5. BAR MATERIALS IN TAXATION Series 2017 Prepared by: Dr. Virginia Jeannie P. Lim, LLM, Ed. D. GENERAL PRINCIPLES: ‘State policy on taxation under RA 8424: Answer. ’@) To proméie sustainable economic grovith through rationalization of Philippine internal revenue tax system and tax administration, . b). To provide as much as possible an equitable relief to a greater number of taxpayers: c) To create.a robust environment for business to enable them to complete better global market, d) To ensure that Government is able to: provide the needs ‘of the people within its territorial jurisdiction : in regional and Define The Power of Taxation: ‘Answer. It is the power by which the sovereign, through its legislature, raises revenues to defray the necessary expenses of the government. It is merely @ way of apportioning the costs of the government ‘among those who in some measure are privilege to enjoy its benefits and must bear its burden What are the fiscal incentives granted to PEZ@ registered enterprises under RA 7916? ‘Answer. The taxpayer has two (2) options with respect to its tax burden ~ (a) it could avail of an income tax holiday pursuant to the provisions of EO 226, thus exempt from income taxes for a number of years but not from other IR taxes such as VAT, or (b) it could avail of the tax exemptions cna taxes, including VAT under PD 66 and pay only the preferential tax rate of 5% under RA 7916. (2005 case) X Hospital is a GOCC; All its real properties are devoted to medical use. In dire need of funding to support the escalating medical expenses in its operation, X converted the ground floor of the hospital to various rooms: and leased them to doctors for their private Glinic. The income realized therefrom was used for the support of thé hospital. The tax official assessed X of taxes having found that: (a) X has an annex building exclusively for pay patients; (b) X should be disqualified from its tax exemption because it regularly receives donations from local and foreign donors, and (c) it has income from other ‘sources. On the other hand, protested contending that: (a) all Income eared was brought back for the support of the hospital, (b) the hospital remains predominantly used. for medical services. Decide. ‘Answer. (a) The receipt of money from pay patients ofthe hospital wil not affect the tax exemption privilege ‘of X, because such income is incidental to the medical services performed by X hospital (b) The receipt of donations even if they come regularly does not disqualify the donee from the tax exemption. (c) The income realized from other sources (not medical services) shall be taxable notwithstanding the fact that it' was brought back for the support of X (See Sec, 30 WIRC). The argument of X that the hospital remains predominantly used for medical services is not tenable because the law allows exemption only to a real property owned by the traditional exemptees that are ACTUALLY, DIRECTLY and EXCLUSIVELY used in line with their main objectives. is a non-stock, non-profit hospital. It maintains a wing exclusively for paying pationts, receives payment for medical services from both, in-patient and out-patient of the hospital, it regularly receives subsidies from the government and donations from private individuals/entities. X leases the ground floor of the main building to doctors for their own medical practices. Is there any tax Incident under the facts given? Reason. “Answer. As a general principle, a charitable institution does riot lost its character as such and its exemption from taxes simpie because it derives ificome from patients, whether out:patient cr confined in the hospital, of receives subsidies/donations from the private sector or government, s0 tong as the money received is devoted or used altogether to the charitable object which itis intended to achieve, and no money inures to the private benefit of the persons managing or operating the institution.10. However, the income X receives from the. rentals of the private clinios of doctors at the ground floor of the main building is subject to income tax even if all the money is. brought back for the support of the institution because said money was not derived from the performance of its main objective but come ‘commercial activities. The real property tax may likewise be collected from X-as the property is not actually, directly and exclusively used fro charitable purposes. (2004 case) X was encouraged to invest in-government bonds: because it gives higher interest rates and the interest income earned therefrom are tax exempt. The bond X purchased matures in 61 months. Of late, the interest rate was, lowered and the interest income was even ‘subjected to final withholding taxes. X questions the changes made on his investment and invokes the non-impairment clause of the constitution. Is X correct? ‘Answer. Yes. X is correct because he enjoys a contractual tax exemption when his purchased the government bonds. That contractual. tax exemption, in the real sense of the term and where the non- impairment clause of the Constitution can rightly be invoked are those agreed to. by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling iaws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. This contractual tax exemption should not be confused with tax exemption granted under franchises which is not protected by the non-impaitment clause of the Constitution. (1999 case) * ‘The government entered into a contract with X. The latter will supply foreign rice in support of the government's feeding program. T is not a party to the contract and he files a taxpayer's suit against the government. Will the action prosper? ‘Answer. A taxpayer need not be @ party to the contract to challenge its validity. All that is required in'a ‘taxpayers suit is that the party suing as taxpayer must specially prove sufficient interest in preventing ilegal expenditure of money raised by taxation. (2005 case) Under RA: 7432 (Senior Citizens Law), senior citizens are given 20% discount on their purchase of medicines from private ‘establishments which may be claimed by such establishments subsequently as tax credit. In 2005 X Drugstore sustained an operating loss and therefore was not able to deduct the 20% discount it gave to senior citizens. X applied for the issuance of a tax credit certificate Indicating the correct amount of discount given. CIR denied the claim of X contending that is not entitled because there was no income tax due from its business operation. CIR shows “X” a Rev. Regulation in support of the denial. Is-the tax official correct? Reason. : ‘Answer. The Tax official is. NOT correct. “A law cannot be amended by a mere regulation. The administrative agency issuing regulations may not enlarge, alter ot restrict the provisions of the law it ‘administers — it cannot engraft adcitional requirements not contemplated by the. legislature. RA 7432 maintains that the cost of the discount may be claimed as a tax credit, which simply means that the amount given to senior citizens by way of discount may be claimed as a reduction from any tax liability, considering that X sustained a oss, its application for a tax credit certificate should be granted so that it can apply the discount jater on against his other IR tax payments. To deny X such, despite the plain mandate of the law is, indefensible. (2005 case) Can the CIR issue an administrative tax amnesty? ‘Answer. Nothing in the tax Code gives the CIR the power to issue tax amnesty. A tax amnesty, being & 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 tax law, partakes of an. absolute forgiveness or waiver by the government ofits right to collect what otherwise would be due it. (Republic vs. IAC) The power of taxation is legislative in. character and a legislativesprerogative (NPC vs.-Albay). The waiver partakes of the nature of tax exemption. The Constitution requires that law granting tax exemption must have the concurrence of a majority of all members of Congress. The power to tax includes the power to exempt thereof tt follows, therefore, that only the fegisiatures have the power to grant tax amnesty and not the CIR. How should the discount (20%) granted to Senior Citizens be treated by businessmen for purposes of taxation? ‘Answer. It shall be deducted from their gross income at the end of the tax period. (See. 4, RA 9257) The establistiment giving the 20% discounts may claim it as a tax deduction based on the net cost of the goods sold of services rendered, provided ‘a. the cost of the discount shall be allowed for the same taxable year that it was granted, and41. 12, 13. 14. 