TAXATION

I. GENERAL PRINCIPLES

Tax Avoidance and Tax Evasion

1. Q: Distinguish Tax Avoidance from Tax Evasion.

A: Tax avoidance (or tax minimization) is a tax saving device within the means sanctioned by law, hence,
legal. Tax evasion (or tax dodging), on the other hand, is a scheme used outside of those lawful means
to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil
or criminal liabilities.

Doctrine of Equitable Recoupment

2. Q: What is Doctrine of Equitable Recoupment?

A: This doctrine states that a tax claim for refund, which is prevented by prescription, may be allowed to
be used as payment for unsettled tax liabilities.

NOTE: This is a common law principle and is not applicable in our jurisdiction. If this will be allowed,
both the collecting agency and the taxpayer might be tempted to delay and neglect the pursuit of their
respective claims within the period prescribed by law.

Compromise

3. Q: What is meant by compromise?

A: A compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or
put an end to one already commenced. (Art. 2028, Civil Code)

4. Q: Who are the persons allowed to enter into compromise?

A: The following persons are allowed to enter into compromise:

(a) Commissioner of Internal Revenue – may enter, under certain conditions, into a compromise for both
the civil and criminal liabilities of the taxpayer (NIRC)

(b) Collector of Customs – with respect to customs duties limited to cases where legitimate authority is
specifically granted. (Tariff Code)

(c) Customs Commissioner – subject to the approval of the Secretary of Finance, in cases involving the
imposition of fines, surcharges and forfeitures (Tariff Code)

(d) Local Chief Executives (under Local Government Code) – civil (not criminal) liability is not prohibited
form being compromised (Arts. 2034 & 2035, Civil Code)

5. Q: Under what conditions may the Commissioner of Internal Revenue be authorized to: a.
Compromise the payment of any internal revenue tax?
A: The Commissioner of Internal Revenue may be authorized to compromise the payment of any
internal revenue tax where:

a) A reasonable doubt as to the validity of the claim against the taxpayer exists; or
b) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.

6. Q: State and discuss briefly whether the following cases may or may not be compromised:

a. Delinquent accounts;

b. Cases under administrative protest, after issuance of the final assessment notice to the
taxpayer, which are still pending;

c. Criminal tax fraud cases;

d. Criminal violations already filed in court;

e. Cases where final reports of reinvestigation or reconsideration have been issued resulting
in the reduction of the original assessment agreed to by the taxpayer when he signed the
required agreement form.

A:

a. Delinquent accounts may be compromised if either of the two conditions is present:

(1) the assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a
clear inability to pay the tax. [Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30- 2002]

b. These may be compromised, provided that it is premised upon doubtful validity of the assessment or
financial incapacity to pay. (ibid)

c. These may not be compromised, so that the taxpayer may not profit from his fraud, thereby
discouraging its commission. (ibid)

d. These may not be compromised in order that the taxpayer will not profit from his criminal acts. (ibid)

e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the
reduction of the original assessment agreed to by the taxpayer when he signed the required agreement
form, cannot be compromised. By giving his conformity to the revised assessment, the taxpayer admits
the validity of the assessment and his capacity to pay the same. (Sec. 2 of Revenue Regulations No. 30-
2002)

Tax Amnesty

7. Q: What is tax amnesty?

A: Tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of violating tax law. It partakes an absolute waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate.
 8. Q: What are the purposes of tax amnesty?

A: The purposes of tax amnesty are as follows:

(1) To give tax evaders who wish to relent a chance to start a clean slate;

(2) To give the government a chance to collect uncollected tax from tax evaders without having to go
through the tedious process of tax case;

9. Q: Distinguish tax amnesty from tax exemption.

A: Tax amnesty us an immunity form all criminal, civil and administrative liabilities arising from non-
payment of taxes; WHILE a tax exemption is an immunity from civil liability. Tax Amnesty applies to past
tax periods , hence of retroactive application WHILE tax exemption has prospective application.

Direct Double Taxation and Indirect Double Taxation

10. Q: Differentiate direct double taxation and indirect double taxation.

A: Direct double taxation is double taxation in the strict sense. This means that the taxpayer is taxed
twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same
purpose. Example: Imposition of final withholding tax on cash dividend and requiring the taxpayer to
declare this tax-paid income in his income tax returns.

