VAT Transactions that are made incidental to the pursuit of a

Sec. 105 (2) The value-added tax is an indirect tax and the commercial or economic activity are considered entered into
amount of tax may be shifted or passed on to the buyer, in the course of trade or business
transferee or lessee of the goods, properties or services. ● “Incidental”: something else as primary; something
necessary, appertaining to, or depending on another,
• This rule shall likewise apply to existing contracts of
which is termed as principal
sale or lease of goods, properties or services at the time ● An isolated transaction is not necessarily
of the effectivity of Republic Act No. 7716. disqualified from being made incidentally in the
course of trade or business
VAT is an indirect tax; business tax
• VAT is a tax on consumption Petitioner’s primary business in the manufacture of garments
for sale abroad
Who are liable for VAT? ● In carrying out its business, petitioner acquired and
1. Any person who, in the course of trade or business - eventually sold a Mercedes Benz to its GM
--- ● Prior to the sale, the motor vehicle formed part of
● sells, barters, or exchanges goods or petitioner’s capital assets
properties (seller or transferor) ● Therefore, the sale of the motor vehicle is an
● leases goods or properties (lessor) incidental transaction because the vehicle was
● renders services (service provider) purchased and used in furtherance of petitioner’s
2. Any person who Imports goods (importer) -- business

What do you mean “in the course of trade or business”? Once an activity has been identified as a business, any
Sec. 105, (par. 2), NIRC supply/sale made while carrying it on is likely to be made in
The phrase "in the course of trade or business" the course or furtherance of business
means the regular conduct or pursuit of a commercial or an ● Thus, a supply/sale in the course or furtherance of
economic activity, including transactions incidental thereto, business includes:
by any person regardless of whether or not the person ○ The disposition of the assets and liabilities
engaged therein is a non-stock, nonprofit private of a business;
organization (irrespective of the disposition of its net income ○ The disposition of a business as a going
and whether or not it sells exclusively to members or their concern; and
guests), or government entity. ○ Anything done in connection with the
The rule of regularity, to the contrary notwithstanding, termination or intended termination of a
services as defined in this Code rendered in the Philippines business
by nonresident foreign persons shall be considered as being
rendered in the course of trade or business. Transactions subject to VAT
SEC. 106. Value-added Tax on Sale of Goods or Properties.
What are transactions “incidental” to the conduct of trade or —
business? Rate and Base of Tax. — There shall be levied, assessed and
collected on every sale, barter or exchange of goods or
The term “incidental” means something necessary, properties, a value-added tax equivalent to twelve percent
appertaining to, or depending upon another which is termed the (12%) of the gross selling price or gross value in money of the
principal, something incident to the main purpose goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor.
a) The term ‘goods or properties’ shall mean all tangible
CS Garments, Inc. vs. Commissioner of Internal Revenue
and intangible objects which are capable of pecuniary
On the instant petition, CS Garments submits that the Second
Division erred in its conclusion that: The isolated sale of petitioner's estimation and shall include:
company vehicle to its General Manager is subject to 10% VAT. i. Real properties held primarily for sale to
customers or held for lease in the ordinary
VAT is imposed on a sale or transaction entered into by a course of trade or business;
person in the course of any trade or business ii. The right or the privilege to use patent,
● A transaction will be characterized as having been copyright, design or model, plan, secret
entered into by a person in the course of trade or formula or process, goodwill, trademark,
business if it is: trade brand or other like property or right;
○ Regularly conducted; and iii. The right or the privilege to use in the
○ Undertaken in pursuit of a commercial or Philippines of any industrial, commercial or
economic activity scientific equipment;
iv. The right or the privilege to use motion
picture films, films, tapes and discs; and
v. Radio, television, satellite transmission and
cable television time.
1
 The term ‘gross selling price’ means the total amount of VAT rate upon satisfaction of the following conditions:
money or its equivalent which the purchaser pays or is 1. The successful establishment and implementation of
obligated to pay to the seller in consideration of the sale, an enhanced VAT refund system that grants refunds of
barter or exchange of the goods or properties, excluding the creditable input tax within ninety (90) days from the
value-added tax. The excise tax, if any, on such goods or filing of the VAT refund application with the Bureau:
properties shall form part of the gross selling price. a. Provided, That, to determine the effectivity of
item no. 1, all applications filed from January
b) The following sales by VAT-registered persons shall 1, 2018 shall be processed and must be
be subject to zero percent (0%) rate: decided within ninety (90) days from the
i. (1) Export Sales.— The term ‘export sales’ filing of the VAT refund application; and
means: The sale and actual shipment of goods b. All pending VAT refund claims as of
from the Philippines to a foreign country, December 31, 2017 shall be fully paid in cash
irrespective of any shipping arrangement that by December 31, 2019.
may be agreed upon which may influence or
determine the transfer of ownership of the Provided, That the Department of Finance shall establish a VAT
goods so exported and paid for in acceptable refund center in the Bureau of Internal Revenue (BIR) and in
foreign currency or its equivalent in goods or the Bureau of Customs (BOC) that will handle the processing
services, and accounted for in accordance and granting of cash refunds of creditable input tax.
with the rules and regulations of the Bangko An amount equivalent to five percent (5%) of the total VAT
Sentral ng Pilipinas (BSP); collection of the BIR and the BOC from the immediately
ii. (2) Sale and delivery of goods to: preceding year shall be automatically appropriated annually and
i. Registered enterprises within a shall be treated as a special account in the General Fund or as
separate customs territory as trust receipts for the purpose of funding claims for VAT refund:
provided under special laws; and Provided, That any unused fund, at the end of the year shall
ii. Registered enterprises within revert to the General Fund.
tourism enterprise zones as declared Provided, further, That the BIR and the BOC shall be required
by the Tourism Infrastructure and to submit to the Congressional Oversight Committee on the
Enterprise Zone Authority (TIEZA) Comprehensive Tax Reform Program (COCCTRP) a quarterly
subject to the provisions under report of all pending claims for refund and any unused fund (b)
Republic Act No. 9593 or The Sales to persons or entities whose exemption under special laws
Tourism Act of 2009. - VETOED by or international agreements to which the Philippines is a
the President] signatory effectively subjects such sales to zero rate.
iii. (3) Sale of raw materials or packaging
materials to a nonresident buyer for delivery B) Transactions Deemed Sale. — The following transactions
to a resident local export-oriented enterprise shall be deemed sale:
to be used in manufacturing, processing, 1. Transfer, use or consumption not in the course of
packing or repacking in the Philippines of the business of goods or properties originally intended for
said buyer’s goods and paid for in acceptable sale or for use in the course of business;
foreign currency and accounted for in 2. Distribution or transfer to:
accordance with the rules and regulations of a. Shareholders or investors as share in the
the Bangko Sentral ng Pilipinas (BSP); profits of the VAT registered persons; or
iv. (4) Sale of raw materials or packaging b. Creditors in payment of debt
materials to export-oriented enterprise whose 3. Consignment of goods if actual sale is not made within
export sales exceed seventy percent (70%) of sixty (60) days following the date such goods were
total annual production; consigned; and
v. (5) Those considered export sales under 4. Retirement from or cessation of business with respect
Executive Order No. 226, otherwise known to inventories of taxable goods existing as of such
as the Omnibus Investments Code of 1987, retirement or cessation.
and other special laws; and
vi. (6) The sale of goods, supplies, equipment (C) Changes in or Cessation of Status of a VAT registered
and fuel to persons engaged in international Person. — The tax imposed in Subsection (A) of this Section
shipping or international air transport shall also apply to goods disposed of or existing as of a certain
operations: Provided, That the goods, date if under circumstances to be prescribed in rules and
supplies, equipment and fuel shall be used for regulations to be promulgated by the Secretary of Finance, upon
international shipping or air transport recommendation of the Commissioner, the status of a person as
operations a VAT-registered person changes or is terminated.

Provided, That subparagraphs (3), (4), and (5) hereof shall be (D) Sales Returns, Allowances and Sales Discounts. — The
subject to the twelve percent (12%) value-added tax and no value of goods or properties sold and subsequently returned or
longer be considered export sales subject to zero percent (0%) for which allowances were granted by a VAT-registered person
2
may be deducted from the gross sales or receipts for the quarter deemed a sale, barter or exchange of goods or properties
in which a refund is made or a credit memorandum or refund is under Sec. 4.106-7 paragraph (a) hereof, or where the
issued. Sales discount granted and indicated in the invoice at the gross selling price is unreasonably lower than the actual
time of sale and the grant of which does not depend upon the market value.
happening of a future event may be excluded from the gross The gross selling price is unreasonably lower
sales within the same quarter it was given than the actual market value if it is lower by more than
30% of the actual market value of the same goods of the
(E) Authority of the Commissioner to Determine the same quantity and quality sold in the immediate locality
Appropriate Tax Base. — The Commissioner shall, by rules on or nearest the date of sale.
and regulations prescribed by the Secretary of Finance,
determine the appropriate tax base in cases where a transaction For transactions deemed sale, the output tax shall be based
is deemed a sale, barter or exchange of goods or properties on the market value of the goods deemed sold as of the time
under Subsection (B) hereof, or where the gross selling price of the occurrence of the transactions enumerated in Sec.
4.106-7(a)(1),(2), and (3) of these Regulations.
is unreasonably lower than the actual market value.
However, in the case of retirement or cessation of
Sale of goods or properties business, the tax base shall be the acquisition cost or the
1. Actual sale current market price of the goods or properties, whichever is
2. Transaction Deemed sale lower.

The following transactions shall be deemed sale: In the case of a sale where the gross selling price is
1. Transfer, use or consumption not in the course of unreasonably lower than the fair market value, the actual
business of goods or properties originally intended for market value shall be the tax base.
sale or for use in the course of business;
2. Distribution or transfer to: 3. Sale or exchange of services
a. Shareholders or investors as share in the 4. Importation of goods
profits of the VAT registered persons; or
i. NOTE: Property dividends which VAT BASE
constitute stocks in trade or 1. Sale of Goods – Gross selling price or gross value in money
properties primarily held for sale or a. In cases where a transaction is a deemed sale,
lease declared out of retained barter or exchange of goods or where the
earnings on or after January 1, 1996 selling price is unreasonably lower than the
and distributed by the company to actual market value, the Commissioner shall
its shareholders shall be subject to determine the appropriate tax base.
VAT based on the zonal value or fair b. The gross selling price is unreasonably lower
market value at the time of than the actual market value if it is lower by
distribution, whichever is more than 30% of the actual market value of
applicable. the same goods of the same quantity and
b. Creditors in payment of debt quality sold in the immediate locality on or
nearest the date of sale
3. Consignment of goods if actual sale is not made within c. The output tax shall be based on the market
sixty (60) days following the date such goods were value of the goods deemed sold as of the time
consigned; and of the occurrence of the transactions
4. Retirement from or cessation of business with respect enumerated above in numbers 1, 2, and 3.
to inventories of taxable goods existing as of such i. However, in the case of retirement
retirement or cessation. or cessation of business, the tax base
shall be the acquisition cost or the
Note: The following circumstances shall, among others, give current market price of the goods or
rise to transactions "deemed sale" for purposes of this properties, whichever is lower.
Section; d. In the case of a sale where the gross selling
1. Change of ownership of the business. price is unreasonably lower than the fair
a. There is a change in the ownership of the market value, the actual market value shall be
business when a single proprietorship the tax base. (Sec. 4.106-7, RR No. 16 –
incorporates; or the proprietor of a single 2005)
proprietorship sells his entire business. e. Nonetheless, if one of the parties in the
2. Dissolution of a partnership and creation of a new transaction is the government as defined and
partnership which takes over the business. contemplated under the Administrative Code,
the output VAT on the transaction shall be
Important: The CIR shall determine the based on the actual selling price
appropriate tax base in cases where a transaction is
3
 Gross Selling Price - It means the total amount of money
or its equivalent which the purchaser pays or is obligated to For this purpose, “unrelated party” shall not include
pay to the seller in consideration of the sale, barter or taxpayer’s employees, partners, affiliates (parent, subsidiary
exchange of goods or properties, excluding the value-added and other related companies), relatives by consanguinity or
tax. The excise tax, if any, on such goods or properties affinity within the fourth (4th) civil degree, and trust fund where
shall form part of the gross selling price. (Sec. 106(A)(1), the taxpayer is the trustor, trustee or beneficiary, even if covered
NIRC) by an agreement to the contrary. (Sec. 11, RR No. 04- 2007)

Allowable deductions from the GSP: 3. Importation of Goods – Total value used by the Bureau of
In computing the taxable base during the month or quarter, the Custom
following shall be allowed as deductions from gross selling
price: The total value used by the Bureau of Customs in determining
• Discounts tariff and customs duties plus customs duties, excise taxes, if
a. Determined and granted at the time of sale any, and other charges, (such as postage, commission, and
similar charge) such tax to be paid by the importer prior to the
b. Which are expressly indicated in the invoice;
release of such goods from customs custody.
c. The amount thereof forming part of the gross
sales duly recorded in the books of accounts; If the valuation used by the BOC in computing customs duties
d. The grant of which is not dependent upon the is based on volume or quantity of the imported goods, the
happening of a future event; and landed cost shall be the basis for computing VAT.
• Sales returns and allowances for which a proper credit • Landed cost consists of the invoice amount,
or refund was made during the month or quarter to the customs duties, freight, insurance and other
buyer for sales previously recorded as taxable sales. charges.
(Sec. 106(D), NIRC • If the goods imported are subject to excise tax, the
excise tax shall form part of the tax base.
Note: Exception: Sales discount indicated in the invoice at the
time of sale, the grant of which is not dependent upon the The same rule applies to technical importation of goods sold
happening of a future event, may be excluded from the gross by a person located in a Special Economic Zone to a
sales within the same month/quarter it was given. customer located in a customs territory.

Zero- Rated and VAT Exempt Transactions

2. Sale or exchange of services – Gross Receipts
What is a VAT-exempt transaction?
Gross receipts = It pertains to the total amount of money or its
equivalent representing the contract price, compensation,
An Exempt transaction involves goods or services which, by
service fee, rental or royalty, including the amount charged for
their nature, are specifically listed in and expressly exempted
materials supplied with the services and deposits and advanced
from the VAT under the Tax Code, without regard to the tax
payments: (1) actually or (2) constructively received during the
status --VAT-exempt or not --of the party to thetransaction.
taxable quarter for the services performed or to be performed
• In VAT-exempt sales, the taxpayer/seller shall not bill
for another person,
any output tax on his sales to his customers and
excluding VAT, except those amounts earmarked for
corollary, is not allowed any credit or refund of the
payment to unrelated third (3rd) party or received as
input taxes he paid on his purchases.
reimbursement for advance payment on behalf of
another which do not redound to the benefit of the • This non-crediting of input taxes is exempt
payor (service provider). transactions is the underlying reason why the NIRC
adopted the rule on apportionment of tax credits under
A payment is a payment to a third (3rd) party if the same is Section 104(A) whenever a VAT registered taxpayer
made to settle an obligation of another person. Such obligation engages in other VAT taxable and non-VAT taxable
should be evidenced by the sales invoice/official receipt issued sales.
by the said third party to the customer/client of the service
provider What is a zero-rated transaction?
The output tax rate is set at zero.
An advance payment is an advance payment on behalf of • When applied to the tax base, such rate obviously
another if the same is paid to a third (3rd) party for a present or results in no tax chargeable against the purchaser.
future obligation of said customer or client which obligation is • The seller of such transactions charges on output tax
evidenced by a sales invoice or official receipt issued by the but can claim a refund or tax credit certificate for the
creditor (3rd party) to the customer or client (the VAT previously charged by suppliers. (AT&T
aforementioned another party) for the sale of goods or services Communications Services Phils., Inc. v. CIR, G.R. No.
by the former to the latter. 182364, August 3, 2010)
4
 o No VAT shall be shifted or passed-on by: exemption. — The VAT exemption on importation and VAT
 VAT registered sellers or suppliers zero rating on local purchases shall only apply to goods and
from the Customs Territory on their services directly and exclusively used in the registered
sale, barter or exchange of goods, project or activity of a registered export enterprise, for a
properties or services to the subject maximum period of seventeen (17) years from the date of
registered Freeport Zone enterpises. registration, unless otherwise extended under the SIPP.
• Simply put, the difference lies in the input tax. The direct and exclusive use for the registered project or
o In VAT-exempt transactions there is no input
activity refers to raw materials, inventories, supplies,
tax credit allowed.
equipment, goods, packaging materials, services, including
• In the case of 0% rated transattion of a VAT registered
person, the sale of goods or properties is multiplied by provision of basic infrastructure, utilities, and maintenance,
0% thus his output tax is P 0.00. repair and overhaul of equipment, and other expenditures
o If the person is VAT registered, he may claim directly attributable to the registered project or activity
such input tax as tax credit or refund. without which the registered project or activity cannot be
carried out;
Provided, That the VAT zero-rating on local
purchases shall be granted upon the endorsement of
the concerned IPA, in addition to the documentary
requirements of the BIR.
(a) Export sales — "Export Sales" shall mean:

(2) The sale of goods, supplies, equipment, and fuel to

persons engaged in international shipping or international air
transport operations: Provided, That the goods, supplies,
equipment, and fuel shall be used exclusively for
international shipping or air transport operations.

The sale of goods, supplies, equipment and fuel to persons

engaged in international shipping or international air
transport operations is limited to goods, supplies, equipment
and fuel that shall be used in the transport of goods and
passengers from a port in the Philippines directly to a foreign
port, or vice versa, without docking or stopping at any other
port in the Philippines unless the docking or stopping at any
other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to
load passengers and/or cargoes bound for abroad:
• Provided, further, that if any portion of such fuel,
goods, supplies or equipment is used for purposes
other than that mentioned in this paragraph, such
portion of fuel, goods, supplies, and equipment shall
What is a Zero-rated Transaction? be subject to 12% VAT;
1. Automatically zero-rated transactions
SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. — 2. Effectively zero-rated transactions
A zero rated sale of goods or properties by a VAT registered "SEC. 4.108-5. Zero-Rated Sale of Services.
person is a taxable transaction for VAT purposes but shall not (b) Transactions Subject to Zero Percent (0%) VAT Rate. —
result in any output tax. The following services performed in the Philippines by a
• However, the input tax on purchases of goods, VAT-registered person shall be subject to zero percent (0%)
properties, or services, attributable to such zero- VAT rate:
rated sale, shall be available as tax credit or refund (2) Services rendered to persons or entities whose
in accordance with these Regulations. exemption from direct and indirect taxes under special
laws or international agreements to which the Philippines
The following sales by VAT-registered persons shall be is a signatory, effectively subjects the supply of such
subject to zero-percent (0%) rate: services to zero percent (0%) rate;
SECTION 5. Value-Added Tax (VAT) zero-rating and (B) Transactions Subject to Zero Percent (0%) Rate - The
5
 following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%) rate. The Philippines' VAT law adheres to the "Cross Border
1. Processing, manufacturing or repacking goods for other Doctrine" of the VAT System, which basically means that no
persons doing business outside the Philippines which VAT shall be imposed to form part of the cost of goods destined
goods are subsequently exported, where the services are for consumption outside of the territorial border of the taxing
paid for in acceptable foreign currency and accounted authority.
for in accordance with the rules and regulations of the • Hence, actual export of goods and services from the
Bangko Sentral ng Pilipinas (BSP); Philippines to a foreign country must be free of the
2. Services other than those mentioned in the preceding VAT.
paragraph, rendered to a person engaged in business • Conversely, those destined for use or consumption
conducted outside the Philippines or to a nonresident within the Philippines shall be imposed with the 10%
person not engaged in business who is outside the VAT. Accordingly, interpretation of the provisions of
Philippines when the services are performed, the the VAT law has been harmonized with the "Cross
consideration for which is paid for in acceptable foreign Border Doctrine". [RMC 74-99]
currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas ● VAT Principle of Territoriality – VAT is imposed
(BSP); on transactions that take place within its territory,
3. Services rendered to persons or entities whose either:
exemption under special laws or international ○ Origin principle – situs is the country of
agreements to which the Philippines is a signatory production only national taxpayers would be
effectively subjects the supply of such services to zero exposed to the tax, without distinguishing
percent (0%) rate; between transactions “consumed” locally or
4. Services rendered to persons engaged in international abroad.
shipping or international air transport operations, ■ Exports taxable, imports exempt.
including leases of property for use thereof: ○ Destination principle – situs is the country of
a. Provided, That these services shall be consumption VAT is imposed in the country
exclusive for international shipping or air in which the products or services are actually
transport operations; consumed or used.
5. Services performed by subcontractors and/or ■ Exports exempt, imports taxable.
contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales exceed What are VAT Exempt Transactions?
seventy percent (70%) of total annual production; An exempt transaction involves goods or services which, by
6. Transport of passengers and cargo by domestic air or their nature, are specifically listed in and expressly exempted
sea vessels from the Philippines to a foreign country; from the VAT under the Tax Code, without regard to the tax
and status -- VAT-exempt or not -- of the party to the transaction.
7. Sale of power or fuel generated through renewable Indeed, such transaction is not subject to the VAT, but the seller
sources of energy such as, but not limited to, biomass, is not allowed any tax refund of or credit for any input taxes
solar, wind, hydropower, geothermal, ocean energy, paid.
and other emerging energy sources using technologies
such as fuel cells and hydrogen fuels. The following are the VAT-exempt transactions, which were
8. Vetoed amended or added under the TRAIN Law:
9. Services rendered to offshore gaming licensees subject 1. Sale or importation of agricultural and marine food
to gaming tax under Section 125-A of this Code by products in their original state, livestock and poultry of or
service providers, including accredited service king generally used as, or yielding or producing foods for
providers as defined in Section 27 (G) of this Code.
human consumption; and breeding stock and genetic
materials therefor.
a. Products classified under this paragraph
What is the Cross-border doctrine/ destination principle?
shall be considered in their original state
One of the nature and charactersistics of VAT is that it adheres even if they have undergone the simple
to the Cross-border doctrine/Destination principle. processes of preparation or preservation for
the market, such as freezing, drying, salting,
Under the cross-border principle, no VAT shall be imposed broiling, roasting, smoking or stripping.
to form part of the cost of goods destined for consumption Polished and/or husked rice, corn grits, raw
outside of the territorial border of the taxing authority. cane sugar and molasses, ordinary salt and
• If exports of goods and services from the Philippines copra shall be considered in their original
to a foreign country are free of the VAT, then the state;
same rule holds for such exports from the national 2. Sale or importation of fertilizers; seeds, seedlings and
territory -- except specifically declared areas -- to an fingerlings; fish, prawn, livestock and poultry feeds,
ecozone.
6
 including ingredients, whether locally produced or 12. Sales by agricultural cooperatives duly registered with the
imported, used in the manufacture of finished feeds Cooperative Development Authority to their members as
(except specialty feeds for race horses, fighting cocks, well as sale of their produce, whether in its original state
aquarium fish, zoo animals and other animals generally or processed form, to non-members; their importation of
considered as pets); direct farm inputs, machineries and equipment, including
3. Importation of personal and household effects belonging spare parts thereof, to be used directly and exclusively in
to the residents of the Philippines returning from abroad the production and/or processing of their produce;
and nonresident citizens coming to resettle in the 13. Gross receipts from lending activities by credit or multi-
Philippines: Provided, That such goods are exempt from purpose cooperatives duly registered with the
customs duties under the Tariff and Customs Code of the Cooperative Development Authority;
Philippines; 14. Sales by non-agricultural, non- electric and non-credit
4. Importation of professional instruments and implements, cooperatives duly registered with the Cooperative
tools of trade, occupation or employment, wearing Development Authority: Provided, That the share capital
apparel, domestic animals, and personal and household contribution of each member does not exceed Fifteen
effects belonging to persons coming to settle in the thousand pesos (P15,000) and regardless of the aggregate
Philippines or Filipinos or their families and descendants capital and net surplus ratably distributed among the
who are now residents or citizens of other countries, such members;
parties hereinafter referred to as overseas Filipinos, in 15. Export sales by persons who are not VAT-registered;
quantities and of the class suitable to the profession, rank 16. Sale of real properties not primarily held for sale to
or position of the persons importing said items, for their customers or held for lease in the ordinary course of trade
own use and not for barter or sale, accompanying such or business or real property utilized for low-cost and
persons, or arriving within a reasonable time: Provided, socialized housing as defined by Republic Act No. 7279,
That the Bureau of Customs may, upon the production of otherwise known as the Urban Development and Housing
satisfactory evidence that such persons are actually Act of 1992, and other related laws, residential lot valued
coming to settle in the Philippines and the goods are at One million pesos (P1,500,000) and below, house and
brought from their former place of abode, exempt such lot, and other residential dwellings valued at Two million
goods from payment of duties and taxes: Provided, five hundred thousand pesos (P2,500,000) and below:
further, That the vehicles, vessels, aircrafts, machineries Provided, That beginning January 1, 2021, the VAT
and other similar goods for use in manufacture,shall not exemption shall only apply to sale of real properties not
fall within this classification and shall therefore be subject primarily held for sale to customers or held for lease in
to duties, taxes and other charges; the ordinary course of trade or business, sale of real
5. Services subject to percentage tax under Title V; property utilized for socialized housing as defined by
6. Services by agricultural contract growers and milling for Republic Act No. 7279, sale of house and lot, and other
others of palay into rice, corn into grits and sugar cane residential dwellings with the selling price of not more
into raw sugar; than Two million pesos (P2,000,000):[95] Provided,
7. Medical, dental, hospital and veterinary services except further, That every three (3) years thereafter, the amount
those rendered by professionals; herein stated shall be adjusted to its present value using
8. Educational services rendered by private educational the Consumer Price Index, as published by the Philippine
institutions, duly accredited by the Department of Statistics Authority (PSA);
Education(DepED), the Commission on Higher 17. Lease of a residential unit with a monthly rental not
Education (CHED), the Technical Education and Skills exceeding Fifteen thousand pesos (₱15,000);
Development Authority (TESDA) and those rendered by 18. Sale, importation, printing or publication of books, and
government educational institutions; any newspaper, magazine, journal, review bulletin, or any
9. Services rendered by individuals pursuant to an employer- such educational reading material covered by the
employee relationship; UNESCO Agreement on the Importation of Educational,
10. Services rendered by regional or area headquarters Scientific and Cultural Materials, including the digital or
established in the Philippines by multinational electronic format thereof: Provided, That the materials
corporations which act as supervisory, communications enumerated herein are not devoted principally to the
and coordinating centers for their affiliates, subsidiaries publication of paid advertisements;
or branches in the Asia-Pacific Region and do not earn or 19. Transport of passengers by international carriers;
derive income from the Philippines 20. Sale, importation or lease of passenger or cargo vessels
11. Transactions which are exempt under international and aircraft, including engine, equipment and spare parts
agreements to which the Philippines is a signatory or thereof for domestic or international transport operations;
under special laws, except those under Presidential 21. Importation of fuel, goods and supplies by persons
Decree No. 529; engaged in international shipping or air transport

7
 operations: Provided, That the fuel, goods, and supplies (DOH) shall issue a list of prescription
shall be used for international shipping or air transport drugs and medical devices covered by this
operations; provision: Provided, finally, That the
22. Services of bank, non-bank financial intermediaries exemption claimed under this subsection
performing quasi-banking functions, and other non-bank shall be subject to post audit by the Bureau
financial intermediaries; of Internal Revenue or the Bureau of
23. Sale or lease of goods and services to senior citizens and Customs as may be applicable.
persons with disability, as provided under Republic Act 31.
(CC) Sale or lease of goods or properties or the
Nos. 9994 (Expanded Senior Citizens Act of 2010) and performance of services other than the transactions
10754 (An Act Expanding the Benefits and Privileges of mentioned in the preceding paragraphs, the gross annual
Persons With Disability), respectively; sales and/or receipts do not exceed the amount of Three
24. Transfer of property pursuant to Section 40(C)(2) of the million pesos (P3,000,000.00).
NIRC, as amended;
25. Associations dues, membership fees, and other Zero-rated Effectively zero-rated
assessments and charges collected by homeowners’ transactions transactions
associations and condominium corporations;
26. Sale of gold to the Banko Sentral ng Pilipinas (BSP); Source EXPORT sale of Sale of goods or supply of
27. Sale of or importation of prescription drugs and medicines goods and supply services to persons or
for: of services. entities whose exemption
28. Diabetes, high cholesterol, and hypertension beginning under special laws or
January 1, 2020; and Tax rate is at zero. international
29. Cancer, mental illness, tuberculosis, and kidney diseases agreements to which the
Philippines is a signatory
beginning January 1, 2021.
effectively subjects such
transactions to a zero rate.
Provided, That the DOH shall issue a list of approved
drugs and medicines for this purpose within sixty (60) COMMO Since zero rate, this results in NO tax chargeable
days from the effectivity of this Act; and N against the PURCHASER.
30.
Sale or importation of the following beginning January 1, EFFECT The SELLER of such transactions charges NO
2021 to December 31, 2023: OF OUTPUT tax, but CAN CLAIM a refund of or
a.
Capital equipment, its spare parts and raw BOTH: a tax credit certificate for the VAT previously
materials, necessary for the production of charged by suppliers.
personal protective equipment components
such as coveralls, gown, surgical cap,
surgical mask, N-95 mask, scrub suits,
goggles and face shield, double or surgical Exempt transaction Exempt party or entity
gloves, dedicated shoes, and shoe covers,
for COVID-19 prevention; and
● Involves GOODS ● Involves a PERSON
b.
All drugs, vaccines and medical devices
OR SERVICES OR ENTITY
specifically prescribed and directly used for
which are granted VAT
the treatment of COVID-19; and EXPRESSLY exemption under the
c.
Drugs for the treatment of COVID-19 EXEMPTED Tax Code, a special
approved by the Food and Drug from the VAT law or an
Administration (FDA) for use in clinical under the Tax international
trials, including raw materials directly Code, without agreement.
necessary for the production of such regard to the tax ● Such party is also not
drugs: Provided, That the Department of status of the party subject to VAT, but
Trade and Industry (DTI) shall certify that to the transaction. may be allowed
such equipment, spare parts or raw materials ● Such transaction refund/credit,
for importation are not locally available or is not subject to depending on its
insufficient in quantity, or not in accordance the VAT, but the registration as a VAT
seller is not or non-VAT
with the quality or specification
allowed any tax taxpayer.
required: Provided, further, That for item
refund of or credit
(ii), within sixty (60) days from the for any input taxes
effectivity of this Act, and every three (3) paid.
months thereafter, the Department of Health

8
 medical services, is exempt from the VAT coverage. This Ruling was
Automatic zero- Effective zero- Exemption subsequently confirmed by Regional Director Osmundo G. Umali of
Revenue Region No. 8 in a letter dated April 22, 1994. Meanwhile, on
rating rating January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT
Law) took effect, amending further the National Internal Revenue Code of
● intended to Intended to benefit The 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue
be enjoyed the PURCHASER purchaser is Code of 1997) became effective. This new Tax Code substantially adopted
and reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716
by the who, not being only on E-VAT. In the interim, on October 1, 1999, the BIR sent respondent a
SELLER directly and legally PARTIALL Preliminary Assessment Notice for deficiency in its payment of the VAT
who is liable for the payment Y and documentary stamp taxes (DST) for taxable years 1996 and 1997.
directly and of the VAT, will RELIEVED
legally ultimately bear the because he 1. Philippine Health Care Providers "is not actually
liable for burden of the tax is not rendering medical service but merely acting as a
the VAT shifted by the allowed any conduit between the members and their accredited
● makes the suppliers. tax refund and recognized hospitals and clinics."
seller of or credit (a) It merely "provides and arranges for the
internation for INPUT provision of pre-need health care services
ally taxes paid. to its members for a fixed prepaid fee for
competitiv a specified period of time."
e by 2. It then "contracts the services of physicians,
allowing medical and dental practitioners, clinics and
the hospitals to perform such services to its enrolled
refund/cred members;" and
it of input 3. Philippine Health Care Providers "also enters into
taxes contract with clinics, hospitals, medical
attributable professionals and then negotiates with them
to export regarding payment schemes, financing and other
sales. procedures in the delivery of health services."