15. . the total amount of the claimed tax deductions net of VAT 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 NIRC. ‘The VAT law provides that the President, upon the recommendation of the Sec. of Finance, shall raise the VAT rate of 10% to 12% after the given conditions are met satisfactorily. Was there an invalid delegation of legislative power to tax to the president? Answer. There was ‘no undue delegation of iagisiative power to tax but only the discretion as to the ‘execution of the law, which is constitutionally permitted. The Congress.does not abdicate ts 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 VAT issue, the Sec. of Finance merely acted as the agent of the. legislative department in determining and deciaring whén the event of increase should commence. The President cannot set aside the findings of the Sec. of Finance but she must act accordingly: (Abakada Guro Party List vs. Ermita, Sept 1, 2005) . ‘Sec. 12, Art, VI of the 1987 Phil. Constitution encourages the use of Filipino labor, domestic materials and locally produce goods. (Concept of “preferential use” and “Filipino First policy"), However, our government grants tax and duty-free importation to businessmen ‘operating inside the export processing zone. Is this not violative of the “preferential use” of the Constitution? ‘Answer. The mere fact that the law authorizes the importation and trade of foreign goods does not suffice to declare the statute granting tax and duty-free exemption unconstitutional on at ground alone. Itis true that the Constitution does not encourage the uniimited entry of foreign goods, services and investments into the country yet does not prohibit them either. The current dictates of time and global market is to allow an ‘exchange on the basis of equality and reciprocity, frowning only foreign competitions that are discriminatory and unfair. (Coconut Off Refiners Association, inc. vs. Torres, July 29, 2008) : Petitioners are local non-life insurance corporations, which formed a “pool”, in order to enter into a Reinsurance Treaty with.a German company, the BIR assessed deficiency corporate taxes against the “poo!” on the ground that it is considered a partnership taxable as a corporation. Patitioners insist that the pool is a mere agent, not acting on its own and therefore, cannot be taxed as'a corporation, there being no risk undertaken by the pool, no common fund and no control exercised by its board in the management of its fund. Is the “pool” taxable as a corporation? . Answer. Yes. Pursuant to Sec. 24 of the NIRC, the pool is included within the definition of “Domestic Corporation’ which comprises even unregistered partnerships and associations. In this case, the ceding ‘companies entered into an association that would handle all businesses under the Treaty. it has a common fund and an‘executive board to manage its affairs. Moreover, even ifthe poo! itself did not issue any policies Con its own, its work was indispensable to the business of the ceding companies and the Germany company. Is there double taxation? Answer. None. Double taxation means taxing the same. person twice by the same jurisdiction for the same thing, The pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends feceived by the said companies. PBCom filed its quarterly ITR for the 1" & 2° qrts. Of 1985. Later, if suffered losses and reported a net loss for 1985 & 1986. However, it earned rent for which taxes were previously withheld by their lessees. In Aug. 1987, if requested for @ tax credit representing tax overpayments in the 1" & 2"! qrts. Of 1986. In July 1988, it also claimed refund of the creditable taxes withheld from 1985 & 1986 rentals. The CIR change the prescriptive peridd for tax refund under'a RMC. PBCom relied on said circular. Is the claim for refund beyond the 2-year period valid as the same was based on the Revenue Memorandum Circular? ‘Angwer. The claim for refund is already time barred. Taxes are the lifeblogd of the nation, thus the modes to enforce collection should be summary & rarely injerfered with. From the same perspective, claims for refund/credit should be exercised with the time fixed by law in order not to unduly delay the BIR in’ its collection functions. The RMC issued by the CIR is beyond the provition of the law. An erroneous interpretation of the law does not vest the taxpayer with a shield against judicial action. Sec. 248 of the 1997 NIRC provides: “Any revocation, modification or reversal of any of the tules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the GIR shall NOT be given retroactive application if the16. 47. 19. revocation, modification or reversal will be prejudici EXCEPTION. to the taxpayers, Give the Answer. Retroactive application shall be imposed. ’a)__ Where the taxpayer deliberately misstates or omits material facts from his retum or any document required of him by the BIR; b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or c) Where the texpayer acted in bad faith. ‘ ‘The CIR issued two rulings on the determination of the tax base for the imposition of ad valorem tax on cigar and cigarettes, BIR Ruling 100-00 dated Oct. 2, 2000 excluded the VAT from the tax base in computing the 15% excise tax due. BIR Ruling 120-01 dated Feb. 11, 2004 included back the VAT in computing the tax base for purposes of the 15% ad valorem tax and expressly revoked the BIR Ruling 100-00. X, was assessed deficiency ad valorem tax on its removals of cigarette products during the period Nov. 10, 2000 to Jan. 22, 2001. The deficiency assessment carne about because of the failure of the company.to include in its tax base the VAT. Is the assessment correct? * ‘Answer. No, The retroactive application. of BIR Ruling 120-01 would be prejudicial to X. Since the ‘exceptions above-mentioned are not attendant in.the case at bar, then the rule on the non-retroactiity of rulings would apply. The assessment gave BIR Ruling 120-01 a retroactive effect. Thus, such assessment is incorréct as itis in contravention with Seo. 246 of the Tax Code. RMC No. 7-36 states that overpaid income taxes are not covered by the 2-year prescriptive period under the Tax Code and that taxpayers may claim refund of tax credits for the ‘excess quarterly income tax with the BIR within 10 years under Art. 1144 of the Civil Code. Corporation relying in good ‘faith in the circular did not immediately file its claims for refunds and tax credit of its 1985-1996 excess quarterly income payments. Upon filing in 1998, the request for tax refund was denied. {a) Is RMC No. 7-36, with respect to the 10-year prescriptive period valid? _ (b) If RMC No. 7-35 is not valid, may the government be compelled to allow tax refunds or credit on the ground of estoppel? ‘Answer. (a) No. The Tax Code states that the taxpayer may fle a claim for refund or credit with the BIR within 2 years from the date of payment of the tax or penalty. The two-year prescriptive period is to-be Computed from the time of fling the final adjustment return and the tax as finally computed for the taxable period. MC No. 7-35 is changing the prescriptive period of 2 years to 10 years, created a clear inconsistency. with the provision of the Tax Cade. The CIR rendergd an interpretation which is not in harmony with the statute. Hence, his interpretation could not be given weight for to do so would in effect, amend the statute, (©) No. Fundamental is the rule that the State cannot be put in estoppel by the mistake or errors of its officials or agents. This rule is even more important in matters involving taxes. Taxes are the lifeblood of the rrafion through which the goverment agencies continue to operate and, with which the State effects its function for the welfare of its people. The errors of certain administrative officers should never be allowed to jeopardize the government's financial position. A petition was filed questioning the constitutionality & validity of EO No. 97- A issued pursuant to RA No, 7227 which, among other things, created the Subic Special Economic Zone and granted thereto special tax privileges. Petitioners allege that the EO violated their right to equal protection by limiting the tax-and duty-free privileges to businesses and residents within the fenched-in area of the Economic Zone. Is the contention correct? ‘Answer. No. The order is not violative ofthe equal protection clause, otf it discriminatory, There are real ‘and substantial diferences between those inside & outside the Zone, thus justifying a valid and reasonable Classification. Equal protection is not an absolute right and is subject to ee classification. RA 7227 ‘aims to accelerate the conversion of military reservation to productive uses. Therefore, the “lands covered under the Bases Agreement" are its-object. The classification does not merely apply to existing conditions: because upon the conversion of the Zone into a self-sustaining industrjal & commercial area, there will indeed be a long-term difference between the Zone and the areas outsidd. Also, all residents & businesses within the "secured area” are treated similarly. 3 § SC Johnson was licensed by SC Johnson & Son (USA) to use its trademarks. The agreement was registered with the Bureau of Patents (Phils.) For this privilege, SC 1020, 21. 22. Johnson pays royalties to the US Corp. which was subject to:25% withholding tax. In 1993, ‘SC Johnson filed for tax refund of overpaid withholding tax. It claims that under the Most. Favored Nation (MFN) Clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty, the royalty payments it made were subject only to 10% tax. Is SC Johnson & Son Correct? ‘Answer. The 10% tax claimed is net correct. The RP-US Tax Treaty states that the applicable rate would be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances (Most Favored Nation Clause) to a resident of a third stats, The 10% rate provided in the RP-West Germany Treaty is not applicable. This is because the RP-US Treaty does not provide for a matching tax.credit of 20% for taxes paid to the Philippines on royalties expressly allowed in ‘the RP-West Germany Treaty. The entitlement of the 10% rate by US firms despite the absence of a matching 20% credit ‘would derogate from the design behind the "MFN* clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity of payment of taxes is a condition for the enjoyment of the MFN treatment precisely to underscore the need for “equality of treatment. Royalties is not a tax. May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his other tax liabilities? Reason. ‘Answer, No. Taxes and claims for fefund cannot be set-off (legal compensation) for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is material distinction between a tax and a claim for refund. Claims for refunds just ike debts are due from. the governments in its ‘corporate