp
should be placed on the registered booklet or pad:
a. On the face of the taxpayer‘s copy of the authority to print as well as on the front cover;
b. On the back of the middle invoice or receipt; and
c. On the back of the last invoice or receipt
4) This should be authenticated by the signature of the officer authorized to place the stamp
thereon.
5) Unused or unissued receipts and invoices in the possession of taxpayers and have been
printed prior to the effectivity of these regulations must also be registered with the RDO
where the principal place of business of the taxpayer is located within 30 days from the
effectivity of these regulations.




c) Revenue Regulation No. 12-99

Implementing the Provisions of the NIRC (1997)
Governing the Rules on Assessment of
NIR Taxes, Civil Penalties, and Interest, and
The Extra-judicial Settlement of a Taxpayer‘s Criminal
Violation of the Code Through Payment of
a Suggested Compromise Penalty

1) Procedure in the issuance of a deficiency tax assessment:
a. Notice for INFORMAL CONFERENCE
i. Revenue Officer who made the audit will make a report, stating whether the
taxpayer agrees with the finding.
ii. If the taxpayer is not amenable, the taxpayer shall be informed in writing of the
discrepancies in the taxpayer‘s payment of taxes.
iii. Taxpayer has 15 days from date of receipt of the notice to respond
iv. Failure to respond: Taxpayer is declared in default
1. The report is endorsed to the Assessment Division of the Revenue
Regional Office, to the Commissioner, or his duly authorized
representative, as the case may be, for appropriate review and issuance of
the tax assessment, if warranted.
v. Assessment Division/ Commissioner/ representative will review and evaluate
the report

b. Preliminary Assessment Notice (PAN)
i. The Division/ Commissioner/ Representative makes a finding that there is
deficiency tax or taxes
ii. Preliminary Assessment Notice (PAN) is issued by registered mail at the least.
iii. PAN shows in detail:
1. facts
2. law
3. rules and regulations
4. jurisprudence on which the proposed assessment is based
iv. Taxpayer has 15 days to respond to the PAN
v. Failure to respond = default
vi. In case of DEFAULT: The Formal Letter of demand and Assessment notice (Formal
Assessment Notice… FAN?) will be issued, calling for payment of the deficiency
tax, inclusive of applicable penalties.

c. EXCEPTIONS to Prior Notice of Assessment – These are the cases where there is no
need for the notices for ―Informal Conference‖ or the PAN, and the FAN is sufficient
i. When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax appearing on the face of the tax return filed by the
taxpayer; or
ii. When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
iii. When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of the succeeding taxable year; or
iv. When the excise tax due on excisable articles has not been paid; or
v. When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been
sold, traded or transferred to non-exempt persons.

d. Formal Letter of Demand and Assessment Notice (FAN) –
i. It is issued by the Commissioner or duly authorized representative
ii. It shall state:
1. facts;
2. law;
3. rules and regulations; or
4. jurisprudence on which the assessment is based.
iii. Failure to State these facts makes the FAN void
iv. It shall be sent to the taxpayer only by
1. registered mail or
2. personal delivery – If by personal delivery, the taxpayer or his duly
authorized representative shall acknowledge receipt thereof in the
dulplicate copy of the letter of demand, showing:
a. His name;
b. Signature;
c. Designation and authority to act for and in behalf of the taxpayer, if
acknowledged received by a person other than the taxpayer
himself; and
d. Date of receipt thereof.

2) Disputed Assessments:
a. Taxpayer has 30 days from the receipt of the FAN to make an administrative protest.
b. If the taxpayer disputes only some of the issues regarding the validity of some of the
assessments,
i. the taxpayer has to pay the deficiency taxes for those which he does not dispute
ii. a collection letter shall be issued to the taxpayer calling for the deficiency tax for
the undisputed issues, inclusive of applicable surcharge and/or interest.
iii. No action shall be taken on the taxpayer‘s disputed issues until the taxpayer has
paid the deficiency tax or taxes attributable to the said undisputed issues.
iv. The prescriptive period for assessment or collection of the tax or taxes
attributable to the disputed taxes shall be suspended.
c. The taxpayer shall state:
i. The facts;
ii. Applicable law;
iii. Rules and Regulations; or
iv. Jurisprudence on which his protest is based.
d. Failure to so state these matters will make the protest void and without force and effect.
e. Taxpayer files the letter of protest
f. Within 60 days from filing the letter, he has to submit supporting documents.
Otherwise, the assessment shall become final, executory and demandable.
g. Failure to make the protest within 30 days shall make the assessment final, executory
and demandable.

3) Decision of the Commissioner/ his representative must state:
a. The facts, applicable law, rules and regulations or jurisdprudence on which the decision
is based. Failure to so state makes the decision void, in which case, the same shall not be
considered a decision on a disputed assessment; and
b. That the same is his final decision.