In both cases, the PURCHASER is Thus, since Philippine Health Care Providers does not
TOTALLY RELIEVED from the burden of actually provide medical and/or hospital services, as
tax. provided under Section 103 on exempt transactions, but
merely arranges for the same, its services are not VAT-
exempt.
Exempt transaction Exempt party or entity
HOWEVER, Section 246 of the 1997 Tax Code, as
amended, provides that any revocation, modification or
Involves GOODS OR Involves a PERSON OR reversal of rulings, circulars, rules and regulations
SERVICES which are ENTITY granted VAT promulgated by the CIR have no retroactive application if it
EXPRESSLY exemption under the Tax would prejudice the taxpayer.
EXEMPTED from the Code, a special law or an
VAT under the Tax Code, international agreement. The exceptions to this rule are:
without regard to the tax • (1) where the taxpayer deliberately misstates or
status of the party to the Such party is also not subject omits material facts from his return or in any
transaction. to VAT, but may be allowed document required of him by the BIR;
refund/credit, depending on its • (2) where the facts subsequently gathered by the
Such transaction is not registration as a VAT or non- BIR are materially different from the facts on
subject to the VAT, but VAT taxpayer. which the ruling is based, or
the seller is not allowed o (3) where the taxpayer acted in bad faith.
any tax refund of or credit
for any input taxes paid. In this case, there is no showing that Philippine Health Care
Providers deliberately committed mistakes or omitted
material facts when it obtained VAT Ruling from the BIR.
CIR v. Philippine Health Care Providers • Philippine Health Care Providers' failure to
describe itself as a health maintenance
The Philippine Health Care Providers, Inc., herein respondent, provides
prepaid group practice health care delivery system or a health maintenance
organization, which is subject to VAT, is not
organization to take care of the sick and disabled persons. Before the tantamount to bad faith.
effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote • Philippine Health Care Providers’ letter which
the Commissioner of Internal Revenue (CIR), petitioner, inquiring whether served as the basis for the VAT ruling sufficiently
the services it provides to the participants in its health care program are
exempt from the payment of the VAT. On June 8, 1988, petitioner CIR described its business.
issued VAT Ruling No. 231-88 stating that respondent, as a provider of

9
 o When the CIR ruling was issued the term
health maintenance organization was yet BIR Ruling No. 557-19
unknown or had no significance for Sale of goods are recognized when Bounty Agro Ventures, Inc. sells the
taxation purposes. roasted chicken to the customer on a take-out basis, as control passes to
the customer on the day the transaction takes place Process flow: When the
o Philippine Health Care Providers, dressed chicken meets the required specifications, weighed and sorted
therefore, believed in good faith that it according to size, marinated, packed, sealed and labeled, Bounty Agro
was VAT exempt for the taxable years Ventures, Inc. delivers the dressed chicken to various outlets Prior to
1996 and 1997. roasting, store outlets do not add any other preservatives, additives or
coloring; and Store outlets sold roasted chickens in either whole or
o The CIR is precluded from adopting a chopped to customers
position contrary to one previously taken
where injustice would result to the Section 109 (1) (A) of the Tax Code of 1997, as amended:
taxpayer. Exempt transactions xxx A) Sale or importation of
agricultural and marine food products in their original state,
CIR v. John Gotamco & Sons, Inc., livestock and poultry of a kind generally used as, or yielding
The World Health Organization (WHO) is an international organization
which has a regional office in Manila. It enjoys privileges and immunities or producing foods for human consumption. Products
defined in the Host Agreement entered into between the Republic of the classified under this paragraph shall be considered in their
Philippines and the said Organization on July 22, 1951. Section 11 of that original state even if they have undergone the simple
Agreement provides that "the Organization, its assets, income and other processes of preparation or preservation for the market,
properties shall be: (a) exempt from all direct and indirect taxes. It is
understood, however, that the Organization will not claim exemption from such as freezing, drying, salting, broiling, roasting,
taxes which are, in fact, no more than charges for public utility services; smoking or stripping
WHO decided to construct a building to house its own offices and other
United Nations offices in Manila. the CIR sent a letter of demand to Such being the case, the sale of roasted chicken is therefore
Gotamco demanding payment of P16,970.40, representing the 3%
contractor's tax plus surcharges on the gross receipts it received from the exempt from VAT as provided for under Section 109 (1)
WHO in the construction of the latter's building. Respondent Gotamco (A) of the Tax Code of 1997.
appealed the CIR’s decision to the CTA, which rendered a decision in • The inclusion of the other processes of preparation
favor of Gotamco and reversed the CIR decision. CIR is now appealing
and preservation for the market, i.e. , broiling and
to SC. CIR questions the entitlement of the WHO to tax exemption,
contending that the Host Agreement is null and void, not having been roasting, was introduced by R.A. No. 8241.
ratified by the Philippine Senate as required by the Constitution. CIR also • The Congressmen also intended this measure to be
argues that the 3% contractor's tax assessed on Gotamco is not an indirect more receptive to the cry of the poor people: “So,
tax. CIR also claims that the 3% contractor's tax is directly on Gotamco
and cannot be shifted to the WHO.
if our worker who goes home at night because of
traffic stops at ANDOK'S LECHON, and buys
The Host Agreement comes within the latter category; it is roasted chicken on a take-out basis NO VAT will
a valid and binding international agreement even be imposed on his purchase of that roasted
without the concurrence of the Philippine Senate. chicken."
• The privileges and immunities granted to the
WHO under the Host Agreement have been It is to be emphasized however, that the exemption applies
recognized by this Court as legally binding on only if the roasted chicken, which has undergone the simple
Philippine authorities. process of roasting, is purchased on a take-out basis
• Accordingly, should Bounty Agro Ventures, Inc.,
In context, direct taxes are those that are demanded from the doing business under the name and style of
very person who, it is intended or desired, should pay them; Chooks-To-Go; Uling Roasters; Reyal Litson
1. while indirect taxes are those that are demanded Manok maintain a facility by which the chicken,
in the first instance from one person in the which has undergone the simple process of
expectation and intention that he can shift the roasting, will be offered as a menu to customers
burden to someone else. who would dine-in, then it will be subject to the
VAT on sale of service which is similarly
The contractor's tax is of course payable by the contractor imposed on restaurants and other eateries.
but in the last analysis it is the owner of the building that (VAT Ruling No. 009-07 dated June 21, 2007 ).
shoulders the burden of the tax because the same is
shifted by the contractor to the owner as a matter of self- BIR Ruling No. 665-19
preservation. It is represented that KLM is a foreign air carrier organized and existing
under the laws of the Netherlands with Philippine business address at 39th
Floor, Yuchengco Tower, RCBC Plaza corner Sen. Gil Puyat and Ayala
Thus, it is an indirect tax.And it is an indirect tax on the Avenue, Makati City; that it was issued a license to establish its branch
WHO because, although it is payable by the petitioner, the office in the Philippines on August 8, 1955; that it has been granted
latter can shift its burden on the WHO. landing rights in the Philippines to perform international air transportation
services/activities or flight operations from the Philippines to anywhere in
• In the last analysis it is the WHO that will pay the the world and vice-versa; that it flies directly from the Philippines directly
tax indirectly through the contractor and it to foreign port without docking or stopping at any other port in the
certainly cannot be said that 'this tax has no bearing Philippines to unload passengers and/or cargoes loaded in and from
upon the World Health Organization. another domestic airport; that it currently purchases and avails of supplies

10
and services from local suppliers which consist of office and operational ○ (1) Certificate of Non-Registration of
supplies, computers, printers, catering for its flights and rental for its office
Company issued by the Securities and
spaces which are all intended and attributable to its business of transporting
by air goods and passengers from the Philippines to any port in the world. Exchange Commission (SEC),
○ (2) Consularized Articles of Association,
Based on the foregoing, in order to qualify for zero-rating, ○ (3) Certificate of Tax Residency issued
by the Central Customs and Tax
the sale of goods, supplies, equipment, fuel and services
Administration of Denmark, and
rendered by a VAT-registered person to a person engaged ○ (4) Company Extract from the Danish
in international air transport operations must pertain to or Business Authority.
must be attributable to the transport of goods and passengers ● It is settled that findings of fact by the Court of Tax
from a port in the Philippines directly to a foreign port Appeals in Division are generally accorded great
without docking or stopping at any port in the Philippines. weight and are not to be disturbed without any
● Accordingly, KLM's purchases of office and showing of grave abuse of discretion, considering
that the members of the Division are in the best
operational supplies, computers and printers, as
position to analyze the documents presented by the
well as the catering services for its flights, from parties
VAT-registered local suppliers which are all
intended and attributable to KLM's business of VWS and Respondent are two distinct corporate entities
transporting by air, goods and passengers from the separately registered in two (2) different countries,
Philippines to any port in the world without Denmark and Philippines.
docking or stopping at any other port in the ● Although VWS is one of the shareholders of
Respondent, it is a fundamental principle of
Philippines to unload passengers and/or cargoes
corporation law that "a corporation is an entity
loaded in and from another domestic airport are separate and distinct from its stockholders and
subject to zero percent (0%) VAT rate. from other corporations to which it may be
○ However, the sale of the aforesaid connected."
supplies and services to KLM by persons
who are not VAT-registered is exempt Indeed, Section 3 (d) of Republic Act ("R.A.") No. 7042, 25
as amended by R.A. No. 8179, 26 or the Foreign
from VAT
Investments Act of 1991, specifies that being a shareholder
As regards the lease of office space, while said service is in a domestic corporation does not equate to "doing
not being rendered to the aircraft itself, the same can be business" in the Philippines
characterized as service directly connected with or
FTEPI v. CIR
attributable to the transport of goods or passengers from Before the CTA En Banc, FTEPI argued that CTA Division erred in
the Philippines to a foreign port and, thus, subject to zero holding, among others, that: FTL is a non-resident foreign corporation
percent (0%) VAT. However, the lease of office space to doing business outside the PH. FTEPI has sufficiently shown that FTL is
KLM by persons who are not VAT-registered is exempt a non-resident foreign corporation doing business outside the Philippines;
That such was evident in the Authenticated Articles of Incorporation,
from VAT. Services Agreement, and the testimony of FTEPI's witness, Paulito B. De
Pano. According to FTEPI, there must be continuity of conduct and
intention to establish a continuous business before a foreign corporation is
CIR v. Vestas Services treated as doing business in the Philippines. Allegedly, FTL did not have
Vestas Services reported zero-rated sales for the following transactions a continuous business in the Philippine because it merely entered into a
Engineering, Procurement and Construction (EPC) Contract with EDC Service Agreement with FTEPI. Considering that FTEPI has presented
Burgos Wind Power Corporation (EDC), a Renewable Energy Developed evidence as to the status of FTL as a non-resident foreign corporation not
(RE Developer) of wind energy resources, located in the Municipality of doing business in the Ph, BIR now has the burden to prove otherwise.
Burgos, Province of Ilocos Norte; Intercompany Service Agreement with According to FTEPI, BIR failed to present controverting evidence to
Vestas Wind Systems A/S (Vestas Denmark), a non-resident foreign FTEPI’s claim.
corporation not doing business in the Philippines; and Sublease Agreement
with Bayview Technologies, Inc. (Bayview), a Cagayan Special Economic
Zone and Freeport enterprise currently registered with the Cagayan In Commissioner of Internal Revenue vs. Deutsche
Economic Zone Authority (CEZA) Knowledge Services Pte. Ltd. (Deutsche case) the Supreme
Court ruled that for purposes of zero-rating under Section
The Court ruled that the services rendered by Respondent 108 (B) (2) of the Tax Code, two (2) components must be
to its customer VWS qualifies for VAT zero rating established by the claimant, namely:
● Section 108 (B) (2) 20 of the National Internal 1. That the claimant's client is a non-resident foreign
Revenue Code ("NIRC") of 1997, as amended, corporation (or NRFC); and
provides that the recipient of services is doing 2. That said client is not engaged in trade or business
business outside the Philippines. in the Philippines
VWS is a non-resident foreign corporation doing business Commissioner of Internal Revenue vs. Deutsche Knowledge
outside the Philippines. Services Pte. Ltd.: "For purposes of zero-rating under
● This pronouncement was supported by Section 108(B)(2) of the Tax Code, the claimant must
documentary evidence, as follows: establish the two components of a client's NRFC status, viz.:
11
 1. that their client was established under the laws of granted in the most explicit and categorical language, considering that they
partake in the nature of tax exemptions
a country not the Philippines or, simply, is not a
domestic corporation; and
2. that it is not engaged in trade or business in the As per jurisprudence, the requisites for claiming unutilized
Philippines. or excess input VAT under Section 112 of the NIRC of
a. To be sure, there must be sufficient proof 1997, as amended, are as follows:
of both of these components: showing not ● As to the timeliness of the filing of the
only that the clients are foreign administrative and judicial claims:
corporations, but also are not doing ○ 1. the claim is filed with the BIR within two
business in the Philippines.
years after the close of the taxable quarter
3. In any case, after a judicious review of the records,
the Court still do not find any reason to deviate when the sales were made;
from the court a quo's findings. ○ 2. that in case of full or partial denial of the
a. To the Court's mind, the SEC refund claim, or the failure on the part of the
Certifications of Non-Registration show Commissioner to act on the said claim within
that their affiliates are foreign a period of 120 days, the judicial claim has
corporations. been filed with this Court, within 30 days
b. On the other hand, the articles of
from receipt of the decision or after the
association/certificates of incorporation
stating that these affiliates are registered expiration of the said 120-day period;
to operate in their respective home ● With reference to the taxpayer's registration with
countries, outside the Philippines are the BIR:
prima facie evidence that their clients are ○ 3. The taxpayer is a VAT-registered person;
not engaged in trade or business in the ● In relation to the taxpayer's output VAT:
Philippines."
○ 4. the taxpayer is engaged in zero-rated or
IN THIS CASE, FTEPI was not able to comply with the
requirements under the Deutsche case to prove that its client effectively zero-rated sales;
FTL is a nonresident foreign corporation not registered to ○ 5. for zero-rated sales under Sections 106 (A)
do business in the Philippines. (2) (1) and (2); 106 (B); and 108 (B) (1) and
(2), the acceptable foreign currency exchange
While FTEPI presented the following evidence during trial: proceeds have been duly accounted for in
1. FTL's Certificate of Incorporation; accordance with BSP rules and regulations
2. Service Agreement; and
● As regards the taxpayer's input VAT being
3. SEC Certification of Non-Registration of the
Company, refunded:
○ 6. the input taxes are not transitional input
It bears noting, however, that the SEC Certification of taxes;
Non-Registration of Company was denied admission in ○ 7. the input taxes are due or paid;
the Resolution dated September 11, 2017, 15 because of ○ 8. the input taxes claimed are attributable to
FTEPI’s failure to present the original thereof. zerorated or effectively zero-rated sales.
• Moreover, even if the said SEC Certification of
■ However, where there are both zero-
Non-Registration was admitted, We affirm the
findings of the Court in Division in the assailed rated or effectively zero-rated sales
Decision pertaining to the discrepancy in the name and taxable or exempt sales, and the
of the corporation appearing on the SEC input taxes cannot be directly and
Certification of Non-Registration entirely attributable to any of these
sales, the input taxes shall be
Clearly, the Court in Division was correct in finding that proportionately allocated on the
petitioner failed to satisfy the requirement that its client,
basis of sales volume; and
FTL, is a non-resident foreign corporation not
registered to do business in the Philippines. ○ 9. the input taxes have not been applied
against output taxes during and in the
Maxima Machineries Inc. v. CIR succeeding quarters.
Aggrieved, Petitioner filed a PEtition for Review in the CTA and alleged
that its claim for tax refund should be granted because all the elements Petitioner reported total sales of P2,740,186,115.69, which
necessary are present, citing the requirements outlined in San Roque
Power Corporation vs. Commissioner of Internal Revenue. As per included VAT zero-rated sales amounting to
respondent CIR, the judicial claim should be denied for petitioner's failure P742,641,360.36 for the third and fourth quarters of the FY
to substantiate its claims for refund. CIR added that refund claims are
strictly construed against the claimant and cannot be allowed unless ending 31 March 2016 (May table po sa full text)
● It claimed that its zero-rated sales include sale of
12
 goods and services to entities registered with the ● (1) a SEC Certification of Non-Registration of
PESA, SBMA, CDA, CEZA, CDC, BOI. Corporation/Partnership; and
● (2) proof of registration/incorporation in a foreign
It likewise claimed that part of its zero-rated sales pertain to country,
indent commissions received from NRFCs which are
subject to zero-rate under Section 108 (B) (2) of the NIRC In this case, records reveal that petitioner submitted a SEC
of 1997, as amended Certificate of Non-Registration of Company attesting that
● HOWEVER, Petitioner’s zero-rated sales of goods the SEC records do not show the registration of
and services amounting to P143,066,770.58 were Marubeni Corporation-Japan as a corporation or as a
disallowed based on the findings and exceptions partnership.
noted by the Court-commissioned Independent ● However, petitioner failed to present proof of
Certified Public Accountant ("ICPA") registration or foreign incorporation of
● in addition, the Court in Division disallowed Marubeni Corporation-Japan.
petitioner's zerorated sales amounting to Based on the foregoing legal and jurisprudential
P41,377,407.15 82 for failure to comply with the pronouncements, neither Marubeni Corporation-Japan
invoicing requirements under the NIRC of 1997, nor Marubeni Corporation can be considered as NRFC
as amended, and RR No. 16- 2005. doing business outside the Philippines.
○ Court also disallowed its sales of services ● Thus, the indent commissions earned and received
to Marubeni Corporation and Hyundai by the petitioner from either of them, failed to
Corporation in the total amount of qualify for VAT zero-rating under Section 108 (B)
P108,557,506.98 83 for failure to qualify (2) of the NIRC of 1997, as amended.
as zero-rated sales of services Petitioner's reliance on the Marubeni case is misplaced.
In the instant case, petitioner claims that Marubeni The Marubeni case involves income derived by a foreign
Corporation-Japan should be considered an NRFC and its corporation from its investment in the Philippines while
sale of services amounting to P107,688,733.87 should be the present case involves sales made by petitioner to a
allowed VAT zero-rating. foreign corporation which is found to be doing business
● The CTA EN BANC DID NOT AGREE. in the Philippines.

Under Section 108 (B) (2) of the NIRC of 1997, as

amended, the following essential elements must be present CIR v. Seagate
Since Seagate is a PEZA registered Ecozone Enterprise, then its business
for a sale or supply of services to be subject to the VAT rate is not subject to VAT pursuant to Sec. 24 of RA 7916 (creating PEZA) in
of zero percent (0%), to wit: relation to Sec. 103 of the Tax Code. As Seagate’s business is not subject
● 1. The recipient of the services is a foreign to VAT, the capital goods and services it alleged to have purchased are
considered not used in VAT taxable business. Thus, it is not entitled to
corporation, and the said corporation is doing refund of input taxes on such capital goods and services. CTA, affirmed by
business outside the Philippines, or is a CA: granted Seagate’s claim for refund representing the unutilized but
substantiated input VAT paid on capital goods purchased for the period
nonresident person not engaged in business who is covering April 1, 1998 to June 30, 1999.
outside the Philippines when the services were
performed; As a PEZA-registered enterprise within a special
economic zone (aka ECOZONE, a selected area with
● 2. The payment for such services were made in
highly-developed or which has the potential to be developed
acceptable foreign currency accounted for in into, agro-industrial, industrial, tourist-recreational,
accordance with the Bangko Sentral ng Pilipinas commercial, banking, investment and financial centers. RA
(BSP) rules; 7916, The Special Economic Zone Act of 1995.),
● 3. The services fall under any of the categories respondent is entitled to the fiscal incentives and
under Section 108 (B) (2), or simply, the services benefits provided for by EITHER PD 66 (law creating the
rendered should be other than "processing, Export Processing Zone Authority- EPZA) or EO 226
(Omnibus Investments Code).
manufacturing or repacking goods"; and,
● Its sales transactions intended for export may
● 4. The services must be performed in the not be exempt, but like its purchase transactions,
Philippines by a VAT-registered person. they are zero-rated.
○ No prior application for the effective zero
To be considered as an NRFC doing business outside the rating of its transactions is necessary.
Philippines, each entity must be supported, at the very least, ○ Being VAT-registered and having
by both: satisfactorily complied with all the
requisites for claiming a tax refund of or
13
 credit for the input VAT paid on capital in fact be viewed as constructively exported under
goods purchased, Seagate is entitled to EO 226.
such VAT refund or credit. ○ Considered as export sales, such purchase
transactions by Seagatewould indeed be
Tax Credit Method subject to a zero rate.
● Under the present method that relies on invoices,
an entity can credit against or subtract from the Tax exemptions; Tax refunds are in the nature of a tax
VAT charged on its sales or outputs the VAT paid exemption
on its purchases, inputs and import. ● The special laws are clear that Seagate is an
● If at the end of a taxable quarter the output taxes ENTITY exempt from internal revenue taxes -
charged by a seller are equal to the input taxes which includes both direct and indirect taxes.
passed on by the suppliers, no payment is required. ● Statutes that grant tax exemptions are construed
○ BUT when the output taxes exceed the strictly against the taxpayer and liberally in favor
input taxes that the excess has to be paid. of the taxing authority.
● If the input taxes exceed the output taxes, the ● Accordingly, claimants of tax refunds have the
excess shall be carried over to the succeeding burden to prove their claims.
quarter or quarters. ● In this case, Seagate clearly showed through the
○ Should the input taxes result from zero- special laws of its entitlement to the tax credits.
rated or effectively zero-rated ● Seagate, which as an entity is exempt, is different
transactions or from the acquisition of from its transactions which are not exempt.
capital goods, any excess over the output ● The end result, however, is that it is not subject to
taxes shall instead be refunded to the the VAT.
taxpayer or credited against other internal ○ To add: RMC 74-99 now clearly and
revenue taxes. correctly provides that any VAT-
Since VAT is a tax on consumption, its amount may be registered supplier’s sale of goods,
shifted by the seller to the purchaser. property or services from the customs
● While the LIABILITY is imposed on one person territory to any registered enterprise
(seller), the BURDEN may be passed on to operating in the ecozone -- regardless of
another. the class or type of the latter’s PEZA
○ If a special law exempts a party as seller registration -- is legally entitled to a zero
from its direct LIABILITY for VAT but rate.
does not relieve the same party as a
PURCHASER from its INDIRECT VAT Registration and not application is needed for
burden of VAT as shifted by its VAT- effective zero-rating.
registered suppliers, the PURCHASE ● Context: There were BIR regulations kasi which
TRANSACTION IS NOT EXEMPT. requires an approved prior application for effective
Application to this case: Purchase transactions entered into zero rating.
by Seagate are NOT exempt. ● SC held that this BIR regulation CAN NOT
● Special laws may exempt certain transactions prevail over the clear VAT nature of Seagate’s
from VAT but the Tax Code provides that those transactions (which were already declared by
under PD 66 are not (Respondent was registered LAW)
under RA 7916, the precursor of PD 66). ○ BIR regulation cannot amend the law. No
○ Thus, purchase transactions entered into provision under VAT law requires an
by Seagate are not VAT-exempt. additional application to be made for such
● Since purchases of Seagate are not exempt from taxpayer’s transactions to be considered
VAT, the rate applied is zero. effectively zero-rated.
○ Its exemption under PD 66 and RA 7916 ● A VAT-registered status + compliance with the
subjects transactions to zero rate, since invoicing requirements, is sufficient for the
the ecozone within which it is registered effective zero rating of the transactions of a
is managed by PEZA as a SEPARATE taxpayer.
CUSTOMS TERRITORY. ○ The nature of its business and
● Sales made by a VAT-registered person in the transactions can easily be perused from
customs territory to a PEZA-registered entity are its VAT registration papers and
considered exports to a foreign country; photocopied documents attached.
● conversely, sales by a PEZA-registered entity to a ○ Hence, its transactions cannot be
VAT-registered person in the customs territory are exempted by its mere failure to apply for
deemed imports from a foreign country. their effective zero rating.
● If Seagate is located in an export processing zone
within that ecozone, sales to the export processing Seagate complied with all the requisites for VAT
zone, even without being actually exported, shall refund/credit
14
 ● Seagate is a VAT registered entity 1. The provision thereby establishes the fiction that
● Input taxes paid on capital goods of Seagate are an ECOZONE is a foreign territory separate and
duly supported by VAT invoices and have not distinct from the customs territory.
been offset against any input taxes. 2. Accordingly, the sales made by suppliers from a
● There is no question as to either the filing of such customs territory to a purchaser located within an
claims within the prescriptive period/validity of ECOZONE will be considered as exportations.
the VAT returns have been raised. 3. Following the Philippine VAT system's adherence
○ The tax exemption under all special laws to the Cross Border Doctrine and Destination
mentioned is broad enough to cover even Principle, the VAT implications are that "no VAT
the enforcement of internal revenue laws. shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial
There was a very clear intent on the part of our legislators, border of the taxing authority"
not only to exempt investors in ecozones from national and
local taxes, but also to grant them tax credits. The petitioner's principal office was located in Barangay
Rio Tuba, Bataraza, Palawan.
4. Its plant site was specifically located inside the Rio
Tuba Export Processing Zone — a special
CIR v. Toshiba Information Equipment (Phils.), economic zone (ECOZONE) created by
CIR: denied the application, claiming that capital goods and services Proclamation No. 304, Series of 2002, in relation
purchased by Toshiba are considered not used in VAT taxable business to Republic Act No. 7916.
and therefore not entitled to refund of input taxes. Toshiba, on the other
hand, contends that it is PEZA-registered and located within the ecozone
and therefore for, VAT-exempt entity. As such, the purchases of goods and services by the
petitioner that were destined for consumption within the
The CIR failed to differentiate between VAT-exempt ECOZONE should be free of VAT;
transactions from VAT-exempt entities. 5. hence, no input VAT should then be paid on such
1. Exempt transactions are transactions specifically purchases, rendering the petitioner not entitled to
listed in and expressly exempted from VAT under claim a tax refund or credit.
the Tax Code without regard to the tax status, a. Verily, if the petitioner had paid the input
VAT-exempt or not, of the taxpayer. VAT, the CTA was correct in holding that
2. An exempt party, on the other hand, is a person or the petitioner's proper recourse was not
entity granted VAT-exemption under the Tax against the Government but against the
Code, special law or an international agreement to seller who had shifted to it the output
which the Philippines is a signatory and by virtue VAT following RMC No. 42-03
of which its taxable transactions become exempt We should also take into consideration the nature of VAT
from VAT. as an indirect tax.
6. Although the seller is statutorily liable for the
Toshiba, a PEZA-registered and located within a ecozone is payment of VAT, the amount of the tax is allowed
a VAT-exempt entity because of Sec 8 of RA 7916 which to be shifted or passed on to the buyer.
establishes the fiction that ecozones are foreign territory. 7. However, reporting and remittance of the VAT
• Therefore, a supplier from the custom territory paid to the BIR remained to be the
cannot pass on output VAT to an ecozone seller/supplier's obligation.
enterprise, like Toshiba, since it is exempt. a. Hence, the proper party to seek the tax
refund or credit should be the suppliers,
not the petitioner.
Coral Bay Nickel Corporation v. CIR
Petitioner Contentions on appeal to the SC: Toshiba is not applicable
inasmuch as the unutilized input VAT subject of its claim was incurred
from May 1, 2002 to December 31, 2002 as a VAT-registered taxpayer, S&WOO v. CIR
not as a PEZA-registered enterprise; that during the period subject of its
Petitioner's arguments:
claim, it was not yet registered with PEZA because it was only on
Petitioner argues that it is a VAT-registered entity as required under
December 27, 2002 that its Certificate of Registration was issued; that
Section 112 (A) of the NIRC of 1997, as amended, and its pertinent
until then, it could not have refused the payment of VAT on its purchases
regulations; that it is engaged in zero-rated transactions; that the input taxes
because it could not present any valid proof of zero-rating to its VAT
due from the purchases of goods and services directly attributable to zero-
registered suppliers; and that it complied with all the procedural and
rated sales of Petitioner were duly supported by VAT invoices or official
substantive requirements under the law and regulations for its entitlement
receipts; and that the claimed input VAT payments were not applied
to the refund.
against any output tax in the succeeding periods.
Section 8 of Republic Act No. 7916 mandates that PEZA Respondent's counter-arguments:
shall manage and operate the ECOZONE as a separate Respondent counter-argues that only the "creditable input taxes" that are
customs territory. "directly attributable" may be refunded; that a tax refund is in the nature of
a tax exemption which must be construed strictissimi juris against the
taxpayer; and that the taxpayer must present convincing evidence to
substantiate a claim for refund.
15
 NIRC of 1997, as amended, as implemented by
The applicable law in this case is RA No. 7916, as amended Section 4.113-1 (A) (2), (B) (1) and (2) (a), (c) of
by RA No. 8748, otherwise known as "The Special Revenue Regulations ("RR") No. 16-05, which are
Economic Zone Act of 1995," which provides that an all quoted hereunder: Section 113 of the NIRC of
ecozone is considered a separate customs territory, and the 1997, as amended:
business establishments operating within such ecozone are
entitled to certain fiscal incentives. Thus, only the sales of services supported by the above-
stated documents, having the required information, shall
In Commissioner of Internal Revenue v. Toshiba qualify for VAT zero-rating.
Information Equipment (Phils.), Inc., 41 the Supreme Court • Nevertheless, upon scrutiny of Official Receipt
said: Nos. "0001" and "0004", the same do not indicate
whether the sales were zero-rated.
"This Court agrees, however, that PEZA-registered • Thus, the same should be denied VAT zero-rating
enterprises, which would necessarily be located within for failure to comply with one of the invoicing
ECOZONES, are VAT-exempt entities, not because of requirements under the aforequoted provisions,
Section 24 of Rep. Act No. 7916, as amended, which i.e., that the term "zero-rated sale" shall be written
imposes the five percent (5%) preferential tax rate on gross or printed prominently on the official receipt.
income of PEZA-registered enterprises, in lieu of all taxes; o As a corollary, only Official Receipt No.
but, rather, because of Section 8 of the same statute which "0003" qualify for VAT zero-rating, since
establishes the fiction that ECOZONES are foreign it is compliant with the said requirements.
territory. Such being the case, for purposes of the fourth requisite,
only the sales of services covering the fourth quarter of
Given the preceding discussion, what would be the VAT CY 2015 amounting to Php485,880,236.00 (equivalent to
implication of sales made by a supplier from the Customs $10,298,000.00) may be treated as zero- rated sales
Territory to an ECOZONE enterprise?
The eighth requisite is to the effect that the input taxes
The Philippine VAT system adheres to the Cross Border claimed are attributable to zero-rated or effectively zero-
Doctrine, according to which, no VAT shall be imposed to rated sales.
form part of the cost of goods destined for consumption 1. However, where there are both zero-rated or
outside of the territorial border of the taxing authority. effectively zero-rated sales and taxable or exempt
• Hence, actual export of goods and services from sales, and the input taxes cannot be directly and
the Philippines to a foreign country must be free of entirely attributable to any of these sales, the input
VAT; taxes shall be proportionately allocated on the
• while, those destined for use or consumption basis of sales volume.
within the Philippines shall be imposed with ten 2. Considering that Petitioner had no other type of
percent (10%) VAT." 42 (Emphasis supplied) sales in the fourth quarter of CY 2015, except for
the declared zero-rated sales in the total amount of
Based on the foregoing doctrinal pronouncements, since the Php640,362,400.00, 55 the validly substantiated
ecozone is viewed as a foreign territory by legal fiction, input VAT for the fourth quarter of CY 2015
sales of goods and services made by a VAT-registered amounting to Php13,525,204.88 is attributable
person in the Philippine customs territory to an entity Thereto.
registered and operating within the ecozone are considered a. Thus, for purposes of, and with regard to
exports to a foreign country subject to zero percent (0%) Petitioner's compliance with, t h e eight
VAT. requisite, only the amount of
Php10,262,360.41 represents Petitioner's
In other words, while an ecozone is geographically within valid input VAT attributable to valid
the Philippines, it is deemed a separate customs territory zero-rated sales for the fourth quarter of
and is regarded in law as foreign soil. CY 2015,
• Sales by suppliers from outside the borders of the 3. A plain reading of Section 112 (A) of the NIRC of
ecozone to this separate customs territory are 1997, as amended, as quoted earlier, would reveal
deemed exports and treated as export sales. These that the law merely states that the creditable input
sales are zero-rated or subject to tax rate of zero VAT should be "attributable" to the zero-rated or
percent (0%). effectively zero-rated sales.
• Nevertheless, relative to its zero-rated a. In other words, nowhere does the said
transactions, Petitioner must further comply with Section 112 (A) say that the refundable
the invoicing requirements mandated by the NIRC creditable input VAT should be "directly
of 1997, as amended, as well as by revenue attributable" to such sales.
regulations implementing them, 47 specifically, b. It is elementary that where the law does
Section 113 (A) (2), (B) (1), (2) (c) and (3) of the not distinguish, none must be made. Ubi

16
 lex non distinguit nec nos distingere from the filing of the VAT refund application with the
debemos. Bureau: Provided that, to determine the effectivity of
c. Indeed, in a claim for refund under Item no. 1, all applications filed from January 1, 2018
Section 112 of the NIRC, the claimant shall be processed and decided within ninety (90) days
must show that: from the filing of the VAT refund application.
i. (1) it is engaged in zero-rated a. The 90-day period to process and decide,
sales of goods of services; and pending the establishment of the enhanced
ii. (2) it paid input VAT that are VAT Refund System shall only be up to the
attributable to zero-rated sales. date of approval of the Recommendation
4. Otherwise stated, the claimant must prove that it Report on such application for VAT refund
made a purchase of taxable goods or services for by the Commissioner or his duly authorized
which it paid VAT (input), and later on engaged in representative.
the sale of goods or services subject to VAT b. However, all claims for refund/tax credit
(output) but at zero rate. certificate filed prior to January 1, 2018 shall
still be governed by the one hundred twenty
(120)-day processing period.
c. The Secretary of Finance shall provide
Transactions/ services that are currently zero rated BUT transitory rules for the grant of refund under
will be eventually subject to VAT the enhanced VAT Refund System after the
determination of the fulfilment of the
(a) In general. – A zero-rated sale of service (by a VAT- condition by the Commissioner of Internal
registered person) is a taxable transaction for VAT purposes, Revenue as provided in item 1 paragraph 1
but shall not result in any output tax. However, the input tax on hereof; and
purchases of goods, properties or services related to such zero- 2. All pending VAT refund claims as of December 31,
rated sale shall be available as tax credit or refund in accordance 2017 shall be fully paid in cash by December 31, 2019.
with these Regulations. a. Provided, That Department of Finance shall
establish a VAT refund center in the BIR and
in the Bureau of Customs (BOC) that will
(b) Transactions Subject to Zero Percent (0%) VAT Rate. – The handle the processing and granting of cash
following services performed in the Philippines by a VAT- refunds of creditable input tax
registered person shall be subject to zero percent (0%) VAT
rate:
VAT-EXEMPT Transactions- Option to be VAT
registered
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines,
which goods are subsequently exported, where the Optional registration- cannot be cancelled for a period of 3
services are paid for in acceptable foreign currency years
and accounted for in accordance with the rules and 1. An existing VAT-registered taxpayer whose gross
regulations of the BSP; sales/receipts in the preceding taxable year did not
exceed the VAT threshold of P 3,000,000.00 may
(5) Services performed by subcontractors and/or continue to be a VAT-registered taxpayer and avail of
contractors in processing, converting, or the “Optional Registration for Value-Added Tax of
manufacturing goods for an enterprise whose export Exempt Person”.
sales exceed seventy percent (70%) of the total annual 2. Once availed, the taxpayer shall not be entitled to
production; cancel the VAT registration for the next 3 years.

