Professional Documents
Culture Documents
2022 Leb Bar Bulletin No. 31, S. 2022
2022 Leb Bar Bulletin No. 31, S. 2022
by
ABELARDO T. DOMONDON
AB, BSC, MA, JD, LLM, DCL (C.A.U.), PhD (CAND.)
Lawyer-CPA-Customs Broker
Commissioner, Legal Education Board
2022 SPECIAL EDITION
For VENNY VALDEZ my one and only whose inspiration
and support brought me to where I am. For my late
parents, JOSE CONCEPCION DOMONDON and INES
JIMENEZ TORRES, who shall always be honored and
remembered.
ABELARDO T. DOMONDON
BAR CANDIDATE’S PRAYER*
AMEN
___________
* A non-sectarian prayer written by Prof. Abelardo T. Domondon.
3
FOREWORD
4
candidates’ optimism and take away from them any feeling
of bar disaster. Given its unhindered availability, through
the generosity of Mr. Paolo Sibal and Central Book
Supply, anyone who wishes to expand his or her
knowledge of Tax Law, affected or not by Typhoon Odette,
will benefit exceedingly from this material.
While the intellectual gain is invaluable, there is more
to this work than the academic light it brings. In the midst
of the uncertainty, panic and grief that Odette has inflicted
upon the properties in the Visayas and the spirit of its
people, and as the pandemic continues to have a grip on
all nations, this book, a product of pure altruism, is a
reminder of all that is still right and good in us, in others
and in this world.
5
PREFACE TO THE 2022 SPECIAL EDITION
This Book was written as a labor of love for those who are
going to take the January 23, 2022 Bar Examination in Taxation
Law serving as a memory jogger so the reader should note the
following marks:
*** must know.
** should know.
* nice to know.
Without any star, just browse.
All the best for the 2022 Bar Candidates especially for the
victims of Typhoon “Odette.” My prayers are always with you.
6
i. BASIC PRINCIPLES OF TAXATION IN
THE CONSTITUTION
7
Some authorities include double taxation. While this may be
so, it is submitted that double taxation is properly a constitutional
limitation.
8
exclusively for the aid and support of the preserved
pineapply industry. Decide the same.
SUGGESTED ANSWER: The tax is valid because it is for a
public purpose.
It is an exercise of police power which is for the general welfare
of the entire country because the preserved pineapple industry is one
of the pillars of the Philippine economy which affects the welfare of the
State. (Republic v. Bacolod-Murcia Co., G.R. No. L-19824, July 9, 1966)
It is a pillar of the Philippine economy providing employment for
thousands of workers, providing much needed foreign exchange, and
otherwise contributes to economic development and progress.
Public purpose is the heart of a tax law. [Planters Products, Inc. v.
Fertiphil Corporation, 548 SCRA 485 (2008)]
***5.
What is the extent of the legislative power that
may not be delegated ?
9
SUGGESTED ANSWER: The legislative power that may not
be delegated is the discretion to ascertain the following:
a. basis, amount, or rate of tax;
b. person or property that is subject to tax;
c. exemptions and exclusions from tax; and
d. manner of collecting the tax - may not be delegated away
by Congress. (La Suerte Cigar & Cigarette Factory v. Court of Appeals, G.R. No.
125346, November 11, 2014, and companion cases, paraphrasing and arrangement
supplied)
10
a. Provisions directly affecting taxation. Direct or specific
limitations. Provisions in the constitution that contain the words tax,
taxation or others, of similar import.
Some examples of the provisions directly affecting taxation are:
1) Prohibition against imprisonment for non-payment of
poll tax. (CONST., art. III, sec. 20)
2) Majority vote of Congress for grant of tax
exemptions. [Ibid., art. VI, sec. 28 (4)]
3) President’s veto power on appropriation, revenue,
tariff bills. [Ibid., art. VI, sec. 27 (2)]
b. Provisions indirectly affecting taxation. Indirect or
general limitations. Provisions in the constitution that do NOT contain
the words tax, taxation or others of similar import.
Some examples of constitutional provisions indirectly affecting
taxation:
1) Due process. (CONST., art. III, sec. 1)
2) Equal protection. (Ibid.)
3) Religious freedom. (Ibid., sec. 5)
4) Non-impairment of obligations of contract. (Ibid., sec.
10)
11
g. Prohibition on use of tax levied for special purpose. [Ibid.,
art. VI, sec. 29 (3)]
h. President’s veto power on appropriation, revenue, tariff
bills. [Ibid., art. VI, sec. 27 (2)]
i. Non-impairment of jurisdiction of the Supreme Court.
(Ibid., art. VIII, sec. 5)
j. Grant of power to the local government units to create its
(their) own sources of revenue. (Ibid., art. X, sec. 5)
k. Flexible tariff clause. [Ibid., art. VI, sec. 28 (2)]
l. Exemption from real property taxes. [Ibid., art. VI, sec. 28 (3)]
m. No appropriation or use of public money for religious
purposes. [[bid., art. VI, sec. 29 (2)]
n. Mandate for Congress to evolve a progressive system of
taxation. [Ibid, art. VI, Sec. 28 (1), 2nd sentence]
o. Origination of appropriation, revenue or tariff bills. (Ibid.,
art. VI, sec. 24)
p. Automatic release of LGU’s just share in national taxes .
(Ibid., art. X, sec. 6)
q. Tax exemption of grants, endowments, donations or
contributions. [Ibid., art. XIV, sec. 4 (4)]
NOTE NOT PART OF THE ANSWER: The reader should note that
the specific or direct constitutional provisions include words like tax, taxation,
revenue or tariff bills, use of public money, or words of similar import WHILE
the general or indirect constitutional limitations do not include such words.
***
9. Under the 1987 Constitution, may the
government tax income of non-profit educational institution
operated by religious orders ? What policy considerations are to
be taken into account ?
SUGGESTED ANSWER: No. The revenue of non-stock, non-profit
educational institutions which are actually, directly and exclusively used for
educational purposes, irrespective of whether or not they are operated by
religious orders under the 1987 Constitution. are exempt from income
taxation. (La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue,
G.R. No. 202792, February 27, 2019 citing 1987 Constitution, Article XIV)
The policy consideration is to encourage the establishment of
educational institutions which are not profit motivated. The tax
exemption would translate to lower tuition fees providing access to
education for all
12
SUGGESTED ANSWER: Equality of taxation means that all persons
who are similarly situated should be treated alike both in privileges conferred
and burdens imposed.
Constitutional equality in taxation means the application of the
concept of equal protection of the laws which prohibits discrimination other
than these instances where there is valid classification.
Thus, persons who are similarly situated, or who belong to the same
class, should be given by law the same protection and privileges as well as
imposed the same burdens and obligations.
“The constitutional guarantee of equal protection is not violated
by an executive issuance which was issued to simply reinforce
existing taxes applicable to both the private and public sector.”
[Confederation for Unity, Recognition and Advancement of Government Employees
(Courage) v. Commissioner, etc., G.R. No. 213446, and companion cases July 03,
2018, paraphrasing supplied]
13
The standard is met if the classification or distinction is based
on a reasonable foundation or rational basis and is not palpably
arbitrary. [ABAKADA Guro Party List, etc. v. Purisima, etc., G.R. No. 166715, August
14, 2008]
c. A third standard, denominated as heightened or intermediate
level of scrutiny (in While Light this was called immediate scrutiny),
Intentional discriminations against members of a quasi-suspect class violate
equal protection unless they are substantially related to important government
objectives. (White Light, supra)
14
*** 12. Quezon City Ordinance No. SP-2235, S-
2013 was enacted on December 16, 2013 and took effect
ten days after when it was approved by City Mayor. The
proceeds collected from the garbage fees on residential
properties shall be deposited solely and exclusively in an
earmarked special account under the general fund to be
utilized for garbage collections.
1. The Ordinance set forth the schedule and
manner for the collection of garbage fees as
follows:
On all domestic households in Quezon City;
LAND AREA IMPOSABLE FEE
Less than 200 sq. m. Php 100.00
201 sq. m. – 500 sq. m. Php 200.00
501 sq. m. – 1,000 sq. m. Php 300.00
1,001 sq. m. – 1,500 sq. m. Php 400.00
1,501 sq. m. – 2,000 sq. m. or more Php 500.00
On all condominium unit and socialized housing
projects/units in Quezon City;
FLOOR AREA IMPOSABLE FEE
Less than 40 sq. m. Php 25.00
41 sq. m. – 60 sq. m. Php 50.00
61 sq. m. – 100 sq. m. Php 75.00
101 sq. m. – 150 sq. m. Php100.00
151 sq. m. – 200 sq. [m.] or more Php200.00
On high-rise Condominium Units
a) High-rise Condominium – The
Homeowners Association of highrise condominiums
shall pay the annual garbage fee on the total size of
the entire condominium and socialized Housing Unit
and an additional garbage fee shall be collected
based on area occupied for every unit already sold or
being amortized.
b) High-rise apartment units – Owners of
high-rise apartment units shall pay the annual
garbage fee on the total lot size of the entire
apartment and an additional garbage fee based on the
schedule prescribed herein for every unit occupied.
