2021 BAR EXAMINATIONS TRIAL

TAXATION LAW

LEGAL EDGE BAR REVIEW CENTER

legaledge8@gmail.com
0942-949-9176 / 0917-894-5356

QUESTION NO. 1

Mr. Juan sells bags in Quezon City through a retail store. He pays VAT on his gross sales to the BIR
and the city license tax based on the same gross sales in Quezon City. He comes to you for advice,
because he thinks he is being subjected to double taxation. What advice will you give him? (5 points)

SUGGESTED ANSWER

I will advise him that there is no constitutional prohibition against double taxation.

Double taxation is not favored, but is permissible. It is allowed where one tax is imposed by national
government and another by the local government.

In this case, VAT is imposed by the national government through the Bureau of Internal Revenue, while
city license tax is imposed by the local government through the Local Government Unit of Quezon City.

Therefore, this is a permissible form of double taxation in broad sense.

QUESTION NO. 2

ABC Corporation engaged the services of DEF Law Firm in 2017, to defend the Corporation’s title over
a property used in its business. For legal services rendered in 2018, DEF Law Firm billed ABC
Corporation only in 2019. The latter duly paid the same. ABC Corporation claimed expenses for legal
services, as a deduction in its Income Tax return in 2019, since the exact amount of the expense was
determined only in 2019. Is ABC Corporation’s claim of deduction proper? (5 points)

SUGGESTED ANSWER

No, ABC Corporation’s claim of deduction is not proper.

All-event test states that an expense is deductible in the year, when the amount is determinable with
reasonable certainty.

When the services were rendered in 2018, the liability to pay was already fixed and reasonably
determined with accuracy.

Hence, the deduction should have been claimed as deduction in 2018, not in 2019.

(Source: CIR v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007)

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QUESTION NO. 3

Upon his retirement, Rody transferred his savings derived from his salary as President of a corporation
to a time deposit with Harry Bank. The bank regularly deducted 20% final withholding tax on the interest
income from the time deposit. Rody contends that the 20% final withholding tax on the interest income
constituted double taxation, because his salary had been subjected to withholding tax. Is Rody’s
contention correct? Explain your answer. (5 points)

SUGGESTED ANSWER

No, Rody’s contention is not correct.

Double taxation, in strict sense, refers to direct double taxation. This occurs, among others, when both
taxes must be imposed on the same property or subject matter.

In this case, no double taxation exists because the 20% final withholding tax is imposed on the interest
income, while the tax withheld pertains to his salary or compensation income.

Although withholding taxes pertain to income tax, they do not pertain to the same thing or activity.

QUESTION NO. 4

JKL College, a non-stock, non-profit educational institution, filed with the City of Baguio a building permit
for the construction of the building of the JKL Hospital and Medical Center. The City Treasurer assessed
and issued to JKL a Building Permit Assessment. JKL argues that it is exempt from the payment of the
building permit fees because it is a tax. The City argues that JKL is not exempt, because it is a
regulatory fee. Is the contention of City of Baguio correct? (5 points)

SUGGESTED ANSWER

Yes, the City of Baguio is correct.

In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of
the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax
even though the measure results in some form of regulation. On the other hand, if the purpose is
primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state,
even though incidentally, revenue is generated.

In this case, while it is conceded that the revenue from the building fees is generated for the benefit of
the City of Baguio, it appears that the primary purpose is for regulation. The fact that the revenue is
incidentally raised does not necessarily make the imposition a tax.

As the sum charged is in the nature of a regulatory fee, the position of JKL College holds no water.

(Source: Angeles University Foundation v. City of Angeles, G.R. No. 189999, June 27, 2012)

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QUESTION NO. 5

Enumerate the three (3) elements of Tax Evasion. (5 points)

SUGGESTED ANSWER

According to jurisprudence, the following are the elements of Tax Evasion:

1) 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;

2) An accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and

3) A course of action or failure of action which is unlawful.

(Source: CIR v. Estate of Benigno P. Toda, Jr., G.R. No. 147188, September 14, 2004)

QUESTION NO. 6

In 2021, the BIR issued a Revenue Memorandum Circular (RMC), which states that income earned by
a resident citizen of the Philippines from cryptocurrency trading is subject to income tax. Diane, a
lawyer, traded cryptocurrency in 2020 during her spare time, as she was not able to go out, because
of COVID restrictions. She was able to earn almost PhP1,000,000 in income. Considering that the RMC
of the BIR was only issued in 2021, should Diane be liable for income tax in 2020 on her income from
cryptocurrency trading? (5 points)

SUGGESTED ANSWER

Yes, Diane should be liable for income tax in 2020 for the income she realized from cryptocurrency
trading.