Types of Tax Credits

Input Tax Credit
The value-added tax due on or paid by a VAT-registered person
Provided, That Subparagraphs (b)(1) and (b)(5) on importation of goods or local purchase of goods, properties
abovementioned shall be subject to the twelve percent (12%) or services, including lease or use of properties, in the course of
VAT and no longer be subject to zero percent (0%) VAT rate his trade or business. It shall also include the transitional input
upon satisfaction of the following conditions: tax and the presumptive input tax determined in accordance
with Section 111 of the NIRC.
1. The successful establishment and implementation of
Any input tax on the following transactions evidenced by a
an enhanced VAT refund system that grants and pays
VAT invoice or official receipt issued by a VAT-registered
refunds of creditable input tax within ninety (90) days
person in accordance with Secs. 113 and 237 of the Tax Code
17
shall be creditable against the output tax: production
CIR v. Benguet Corp As used in this paragraph, the term processing shall mean
Input VAT or input tax represents the actual payments, costs pasteurization, canning and activities which through
and expenses incurred by a VAT- registered taxpayer in physical or chemical process alter the exterior texture or
connection with his purchase of goods and services. On the form or inner substance of a product in such manner as to
other hand, when that person or entity sells his/its products or prepare it for special use to which it could not have been put
services, the VAT-registered taxpayer generally becomes liable in its original form or condition.
for 10% (now 12%) of the selling price as Output VAT or
output tax What is the rate of the transitional input tax
Persons or firms engaged in the processing of sardines,
Persons Who Can Avail of the Input Tax Credit mackerel, and milk, and in manufacturing refined sugar,
cooking oil and packed noodle based instant meals, shall be
The input tax credit on importation of goods or local purchases allowed a presumptive input tax, creditable against the
of goods, properties, or services by a VAT- registered person output tax, equivalent to four percent (4%) of the gross
shall be creditable: value in money of their purchases of primary agricultural
products which are used as inputs to their production
1. To the importer upon payment of VAT prior to the
release of goods from customs custody
2. To the purchaser of the domestic goods or properties
upon consummation of the sale (g) Transitional input tax credits allowed under the transitory
3. To the purchaser of services or the lessee or licensee and other provisions of these Regulations.
upon payment of the compensation, rental, royalty or
fee "SEC. 111. Transitional/Presumptive Input Tax Credits. —
(A) Transitional Input Tax Credits . — A person who
(a) Purchase or importation of goods becomes liable to value-added tax or any person who elects
(1) For sale; or to be a VAT- registered person shall, subject to the filing of
an inventory according to rules and regulations prescribed
(2) For conversion into or intended to form part of a by the Secretary of Finance, upon recommendation of the
finished product for sale, including packaging Commissioner, be allowed input tax on his beginning
materials; or inventory of goods, materials and supplies equivalent to two
(3) For use as supplies in the course of business; or percent (2%) of the value of such inventory or the actual
value added tax paid on such goods, materials and supplies,
(4) For use as raw materials supplied in the sale of whichever is higher, which shall be creditable against the
services; or output tax."

(5) For use in trade or business for which deduction for

depreciation or amortization is allowed under the Tax Transitional input tax credit operates to benefit newly VAT-
Code, registered persons, whether or not they previously paid taxes in
the acquisitions of their beginning inventory of goods, materials
(b) Purchase of real properties for which a VAT has actually and supplies.
been paid;
During the period of transition from non-VAT to VAT status, the
(c) Purchase of services in which a VAT has actually been paid; transitional input tax credit serves to alleviate the impact of the
(d) Transactions "deemed sale" under Sec. 106 (B) of the Tax VAT on the taxpayer.
Code; Section 4.111-1(a), Rev. Regs. No. 16-2005
(e) Transitional input tax allowed under Sec. 4.111 (a) of these (a) Transitional Input Tax Credits on Beginning Inventories
Regulations;
Taxpayers who became VAT-registered persons upon
(f) Presumptive input tax allowed under Sec. 4.111 (b) of these exceeding the minimum turnover of P1,500,000.00 in any
Regulations; 12-month period, or who voluntarily register even if their
turnover does not exceed P1,500,000.00 (except franchise
Who are entitled to the presumptive input tax grantees of radio and television broadcasting whose
Persons or firms engaged in the processing of sardines, threshold is P10,000,000.00) shall be entitled to a
mackerel, and milk, and in manufacturing refined transitional input tax on the inventory on hand as of the
sugar, cooking oil and packed noodle based instant effectivity of their VAT registration, on the following:
meals, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent (4%) of the (1) goods purchased for resale in their present
gross value in money of their purchases of primary condition;
agricultural products which are used as inputs to their (2) materials purchased for further processing, but
18
 which have not yet undergone processing; registered buyer shall constitute valid proof of
(3) goods which have been manufactured by the substantiation of tax credit only if it shows the
taxpayer; information required under Secs. 113 and 237 of the
(4) goods in process for sale; or Tax Code.
(5) goods and supplies for use in the course of the
(b) Transitional input tax shall be supported
taxpayer's trade or business as a VAT-registered
by an inventory of goods as shown in a detailed list to
person.
be submitted to the BIR.
The transitional input tax shall be: (c) Input tax on "deemed sale" transactions
1. two percent (2%) of the value of the beginning shall be substantiated with the invoice required under
inventory on hand or Sec. 4.113-2 of these Regulations.
2. actual VAT paid on such goods, materials and (d) Input tax from payments made to non-residents (such
supplies, whichever is higher, which amount shall as for services, rentals and royalties) shall be supported by
be creditable against the output tax of VAT- a copy of the Monthly Remittance Return of Value Added
registered person. Tax Withheld (BIR Form 1600) filed by the
a. The value allowed for income tax
purposes on inventories shall be the basis Claims for Refund/Credit of Input Tax
for the computation of the 2% transitional
input tax, excluding goods that are Atlas Consolidated Mining v. CIR
exempt from VAT under Sec. 109 of the Atlas filed with the BIR its VAT Return for the first quarter of 1992. It
Tax Code. alleged that it also filed with the BIR the corresponding application for
the refund/credit of its input VAT on its purchases of capital goods
and on its zero-rated sales in the amount of P26,030,460.00. When its
The threshold amount of P1,500,000.00 shall be adjusted, application for refund/credit remained unresolved by the BIR, petitioner
not later than January 31, 2009 and every three years corporation filed its Petition for Review with the CTA. Asserting that it
thereafter, to its present value using the Consumer Price was a "zero-rated VAT person," it prayed for refund/credit of its input VAT
Index as published by the NSO. it paid for the first quarter of 1992. CIR opposed. After due trial, the CTA
DENIED the petition on the ground of prescription, insufficiency of
evidence and failure to comply with Section 230 of the Tax Code, as
amended. CA affirmed the CTA decision.
SECTION 4.110-8. Substantiation of Input Tax
Credits.— Taxpayer-claimant has the burden of proving the legal and
factual bases of its claim for tax credit or refund, but once it
(a) Input taxes for the importation of goods or has submitted all the required documents, it is the function
the domestic purchase of goods, properties or services of the BIR to assess these documents with purposeful
is made in the course of trade or business, whether such dispatch.
input taxes shall be credited against zero-rated sale, 1. It therefore falls upon Atlas to first establish that
non-zero-rated sales, or subjected to the 5% Final its sales qualify for VAT zero-rating under the
Withholding VAT, must be substantiated and existing laws (legal basis), and then to present
supported by the following documents, and must be sufficient evidence that said sales were actually
reported in the information returns required to be made and resulted in refundable or creditable input
submitted to the Bureau: VAT in the amount being claimed.
(1) For the importation of goods — import entry
or other equivalent document showing Applications for refund/credit of input VAT with the
actual payment of VAT on the BIR must comply with the appropriate revenue regulations.
imported goods.
Revenue Regulations No. 3-88 also required to present
(2) For the domestic purchase of goods and evidence proving actual zero-rated VAT sales to qualified
properties — invoice showing the buyers, such as:
information required under Secs. 113 1. photocopy of the approved application for zero-
and 237 of the Tax Code. rate if filing for the first time;
(3) For the purchase of real property — public 2. sales invoice or receipt showing the name of the
instrument i.e.,deed of absolute sale, person or entity to whom the goods or services
deed of conditional sale, were delivered, date of delivery, amount of
contract/agreement to sell, etc.,together consideration, and description of goods or services
with VAT invoice issued by the seller. delivered; and
3. the evidence of actual receipt of goods or services.
(4) For the purchase of services — official
receipt showing the information
A thorough examination of the evidence submitted by the
required under Secs. 113 and 237 of
petitioner before this court reveals outright the failure to
the Tax Code.
satisfy documentary requirements laid down under the
A cash register machine tape issued to a
19
above-cited regulations. Specifically, petitioner was not CIR v. Manila Mining Corp
able to present the following documents, to wit: Respondent Manila Mining sold gold to Central Bank. It then filed its VAT
returns, but then filed for application for tax refund/credit of input VAT
paid as attributed to the sale of gold to Central Bank. BIR did not act on
a) sales invoices or receipts; the application, so Respondent went to the CTA. BIR denied the
b) purchase invoices or receipts allegations of respondent in its answer. Respondent filed a Request for
c) evidence of actual receipt of goods; admissions from the BIR, that “original copies of official receipts and sales
invoices” were submitted to BIR-VAT. BIR filed a reply to deny the
d) BOI statement showing the amount and description of
request for admissions but failed to verify said reply. During the trial,
sale of goods, etc. Respondent presented a summary of supplier’s invoice or receipts. An
e) original or attested copies of invoice or receipt independent CPA attested to the correctness of the summary of supplier’s
on capital equipment locally purchased; and invoice or receipts. The independent CPA also testified that it examined
the information concerning the input tax payments made by respondent.
f) photocopy of import entry document and
The examination included inspection of the pertinent suppliers' invoices
confirmation receipt on imported capital and official receipts and such other auditing procedures as we considered
equipment. necessary in the circumstances.

There is the need to examine the sales invoices or receipts SC held that such certifications will not suffice. There is
to ascertain the actual amount or quantity of goods sold and nothing under CTA Circular No. 1-95, as amended by CTA
their selling price. Circular No. 10-97, which either expressly or impliedly
2. Without them, this Court cannot verify the suggests that summaries and schedules of input VAT
correctness of petitioner's claim inasmuch as the payments, even if certified by an independent CPA, suffice
regulations require that the input taxes being as evidence of input VAT payments.
sought for refund should be limited to the portion 1. What is required is that the receipts, invoices and
that is directly and entirely attributable to the other documents covering the said accounts or
particular zero-rated transaction. payments [or its photocopies] must be pre-marked
3. In this instance, the best evidence of such by the party concerned and submitted to the Court
transaction are the said sales invoices or receipts. a. Purpose: to avoid the time-consuming
4. Also, even if sales invoices are produced, there is procedure of presenting, identifying and
the further need to submit evidence that such marking of documents before the Court
goods were actually received by the buyer, in
this case, by CBP, Philp[h]os and PASAR. It does not relieve respondent of its imperative task of pre-
5. Lastly, this Court cannot determine whether there marking photocopies of sales receipts and invoices and
were actual local and imported purchase of capital submitting the same to the court after the independent CPA
goods as well as domestic purchase of non-capital shall have examined and compared them with the originals.
goods without the required purchase invoice or 2. Without presenting these premarked documents as
receipt, as the case may be, and confirmation evidence — from which the summary and
receipts. schedules were based, the court cannot verify the
There is, thus, the imperative need to submit before this authenticity and veracity of the independent
Court the original or attested photocopies of petitioner's auditor's conclusions
invoices or receipts, confirmation receipts and import entry
documents in order that a full ascertainment of the claimed While the CTA is not governed strictly by technical rules of
amount may be achieved. evidence, as rules of procedure are not ends in themselves
6. Petitioner should have taken the foresight to but are primarily intended as tools in the administration of
introduce in evidence all of the missing documents justice, the presentation of the purchase receipts and/or
abovementioned. invoices is not mere procedural technicality which may be
a. Tax refunds are in the nature of tax disregarded considering that it is the only means by which
exemptions. It is regarded as in the CTA may ascertain and verify the truth of respondent's
derogation of the sovereign authority, and claims.
should be construed in strictissimi juris
against the person or entity claiming the As the certification merely stated that it used "auditing
exemption. The taxpayer who claims for procedures considered necessary" and not auditing
exemption must justify his claim by the procedures which are in accordance with generally accepted
clearest grant of organic or statute law auditing principles and standards, and that the examination
and should not be permitted to stand on was made on "input tax payments by the Manila Mining
vague implications. Corporation," without specifying that the said input tax
payments are attributable to the sales of gold to the Central
Hence, the Court denies the claims of Atlas for refund of its Bank, this Court cannot rely thereon and regard it as
input VAT on its purchases of capital goods and effectively sufficient proof of respondent's input VAT payments for the
zero-rated sales during the second, third, and fourth quarters second semester\
of 1990 and the first quarter of 1992, for not being
established and substantiated by appropriate and Respondent's Requests for Admission do not fall within
sufficient evidence. Section 2 Rule 26 of the Revised Rules of Court. What
20
respondent sought the CIR to admit are the total amount of
can be claimed for refund or issuance of a tax credit
input VAT payments it paid for the first and second
certificate.
semesters of taxable year 1991, which matters have already
been previously alleged in respondent's petition and In the case of a person engaged in the transport of passenger
specifically denied by the CIR in its Answers. and cargo by air or sea vessels from the Philippines to a
● admissions by an adverse party as a mode of foreign country, the input taxes shall be allocated ratably
discovery contemplates of interrogatories that between his zero-rated sales and non-zero-rated sales (sales
would clarify and tend to shed light on the truth or subject to regular rate, subject to final VAT withholding and
falsity of the allegations in a pleading, and does not VAT-exempt sales).
refer to a mere reiteration of what has already been
alleged in the pleadings; otherwise, it constitutes
an utter redundancy and will be a useless, pointless
(b) Cancellation of VAT registration
process which petitioner should not be subjected to
A VAT-registered person whose registration has been
Petitioner controverted in its Answers the matters set forth cancelled due to retirement from or cessation of business, or
in respondent's Petitions for Review before the CTA — the due to changes in or cessation of status under Sec. 106 (C)
requests for admission being mere reproductions of the of the Tax Code may, within two (2) years from the date of
matters already stated in the petitions. cancellation, apply for the issuance of tax credit certificate
• Thus, petitioner should not be required to for any unused input tax which he may use in payment of
make a second denial of those matters it his other internal revenue taxes:
already denied in its Answers
Provided, however, that he shall be entitled to a refund if he
That the Reply was not made under oath is merely a formal has no internal revenue tax liabilities against which the
and not a substantive defect and may be dispensed with. tax credit certificate may be utilized:
• Although not under oath, petitioner's Provided, further, that the date of cancellation
reply to the request readily showed that being referred hereto is the date of issuance of tax
its intent was to deny the matters set forth clearance by the BIR, after full settlement of all tax
in the Request for Admissions liabilities relative to cessation of business or
change of status of the concerned taxpayer:
Provided, finally, that the filing of the
claim shall be made only after completion
SEC. 4.112-1. Claims for Refund/Credit of Input Tax. – of the mandatory audit of all internal
(a) Zero-rated and Effectively Zero-rated Sales of Goods, revenue tax liabilities covering the
Properties or Services. immediately preceding year and the short
period return and the issuance of the
A VAT-registered person whose sales of goods, properties applicable tax clearance/s by the
or services are zero-rated or effectively zero-rated may appropriate BIR Office which has
apply for the issuance of a tax refund of input tax jurisdiction over the taxpayer.
attributable to such sales.
The input tax that may be subject of the claim shall exclude (c) Where to file the claim for refund/credit
the portion of input tax that has been applied against the
output tax. Claims for refunds shall be filed with the
appropriate Bureau of Internal Revenue (BIR)
Office (Large Taxpayers Service (LTS), Revenue
The application should be filed within two (2) years after District Office (RDO)) having jurisdiction over the
the close of the taxable quarter when such sales were made. principal place of business of the taxpayer.
In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and
(3), Secs. 108(B)(1) and (2) of the Tax Code, the payments • Claims for input tax refund of direct exporters
for the sales must have been made in acceptable foreign shall be exclusively filed with the VAT Credit
currency duly accounted for in accordance with the BSP Audit Division (VCAD).
rules and regulations.
Where the taxpayer is engaged in both zero-rated or (d) Period within which refund/credit of input taxes shall be
effectively zero rated sales and in taxable (including sales made
subject to final withholding VAT) or exempt sales of goods,
In proper cases, the Commissioner of Internal Revenue shall
properties or services, and the amount of creditable input tax
grant refund for creditable input taxes within ninety (90)
due or paid cannot be directly and entirely attributed to any
days from the date of submission of the official receipts or
one of the transactions, only the proportionate share of input
invoices and other documents in support of the application
taxes allocated to zero-rated or effectively zero-rated sales

21
 Filing of VAT Returns
filed in accordance with subsections (A) and (B) hereof:
Provided, That, should the Commissioner find that SEC. 4.114-1. Filing of Return and Payment of VAT. —
the grant of refund is not proper, the Commissioner
must state in writing the legal and factual basis for (A) Filing or Return. — Every person liable to pay the value-
the denial. added tax imposed under this Title shall file a quarterly return
of the amount of his gross sales or receipt within twenty-five
The 90-day period to process and decide, pending the
establishment of the enhanced VAT Refund System shall (25) days following the close of each taxable quarter
only be up to the date of approval of the Recommendation prescribed for each taxpayer. The term "taxable quarter" shall
Report on such application for VAT refund by the mean that quarter that is synchronized with the income tax
Commissioner or his duly authorized representative: quarter of the taxpayer (i.e., the calendar quarter or fiscal
quarter):
Provided, That all claims for refund/tax credit Provided, however, That VAT-registered persons
certificate filed prior to January 1, 2018 will be shall pay the value-added tax on a monthly basis:
governed by the one hundred twenty (120)-day
Provided, finally That beginning January
processing period.
1, 2023, the filing and payment required
under the Tax Code shall be done within
twenty-five (25) days following the close
In case of full or partial denial of the claim for tax refund, of each taxable quarter
the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim, appeal the
decision with the Court of Tax Appeals: COMPLIANCE REQUIREMENTS
SEC. 113. Invoicing and Accounting Requirements for VAT-
• Provided, however, that failure on the part of Registered Persons. -
any official, agent, or employee of the BIR to
act on the application within the ninety (90)- (A) Invoicing Requirements. - A VAT-registered person shall issue:
day period shall be punishable under Section (1) A VAT invoice for every sale, barter or exchange of
269 of the Tax Code, as amended. goods or properties; and
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of services.
(e) Manner of giving refund
(B) Information Contained in the VAT Invoice or VAT Official
Refund shall be made upon warrants drawn by the Receipt. - The following information shall be indicated in the VAT
Commissioner of Internal Revenue or by his duly invoice or VAT official receipt:
authorized representative without the necessity of (1) A statement that the seller is a VAT-registered person,
being countersigned by the Chairman, followed by his Taxpayer's Identification Number (TIN);
and
Commission on Audit (COA), the provision of the
(2) The total amount which the purchaser pays or is obligated
Revised Administrative Code to the contrary to pay to the seller with the indication that such amount
notwithstanding: Provided, That refunds under this includes the value-added tax. Provided, That:
paragraph shall be subject to post audit by the (a) The amount of the tax shall be known as a
COA. separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the
term VAT-exempt sale: shall be written or printed
prominently on the invoice or receipt;
(f) VAT Refund Center (c) If the sale is subject to zero percent (0%) value-
added tax, the term “zero-rated sale” shall be
The Department of Finance shall establish a VAT written or printed prominently on the invoice or
refund center in the BIR and in the Bureau of receipt.
Customs (BOC) that will handle the processing (d) If the sale involved goods, properties or
and granting of cash refunds of creditable input services some of which are subject to and some of
tax. which are VAT zero-rated or Vat exempt, the
invoice or receipt shall clearly indicate the break-
down of the sale price between its taxable, exempt
and zero-rated components, and the calculation of
the value-added tax on each portion of the sale
shall be known on the invoice or receipt: Provided,
That the seller may issue separate invoices or
receipts for the taxable, exempt, and zero-rated
components of the sale.
(3) The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the
service; and
22
 (4) In the case of sales in the amount of One thousand pesos required, the invoice or receipt shall
(P1,000) or more where the sale or transfer is made to a further show the Taxpayer Identification
VAT-registered person, the name, business style, if any, Number (TIN) of the purchaser.
address and Taxpayer Identification Number (TIN) of the
purchaser, customer or client. Within five(5) years from the effectivity of this Act and upon the
(C) Accounting Requirements. - Notwithstanding the provisions of establishment of a system capable of storing and processing the
Section 233, all persons subject to the value-added tax under Sections required data, the Bureau shall require taxpayers engaged in the export
106 and 108 shall, in addition to the regular accounting records of goods and services, taxpayers engaged in e-commerce, and
required, maintain a subsidiary sales journal and subsidiary purchase taxpayers under the jurisdiction of the Large Taxpayers Service to
journal on which the daily sales and purchases are recorded. issue electronic receipts or sales or commercial invoices in lieu of
manual receipts or sales or commercial invoices, subject to the rules
• The subsidiary journals shall contain such and regulations to be issued by the Secretary of Finance upon
information as may be required by the Secretary of recommendation of the Commissioner and after a public hearing shall
Finance. have been held for this purpose:

(D) Consequence of Issuing Erroneous VAT Invoice or VAT Official • Provided, That taxpayers not covered by the
Receipt.- mandate of this provision may issue electronic
(1) If a person who is not a VAT-registered person issues an receipts or sales or commercial invoices, in lieu of
invoice or receipt showing his Taxpayer Identification manual receipts, and sales and commercial
Number (TIN), followed by the word “VAT”; invoices.[210]
(a) The issuer shall, in addition to any liability to
other percentage taxes, be liable to: The original of each receipt or invoice shall be issued to the purchaser,
(i) The tax imposed in Section 106 or customer or client at the time the transaction is effected, who, if
108 without the benefit of any input tax engaged in business or in the exercise of profession, shall keep and
credit; and preserve the same in his place of business for a period of three (3) years
(ii) A 50% surcharge under Section from the close of the taxable year in which such invoice or receipt was
248(B) of this Code; [55] issued, while the duplicate shall be kept and preserved by the issuer,
(b) The VAT shall, if the other requisite also in his place of business, for a like period:
information required under Subsection (B) hereof
is shown on the invoice or receipt, be recognized
• Provided, That in case of electronic receipts or
as an input tax credit to the purchaser under sales or commercial invoices, the digital records of
Section 110 of this Code. the same shall be kept by the purchaser, customer
(2) If a VAT-registered person issues a VAT invoice or VAT or client and the issuer for the same period above
official receipt for a VAT-exempt transaction, but fails to stated.
display prominently on the invoice or receipt the term ‘VAT
exempt sale,’ the issuer shall be liable to account for the tax The Commissioner may, in meritorious cases, exempt any person
imposed in section 106 or 108 as if Section 109 did not subject to internal revenue tax from compliance with the provisions of
apply. [55] this Section.

(E) Transitional Period. – Notwithstanding Subsection (B) hereof, SEC. 237-A. Electronic Sales Reporting System. – Within five (5)
taxpayers may continue to issue VAT invoices and VAT official years from the effectivity of this Act and upon establishment of a
receipt for the period July 1, 2005 to December 31, 2005 in accordance system capable of storing and processing the required data, the Bureau
with Bureau of Internal Revenue administrative practices that existed shall require taxpayers engaged in the export of goods and services,
as of December 31, 2004. and taxpayers under the jurisdiction of the Large Taxpayers Service to
electronically report their sales data to the Bureau through the use of
Sections 237 (Issuances of receipts or sales or commercial invoices) electronic point of sale systems, subject to rules and regulations to be
and 238 (Printing of receipts or sales or commercial invoices) of the issued by the Secretary of Finance as recommended by the
1997 Tax Code, as amended, for the other information required to be Commissioner of Internal Revenue:
indicated in the invoice/OR. Hernandez
• Provided, That the machines, fiscal devices, and
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – fiscal memory devices shall be at the expense of
(A) Issuance. - All persons subject to an internal revenue tax shall, at the taxpayer.
the point of each sale and transfer of merchandise or for services
rendered valued at One hundred pesos (P100.00) or more, issue duly The date processing of sales and purchase data shall comply with the
registered receipts or sales or commercial invoices, showing the date provisions of Republic Act No. 10173, otherwise known as the “Data
of transaction, quantity, unit cost and description of merchandise or Privacy Act” and Section 270 of the NIRC, as amended, on unlawful
nature of service: divulgence of taxpayer information and such other laws relating to the
confidentiality of information.
• Provided, however, That where the receipt is
issued to cover payment made as rentals, The Bureau shall also establish policies, risk management approaches,
commissions, compensations, fees, receipts or actions, trainings, and technologies to protect cyber environment,
invoices shall be issued which shall show the organization, and data in compliance with Republic Act No. 10175 or
name, business style, if any, and address of the the “Cybercrime Prevention Act of 2012.”[211]
purchaser, customer or client:
o Provided, further, That where the SEC. 238. Printing of Receipts or Sales or Commercial Invoices. -
purchaser is a VAT-registered person, in All persons who are engaged in business shall secure from the Bureau
addition to the information herein of Internal Revenue an authority to print receipts or sales or
23
commercial invoices before a printer can print the same. services some of which are subject to and some of
which are VAT zero-rated or Vat exempt, the
No authority to print receipts or sales or commercial invoices shall be invoice or receipt shall clearly indicate the break-
granted unless the receipts or invoices to be printed are serially down of the sale price between its taxable, exempt
numbered and shall show, among other things, the name, business and zero-rated components, and the calculation of
style, Taxpayer Identification Number (TIN) and business address of the value-added tax on each portion of the sale
the person or entity to use the same, and such other information that shall be known on the invoice or receipt: Provided,
may be required by rules and regulations to be promulgated by the That the seller may issue separate invoices or
Secretary of Finance, upon recommendation of the Commissioner. receipts for the taxable, exempt, and zero-rated
components of the sale.
All persons who print receipt or sales or commercial invoices shall (3) The date of transaction, quantity, unit cost and
maintain a logbook/register of taxpayers who availed of their printing description of the goods or properties or nature of the
services. The logbook/register shall contain the following information: service; and
(1) Names, Taxpayer Identification Numbers of the persons (4) In the case of sales in the amount of One thousand pesos
or entities for whom the receipts or sales or commercial (P1,000) or more where the sale or transfer is made to a
invoices were printed; and VAT-registered person, the name, business style, if any,
(2) Number of booklets, number of sets per booklet, number address and Taxpayer Identification Number (TIN) of the
of copies per set and the serial numbers of the receipts or purchaser, customer or client.
invoices in each booklet.