15
SECTION 3. of the ordinance contains a penalty
clause which reads: “A penalty of 25% of the garbage fee
due plus an interest of 2% per month or a fraction thereof
(interest) shall be charged against a household owner who
refuses to pay the garbage fee herein imposed.”
Rule on the validity of the ordinance.
SUGGESTED ANSWER: The ordinance is null and void.
It violates the equal protection clause of the Constitution and
the provisions of the LGC that an ordinance must be equitable and
based as far as practicable on the taxpayer’s ability to pay, and not
unjust, excessive, oppressive, confiscatory. (Ferrer, Jr. v. City Mayor
Bautista, G.R. No. 210551, June 30, 2015 citing LGC, Secs. 130 and 186)
In the subject ordinance, the rates of the imposable fee depend
on land or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment.
The rates being charged by the ordinance are unjust and
inequitable: a resident of a 200 sq. m. unit in a condominium or
socialized housing project has to pay twice the amount than a resident
of a lot similar in size; unlike unit occupants, all occupants of a lot with
an area of 200 sq. m. and less have to pay a fixed rate of Php100.00;
and the same amount of garbage fee is imposed regardless of
whether the resident is from a condominium or from a socialized
housing project.
Indeed, the classifications under Ordinance No. S-2235 are not
germane to its declared purpose of “promoting shared responsibility
with the residents to attack their common mindless attitude in over-
consuming the present resources and in generating waste.”
Instead of simplistically categorizing the payee into land or floor
occupant of a lot or unit of a condominium, socialized housing project
or apartment, the City Council should have considered factors that
could truly measure the amount of wastes generated and the
appropriate fee for its collection. Factors include, among others,
household age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and actual
occupancy of the property.
On top of an unreasonable classification, the penalty clause
lacks the limitation required by Section 168 of the LGC, which
provides that, in no case shall the total interest on the unpaid amount
or portion thereof exceed thirty-six (36) months.” (Ibid.)
16
SUGGESTED ANSWER:
a. All donations, grants, endowments or contributions used
actually, directly and exclusively for educational purposes
1) shall be exempt from tax
2) subject to conditions prescribed by law. (CONST., art.
XIV, sec. 4)
b. All lands, buildings, and improvements
1) actually, directly and exclusively used
2) for educational purposes. [CONST., art. VI, sec. 28 (3),
17
(L). What do you understand by “a progressive system of
taxation”?
Discuss briefly the rationale for its inclusion in the
1987 Constitution.
SUGGESTED ANSWER: Taxation is progressive when its rate goes
up depending on the resources of the person affected. [Abakada Guro Party List
(Formerly AASJS) etc. v. Ermita, G.R. No. 168056, September 1, 2005]
It should be noted that the foregoing definition is clearly deficient. It
is not the mere increase in the rate alone in relation to income (the tax base)
but the increase in the tax rate must be at faster rate than the increase in the
tax base. If the tax rate increases in the same proportion as the increase on
the tax base, the tax is a proportional tax not a progressive tax.
The progressive system of taxation is exemplified by the
income tax rate which increases as the net taxable increases.
It is based on the ability to pay and in implementation of the social
justice principle that the more affluent should contribute more to the
community’s benefit.
The progressive system of taxation is constitutionally imposed
to achieve social justice through redistribution of income. Progressive
income taxes alleviate the margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, G.R. No.
158540, August 3, 2005)
Among the general rationale for the progressive system of
taxation are the following:
a. It represents a procedurally legitimate outcome of a
political process based on sound democratic principles.
b. It furthers (not guarantees) the end of achieving a
modest redistribution of wealth.
c. It limits the wealth and power of the extremely wealthy.
d. It compensates for regressive national taxes such as the
value-added tax, etc. (Adapted from Dodge, Joseph M. The Logic of Tax, West
Publishing Company, St. Paul, Minn, USA, 1989)
18
promoting the general interests of the coconut industry and its
farmers.” (Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa
sa Niyugan (PKSMMN), et al. v. Executive Secretary, G.R. Nos. 147036-37, April 10,
2012, and companion cases)
***
18. State the provisions of our constitution
that indirectly affects taxation.
SUGGESTED ANSWER: The general or indirect constitutional
limitations on the power of taxation are the provisions on:
a. Due process. (CONST., Art. III, Sec. 1)
b. Equal protection. (Ibid.)
c. Religious freedom. (Ibid., Sec. 5)
d. Non-impairment of obligations of contract. (Ibid., Sec. 10)
e. Freedom of the press. (Ibid., Sec. 4)
f. No taking of private property without just compensation.
(Ibid., Sec. 9)
g. Law-making process:
1) Bill should embrace only one subject expressed in
the title thereof. [Ibid., Art VI, Sec. 26 (1)]
2) Three readings on three separate days. [Ibid., Sec.
26(2)]
3) Printed copies in final form distributed three (3)
days before passage. (Ibid.)
h. Presidential power to grant reprieves, commutations and
pardons and remit fines and forfeitures after conviction by final
judgment. (Ibid., Art. VII, Sec. 19)
i. Preference to Filipinos. (Ibid., Art. XII; Sec. 12)
j. Policy on cooperatives. (Ibid., Art. XII, Sec. 1, last par., last
sentence)
k. Reducing Commission on Audit’s audit function over tax
revenues is unconstitutional.
19
persons. Thus, the failure of a government entity or its agents to
protect an individual against being harmed by others is not covered by
the due process clause. (De Shaney v. Winnebago County Department of Social
Services, 489 U.S. 189)
**
19. What are the requisites for the observance of
due process in taxation ?
SUGGESTED ANSWER: Due process in taxation requires:
a. The tax must be for public purpose
b. imposed within its territorial jurisdiction.
c. There should be no arbitrariness or oppression in its
1) assessment and
2) collection. (Pepsi-Cola Co. of the Phil. v. Municipality of Tanauan,
Leyte, 69 SCRA 460, arrangement and numbering supplied)
Due process in taxation does not require:
a. Determination through judicial inquiry of
1) property subject to tax, and
2) amount of tax to be imposed.
b. Notice and hearing as to:
1) amount of the tax, and
2) manner of apportionment. Reason: Lifeblood theory.
(Ibid.)
20
h. The tribunal or any of its judges, must act on its or his
own independent consideration of the law and facts of the
controversy. and
i. The tribunal should, in all controversial questions render
its decision in such a manner that the parties to the proceeding may
know the various issues involved, and the reasons for the decision
rendered. (Ang Tibay v. C.I.R., 69 Phil. 635)
***
21. Give exceptions or instances where notice
is dispensed with before the issuance of an assessment.
SUGGESTED ANSWER: The following are the instances
where notice for informal conference may be dispensed with before
issuance of a preliminary assessment notice and where a pre-
assessment notice is not required before issuing an assessment
notice:
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return filed by the taxpayer;
b. When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the withholding
agent; or
c. When a taxpayer who has opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
d. When the excise tax due on excisable articles has not
been paid; or
e. When an article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons. (NIRC of 1997, Sec. 228; Rev. Regs. No.
12-99, Sec. 3.1.3)
21
succeeding legislation and a tax could not be imposed without infringing on
the impairment clause.
22
f. whether the impact of the law is permanent (rather than
temporary) or immediate (as opposed to gradual). (Energy Reserves
Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400)
***
27. What is the nature of the state’s power to
tax ? Why is it so ?
SUGGESTED ANSWER: The nature of the state’s power to tax is
two-fold. It is both an inherent power and a legislative power.
a. Taxation is inherent in nature being an attribute of
sovereignty [Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614
SCRA 605 (2010)] and consequently it exists with or without a
constitutional provision to the effect. (Cooley, Constitutional Limitations, p.