The National Internal Revenue Code expressly provides that gross income shall include all income
derived from whatever source. In addition, a resident citizen is taxable on his/her worldwide income.

While the RMC was only issued in 2021, this was only meant to clarify or interpret the existing provisions
of the NIRC, which was already effective even prior to 2020.

Thus, the income of Diane in 2020 derived from cryptocurrency trading should be taxed.

QUESTION NO. 7

Xian Trading Corp. is engaged in the wholesale of electronic products. One of its major customers is
Gio Technology, Inc., who buys the electronic products for resale in its online store. As part of routine
procedure, the BIR did an electronic matching/comparison of the sales of Xian Trading Corp. and the
purchases of Gio Technology, Inc. Based on the matching, it was determined that the revenues

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declared by Xian Trading Corp. is substantially less than the purchases declared by Gio Technology,
Inc. The BIR issued a Letter Notice to Xian Trading Corp. with a requirement to explain the difference
within fifteen (15) days. As Xian Trading Corp. was not able to explain the difference, the BIR proceeded
to issue the necessary assessment notices, including the Final Assessment Notice. Can Xian Trading
Corp. be held liable for deficiency taxes? (5 points)

SUGGESTED ANSWER

No, Xian Trading Corp. cannot be held liable for deficiency taxes, as the assessment was invalid.

Pursuant to the National Internal Revenue Code, the Commissioner, or his duly authorized
representative, may authorize the examination of any taxpayer and the assessment of the correct
amount of tax, through a Letter of Authority (LOA). A LOA is the authority given to the appropriate
revenue officer assigned to perform assessment functions. In the absence of such an authority, the
assessment or examination is a nullity.

A Letter Notice, on the other hand, is issued merely for the purpose of notifying the taxpayer that a
discrepancy is found based on the BIR's Reconciliation of Listing for Enforcement (RELIEF) System. A
Letter Notice is entirely different and serves a different purpose than an LOA. In this case, there was
no LOA issued and served to Xian Trading Corp., prior to the issuance of the assessment notices.

Thus, the assessment is not valid as the absence of an LOA violated Xian Trading Corp.’s right to due
process.

(Source: Medicard Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 222743, April 5,
2017)

QUESTION NO. 8

JVCM Corp. wants to sell the shares of its subsidiary, Happy Corp. in order to raise funds for its other
business expansion programs. The book value of Happy Corp. based on its audited financial
statements is PhP500,000,000. JVCM Corp. sent out invitation to bid to several conglomerates, who
has expressed intention to acquire Happy Corp. Based on the bids received by JVCM Corp., the highest
bidder is only at PhP450,000,000. As JVCM Corp. badly needs the funds, it accepted the bid and sold
Happy Corp. to the highest bidder for PhP450,000,000. When processing the transfer of the shares,
the BIR alleged that JVCM Corp. is liable for donor’s tax. The contention of the BIR is that the book
value of Happy Corp. is PhP500,000,000. By selling it for PhP450,000,000 only, JVCM Corp. is deemed
to have made a donation of PhP50,000,000, pursuant to Section 100 of the NIRC on transfers for
insufficient consideration. Is JVCM Corp. liable for donor’s tax? (5 points)

SUGGESTED ANSWER:

No, JVCM Corp. is not liable for donor’s tax.

Based on Section 100 of the National Internal Revenue Code, as amended by Republic Act No. 10963
(TRAIN Law), even if the transfer is for insufficient consideration, as long as it can be established that
the sale is made in the ordinary course of business – in a transaction which is bona fide, at arm’s length
and free of donative intent – then it will not be subject to donor’s tax.
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In the present case, JVCM Corp. sent out invitation to bid to several interested parties. The highest bid
that it got was at PhP450,000,000. While this is lower than the PhP500,000,000 book value of Happy
Corp., it is a sale in the ordinary course of business with no intent to donate.

Hence, the sale is not subject to donor’s tax.

QUESTION NO. 9

On December 26, 1992, the Sangguniang Bayan of the Municipality of Pasig enacted Ordinance No.
25, which imposed a franchise tax on all business venture operations carried out through a franchise
within the municipality. By virtue of Republic Act No. 7829, which took effect on January 25, 1995, the
Municipality of Pasig was converted into a highly urbanized city to be known as the City of Pasig. On
August 24, 2001, the Treasurer's Office of the City Government of Pasig issued deficiency tax
assessment to Manila Electric Company, a grantee of a legislative franchise, alleging that it is liable to
pay taxes for the period 1996 to 1999, pursuant to Municipal Ordinance No. 25. Does the City of Pasig
have a valid basis for the imposition of franchise tax for the year 1996 to 1999? (5 points)

SUGGESTED ANSWER:

None.

