Requisites | Compensation | Extinguishment of Obligations | Obligations | OBLIGATIONS AND CONTRACTS

Under Philippine Civil Law, the extinguishment of obligations through compensation is governed by the Civil Code of the Philippines (Articles 1278 to 1290). Compensation, as a mode of extinguishing obligations, occurs when two persons, in their capacity as debtors and creditors of each other, offset their respective debts to the extent of their concurrence. Below is a detailed breakdown of compensation, specifically its requisites, types, and related provisions.

I. Definition of Compensation

Compensation is defined in Article 1278 of the Civil Code as a way of extinguishing two obligations that are reciprocally due between two persons who are principal creditors and debtors of each other. Compensation essentially operates as a "set-off," balancing two obligations against each other, to the degree that one debt extinguishes the other.

II. Types of Compensation

There are four main types of compensation in Philippine law:

1. Legal Compensation - Takes place by operation of law, subject to the conditions set forth in Article 1279 of the Civil Code.
2. Voluntary or Conventional Compensation - Results from an agreement between the parties, even when some requisites for legal compensation are absent.
3. Judicial Compensation - Takes place when declared by a court in a lawsuit where two persons are plaintiffs and defendants reciprocally.
4. Facultative Compensation - Operates when one of the parties, despite not all legal requisites being present, offers and the other accepts compensation.

III. Requisites of Legal Compensation

For legal compensation to occur, the following requisites under Article 1279 must all be met:

1. Both Parties Must Be Principal Creditors and Debtors of Each Other:

   • Each party must hold the role of both creditor and debtor towards the other.
   • Obligations must exist in the capacity of principal, not merely as guarantors or sureties.

2. The Debts Must Be Due and Demandable:

   • Both obligations must be liquidated (certain as to amount) and enforceable.
   • If the debt is conditional or dependent upon a future event, compensation cannot occur until that condition is fulfilled.

3. The Debts Must Be of the Same Kind:

   • The debts involved must consist of fungible things (things that can be replaced by others of the same kind, like money or consumable goods).
   • Different types of obligations (e.g., services vs. money) cannot be set off against each other.

4. Both Debts Must Be Liquidated:

   • Liquidation means the debts must be determined or determinable by computation.
   • An unliquidated debt (e.g., a disputed amount) does not meet this requirement until resolved.

5. There Must Be No Retention or Controversy Filed by a Third Party:

   • If a third party claims a right over the debt (e.g., by attachment or garnishment), compensation may not be possible.
   • Similarly, if a judicial controversy exists over the debt, it must be resolved before compensation can occur.

IV. Rules and Effects of Compensation

1. Extent of Compensation: Compensation extinguishes both debts only to the extent of their concurrence. If one debt exceeds the other, only the portion equivalent to the lesser amount is extinguished.

2. Date of Compensation: Compensation takes effect from the moment all requisites are present, not from the time the parties declare or apply it. This retroactive effect is crucial when determining the status of debts at a specific point.

3. Obligations Not Subject to Legal Compensation (Article 1287):

   • Compensation does not apply to obligations arising from deposits, support due by gratuitous title, or other obligations where the law or contract excludes compensation.
   • Compensation is also not permitted in cases where one of the debts is owed to the government unless mutual debts exist between public entities.

4. Prohibition Against Waiver (Article 1288):

   • A party may waive compensation even when all requisites are met.
   • This waiver may be express or implied, provided it does not prejudice third parties.

V. Judicial Compensation

Judicial compensation is ordered by a court when legal requisites are absent or a judicial determination is necessary. It arises commonly during a lawsuit where each party asserts claims against the other, allowing the court to offset the claims against each other.

VI. Facultative Compensation

Facultative compensation arises when one party has the choice to impose compensation, usually because one requisite for legal compensation is missing, such as when one debt is not yet demandable. Facultative compensation is useful in scenarios where one party agrees to compensation despite the technical absence of certain conditions.

VII. Special Rules and Additional Considerations

1. Subrogation and Compensation (Article 1290):

   • If a third party subrogates (substitutes) into the rights of the creditor, compensation may still be claimed unless the debtor was notified of the subrogation before the compensation took place.