capacity, while taxes are due to the government in its sovereign capacity. i Moreover, set-off is available only if both obligations are due; demandable and fully liquidated, Liquidated debts are those where the exact amounts have already been determined. In the instant case, the iaim of the taxpayer for VAT refund is stil pending and the amount is stil to be determined. A fortion, the liquidated obligation of the taxpayer to the government cannot therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor. fe j May the CIR be held personally liable for damages caused to a taxpayer in the performance of his official duties? (Chato vs. Fortune Tobacco, June 19, 2007) ‘Answer. Yes, The rule in this jurisdiction is that @ 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: (a) acted with malice, bad faith; or negligence; or (2) where the public offer violated a constitutional right of the plaintit. * In the cited case, the then CIR issued a Rev. Regulation (RMC 3793)'in violation of Fortune Tobacco's ‘constitutional right against deprivation of property without due process of law and the right to equal protection of the laws. Under what circumstances may a special law prevail ove general law? (Chato case) ‘Answer. The rule is that where there are two acts, one of which is special and particular (Art. 32 of the Civil Code — A public officer who directly of indirectly violates the constitutional rights of another, may be sued for damages even if his acts were not so tainted with malice or bad faith) and the other general (Sec. 38,-Book | of the Administrative Code ~ “A public officer shail nofbe civily liable for acts done in the performance of his. official duties unless there is a clear showing of bad faith, malice or gross negligence") which, if standing alone, would include the same matter and thus confict with the special act, the special law must prevail since it evinces the legislative intent more clearly than that of a general statute and must not be taken as intended to affect the more particular and specific provisions of the earlier act, unless it is absolutely so to construe it in order to give its words any meaning at al ‘ ‘The circumstances that the special law is passed BEFORE OR AFTER the general act does not change the principle above. Where the special law is later, it wil be regarded as an exception to, or a qualification of, the prior general act, and where the general act is later, the special statute. will be construed as remaining an exception to its terms, unless repealed expressly or by necestary implication ” X was suspected to have amassed ill-gotten wealth while in public office. He maintained various accounts in several different banks under fictitious names. Upon investigation, the CIR placed these bank accounts under constructive distraint.|X’s counsel challenged the CIR’s action for want of an assessment against X. Is the GIR justified in freezing the accounts of X?24, 25. 26. 27. 28. 23, 30. Answer. The CIR is justified in placing the accounts of X under constructive distraint. The act of maintaining fictitious accounts is an act of concealing properties with warrants the remedy of constructive distraint under Sec 206, of the Tax Code * Is the BIR authorized to freeze inquiries of a bank deposit of a taxpayer? : ‘Answer. Sec, 206 of RA’8424 provides the legal basis of such authority. To safeguard the interest of the ‘goverment, the CIR may place under constructive distraint the property of a taxpayer who, in his opinion {@) is concealing property for purposes of tax evasion, (b) intends to leave the country, (c), obstruct the collection of taxes, (d) is retiring from business and (e) removing property ftom where they are collected for purposes of tax evasion. : The legal officers of the BIR relying on the pro judicial action on behalf of the government against X. The same officials filed a Petition for Review on Gertiorari before the Supreme Court. The highest Court dismissed the petition. Basis of dismissal - A Petition for Review on Certiorari before the CA or the SC, without the participation of the Solicitor General is defective, being the legal oficer ofthe Republic of the Philippines, he 's the rightly person who should represent the government in tax cases before the CA and the SC, not the. Jega officers of the bureau. ‘A revenue bill was approved by the Lower House of the Congress and transmitted to the Upper House. After the latter's review, it came out with its own version dealing with the ‘same subject matter. This version was approved by the President and became a revenue Is this bill constitutional? Why? Answer. This is constitutional and valid because the revenue bill originated from the Lower House. The ‘version of the Upper House involves the same subject matter although its version is different from that of the version of the. lower-house. This is consonant with the ‘Senate's power, not oniy.to concur, modify, anid revise but also to propose amendments, eveh if the: result will cause extensive changes resulting in re- writing the whole. (Abakada vs. Ermita) Income Taxation During the lifetime. of X he was employed as the gener: Corporation. His dedication and exemplary performance on the job brought in huge profit to the corporation. X was allowed to borrow Php 2.0.million for the renovation of his house in the province at a minimal rate of 6% per annum. Three days after Christmas of 2007 X suffered a cardiac arrest and died. in recognition of his valuable: contribution to the firm, the widow was given Php 1.0 million and-the unpaid debt of X was condoned. In the filing of her income tax return, should the widow declare the money she received-as income for the year 20077 What is the tax imiplication of X's debt that was condoned? manager of the Wonder ‘Answer. The amount given to the widowr of X is treated as an exempt income because any amount received by the employee's heirs as a consequence of separation of the erriployee on account of sickness or death is excluded from gross income. The debt condones is, reruuneratory donation subject to taxation. It is nota gif given out of pure generosity or liberality but started out as an obligation. May the Secretary of Finance suspend the imposition of the Minimum Corporate Income. ‘Tax? ‘Answer. He may under the following instances: (a) there is a prolonged labor dispute (more than'® months), (©) force majeure and (c) legitimate business reverses. Distinguish a Certificate of Repurchase After Sale from a Certificate of Sale: ‘Answer. The former is glven to the delinquent taxpayer or fis assign if he exerciees his option to redeem the property sold either to the highest bidder in the public auction, of to the province if there was no winning bidder, whereas, the latter is given to the winning bidder at the public auction or to the province if it decided to purchase the property when there was no other bidder or no satisfactory bid. (2003 case) ‘Suan Company is an unregistered partnership operating in Baguio City without business license. {a) Is it liable for any internal revenue taxes? JWHM. 32. 33. (b) After a BIR assessment, it noticed that “Suan” was not paying: its income tax regularly and those that were covered by tax payments were not commensurate to its business operation. May the BIR impose the 2% MCIT on “Suan”? Why? ‘Answer. (a) Licensing and registration of a business entity is immaterial for tax liability under the Tax Code. *Suan’ is liable for all unpaid IR taxes from its inital operation which necessarily includes surcharges, interests and other penalties for violation of the Tax Code (non-payment of taxes) (b) The BIR is correct in imposing the 2% MCIT on “Suan” whose annual corporate tax payments was less than its 2% gross income. The 2% MCIT Is imposable whenever a corporation is sustaining @ loss or that its annual corporate tax payable is less than 2% MCIT. X ‘Manufacturing is engaged in the production of quality electrical appliances and electronics, products. X regularly incurred advertising expenses in protecting its brand franchise. Is the advertising expense allowed as a deduction from gross income as business expenses? ‘Answer. The protection of X's brand franchise is analogous to the maintenance of goodwill-or tile to one’s property which is in the nature of capital expense and not permitted to be deducted as. ordinary business expenses, Hence, it should fall under depreciation allowance of capital assets. (CIR vs. Procter and Gamble Phil. Mig. Corp. 1999) : NOTE: If the company was paid coripensation for damages it incurred from destroying its goodwill, such amount is not taxable because it is mere return of capital unless, the value awarded is more than the value of the goodwil, then the excess will be taxable. X corporation incurred advertising experises for the purpose of changing the image of its existing product line. The said expenses were deducted in full by X for the year it was incurred. The BIR disallowed the same on the ground that the said expenses benefited the product line and the company for a period exceeding one year and was therefore not an ordinary expense but a capital expenditure subject to depreciation over the life of the expense. Who Is correct? What distinguishes an ordinary expense from a capital expenditure? ‘Answer, The BIR is correct. Generally, ordinary and necessary expenses paid or incurred during the taxabie year in carrying on a trade or business of a taxpayer can be claimed as an allowable deduction for income tax purposes. In the instant case, itis shown that the expenses were actually incurred and likewise paid in the tax year involved, and that the expenses were incurred for business purpose. i. e., changing the