On the other hand, indirect double taxation is double taxation in the broad sense. This extends to all
cases in which there is a burden of two or more impositions. It is the double taxation other than those
covered by direct double taxation (CIR v. Solidbank Corp., 436 SCRA 416). Example: Subjecting the
interest income of banks on their deposits with other banks to the 5% gross receipts tax (GRT) despite of
the same income having been subjected to 20% final withholding tax (FWT), is only a case of indirect
double taxation. The GRT is a tax on the privilege of engaging in business while the FWT is a tax on the
privilege of earning income.

Direct Taxes and Indirect Taxes

11. Q: Distinguish “direct taxes” from “indirect taxes".

A: Direct taxes are demanded from the very person who, as intended, should pay the tax which he
cannot shift to another; while an indirect tax is demanded in the first instance from one person with the
expectation that he can shift the burden to someone else, not as a tax, but as part of the purchase price.
(Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]) Examples of direct taxes are income tax, estate tax and
donor’s tax. Examples of indirect taxes are value-added tax, percentage tax and excise tax on excisable
articles.

Regressive Tax

12. Q: What is meant by regressive tax?

A: Regressive taxes are those that decreases as the income of the taxpayer increases

Tax Shifting, Incidence of Taxation, and Impact of Taxation

13. Q: What is the concept of shifting of tax burden?

A: It is the transfer of tax burden to another; the imposition of tax is transferred from the statutory
taxpayer to another without violating the law.

14. Q: what are the ways of shifting the tax burden?

A: tax burden may be shifted through: (FBO)

a. Forward Shifting – when the burden of tax is transferred form the manufacturer then to the
distributor and finally to the ultimate consumer of the product (i.e. VAT)
b. Backward Shifting – when the burden is transferred from the ultimate consumer through the
factors of distribution to the factor of production;
c. Onward Shifting – when tax burden is shifted two or more times either forward or backward

15. Q: Distinguish incidence of taxation from impact of taxation.

A: Impact of taxation is the point on which tax is originally imposed or the one on whom the tax is
formally assessed; while, incidence of taxation is the point on which the tax burden finally rests or
settles down.

16. Q: What is the relation among Impact, Shifting and Incidence of Taxation?

A: The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is
the result.

Powers and Jurisdiction of BIR (Commissioner of Internal Revenue)

17. Q: What are the powers of the Commissioner of Internal Revenue?

A: (IDOM-PD-MAIS) under NIRC

(1) Interpret tax laws (Sec. 4(1))

(2) Decide tax cases (Sec. 4 (2))
(3) Obtain information and to summon, examine and take testimony of persons (Sec. 5, TRAIN Law)
(4) Make assessments and prescribe additional requirements for tax administration and
enforcement, notwithstanding any law requiring the prior authorization pf any government
agency or instrumentality (Sec. 6 (A), TRAIN Law)
(5) Prescribe real property values (Sec. 6 (E))
(6) Delegate powers (Sec. 7)
(7) Make arrests and seizures (Sec. 15)
(8) Assign and reassign internal revenue officers involved in excise tax functions to establishments
where articles subject to excise tax are produced or kept (Sec. 16)
 (9) Impose duties on certain officers (Secs. 95 & 97)
(10)Suspend business operations of taxpayers (Sec. 115)

18. Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If
so, does this power of the Commissioner conflict with RA 1405 (Secrecy of Bank Deposits Law)

A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of:

1. Any taxpayer upon his written consent;

2. A decedent to determine his gross estate;

3. Any taxpayer who has filed an application for compromise of his tax liability by means of financial
incapacity to pay his tax liability;

4. A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign
tax authority pursuant to an international convention or agreement on tax matters to which the
Philippines is a signatory. [Sec. 6(F), NIRC]

The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of
the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a
later legislation

Power of the Secretary of Finance

19. Q: What is the scope of rule-making power of the Secretary of Finance?

A: The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules and
regulations for effective enforcement of the provisions of the Code. (Sec. 244, NIRC)

INCOME TAX

Capital vs. Income

1. Q: Define Income.

A: Income means all wealth that flows into the taxpayer other than as a mere return of capital. It
includes the forms of incomes specifically described as gains and profits including gains derived from the
sale or other disposition of capital assets.

2. Q: Define Income Tax.

A: It is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on
person’s income, emoluments, profits and the like.

