PRIMUS 2008 ONE-LINERS

TAXATION
VER. 2008.09.10 copyrighted 2008 Prepared by the PRIMUS Board of Consultants
Prof. Abelardo T. Domondon Principal Consultant These Notes in the form of one or two sentences and questions and answers were specially prepared by a Board of Consultants specially commissioned by PRIMUSInformation Center, Inc., for the use of candidates who are going to take the 2008 Bar Examination. They are not as comprehensive as the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste. They are intended to be read during the Pre-Week or before the start of the regular Bar review for any given Bar Examination year. These Notes attempt to second guess the areas where questions may probably be sourced for the 2008 Bar Examination in Taxation. They include enumerations and distinctions, as well digests of some landmark cases, although they go beyond two sentences. They may also serve as memory joggers to help the candidate recall concepts. The reader is advised to concentrate on the One-liners that are in bold letters.Those that are not in bold are mere elucidations of concepts. The PRIMUS 2008 ONE-LINERS shall be revised regularly to consider latest law and jurisprudence to meet the requirements of future Bar Reviews such that the title shall change from year to year. For the 2009 Bar examination the title shall be PRIMUS 2009ONELINERS which shall be released sometime in September, 2009. The reader is however advised to acquire and read the latest versions of the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste which contain more detailed information leading to a more comprehensive Bar review. Of course those who intend to take the 2009 Bar examination are encouraged to attend the PRIMUS 2009 Wrap-up Reviews Although primarily for the use of Bar candidates who have attended the PRIMUS 2008 Wrap-up Reviews, the On-Liners may be availed of by other students who are interested in the subject. While available for the free use of all the contents of the PRIMUS 2008ONELINERS are covered by copyright protection and should never be published (whether through printed media or through the internet) without written permission in writing from PRIMUS Information Center, Inc. Downloading and printing into hard copies is allowed only for private use and should not be distributed on a commercial basis.

GENERAL PRINCIPLES OF TAXATION

GENERAL CONCEPTS
1. What is the power to tax ? Define the power to tax. What is the concept of taxation, and its nature ? SUGGESTED ANSWER: The power to tax is an inherent power of the state exercised through the legislature imposing burdens upon subjects and objects within its jurisdiction to raise revenues in order to meet the legitimate objects of government. Its nature is that it is both an inherent power of government and an exercise of legislative power. It is inherent in character because it could be exercised even in the absence of a constitutional grant. It is an exercise legislative power because it is that department that promulgate rules and taxation is the promulgation of rules, such as how much tax is to be paid, who pays the tax, to whom should it be paid and when it should be paid. 2. How should the power to tax be exercised ? Explain briefly.

SUGGESTED ANSWER: The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in the order to maintain the general publics trust and confidence in the Government this power must be used justly and not treacherously. (Roxas v. Court of Tax Appeals, No. L-25043, April 26, 1968, 23 SCRA 276, 282. cited in Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue, G. R. No. 172598,December 21, 2007) 3. It is said that taxes are the lifeblood of the government and any delay in its collection would impair the rendition of government services. May the collection of taxes be restrained by a court ? SUGGESTED ANSWER: As a general rule, No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC) However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Sec. 11, Rep. Act No. 1125) 4. What is the procedure before the CTA for issuance of an order suspending the collection of taxes ? SUGGESTED ANSWER: Where the collection of the amount of the taxpayers liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. The motion for suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005) 5. How should tax exemptions be construed ? SUGGESTED ANSWER: Tax exemptions are strictly construed against the taxpayer and liberally in favor of the State and must be clearly shown and based on language in the law too plain to be mistaken (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al., 293 SCRA 76, 88), because taxes are necessary for the continued existence of the State. 6. Why are tax laws construed strictly against the State and liberally in favor of the State ? SUGGESTED ANSWER: Taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99) 7. May a BIR ruling in favor of a taxpayer be reversed so as to subject a taxpayer to tax ? Why ? SUGGESTED ANSWER: A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. (LincolnPhilippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99) 8. In 1996 Rosemarie, a nonresident citizen, was collected Philippine income taxes on her incomes derived from sources without the Philippines. Upon the enactment of the NIRC of 1997 which took effect on January 1, 1998, she filed a claim for refund of the taxes she paid praying for the retroactive application of the provision that subjects nonresident citizens to tax only on their incomes from within. Should the refund be granted ? SUGGESTED ANSWER: No. Tax laws, unlike remedial laws, are not to be applied retroactively.Revenue laws are substantive laws and their application must not be equated with remedial laws. Revenue laws are not intended to be liberally construed, and exemptions are not given retroactive application, considering that taxes are the lifeblood of the government. In Holmes memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007) 9. What are the purposes for the exercise of the taxing power ? SUGGESTED ANSWER: The three purposes for the exercise of the taxing power are: a. the revenue purpose (also known as the primary purpose of taxation);

b. the sumptuary purpose (implementation of police power objectives);; and c. the compensatory purpose. 10. Explain briefly the revenue purpose of taxation. SUGGESTED ANSWER: One of the purposes of taxation is to raise revenues to meet the recognized objects of purposes of government. Thus, is based the lifeblood theory which posits that the revenues collected constitute the lifeblood that animates the existence of governments, without which governments cannot perform the functions for which they were established. 11. What is the sumptuary purpose of taxation and upon which is it based ? Explain briefly. SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the states police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316] The reader should note that the August 3, 2005 Southern Crosscase is the decision on the motion for reconsideration of the July 8, 2004 Southern Crossdecision. The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 12. Distinguish taxation from police power. SUGGESTED ANSWER: a. Purpose: Taxation is for revenue while police power is for general welfare. b. Amount: In taxation, the amount of tax collected is practically unlimited while under police power, the license fee should not exceed cost of regulation. c. Compensation: In taxation, the enjoyment of public services while in police power, the feeling of having done something good for society in general. d. Property taken: In taxation, generally money while under police power, any property, other than money, which is the source of the danger health, safety or morals. e. What is done with the property taken: Taxation is constructive because the money collected is spent for building infrastructure or providing public services while police power is destructive. The property taken is usually destroyed. f. Relation to the non-impairment clause: Taxation is inferior to the non-impairment clause and could not override the same while police power is superior to the non-impairment clause. g. Scope. Taxation interferes with property rights only while police power regulates both liberty and property. h. Surrender. Taxation may be bargained away through a contract such that if the government issues a tax-exempt bond, it could not withdraw the exemption because it would violate the nonimpairment clause while police power cannot be bargained away. 13. What is the relation between the power of taxation and police power ?Explain. SUGGEWTED ANSWER: The motivation behind many taxation measures is the implementation of police power goals. Progressive income taxes alleviate the margin between rich and poor; the so-called sin-taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. Taxation is distinguishable from police power as to the means employed to implement these public good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state. These considerations necessitated the evolution of taxation as a distinct legal concept from police power. Yet at the same time, it has been recognized that taxation may be made the implement of the states police power. [Southern Cross Cement Corporation v. Cement

Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citingLutz v. Araneta, 98 Phil. 148, 152 (1955) in turn citing Great Atl.,& Pac. Tea Co. v. Grosjean,301 U.S. 412, U.S. v. Butler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316] 14. What are the similarities between the power of taxation and police power ? SUGGESTED ANSWER: a. Both are inherent in the State and may be exercised even if there is no specific authority granted by the Constitution. b. Without these powers the State could not attain the purposes for which it is established.Otherwise stated, the very existence of the State is dependent upon the exercise of these powers. c. The powers are to be exercised by the legislative department. d. Both interfere with ownership and use of private property. 15. What is the nature of the Sugar Adjustment Act which increased the existing taxes on sugar ? Explain briefly. SUGGESTED ANSWER: The Sugar Adjustment Act which increased existing taxes on sugar was enacted to stabilize the sugar industry to prepare it for the loss of its quota in the U.S. market was levied for a regulatory purpose to protect and promote the sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148) The Philsugin fund, an imposition on sugar, to raise funds to conduct research for the improvement of the sugar industry, is for the purpose of stabilizing the sugar industry which one of the pillars of the Philippine economy which affects the welfare of the State. The levy is not so much an exercise of the power of taxation, nor the imposition of a special levy, but the exercise of police power which is for the general welfare of the entire country, therefore for a public purpose. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966) 16. Section 40 (g) of the Public Service Act authorizes the collection of x x x fees as reimbursement of its expenses in the authorization, supervision and/or regulation of the public services: x x x g) For each permit, authorizing the increase in equipment, the installation of new units or authorizing the increase of capacity, or the extension of means or general extensions in the services, twenty centavos for each one hundred pesos or fraction of the additional capital necessary to carry out the permit. (paraphrasing supplied) Is the imposition a tax measure ? Explain. SUGGESTED ANSWER: No. It is not a tax measure but a simple regulatory provision for the collection of fees imposed pursuant to the exercise of the States police power. A tax is imposed under the taxing power of government principally for the purpose of raising revenues. The law in question, however, merely authorizes and requires the collection of fees for the reimbursement of the Commissions expenses in the authorization, supervision and/or regulation of public services. (Republic, etc., v. International Communications Corporation (ICC), G. R. No. 141667, July 17, 2006) 17. Explain the compensatory purpose of taxation. SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) 18. May the power of taxation be used to implement the power of eminent domain ?Explain. SUGGESTED ANSWER: Yes. The power of taxation can also be used to implement power of eminent domain. Tax measures are but enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G.R. No. 159647, April 16, 2005) 19. The senior citizens discount. The senior citizens shall be entitled to the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all

establishments for the exclusive use or enjoyment of senior citizens,[Expanded Senior Citizens Act of 2003, Sec. 4 (a)] 20. The Senior Citizens Act is a legitimate exercise of police power. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object (Carlos Superdrug Corp., etc., et al, G. R. No. 166494, June 29, 2007) 21. Senior citizens discount not allowed anymore as a tax credit but as a deduction from gross income. It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax treatment for sales discount purchases of qualified senior citizens of medicines. The establishment may claim the discounts granted to senior citizens as tax deductionbased on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al.,G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)] 22. Just compensation, defined. The full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. (Carlos Superdrug Corp., etc., et al, G. R. No. 166494, June 29, 2007)

THE LIMITATIONS ON THE EXERCISE OF THE POWER OF TAXATION; GROUNDS FOR THE NULLIFICATION OF TAX MEASURES
1. What criteria should be used by the judiciary in quashing a legislative act ? SUGGESTED ANSWER: Subject to the determination of the courts as to what is a proper exercise of police power using the due process clause and the equal protection clause as yardsticks, the State may interfere wherever the public interests demand it, and in this particular a large discretion is necessarily vested in the legislature to determine, not only what interests of the public require, but what measures are necessary for the protection of such interests [Carlos Superdrug Corp., etc., et al, G. R. No. 166494, June 29, 2007 citingU.S. v. Toribio, 15 Phil.85 at 98 (1910) in turn citing Lawton v. Steele, 152 U.S. 133,136; Barbier v. Connoly, 113 U.S. 27; Kidd v. Pearson, 128 U.S. 1] 2. What is meant by a taxpayers suit ? SUGGESTED ANSWER: A taxpayers suit is a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110) 3. What is locus standi ? SUGGESTED ANSWER: Locus standi is a right of appearance in a court of justice on a given question. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) It is a partys personal and substantial interest in the case, such that the party has sustained or will sustain (Ibid.)direct injury as a result of the government act being challenged. It calls for more than just a generalized grievance. A party need not be a party to the contract to challenge its validity. (Ibid.) 4. Rationale for locus standi. The rationale for requiring a party who challenges the constitutionality of a statute to allege such a personal stake in the outcome of the controversy is to ensure that a concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of different constitutional questions. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

5. What are the requirements that must be met before taxpayers, concerned citizens and legislators may be accorded standing to sue ? SUGGESTED ANSWER: a. The case should involve constitutional issues; b. For taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. c. For voters, there must be a showing of obvious interest in the validity of the election law in question. d. For concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early. e. For legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006) 6. Requisites for challenging constitutionality of law. The party bringing suit must show not only that the law or act is invalid, but also that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its enforcement and not merely that he suffers thereby in some indefinite way. (Soriano III v. Lista, et al., G. R. No. 153881, March 24, 2003) 7. Alternative statement of doctrine of brushing aside locus standi. In cases of paramount importance where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan (Bagong Alyansang Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110] 8. Locus standi being merely a matter of procedure, have been waived in certain instances where a party who is not personally injured may be allowed to bring suit.Give some examples. SUGGESTED ANSWER: The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest: a. Taxpayers suits to question contracts entered into by the national government or governmentowned or controlled corporations allegedly in contravention of the law. b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007) 9. What is the rationale behind the inherent and constitutional limitations on the power of taxation ? SUGGESTED ANSWER: The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. 10. What are the inherent limitations upon the power of taxation ? SUGGESTED ANSWER: The inherent limitations are a. Public purpose. The revenues collected from taxation should be devoted to a public purpose. b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. c. Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority. d. Recognition of government exemptions; and e. Observance of the principle of comity. Comity is the respect accorded by nations to each other because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out of respect. Some authorities include no double taxation.

11. What are some of the principles to consider in the determination of whether tax revenues are devoted for a public purpose ? SUGGESTED ANSWER: a. The tax revenues are for a public purpose if utilized for the benefit of the community in general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. b. Public use is no longer confined to the traditional notion of use by the publicbut held synonymous with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) c. The tax revenues are for a public purpose if utilized for the benefit of the community in general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government. Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) 12. The petitioners impugn the validity of the establishment of tax and duty-free shops within the Subic Special Economic Zone (SSEZ) and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes for the reason that this constitute executive legislation in violation of the rule on separation of powers, that only raw material, capital and equipment should be allowed the privilege. Rule on the objections and reason out your answer briefly. SUGGESTED ANSWER: The objections should not be given credence. It is legal to setup duly authorized duty-free shops in the SSEZ to sell tax and duty-free consumer items in the Secured Area. This is in line with the policy enunciated in the law that the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments. While it is true that Section 12 (b) of Rep. Act No. 7227 mentions only raw materials, capital and equipment, this does not necessarily mean that the tax and duty free buying privilege is limited to these types of articles to the exclusion of consumer goods. It must be remembered that in construing statutes, the proper course is to start out and follow the true intent of the Legislature and to adopt that sense which harmonizes best with the context and promotes to the fullest manner the policy and objects of the Legislature. The concept of inclusio unius est exclusio alterius does not find application because the phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of incentives that the SSEZ is authorized to grant, in line with its being a free port zone. Thus, the legislative intent is that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine law. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005) ` Would your answer be the same if a Presidential Proclamation allowed for the limited withdrawal from the Clark Special Economic Zone or the John Hay Economic Zone of consumer goods tax and duty-free ? SUGGESTED ANSWER: The answer would not be the same. This time the Presidential Proclamation would be invalid as the statutory tax exempt privilege was granted only to the Subic Special Economic Zone and not to John Hay or Clark. This is so because the Constitution mandates that no law granting tax exemption shall be passed without the concurrence of a majority of all the members of Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R.

No. 132527, July 29, 2005 citing John Hay Peoples Alternative Coalition, et al., v. Lim, etc., et al., G.R. No. 119775, October 24, 2003, 414 SCRA 356) Furthermore, the law is very clear that the exportation or removal of goods from the territory of the Subic Special Economic Zone to other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. (Ibid.) 13. The VAT law provides that, the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied. (i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and fourfifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %). Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]] 14. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission of 10% all sales actually concluded and collected through her efforts. The local company withheld the amount of P107,000 from her sales commission and remitted the same to the BIR. She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Is her contention correct ? SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually performed. Since the activity of securing the sales were in Germany, then the income did not originate from sources from within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006) 15. A domestic insurance company decided to reinsure with a foreign reinsurer the risks it has undertaken with its local clients. The foreign reinsurer does not have an office, neither does it do business in the Philippines. Are the reinsurance premiums subject to Philippine income taxation ? SUGGESTED ANSWER: Yes because the undertaking of the foreign insurance company to indemnify the local insurance company is the activity that produced the income. The reinsurance premiums remitted to the foreign reinsurer had for their source the undertaking to indemnify the local insurer against liability. Said undertaking is the activity that produced there insurance premiums, and the same took place in the Philippines. The reinsured, the liabilities insured and the risk originally undertaken by the local insurance company, upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. (Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965) cited in Baier-Nickel) 16. BOAC, a foreign airline company which does not maintain any flight to and from the Philippines sold air tickets in the Philippines, through a general sales agent, relating to the carriage of passengers and cargo between two points, both outside the Philippines.

Is BOAC subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes. The source of income which is taxable is that activity which produced the income. The sale of tickets in the Philippines is the activity that determines whether such income is taxable in the Philippines. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. (Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395 cited in Bauer-Nickel) 17. Give some of the general or indirect constitutional limitations. SUGGESTED ANSWER: The general or indirect constitutional limitations are the following: a. Due process clause; b. Equal protection clause; c. Freedom of the press; d. Religious freedom; e. No taking of private property without just compensation; f. Non-impairment clause; g. Law-making process: 1) Bill should embrace only one subject expressed in the title thereof; 2) Three (3) readings on three separate days; 3) Printed copies in final form distributed three (3) days before passage. h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture after conviction by final judgment. 18. The specific or direct constitutional limitations are the following: a. No imprisonment for non-payment of a poll tax; b. Taxation shall be uniform and equitable; c. Congress shall evolve a progressive system of taxation; d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose and concur with amendments; e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object; f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and wharfage dues: 1) Delegation by Congress 2) Through a law 3) Subject to Congressional limits and restrictions 4) Within the framework of national development program. g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious, charitable or educational purposes; h. No tax exemption without the concurrence of majority vote of all members of Congress; i. No use of public money or property for religious purposes except if priest is assigned to the armed forces, penal institutions, government orphanage or leprosarium; j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any, to general funds; k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above;

l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy; m. Automatic release of local government's just share in national taxes; n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes; o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits; p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes subject to conditions prescribed by law. 19. Equal protection of the law clause is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class.(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999) 20. Classification, to be valid, must (a) rest on substantial distinctions, (b) be germane to the purpose of the law, (c) not be limited to existing conditions only, and (d) apply equally to all members of the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999) 21. The law grant of tax and duty-free status under Rep. Act No. 7227, to retailers inside the SSEZ without granting the same to those outside the SSEZ. Is there a violation of the equal protection clause ? SUGGESTED ANSWER: There is no violation of equal protection because there exists a valid classification as shown below: a. Significant distinctions exist between the two groups. Those outside of the SSEZ maintain their business within Philippine customs territory while those within the SSEZ operate within the so-called separate customs territory. To grant the same privileges would clearly defeat the statues intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained. b. The classification is germane to the purpose of Rep. Act No. 7227. As held in Tiu, the real concern of the law is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to extend economic incentives, in terms of a complete package of tax incentives and other benefits, to the establishments within the zone to attract and encourage foreign and local investors. c. The classification is not limited to the existing conditions when the law was promulgated but to future conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaining investment center. d. The classification applies equally to all retailers found within the secured area. As ruled inTiu, the individuals and businesses within the secured area, being in like circumstances or contributing directly to the achievement of the end purposes of the law, are not categorized further. They are all similarly treated, both in privileges granted and in obligations required.(Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999, 301 SCRA 278) 22. Is the statutory grant of tax and duty-free importation into the Subic Special Economic Zone violative the preferential use concept of the Constitution ? SUGGESTED ANSWER: No. The mere fact that the law authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this ground. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only in foreign competition that is unfair.(Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara, G. R. No. 118295, May 2, 1997, 272 SCRA 18)

23. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation."(Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617) 24. A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a contract or impairs its obligation, within the meaning of the constitution.Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the constitution, nor can it be said that it impairs the obligations of any existing contract in its true and legal sense. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 25. Under the now prevailing Constitution, where there is neither a grant nor prohibition by statute, the taxing power of local governments must be deemed to exist although Congress may provide statutory limitations and guidelines in order to safeguard the viability and selfsufficiency of local government units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al.,G.R. No. 127708, March 25, 1999) 26. The Local Government Code explicitly authorizes provinces and cities, notwithstanding any exemption granted by any law or other special law to impose a tax on businesses enjoying a franchise. Indicative of the legislative intent to carry out the constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) 27. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. 28. Paradigm shift from exclusive Congressional power to direct grant of taxing power to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 29. The fundamental law did not intend the direct grant to local government units to be absolute and unconditional, the constitutional objective obviously is to ensure that, while local government units are being strengthened and made more autonomous, the legislature must still see to it that: a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; b. each local government unit will have its fair share of available resources; c. the resources of the national government will be unduly disturbed; and d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999) 30. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all taxes. Indeed, the grant of taxing powers to local government units under the Local Government Code does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.(Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001) 31. When Congress approved a provision that, Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither

apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. (Underscoring supplied) there was no intention for it to operate as a blanket tax exemption to all telecommunications entities.Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxation, it was held that said provisions cannot be considered as extending its application to franchises such as that of PLDT. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001) 32. When an item of income is taxed in the Philippines and the same income is taxed in another country, this would be known as international juridical double taxationwhich is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999) 33. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005) 34. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has exceeded its authority in including provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%; deleting entirely the no pass-on provisions found in both the House and Senate Bills; inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added tax. Thus, there was a violation of the constitutional mandate that revenue bills shall originate exclusively from the House of Representatives. Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ? Explain briefly. SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and modifications made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation. The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Philippine Judges Association v. Pardo, G. R. No. 105371, November 11, 1993, 227 SCRA 703; Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235SCRA 630] 35. The VAT is assailed as being regressive and therefore violative of the mandate to evolve a progressive system of taxation. Do you agree ? Explain your answer. SUGGESTED ANSWER: No. The VAT does not violate the progressive system of taxation.The mandate to Congress is not to prescribe but to evolve a progressive system of taxation.Otherwise, sales taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of the constitutional provision. Sales taxes are also regressive. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]

CONSTITUTIONAL TAX EXEMPTIONS

1. What constitutional exemptions are enjoyed by real property ? SUGGESTED ANSWER: Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements that are actually, directly and exclusively used for religious, charitable or educational purposes are exempt from taxation. [Sec.28 (3) Article VI, 1987 Constitution]

2. The above constitutional tax exemptions refer only to real property that are actually, directly and exclusively used for religious, charitable or educational purposes, and that the only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, nonstock educational institutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83) The constitutional tax exemption covers property taxes only. What is exempted is not the institution itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citing Justice Davide) 3. The 1935 Constitution stated that the lands, buildings, and improvements are used exclusively but the present Constitution requires that the lands, buildings and improvements are actually, directly and exclusively used. The change should not be ignored. Reliance on past decisions would have sufficed were the words actually as well as :directly are not added. There must be proof therefore of the actual and direct use to be exem pt from taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citing Province of Abra v. Hernando, 107 SCRA 105) 4. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation,. The words dominant use or principal use cannot be substituted for the words used exclusively without doing violence to the Constitution and the law. Solely is synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 5. Portions of the land of a charitable institution, such as a hospital, leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from real property taxes. On the other hand, the portion of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 6. Distinction between Lung Center and City Assessor of Cebu. The ruling in City Assessor of Cebu v. Association of Benevola de Cebu, Inc.., G. R. No. 152904, June 8, 2007was not an interpretation of tax exemption. Furthermore, the doctors offices in City Assessor of Cebu were exclusively used by doctors duly accredited with the hospital. No such showing was made in Lung Center. 7. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government. So long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) 8. All revenues and assets of non-stock, non-profit educational institutions that are actually, directly and exclusively used for educational purposes shall be exempt from taxation. 9.. Revenues and assets of proprietary educational institutions, including those which are cooperatively owned, may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions for reinvestments. There is no law at the present which grants exemptions, other the exemptions granted to cooperatives. 10. The NIRC recognizes the exemption from tax of the incomes of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, as well as clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes where no part of the net income inures to the benefit of any private stockholder or member.