A municipality is bereft of authority to levy and impose franchise tax on franchise holders within its
territorial jurisdiction. That authority belongs to provinces and cities only.

Here, at the time the ordinance was enacted in 1992, the local government of Pasig, then a municipality,
had no authority to levy franchise tax. Consequently, such provisions in Municipal Ordinance No. 25 is
void for being in direct contravention with the LGC. Being void, it cannot be given any legal effect.
Neither does it authorize the collection of the tax under said ordinance. The conversion of the
municipality into a city does not lend validity to the void ordinance.

Therefore, the imposition of the City of Pasig of the disputed tax is devoid of legal basis.

(Source: City of Pasig v. Manila Electric Co., G.R. No. 181710, March 7, 2018)

QUESTION NO. 10

Philippine Coconut Processing Corp. (PCPC) is a government-owned and controlled corporation

(GOCC) formed in order to purchase coconut from farmers and process them into coconut oil for export
to foreign countries. It owns a parcel of land in Calamba, Laguna, on which its manufacturing facility is
located. The local government is assessing PCPC for real property tax. Can PCPC use the argument
that real properties owned by the Republic of the Philippines are expressly exempted from real property
tax under the Local Government Code? (5 points)

SUGGESTED ANSWER:

No.
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Based on jurisprudence, GOCCs are not included under Republic of the Philippines and its political
subdivisions for purposes of real property tax exemption. Likewise, the Local Government Code has
removed the tax exemptions of GOCCs.

As it factually represented, PCPC is a GOCC.

Thus, PCPC cannot be covered by the real property tax exemption of the Republic of the Philippines
and its political subdivisions.

QUESTION NO. 11

A city enacted an ordinance that imposes a Mayor’s Permit Fee of PhP5,000 on every electric and
telecommunication pole or post erected within the city. The measure was seen as a safeguard against
the hazard to traffic and safety to the public posed by such poles or posts. A private power company
filed a suit before the RTC to question the validity of the ordinance. The company anchored its claim
on the allegation that the fee amounted to a tax on income and, thus, prohibited by law. The city moved
to dismiss the case contending that the taxpayer failed to exhaust administrative remedies, as it should
have first filed an appeal to the Secretary of Justice. Is the motion of the city tenable? (5 points)

SUGGESTED ANSWER

No.

The administrative procedure requiring an appeal to the Secretary of Justice does not find application
in cases where the imposition is in the nature of a regulatory fee.

Here, the Mayor’s Permit Fee is clearly not a tax, but a regulatory fee, as it is intended primarily to curb
the hazard to traffic and safety to the public posed by electric and telecommunication poles or posts
erected within the city.

The motion of the city is, thus, not tenable.

(Source: City of Cagayan de Oro v. Cagayan Electric Power & Light Co., Inc. G.R. No. 224825, October
17, 2018)

QUESTION NO. 12

The City of Karangyaan enacted an ordinance imposing amusement taxes on amusement places
including resorts and golf courses. Pursuant thereto, the city treasurer assessed ABC Resort and XYZ
Golf Club for operating a resort and a golf course, respectively. On pure question of law, ABC Resort
and XYZ Golf Club separately assailed the ordinance, before the RTC on the theory that the city is
bereft of authority to impose amusement taxes on resorts and golf courses. ABC Resort filed a petition
for declaratory relief, while XYZ Golf Club filed a petition for injunction. Procedurally, are the remedies
taken by ABC Resort and XYZ Golf Club proper? (5 points)

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SUGGESTED ANSWER

Only the remedy taken by XYZ Golf Club is proper.

A petition for declaratory relief is not the proper remedy once a notice of assessment was already
issued. On the other hand, a complaint for injunction is the appropriate ordinary civil action to enjoin
the collection of taxes. After all, a declaratory judgment as to the tax-exempt status of the taxpayer is
useless unless the taxing authority is enjoined from enforcing its demand.

In this case, since the City of Karangyaan already made an assessment and demanded from both ABC
Resort and XYZ Golf Club to pay the assessed taxes, a petition for declaratory relief is no longer the
appropriate remedy but a petition for injunction.

Accordingly, XYZ Golf Club appropriately filed a petition for injunction, while ABC Resort erred in filing
a petition for declaratory relief.