Calendar vs. Fiscal Period

3. Q: What are the different taxable periods under the NIRC?

A: Calendar period, Fiscal period, and Short period.

5. Q: Distinguish Calendar period from Fiscal period.

A: In Calendar period, accounting period starts from January 1 to December 31, WHILE in Fiscal period,
accounting period of 12 months ends on the last day of any month other than December. Fiscal period is
allowed only for corporations

Period to File Returns (Corporation vs Individual)

6. Q: When should an individual taxpayer file his income tax return?

A: The return should be filed on or before April of each year covering income for the preceding taxable
year (Sec. 51(c), NIRC)

7. Q: When should a corporation file its income tax return?

A: A corporation may employ either calendar year or fiscal year as a basis for the filing of its annual
income tax return, provided that the corporation shall not change the accounting period employed
without prior approval form the Commissioner. (Sec. 52(B), NIRC)

Types of Philippine Income Tax

8. Q: Enumerate the types of Philippine Income Taxes?

A: The types of Philippine Income Taxes are:

(1) Graduated Income Tax to Individuals
(2) Regular/Normal Corporate Income Tax on Corporation
(3) Minimum Corporate Income Tax on Corporations
(4) Special Income Tax on Certain Corporations
(5) Capital Gains Tax on sale and exchanges of unlisted shares of stock of a domestic corporation
classified as a capital asset
(6) CGT on sale or exchange of real property located in the Philippines classified as capital asset
(7) Final Withholding Tax on certain passive investment income
(8) Final Withholding Tax on income payments made to non-residents
(9) Fringe Benefits Tax
(10)Branch Profit Remittance Tax
(11)Improperly Accumulated Earnings Tax
(12)Gross Income Tax

Realization test vs. Economic test vs. Severance test

9. Q: Distinguish realization test, economic test and severance test?

A: These tests are used to determine whether income is earned for tax purposes.
Under Realization test, income is generally recognized when both of the following conditions are met:
(a) the earning process is complete; and (b) an exchange has taken place.

Under Economic benefit test, any economic benefit to the employee that increases his net worth,
whatever may have been the mode by which it is effected is taxable.

Under Severance test, there is no taxable income until there is a separation from capital of something of
exchangeable value. The income requires a realization of gain. It is also known as the Macomber test.

10. Q: What is the “all events test”? Explain Briefly.

A: The “all events test” is a test applied in the realization of income and expense by an accrual-basic
taxpayer. The test requires (1) the fixing to the right to the income or liability to pay; and (2) the
availability of reasonably accurate determination of such income or liability, to warrant the inclusion of
the income or expense the gross income or deductions during the taxable year.

Doctrine of Proprietary Interest

11. Q: What is the Doctrine of Proprietary Interest?

The doctrine of Proprietary Interest also refers to Economic Benefit Test, which states that any
economic benefit to the employee that increases his net worth, whatever may have been the mode by
which it is effected, is taxable.

Tax-free Exchanges

12. Q: What are tax-free exchanges?

A: Tax-free exchanges refer to (a) transfer to a controlled corporation and (b) merger or consolidation
[Sec. 40 C-2 of NIRC] that are not subject to income tax, capital gains tax, documentary stamp tax and/or
value-added tax, as the case may be.

Gross Income vs. Net Income vs Taxable Income

13. Q: define gross income.

A: Gross income means all income derived from whatever source, including but not limited to
compensation for services in whatever form paid (fees, salaries, wages, commissions); income derived
from the conduct of trade or business or exercise of profession; gains derived from dealings in property;
interests; rents; royalties; dividends; annuities, prizes and winnings; pensions; partner’s distributive
share from the net income of general professional partnership.

14. Q: Distinguish gross income vs net income vs taxable income.

A: Gross income refers to all gains or profit subject to income tax under Sec 34 (A) of the NIRC. Net
income is gross income less statutory deductions. Taxable Income is pertinent items of gross income
specified in NIRC, less deductions, if any, authorized for such types of income by NIRC or other special
laws.

Fringe Benefits

15. Q: A “fringe benefit’ is defined as being any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee. Would it be the
employer or the employee who is legally required to pay an income tax on it? Explain.