11. The tax exemption so recognized does not flow to income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, which shall be subject to income taxes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

OTHER CONCEPTS:
1. What is a tax amnesty ? SUGGESTED ANSWER: A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. (Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001) 2. The purpose of tax amnesty is to a. give tax evaders who wish to relent a chance to start a clean slate, and to b. give the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000) c. To improve tax collection. 3. Distinguish tax amnesty from tax exemption. SUGGESTED ANSWER: a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption is an immunity from civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365) b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda,supra) WHILE tax exemption has prospective application. 4. Define tax avoidance and tax evasion. SUGGESTED ANSWER: Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal means to escape the payment of taxes. 5. Tax evasion connotes the integration of three factors: a. the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; b. an accompanying state of mind which is described as being evil on bad faith, willful, or deliberate and not accidental; and c. a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004) 6. What are the reasons why national taxes cannot be the subject of compensation and set-off with debts ? SUGGESTED ANSWER: a. The lifeblood theory; b. Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of which the personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622) c. The government and the taxpayer are not mutually creditors and debtors of each other and a claim for taxes is no such debt, demand, contract or judgment as is allowed to be set-off. (Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA 726, 756) 7. Compensation takes place by operation of law, where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable, in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443) 8. In case of a tax overpayment, where the BIRs obligation to refund or set-off arises from the moment the tax was paid under the principle of solutio indebeti.(Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364) 9. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held that in order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first

show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. 10. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases, citing Maceda v. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217) 11. Acesite is the owner and operator of restaurant which caters to the patrons of a casino operated by PAGCOR within its premises. it billed PAGCOR for the cost of the food and beverages consumed by the PAGCORs patrons as well as the lease of the premises plus the VAT on these items. PAGCOR paid Acesite minus the VAT claiming exemption while Acesite, in order to avoid legal implications, paid the P30 million tax and applied for a refund on the ground of solutio indebeti. Acesite cites the tax exemption grant in PAGCORs franchise as follows: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income, or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association (s), agency (cies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino (s) authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator. (emphasis supplied) The BIR denied the claim on the ground that PAGCOR is exempt only from direct taxes and not from indirect taxes so Acesite may not avail of the exemption. Is this correct ? SUGGESTED ANSWER: No. As the law is worded the exemption flows to Acesite. The law is clear that the exemption extends the exemption to entities or individuals dealing with PAGCOR.(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007) 12. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron Corporation, which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which provides that petroleum products are exempt from excise taxes when sold to Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads: Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control. Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which

upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer. SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons: a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)] b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from all taxes granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPCs charter, is so couched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the details covered by NPCs exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPCs amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from all forms of taxes, duties[,] fees The use of the phrase all forms of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction.(Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008)

NATIONAL INTERNAL REVENUE CODE

INCOME TAXATION
1. Is a Commissioner of Internal Revenue liable for damages with respect to a ruling she issued, without notice, that had adverse effects against a taxpayer ? SUGGESTED ANSWER: Yes. A public officer who directly or indirectly violates the constitutional rights of another, may be validly sued for damages under Article 32 of the Civil Code even if his acts were not so tainted with malice or bad faith. (Vinzons-Chato v. Fortune Tobacco Corporation, G. R. No. 141309, June 19, 2007 citing Cojuangco, Jr. v. Court of Appeals, G.R. No. 119398, July 2, 1999, 309 SCRA 602, 604) Thus, the rule in this jurisdiction is that a public officer may be validly sued in his/her private capacity for acts done in the course of the performance of the functions of the office, where said

public officer: (1) acted with malice, bad faith, or negligence; or (2) where the public officer violated a constitutional right of the plaintiff. (Ibid.) 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held, citing Mertens, that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. 3. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: 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. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436) 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. (Ibid.) 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) 4. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 5. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income.(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999) 6. An insolvent debtor does not realize taxable income from the cancellation or forgiveness.(Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th) 7. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289) 8. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 9. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 10. What are the requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services ? SUGGESTED ANSWER: a. the expense must be ordinary and necessary; b. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. c. it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) 11. TMG Corporation using the accrual method of accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Since the bills for legal and auditing services were received only in 2006 and paid in the same year, TMG deducted the same from its 2006 gross income. The BIR disallowed the deduction ? Who is correct, TMG or BIR ? Explain.

SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007) 12. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished, granted or paid by the employer to the employee, except rank and file employees. [1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] 13. What is meant by fringe benefit for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees), such as but not limited to: a. Housing; b. Expense account; c. Vehicle of any kind; d. Household personnel, such as maid, driver and others; e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Educational assistance to the employee or his dependents; and j. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98] 14. What fringe benefits are not subject to the fringe benefits tax ? SUGGESTED ANSWER: Fringe benefits that are not subject to the fringe benefits tax: a. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer; or b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98] c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law; d. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; e. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1stpar., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98] 15. What is meant by de minimis benefits ? SUGGESTED ANSWER: De minimis benefits are facilities and privileges (such as entertainment, medical services, or so-called courtesy discounts on purchases), furnished or offered by an employer to his employees. They are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 16. What are the de minimis benefits not subject to withholding tax for both managerial and rank and file employees ? SUGGESTED ANSWER: The following shall be considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees: a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;

b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00; d. Uniforms and clothing allowance not exceeding P3,000.00 per annum; e. Actual yearly medical benefits not exceeding P10,000.00 per annum; f. Laundry allowance not exceeding P300 per month; g. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible persona property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees; h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of other benefits provided under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 17. What is meant by income subject to final tax ? SUGGESTED ANSWER: Income subject to final tax refers to an income collected through the withholding tax system. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. 18. Disinguish exclusions from deductions. SUGGESTED ANSWER: Exclusions distinguished from deductions: a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayers taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. b. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. c. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. An example of an exclusion from gross income are life insurance proceeds, and an example of a deduction are losses. 19. What proceeds are excluded from gross income ? SUGGESTED ANSWER: The following are excluded from gross income: a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon surrender of the contract. c. Value of property acquired by gift, bequest, devise, or descent.

d. Amounts received, through accident or health insurance or Workmens Compensation Acts as compensation for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. e. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts received for beyond control separation. Foreign social security, retirement gratuities, pensions, etc.USVA benefits, SSS benefits and GSIS benefits. 20. What conditions must be present in order to exclude retirement benefits from gross income ? SUGGESTED ANSWER: Conditions for excluding retirement benefits from gross income, hence tax-exempt: a. Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with the employers reasonable private benefit plan approved by the BIR. b. Retiring official or employee 1) In the service of the same employer for at least ten (10) years; 2) Not less than fifty (50) years of age at time of retirement; 3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98] 21. What kind of separation pay is excluded from gross income ? SUGGESTED ANSWER: Separation (retirement) pay excluded from gross income, hence taxexempt: a. Any amount received by an official, employee or by his heirs, b. From the employer c. As a consequence of separation of such official or employee from the service of the employer because of 1) Death, sickness or other physical disability; or 2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of business.[1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98] 22. What prizes are excluded from gross income ? SUGGESTED ANSWER: Prizes that are excluded from gross income, hence not taxable: a. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if 1) The recipient was selected without any action on his part to enter the contest or proceeding; and 2) The recipient is not required to render substantial future services as a condition to receiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997] b. All prizes and awards 1) Granted to athletes 2) In local and international sports tournaments and competitions 3) Whether held in the Philippines or abroad, and 4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d}, NIRC of 1997], which per BIR ruling is accreditation with the Philippine Olympic Committee. Note that the exemption refers only to amateur sports. For professional boxing, a special law grants the exemption not the NIRC. 23. Who are allowed to deduct the optional standard deduction ?

SUGGESTED ANSWER: Only resident citizens and resident alien individuals are allowed to deduct the optional standard deduction on their gross income other than passive or compensation income. Nonresident individuals, estates, trusts or corporations are not allowed to avail of this deduction. 24. What is the optional standard deduction ? Sec. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Section (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1) there shall be allowed the following deductions from gross income: (A) Expenses. x x x (L) Optional Standard Deduction. In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall irrevocable for the taxable year for which the return is made. Provided, That an individual who is entitled to an claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits the said individual shall keep such records pertaining to this gross sales or gross receipts, or the said corporation shall keep such records pertaining to this gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (Sec. 34, NIRC of 1997 as amended by R.A. No. 9504) (M) x x x. 25. What are the allowed itemized deductions from gross income ? SUGGESTED ANSWER: Itemized deductions from gross income: a. Ordinary and necessary trade, business or professional expenses. b. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. c. Taxes paid or incurred within the taxable year in connection with the taxpayers profession. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this

expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within the taxable year, connected with profession, trade or business, not sustained between related parties. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural resource. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed

to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business,on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes from within may also deduct this expense.Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 26. What are extraordinary deductions ? SUGGESTED ANSWER: Extraordinary deductions a. Those allowed to insurance companies b. Deductions allowed to estates and trusts availing of itemized deductions of income currently distributed to beneficiaries. c. Losses from wash sales of stocks or securities. d. Certain capital losses but only from capital gains. 27. What are ordinary expenses ? SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. Necessary expenses are those which are appropriate or helpful to the business. 28. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. Compliance with the business test: 1) Must be ordinary and necessary; 2) Must be paid or incurred within the taxable year; 3) Must be paid or incurred in carrying on a trade or business. 4) Must not be bribes, kickbacks or other illegal expenditures b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by law including compliance with the business test. 29. What kind of advertising expenses are not deductible ? Why ? SUGGESTED ANSWER: Advertising expenses not designed to stimulate the future sale of merchandise are not deductible These are expenditures in order to create or maintain some form of goodwill. These expenditures are to be spread over a reasonable period of time because they are

considered that a capital asset which has a determinable life has been acquired. (General Foods [Phils.], Inc. v. Commissioner of Internal Revenue, CTA Case No. 4386, February 8, 1994) 30. What kind of advertising expenses are considered as capital investments ? SUGGESTED ANSWER: Expenses incurred to create a favorable image for the corporation to generate sales of its shares of stock constitute capital investment because the particular advertising expense was incurred in relation to the capital asset or equity of the company(Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 102 SCRA 246), and are to be capitalized or spread over a reasonable period. 31. Entertainment, Amusement and Recreation Expenses, include representation expenses and/or depreciation or rental expense relating to entertainment facilities. (1st par., Sec. 2, Rev. Regs. 1102002) 32. Representation expenses, shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. (2nd par., Sec. 2, Rev. Regs. 102002) Representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations. (Ibid.) 33. Club dues, when fringe benefits and when representation expenses. In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the taxpayer, there shall be a presumption that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are actually representation expenses. For purpose of proving that the said expense is a representation expense and not fringe benefits, the taxpayer should maintain receipts and adequate records that indicate a) the amount of expense b) date and place of expense c) purpose of expense d) professional or business relationship of expense d) professional or business relationship of expense e) name of person and company entertained with con-tact details. (2nd par., Sec. 2, Rev. Regs. 102002) 34. Dues paid by company officers to any one club deductible by employer as business expense but not as representation or entertainment: a. Dues paid to any one social, athletic, or sporting club or organization per officer may be deductible as a business expense. However, purchase of proprietary shares and playing rights and expenses in the said club or organization may be deductible only if said expense complies with the rules on substantiation. Dues on company membership constitute deductible expense. (No. 3.4.2, RAMO No. 1-87) b. Dues or fees paid to professional or business organizations and civic clubs such as Lions, Rotary, Kiwanis shall be deductible to the employer to the extent of one club. (No. 3.4.3, RAMO No. 1-87) The above provisions of RAMO No. 1-87 are to be read in relation to the provisions of Rev. Regs. No. 10-2002. If considered as a fringe benefit subject to the fringe benefits tax under Sec. 33, NIRC of 1997, may be deductible from the employer's gross income. 35. Entertainment facilities shall refer to (1) a yacht, vacation home or condominium; and 2)any similar item of real or personal property used by the taxpayer primarily for the entertainment, amusement, or recreation of guests or employees. To be considered an entertainment facility, such yacht, vacation home or condominium, or item of real or personal property must be owned or form part of the taxpayers trade, business or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or rental expense. A yacht shall be considered an entertainment facility if its use is in fact not restricted to specified officers or employees or positions in such a

manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax. (4th par., Sec. 2, Rev. Regs. 10-2002) 36. Guests shall mean persons or entities with which the taxpayer has direct business relations, such as but not limited to, clients/customers or prospective clients/customers. The term shall not include employees, officers, partners, directors, stockholders, or trustees of the taxpayer. (last par., Sec. 2, Rev. Regs. No. 10-2002) 37. What expenses are not considered as entertainment, amusement and recreational expenses ? SUGGESTED ANSWER: a. Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship; b. Expenses for charitable or fund raising events; c. Expenses for bona fide business meeting of stock-holders, partners or directors; d. Expenses for attending or sponsoring an employee to a business league or professional organizational meeting; e. Expenses organized for promotion, marketing and advertising including concerts, conferences, seminars, workshops, conventions, and other similar events; f. Other expenses of similar nature. Notwithstanding the foregoing such items of exclusions may, nonetheless qualify as items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for deductibility stated therein. (Sec. 3, Rev. Regs. No. 10-2002) 38. Reimbursements for expenses relating to entertainment shall be deductible by the employer if a. Used primarily for the furtherance of employers trade or business b. Only to the extent allowable, the same is directly related to the active conduct of the employers trade or business and c. Subject to the rule of substantiation.. (No. 3.4.1, RAMO No. 1-87) If considered as a fringe benefit subject to the fringe benefits tax under Sec. 33, NIRC of 1997, may be deductible from the employer's gross income. Refer to previous discussion for limitations. 39. Representation expenses fall under the category of business expenses which are allowable deductions, if they are ordinary and necessary; paid or incurred in carrying on a trade or business; and they are reasonable. (Zamora v. Col. of Int. Revenue, 8 SCRA 163 cited in Paramount Insurance Corporation v. Commissioner of Internal Revenue, CTA Case No. 4844,. June 7, 1996) If treated as a fringe benefit, subject to the fringe benefits tax under Sec. 33, NIRC of 1997, it may be allowed as a deduction from the employer's gross income. 40. Representation expenses not supported by official receipts should be disallowed. Mere receipts when signed by the company officers themselves are not sufficient, for while they may show that they received the amount from the company, they do not prove payment of the alleged representation expenses to the entity in which the same were incurred.Furthermore, the absence of invoices receipts or vouchers, particularly lack of proof of the items constituting the expense is fatal to the allowance of the deduction. (Paramount Insurance Corporation v. Commissioner of Internal Revenue, CTA Case No. 4844, June 7, 1996 citing Collector of Internal Revenue v. Goodrich Int. Rubber Co., 21 SCRA 1336 and Gancayco v. Collector of Internal Revenue, 1 SCRA 980) 41. What are the requisites for deductibility of an entertainment, amusement and recreation expense ? SUGGESTED ANSWER: a. It must be a reasonable allowance for entertainment, amusement and recreation expenses [Sec. 34 (A) (1) (iv), NIRC of 1997]; b. It must be paid or incurred during the taxable year; c. It must be 1) directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or 2) directly related to or in furtherance of the conduct of its trade, business or exercise of a profession;

d. It must not be contrary to law, morals, good customs, public policy or public order; e. It must not have been paid, directly or indirectly, to an official or employee of the national government, or any local government unit, or of any government-owned or controlled corporation (GOCC), or of a foreign government, or to a private individual, or corporation, or general professional partnership (GPP), or a similar entity, if it constitutes a bribe, kickback or other similar payment; f. It must be duly substantiated by adequate proof. The official receipts, or invoices, or bills or statements of accounts should be in the name of the taxpayer claiming the deduction; and g. The appropriate amount of withholding tax, if applicable, should have withheld therefrom and paid to the Bureau of Internal Revenue. (Sec. 4, Rev. Regs. No. 10-2002) i. It must conform to the following ceilings: 1) in an amount equivalent to the actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer, 2) but in no case shall such deduction exceed 0.50 percent (.5%) of net sales (i.e. gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 3) 1.00 percent (1%) of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties. 4) However, if the taxpayer is deriving income from both sale of goods/properties and services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the maximum percentage ceiling. (Sec. 5, Ibid.) 42. Who are allowed to deduct entertainment, amusement and recreation expenses ? a. Individuals engaged in trade or business, including taxable estates and trusts; b. Individuals engaged in the practice of profession; c. Domestic corporations; d. Resident foreign corporations; e. General professional partnerships. 43. Are dividends or interests on preferred shares deductible from gross income ? SUGGESTED ANSWER: Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or interests paid thereon are not allowed as deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71) 44. In addition to the expenses allowable as deductions a private educational institution, may at its option elect either: a. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or b. To deduct allowance for depreciation thereof. [Sec. 34 (A) (2), NIRC of 1997] 45. Financial statements audited by in dependent external auditors constitute the normal method of proof of the profit and loss performance of a company. A comparative statement of revenue and expenses for two years, by itself, is not conclusive proof of serious business losses. (Bogo-Medellin Sugarcane Planters Association, Inc. v. NLRC, et al., 296 SCRA 108, 121) 46. Define bad debts. SUGGESTED ANSWER: Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 599) 47. What are the requisites for a valid deduction of bad debts from gross income ? SUGGESTED ANSWER: a. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; b. The same must be connected with the taxpayers trade, business or practice of profession; c. The same must not be sustained in a transaction entered into between related parties;

d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and e. The debt must be actually ascertained to be worthless and uncollectible during the taxable year; f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667] g. Must have been reported as receivables in the income tax return of the current or prior years. (Sec. 103, Rev. Regs. No. 2) 48. Who are related parties ? SUGGESTED ANSWER: The following are related parties: a. Members of the same family. The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; b. A corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual; d. A grantor and a fiduciary of any trust; or e. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997] 49. May the value of worthless securities be deductible from gross income ? SUGGESTED ANSWER: The value of worthless securities are not allowed to be deductible from gross income because they are considered as capital losses and may be deducted only from capital gains. 50. What is the tax benefit rule ? SUGGESTED ANSWER: 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 taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction. 51. What is depreciation ? SUGGESTED ANSWER: Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. 52. What are the methods of depreciation ? SUGGESTED ANSWER: The methods of depreciation are the following: a. Straight line method; b. Declining balance method; c. Sum of years digits method; and d. Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1) Apportionment to units of production; 2) Hours of productive use; 3) Revaluation method; and 4) sinking fund method. : 53. What are personal and additional exemptions ? SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by

Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion,38 Phil. 414, 418 (1918)] 54. What are the personal exemptions allowed for an individual taxpayer ? SUGGESTED ANSWER: Fifty thousand pesos (P50,000) for each individual taxpayer. [NIRC of 1997, Sec. 55 (A) 1stpar., as amended by R.A. No. 9504) In the case of married individuals where only one of the spouse is deriving gross income, only such spouse shall be allowed the personal exemption. [NIRC of 1997, Sec. 55 (A) 2ndpar., as amended by R.A. No. 9504) (B) Additional Exemption for Dependents. There shall be allowed an additional exemption of Twenty-five thousand pesos (P25,000) for each dependent not exceeding four (4). The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this Subsection, a dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twentyone (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. x x x (Sec. 35, NIRC of 1997, as amended by R.A. No. 9504)

CAPITAL GAINS TAXATION

1. What are capital assets ? Explain. SUGGESTED ANSWER: Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003) The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE: a. Stock in trade of the taxpayer, or b. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or c. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or d. Property used in the trade or business, of a character which is subject to the allowance for depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003] 2. Give some examples of capital assets SUGGESTED ANSWER: a. Stock and securities held by taxpayers other than dealers in securities; b. Jewelry not used for trade and business; c. Residential houses and lands owned and used as such; d. Automobiles not used in trade and business; e. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business;

f. Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968) g. Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore considered as capital asset. (last sentence, 3rdpar., Sec. 3.b, Rev. Regs. No. 7-2003) h. Real property, whether single detached, townhouse, or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003) 3. What are considered as ordinary assets ? SUGGESTED ANSWER: Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets, namely: a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year; or b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e. buildings and/or improvements), of a character which is subject to the allowance for depreciation; or d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003) 4.. Give some examples of ordinary assets hence not capital assets. SUGGESTED ANSWER: a. The machinery and equipment of a manufacturing concern subject to depreciation; b. The tractors, trailers and trucks of a hauling company; c. The condominium building owned by a realty company the units of which are for rent or for sale; d. The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture factory; e. Inherited parcels of land of substantial areas located in the heart of Metro Manila, which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable ; the employment of an attorney-in-fact for the purpose of developing, managing, administering and selling the lots; sales made with frequency and continuity; annual sales income from the sales was considerable; and the heir was not a stranger to the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170) f. Inherited agricultural property improved by introduction of good roads, concrete gutters, drainage and lighting systems converts the property to an ordinary asset. The property forms part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672) g. Real properties acquired by banks through foreclosure sales are considered their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the applicable rate of withholding tax. (Sec. 2. b, Rev. Regs. No. 7-2003) A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond the taxpayers control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of the property change its character previously established as a business property. (last sentence, Sec. 3.a.4, Rev. Regs. No. 7-2003) 5. Factors considered as helpful guides in determining whether asset is ordinary or capital: a. The purpose for which the property was initially acquired; b. The purpose for which the property was subsequently held; c. The extent to which the improvements, if any, were made by the taxpayer; d. The frequency, number and continuity of sales; e. The extent and nature of the transactions involved; f. The ordinary business of the taxpayer;

g. The extent of advertising, promotion, or other activities used in soliciting buyers for the sale of the property; h. The listing of property, with brokers; and i. The purpose for which the property was held at the time of sale. [Elumba, et al. v. The Honorable Commissioner of Internal Revenue, CTA Case No. 5103, August 16, 1996; Klarkowski, TCM 1965328, affirmed 385 F. 2d (CA-7, 1967)] j. Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the application rate of withholding tax imposed under Revenue Regulations. (last par., Sec. 2.b, Rev. Regs. No. 7-2003) 6. What is the tax treatment of real properties that have been transferred ? SUGGESTED ANSSWER: Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: a. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. b. Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. c. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003) 7. Monetary consideration or the presence or absence of profit in the operation of the property is not significant in the characterization of the property. So long as the property is or has been used for business purposes, whether for the benefit of the owner or nay of its members or stockholders, it shall be considered as an ordinary asset. (1st and 2ndsentences, 3rd par., Sec. 3.b., Rev. Regs. No. 7-2003) 8. Taxpayers engaged in the real estate business shall refer collectively to real estate dealers, real estate developers, and/or real estate lessors. (Sec. 2.g, Rev. Regs. No. 7-2003) 9. The term taxpayers not engaged in the real estate business shall refer to persons other than real estate dealers, real estate developers and/or real estate lessors. A taxpayerwhose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to been engaged in the real estate business. (Sec. 2.g, Rev. Regs. No. 7-2003) 10. The tax is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real property as having the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 7-2003) 11. What transactions are covered by the presumed capital gains tax on real property ? SUGGESTED ANSWER: a. sale, b. exchange, c. or other disposition, including pacto de retro sales and other forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied]

d. Sale, exchange, or other disposition includes taking by the government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) 12. A final withholding tax (FWT) of 20% on passive income is collected from the interest income of banks. It likewise has to pay a 5% gross receipts tax (GRT) on gross receipts which includes their passive income. XYZ Bank now claims that the GRT should be computed after deducting the 20% passive income tax on the ground that the monies or receipts that do not redound to the benefit of the taxpayer are not part of its gross receipts. To impose the GRT without deducting the 20% would be double taxation. It also contends that since the 20% was withheld at source and is paid directly to the government, then the bank has not received the same. Thus, it should not be included in the gross receipts subject to tax. Resolve the issue of whether the 20% FWT on the banks passive income form part of the taxable gross receipts for the purpose of computing the 5% GRT. SUGGESTED ANSWER: No. The word gross must be used in its plain and ordinary meaning.It is defined as whole, entire, total, without deduction. Thus, the 20% should not be deducted for purposes of computing the 5% gross receipts tax. Receipt may either be actual or constructive. There is prior to the withholding a constructive receipt of the interest, otherwise there would be no interest from where the 20% tax may be withheld from. There is no double taxation because there are two kinds of taxes, the 20% FWT which is an income tax and the 5% GRT which is a percentage tax. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case) 13. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. On May 22, 1987, it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. On June 23, 1999, the BSP authorized MBC to operate as a thrift bank. In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). It sought the BIRs ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIRs inaction, MBC filed a petition for review with the CTA. The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not close its business operations in 1987 but merely suspended the same. Even if placed under receivership, the corporate existence was never affected. Thus, it falls under the category of an existing corporation recommencing its banking operations. Should the refund be granted ? SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations.[Sec. 27 (E) (1), NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 4-95) Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it.(Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) 14. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]