image of a product line, hence. Necessary. However, the BIR correctly pointed out that the expense were not ordinary, The SC held that to be ordinary, the expense must be both reasonable and does not partake of ‘a capital outlay, such as: to create “goodwill. Thus, the SC disallowed the outright deduction of advertising ‘expense which is found unreasonable in amount and intended to protect the image of taxpayer's products, As a tule, if the advertising expense was incurred to stimutate current sales, it is deductible in full, if, however, it is uncured to stimulate future sales, it will be treated as a capital expenditure and the cost thereof will be amortized over the years benefited, with each year able to claim only the amount amortized in such year. (CIR vs. General Foods) * Differentiate (a) Withholding tax on Compensation, (b) Expanded Withholding Tax, (c) Final Withholding Tax and (d) Withholding Tax on Government Money Payments: “ ° Answer. ‘a. Withholding Tax on Compensation - is the tax withheld from individuals recelving purely compensation income. b: Expanded Withholding Tax - is @ kind of withholding tax which is prescribed only for certain payers and is creditable against the income tax due of the payee for the taxable quarter year. c. Final Withholding Tax - is a’kind of withholding tax which is prescribed only for certain payers and is not creditable against the income tax due of the payee for the taxabie year: Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the said income. d. Withholding Tax on Government Money Payments - is the withnoiding tax withheld by goverment offices and instrumentaiiies, including government-owned or -controlled corporations and local government units, before making any payments to private individuals, corporations, partnerships andlor associations.34. 35. 36. 37. 38. 39. - Are the X Corporation hired the services of Atty. Magaling to represent it in all its legal matters. ‘Atty. Magaling does not immediately bill the corporation as soon as legal services were rendered but he sends the corporation a Statement of Account once payments have accumulated. The last billing statement was for the years January 2010 — December 2012. May X deduct the payment from its gross. income under the “Substantiation Rule” when it files it income tax return? ‘Answer. The corporation should have estimated the cost of the legal services the year they were incurred ‘and deduct them accordingly for that year. This is because expenses are deductibie only on the year they were incurred. Hence, the expenses for the years 2010 and 2011 under the glven facts are no longer deductible. Only expenses for the year 2012 may be claimed under its ITR due on April 15, 2013. When ‘all events” have been met such that the expenses could already be estimated, they are allowed to be deducted even without supporting receipts. These expenses may be adjusted subsequently when the receipts are available. (“All Events Test Rule”) What is tax pyramiding?. ‘Answer. A tax imposed upon another tax. This has, no basis either in fact or in law. Sings 1922 tax pyramiding has been rejected by the Supreme Court, the legislature and our tax authorities. (2005 case) X Corporation in engaged in insurance business. Part of its activities is lending money to its policy holders. The CIR imposes additional percentage tax on the said activity because the former believes “X" is also a lending investor. Is the tax official correct? ‘Answer. When a company is taxed on its main business, itis no longer taxable further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business — to require X to pay additional percentage tax and fixed taxed again for an activity which is necessary @ part of the same business, the CIR must prove that that is a law. expressly requiring X such additional payment of tax because unless @ statute imposes. tax clearly, expressly and unambiguously, what applies is the equally ‘well-settled rule that imposition of a tax cannot be presumed. (2005 case). How shall a taxpayer report the income he realized from long term contracts? * ‘Answer. The income must be reported on'the basis of percentage of completion of the project. X (Lessor) and Y (Lessee) entered into a lease contract over a commercial building for a period of 10 years. Among the agreements entered into was for Y to shoulder all local and national taxes relative to the said leased, which was then computed at 18% per annum. The local government under a tax ordinance increased. taxes on lease of commer spaces/building. Did this tax measure interfere with the contract of X and Y, thereby violating the Non-impairment clause of the Constitution? ‘Answer. As held in the case of Talentino vs, Sec. of Finance, 235 SCRA 630, 8 lawful tax on anew subject, or ari increased tax on an old one does ‘not interfere with a contract or impairs its obligation ‘within the ‘meaning of the Constitution. While 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 cless and release the burdens of another, stil the tax must be paid unless prohibited by the Constitution, or can it be said that it impairs the obligations of any existing contract. : X is a real estate lessor, He leases his real property to L under the following conditions: " pays the annual real property tax, b. “L" pays the insurance premium on the insured leased premises’ ” advances 3 months of rent to X; d._ “L” lends to X Php 160,000 to be gradually deducted from the monthly rental; 2. “L” is allowed to build a “bodega” (Php 500,000) at the back of the existing building under a build-operate-and-transfer scheme, and f. “L” gives a two (2) months’ deposit upon execution of the lease contract. bove taxable incomes to X? ‘Answer. Yes, all [(a) to (e)] are taxable income to X because they are considered additional rent income to him, whereas, (?) wil depend on whether or not its refundable to L at the end of the contract period. If not refundable then itis taxable to X 144A. 42, 45. During the end of 2014, X Inc. received in advance the amount Php 100K from’ Y Corporation for future maintenance services as embodied in their Maintenance Service Agreement. Is the amount taxable in the calendar year 2011? (Manila Mandarin Hotel case) ‘Answer. No. Under the realization principle, revenue is generally recognized when both of the following conditions are met ‘a) - The earning process is complete or virtually complete, and b) Anexchange has taken place. ‘This principle requires that revenues be eamed before itis recorded. Amounts received in advance are not treated as revenue for the period in which they are received but as revenue of the future period or periods in which they are earned. These amounts are carried es uneamed revenue or liablity to transfer {goods or render services in the future ~ until the earning process is complete. The CIR disallowed some of the allowable deductions claimed ‘by X in his tax return of 2002. Without sending X a notice of assessment the CIR enforces tax collection in 2006, contending that IR taxes are self-assessing, hence, can be collected without an assessment. Is the CIR correct? ‘Answer. The CIR is not correct, because when he disallowed deductions claimed by X, he should have given X the opportunity to prove the validity and the relationship of those disallowed deductions to his business operation or professional conduct otherwise the due process clause of the Constitution is squarely Violated. Further, the right of the CIR to assess is 3 years, for failure to make the assessment within 3 years, the CIR claims against the taxpayer is barred and where there was never any valid notice of an assessment, it could not have become final, executory and uncontestable; the CIR cannot collect eny deficiency tax under the given facts. (2004.case) X owns a five-door apartment and leases it to tenants for residential purposes. X decided to sell the individuat units to the occupants. X inquires from you as to what kind of tax is due from him. What is your reply? Answer. X is subject to the regular income tax and not to capital gains tax because the property sold is not a capital asset, The sale of his property to his tenants cannot be characterized as other than sales of non- capital assets. (Tuason case) 7 X, 43 years oid, Is a regular employee of R (private) Corporation that has a CBA contract. He started with R Corporation at the age of 21. Having worked for 22 long years he decided to avail of the optional retirement benefits recently being offered by R. (a) is the optional retirement benefits of X taxable? (b) Are pre-terminated gratuity plans taxable?, ‘Answer. (a) The optional retirement benefit of X is taxable. For this retirement benefit to be exemipted from ‘taxation, he should be more thar’ 50 years of age and have worked with the same empioyer for no less than 40 years. (50-10 Rule) Moreover, this exemption can only be enjoyed once.-(b) The gratuity plan will lose its tax exempt status ifthe retirement benefits are released prior to the retirement of the employee at the age of 60. (2004 case) In case the company where X, an employee works has no CBA contract providing for a retirement benefit plan. What are the requirements to avail of the benefits of tax exemption ‘on money received upon termination? ‘Answer. X should have been in service for at least five (5) years with the company. and he should be between 60 - 65 years of age. (RA 7641) X availed of the optional retirement benefits of his employer. (a) If at the time of retirement X is 43 years of age and rendered 15 years of service, is the retirement benefit exempt from income taxation? (b) if at the time of retirement X is 52 years of age and rendered 8 years of service, is the retirement benefit exempt from income taxation? (C) If at the time of retirement X is 54 years old and rendered 20 years of service, is his optional retirement benefits taxable? Granting that X’s gratuity benefits were pre- terminated and its cash equivalent released to him upon availment of the optional retirement benefits is said money taxable? Answer. (a) The retirement benefits taxable because. is below 50 years of age. 1s47. 