XAVIER UNIVERSITY

COLLEGE OF LAW
TAXATION II
ATTY. VIKTORIA VILLO-
MURILLO
Brief discussions of essential
Principles, Doctrines and Topics in
Taxation II

Submitted by:
Jasper Alon
 UNIVERSITY OF THE PHILIPPINES’ EXEMPTION UNDER
RA9500
One source of UP's exemption from tax comes from its character
as a government instrumentality. Section 133(o) of the Local
Government Code states that, unless otherwise provided by the
Code, the exercise of taxing powers of the local government units
shall not extend to levy of taxes, fees or charges of any kind on
government instrumentalities.

A combined reading of Sections 205 and 234 of the Local

Government Code, provides for removal of the exemption to
government instrumentalities when beneficial use of a real property
owned by a government instrumentality is granted to a taxable
person. Stated differently, when beneficial use of a real property
owned by a government instrumentality is granted to a taxable
person, then the taxable person is not exempted from paying real
property tax on such property.

However the enactment and passage of Republic Act No.

9500 in 2008 superseded Sections 205(d) and 234(a) of the Local
Government Code. Before the passage of Republic Act No. 9500,
there was a need to determine who had beneficial use of UP's
property before the property may be subjected to real property tax.
After the passage of Republic Act No. 9500, there is only a need to
determine whether UP's property is used for educational purposes or
in support thereof before the property may be subjected to real
property tax. To wit:
SEC. 25. Tax Exemptions. -
(a) All revenues and assets of the University of the Philippines
used for educational purposes or in support thereof shall be
exempt from all taxes and duties;
The Contract of Lease between UP and ALI shows that there is an
intent to develop "a prestigious and dynamic science and
technology park, where research and technology-based
collaborative projects between technology and the academe thrive,
thereby becoming a catalyst for the development of the information
technology and information technology-enabled service." 
Considering that the subject land and the revenue derived from
the lease thereof are used by UP for educational purposes and in
support of its educational purposes, UP should not be assessed, and
should not be made liable for real property tax on the land subject of
this case. Under Republic Act No. 9500, this tax exemption,
however, applies only to "assets of the University of the Philippines,"
 referring to assets owned 1by UP.

ONGSUCO DOCTRINE
In consonance with the Doctrine of Exhaustion of Administrative
remedies the periods stated in Section 187 of the Local Government
Code are mandatory.
The 30-60-30 period:
(1) Assail the tax ordinance within 30 days of its effectivity with the
SOJ;
(2) The SOJ is given 60 days to decide;
(3) After the lapse of 60 days, appeal before a competent court within
30 days. (Hagonoy Market Vendor Association v. Municipality of
Hagonoy, Bulacan, 426 Phil. 769 (2002)

The Court recognized exceptional circumstances that justify

noncompliance by a taxpayer with Section 187 of the Local
Government Code.

In the case of, Ongsuco v. Malones, it stated that, it is true that

the general rule is that before a party is allowed to seek the
intervention of the court, he or she should have availed himself or
herself of all the means of administrative processes afforded him or
her. The doctrine of exhaustion of administrative remedies is based on
practical and legal reasons.

The availment of administrative remedy entails lesser expenses

and provides for a speedier disposition of controversies. However,
there are several exceptions to this rule. The rule on the exhaustion of
administrative remedies is intended to preclude a court from
arrogating unto itself the authority to resolve a controversy, the
jurisdiction over which is initially lodged with an administrative body of
special competence.

Thus, a case where the issue raised is a purely legal question,

well within the competence; and the jurisdiction of the court and not
the administrative agency, would clearly constitute an exception.
Resolving questions of law, which involve the interpretation and
application of laws, constitutes essentially an exercise of judicial power
1
G.R. No. 214044 - University of the Philippines vs City Treasurer of Quezon City.
Sections 205(d) and 234(a) of the Local Government Code
REPUBLIC ACT 9500 April 2008, Section 25 Tax Exemption
that is exclusively allocated to the Supreme Court and such lower
courts the Legislature may establish.
2

RESIDUAL POWER OF TAXATION OF LGU

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local
government units may exercise the power to levy taxes, fees or
charges on any base or subject not otherwise specifically enumerated
herein or taxed under the provisions of the National Internal Revenue
Code, as amended, or other applicable laws: Provided, That the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy: Provided, further, That the
ordinance levying such taxes, fees or charges shall not be enacted
without any prior public hearing conducted for the purpose. (Local
Government Code of 1991)
“Residual Taxing Power of the LGU” means LGUs may exercise the
power to levy taxes, fees or charges on any base or subject NOT
otherwise specifically enumerated herein or taxed under the:
1. Local Government Code;
2. National Internal Revenue Code; or
3. Other applicable laws (Sec. 186, LGC).
Conditions in the exercise of the residual power of
taxation
1. The tax base or subject is not taxed under the National Internal
Revenue Code or other applicable laws;
2. The taxes, fees, or charges are not unjust, excessive, confiscatory,
oppressive, or contrary to the declare national economic policy of the
government;
3. A public hearing has been conducted prior to the enactment of the
ordinance levying taxes, fees, or charges; and
4. The procedures for the approval, effectivity, and publication of tax
ordinance have been complied with.