15. In case of non-redemption of the property sold upon a foreclosure of mortgage sale, the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99] 16. Real properties acquired by banks through foreclosure sales are considered as their ordinary assets. However, banks shall not be considered as habitually engaged in the real estate business for purposes of determining the application rate of withholding tax imposed under Revenue Regulations. (last par., Sec. 2.b, Rev. Regs. No. 7-2003) 17. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a. gross selling price, or b. the current fair market value as determined below: 1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors; or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] 18. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 19. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or other dispositions of real property, classified as capital assets, to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined, at the option of the taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] 20. The interest at the legal rate on the value of expropriated land should be taxed as ordinary income, and not as capital gains. (Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) 21. The seller of the real property, classified as a capital asset, pays the presumed capital gains tax whether: a. an individual [Sec. 24 (D) (1), NIRC of 1997]; 1) Citizen, whether resident or not [Ibid.]; 2) Resident alien [Ibid.]; 3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; 4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; b. an estate or trust (Ibid.); c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997] 22. The proceeds of sale of real property, classified as capital assets, by foreign corporations shall be subject to ordinary income taxation of whichever is higher between the reduced rate of 32% and the minimum corporate income tax [Sec. 28 (A) (1) (2) in relation to Sec. 27 (E), both of the NIRC of 1997] 23. In the instances where non-resident aliens are qualified to own real property in the Philippines (like condominium units, or buildings, or other immovables as defined under Art. 415 of Rep. Act No. 386, the Civil Code of the Philippines), and these are considered as capital in character, they are to be subject to tax in the same manner as citizens and resident aliens. [Sec. 25 (A) (3) and Sec. 25 (B) in relation to Sec. 24 (D), all of the NIRC of 1997] 24. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence; b. within eighteen (18) calendar months from the date of sale or disposition

c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and d. the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997] 25. Net loss carry-over means the deduction from net capital gains of a succeeding year the net capital loss suffered during the prior year. Net operating loss carry-over is the deduction from gross income for the next three (3) consecutive taxable years following the year of such loss, the excess of allowable deduction over the gross income. (Sec. 39 [D], NIRC of 1997) 26. Distinctions between net loss carry-over and net operating loss carry-over. a. Source: The source of net loss carry-over are capital losses only WHILE the source of net operating loss carry-over are from the ordinary trade and business of the taxpayer. b. Who may enjoy the carry-over: Only taxpayers other than corporations may enjoy net loss carryover WHILE only corporations may enjoy the net operating loss carry-over. (Sec. 39 [D], NIRC of 1997) 27. Concept of net loss carry-over. Any taxpayer, other than a corporation (individuals including trusts and estates), who sustains in any taxable year a net capital loss from capital transactions involving capital assets (other than real property or shares of stock not listed or traded in the stock exchange), is allowed to treat during the succeeding year such net capital loss as a loss from the sale or exchange of a capital asset (other than real property or shares of stock not listed and traded in the stock exchange), held for more than twelve months. (Sec. 39 [D], NIRC of 1997) 28. The equity investment by a bank in another corporation is capital in character,the loss of which could be deductible only from capital gains, and not from any other income of the taxpayer. (China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, July 19, 2000) 29. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: a. There is a sale or exchange; and b. The thing sold or exchanged is a capital asset. When securities become worthless there is strictly no sale or exchange but the law deems the loss anyway to be a loss from the sale or exchange of capital assets. (China Banking Corporation v. Court of Appeals, et al., G.R. No. 12508, July 19, 2000) 30. Securities, defined for deductibility of bad debts are shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. (Sec. 2.b, Rev. Regs. No. 5-99) 31. General rule: If securities, held as capital asset, are ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall be considered as a loss from the sale or exchange of capital asset made on the last day of such taxable year. The taxpayer, however, has to prove through clear and convincing evidence that the securities are in fact worthless. (Sec. 5, Rev. Regs. No. 5-99) 32. The above rule, however, is not true in the case of banks or trust companies incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits. (Sec. 5, Rev. Regs. No. 5-99) Is a mutual life insurance company which is considered as a cooperative required to register with the Cooperatives Development Authority (CDA) before it could avail of the exemptions from the payment of percentage taxes under Sec. 121 and documentary stamps on policies of insurance or annuities under Sec. 199 both of the BIRC ? ANSWER: No. The Tax Code does not require a mutual life insurance company to register with the CDA in order to enjoy the exemption. Only cooperatives to be formed or organized under the Cooperative Code require registration with the CDA and a mutual life insurance company is not one of them. Finally, not even the Insurance Code requires registration with the CDA. (Republic , etc. v. Sunlife Assurance Company of Canada, G. R. No. 158085, October 14, 2005)

Sec. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) x x x x x x; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. (2) Rates of Tax on Taxable Income of Individuals. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000 . 5% Over P10,000 but not over P30,000 P500 + 10% of excess over P10,000 Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000 Over P70,000 but not over P140,000 . P8,500 + 20% of the excess over P70,000 Over P140,000 but not over P250,000 .. P22,500 + 25% of the excess over P140,000 Over P250,000 but not over P500,000 .. P50,000 + 30% of the excess over P250,000 Over P500,000 .. P125,000 + 32% of the excess over P500,000 For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. x x x. [Sec. 24, NIRC of 1997 as amended by R.A. No. 9504) GG) The term statutory minimum wage shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). [Sec. 22 (GG), NIRC of 1997 as added by R.A. No. 9504] (HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than

the statutory minimum wage in the non-agricultural sector where he/she is assigned. [Sec. 22 (HH), NIRC of 1997, as added by R.A. No. 9504]

TRANSFER TAXES ESTATE TAXES

1. The gross estate for purposes of estate taxation of Filipino citizens, whether residents or nonresidents and resident alien includes the value at the time of his death of all his real property, wherever situated, personal property, whether tangible, intangible or mixed, wherever situated, to the extent of the interest existing therein of the decedent at the time of his death. 2. The gross estate for purposes of estate taxation of non-resident aliens includes the value at the time of his death of all the real property situated in the Philippines, personal property whether tangible, intangible or mixed, situated in the Philippines, to the extent of the interest therein of the decedent at the time of his death. 3. Items deductible from the gross estate of a resident or nonresident Filipino decedent or resident alien decedent: a. Expenses, losses, claims, indebtedness and taxes; b. Property previously taxed; c. Transfers for public use; d. The Family Home up to a value not exceeding P1 million; e. Standard deduction of P1 million; f. Medical expenses not exceeding P500,000.00; g. Amount of exempt retirement received by the heirs under Rep. Act Mo. 4917; h. Net share of the surviving spouse in the conjugal partnership. 4. The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of the estate to his lawful heirs, Similarly, the attorneys fees for a guardian of the property during the decedents lifetime should also be considered as a deductible administration expense. The guardian gives a detailed accounting of decedents property and gives advice as to the proper settlement of the estate, acts which contributed towards the collection of decedents assets and the subsequent settlement of the case. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, March 22, 2000) 5. Judicial expenses are expenses of administration. Administration expenses, as an allowable deduction from gross estate of the decedent for purposes of arriving at the value of the net estate, have been construed to include all expenses essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it. In other words, the expenses must be essential to the proper settlement of the estate. 6. Not deductible are expenditures incurred for the individual benefit of the heirs, devisees or legatees. Thus, in Lorenzo v. Posadas, the Court construed the phrase judicial expenses of the testamentary or intestate proceedings as not including the compensation paid to a trustee of the decedents estate when it appeared that such trustee was appointed for the purpose of managing the decedents real property for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorneys fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206, March 22, 2000) 7. Not every inter-vivos transfer in anticipation of death is considered transfer in contemplation of death for purposes of determining the property to be included in the gross estate of a decedent. 8. To be considered a transfer in contemplation of death the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death [Sec. 85 (B), NIRC of 1997]. It is clear that the properties are not transferred in contemplation of or intended to take effect in possession or enjoyment at or after death.

9. There is no transfer in contemplation of death if there is no showing the transferorretained for his life or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. [Sec. 85 (B), NIRC of 1997] 10. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period. The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al.,273 SCRA 47) 11. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period. The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47) 12. Jose died and his estate taxes were correspondingly paid as shown by a Tax Clearance issued by the BIR to the effect that the taxes due on the transfer of real and personal properties of Jose had been fully paid and said properties may be transferred to his heirs. Subsequently the BIR issued an assessment notice on the ground that there were improper deductions as the claims against the estate were subsequently compromised. As a result, the specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors. In short, is the estate still liable for deficiency estate taxes ? SUGGESTED ANSWER: No. The estate is not liable for deficiency estate taxes. The claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. Reasons: First. There is no law, nor may there be discerned any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construedstrictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. (Dizon, etc., v. Court of Tax Appeals, et al., G.R. No. 140944, April 30, 2008) 13. The approval of the court sitting in probate, or as a settlement tribunal over the estate of the deceased is not a mandatory requirement for the collection of the estate. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. The notices of levy were regularly issued within the prescriptive period. The tax assessment having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)

14. Jose died and his estate taxes were correspondingly paid as shown by a Tax Clearance issued by the BIR to the effect that the taxes due on the transfer of real and personal properties of Jose had been fully paid and said properties may be transferred to his heirs. Subsequently the BIR issued an assessment notice on the ground that there were improper deductions as the claims against the estate were subsequently compromised. As a result, the specific question is whether the actual claims of the aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors. In short, is the estate still liable for deficiency estate taxes ? SUGGESTED ANSWER: No. The estate is not liable for deficiency estate taxes. The claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. Reasons: First. There is no law, nor may there be discerned any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construedstrictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. (Dizon, etc., v. Court of Tax Appeals, et al., G.R. No. 140944, April 30, 2008) 15, When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. 16. For purposes of the donors tax, a stranger is person who is not a: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship.[Sec. 99 (B), NIRC of 1997] 17. The amount of P100,000.00 donated during a calendar year is exempt from donors tax. [Sec. 99 (A), NIRC of 1997] 18. The donation of a prize to an athlete in an international sports tournament held abroad and sanctioned by the national sports association is exempt from donors tax. (Sec. 1, Rep. Act No. 7549) 19. A non-resident citizen or alien is exempt only from the payment of donors taxes if his gifts are made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. 20. A non-resident cirtizen or alien is subject to donors tax where the gift is not made in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or corporation which does not use more than 30% of the donation for administration purposes.

VALUE-ADDED TAX
1. Define value-added tax. SUGGESTED ANSWER: A tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered. 2. Discuss the meaning and scope of value-added tax (VAT). SUGGESTED ANSWER: The value added tax is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate annual sales of articles and / or services, exceeding P1,500,000.00, to his purchase of goods reported and services unless exempt. VAT is computed at the rate of 0% or 12% of the gross selling price of goods or gross

receipts realized from the sale of services. (Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc., et al., v. Tan, etc. and companion cases, 163 SCRA 371, amount and rates supplied) 3. Purposes or objectives of VAT. The VAT system of taxation is a. principally aimed at realizing the system of taxing goods and services, b. simplifying tax administration, and c. make the tax system more equitable, to enable the country to attain economic recovery.(Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc., et al., v. Tan, etc. and companion cases, 163 SCRA 371) 4. What are the characteristics of the Value-Added Tax ? SUGGESTED ANSWER: a. The value- added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (NIRC of 1997, Sec. 105, 2nd sentence) The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer transferee or lessee of the goods, properties or service. The rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable for the VAT. (Rev. Regs. No. 16-2005, Sec. 4.105-2, 2nd, 3rd and last sentences.) b. VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. However, in the case of importation, the importer is the one liable for the VAT.(Rev. Regs. No. 16-2005, Sec. 4.105-2, 1st sentence) 5. The VAT is a tax on consumption. Explain the meaning of consumption as used under the VAT system. Give an example. SUGGESTED ANSWER: Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability x x x" Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Such facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. [Commissioner of Internal Revenue v. American Express G.R. No. 152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007] 6. Who are liable for the value-added tax ? SUGGESTED ANSWER: a. Any person who, in the course of his trade or business, 1) Sells, barters, exchanges or leases goods or properties, or 2) renders services, and b. any person who imports goods xxx However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied) 7. Indirect tax, defined. An indirect tax is imposed upon goods [before] reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.(Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities)

8. VAT is an indirect tax. The VAT being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the endconsumers. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) NOTE: VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or entity that is primarily, directly liable for its payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various authorities} As an indirect tax on services, the VATs main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this country, undertaken in pursuit of a commercial or an economic activity, for a valuable consideration, and not exempt under the Tax Code, other special laws, or any international agreement.(Commissioner, supra citing various cases and authorities) 9. What is the effect of VAT being an indirect tax on exemptions ? If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. REASON: The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005) Illustration: A VAT exempt seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. 10. Service performed by American Express in facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines in behalf of its Hong-Kong based client is subject to VAT. This is so because it meets all the requirements for VAT imposition, as follows: a. It regularly renders in the Philippines the service of facilitating the collection and payment of receivables belonging to a foreign company that is a clearly separate and distinct entity. b. Such service is commercial in nature; carried on over a sustained period of time; on a significant scale with a reasonable degree of frequency; and not at random, fortuitous, or attenuated. c. For this service, it definitely receives consideration in foreign currency that is accounted for in conformity with law. d. It is not an entity exempt under any of our laws or international agreements.(Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005) 11. While the service performed by American Express is subject to VAT it is zero-rated, and BIR Revenue Regulations that alter the legal requirements for zero-rating are ultra vires and invalid. The VAT system uses the destination principle which posits that the goods and services are taxed only in the country where they are consumed, However, the law itself provides for clear exceptions under which the supply of services shall be zero-rated, among which are the following: a. The service is performed in the Philippines; b. The services are within the categories provided for under the Tax Code; and c. It is paid for in acceptable foreign currency of the Bangko Sentral ng Pilipinas. American Express renders assistance to its foreign clients by receiving the bills of service establishments located in the country and forwarding them to their clients abroad. The services are performed or successfully completed upon send to its foreign clients the drafts and bills it has gathered from service establishments here, Its services, having been performed in the Philippines

are therefore also consumed in the Philippines. Thus, its services are exempt from the destination principle and are zero-rated. The BIR could not change the law. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005) 12. Concept of VAT zero-rating. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously charged by suppliers. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005] Under a zero-rating scheme, the sale or exchange of a particular service is completely freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or exchange.The tax paid or withheld is not deducted from the tax base. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases) 13. Situs of taxation of zero-rated VAT services such as facilitating the collection of receivables from credit card members situated in the Philippines and payment to service establishments in the Philippines. The place where the service is rendered determines the jurisdiction (Commissioner of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005 citing [N]o state may tax anything not within its jurisdiction without violating the due process clause of the [C]constitution. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900, January 17, 1936, per Malcolm, J.) to impose the VAT [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the Philippines (2000), p. 93] Performed in the Philippines, the service is necessarily subject to its jurisdiction [Commissioner, supra citing Alejandro, The Law on Taxation (1966 rev. ed.) p. 33], for the State necessarily has to have a substantial connection [Commissioner, supra citing Garner (ed. in chief), Blacks Law Dictionary (8th ed., 1999), p. 1503] to it in order to enforce a zero rate. [Commissioner, supra citing De Leon, The Fundamentals of Taxation (12th ed., 1998), p. 3] The place of payment is immaterial [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the Philippines (2000), p. 93], much less is the place where the output of the service will be further or ultimately used. This is so because the law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. (Commissioner, supra) 14. Various VAT methods and systems. a. Cost deduction method. This is a single-stage tax which is payable only by the original sellers. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo, V.C., The Value Added Tax in the Philippines (First Edition 2000)] This was subsequently modified and a mixture of cost deduction method and tax credit method was used to determine the value-added tax payable. (Ibid.) b. Tax credit method. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zerorated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities]

15. The VAT registration fee imposed on non-VAT enterprises which includes among others, religious sects which sells and distributes religious literature is not violative of religious freedom, although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration fee is thus more of an administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 16. Interpretation of the term In the Course of Trade or Business. VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) 17. Sale of vessels not in the ordinary course of business of NDC. Pursuant to a government program of privatization, NDC, a VAT-registered entity created for the purpose of selling real property, decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines. Is the sale subject to VAT ? SUGGESTED ANSWER: No. The sale is not subject to VAT. In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)]. What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)

18. Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or exchange or goods and services. The VAT is also imposed on certain transactions deemed sales. What are these so-called transactions deemed sales ?SUGGESTED ANSWER: a. Transfer, use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx b. Distribution or transfer to: 1) Shareholders or investors as share in the profits of the VAT- registered person; xxx or 2) Creditors in payment of debt or obligation c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold. d. Retirement from or cessation of business, with respect to all goods on hand, 1) whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement, or cessation, 2) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No. 162005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied] 19. What transactions considered retirement or cessation of business deemed sale subject to VAT ? a. Change of ownership of the business. There is change in the ownership of the business where a single proprietorship incorporates; or 1) the proprietor of a single proprietorship sells his entire business. b. Dissolution of a partnership and creation of a new partnership which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied] 20. Sale of or lease of real properties subject to VAT. Sale of real properties 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. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to VAT. 21. On Jan. 10, 2008, X, a domestic corporation engaged in the real estate business, sold a building for P10,000,000.00. Is the sale subject to the value-added tax (VAT)? If so, how much? Explain. SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X, a domestic corporation engaged in the real estate business. 22. Sale of real property exempt from VAT. The following sales of real properties are exempt from VAT, namely: a. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the Urban and Development Housing Act of 1992 and other related laws, such as RA No. 7835 and RA No. 8763. xxx xxx xxx c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. xxx xxx xxx d. Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after November 1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); provided, further, that such

adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed of to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p),paraphrasing and numbering supplied] 23. VAT on services and lease of properties. a. There shall be levied, assessed, and collected, b. a value-added tax equivalent to ten percent (10%) of gross receipts c. derived from the sale or exchange of services, 1) including the use or lease of properties. d. Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: 1) Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 2) National government deficit as a percentage of GDP of the previous year exceeds one and onehalf percent (1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and numbering supplied] 24. Sale or exchange of services, defined. The term sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: a. construction and service contractors; b. stock, real estate, commercial, customs and immigration brokers; c. lessors of property, whether personal or real; d. persons engaged in warehousing services e. lessors or distributors of cinematographic films; f. persons engaged in milling, processing, manufacturing or repacking goods for others; g. proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie houses; h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; i. dealers in securities; j. lending investors; k. transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; l. common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; m. sales of electricity by generation companies, transmission, and/or distribution companies; n. franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities; o. non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and p. similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1st par., arrangement and numbering supplied] 25. X Corporation rendered technical services through its work engineers to PNB and SSS in the construction of their buildings. The work engineers acted as overseers of X Corporation, rendering their professional services as employees of X corporation. Should X Corporation be subjected to VAT or should it be subjected to tax on the professional services of those employees themselves? Decide the case with reason. SUGGESTED ANSWER: X Corporation is subject to VAT. For reasons refer to no. 16.a, supra,

26. Also included in the phrase sale or exchange of services. a. The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b. The lease or the use of, or the right to use any industrial, commercial or scientific equipment; c. The supply of scientific, technical, industrial or commercial knowledge or information; d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is mentioned in subparagraph (3) hereof; or e. The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person; f. The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project of scheme; g. The lease of motion picture films, film tapes and discs; h. The lease or the use of or the right to use radio, television, satellite transmission and cable television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2nd par.) 27. Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in any output tax. However, the input tax on the purchases of goods, properties or services related to such zerorated sale shall be available as tax credit or refund in accordance with Rev. Regulations No. 162005. (Rev. Regs. No. 16-2005, 1st par.) 28. What is the destination principle the VAT ? SUGGESTED ANSWER: As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. 29. Is there any exception to the destination principle ? SUGGESTED ANSWER: Yes. The law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." 30. Rationale for zero-rating of exports. 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.[Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The Cross Border Doctrine is also known as the destination principle. Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. 31. Zero-rated sale distinguished from exempt transactions: a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax. b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt. c. Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons. 32. Zero-rated sales by VAT-registered persons. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: a. Export sales;

b. Considered export sales under Executive Order No. 224; c. Foreign currency denominated sale; and d. Sales to persons or entities demed tax-exempt under special law or international agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par., paraphrasing supplied) 33. Sale of gold to the Central Bank considered as export sales. As export sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is primarily intended to be enjoyed by the seller, which charges no output VAT but can claim a refund of or a tax credit certificate for the input VAT previously charged to it by suppliers. ( Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005) 34. Sales to ecozone, such as PEZA, considered export-sale. Notably, 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. (Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities) 35. Ecozone, defined. An ECOZONE or a Special Economic Zone has been described as [S]elected areas with highly developed or which have the potential to be developed into agroindustrial, 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. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] 36. Zero-rated sale of service, defined. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax.However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics supplied) 37. Zero-rating is an exception to the destination principle. As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT law itself provides for a clear exception, where the supply of service shall be zero-rated.[Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005] Destination principle: No VAT shall be imposed to form part of the services destined outside of the territorial border of the taxing authority. It is also referred to as Cross Border doctrine. 38. A foreign Consortium composed of BWSC-Denmark, Mitsui Engineering and Shipbuilding Ltd., and Misui and Co., Ltd., which entered into a contract with NAPOCOR for the operation and maintenance of two power barges appointed BWSC-Denmark as its coordination manager. BWSCMI was established as the subcontractor to perform the actual work in the Philippines. The Consortium paid BWSCMI in acceptable foreign exchange and accounted for in accordance with the rules and regulations of the BSP. Through a February 14, 1995 ruling the BIR declared that BWSCMI may choose to register as a VAT persons subject to VAT at zero rate. For 1996, it filed the proper VAT returns showing zero rating. On December 29, 1997, believing that it is covered by Rev. Regs. 5-96, dated February 20, 1996, BWSCMI paid 10% output VAT for the period April-December 1996, through the Voluntary Assessment Program (VAP). On January 7, 1999, BWSCMI was able to obtain a Ruling from the BIR reconfirming that it is subject to VAT at zero-rating. On this basis, BWSCMI applied for a refund of the output VAT it paid. a. Is BWSCMI subject to the 10% VAT or is it zero rated ? SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is subject to the 10% VAT. It is rendering service for the Consortium which is not doing business in the Philippines. Zero-rating finds application only where the recipient of the services are other persons doing business outside of the