4) Appeal to the CTA–
a. If the Commissioner denies the protest in whole or in part, the taxpayer may appeal to
the Court of Tax Appeals within 30 days from receipt of the decision. However: If the
decision was made by the Commissioner’s duly authorized representative, the taxpayer should
elevate the matter to the Commissioner within 30 days from the receipt of the representative’s
decision, in which case, the protest shall then be decided by the Commissioner.
b. If the Commissioner or his representative fails to act on the protest within 180 days
from the date of the submission of the required documents in support of the protest¸ the
taxpayer can appeals to the CTA within 30 days from the lapse of the 180 day period.
5) Constructive Service:
a. If notice is sent by registered mail, and no response is received from the taxpayer within
the prescribed period from date and posting thereof in the mail, the same shall be
considered actually or consturcitively received by the taxpayer.
b. If the notice is personally served on the taxpayer/ duly authorized representative who
refused to acknowledge receipt thereof, there is also constructive notice. In which case:
i. Constructive service thereof shall be considered effected by leaving the same in
the premises of the taxpayer and
ii. This fact of constructive service is attested to, witnessed and signed by at least 2
revenue officers other than the officer who constructively served the same.
iii. The revenue officer who constructively served the same shall make a written
report of this matter which shall form part of the docket of his case.

6) Computing surcharge – Mode of Procedures in Computing for the Tax and/or Applicable Surcharge.
Illustrative cases for the computation and assessment of the tax, inclusive of surcharge (if
applicable) and interest (This is copied from the RR)

CODAL PROVISIONS:
Civil Penalties. —
4.1 Twenty-Five Percent (25%) Surcharge. — There shall be imposed, in addition to the basic
tax required to be paid, a penalty equivalent to twenty-five percent (25%) thereof, in any the
following cases:
4.1.1 Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or
4.1.2 Unless otherwise authorized by the Commissioner, filing a return with an
internal revenue officer other than those with whom the return is required to be
filed; or
4.1.3 Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
4.1.4 Failure to pay the full or part of the amount of tax shown on any return required
to be filed under the provisions of this Code or rules and regulations, or the full
amount of tax due for which no return is required to be filed, on or before the
date prescribed for its payment.
4.2 Fifty Percent (50%) Surcharge:
4.2.1 In case of willful neglect to file the return within the period prescribed by the Code, or
in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent
(50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud:
Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner or his duly
authorized representative, shall constitute prima facie evidence of a false or fraudulent return:
Provided, further, That failure to report sales, receipts or income in an amount exceeding
thirty percent (30%) of that declared per return, and a claim of deductions in an amount
exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for
substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as
mentioned herein:
Provided, further, that the term "willful neglect to file the return within the period prescribed
by the Code" shall not apply in case the taxpayer, without notice from the Commissioner or his
authorized representative, voluntarily files the said return, in which case, only 25% surcharge
shall be imposed for late filing and late payment of the tax in lieu of the above 50% surcharge.
Conversely, the 50% surcharge shall be imposed in case the taxpayer files the return only after
prior notice in writing from the Commissioner or his duly authorized representative.

4.2.2 Section 6 (A) of the Code provides that any tax return filed by a taxpayer "may be
modified, changed or amended" by the taxpayer "within three (3) years from date of such filing"
provided, however, that "no notice for audit or investigation of such return, statement or declaration
has, in the meantime, been actually served upon the taxpayer." Thus, if upon investigation, it is
determined that the taxpayer's originally filed tax return is false or fraudulent, such taxpayer shall remain
liable to the 50% civil penalty regardless that the taxpayer has filed his amended tax return, if the said amended
tax return, however, has been filed only after issuance of the Letter of Authority for the investigation of the
taxpayer's tax return or such amendment has been made in the course of the said investigation.

COMPUTATIONS

a) Late filing and late payment of the tax. — Illustration: Income tax return for the calendar year
1998 was due for filing on April 15, 1999 but the taxpayer voluntarily filed his tax return, without
notice from the BIR, only on June 30, 1999. The tax due per return amounts to P100,000. In this case,
the taxpayer shall be liable for delinquency penalties consisting of 25% surcharge, plus 20% interest
per annum, computed from due date of the tax until date of payment, computed as follows:

Calendar Year 1998

Income tax due per return P100,000.00

Add: 25% surcharge for late filing and late
payment (P100,000.00 times 25%) P25,000.00

20% int. p.a. from 4-15-99 to 6-30-99
(P100,000.00 times .0415524) P4,155.24 P29,155.24
———— —————
Total amount due (excluding suggested compromise for
late filing and late payment of the tax) P129,155.24
=========
Only one 25% surcharge shall be imposed for late filing of the return and late payment of the
tax.

b) The tax return is filed on time but filed through an internal revenue officer other than with whom the
return is required to be filed. — Illustration: The taxpayer's 1998 income tax return is required to be filed
through the authorized agent bank under the jurisdiction of RDO East Makati. But, without prior
authorization from the BIR, the taxpayer filed his tax return and paid the tax through the authorized
agent bank under the jurisdiction of RDO Davao City. Tax due and paid per return is P100,000.00.