2
Hagonoy Market Vendor Association v. Municipality of Hagonoy, Bulacan, 426 Phil.
769 2002
Ongsuco v. Malones G.R. No. 182065,October 27, 2009
5. The residual power is subject to the constitutional limitations on the
taxing power and the common limitations on the taxing power of LGUs
as prescribed in Section 133 of LGC.
6. Principle of Pre-emption or Exclusionary Rule

In the alta Vista case Respondents, were not allowed to claim

that Section 42 of the Revised Omnibus Tax Ordinance, as amended,
imposing amusement tax on golf courses was enacted pursuant to the
residual power to tax of respondent Cebu City.
A local government unit may exercise its residual power to tax
when there is neither a grant nor a prohibition by statute; or when such
taxes, fees, or charges are not otherwise specifically enumerated in the
Local Government Code, National Internal Revenue Code, as amended,
or other applicable laws. In the case, Section 140, in relation to Section
131(c), of the Local Government Code already explicitly and clearly
cover amusement tax and respondent Cebu City must exercise its
authority to impose amusement tax within the limitations and
guidelines as set forth in said statutory provisions. (Alta Vis3ta Golf and
Country Club v. The City of Cebu, GR No. 180235)
4

CEPALCO DOCTRINE- SETTLED THE SCOPE OF THE TAXING

POWER OF A CITY
The city, may levy the taxes, fees, and charges which the province or
municipality may impose, except as otherwise provided in the LGC.
Those levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance
with the provisions of LGC (Sec. 151, LGC).
The rates of taxes that the city may levy may exceed the maximum
rates allowed for the province or municipality by not more than 50%
except the rates of professional and amusement taxes (Ibid.).
Cities have the broadest taxing powers, embracing both specific and
general powers as provinces and municipalities may impose. Under the
LGC, there are three types of cities, Component Cities, Independent
Component Cities and Highly Urbanized Cities. ICCs and HUCs are
independent of the province (Sec. 451-452, LGC). This means that
taxes, fees, and charges levied and collected by ICCs and HUCs accrue
solely to them (Sec. 151, LGC)
IN CEPALCO v. City of Cagayan de Oro, CEPALCO argued that if it is a
city which imposes it, it can only impose up to 1/2 of what the province
or municipality may impose, and since under Section 137, a province

3
Local Government Code of 1991
Alta Vista Golf and Country Club v. The City of Cebu, GR No. 180235
4
Local Government Code of 1991Section 186, 140 and 133
Alta Vista Golf and Country Club v. The City of Cebu, GR No. 180235
The Fundamentals of Taxation  2016 Seventeenth Edition Hector S. De Leon &
Hector M. De Leon
may impose 50% of 1%, a city may therefore only impose 25% of 1%.
The Supreme Court, in giving no merit to CEPALCO’s contention ruled
that:
Section 151 of the LGC states that, subject to certain exceptions, a city
may exceed by "not more than 50%" the tax rates allowed to provinces
and municipalities.
Therefore, a city may impose a franchise tax of up to 0.75% of a
business’ gross annual receipts for the preceding calendar year based
on the incoming receipt, or realized, within its territorial jurisdiction. In
the same manner, since a municipality may impose a business tax at a
rate not exceeding "two percent of gross sales or receipts" under
Section 143, a city may impose a business tax of up to 3% of a
business’ gross sales or receipts of the preceding calendar year (May
exceed by not more than 50% means it may impose up to 50% more
than what a province or municipality could impose).
In the same case, the Supreme Court also ruled that, CEPALCO
also erred when it equates Section 137’s "gross annual receipts" with
Ordinance No. 9503- 2005’s "annual rental income." Section 2 of the
ordinance imposes "a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole
users at the rate of 10% of the annual rental income derived
therefrom," and not on CEPALCO’s gross annual receipts. Thus,
although the tax rate of 10% is definitely higher than that imposable by
cities as franchise or business tax, the tax base of annual rental income
of "electric and/or telecommunication posts, poles or towers by pole
owners to other pole users" is definitely smaller
5

NATURE OF TAX DECLARATION IN REAL PROPERTY TAXATION

Tax declaration means a statement made to the tax authorities

about the earning during a particular year. It is used to calculate how
much tax an individual will have to pay in a particular year. Normally,
criminal penalties are imposed for failure to file a local earned
income tax declaration.
As a rule, tax declarations or realty tax payments of property are
not conclusive evidence of ownership, nevertheless, they are good
indicia of possession in the concept of owner, for no one in his right
mind would be paying taxes for a property that is not in his actual or
constructive possession.
They constitute at least proof that the holder has a claim of title
over the property. The voluntary declaration of a piece of property for
taxation purposes manifests not only one’ s sincere and honest desire
5
Local Government Code of 1991 section 151, Section 451-452
 Cagayan Electric Power and Light Co., Inc. vs. City of Cagayan de Oro. G.R. No.
191761. November 14, 2012
to obtain title to the property and announces his adverse claim against
the State and all other interested parties, but also the intention to
contribute needed revenues to the government. Such an act
strengthens one’ s bona fide claim of acquisition of ownership.
(Buenaventura, et al., v. Republic, G. R. No. 166865, March 2, 2007
citing Heirs of Simplicio Santiago v. Heirs of Mariano E. Santiago, G. R.
No. 151440, 17 June 2003, 404 SCRA 193, 199 – 200) 6

TAX BENEFIT RULE

The “ tax benefit rule” posits that the recovery of bad debts
previously allowed as deduction in the preceding year or years shall be
included as part of the taxpayer’ s gross income in the year of such
recovery to the extent of the income tax benefit of said deduction.
If in the year the taxpayer claimed deduction of bad debts
written-off, he realized a reduction of the income tax due from him on
account of the said deduction, his subsequent recovery thereof from
his debtor shall be treated as a receipt of realized taxable income.
(Sec. 4, Rev. Regs. 5-99) .