787)
23
This is so, because without tax revenues the state’s very existence
would be imperiled for lack of funds to perform the essential obligations of
the state.
b. Taxation is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules, why should the tax be paid,
who pays the tax, how much is the tax to be paid, to whom it should be paid,
and when the tax should be paid.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the
immediate representatives of the people, and where the people have
laid the power, there it must remain and be exercised. [Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, 559 SCRA 160 (2008)]
24
inherent in the State, such power being inherently legislative, based
on the principle that taxes are a grant of the people who are taxed,
and the grant must be made by the immediate representatives of the
people. Where the people have laid the power, there it must remain
and be exercised. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, 559 SCRA 160 (2008)]
A legislative body may enact laws to raise revenues despite the
absence of a constitutional provision granting that body the power to
tax. Taxation is inherent in nature being an attribute of sovereignty
[Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614 SCRA 605
(2010)] and consequently it exists with or without a constitutional
provision to the effect. (Cooley, Constitutional Limitations, p.787)
This is so, because without taxes the state’s very existence would be
imperiled for lack of funds to perform the essential obligations of the state.
Taxation is a legislative power because it involves the promulgation
of rules. Taxation is a set of rules, who pays the tax, how much is the tax to
be paid, to whom it should be paid, and when the tax should be paid.
25
e. What is done with the property taken: Taxation is
constructive because the money collected is spent for building
infrastructure or providing public services while police power is
destructive. The property taken is usually destroyed.
f. Relation to the non-impairment clause: Taxation is
inferior to the non-impairment clause and could not override the same
while police power is superior to the non-impairment clause.
g. Scope. Taxation interferes with property rights only while
police power regulates both liberty and property.
h. Surrender. Taxation may be bargained away through a
contract such that if the government issues a tax-exempt bond, it
could not withdraw the exemption because it would violate the non-
impairment clause while police power cannot be bargained away.
26
providing telecommunications services to the general
public. In the course of its business, Smart constructed a
telecommunications tower within the territorial jurisdiction
of the Municipality of Malvar, Batangas, The construction
of the tower was for the purpose of receiving and
transmitting cellular communications within the covered
area.
On 30 July 2003, the Municipality passed Ordinance
No. 18, series of 2003, entitled “An Ordinance Regulating
the Establishment of Special Projects.” On 24 August 2004,
Smart received from the Permit and Licensing Division of
the Office of the Mayor of the Municipality an assessment
letter with a schedule of payment for the total amount of
₱389,950.00 for Smart’s telecommunications tower.
Is the imposition a tax ?
SUGGESTED ANSWER: No. The imposition of fees on “cell
sites” is under police power.
The main purpose of Ordinance No. 18 is to regulate certain
construction activities of the identified special projects, which includes
“cell sites” or telecommunications towers. Thus, the fees imposed in
Ordinance No. 18 are primarily regulatory in nature, and not primarily
revenue-raising. They are not taxes. While the fees may contribute to
the revenues of the Municipality, this effect is merely incidental. (Smart
Communications, Inc. v. Municipality of Malvar, Batangas, G.R. No. 204429, February
18, 2014)
27
tax credit to be granted shall be equivalent to the total
amount of the special assessment paid by the property
owner.
Is the imposition valid ?
SUGGESTED ANSWER: Yes. The ordinance imposing the
Socialized Housing Tax of Quezon City, (SHT) is valid.
The tax is not a pure exercise of taxing power or merely to raise
revenue; it is levied with a regulatory purpose. The levy is primarily in
the exercise of the police power for the general welfare of the entire
city. It is greatly imbued with public interest.
Removing slum areas in Quezon City is not only beneficial to
the underprivileged and homeless constituents but advantageous to
the real property owners as well. The situation will improve the value
of their property investments, fully enjoying the same in view of an
orderly, secure, and safe community, and will enhance the quality of
life of the poor, making them law-abiding constituents and better
consumers of business products. (Ferrer, Jr. v. City Mayor Bautista, G.R. No.
210551, June 30, 2015)
28
They are constitutionally exempt from taxation because all lands,
buildings and improvements actually, directly and exclusively used for
educational purposes shall be exempt from taxation. [CONST., art. VI, sec. 28 (3),
paraphrasing supplied]
**36.
What are the five (5) circumstances that must
be present in order to qualify “taking” as an exercise of
eminent domain which requires just compensation ?
SUGGESTED ANSWER: The circumstances are:
“First, the expropriator must enter a private property.
Second, the entrance into private property must be for more
than a momentary period.
Third, the entry into the property should be under warrant or
color of legal authority.
Fourth, the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected.
Fifth, the utilization of the property for public use must be in
such a way as to oust the owner and deprive him of all beneficial
enjoyment of the property. (Southern Luzon Drug Corporation v. The Department
of Social Welfare and Development, G.R. No. 199669, April 25, 2017, arrangement
supplied)
**
37. What is the concept of “taking” which requires
just compensation ?
SUGGESTED ANSWER: There are two different types of
taking that can be identified.
a. A “possessory” taking occurs when the government
confiscates or physically occupies property.
b. A “regulatory” taking occurs when the government’s
regulation leaves no reasonable economically viable use of the
property.
What is crucial in judicial consideration of regulatory takings is
that government regulation is a taking if it leaves no reasonable
economically viable use of property in a manner that interferes with
reasonable expectations for use. A regulation that permanently denies
all economically beneficial or productive use of land is, from the
owner’s point of view, equivalent to a “taking” unless principles of
nuisance or property law that existed when the owner acquired the
land make the use prohibitable. When the owner of real property has
been called upon to sacrifice all economically beneficial uses in the
name of the common good, that is, to leave his property economically
idle, he has suffered a taking. (Southern Luzon Drug Corporation v. The
Department of Social Welfare and Development, G.R. No. 199669, April 25, 2017)
29
The circumstances that must be present for eminent domain are absent
in the senior citizens and PWDs discount. (Ibid.)
30
**4. Briefly explain the symbiotic relation principle.
SUGGESTED ANSWER: The symbiotic relation principle is the
reciprocal relation of protection and support between the state and the
taxpayers. The state gives protection and for it to continue giving protection
it must be supported by the taxpayers in the form of taxes.
31
There is also no theoretical justice because the burden falls
upon the poor. This is illustrated by the fact that most tax revenues
are generated by indirect taxes.
The tax system is likewise complex that it violates the principle
of administrative feasibility. Some taxpayers still find difficulty in
applying the VAT. So also, the two methods of taxing corporations
results to confusion.
32
Statutes may, however, provide for prescriptive periods for the
collection of particular kinds of taxes in order to respect the due process
rights of taxpayers.
Situs of taxation
33
and the state. The state gives protection and in order to continue
giving protection, it must be supported in the form of taxes.
b. Jurisdiction, state or political unit that gives protection
has the right to demand support.
Technically tax laws are jurisdictional, or operate only within the
territorial jurisdiction of a state because that is where it could give
protection. This is subject to the concept of mobilia sequuntur
personam.
NOTE NOT PART OF THE ANSWER: There is a distinction between
a question asking for situs of taxation, in general (such as the question above)
and one which asks for the situs of various kinds of taxes (such as the situs of
income taxation, the situs of estate taxes, the situs of property taxes, etc.).
**
4. Situs of taxation means the place of taxation,
the state which has jurisdiction to impose a particular tax
on persons, property or transaction. Bearing in mind the
general rule on situs of taxation and the provisions of the
National Internal Revenue Code, what is the situs of
taxation of the following stating the basis for your answer:
a. Transfer of property by death.
SUGGESTED ANSWER: For resident decedents, whether Filipino
citizens or not, the situs would be irrespective of where the property real or
personal, tangible or intangible, is located and in the case of a nonresident
decedents who are not Filipino citizens, the situs would only be those
property situated in the Philippines. (NIRC of 1997, Sec. 85, paraphrasing supplied)
The places of situs are the places that give protection.
b. Transfer of property by gift.
SUGGESTED ANSWER: The Philippines is the situs of taxation of
the donation or transfers of property by gift.
1) Donations made in the Philippines irrespective of
the nationality of rhe donor, as well as the location of the
property. The basis is the protection made of the activity which
is the act of donation.
2) Donations made outside of the Philippines where
the donor is a Philippine citizen, irrespective of his residency or
location of the property donated. The basis is the protection
given to the donor who is a Filipino citizen.
3) Donations made outside of the Philippines where
the property donated is located in the Philippines irrespective of
the nationality or residency of the donor. The Philipines gives
protection to the property that is donated that is why it is the
situs of taxation.
NOTES NOT PART OF THE ANSWER: It is to be noted that the
residence and nationality of the donee are not taken into consideration for
34
determining whether the donation is subject to Philippine donor’s taxation or
not.
c. Business and occupation.