Calendar Year 1998
Income tax due per return P100,000.00
Add: 25% surcharge P25,000.00
—————
Total amount due P125,000.00
Less: Amount paid P100,000.00
—————
Amount still due P25,000.00
=========

c) Late filing and late payment due to taxpayer's willful neglect. — Illustration: The taxpayer did not
file his income tax return for the calendar year 1997 which was due for filing on April 15, 1998. He
was notified by the BIR of his failure to file the tax return, for which reason, he filed his tax return
and paid the tax, only after the said notice, on June 30, 1999. The tax due per return is P100,000.00.

Calendar Year 1997

Income tax due per return P100,000.00

Add: 50% surcharge for willful neglect to
file the return and late payment of the tax
(P100,000 times 50%) P50,000.00

20% int. p.a. fr. 4-15-98 to 6-30-99
(P100,000.00 times .2415524) P24,155.24 P74,155.24
————— —————
Total amount due (excluding suggested compromise
for late filing and late payment of the tax) P174,155.24
=========

d) Penalty or penalties for deficiency tax. — As a rule, no surcharge is imposed on deficiency tax
and on the basic tax. However, if the amount due inclusive of penalties is not paid on or before the
due date stated on the demand letter, the corresponding surcharge shall be imposed.

Illustration No. 1: Taxpayer filed on time his income tax return for calendar year 1997 and paid
P100,000.00 on April 15, 1998. Upon pre-audit of his return, it was disclosed that he erroneously
computed the tax due. The correct amount of tax due is P120,000.00. The taxpayer is assessed for
deficiency income tax in a letter of demand and assessment notice issued on June 30, 1999.

Calendar Year 1997

Tax due per pre-audit P120,000.00
Less: Amount assessed and paid per tax return filed P100,000.00
—————
Deficiency income tax P20,000.00

Add: 20% int. p.a. from 4-15-98 to 6-30-99
(P20,000.00 times .2415524) P4,831.05
—————
Amount still due P24,831.05
=========
Illustration No. 2: ABC CORPORATION filed its income tax return for calendar year 1997 and
paid on time its income tax shown thereunder, amounting to P100,000. Said taxpayer was
investigated. Upon verification of its accounting records, it was disclosed that its deduction, from
gross income, of representation expenses in the amount of P200,000.00 did not meet all the statutory
requisites for deductibility. The corporation was duly notified of the said discrepancy through a
Preliminary Assessment Notice. Based on the 35% income tax rate on corporations applicable in the
year 1997, the income tax due after investigation amounts to P170,000.00. After deduction of income
tax paid per return filed, the basic deficiency income tax amounts to P70,000, excluding penalties.
Failing to protest on time against the preliminary assessment notice, a formal letter of demand and
assessment notice was issued on May 31, 1999, requiring payment of the assessment not later than
June 30, 1999.

Calendar Year 1997

Income tax due per investigation P170,000.00
Less: Income tax paid per return P100,000.00
—————
Deficiency income tax P70,000.00
Add: 20% int. p.a. fr. 4-15-98 to 6-30-99 (P70,000 times .2415524) P16,908.67
—————
Total amount still due P86,908.67
=========

Illustration No. 3: XYZ CORPORATION filed its income tax return for calendar year 1997 with
a net taxable income of P500,000.00. At the applicable income tax rate of 35% for the year 1997, its
income tax amounted to P175,000.00. However, upon investigation, it was disclosed that its income
tax return was false or fraudulent because it did not report a taxable income amounting to another
P500,000.00. On its net income of P1,000,000.00, per investigation, the income tax due is P350,000.00.
Deducting its payment per return filed, the deficiency, excluding penalties, amounted to P175,000.00.
It was duly informed of this finding through a Preliminary Assessment Notice. Failing to protest on
time against the preliminary assessment notice, a formal letter of demand and assessment notice was
issued on May 31, 1999 calling for payment of the deficiency income tax on or before June 30, 1999.
In this case, said corporation is liable for the civil penalties of 50% surcharge for having
filed a false or fraudulent return, plus 20% interest per annum on the deficiency,
computed as follows:
Calendar Year 1997
Income tax due per investigation P350,000.00
Less: Income tax paid per return P175,000.00
—————
Deficiency income tax P175,000.00
Add: 50% surcharge for filing a fraudulent or false
return (P175,000.00 times 50%) P87,500.00
20% int. p.a. fr. 4-15-98 to 6-30-99
(P175,000.00 times .2415524) P42,271.67 P129,771.67
————— —————
Total amount due P304,771.67
=========