If the said taxpayer did not benefit from the deduction of the said
bad debt written-off because it did not result to any reduction of his
income tax in the year of such deduction (i.e. where the result of his
business operation was a net loss even without deduction of the bad
debts written-off), then his subsequent recovery thereof shall be
treated as a mere recovery or a return of capital, hence, not treated as
receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99).

APPROACHES IN ESTIMATING THE FAIR MARKET VALUE OF

REAL PROPERTY FOR REAL PROPERTY TAX PURPOPSE

Sales Analysis Approach. The sales price paid in actual

market transactions is considered by taking into account valid sales
data accumulated from among the Registrar of Deeds, notaries
public, appraisers, brokers, dealers, bank officials, and various
sources stated under the Local Government Code.
Income Capitalization Approach. The value of an income-
producing property is no more than the return derived from it. An

Buenaventura, et al., v. Republic, G. R. No. 166865, March 2, 2007 citing Heirs of

6

Simplicio Santiago v. Heirs of Mariano E. Santiago, G. R. No. 151440, 17 June 2003,

404 SCRA 193, 199 – 200
Sec. 4, Revenue Regulation No 5-99
analysis of the income produced is necessary in order to estimate the
sum which might be invested in the purchase of the property.
Reproduction cost approach is a formal approach used
exclusively n appraising man-made improvements such as buildings
and other structures, based on such data as materials and labor costs
to reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in analyzing the
data gathered to arrive at the estimated fair market value to be
included in the ordinance containing the schedule of fair market
values. (Allied Banking Corporation, etc., v. Quezon City Government,
et al., G. R. No. 154126, October 11, 2005 citing Local Assessment
Regulations No. 1-92)
In a case where An LGU passed an ordinance which contains a proviso,
to wit:
“The parcels of land sold, ceded, transferred, and conveyed for
remuneratory consideration after the effectivity of this revision
shall be subject to real estate tax based on the actual amount
reflected in the deed of conveyance or the current approved
zonal valuation of the Bureau of Internal Revenue prevailing at
the time of the sale, cession, transfer, and conveyance, whoever
is higher, as evidenced by the certificate of payment of the
capital gains tax issued therefore.”
The Supreme Court ruled that said proviso mandates an exclusive
rule in determining the fair market value and departs from the
established procedures such as sales analysis approach, the income
capitalization approach and reproduction cost approach under the rules
implementing the statute (Local Assessment Regulation No. 1-92).It
unduly interferes with 7the duties statutorily placed upon the local
assessor by completely dispensing with his analysis and discretion
which the LGC and the regulations require to be exercised

CO-HEIRS SHOULD NOT BE CONSIDERED AS PARTNERS OF

UNREGISTERED CORPORATION

7
Local Assessment Regulations No. 1-92
Allied Banking Corporation, etc., v. Quezon City Government, et al., G.
R. No. 154126, October 11, 2005 citing Local Assessment Regulations
No. 1-92
 Co-heirs who own inherited properties which produce income should
not automatically be considered as partners of an unregistered
corporation subject to income tax.
a. The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived. There must be an unmistakable intention to form a
partnership or joint venture.
b. There is no contribution or investment of additional capital to
increase or expand the inherited properties, merely continuing the
dedication of the property to the use to which it had been put by their
forebears.
c. Persons who contribute property or funds to a common enterprise
and agree to share the gross returns of that enterprise in proportion to
their contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common
stock capital, and no community of interest as principal proprietors in
the business itself from which the proceeds were derived. (Elements of
the Law of Partnership by Floyd R. Mechem, 2nd Ed., Sec. 83, p. 74
cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)
All co-ownerships are not deemed unregistered partnership.—Co-
heirs who own properties which produce income should not
automatically be considered partners of an unregistered partnership, or
a corporation,within the purview of the income tax law.
To hold otherwise, would be to subject the income of all co-
ownershipsof inherited properties to the tax oncorporations, inasmuch
as if a property does not produce an income at all, itis not subject to
any kind of income tax, whether the income tax onindividuals or the
income tax on corporation." (De Leon vs. CIR, CTA CaseNo. 738,
September 11, 1961, cited in Arañas, 1977 Tax Code Annotated,Vol. 1,
1979 Ed., pp. 77-78),

8
Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436
Elements of the Law of Partnership by Floyd R. Mechem, 2nd Ed., Sec. 83, p. 74
Tax Code Annotated,Vol. 1, 1979 Ed., pp. 77-78
 WAIVER OF THE DEFENSE OF PRESCRIPTION UNDER THE
STATUTE OF LIMITATIONS OF THE NATIONAL INTERNAL
REVENUE CODE
AS A GENERAL RULE: The BIR can assess taxpayers for deficiency
internal revenue taxes within 3 years after the last day prescribed by
law for the filing of the return or the actual date of filing of such
return, whichever comes later. If the return is filed beyond the period
prescribed by law, the three (3) year period shall be counted from
the day the return was filed. Any assessment notice issued after the
3-year prescriptive period is not valid and not effective.
EXCEPTION: Sec 222 of the National Internal Revenue Code of
1997, as amended provides that: “If before the expiration of the time
prescribed in Section 203, both the Commissioner and the taxpayer
have agreed in writing to its assessment after such time, the tax may
be assessed within the period agreed upon. The agreed period so
agreed upon may be extended by subsequent recent agreement
made before the expiration of the period previously agreed upon.”