2. Assignment of Rights and Compensation:

   • If a debt is assigned, compensation will only be applicable if the debtor was notified of the assignment after all requisites of compensation had been fulfilled.

Practical Applications of Compensation in Philippine Civil Law

In practice, compensation is beneficial in commercial transactions, debtor-creditor arrangements, and financial negotiations, where mutual debts often arise. Understanding the requisites ensures that parties comply with legal standards, avoid disputes, and protect their financial interests.

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This thorough breakdown of compensation highlights its importance as a practical, efficient mechanism for extinguishing debts in Philippine civil law.

Requisites | Loss of the Thing Due | Extinguishment of Obligations | Obligations | OBLIGATIONS AND CONTRACTS

Under Philippine Civil Law, the extinguishment of obligations due to the "Loss of the Thing Due" is governed by the Civil Code, particularly under the general rules of obligations and contracts. This topic involves specific requisites and conditions that must be met for the loss of the thing due to extinguish an obligation. Below is a meticulous breakdown of the relevant legal provisions, requirements, and implications concerning the extinguishment of obligations by the loss of the thing due, per the Civil Code of the Philippines:

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1. Definition and Scope

Under Article 1262 of the Civil Code, an obligation is extinguished when the thing that is the object of the obligation is lost or destroyed without the fault of the debtor and before he has incurred in delay, provided that the obligation involves a specific or determinate thing. This extinguishment applies only if the thing due is determinate and specific, meaning it is explicitly identified and unique, rather than fungible or generic.

2. Requisites for the Extinguishment of Obligation Due to Loss of the Thing Due

For an obligation to be extinguished due to the loss of the thing due, the following requisites must be strictly met:

a. The Thing Must Be a Specific or Determinate Thing

• The obligation must involve a determinate or specific thing, meaning it is distinct and identified in a way that it cannot be substituted with any other. For instance, if the obligation involves delivering a specific car with a particular VIN (vehicle identification number), this car is a determinate thing.
• If the obligation involves a generic or indeterminate thing (e.g., a generic car of a particular model), the loss of one car does not extinguish the obligation, as the debtor can substitute it with another.

b. The Thing Is Lost Without the Fault of the Debtor

• The loss or destruction of the thing must occur without any fault or negligence on the part of the debtor. If the debtor’s fault causes the loss, the obligation is not extinguished, and the debtor remains liable.
• For example, if a debtor is supposed to deliver a specific artwork, and it is lost due to accidental fire not attributable to his fault, the obligation is extinguished. However, if the debtor negligently caused the fire, the obligation is not extinguished, and he may be held liable.

c. The Loss Occurs Before the Debtor Is in Delay

• The loss of the thing must occur before the debtor incurs delay. According to the Civil Code, a debtor is in delay if he fails to fulfill his obligation upon demand by the creditor when the time for performance has already arrived.
• If the thing is lost after the debtor is already in delay, the obligation is not extinguished, and the debtor remains liable. This is based on the principle that the debtor bears the risk of loss once he is in delay.

d. No Substitute or Replacement Available (for Determinate Thing)

• Because the obligation involves a specific thing, the principle of substitution is not applicable. The object lost cannot simply be replaced by an equivalent as it is unique. This condition reinforces the necessity of the thing’s uniqueness to invoke this extinguishment rule.

3. When is a Thing Considered "Lost"?

Under the Civil Code, a thing is considered "lost" when:

• It perishes completely or is destroyed in a manner that it can no longer be delivered.
• It goes out of commerce, meaning it becomes legally unavailable for trade or cannot be delivered as per the legal standards.
• It disappears in such a way that its existence is unknown or it is irretrievable, as when a ship sinks and cannot be salvaged.

4. Effects of the Loss of the Thing Due

When the above requisites are met and the thing is lost, the following legal effects apply:

a. Extinguishment of the Obligation

• The obligation is extinguished, and the debtor is released from his duty to deliver the lost thing. This discharge is absolute when all requisites are satisfied.

b. Exceptions to Extinguishment Due to Loss

The obligation may not be extinguished even if the specific thing is lost under the following conditions:

1. When the law expressly provides otherwise.

   • Certain provisions in special laws may dictate that the loss of the thing does not extinguish the obligation, particularly in cases involving public interest.