Philippines. BWSCMI provides services to the Consortium which by virtue of its contract with NAPOCOR is doing business within the Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007) b. Could it obtain a refund of the VAT it paid through the VAP ? Explain. SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the 10% output VAT it paid thebased on the non-retroactivity of the prejudicial revocation of the BIR Rulings which held that its services are subject to 0% VAT and which BWSCMI invoked in applying for refund of the output VAT. (Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., supra) 39. Service, defined. Service has been defined as the art of doing something useful for a person or company for a fee or useful labor or work rendered or to be rendered another for a fee. [Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005] 40. Output tax, defined. The value-added tax due on the sale or lease or taxable goods, properties or services by any VAT-registered person. 41. Input tax, defined. The VAT due on or paid by a VAT-registered person on importation of good or local purchases of goods or services, including lease or use of properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1st par.) 42. Included in input tax. It shall also include: a. the transitional input tax and b. the presumptive input tax xxx. It includes c. input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing, arrangement and numbering supplied ) 43. The right to credit the input tax is a mere creation of law. Prior to the enactment of multistage sales taxation, the sales taxes paid at every level of distribution are not recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that a person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion for reconsideration) 44. Transitional input tax credits on beginning inventories. Taxpayers who become VATregistered persons upon exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following: a. goods purchased for resale in their present condition; b. materials purchased for further processing, but which have not yet undergone processing; c. goods which have been manufactured by the taxpayer; d. goods in process for sale; or e. goods and supplies for use in the course of the taxpayers trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and numbering supplied] 45. Presumptive input tax credits. Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

As used in this paragraph, the term processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)] 46. VAT-Exempt transactions, defined. a. The sale of goods or properties and/or services and the use or lease of properties that is b. not subject to VAT (output tax) and c. the seller is not allowed any tax credit on VAT (input tax) purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement and numbering supplied] 47. VAT-exempt transactions distinguished from VAT-exempt entities. a. An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or not of the party to the transaction. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005] b. An exempt transaction shall not be the subject of any billing for output VAT but it shall not also be allowed any input tax credits WHILE an exempt party being zero-rated is allowed to claim input tax credits. 48. Exempt transactions. (Subject to the election by a VAT-registered person not to be subject to the value-added tax), the following shall be exempt from VAT: (A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey, Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets. Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams. Meat, fruit, fish, vegetables and other agricultural and marine food Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state. Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above are presumed to be refined sugar. Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar: (1) product of a refining process, (2) products of a sugar refinery, or (3) product of a production line of a sugar mill accredited by the BIR to be producing sugar with polarimeter reading of 99.5o and above, and for which the quedanissued therefor, and verified by the Sugar Regulatory Administration, identifies the same to be of a polarimeter reading of 99.5o and above. Bagasse is not included in the exemption provided for under this section. (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture

of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets); Specialty feeds refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets. (C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines; (D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; (E) Services subject to percentage tax under Title V of the Tax Code, as enumerated below: (1) Sale or lease of goods or properties or the performance of services of non-VAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code, the annual sales and/or receipts of which does not exceed the amount of One Million Five Hundred thousand Pesos (P1,500,000.00), Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO). (Sec. 116, Tax Code) (2) Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages. (Sec. 117) (3) Services rendered by international air/shipping carriers. (Sec. 118) (4) Service rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00) and by franchises of gas and water utilities. (Sec. 119) (5) Service rendered for overseas dispatch message or conversation originating from the Philippines. (Sc. 120) (6) Services rendered by any person, company or corporation (except purely cooperative companies or associations ) doing life insurance business of any sort in the Philippines. (Sec. 123) (7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies. (Sec. 124) (8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions professional basketball games, jai-Alai and race tracks. (Sec. 125). and (9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering. (Sec. 127) (F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; Agricultural contract growers refers to those persons producing for others poultry, livestock or other agricultural and marine food products in their original state. (G) Medical, dental, hospital and veterinary services except those rendered by professionals; Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. (H) Educational services rendered by private educational institutions, duly accredited by theDepartment of Education (DEPED), the Commission on Higher Education (CHED), theTechnical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions; Educational services shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by government educational institutions and it does not include seminars, in-service training, review

classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the TESDA. (I) Services rendered by individuals pursuant to an employer-employee relationship; (J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines; (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and; (L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce; (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority; (N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members; Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT. (O) Export sales by persons who are not VAT-registered; (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, such as RA No. 7835 and RA No. 8765, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P 2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); (Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); (R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; 49. X is engaged in the importation and sale of books and magazines. Is the importation of books and magazines subject to the 10% VAT? Explain. SUGGESTED ANSWER: No. For reasons, refer to no. (R), supra. (S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons and above, including engine and spare parts of said vessels; Provided, further, that the vessels be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessels original commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen years (15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For high-speed passenger cars, the age limit is five (5) years old, Provided, finally, that exemption shall be subject to the provisions of section 4 of Republic Act No. 9295, otherwise known as The Domestic Shipping Development Act of 2004.

(T) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; provided, further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10% VAT (now 12%); (U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000):Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO). For purposes of the threshold of P1,500,000.00, the husband and wife shall be cnsidered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a profesional, aside from the practice ofhis profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall to be icluded in determining the threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied] 50. Tax-exempt may elect to be subject to tax. A VAT-registered person may elect that the tax exemption not apply to its sale of goods or properties or services: Provided, That an election made under shall be irrevocable for a period of three (3) years from the quarter the election was made. (Rev. Regs. No. 16-2005, Sec. 4,109-2, wordings not verbatim) 51. Is there any tax to be paid by persons exempt from VAT. a. Any person, whose sales or receipts are exempt under Sec. 109 (1) (V) of the Tax Code, (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO),from the payment of VAT and b. who is not a VAT-registered person c. shall pay a tax equivalent to three percent (3%) of his gross monthly sales or receipts; Provided, that cooperatives shall be exempt from the three (3%) gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and words in italics supplied) INTERNAL REVENUE TAX RETURNS AND WITHHOLDING 1. Income tax returns being public documents, until controverted by competent evidence, are competent evidence, are prima facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317) 2. A withholding agent is explicitly made personally liable under the Tax Code for the payment of the tax required to be withheld, in order to compel the withholding agent to withhold the tax under any and all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999) The system facilitates tax collection. Sec. 51. Individual Return. (A) Requirements.

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return: (a) x x x; x x x. (2) The following individuals shall not be required to file an income tax return: (a) x x x; (b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: (c) x x x; and (d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special. x x x. (Sec. 51, NIRC of 1997 as amended by R.A. No. 9504) Sec. 79. Income Tax Collected at Source. (A) Requirement of Withholding. Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. x x x. (Sec. 79 (A) , NIRC of 1997, as amended by R.A. No. 9504) 3. A erroneously withheld the amount of 15% from the selling price of books authored by W when the correct rate should have been 10% only. Since W is out of the country, A applied for a refund of the excess withholding of 5%. May A properly apply for the refund ? Explain. SUGGESTED ANSWER: Yes. In applications for refund, the withholding agent is a taxpayer because if he does not pay the tax shall be collected from him. (Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377, 383-386), PENALTIES, INTERESTS AND SURCHARGES 1. Surtax or surcharge, also known as the civil penalties, defined. These are the amounts imposed in addition to the tax required. They are in the nature of penalties and shall be collected at the same time, in the same manner, and as part of the tax. [Sec.248 (A), NIRC of 1997] 2. The two (2) kinds of civil penalties: a. the 25% surcharge for late filing or late payment [Sec. 248 (A), NIRC of 1997] (also known as the delinquency surcharge), and b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B), Ibid.] 3. Deficiency income tax, defined. The amount by which the tax imposed under the NIRC of 1997 exceeds the amount shown as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997]

4. Deficiency interest, defined. The interest assessed and collected on any unpaid amount of tax at the rate of 20% per annum or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997] 5. Delinquency interest, defined. The interest assessed and collected on the unpaid amount until fully paid where there is failure on the part of the taxpayer to pay the amount die on any return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest thereon, on the date appearing in the notice and demand by the Commissioner of Internal Revenue. [Sec.249 (c), NIRC of 1997] 6. Compromise penalty, defined. The amount agreed upon between the taxpayer and the Government to be paid as a penalty in cases of a compromise. 7. After resolving the issues the BIR Commissioner reduced the assessment. Was it proper to impose delinquency interest despite the reduction of the assessment ?Why ? ANSWER: Yes. The intention of the law is to discourage delay in the payment of taxes due to the State and in this sense the surcharge and interest charged are not penal but compensatory in nature they are compensation to the State for the delay in payment, or for the concomitant tuse of the funds by the taxpayer beyond the date he is supposed to have paid them to the State. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006) 8. As a result of divergent rulings on whether it is subject to tax or not, the taxpayer was not able to pay his taxes on time. Imposed surcharges and interests for such delay, the taxpayer not invokes good faith with the BIR countering by saying that good faith is not a valid defense for violation of a special law. Furthermore, the BIR further raises the defense that the government is not bound by the errors of its agents. Who is correct ? ANSWER: The taxpayer is correct. The settled rule is that good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax, are sufficient justification to delete the imposition of surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. R. No. 166786, September 11, 2006)

PRIMUS 2008 ONE-LINERS

TAXATION
VER. 2008.09.10 copyrighted 2008 Prepared by the PRIMUS Board of Consultants
Prof. Abelardo T. Domondon Principal Consultant These Notes in the form of one or two sentences and questions and answers were specially prepared by a Board of Consultants specially commissioned by PRIMUSInformation Center, Inc., for the use of candidates who are going to take the 2008 Bar Examination. They are not as comprehensive as the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste. They are intended to be read during the Pre-Week or before the start of the regular Bar review for any given Bar Examination year. These Notes attempt to second guess the areas where questions may probably be sourced for the 2008 Bar Examination in Taxation. They include enumerations and distinctions, as well digests of some landmark cases, although they go beyond two sentences. They may also serve as memory joggers to help the candidate recall concepts. The reader is advised to concentrate on the One-liners that are in bold letters.Those that are not in bold are mere elucidations of concepts.

The PRIMUS 2008 ONE-LINERS shall be revised regularly to consider latest law and jurisprudence to meet the requirements of future Bar Reviews such that the title shall change from year to year. For the 2009 Bar examination the title shall be PRIMUS 2009ONELINERS which shall be released sometime in September, 2009. The reader is however advised to acquire and read the latest versions of the other PRIMUS publications such as the PRIMUS Bar Star Notes, or the PRIMUS Cut and Paste which contain more detailed information leading to a more comprehensive Bar review. Of course those who intend to take the 2009 Bar examination are encouraged to attend the PRIMUS 2009 Wrap-up Reviews Although primarily for the use of Bar candidates who have attended the PRIMUS 2008 Wrap-up Reviews, the On-Liners may be availed of by other students who are interested in the subject. While available for the free use of all the contents of the PRIMUS 2008ONELINERS are covered by copyright protection and should never be published (whether through printed media or through the internet) without written permission in writing from PRIMUS Information Center, Inc. Downloading and printing into hard copies is allowed only for private use and should not be distributed on a commercial basis.
TARIFF AND CUSTOMS CODE 1. Customs duties defined. Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001) 2. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them. The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004) The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition. 3. What is mean by the term entry in Customs Law ? SUGGESTED ANSWER: It has a triple meaning. a. the documents filed at the Customs house; b. the submission and acceptance of the documents; and c. Customs declaration forms or customs entry forms required to be accomplished by passengers of incoming vessels or passenger planes as envisaged under Sec. 2505 of the TCCP (Failure to declare baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006) 4. A flight stewardess arrived from Singapore. Upon her arrival she was asked whether she has anything to declare. She answered none, and she submitted her Customs Baggage Declaration Form which she accomplished and signed with nothing or written on the space for items to be declared. When her hanger bag was examined some pieces of jewelry were found concealed within the lining of said bag. She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code for unlawful importation which penalizes any person who shall fraudulently import or bring into the Philippines any article contrary to law. She now appeals claiming that lower court erred n convicting her under Sec. 3601 when the facts alleged both in the information and those shown by the prosecution constitute the offense under Sec. 2505 Failure to Declare Baggage, of which she was acquitted. Is she correct ? SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. It merely provides, inter alia,the administrative remedies which can be resorted to by the Bureau of Customs when seizingdutiable articles found the baggage of any person arriving in the Philippines which is not included in the accomplished baggage declaration submitted to the customs authorities, and the administrative penalties that such person must pay for the release of such goods if not imported contrary to law.

Such administrative penalties are independent of the criminal liability for smuggling that may be imposed under Sec. 3601, and other provisions of the TCC which can only be determined after the appropriate criminal proceedings, prescinding from the outcome in any administrative case that may have been filed and disposed of by the customs authorities. Indeed the second paragraph of Sec. 2505 provides that nothing shall prevent the bringing of a criminal action against the offender for smuggling under Section 3601. (Jardeleza v. People,G. R. No. 165265, February 6, 2006) 5. How is smuggling committed ? SUGGESTED ANSWER: Smuggling is committed by any person who: a. fraudulently imports or brings into the country any article contrary to law; b. assists in so doing any article contrary to law; or c. receives, conceals, buys, sells or in any manner facilitates the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. (Jardeleza v. People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296) 6. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus.(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000) What is the rationale for this doctrine ? SUGGESTED ANSWER: a. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455) b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the governments drive, not only to prevent smuggling and other frauds upon Customs, c. but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43) d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or grant was for consideration other than the strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003]) e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place. Where an administrative office has obtained a technical expertise in a specific subject, even the courts must defer to this expertise. 7. A claiming to be the owner of a vessel which is the subject of customs warrant of seizure and detention sought the intercession of the RTC to restrain the Bureau of Customs from interfering with his property rights over the vessel. Would the suit prosper? SUGGESTED ANSWER: No. His remedy was not with the RTC but with the CTA, as issues of ownership of goods in the custody of customs officials are within the power of the CTA to determine. The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial courts are precluded from assuming cognizance over such matters even through petitions for certiorari, prohibition or mandamus. (Commissioner of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) 8. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and

continue with the administrative hearings.(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000) 9. Instances where there is no right of redemption of seized and forfeited articles: a. There is fraud; b. The importation is absolutely prohibited, or c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) 10. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax Appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right. 11. Requisites for forfeiture of imported goods: a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper all touching on the importation or exportation of merchandise. b. the falsity of such declaration, affidavit, invoice, letter or paper; and c. an intention on the part of the importer/consignee to evade the payment of the duties due.(Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001) 12. On January 7, 1989, the vessel M/V Star Ace, coming from Singapore laden with cargo, entered the Port of San Fernando, La Union for needed repairs. When the Bureau of Customs later became suspicious that the vessels real purpose in docking was to smuggle cargo into the country, seizure proceedings were institutedand subsequently two Warrants of Seizure and Detention were issued for the vessel and its cargo. Cesar does not own the vessel or any of its cargo but claimed a preferred maritime lien. Cesar then brought several cases in the RTC to enforce his lien. Would these suits prosper ? SUGGESTED ANSWER: No. The Bureau of Customs having first obtained possession of the vessel and its goods has obtained jurisdiction to the exclusion of the trial courts. When Cesar has impleaded the vessel as a defendant to enforce his alleged maritime lien, in the RTC, he brought an action in rem under the Code of Commerce under which the vessel may be attached and sold. However, the basic operative fact is the actual or constructive possession of the res by the tribunal empowered by law to conduct the proceedings. This means that to acquire jurisdiction over the vessel, as a defendant, the trial court must have obtained either actual or constructive possession over it. Neither was accomplished by the RTC as the vessel was already in the possession of the Bureau of Customs. (Commissioner of Customs v. Court of Appeals, et al.,G. R. Nos. 111202-05, January 31, 2006) 13. What is the concept of assessments under the Tariff and Customs Code ? SUGGESTED ANSWER: Assessments inform taxpayers of their tax liabilities. Under the TCCP, the assessment is in the form of a liquidation made on the face of the import entry return and approved by the Collector of Customs. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008) 14. What is meant by liquidation ? SUGGESTED ANSWER: Liquidation is the final computation and ascertainment by the Collector of Customs of the duties due on imported merchandise based on official reports as to the quantity, character and value thereof, and the Collector of Customs' own finding as to the applicable rate of duty. A liquidation is considered to have been made when the entry is officially stamped liquidated. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008) 15. When assessment or liquidation made by the Bureau of Customs attains finality and conclusiveness. An assessment or liquidation by the Bureau of Customs attains finality and conclusiveness one year from the date of the final payment of duties except when: a. there was fraud;

b. there is a pending protest or c. the liquidation of import entry was merely tentative. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008) 16. Instance when the Bureau of Customs would utilize its remedy of filing a civil suit for collection of taxes. Import duties constitute a personal debt of the importer that must be paid in full. The importers liability therefore constitutes a lien on the article which the government may choose to enforce while the imported articles are either in its custody or under its control. When Bureau of Customs has released the imported goods, its lien over the imported goods was extinguished. Consequently, Bureau of Customs could only enforce the payment ofimport duties in full by filing a case for collection against importer. (Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008) 17. Despite the holding in Pilipinas Shell Petroleum Corporation v. Republic of the Philippines, etc., G. R. No. 161953, March 6, 2008, the distribution of jurisdiction for collection cases involving tariff and customs duties is as follows: a. Basic tax does not exceed P300,000.00 MTC if outside of Metro Manila; does not exceed P400,000.00 MTC if within Metro Manila; b. Basic tax exceeds P300,000 but does not reach P1 million RTC if outside Metro Manila, exceeds P400,000.00 but does not reach P1 million RTC if within Metro Manila; c. Basic tax is P1 million or over, Court of Tax Appeals, Division. Pilipinas Shell ruled that jurisdiction vested upon the RTC because it was interpreting the CTA jurisdiction prior to the amendment of Rep. Act No. 1125. 18. Importation begins when the conveying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. (Sec. 1202, TCCP) The jurisdiction of the Bureau of Customs to enforce the provisions of the TCCP including seizure and forfeiture also begins from the beginning of importation. 19. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at the port of entry and the legal permit for withdrawal shall have been granted. In case the articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP and to make seizures and forfeitures after importation is deemed terminated. 20. The flexible tariff clause is a provision in the Tariff and Customs Code, which implements the constitutionally delegated power to the President of the Philippines, in the interest of national economy, general welfare and/or national security upon recommendation of the NEDA (a) to increase, reduce or remove existing protective rates of import duty, provided that, the increase should not be higher than 100% ad valorem; (b) to establish import quota or to ban imports of any commodity, and (c) to impose additional duty on all imports not exceeding 10% ad valorem, among others. 21. Customs duties defined. Customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001) 22. Special customs duties are additional import duties imposed on specific kinds of imported articles under certain conditions. The special customs duties under the Tariff and Customs Code (TCCP) are the anti-dumping duty, the countervailing duty, the discriminatory duty, and the marking duty, and under the Safeguard Measures Act (SMA) additional tariffs as safeguard measures. 23. The special customs duties are imposed for the protection of consumers and manufacturers, as well as Philippine products. 24. Dumping duty is an additional special duty amounting to the difference between the export price and the normal value of such product, commodity or article (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999.) imposed on the importation of a product, commodity or article of commerce into the Philippines at less than its normal value when destined for domestic consumption in the exporting country which is causing or is threatening

to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999] 25. The anti-dumping duty is imposed a. Where a product, commodity or article of commerce is exported into the Philippines at a price less than its normal value when destined for domestic consumption in the exporting country, b. and such exportation is causing or is threatening to cause material injury to a domestic industry, or materially retards the establishment of a domestic industry producing the like product. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999] 26. Normal value for purposes of imposing the anti-dumping duty is the comparable price at the date of sale of like product, commodity, or article in the ordinary course of trade when destined for consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999] 27. A dumped imported product is any product, commodity or article of commerce introduced into the Philippines at an export price less than its normal value in the ordinary course of trade, for the like product, commodity or article destined for consumption in the exporting country, which is causing or is threatening to cause material injury to a domestic industry, or materially retarding the establishment of a domestic industry producing the like product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999] 28. The imposing authority for the anti-dumping duty is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article,after formal investigation and affirmative finding of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti Dumping Act of 1999] 29. Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999] Thus, the cabinet secretaries could not contravene therecommendation of the Tariff Commission. They could not impose the anti-dumping duty or any special customs duty without the favorable recommendation of the Tariff Commission. 30. In the determination of whether to impose the anti-dumping duty, the Tariff Commission, may consider among others, the effect of imposing an anti-dumping duty on the welfare of the consumers and/or the general public, and other related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999) 31. The amount of anti-dumping duty that may be imposed is the difference between the export price and the normal value of such product, commodity or article. (Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999) The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article thereafter imported to the Philippines under similar circumstances, in addition to ordinary duties, taxes and charges imposed by law on the imported product, commodity or article. 32. Countervailing duties are additional customs duties imposed on any product, commodity or article of commerce which is granted directly or indirectly by the government in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product commodity or article, and the importation of such subsidized product, commodity, or article has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry. (Sec. 302, TCCP as amended by Section 1, R.A. No. 8751) 33. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article,after formal investigation and affirmative finding of the Tariff Commission.