48. 49. . (b) The ‘etirement-benefit is taxable because while X is more than 50 years of age, he has not rendered more than 10 years of service. (©) The retirement benefits of X is tax exempt having met both the age requirement (60) and the number of years in service (10) with the same employer which. need not-be continuous but ‘agregated number of years in service, The cash equivalent of the gratuity plan that was released t0 X prior to age 60 is TAXABLE. ‘Taxability of retirement benefits: (@) Those received from the SSS and the-GSIS upon reaching the mandatory age of 60 ~ exempt from income tax: (b) Those received under RA 4917 (those received under a reasonable retirement plan) ~ exemat only f(a) the retiring employee or official has been in the service of the same employer for more than 10 years, and (b) he is not less than 50 years of age at the time of retirement, and (c) he avails of the benefit only ‘once, and (d) the retirement pian is approved by the BIR. (Ex. CBA agreement) (c) Those received under RA 7641 ~ (Those received where the employer has no retirement plan) The retiree receiving benefits from his employer shall be exempt from income taxation only if (a) he is at least 60 years of age but not more than 66 years old, and (b) must have serve the employer for at least 5 years. . X, an employee was seriously injured a vehicular accident. Upon recovery he filed a case against the owner of the motor vehicle. Among the awards granted to X includes punitive damages. Is such an award taxable? ‘Answer. The portion of the award consistig of punitive damages, (to punish the wrangdoer) is taxable ‘because itis not compensation for injuries sustained. X, an, educational institution owns several motor vehicles that are used exclusively for ‘educational purposes. Is X exempt from the paying the motor vehicle registration fees? ‘Answer. Motor vehicle registration fees are now considered taxes and are no’ longer deemed. mere regulatory fees, Consequently, entities enjoying tax exemptions are also exempt from paying motor vehicle registration fees under the Doctrine of Incidental Tax Exemption. (PAL vs, EDU, August 18, 1985) No. 1 — YMCA is a non-stock, non-profit institution, which conducts various programs and activities beneficial to the public pursuant to its religious, educational and charitable objectives. In 1980, YMCA earned an income. of more than P600K from leasing out portion of its premises to small shop owners and P47K from parking fees. Is the rental income from real property owned by YMCA subject to income tax? ‘Answer, Yes. The exemption claimed by YMCA is expressly disallowed by the last paragraph of then Sec. 27 of the NIRC. Furthermore, the Constitution only exempts YMCA from property taxes and NOT from income tax. YMCA cannot be considered as an “educational institution’ within the purview of the above-cited article. The term under the Education Act of 1982 refers to schools. The schoo! system is synonymous with formal education, which refers fo hierarchically structured and chronologically graded learning’s organized and provided by the formal schéot system and for which certification Is required in order for the learner to progress through grades to higher levels. Nothing in the Articles of incorporation or By-laws of the YMCA suggests that its an educational institution : No. 2 - X, a charitable organization (non-stock, non-profit) was organized for the purpose of providing shelter to homeless and family-less elders in Baguio City. It owns a property and devoted it actually, directly and exclusively for charitable purposes. In July 2003, x acquired a new property in La Trinidad, Benguet for its operations and leased the Baguio property to ¥ Corporation. a) Will X be liable for any tax on the rent payments received from July to December 2003 from Y Corporation? b) Is X liable for real property tax on the Baguio property for the taxable year 2003 for the period corresponding to 6-months use of the property for income purposes? Answer. (a) Yes. Generally, a non-stock charitable institution organized and operated exclusively for charitable purposes, when no part of its income or tsset belongs oF inures to the benefit of any of its 1650. 51: 52. 53. member, is not subject to income tax in respect to income received by it as such. In the case of X, however, its Baguio property was used for commercial purposes which cannot be considered as incidental to its operations as @ charitable institution. Thus, the rental payments of ¥' Corporation to X are not covered by the exemption, Likewise, under Sec. 30 of the NIRC, it provides that the income of whatever kind and character of the tax exempt organizations from any of their properties, real or personal, or from any of their activities coriducted for prof, regardless of the disposition made of such income, shail be subject to tax. (b) No. Sec. 246 of the LTC provides that real propérty tax for any year shall ‘accrue on the first day of “ianuary and from that date i shal constitute @ lien on the property. If 8 property is tax-exempt at the beginning of the year because its use at that ime is confined actually, directly and exclusively to charitable purposes, the exemption covers the entire year even if some time during the year, the use ofthat property eases to be for charitable purposes. No, 3 = X, a non-stock, nion-profit. organization operating exclusively to promote social welfare, derives the following items of income during the taxable yeat a) Assessment dues from the members; b) Rentals from small stalts; and ©) Parking fees. All monies realized therefrom are used exclusively for the support of the organization. Is X exempt from paying income taxes on the above items? Answer. X is exempt from paying tax only on income received by it as a non-stock, non-profit entity. Hens, its exemption extends only to the assessments dues paid by its membets. With respect to the others, itis liable to pay taxes thereon pursuant to the last paragraph of Sec. 30 of the Tax Code. Regardless of the disposition of the income, money realized from other activities not related to their main objectives or from their properties (réal or personal) shall be subject to tax. Cite eight (8) Constitutional limitations on the exercise of the power of taxation: Answer. (1) Progressive Scheme of Taxation (2) Due process of law (3) Equal protection of the laws; (4) Uniformity and Equity: (5) Non-impairment clause on obligations and contracts (8) Free-Worship clause (7) Non-imprisonment for non-payment of poll tax, and (8) President's power to veto tax bls, : When is there indirect double taxation? Is this allowed? ‘Answer. If the two Imposing tax’ authorities are not the same (national and local), the double taxation is merely one of indirect Uuplicate taxation. There is no prohibition to inditect double taxation, What is meant by “Eclectic Theory” in the determination of tax situs? Answer. This theory provides for.the application of the law to the ‘elements of a transaction occurring in the place of the forum. It coincides with the “terttriality’ of taxation under which a taxing authority has the right to impose a tax and fix a tax situs, among other things, at the place where the privilege is exercised. (a) Can capital assets ‘be converted into ordinary assets? (b) Can ordinary assets be ‘converted to capital assets? fi ‘Answer: (a) Yes. If the taxpayer executed acts to convert capital assets into ordinary assets. Ex. “T” inherited real properties from his parents (considered capital assets) and introduces improvements on the property to develop the same into a subdivision, (b) If the taxpayer is engaged in real estate business — the reai prpperties held by him are ordinary assets. Properties he purchased for future use in his business, even though his purpose is later thwarted by ‘circumstances beyond his control does not lose its character as ordinary assets. The discontinuance of his, business operation will not change the character of the properties previously held. if the taxpayer is a businessman but not engaged in real estatp business — all real properties which are used, being used or have been previously used in his trade br business shall be considered ordinary assets. Whereas, real properties not so used, with the propar certification by the Barangay Chairman or head of administration and validation of the BIR, shall.be treated as capital asset. Ordinary assets not in used in business are automatically converted into capital assets upon showing proof of its non- use in business for more than two (2)-years prior to the consummation of the taxabie transaction involving ‘said properties. 1755. 87. 