Sections 4.113-1 to 4.113-2- Rev. Regs. No. 15-2005 Hernandez

(Mali ata yung rev reg? Walang sec 4.113)
https://www.bir.gov.ph/images/bir_files/old_files/pdf/21429RR15-
2005.pdf

a. Issuance of a VAT Invoice Hernandez

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered

Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of
goods or properties; and

b. Issuance of a VAT Official Receipt Hernandez

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered

Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall issue:
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of services.

c. Information contained in VAT Invoice and VAT Official Receipt

Ismael

SEC. 113. Invoicing and Accounting Requirements for VAT-

Registered Persons

(B) Information Contained in the VAT Invoice or VAT Official

Receipt. - The following information shall be indicated in the VAT
invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person,
followed by his Taxpayer's Identification Number (TIN);
and
(2) The total amount which the purchaser pays or is obligated
to pay to the seller with the indication that such amount
includes the value-added tax. Provided, That:
(a) The amount of the tax shall be known as a
separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the
term VAT-exempt sale: shall be written or printed
prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-
added tax, the term “zero-rated sale” shall be
written or printed prominently on the invoice or
receipt.
(d) If the sale involved goods, properties or
24
 TAX ASSESSMENTS AND CLAIMS other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath,
FOR REFUND REMEDIES OF THE as may be relevant or material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass
GOVERNMENT TAX ASSESSMENTS from time to time of any revenue district or region and
inquire after and concerning all persons therein who may be
Powers of the Commissioner: liable to pay any internal revenue tax, and all persons owning
or having the care, management or possession of any object
1. SEC. 4. Power of the Commissioner to Interpret Tax with respect to which a tax is imposed.
Laws and to Decide Tax Cases
2. SEC. 5. Power of the Commissioner to Obtain The provisions of the foregoing paragraphs notwithstanding, nothing
Information, and to Summon, Examine, and Take in this Section shall be construed as granting the Commissioner the
Testimony of Persons. – authority to inquire into bank deposits other than as provided for in
3. SEC. 6. Power of the Commissioner to Make Section 6(F) of this Code.
Assessments and Prescribe Additional Requirements
SEC. 6. Power of the Commissioner to Make Assessments and
for Tax Administration and Enforcement Prescribe Additional Requirements for Tax Administration and
4. SEC. 7. Authority of the Commissioner to Delegate Enforcement. -
Power.
5. SEC. 204. Authority of the Commissioner to (A) Examination of Return and Determination of Tax Due. After a
Compromise, Abate and Refund or Credit Taxes return has been filed as required under the provisions of this Code, the
Commissioner or his duly authorized representative may authorize the
SEC. 5. Power of the Commissioner to Obtain Information, and to examination of any taxpayer and the assessment of the correct amount
Summon, Examine, and Take Testimony of Persons. - In ascertaining of tax, notwithstanding any law requiring the prior authorization of any
the correctness of any return, or in making a return when none has been government agency or instrumentality [5]:
made, or in determining the liability of any person for any internal Provided, however, That failure to file a return shall not
revenue tax, or in collecting any such liability, or in evaluating tax prevent the Commissioner from authorizing the examination
compliance, the Commissioner is authorized: of any taxpayer.
(A) To examine any book, paper, record, or other data which
may be relevant or material to such inquiry; The tax or any deficiency tax so assessed shall be paid upon notice and
(B) To obtain on a regular basis from any person other than the demand from the Commissioner or from his duly authorized
person whose internal revenue tax liability is subject to audit representative.
or investigation, or from any office or officer of the national Any return, statement of declaration filed in any office
and local governments, government agencies and authorized to receive the same shall not be withdrawn:
instrumentalities, including the Bangko Sentral ng Pilipinas Provided, That within three (3) years from the date
and government-owned or -controlled corporations, any of such filing, the same may be modified, changed,
information such as, but not limited to, costs and volume of or amended:
production, receipts or sales and gross incomes of taxpayers, Provided, further, That no notice for
and the names, addresses, and financial statements of audit or investigation of such return,
corporations, mutual fund companies, insurance companies, statement or declaration has in the
regional operating headquarters of multinational companies, meantime been actually served upon the
joint accounts, associations, joint ventures of consortia and taxpayer.
registered partnerships, and their members;
Provided, That the Cooperative Development (B) Failure to Submit Required Returns, Statements, Reports and
Authority shall submit to the Bureau a tax other Documents. - When a report required by law as a basis for the
incentive report, which shall include information assessment of any national internal revenue tax shall not be
on the income tax, value added tax, and other tax forthcoming within the time fixed by laws or rules and regulations or
incentives availed of by cooperatives registered when there is reason to believe that any such report is false, incomplete
and enjoying incentives under Republic Act No. or erroneous, the Commissioner shall assess the proper tax on the best
6938, as amended: evidence obtainable.
Provided, further, That the information
submitted by the Cooperative In case a person fails to file a required return or other document at the
Development Authority to the Bureau time prescribed by law, or willfully or otherwise files a false or
shall be submitted to the Department of fraudulent return or other document, the Commissioner shall make or
Finance and shall be included in the amend the return from his own knowledge and from such information
database created under Republic Act as he can obtain through testimony or otherwise, which shall be prima
No. 10708, otherwise known as “The facie correct and sufficient for all legal purposes.
Tax Incentives Management and
Transparency Act (TIMTA).” (C) Authority to Conduct Inventory-taking, Surveillance and to
(C) To summon the person liable for tax or required to file a Prescribe Presumptive Gross Sales and Receipts. - The Commissioner
return, or any officer or employee of such person, or any may, at any time during the taxable year, order inventory-taking of
person having possession, custody, or care of the books of goods of any taxpayer as a basis for determining his internal revenue
accounts and other accounting records containing entries tax liabilities, or may place the business operations of any person,
relating to the business of the person liable for tax, or any natural or juridical, under observation or surveillance if there is reason
other person, to appear before the Commissioner or his duly to believe that such person is not declaring his correct income, sales or
authorized representative at a time and place specified in the receipts for internal revenue tax purposes. The findings may be used
summons and to produce such books, papers, records, or as the basis for assessing the taxes for the other months or quarters of
25
the same or different taxable years and such assessment shall be (2) Any taxpayer who has filed an application for compromise
deemed prima facie correct. of his tax liability under Section 204(A)(2) of this Code by
reason of financial incapacity to pay his tax liability.
When it is found that a person has failed to issue receipts and invoices In case a taxpayer files an application to compromise the
in violation of the requirements of Sections 113 and 237 of this Code, payment of his tax liabilities on his claim that his financial
or when there is reason to believe that the books of accounts or other position demonstrates a clear inability to pay the tax
records do not correctly reflect the declarations made or to be made in assessed, his application shall not be considered unless and
a return required to be filed under the provisions of this Code, the until he waives in writing his privilege under Republic Act
Commissioner, after taking into account the sales, receipts, income or No. 1405, Republic Act No. 6426, otherwise known as the
other taxable base of other persons engaged in similar businesses under Foreign Currency Deposit Act of the Philippines, or under
similar situations or circumstances or after considering other relevant other general or special laws, and such waiver shall
information may prescribe a minimum amount of such gross receipts, constitute the authority of the Commissioner to inquire into
sales and taxable base, and such amount so prescribed shall be prima the bank deposits of the taxpayer.
facie correct for purposes of determining the internal revenue tax
liabilities of such person. (3) A specific taxpayer or taxpayers subject of a request for the
supply of tax information from a foreign tax authority
(D) Authority to Terminate Taxable Period. - When it shall come to pursuant to an international convention or agreement on tax
the knowledge of the Commissioner that a taxpayer is retiring from matters to which the Philippines is a signatory or a party of:
business subject to tax, or is intending to leave the Philippines or to Provided, That the information obtained from the banks and
remove his property therefrom or to hide or conceal his property, or is other financial institutions may be used by the Bureau of
performing any act tending to obstruct the proceedings for the Internal Revenue for tax assessment, verification, audit and
collection of the tax for the past or current quarter or year or to render enforcement purposes.
the same totally or partly ineffective unless such proceedings are begun
immediately, In case of a request from a foreign tax authority for tax information
the Commissioner shall declare the tax period of such held by banks and financial institutions, the exchange of information
taxpayer terminated at any time and shall send the taxpayer shall be done in a secure manner to ensure confidentiality thereof under
a notice of such decision, together with a request for the such rules and regulations as may be promulgated by the Secretary of
immediate payment of the tax for the period so declared Finance, upon recommendation of the Commissioner.
terminated and the tax for the preceding year or quarter, or
such portion thereof as may be unpaid, and said taxes shall The Commissioner shall provide the tax information obtained from
be due and payable immediately and shall be subject to all banks and financial institutions pursuant to a convention or agreement
the penalties hereafter prescribed, unless paid within the time upon request of the foreign tax authority when such requesting foreign
fixed in the demand made by the Commissioner. tax authority has provided the following information to demonstrate
the foreseeable relevance of the information to the request:
(E) Authority of the Commissioner to Prescribe Real Property (a) The identity of the person under examination or
Values. –The Commissioner is hereby authorized to divide the investigation;
Philippines into different zones or areas and shall, upon mandatory (b) A statement of the information being sought, including its
consultation with competent appraisers both from the private and nature and the form in which the said foreign tax authority
public sectors, and with prior notice to affected taxpayers, prefers to receive the information from the Commissioner;
determine the fair market value of real properties located in each zone (c) The tax purpose for which the information is being sought;
or area, subject to automatic adjustment once every three (3) years (d) Grounds for believing that the information requested is held
through rules and regulations issued by the Secretary of Finance based in the Philippines or is in the possession or control of a
on the current Philippine valuation standards: person within the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person
Provided, That no adjustment in zonal valuation shall be valid unless believed to be in possession of the requested information;
published in a newspaper of general circulation in the province, city or (f) A statement that the request is in conformity with the law
municipality concerned, or in the absence thereof, shall be posted in and administrative practices of the said foreign tax authority,
the provincial capitol, city or municipal hall and in two (2) other such that if the requested information was within the
conspicuous public places therein: jurisdiction of the said foreign tax authority then it would be
Provided, further, That the basis of any valuation, including able to obtain the information under its laws or in the normal
the records of consultations done, shall be public records course of administrative practice and that it is in conformity
open to the inquiry of any taxpayer. [5] For purposes of with a convention or international agreement; and
computing any internal revenue tax, the value of the property (g) A statement that the requesting foreign tax authority has
shall be, whichever is the higher of: exhausted all means available in its own territory to obtain
(1) The fair market value as determined by the the information, except those that would give rise to
Commissioner; or disproportionate difficulties.
(2) The fair market value as shown in the schedule
of values of the Provincial and City Assessors. The Commissioner shall forward the information as promptly as
possible to the requesting foreign tax authority. To ensure a prompt
(F) Authority of the Commissioner to Inquire into Bank Deposit response, the Commissioner shall confirm receipt of a request in
Accounts and Other Related information held by Financial writing to the requesting tax authority and shall notify the latter of
Institutions. - Notwithstanding any contrary provision of Republic Act deficiencies in the request, if any, within sixty (60) days from receipt
No. 1405, Republic Act No. 6426, otherwise known as the Foreign of the request.
Currency Deposit Act of the Philippines, and other general or special
laws, the Commissioner is hereby authorized to inquire into the bank If the Commissioner is unable to obtain and provide the information
deposits and other related information held by financial institutions of: within ninety (90) days from receipt of the request, due to obstacles
(1) A decedent to determine his gross estate; and encountered in furnishing the information or when the bank or
26
financial institution refuses to furnish the information, he shall d) The power to assign or reassign internal revenue officers to
immediately inform the requesting tax authority of the same, establishments where articles subject to excise tax are
explaining the nature of the obstacles encountered or the reasons for produced or kept.
refusal.

The term “foreign tax authority,” as used herein, shall refer to the tax SEC. 204. Authority of the Commissioner to
authority or tax administration of the requesting State under the tax Compromise, Abate and Refund or Credit Taxes. –
treaty or convention to which the Philippines is a signatory or a party The Commissioner may –
of.
A. Compromise the payment of any internal
G) Authority to Accredit and Register Tax Agents. - The revenue tax, when:
Commissioner shall accredit and register, based on their professional a. A reasonable doubt as to the validity
competence, integrity and moral fitness, individuals and general
professional partnerships and their representatives who prepare and of the claim against the taxpayer
file tax returns, statements, reports, protests, and other papers with or exists; or
who appear before, the Bureau for taxpayers. Within one hundred b. The financial position of the taxpayer
twenty (120) days from January 1, 1998, the Commissioner shall create
national and regional accreditation boards, the members of which shall demonstrates a clear inability to pay
serve for three (3) years, and shall designate from among the senior the assessed tax.
officials of the Bureau, one (1) chairman and two (2) members for each
board, subject to such rules and regulations as the Secretary of Finance
shall promulgate upon the recommendation of the Commissioner. The compromise settlement of any tax liability shall
be subject to the following minimum amounts:
Individuals and general professional partnerships and their 1. For cases of financial incapacity, a minimum
representatives who are denied accreditation by the Commissioner
and/or the national and regional accreditation boards may appeal such compromise rate equivalent to ten percent
denial to the Secretary of Finance, who shall rule on the appeal within (10%) of the basic assessed tax; and
sixty (60) days from receipt of such appeal. Failure of the Secretary of 2. For other cases, a minimum compromise rate
Finance to rule on the Appeal within the prescribed period shall be
deemed as approval of the application for accreditation of the equivalent to forty percent (40%) of the basic
appellant. assessed tax.
3. Where the basic tax involved exceeds One
(H) Authority of the Commissioner to Prescribe Additional
Procedural or Documentary Requirements. - The Commissioner may million pesos (P1,000.000) or where the
prescribe the manner of compliance with any documentary or settlement offered is less than the prescribed
procedural requirement in connection with the submission or minimum rates, the compromise shall be
preparation of financial statements accompanying the tax returns.
subject to the approval of the Evaluation
SEC. 7. Authority of the Commissioner to Delegate Power. - The Board which shall be composed of the
Commissioner may delegate the powers vested in him under the Commissioner and the four (4) Deputy
pertinent provisions of this Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to such Commissioners.
limitations and restrictions as may be imposed under rules and B. Abate or cancel a tax liability, when:
regulations to be promulgated by the Secretary of Finance, upon a. The tax or any portion thereof appears
recommendation of the Commissioner: Provided, however, That the
following powers of the Commissioner shall not be delegated: to be unjustly or excessively assessed;
or
a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance;
b. The administration and collection
b) The power to issue rulings of first impression or to reverse, costs involved do not justify the
revoke or modify any existing ruling of the Bureau; collection of the amount due.
c) The power to compromise or abate, under Sec. 204 (A) and
(B) of this Code, any tax liability:
a. Provided, however, That assessments issued by All criminal violations may be compromised except:
the regional offices involving basic deficiency (a) those already filed in court, or (b) those involving
taxes of Five hundred thousand pesos (P500,000)
or less, and minor criminal violations, as may be
fraud.
determined by rules and regulations to be C. Credit or refund taxes erroneously or
promulgated by the Secretary of finance, upon illegally received or penalties imposed
recommendation of the Commissioner, discovered
by regional and district officials, may be
without authority, refund the value of internal
compromised by a regional evaluation board revenue stamps when they are returned in
which shall be composed of the Regional Director good condition by the purchaser, and, in his
as Chairman, the Assistant Regional Director, the
heads of the Legal, Assessment and Collection
discretion, redeem or change unused stamps
Divisions and the Revenue District Officer having that have been rendered unfit for use and
jurisdiction over the taxpayer, as members; and refund their value upon proof of destruction.
27
 a. No credit or refund of taxes or Congress and in aid of legislation, furnish its appropriate
penalties shall be allowed unless the Committee pertinent information including but not limited to:
industry audits, collection performance data, status reports in
taxpayer files in writing with the criminal actions initiated against persons and taxpayer's returns:
Commissioner a claim for credit or Provided, however, That any return or return
refund within two (2) years after the information which can be associated with, or
payment of the tax or penalty: otherwise identify, directly or indirectly, a particular
i. Provided, however, That a taxpayer shall be furnished the appropriate Committee
of Congress only when sitting in Executive Session
return filed showing an Unless such taxpayer otherwise consents in writing to
overpayment shall be such disclosure.
considered as a written claim
for credit or refund.
Submission of tax-related information as required by the
Secretary of Finance ( as amended by the TRAIN Law)
A Tax Credit Certificate validly issued under the
provisions of this Code may be applied against any Submission of Tax-Related Information to the Department of
internal revenue tax, excluding withholding taxes, Finance. - The Commissioner shall, upon the order of the
Secretary of Finance specifically identifying the needed
for which the taxpayer is directly liable.
information and justification for such order in relation to the
• Any request for conversion into refund of grant of incentives under Title XIII, furnish the Secretary
unutilized tax credits may be allowed, pertinent information on the entities receiving incentives under
subject to the provisions of Section 230 of this Code:
this Code: Provided, however, That the Secretary and the relevant
officers handling such specific information shall be
• Provided, That the original copy of the covered by the provisions of Section 270 unless the
Tax Credit Certificate showing a taxpayer consents in writing to such disclosure.
creditable balance is surrendered to the
appropriate revenue officer for Audit Process
verification and cancellation: 1. Issuance of the eLetter of Authority
o Provided, further, That in no case 2. Examination of Documents
shall a tax refund be given 3. Notice of Discrepancy
resulting from availment of 4. Issuance of the Preliminary Assessment Notice (PAN)
incentives granted pursuant to 5. Issuance of Formal Letter of Demand and Assessment
special laws for which no actual Notice (FAN)
payment was made. 6. Filing of Protest- disputed assessment
7. Submission of required documents within 60 days
form the filing of the protest
Period within which to issue an assessment
8. Decision within 180 days from submission of
SEC. 203. Period of Limitation Upon Assessment and
Collection. - Except as provided in Section 222, internal documents
revenue taxes shall be assessed within three (3) years after the 9. Final decision on disputed assessment
last day prescribed by law for the filing of the return, and no 10. Appeal to the Court of Tax Appeals.
proceeding in court without assessment for the collection of 11.Appeal to the Supreme Court
such taxes shall be begun after the expiration of such period:
Provided, That in a case where a return is filed beyond "SEC. 3. Due Process Requirement in the Issuance of
the period prescribed by law, the three (3)-year period a Deficiency Tax Assessment. —
shall be counted from the day the return was filed.
3.1 Mode of procedure in the issuance of a deficiency
For purposes of this Section, a return filed before the last day tax assessment:
prescribed by law for the filing thereof shall be considered as 3.1.1 Preliminary Assessment Notice (PAN).
filed on such last day. — If after review and evaluation by the
Commissioner or his duly authorized
Submission of Reports by the Commissioner representative, as the case may be, it is
determined that there exists sufficient basis to
Submission of pertinent information to Congress assess the taxpayer for any deficiency tax or
(A) Submission of Pertinent Information to Congress. - The taxes, the said Office shall issue to the
provision of Section 270 of this Code to the contrary taxpayer a Preliminary Assessment Notice
notwithstanding, the Commissioner shall, upon request of (PAN) for the proposed assessment.

28
 It shall show in detail the facts and the law, 3.1.3 Formal Letter of Demand and Final
rules and regulations, or jurisprudence on Assessment Notice (FLD/FAN). — The Formal Letter
which the proposed assessment is based of Demand and Final Assessment Notice (FLD/FAN)
shall be issued by the Commissioner or his duly
If the taxpayer fails to respond authorized representative. The FLD/FAN calling for
within fifteen (15) days from date of receipt payment of the taxpayer's deficiency tax or taxes shall
of the PAN, he shall be considered in default, state the facts, the law, rules and regulations, or
in which case, a Formal Letter of Demand jurisprudence on which the assessment is based;
and Final Assessment Notice (FLD/FAN) otherwise, the assessment shall be void (see
shall be issued calling for payment of the illustration in ANNEX "B" hereof).
taxpayer's deficiency tax liability, inclusive
of the applicable penalties. 3.1.4 Disputed Assessment. — The taxpayer
If the taxpayer, within fifteen (15) or its authorized representative or tax agent may
days from date of receipt of the PAN, protest administratively against the aforesaid
responds that he/it disagrees with the findings FLD/FAN within thirty (30) days from date of receipt
of deficiency tax or taxes, an FLD/FAN shall thereof. The taxpayer protesting an assessment may
be issued within fifteen (15) days from file a written request for reconsideration or
filing/submission of the taxpayer's response, reinvestigation defined as follows:
calling for payment of the taxpayer's (i) Request for reconsideration — refers to a
deficiency tax liability, inclusive of the plea of re-evaluation of an assessment on the
applicable penalties. basis of existing records without need of
additional evidence. It may involve both a
3.1.2 Exceptions to Prior Notice of question of fact or of law or both.
the Assessment. — Pursuant to Section 228 of (ii) Request for reinvestigation — refers to a
the Tax Code, as amended, a PAN shall not plea of re-evaluation of an assessment on the
be required in any of the following cases: basis of newly discovered or additional
(i) When the finding for any evidence that a taxpayer intends to present in
deficiency tax is the result of the reinvestigation. It may also involve a
mathematical error in the question of fact or of law or both
computation of the tax appearing on
the face of the tax return filed by the The taxpayer shall state in his protest:
taxpayer; or (i) the nature of protest whether
(ii) When a discrepancy has been reconsideration or reinvestigation, specifying
determined between the tax newly discovered or additional evidence he
withheld and the amount actually intends to present if it is a request for
remitted by the withholding agent; reinvestigation,
or (ii) date of the assessment notice, and
(iii) When a taxpayer who opted to (iii) the applicable law, rules and regulations,
claim a refund or tax credit of excess or jurisprudence on which his protest is
creditable withholding tax for a based, otherwise, his protest shall be
taxable period was determined to considered void and without force and effect.
have carried over and automatically
applied the same amount claimed If there are several issues involved in the FLD/FAN
against the estimated tax liabilities but the taxpayer only disputes or protests against the
for the taxable quarter or quarters of validity of some of the issues raised, the assessment
the succeeding taxable year; or attributable to the undisputed issue or issues shall
(iv) When the excise tax due on become final, executory and demandable;
excisable articles has not been paid; • and the taxpayer shall be required to pay the
or deficiency tax or taxes attributable thereto, in
(v) When an article locally which case, a collection letter shall be issued
purchased or imported by an exempt to the taxpayer calling for payment of the said
person, such as, but not limited to, deficiency tax or taxes, inclusive of the
vehicles, capital equipment, applicable surcharge and/or interest.
machineries and spare parts, has If there are several issues involved in the disputed
been sold, traded or transferred to assessment and the taxpayer fails to state the facts, the
non-exempt persons. applicable law, rules and regulations, or jurisprudence
in support of his protest against some of the several
In the above-cited cases, a FLD/FAN shall be issues on which the assessment is based, the same shall
issued outright. be considered undisputed issue or issues, in which
case, the assessment attributable thereto shall become
29
final, executory and demandable; and the taxpayer (i) appeal to the CTA within thirty (30) days
shall be required to pay the deficiency tax or taxes after the expiration of the one hundred eighty
attributable thereto and a collection letter shall be (180)-day period; or
issued to the taxpayer calling for payment of the said (ii) await the final decision of the
deficiency tax, inclusive of the applicable surcharge Commissioner's duly authorized
and/or interest. representative on the disputed assessment.

For requests for reinvestigation, the taxpayer If the protest or administrative appeal, as the case may
shall submit all relevant supporting documents in be, is denied, in whole or in part, by the Commissioner,
support of his protest within sixty (60) days from date the taxpayer may appeal to the CTA within thirty (30)
of filing of his letter of protest, otherwise, the days from date of receipt of the said decision.
assessment shall become final. Otherwise, the assessment shall become final,
• The term "relevant supporting documents" executory and demandable.
refer to those documents necessary to support • A motion for reconsideration of the
the legal and factual bases in disputing a tax Commissioner's denial of the protest or
assessment as determined by the taxpayer. administrative appeal, as the case may be,
• The sixty (60)-day period for the submission shall not toll the thirty (30)-day period to
of all relevant supporting documents shall not appeal to the CTA.
apply to requests for reconsideration.
• Furthermore, the term "the assessment shall If the protest or administrative appeal is not acted upon
become final" shall mean the taxpayer is by the Commissioner within one hundred eighty (180)
barred from disputing the correctness of the days counted from the date of filing of the protest, the
issued assessment by introduction of newly taxpayer may either:
discovered or additional evidence, and the (i) appeal to the CTA within thirty (30) days
FDDA shall consequently be denied. from after the expiration of the one hundred
eighty (180)-day period; or
If the taxpayer fails to file a valid protest against the (ii) await the final decision of the
FLD/FAN within thirty (30) days from date of receipt Commissioner on the disputed assessment
thereof, the assessment shall become final, executory and appeal such final decision to the CTA
and demandable. within thirty (30) days after the receipt of a
• No request for reconsideration or copy of such decision.
reinvestigation shall be granted on tax
assessments that have already become final, It must be emphasized, however, that in case of
executory and demandable. inaction on protested assessment within the 180-day
period, the option of the taxpayer to either:
If the protest is denied, in whole or in part, by the (1) file a petition for review with the CTA
Commissioner's duly authorized representative, the within 30 days after the expiration of the 180-
taxpayer may either: day period; or
(i) appeal to the Court of Tax Appeals (CTA) (2) await the final decision of the
within thirty (30) days from date of receipt of Commissioner or his duly authorized
the said decision; or representative on the disputed assessment
(ii) elevate his protest through request for and appeal such final decision to the CTA
reconsideration to the Commissioner within within 30 days after the receipt of a copy of
thirty (30) days from date of receipt of the such decision,
said decision. *are mutually exclusive and the resort to
o No request for reinvestigation shall one bars the application of the other.
be allowed in administrative appeal
and only issues raised in the 3.1.5 Final Decision on a Disputed
decision of the Commissioner's duly Assessment (FDDA). — The decision of the
authorized representative shall be Commissioner or his duly authorized representative
entertained by the Commissioner. shall state the:
(i) facts, the applicable law, rules and
If the protest is not acted upon by the Commissioner's regulations, or jurisprudence on which such
duly authorized representative within one hundred decision is based, otherwise, the decision
eighty (180) days counted from the date of filing of the shall be void (see illustration in ANNEX "C"
protest in case of a request reconsideration; or from hereof), and
date of submission by the taxpayer of the required (ii) that the same is his final decision.
documents within sixty (60) days from the date of
filing of the protest in case of a request for
reinvestigation, the taxpayer may either:
30
 3.1.6 Modes of Service. — The notice barangay official. Such facts shall be
(PAN/FLD/FAN/FDDA) to the taxpayer herein contained in the bottom portion of the notice,
required may be served by the Commissioner or his as well as the names, official position and
duly authorized representative through the following signatures of the witnesses.
modes: • "Disinterested witnesses" refers to persons of
(i) The notice shall be served through legal age other than employees of the Bureau
personal service by delivering personally a of Internal Revenue.
copy thereof to the party at his registered or
known address or wherever he may be found. (iii) Service by mail is done by sending a copy of the
o A known address shall mean a place notice by registered mail to the registered or known
other than the registered address address of the party with instruction to the Postmaster
where business activities of the to return the mail to the sender after ten (10) days, if
party are conducted or his place of undelivered. A copy of the notice may also be sent
residence. through reputable professional courier service. If no
o In case personal service is not registry or reputable professional courier service is
practicable, the notice shall be available in the locality of the addressee, service may
served by substituted service or by be done by ordinary mail.
mail. • The server shall accomplish the bottom
portion of the notice. He shall also make a
(ii) Substituted service can be resorted to written report under oath before a Notary
when the party is not present at the registered Public or any person authorized to administer
or known address under the following oath under Section 14 of the NIRC, as
circumstances: amended, setting forth the manner, place and
o The notice may be left at the party's date of service, the name of the
registered address, with his clerk or person/barangay official/professional courier
with a person having charge thereof. service company who received the same and
If the known address is a place such other relevant information. The registry
where business activities of the receipt issued by the post office or the official
party are conducted, the notice may receipt issued by the professional courier
be left with his clerk or with a company containing sufficiently identifiable
person having charge thereof. If the details of the transaction shall constitute
known address is the place of sufficient proof of mailing and shall be
residence, substituted service can be attached to the case docket.
made by leaving the copy with a
person of legal age residing therein. Rev. Regs. No. 7-2018- Due Process
o If no person is found in the party's
registered or known address, the "SECTION 3. Due Process Requirement in the
revenue officers concerned shall Issuance of a Deficiency Tax Assessment. —
bring a barangay official and two (2)
disinterested witnesses to the 3.1 Mode of procedure in the issuance of a
address so that they may personally deficiency tax assessment:
observe and attest to such absence.
 The notice shall then be 3.1.1 Notice for Informal Conference. — The
given to said barangay Revenue Officer who audited the taxpayer's records
official. shall, among others, state in his report whether or
 Such facts shall be not the taxpayer agrees with his findings that the
contained in the bottom taxpayer is liable for deficiency tax or taxes. If the
portion of the notice, as taxpayer is not amenable, based on the said
well as the names, official Officer's submitted report of investigation, the
position and signatures of taxpayer shall be informed, in writing, by the
the witnesses. Revenue District Office or by the Special
Investigation Division, as the case may be (in the
Should the party be found at his registered or case of Revenue Regional Offices) or by the Chief
known address or any other place but refuse to of Division concerned (in the case of the BIR
receive the notice, the revenue officers concerned National Office) of the discrepancy or
shall bring a barangay official and two (2) discrepancies in the taxpayer's payment of his
disinterested witnesses in the presence of the party internal revenue taxes, for the purpose of "Informal
so that they may personally observe and attest to Conference," in order to afford the taxpayer with an
such act of refusal. opportunity to present his side of the case.
• The notice shall then be given to said
31
 The Informal Conference shall in no case extend 10. A waiver of the statute of limitations is not a
beyond thirty (30) days from receipt of the notice unilateral act by the taxpayer or the BIR, but is a
for informal conference. If it is found that the bilateral agreement between two parties.
taxpayer is still liable for deficiency tax or taxes
after presenting his side, and the taxpayer is not REVENUE MEMORANDUM CIRCULAR NO. 82-2022
amenable, the Revenue District Officer or the
Chief of the Special Investigation Division of the This Circular is hereby issued to address the issues and
Revenue Regional Office, or the Chief of concerns on the service of the electronic Letter of
Division in the National Office, as the case may Authority (eLA) to the taxpayer within the 30-day period
be, shall endorse the case within seven (7) days from the date of issuance thereof.
from the conclusion of the Informal Conference Item No. VIII of RAMO No. 1-2000 provides:
to the Assessment Division of the Revenue "2.3 A Letter of Authority must be served or
Regional Office or to the Commissioner or his presented to the taxpayer within 30 days from its
duly authorized representative for issuance of a date of issue, otherwise, it becomes null and void
deficiency tax assessment. unless revalidated. The taxpayer has all the right
Failure on the part of Revenue Officers to comply to refuse its service if presented beyond the 30-
with the periods indicated herein shall be meted day period depending on the policy set by top
with penalty as provided by existing laws, rules management. Revalidation is done by:
and regulations." • issuing a new Letter of Authority or
• by just simply stamping the words
'Revalidated on ____' on the face of the
Requisites for a valid waiver: copy of the Letter of Authority issued"
1. For a valid waiver on the part of the taxpayer,
the waiver must be executed prior to the In the Decision of the Court of Tax Appeals
expiration of the period to assess or collect (CTA) in the case of Dakay Construction and
taxes Development Corporation vs. Commissioner of Internal
2. Waiver must indicate the expiry date of the Revenue (CTA EB No. 1294), which Decision is
extended period. SO you have to state that anchored on the above quoted provision, the CTA-En
you’re allowing the BIR an examination up Banc ruled that "The Letter of Authority no longer has
to: Septemeber 30 (sample) any force or effect having been served on the petitioner
3. specify the type of tax that you can still be beyond the prescribed 30-day period. The assessment
examined on conducted by the Revenue Officers was already
4. Make sure that the waiver is signed by a duly unauthorized, because there is no valid LOA covering
authorized officer of your corporation it."
Let it be clarified, that RAMO No. 1-2000 was
Notes on Waiver: already amended by RAMO No. 1-2020, thereby
1. Waiver need not be authorized deleting the above quoted provision to read as follows:
2. Receiving person need not be specifically "1. Serving of eLA
authorized through SPA a. On the first opportunity of the RO to
3. No strict format have a personal contact with the taxpayer,
4. Must indicate the type of tax and the date of he should present the eLA together with
examination the checklist of requirements. The eLA
5. Date of acceptance by the CIR need not should only be served by the RO assigned
already be need to the case. He should have the proper
6. Duty on the party of the taxpayer to keep a identification card and should be in
copy uniform. However, the service of eLA may
7. Burden to the taxpayer to prove that the likewise be done in other manners as
waiver is duly executed prescribed in existing policies.
8. A waiver of the statute of limitations under the Tax b. An eLA authorizes or empowers a
Code, to a certain extent, is a derogation of the designated RO to examine, verify and
taxpayer's right to security against prolonged and scrutinize a taxpayer's books and records
unscrupulous investigations and must therefore be in relation to his internal revenue tax
carefully and strictly construed. liabilities for a particular period.
9. A waiver of the statute of limitations is not a waiver 2. Request for Accounting Records
of the right to invoke the defense of prescription. xxx xxx xxx."
a. It is an agreement between the taxpayer While the timeline for the "service of eLA" is
and the BIR that the period to issue an not explicitly provided therein, it is still for the best
assessment and collect the taxes due is interest of the government that the eLA should be served
extended to a date certain. to the taxpayer immediately upon issuance/assignment
thereof.
32
 the Tax Fraud Division of
Hence, it should be necessary for all concerned the
Revenue Officers (RO) as a duty or responsibility to Enforcement Services, and
serve the eLA immediately, considering that the entire b. Policy cases under audit
audit process must be completed within a period of 180 by the special teams in the
days for RDO cases/240 days for LT cases from the date National Office. [RMO 36-
of issuance of eLA. Non-observance on the aforesaid 99]
timeline is gross neglect of duty which is a grave offense
subject to appropriate administrative sanctions pursuant
to Revenue Memorandum Order No. 53-2010.