SUGGESTED ANSWER: The situs of business and occupation is the
place where the business and occupation are being conducted. The reason
being that this is the place which gives protection to the business or
occupation.
d. Situs of taxes on real propery.
SUGGESTED ANSWER: The place where the real property is
located under the principle of Lex rei sitae or lex situs because of the
following reasons:
1) The taxing authority has control because of the
stationary and fixed character of the property.
2) The place where the real property is situated
gives protection to the real property, hence the property or its
owner should support the government of that place.
e. Situs of taxation of personal property.
SUGGESTED ANSWER: The basis of taxation is determined
by the nature of the property whether it is tangible, intangible or mixed.
For tangible personal property the basis is mobilia sequuntur
personam (movables follow the person). The situs of taxation is the
place where the owner is found. This is generally, where the owner
resides.
The domicile of the owner is the place that provides protection
to the property because the intangible follows the owner.
For intangible personal property or mixed the basis is the place
where the property has acquired a business situs.
For example, taxes imposed on the sales of Philippine stocks
(stocks in domestic corporations) are taxable in the Philippines no
matter where they may be found, or where the owner’s domicile is
located.
f. Situs of excise taxes.
SUGGESTED ANSWER: The situs of taxation of excise tax
would depend whether the article is
1) a domestic product or mineral;
2) an imported article.
Situs of taxation of the excise tax on a domestic product or
mineral. The situs is the place of production or where mined or
extracted. [NIRC of 1997, Sec. 130 (A) (2), paraphrasing supplied]
Situs of taxation of imported articles. Place where the
customshouse from where released is located. In case of tax exempt
articles where the possessor is not entitled to the exemption, then the
place where the possessor is found . [Ibid., Sec. 130 (A) (1), paraphrasing
supplied]
35
Situs of franchise tax which is an excise tax. It should be
stressed that what the City of Iriga seeks to collect from CASURECO
III is “a franchise tax, which as defined, is a tax on the exercise of a
privilege.” [City of Iriga v. Camarines Sur III Electric Cooperative, Inc. (CASURECO
III), G.R. No. 19245, September 5, 2012]
The “franchise tax shall be based on gross receipts precisely
because it is a tax on business, rather than on persons or property.
Since it partakes of the nature of an excise tax the situs of taxation is
the place where the privilege is exercised, in this case in the City of
Iriga, where CASURECO III has its principal office and from where it
operates, regardless of the place where its services or products are
delivered. Hence, franchise tax covers all gross receipts from Iriga
City and the Rinconada area.” (Ibid.)
g. Situs of sales of property.
SUGGESTED ANSWER: The situs of taxation depends upon
whether the property is real or personal.
Gains, profits, and income from sale of real property located in
the Philippines are treated as gross income from sources within the
Philippines. [NIRC of 1997, Sec. 42 (A) (5)]
Thus, the situs is where the real property is located.
Tax treatment of gains, profits, and income derived from the
sale of personal property. Gains, profits and income derived:
1) From the purchase of personal property within and
its sale without the Philippines, or
2) From the purchase of personal property without
and its sale within the Philippines,
a) shall be treated as derived entirely from
sources within the country in which sold:
b) Provided, however, That gains from the
sales of shares of stock in a domestic corporation
1) shall be treated as derived entirely
from sources within the Philippines
2) regardless of where the said shares
are sold. [Ibid., Sec. 42 (E), 2nd par., arrangement, and
numbering supplied]
Illustration of situs of sale of personal property. Sales of
encyclopedias were considered as perfected and consummated in the
U.S. because of showing that when the Philippine distributors placed
and/or sent their specific orders to P.F. Collier, U.S., they already
knew the price of the books. Such orders were shipped by the vendor
in the U.S. direct to the different buyers in the Philippines. [P.F. Collier,
Inc. (Philippine Branch) v. Commissioner of Internal Revenue, CTA Case No. 4355,
November 9, 1995]
Double taxation
36
***1.Is “double taxation” allowed or prohibited in
the Philippines? Illustrate.
SUGGESTED ANSWER: There is no specific provision in the
Constitution prohibiting double taxation. Unlike the United States
Constitution, double taxation is not specially prohibited in the
Philippine Constitution. (Manufacturers Life v. Meer, 89 Phil. 210)
However, where there is direct duplicate taxation, then there
may be violation of the constitutional precepts of equal protection and
uniformity in taxation.
If only the 1st element of direct duplicate taxation is present
(taxing the same subject or object twice, by the same taxing authority,
etc.), there is no violation of the equal protection clause because all
subjects and objects that are similarly situated are subject to the same
burdens and granted the same privileges without any discrimination
whatsoever,
The presence of the 2nd element, taxing all of the subjects and
objects within the territory for the first time, without taxing all for the
second time, results to discrimination among subjects and objects that
are similarly situated, hence violative of the equal protection clause.
At all events, there is no constitutional prohibition against double
taxation in the Philippines. (La Suerte Cigar & Cigarette Factory v. Court of Appeals,
G.R. No. 125346, November 11, 2014, and companion cases]
***
2. What are the usual methods of avoiding the
occurrence of double taxation ?
SUGGESTED ANSWER: The following are the methods for
easing the economic burden of double taxation:
a. Tax treaties which exempts foreign nationals from local
taxation and local nationals from foreign taxation under the principle of
reciprocity.
b. Tax credits where foreign taxes are allowed as
deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
d. Reduction of Philippine income tax rates.
EXPLANATION NOT PART OF THE ANSWER: The double taxation
referred to in the question is indirect duplicate taxation which is not a basis for
invalidating a tax measure. Thus, the taxpayer is subject to tax twice unlike in
the case of direct duplicate taxation where one of the tax measures may be
invalidated because it violates the equal protection clause.
37
SUGGESTED ANSWER: Yes. If the double taxation is in its
strict sense also known as direct duplicate taxation because it would
be a valid defense against a tax measure. The tax measure would be
nullified for being unconstitutional because it violates the equal
protection clause.
38
a. on the same subject matter - the privilege of doing
business in the City of San Fernando;
b. for the same purpose - to make persons
conducting business within the City of San Fernando contribute
to city revenues;
c. by the same taxing authority - City of San
Fernando;
d. within the same taxing jurisdiction - within the
territorial jurisdiction of the City of San Fernando;
e. for the same taxing periods - per calendar year;
and
f. of the same kind or character - a local business tax
imposed on gross sales or receipts of the business. (Nursery Care
Corporation v. Acevedo, etc., G.R. No. 180651, July 30, 2014)
***5.
A 20% final withholding tax (FWT) on interest
income and a 5% gross receipts tax (GRT) are both
imposed upon banks. Is there double taxation ?
SUGGESTED ANSWER: No because of the following reasons:
a. The taxes are imposed on two different subject matters.
The subject matter of the FWT is the passive income generated in the
form of interest on deposits and yield on deposit substitutes, while the
subject matter of the GRT is the privilege of engaging in the business
of banking.
A tax based on receipts is a tax on business rather than on the
property, hence it is an excise rather than a property tax. It is not an
income tax, unlike the FWT. One can be taxed for engaging in
business and further taxed differently for the income derived
therefrom. These two taxes are entirely distinct and are assessed
under different provisions. (Commissioner of Internal Revenue v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003)
b. Although both taxes are national in scope because they
are imposed by the same taxing authority – the national government
under the Tax Code – and operate within the same Philippine
jurisdiction for the purpose of raising revenues, the taxing periods they
affect are different.
The FWT is deducted and withheld as soon the income is
earned, and is paid every calendar quarter in which it is earned. On
the other hand, the GRT is neither deducted nor withheld, but is paid
only after every taxable quarter in which it is earned.
c. These two taxes are of different kinds or character. The
FWT is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding. (Commissioner of Internal
Revenue v. Bank of Commerce, G.R. No. 149636, June 8, 2005)
39
***
6. Is there a case of double taxation when an
item of income is taxed in the Philippines and the same
income is taxed in another country ?
SUGGESTED ANSWER: In its general sense yes, because the same
subject is taxed twice although by different taxing authorities
However, this type of double taxation is not prohibited by the
Constitution because it is not direct duplicate taxation which is violative of
equal protection and uniformity in taxation. The reason is that the taxes are
imposed for different purposes and by different taxing authorities.