Even when all the requirements for the imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains the prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999) 34. The countervailing duty is equivalent to the value of the specific subsidy. 35. Marking duties are the additional customs duties imposed on foreign articles (or its containers if the article itself cannot be marked), not marked in any official language in the Philippines, in a conspicuous place as legibly, indelibly and permanently in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin. 36. The Commissioner of Customs imposes the marking duty. 37. The marking duty is equivalent to five percent (5%) ad valorem. 38. A discriminatory duty is a new and additional customs duty imposed upon articles wholly or in part the growth or product of, or imported in a vessel, of any foreign country which imposes, directly or indirectly, upon the disposition or transportation in transit through or reexportation from such country of any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulation or limitation which is not equally enforced upon like articles of every foreign country, or discriminates against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. 39. The President of the Philippines imposes the discriminatory duties. 40. Safeguard measures are emergency measures, including tariffs, to protect domestic industries and producers from increased imports which inflict or could inflict serious injury on them. The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguard measures as provided under Rep. Act No. 8800 the Safeguard Measures Act (SMA). (Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004) The DTI Secretary cannot impose the safeguard measures if the Tariff Commission does not favorably recommend its imposition. 41. Imposing authority for safeguard measures. The imposing authority for the countervailing duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretary of Agriculture, in the case of agricultural product, commodity or article, after formal investigation and affirmative finding of the Tariff Commission. 42. Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports. 43. Payment under protest required where additional duties, taxes, fees or other charges are imposed by the Collector otherwise taxpayer could not obtain refund.When a ruling or decision of the collector is made whereby liability for duties, taxes, fees, or other charges are determined, except the fixing of fines in seizure cases, the party adversely affected may protest such ruling or decision a. by presenting to the Collector at the time when payment is made, or within fifteen (15) days thereafter, b. a written protest setting forth his objection to the ruling or decision in question, together with his reasons therefor. No protest shall be considered unless payment of the amount due after final liquidation has first been made and the corresponding docket fee. (Sec. 2308, TCC numbering and arrangement supplied) 44. Protest Exclusive Remedy in Protestable Cases. In all cases subject to protest, the interested party who desires to have the action of the collector reviewed, shall make a protest, otherwise the action of the collector shall be final and conclusive against him.(Sec. 2309, TCC) 45. The basis of dutiable value of merchandise that is subject to ad valorem customs duties the transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are

incurred by the buyer but are not included in the price actually paid or payable for the imported goods, and may include the following: a. Cost of containers and packing, b. Insurance, and c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No. 9135) 46. The above transaction value is the primary method of determining dutiable value. If the transaction value of the imported article could not be determined using the above, the following alternative methods should be used one after the other: a. Transaction value of identical goods b. Transaction value of similar goods c. Deductive method d. Computed method e. Fallback method 47. There is a mistaken belief that claims for refund are governed by the rule on quasicontract of solutio indebeti which prescribes in six (6) years under Article 1145 of the Civil Code. In order for the rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favor of the Collector of Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001) 48. There is no automatic grant of refund. In determining whether Nestle is entitled to refund of alleged overpayment of custom duties, it is necessary to determine exactly how much the Government is entitled to collect as customs duties. Until there is such a determination by the Collector and affirmed or rejected by the Commissioner, then the Court of Tax Appeals does not have jurisdiction. The CTAs jurisdiction under the Tariff and Customs Code is not concurrent with that of the Commissioner of Customs due to the absence of any certification from the Collector of Customs of Manila that such import duties should be refunded. Consequently, the finding by the CTA in another case of overpayment of internal revenue taxes is not necessarily a finding that there was overpayment of customs duties. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001) 49. All claims for refund of duties shall be made in writing and forwarded to the Collector of Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be correct and in accordance with law, shall certify the same to the Commissioner of Customs with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct.(Sec. 1708, TCC) 50. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conduct searches, seizures and forfeitures of contraband without interference from the courts. It could conduct searches and seizures without need of a judicial warrant except if the search is to be conducted in a dwelling place. 51. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored upon the policy of placing no unnecessary hindrance on the governments drive, not only to prevent smuggling and other frauds upon Customs, but more importantly, to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35, 43) 52. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. RTCs are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus.(The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)

53. Regional Trial Courts have no jurisdiction to replevin a property which is subject to seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455) 54. The customs authorities do not have to prove to the satisfaction of the court that the articles on board a vessel were imported from abroad or are intended to be shipped abroad before they may exercise the power to effect customs searches, seizures, or arrests provided by law and continue with the administrative hearings. (The Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March 20, 2000) 55. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article when the imported articles could be found and be subject to seizure and forfeiture. 56. The Tariff and Customs Code allows the Bureau of Customs to resort to the judicial remedy of filing an action in court when the imported articles could not anymore be found. 57. Instances where there is no right of redemption of seized and forfeited articles: a. There is fraud; b. The importation is absolutely prohibited, or c. The release of the property would be contrary to law. (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) 58. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme Court clarified that the fraud contemplated by law must be actual and not constructive. It must be intentional, consisting of deception, willfully and deliberately done or resorted to in order to induce another to give up some right. 59. Fraud must be proved to justify forfeiture. It must be actual, amounting to intentional wrongdoing with the clear purpose of avoiding the tax. Forfeiture is not favored in law nor in equity. Mere negligence is not equivalent to the fraud contemplated by law. An honest mistake, will not deprive the government of its right to collect the proper tax. (Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001) 60. Requisites for forfeiture of imported goods: a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper all touching on the importation or exportation of merchandise. b. the falsity of such declaration, affidavit, invoice, letter or paper; and c. an intention on the part of the importer/consignee to evade the payment of the duties due.(Republic, etc., v. The Court of Appeals, et al., G.R. No. 139050, October 2, 2001) 61. Forfeiture of seized goods in the Bureau of Customs is in the nature of a proceeding in rem, i.e. directed against the res or imported goods and entails a determination of the legality of their importation. In this proceeding, it is in legal contemplation the property itself which commits the violation and is treated as the offender, without reference whatsoever to the character or conduct of the owner. The issue is limited to whether the imported goods should be forfeited and disposed of in accordance with law for violation of the Tariff and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634, January 25, 1999) 62. The one-year prescriptive period for forfeiture proceedings applies only in the absence of fraud. (Commissioner of Customs v. Court of Tax Appeals, et al., G.R. No. 132929, March 27, 2000) 63. The posting of customs guards at the importers warehouse where the imported steel billets were transferred under guard from the customs zone is an indication that the goods were not yet released by the Bureau of Customs to the importer and that importation has not yet been terminated. However, when the Bureau of Customs allowed the processing of the import entry, accepted the payment and issued an order of release such order is sufficient legal permit for withdrawal and importation is then deemed terminated. The goods could not anymore be seized and forfeited

because importation has been validly terminated. (Sandoval-Gutierrez J.Commissioner of Customs v. Milwaukee Industrial Corporation, G. R. No. 135253, December 9, 2004) 64. The Collector of Customs upon probable cause that the articles are imported or exported, or are attempted to be imported or exported, in violation of the tariff and customs laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9-93) If the search and seizure is to be conducted in a dwelling place, then a search warrant should be issued by the regular courts not the Bureau of Customs. There may be instances where no warrants issued by the Bureau of Customs or the regular courts is required, as in search and seizures of motor vehicles and vessels. 65. Smuggled goods seized by virtue of a court warrant should be surrendered to the court that issued the warrant and not to the Bureau of Customs because the goods are in custodia legis.

REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX APPEALS INCLUDING JURISDICTION OF THE CTA, AS AMENDED
1. Why was the Court of Tax Appeals created ? SUGGESTED ANSWER: a. To prevent delay in the disposition of tax cases by the then Courts of First Instance (now RTCs), in view of the backlog of civil, criminal, and cadastral cases accumulating in the dockets of such courts; and b. To have a body with special knowledge which ordinary Judges of the then Courts of First Instance (now RTCs), are not likely to possess, thus providing for an adequate remedy for a speedy determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209;Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931) 2. CTA specialized court. By the very nature of its functions, the CTA is a highly specialized court specifically created for the purpose of reviewing tax and customs cases. it is dedicated exclusively to the study and consideration of revenue-related problems and has necessarily developed an expertise on the subject. (J. Panganiban in Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005, citing various cases in his separate opinion to the decision on the motion for reconsideration) 3. Court of Tax Appeals finding of fact binds the Supreme Court. It is doctrinal that the factual findings of the Court of Tax Appeals, when supported by substantial evidence, will not be disturbed on appeal, unless it is shown that it committed gross error in the appreciation of facts. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007 citing Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, October 14, 1998, 298 SCRA 83, 91 citing Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54909 and 80041, January 22, 1990, 181 SCRA 214, 220;Philippine Refining Company v. Court Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, October 14, 1998, 298 SCRA 83, 91 citing Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54909 and 80041, January 22, 1990, 181 SCRA 214, 220; Philippine Refining Company v. Court of Appeals, G.R. No. 118794, May 8, 1996, 256 SCRA 667, 676) Hence, as a matter of practice and principle, the Supreme Court will not set aside the conclusion reached by the Court of Tax Appeals, especially if affirmed by the Court of Appeals as in the present case. For by the nature of its functions, the tax court dedicates itself to the study and consideration of tax problems and necessarily develops expertise thereon, unless there has been an abuse or improvident exercise of authority on its part. (Ibid. citing Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue, G.R. No. 133834, August 28, 2006, 499 SCRA 664, 669; Commissioner of Internal Revenue v. General Foods (Phils.) Inc., G.R. No. 143672, April 24, 2003, 401 SCRA 545, 553. 4. Court of Tax Appeals is not governed strictly by technical rules of evidence. (Sec. 8, Rep. Act No. 1125) While this may be so rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or

invoices is not mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of the taxpayers claims. (Commissioner of Internal v. Manila Mining Corporation, G. R. No. 153204,August 31, 2005) Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally offered before the CTA. While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves and are primarily intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims. (Dizon, etc., v. Court of Tax Appeals, et al., G.R. No. 140944, April 30, 2008) 5. The legal remedies under the NIRC of 1997 and other laws available to an aggrieved taxpayer may be classified into the tax remedies with respect to: a. assessment; b. collection, and c. refund of internal revenue taxes. The remedies may also be classified into the administrative or the judicial remedies. 6. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to assessment of internal revenue taxes are the following: a. Upon receipt of a pre-assessment notice, the taxpayer shall respond to the same within fifteen (15) days from receipt which is the period provided for by implementing rules and regulations. [3rd par., Sec. 228 (e), NIRC of 1997] b. Upon the issuance of an assessment notice, the taxpayer shall protest administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. c. Within sixty (60) days from the filing of the protest, all relevant supporting documents shall be submitted; otherwise the assessment shall become final. (4th par., Ibid.) 7. The legal remedies under the NIRC of 1997 available to an aggrieved taxpayer at the judicial level with respect to assessment of internal revenue taxes: a. If the protest is denied in whole or in part, or b. is not acted upon within one hundred eighty (180) days from submission of documents, c. the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) day period; otherwise, the decision shall become final, executory and demandable. [last par., Sec. 228 (e), NIRC of 1997] d. On appeal, the taxpayer should apply for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal. e. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. . f. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the government may be appealed to the Supreme Court through a petition for review on certiorari filed with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days only. 8. The legal remedy under the NIRC of 1997 available to an aggrieved taxpayer at the administrative level with respect to refund or recovery of tax erroneously or illegally collected, is to file a claim for refund or credit with the Commissioner of Internal Revenue. (1stpar., Sec. 229, NIRC of 1997) 9. The legal remedy under the NIRC of 1997 at the judicial level with respect torefund or recovery of tax erroneously or illegally collected, is the filing of a suit or proceeding with the Court of Tax Appeals

a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2nd par., Sec. 229, NIRC of 1997;), or b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125) 10. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G.R.No. 82618, March 16, 1989, unrep.) 11. Where the taxpayer is a corporation the two year prescriptive period from date of payment for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) 12. Generally speaking it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the PhilippineIslands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001) 13. Outline of tax remedies of a taxpayer and the government relative to ASSESSMENT of internal revenue taxes. a. The taxpayer files his tax return. b. A Letter of Authority is issued authorizing BIR examiner to audit or examine the tax return and determines whether the full and complete taxes have been paid. c. If the examiner is satisfied that the tax return is truly reflective of the taxable transaction and all taxes have been paid, the process ends. However, if the examiner is not satisfied that the tax return is truly reflective of the taxable transaction and that the taxes have not been fully paid, a Notice of Informal Conference is issued inviting the taxpayer to explain why he should not be subject to additional taxes. d. If the taxpayer attends the informal conference and the examiner is satisfied with the explanation of the taxpayer, the process is again ended. If the taxpayer ignores the invitation to the informal conference, or if the examiner is not satisfied with taxpayers explanation,, and he believes that proper taxes should be assessed, the Commissioner of Internal Revenue or his duly authorized representative shall then notify the taxpayer of the findings in the form of a pre-assessment notice. The pre-assessment notice requires the taxpayer to explain within fifteen (15) days from receipt why no notice of assessment and letter of demand for additional taxes should be directed to him. e. If the Commissioner is satisfied with the explanation of the taxpayer, then the process is again ended. If the taxpayer ignores the pre-assessment notice by not responding or his explanations are not accepted by the Commissioner, then a notice of assessment and a letter of demand is issued. The notice of assessment must be issued by the Commissioner to the taxpayer within a period of three (3) years from the time the tax return was filed or should have been filed whichever is the later of the two events. Where the taxpayer did not file a tax return or where the tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) years from discovery of the failure to file a tax return or from discovery of the fraud within which to issue an assessment notice. The running of the above prescriptive periods may however be suspended under certain instances. The notice of assessment must be issued within the prescriptive period and must contain the facts, law and jurisprudence relied upon by the Commissioner. Otherwise it would not be valid. f. The taxpayer should then file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment notice.

The taxpayer could not immediately interpose an appeal to the Court of Tax Appeals because there is no decision yet of the Commissioner that could be the subject of a review. To be valid the administrative protest must be filed within the prescriptive period, must show the error of the Bureau of Internal Revenue and the correct computations supported by a statement of facts, and the law and jurisprudence relied upon by the taxpayer. There is no need to pay under protest. If the protest was not seasonably filed the assessment becomes final and collectible and the Bureau of Internal Revenue could use its administrative and judicial remedies in collecting the tax. g. Within sixty (60) days from filing of the protest, all relevant supporting documents shall be submitted, otherwise the assessment shall become final and collectible and the BIR could use its administrative and judicial remedies to collect the tax. Once an assessment has become final and collectible, not even the BIR Commissioner could change the same. Thus, the taxpayer could not pay the tax, then apply for a refund, and if denied appeal the same to the Court of Tax Appeals. h. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from the submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with an application for the issuance of a writ of preliminary injunction to enjoin the BIR from collecting the tax subject of the appeal. If the taxpayer fails to so appeal, the denial of the Commissioner or the inaction of the Commissioner would result to the notice of assessment becoming final and collectible and the BIR could then utilize its administrative and judicial remedies to collect the tax. i. A decision of a division of the Court of Tax Appeals adverse to the taxpayer or the government may be the subject of a motion for reconsideration or new trial, a denial of which is appealable to the Court of Tax Appeals en banc by means of a petition for review. . The Court of Tax Appeals, has a period of twelve (12) months from submission of the case for decision within which to decide. j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by the Commissioner or the assessment in case of failure by the Commissioner to decide the taxpayer must file a petition for review on certiorari with the Supreme Court within fifteen (15) days from notice of the judgment on questions of law. An extension of thirty (30) days may for justifiable reasons be granted. If the taxpayer does not so appeal, the decision of the Court of Tax Appeals would become final and this has the effect of making the assessment also final and collectible. The BIR could then use its administrative and judicial remedies to collect the tax. 14. The jurisdiction of the Court of Tax Appeals: a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; (DIVISION) 2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation thereto, or other matter arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; (The inaction on refunds in two years from the time tax was paid.Thus, if the prescriptive period of two years is about to expire, the taxpayer should interpose a petition for review with the CTA DIVISION) 3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; (If original DIVISION; if appellate EN BANC)

4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (DIVISION) 5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; (EN BANC) 6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code; (This has reference to forfeiture cases where the decision is to release the seized articles DIVISION) 7. Decisions of the Secretary of Trade and Industry, in case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. (DIVISION) b. Jurisdiction over cases involving criminal offenses as herein provided: 1. Exclusive original jurisdiction over all criminal cases arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties claimed, is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the civil action will be recognized. 2. Exclusive appellate jurisdiction in criminal offenses: a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respective territorial jurisdiction. b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. c. Jurisdiction over tax collection cases: 1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. 2. Exclusive appellate jurisdiction in tax collection cases: a. Over appeals from judgments, resolutions, or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the

Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction. (Sec. 7, R. A. No. 1125, as amended by R. A. No. 9282, emphasis and words in parentheses supplied) 15. The following are the acts of BIR Commissioner considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals: a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) b. An indication to the taxpayer by the Commissioner in clear and unequivocal language of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523) d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204) e. Final notice before seizure considered as commissioners decision of taxpayers request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was the CIRs final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to distraint and levy. 16. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest. As counsel what advice shall you give the taxpayer. Explain briefly your answer. ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment. To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy.(Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547) Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer. 17. As a general rule, there must always be a decision of the Commissioner of Internal Revenue or Commissioner of Customs before the Court of Tax Appeals, would have jurisdiction. If there is no such decision, the would be dismissed for lack of jurisdiction unless the case falls under any of the following exceptions. 18. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue: a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par.,

Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001) b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid. It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.) 19. What is the legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected ? SUGGESTED ANSWER. The legal remedy under the NIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected, is the filing of a suit or proceeding with the Court of Tax Appeals a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause that may arise after payment (2nd par., Sec. 229, NIRC of 1997), or b. within thirty (30) days from receipt of the denial by the Commissioner of the application for refund or credit. (Sec. 11, R.A. No. 1125) 20. The two (2) year period and the thirty (30) day period should be applied on a whichever comes first basis. Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet by the Commissioner which would trigger the 30-day period, the taxpayer should file an appeal, despite the absence of a decision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.) 21. Where the taxpayer is a corporation the two year prescriptive period from date of payment for refund of income taxes should be the date when the corporation filed its final adjustment return not on the date when the taxes were paid on a quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) Generally speaking it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or refund can be claimed based on the adjusted and audited figures. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001) 22. What is the burden of taxpayers seeking tax refunds or credits ? SUGGESTED ANSWER: It has always been the rule that those seeking tax refunds or credits bear the burden of proving the factual basis of their claims and of showing, by words too plain to be mistaken, that the legislature intended to entitle them to such claims. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 16, 2007, See Commissioner of Internal Revenue v. Seagate Technology (Philippines)G. R. No. 153866, 11 February 2005, 451 SCRA 132) 23. What is the nature of proceedings before the Court of Tax Appeals ? SUGGESTED ANSWER: First, a judicial claim for refund or tax credit in the CTA is by no means an original action, but rather an appeal by way of petition for review of a previous, unsuccessful administrative claim. Therefore, as in every appeal or petition for review, a petitioner has to convince the appellate court that the quasi-judicial agency a quo did not have any reason to deny its claims. Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove every minute aspect of its case by presenting, formally offering and submitting its evidence to the CTA. Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim should have been granted in the first place, part of the evidence to be submitted to the CTA must necessarily include whatever is required for the successful prosecution of an administrative

claim. (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526, March 116, 2007) 24. Applicability of Proton Pilipinas Corporation vs. Republic, etc., G. R. No. 165027, October 16, 2006. The case was decided on factual antecedents before R. A. No. 9282 which grants criminal jurisdiction to the Court of Tax Appeals if the value of the tax is P1 million or more. Interpreting the provisions of Republic Act No. 8249, which provides that the civil action for recovery of civil liability should be jointly determined in the criminal proceeding by the Sandiganbayan or appropriate courts, the prohibition of reservation of the criminal aspect, the Supreme Court said that tax collection cases may be tried separately, and not before the Sandiganbayan in Rep. Act No. 3019 cases. This is so because, Rep. Act No. 3019 is silent on the definition of civil liability and the application of Art. 104 of the Revised Penal Code does not cover taxes. Consequently, the Supreme Court ruled that on the tax collection case the RTC would have jurisdiction. Interpretation by the author in the light of Rep. Act. 9282. If it is a criminal case cognizable by the Sandiganbayan, then this court retains jurisdiction, with the civil jurisdiction being cognizable by the CTA or the lower courts depending on the amount. If the issue is a purely tax case, even if it involves cases cognizable by the Sandiganbayan, then jurisdiction vests upon the CTA or the lower courts depending on the amount of the tax. 25. On January 24, 1995, the then Secretary of Finance, through the recommendation of the then Commissioner of Internal Revenue issued Revenue Regulations [Rev. Reg.] No. 1-95, providing the Rules and Regulations to Implement the Tax Incentives Provisions Under Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227, [o]therwise known as the Bases Conversion and Development Act of 1992. Subsequently, Rev. Reg. No. 12-97 was issued providing for the Regulations Implementing Sections 12(c) and 15 of [R.A.] No. 7227 and Sections 24(b) and (c) of [R.A.] No. 7916 Allocating Two Percent (2%) of the Gross Income Earned by All Businesses and Enterprises Within the Subic, Clark, John Hay, Poro Point Special Economic Zones and other Special Economic Zones under PEZA. OnSeptember 27, 1999, Rev. Reg. No. 16-99 was issued Amending [RR] No. 1-95, as amended, and other related Rules and Regulations to Implement the Provisions of paragraphs (b) and (c) of Section 12 of [R.A.] No. 7227, otherwise known as the Bases Conversion and Development Act of 1992 Relative to the Tax Incentives Granted to Enterprises Registered in the Subic Special Economic and Freeport Zone. On June 3, 2003, the Commissioner of Internal Revenue issued Revenue Memorandum Circular (RMC) No. 31-2003 setting the Uniform Guidelines on the Taxation of Imported Motor Vehicles through the Subic Free Port Zone and Other Freeport Zones that are Sold at Public Auction, which provided for the tax treatments on the transactions involved in the importation of motor vehicles through the SSEFZ and other legislated Freeport zones and subsequent sale thereof through public auction. This was later amended by RMC No. 32-2003. Asia International Auctioneers and others filed a complaint before the RTC of Olongapo City, to declare Void, Ultra Vires, and Unconstitutional [RMC] No. 31-2003 dated June 3, 2003 and [RMC] No. 32-2003 dated June 5, 2003, Rev. Reg. Nos. 1-95, 12-97 and 16-99 dated January 24, 1995, August 7, 1997 and September 27, 1999, respectively, They contended that jurisdiction over the case at bar properly pertains to the regular courts as this is an action to declare as unconstitutional, void and against the provisions of [R.A. No.] 7227 the RMCs issued by the CIR. They do do not challenge the rate, structure or figures of the imposed taxes, rather they challenge the authority of the respondent Commissioner to impose and collect the said taxes. They also claim that the challenge on the authority of the CIR to issue the RMCs does not fall within the jurisdiction of the Court of Tax Appeals (CTA). Does the RTC have jurisdiction ? SUGGESTED ANSWER: No. It is the Court of Tax Appeals that has exclusive jurisdiction. In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to implement Section 12 of R.A. No. 7227 which provides that exportation or