Further, the deletion of the 30-day period to

serve the eLA shall in no case be an excuse for the
concerned RO to delay its service nor for a taxpayer to
refuse its service or to question its validity, in case the
same is served beyond the 30-day period.
Again, what is crucial is that the entire
audit process shall be completed within a period What is the Effect of lack of letter of authority (LOA)?
of 180 days for RDO cases/240 days for LT cases Any tax assessment issued without an LOA is a violation of the
from the date of issuance of eLA. taxpayers’ right to due process and is therefore “inescapably
void.” [RMC 75-2018; Medicard Philippines, Inc. v. CIR, G.R.
Therefore, eLA which remains unserved upon the No. 222743 (2017)]
effectivity of this Circular or have been served beyond the
30-day period from the date of its issuance shall still be Revalidation of LOA?
considered valid and enforceable, provided that the 180- A Revenue Officer is allowed only 120 days from the date of
day/240-day period to complete the audit process has not receipt of an LOA by the taxpayer to conduct the audit and
yet expired. submit the required report of investigation. If the Revenue
Officer is unable to submit his final report of investigation
Letter of Authority Letter Notice within the 120-day period, he must then submit a progress
report to his Head of Office, and surrender the LOA for
An official document that A Letter Notice (LN) is not revalidation.
empowers a Revenue found in the NIRC and is not
Officer to examine and an authority to conduct an OOCL v. CIR
scrutinize a taxpayer’s audit. The LN is merely a OOCL received a Letter of Authority dated Oct. 11, 2011 (LOA) authorizing
books of accounts and other notice to the taxpayer that a Revenue Officer Sevilla (RO Sevilla) to examine its books of account and
other accounting records for all internal revenue taxes for the period from
accounting records, in discrepancy is found based July 1, 2009 to June 30, 2010. OOCL received a Notice of Informal
order to determine the on the BIR’s third party Conference requesting it to appear for an informal conference to enable it to
taxpayer’s correct internal information data matching present its side of the case. Oct. 2, 2013 letter: OOCL disputed the findings
revenue tax liabilities. programs. attached to the Notice of Informal Conference issued by LTS-RLTAD
(Large Taxpayers Service Regular Large Taxpayers Audit Division). OOCL
received from LTS-RLTAD II a Preliminary Assessment Notice (PAN) with
Details of Discrepancies
General Rule: The issuance Thus, an LOA must still be
of an LOA is a mandatory secured before proceeding Court finds the deficiency tax assessments issued by CIR
statutory requirement. [Sec. with the further examination against OOCL to be intrinsically void and thus, shall be
13, NIRC] Any tax and assessment of the canceled and set aside.
assessment issued without taxpayer. [Medicard • The invalidity of such deficiency tax assessments
an LOA is a violation of the Philippines, Inc. v. CIR, G.R. springs from the absence of authority on the part of
taxpayers’ right to due No. 222743 (2017) the revenue officers who conducted the
process and is therefore examination of OOCL's books of accounts and
“inescapably void.” [RMC other accounting records.
75-2018; Medicard • While the lack of authority of the revenue officers
Philippines, Inc. v. CIR, to conduct the audit was not specifically raised as
G.R. No. 222743 (2017)] an issue, this Court is not precluded from
considering the same given that a void assessment
Exception: The following bears no fruit.
cases need not be covered
by a valid LOA: Section 6 (A) of the 1997 NIRC likewise vested the CIR's
a. Cases involving civil or duly authorized representatives the power to authorize the
criminal tax fraud which
fall under the jurisdiction of
33
examination of any taxpayer for the purpose of collecting the and GS Lingan the authority to conduct the examination
correct amount of tax. pursuant to LOA.
● The term "duly authorized representative" under ● In his capacity as OIC-Chief of LTS-RLTAD II,
Section 6 (A) of the 1997 NIRC which may Mr. Edwin T. Guzman is bereft of any power to
authorize examination of taxpayers refers to a authorize the examination of taxpayers or to effect
Revenue Regional Director, in accordance with any modification or amendment to a previously
Sections 10 and 13 of the 1997 NIRC. issued LOA because, as mentioned earlier, only the
● The term likewise refers to other tax officials with CIR or his duly authorized representatives are
the rank equivalent to a division chief or higher, granted such power.
pursuant to the CIR's authority to delegate powers
vested in him under Section 7 of the 1997 NIRC.
● Notably, the issuance of LOAs for the examination Nanox Philippines Inc. v. CIR.
On October 22, 2007, petitioner received Letter of Authority (LOA) dated
of taxpayers is not one of those enumerated powers October 4, 2007 from respondent authorizing Revenue Officer (RO) and
which the CIR cannot delegate. Group Supervisor to examine its books of accounts and other accounting
records for the FY ended March 31, 2007.Petitioner received a Notice of
In relation to the foregoing provisions, RMO No. 43-90 Informal Conference from the Revenue District Office (RDO) No. 21 of the
BIR on June 2, 2009, inviting petitioner or its duly authorized representative
issued by the CIR identifies those officials who are to an informal conference to discuss the preliminary results of the tax audit.
authorized to issue and sign LOA. It may be noted that Petitioner submitted various supporting documents to support its position
the Chief of LTS-RLTAD II is not included therein. The relative to the cancellation of the findings contained in the attached
relevant portion provides that: preliminary report of investigation. Such documents were found to be
insufficient. Afterwards, respondent issued a preliminary Assessment
● “the only BIR officials authorized to issue and sign Notice (PAN) wherein it was stated that petitioner had deficiency value-
Letters of Authority are the Regional Directors, the added tax (VAT) on sales of scrap, expanded withholding tax (EWT), final
Deputy Commissioners and the Commissioner. For withholding tax (FWT) on royalty payments, and fringe benefits tax (FBT)
the exigencies of the service, other officials may in the total amount of P21,564,547.66. Petitioner sought clarification, but
the respondent issued the Formal Letter of Demand (FLD) covering the
be authorized to issue and sign Letters of Final Assessment notice (FAN)
Authority but only upon prior authorization by the
Commissioner himself." The audit process normally commences with the issuance
by the respondent of an LOA.
To reiterate, only the CIR or his duly authorized ● The LOA gives notice to the taxpayer that it is
representatives who can authorize the examination of under investigation for possible deficiency tax
taxpayers for purposes of assessment of any deficiency taxes. assessment;
● Stated differently, unless duly authorized by the ● at the same time it authorizes or empowers a
CIR himself or by his duly authorized designated Revenue Officer (RO) to examine,
representatives, an examination of the taxpayer by verify, and scrutinize a taxpayer's books and
a revenue officer cannot be validly made. records, in relation to internal revenue tax
liabilities for a particular period.
Considering that only the above officials are given the power
to authorize examination of taxpayers for assessment Thus, the law requires that an LOA must have been issued in
purposes through the issuance of an LOA, logically favor of an RO, in order for such an RO to examine taxpayers
speaking, it is only them who can effect any modification or and to perform tax assessment and collection functions.
amendment to a previously issued LOA, should the need ● ROs must be authorized, through an LOA, to
therefor arises. examine the books of accounts and other
● Parenthetically, RMO No. 43-90 provides that any accounting records of a taxpayer; in the absence
reassignment or transfer of cases to another revenue thereof, the tax assessments issued by the BIR
officers shall require the issuance of a new LOA. against such taxpayer is a nullity.
IN THIS CASE, the revenue officers named under the LOA In this case, records show that it was RO Erlinda M. De Leon
were different from those who actually examined OOCL's who was initially authorized to examine petitioner's books of
books of accounts and other accounting records for the accounts and other accounting records for fiscal year ending
period from July 1, 2009 to June 30, 2010. March 31, 2007 under LOA No. LOA 2007 00003651 dated
● As it appears, RO Sison and GS Lingan conducted October 4, 2007.
the audit on the basis of Memorandum of ● It was only through an undated Re-Assignment
Assignment issued by OIC-Chief of LTS-RLTAD Notice where RO Rey K. Lugtu was "authorized" to
II Guzman reassigning to them the conduct of continue the examination of the petitioner's books
examination of OOCL's books of accounts and and accounting records.
other accounting records. ● Thereafter, invoking the very same LOA, RO Lugtu
recommended the issuance of a PAN against
Thus, the Memorandum of Assignment issued by OIC-Chief petitioner.
of LTS-RLTAD II Guzman cannot validly grant RO Sison

34
Thus, RO Lugtu cannot be considered as validly authorized of a taxpayer for the purpose of
to examine petitioner's books of accounts and other collecting the correct amount of tax.
accounting records for fiscal year ending March 31, 2007. ii. An LOA is premised on the fact that
● This must be so because his authority to examine the examination of a taxpayer who has
did not spring from, or was not made pursuant to, already filed his tax returns is a power
an LOA, as required by law and jurisprudence that statutorily belongs only to the
● Furthermore, the issuance of the said Re- CIR himself or his duly authorized
Assignment Notice in favor of RO Lugtu is representatives.
inconsequential, since it is not an LOA. b. Based on Sec. 6 of the NIRC, it is clear that
unless authorized by the CIR himself or by his
Pursuant to the foregoing provisions then, the issuance of duly authorized representative, through an
ReAssignment Notice for purposes of audit examination and LOA, an examination of the taxpayer cannot
tax assessment is strictly prohibited. ordinarily be undertaken.
● As a corollary, the said Re-Assignment Notice 5. ITCAB, pursuant to a LOA, only ROs Maddela,
cannot be a source of authority for an RO to Ramirez, Paz, Parugao, Maniego, Aguila and GS
examine the books of accounts and other Glorializa Samoy, were authorized to conduct the audit
accounting records of taxpayers. investigation of petitioner for TY 2010.
a. Thereafter, a MOA was issued, referring the
Correspondingly, since RO Lugtu was not authorized, case to RO Rosario Arriola and GS Rolando
through an LOA, the subject tax assessments, which came Balbido, for the continuation of the
about as a result of the said RO's examination of petitioner's audit/investigation of petitioner's tax liabilities
books of accounts and accounting records for fiscal year for TY 2010.
ending March 31, 2007, are void. 6. Notably, it was RO Arriola who recommended the
issuance of the PAN, FLD, FDDA and Revised FDDA.
Metro Main Star AIsa Corp v. CTA 7. It evident from the foregoing, that the supposed
On September 20, 2011, respondent, through Alfredo Misajon, OIC- authority of RO Arriola to conduct the audit
Assistant Commissioner for the Large Taxpayers Service (LTS), issued investigation of petitioner and to recommend the
a Letter of Authority (LOA) authorizing ROs Ma. Salud Maddela, Myrna
Ramirez, Zenaida Paz, Cletofel Parugao, Allan Maniego, Joel Aguila and issuance of the assessment notices, was merely based on
Group Supervisor (GS) Glorializa Samoy, to examine the books of accounts an MOA.
and other accounting records of petitioner for all internal revenue taxes for a. As a corollary, it bears noting that there is no
the period from January 1 to December 31, 2010. In 2013, a Memorandum showing that a new LOA was issued
of Assignment (MOA) was issued by Cesar Escalada, Chief of Regular LT
Audit Division 1, referring the case to RO Arriola and GS Balbido, for the specifically authorizing RO Arriola to continue
continuation of the audit/investigation of petitioner's tax liabilities for TY the audit investigation of petitioner following
2010. Petitioner received a PAN and later on FAN/FLD and FDDA. the reassignment and transfer of the case.
8. The failure of respondent to issue a new LOA runs
1. Section 6 (A) of the NIRC of 1997, lays down the counter to RMO No. 43-90, which lays down the
power of the CIR to authorize the examination of any guideline for the audit/investigation and issuance of
taxpayer and the assessment of the correct amount LOA.
of tax: a. Based on the foregoing RMO, all audit
a. Based on the foregoing, an authority investigations must be conducted by a duly
emanating from respondent CIR or his duly designated RO authorized to perform audit and
authorized representative is required before an examination of taxpayer's books and
examination and an assessment may be made. accounting records, pursuant to an LOA.
2. Relative thereto, Section 13 provides that the authority b. In case of re-assignment or transfer of cases to
of a RO to examine or to recommend the assessment of another RO, it is mandatory that a new LOA
any deficiency tax due must be exercised pursuant to a shall be issued with the corresponding notation
LOA issued by the Revenue Regional Director. thereto.
3. Evidently, a grant of authority, through an LOA, must c. In the absence of such an authority, the
be issued assigning a revenue officer to perform tax assessment or examination is a nullity.
assessment functions, in order that such officer may 9. The Supreme Court likewise pronounced in said case
examine taxpayers and collect the correct amount of tax, that the practice of reassigning or transferring revenue
or to recommend the assessment of any deficiency tax officers originally named in the LOA and substituting
due. them with new revenue officers to continue the audit or
4. In the case of Medicard v. CIR, it was held that: investigation without a separate or amended LOA:
a. A LOA is the authority given to the appropriate a. (i) violates the taxpayer's right to due process
revenue officer assigned to perform assessment in tax audit or investigation;
functions. b. (ii) usurps the statutory power of the CIR or his
i. It empowers or enables said revenue duly authorized representative to grant the
officer to examine the books of power to examine the books of account of a
account and other accounting records taxpayer; and
35
 c. (iii) does not comply with existing BIR rules or required to file a return, or should the information or records
and regulations, particularly RMO No. 43-90 be in the possession of a third party or office, then in that party’s
dated September 20, 1990. name, requiring the concerned person to appear and submit
10. Even assuming arguendo that an MOA may be before the signatory of the SDT the mandated
considered as an LOA, the same is still insufficient to information/documents at an appointed time, date and place.
authorize the revenue officer to continue the audit
investigation in this case.
11. Under RMO No. 29-07 dated September 26, 2007, the The time to be indicated in the SDT shall be during regular
BIR officers who are authorized to issue and approve business hours or from eight o’clock in the morning and five
LOAs for the conduct of audit investigation of taxpayers o’clock in the afternoon during the work week, excluding
under the Large Taxpayers Services are enumerated as holidays. The venue shall be in the BIR office of the signatory
follows: of the SDT.
a. II. AUDIT POLICIES AND GUIDELINES
xxx a. In case of corporations, partnerships or associations,
b. 2. All Letters of Authority (LOAs) shall be the SDT shall be issued to the partner, president,
issued and approved by the Assistant general manager, branch manager, treasurer,
Commissioner/Head Revenue Executive registered officer-in-charge, employee/s or other
Assistants. persons responsible for the custody of the books of
12. Based on the foregoing, the LOA shall be issued and accounts and other accounting records mandated to be
approved by the Assistant Commissioner/Head Revenue submitted or information mandated to be provided.
Executive Assistants (HREA).
13. In the instant case, however, the MOA addressed to RO
Arriola were signed and issued not by the Assistant To ascertain the names of the incumbent of the aforesaid
Commissioner/HREA, but by the Chief, Regular LT positions, the concerned revenue officers may access, among
Audit Division 1, Escalada. others, the latest General Information Sheet filed by the
a. Evidently, the subject MOA was signed by a corporation with the Securities and Exchange Commission.
BIR officer who is not authorized to issue an
b. If the concerned party is the national and local
LOA.
government, government agencies and
b. Hence, RO Arriola has no authority to continue
instrumentalities, including the Bangko Sentral ng
the audit investigation.
Pilipinas and government-owned or controlled
14. In sum, since RO Arriola was not duly authorized by a
corporations (GOCCs), the SDT shall be issued to the
valid LOA, the subject tax assessments, which came
head of such office, agency, instrumentality, political
about as a result of her examination of petitioner's books
subdivision or GOCC. If the head shall comply
of accounts and accounting records for TY 2010, are
through a representative, the latter shall present the
void. Apropos,it is well-settled that a void assessment
SDT, written authorization letter from the head, and
bears no valid fruit.
sufficient proof of identification.

Examination of Documents 3.7 The date of issuance of the SDT shall be the date when it
was officially signed.
RMO No. 10-2013 3.8 The compliance date for the submission of books of
accounts and other accounting records shall be set on the
3.4 The issuance of SDT shall be requested from the following: fourteenth (14th) day from date of issuance of the SDT.

a. Assistant Commissioner, Enforcement and Advocacy 3.10 The service of the SDT shall be effected by the revenue
Service, through the Prosecution Division – for the officers assigned to investigate the case. However, such service
National Office; may be made by any other internal revenue officer authorized
b. Assistant Commissioner, Large Taxpayers Service, for the purpose.
through the Prosecution Division – for taxpayers under 3.12 The duly issued SDT shall be served within three (3)
the jurisdiction of the Large Taxpayers Service, working days from receipt by the concerned revenue officers.
including LTDOs;
c. Revenue Regional Directors, through the Legal 3.13 The SDT shall be served through personal service by
Divisions – for the Regional Offices; delivering personally a copy of the SDT to the party at his
d. Any other officer duly delegated by the registered or known address or wherever he may be found. A
Commissioner. known address shall mean a place other than the registered
The records of the case shall be attached to the Memorandum address where business activities of the party are conducted or
Report. his place of residence.
3.6 In case the request for issuance of SDT is found to be a. In case personal service is not practicable, the SDT
meritorious, the SDT shall be issued to the person liable for tax shall be served by substituted service or by mail.
36
 b. Substituted service can be resorted to when the party records presented are substantially complete, the documents
is not present at the registered or known address under presented shall be consolidated with the records of the case and
the following circumstances: shall be referred back to the appropriate office for continuation
i. The SDT may be left at the party’s registered of the investigation. The concerned revenue officer shall submit
address, with his clerk or with a person a written report to the issuing office that the documents/records
having charge thereof. indicated in the SDT have been submitted or that there was
ii. If the known address is a place where either no submission or that the documents presented were so
business activities of the party are conducted, incomplete.
the SDT may be left with his clerk or with a
person having charge thereof. 4.3 In case there is no submission or incomplete presentation of
iii. If the known address is the place of residence, the required books of accounts and other accounting records,
substituted service can be made by leaving the action lawyer assigned to the case shall request the
the copy with a person of legal age residing concerned revenue officers for a conference. This shall be
therein. scheduled on the fifth (5th) working day from the date set for
iv. If no person is found in the party’s registered compliance with the SDT.
or known address, the revenue officers
concerned shall bring a barangay official and The revenue officers shall work jointly with the action lawyer
two (2) disinterested witnesses to the address in documenting/gathering evidence/s for the criminal
so that they may personally observe and attest prosecution of the individual who disobeyed the SDT.
to such absence. The SDT shall then be given
to said barangay official. Such facts shall be 4.4 Payment of the administrative penalty shall not excuse the
contained in the bottom portion of the SDT, taxpayer/person summoned from complying with the SDT.
as well as the names, official position and
signatures of the witnesses. V. INSTITUTION OF CRIMINAL ACTION FOR
v. Should the party be found at his registered or FAILURE TO OBEY SDT
known address or any other place but refuse
to receive the SDT, the revenue officers 5.1 Within seven (7) working days from conference mentioned
concerned shall bring a barangay official and in Paragraph “IV.4.3” above, the action lawyer shall prepare a
two (2) disinterested witnesses in the Letter-Complaint addressed to the Office of the Prosecutor,
presence of the party so that they may recommending the criminal prosecution of the individual
personally observe and attest to such act of taxpayer or third party; or the responsible officer/s or partner/s
refusal. The SDT shall then be given to said (in case the taxpayer or third party is a corporation, partnership,
barangay official. Such facts shall be association, or office); who disobeyed the SDT for violation of
contained in the bottom portion of the SDT, Section 266 (“Failure to Obey Summons”) of the NIRC, as
as well as the names, official position and amended, together with the Complaint-Affidavit and its
signatures of the witnesses. supporting evidentiary documents, properly marked.
vi. “Disinterested witnesses” refers to persons of
legal age other than employees of the Bureau If the taxpayer concerned is a corporation, an association or a
of Internal Revenue. general co-partnership, the sanctions mandated under Section
c. Service by mail is done by sending a copy of the SDT 256 (“Penal Liabilities of Corporations”) of the NIRC, as
by registered mail to the registered or known address amended, shall likewise be imposed and invoked in the filing of
of the party with instruction to the Postmaster to return a criminal case. The Letter-Complaint, together with the
the mail to the sender after ten (10) days, if Complaint-Affidavit and its attachments, shall then be routed to
undelivered. A copy of the SDT may also be sent the appropriate office/s for review and signature of the
through reputable professional courier service. If no concerned revenue official/s.
registry or reputable professional courier service is
available in the locality of the addressee, service may REVENUE MEMORANDUM CIRCULAR NO. 111-16
be done by ordinary mail.
This Circular is hereby issued to clarify and accordingly
reiterate the procedures relative to issuance of Subpoena
IV. ENFORCEMENT OF THE SDT Duces Tecum (SDT), and submission of reports of
4.1 The concerned revenue officers are required to be present investigation/verification on tax cases/dockets to the
during the appointed time, date and place set for the reviewing Office.
presentation of the books of accounts and other accounting
records in order to check if the records presented are the One of the powers of the Commissioner under Section 6
complete records being required as stated in the SDT. Non- of the National Internal Revenue Code of 1997 ("Tax
compliance therewith shall subject violators to administrative Code"), as amended, is to authorize the examination of any
liability. taxpayer for the purpose of assessing the taxpayer's correct
internal revenue tax liabilities. However, the issuance of
4.2 Upon verification by the concerned revenue officers that the an assessment must be made, generally, within the three
37
 (3)-year prescriptive period or, exceptionally, within the the investigation of the Revenue Officer assigned and
ten (10)-year prescriptive period pursuant to Sections 203 submit documents to support the explanation or
and 222, respectively, of the Tax Code, as amended. arguments.

In this statutory context of prescription, when the taxpayer If the taxpayer disagrees with the discrepancy/discrepancies
fails to present or submit his books of accounts and/or detected during the audit/investigation, the taxpayer must
pertinent records, or to account for all present an explanation and provide documents to support his
sales/receipts/invoices and to substantiate all or any of the explanation. The documents must be submitted during
deductions, exemptions or credits claimed in his return, the discussion. Should the taxpayer need more time to
there are instances when jeopardy assessments, issued present the documents, he may submit such documents after
basically to comply with the prescriptive period, are the discussion. The taxpayer must submit all necessary
resorted to by our Revenue Officers. To prevent the documents that supports his explanation within thirty (30)
issuance of such assessments, the procedures for the days after receipt of the Notice of Discrepancy.
issuance and enforcement of SDTs, as prescribed under
Revenue Memorandum Order No. 10-2013, as amended If after being afforded the opportunity to present his side
by RMO No. 8-2014, must be strictly observed by all through the Discussion of Discrepancy, it is still found that
concerned to compel taxpayers to submit or otherwise the taxpayer is still liable for deficiency tax or taxes and the
present the required books, records and documents. taxpayer does not address the discrepancy through payment
of the deficiency taxes or the taxpayer does not agree with
Likewise, to ensure that the Bureau is not deprived of its the findings, the investigating office, shall endorse the case
right to assess and collect the correct amount of tax or any to the reviewing office and approving official in the
deficiency taxes so assessed, a tax docket with deficiency National Office or the Revenue Regional Office, for
tax collections/assessments shall be transmitted by the issuance of a deficiency tax assessment in the form of a
investigating office to the reviewing/approving official not Preliminary Assessment Notice within ten (10) days from
later than sixth months prior to prescription date (e.g., if the conclusion of the Discussion.
the income tax case will prescribe on April 15, 2017, the
docket should have been transmitted on October 15, 2016).
Issuance of the Preliminary Assessment Notice (PAN)
The reviewing/approving official shall not accept any tax
docket after the aforesaid period, unless a duly SEC. 203. Period of Limitation Upon Assessment and
accomplished "waiver form'' is attached thereto. Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
Notice of Discrepancy (Formerly LN) the last day prescribed by law for the filing of the return, and
no proceeding in court without assessment for the collection
What is a Notice of Discrepancy? of such taxes shall be begun after the expiration of such
3.1.1 Notice of Discrepancy.— If a taxpayer is found to be period: Provided, That in a case where a return is filed
liable for deficiency tax or taxes in the course of an beyond the period prescribed by law, the three (3)-year
investigation conducted by a Revenue Officer, the taxpayer period shall be counted from the day the return was filed. For
shall be informed through a Notice of Discrepancy. The Notice purposes of this Section, a return filed before the last day
of Discrepancy aims to fully afford the taxpayer with an prescribed by law for the filing thereof shall be considered
opportunity to present and explain his side on the discrepancies as filed on such last day.
found. Rev. Regs. No. 22-202
SEC. 228. Protesting of Assessment. - When the
The Revenue officer who audited the taxpayer's records Commissioner or his duly authorized representative finds
shall, among others, state in the initial report of investigation that proper taxes should be assessed, he shall first notify the
his findings of discrepancies. Based on the said Officer's taxpayer of his findings:
submitted initial report of investigation, the taxpayer shall be
informed, in writing, by the Revenue District Office or by [IMPT] Provided, however, That a pre-assessment notice
the Assessment Division/Regional Investigation Division, as shall not be required in the following cases:
the case may be (in the case of Revenue Regional Offices) or
by the Chief of Division concerned (in the case of the BIR 1. When the finding for any deficiency tax is the result of
National Office) of the discrepancy or discrepancies in the mathematical error in the computation of the tax as
taxpayer's payment of his internal revenue taxes, for the appearing on the face of the return; or
purpose of the "Discussion of Discrepancy." 2. When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the
The Discussion of Discrepancy shall in no case extend withholding agent; or
beyond thirty (30) days from receipt of the Notice of 3. When a taxpayer who opted to claim a refund or tax
Discrepancy. It is during the Discussion of Discrepancy credit of excess creditable withholding tax for a taxable
that the taxpayer is given the opportunity to present his period was determined to have carried over and
side of the case and explain the discrepancy found during automatically applied the same amount claimed against
38
 the estimated tax liabilities for the taxable quarter or responds that he/it disagrees with the findings of deficiency tax
quarters of the succeeding taxable year; or or taxes, an FLD/FAN shall be issued within 15 days from
4. When the excise tax due on excisable articles has not filing/submission of the taxpayer’s response, calling for
been paid; or payment of the taxpayer's deficiency tax liability, inclusive of
5. When the article locally purchased or imported by an the applicable penalties
exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has been Vanguard Logistics Services Phil v. CIR
sold, traded or transferred to non-exempt persons. Vanguard received a Post-Reporting Notice dated June 14, 2005 from the
RDO of Revenue District No. 33, informing it that a report of investigation
has been submitted proposing to assess petitioner for deficiency.. Vanguard
The taxpayers shall be informed in writing of the law and the filed its protest to the Post-Reporting Notice on July 15, 2005. A
facts on which the assessment is made; otherwise, the Supplemental Protest was subsequently filed on August 10, 2005. In a
assessment shall be void. Letter, dated January 16, 2006, CIR notified Vanguard that the case will be
forwarded to the Assessment Division for review and disposition, and that
the written protest alone did not warrant the cancellation of the proposed
Within a period to be prescribed by implementing rules and assessment; thus, the need to submit documentary evidence to support
regulations, the taxpayer shall be required to respond to said petitioner's objections/clarifications. Vanguard submitted proof of the tax
notice. If the taxpayer fails to respond, the Commissioner or exemption of its lessor as well as its Agreement with DCL Logistics (HKG)
Limited. On August 22, 2006, Vanguard received 6 separate Formal Letters
his duly authorized representative shall issue an assessment of Demand, with their corresponding Assessment Notices, all bearing the
based on his findings. Such assessment may be protested same number 33-2003 and dated August 8, 2006, for alleged deficiency
administratively by filing a: taxes, and seven 7 separate Formal Letters of Demand for alleged
compromise penalties. On September 20, 2006, Vanguard formally
protested the afore-mentioned Letters of Demand and Assessment Notices
1. request for reconsideration or by filing an Administrative Protest dated September 19, 2006. Vanguard
2. reinvestigation within thirty (30) days from receipt of filed this Petition for Review on April 17, 2007, after CIR failed to issue a
the assessment in such form and manner as may be reply or decision with regard to its protest and before Vanguard could be
prescribed by implementing rules and regulations. barred by prescription.

Preliminary Assessment Notice/pre-assessment notice

Within sixty (60) days from filing of the protest, all relevant
(PAN) is a vital part of due process. Petitioner did not
supporting documents shall have been submitted; otherwise,
receive PAN, hence, he was denied due process.
the assessment shall become final.
If the protest is denied in whole or in part, or is not acted • Both the law and regulations mandate the issuance
upon within one hundred eighty (180) days from submission of the pre-assessment notice or preliminary
of documents, the taxpayer adversely affected by the assessment notice (PAN) as part of the due process
decision or inaction may: requirement in the issuance of a tax assessment.
Under Sec. 228 of the 1997 Tax Code, when the
1. appeal to the Court of Tax Appeals within thirty (30) Commissioner or his duly authorized representative finds
days from receipt of the said decision, or that proper taxes should be assessed, he shall first notify the
2. from the lapse of one hundred eighty (180)-day period; taxpayer of his findings in writing, stating the law and the
a. otherwise, the decision shall become final, facts on which the assessment is made; otherwise, the
executory and demandable. assessment shall be void.

This is likewise reflected under RR 12-99. Citing the case of

RR 12-99, as amended by RR 18-2013, RR 7-2018 and RR 20- Commissioner of Internal Revenue v. Metro Star, the court
2020: (from Balili) reiterated that the law imposes a substantive, not merely a
formal, requirement, as part of due process.
3.1.2. Preliminary Assessment Notice (PAN). — If after review
and evaluation by the Commissioner or his duly authorized In this case, the CIR claims it sent the PAN to petitioner
representative, as the case may be, it is determined that there through Mr. Paul C. Parazo, a BIR employee.
exists sufficient basis to assess the taxpayer for any deficiency • Mr. Parazo testified that he personally mailed the
tax or taxes, the said Office shall issue to the taxpayer a PAN PAN to petitioner's business address, but that no
for the proposed assessment. It shall show in detail the facts and certification/proof of mailing was issued to him
the law, rules and regulations, or jurisprudence on which the because the Post Office does not maintain records
proposed assessment is based. on ordinary mails.
If the taxpayer fails to respond within 15 days from date of
Jurisprudence provides that when a mail matter is sent by
receipt of the PAN, he shall be considered in default, in which
registered mail, there exists a presumption that it was
case, a Formal Letter of Demand and Final Assessment Notice
received in the regular course of mail. In order for the
(FLD/FAN) shall be issued calling for payment of the
presumption to arise, two material facts must be proven: (a)
taxpayer's deficiency tax liability, inclusive of the applicable
that the letter was properly addressed with postage prepaid;
penalties.
and (b) that it was mailed.
If the taxpayer, within 15 days from date of receipt of the PAN,
39
 Here, the disputable presumption will not apply because last day prescribed by law for the filing of the return, and no
PAN was not properly addressed. proceeding in court without assessment for the collection of
• Respondent did not refute the existence of the said such taxes shall be begun after the expiration of such period:
document.
• Provided, That in a case where a return is filed beyond
• Also, the witness admitted sending the PAN via the period prescribed by law, the three (3)-year period
ordinary mail in violation of RR 12-99 requiring shall be counted from the day the return was filed. For
PAN to be issued at least by registered mail. purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be
The Post Reporting Notice (Notice) lacks legal bases, considered as filed on such last day.
thus, it cannot take the place of PAN.
CIR v. Lepanto
Petitioner CIR and respondent LCMC allegedly executed Waivers of Statute
While it is true that petitioner received the Post Reporting of Limitations on January 27, 2012 and on September 16, 2013 Petitioner
Notice ("Notice" for brevity) and was able to file a Protest as CIR informed respondent LCMC that after the tax investigation, it was
well as a Supplemental Protest to the Notice, the totality of found that the latter had deficiency taxes due. CIR argues that respondent
LCMC may not raise an issue for the first time on appeal such as the validity
the circumstances did not meet the minimum requirements of the waiver which was not questioned in the administrative protest.
of due process. Despite the issue on validity of waiver not being joined by the pleadings nor
raised in the court proceedings, still the waiver was accorded validity by the
parties because it was actually received by respondent LCMC
An examination of the Notice shows that it contained only a
computation of tax liabilities without the legal bases on On petitioner CIR's questioning the action of the Court in
which the assessment is based. Failure to comply with the Division in deciding matters not raised as issue by the parties
requirements under Sec. 228 of the Tax Code renders the in the course of the trial, Section 1, Rule 14 of the Revised
assessment void. Rules of the Court of Tax Appeals (RRCTA) “Sec 1: xxx In
deciding the case, the Court may not limit itself to the issues
Assessment for deficiency withholding tax on stipulated by the parties but may also rule upon related issues
compensation is upheld as it falls in one of the exceptions necessary to achieve an orderly disposition of the case. “
where PAN is not required. • The said provision allows the CTA division or en
banc to rule on related issues necessary for the
PAN is not required at all times. The provision of law on the orderly disposition of the case although not
requirement of PAN admits exceptions, such as in the stipulated earlier by the parties
following cases: xxx
Petitioner should also be aware that the issue on the validity
2. When a discrepancy has been determined of the waiver of prescription is necessary to dispose the issue
between the tax withheld and the amount actually on the validity of the tax assessment as it is intricately linked
remitted by the withholding agent with the Court acquiring jurisdiction on the case.
• "If the pleadings or the evidence on record show
that the claim is barred by prescription, the court is
In this case, Assessment for Deficiency Withholding Tax on mandated to dismiss the claim even if prescription
Compensation falls in one of the exceptions enumerated is not raised as a defense”
above. The records of the case reveal, per the testimony of
• The records of the case showed that there is a petitioner's witness, Ms. Teresita Villamor, that she could not
difference between the tax withheld and what was ascertain the identity of the person who received the first
actually remitted. waiver.
• Under Section 228 (b) of the NIRC of 1997, there • Further, the Court in Division found that said
is no need for PAN when the tax withheld does not witness was not the one who served such waiver
tally with the amount actually remitted by the and had no knowledge as to who received the same.
withholding agent. o It is very clear from the factual findings
narrated in the assailed decision that the
waiver had defects, hence, it did not
All other tax assessments are void.
extend the prescriptive period for
petitioner CIR's right to assess respondent
LCMC
Issuance of Formal Letter of Demand and Assessment
Thus, following the rationale of the China Banking case that
Notice (FAN)
when prescription was evident in the pleadings and in the
evidence presented during the trial of the case, the Court in
Period within which to issue an assessment- Section 203, Tax
Division was mandated to dismiss the case even if such issue
Code
was not raised in the parties' pleadings or Court-issued
SEC. 203. Period of Limitation Upon Assessment and
orders.
Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the
40
 • Petitioner CIR should also be aware that the Court ○ Accordingly, the burden to prove that the
is not confined solely to the issues raised by the PAN was received by respondent is shifted
party-litigants. to petitioner.
o It can delve on other issues or matters
related to the lis mota of the case which Failure to prove that the PAN was indeed received by the
will help in its complete resolution. respondent renders the instant assessment null and void.
Without proof of receipt, the PAN is deemed not received by
As held in the case of Salvador Comilang v. Francisco respondent.
Burcena and Mariano Burcena: "Once a court acquires ● Hence, respondent's right to be informed of the
jurisdiction over a case, it has wide discretion to look upon assessments issued against it has been violated. On
matters which, although not raised as an issue, would give this score alone, the instant Petition must fail.
life and meaning to the law.
• In the instant case, the issue on the validity of the An LOA as an instrument of due process should particularly
waiver was interwoven with prescription which name the revenue officers who are authorized to conduct an
affects directly the jurisdiction of this Court. audit
• The Court in Division did not err in ruling upon a ● Revenue officers conducting an examination of a
matter not raised by the parties during the trial of taxpayer to determine the correct amount of taxes
the case due should be armed with an LOA.
● This is a principle undeterred under our tax laws.
○ An LOA is an instrument of due process
CIR v. Jopauen Realty Corp for the protection of taxpayers.
CIR alleges that it issued a Preliminary Assessment Notice (PAN) to ● It guarantees that tax agents will act only within the
Jopauen via registered mail. since Jopauen did not reply to the PAN hence
CIR issued the Formal Letter of Demand (FLD) with the FAN inside the
authority given them in auditing a taxpayer.
FLD. CIR issued a letter informing that Rev. Officer Tibayan and
Supervisor Ricaforte were assigned for examination of the case. Jopauen Based on the afore-quoted provision, it is clear that unless
received an Amended PAN demanding the payment for alleged deficiency authorized by the CIR himself or by his duly authorized
taxes in 2008. Petitioner claim that the Amended PAN was received on Feb
10, 2014. Lordan then consulted BIR Regional Director (RD) and thus the
representative, through an LOA, an examination of the
RD ordered the reinvestigation. Later on FDD was issued. Subsequently, taxpayer cannot ordinarily be undertaken.
the CTA rendered a decision granting the Jopauen’s petition for revies and ● The circumstances contemplated under Section 6
cancelled all the assessments rendered by the BIR. where the taxpayer may be assessed through best-
evidence obtainable, inventory-taking, or
Once receipt is denied, the CIR must prove through a surveillance among others has nothing to do with
preponderance of evidence that the assessment notices were the LOA.
indeed received by the taxpayer ● These are simply methods of examining the
● Once receipt of the assessment notices is denied and taxpayer in order to arrive at the correct amount of
controverted by the taxpayer, the burden of proof is taxes.
shifted to the CIR to prove through a preponderance
of evidence that the taxpayer, or his or her Hence, unless undertaken by the CIR himself or his duly
authorized representative, indeed received the authorized representatives, other tax agents may not validly
subject assessment notices. conduct any of these kinds of examinations without prior
authority.
As can be gleaned from the above provisions, service of the ● An MOA cannot take the place of an LOA.
PAN or the FAN to the taxpayer may be made by registered
mail. Under Section 3(v), Rule 131 of the Rules of Court,
there is a disputable presumption that 'a letter duly directed
and mailed was received in the regular course of the mail. CIR v. Toledo Power Company
● However, the presumption is subject to Petitioner argues that respondent's act of paying the assessed deficiency
controversion and direct denial, in which case the VAT signifies its concurrence with the validity of the assessment. He also
contends that since the said payment was made during the Preliminary
burden is shifted to the party favored by the Assessment Notice ("PAN") stage, the issuance of the Final Letter of
presumption to establish that the subject mailed Demand and Assessment Notices ("FLD/FAN") is deemed superfluous.
letter was actually received by the addressee. Meanwhile, respondent, in its Comment, states that its sale of electricity to
CCC is subject to VAT zero-rating having satisfied all the conditions
under Revenue Memorandum Order ("RMO") No. 9-2000 and the Cross-
In view of respondent's categorical denial of due receipt of Border Doctrine. It also opines that the tax payments were erroneous since
the PAN and the FAN, the burden was shifted to the CIR to the BIR did not issue an FLD/FAN, which is mandatory in all assessment
prove that the mailed assessment notices were indeed cases.
received by respondent or by its authorized representative."
● In the present case, respondent has unequivocally The issuance of the FLD/FAN is at all times required
denied receipt of the PAN. under the Tax Code and BIR Regulations.