A: It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe
benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the
employer, such that, if the tax is not paid the legal recourse of the BIR is to go after the employer. Any
amount or value received by the employee as a fringe benefit is considered tax paid hence, net of the
income tax due thereon. The person who is legally required to pay (same as statutory incidence as
distinguished from economic incidence) is that person who, in case of non-payment, can be legally
demanded to pay the tax

Itemized Deduction vs. Optional Standard Deduction (OSD)

16. Q: What is optional standard deduction?

A: It is a fixed percentage deduction without regard to any actual expenditure, in lieu of the itemized
deductions (Sec. 34(L), NIRC)

17. Q: What are the deductions allowable to a domestic corporation?

A: (1) The taxable income of a domestic corporation, for purposes of determining its MCIT, shall be
computed by deducting from its gross income the itemized deductions allowed under Section 34 of the
NIRC, or instead of the itemized deductions, the 40% OSD;

(2) special deductions allowed to insurance companies under Sec. 37 of the NIRC; and

(3) those granting sales discounts to or employing senior citizens (IRR, R.A. No. 9994)

Capital Asset vs. Ordinary Asset

18. Q: Distinguish a “capital asset" from an “ordinary asset".

A: The term “capital asset” regards all properties not specifically excluded in the statutory definition of
capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or
capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets
and the profits or losses realized must have to be treated as ordinary gains or ordinary losses.

Accordingly, “capital assets” includes property held by the taxpayer whether or not connected with his
trade or business, but the term does not include any of the following, which are consequently
considered “ordinary assets:”
1. stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year;

2. property held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business;

3. property used in the trade or business of a character which is subject to the allowance for
depreciation provided in Section 34 (F) of the Tax Code; or

4. real property used in trade or business of the taxpayer.

The statutory definition of “capital assets” practically excludes from its scope, it will be noted, all
property held by the taxpayer if used in connection with his trade or business.

Branch Profit Remittance Tax

19. Q: What is Branch Profit Remittance Tax?

A: It is the tax imposed on profits remitted by the Philippine branch to the head office based on the
total profits applied or earmarked for remittance without any deduction for the tax component thereof.
It applies to non-resident foreign corporations.

Minimum Corporate Income Tax (MCIT) and Improperly Accumulated Earnings Tax (IAET)

20. Q: To what corporations is MCIT applicable?

A: it is applicable to domestic and resident foreign corporations which are subject to normal corporate
income tax (Sec. 27 (E) and Sec. 28 (A.2), NIRC)

21. Q: To which corporation is IAET applicable?

A: It is a tax in the nature of a penalty to the corporation for the improper accumulation of its earnings,
and a deterrent to the avoidance of tax upon shareholder who are supposed to pay dividends tax on the
earnings distributed to them.

Substantiation Rule ---- ???

Tax Arbitrage Rule ---- ???

Tax Benefit Rule

22. Q: What is the tax benefit rule?

A: This is a general principle in taxation which states that if a taxpayer deducted an item on his income
tax return and enjoyed a tax benefit (reduced his income tax) thereby, and in a subsequent year
recovers all or part of that item, he will recognize gross income in the year the deducted item is
recovered.

The rule has both an inclusionary and an exclusionary component, i.e., the recovery is included in the
taxpayer’s gross income to the extent that the taxpayer obtained a tax benefit from the prior year’s
deduction, and the recovery is excluded to the extent that the prior year’s deduction did not provide a
tax benefit.

Deductions in Sec. 34 which makes reference to Tax Benefit Rule are the following:
1) Taxes [Sec 34(C)(1)]
2) Abandonment Losses [Sec 34 (D)(7)(b)]
3) Bad Debts [Sec 34(E)(1)]

NELCO vs NOLCO

23. What is Net Loss Carry-Over (NELCO) rule?

A: If any tax payer, other than a corporation, sustains in any taxable year a net capital loss, such loss
shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held
for not more than twelve (12) months.

24. What is Net Operating Loss Carry-Over (NOLCO)?

A: It is the excess of allowable deductions over gross business income for any 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 (3) consecutive taxable years immediately following the year of such loss,
provided that: (Requisites)

a. The taxpayer was not exempt from income tax the year the loss was incurred;
b. There has been no substantial change in the ownership of the business or enterprise wherein:
c. AT LEAST 75% of nominal value of outstanding issued shares is held by or on behalf of the same
persons; or
d. AT LEAST 75% of the paid up capital of the corporation is held by or on behalf of the same
persons.