59, 61. Is income realized from the sale of capital asset and ordinary assets included in the Income ‘Tax Return of the taxpayer and subject to income tax? ‘Answer. Income realized from the sale of cajital asset is subject to the final withholding tax at source and therefore is excluded from the Income Tax Return. Whereas, income realized from sale of ordinary asset is part of gross income, included in the Income Tax Return Does the foreclosure of a mortgage upon real estate give rise to Capital Gains Tax (CGT) of 6%? : ‘Answer. No. Generally, a foreclosure of mortgage does not give rise to CGT. The proceeds after the foreclosure and sale in public auction are applied to the loan deficiency and, technically, there is no transfer ‘of ownership when the mortaage is foreclosed. However, in case the debtor-mortgagor fails to redeem the property sold within: the one (1) year redemption Period, the CGT shall then accrue after the, ttle is Consolidated in the name of the highest bidder. X was seriously injured in-a car accident. He filed a case against the driver and owner of the vehicle. The court finds for X. In the decision, X was awarded the following: (a) actually, (b) moral, (c) exemplary and (d) punitive damages, (0) reimbursement of litigation cost and (f) attorney's fees. Which of these is/are not subject to income tax? ‘ ‘Answer. All are exempt from income taxation except punitive damages. Said amount is taxable because it jg not payment or compensation for injuries sustained and/or mere return of capital. Its an amount awarded to punish the wrongdoer. When is substituted filing of income tax return obtaining? ‘Answer. Individualtaxpayers are no longer required to file income tax return. The concept of substituted filing applies under the following conditions: 4) Taxpayer must be a compensation eamer, deriving his income solely from employment, 5B) Income is derived from services rendered in the Philippines; employer conducts business in the Philippines; i ) Tax withheld by the employer must be equal to its tax lability, and 8). Employer must fle annual income tax information return which shows the amount of tax withheld on this ‘compensation income, . ‘The tax withheld by the employer is tantamount to the substituted filing of income tax return of employees. When may the CIR assess taxes on the basis of the Best Evidence Obtainable Rule? ‘Answer. When the taxpayer: (a) fails to file'a tax retum or other papers, documents required of him at the time prescribed by law or rules and regulations, or (b) willfully or otherwise files a false, incomplete or erroneous return or report. (c) When the taxpayer is not cooperating with the tax investigation. In such case, the CIR shall make or amend the retum from his own knowledge and fram such information as he can ebtain through testimony or otherwise, which shall be prima facie presumed to be correct and sufficient for ail legal purposes. X, a foreign corporation is duly licensed to. do business here. It invested by purchasing ‘shares of stocks of D, a domestic corporation. D declared cash and stock dividends to X. Is the dividend taxable? Is there any distinction if X is a non-resident corporation? “Answer: Dividends received by'a corporation irom a-domestic corporation are referred to as intra-corporate dividends. It is exempt from taxation if the recipient of the dividend is another domestic corporation or a tesident foreign corporation. However, if the recipient is a non-resident foreign corporation itis taxed at 15% subject to the Tax Sparing Rule. ‘What kinds of sales or exchanges are exempt*from income taxation? ‘Answer. (a) Exchanges solely in kind in mergers and consolidation (b) Transfers or exchanges of property for stock to gain control (51% or more of the total voting power) by an individual or with others not exceeding four (4). ; ‘What are disguised dividends? Are they taxable? ‘Answer, These are dividends given to stockholders not as. a return on investment but in payment of ‘services rendered. They. ate taxable as. compensation income or income derived from exercise of a 18 :62. 63. 64, 65. 66. profession or self-employment These are issued in order to avail of @-lower-rate as that imposed on dividends. This is tantamount to tax evasion. ’ X Gorporation is a domestic entity it paid dividends to its parent company abroad, Y Corporation, based in Canada. The Canadian Government does not impose any tax on dividends received by the Canadian parent corporation from its Philippine company. Is the ietaon payment subject to tax at the rate of 15% instead of the normal corporate tax of 32%? Answer. Yes. The dividends are subject to a 15% final withholding tax. Under Sec. 28(b)(5)(b) of the Tax Code, dividends paid.to a NRFC are ‘subject to a 32% final withholding tax: However, the rate may be reduced to 15% if the country to which the NRFC is domiciled allows a deemed-paid tax credit to the said NRFC in an amount that is equivalent to at least 17% difference between 32% and the 15% rates. In the above-cited case, the SC ruled that since the Canadian Government does not impose any tax on dividends received by the Canadian parent corporation from its Philippine company, the condition for the imposition of the lower 18% rate is satisfied, (Tax Sparing Rule) Stock dividends strictly speaking represent,capltal and do not constitute income to its recipient; in a loose serise, stock dividends issued by a corporation are considered unrealized gain and cannot be subjected to income tax until the gain has been realized. (Ex. Shares with a par value of Php 1.00 is sold for Php 2.75 per share. The entire Php 2.75 is now a realized gain and is taxable. If the same share is not yet sold, regardless of the increase in value, the unrealized profit is not yet taxable) are stock dividends redeemed by the issuing corporation taxable? ‘Answer. Depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution’ of cash dividends, which when paid becomes the absolute. property of the. stockholder, who having realized gain from that redemption, cannot escape income tax. (Ex. Redemption by the corporation ‘of stock dividends with cash is tantamount to'a sale of such stock dividends by the taxpayer fo the corporation, there is a realized gain to him, and thus, he is subject to tax. NOTE: Treasury shares distributed to the stockholders of a corporation are TAXABLE. (CIR vs. Manning, 66 SCRA 14) 7 During the initial stage of Y’s organization, X bought from Y Corporation redeemable ‘shares of stocks with a contract period of ten (10) years. Upon the arrival of the period Y redeemed the said shares from X. Is there any tax implication under the given facts? ‘Answer. The source of shareé belonging to,X is the original capital subscriptions upon establishment of the ‘corporation or his initial investment in an existing. enterprise, its redemption to the concurrent value of ‘atquisition does not create any tax implication. However, If what are redeemed by Y are stock dividends ‘earlier distributed to its stockholders for purposes of retirement or cancellation, whether in whole or in pert, Such Is deemed equivalent to the distribution of taxable dividend. (CIR vs. CA, CTA and ANSCOR, January 20, 1999) : What is an intra-corporate dividend? Is it taxable? nd received by @ corporation from another corporation. If received. by, a domestic ‘other domestic corporation it is exempt from income taxation. But if received by a ‘domestic corporation from a foreign corporation it shall form part of the gross income, of the former and are therefore subject to net income tax. : 7 Options available to a taxpayer in case helit has an excess in his/its tax payments? ‘Answer. (2) Apply for tax refund, or (b) Converts the excess payments into tax credit certificates which may be used in paying. other NIRC taxes, or (c) Carry-over the excess payment to the next quarter. These options are alternative and not cumulative and the choice of one precludes the use of the other options. What is the prescriptive period to claim for a refund of taxes of an enterprise duly registered under the EPZA Law? ‘Answer, The EPZA Law itself is silent on the matter, and the prescriptive periods under the TCC and other Tevenué laws are inapplicable. by specific mandatesof Sec 17(1) of the |EPZA Law. This does not mean however, that the prescriptive period will not tie. The provisions on solution indebiti of the Civil Code may find application, Solution indebit is @ quasi-contract, thus the claim for refund must be commenced within Sx (6) years from date of payment pursuant to Art 1145(2) of the New Civil. Code. (This is an isolated ‘exemption to the 2-year prescriptive period for refund under the Tax Code) (Commissioner of Customs vs. Phil: Phosphate Fertiizer Corp., September 1, 2004). 1968. 69. 70. 71. 72. X Corporation committed an error in the pay! The overpayment was noticed much later after it had already filed its Final Adjustment Return on April 15, 2006. Can X still claim for tax refund when it failed to signify its intention to avail of refund in its last return? “Answer, The prescriptive period for tax refund or tax credit is two (2) years from payment but to a corporate ‘taxpayer, this period is reckoned from the filing of its Final Adjustment Return ("FAR"). Failure to signify see yatanton in the “FAR” to avail of the overpayment does not mean outright barring of a valid request for 4 refund for as long as the claim is made within the 2-year prescriptive period. (2008 case) ‘The CIR Isgued 2 Revenue Memorandum Circulars affecting pawnshops. X, a pawnshop operator céntested the RMC's and filed a case in the RTC. CIR filed a Motion to dismiss contending that RTC has no jurisdiction. RTC: denied CIR’s Motion to Dismiss. Was the RTC correct? "Answer. The power to review rulings issued by the CIR is lodged with the CTA and not with the RTC. The Revenue Memorandum Circulars are ruling or opinions issuéd bythe CIR’ implementing the provisions of the Tax Code on the taxabilty of pawnstiop. Clearly the regular court has no jurisdiction over the Issues obtaining X, a domestic corporation is engaged in building construction. X ordered many pre~ fabricated suppliesimateriats and assembled equipment compietely designed and engineered from Thailand where cost is chegper. Thereafter, X imported these