Requisites of a Valid Waiver

According to RMO 20-90 (4/4/90) and RDAO 05-01 (08/02/01)
1. The waiver shall be signed by the taxpayer himself or his duly
authorized representative.
2. The authorized revenue official shall ensure that the waiver is duly
accomplished and signed by the taxpayer or his authorized
representative before affixing his signature to signify acceptance of the
same. In case the authority is delegated by the taxpayer to a
representative, the concerned revenue official shall see to it that such
delegation is in writing and duly notarized.
3. Only the designated Revenue Officers who are authorized under
RMO 20-90 and RDAO 05015 are allowed to sign and accept such the
waivers 4. Date of Acceptance must be indicated 5. The “WAIVER”
should not be accepted by the concerned BIR office and official unless
duly notarized. 6. Waiver must be in the form identified thereof
The salient features of RMO No. 14-2016 (repealed
RMO 20-90 and RDAO 05-01) include the following:
1.The waiver may not necessarily be in the form prescribed by RMO 20-
90 or RDAO 05-01 provided that the following conditions are complied
with:

 The waiver is executed before the expiration of the period to

assess or to collect taxes;
 The waiver is signed by the taxpayer himself, his duly authorized
representative, or by any of the responsible officials for
 corporations; and,
 The expiry date of the period agreed upon to assess/collect the
tax is indicated. .
2. The waiver need not specify the taxes to be assessed nor the
amount thereof except in cases of waiver for collection of taxes
3. The taxpayer has the burden to ensure that the waiver is validly
executed by its authorized representative. The waiver cannot
thereafter be invalidated on the ground that the taxpayer’s
representative who participated in the conduct of the audit is not
authorized to sign the waiver.
4. Notarization of the waiver is now optional.
5.The waiver can be accepted by the Commissioner’s authorized
representative as prescribed in existing regulations, the revenue
district officer, or the group supervisor designated in the Letter of
Authority for the audit.
6. To be valid, there are only two dates that need to be present on the
waiver, namely (1) the date of execution, and (2) the expiry date of the
period the taxpayer waives the statute of limitations.

PAYMENT OF REAL PROPERTY TAX UNDER PROTEST

As General Rule the taxpayer must pay the real property tax
assessed prior to protesting a real property tax assessment (Sec.
252, LGC).
Reason for the necessity of prior payment before protest may be
entertained by the courts
“The basis for requiring payment before protest can be
entertained is that taxes are the lifeblood of the nation and as
such collection cannot be restrained by injunction or any like
action (Manila Electric Company v. Barlis, et. al., G.R. No. 114231,
May 18, 2001).”
An Exception however when the payment of the tax prior to
protest is not necessary where the taxpayer questions the authority
and power of the assessor to impose the assessment and of the
treasurer to collect the tax (Manila Electric Company v. Barlis, et. al.,
G.R. No. 114231. December 1, 1995).
The protest contemplated under Section 252 is required where
there is a question as to the reasonableness or correctness of the
amount assessed. Hence, if a taxpayer disputes the reasonableness of
an increase in a real property tax assessment, he is required to “first
pay the tax” under protest. Otherwise, the city or municipal treasurer
will not act on his protest
9

NET WORTH METHOD IN PROVING INCOME

To prove unreported income, the government could use the net

worth method, which is an indirect method to prove under
declarations of income for taxation.

The net worth method relies on circumstantial evidence to show

increases in net worth that do not match an individual's reported
income.

The theory of the net worth method is that if an individual has

more wealth at the end of a given year than at the beginning of that
year, and the increase is not from non-taxable sources such as a gift,
loan, or inheritance, then the amount of the increase is taxable income
for that year.

It is a method of determining income where a government can prove

with reasonable certainty the increase of taxpayer’s net worth at a
given date by reasonable inference with independent evidence such as
bank deposits or purchase of assets. (Holland v. U.S., 348, U.S., 121).
Section 43 of the NIRC allows the CIR to use any method of
computation or accounting which would more clearly reflect the income
of the taxpayer (Collector v. Avelino, 3 SCRA 57)
THE FORMULA:
ASSETS – LIABILITIES = NET WORTH.
His net worth at the beginning of the taxable year is then
compared with his net worth at the end of the year. Any increase in the
net worth is presumed to be income not declared for tax purposes.
Presumption: The unexplained increase in net worth of the taxpayer is
derived from taxable sources
If it chooses to use the net worth method, the government must
perform an in-depth financial investigation. Essentially, the
investigation and resulting calculation portrays the financial life of an
individual, both prior 10to and during the tax year(s) in question.
9
Sec. 5 (B), NIRC of 1997
Manila Electric Company v. Barlis, et. al., G.R. No. 114231. December 1, 1995
Phil. Journalists Inc., v. CIR, GR No. 162852, Dec. 16, 2004
RMO No. 14-2016 and RDAO 05-01
10
Holland v. U.S., 348, U.S., 121
Because the government is approximating the individual's income
using circumstantial evidence, there are specific requirements in the
net worth method of proof to ensure the government's evidence is
adequately dependable to prove beyond a reasonable doubt that the
individual had unreported taxable income.

The inference is disputable in the sense that the taxpayer is not

precluded from adducing evidence to show that the excess were
derived from items which are excluded from gross income.

RECONCILIATIONS OF DOCTRINES OF PRESCRIPTIONS

NOTE: The 120—day period given to the CIR to resolve taxpayer’s claim his now reduced to 90 DAYS
ONLY under the Train Law.