(Source: City of Lapu-Lapu v. PEZA, G.R. No. 184203, November 26, 2014)

QUESTION NO. 13

The CIR issued an assessment against ABC Corporation for deficiency income tax and VAT. ABC
Corporation timely protested the assessment. The CIR failed to render a decision on the protest within
the reglementary period of 180 days. Neither did ABC Corporation appeal the inaction to the CTA. One
year later, the BIR issued against ABC Corporation warrants of distraint and levy. Only then did ABC
Corporation file an appeal with the CTA. The CIR moved for dismissal claiming that the appeal was
belatedly filed. Is the motion of the CIR tenable? (5 points)

SUGGESTED ANSWER

No, the motion of the CIR is untenable.

In case of inaction by the CIR after 180 days, the taxpayer does not only have the remedy of appealing
such inaction within 30 days, but also has the option to await the decision of the CIR. In the latter option,
the taxpayer may, upon receipt of the decision expressly or impliedly denying the protest, appeal the
assessment to the CTA.

In this case, ABC Corporation was within its right to await the decision of the CIR instead of immediately
filing an appeal to the CTA upon expiration of the 180-day period. Relatedly, the issuance by the BIR
of warrants of distraint and levy may be taken as an implied denial of ABC Corporation’s protest and,
thus, may be appealed within 30 days from receipt thereof.

Thus, the CIR is wrong in insisting that ABC Corporation’s appeal to the CTA on the ground of inaction
is belatedly filed, for ABC Corporation had the other option of simply awaiting the CIR’s decision.

(Source: Lascona Land Co., Inc. v. CIR, G.R. No. 171251, March 5, 2012)

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QUESTION NO. 14

ABC Corporation, doing business in Marikina City, is a manufacturer of shoes. For the First Quarter of
2020, the City assessed ABC Corporation, local business taxes as contained in a Statement of Account
dated January 15, 2020. On January 20, 2020, ABC Corporation paid the assessed tax under protest.
ABC Corporation formalized its protest by filing a letter to the City Treasurer on February 15, 2020.
Alleging inaction by the City Treasurer, ABC Corporation filed on April 20, 2020 a complaint before the
RTC asking for the refund of the assessed tax. The City Treasurer claims that assessment against ABC
Corporation became final and executory, when the latter effectively abandoned its protest and instead
sued in court for the refund of the assessed taxes and charges. Is the claim of the City Treasurer legally
tenable? (5 points)

SUGGESTED ANSWER

No.

A taxpayer, after it had protested and paid the assessed local tax, is permitted by law to seek a judicial
refund so long as it is made within 30 days from either receipt of the decision or inaction by the local
treasurer. Such suit in court is merely a continuation of the remedy of protest because the taxpayer
cannot successfully prosecute his theory of erroneous payment or illegal collection of taxes without
necessarily assailing the validity or correctness of the assessment he had administratively protested.

In this case, the assessment has not become final and unappealable because ABC timely filed its suit
on April 20, 2020, or within 30 days from inaction by the City Treasurer which arose on April 15, 2020,
the last day of the 60-day period counted from the filing of the protest on February 15, 2020.

Based on the foregoing, the City Treasurer must be wrong in insisting that ABC abandoned its protest
and that the assessment had become final and executory.

(Section 195, LGC; City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018)

QUESTION NO. 15

After an examination was conducted on the books of account and other accounting records of Forever
Mart, the revenue officers of the BIR recommended for the issuance of an assessment against the
taxpayer. Instead of issuing an assessment, however, the BIR filed a criminal complaint before the
Department of Justice alleging evasion of taxes committed by Mr. Mayaman, the proprietor of Forever
Mart. In due course, an Information was filed in court. In a motion for dismissal, Mr. Mayaman
maintained that the filing of a criminal complaint is premature, as he did not receive from the BIR any
assessment for deficiency taxes. Rule on the motion of Mr. Mayaman. (5 points)

SUGGESTED ANSWER

The ground raised by Mr. Mayaman in his motion is untenable.

In tax evasion cases, the Commissioner of Internal Revenue has the discretion on whether to issue an
assessment or to file a criminal case against the taxpayer or to do both. In other words, the filing of a
criminal complaint need not be preceded by an assessment.
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Accordingly, Mr. Mayaman is wrong in maintaining that the criminal complaint against him is premature
for lack of any prior assessment made by the BIR against him.

Thus, his motion to dismiss must be denied.

(Source: CIR v. Pascor Realty and Development Corporation, G.R. No. 128315 June 29, 1999)

-NOTHING FOLLOWS-

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