25. Q: Who are entitled to NOLCO?

A: Taxpayers Entitled to NOLCO

a. Individuals engaged in trade or business or in the exercise of his profession (including estates and
trusts);

b. Domestic and resident foreign corporations subject to the normal income tax (e.g., manufacturers
and traders) or preferential tax rates under the Code (e.g., private educational institutions, hospitals,
and regional operating headquarters) or under special laws (e.g., PEZA-registered companies)

26. Q: Distinguish Net Loss Carry-Over (NELCO) from Net Operating Loss Carry-Over (NOLCO).
A: NELCO is a concept in capital gains taxation, enjoyed only by individuals (not corporations), and may
be availed of only during succeeding year WHILE NOLCO is a concept in ordinary income taxation,
enjoyed by corporation (not individuals), and may be availed over a period of three years.

Loss Limitation Rule

26. Q: What is loss limitation rule?

A: Under this rule, losses from sales or exchange capital assets shall be allowed only to the extent of the
gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the
Philippines. A substantial part of whose business is the receipt pf deposits, sells any bond, debenture,
note or certificate or other evidence of indebtedness issued by an corporation, with interest coupons or
in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and
shall not be included in determining the applicability of such limitation to other losses. (Sec 39(C), NIRC)

Capital Expenditure

27. Q: What is capital expenditure?

A: These are expenditures for replacements, alterations, improvements, or additions which prolong the
life of the property .

Note: Capital expenditures are not deductible because they do not help earn income when it is incurred.
However, the proportion of capital expenditures which would help earn income for future periods are
allowed as deductions for depreciation or as amortization.

Transactions at Arm’s Length --- ???

Hold-over/Holding Period

28. Q: What is holding period?

A: It is the length of time the asset has been held by a taxpayer. It covers the period from the date of
acquisition to the date of sale of the particular asset.

29. Q: What is the rule on Holding Period?

A: The following percentages of the gain or loss recognized upon the sale or exchange of a capital asset
shall be taken into account in computing net capital gain, net capital loss, and net income:

1. If the taxpayer is an individual –

• 100% if the capital asset has been held for not more than 12 months; and
• 50% of the capital asset has been held for more than 12 months
2. If the taxpayer is a corporation –
 • 100%, regardless of the holding period of the capital asset [Sec. 39(B), NIRC]

Income Tax – Tax 1 (additional)

New De Minis Benefit – benefits received by an employee by virtue of a Collective Bargaining

Agreement (CBA) and productivity incentive schemes that the total annual monetary value received
from both CBA and productivity incentive schemes combined do not exceed P10,000 per employee per
taxable year (RR No. 1-2015).

Minimum Corporate Income Tax (MCIT) – is imposed on gross income which si arrived at by deducting
the capital sent by a corporation in the sale of its goods.

Fringe Benefit is defined as being any good service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee.

Requisites for deductibility of a loss:

1. They must be ordinary losses that are incurred by a taxable entity as a result of its day to day
operations conducted for profit or otherwise, or casualty losses

2. They must have been losses that ar actually sustained during the taxable year.

3. Must not have been compensated for by insurance or other forms of indemnity.

4. If they are casualty losses, they are of property connected with trade, business, or profession
and the lose arises from fires, storms, shipwreck, or other casualties or from robbery, theft or
embezzlement.

5. Must not have been claimed as a deduction for estate tax purposes in the estate tax return.

REMEDIES

Delinquency vs Deficiency Interest

There are two types of interest:

Deficiency interest is imposed on any deficiency tax due, which will be assessed and collected from the
date prescribed for payment until the full payment or upon the issuance of a notice of demand by the
BIR, whichever comes first.

Delinquency interest, on the other hand, is imposed on the failure to pay the amount of tax due on any
return to be filed, the amount of tax due for which no return is required, or deficiency tax or any
surcharge or interest appearing in the notice of demand.

RR 21-2018 clarifies that deficiency and delinquency interests cannot be imposed simultaneously.

Letter of Authority – it is an official docment that empowers a revenue officer to examine and scrutinize
a taxpayers books of accounts and records to determine the taxpayers correct internal revenue.

Notice of Informal Conference is a written statement issued by the BIR informing the taxpayer of the
discrepancies in the taxpayer’s tax payments for the purpose of conducting an informal conference
wherein the taxpayer will be given an opportunity to present his side of the case.