41
 1. The FLD/FAN not only constitutes the BIR's Request for reconsideration Request for re-investigation
demand for payment; it also establishes the
taxpayer's basic deficiency tax liability.
2. In short, the right to collect the deficiency taxes on refers to a plea of re-evaluation refers to a plea of re-evaluation of
the part of the BIR and the liability of the taxpayer of an assessment on the basis of an assessment on the basis of
accrues or ripens only upon the issuance of the existing records without need of newly discovered or additional
FLD/FAN. additional evidence. evidence

The PAN cannot replace the FLD/FAN since the same is The taxpayer cannot submit the taxpayer must submit all
merely a pre-assessment or a "proposed assessment." additional documents. He should relevant supporting documents in
3. The function of the PAN is hinged on due process, only rely on the documents that support of his protest within 60
specifically, to inform the taxpayer of the proposed he submitted when he filed his days from date of filing of his letter
findings of the BIR and to give the same a chance protest to the FAN or FLD. of protest, otherwise, the
to dispute the findings before the BIR finalizes the assessment shall become final.
assessment and determines the liability of the Note: But in a recent case, the Supreme
taxpayer. Court ruled that the submission of
4. This is why a Protest or Reply to a PAN is not additional documents within 60 days
refers to the Preliminary Assessment
required under BIR Regulations; only an FLD/FAN Notice (PAN) and not to the FAN or
is essential in cases when the taxpayer's tax liability FLD.
is apparent (e.g., mathematical error, incorrect
withholding) because the purpose of the PAN is to This SC ruling is contrary to the BIR’s
interpretation on when the 60-day
merely inform the taxpayer of the BIR's initial period to submit additional documents
findings, not establish the taxpayer's liability. must be commenced. According to the
Contrary to petitioner's claim, the issuance of an FLD/FAN, BIR, it must be reckoned from the
in this case, is not tantamount to double demand since as submission of the protest to the FAN
but according to the SC, it must be
stated earlier, without the said issuance, there is no demand counted from the filing of the protest to
nor an established tax liability to speak of. the PAN.
1. The payment of respondent does not forego the need
So, effectively all tax assessments
for an FLD/FAN. where the BIR immediately issued a
a. No law or regulations support this assertion. FAN or FLD after the expiration of the
2. Furthermore, there are instances where the taxpayer 15 day period for the taxpayer to reply
settles the assessment in advance in order to stop the to the PAN, and the BIR did not wait
for the taxpayer to submit additional
continuous accrual of interest charges. documents within 60 days from the
a. In this case, the Court still upheld the need to filing of the protest to the PAN, are
issue an FLD/FAN. void.

This apparent contradiction between

What is a valid Protest? the BIR rules and the recent SC ruling,
SEC. 228. Protesting of Assessment. – xxx on when the counting of the 60-day
Such assessment may be protested administratively by filing a period to submit additional documents
request for reconsideration or reinvestigation within thirty (30) must commence, have far reaching
legal implications.
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 The running of the 5-year The BIR must accept the request
relevant supporting documents shall have been prescriptive period for the BIR for reinvestigation. Some
submitted; otherwise, the assessment shall become to collect does not stop in a jurisprudence say that such
final. motion for reconsideration. acceptance may either be
expressed or implied.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from submission of It is only when a request for
documents, the taxpayer adversely affected by the decision or So, after 5 years from the reinvestigation is accepted that the
inaction may appeal to the Court of Tax Appeals within: issuance of the FAN or FLD, running of the 5-year prescriptive
taxpayers will have a sigh of period for the BIR to collect is
• thirty (30) days from receipt of the said decision, or
relief because when this time tolled. If there is no express or
• from the lapse of one hundred eighty (180)-day period; comes, the BIR has lost it right implied acceptance of the
o otherwise, the decision shall become final, to collect. taxpayer’s request for
executory and demandable reinvestigation, the BIR’s right to
collect will be limited only to 5-
years from the issuance of the FAN
or FLD

42
 become final, executory and demandable.
In both motions for reconsideration and reinvestigation the taxpayer
must state the following:
• A motion for reconsideration of the Commissioner's
● the nature of protest whether reconsideration or denial of the protest or administrative appeal, as the
reinvestigation, specifying newly discovered or additional case may be, shall not toll the thirty (30)-day period to
evidence he intends to present if it is a request for appeal to the CTA.
reinvestigation,
● date of the assessment notice, and
● the applicable law, rules and regulations, or jurisprudence on If the protest or administrative appeal is not acted upon by the
which his protest is based, otherwise, his protest shall be Commissioner within one hundred eighty (180) days counted
considered void and without force and effect. from the date of filing of the protest, the taxpayer may either:
(i) appeal to the CTA within thirty (30) days from after
These are very important details that must not be omitted in a protest. the expiration of the one hundred eighty (180)-day
period; or
● So, a one pager general denial of a tax liability will not fly. (ii) await the final decision of the Commissioner on the
A protest must lay down the legal basis for it to be disputed assessment and appeal such final decision to
considered valid. the CTA within thirty (30) days after the receipt of a
● If not, the taxpayer will be considered as not having filed a
copy of such decision.
protest at all, making the tax assessment against him final
and executory.

It must be emphasized, however, that in case of

inaction on protested assessment within the 180-day
Submission of required documents within 60 days form the period, the option of the taxpayer to either:
filing of the protest (1) file a petition for review with the CTA
within 30 days after the expiration of the 180-
day period; or
Decision within 180 days from submission of documents or (2) await the final decision of the
inaction of the commission on a valid protest Commissioner or his duly authorized
representative on the disputed assessment
If the protest is denied, in whole or in part, by the and appeal such final decision to the CTA
Commissioner's duly authorized representative, the taxpayer within 30 days after the receipt of a copy of
may either: such decision,
(i) appeal to the Court of Tax Appeals (CTA) within *are mutually exclusive and the resort to
thirty (30) days from date of receipt of the said one bars the application of the other.
decision; or
(ii) elevate his protest through request for Final decision on disputed assessment
reconsideration to the Commissioner within thirty (30) 3.1.5 Final Decision on a Disputed Assessment (FDDA). —
days from date of receipt of the said decision. The decision of the Commissioner or his duly authorized
No request for reinvestigation shall be allowed in representative shall state the:
administrative appeal and only issues raised in the
decision of the Commissioner's duly authorized 1. facts, the applicable law, rules and regulations, or
representative shall be entertained by the jurisprudence on which such decision is based, otherwise,
Commissioner. the decision shall be void (see illustration in ANNEX "C"
hereof), and
If the protest is not acted upon by the Commissioner's duly 2. that the same is his final decision.
authorized representative within one hundred eighty (180) days
counted from the date of filing of the protest in case of a request
reconsideration; or from date of submission by the taxpayer of Ten-Four Ready-Mix Concrete v. CIR
Pursuant to a Bureau of Internal Revenue (BIR) audit investigation, BIR
the required documents within sixty (60) days from the date of assessed and served on petitioner Ten-Four Readymix Concrete, Inc a
filing of the protest in case of a request for reinvestigation, the Preliminary Collection Letter (PCL) and Final Notice Before Seizure
taxpayer may either: (FNBS) on 27 November 2018 and 17 December 2018, respectively. On 03
(i) appeal to the CTA within thirty (30) days after the January 2019, petitioner wrote a letter to the Chief Collection Division of
Revenue Region Calasiao, Pangasinan, Josephine B. Paragas (Chief
expiration of the one hundred eighty (180)-day period; Paragas) inquiring about the reason for the issuance of the PCL and the
or FNBS absent receipt of any action on its previously filed protest. Days after,
(ii) await the final decision of the Commissioner's duly Chief Paragas issued a Warrant of Distraint and/or Levy (WDL) against
authorized representative on the disputed assessment. petitioner Chief Paragas then responded to the letter of petitioner, saying
that the BIR constructively served a copy of the Final Decision on Disputed
Assessment (FDDA) on 20 September 2018 since a certain Engr. Charlito
If the protest or administrative appeal, as the case may be, is Flores (Engr. Flores) refused to receive the said notice.
denied, in whole or in part, by the Commissioner, the taxpayer
may appeal to the CTA within thirty (30) days from date of
receipt of the said decision. Otherwise, the assessment shall
43
 The petitioner denies receiving the FDDA. Instead, duties, fees or other money charges, seizure,
petitioner was served with a PCL and an FNBS. detention or release of property affected,
1. The provisions above do not patently disclose a fines, forfeitures or other penalties in relation
remedy when such circumstances occur. thereto, or other matters arising under the
2. However, as the First Division correctly ruled, the Customs Law or other laws administered by
Supreme Court has already settled this issue in the the BOC;
case of Oceanic Wireless Network, Inc. v. 5. Decisions of the Central Board of
Commissioner of Internal Revenue, et al. Assessment Appeals in the exercise of its
(Oceanic). appellate jurisdiction over cases involving
a. In Oceanic, the Court ruled that if the BIR the assessment and taxation of real property
sent a letter demanding payment of originally decided by the provincial or city
deficiency taxes after the taxpayer board of assessment appeals;
protested the assessment, the same is 6. Decisions of the Secretary of Finance on
already tantamount to a denial of protest customs cases elevated to him automatically
with the intention of making it the BIR’s for review from decisions of the
final decision. Commissioner of Customs which are adverse
b. Being final, it was tantamount to a to the Government under Section 2315 of the
rejection of the request for reconsideration Tariff and Customs Code;
or reinvestigation. 7. Decisions of the Secretary of Trade and
Herein petitioner admits that it filed a protest against the Industry, in the case of nonagricultural
BIR's assessment prior to its receipt of the PCL and the product, commodity or article, and the
FNBS. Secretary of Agriculture in the case of
3. Therefore, it could be reasonably assumed that the agricultural product, commodity or article,
same had been denied with the issuance of the PCL involving dumping and countervailing duties
and the FNBS, both of which are unequivocal under Section 301 and 302, respectively, of
demands of payment of petitioner's tax deficiencies. the Tariff and Customs Code, and safeguard
4. CTA en banc then holds that the First Division was measures under Republic Act No. 8800,
thus correct when it ruled that the 30-day period for where either party may appeal the decision to
petitioner to appeal its case, either with the CIR or impose or not to impose said duties.
the CTA, had already lapsed when it filed its prior
Petition for Review before the First Division on 20 b. Jurisdiction over cases involving criminal offenses as
May 2019. herein provided:
1. Exclusive original jurisdiction over all criminal offenses
Appeal to the Court of Tax Appeals arising from violations of the Tax Code or Tariff and
Sec. 7. Jurisdiction. - The CTA shall exercise: Customs Code and other laws administered by the BIR or
the BOC:
a. Exclusive appellate jurisdiction to review by appeal, a. Provided, however, That offenses or felonies
as herein provided: mentioned in this paragraph where the principal
1. Decisions of the CIR in cases involving amount of taxes and fees, exclusive of charges and
disputed assessments, refunds of internal penalties, claimed is less than P1,000,000.00, or
revenue taxes, fees or other charges, penalties where there is no specified amount claimed, shall
in relation thereto, or other matters arising be tried by the regular Courts and the jurisdiction
under the Tax Code or other laws of the CTA shall be appellate.
administered by the BIR; i. Any provision of law or the Rules of
2. Inaction by the CIR in cases involving Court to the contrary notwithstanding,
disputed assessments, refunds of internal the criminal action and the
revenue taxes, fees or other charges, penalties corresponding civil action for the
in relations thereto, or other matters arising recovery of civil liability for taxes and
under the Tax Code or other laws penalties shall at all times be
administered by the BIR, where the Tax Code simultaneously instituted with, and
provides a specific period of action, in which jointly determined in the same
case the inaction shall be deemed a denial; proceeding by the CTA, the filing of the
3. Decisions, orders or resolutions of the criminal action being deemed to
Regional Trial Courts in local tax cases necessarily carry with it the filing of the
originally decided or resolved by them in the civil action, and no right to reserve the
exercise of their original or appellate filling of such civil action separately
jurisdiction; from the criminal action will be
4. Decisions of the Commissioner of Customs recognized.
in cases involving liability for customs
44
2. Exclusive appellate jurisdiction in criminal offenses: ruling or after the expiration of the period fixed by law for
a. Over appeals from the judgments, resolutions or action as referred to in Section 7(a)(2) herein.
orders of the Regional Trial Courts in tax cases
originally decided by them, in their respected "Appeal shall be made by filing a petition for review under
territorial jurisdiction. a procedure analogous to that provided for under Rule 42 of
b. Over petitions for review of the judgments, the 1997 Rules of Civil Procedure with the CTA within thirty
resolutions or orders of the Regional Trial Courts (30) days from the receipt of the decision or ruling or in the
in the exercise of their appellate jurisdiction over case of inaction as herein provided, from the expiration of
tax cases originally decided by the Metropolitan
the period fixed by law to act thereon. A Division of the CTA
Trial Courts, Municipal Trial Courts and
shall hear the appeal: Provided, however, That with respect
Municipal Circuit Trial Courts in their respective
to decisions or rulings of the Central Board of Assessment
jurisdiction.
c. Jurisdiction over tax collection cases as herein Appeals and the Regional Trial Court in the exercise of its
provided: appellate jurisdiction appeal shall be made by filing a
1. Exclusive original jurisdiction in tax petition for review under a procedure analogous to that
collection cases involving final and provided for under rule 43 of the 1997 Rules of Civil
executory assessments for taxes, fees, Procedure with the CTA, which shall hear the case en banc.
charges and penalties:
a. Provided, however, That "All other cases involving rulings, orders or decisions filed
collection cases where the with the CTA as provided for in Section 7 shall be raffled to
principal amount of taxes and its Divisions.
fees, exclusive of charges and A party adversely affected by a ruling, order or
penalties, claimed is less than decision of a Division of the CTA may file a motion
P1,000,000.00 shall be tried by for reconsideration of new trial before the same
the proper Municipal Trial Division of the CTA within fifteens (15) days from
Court, Metropolitan Trial Court notice thereof:
and Regional Trial Court. Provide,D however, That in criminal cases,
2. Exclusive appellate jurisdiction in tax the general rule applicable in regular
collection cases: Courts on matters of prosecution and
a. Over appeals from the appeal shall likewise apply.
judgments, resolutions or
orders of the Regional Trial
"No appeal taken to the CTA from the decision of the
Courts in tax collection cases
originally decided by them, in Commissioner of Internal Revenue or the Commissioner of
their respective territorial Customs or the Regional Trial Court, provincial, city or
jurisdiction. Regional Trial municipal treasurer or the Secretary of Finance, the
Court. Secretary of Trade and Industry and Secretary of
2. Exclusive appellate jurisdiction in tax collection cases: Agriculture, as the case may be shall suspend the payment,
levy, distraint, and/or sale of any property of the taxpayer for
a. Over appeals from the judgments, resolutions or orders the satisfaction of his tax liability as provided by existing
of the Regional Trial Courts in tax collection cases law:
originally decided by them, in their respective Provided, however, That when in the opinion of the
territorial jurisdiction. Court the collection by the aforementioned
b. Over petitions for review of the judgments, resolutions government agencies may jeopardize the interest of
or orders of the Regional Trial Courts in the Exercise
the Government and/or the taxpayer the Court any
of their appellate jurisdiction over tax collection cases
stage of the proceeding may suspend the said
originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial
collection and require the taxpayer either to deposit
Courts, in their respective jurisdiction." the amount claimed or to file a surety bond for not
more than double the amount with the Court.
Who may appeal? "In criminal and collection cases covered respectively by
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Section 7(b) and (c) of this Act, the Government may
Appeal. - Any party adversely affected by a decision, ruling directly file the said cases with the CTA covering amounts
or inaction of the Commissioner of Internal Revenue, the within its exclusive and original jurisdiction."
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Note:
Agriculture or the Central Board of Assessment Appeals or
the Regional Trial Courts may file an appeal with the CTA "SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No
within thirty (30) days after the receipt of such decision or civil proceeding involving matter arising under the National
Internal Revenue Code, the Tariff and Customs Code or the
45
Local Government Code shall be maintained, except as questioning the constitutionality or validity of tax laws or
herein provided, until and unless an appeal has been regulations.
previously filed with the CTA and disposed of in accordance
with the provisions of this Act. The Court En Banc holds that the CTA has jurisdiction
to take cognizance of petitioner's judicial claim for
"A party adversely affected by a resolution of a Division of refund and, at the same time, resolve the issue of validity
the CTA on a motion for reconsideration or new trial, may and/or constitutionality of RMC No. 90-2012.
file a petition for review with the CTA en banc • To begin with, the validity and constitutionality of
RMC No. 90-2012 were directly pleaded and duly
San Miguel Brewery Inc. v. CIR raised as issues in petitioner's judicial claim for
On December 21, 2012, (R.A.) No. 10351 took effect upon its publication refund.
in a newspaper of general circulation. The law amended, among others, • Finally, the validity and/or constitutionality of
Section 143 of the NIRC of 1997, which imposes excise tax on fermented
liquors. On December 27, 2012, the BIR issued Revenue Memorandum
RMC No. 90-2012 is also the lis mota of petitioner's
Circular (RMC) No. 90-2012, which provides for the revised tax rates, judicial claim for refund
effective January 1, 2013, of alcohol and tobacco products under RA No.
10351. Based on the said RMC, the applicable tax rate for SML, in bottle or
in can, is P20.57, instead of P20.00 as provided in Section 143 of the NIRC
of 1997, as amended. Thereafter, or during the period from January 1, 2013 CIR v. Tridharma Marketing Corp
to December 31, 2013, the BIR allegedly required, and petitioner was Tridharma filed an application for compromise settlement on the ground of
constrained to pay excise taxes on its removal of SML at the tax rate of doubtful validity of the BIR's assessments under Section 204 of the National
P20.57 per liter for SML in bottle and in can and for SML in kegs, when it Internal Revenue Code (NIRC) of 1997, as amended. Tridharma paid 40%
should have only paid P20.00 and P15.00 per liter, respectively, under the of the basic taxes assessed in the FLD. Tridharma received the Notice of
express provisions of the second and third paragraphs of Section 143 of Denial issued by the BIR, directing it to pay the amount of deficiency taxes.
NIRC of 1997, as amended. Thus, it erroneously or excessively paid the
amount of P0.57 per liter for SML in bottle and in can and P5.57 per liter Section 7 (a) (1) of Republic Act (R.A.) No. 1125, 23 as
for SML in kegs, or in the sum of P83,019,296.21. On December 9, 2014, amended by R.A. No. 9282 24 and R.A. No. 9503: CTA shall
petitioner filed with the BIR a Claim for Refund in the amount of exercise appellate jurisdiction to review by appeal “other
P83,019,296.21, representing its erroneously and excessively paid excise
taxes on SML for the period from January 1, 2013 to December 31, 2013. matters arising under the National Internal Revenue Code”
Section 3 (a) (1), Rule 4 of the 2005 Revised Rules of the
The CTA has jurisdiction to pass upon the constitutionality Court of Tax Appeals, as amended, includes in its
or validity of a tax law or regulation when raised by the enumeration of cases falling within the jurisdiction of the
taxpayer as a defense in disputing or contesting an Court of Tax Appeals in Division “other matters arising
assessment or claiming a refund. under the National Internal Revenue Code”
• The foregoing provisions reveal that the appellate
It is only in the lawful exercise of its power to pass upon all jurisdiction of the Court of Tax Appeals is not
matters brought before it, as sanctioned by Section 7 of limited to cases that involve the decisions of the
Republic Act No. 1125, as amended. petitioner on matters relating to assessments or
● This Court, however, declares that the Court of Tax refunds.
Appeals may likewise take cognizance of cases • Rather, the second part of the provision
directly challenging the constitutionality or validity specifically covers other cases that arise out of
of a tax law or regulation or administrative issuance the NIRC or other related laws administered by
(revenue orders, revenue memorandum circulars, the BIR. The wording of the provision is clear and
rulings). simple.

Section 7 of Republic Act No. 1125, as amended, is explicit In other words, aside from the decisions of the CIR
that, except for local taxes, appeals from the decisions of pertaining to assessments or refunds, decisions of the CIR
quasi-judicial agencies (Commissioner of Internal Revenue, relating to "other matters" may be taken cognizance of by
Commissioner of Customs, Secretary of Finance, Central the CTA, if such "other matters" arose from the NIRC or
Board of Assessment Appeals, Secretary of Trade and other laws administered by the BIR.
Industry) on tax-related problems must be brought IN THIS CASE, the Notice of Denial of Tridharma's
exclusively to the Court of Tax Appeals. application for compromise settlement is a matter which
• In other words, within the judicial system, the law arose from the provisions of the NIRC of 1997, as amended.
intends the Court of Tax Appeals to have exclusive • To be specific, the power of the CIR to enter into a
jurisdiction to resolve all tax problems. compromise is granted under Section 204 (A) of the
• Petitions for writs of certiorari against the acts and NIRC of 1997,
omissions of the said quasi-judicial agencies
should, thus, be filed before the Court of Tax With regard to the exercise of the CIR's authority to
Appeals. compromise, abate, and refund or credit taxes, it is generally
true that purely administrative and discretionary functions
Republic Act No. 9282, a special and later law than Batas may not be interfered with by the courts;
Pambansa Blg. 129 provides an exception to the original • but when the exercise of such functions by the
jurisdiction of the Regional Trial Courts over actions administrative officer is tainted by a failure to abide
46
 by the command of the law, then it is incumbent on
the courts to set matters right, with the Supreme
Court having the last say on the matter.

In other words, the discretionary authority to compromise

granted to the BIR Commissioner is never meant to be
absolute, uncontrolled and unrestrained.
• No such unlimited power may be validly granted to
any officer of the government, except perhaps in
cases of national emergency.
• Thus, the BIR Commissioner would have to
exercise his discretion within the parameters set by
the law, and in case he abuses his discretion, this
Court may correct such abuse if the matter is
appealed to it.

Correspondingly, any decision of the CIR in relation to the

exercise of his power to enter into a compromise under
Section 204 (A) of the NIRC of 1997, as amended, which is
tainted by a failure to abide by the parameters set by law, is
subject to this Court's exclusive appellate jurisdiction.

The issuance of an LOA prior to examination and

assessment is a requirement of due process.
It is not a mere formality or technicality.
• The result of the absence of an LOA is the nullity
of the examination and assessment based on the
violation of the taxpayer's right to due process

Revenue Officer Jennifer L. Almedilla-Potot testified that

she was tasked to continue the audit of Tridharma for taxable
year 2009, under authority of Memorandum of Assignment
(MOA) No. LN-116-2013-0514 38 dated March 5, 2013.
Originally, the conduct of audit examination was assigned
Revenue Officer Reynoso C. Bravo, under MOA No. LN-
116-2011-322 dated June 6, 201
• Considering that RO Almedilla-Potot was not
authorized by a valid LOA to conduct the
investigation and audit of Tridharma, the subject
tax assessment resulting therefrom is void for
violating Tridharma's right to due process. For
being void, the same bears no valid fruit.|

Appeal to the Supreme Court

Decision of the CTA en banc may be appealed to the SC
through Petition for Review on certiorari within 15 days from
receipt of the decision

47
 Claims for Refund o otherwise, he would be unjustly enriching
himself.
SEC. 229. Recovery of Tax Erroneously or Illegally
Collected.- no suit or proceeding shall be maintained in any Of course, the taxpayer (or the person whose income was
court for the recovery of any national internal revenue tax subjected to withholding) may also file a claim for refund, but
hereafter alleged to have been erroneously or illegally assessed it should be directed to the BIR, not the taxpayer's withholding
or collected, or of any penalty claimed to have been collected agent.
without authority, of any sum alleged to have been excessively
or in any manner wrongfully collected without authority, or of • The taxpayer does not have a cause of action for
any sum alleged to have been excessively or in any manner erroneously collected tax against the withholding
wrongfully collected, until a claim for refund or credit has been agent.
duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has CIR v. Smart Communications Inc.
Smart entered into 3 agreements with Prism, a non-resident Malaysian
been paid under protest or duress. corporation, under which Prism would provide programming and
consultancy services for the installation of the SDM Agreement and the CM
In any case, no such suit or proceeding shall be filed after the Agreement, and for the installation and implementation of Smart Money and
Mobile Banking Service SIM Applications and Private Text Platform (SIM
expiration of two (2) years from the date of payment of the tax Application Agreement). Prism billed Smart US$547,822.45. Thinking
or penalty regardless of any supervening cause that may arise that the amount constituted royalties, Smart withheld from its
after payment: payments to Prism, representing the 25% royalty tax under the RP-
Malaysia Tax Treaty. Within the 2-year period to claim a refund, Smart filed
• Provided, however, That the Commissioner may, even an administrative claim with the BIR for the refund of the withheld amount.
without a written claim therefor, refund or credit any When the CIR failed to act on its claim, Smart filed a Petition for CTA.
Smart averred that its payments to Prism were not royalties but “business
tax, where on the face of the return upon which profits,” as defined in the RP-Malaysian Tax Treaty, which were not taxable
payment was made, such payment appears clearly to because Prism did not have a permanent establishment in the Philippines.
have been erroneously paid. The CIR countered that Smart, as a withholding agent was not a party-in-
interest to file the claim for refund, and even if it were the proper party, there
was no showing that the payments to Prism constituted “business profits
Nature of Refund
● The person entitled to claim a tax refund is the
Nature: Considered as form of tax exemption, therefore, strictly
taxpayer [Sections 204(c) and 229 of the National
construed against the taxpayer
Internal Revenue Code (NIRC)].
○ However, in case the taxpayer does not file
Grounds for Claim for Tax Refund or Credit:
a claim for refund, the withholding agent
• Erroneous payment of tax
may file the claim
• Illegally collected tax
• Penalty collected without authority As per jurisprudence, a withholding agent was considered a
• Any tax excessively or wrongfully collected proper party to file a claim for refund of the withheld taxes
of its foreign parent company
Filing of the claim for refund ● The CIR was incorrect in saying that this ruling
Administrative claim - BIR level applies only when the withholding agent and the
• 2 years form date of payment of tax, regardless of taxpayer are related parties, i.e., where the
any supervening cause that may arise after payment withholding agent is a wholly owned subsidiary of
• If the taxpayer does not claim any vat input taxes, 2 the taxpayer
years from the cessation/retirement of the business ○ Although such relation between the
taxpayer and the withholding agent is a
Judicial claim - CTA, SC in case of denial or inaction by CIR factor that increases the latter’s legal
• Before the 2-year period expires, file claim with CTA interest to file a claim for refund, there is
nothing in the decision in said case to
Withholding agent may file a claim for refund suggest that such relationship is required
As an agent of the taxpayer, his authority to file the necessary or that the lack of such relation deprives
Income tax return and to remit the tax withheld to the the withholding agent of the right to file a
government impliedly includes the authority to file a claim for claim for refund
refund and to bring an action for recovery of such claim. (CIR Rather, what is clear in the decision is that a withholding
v. Smart Communications, Inc., G.R. No. 179045, August 25, agent has a legal right to file a claim for refund for two
2010) reasons.
● First, he is considered a “taxpayer” under the NIRC
• However, if ever the withholding agent does get the as he is personally liable for the withholding tax as
refund, the withholding agent has the obligation to well as for deficiency assessments, surcharges, and
remit the same to the principal taxpayer. penalties, should the amount of the tax withheld be
• As a mere agent of the taxpayer, he has the duty to finally found to be less than the amount that should
return what he has recovered; have been withheld under law.