40
the retailer (Section 17), all the taxes – being imposed on the privilege of
doing business in the City of Manila in order to make the taxpayers
contribute to the city’s revenues – were imposed on the same subject matter
and for the same purpose. (Nursery Care Corporation v. Acevedo, etc., G.R. No. 180651,
July 30, 2014)
An example of double taxation in a broad sense is where a 20%
final withholding tax (FWT) on interest income and a 5% gross
receipts tax (GRT) are both imposed upon banks . (Commissioner of
Internal Revenue v. Solidbank Corporation, G.R. No. 148191, November 25, 2003)
***
8. Your neighbor owns a row of apartments, one
unit of which he occupies as his residence and the rest, he
leases to tenants. He complains to you that he has to pay
the following taxes:
a. real estate taxes on the properties;
b. real estate dealer’s tax based on his rental
receipts;
c. income tax for said rental receipts;
d. community tax based on the assessed value of
the same properties.
He asks you whether or not the various impositions
constitute double taxation and therefore violative of the
Constitution. What will your answer be? Explain.
SUGGESTED ANSWER: The various impositions constitute double
taxation because my neighbor is taxed twice.
However, this type of double taxation is not prohibited by the
Constitution because it is not direct duplicate taxation that is violative of
equal protection and uniformity in taxation. The reason is that the taxes are
imposed for different purposes and by different taxing authorities.
NOTE NOT PART OF THE ANSWER: The answer may be
expanded by explaining the concept of direct duplicate taxation.
***
9. In 2020, Batangas City amended its Revenue
Code to include a new provision imposing a tax on every
sale of merchandize by a wholesaler based on the total
selling price of the goods, inclusive of value-added taxes
(VAT). Kulambo’t Kumot Corp., a wholesaler operating
within Batangas City, challenged the new provision based
in the following contentions: 1. The new provision is a
form of prohibited double taxation because it essentially
amounts to Batangas City imposing VAT which was
already being levied by the national government; and 2.
41
Since the tax being imposed is akin to VAT, it is beyond the
power of Batangas City , to levy the same.
Rule on each of Kulambo’t Kumot Corp.’s
contentions.
SUGGESTED ANSWER: Kulambo’t Kumot Corp.’s contention
no. 1 is lacking in merit.
The same taxing authority that imposed the first tax should also
be the one that imposes the second tax is among the elements of
prohibited double taxation, which is also known as direct duplicate
taxation.
There is absent the element above described because there
are different taxing authorities. VAT is imposed by the national
government while the second tax is imposed by a local government
unit, Batangas City.
Kulambo’t Kumot Corp.’s contention no. 2 is likewise bereft of
merit.
Local government units such as Batangas City, may impose a
tax on any business that are “not otherwise specified in the preceding
paragraphs” of Sec. 143 (h) of the Local Government Code but
already subject to tax under the NIRC such as excise, value-added tax
or percentage provided the rate of tax does not exceed two percent
(2%) of gross sales or receipts of the preceding calendar year. [LGC,
Sec. 133 (h); Nursery Care Corporation v. Acevedo, etc., G.R. No. 180651, July 30,
2014)]
42
11. What are the methods resorted to by a tax treaty
in order to eliminate double taxation ?
SUGGESTED ANSWER: The methods are the:
First Method: The tax treaty sets out the respective rights to tax
by the state of source or situs and by the state of residence with
regard to certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are given the
right to tax, although the amount of tax that may be imposed by the
state of source is limited.
Second Method: The state of source is given a full or limited
right to tax together with the state of residence. In this case, the treaty
makes it incumbent upon the state of residence to allow relief in order
to avoid double taxation. Two methods of relief are used under the
second method:
a. Tax exemption method (using the deduction method).
The income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may
be taken into account in determining the rate of tax applicable to the
taxpayer’s remaining income or capital. (This may be done using the
tax deduction method which allows foreign income taxes to be
deducted from gross income, in effect exempting the payment from
being further taxed.) (Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc., G.R. No. 127105, June 25, 1999)
Tax deduction method is a subtraction from income for tax
purposes, or an amount that is allowed by law to reduce income prior
to the application of the tax rate to compute the amount of tax which is
due.
A tax deduction reduces the income that is subject to tax in
order to arrive at taxable income. (Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
b. The credit method. Although the income or capital
which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited (deducted) against the
tax levied in the latter. (Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc., G.R. No. 127105, June 25, 1999)
Tax credit generally refers to an amount that is subtracted
directly from one’s total tax liability, an allowance against the tax itself,
or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever
applicable – the income tax that is determined after applying the
corresponding tax rates to taxable income. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
Author’s comments. The reader should note that the “double
taxation” referred to is the valid type which is double taxation in its general
43
sense or indirect duplicate taxation. Under this type, the two laws could
validly be enforced because there is no constitutional infirmity (as a result of
the absence for example of the same taxing authority that imposes the tax)
hence, there is collection of the two taxes imposing a dual economic burden
upon the taxpayer. Thus, the methods described are for the purpose of
eliminating if not easing the economic burden of “double taxation.”
44
SUGGESTED ANSWER: The impact of a tax refers to the
statutory taxpayer. The person or entity stated in the law who is liable
for the tax.
Importance of knowing upon whom the impact of a tax lies for
refund purposes. The proper party to question or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden
thereof to another because once shifted, it is no longer in the nature of
a tax, but part of the purchase price or the cost of the goods or
services sold. [Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue,
G.R. No. 166482, January 25, 2012]
45
***6. GASOLINA Corporation is a domestic
corporation engaged in the business of importing, refining
and selling petroleum products. During the period from
September 1, 2020 to December 31, 2020, GASOLINA
Corporation imported 225 million liters of Jet A-1 aviation
fuel and paid the excise taxes thereon. Seventy-five
percent (75%) of the total volume of aviation fuel imported
were actually sold to international carriers of Philippine
and foreign registries for their use or consumption outside
of the Philippines in the period from November 1, 2020, to
December 31, 2020. GASOLINA Corporation did not pass
on to the international carriers the excise taxes it paid on
the importation of petroleum products.
On June 25, 2021, GASOLINA Corporation filed an
administrative claim for refund or issuance of tax credit
certificate amounting to the excise taxes it had paid on the
importation of 225 million liters of Jet A-1 aviation fuel.
If you were the Commissioner of lnternal Revenue,
will you grant GASOLINA Corporation’s administrative
claim for refund or issuance of tax credit certificate.
Explain your answer.
SUGGESTED ANSWER: Yes. GASOLINA Corporation as the
statutory taxpayer is entitled to refund but only up to the extent of the
seventy-five percent (75%) of the total volume of aviation fuel
imported were actually sold to international carriers of Philippine and
foreign registries for their use or consumption outside of the
Philippines.
The excise tax on petroleum products is a tax on property;
hence, the exemption from the excise tax expressly granted under
Section 135 of the NIRC, in favor of international carriers, must be
construed in favor of the petroleum products on which the excise tax
was initially imposed.
Accordingly, the excise taxes that Wreck paid on its importation
of petroleum products subsequently sold to international carriers and
foreign registries for their use or consumption outside the Philippines
were illegal and erroneous, and should be credited or refunded to
GASOLINA in accordance with Section 204 of the NIRC. (Chevron
Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 210836, September 1,
2015)
46
SUGGESTED ANSWER: Tax avoidance is the exploitation by the
taxpayer of legally permissible alternative rates or methods of assessing
taxable property or income in order to reduce or entirely avoid tax liability.
Example: Availing of all deductions allowed by law or refraining from
engaging in activities subject to tax.
47
An example of tax avoidance is spreading a P500,000.00 donation over
a period of two calendar years in order to avail of the tax exemption of the first
and second P250,000.00 donation.
48
There was no tax avoidance, instead there was tax evasion on
the part of Lucky because of the simulated sale to Rainier which had
its apparent purpose to reduce the income tax to be paid by Lucky on
the sale to HSC.
The sale to Rainier was simulated as evidenced by the fact that
two months prior to the sale of the properties to Rainier, Lucky
received P40 million from HSC and not from Rainier.
The intermediary transaction (the simulated sale to Rainier), was
prompted more on the mitigation of tax liabilities than for legitimate business
purpose constitutes one of tax evasion. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188, September 14, 2004, 438 SCRA 290)
49
b. Adherence to form. If the exemption is granted by the
Constitution, its revocation may be effected through constitutional
amendment only.
Where the tax exemption grant is in the form of a special law and not
by a general law even if the terms of the general act are broad enough to
include the codes in the general law unless there is manifest intent to repeal
or alter the special law. (Commissioner of Internal Revenue v. Court of Appeals, 207
SCRA 487)
Equitable recoupment
50
The doctrine does not find application to local government taxation because
the death of a local government unit does not result to the demise of the national
government.
Compromise
51
Tax Amnesty
52
**
3. Distinguish a tax amnesty from a tax
exemption.