removal of goods from the territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. They were issued pursuant to the power of the CIR under Section 4 of the National Internal Revenue Code, viz: Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.-- The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (as amended by the NIRC of 1997, emphases supplied, Asia International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007) 26. What is the characteristic of a BIR denial of a protest such as would enable the taxpayer to appeal the same to the Court of Tax Appeals ? SUGGESTED ANSWER: The Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment. On the basis of his statement indubitably showing that the Commissioners communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues.(Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523) 27. Reasons for the rule requiring CIRs unequivocal language on his action on the protest. a. It would obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. b. On the part of the Commissioner of Internal Revenue, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and define decision thereon in the first instance. c. This would also deter the Commissioner of Internal Revenue from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. d. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. (Commissioner of Internal Revenue v. Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523) 28. Cite acts of BIR Commissioner that may be considered as denial of a protest which serve as basis for appeal to the Court of Tax Appeals. SUGGESTED ANSWER: a. Filing by the BIR of a civil suit for collection of the deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. Union Shipping Corporation,185 SCRA 547) b. An indication to the taxpayer by the Commissioner in clear and unequivocal language of his final denial not the issuance of the warrant of distraint and levy. What is the subject of the appeal is the final decision not the warrant of distraint. (Commissioner of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) c. A BIR demand letter sent to the taxpayer after his protest of the assessment notice is considered as the final decision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d. A letter of the BIR Commissioner reiterating to a taxpayer his previous demand to pay an assessment is considered a denial of the request for reconsideration or protest and is appealable to the Court of Tax Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204) e. Final notice before seizure considered as commissioners decision of taxpayers request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001 held that not only is the Notice the only response received: its content and tenor supports the theory that it was the CIRs final act regarding the request for reconsideration. The very title expressly indicated that it was a finalnotice prior to seizure of property. The letter itself clearly stated that the taxpayer was being given this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to distraint and levy. 29. The taxpayer seasonably protested the assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxes subject of the protest. As counsel what advice shall you give the taxpayer. Explain briefly your answer. SUGGESTED ANSWER: The taxpayer should appeal, by way of a petition for review, to the Court of Tax Appeals not on the ground of the denial of the protest but on other matter arising under the provisions of the National Internal Revenue Code. The actual issuance of a warrant of distraint and levy in certain cases cannot be considered a final decision on a disputed assessment. To be a valid decision on a disputed assessment, the decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case the same shall not be considered a decision on the disputed assessment; and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions are not complied with by the mere issuance of a warrant of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping Corp., 185 SCRA 547) Furthermore, a motion for the suspension of the collection of the tax may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) because the collection of the tax may jeopardize the interest of the taxpayer. 30. Instances where the Court of Tax Appeals would have jurisdiction even if there is no decision yet by the Commissioner of Internal Revenue: a. Where the Commissioner has not acted on the disputed assessment after a period of 180 days from submission of complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which to appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001) b. Where the Commissioner has not acted on an application for refund or credit and the two year period from the time of payment is about to expire, the taxpayer has to file his appeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid. It is disheartening enough to a taxpayer to be kept waiting for an indefinite period for the ruling,. It would make matters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after the Commissioner, would have, at his personal convenience, given his go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.) 31. As a general rule, No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218,NIRC) No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for

not more than double the amount with the Court. (Sec. 11, Rep. Act No. 1125, as amended by Sec.9, Rep. Act No. 9282 ) The Supreme Court may enjoin the collection of taxes under its general judicial power but it should be apparent that the source of the power is not statutory but constitutional. The Supreme Court did not grant the provisional remedy prayed for in Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004 for it would be tantamount to enjoining the collection of taxes, a peremptory judicial act which is traditionally frowned upon unless there is a clear statutory basis for it. Evident is the clear legislative intent that the imposition of safeguard measures, despite the availability of judicial review, should not be enjoined notwithstanding any timely appeal of the imposition. This so because the Safeguard Measures Act states that the filing of a petition for review before the CTA does not stop, suspend, or otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard measures. 32. General rule: The rule is that in the absence of accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner (Commissioner of Internal Revenue) is not required to compute such tax liabilities with mathematical exactness.Approximation in the calculation of taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citingUnited States v. Johnson, 319 U.S. 1233 (1943)] However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., citing United States v. Rindskopf, 105 U.S.418 (1881)] 33. Meaning of "best evidence obtainable" under Sec. 6 (B), NIRC of 1997. Thismeans that the original documents must be produced. If it could not be produced, secondary evidence must be adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, September 30, 1998) 34. Sec. 6 (B) of the NIRC of 1997 allows the BIR to make or amend a tax return from his own knowledge or obtained through testimony or otherwise. Thus, the Commissioner of Internal Revenue investigates any circumstance which led him to believe that the taxpayer had taxable income larger than that reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer, he may take the testimony of third parties; he may examine and subpoena, if necessary, traders and brokers accounts and books and the taxpayers books of accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any particular proof that is available in the circumstances of the particular situation. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. citingCampbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)] Citing its ruling in a previous case, a U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. (Ibid., in turn citing Kenney v. Commissioner, 111 F.2d 374) 35. The following are the general methods developed by the Bureau of Internal Revenue for reconstructing a taxpayers income where the records do not show the true income or where no return was filed or what was filed was a false and fraudulent return (a) Percentage method; (b) Net worth method.; (c) Bank deposit method; (d) Cash expenditure method; (e) Unit and value method; (f) Third party information or access to records method; (g) Surveillance and assessment method. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74)

36. Under the percentage method, the computed amount of revenues based on the percentage computation is compared to the amount of revenues reflected on the return. The percentages used may be obtained from the taxpayer, industry publication, prior years audit results, or third parties. The comparison will provide an indication on the possibility of revenue being understated. Among the significant ratios and trends to be analyzed are the percentage mark-up, gross profits ratio or gross margin percentage, profit margin, total assets turnover, and inventory turnover. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) 37. The net worth method is a method of reconstructing income which is based on the theory that if the taxpayers net worth has increased in a given year in an amount larger than his reported income, he has understated his income for that year. The net worth on a fixed starting date is compared with the net worth on a fixed ending date. Any increase in net worth is presumed to be income not declared for tax purposes. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) 38. The difficulty of establishing the opening net worth of a tax payer has led to the Cohan Rule which is the use of estimates or approximations of the amount of cash and other asserts where the taxpayer lacks adequate records. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) 39. Under the bank deposit method, the bank records of the taxpayer are analyzed and the BIR estimates income on the basis of the total bank deposits after eliminating non-income items. This method stands on the premise that deposits represent taxable income unless otherwise explained as being non-taxable items. This method may be used only where the BIR has been legally allowed access to the taxpayers bank records. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) 40. The cash expenditure method assumes that the excess of a taxpayers expenditures during the tax period over his reported income for that period is taxable to the extent not disproved otherwise. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) 41. Under the unit and value method, the determination or verification of gross receipts may be computed by applying price and profit figures to the known ascertainable quality of business of the taxpayer. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Procedures and Techniques Volume I, pp. 68-74) For example, in order to determine the gross receipts of a pizza parlor, multiply the pounds of flour used by the number of pizzas per pound which in turn would then be multiplied by the average price per pizza. 42. 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) 43. A pre-assessment notice is a letter sent by the Bureau of Internal Revenue to a taxpayer asking him to explain within a period of fifteen (15) days from receipt why he should not be the subject of an assessment notice. It is part of the due process rights of a taxpayer. As a general rule, the BIR could not issue an assessment notice without first issuing a preassessment notice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-assessment notice, and for him to explain why he should not be the subject of an assessment notice.

44. Instances where a pre-assessment notice is not required before a notice of assessment is sent to the taxpayer. a. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or b. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or c. When a taxpayer opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding table year; or d. When the excess tax due on excisable articles has not been paid; or e. When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, trade or transferred to nonexempt persons. (Sec. 228, NIRC of 1997) 45. The word assessment when used in connection with taxation, may have more than one meaning. More commonly the word assessment means the official valuation of a taxpayers property for purpose of taxation. The above definition of assessment finds application under tariff and customs taxation as well as local government taxation. For real property taxation, there may be a special meaning to the burdens that are imposed upon real properties that have been benefited by a public works expenditure of a local government. It is sometimes called a special assessment or a special levy. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) For internal revenue taxation assessment as laying a tax. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay.(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) 46. An assessment is a notice duly sent to the taxpayer which is deemed made only when the BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999) 47. What is a self-assessed tax ? SUGGESTED ANSWER: A tax that the taxpayer himself assesses or computes and pays to the taxing authority. It is a tax that self-assessed by the taxpayer without the intervention of an assessment by the tax authority to create the tax liability. The Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability, prepares the return, and pays the tax as he files the return. The pay-as-you-file system is a self-assessing tax return. Internal revenue taxes are self-assessing. [Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case citing Tupaz v. Ulep, 316 SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and Jurisprudence, 1st edition, 1997, p. 267] A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself computes and pays without the intervention of any assessment by the BIR. The annual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayers liability for the income tax does not depend on whether or not the BIR conducts such subsequent investigation or audit. However, if the taxing authority is first required to investigate, and after such investigation to issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed.(Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case) 48. On October 28, 1988 taxpayer bank received a notice of assessment from the BIR informing it that deficiency taxes are due from the said taxpayer bank without any findings of law or fact but supported only with a computation. On December 10, 1988, the taxpayer bank counsel filed a letter that as soon as this is explained and clarified in a proper notice of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment. The

taxpayer bank insists that the assessment was not valid. Of course, BIR took the opposite view contending further that there was no seasonable protest, hence the tax is sue and collectible.Who is correct ? SUGGESTED ANSWER: The BIR is correct. Under the old law Sec. 270, it is enough merely that the BIR Commissioner shall notify the taxpayer of his findings The taxpayer bank counsels December 10, 1988 letter is not a seasonable protest because it was filed thirty (30) days after receipt of the assessment on October 28, 1988. (Commissioner of Internal Revenue v. Bank of Philippine Islands, G. R. No. 134062, April 17, 2007) 49. What are the prescriptive periods for making assessments of internal revenue taxes ? SUGGESTED ANSWER: a. Three (3) years from the last day within which to file a return or when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997). The CIR has three (3) years from the date of actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection thereof without an assessment. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] b. ten years from discovery of the failure to file the tax return or discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997) ; or c. within the period agreed upon between the government and the taxpayer where there is a waiver of the prescriptive period for assessment (Sec. 222 (b), NIRC of 1997). 50. Purpose of period of limitations in taxation. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004;], as well as their assessments. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. [Republic of the Philippines v. Ablaza, 108 Phil. 1105, 1108, cited in Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] 51. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will not longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108) Laws on prescription should be liberally construed in favor of the taxpayer. Reason: for the purpose of safeguarding taxpayers from an unreasonable examination, investigation or assessment, our tax laws provide a statute of limitation on the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection, As a corollary, the exceptions to the law on prescription should perforce be strictly construed. [Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546]

The prescriptive period was precisely intended to give the taxpayers peace of mind.(Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999) 52. During Julianas lifetime, her business affairs were managed by the Philippine Trust Company (Philtrust). She died on April 3, 2001.Two days after her death, Philtrust, through its Trust Officer, filed her Income Tax Return for 2000, without indicating that Juliana died. On May 22, 2001, Philtrust filed a verified petition with the RTC for appointment as Special Administrator. This was denied by the court who appointed one of the heirs as Special Administrator. Philtrusts motion for reconsideration was denied. After an investigation by the BIR of the decedents income tax liability, it sent, on November 18, 2003, a demand letter and a Notice of Assessment to Juliana c/o Philtrust at the latters address which was stated in the 1998 Income Tax Return. No response was made neither was the BIR advised that Juliana already died. On June 18, 2005, the BIR Commissioner issued warrants of distraint and levy to enforce collection of the deficiency income tax liability which was served on Julianas heir. On November 22, 2005, the BIR filed with the estate court a motion for allowance of claim. The heir claimed that there was no proper service of the notice of assessment and that the filing of the motion was time-barred. On the other hand the BIR made the submission that both the issuance of the assessment notice and the motion were all properly made on Philtrust. Furthermore the lapse of the 30-day period within which to protest made the assessment final, executory and uncontestable and not time barred. Rule on the conflicting claims of the parties. SUGGESTED ANSWER: I would rule in favor of the heir. There was no proper service of the notice of assessment because the death of Juliana automatically severed the legal relationship of principal and agent between her and Philtrust.The severed relationship could not be revived on the mere fact that Philtrust filed her Tax Return two days after her death. Philtrusts failure to file a notice of death subjects it to penal sanctions which do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments. (Estate of the late Juliana Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No. 155541, January 27, 2004) 53. What is the presumption that flows from a taxpayers failure to protest an assessment ? SUGGESTED ANSWER: Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. (Commissioner of Internal Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted) 54. What are the reasons for presumption of correctness of assessments ? SUGGESTED ANSWER: a. Lifeblood theory b. Presumption of regularity (Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA 397) c. The likelihood that the taxpayer will have access to the relevant information [Commissioner of Internal Revenue, supra citing United States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United States Supreme Court on November 19, 1973) d. The desirability of bolstering the record-keeping requirements of the NIRC. (Ibid.) 55. Give instances where prima facie correctness of a tax assessment does not apply.

SUGGESTED ANSWER: The prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a naked assessment i.e., without any foundation character, the determination of the tax due is without rational basis. [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a situation, the determination of the Commissioner contained in a deficiency notice disappears. [Commissioner of Internal Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence. [Commissioner of Internal Revenue, supra] 56. What are the instances that suspends the running of the prescriptive periods (Statute of Limitations) within which to make an assessment and the beginning of distraint or levy or of a proceeding in court for the collection, in respect of any tax deficiencies? SUGGESTED ANSWER: a. When the Commissioner is prohibited from making the assessment, or beginning distraint, or levy or proceeding in court and for sixty (60) days thereafter; b. When the taxpayer requests for and is granted a reinvestigation by the commissioner; c. When the taxpayer could not be located in the address given by him in the return filed upon which the tax is being assessed or collected; d. When the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and e. When the taxpayer is out of the Philippines. : 57. The signatures of both the Commissioner and the taxpayer, are required for a waiver of the prescriptive period, thus a unilateral waiver on the part of the taxpayer does not suspend the prescriptive period. [Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)] 58. The act of requesting a reinvestigation alone does not suspend the running of the prescriptive period. The request for reinvestigation must be granted by the CIR.The Supreme Court declared that the burden of proof that the request for reinvestigation had been actually granted shall be on the Commissioner of Internal Revenue. Such grant may be expressed in its communications with the taxpayer or implied from the action of the Commissioner or his authorized representative in response to the request for reinvestigation.[Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] 59. Philippine Journalists, Inc. (PJI) filed its Annual Income Tax Return for the calendar year ended December 31, 1994 which showed a net income of P30 million and the tax due as P10 million. An examination of PJIs books of account and other accounting records for the period January 1, 1994 to December 31, 1994 showed deficiency VAT, Income Tax and Withholding Tax in the total amount of P1`27 million.During the September 22, 1997 informal conference with the Revenue District Officer, PJIs Comptroller executed a waiver of statute of limitatio ns provided for under sections 223 and 224 of the NIRC. On October 5, 1998, the BIR issued a PreAssessment Notice which was followed by Assessment/Demand No.33-1-000757-94 stating a total deficiency taxes in the amount of P111 million for income tax, VAT and expanded withholding taxes, inclusive of interest and compromise penalty. On March 16, 1999, the BIR sent to PJI a Preliminary Collection Letter to pay the assessment within 10 days from receipt. On November 10,1999, a Final Notice Before Seizure was issued giving PJI 10 days from receipt within which to pay. PJI received the final notice on November 24, 1999 and on November 26, 1999 PJI asked that it be clarified on how the tax liability of P111 million was arrived at and requested for an extension of 30 days from receipt of the clarification within which to reply. PJI, through a follow-up letter, asserted it never received

Assessment/Demand No. 33-1-000757-94. On March 28, 2000 PJI received a Warrant of Distraint and/or Levy. PJI then appealed to the CTA. The following issues are for resolution in the appeal: a. Does the CTA have jurisdiction over the appeal ? b. Was the Waiver of the Statute of Limitations valid ? c. Were the Assessment/Demand and the Warrant of Distraint and/or Levy valid ? Will the appeal prosper? Explain briefly your answer. SUGGESTED ANSWER: Yes, it will prosper. a. The CTA has jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of the Statute of Limitations was validly effected. This is so because the CTA has exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue in cases involving other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue. [Sec. 7 (a) (1). R. A. No. 1125, as amended by R. A. No. 9282) Thus it was previously ruled that the CTA had jurisdiction to act on a petition to invalidate and annul the distraint orders of the Commissioner. [Ynares-Santiago, J. Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 citing Panrtoja v. David, 111 Phil. 197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Court was the decision of the CTA declaring several waivers executed by the taxpayer as null and void, thus invalidating the assessments issued by the BIR. (Ibid., citing Commissioner of Internal Revenue v. Court of Appeals, G. R. No. 115712, 25 February 1999, 303 SCRA 614) b. The Waiver of the Statute of Limitations is not valid because it did not specify a definite agreed date between the BIR and PJI, within which the former may assess and collect revenue taxes. Furthermore, the waiver is also defective from the government side because it was signed only by a revenue district officer, and not the Commissioner, as so required. Finally, PJI was not furnished a copy of the waiver. c. The waiver document is incomplete and defective and thus the three-year prescriptive period within which to assess was not tolled or extended and continued to run until April 17, 1998. Consequently, Assessment/Demand No. 33-1-000757-94 issued on December 9, 1998 was invalid because it was issued beyond the three (3) year period. In the same manner, the Warrant of Distraint and/or Levy which PJI received on March 28, 2000 is also null and void for having been issued pursuant to an invalid assessment. (Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004) 60. What are the two ways of protesting an assessment notice for an internal revenue tax ? Alternatively, what are the two types of protests ? Explain briefly. SUGGESTED ANSWER: a. Request for reconsideration which refers to a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. b. Request for reinvestigation which refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85) 61. What is that type of protest that suspends the running of the statute of limitations for the beginning of distraint or levy or a proceeding in court for collection ? Why ? SUGGESTED ANSWER: It is that type of protest when the taxpayer requests for a reinvestigation which is granted by the Commissioner (Sec. 223, NIRC of 1997), that suspends the running of the statute of limitations for collection of the tax. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer demands a reinvestigation, the time employed in reinvestigation should be deducted from the total period of limitation.[Commissioner of Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)] Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment which will be limited to the evidence

already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. (Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231) 62. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code) A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001) 63. A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. (Art. 2028, Civil Code) 64. A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001) 65. The following cases may, upon taxpayers compliance with the basis for compromise, be the subject matter of compromise settlement: a. Delinquent accounts; b. Cases under administrative protest after issuance of the Final Assessment Notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; c. Civil tax cases being disputed before the courts; d. Collection cases filed in courts; e. Criminal violations, other than those already filed in court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002) 66. Tax cases which could not be the subject of compromise: a. Withholding tax cases unless the applicant-taxpayer invokes provisions of law that cast doubt on the taxpayers obligation to withhold.; b. Criminal tax fraud cases, confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; c. Criminal violations already filed in court; d. Delinquent accounts with duly approved schedule of installment payments; e. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; f. Cases which become final and executory after final judgment of a court where compromise is requested on the ground of doubtful validity of the assessment; and g. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002) 67. The Commissioner may compromise the payment of any internal revenue tax when: a. A reasonable doubt as to the validity of the claim against the taxpayer exists provided that the minimum compromise entered into is equivalent to forty percent (40%) of the basic tax; or b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax provided that the minimum compromise entered into is equivalent to ten percent (10%) of the basic assessed tax In the above instances the Commissioner is allowed to enter into a compromise only if the basic tax involved does not exceed One million pesos (P1,000,000.00), and the settlement offered is not less than the prescribed percentages. [Sec. 204 (A), NIRC of 1997]

In instances where the Commissioner is not authorized, the compromise shall be subject to the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy Commissioners. 68. The Commissioner of Internal Revenue is authorized to abate or cancel a tax liability, when: a. The tax or any portion thereof appears to be unjustly or excessively assessed; or b. The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997] 69. The offer to compromise a delinquent account or disputed assessment on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that: a. The delinquent account or disputed assessment is one resulting from a jeopardy assessment. or b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or c. The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; or d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or e. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and/or factual basis; or f. The assessments were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities under Sec. 228 of the National Internal Revenue Code of 1997; or g. Assessments made based on the Best Evidence Obtainable Rule and there is reason to believe that the same can be disputed by sufficient and competent evidence; or h. The assessment was issued within the prescriptive period for assessment as extended by the taxpayers execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic. (Sec. 3, 1, Rev. Regs. No. 30-3002) 70. The offer to compromise based on financial incapacity may be accepted upon showing that: a. The corporation ceased operation or is already dissolved Provided, that tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be considered for compromise; or b. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, provided that amounts payable to due to stockholders other than businessrelated transactions which are properly ineludible in the regular accounts payable are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or c. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business-related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets) taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; or d. The taxpayer is a compensation income earner with no other source of income and the familys gross monthly compensation income does not exceed, if single, P10,500 or less, or if married, whose salary together with his spouse is P21,000 per month, or less, and it appears that the taxpayer possesses no other leviable/distrainable assets other than his family home; or

e. The taxpayer has been declared by any competent tribunal/ authority/body/government agency as bankrupt or insolvent. (Sec. 3. 2, Rev. in relation to Sec.4.1.1 both of Regs. No. 30-3002) 71. What is the prescriptive period for collecting internal revenue taxes ? SUGGESTED ANSWER: There are four (4) prescriptive periods for the collection of an internal revenue tax: a. Collection upon a false or fraudulent return or no return without assessment. In case of a false or fraudulent return with the intent to evade tax or of failure to file a return, a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission. [Sec. 222 (a), NIRC of 1997) b. Collection upon a false or fraudulent return or no return with assessment. Any internal revenue tax which has been assessed (because the return is false or fraudulent with intent to evade tax or of failure to fail a return), within a period of ten (10) years from discovery of the falsity, fraud or omission may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied) c. Collection upon an extended assessment. Where a tax has been assessed with the period agreed upon between the Commissioner and the taxpayer in writing (which should initially be within three (3) years from the time the return was filed or should have been filed), or any extensions before the expiration of the period agreed upon, the tax may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis supplied) d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extended assessment. Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period; Provided, That in case where a return is filed beyond the period prescribed by law, the three (3) year period shall be computed from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered filed on such last day. (Sec. 203, NIRC of 1997, emphasis supplied) When the BIR validly issues an assessment within the three (3)-year period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205, 222-223) 72. What is solutio indebeti as applied to tax cases ? SUGGESTED ANSWER: This is erroneous payment of taxes and occurs when the taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existing exemption in his favor at the time the payment was made. Such payment is held to be not voluntary and therefore, can be recovered or refunded. (Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007) 73. What are the reasons for requiring the filing of an administrative application for refund or credit with the Bureau of Internal Revenue before a case may be filed with the Court of Tax Appeals ? SUGGESTED ANSWER: The filing of an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals, is necessary for the following reasons: a. To afford the Commissioner an opportunity to correct his errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79) b. To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bermejo v. Collector, G.R. No. L3028, July 28, 1950)