Atlas Consolidated Mining & Development Corp., vs. CIR, GR

Nos. 141104 & 128763, June 8, 2007
The SC held that the 2-year prescriptive period for filing a
claim for unutilized input taxes is reckoned from the date of the
filing of the quarterly VAT return and payment of the tax due. If
the said period is about to expire and the CIR has not yet acted
on the taxpayer’s written claim, the taxpayer MAY interpose a
petition for review with the CTA within the two-year period.

CIR vs. Mirant Pagbilao Corp, GR No. 172129, September

12, 2008
This case, OVERTURNED the ATLAS case above. The SC held that
the 2-year prescriptive period to file a refund of unutilized input
taxes arising from a zero-rated sale should be reckoned from the
CLOSE OF THE TAXABLE QUARTER when the sales were made.

CIR vs. Aichi Forging Asia, GR No. 184823, October 6, 2010

The 120 + 30-day Rule on appeal to the CTA was established.
This holds that the taxpayer has 30 days to file an appeal to the
CTA if the CIR denies his claim within the 120-day period or if
there is inaction within the said period, the taxpayer has 30 days
to appeal to the CTA which period is reckoned immediately from
the expiration of the 120-day period. The 30-day period to appeal
to the CTA is both mandatory and jurisdictional.

CIR vs. San Roque Power Corporation, GR No. 187485,

February 12, 2013

Brown,.PC 2018 Instructional Law Dictionary, Definitions and Discussion on

Networth Method
Collector v. Avelino, 3 SCRA 57 L-17715 July 31, 1963 -
 The SC ruled that the 2-year period to file a claim for tax refund or
credit of unutilized input tax applies to taxpayer’s administrative
claim before the CIR. It does not apply to a judicial claim before the
CTA, i.e., an appeal to the CTA can be pursued even outside of the
2-year period).

Aichi Forging Company of Asia, Inc., vs. CTA, GR. 193625.

August 30, 2017
The SC reiterates the proper interpretation of the 2-year
period under Sec. 112 (VAT). There are 2 instances when an
appeal to the CTA is considered fatally defective even when the
appeal was initiated WITHIN the 2-year period: (a) when there is
no decision and the appeal is take PRIOR to the lapse of the 120
—day mandatory waiting period, except only when the appeal
was make within the window period of December 10, 2002 to
October 6, 2010; (b) when the appeal to the CTA is taken
BEYOND 30 days from either decision or inaction (deemed a
denial) of the CIR. An appeal OUTSIDE the 2-year period is NOT
legally infirm for as long as it is taken WITHIN 30 days from
decision or inaction on the administrative claim that must have
been initiated within the 2-year prescriptive period of claim.

MACHINERY AS REAL PROTERTY SUBJECT TO TAX

Road equipment and mini haulers shall be considered as real

property, subject to real property tax.
Section 199(o) of the Local Government Code defines
"machinery" as real property subject to real property tax, thus:
(o) "Machinery" . . . includes the physical facilities for
production, the installations and appurtenant service facilities,
those which are mobile, self-powered or self-propelled, and
those not permanently attached to the real property which are
actually, directly, and exclusively used to meet the needs of
the particular industry, business or activity and which by their
very nature and purpose are designed for, or necessary to its
manufacturing, mining, logging, commercial, industrial or
agricultural purposes .
Respondent is engaged in palm oil plantation. Thus, it harvests fruits
from palm trees for oil conversion through its milling plant. By the
nature of respondent's business, transportation is indispensable for its
operations." mini-haulers are farm tractors pulling attached trailers
used in the hauling of seedlings during planting season and in
transferring fresh palm fruits from the farm [or] field to the processing
plant within the plantation area." The indispensability of the road
equipment and mini haulers in transportation makes it actually,
directly, and exclusively used in the operation of respondent's
business.
 Under the definition provided in Section 199(o) of the Local
Government Code, the road equipment and the mini haulers are
classified as machinery.
Real property tax in the Philippines is imposed upon the owners of
the real property making the owner under obligation to pay the same
based on actual use.
Real property tax in the Philippines is not imposed on the literal
meaning of real properties (e.g. land and building) alone because it
extends to machineries, even improvements.11
In Province of Batangas et. al., vs. Napocor, Feb. 16, 2007, power plant
barges and its accessory equipment mounted on the barges were
subject to real property taxation.
The Supreme Court held that, These are intended by their nature and
object to be immovable properties by destination, being in the nature
of machinery and other implements intended by the owner for an
industry or work which may be carried on in a building or a piece of
land and which tend directly to meet the needs of said industry or
work. Further, subject accessories are mounted on the barges and
attached to gas turbine power plants designated to generate electric
power installed at a specific location with a character of permanency.

PROHIBITION ON ISSUANCE OF LETTERS OF AUTHORITY

COVERING AUDIT OF “UNVERIFIED PRIOR YEARS”

A Letter of Authority an official document that authorizes a

revenue officer to examine and scrutinize a taxpayer’s books of
accounts and other accounting records, in order to determine the
taxpayer’s correct internal revenue tax liabilities (Sec. 13, NIRC).
There must be a grant of authority before any revenue officer can
conduct an examination or assessment and the revenue officer must
not go beyond authority. Otherwise, the assessment or examination is
a nullity.
A Letter of Authority should cover a taxable period not exceeding one
taxable year. The practice of issuing LAs covering audit of “unverified
prior years” is therefore prohibited (CIR v. Sony Philippines, Inc., G.R.
No. 178697, November 17, 2010).

The same principle was enunciated by the Supreme Court in CIR v.

DLSU, G.R. No. 196596, November 09, 2016, to wit:

Prov. Assessor of Agusan del Sur v. Filipinas Palm Oil Plantation Inc.