SUGGESTED ANSWER: The distinctions between a tax amnesty
and tax exemption are as follows:
a. Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v.
Castañeda, G.R. No. L-46881, September 15, 1988) while a tax exemption is
an immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which others
are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence
of retroactive application (Castañeda, supra) while a tax exemption
has prospective application.
53
The State cannot be deprived of this most essential power and
attribute of sovereignty by vague implications of law and he who claims an
exemption must be able to justify his claim by the clearest grant of statute.
[Jaka Investments Corporation v. Commissioner of Internal Revenue, 626 SCRA 16 (2010)]
54
(Commissioner of Internal Revenue v. The Philippine American Accident Insurance Company,
Inc., G.R. No. 141658, March 18, 2005)
This is so because taxes, as burdens which must be endured by the
taxpayer, should not be unduly exacted or presumed to go beyond what the
law expressly and clearly declares. (Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)
55
***8. Does exemption granted by law from payment of
all taxes carry with it automatically exemption from payment of
customs duties and license fees ?
SUGGESTED ANSWER: Yes but only with regard to the payment of
customs duties. There is no exemption from the payment of license fees.
When the law is clear and unequivocal there is no need for the application of
the principle of stict interpretation against the taxpayer.
The exemption applies to “all taxes,” hence there is no need for
interpretation as “customs duties” are taxes. Ubi lex non distinguit nec nos
distinguire debemos (Where the law does not distinguish, we should not
distinguish). It is clear in the problem that there is no distinction made as to
what kind of taxes the exemption refers to.
However, there should be no exemption from the payment of license
fees because they are not taxes. They are imposed under police power not
under the power of taxation.
56
d. not retroactive in its application.
**2.
What is the extent of the authority of the
Commissioner of Internal Revenue to make or amend a
return ?
SUGGESTED ANSWER: In case a person
a. fails to file a required return or other document at the
time prescribed by law, or
b. willfully or otherwise files a false or fraudulent return or
other document,
1) the Commissioner shall make or amend the return
a) from his own knowledge
b) and from such information as he can obtain
through testimony or otherwise, which shall be prima
facie correct and sufficient for all legal purposes. [NIRC of
1997, Sec. 6 (B), 2nd par., arrangement and numbering supplied]
57
have not been issued by the BIR letters of authority to
examine. Relleve Corp. believes that the BIR is on a
“fishing expedition” and comes to you for counsel. What
is your advice ?
SUGGESTED ANSWER: I would advise Relleve Corp., to
supply the BIR with the information desired.
The BIR is authorized under the NIRC of 1997 to secure
information even from persons who are not under tax investigation.
The BIR Commissioner is allowed to investigate any circumstance
which led him to believe that the taxpayer had taxable income larger than that
reported. Necessarily, this inquiry would have to be outside of the books
because they supported the return as filed. He may take the sworn testimony of
the taxpayer; he may take the testimony of third parties; he may examine and
subpoena; if necessary, traders’ and brokers’ accounts and books and the
taxpayer’s books of accounts. The Commissioner is not bound to follow any
set of patterns. The existence of unreported income may be shown by any
particular proof that is available in the circumstances of the particular situation.
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G.R. No. 136975, March 31, 2005)
It was once held that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other sources of
information to establish income made by the taxpayer during the years in
question. (Ibid) .
58
determining the capital gains tax and not the zonal value as
determined by the Commissioner of Internal Revenue?
Reason Briefly.
SUGGESTED ANSWER: No. The RDO has no authority to
use a fair market value other than that prescribed in the Tax Code.
The power to prescribe the fair market value (zonal valuation) is
lodged with the Commissioner of Internal Revenue.
The fair market value prescribed for the computation of any
internal revenue tax shall be, whichever is higher of: (1) the fair market
value as determined by the Commissioner (referred to as zonal value);
or (2) the fair market value as shown in the schedule of values of the
provincial and city assessors (FMV per tax declaration). [NIRC, Sec.
6(E)] The use of the fair market value appearing in a nearby bank’s
valuation list, therefor, is not allowed for purposes of computing
internal revenue taxes.
b. Should the difference in the supposed taxable
value be legally subject to donor’s tax? Reason briefly.
SUGGESTED ANSWER: No. The difference in the supposed
taxable value cannot be legally subject to the donor’s tax, because the
use of a fair market value other than that prescribed by the Tax Code
is not allowed for computing any internal revenue tax. [NIRC, Section
6(E)]
59
The power of the Commissioner in the instances stated above
does not conflict with R.A. 1405 because the Commissioner’s power
to inquire into bank deposits authorized under the NIRC of 1997
constitutes exceptions to R.A. 1405.
60
‘directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary
in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.”
(Ibid.) “These revenue issuances are subject to the review of the
Secretary of Finance.
61
Commissioner, as delegated to duly authorized internal revenue
officers. [Ibid.,, Sec. 3 (b)]
***
5. XYZ Corporation, an export-oriented company,
was able to secure a Bureau of Internal Revenue (BIR)
ruling in June 2020 that exempts from Tax the importation
of some of its raw materials. The ruling is of first
impression, which means the interpretations made by the
Commissioner of Internal Revenue is one without
established precedents. Subsequently, however, the BIR
issued another ruling which in effect would subject to tax
such kind of importation. XYZ Corporation is concerned
that said ruling may have a retroactive effect, which means
that all their importations done before the issuance of the
second ruling could be subject to tax.
a. What are BIR rulings?
SUGGESTED ANSWER: BIR rulings are official positions of
the Bureau on inquiries of taxpayers, who request clarification on
certain provisions of the National Internal Revenue Code (NIRC),
other tax laws, or their implementing regulations, usually for the
purpose of seeking tax exemptions. Rulings are based on particular
facts and circumstances presented and are interpretations of the law
at a specific point in time.
The Bureau also issues rulings to answer written questions of
individuals and juridical entities regarding their status as taxpayers
and the effects of their transactions for taxation purposes. (RMO No. 9-
2014, Sec. 1)
b. What is required to make a BIR ruling of first
impression valid ?
SUGGESTED ANSWER: A BIR ruling of first impression to be
valid must not be against the law and it must be issued only by the
Commissioner of Internal revenue. (Philippine Bank of Communications v.
CIR, 302 SCRA 241)
Rulings of first impression shall be submitted together with their
dockets to the Secretary of Finance and shall not be valid unless
reviewed and approved by the Secretary of Finance. [RAO No. 1-99, Sec.
4 (a)]
***
6. The Commissioner of Internal Revenue
issued a BIR ruling to the effect that the transaction is
liable to income tax and value added tax. Upon receipt of
62
the ruling, a taxpayer does not agree thereto. What is his
proper remedy ?
SUGGESTED ANSWER: File an appeal to the Secretary of
Finance within thirty (30) days from receipt thereof.
63
lifeblood upon which the government depends for its continued
existence.
The Commissioner of Internal Revenue is not bound by the
ruling of his predecessors. He could reverse the same. To the
contrary, the overruling of decisions is inherent in the interpretation of
laws. (Misamis Oriental Association of Coco Traders, Inc. v. Secretary of Finance,
238 SCRA 63, 69)
NOTE NOT PART OF THE ANSWER: Where the alternative answer
finds application, the taxpayer should not be subject to the payment of
interests, fines, surcharges, and other penalties for the late payment of the
deficiency taxes. After all, the taxpayers should not be penalized for their
reliance in good faith upon the previous interpretation.
***
3. Discuss the meaning of the schedular system
of taxation.
SUGGESTED ANSWER: A system employed where the
income tax treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer. (Tan v. Del Rosario, Jr., 237
SCRA 324, 331)
64
It is a system which itemizes the different incomes and provides
for varied percentages of taxes, to be applied thereto.
Sec. 24 (A) (2) (a), NIRC of 1997, as amended by the TRAIN,
provides for the application of the schedular system of income
taxation to individuals. There is adoption, effective January 1, 2018
until December 31, 2022, of a progressive rate which taxes at 20%
taxable incomes which goes beyond P250,000.00, progressively
increasing up to a high of 35% for taxable incomes exceeding
P8,000,000.00.
General principles
65
d. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the
Philippines;
e. A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines. (NIRC of 1997, Sec. 23, arrangement and
numbering supplied)
**
2. Currently we hear of the system of income
taxation by basing the tax on the gross rather than on the
net income. What do you understand by “gross income
taxation” ?
SUGGESTED ANSWER: The gross income taxation in its
general sense is the taxation of all income received without any
deduction. The tax base, in gross income taxation in its broad
sense, is the total gross income of an individual or corporation
during the taxable year without any deductions allowed.