74. As a general rule the filing of an application for refund or credit with the Bureau of Internal Revenue is an administrative precondition before a suit may be filed with the Court of Tax Appeals. Is there any exception ? SUGGESTED ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a petition for review involving a disputed assessment where an assessment was disputed but the protest was denied by the Bureau of Internal Revenue. To hold that the taxpayer has now lost the right to appeal from the ruling on the disputed assessment and require him to file a claim for a refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Commissioner would certainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities. (vda. de San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector of Internal Revenue, 4 SCRA 279) 75. What is the nature of the taxpayers remedy of either to ask for a refund of excess tax payments or to apply the same in payment of succeeding taxable periods taxes ? ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of the NIRC of 1997) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative and the choice of one precludes the other. Since the Bank has chosen the tax credit approach it cannot anymore avail of the tax refund. (Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999) 76. What is the irrevocability rule in claims for refund and what is the rationale behind this ? SUGGESTED ANSWER: A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. [Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)] This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase such option shall be considered irrevocable for that taxable period means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. (Systra Philippines, Inc., supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE CODE, Seventh Edition, 2000, p. 430) 77. In the year 2000 Systra derived excess tax credits and exercised the option to carry them over as tax credits for the next taxable year. However, the tax due for the next taxable year is lower than excess tax credits. It now applies for a refund of the unapplied tax credits. May its refund be granted ? If the refund is denied, does Systra lose the unapplied tax credits ? Explain briefly your answer. SUGGESTED ANSWER: Systras claim for refund should be denied. Once the carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized Under Section 76 of the Tax Code, a claim for refund

of such excess credits can no longer be made. The excess credits will only be applied against income tax due for the taxable quarters of the succeeding taxable years. Despite the denial of its claim for refund, Systra does not lose the unapplied tax credits. The amount will not be forfeited in favor of the government but will remain in the taxpayers account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. (Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007 citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761) Supposing in the above problem that Systra permanent ceased operations, what happens to the unapplied credits ? SUGGESTED ANSWER: Where, the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. Cessante ratione legis, cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v. Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007) 78. Is it fatal to a claim for refund the failure of a taxpayer to indicate in its tax return the option whether to request a refund or claim the excess withholding tax as tax credit for the succeeding taxable year ? SUGGESTED ANSWER: No. The option of requesting a tax refund or claiming a tax credit is in the alternative. A corporation must signify its intention whether to request a tax refund or claim a tax credit by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection. One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify ones intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this option later on. A tax credit should be construed merely as an alternative remedy to a tax refund, subject to prior verification and approval by the BIR.. The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus demonstrates clear diligence.Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference and hence shows simple negligence or plain oversight. (Commissioner of Internal Revenue v. PERF Realty Corporation, G.R. No. 163345, July 4, 2008, citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637 & 162004, December 14, 2005, 477 SCRA 761) 79. Tax credit, defined. A tax credit is not specifically defined in our Tax Code, but Art. 21 of EO 226 defines a tax credit as any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board (of Investments), if so delegated by the Secretary of Finance. Tax credits were granted under EO 226 as incentives to encourage investments in certain businesses. A tax credit generally refers to an amount that may be subtracted directly from ones total tax liability. [Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue, G. R. No. 172598, December 21, 2007 citing Garner, ed., BLACKS LAW DICTIONARY 1501 (8th ed., 1999)] It is therefore an allowance against the tax itself [Pilipinas Shell, supra citing Smith,WESTS TAX LAW DICTIONARY 177-178 (1993).] or a deduction from what is owed [Ibid.,citing Oran and Tosti, ORANS DICTIONARY OF THE LAW 124 (3rd ed., 2000)], by a taxpayer to the government. In RR 5-2000, Prescribing the Regulations Governing the Manner of the Issuance of Tax Credit Certificates, and the Conditions for their Use, Revalidation and Transfer, issued by then

Secretary of Finance Jose T. Pardo on July 19, 2000. a tax credit is defined as the amount due to a taxpayer resulting from an overpayment of a tax liability or erroneous payment of a tax due. (Id., Section 1.A) Tax credit generally refers to an amount that is subtracted directly from ones total tax liability, an allowance against the tax itself, or a deduction from what is owned. A tax credit reduces the tax due, including whenever applicable the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005) 80. Tax credit certificate (TCC), defined, and its nature. A certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations. (Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue, G. R. No. 172598, December 21, 2007 citing RR 5-2000, Prescribing the Regulations Governing the Manner of the Issuance of Tax Credit Certificates, and the Conditions for their Use, Revalidation and Transfer, issued by then Secretary of Finance Jose T. Pardo on July 19, 2000, Sec. I, B) It is clear that a TCC is an undertaking by the government through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an overpayment of income taxes, a direct benefit granted by law or other sources and instances granted by law such as on specific unused input taxes and excise taxes on certain goods. As such, tax credit is transferable in accordance with pertinent laws, rules, and regulations. Therefore, the TCCs are immediately valid and effective after their issuance.(Pilipinas Shell Petroleum Corporation, supra) 81. Discuss the difference between tax refund and tax credit. SUGGESTED ANSWER: There are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004) 82. In early April 1999 XYZ Bank advanced the amount of P180 million to the BIR its income tax payment for the banks 1999 operations in response for the governments call to generate more revenues for national development. In separate letters dated April 19 and 29, 1999 and May 14, 1999 XYZ requested for the issuance of a Tax Credit Certificate (TCC) to be utilized against future tax obligations of the bank. By the end of 1999, a credit balance in the amount of P73 million remain which was carried over for the years 2000 to 2004 but was not availed of because XYZ incurred losses during the period. On July 28, 2005 PNB reiterated its request for the issuance of a TCC for the P73 million balance. The BIR rejected the request on the ground of among others prescription having been applied for beyond the two-year reglementary period for filing claims for refund as set forth in Sec. 229 of the NIRC of 1997. Has the claim prescribed ? Explain briefly your answer. SUGGESTED ANSWER: The claim has not prescribed. Sec. 229 of the Tax Code, as couched, particularly its statute of limitations component, is in context intended to apply to suits for any national internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have excessively or in any manner wrongfully collected.

Analyzing the underlying reason behind the advance payment (to help the government) made by XYZ it would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Sec. 229 of the NIRC of 1997. An availment of tax credit due for reasons other than the erroneous or wrongful collection of taxes may have a different prescriptive period. (Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 161997, October 25, 2005 citing Commissioner of Internal Revenue v. The Philippine Life Insurance Co., et al. G.R. No. 105208, May 29, 1995) Absent any specific provision in the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code. (Commissioner of Internal Revenue v. Philippine National Bank, supra) 83. ABC Bank filed with the BIR an application for a tax credit/refund for alleged excess payments of its gross receipts tax (GRT) for the 3rd and 4th quarters of 2003 and the entire 2004 amounting to P14 million. Since no action was taken by the Commissioner on its claim, ABC filed a case with the CTA on October 18, 2005 to comply with the two-year reglementary period and avoid the prescription of its action. Only July 30, 2007, the CTA rendered a decision denying the claim for ABCs failure to file its formal offer of evidence in the CTA. ABC Bank now seeks refuge in Onate v. Court of Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where the Supreme Court allowed evidence, not formally offered, to be considered on condition that: (1) evidence must have been identified by testimony duly recorded and (2) it must have been incorporated in the records of the case. Is ABC correct ? SUGGESTED ANSWER: No. A tax refund s in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer. The taxpayer must present convincing evidence to substantiate a claim for refund. Without any documentary evidenced on record, ABC failed to discharge the burden of proving its right to a tax credit/tax refund. (Far East Bank & Trust Company v. Commissioner of Internal Revenue, G. R. No. 149589, September 15, 2006) 84. A simultaneous filing of the application with the BIR for refund/credit and the institution of the court suit with the CTA is allowed. There is no need to wait for a BIR denial. REASONS: a. The positive requirement of Section 230 NIRC (now Sec. 229, NIRC of 1997); b. The doctrine that delay of the Commissioner in rendering decision does not extend the peremptory period fixed by the statute; c. The law fixed the same period two years for filing a claim for refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the period (thirty days from receipt of decision) for appealing to the court, thus clearly implying that the prior decision of the Commissioner is necessary to take cognizance of the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151) 85. The grant of a refund is founded on the assumption that the tax return is valid, i.e. that the facts stated therein are true and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it would be virtually impossible to determine whether the proper taxes have been assessed and paid. After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004) However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund was granted, despite the failure to present the tax return, because other evidence was presented to prove that the overpaid taxes were not applied. (Ibid.) 86. What are the three (3) conditions for the grant of a claim for refund of creditable withholding tax ? SUGGESTED ANSWER:

a. The claim is filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax. b. It is shown on the return of the recipient that the income payment received was declared as part of the gross income; and c. The fact of withholding is established by a copy of a statement duly issued by the payee showing the amount paid and the amount of tax withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007) 87. What should be established by a taxpayer for the grant of a tax refund ? Why ? SUGGESTED ANSWER: A taxpayer needs to establish not only that the refund is justified under the law, but also the correct amount that should be refunded. If the latter requisite cannot be ascertained with particularity, there is cause to deny the refund, or allow it only to the extent of the sum that is actually proven as due. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi jurisagainst the person claiming the exemption. The burden in proving the claim for refund necessarily falls on the taxpayer. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006) 88. What are the requisites for the refund of illegally deducted taxes from the income of an employees trust fund ? SUGGESTED ANSWER: What has to be established, as a matter of evidence, is that the amount sought to be refunded to the bank-trustee corresponds to the tax withheld on the interest income earned from the exempt employees trust. The need to be determinate is important, specially if the bank trustee, in the ordinary course of its banking business, earns interest income not only from its investments of employees trusts, but on a whole range of accounts which do not enjoy the same broad exemption as employees trusts. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006) 89. A bank-trustee of employee trusts filed an application for the refund of taxes withheld on the interest incomes of the investments made of the funds of the employees trusts. Instead of presenting separate accounts for interest incomes made of these investments, the banktrustee instead presented witness to establish that it would next to impossible to single out the specific transactions involving the employees trust funds from the totality of all interest income from its total investments. On the above basis will the application for refund prosper ? SUGGESTED ANSWER: No. The application for refund will not prosper. The bank-trustee needs to establish not only that the refund is justified under the law (which is so because incomes of employees trusts are tax exempt), but also the correct amount that should be refunded. Tax refunds partake of the nature of tax exemptions and are thus construed strictissimi jurisagainst the person or entity claiming the exemption. The burden in proving the amount to be refunded necessarily falls on the bank-trustee, and there is an apparent failure to do so. A necessary consequence of the special exemption enjoyed alone by employees trusts would be a necessary segregation in the accounting of such income, interest or otherwise, earned from those trusts from that earned by the other clients of the bank-trustee. (Far East Bank and Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2, 2006)The amounts that are the exempt earnings of the employees trust has not been shown as they have been commingled with the interest income of the other clients of the bank-trustee. 90. CTA Circular No. 1-95 clearly requires that photocopies of the receipts or invoices must be pre-marked and submitted to the CTA to verify the correctness of the summary listing and the CPA certification. CTA Circular No. 1-95, issued on 25 January 1995, reads: 1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary containing the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination and evaluation of the

voluminous receipts and invoices. Such summary and certification must properly be identified by a competent witness from the accounting firm. 2. The method of individual presentation of each and every receipt or invoice or other documents for marking, identification and comparison with the originals thereof need not be done before the Court or the Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party whenever he/she desires to check and verify the correctness of the summary and CPA certification. However, the originals of the said receipts, invoices or documents should be ready for verification and comparison in case doubt on the authenticity of the particular documents presented is raised during the hearing of the case. (Emphasis supplied) 91. Manila Electric Company a grantee of a legislative franchise under Act No. 484, as amended by Republic Act No. 4159 and Presidential Decree No. 551, had been paying a 2% franchise tax based on its gross receipts, in lieu of all other taxes and assessments of whatever nature. Upon the effectivity of Executive Order No. 72 on February 10, 1987, however, respondent became subject to the payment of regular corporate income tax. For the last quarter ending December 31, 1987, respondent filed on April 15, 1988 its tentative income tax reflecting a refundable amount of P101,897,741, but onlyP77,931,812 was applied as tax credit for the succeeding taxable year 1988. Acting on a yearly routinary Letter of Authority No. 0018064 NA dated June 27, 1988 issued by petitioner, directing the investigation of tax liabilities of respondent for taxable year 1987, an investigation was conducted by Revenue Officer Frederick Capitan which showed that respondent was liable for 1. deficiency income tax in the amount of P2,340,902.52; and 2. deficiency franchise tax in the amount of P2,838,335.84. On April 17, 1989, respondent filed an amended final corporate Income Tax Return ending December 31, 1988 reflecting a refundable amount of P107,649,729. Respondent thus filed on March 30, 1990 a letter-claim for refund or credit in the amount of P107,649,729 representing overpaid income taxes for the years 1987 and 1988. Petitioner not having acted on its request, respondent filed on April 6, 1990 a judicial claim for refund or credit with the Court of Tax Appeals. It is gathered that respondent paid the deficiency franchise tax in the amount ofP2,838,335.84. It protested the payment of the alleged deficiency income tax and claimed as an alternative remedy the deduction thereof from its claim for refund or credit. The Court of Tax Appeals granted the P107,649,729 claim for refund, or in the alternative for the BIR to issue a tax credit. Is the Court of Tax Appeals correct ? SUGGESTED ANSWER: Yes. Section 69 of the National Internal Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly tax payments made during a taxable year is not equal to the total tax due on the entire taxable income of that year as shown in its final adjustment return, the corporation has the option to either: (a) pay the excess tax still due, or (b) be refunded the excess amount paid. The returns submitted are merely pre-audited which consist mainly of checking mathematical accuracy of the figures in the return. After such checking, the purpose of which being to insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, (Revenue Memorandum Order No. 32-76 dated June 11, 1976) the refund or tax credit is granted. (Commissioner of Internal Revenue v. Manila Electric Company, G. R. No. 121666, October 10, 2007)

LOCAL GOVERNMENT CODE ON TAXATION

LOCAL TAXATION
1. The Local Government Code prohibits local government units from collecting excise taxes on articles enumerated under the NIRC, and taxes, fees or charges on petroleum products. (Sec. 133 [h], Local Government Code in relation to the Tax Code). 2. Petron maintains a depot or bulk plant at the Navotas Fishport Complex in Navotas. Through that depot, it has engaged in the selling of diesel fuels to vessels used in

commercial fishing in and around Manila Bay. On 1 March 2002, Petron received a letter from the office of Navotas Mayor, Toby Tiangco, wherein the corporation was assessed taxes relative to the figures covering sale of diesel declared by your Navotas Terminal from 1997 to 2001. The stated total amount due was P6,259,087.62, a figure derived from the gross sales of the depot during the years in question. The computation sheets that were attached to the letter made reference to Ordinance 92-03, or the New Navotas Revenue Code (Navotas Revenue Code). Is a local government unit, like Navotas, empowered under the Local Government Code (the LGC) to impose business taxes on persons or entities engaged in the sale of petroleum products ? SUGGESTED ANSWER: No. While the Local Government Code does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of taxes, fees or charges on petroleum products. The plain letter of the law is an explicit disinclination on the part of the legislature to impart that particular taxing power to local government units. The Supreme Court defers to the other branches of government in the formulation of oil policy, but when the choices are made through legislation, the Court expects that the choices are deliberate, considering that the stakes are virtually all-in. Navotas may be bolstered by the constitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudent adjudication should fully ascertain the mandate of local government units to impose taxes on petroleum products, and such mandate should be cast in so specific terms as to leave no dispute as to the legislative intendment to extend such power in the name of local autonomy. (Petron Corporation v. Tiangco, et al., G. R. No. 158881, April 16, 2008) 3. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled corporations and all other units of government was that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003) 4. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. It is thus, an instrumentality of the National Government which is exempt from local taxation. As such it is not a private corporation engaged in business enjoying franchise Is such contention meritorious ? SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them. 5. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium. ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy.

SUGGESTED ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise. X City, is authorized under the Local Government Code, to impose a tax on business, which is defined under the Code as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) 6. On 17 August 2000, City of Manila, Tax Ordinance No. 7988 was declared null and void and of no effect by the Secretary of Justice. For failure of the City to move for reconsideration the decision lapsed into finality. On 22 February 2001, the City enacted Tax Ordinance No. 8011 which amended certain provisions of Tax Ordinance No. 7988. May Tax Ordinance No. 8011 be enforced ? SUGGESTED ANSWER: No. If an order or law such as Tax Ordinance No. 7988 is invalid, then it does not legally exist, there should be no occasion or need to amend it. [Coca-Cola Bottlers Philippines, Inc. v. City of Manila, et al., G. R. No. 156252, June 27, 2006 citing People v. Lim,108 Phil. 1091 (1960)], hence Tax Ordinance No. 8011 is also invalid and cannot be enforced. 7. Professional tax may be imposed by a province or city but not by a municipality or barangay. a. Transaction taxed: Exercise or practice of profession requiring government licensure examination. b. Tax rate: Not be exceed P300.00. c. Tax base: Reasonable classification by the sanggunian. d. Exception: Payment to one province or city no longer subject to any other national or local tax, license or fee for the practice of such profession in any part of the Philippine professionals exclusively employed in the government. e. Date of payment: or on before January 31 or engaging in the profession. f. Place of payment: Province or city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places. 8. Requirements: Any individual or corporation employing a person subject to professional tax shall require payment by that person of the tax on his profession before employment and annually thereafter. Any person subject to the professional tax shall write in deeds, receipts, prescriptions, reports, books of account, plans and designs, surveys and maps, as the case may be, the number of the official receipt issued to him. f. Exemption: Professionals exclusively employed in the government shall be exempt from payment. (Sec. 139, LGC) 9. Professionals who are subject to professional tax, defined. The professionals subject to the professional tax are only those who have passed the bar examinations, or any board or other examinations conducted by the Professional Regulation Commission (PRC).for example, a lawyer who is also a Certified Public Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule XXX, Rules and Regulations Implementing the Local Government Code of 1991] 10. Overview of the power of a local government unit to impose business taxes.The power of local government units to impose taxes within its territorial jurisdiction derives from the Constitution itself, which recognizes the power of these units to create its own sources of revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy.(Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005 citing Sec. 5, Article X, Constitution)

These guidelines and limitations as provided by Congress are in main contained in the Local Government Code of 1991 which provides for comprehensive instances when and how local government units may impose taxes. The significant limitations are enumerated primarily in Section 133 of the Code, which includes among others, a prohibition on the imposition of income taxes except when levied on banks and other financial institutions. The most well-known mode of local government taxation is perhaps the real property tax. The Code specifically enumerates several types of business on which municipalities and cities may impose taxes. Moreover, the local sanggunian is also authorized to impose taxes on any other businesses not otherwise specified under the Code which the sanggunian concerned may deem proper to tax. (Ibid.) 11. X City issued a notice of assessment against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance with the Condominium Act which owns and holds title to the common and limited common areas of the condominium. Its membership comprises the unit owners and is authorized under its By-Laws to collect regular assessments from its members for operating expenses, capital expenditures on the common areas and other special assessments as provided for in the Master Deed with ?Declaration of Restrictions of the Condominium. ABC Condominium Corporation insists that the X City Revenue Code and the Local Government Code do not contain provisions upon which the assessment could be based. Resolve the controversy. ANSWER: ABC is correct. Condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise. X City, is authorized under the Local Government Code, to impose a tax on business, which is defined under the Code as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. By its very nature a condominium corporation is not engaged in business, and any profit that it derives is merely incidental, hence it may not be subject to business taxes. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) 12. Situs of municipal taxation where there is no branch, sales office or warehouse.For purposes of collecting business taxes, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other business shall report In cases where there is no such branch, sales office, or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where said principal office is located. [Sec. 150 (a), LGC; Art. 243 (b) (2),Rules and Regulations Implementing the Local Government Code of 1991] 13. Situs of municipal taxation where there is a factory, project office, plant or plantation in pursuit of business. The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with a factory, project office, plant or plantation in pursuit of a business, a. thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located, and b. seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant or plantation is located. LGUs where only experimental farms are located shall not be entitled to the above sales allocation. [Sec. 150 (a), LGC; Art. 243 (b) (3),Rules and Regulations Implementing the Local Government Code of 1991, numbering and arrangement supplied]

On-site sales of commercial quantity made by experimental farms shall be similarly imposed the corresponding tax and allocated as shown above. [2nd par., Art. 243 (a) (5), Ibid.] 14. Situs of municipal taxation where the sales are made by route trucks, vans, or vehicles. a. For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has a branch or sales office or warehouse, the sales are recorded in the branch, sales office or warehouse and the tax due thereon is paid to the LGU where such branch, sales office or warehouse is located. [Art. 243 (d) (1), Rules and Regulations Implementing the Local Government Code of 1991] b. For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sale is paid to the LGU where such branch, sales office or warehouse is located.[Art. 243 (d) (2), Ibid.] c. The LGUs where the route trucks, mentioned above, deliver merchandise cannot impose any tax on said trucks except the annual fixed tax authorized to be imposed by the province or city on every delivery truck or van or any motor vehicle used by manufacturers, producers, wholesalers, dealers, or retailers in the delivery and distribution of distilled spirits, fermented liquors, softdrinks, cigars and cigarettes, and other products as may be determined by thesangguniang panlalawigan, or panlungsod. [Art. 243 (d) (3), Ibid.] d. In addition to the annual fixed tax, cities may also collect from the same manufacturers, producers, wholesalers, retailers, and dealers using route trucks a mayors permit fee which shall be imposed in a local tax ordinance. [Art. 243 (d) (4), Ibid.] 15. Illustrations of situs of taxation. a. MI is a corporation engaged in the trading of books. It holds office in Pasig City, where all transactions are made including the issuance of sales invoices. However, it also maintains a warehouse in Mandaluyong City which serves as its storage area and no transactions are made therein. MI should be assessed at the gross sales or receipts of the preceding year by Pasig City.Likewise, it may also collect the mayors permit and other regulatory fees. Mandaluyong City where the warehouse is located but where no transactions are made, may only collect the Mayors permit fee and other regulatory fees provided for under its existing local tax ordinances. (DOF March 29, 1993 letter to Megastrat, Inc.) b. MC is a subsidiary of SMC. It is a manufacturer with a principal office in Pasig Citymaintained for management and administrative purposes. It has a factory and sales office inQuezon City, where said route trucks withdraw their products for delivery to the customers inPasig City. MC should pay business taxes to Quezon City and not to Pasig City. However, Pasig may levy and collect the annual fixed tax for every delivery truck or van of MC delivering goods within Pasig. The IRR of the LGC of 1991 provides in Article 243 (2), For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sales is paid to the LGU where such branch, sales office or warehouse is located. (DOF February 26, 1993 letter to San Miguel Corporation) c. The place of delivery of the subject of the contract, and not the place where the contract was perfected determines the situs of taxation. (Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, 105 Phil. 1263) This is the place where the sale was consummated through delivery.

d. Matches purchased by customers outside of Cebu City but booked, paid for and delivered to carriers in Cebu City are taxable by Cebu City. Delivery to the carrier is delivery to the buyer. (Philippine Match Co., Ltd. v. City of Cebu, et al., L-30745, January 18, 1978] 16. What is the jurisdiction of the Secretary of Justice regarding issues of validity of tax ordinances ? SUGGESTED ANSWER: Secretary of Justice can take cognizance of a case involving the constitutionality or legality of tax ordinances where there are factual issues involved. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999) Taxpayer files appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already seek relief in court within 30 days from the lapse of the 60 day period. These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals, et al.,G.R. No. 118233, December 10, 1999) 17. Public hearings are mandatory prior to approval of tax ordinance, but this still requires the taxpayer to adduce evidence to show that no public hearings ever took place.(Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999) 18. When is payment under protest not required when impugning the validity of a tax ordinance ? Explain. SUGGESTED ANSWER: If the ground for the protest is validity of the real property tax ordinance and not the unreasonableness of the amount collected the tax must be paid under protest, and the issue of legality may be raised to the proper courts on certiorari without need of exhausting administrative remedies. 19. When is payment under protest required when impugning the validity of a tax ordinance ? If the ground for the protest is unreasonableness of the amounts collected there is need to pay under protest and administrative remedies must be resorted to before recourse to the proper courts.