2. When the parties have stipulated otherwise.

   • If the parties expressly agree that the debtor will bear the risk of loss, even if the thing perishes without his fault, the debtor remains liable despite the loss.

3. When the obligation arises from a crime or quasi-delict (tort).

   • In obligations arising from a criminal act or quasi-delict, liability may persist regardless of the loss of the thing. This often involves cases where restitution is part of the punishment or civil liability.

4. When the debtor incurs in delay.

   • As previously noted, if the thing is lost after the debtor has already incurred in delay, the debtor bears the risk of loss, and the obligation is not extinguished.

5. If the debtor promised to deliver the same thing to two or more persons who do not have the same interest.

   • In cases of conflicting multiple obligations for the same specific thing, the obligation to one of the creditors may not necessarily be extinguished, depending on the circumstances and timing.

5. Illustrative Applications of Article 1262

• Example 1: A debtor obliges himself to deliver a specific racehorse to a creditor. Before the due date of delivery, the horse dies from natural causes. The obligation to deliver the horse is extinguished.
• Example 2: A debtor is supposed to deliver a valuable painting but fails to do so on the agreed date. While the painting is with the debtor, it is accidentally damaged by a third party. Since the debtor was already in delay, he bears the risk and may still be liable to the creditor.

6. Concept of Risk in the Loss of a Specific Thing

Philippine Civil Law adopts the principle of res perit domino ("the thing perishes with its owner"). This means that if the thing perishes without the debtor’s fault and without delay, the creditor who is the ultimate owner bears the risk of loss, leading to the extinguishment of the obligation.

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Summary

The extinguishment of obligations by the loss of the thing due is strictly applied under the conditions outlined in the Civil Code, particularly Article 1262. The critical elements involve the uniqueness of the thing (it must be specific or determinate), absence of fault by the debtor, the loss occurring before the debtor’s delay, and lack of any conflicting laws or stipulations to the contrary.

Requisites | Collection Process | Tax Remedies | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

To understand the requisites for the collection process under the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law and Republic Act No. 11976 (Ease of Paying Taxes Act), we must meticulously review relevant provisions, procedural requirements, and the legal foundation guiding the Bureau of Internal Revenue's (BIR) authority in enforcing tax liabilities.

1. Legal Basis for Collection

The power to enforce collection of taxes due and demand payment stems from:

• NIRC of 1997 (Republic Act No. 8424), particularly Sections 205-209.
• TRAIN Law (R.A. No. 10963), which introduced modifications on thresholds, tax rates, and exemptions.
• Ease of Paying Taxes Act (R.A. No. 11976), aimed at simplifying compliance and enhancing taxpayer services.

This framework permits the BIR to assess, collect, and enforce liabilities while ensuring taxpayers are afforded due process.

2. Requisites in the Collection Process

The collection process begins after a final assessment has been issued and becomes due and demandable. The following requisites must be fulfilled:

a. Issuance of a Final Assessment Notice (FAN) and Formal Letter of Demand

• The BIR must first determine the taxpayer's liability through an audit or investigation.
• The result of this assessment, known as a Final Assessment Notice (FAN), is a crucial document that specifies the amount due, with a Formal Letter of Demand for payment.
• Requirements of a Valid FAN:
  • Must state a specific due date for payment.
  • Must be served personally or via registered mail.
  • Must contain a detailed computation of the tax deficiency.
  • Properly signed by the authorized BIR official.