items here to be locally used and installed in their construction projects and work, thereby saving on time and labor cost. What is the tax implication of such an arrangement between X and the Thai Company? ‘Answer. The situs of taxation of a contract for a project which included the construction and installation of equipment’ designed, fabricated and manufactured in Thailand but to be Used in our country is the Philippines because it is here where such materials, supplies and equipment are to be installed. Whereas, taxation for the cost of supplies and labor which were completely designed and engineered in Thailand is in that country. (CIR vs. Marubeni Corp. Dec: 18, 2001) NOTE: a) Compensation income — is considered as having been eared in the place where the service was rendered and not considered as sourced from the piace where the money originated. b) Payment for services — other than compensation income, is considered as having been earned ‘at the place where the money originated and not at the place where the activity or service as performed. é : To what types of taxpayers. does the Net Operating Loss Carry-Over Principle (NOLCO) apply? ‘Answer. The NOLCO applies only to individuals’ and corporations subject to net incorne tax except ‘compensation or salaried employees. This operating loss can be carried over for three (3) consecutive years ‘except mining other than gas and oil well industries which can be catried over their operating losses for 3 period of 5 years. What are the consequences of condonation of debt for purposes of income taxation? a) Ifthe creditor is an employer and the debtor its employee? - is b) If the creditor is a corporation and the debtor is one of its stockholders? c) If there is no relationship between the creditor and the debtor and the former condones the obligation of the debtor. Answer. : {2) The amount condoned is compensation income to the employee. {b)The amount condoned is'an indirect dividend to the stockholder which shall Be subject to 10% final withholding tax ‘ (©) The debior is subject to income tax except if he is insolvent because the: amount condoned is a remuneratory donation to him, whereas, the creditor is subject to donor's tax if the amount ‘condoned is more than Php100,000. '73. 74, 75. 76. 78. 79. Where do you deduct a capital loss? ‘Answer. This can only be deducted from a capital gain subject to the Loss Limitation Rule the year of such loss or carried over until the next year. it can never be deducted from ordinary gain. Whereas, an ordinary loss can be deducted either from an ordinary or a capital gain and can be carried over for the thre® taxable year immediately following the year of such loss. X Bank purchased 83% of the voting stocks of Y, its own subsidiary. Subsequently, due to economic depression and mismanagement of Y it became insolvent. May X Bank treat its loss as a bad debt or an ordinary loss which it can deduct from its gross income? Why? ‘Answer. The equity investment in shares of stocks held by X in its subsidiary Y is not indebtedness. The shares of stocks in question do not constitute a loan extended by X to Y or was it a debt subject to obligatory repayment by the latter. The invesiment of X is a capital not an ordinary asset. Thus, any loss sustained therefrom is a capital loss which can only be deducted from a capital gain and not from ordinary income or gain. (China Banking Corp. vs. CA, July 19, 2000) Petitioners are domestic corporations engaged in the insurance business. They are claiming for the refund on the DST they paid for insurance policies earlier issued. They maintain that since the premiums on the policies were not paid, they are. considered, as never to have taken effect pursuant to the Insurance Code and therefore, no DST were due thereon. Are the petitioners correct? ‘Answer. No. The petitioners are wrong. DST is levied on: the exercise of the privilége executing specific instruments and must be paid upon the issuance of the instruments; without regard to whether the contracts Which gave rise to them is recissible, void, voidable or unenforceable. Life and non-life insurance policies are subject to DST by their mere issuances, and the fact that the policies have not become effective for non-payment of the corresponding premiums cannot affect the insurance company's liabilty for the DST. X's income tax return and payment of tax was accomplished by his bookkeeper. During the investigation of X’s return, the tax officials discovered the understatement of the tax in X's return. An assessment was made and included in the notice to X was the imposition of 50% fraud penalty. X disputed the assessment. Is the imposition of the fraud penalty correct? ‘Answer. No. The imposition is not correct. Mere understatement of tne tax Is not itself proof of fraud for purposes of tax evasion. Error or mistakes of law is not fraud, therefore the Imposition of the 50% fraud penalty is not justified. (CIR vs. Melchor Jr, Javier & CTA, 199 SCRA 825) Lincoln is a domestic corporation engaged in life insurance business. In 1984, it issued 50,000 shares as dividends, with par value of Php 100 or for a total of Php 5M. Lincoln paid DST on each certificate based on its par value. What is the proper basis of the DST, par value or book value of the shares? Answer. There is no basis to treat stock dividends as a distinct olass from ordinary shares of stock since ‘Sec. 224 of the NIRCimerely distinguishes certficate of stocks & not the shares themselves as one with par value and one without. There is therefore no reason to determine the actual value of such dividends for purposes of DST ifthe certificates indicate a par valu®. The tax is not levied upon the specific transactions ‘which give rise to the original issuance but on the privilege of issuing certificates of stock, ‘ Are the prizes (cash and kinds) won by Manny Pacquioa subject to Philippine income tax? ‘Answer. All the prizes won by Manny Pacquiao are considered fruit of labor subject to income tax. The ‘exemption of prizes won by athletes in intemational and local sports competition is limited to amateur events sanctions by-the athletes’ respective national sports association. Money realized from professional games is taxable 5 During the: end of 2004, X Inc. received in advance the amount Php 100K from Y Corporation for future maintenance services as embodied in their Maintenance Service Agreement. Is the amount taxable in the calendar year 2004? (Menila Mandarin Hotel case) ‘Answer. No. Under the realization principle, revenue is generally recognized when both of the following conditions are met 2), The earning process is complete or virtually complete, and b)._ An exchange has taken piace. 280. 81. 82. 83. “This principle requires that revenues be eared before It is recorded. Amounis received in advance are not Tented ae revenue for the period in which they are received but as revenue of the Hutte period or periods in which they are earned. These amounts are caried as uneamed revenue OF liability to transfer ‘Joods or render services in the future = until the eeming process is complete Value-Added Tax (VAT) What is the Cross Border Doctrine in taxation? ‘Anewer, This Doctrine finds application in the Phippine VAT system which means that no Witt shat be imposed to form pat ofthe cost of goods destined for consumption outsise the teritorial border of the taxing authority Saleé of goods, properties and services by a VAT-tegistered supplier from Customs Tertiony 1 econ Pic mige shallbe treated as export sales, wile sales to an ecozone enterprise made by & Non- coz ore erred supplier would only be exempt from VAT and the supplier shall not be able to credit creditirefund of its input VAT. (2005 case) : What is “Destination Rule” for purposes of the Value Added Tax? (GR 153205, Jan 22, 2007)? ‘Answer. This principle is followed in our VAT law who means that exports are exempt, whereas imports are taxable and subject to VAT. : X, a non-profit, non-stock affiiate of Y Insurance Comipany organized by the les’ Xo perform collection, consultative and other technical services, includ functioning as an Peron caditor of Y and its other affiliates. The BIR assessed X for deficiency VAT. x internal chat the services It rendered to Y were on a “non-profit, reimbursementoF cont, ciy" basis, that it was not engaged in the business of providing services, 10 ¥ and its on oa x was established to ensure operational orderliness and administrative efficiene; Of Y and its affiliates; and not in the sale of service business, it was not VATable. Is X's contention valid? “Answer, The services of X to ¥ and its affliates fora fee or consideration are subject to VAT. WAT s 4 tn Aneer ne acldod by the performance of the senice. It is immaterial whether proft is derved from or dering the service or not.-The Tax Code provides that even @ non-stock. non-profit ‘organization or government ently, is lable to pay VAT on the sale of goods or Services even the absence of profit Soyer erat, provided the sale oF performance of the services were made in the course of trads oF FL er Tedires thal the regular conduct or pursuit of @ commercial or an eounomic actly rusaraiees of whether or not the entity & erofitoiented, (CIR vs, CA & Commonwealth ‘management & ‘Services Corp. March 30, 2000) Distinctions: (a) Automatic Zero-rate VAT? (b) Effectively Zero-rate VAT? And (c) Exempt VAT? ‘Automatic Zero-Rate VAT | Effectively Zero-rate VAT] VAT exempt transaction 7} This Telers 16 the export sale ] 1) This refers to the focal sale of | 1) Sale of goods o” properties af goods and. supply ef| goods or supply of services by 4 } and/or services and Wi Sse or eeby avATrealstered | VAT-tegistered person to} or ease of properties that is person. persons or entitles who was | NOT subject to output tax | 2) The tax fate is set at zero, | ararted indirect tax exemption | and, the seller NOT wren speted’ to. the tax| under special laws or| alowed any tax credit of base, such rate results in no |’ international agreements, | input tax on purchases: ee ae nat he | purchaser. 