48
 ● Second, as an agent of the taxpayer, his authority to Developers and those with indirect exports
file the necessary income tax return and to remit the classified as effectively VAT zero-rated sales)
tax withheld to the government impliedly includes whose claims are anchored under Section 112(A) of
the authority to file a claim for refund and to bring the Tax Code of 1997, as amended
an action for recovery of such claim c. RDO or LT Audit Division having jurisdiction over
the taxpayer-claimant - for taxpayers whose VAT
Under the same Treaty, the “business profits” of an Registration have been cancelled pursuant to
enterprise of a Contracting State is taxable only in that State, Section 112(B) of the Tax Code of 1997, as
unless the enterprise carries on business in the other amended
Contracting State through a permanent establishment.
● The term “permanent establishment” is defined as a Subject to the provisions of Sec. 4.112-1(b) of RR No. 13-
fixed place of business where the enterprise is 2018, the filing of the claim for VAT refund of a VAT-
wholly or partly carried on. registered person whose registration has been cancelled due
○ However, even if there is no fixed place of to retirement from or cessation of business, or due to changes
business, an enterprise of a Contracting in or cessation of status shall be at the BIR office which has
State is deemed to have a permanent jurisdiction over the taxpayer, within two (2) years from the
establishment in the other Contracting date of issuance of the Tax Clearance by the BIR.
State if it carries on supervisory activities
in that other State for more than 6 months Upon filing of the claim, the taxpayer-claimant shall have no
in connection with a construction, outstanding tax liabilities. Outstanding VAT liability with
installation or assembly project which is the BIR may be deducted from the approved refund on the
being undertaken in that other State. BIR portion. If there is a VAT liability with the BIR and the
In this case, it was established during the trial that Prism did claim includes refund of input VAT on importations which
not have a permanent establishment in the Philippines. necessitates endorsement to the Bureau of Customs (BOC)
● Hence, “business profits” derived from Prism’s for processing of the payment, the VAT liability with the
dealings with Smartwere not taxable. BIR must first be settled before filing the application for
VAT refund with the BIR
Under its agreements with Smart, Prism had intellectual
property right over the SDM program, but not over the CM The taxpayer-claimant shall ensure the completeness and
and SIM Application programs as the proprietary rights of authenticity of the documentary requirements upon filing of
these programs belonged to Smart. the application for VAT refund. Failure on the part of the
● Thus, out of the payments made to Prism, only the taxpayer-claimant to submit the complete documents in
payment for the SDM program was a royalty support of the claim shall result in non-acceptance of the
subject to a 25% withholding tax; the payments for applications. No additional document/s shall be subsequently
the CM and SIM Application programs constituted requested/required from the taxpayer-claimant. Any
Prism’s non-taxable “business profits.” unsupported claim shall be outrightly disallowed, resulting
● The BIR should, therefore, refund the erroneously in full/partial denial of the claim.
withheld royalty taxes for the payments pertaining
to the CM and SIM Application Agreements. The person who will sign and file the application for VAT
refund, execute affidavit/s and/or such other document/s
supporting the claim shall be duly authorized by the
REVENUE MEMORANDUM CIRCULAR NO. 47-2019 taxpayer. The “Secretary’s Certificate” or “Special Power of
Attorney” designating/authorizing said representative of the
The time frame to process and grant claims for VAT refund corporate claimant or sole proprietorship/partnership, as the
is ninety (90) days from the date of submission of the official case may be, should be notarized and must be presented to
receipts or invoices and other documents in support of the the processing office, together with one (1) valid
application filed up to the release of the payment for the government-issued Identification Card (ID) of the said
approved amount of the refund. authorized representative

The Application for VAT Credit/Refund Claims (BIR Form

No. 1914) shall be received by the following BIR offices:
a. VAT Credit Audit Division (VCAD) - for direct
I.) A-17 of Revenue Memorandum Circular No.
exporters, regardless of the percentage of export
42-2003 is hereby revised to read as follows:
sales to total sales and whose claims are anchored
under Section 112(A) of the Tax Code of 1997, as In cases where the taxpayer has filed a "Petition
amended for Review" with the Court of Tax Appeals involving a
b. Revenue District Office (RDO) or LT Audit claim for refund/TCC that is pending at the
Division having jurisdiction over the taxpayer- administrative agency (Bureau of Internal Revenue or
claimant - for taxpayers engaged in other VAT OSS-DOF), the administrative agency and the tax court
zero-rated sales (e.g. Renewable Energy may act on the case separately. While the case is pending
49
in the tax court and at the same time is still under process not been acted upon by the
by the administrative agency, the litigation lawyer of the investigating/processing
BIR, upon receipt of the summons from the tax court, office due to incomplete
shall request from the head of the documentation, the
investigating/processing office for the docket containing taxpayer-claimants are given
certified true copies of all the documents pertinent to the thirty (30) days within which
claim. The docket shall be presented to the court as to submit the documentary
evidence for the BIR in its defense on the tax requirements unless given
credit/refund case filed by the taxpayer. In the further extension by the head
meantime, the investigating/processing office of the of the processing unit, but
administrative agency shall continue processing the such extension should not
refund/TCC case until such time that a final decision has exceed thirty (30) days.
been reached by either the CTA or the administrative
agency. For claims to be filed by claimants
with the respective
If the CTA is able to release its decision ahead investigating/processing
of the evaluation of the administrative agency, the latter office of the administrative
shall cease from processing the claim. agency, the same shall be
On the other hand, if the administrative agency officially received only upon
is able to process the claim of the taxpayer ahead of the submission of complete
CTA and the taxpayer is amenable to the findings documents.
thereof, the concerned taxpayer must file a motion to For current and future claims for tax credit/refund, the
withdraw the claim with the CTA. same shall be processed within one hundred twenty (120)-
A copy of the positive resolution or approval of days from receipt of the complete documents. If, in the
the motion must be furnished the administrative agency course of the investigation and processing of the claim,
as a prerequisite to the release of the tax credit additional documents are required for the proper
certificate/tax refund processed administratively. determination of the legitimate amount of claim, the
However, if the taxpayer is not agreeable to the findings taxpayer-claimants shall submit such documents within
of the administrative agency or does not respond thirty (30) days from request of the investigating/processing
accordingly to the action of the agency, the agency shall office, which shall be construed as within the one hundred
not release the refund/TCC unless the taxpayer shows twenty (120)-day period.
proof of withdrawal of the case filed with the tax court.
If, despite the termination of the processing of Taxes Not Subject of Set-Off
the refund/TCC at the administrative level, the taxpayer
decides to continue with the case filed at the tax court, CIR v. Toledo Power Company
TPC filed with the BIR Regional District Office (RDO) No. 83 an
the litigation lawyer of the BIR, upon the initiative of administrative claim for refund or credit of its unutilized input VAT for the
either the Legal Office or the Processing Office of the taxable year 2002 in the total amount of P14,254,013.27 under RA No. 9136
Administrative Agency, shall present as evidence or the Electric Power Industry Reform Act of 2001 (EPIRA) and the NIRC.
against the claim of the taxpayer the result of due to the inaction of the Commissioner of Internal Revenue, TPC filed with
the CTA a Petition for Review. In response to the Petition for Review, the
investigation of the investigating/processing office. CIR argued that TPC failed to prove its entitlement to a tax refund or credit.
II.) Additional paragraphs are hereto added to CTA Division: rendered a Decision partially granting TPC's claim. Since
NPC is exempt from the payment of all taxes, including VAT, the CTA
the last paragraph of RMC No. 42-2003 to read as Division allowed TPC to claim a refund or credit of its unutilized input VAT
follows: attributable to its zero-rated sales of electricity to NPC for the taxable year
2002. The CTA Division, however, denied the claim attributable to TPC's
Q-18: For pending claims with sales of electricity to CEBECO, ACMDC and AFC due to the failure of TPC
incomplete documents, what to prove that it is a generation company under the EPIRA. The CTA
is the period within which to Division did not consider the said sales as valid zero-rated sales because
TPC did not submit a Certificate of Compliance (COC) from the Energy
submit the supporting Regulatory Commission (ERC). Although TPC filed an application for a
documents required by the COC on June 20, 2002 with the ERC, the CTA Division found this
investigating/processing insufficient to prove that TPC is a generation company under the EPIRA.
office? When should the TPC moved for partial reconsideration contending that as an existing
generation company, it was not required to obtain a COC from the ERC as
investigating/processing a prerequisite for its operations, and that the issue of whether it is a
office officially receive generation company was never raised during the trial. In any case, it
claims for tax credit/refund attached photocopies of its application for a COC. The CIR, likewise, sought
and what is the period partial reconsideration arguing that the administrative claim was merely pro
forma since TPC failed to submit the complete documents required under
required to process such Revenue Memorandum Order (RMO) No. 53-98, which were necessary to
claims? ascertain the correct amount to be refunded in the administrative claim.
A-18: For pending claims which have
50
Both the administrative and the judicial claims were 2. CIR v. CTA: existing deficiency income and
timely and validly business tax assessment against the taxpayer
filed a. South African Airways: permitted
1. In filing tax refund claims - taxpayer has two (2) offsetting of taxes because the correctness
years from the close of the taxable quarter when the of the return filed by the taxpayer was put
zero-rated sales were made within which to file with in issue.
the CIR an administrative claim for refund or credit 3. However, we clarified that while offsetting may be
of unutilized input VAT attributable to such sales. allowed, the BIR can no longer assess the taxpayer
2. In this case, TPC applied for a claim for refund or for deficiency taxes in excess of the amount claimed
credit of its unutilized input VAT for the taxable for refund if prescription has already set in SC
year 2002 on December 22, 2003. allowed offsetting of taxes only because the
3. Since the CIR did not act on its application within determination of the taxpayer's liability is
the 120- day period, TPC appealed the inaction on intertwined with the resolution of the claim for tax
April 22, 2004. refund of erroneously or illegally collected taxes
4. Clearly, both the administrative and the judicial under Section 229 of the NIRC.
claims were filed within the prescribed period 4. In this case. TPC filed a claim for tax refund or
provided in Section 112 of the NIRC. credit under Section 112 of the NIRC, where the
5. To the validity of TPC's claim, there is no question issue to be resolved is whether TPC is entitled to a
that TPC is entitled to a refund or credit of its refund or credit of its unutilized input VAT for the
unutilized input VAT attributable to its zero-rated taxable year 2002.
sales of electricity to NPC for the taxable year 2002 a. And since it is not a claim for refund under
pursuant to Section 108 (B) (3)49 of the NIRC, as Section 229 of the NIRC, the correctness
amended, in relation to Section 1350 of the Revised of TPC s VAT returns is not an issue.
Charter of the NPC, as amended. 5. Thus, there is no need for the court to determine
whether TPC is liable for deficiency VAT.
TPC is not entitled to a refund or credit of unutilized 6. It would be unfair to allow the CIR to use a claim
input VAT for refund under Section 112 of the NIRC as a
attributable to its sales of electricity to CEBECO, means to assess a taxpayer for any deficiency VAT,
ACMDC, and AFC. especially if the period to assess had already
1. To be entitled to a refund or credit of unutilized prescribed.
input VAT attributable to the sale of electricity 7. As we have said, the courts have no assessment
under the EPIRA, a taxpayer must establish: powers
a. (1) that it is a generation company, and
b. (2) that it derived sales from power
generation.
2. Under the EPIRA, all new generation companies SMI-ED Philippine Technology v. CIR
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage
and existing generation facilities are required to in the business of manufacturing ultra high-density microprocessor unit
obtain a COC from the ERC. package." After its registration on June 29, 1998, SMI-Ed Philippines
a. New generation companies must show that constructed buildings and purchased machineries and equipment. SMI-Ed
they have complied with the requirements, Philippines "failed to commence operations." Its factory was temporarily
closed, and then it eventually sold its buildings and some of its installed
standards, and guidelines of the ERC machineries and equipment to Ibiden Philippines, Inc., another PEZA-
before they can operate. registered enterprise. SMI-Ed Philippines was dissolved on November 30,
3. There is nothing in the JSFI to show that the parties 2000. In its quarterly income tax return for year 2000, SMI-Ed Philippines
agreed that TPC is a generation company under the subjected the entire gross sales of its properties to 5% final tax on PEZA
registered corporations, and paid the taxes thereon. On February 2, 2001,
EPIRA. after requesting the cancellation of its PEZA registration and amending its
4. It was only on June 23,2005, when the ERC issued articles of incorporation to shorten its corporate term, SMI-Ed Philippines
a COC in favor of TPC, that it became a generation filed an administrative claim for the refund BIR. SMIEd Philippines alleged
company under EPIRA. Consequently, TPC's sales that the amount was erroneously paid and that it had net loss. The BIR did
not act on SMI-Ed Philippines’ claim, which prompted the latter to file a
of electricity to CEBECO, ACMDC, and AFC petition for review before the CTA on September 9, 2002. CTA 2nd Div:
cannot qualify for VAT zero-rating under the denied SMI-Ed Philippines’ claim for refund, finding that administrative
EPIRA? claim for refund and the petition for review with the CTA were filed within
the two-year prescriptive period, but that fiscal incentives given to PEZA-
registered enterprises may be availed only by PEZA-registered enterprises
TPC is not liable for deficiency VAT. that had already commenced operations. Since SMI-Ed Philippines had not
1. As a rule, taxes cannot be subject to compensation commenced operations, it was not entitled to the incentives of either the
because the government and the taxpayer are not income tax holiday or the 5% preferential tax rate. Payment of the 5%
creditors and debtors of each other. preferential tax was erroneous. Instead, it was liable for 6% capital gains
tax (CGT).
a. However, we are aware that in several
cases, SC have allowed the determination
of a taxpayer's liability in a refund case,
thereby allowing the offsetting of taxes.
51
Under the Tax Code, the Commissioner has the power to When the BIR’s unfavorable decision is brought on appeal
make assessments and prescribe additional requirements for to the CTA, the CTA reviews the correctness of the BIR’s
tax administration and enforcement assessment and decision.
1. The CTA has no power to make an assessment. 6. In reviewing the BIR’s assessment and decision, the
2. On matters such as tax collection, tax refund, and CTA had to make its own determination of the
others related to the national internal revenue taxes, taxpayer’s tax liabilities.
the Court of Tax Appeals’ jurisdiction is appellate 7. The CTA may not make such determination before
in nature. the BIR makes its assessment and before a dispute
involving such assessment is brought to the
Under RA 1125, as amended by RA 9282, the CTA reviews CTA on appeal.
decisions and inactions of the Commissioner of Internal
Revenue in disputed assessments and claims for tax refunds. The CTA’s jurisdiction is not limited to cases when the BIR
3. In stating that petitioner’s transactions are subject makes an assessment or a decision unfavorable to the
to capital gains tax, however, the Court of Tax taxpayer.
Appeals was not making an assessment. 8. Taxes are generally self-assessed.
a. It was merely determining the proper 9. They are initially computed and voluntarily paid by
category of tax that petitioner should have the taxpayer. may later find that he or she has
paid, in view of its claim that it erroneously paid taxes. In these instances, the
erroneously imposed upon itself and paid taxpayer may ask for a refund.
the 5% final tax imposed upon PEZA- 10. If the BIR fails to act on the request for refund, the
registered enterprises. taxpayer may bring the matter to the CTA.
The determination of the proper category of tax that
petitioner should have paid is an incidental matter necessary ATR Kim Eng Financial v. CIR
for the resolution of the principal issue, which is whether Petitioner ATR filed its amended final annual income tax return for the year
petitioner was entitled to a refund. ended December 31, 1995, declaring an overpayment of income tax of about
36.1M Petitioner filed a claim for refund with the BIR in the amount of
4. The issue of petitioner’s claim for tax refund is approx 34.7M representing excess creditable income taxes for taxable year
intertwined with the issue of the proper taxes that 1995 There being no immediate action by respondent, petitioner filed a
are due from petitioner. Petition for Review before this Court on April 1, 1998. After due hearing,
this Court, in a decision dated January 18, 2000, partially granted petitioner's
a. A claim for tax refund carries the claim for refund for the amount of 34.5M the Court ruled that the issue
assumption that the tax returns filed were raised in the Petition for Review is limited to petitioner's entitlement of a
correct. tax refund for excess income tax payments for taxable year 1995. It has no
jurisdiction over assessments for deficiency income, value-added and
b. If the tax return filed was not proper, the documentary stamp taxes which have neither been disputed nor have
correctness of the amount paid and, become due and demandable against petitioner. CIR filed a motion for
therefore, the claim for refund become reconsideration thereof asserting that petitioner cannot claim for a refund
questionable. since upon their investigation and verification, it has been found out that
petitioner had a deficiency income tax for taxable year 1995. In opposition
c. In that case, the court must determine if a to respondent's motion for reconsideration, petitioner countered that the
taxpayer claiming refund of erroneously deficiency income assessment was never raised as an issue in the Petition
paid taxes is more properly liable for taxes for Review or in the Answer of the respondent. Respondent cannot defeat
petitioner's claim for refund by invoking its right to impose deficiency
other than that paid. income assessment against petitioner. Petitioner's claim for refund and
Any liability in excess of the refundable amount, however, respondent's demand for payment of deficiency income tax cannot be
may not be collected in a case involving solely the issue of subject of a set-off or legal compensation as the government and taxpayer
the taxpayer’s entitlement to refund. are not mutually creditors and debtors to each other.
The question of tax deficiency is distinct and
Before a taxpayer may claim for a refund of excess creditable
unrelated to the question of petitioner’s entitlement
taxes, he must comply with all the requirements set forth by
to refund.
the Supreme Court in the case of Citibank N.A. vs. Court of
d. Tax deficiencies should be subject to Appeals and Commissioner of Internal Revenue to wit:
assessment procedures and the rules of 1. The claim for refund was filed within the two year
prescription. prescriptive period under Section 204 (3) in relation
to Section 230 of the 1995 Tax Code 22
When the BIR makes the assessment, the taxpayer is allowed 2. The income upon which taxes were withheld were
to dispute that assessment before the BIR. included in the return of the recipient; and
5. If the BIR issues a decision that is unfavorable to 3. The fact of withholding is established by a copy of
the taxpayer or if the BIR fails to act on a dispute the statement duly issued by the payor (withholding
brought by the taxpayer, the BIR’s decision or agent) to the payee, showing the amount paid and
inaction may be brought on appeal to the CTA. the amount tax withheld therefrom.
a. The CTA then acquires jurisdiction over a. Petitioner complied with all the
the case. requirements.
52
Respondent's findings of deficiency income tax against 4. As early as September 15, 1998, respondent was
petitioner does not in any way disqualify the latter from already informed of petitioner's change of address
claiming for a tax refund. from its former office.
4. Otherwise put, petitioner's claim of tax refund can
proceed independently, despite the existence of In the case of Obayashi Philippines Corporation vs. CIR, We
deficiency income tax assessment because the ruled that the date when the assessment notice was received
remedies for assessment appeals vary from claims by the taxpayer is essential in determining if assessment was
for refund. undertaken within the prescribed period mandated by law
After taking into consideration all the circumstances 5. An assessment must be sent to and received by the
encompassing the present appeal and the existing taxpayer and must demand payment of the taxes
jurisprudence applicable, the Court finds that the issue of described therein within the specified period.
whether or not petitioner is liable to pay the assessments for a. Failure of the respondent to establish
deficiency income, VAT and documentary stamp taxes receipt by the petitioner of the subject
should be tackled in a separate case. assessment notice to petitioner's new
5. The subject brought to CTA for resolution in the address renders the assessment notice
petition for review only involves the refund of invalid. It is thus, as if there was no
overpaid income tax for the year 1995. assessment notice issued.
a. Moreover, the Court has no jurisdiction b. The assessment being void due to
over the assessments issued against prescription, petitioner is not liable for
petitioner because the said assessments income tax deficiency for the taxable year
have neither been disputed nor do we have 1995.
any information whether or not these have
become due and demandable.

Art. 229 of the Tax Code, as amended, provides that if the CIR v. Acesite Hotel Corp
For January 1996 to April 1997, Acesite incurred VAT amounting to
protest is denied in whole or in part, the taxpayer affected P30,152,892.02 from its rental income and sale of food and beverages to
may appeal to the Court within thirty days from receipt of PAGCOR during said period. Acesite tried to shift the said taxes to
the said decision. PAGCOR by incorporating it in the amount assessed to PAGCOR but the
6. Furthermore, Section 7 of Republic Act 1125 latter refused to pay the taxes on account of its tax exempt status. Thus,
PAGCOR paid the amount due to Acesite minus the P30,152,892.02 VAT
provides that the Court of Tax Appeals has while the latter paid the VAT to the Commissioner of Internal Revenue
exclusive appellate jurisdiction to review by appeal [hereafter, CIR] as it feared the legal consequences of non-payment of the
decisions of the Commissioner of Internal Revenue tax. However, Acesite belatedly arrived at the conclusion that its transaction
in cases involving disputed assessments. with PAGCOR was subject to zero rate as it was rendered to a tax-exempt
entity. Acesite then filed an an administrative claim for refund with the CIR
7. In the case at bar, the records bear no traces of but the latter failed to resolve the same. Thus on 29 May 1998, Acesite filed
whether or not the assessments issued against a petition with the Court of Tax Appeals [hereafter, CTA] CTA: granted the
petitioner have become disputed or final. petition and ruled under the principle of Solutio Indebiti which requires the
return of what has been delivered through mistake, Respondent must refund
to the Petitioner.
Court cannot assume jurisdiction over assessments which
have not been duly protested by the taxpayer.
1. It should be emphasized that the issue raised herein PAGCOR is exempt from payment of indirect taxes. Indeed,
has already been squarely ruled upon in Our by extending the exemption to entities or individuals dealing
questioned decision. with PAGCOR, the legislature clearly granted exemption
2. Moreover, the BIR records show no traces that the also from indirect taxes.
assessment notices together with the demand letters 1. It must be noted that the indirect tax of VAT, as in
have already been sent to petitioner. the instant case, can be shifted or passed to the
3. The assessment notices on file with the BIR records buyer, transferee, or lessee of the goods, properties,
show no evidence of being received by petitioner or services subject to VAT. T
nor were there any registry receipt cards, if they 2. Thus, by extending the tax exemption to entities or
were sent through mail. individuals dealing with PAGCOR in casino
a. Hence, the Court cannot be compelled by operations, it is exempting PAGCOR from being
the respondent to take cognizance of the liable to indirect taxes.
assessments which appear to be Thus, VAT exemption extends to Acesite. while it was
undisputed and worse, not yet served. proper for PAGCOR not to pay the 10% VAT charged by
Petitioner asseverates that it never received the assessment Acesite, the latter is not liable for the payment of it as it is
notice for deficiency income tax for the year 1995 (Exhibit exempt in this particular transaction by operation of law to
4; L) and that it was impossible that said assessment notice pay the indirect tax.
be received by it because prior to the issuance of the same, 3. Such exemption falls within the former Section 102
petitioner already transferred to its new office. (b) (3) of the 1977 Tax Code, as amended (now Sec.
108 [b] [5] of R.A. 8424).

53
Acesite paid VAT by mistake.
4. Considering the foregoing discussion, there are
undoubtedly erroneous payments of the VAT
pertaining to the effectively zero-rate transactions
between Acesite and PAGCOR.
5. Verily, Acesite has clearly shown that it paid the
subject taxes under a mistake of fact, that is, when
it was not aware that the transactions it had with
PAGCOR were zero-rated at the time it made the
payments.

Solutio indebiti applies to the Government.

6. Tax refunds are based on the principle of quasi-
contract or solutio indebiti and the pertinent laws
governing this principle are found in Arts. 2142 and
2154 of the Civil Code.
7. When money is paid to another under the influence
of a mistake of fact, that is to say, on the mistaken
supposition of the existence of a specific fact, where
it would not have been known that the fact was
otherwise, it may be recovered.

The ground upon which the right of recovery rests is that

money paid through misapprehension of facts belongs in
equity and in good conscience to the person who paid it.
8. The Government comes within the scope of solutio
indebiti principle as elucidated in Commissioner of
Internal Revenue v. Fireman's Fund Insurance
Company , where we held that: "Enshrined in the
basic legal principles is the time-honored doctrine
that no person shall unjustly enrich himself at the
expense of another. It goes without saying that the
Government is not exempted from the application
of this doctrine."

Action for refund strictly construed; Acesite discharged the

burden of proof.
• Since an action for a tax refund partakes of the
nature of an exemption, which cannot be allowed
unless granted in the most explicit and categorical
language, it is strictly construed against the
claimant who must discharge such burden
convincingly.
• In the instant case, respondent Acesite had
discharged this burden as found by the CTA and the
CA.
o Indeed, the records show that Acesite
proved its actual VAT payments subject to
refund, as attested to by an independent
Certified Public Accountant who was duly
commissioned by the CTA.
o On the other hand, petitioner never
disputed nor contested respondent's
testimonial and documentary evidence.
• In fact, petitioner never presented any evidence on
its behalf

54
 LOCAL TAXATION • Such taxes, fees, and charges shall accrue exclusively
to the local government units.”
Nature of Local Government units
Local Taxing Authority (Section 132)
Under the 1987 Constitution, local governments or local
government units (LGUs) or municipal corporations FUNDAMENTAL PRINCIPLES OF LGU’s TAXING
proper are referred to as “territorial and political POWERS (Section 130):
subdivisions” (Section 1, Article X, 1987 Constitution).
• An LGU is a public office, a public corporation, The following fundamental principles shall govern the exercise
and is classified as a municipal corporation proper. of the taxing and other revenue raising powers of local
government units:
The purpose of LGs is also two-fold:
1. LGs are agents of the State in the exercise of a) Taxation shall be uniform in each local government
government or public powers, and unit;
2. are agents of the community and people in the b) Taxes, fees, charges and other impositions shall:
exercise of proprietary or private powers a. be equitable and based as far as practicable
(Lina, Jr. vs. Paňo, G.R. No. 129093, August 30, 2001; Magtajas vs. on the taxpayer's ability to pay;
Pryce Properties and Philippine Amusements and Gaming Corporation, b. be levied and collected only for public
G.R. No. 111097, July 20, 1994; Basco vs. Philippine Amusements and
Gaming Corporation, G.R. No. 91649, May 14, 1991). purposes;
c. NOT BE unjust, excessive, oppressive, or
Chapter X, Section 3, 1987 Constitution: confiscatory;
“The Congress shall enact a local government code which d. NOT BE contrary to law, public policy,
shall provide for a more responsive and accountable local national economic policy, or in restraint of
government structure instituted through a system of trade;
decentralization with effective mechanisms of recall, initiative, c) The collection of local taxes, fees, charges and other
and referendum, allocate among the different local government impositions shall in no case be let to any private
units their powers, responsibilities, and resources, and provide
person;
for the qualifications, election, appointment and removal, term,
d) The revenue collected pursuant to the provisions of
salaries, powers and functions and duties of local officials, and
all other matters relating to the organization and operation of this Code shall inure solely to the benefit of, and be
the local units.” subject to disposition by, the local government unit
levying the tax, fee, charge or other imposition unless
Supervision of LGUs otherwise specifically provided herein; and,
Chapter X, Section 4, 1987 Constitution: e) Each local government unit shall, as far as
1. “The President of the Philippines shall exercise practicable, evolve a progressive system of taxation.
general supervision over local governments.
2. Provinces with respect to component cities and
municipalities, and COMMON LIMITATIONS ON THE TAXING POWERS
3. cities and municipalities with respect to component OF LOCAL GOVERNMENT UNITS (Section133)
barangays
a. shall ensure that the acts of their component Unless otherwise provided herein, the exercise of the taxing
units are within the scope of their prescribed powers of provinces, cities, municipalities, and barangays
powers and functions SHALL NOT EXTEND to the levy of the following:

Local Government Taxation a) Income tax, except when levied on banks and other
Local government taxation and other fiscal matters are financial institutions;
contained in Book II of the Local Government Code. These b) Documentary stamp tax;
include real property taxation, shares of local governments in c) Taxes on estates, inheritance, gifts, legacies and other
the proceeds of national taxes, credit financing and local acquisitions mortis causa, except as otherwise
budgets including property and supply management. provided herein;
d) Customs duties, registration fees of vessel and
Power to Create Sources of Revenue: wharfage on wharves, tonnage dues, and all other
Section 129 of the LGC provides that each local government kinds of customs fees, charges and dues except
unit shall exercise its power to create its own sources of wharfage on wharves constructed and maintained by
revenue and to levy taxes, fees, and charges subject to the the local government unit concerned;
provisions of the Code, consistent with the basic policy of local e) Taxes, fees, and charges and other impositions upon
autonomy. goods carried into or out of, or passing through, the
territorial jurisdictions of local government units in
55
 the guise of charges for wharfage, tolls for bridges or • Officers and enlisted men of the Armed Forces of the
otherwise, OR other taxes, fees, or charges in any Philippines and members of the Philippine National
form whatsoever upon such goods or merchandise; Police on mission;
f) Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or • Post office personnel delivering mail,
fishermen; physicallyhandicapped, and
g) Taxes on business enterprises certified to by the • Disabled citizens who are sixty-five (65) years or
Board of Investments as PIONEER or NON- older.
PIONEER for a period of six (6) and four (4) years,
respectively from the date of registration; When public safety and welfare so requires, the sanggunian
h) Excise taxes on articles enumerated under the concerned may discontinue the collection of the tolls, and
National Internal Revenue Code, as amended, and thereafter the said facility shall be free and open for public use.
taxes, fees or charges on petroleum products;
i) Percentage or value-added tax (VAT) on sales, PROVINCIAL TAXES
barters or exchanges or similar transactions on goods
or services except as otherwise provided; 1. Tax on business of printing and publication at a
j) Taxes on the gross receipts of transportation rate not exceeding 50% of 1% of the gross annual
contractors and persons engaged in the transportation receipts for the preceding calendar year.
of passengers or freight by hire and common carriers a. In case of newly started business, the tax
by air, land or water, except as provided in the Code; shall not exceed 1/20 of 1% of the capital
k) Taxes on premiums paid by way or reinsurance or investment.
retrocession; 2. Tax on a business enjoying franchise at a rate not
l) Taxes, fees or charges for the registration of motor exceeding 50% of 1% of the gross annual receipts
vehicles and for the issuance of all kinds of licenses for the preceding calendar year.
or permits for the driving thereof, EXCEPT tricycles; a. In case of a newly started business, the
m) Taxes, fees, or other charges on Philippine products tax shall not exceed 1/20 of 1% of the
actually exported, except as otherwise provided in the capital investment
Code; 3. Tax on sand, gravel and other quarry resources at
n) Taxes, fees, or charges, on Countryside and a rate not exceeding 10% of the fair market value
Barangay Business Enterprises and cooperatives in the locality per cubic meter of ordinary stones,
duly registered under R.A. No. 6810 and Republic Act sand, gravel, earth, and other quarry resources, as
Numbered Sixty-nine hundred thirty-eight (R.A. No. defined under the National Internal Revenue Code
6938) otherwise known as the "Cooperative Code of (NIRC), as amended, extracted from public lands
the Philippines" respectively; and or from the beds of seas, lakes, rivers, streams,
o) Taxes, fees or charges of any kind on the National creeks, and other public waters within its territorial
Government, its agencies and instrumentalities, and Jurisdiction.
local government units. 4. PROFESSIONAL TAX on each person engaged in
the exercise or practice of his/her profession
COMMON REVENUE-RAISING POWERS requiring government examination at a rate not
exceeding PhP300.00.
1. Service Fees and Charges. - Local government units 5. Amusement tax payable by proprietors, lessees, or
may impose and collect such reasonable fees and operators of theaters, cinemas, concert halls,
charges for services rendered. circuses, boxing stadia, and other places of
2. Public Utility Charges. - Local government units may amusement at a rate of not more than 10% of the
fix the rates for the operation of public utilities owned, gross receipts from admission fees.
operated and maintained by them within their 6. Annual fixed tax not exceeding PhP500.00 for
jurisdiction. every delivery truck or van used by manufacturers,
3. Toll Fees or Charges. - The SANGGUNIAN producers, wholesalers, dealers or retailers in the
concerned may prescribe the terms and conditions and delivery or distribution of distilled spirits,
fix the rates for the imposition of toll fees or charges fermented liquors, soft drinks, cigars and cigarettes,
to sales outlets, or consumers, whether directly or
for the use of any public road, pier or wharf, waterway,
indirectly, within the province.
bridge, ferry or telecommunication system funded and
constructed by the local government unit concerned.

NO such toll fees or charges shall be collected from:

56
 MUNICIPAL TAXES: 3. Any business, not otherwise specified in the preceding
paragraph at a rate to be determined by the local
a. Business Taxes Sanggunian.
a. If the business is subject to the excise, VAT
There are three (3) kinds of business taxes imposed by or percentage tax under the NIRC, the rate
municipalities: shall not exceed 2% of the gross sales or
1. a combination of a graduated-fixed and percentage receipts of the preceding calendar year.
business taxes; 4. Annual tax on peddlers engaged in the sale of any
2. percentage tax; and merchandise or article of commerce, at a rate not
3. annual tax. exceeding PhP50.00 per peddler.

A.1 The following are subject to a combination of a CITY TAXES

graduatedfixed and percentage business taxes:
1. Manufacturers, assemblers, repackers, processors, The city government may impose and collect any of the taxes,
brewers, distillers, rectifiers, and compounders of fees and charges imposed by the province or municipality.
liquors, distilled spirits, and wines or manufacturers
of any article of commerce of whatever kind or nature
The rates of taxes may exceed the maximum rates allowed for
at rates ranging from PhP165.00 for gross receipts of
the province or municipality by not more than 50% EXCEPT
less than PhP10,000.00 to PhP24,375.00 for gross
the rates of professional and amusement taxes which are already
receipts of PhP5 million to PhP6,499,999.00.
a. Those with gross receipts of fixed.
PhP6,500,000.00 or more are taxed at a rate
of not exceeding 37 1/2% of 1% of the gross BARANGAY TAXES
receipts.
2. Wholesalers, distributors, or dealers in any article of The barangay may impose a tax on stores or retailers with
commerce of whatever kind or nature at rates ranging fixed business establishments with annual gross sales or
from PhP18.00 for gross receipts of less than receipts of PhP50,000.00 or less in the case of cities; and
PhP1,000.00 to PhP10,000.00 for gross receipts of PhP30,000.00 or less, in the case of municipalities, at a rate
PhP1 million to PhP1,999,999.00. not exceeding 1% of gross sales or receipts
a. Those with gross receipts of PhP2 million or
more are taxed at a rate of not exceeding 50% COMMUNITY TAX
of 1% of the gross receipts. City and municipal government may impose a community tax
3. Exporters, and manufacturers, millers, producers, at the following rates:
wholesalers, distributors, dealers or retailers of 1. Individuals
essential commodities are subject to not more than Basic community tax ………………………....... PhP5.00
one-half (1/2) of the rates prescribed for Additional tax –
manufacturers wholesalers and retailers of other For every PhP1,000.00 of income .…............ PhP1.00
products. • The tax, however, shall in no case exceed
4. Contractors and other independent contractors at PhP5,000.00.
rates ranging from PhP27.50 for gross receipts of less
than PhP5,000.00 to PhP11,500.00 for gross receipts 2. Corporations
of PhP1 million to PhP1,999,999.00. Basic community tax………………………... PhP500.00
a. Those with gross receipts of PhP2 million or Additional tax –
more are taxed at a rate of not exceeding 50% For every PhP5,000.00 worth of real property ......... PhP2.00
of 1% of the gross receipts. For every PhP5,000.00 worth of gross receipts/ earnings
derived from business…………... PhP2.00
A2 Percentage taxes are imposed on the following: • The tax, however, shall in NO case exceed
1. Retailers, at rates of 2% for gross receipts of PhP10,000.00.
PhP400,000.00 or less and 1% for gross receipts over
PhP400,000.00. Exemptions from the community tax:
2. Banks and other financial institutions at a rate not
exceeding 50% of 1% of the gross receipts of the • Diplomatic and consular representatives; and
preceding calendar year derived from interest, • Transient visitors when their stay in the Philippines
commissions and discounts from lending activities, does not exceed three (3) months.
income from financial leasing, dividends, rentals, on exceed three (3) months.
property and profit from exchange or sale of property,
insurance premium.