11

GR No. 183416. 05 October 2016

Batangas et. al., vs. Napocor, Feb. 16, 2007 GR No 168557 
Section 199(o) of the Local Government Code
A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable
year. The practice of issuing [LOAs] covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the [LOA].

What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains unverified
prior years is void. It merely prescribes that if the audit includes more than one taxable
period, the other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year, the BIR must
specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is
simply to inform the taxpayer of the extent of the audit and the scope of the revenue
officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer
by demanding random accounting records from random unverified years, which may
include documents from as far back as ten years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year

Ending 2003 and Unverified Prior Years. The LOA does not strictly
comply with RMO 43-90 because it includes unverified prior years. This
does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is
valid because this taxable period is specified in the LOA. DLSU was
fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void
for having been unspecified on separate LOAs as required under RMO
No. 43-90.

12

WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT

The Government or any of its political subdivisions, instrumentalities

or agencies, including government owned or controlled corporations
(GOCCs) shall, before making payment on account of its purchase of
goods and/or services taxed at 12% shall deduct and withhold a final
VAT of 5% of the gross payment.
The payment for lease or use of properties or property rights to
nonresident owners shall be subject to 12% withholding tax at the time
of payment. For purposes of this section, the payor or person in control
of the payment shall be considered as the withholding agent (Sec.
114(C), NIRC).
NOTE: The five percent (5%) final VAT withholding rate shall represent
the net VAT payable to the seller The remaining seven percent (7%)
CIR v. DLSU, G.R. No. 196596, November 09, 2016
12

Revenue Memurandum 43-90

CIR v. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010
effectively accounts for the standard input VAT for sales of goods or
services to government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, in lieu of the actual
Input VAT directly attributable or ratably apportioned to such sales.
Should actual input VAT attributable to sale to government exceed
seven percent (7%) of gross payments, the excess may form part of
the seller’s expense or cost. If actual input VAT attributable to sale to
government is less than 7% of gross payment, the difference must be
closed to expense or cost.
The government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, as well as private corporations, individuals,
estates and trusts, whether large or non-large taxpayers, shall withhold
ten percent (12%) VAT with respect to the following payments:
1.Lease or use of properties or property rights owned by non-
residents;
2. Services rendered to local insurance companies, with respect
to reinsurance premiums payable to non-residents; and
3. Other services rendered in the Philippines by non-residents.
VAT withheld and paid for the non-resident recipient (remitted using
BIR Form No. 1600), which VAT is passed on to the resident withholding
agent by the non-resident recipient of the income, may be claimed as
input tax by said VAT-registered withholding agent upon filing his own
VAT Return, subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales.
The VAT withheld shall be remitted within 10 days following the end of
the month the withholding was made (Sec. 4.114-2, RR. 16-2005).
NOTE: It was held in the case of Abakada Guro Partylist v. Ermita, G.R.
No. 168056, September 1, 2005, that the since it has not been shown
that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision.
It applies to all those who deal with the government.
13

DIFFERENCE BETWEEN SECTION 112 ON REFUND FOR VAT

and SECTION 229 ON REFUND OF OTHER TAXES
SEC. 112. Refunds or Tax Credits of Input Tax. -
Zero-Rated or Effectively Zero-Rated Sales.- any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may,
within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or

Abakada Guro Partylist v. Ermita, G.R. No. 168056, September 1, 2005

13

Sec. 4.114-2, Revenue Regulation. 16-2005

National Internal Revenue Code Section 114(C)
refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not
been applied against output tax:..xx...
Period Within Which Refund or Tax Credit of Input Taxes Shall be
Made. - In proper cases, the Commissioner shall grant a refund or issue
the tax credit certificate for creditable input taxes within one hundred
twenty (120) days from the date of submission of compete documents
in support of the application filed in accordance with Subsections (A)
and (B) hereof.
 
In case of full or partial denial of the claim for tax refund or tax credit,
or the failure on the part of the Commissioner to act on the application
within the period prescribed above, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.-
SEC. 229. Refunds of other taxes. -
Recovery of Tax Erroneously or Illegally Collected. - no suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, of any sum alleged to have
been excessively or in any manner wrongfully collected without
authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
SECTION 112 SECTION 229
This may be availed only by “Any This covers refund of “Other
VAT Registered Person” whose Taxes” of a taxpayer or Recovery
sales are zero-rated or effectively of Tax Erroneously or Illegally
zero-rated Collected
Period is 2 years after the close of Period is 2 years from the date of
the taxable quarter when the payment of tax.
sales were made
Period is 2 years from the date of Period to file an administrative
payment of the tax The 30-day claim before the CIR AND judicial
period of appeal to the CTA need claim with the CTA must fall
not necessarily fall within the within the 2 year prescriptive
two-year prescriptive period, as period
long as the administrative claim
before the CIR is filed within the
two-year prescriptive period. This
is because Sec. 112 (D) of the
1997 NIRC mandates that a
taxpayer can file the judicial
claim: (1) only within thirty days
after the Commissioner partially
or fully denies the claim within
the 120-day period, or (2) only
within thirty days from the
expiration of the 120-day period
if the Commissioner does not act
within the 120-day period (CIR v.
San Roque Power Corporation,
G.R. Nos. 187485, 196113,
197156, February 12, 2013)

A MUNICIPAL CORPORATION UNLIKE A SOVEREIGN STATE IS

CLOTHED WITH NO INHERENT POWER OF TAXATION.
The power to tax "is an attribute of sovereignty," and as such,
inheres in the State. Such, however, is not true for provinces, cities,
municipalities and barangays as they are not the sovereign; rather,
they are mere "territorial and political subdivisions of the Republic of
the Philippines.”(Pelizloy Realty Corporation v. The Province of
Benguet, GR NO. 9223041)

The rule governing the taxing power of provinces, cities,

muncipalities and barangays is summarized in Icard v. City Council of
Baguio:

It is settled that a municipal corporation unlike a sovereign

state is clothed with no inherent power of taxation. The charter
or statute must plainly show an intent to confer that power or the
municipality, cannot assume it. And the power when granted is
to be construed in strictissimi juris.