2) The seller charges no cutput |2) Businessmen who are not 3) The seller charges no output | tax, but can claim refund ‘of| VATABLE because they tae ‘but can Gaim a tax | _ taxcredifor the VAT previously | fave not meet the Pap tag of the. input tax by | “charged to him by suppliers. 15M of gross sales. oF way of tax credit for the VAT gross receipt. previously charged by his| 3) Approval: is necessary before suppliers. the. transaction may be] 4) .They shall be covered by 44) Nonoed to fle an application | considered effectively zero-| the percentage tax instead | form and to get SIR approval |- ated. ortne 12% VAT | |__betore the sale. j 285. 86, 87. 2. VAT follows the destination principle also referred to as the Cross Border Doctrine — NO VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, goods ‘are taxed only in the country where these are consumed. (EXPORTATION IS NOT VATABLE BUT IMPORTATION IS VATABLE) D> Sale of goods and services to government, and "REC" is subject to 12% VAT. D> Sale of medicine by drug stores inside the hospital is VATable, so are sales to senior citizens. BUT, sale of medicine to in-patients are exempt ‘Sale of real properties by real estate dealers is VATable — (a) Residential tot with gross selling price ‘exceeding Php 1,919,500, (b) Residential house and lot or other residential dwelling with gross selling price of more than Php 3,199,200. © If the importer’is exempt from VAT and such goods imported were subsequently sold, transferred or exchanged in the Philippines to a non-exempt person or entity, the non-exempt purchaser, transferee or recipient shall be considered as the importer and. hall be liable for VAT due on such importation. Is the sale of sardines VATable? ‘Answer. Yes. Sardines have undergone the canning process. Under the VAT exempt transactions of the ‘Tax Code, the sale or importation of agricultural and marine food products in their original state are exempt from VAT. What is technical importation? It is the sale of goods by a PEZA registered enterprise, to a buyer from the customs territory shall be {treated as a technical importation. Such buyer shall be treated as an importer thereof and shall be imposed with the corresponding import taxes and VAT. The local branch of American Express is 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 clients. Are the services of the local branch of American Express subject to VAT and other business taxes? (CIR. vs..Am. Express, Int'l. Inc. (Phil. Branch), June 29, 2005) ‘Answer. Yes, for the following reasons: : ’2) it regularly renders in the Philippines the gervice of facilitating the collection and payment of receivables belonging to a foreign company that is clearly a separate and distinct entity, ) Such service is commercial in nature ‘c) For such service, American Express is clearly paid consideration in foreign currency; 4) Itis not an entity exempt under any of our laws or international agreements. ESTATE / DONOR’S TAX X, a very wealthy Filipino died abroad leaving behind properties within and without the Philippines. An investigation and examination was conducted to determine his estate’ tax liabilities. The BIR found out that the executor of X's estate failed to file a written notice of death of the decedent and an estate tax return. Thereafter, the CIR caused the preparation of the return. Pursuant thereto, deficiency estate tax assessment was issued and was duly Served to the. executor. After some time, it was followed by a formal assessment notice. The assessment was not protested by the executor within the reglamentary period. Subsequently, the CIR proceeded with the summary remedy of levy and sale of the properties of the decedent. The executor filed a petition for certiorari and prohibition with an application for TRO to annul the notices of levy and notices of sale, and to enjoin the BIR from proceeding with the auction on the ground that the summary remedy of levy and sale is premature since the decedent has pending cases invotving his properties and that the probate proceeding of his will are still ongoing. ( Marcos, Jr, case) levy and sale of properties of the decedent even without the recognition and authority of the court sitting in probate over the will of the deceased? Reason. b) Is the summary remedy of levy. and sale made by the BIR premature considering that the decedent has pending cases involving his properties? a) May the BIR pursue collection of estate tax deficiencies see summary remedy of 2388. 89. 90. a. c). Is it necessary for the BIR to serve the Notice of Levy and Notice of Sale to the heirs of the deceased for the summary remedy of levy and sale of properties to be valid? d) What is the effect of a protest filed beyond the 30-day period in so far as the running of the prescriptive period is concemed? ‘Answer. (2) Yes. The approval of the probate court is not a mandatory requirement in the collection of estate taxes ‘On the contrary, under Sec. 94 of the Tax Code, its the probate or settlement court which is. forbidden’ to authorize the executor or administrator of the decedent's estate to deliver any distributive share to any party interested in the estate unless itis shown that the estate tax has been paid. Certificate of clearance and payment from the BIR are proofs of settlement. (b) No. The mere fact that the decedent has pending cases involving the properties does not affect the ‘enforcement of tax assessments over the properties indubitably included in the estate. Taxes are the lifeblood of the governrient and should be collected without necessary hindrance. (6) No. The notices of levy and sale issued to satisty the delinquent estate tax should be delivered to the estate of the deceased, through the executor or the administrator, being the delinquent taxpayer and net necessarily to the heirs of the deceased. (a) The protest that is filed out of time will not suspend the running of the prescriptive period for the collestion of the tax. Therefore, the tax must be collected within 8 years from the date of the finality of the assessment. ‘Are the Notarial fees paid for the extrajudicial settlement and the attorney's fees in the guardianship proceedings allowed as deductions from the gross estate of the decedent in order to arrive at the value of the net estate? ‘Answer, Yes. Although the tax code specifies-judicial expenses ‘of the testamentary of intestate proceedings" there is no reason why expenses incurred in the administration and settlement of the estate in extrajudicial proceedings should not be allowed. However, deduction is limited to such administration ‘expenses as are actually and necessarily incurred in the collection of the assets of the estate, payment of the debts, and distribution of the remainder among those entitled thereto, Exdrajucicial settlement was for the purpose of payment of taxes and the distribution of the estate to the hers. The execution of the extrajudicial setlement necessitated the notarization of the same, i follows then that the Notarial fee was incurred primarily to settle the estate of the deceased. Attorney's fees on the other hand to be deductibie from the gross estate must be essential to the settlement of the estate. The guardianship proceeding in this case was necessary for the distribution of the property of the deceased During the life time of H, his wife “W" bought a vacant lot. The property was registered in her name: “owner ~'W, married to H.” ‘Before H died, he and his wife W opened a savings account with Bank X. The account is a surviver’s account or the “winner-takes-all” account (meaning an and/or account) (a) Upon the death of H should W include half of the value of ‘the vacant lot in the estate tax return of H and subject it to estate tax? (b) Is one-half of the ‘saving account includible in the gross estate of H? ‘Answer. (a) W owns the property, the words ‘married to H" does not mean half of the property belongs to H but itis simply is @ désoription of W as a married individual. Its a statement of her civil status. Hence, no estate tax is due from W's property the husband does not own half of it. (b) Upon the death of H, the entire ‘amount in the savings account automatically vests ort W, the savings account is not a joint account (H and W" account) which means haif belongs to H and the other half to W. X, a businessman died leaving behind assets worth Php 10 million and liabilities of Php 3.5 million. His administrator deduction all claims against the estate and paid the corresponding estate tax to the BIR. 2 years thereafter, the tax officials learned that some of the debts of X were condoned by his creditors and therefore should not:have been deducted from the gross estate. BIR re-assessed the estate and now enforces deficiency estate tax against the estate. Is the BIR correct? ‘Answer. The BIR is not co‘rect, because what are Included in the gross estate of the decedent es deductible are the obligations that existed at the time of death among the others. The post-deatn development, like the condonation of the debts after the estate tax was paid should not affect the tax paid under the “Date of Death Valuation Rule” During X’s lifetime, ail her business affairs were managed by the Y Bank. X died on April 3, 2001. Two days after her death, Y filed her income tax return without indicating that X died. 24