Sec 112 (VAT Refund), 228 and 229 (Tax Refund)

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales. Provided, finally,
That for a person making sales that are zero-rated under Section 108(B) (6), the input taxes shall be
allocated ratably between his zero-rated and non-zero-rated sales.

(B) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be used in payment of his other internal
revenue taxes.
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or by
his duly authorized representative without the necessity of being countersigned by the Chairman,
Commission on audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the
Commission on Audit.

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided,
however, That a pre-assessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or

(c) 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

(d) When the excise tax due on excisable articles has not been paid; or

(e) When the 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.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required
to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may
be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of
one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and
demandable.

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner wrongfully collected without
authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

Taxpayers Remedies vs. Government Remedies

A. TAXPAYER’S REMEDIES

ADMINISTRATIVE (BIR)

(a) Before payment

(i) Filing a petition or reconsideration or reinvestigation; and

(ii) Enteringintoacompromise

(b) After payment

1. (i) Filing a claim for refund; and

2. (ii) Filing a claim for tax credit

JUDICIAL (CTA/RTC)

(a) Civil action

(i) Appeal to the CTA

(ii) Action to contest forfeiture of chattel; and
(iii) Action for damages

(b) Criminalaction
(i) Filing a criminal complaint against erring BIR officials and employees
B. GOVERNMENT REMEDIES

(1) Administrative remedies

1. (a) Tax lien

2. (b) Levy and sale of real property

3. (c) Forfeiture of real property to the government for want of bidder

4. (d) Further distraint and levy

5. (e) Suspensionofbusinessoperation

6. (f) Non-availability of injunction to restrain collection of tax

(2) Judicial remedies

Tax Assessment – contains not only computation of tax liabilities but also a demand for payment within
a prescribed period; it also signals the time when penalties and protest begin to accrue against taxpayer.

Pre-Assessment Notice (PAN) – is a communication issued by the Regional assessment division or any
other concerned BIR officer, informing a taxpayer who has been audited of the findings of the Revenue
Officer (RO).

Formal Assessment Notice (FAN) – it is a declaration of deficiency taxes issued to a taxpayer who fails to
respond a PAN within the prescribed period of time OR whose reply to the PAN was found without
merit.

Jeopardy Assessment – Sec. 3 (1) of RR No. 30-02, it is a tax assessment made by an authorized RO
without a benefit of complete or partial audit in the light of RO belief that the assessment collection of a
deficiency tax will be jeopardized by delay caused by the taxpayers failure to:

 Comply with audit and investigation requirements

 Substantiate all or any of the deductions

REINVESTIGATION VS. RECONSIDERATION (BPI vs. CIR GR. No. 139736, Oct. 17, 2005)

Reinvestigation – refers to plea for re-evaluation of an assessment on the basis of a newly discovered
evidence or additional evidence that taxpayer intends to present in reinvestigation.
It may also involve a question of fact or law or both.

Reconsideration – refers to a plea for re-evaluation of an assessment on the basis of existing records
without need of additional evidence. It may involve both question of fact or law.

ACTUAL DISTRANT vs. CONSTRUCTIVE DISTRAINT

Actual Distraint Constructive distraint

Made only on the property of a delinquent Made on the property of any taxpayer whether
taxpayer. delinquent or not.

There is taking or possession The taxpayer is merely prohibited from disposing

his property.

Effected by leaving a list of distrained property or

by service of a warrant of distraint or Effected by requiring the taxpayer to sign a
garnishment. receipt of the property or by the revenue office
preparing and leaving a list of such property.

An immediate step for collection of taxes

Not necessarily an immediate step for collection
of taxes

DISTRAINT vs. LEVY

Distraint Levy

Refers to personal property Involves real property

Forfeiture of the property in favor of the Forfeiture is authorized if:

government is not provided
- There is no bidder

- If the highest bid is insufficient to pay the

No rights of redemption taxes, penalties, withholding tax
 There is right of redemption

DEFECIENCY vs. DELINQUENCY TAX

Deficiency Tax Delinquency Tax

The amount imposed by law exceeds amount Exist when the self-assessed tax is not said at all
shown as tax upon return. or was only partially paid.

The amount is determined by the Bir, where When the deficiency tax assessed by the BIR
there is no amount stated in the return. become final and executory.

To be collected, it has to go through the Can be immediately collected

assessment process.