The system of gross compensation income is considered valid
because taxpayers may be classified into different categories. It is
enough that the classification must rest upon substantial distinctions
that make for real differences.
Taxpayers who are recipients of compensation income are
apart as a class because they are not entitled to make deductions as
they practically have no overhead expense. On the other hand, in the
case of professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to produce
their income. It would not be just to disregard the disparities by giving
all of them zero deductions and indiscriminately impose an all alike the
same tax rates on the basis of gross income. (Sison, Jr. v. Ancheta, 130
SCRA 654, 665-5)
66
b. Nationality theory. The country where the income earner
is a citizen is the situs of taxation because a citizen is given protection
by his country no matter where he is found or no matter where he
earns his income. He is therefore obligated to support that country, in
exchange for the protection he receives.
The principle of mobilia sequuntur personam may likewise
apply as income taxation laws of his country follow the citizen no
matter where he is found. This applies to resident citizens on their
incomes derived from sources without the Philippines.
c. Source. The country which is the source of the income is
where the activity that produced the income took place. This is the
situs of taxation and not the place where the money originated. The
money may come from one place but if that is not where the activity
that produced the income, then it is not the source of the income for
tax purposes.
The important factor which determines the source of income of
personal services is not the residence of the payor, or the place where
the contract for service is entered into, or the place of payment, but the
place where the services were actually performed.
Prescinding from the above, the basis for taxability of income
depends on the following:
a. As regards individuals, the taxability of income depends
upon:
1) citizenship; or
2) residence of the recipient; or
3) the place where such income is derived.
b. With respect to corporations, the taxability of income
depends upon;
1) whether the corporation is a domestic or a foreign
corporation;
2) whether the foreign corporation is a resident or
nonresident.
Author’s observation. The question based on an actual Bar question
is unfair. It should be noted that the answer is rather lengthy and could not
be written within the time limitation for answering Bar questions. It is
suggested that the reader should be able to come up with a short
summarization.
67
a) How will the income of the trust be taxable ?
SUGGESTED ANSWER: The trust created by Atty. Mary is
irrevocable in character, but only 50% of the income is distributable. In
this case the amount that is not distributed is not allowed to be
deductible from the gross income of the trust in order to arrive at
income subject to tax.
The amount that is not distributed, is taxed in the same manner
as individual citizens and resident alien individuals. It shall be subject
to the same exclusions, itemized deductions and tax rates with the
following qualifications:
1) allowed to use standard optional deduction,
[NIRC of 1997, Sec. 34 (L)]
2) in addition to the itemized deductions the trust may
deduct
(a) the amount of income for the taxable year
distributed currently by the fiduciary to the beneficiaries
[Ibid., Sec. 61 (A)];
(b) the amount of the income collected by the
guardian of an infant which is to be held or distributed as
the court may direct (Ibid.);
(c) the amount of income properly credited to
the beneficiaries. [Ibid., Sec. 61 (B)]
b) Will your answer remain the same if the trust established
by Atty. Mary is revocable ?
SUGGESTED ANSWER: No. The income which is part of a
revocable trust shall be included in computing the net income of Atty.
Mary, the grantor. (NIRC of 1997, Sec. 63)
c) When is a trust considered revocable ?
SUGGESTED ANSWER: A trust is considered as revocable
where at any time the power to revest in the grantor title to any part of
the corpus of the trust is vested (1) in the grantor either alone or in
conjunction with any person not having a substantial adverse interest
in the disposition of such part of the corpus or the income therefrom,
or (2) in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom. (NIRC of
1997, Sec. 63)
68
of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
[NIRC of 1997, Sec. 22 (B), 1st sentence]
**
7. May an individual taxpayer change his/her
accounting period ? Why ?
SUGGESTED ANSWER: No. Only a corporation may change
its accounting periods but always subject to the approval of the
Commissioner of Internal Revenue and compliance with the
requirements for filing returns for short period resulting from change of
accounting period. (NIRC of 1997, Sec. 46, paraphrasing supplied)
An individual taxpayer cannot change his/her accounting period
because he/she is allowed only one, the calendar year.
69
** 9. The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues and
membership fees collected by condominium corporations
from its member condominium-unit owners. The RMC’s
validity is challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor general, counsel
for BIR, claims that association dues, membership fees,
and other assessment/charges collected by a
condominium corporation are subject to VAT since they
constitute income payments or compensation for the
beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium
corporations argues that such fees are merely held in trust
by the condominium corporations exclusively for their
members and used solely for administrative expenses in
implementing the condominium corporations’ purposes.
Accordingly, the condominium corporations do not
actually render services for a fee subject to VAT.
Whose argument is correct ? Decide.
SUGGESTED ANSWER The argument of the condominium
corporation’s lawyer is correct.
The condominium is not engaged in business which is a “trade
or commercial activity regularly engaged in as a means of livelihood or
with a view to profit.” (Yamane , etc. v. BA Lepanto Condominium Corporation,
G.R. No. 154993, October 25, 2005)
Thus, the association dues, membership fees, and other
assessments/charges are not income payments which constitutes
“yearly profits arising from property, professions, trades or offices, or
as a tax on a person’s income, emoluments, profits and the like.” (Ibid.)
**
10. Are membership fees, assessment dues,
and other fees of similar nature in recreational non-profit
clubs considered as income for tax purposes ?
SUGGESTED ANSWER: No. They only constitute
contributions to and/or replenishment of the funds for the maintenance
and operations of the facilities offered by recreational clubs to their
exclusive members.
“They represent funds “held in trust” by these clubs to defray
their operating and general costs and hence, only constitute
infusion of capital.
70
Case law provides that in order to constitute ‘income,’ there
must be realized ‘gain.’ Clearly, because of the nature of membership
fees and assessment dues as funds inherently dedicated for the
maintenance, preservation, and upkeep of the clubs’ general
operations and facilities, nothing is to be gained from their collection.
This stands in contrast to the fees received by recreational
clubs coming from their income-generating facilities, such as bars,
restaurants, and food concessionaires, or from income-generating
activities, like the renting out of sports equipment, services, and other
accommodations. In these latter examples, regardless of the purpose
of the fees’ eventual use, gain is already realized from the moment
they are collected because capital maintenance, preservation, or
upkeep is not their pre-determined purpose. As such, recreational
clubs are generally free to use these fees for whatever purpose they
desire and thus, considered as unencumbered ‘fruits’ coming from a
business transaction.
“In fine, for as Iong as these membership fees, assessment
dues, and the like are treated as collections by recreational clubs from
their members as an inherent consequence of their membership, and
are, by nature, intended for the maintenance, preservation, and
upkeep of the clubs’ general operations and facilities, then these fees
cannot be classified as ‘the income of recreational clubs from
whatever source’ that are ‘subject to income tax.’ Instead, they only
form part of capital from which no income tax may be collected or
imposed.” [Association of NonProfit Clubs, Inc. (ANPC), etc. v. Bureau of Internal
Revenue (BIR), etc., G.R. No. 228539, 26 June 2019, reierated in Commissioner of
Internal Revenue v. Federation of Golf Clubs of the Philippines, Inc. (FEDGOLF), G.R.
No. 226449, July 28, 2020]
“It is a well-enshrined principle in our jurisdiction that the State
cannot impose a tax on capital as it constitutes an unconstitutional
confiscation of property.” (Ibid.)
71
Besides, capital gains of individuals on dispositions of real
property are subject to a final tax, the presumed capital gains tax.
Consequently, increases in valuation are not reported in the income
tax return. Increases in valuation of real property are not subject to
income tax, hence not reportable in the income tax return.
NOTE NOT PART OF THE ANSWER: The appropriate return to be
filed is the capital gains tax return, once the real property considered as
capital asset is disposed, whether the seller made a profit or not.
72
**14. CHED Corporation engaged the services of
the ABOGADO Law Firm in 2019 to defend the
corporation’s title over a property used in the business.
For the legal services rendered in 2020, the law firm billed
the corporation only in 2021. The corporation duly paid.
CHED Corporation claimed this expense as a
deduction from gross income in its 2021 return, because
the exact amount of the expense was determined only in
2021. Is YYY’s claim of deduction proper ? Reasons.
SUGGESTED ANSWER: No. Since CHED is a corporation, it
should be using the accrual method. As such, it should have
recognized the expense in 2019 when the amount of legal services
was agreed upon.