The issuance of a FAN is essential; without it, the BIR cannot proceed with enforcement actions.

b. Due Process Requirements

• Due process in tax collection entails notifying the taxpayer and allowing a reasonable opportunity to challenge the assessment.
• The BIR is required to follow prescribed timelines, including the issuance of a Preliminary Assessment Notice (PAN) and the FAN.
• Judicial Remedies: If the taxpayer disagrees with the FAN, they may file an administrative protest within 30 days and potentially appeal to the Court of Tax Appeals (CTA) if unresolved.

c. Issuance of a Warrant of Distraint and/or Levy

• If the taxpayer fails to pay the assessed deficiency within the time specified in the FAN, the BIR may issue a Warrant of Distraint (for personal property) or Warrant of Levy (for real property).
• Requirements for Warrant Issuance:
  • There must be a final, executory assessment (no ongoing protest or judicial appeal).
  • The taxpayer must be notified of the impending warrant.
  • The BIR Commissioner or a duly authorized representative must approve the issuance.
• Process of Distraint and Levy:
  • Distraint involves seizing personal property or garnishing bank accounts to satisfy the tax debt.
  • Levy involves selling real property to cover the liability.

Distraint and levy proceedings require strict adherence to procedural rules to avoid abuse of authority and ensure fairness.

d. Taxpayer’s Right to Redemption

• In cases of levy on real property, the taxpayer has the right to redeem the property by paying the assessed tax, penalties, and interest within one year from the sale date.
• This redemption right is a statutory safeguard to protect taxpayers from disproportionate enforcement actions.

e. Civil Action for Collection

• In addition to administrative remedies, the BIR may file a civil action in court to recover unpaid taxes.
• This step is usually taken if distraint and levy are not viable or sufficient to settle the tax debt.
• Civil actions follow the rules of procedure in the Rules of Court and may be filed in the Regional Trial Court (RTC).

f. Tax Liens

• Tax liens arise automatically when a taxpayer incurs a deficiency, securing the government's interest in the taxpayer's property.
• For real property liens to be enforceable against third parties, the lien must be annotated in the Registry of Deeds.
• Liens ensure the government’s priority over other creditors regarding the taxpayer's assets.

3. Additional Provisions under the Ease of Paying Taxes Act (R.A. No. 11976)

• Simplification and Digitalization: The Ease of Paying Taxes Act introduced reforms aimed at enhancing the accessibility and efficiency of the BIR’s collection process. For instance:
  • Expanded use of digital platforms for tax payments.
  • Streamlined processes for small and micro taxpayers.
• Taxpayer Bill of Rights: This act reinforced the rights of taxpayers, especially regarding due process and access to clear information on their liabilities and available remedies.
• Electronic Invoicing and Receipting: The act mandated wider adoption of electronic invoicing, making record-keeping more accessible and audit procedures more efficient.

4. Statute of Limitations on Collection

• Basic Rule: The BIR has five years from the date of assessment to collect a tax due, following the issuance of a final assessment.
• Suspension of the Prescriptive Period:
  • If the taxpayer is outside the Philippines.
  • If the taxpayer cannot be located despite reasonable efforts.
  • If the taxpayer has pending appeals or claims for refund that affect the amount due.
• The statute of limitations is intended to prevent indefinite exposure to liability while ensuring prompt tax collection.

5. Judicial Remedies Available to the Taxpayer

• Administrative Protest: Filed within 30 days from the issuance of the FAN.
• Appeal to the CTA: If the administrative protest is denied or unresolved within the period prescribed, the taxpayer may elevate the matter to the Court of Tax Appeals.
• Injunctions and Appeals in Higher Courts: In exceptional cases, injunctions may be sought to halt collection activities, though courts rarely grant these due to the state’s right to collect taxes.

6. Summary of Key Steps in Collection Process

• Issuance of PAN and FAN with due process requirements.
• Demand for payment within the specified period.
• Issuance of distraint or levy warrants upon non-payment.
• Resort to civil action if administrative remedies are inadequate.
• Ensuring compliance with statutes of limitations.
• Providing avenues for judicial and administrative relief to the taxpayer.

The BIR’s authority in enforcing tax collections is balanced by requirements to respect taxpayer rights, adhere to procedural due process, and observe statutory limitations on collection activities. The TRAIN Law and the Ease of Paying Taxes Act have contributed to streamlining processes and safeguarding taxpayer rights while preserving the government’s ability to collect essential revenues.