e) Late payment of a deficiency tax assessed. — In general, the deficiency tax assessed shall be
paid by the taxpayer within the time prescribed in the notice and demand, otherwise, such taxpayer
shall be liable for the civil penalties incident to late payment.
Illustration: Based on the above Illustration No. 3, Scenario 4, assuming that the calendar year
1997 deficiency income tax assessment against XYZ CORPORATION, in the amount of P304,771.67, is
not paid by June 30, 1999, the deadline for payment of the assessment, and assuming further that this
assessment has already become final and collectible. In this case, such corporation shall be considered
late in payment of the said assessment. Assuming, further, that the corporation pays its tax
assessment only by July 31, 1999, the civil penalties for late payment shall be computed as follows:

Calendar Year 1997
Total deficiency income tax assessed on May 31, 1999 P304,771.67
Add: 25% surcharge for late payment
(P304,771.67 times 25%) P76,192.92
20% interest p.a. from 7-1-99 to
7-31-99 (P304,771.67
times .0166667) P5,079.54 P81,272.46
————— —————
Total amount due (excluding suggested compromise
penalty for late payment) P386,044.13
=========

f) Computation of 20% interest per annum in case of partial or installment payment of a tax liability.
— Illustration No. 1: In case extended payment of the tax is duly authorized. — DEF CORPORATION,
due to financial incapacity, requested that it be allowed to pay its income tax liability per return for
calendar year 1998, in the amount of P1,000,000.00, in four (4) monthly installments, starting April 15,
1999. Its request has been duly approved pursuant to Sec. 53 of the Tax Code.
In this case, no 25% surcharge shall be imposed for late payment of the tax since its deadline
for payment has been duly extended. However, 20% interest per annum for the extended payment
shall be imposed, computed based on the diminishing balance of the "unpaid amount", pursuant to
the provisions of Section 249 (D) of the Code.
No 25% surcharge on extended payment shall be imposed provided, however, that the
taxpayer's request for extension of the period within which to pay is made on or before the deadline
prescribed for payment of the tax due. Conversely, if such request is made after the deadline
prescribed for payment, the taxpayer shall already be treated late in payment, in which case, the 25%
surcharge shall be imposed, even if payment of the delinquency be allowed in partial amortization.
Example:
Calendar Year 1998

Income tax due per return P1,000,000.00
Less: 1st installment of the tax on or before 4-15-99 P250,000.00
——————
Balance as of 4-15-99 P750,000.00
Add: 20% int. p.a. from 4-15-99 to 5-15-99
(P750,000.00 times .0166667) P12,500.03
——————
Amount due on 5-15-99 P762,500.03
Less: 2nd installment on 5-15-99 (P250,000.00 plus
P12,500.03 interest) P262,500.03
——————
Balance as of 5-15-99 P500,000.00
Add: 20% int. p.a. from 5-15-99 to 6-15-99
(P500,000.00 times .0166667) P8,333.35
——————
Amount due on 6-15-99 P508,333.35
Less: 3rd installment on 6-15-99 (P250,000.00 plus
P8,333.35 interest) P258,333.35
——————
Balance as of 6-15-99 P250,000.00
Add: 20% int. p.a. from 6-15-99 to 7-15-99
(P250,000.00 times .0166667) P4,166.68
——————
4th and final installment on 7-15-99 P254,166.68
===========

Illustration No. 2: Computation of tax delinquency in case of partial payment of the tax due
without prior BIR authorization for extended payment. —
Example: GHI CORPORATION did not file its final adjustment income tax return for the
calendar year 1998 which was due on April 15, 1999. The BIR informed the corporation of its failure
to file its said tax return and required that it file the same, inclusive of the 25% surcharge and 20%
interest per annum penalties incident to the said omission. On May 15, 1999 it advised that its income
tax due for the said year amounts to P1,000,000.00 but, however, due to its adverse financial condition
at the moment, it will be unable to pay the entire amount, inclusive of the delinquency penalties.
Hence, on May 15, 1999, it made a partial payment of P400,000.00. Assuming that the BIR demanded
payment of the unpaid balance of its tax obligation payable by June 15, 1999, the unpaid balance of
the corporation's delinquent income tax shall be computed as follows:
Calendar Year 1998