Filing of a civil action for the collection of taxes is

Filing of a civil action during the pendency protest the proper remedy.
is a ground for a Motion to Dismiss (MTD).

Subject to administrative penalties.

Generally, not subject to 25% surcharge.

Surcharge – is a civil penalty imposed by law as an addition to the main tax required to be paid. (SEC.
248, NIRC).

FALSE RETURN vs. FRAUDULENT RETURN

False Return Fraudulent Return

Deviation from the truth, whether intentional or Implies intentional deceitful entry with intent to
not, it may be due to mistake, ignorance evade the taxes due.
carelessness.
TAX AVOIDANCE vs. TAX EVASION

Tax Avoidance Tax Evasion

Is the tax saving devise within the means It is a scheme use outside of those lawful means
sanctioned by law. and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal
liabilities.
This method should be used by the taxpayer in
good faith at arm’s length.

TAX CREDIT vs. TAX REFUND

Tax Credit Tax Refund

Works by applying the refundable amount as Any tax on income that is paid in excess of the
shown on the FAR of a given taxable year, against amount due the government may be refunded,
the estimated quarterly income tax liablities of provided, that a taxpayer properly applies for the
the succeeding taxable year. refund.

There is no prescriptive period for the carrying Prescribes after 2 years from the filing of FAR.
over of the same; it may repeatedly carried over
to succeeding taxable years until fully utilized.

LOCAL TAXATION

Amusement places – SEC 131, include theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances.

Sec. 140. Amusement Tax.

(a) The province may levy an amusement tax to be collected from the propreitors, lessess or
operators of theathers, cinemas, concert halls, circuses, boxing statia and ther places of
amusement at a rate of not more than 10% of the gross receipts from admission fees.
PELIZ LOY REALTY CORP. vs. PROV. Of BENGUET

“However, resorts, swimming pools, bath houses, hot springs & tourist spots are not among those places
expressly mentioned by SEC 140 of Local Government Code as expressly subject to amusement tax.”

REAL ESTATE TAX

Real Estate Tax – is a direct tax on the ownership of lands and buildings or other improvements thereon,
not specifically exempted, and is payable regardless of whether the property is used or not, although the
value may vary in accordance with such factor. The tax is usually singe or indivisible, although the land
and building or improvements erected thereon are assessed separately except when the land and
building or improvements belong to separate owners. (Villanueva vs. Prov. Of Iloilo).

Beneficial Use Doctrine – It is true that said Sec. 234 (a) … exempts from real estate taxes real property
owned by the Republic, unless the beneficial use of the property is, for consideration, transferred to a
taxable person… This exemption, however, must be read in relation with Sec 133 (o) of the LGC, which
prohibits LGUs from imposing taxes or fees of any kind on the national government, its agencies, and
instrumentalities…Thus read together, the provisions allow the Republic to grant the beneficial use of its
property to an agency or instrumentality of the national government. Such grant does not necessarily
result in the loss of the tax exemption.

Doctrine of Primacy of Administrative Remedies – an error in the assessment must be administratively

pursued to the exclusion of ordinary courts whose decisions would be void for lack of jurisdiction. But an
appeal shall not suspend the collection of the tax assessed without prejudice to a later adjustment
pending the outcome of the appeal. (Olivarez vs. Marquez).

EXCISE TAX – a tax upon the performance, carrying on, or exercise of some right, privilege, activity,
calling or occupation. Under Sec. 129, excise tax are those applied to goods manufactured or produced
in the Philippines for domestic sale or consumption or for any other disposition and to things imported.

Two Types:

1. Specific Tax – tax which is based on weight or volume capacity and other physical unit of
measurement.
 2. Ad Valorem Tax – which is based on selling price or other specified value of the goods.

ESTATE TAX - A tax imposed upon the privilege to transmit property at the time of death; the tax should
not be construed as a direct tax on the property of the decedent although the tax is based thereon.

DONOR’S TAX - is a tax on a donation or gift, and is imposed on the gratuitous transfer of property
between two or more persons who are living at the time of the transfer.

VALUE-ADDED TAX (VAT)

Vat is a tax on the value added of a taxpayer arising from taxable sales of goods, properties or services
during the quarter at the rate of zero 0% or 10%.

“Value added” is the difference between the total sales of the taxpayer for the taxable quarter subject
to value added tax and his total purchases for the same period subject also to the value added tax.