57
 COLLECTION OF TAXES, FEES AND CHARGES 2. Branch or Sales Office — a fixed place in a locality
1. All local taxes, fees and charges SHALL ACCRUE on which conducts operations of the business as an
the first day of January of each year. extension of the principal office.
a. HOWEVER, new taxes, fees or charges, or a. Offices used only as display areas of the
changes in the rates thereof, shall accrue on products where no stocks or items are stored
the first (1st) day of the quarter next for sale, although orders for the products may
following the effectivity of the ordinance be received thereat, are not branch or sales
imposing such new levies or rates. offices as herein contemplated.
2. All local taxes, fees and charges SHALL BE PAID b. A warehouse which accepts orders and/or
within the first twenty (20) days of January or of each issues sales invoices independent of a branch
subsequent quarter, as the case may be. with sales office shall be considered as a
a. The payments may be made in quarterly sales office.
installments. 3. Warehouse — a building utilized for the storage of
3. The sanggunian concerned may, for a justifiable products for sale and from which goods or
reason or cause, EXTEND THE TIME for payment of merchandise are withdrawn for delivery to customers
such taxes, fees, or charges without surcharges or or dealers, or by persons acting in behalf of the
penalties, but only for a period not exceeding six (6) business.
months. a. A warehouse that does not accept orders
4. The sanggunian may impose a surcharge not and/or issue sales invoices as aforementioned
exceeding twenty-five percent (25%) of the amount of shall not be considered a branch or sales
taxes, fees or charges not paid on time and an interest office.
at the rate not exceeding two percent (2%) per month 4. Plantation — a tract of agricultural land planted to
of the unpaid taxes, fees or charges including trees or seedlings whether fruit bearing or not,
surcharges, until such amount is fully paid uniformly spaced or seeded by broadcast methods or
a. but IN NO CASE shall the total interest on normally arranged to allow highest production.
the unpaid amount or portion thereof exceed a. Inland fishing ground shall be considered as
thirty-six (36) months. plantation.
5. All local taxes, fees, and charges shall be collected by 5. Experimental Farms — agricultural land utilized by
the provincial, city, municipal, or barangay treasurer, a business or corporation to conduct studies, tests,
or their duly authorized deputies. The provincial, city researches or experiments involving agricultural,
or municipal treasurer may designate the barangay agribusiness, marine, or aquatic, livestock, poultry,
treasurer as his deputy to collect local taxes, fees, or dairy and other similar products for the purpose of
charges. improving the quality and quantity of goods or
products.
SITUS OF THE TAX. a. On-site sales of commercial quantity made in
experimental farms shall be similarly
Definition of Terms — imposed the corresponding tax under and
1. Principal Office — the head or main office of the allocated.
business appearing in the pertinent documents
submitted to the Securities and Exchange Sales Allocation —
Commission, or the Department of Trade and 1. All sales made in a locality where there is a branch
Industry, or other appropriate agencies, as the case or sales office or warehouse shall be
may be. a. recorded in said branch or sales office or
a. The city or municipality specifically warehouse and the
mentioned in the articles of incorporation of b. tax shall be payable to the city or
official registration papers as being the municipality where the same is located.
official address of said principal office shall 2. In cases where there is NO such branch, sales office,
be considered as the situs thereof. or warehouse in the locality where the sale is made,
b. In case there is a transfer or relocation of the the sale shall be
principal office to another city or a. recorded in the principal office along with
municipality, it shall be the duty of the the sales made by said principal office and
owner, operator or manager of the business the
to give due notice of such transfer or b. tax shall accrue to the city or municipality
relocation to the local chief executives of the where said principal office is located.
cities or municipalities concerned within
fifteen (15) days after such transfer or
relocation is effected.

58
3. In cases where there is a factory, project office, plant Port of Loading
or plantation in pursuit of business,
a. thirty percent (30%) of all sales Port of Loading:
i. recorded in the principal office • GR: The city or municipality where the port of
shall be loading is located shall not levy and collect the tax
ii. taxable by the city or municipality imposable in Article 233 (fees nd charges)
where the principal office is located • XPN: unless the exporter maintains in said city or
and municipality its principal office, a branch, sales office
b. seventy percent (70%) of all sales or warehouse, factory, plant, or plantation in which
i. recorded in the principal office shall case, the rule on the matter shall apply accordingly.
be
ii. taxable by the city or municipality Sales made by route trucks, vans, or vehicles
where the factory, project office, 1. For route sales made in a locality where a
plant or plantation is located. manufacturer, producer, wholesaler, retailer or dealer
c. LGUs where only experimental farms are has a branch or sales office or warehouse, the sale are
located shall not entitled to the sales a. recorded in the branch, sales office or
allocation provided in this subparagraph. warehouse and
4. In case of a plantation located in a locality OTHER b. the tax due thereon is paid to the LGU where
THAN that where the factory is located, the seventy
such branch, sales office or warehouse is
percent (70%) sales allocation shall be divided as
located.
follows:
2. For route sales made in a locality where a
a. Sixty percent (60%) to the city or
manufacturer, producer, wholesaler, retailer or dealer
municipality where the factory is located;
and has no branch, sales office or warehouse the sales are
b. Forty percent (40%) to the city or a. recorded in the branch, sales office or
municipality where the plantation is located warehouse from where the route trucks
5. In cases where there are two (2) or more factories, withdraw their products for sale, and
project offices, plants or plantations located in b. the tax due on such sales is paid to the LGU
different localities, the seventy percent (70%) sales where such branch, sales office or warehouse
allocation shall be prorated among the localities is located.
where such factories, project offices, plants, and 3. Based on subparagraphs (1) and (2) above, LGUs
plantations are located in proportion to their respective where route trucks deliver merchandise CANNOT
volumes of production during the period for which the IMPOSE any tax on said trucks
tax is due. a. except the annual fixed tax authorized to be
a. In the case of project offices of service and imposed by the province on every delivery
other independent contractors, the term truck or van or any motor vehicle used by
production shall refer to the cost of projects manufacturers, producers, wholesalers,
actually undertaken during the tax period. dealers, or retailers, in the delivery or
6. The sales allocation hereof shall be applied distribution of distilled spirits, fermented
irrespective of whether or not sales are made in the liquors, soft drinks, cigars and cigarettes, and
locality where the factory, project office, plant or other products as may be determined by the
plantation is located. sangguniang panlalawigan, and by the city.
a. In case of sales made by the factory, project
4. In addition to this annual fixed tax, cities may also
office, plant or plantation, the sale shall be
collect from same manufacturers, producers,
covered by subparagraphs (1) or (2) above.
wholesalers, retailers, and dealers using route trucks a
7. In case of manufacturers or producers which engage
the services of an independent contractor to produce mayor's permit fee which shall be imposed in a local
or manufacture some of their products, these rules on tax ordinance pursuant to Article 234 in relation to
situs of taxation shall apply Article 223 of the Implementing Rules.
a. except that the factory or plant and
warehouse of the contractor utilized for the
production and storage of the manufacturers'
products shall be considered as the factory or
plant and warehouse of the manufacturer.

59
 RETIREMENT OF BUSINESS. RELATED OR COMBINED BUSINESSES.
Any person natural or juridical, subject to the local tax on a) The conduct or operation of two or more related
businesses shall, upon termination of the business, submit a businesses, by any one person, natural or juridical,
sworn statement of the gross sales or receipts for the calendar shall require the issuance of a separate permit or
year. license to each business.
b) If a person conducts or operates two (2) or more
The term “termination” shall mean that business operations are related businesses which are subject to the same rate
stopped completely. of imposition, the tax shall be computed on the basis
Any change in ownership, management and/or name of the of the combined total gross sales or receipts of the said
business shall not constitute termination. two (2) or more related businesses.
c) IF, however, the businesses operated by one person
• Unless stated otherwise, assumption of the business are governed by separate tax schedules or the rates of
by any new owner or manager or registration of the the taxes are different, the taxable gross sales or
same business under a new name will only be receipts of each business shall be reported
considered by the LGU concerned for record purposes independently and the tax thereon shall be computed
in the course of the renewal of the permit or license to on the basis of the appropriate schedule.
operate the business.

The local treasurer concerned shall see to it that the payment EXAMINATION OF BOOKS OF ACCOUNTS AND
of taxes of a business is not avoided by simulating the PERTINENT RECORDS OF BUSINESSMEN.
termination or retirement thereof. For this purpose, the
following procedural guidelines shall be strictly observed: a) Only the treasurer of the LGU imposing the tax, fee,
or charge, may examine the books of accounts and
1. The local treasurer shall assign every application for pertinent records of businessmen in order to ascertain,
the termination or retirement of business to an assess, and collect the correct amount of taxes, fees,
inspector in his office who shall go to the address of and charges.
the business on record to verify if it is really no longer b) The provincial, city, municipal, or barangay treasurer
operating. may, by himself or through any of his deputies duly
a. If the inspector finds that the business is authorized in writing, examine the books, accounts,
simply placed under a new name, manager and other pertinent records of any person, partnership,
and/or new owner, the local treasurer shall corporation, or association subject to local taxes, fees,
recommend to the mayor the disapproval of and charges.
the application for the termination or c) The examination shall be made during regular
retirement of said business. business hours not oftener than once a year for every
i. Accordingly, the business tax period, which shall be the year immediately
continues to become liable for the preceding the examination, and shall be certified by
payment of all taxes, fees, and the examining official.
charges imposed thereon under a. Such certification shall be made of record in
existing local tax ordinances; and the books of accounts of the taxpayer
2. In the case of a new owner to whom the business was examined.
transferred by sale or other form of conveyance, said d) In case the examination is made by a duly authorized
deputy of the local treasurer, the written authority of
new owner shall be liable to pay the tax or fee for the
the deputy concerned shall specifically state:
transfer of the business to him IF there is an existing
a. the name, address, and business of the
ordinance prescribing such transfer tax.
taxpayer whose books, accounts, and
If it is found that the retirement or termination of the business pertinent records are to be examined,
is legitimate, and the tax due therefrom be less than the tax due b. the date and place of such examination, and
for the current year based on the gross sales or receipts, the c. the procedure to be followed in conducting
difference in the amount of the tax shall be paid before the the same.
business is considered officially retired or terminated. e) For this purpose, the records of the revenue district
office of the BIR shall be made available to the local
• The permit issued to a business retiring or terminating treasurer, his deputy or duly authorized representative.
its operations shall be surrendered to the local f) The Secretary of Finance shall prescribe the necessary
treasurer who shall forthwith cancel the same and forms to be used and such guidelines which may be
record such cancellation in his books. deemed necessary for the proper and effective
implementation of this Article.

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 2. The enforcement of any tax ordinance or revenue
CIVIL REMEDIES FOR COLLECTION OF REVENUES measure after due notice of the disapproval or
suspension thereof shall be sufficient ground for
1. Local Government's Lien. administrative disciplinary action against the local
Local taxes, fees, charges, and other revenues constitute a lien, officials and employees responsible (Book II, Title I,
superior to all liens, charges, or encumbrances in favor of any Chapter V SEC. 190 of LGC)
person, enforceable by appropriate administrative or judicial 3. Adjust Rates of Tax through ordinances once every
action, not only: five (5) years, but in no case shall such adjustment
a) upon any property or rights therein which may be exceed ten percent (10%) of the rates fixed. (Book II,
subject to the lien but also Title I, Chapter V SEC. 187 of LGC)
b) upon property used in business, occupation, practice 4. Authority to Grant and Withdraw Tax Exemption
of profession or calling, or exercise of privilege with Privileges through ordinances duly approved, grant
respect to which the lien is imposed. and withdraw tax exemptions, incentives or reliefs
under such terms and conditions. (Book II, Title I,
The lien may only be extinguished upon full payment of the Chapter V SEC. 192-193 of LGC)
delinquent local taxes, fees, and charges including related 5. Refund of Tax Credit.
surcharges and interests.
PROCEDURE FOR APPROVAL AND AFFECTIVITY
2. Civil Remedies OF TAX ORDINANCES AND REVENUE MEASURES;
MANDATORY PUBLIC HEARINGS:
The civil remedies for the collection of local taxes, fees, or
charges, and related surcharges and interest resulting from 1. Public hearings shall be conducted for the purpose
delinquency shall be: prior to the enactment;
1. By administrative action thru distrain of goods, 2. Any question on the constitutionality or legality of
chattels, or effects, and other personal property of tax ordinances or revenue measures may be raised
whatever character, including stocks and other on appeal
securities, debts, credits, bank accounts, and interest in a. within thirty (30) days from the affectivity
and rights to personal property, and by levy upon real thereof to the Secretary of Justice
property and interest in or rights to real property; and i. who shall render a decision within
sixty (60) days from the date of
receipt of the appeal;
2. By judicial action.
3. The aggrieved party may file appropriate proceedings
with a court of competent jurisdiction after lapse of
Local government unit concerned may enforce the collection of
the sixty-day period without the Secretary of Justice
delinquent taxes, fees, charges or other revenues by civil action acting upon the appeal.
in any court of competent jurisdiction. 4. Publication of Tax ordinances and Revenue
Measures shall be made AFTER 10 days of approval
The civil action shall be filed by the local treasurer within the a. for 3 consecutive days in a newspaper of local
period prescribed in Section 194 of the Code. circulation, posted in at least two (2)
conspicuous and publicly accessible places
TAX ORDINANCE IN LGUS: b. and furnish certified true copy of ordinance
to local treasurers for public dissemination.
AUTHORITY AND LIMITATION OF LGU TO TAX

1. Exercise the power to levy taxes, fees or charges

[Through passing of tax ordinance by the
Sanggunian] on any base or subject NOT otherwise
specifically enumerated in the Code or taxed under
the provisions of the National Internal Revenue Code,
as amended, or other applicable laws.
a. The taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or
contrary to declared national policy.
b. The ordinance levying such taxes, fees or
charges shall not be enacted WITHOUT
any prior public hearing conducted for the
purpose.
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 REAL PROPERTY TAX actually, directly and exclusively used for hospitals,
cultural, or scientific purposes, and those owned and
AUTHORITY TO IMPOSE REAL PROPERTY TAXES used by local water districts, and GOCCs rendering
The power to impose the real property tax has been given to essential public services in the supply and distribution
provinces, cities, and municipal governments within the of water and generation and transmission of electric
Metropolitan Manila area. power shall be classified as special.
• The tax applies to all forms of real property such as 7. IDLE LANDS - The term “idle lands” shall include
land, building, improvements, and machinery. the following:
a. Agricultural lands, more than one (1)
NATURE OF REAL PROPERTY TAX hectare in area, suitable for cultivation,
It is an ad valorem tax assessed, levied and collected in all dairying, inland fishery, and other
provinces, cities and municipalities in Metro Manila on lands, agricultural uses, one-half (1/2) of which
buildings, machineries and other improvements affixed to the remain uncultivated or unimproved by the
real property and NOT specifically exempted by law. owner of the property or person having legal
interest therein.
FUNDAMENTAL PRINCIPLES: i. Agricultural lands planted to
The appraisal, assessment, levy and collection of real property permanent or perennial crops with
tax shall be guided by the following fundamental principles: at least fifty (50) trees to a hectare
a) Real property shall be appraised at its current and fair shall NOT BE CONSIDERED
market value; IDLE lands.
b) Real property shall be classified for assessment ii. Lands actually used for GRAZING
purposes on the basis of its ACTUAL USE; PURPOSES shall likewise not be
c) Real property shall be assessed on the basis of a considered idle lands.
uniform classification within each local government b. Lands, other than agricultural, located in a
unit; city or municipality, more than one
d) The appraisal, assessment, levy and collection of real thousand (1,000) square meters in area one-
property tax shall not be let to any private person; and half (1/2) of which remain unutilized or
e) The appraisal and assessment of real property shall be unimproved by the owner of the property or
EQUITABLE. person having legal interest therein.
8. Machinery embraces machines, equipment,
CLASSES OF REAL PROPERTY mechanical contrivances, instruments, appliances or
Real property shall be classified, valued and assessed on the apparatus, which may or may not be attached,
basis of its ACTUAL USE regardless of where located, permanently or temporarily to the real property.
whoever owns it, and whoever uses it. a. Physical facilities for production,
1. Agricultural Land - land that is devoted principally installations and appurtenant service
to the planting of trees, raising of crops, livestock and facilities, those which are mobile, self-
poultry, dairying, salt making, inland fishing and powered, or self-propelled and those not
similar aquacultural activities and is not classified as permanently attached to the real property
mineral, timber, residential, commercial or industrial shall be classified as real property provided
land; that:
2. Commercial Land - land that is devoted principally i. They are actually, directly, and
for the object of profit and is not classified as exclusively used to meet the needs
agricultural, industrial, mineral, timber, or residential of the particular industry, business,
land or activity; and
3. Industrial Land- land devoted principally to ii. By their very nature and purpose are
industrial activity as capital investment and is not designed for, or necessary to
classified as agricultural, commercial, timber, mineral, manufacturing, mining, logging,
or residential land; commercial, industrial, or
4. Mineral Lands - lands in which minerals, metallic or agricultural purposes.
non-metallic, exist in sufficient quantity or grade to b. Machinery which are of general purpose
justify the necessary expenditures to extract and utilize use including but not limited to office
such materials; equipment, typewriters, telephone
5. Residential Land is land principally devoted to equipment, breakable or easily damaged
habitation. containers (glass or cartons),
6. SPECIAL CLASSES OF REAL PROPERTY - All microcomputers, facsimile machines, telex
lands, buildings, and other improvements thereon
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 machines, cash dispensers, furniture and ADDITIONAL AD VALOREM TAX ON IDLE LANDS
fixtures, freezers, refrigerators, display cases
or racks, fruit juice or beverage automatic 1. A province or city, or a municipality within the
dispensing machines which are not directly Metropolitan Manila Area, may levy an annual tax on
and exclusively used to meet the needs of a IDLE LANDS at the rate not exceeding five percent
particular industry, business or activity shall (5%) of the assessed value of the property which shall
not be considered within the definition of be in addition to the basic real property tax.
machinery under this Rule. 2. The tax on idle lands shall likewise apply to residential
c. Residential machinery shall include lots in subdivisions duly approved by proper
machines, equipment, appliances or authorities, the ownership of which has been
apparatus permanently attached to residential transferred to individual owners, who shall be liable
land and improvements or those immovable for the additional tax.
a. However, individual lots of such
by destination.
subdivisions, the ownership of which has not
been transferred to the buyer shall be
Improvement is a valuable addition made to a property or an
considered as part of the subdivision, and
amelioration in its condition, which is intended to enhance its
shall be subject to the additional tax payable
value, beauty or utility or to adapt it for new or further purposes, by subdivision owner or operator.
amounting to more than a mere repair or replacement of parts 3. Idle Lands Exempt from Tax
involving capital expenditures and labor and normally requiring a. A province or city or a municipality within
a building permit; the Metropolitan Manila Area may exempt
idle lands from the additional levy by reason
POWER TO LEVY REAL PROPERTY TAX of force majeure, civil disturbance, natural
calamity or any cause or circumstance which
A province or city or a municipality within the Metropolitan physically or legally prevents the owner of
Manila Area may levy an annual ad valorem tax on real property the property or person having legal interest
such as land, building, machinery, and other improvement not therein FROM improving, utilizing or
specifically exempted. cultivating the same.

RATES OF LEVY EXEMPTIONS FROM REAL PROPERTY TAX:

A province or city or a municipality within the Metropolitan The following ARE EXEMPTED from payment of the real
Manila Area shall fix a uniform rate of basic real property tax property tax:
applicable to their respective localities as follows: 1. Real property owned by the Republic of the
1. In the case of a province, at the rate not exceeding one Philippines or any of its political subdivisions
percent (1%) of the assessed value of real property; a. EXCEPT when the beneficial use thereof has
and been granted, for consideration or otherwise,
2. In the case of a city or a municipality within the to a taxable person;
Metropolitan Manila Area, at the rate not exceeding 2. Charitable institutions, churches, parsonages or
two percent (2%) of the assessed value of real convents appurtenant thereto, mosques, non-profit or
property. religious cemeteries and ALL lands, buildings, and
improvements actually, directly, and exclusively used
ADDITIONAL LEVY ON REAL PROPERTY FOR THE for religious, charitable or educational purposes;
SPECIAL EDUCATION FUND 3. All machineries and equipment that are actually,
directly and exclusively used by local water districts
A province or city, or a municipality within the Metropolitan and government owned or controlled corporations
Manila Area, may levy and collect an annual tax of one percent engaged in the supply and distribution of water and/or
(1%) on the assessed value of real property which shall be in generation and transmission of ELECTRIC POWER;
addition to the basic real property tax. 4. All real property OWNED BY duly registered
• The proceeds thereof shall exclusively cooperatives as provided for under R.A. No. 6938; and
accrue to the Special Education Fund (SEF). 5. Machinery and equipment USED FOR pollution
control and environmental protection.

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 . DATE OF ACCRUAL OF TAX: Payments of real property taxes shall first be applied to prior
The real property tax for any year shall accrue on the first years delinquencies, interests, and penalties if any,
day of January and from that date it shall constitute a lien on • and only after said delinquencies are settled may tax
the property which shall be superior to any other lien, payments be credited for the current period.
mortgage, or encumbrance of any kind whatsoever,
• and shall be extinguished only upon the payment of TAX DISCOUNT FOR ADVANCED PROMPT PAYMENT
the delinquent tax.
If the basic real property tax and the additional tax accruing
The special levy shall accrue on the first day of the quarter next to the Special Education Fund (SEF) are paid in advance in
following the effectivity of the ordinance imposing such levy. accordance with the prescribed schedule of payment as
provided under Section 250, the sanggunian concerned may
PAYMENT OF REAL PROPERTY TAXES grant a discount not exceeding twenty percent (20%) of the
The owner of the real property or the person having legal annual tax due.
interest therein may pay the basic real property tax and the • If the basic real property tax and the additional tax
additional tax for Special Education Fund (SEF) due thereon accruing to special education fund are paid on time
WITHOUT INTEREST in four (4) equal installments. or in advance, the sanggunian concerned may grant
a discount not exceeding twenty percent (20%) of
Payment on Installment the annual tax due.
o Prompt payments may be given a discount
The owner of the real property or the person having legal of ten percent (10%).
interest therein may pay the: o Advanced payments may be entitled to the
• basic real property tax; and maximum discount of twenty percent
• the additional tax for special education fund (20%).
without interest in four (4) equal installments as follows:
HOW TO COMPUTE THE REAL PROPERTY TAX:
the first installment due and payable on or before
the thirty-first (31st) of To compute for RPT, the RPT rate is multiplied by the
March, assessed value of the property.
• Assessed value is the fair market value of the real
on or before the thirtieth property multiplied by the assessment level.
the second installment (30th) of June
The RPT rate for the cities and municipalities in Metro Manila
is two percent (2%) while for provinces it is one percent (1%).
the third installment on or before the thirtieth
(30th) of September Fair market value X Assessment Level*= ASSESSED
VALUE
• Assessed Value X Real Property Tax Rate = RPT
the last installment on or before the thirty-first PAYABLE
(31st) of December
Assessment level is the percentage applied to the fair market
value of the property to determine the taxable value of the
The payment of the special levy shall be governed by ordinance
property.
of the sanggunian concerned.
• The date for payment of any other tax imposed without
LAND USE ASSESSMENT LEVELS
interest shall be prescribed by the sanggunian
concerned.
• Residential - 20%
Interests on Unpaid Real Property Tax • Agricultural - 40%
Failure to pay the basic real property tax or any other tax levied • Commercial, Industrial and Mineral - 50%
upon the expiration of the periods for installment payments • Timberland - 20%
above, or when due, as the case may be, shall subject the • Special classes: cultural, scientific - 15%
taxpayer to the payment of interest at the rate of two percent • Hospital, and water districts - 10%
(2%) per month on the unpaid amount or a fraction thereof,
until the delinquent tax shall have been fully paid.
• In no case shall the total interest on the unpaid tax or
portion thereof exceed thirty-six (36) months.
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 COLLECTION OF RPT accordance with the provisions of th Rules on
the distribution of proceeds.
Who collects the taxes 3. If the protest is finally decided in favor of the
The collection of the real property tax with interest thereon, and taxpayer, the amount of tax or portion thereof that has
related expenses, and the enforcement of the remedies provided been protested shall be refunded to the protestant, or
in the Rules or any applicable laws, shall be the responsibility applied as tax credit against his existing or future tax
of the city or municipal treasurer concerned. liability.
• Property owners, however, at their option or 4. If the protest is denied OR upon the lapse of the sixty-
convenience, may pay their real property taxes to the day period prescribed in paragraph (a) hereof, the
provincial treasurer of the province to which the taxpayer may avail of the remedies provided inArticles
municipality where the subject property is located, 317 and 320 of the Rules- appeal to the Local Board
belongs. Assessment Appeals.
• The city or municipal treasurer may deputize the
barangay treasurer to collect all taxes on real EXCESSIVE COLLECTIONS
property located in the barangay When an assessment of basic real property tax, or any other tax
o provided that the barangay treasurer is levied is found to be illegal or erroneous and the tax is
properly bonded for the purpose and provided accordingly reduced or adjusted, the taxpayer may file a written
further that claim for refund or credit for taxes and interests with the
 the premium on the bond shall be provincial or city treasurer
paid by the city or municipality
concerned. CLAIM FOR REFUND

Notice of Time for Collection of Tax The claim for refund shall be filed within two (2) years from
The city or municipal treasurer shall, on or before the the date the taxpayer is entitled to such reduction or adjustment.
thirtyfirst (31st) day of January each year, in the case of the • The provincial or city treasurer shall decide the claim
basic real property tax and the additional tax for special for tax refund or credit within sixty (60) days from
education fund or on any other date to be prescribed by the receipt thereof.
sanggunian concerned in the case of any other tax levied under • In case the claim for tax refund or credit is denied,
the RULES, post the notice of the dates when the tax may be the taxpayer may avail of the remedies as provided in
paid without interest. this Rule.
• The notice shall be posted at a conspicuous and
publicly accessible place at the city or municipal hall. REMEDIES OF THE LGU FOR THE COLLECTION OF
• Said notice shall likewise be published in a newspaper REAL PROPERTY TAX
of general circulation in the locality once a week for
two (2) consecutive weeks. Administrative Remedies
For the collection of the basic real property tax and any other
TAXPAYERS’ REMEDIES tax, LGU may avail of remedies by administrative or judicial
Payment Under Protest action.

1. NO protest shall be entertained unless the taxpayer The administrative remedies which are summary in nature are:
first pays the tax. 1. Levy on real property, and
a. The words paid under protest shall be 2. Sale of real property at public auction.
annotated on the tax receipts.
b. The protest must be in writing must be filed Levy on Real Property
within thirty (30) days from payment of the
tax to the provincial or city treasurer, or After the expiration of the time required to pay the basic real
municipal treasurer, in the case of a property tax or any other tax, the real property subject to such
municipality within MMA. tax may be levied upon through the issuance of a warrant.
c. The provincial or city treasurer, or municipal • The warrant shall be issued on or before, or
treasurer shall decide the protest within sixty simultaneously with the institution of the civil action
(60) days from receipt. for the collection of the delinquent tax.
2. The tax or a portion thereof paid under protest shall
be held in trust by the local treasurer concerned.
a. Fifty percent (50%) of the tax paid under
protest shall, however, be distributed in

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The levy on real property shall be made in the following interest therein may stay the proceedings by paying
manner: the delinquent tax, the interest due thereon and the
1. The provincial or city treasurer, or municipal treasurer expenses of sale.
of a municipality within MMA (when issuing a 5. The sale shall be held either at the main entrance of
warrant of levy) shall prepare the duly authenticated the provincial, city, or municipal building, or on the
certificate showing the following information: property to be sold, or any other place as specified in
a. name of the delinquent property owner or the notice of the sale.
person having legal interest therein; 6. Within thirty (30) days after the sale, the local
b. the description of the property; treasurer or his deputy shall make a report of the sale
c. the amount of the tax due and the interest to the sanggunian concerned, and which shall form
thereon. part of his records.
2. The warrant shall be mailed to or served upon the 7. The local treasurer shall likewise prepare and deliver
delinquent real property owner or person having legal to the purchaser a certificate of sale.
interest therein. a. The certificate of sale shall contain the name
a. If the property owner is out or cannot be of the purchaser, a description of the
located, the warrant shall be served to the property sold, the amount of the delinquent
occupant or administrator of the subject tax, the interest due thereon, the expenses of
property. the sale and a brief description of the
3. Written notice of levy with the attached warrant shall proceedings.
be mailed to or served upon the assessor and the 8. Proceeds of the sale in excess of the delinquent tax,
registrar of deeds of the province, city, or municipality the interest due thereon, and the expenses of sale shall
within MMA where the property is located. be remitted to the owner of the real property or person
4. The assessor and registrar of deeds shall annotate the having legal interest therein.
levy on the tax declaration and the certificate of title,
respectively. Redemption of Property Sold
5. The levying officer shall submit a written report on 1. Within one (1) year from the date of sale, the owner
the levy to the sanggunian concerned within ten (10) of the delinquent real property or person having legal
days after receipt of the warrant by the property interest therein, or his representative, shall have the
owner or person having legal interest in the property. right to redeem the property upon payment to the
local treasurer of the amount of the delinquent tax,
The sale of the subject property shall be done in the following including the interest due thereon, and the expenses of
manner: sale from the date of delinquency to the date of sale,
1. Within thirty (30) days after service of the warrant of plus interest of not more than two percent (2%) per
levy, the local treasurer shall publicly advertise the month on the purchase price from the date of sale to
sale or auction the property or a usable portion the date of redemption.
thereof as may be necessary to satisfy the tax a. Such payment shall invalidate the certificate
of sale issued to the purchaser and
delinquency and expenses of sale.
i. the owner of the delinquent real
2. The advertisement shall be effected by posting a
property or person having legal
notice at the main entrance of the provincial, city, or
interest therein shall be entitled to a
municipal building, and in a conspicuous and publicly
certificate of redemption which
accessible place in the barangay where the real shall be issued by the local treasurer
property is located, and by publication once a week or his deputy.
for two (2) weeks in a newspaper of general 2. From the date of sale until the expiration of the
circulation in the province, city, or municipality period of redemption, the delinquent real property
where the property is located. shall remain in the possession of the owner or person
3. The advertisement shall specify- having legal interest therein who shall be entitled to
a. the amount of the delinquent tax; the income and other fruits thereof.
b. the interest due thereon; and 3. The local treasurer or his deputy, upon receipt from
c. expenses of sale; the purchaser of the certificate of sale, shall forthwith
d. the date and place of sale; return to the latter the entire amount paid by him plus
e. the name of the owner of the real property or interest of not more than two percent (2%) per month.
person having legal interest therein; and a. Thereafter, the property shall be free from the
f. a description of the property to be sold. lien of such delinquent tax, interest due
4. At any time before the date fixed for the sale, the thereon and expenses of sale.
owner of the real property or person having legal 4. In case the owner or person having legal interest
therein fails to redeem the delinquent property, the
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 local treasurer shall execute a deed conveying to the complaint in the city or province where the
purchaser said property, free from lien of the property is situated.
delinquent tax, interest due thereon and expenses of 3. In both cases, that is, where the claim is either
sale. cognizable by an inferior court or by the regional trial
a. The deed shall briefly state the proceedings court, the provincial or city treasurer shall furnish the
upon which the validity of the sale rests. provincial attorney or the city or municipal legal
officer concerned the exact address of the defendant
Judicial Remedies where he may be served with summons.

The judicial remedy is availed of in the court of appropriate

jurisdiction. Local Government Lien
• These remedies are cumulative, simultaneous and The basic real property tax and any other tax levied under the
unconditional, that is, any or all of the remedies or Rules constitute a lien on the property subject to tax.
combination thereof may be resorted to and • This lien shall be superior to all liens, charges or
o the use or non-use of one remedy shall not be encumbrances in favor of any person, irrespective of
a bar against the institution of the others. the owner or possessor thereof.
• The lien shall be enforceable by administrative or
Formal demand for the payment of the delinquent taxes and judicial action, and may only be extinguished upon
penalties due is not a pre-requisite to such remedies. payment of the tax and the related interests and
• The notice of delinquency Article 346 of the expenses.
implementing Rules and Regulations shall be
sufficient for the purpose. PERIODS WITHIN WHICH TO COLLECT REAL
PROPERTY TAXES
19.2.a. The delinquent basic real property tax or any
other tax levied shall constitute a lawful indebtedness The basic real property tax and any other tax levied under this
of the taxpayer to the LGU. Rule shall be collected within five (5) years from the date they
become due.
Collection of such indebtedness can be enforced thru civil • NO action for collection of the tax, whether
action in any court of competent jurisdiction, as follows: administrative or judicial, shall be instituted after the
expiration of the said period.
1. The provincial or city treasurer, or municipal treasurer o In case of fraud or intent to evade payment
of a municipality of MMA shall furnish the provincial of the tax, such action may be instituted for
attorney or city or municipal legal officer a certified the collection thereof within ten (10) years
statement of delinquency. from the discovery of such fraud or intent to
a. The said legal officer, within fifteen (15) evade payment.
days after receipt, shall file the civil action in
the name of the province, city, or
The period of prescription within which to collect shall be
municipality in the proper court of competent suspended for the time during which:
jurisdiction.
1. The local treasurer is legally prevented from collecting
b. The jurisdiction of the court is determined by the tax;
the amount sought to be recovered exclusive
2. The owner of the property or the person having legal
of interests and costs. interest therein
i. Thus, where the delinquent tax due a. requests for reinvestigation and
does not exceed Ten Thousand
b. executes a waiver in writing before the
Pesos (P10,000.00), the competent expiration of the period within which to
court is the municipal or city trial
collect; and
court, and 3. The owner of the property or the person having legal
ii. where the amount due is in excess of interest therein is out of the country or otherwise
Ten Thousand Pesos (P10,000.00),
cannot be located.
the proper court is the regional trial
court.
2. Where cognizable in an inferior court, the action
must be filed in the municipality or city where the
delinquent property is located.
a. Where the regional trial court has
jurisdiction, the plaintiff LGU shall file the

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