Income tax due per return P1,000,000.00
Add: 25% surcharge for late filing and
late payment P250,000.00
20% interest per annum from 4-15-99
to 5-15-99 (P1,000,000.00
times .0166667) P16,666.70 P266,666.70
————— —————
Amount due as of 5-15-99 P1,266,666.70
Less: Partial payment on 5-15-99 P400,000.00
—————
Balance as of 5-15-99 P866,666.70
Add: 20% interest per annum from 5-15-99
to 6-15-99 (P866,666.70 times .0166667) P14,444.47
—————
Amount still due (exclusive of the suggested compromise
penalty for late filing and late payment P811,111.17
=========

If the said taxpayer fails to pay the amount of P811,111.17 by June 15, 1999, no further 25%
surcharge for late payment of the tax shall be imposed. Instead, only the 20% interest per
annum shall be imposed against the taxpayer against the taxpayer, computed from due date
thereof (i.e., June 15, 1999) until paid. If said taxpayer pays the same on partial payment
basis, the 20% interest per annum shall be computed on the diminishing balance thereof,
pursuant to the procedures in the preceding Illustration No. 1, Section 6.6 hereof.

7) Final Provisions of the RR:

SECTION 6. Suggested Compromise Penalty in Extra-judicial Settlement of a Taxpayer's
Criminal Violation. — Section 204 of the Tax Code of 1997 provides that "All criminal violations may
be compromised except: (a) those already filed in court, or (b) those involving fraud." This means
that, in general, the taxpayer's criminal liability arising from his violation of the pertinent provision of
the Code may be settled extra-judicially instead of the BIR instituting against the taxpayer a criminal
action in Court. A compromise in extra-judicial settlement of the taxpayer's criminal liability for his
violation is consensual in character, hence, may not be imposed on the taxpayer without his consent.
Hence, the BIR may only suggest settlement of the taxpayer's liability through a compromise.
The extra-judicial settlement of the taxpayer's criminal liability and the amount of the
suggested compromise penalty shall conform with the schedule of compromise
penalties provided under Revenue Memorandum Order No. 1-90 or as hereafter
revised.
SECTION 8. Effectivity. —
8.1 General Rule. — In general, the provisions of these Regulations shall be effective
beginning January 1, 1998 pursuant to the provisions of Section 8 of R.A. No. 8424, otherwise known
as the National Internal Revenue Code of 1997.
8.2 Computation of Surcharge and Interest on Deficiency Tax Assessment. — Any
deficiency tax assessment issued beginning January 1, 1998 shall be governed by the rules prescribed
in these Regulations.




d) Revenue Regulation No. 2-78

Printing of Receipts or Sales or Commercial Invoices

1) Definitions:
a. Printer – any person, natural or juridical, engaged in the process or business of
producing any printed matter.
b. Receipt – a written admission or acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods, debtor and creditor, or person
rendering services and client or customer.
c. Sales or commercial invoice – a written account of goods sold or services rendered and the
prices charged therefore, or
i. A list of goods consigned and the value at which the consignee is to receive them,
or
ii. Any other list by whatever name it is known which is used in the ordinary
course of business evidencing sale and transfer or agreement to sell or transfer
goods and services e.g. purchase orders; job orders; provisional and temporary
receipts, etc.;
- EXCEPT
(1) freight stub receipts;
(2) passage tickets; and
(3) amusement tickets and other similar receipts which are
governed by Revenue Regulations NO. V-1, as amended.

2) Presenting your books, registers, records etc.
a. Persons required to keep books of accounts, internal revenue books, records or receipts
and disbursements, additional registers, and other records, invoices and receipts for
recording their transactions as prescribed in these regulations.
b. Person puts on the front cover:
i. The kind of book, register, or record,
ii. The name and business address of the owner,
iii. Citizenship and number of the alien registration certificate if an alien
iv. Kind of business engaged in
v. Tax Numeric Code Number
vi. Number of the privilege tax receipt issued for the business
c. Approving officer will Authenticate and register the books.
d. If the books, register or records presented for approval is a continuation of previous
books etc, the approving officer will have a different method of annotation.
e. Presentation is made for approval and registration
f. Place: the RDO of the principal place of business
g. Keeping of books: the register or records which have been approved shall be kept
showing such information such as:
i. The date of approval;
ii. The name and address of the taxpayer;
iii. His citizenship;
iv. The number of the alien registration certificate, if an alien;
v. The kind of business
vi. Tax Numeric Code Number
vii. Number of privilege tax receipt issued for the business, if any;
viii. The kind, volume, number of pages or sheets of the book etc.
h. Every book, register or record so approved and registered shall be serially numbered
for each taxpayer.