Sec. 4.105.-2 of RR No. 16-05

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the Philippines. The seller is the one
statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services.

This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the
time of the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable
for the VAT.

Meaning of the phrase “in the course of trade of business” (Sec. 105)

Sec. 4.105-3 of RR No. 16-05

i. the regular conduct or pursuit of a commercial or economic

activity,

 including transactions incidental thereto,

 ii. by any person regardless of whether or not the person engaged
therein is

 a non-stock, non-profit private organization

(irrespective of the disposition of its net
income) and

 whether or not it sells exclusively to members

or their guests),

 or government entity.

INPUT TAX - The term "input tax" means the value-added tax due from or paid by a VAT-registered
person in the course of his trade or business on importation of goods or local purchase of goods or
services, including lease or use of property, from a VAT-registered person. It shall also include the
transitional input tax determined in accordance with Section 111 of this Code.

II.

OUTPUT TAX - The term "output tax" means the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under Section 236 of this
Code.

GROSS SELLING PRICE - The term "gross selling price" means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on
such goods or properties shall form part of the gross selling price.

GROSS RECEIPTS - The term "gross receipts" means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be performed for
another person, excluding value-added tax.

Gift splitting – it is a device to minimize, if not totally avoid, gift tax liability by spreading the gifts into
separate calendar years in order to arrive at lower taxable bases. It is a legally permissible scheme.

Zero Rated vs. Effectively Zero Rated - What is the difference between zero-rated entities and VAT-
exempt entities?

Zero-rated: (1) It is a taxable transaction but does not result in an output tax, (2) The input VAT on the
purchases of a VAT- registered person with zero-rated sales may be allowed as tax credits or refunded,
(3) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register.
VAT- exempt: (1) Not subject to output tax, (2) The seller in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a VAT invoice or receipt, (3) Registration is optional
for VAT- exempt persons.

Effectively Zero rate/Conditionally Zero rate – it is originally VATable at 12% but by reason of
circumstances the government sought that it be zero rated for a certain period of time.

Zero rated – the transaction is not subject to VAT at all stages.

Exempt – the transaction is not subject to VAT only at a particular stage.

Zero Rated Exempt

The transaction is not subject to VAT at all stages. The transaction is not subject to VAT only at a
The input VAT attributable to the transaction is particular stage.
allowed to be credited against output VAT The input VAT is not allowed to be credited
against output VAT.

Cross Boarder Doctrine/Destination Principle – As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax. Under this principle, goods and services are
taxed only in the country where they are consumed. Thus, exports are zer-rated, while imports are
taxed.

Transactions Deemed Sale

1. Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business.

2. Distribution or transfer to shareholders, investors or creditors

(a) Shareholders or investors as share in the profits of the VAT-registered persons;
(b) Creditors in payment of debt;

3. Consignment of goods if actual sale is not made within 60 days following the date such goods
were consigned

4. Retirement from or cessation of business, with respect to inventories of taxable goods existing
as of such retirement or cessation

CUSTOMS LAW

Tariff – is a list or schedule of articles on which a duty is imposed upon their importation into a country,
with the rates at which they are severally taxed.

Customs Duties – Is the name given to taxes on the importation and exportation of commodities, the
tariff or tax assesses upon merchandise imported from, or exported to a foreign country. (Nestle Ph vs.
CA)
Flexible tariff clause – it refers to the authority given to the President to adjust tariff rates under sec 401
of the TCCP.

Cargo Manifest vs. Bill of Lading

Manifest is a declaration of the entire cargo, bill of lading is but a declaration of a specific part of the
cargo and is a matter of business convenience based exclusively on a contract.

Bill of lading is ordinarily merely a convenient commercial instrument designed to protect the imported
or consignee which a manifest of the cargo is absolutely essential to the exportation or importation of
property in all vessels.

“Entry” under Customs Law:

The term entry in customs law has three meaning. It means:

II. The documents filed at the customs house;

III. The submission and acceptance of the documents

IV. The procedure of passing goods through the customs house.

Smuggling – is committed by a person who:

1. fraudulently imports or brings into the Philippines, or assist in doing so, any article contrary to law or;

2. Received, buy, sell or in any manner facilitate the transportation, concealment or sale of such article
after importation, knowing the same to have been imported contrary to law.