Any doubt or ambiguity arising out of the term used in

granting that power must be resolved against the municipality.
Inferences, implications, deductions – all these – have no place in
the interpretation of the taxing power of a municipal corporation.

Therefore, the power of a province to tax is limited to the extent that

such power is delegated to it either by the Constitution or by statute.
14

UNSETTLED ISSUE: TAXABILITY OF ASSOCIATION DUES,

MEMBERSHIP FEES, AND OTHER ASSESSMENT/CHARGES
COLLECTED BY CONDOMINIUM

BIR Released REVENUE MEMORANDUM CIRCULAR NO. 65-

2012 Which clarified the matter and declared that the gross receipts
of condominium corporations including association dues,
membership fees, and other assessments/charges are subject to
VAT, income tax and income payments made to it are subject to
applicable withholding taxes under existing regulations.
However, the same was challenged in First e-Bank Tower
Condominium Corp., v. BIR, Special Civil Action No. 121236, RTC
Br. 146, Makati City, where the lawyer of the condominium
corporations argues that such dues and fees are merely held in trust
by the condominium corporations exclusively for their members and
used solely for administrative expenses in implementing the
condominium corporations’ purposes. Accordingly, the condominium
corporations, do not actually render services for a fee subject to VAT.
The RTC of Makati Ruled in favor of the condominium stating
that: the lawyer of the condominium corporations is correct. The
association dues, membership fees, and other assessment/charges
do not constitute income payments because they were collected for
the benefit of the unit owners and the condominium corporation is
not created as a business entity. The collection is the money of the
unit owners pooled together and will be spent exclusively for the
purpose of maintaining and preserving the building and its premises
which they themselves own and possess.
In another Case decided by the Court of Tax Appeals, the CTA has
ruled that condominium or association dues as well as other fees
collected from unit owners are not subject to income tax and
withholding tax.

The CTA issued this ruling in response to a petition lodged by

Officemetro Philippines Inc. The court agrees with

CIR v. San Roque Power Corporation, G.R. Nos. 187485, 196113,

14

197156, February 12, 2013

Icard v. City Council of Baguio G.R. No. L-1281   May 31, 1949
Pelizloy Realty Corporation v. The Province of Benguet,
GR NO. 9223041GR NO. 922304
petitioner. Condominium dues billed to the company are not subject to
the ruling said.

Finally, On January 30, 2013,REVENUE MEMURANDUM CIRCULAR

NO.9-2013 was released BIR Which relaxed the rule stating that, dues
and membership fees will not be taxed if the local government having
jurisdiction over the homeowner associations will certify that it has
either no or insufficient funds to cover basic services rendered by the
homeowners to their members.

Condominium or homeowners associations must present proof that the

dues and fees are used for cleanliness, safety, security and other basic
services needed by members.15

DIFFERENT VAT TREATMENT ON SALE OF REAL PROPERTIES

Sale of real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business of the seller shall
be subject to VAT.
Sale of residential lot with gross selling price exceeding P1,919,500,
residential house and lot or other residential dwellings with gross
selling price exceeding P3,199,200, where the instrument of sale is
executed on or after July 1, 2012, shall be subject to 12% VAT (R.R. 16-
2005, as amended by RR 16-2011 and RR 03-2012).
This includes sale, transfer or disposal within a 12- month period
of two or more adjacent residential lots, house and lots or other
residential dwellings in favor of one buyer from the same seller, for the
purpose of utilizing the lots, house and lots or other residential
dwellings as one residential area wherein the aggregate value of the
adjacent properties exceeds P1,919,500, for residential lots and
P3,199,200 for residential house and lots or other residential dwellings.
Adjacent residential lots, house and lots or other residential
dwellings although covered by separate titles and/or separate tax
declarations, when sold or disposed to one and the same buyer,
whether covered by one or separate Deed/s of Conveyance, shall be
presumed as a sale of one residential lot, house and lot or residential
dwelling.
It is only the sale of real properties primarily held for sale to customers
or held for lease in the ordinary course of trade or business of the seller
which shall be subject to VAT. As such, transactions involving real
properties held as capital asset of individuals are not subject to VAT.

First e-Bank Tower Condominium Corp., v. BIR, Special Civil Action No.
15

121236, RTC Br. 146, Makati City

REVENUE MEMORANDUM CIRCULAR NO. 65-2012
Revenue Memorandum Circular No. 9-2013 January 30, 2013
Officemetro Philippines Inc. v CIR CTA EB NO. 1213
However, it may give rise to capital gains tax liability. Only persons
engaged in real estate business either as a real estate dealer,
developer or lessors, are subject to VAT
TRANSACTION TAX TREATMENT
Real properties held primarily for sale to 12% VAT
customers, in general
Residential lot with gross selling price exceeding 12% VAT
P1,919,500 (seller is a real estate dealer or
developer)
Residential lot with gross selling price not VAT-exempt, not subject to percentage tax
exceeding P1,919,500 (seller is a real estate
dealer or developer)
Residential house and lot or other residential 12% VAT
dwellings exceeding P3,199,200 (seller is a real
estate dealer or developer)
Residential house and lot or other residential VAT-exempt, not subject to percentage tax
dwellings not exceeding P3,199,200 (seller is a
real estate dealer or developer)
Residential house and/or lot by a seller not Not subject to VAT or OPT May be subject to
engaged in business CGT, except sale of principal residence, which
may be exempt subject to certain conditions
Commercial place or lot (seller uses property in 12% VAT
business)
Real property used in business, taxpayer is not 12% VAT (incidental transaction)
engaged in dealing with real estate
16