3) Authority to print receipts, sales, or commercial invoices:
a. File an application for authority to print (there‘s an annex)
b. File with the RDO
c. File where the principal place of business of the printer is located
d. Copy the application in quadruplicate
e. Taxpayer must duly attest
f. Accompany application with four draft copies of the receipts or invoices to be printed
as well as the job order issued by the printer to the taxpayer.

4) After approval, the original copy of the authority to print shall be retained by the printer, the
duplicate furnished to the taxpayer for purposes of the registration.

5) Registration and Stamping of receipts and invoices:
a. Registered with the RDO where principal place of business of the taxpayer is located
b. Within 30 days form the date of the invoice issued by the printer.
c. The registration is evidenced by an appropriate stamp:
i. On the face of the taxpayer‘s copy of the authority to print
ii. On the front cover,
iii. On the back of the middle page
iv. On the back of the last invoice or receipt of the registration booklet or pad
d. This stamp must be authenticated by the signature of the officer authorized to place the
stamp thereon.




e) Revenue Memorandum Circular No. 48-90

Counting of the Three-year Prescriptive Period

Except in cases of filing a false or fraudulent return, or failure to file a return, the prescriptive
period for assessment is 3 years from the time the return is filed. After this, such tax may be collected
by distraint or levy or garnishment or by a proceeding in court within (3) years after assessment of
the tax.
It seems that it was the practice of the officers to issue assessments on the last possible day of
the prescriptive period. Example, return is filed on April 15, 1989, the assessment will be issued on
April 15, 1992.
The problem with this is that in the case of LEAP YEARS, there could be possible controversy
as to whether the assessment was issued within the prescriptive period. Therefore:
The 3 years are counted in the same way as that prescribed in the Civil Code, as enunciated in
National Marketing Corporation (NAMARCO) vs. Tecson (1969). Therefore, one should count a year as
containing 365 days x 3 = 1,095 days before the prescriptive period ends. However, as an internal
regulatory measure, the officers were instructed to send the assessment notices at least 90 days before
the 3 year prescriptive period, or 1,095.

6.k.

CIR v. CA and Lucio Tan et. al.
GR No. 119322, June 4 1996

FACTS:
On June 1 1993, the President issued a Memorandum creating a Task Force to investigate the
tax liabilities of manufacturers engaged in tax evasion scheme, such as selling products through
dummy marketing corporations to avoid payment of correct internal revenue tax, to collect from
them any tax liabilities discovered from such investigation, and to file the necessary criminal actions
against those who may have violated the tax code.
The CIR then assessed Fortune Tobacco for 7B representing underpayment deficiency income,
ad valorem and value-added tax for the year 1992 with the request that the said amount be paid
within thirty (30) days upon receipt thereof. Within 30 days from receipt of the assessment, Fortune
filed a motion for reconsideration.
Before the resolution of the motion for reconsideration, the CIR filed a complaint with the DOJ
against Fortune and its officers for fraudulent tax evasion for nonpayment of the correct income tax,
ad valorem and VAT for the year 1992. Fortune declared their taxes to amount to 11B, while CIR
found that the taxes as declared by their ―daily manufacturer‘s sworn statements‖ amounted to 16B,
amounting to evasion of ad valorem taxes in the sum of 5B. The CIR claimed that Fortune, as a
manufacturer, would sell their cigarettes at a lower wholesale price to dummy corporations and
individuals, who would in turn sell the cigarettes at a higher cost.
During the preliminary investigations, subpoenas were issued. Meanwhile, Fortune et. al.
filed a motion to enjoin the preliminary investigation proceedings. RTC granted the Injunction of the
preliminary investigations on the ground that the Motion for Reinvestigation filed by Lucio Tan et. al.
(LT) was 1) a prejudicial question that should be determined before the case for tax evasion could
continue; and 2) that the case was filed in violation of LT‘s right to due process. Later, LT also asked
for a TRO with respect to two other preliminary investigations for tax evasion cases. The Court of
Appeals upheld the ruling of the trial court. CIR goes to the SC on certiorari.