REAL PROPERTY TAXATION

GENERAL CONCEPTS
1. What are the fundamental principles of real property taxation ? SUGGESTED ANSWER: The fundamental principles of real property taxation are: a. Appraisal at current and fair market value; b. Classification for assessment on the basis of actual use; c. Assessment on the basis of uniform classification; d. Appraisal, assessment, levy and collection shall not be let to a private person; e. Appraisal and assessment shall be equitable. 2. Basis for appraisal. Real properties shall be appraised at the current and fair market value prevailing in the locality where the property is situated and classified for assessment purposes on the basis of its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

KINDS OF REAL PROPERTY TAXES THEIR LEVY AND IMPOSITION

1. The real property taxes that may be collected by provinces, cities and municipalities within the Metro Manila area are the a. basic real property tax, b. the special education fund, and c. the ad valorem tax on idle lands.

Unlike the special levy, the levy and collection of real property taxes are limited only to the above local government units. 2. A special levy or special assessment is an imposition by a province, a city, a municipality within the Metropolitan Manila Area, a municipality or a barangay upon real property specially benefited by a public works expenditure of the LGU to recover not more than 60% of such expenditures. 3. What are the steps to be followed for the mandatory conduct of General Revision of Real Property Assessments ? SUGGESTED ANSWER: a. Preparation of Schedule of Fair Market Values; b . Enactment of Ordinances: 1) Levying an annual ad valorem tax on real property and an additional tax accruing to the Special Education Fund; 2) Fixing the assessment levels to be applied to the market values of real properties; 3) Providing the necessary appropriations to defray expenses incident to general revision of real property assessments,; and 4) Adopting the Schedule of Fair Market Values prepared by the assessors. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999) 4. What is the fair market value of properties ? SUGGESTED ANSWER: Fair market value is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy, taking into consideration all uses to which the property is adopted and might in reason be applied. The criterion established by the statute contemplates a hypothetical sale. Hence, the buyers need not be actual and existing purchasers. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 ) 5. Factors to be considered in fixing values of real property. In fixing the value of real property, assessors have to consider all the circumstances and elements of value and must exercise prudent discretion in reaching conclusions. [Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005 citing Reyes v. Almanzor,196 SCRA 322, 327 (1991)]) 6 Procedure for the preparation of fair market values. 1) The city or municipal assessor shall prepare a schedule of fair market values for the different classes of real property situated in their respective Local Government Units for the enactment of an ordinance by the sanggunian concerned; and 2). The schedule of fair market values shall be published in a newspaper of general circulation in the province, city or municipality concerned or the posting in the provincial capitol or other places as required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February 19, 1999) 7. Publication requirement. Proposed fair market values of real property in a local government unit as well as the ordinance containing the schedule must be published in full for three (3) consecutive days in a newspaper of local circulation, where available, within ten (10) days of its approval, and posted in at lease two (2) prominent places in the provincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999) 8. Quezon City passed an ordinance whereby 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 sale, cession, transfer and conveyance, whichever is higher, as evidenced by the certificate of payment of the capital gains tax issued therefore. Is the proviso for the basis in determining the value for real property tax purposes valid ? SUGGESTED ANSWER: No. The proviso being contrary to public policy and for restraining trade is not valid for the following reasons: a. It mandates an exclusive rule in determining the fair market value and departs from the established procedures such as the sales analysis approach, the income capitalization approach and the reproduction approach provided under the rules implementing the statute. It unduly interferes with the

duties statutorily placed upon the local assessor by completely dispensing with his analysis and discretion which the Local Government Code and the regulations require to be exercised. An ordinance that contravenes any statute is ultra viresand void. b. The consideration approach in the ordinance is illegal since the appraisal, assessment, levy and collection of real property tax shall not be let to any private person, it will also completely destroy the fundamental principle in real property taxation that real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. Allowing the parties to a private sale to dictate the fair market value of the property will dispense with the distinctions of actual use stated in the Local Government Code and in the regulations. c. The invalidity is not cured by the prhase whichever is higher because an integral part of that system still permits valuing real property in disregard of its actual use. d. The ordinance would result to real property assessments more than once every three (3) years and that is not the congressional intent as shown in the provisions of the Local Government Code and the regulations. Consequently, the real property tax burden should not be interpreted to include those beyond what the Code or the regulations expressly clearly state. e. The proviso would provide a chilling effect on real property owners or administrators to enter freely into contracts reflecting the increasing value of real properties in accordance with prevailing market conditions. While the Local Government Code provides that the assessment of real property shall not be increased once every three (3) years, the questioned proviso subjects the property to a higher assessment every time a sales transaction is made. Real property owners would therefore postpone sales until after the lapse of the three (3) year period, or if they do so within the said period they shall be compelled to dispose of the property at a price not exceeding the last prior conveyance in order to avoid a higher tax assessment. In the above two scenarios real property owners are effectively prevented from obtaining the best price possible for their properties and unduly hampers the equitable distribution of wealth.(Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005) 9. What is the nature of a tax declaration ? SUGGESTED ANSWER: 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 ones sincere and honest desire 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 ones 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) 10. Give examples of personal property under the civil law that may be considered as real property for purposes of taxes. SUGGESTED ANSWER: Personal property under the civil law may be considered as real property for purposes of taxes where the property is essential to the conduct of the business. a. Underground tanks are essential to the conduct of the business of a gasoline station without which it would not be operational. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296) b. Light Rail Transit (LRT) improvements such as buildings, carriageways, passenger terminals stations, and similar structures do not form part of the public roads since the former are constructed over the latter in such a way that the flow of vehicular traffic would not be impaired. The carriageways and terminals serve a function different from the public roads.Furthermore, they are not open to use by the general public hence not exempt from real property taxes. Even granting that the national

government owns the carriageways and terminal stations, the property is not exempt because their beneficial use has been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al., G. R. No. 127316, October 12, 2000) c. The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that [d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. 11. Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization organized under the laws of the Republic of the Philippines and is the owner of Chong Hua Hospital (CHH) in Cebu City. In the late 1990s, it constructed the CHH Medical Arts Center (CHHMAC). It is the contention of the City Assessor that the medical arts center is commercial in nature because CHH is charging rental from the doctors that use the facility and is located 100 meters away from the main building. In turn these doctors also charge fees for the service they render to their patients. Is the CHHMAC built by CHH to house its doctors a separate commercial establishment with an assessment rate of 35% on the building or an appurtenant to the hospital, treated as a special real property entitled to a 10% assessment currently imposed for CHH and its other separate buildingsthe CHHs Dietary and Records Departments for purposes of realty tax ? SUGGESTED ANSWER: CHHMAC is subject to the 10% assessment and not the 35% rate. The doctors and medical specialists holding clinics in CHHMAC are those duly accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHHs patients confined in it. Thus, CHHMAC should not be categorized as commercial since a tertiary hospital like CHH is required by law to have a pool of physicians who comprises the required medical departments in various medical fields. It would have been different if CHHMAC was also open for non-accredited physicians, that is, any medical practitioner, for then CHHMAC would be running a commercial building for lease only to doctors which would indeed subject the CHHMAC to the commercial level of 35% assessment. CHHMAC, being hundred meters away from the CHH main building, does not denigrate from its being an integral part of the latter. The Herrera ruling on what constitutes property exempt from taxation is indeed applicable in the instant case, thus: Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefore (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as, in the case of hospitals, a school for training nurses, a nurses home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, andrecreational facilities for student nurses, interns and residents (84 C.J.S., 621), such as athletic fields, including a farm used for the inmates of the institution (Cooley on Taxation, Vol. 2, p. 1430). CHHMACs charge of rentals for the offices and clinics its accredited physicians occupy cannot be equated to a commercial venture, which is mainly for profit. First, CHHMAC is only for its consultants or accredited doctors and medical specialists.Second, the charging of rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays the proper taxes for its rental

income. And, fourth, if there is indeed any net income from the lease income of CHHMAC, such does not inure to any private or individual person as it will be used for re spondents other charitable projects. (City Assessor of Cebu v. Association of Benevola de Cebu, Inc.., G. R. No. 152904, June 8, 2007)

TAX REMEDIES: REAL PROPERTY TAXATION

1. The concurrent and simultaneous remedies afforded local government units in enforcing collection of real property taxes: a. Distraint of personal property; b. Sale of delinquent real property, and c. Collection of real property tax through ordinary court action. 2. Procedure for refund of real property taxes based on unreasonableness or excessiveness of amounts collected. a. Payment under protest at the time of payment or within thirty (30) days thereafter, protest being lodged to the provincial, city or in the case of a municipality within the Metro Manila Area the municipal treasurer. b. The treasurer has a period of sixty (60) days from receipt of the protest within to decide. c. Within thirty (30) days from receipt of treasurers decision or if the treasurer does not decide, within thirty (30) days from the expiration of the sixty (60) period for the treasurer to decide, the taxpayer should file an appeal with the Local Board of Assessment Appeals. d. The Local Board of Assessment Appeals has 120 days from receipt of the appeal within which to decide. e. The adverse decision of the Local Board of Assessment Appeals should be appealed within thirty (30) days from receipt to the Central Board of Assessment Appeals. f. The adverse decision of the Central Board of Assessment Appeals shall be appealed to the Court of Tax Appeals (En Banc) by means of a petition for review within thirty (30) days from receipt of the adverse decision. g. The decision of the CTA may be the subject of a motion for reconsideration or new trial after which an appeal may be interposed by means of a petition for review on certiorari directed to the Supreme Court on pure questions of law within a period of fifteen (15) days from receipt extendible for a period of thirty (30) days. 3. What is the rationale for the restriction upon the requirement for payment under protest of real property taxes ? SUGGESTED ANSWER: The restriction upon the power of courts to impeach tax assessment without a prior payment, under protest, of the taxes assessed is consistent with the doctrine that taxes are the lifeblood of the nation, and as such their collection cannot be curtailed by injunction or any like action; otherwise, the state or, in this case, the local government unit, shall be crippled in dispensing the needed services to the people, and its machinery gravely disabled. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) Thus, the trial court has no jurisdiction to entertain a petition for prohibition absent payment under protest of the tax assessed. (Ibid.) 4. Unpaid real property taxes are considered as liens upon the property form which they were due. May such property be proceeded against if it is already owned by one other than the one who used it at the time the real property taxes were due ? Explain your answer briefly. SUGGESTED ANSWER: No. While unpaid realty taxes attach to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner, to impose the real property tax on the subsequent owner which was neither the owner not the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. Consequently, MERALCO the former owner/user of the property was required to pay the tax instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) 5. May personal property be distrained in order to enforce real property tax delinquencies ? Explain briefly.

SUGGESTED ANSWER: Yes. The LGU could also avail of the remedy of distraint and levy of personal property subjecting any personal property of the taxpayer to execution. Thus, the issuance of the warrants of garnishment over MERALCOs bank deposits was not improper or irregular. (Manila Electric Company v. Barlis, et al., G.R. No. 114231, May 18, 2001) NOTE: The above May 18, 2001 decision was set aside by the Supreme Court when it granted the petitioners second motion for reconsideration on June 29, 2004. The author submits that the above ruling in the May 18, 2001 decision is still valid, not on the basis of the May 18, 2001decision, in the light of pronouncements of the Supreme Court in other cases. Thus, do not cite the doctrine as emanating from the May 18, 2001 decision. 6. What is the nature of the publication requirement for delinquency sales of real property ? What is the reason behind this nature ? SUGGESTED ANSWER: Notice and publication, as well as the legal requirements for a tax delinquency sale, are mandatory, and the failure to comply therewith can invalidate the sale.The prescribed notices must be sent to comply with the requirements of due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236) The reason behind the notice requirement is that tax sales are administrative proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C.,169 SCRA 314) 7. FELS Energy, Inc., had a contract to supply NPC with the electricity generated by FELS power barges. The contract also stated that NPC shall be responsible for all real estate taxes and assessments. FELS then received an assessment of real property taxes on its power barges from the Provincial Assessor of Batangas. If filed a motion for reconsideration with the Provincial Assessor. a. Upon denial, FELS elevated the matter to the Local Board of Assessment Appeals (LBAA), where it raised the following issues: 1) Since NPC is tax-exempt then FELs should also be tax-exempt because of its contract with NPC. 2) The power barges are not real property subject to real property taxes. b. Upon the other hand the Local Treasurer insists that the assessment has attained a state of finality hence the appeal to the LBAA should be dismissed. Rule on the conflicting contentions. SUGGESTED ANSWER: a. All the contentions of FELS are without merit: 1) NPC is not the owner of the power barges nor the operator of the power barges. The tax exemption privilege granted to NPC cannot be extended to FELS. the covenant is between NPC and FELs and does not bind a third person not privy to the contract such as the Province of Batangas. 2) The Supreme Court of New York in Consolidated Edison Company of New York, Inc., et al., v. The City of New York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, held that barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory equipment mounted on the barges were subject to real property taxes. Moreover, Article 415(9) of the Civil Code provides that [d]ocks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast are considered immovable property by destination being intended by the owner for an industry or work which may be carried on in a building or on a piece of land and which tend directly to meet the needs of said industry or work. b. The Treasurer is correct. The procedure do not allow a motion for reconsideration to be filed with the Provincial Assessor. To allow the procedure would indeed invite corruption in the system of appraisal and assessment. it conveniently courts a graft-prone situation where values of real property may be initially set unreasonably high, and then subsequently reduced upon the request of a property owner. In the latter instance, allusions of possible cover, illicit trade-off cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system. (FELS

Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case, citing Callanta v. Office of the Ombudsman. G. R. Nos. 115253-74,January 30, 1998, 285 SCRA 648) 8. A notice of assessment issued by a local assessor is not the subject of a motion for reconsideration that must be appealed to the LBAA. The last action of the local assessor on a particular assessment shall be the notice of assessment. It is this last action which gives the owner of the property the right to appeal to the LBAA. The procedure does not permit the property owner the remedy of filing a motion for reconsideration before the local assessor, (FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557, February 16, 2007and companion case, citing Callanta v. Office of the Ombudsman. G. R. Nos. 115253-74,January 30, 1998, 285 SCRA 648) 9. A City Ordinance adopting a method of assessment was nullified by the Supreme Court. A taxpayer who has paid his real property taxes on the basis of the nullified ordinance now posits that the return of the real property tax erroneously collected and paid is a necessary consequence of the Supreme Courts nullification of the ordinance and there is no need to claim for a refund. Is this correct ? SUGGESTED ANSWER: No. The entitlement to a tax refund does not necessarily call for the automatic payment of the sum claimed. The amount of the claim being a factual matter, it must still be proven in the normal course and in accordance with the administrative procedure for obtaining a refund of real property taxes, as provided under the Local Government Code.(Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, September 15, 2006) 10. Procedure for refund of real property taxes based on validity of the tax measure or solutio indebeti. a. Payment under protest not required, claim must be directed to the local treasurer, who must decide within sixty (60) days from receipt. b. The denial by the local treasurer of the protest would fall within the Regional Trial Courts original jurisdiction, the review being the initial judicial cognizance of the matter. Despite the language of Section 195 of the Local Government Code which states that the remedy of the taxpayer whose protest is denied by the local treasurer is to appeal with the court of competent jurisdiction, labeling the said review as an exercise of appellate jurisdiction is inappropriate since the denial of the protest is not the judgment or order of a lower court, but of a local government official. (Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. 154993, October 25, 2005) c. The decision of the Regional Trial Court should be appealed by means of a petition for review directed to the Court of Tax Appeals (Division). d. The decision of the Court of Tax Appeals (Division) may be the subject of a review by the Court of Tax Appeals (en banc). e. The decision of the Court of Tax Appeals (en banc) may be the subject of a petition for review on certiorari on pure questions of law directed to the Supreme Court.

STATUTORY TAX EXEMPTIONS

11. Are port and other facilities owned by the Philippine Ports Authority exempt from real property taxes ? SUGGESTED ANSWER: No. The fact that the port and its facilities and appurtenances, owned by the Philippine Ports Authority (PPA), are accessible to the general public does not exempt it from the payment of real property taxes. These are patrimonial properties of PPA, not for public use, and that the operation of the port and its facilities and the administration of its buildings are in the nature of ordinary business. PPA is a profit earning corporation, hence its patrimonial properties are subject to tax. [Philippine Ports Authority v. City of Iloilo, et al., G. R. No. 143214, November 11, 2004 citing Light Rail Transit Authority v. Central Board of Assessment Appeals, 342 SCRA 692 (2000)] 12. Warehouses located in ports are property subject to real property taxes. Ports constructed by the State are properties of the public dominion under Art. 420 of the Civil Code which enumerates these as properties intended for public use. Be that as it may, a warehouse, which, although located within the port is distinct from the port itself. Thus, it is subject to tax. The warehouse, in the case at bar, may not be held as part of the port,

considering its separable nature as an improvement upon the port, and the fact that it is not open for use by everyone and freely accessible to the public. In the same way that the Supreme Court once ruled, that the exemption of public property from taxation does not extend to improvements made thereon by homesteaders or occupants at their own expense, it likewise upheld the taxability of the warehouse, in the case at bar, it being a mere improvement built on an alleged property of public domain. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003) This is still good doctrine. 13. The Manila International Airport Authority (MIAA) was subject to real property taxes by the municipality of Paranaque on its airport lands, and buildings on the ground that the Local Government Code has withdrawn exemptions previously enjoyed by government-owned and controlled corporations. MIAA contends otherwise as it claims it is not a government owned or controlled corporation. Who is correct. SUGGESTED ANSWER: MIAA is correct because it is not a government owned or controlled corporation but an instrumentality of the government that is exempt from taxation. It is not a stock corporation because its capital is not divided into shares, neither is it a non-stock corporation because there are no members. It is instead an instrumentality of the government upon which the local governments are not allowed to levy taxes, fees or other charges. An instrumentality refers to any agency of the National Government, not integrated within the department framework vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies chartered institutions and governmentowned or controlled corporations. [Sec. 2 (10), Introductory Provisions, Administrative Code of 1987] It is an instrumentality exercising not only governmental but also corporate powers. It exercises governmental powers of eminent domain, police power authority, and levying of fees and charges. Finally, the airport lands and buildings are property owned by the government that are devoted to public use and are properties of the public domain. (Manila International Airport Authority v. Court of Appeals, et al., G. R. No. 155650, July 20, 2006) 14. The primary reason for the withdrawal of tax exemption privileges granted to governmentowned and controlled corporations and all other units of governmentwas that such privilege resulted to serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in their requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them. (Philippine Ports Authority v. City of Iloilo, G.R. No. 109791, July 14, 2004 citingMactan Cebu International Airport Authority v. Marcos, 261 SCRA 667) 15. Two (2) parcels of land previously owned by GSIS and sold to private parties were bought at public auction by a private individual to satisfy real property tax delinquencies. Since the original owners duplicate TCT could not be found, the buyer sought the registration of the land in her name. The court ordered the cancellation of GSIS title and the issuance of a new title in the buyers name. GSIS now annulment of the decision claiming that it is exempt from payment of real property taxes in accordance with its charter R. A. No. 8291 which provides among others that, Accordingly, notwithstanding any laws to the contrary, the GSIS, its assets, revenues, including all accruals thereto, and benefits paid shall be exempt from all taxes, assessment fees, charges or duties of all kinds. (Sec. 39) It is the claim of GSIS that the above provisions of R.A. No. 8291, a later law, abrogated the provisions of R.A. No. 7160. Is the contention of GSIS tenable? SUGGESTED ANSWER: No. Even if the charter of GSIS generally exempts it from tax liabilities, the prescription is not so encompassing as to make the tax exemption applicable to the properties in dispute. The properties were already transferred and the alienation of the properties sold by GSIS was the proximate cause and necessary consequence of the delinquent taxes due. (Government Service

Insurance System v. City Assessor of Iloilo City, et al., G.R. No. 147192, June 27, 2006 citing City of Baguio v. Busuego, No. L-29772, 18 September 1980, 100 SCRA 116) The allegation of the repeal of R.A. No. 7160 by R.A. 8291, is not convincing. Repeal cannot be assumed; the intention to revoke must be clear and manifest. To bring about an implied repeal, the two laws must be clearly repugnant in away that the later law R.A. 8291 could not exist without nullifying the earlier law, R. A. No. 7160. (Government Service Insurance System, supra) Sec. 39 of R.A. No. 8291 should be read consistently with its avowed purpose the maintenance of its actuarial solvency to finance the retirement, disability and life insurance benefits of its members. The tax-exempt properties and assets of GSIS referred to those that remained at its disposal and use, either for investment or for income generating purposes.Properties whose actual and beneficial use had been transferred to private taxable persons, for consideration or otherwise, are excluded and are thus taxable. . (Ibid, citing Rubia v. Government Service Insurance System, G.R. No. 151439, 21 June 2004, 432 SCRA529)) 16. A telecommunications company was granted by Congress on July 20, 1992, after the effectivity of the Local Government Code on January 1, 1992, a legislative franchise with tax exemption privileges which partly reads, The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. This provision existed in the companys franchise prior to the effectivity of the Local Government Code. A City then enacted an ordinance in 1993 imposing a real property on all real properties located within the city limits, and withdrawing all tax exemptions previously granted. Among properties covered are those owned by the company from which the City is now collecting P43 million. The properties of the company were then scheduled by the City for sale at public auction. The company then filed a petition for the issuance of a writ of prohibition claiming exemption under its legislative franchise. The City defended its position raising the following: a. There was no exhaustion of administrative remedies because the matter should have first been filed before the Local Board of Assessment Appeals; b. The companys properties are exempt from tax under its franchise. Resolve the issues raised. SUGGESTED ANSWERS: a. There is no need to exhaust administrative remedies as the appeal to the LBAA is not a speedy and adequate remedy within the law. This is so because the properties are already scheduled for auction sale. Furthermore one of the recognized exceptions to the rule on exhaustion is that if the issue is purely legal in character which is so in this case. b. The properties are exempt from taxation. The grant of taxing powers to local governments under the Constitution and the Local Government Code does not affect the power of Congress to grant tax exemptions. The term exclusive of this franchise is interpreted to mean properties actually, directly and exclusively used in the radio or telecommunications business. The subsequent piece of legislation which reiterated the phrase exclusive of this franchise found in the previous tax exemption grant to the company is an express and real intention on the part of Congress to once against remove from the LGCs delegated taxing power, all of the companys properties that are actually, directly and exclusively used in the pursuit of its franchise. (The City Government of Quezon City, et al., v. Bayan Telecommunications, Inc., G. R. No. 162015, March 6, 2006)

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