THIRD PARTY INFORMATION OR ACCESS TO RECORDS

METHOD
The BIR may require third parties, public or private to supply
information to the BIR, and thus, “ obtain on a regular basis from any
person other than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and
instrumentalities including the Bangko Sentral ng Pilipinas and
government-owned or – controlled corporations, any information such
as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names , addresses, and
financial statements of corporations, mutual fund companies, insurance
companies, regional operating headquarters or multinational
companies, joint accounts, associations, joint ventures or consortia and
registered partnerships, and their members; xxx” [Sec. 5 (B), NIRC of
1997)
On 22 February 2018, the Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 12-2018, seeking to
clarify the nature and extent of the Commissioner of Internal
Revenue’s (CIR) power to obtain information vis-à-vis the attorney-
client and accountant-client privileges.

R.R. 16-2005, as amended by RR 16-2011 and RR 03-2012

16

CIR v. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21, 2006
 The RMC attempts to provide a response by saying that the
power of the Commissioner to obtain information under Section 5 of
the Tax Code serves as an exception to both the attorney-client and
accountant-client privilege..

SALE OF GOOD TO ECOZONE DEEMED EXPORT SALE

As a rule, The Philippine VAT system adheres to the cross border
doctrine, according to which, no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial
border of the taxing authority.
However, Sale of goods to ECOZONE is considered as export sales.
While an ecozone is geographically within the Philippines, it is deemed
a separate customs territory and is regarded in law as foreign soil.
Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as
export sales. These sales are zero-rated or subject to a tax rate of zero
percent (CIR v. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21,
2006).
An ecozone or a Special Economic Zone has been described as
selected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes
and bounds are fixed or delimited by Presidential Proclamations. An
ecozone may contain any or all of the following: industrial estates (IEs),
export processing zones (EPZs), free trade zones and
tourist/recreational centers. The national territory of the Philippines
outside of the proclaimed borders of the ecozone shall be referred to as
the Customs Territory (CIR v. Toshiba Information Equipment (Phils.),
Inc., G.R.. No. 150154, August 9, 2005) 17
Section 8 of R.A. No. 7916 mandates that PEZA shall manage and
operate the ECOZONE as a separate customs territory. The provision
thereby establishes the fiction that an ECOZONE is a foreign territory
separate and distinct from the customs territory. Accordingly, the sales
made by suppliers from a customs territory to a purchaser located
within an ECOZONE will be considered as exportations. Following the
Philippine VAT system's adherence to the Cross Border Doctrine and
Destination Principle, the VAT implications are that "no VAT shall be
imposed to form part of the cost of goods destined for consumption
outside of the territorial border of the taxing authority" As such, the
purchases of goods and services by the taxpayer that were destined
for consumption within the ECOZONE should be free of VAT; hence, no
input VAT should then be paid on such purchases, rendering the
taxpayer not entitled to claim a tax refund or credit. Verily, if the
taxpayer had paid the input VAT, the proper recourse is not against the

Sec. 5 (B), NIRC of 1997

17

Revenue Memorandum Circular (RMC) No. 12-2018

CIR v. Toshiba Information Equipment (Phils.), Inc., G.R.. No. 150154, August 9, 2005
Government but against the seller who had shifted to it the output VAT
(Coral Bay Nickel Corp. vs. CIR, G.R. No. 190506, June 13, 2016)

EMPLOYEES TRUST FUND

An employees’ trust fund is a trust established by an employer to
provide retirement, pension, or other benefits to employees - it is a
separate taxable entity established for the exclusive benefit of the
employees. (Development Bank of the Philippines v. Commission on
Audit, 422 SCRA 459)
Income of employees’ trust is tax exempt: “ Any provision of law to
the contrary notwithstanding, the retirement benefits received by
official and employees of private firms, whether individual or corporate,
in accordance with a reasonable private benefit plan maintained by the
employer shall be exempt from all taxes and shall not be liable to
amendment, levy or seizure by or under any legal or equitable process
whatsoever except to pay a debt of the official or employee concerned
to the private benefit plan or that arising from liability imposed in a
criminal action’ x x x “ (Sec. 1, Rep. Act 4917) A tax-exempt
employees’ trust fund is referred to under the NIRC of 1997 as a “
reasonable private retirement plan, which means “ a pension, gratuity,
stock bonus or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein
contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated,
and wherein it is provided in said plan that at no time shall any part of
the corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials or
employees.” [Sec. 32 (B) (6 ) (a), NIRC of 1997]

Extent of exemption. The tax exemption enjoyed by employees’ trust is

absolute irrespective of the nature of the tax. It does not apply only to
the tax on interest income from money market placements, bank
deposits, other deposit substitute instruments and government
security, because the source of the interest income does not have any
effect on the exemption enjoyed by employee’ s trusts. (Far East Bank
Trust and Company, etc., v. Commissioner of Internal Revenue, et al.,
G. R. No. 138919, May 2, 2006)