ISSUE: Was the Preliminary Injunction proper? YES

SC: PRESUMPTION OF REGULARITY: Section 127(b) in relation to Section142(c) of the NIRC
provides for the manner by which ad valorem taxes should be imposed with respect to goods that are
sold wholesale. Under these provisions, the law, specifically Section 142(c), requires that the
corresponding tax on cigarettes shall be levied, assessed and collected at the rates based on the
"manufacturer's registered wholesale price." This obviously means that the taxpayer makes a
determination of its wholesale price first, and then registers it. The determination of wholesale price
by the taxpayer is also under the close supervision of the Revenue Enforcement Officers who are
detailed on a 24-hour basis in the premises of the manufacturer to secure production and removal of
finished products. This is to ensure that the reports filed by the taxpayer are accurate.
Since Fortune‘s registered manufacture‘s wholesale price was duly approved by the BIR and
made under its strict supervision, then it is presumed that when Fortune declared its taxes based on
its registered wholesale price, such amount was correct. In such case, and in the absence of contrary
evidence, it was premature to conclude that private respondents made fraudulent returns or willfully
attempted to evade payment of taxes due. "Willful" means "premeditated; malicious; done with
intent, or with bad motive or purpose, or with indifference to the natural consequence . . ." "Fraud" in
its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions,
and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage taken of
another." The only way the CIR can so prove that Fortune‘s registered wholesale price was incorrect
is to also impute fraud and connivance on the part of the BIR officials themselves. There was no
allegation to this effect.

PROCEDURE FOR CRIMINAL PROSECUTION: Before Fortune can be prosecuted for tax evasion
under Secs. 253 and 255, the fact that there was deficiency income for the periods in question should be
established. When Fortune received its tax assessment from the CIR, it had 30 days from receipt of the
assessment to move for reconsideration. If this was denied, then Fortune would have had another 30
days from the receipt of the decision of the CIR to appeal to the Court of Appeals. Since Fortune
made a timely motion for reconsideration, the CIR should render a decision on this matter before
filing a criminal case for tax evasion. The criminal case could be rendered moot should the CIR find
that there was no deficiency income to begin with.
The Court also distinguished this case from the ruling in Ungad v. Cusi where the Court ruled
that that the lack of a final determination of Fortune's exact or correct tax liability is not a bar to
criminal prosecution, and that while a precise computation and assessment is required for a civil
action to collect tax deficiencies, the Tax Code does not require such computation and assessment
prior to criminal prosecution. The Court said there must be a prima facie showing of a willful attempt
to evade taxes. There was a willful attempt to evade tax in Ungad because of the taxpayer's failure to
declare in his income tax return "his income derived from banana sapplings."

DUE PROCESS: 1) While the general rule is that an injunction will not prosper during the
preliminary investigation stage, the Court found that this case fell under one of the exceptions
enunciated in Brocka v. Enrile.
2) The subpoena was issued with precipitate haste.
3) The complaint of the prosecutors was based on a ―Daily Manufacturer‘s Sworn Statements‖
submitted by the taxpayer. However, this document was never presented.

6.l
CIR v. CTA and Fortune Tobacco
GR No. 119761, Aug. 29, 1996

FACTS: On various dates, the Philippine Patent Office issued to the corporation separate certificates
of trademark registration over "Champion," "Hope," and "More" cigarettes. The initial position of the
CIR was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the
World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the
names of 'Hope' to ‗Luxury' and 'More to 'Premium More', thereby removing the said brands from the
foreign brand category.
RA 7654 was later enacted changing the tax rates of cigarettes. Two days before the effectivity
of this law, the CIR issued a RMC declaring that Hope, More, and Champion would be reclassified as
‗locally manufactured cigarettes bearing a foreign brand‘. It declared that as long as the cigarettes
bore a foreign brand, regardless of whether the foreign owner allowed the local manufacturer to use
the foreign name, the cigarettes would still be classified as foreign, and subject to higher ad valorem
tax of 55%.
The CIR assessed Fortune based on this RMC, declaring that Fortune was liable for deficiency
taxes. Fortune filed a Motion for Reconsideration but this was denied. It then appealed to the CTA.
The CTA agreed with Fortune, and said that the assessment for deficiency ad valorem tax should be
cancelled. It said that the assessment was incorrect because the reclassification of the cigarettes as
locally manufactured bearing a foreign brand subject to the 55% ad valorem tax ―is found to be
defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the
brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section
1142(c)(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified as other
locally manufactured cigarettes and taxed at 45% or 20% as the case may be.‖ The Court of Appeals
upheld the CTA decision.
On certiorari before the Supreme Court, the CIR claims that the RMC was merely an
interpretative ruling by the BIR which can thus become effective without any prior need for notice
and hearing, nor publication, and that its issuance is not discriminatory since it would apply under
similar circumstances to all locally manufactured cigarettes. Thus, the ruling could be immediately
applied to Fortune.

ISSUE: Was the RMO binding even without the notice and publication requirements? No

SC: Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the
effective implementation of the provisions of the National Internal Revenue Code. Let it be made
clear that such authority of the Commissioner is not here doubted. Like any other government
agency, however, the CIR may not disregard legal requirements or applicable principles in the
exercise of its quasi-legislative powers.
The Court then distinguished between a legislative rule, and an interpretative rule:
A legislative rule is in the nature of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws must have the benefit of public
hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this
connection, the Administrative Code of 1987 provides:
"Public Participation. — If not otherwise required by law, an agency shall, as far as practicable,
publish or circulate notices of proposed rules and afford interested parties the opportunity to submit
their views prior to the adoption of any rule.
"(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall
have been published in a newspaper of general circulation at least two (2) weeks before the first
hearing thereon.
"(3) In case of opposition, the rules on contested cases shall be observed.
"In addition such rule must be published. On the other hand, interpretative rules are
designed to provide guidelines to the law which the administrative agency is in charge
of enforcing."

It should be understandable that when an administrative rule is merely interpretative in
nature, its applicability needs nothing further than its bare issuance for it gives no real consequence
more than what the law itself has already prescribed. When, upon the other hand, the administrative
rule goes beyond merely providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter
to be duly informed, before that new issuance is given the force and effect of law.
A reading of the RMC (37-93), particularly considering the circumstances under which it has
been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking
in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1)
of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope
Luxury," "Premium More" and "Champion" within the classification of locally manufactured
cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new
law would have its amendatory provisions applied to locally manufactured cigarettes which at the
time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the
questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the
category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax.
Hence, without the RMC, the enactment of RA 7654, would have had no new tax rate consequence on
private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and
"Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax
rate, the now disputed RMC had to be issued. In so doing, the BIR not simply interpreted the law;
verily, it legislated under it quasi-legislative authority. The due observance of the requirements of notice, of
hearing, and of publication should not have been then ignored.

UNIFORM TAXATION: There is also a violation of uniformity of taxation. Uniformity requires that
all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing
both in privileges and liabilities. Thus, all taxable articles or kinds of property of the same class must
be taxed at the same rate and the tax must operate with the same force and effect in every place
where the subject may be found. It is thus apparent that the CIR did not similarly classify other
cigarettes who are also locally manufactured foreign brands such as Palm Tree, Golden Key, and
Cannon, among others.


6.m.
CIR V. Pascor Realty & Dev. Corp.
GR No. 128315, June 29, 1999

FACTS: CIR Revenue Officers examined Pascor Realty‘s (PR) books of account for the years ending
1986-1988. Instead of an assessment, the CIR filed a criminal complaint for tax evasion in the DOJ.
PR requested for a reconsideration/ reinvestigation, but CIR denied. PR appealed this decision to the
CTA contending that the Joint Affidavit submitted by the Revenue Examiners and appended to the
criminal complaint can be considered an assessment. The CIR filed a Motion to Dismiss on the
ground that the CTA had no jurisdiction over the subject matter of the petition, as there was no formal
assessment issued against PR.
The CTA and CA denied the Motion to Dismiss. They agreed with PR that the criminal
complaint itself can be considered an assessment that can be appealed to the CTA. The Court of
Appeals sustained the CTA by saying that since an assessment is ―simply the statement of the details
and amount of tax due from a taxpayer,‖ the Joint Affidavit in the complaint was sufficient.

ISSUE 2: (as stated in the syllabus) Is an assessment necessary before filing a criminal
complaint? NO.

SC: Section 222 - specifically states that in cases where a false or fraudulent return is submitted or in
cases of failure to file a return, such as in this case, proceedings in court may be commenced without
an assessment.
Section 205 – clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously.
Ungab v. Cusi – protests could not stop or suspend the criminal action which was independent
of the resolution of the protest in the CTA. This is because the commissioner of internal revenue had,
in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case
against a taxpayer or to do both.
… Moreover, the criminal charge need only be supported by a prima facie showing of failure to
file a required return. This fact need not be proven by an assessment.


ISSUE 1: Can the criminal complaint be considered an assessment? NO.
SC: While neither the NIRC nor the revenue regulations governing the protest of assessments
provide a specific definition or form of an assessment, the NIRC defines the specific functions and
effects of an assessment. The issuance of an assessment is vital in determining the period of limitation
regarding its proper issuance and the period within which to protest it. Examples:
a) Internal Revenue taxes must be assessed within 3 years from the last day within which to
file a return;
b) In case of a fraudulent return with intent to evade, it is 10 years from the time it was
submitted, or from the failure to file a return.
c) An assessment must be protested within 30 days from receipt thereof.

An assessment must be sent to and received by a taxpayer, and must demand payment of the
taxes described therein within a specific period. It should also be stressed that the said
document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only
when the collector of internal revenue releases, mails or sends such notice to the taxpayer. In
this case, the Joint Affidavit only contained a computation, but not a demand, nor a period of
payment.



FINISHED.
Thank you to CJ, Joanne, Dyes, Madel, Excel, Mia, Mysty, Arab, Anna, Celine, Denice, Pia, Mervin,
Arpee, Yamyam, Abby, Irene & Trina!!

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