It was in 2019 that the liability to pay the attorney’s fees was
fixed as well as the availability of the reasonable accurate
determination of such liability. (Commissioner of Internal Revenue v. Isabela
Cultural Commission, G.R. No. 172231, February 12 2007)
73
ALTERNATIVE ANSWER: Rodrigo’s compensation he
received as an accountant in TECI’s Tax Department in the BGC
Office is taxable under Philippine law. This is so, because he is a
citizen of the Philippines residing therein hence he is taxable on all
income derived from sources within the Philippines. The situs of
income taxation is the place where the service was rendered, which in
this case, is the Philippines [NIRC of 1997, Sec. 23 (A)]
If Rodrigo received purely compensation income from TECI
who is his single employer and the latter, has withheld correctly the
income tax due from Rodrigo (tax due equals tax withheld) from his
income for the calendar year Rodrigo shall not be required to file an
annual income tax return. The certificate of withholding filed by TECI,
duly stamped ‘received’ by the BIR, shall be tantamount to the
substituted filing of income tax returns by Rdorigo . (NIRC of 1997, Sec. 51-
A, as inserted by the TRAIN)
However, if TECI, Rodrigo’s single employer has failed to
withhold the correct income tax due from Rodrigo, he being a Filipino
citizen would then be required to file an income tax return regardless
of the amount of his gross income because he is engaged in the
practice of his profession as an accountant. (Ibid., SEc. 51 (A) (2) (a) as
amended by the TRAIN)
(b) Adolf Dietrich, a German national who heads
TECl’s Design Department in its BGC office.
SUGGESTED ANSWER: Dietrich’s compensation he received
as the head of TECI’s Design Department in the BGC Office is taxable
under Philippine law because he is an alien individual resident of the
Philippines and is taxable on income derived from sources within the
Philippines. [NIRC of 1997, Sec. 23 (D)] The situs of income taxation is the
place where the service was performed, in this case, the Philippines.
If Dietrich received purely compensation income from TECI who
is his single employer and the latter, has withheld correctly the income
tax due from Dietrich (tax due equals tax withheld) from his income
for the calendar year he shall not be required to file an annual income
tax return. The certificate of withholding filed by TECI, duly stamped
‘received’ by the BIR, shall be tantamount to the substituted filing of
income tax returns by Dietrich . (NIRC of 1997, Sec. 51-A, as inserted by the
TRAIN)
However, if TECI, Dietrich’s single employer has failed to
withhold the correct income tax due from Dietrich, he being a resident
alien, would then be required to file an income tax return because he
earns income from within the Philippines. [Ibid., Sec. 51 (A) (4) (c)]
ALTERNATIVE ANSWER: However, if TECI, Dietrich’s single
employer, has failed to withhold the correct income tax due from
Dietrich, he being a resident alien, would then be required to file an
74
income tax return because he earns income from within the
Philippines. [Ibid., Sec. 51 (A) (4) (c)]
(c) Gabby Francisco, a Filipino engineer in TECI’s
Design Department who was hired to work at the principal
office last January 2021. In April 2021, he was assigned and
detailed in the company’s project in Riyadh, Saudi Arabia,
which project is expected to be completed in April 2023.
SUGGESTED ANSWER: Gabby’s compensation for the whole
taxable year 2021 is not subject to tax under Philippine law because
he is an individual citizen of the Philippines who is working and
deriving income from abroad in Riyadh, Saudi Arabia as an ”overseas
contract worker” which employment thereat requires him to be
physically present abroad most of the time during the taxable year
from April 2021 up to end December 2021. [NIRC of 1997, Sec. 23 (C)]
Since the basis for income taxation is the calendar year, it is as if he
earned all of his income from without the Philippines.
A non-resident citizen like Gabby is required to file an income tax
return only on income derived from sources within the Philippines . [NIRC,
Sec. 51A (4)(b)] Since his income, including his pay prior to his assignment
and detail abroad, is considered income derived from sources outside the
Philippines, he is not required to file an income tax return on such income.
There is likewise no showing that he earned income from Philippine sources.
(d) Aaron Antonis is also an engineer assigned to
TECI’s project in Taipei, Taiwan. Since TECI provides for
housing and other basic needs, Aaron requested that all
his salaries, paid in Taiwanese dollars, be paid to his wife
in Manila in its Philippine Peso equivalent.
SUGGESTED ANSWER: Aaron’s compensation is not taxable
under Philippine laws since he is an individual citizen of the
Philippines who is working and deriving income from abroad in Taipei,
Taiwan as an overseas contract worker hence he is taxable only on
income derived from sources within the Philippines. [NIRC of 1997, Sec.
23 (C)] The fact that his compensation is paid to his wife does not
matter because the situs of income taxation is where the service that
earned him the income was performed.
A non-resident citizen like Aaron is required to file an income
tax return only on income derived from sources within the Philippines .
[NIRC, Sec. 51A (4)(b)] Since his income was derived from sources
outside the Philippines, he is not required to file an income tax return
on such income.
(e) Fil-Am de Castro, is a Filipino architect in TECl’s
Design Department who reported back to TECl’s BGC
75
office in August 2021 after TECI’s project in Belfast, Ireland
was completed.
SUGGESTED ANSWER: Fil-Am’s compensation earned for the
period 2021 is not subject to tax under Philippine Law because she is
an individual citizen of the Philippines who is working and deriving
income from abroad in Belfast, Ireland as an overseas contract worker
which employment thereat requires her to be physically present
abroad most of the time during the taxable year 2021 . [NIRC of 1997, Sec.
23 (C)]
Since the basis for income taxation is the calendar year, it is as
if he earned all of her income from without the Philippines.
A non-resident citizen like Fil-Am is required to file an income
tax return only on income derived from sources within the Philippines.
[NIRC, Sec. 51A (4)(b)] Since her income, including her pay prior to her
return from abroad, is considered income derived from sources
outside the Philippines, she is not required to file an income tax return
on such income.
**16.
ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-resident
foreign corporation based in the U.S. Under the agreement
which the parties forged in the U.S., XYZ granted ABC the
right to use a computer system program and to avail of
technical know-how relative to such program. In
consideration for such rights, ABC agreed to pay 5% of the
revenues it receives from customers who will use and
apply the program in the Philippines.
Discuss the tax implications of the transaction.
SUGGESTED ANSWER: The 5% payment is considered
royalty income of XYZ, a non-resident foreign corporation, derived
from sources within the Philippines subject to Philippine income
taxation. ABC should therefore withhold the appropriate taxes before
remitting the same to XYZ.
The 5% payment is considered as a royalty because it is paid
for the use of or the right or privilege to use in the Philippines XYZ’s
computer system program which is presumably covered by a
copyright or patent as well as the supply of technical know-how that is
ancillary and subsidiary to, and is furnished as a means of enabling
the application or enjoyment of the computer system program.
Since the service is rendered within the Philippines, it is
considered as income derived from the Philippines of a non-resident
foreign corporation. [NIRC of 1997, Sec. 42 (A) (4)]
76
Consequently, the royalty income is subject to a final tax of 20%
based on the amount to be remitted to XYZ. [Ibid., Sec. 28 (B) (1), as
amended by the TRAIN]
**
1. As a way to augment the income of the
employees of DEF, Inc., a private corporation, the
management decided to grant a special stipend of
77
P50,000.00 for the first vacation leave that any employee
takes during a calendar year.
(a) Is the special stipend part of the taxable income
of the employees receiving the same ? If so, what tax is
applicable and what is the tax rate ? Explain.
SUGGESTED ANSWER: It depends on the nature and
character of the employee.
If the employee is not a managerial employee, but a rank and
file employee, then the special stipend would be part of his taxable
income subject to the schedular rate.
If the employee is a managerial employee, and not a rank and
file employee, then the special stipend is not part of his taxable
income but subject to the fringe benefit tax which is a final tax of 35%
based on the grossed-up monetary value. (NIRC of 1997, sec. 33)
(b) Is the cash equivalent value of the housing
facilities received by the senior engineers subject to fringe
benefits tax ? Explain.
SUGGESTED ANSWER: No. Since the purpose of housing is
to make available engineers every time there is breakdown which is
for the convenience of the employer then it is not a fringe benefit
subject to the payment of the fringe benefits tax.
78
P90,000.00 ceiling, provided, further, that MWEs receiving ‘other
benefits’ exceeding the P90,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances,
just like an employee receiving compensation income beyond the
SMW.
The term ‘de minimis’ benefits which are exempt from the
fringe benefits tax shall include the following:
“(a) Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the year and the
monetized value of leave credits paid to government officials
and employees;
(b) Medical cash allowance to dependents of
employees not exceeding P750.00 per employee per semester
or P125 per month;
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-
kg. rice per month amounting to not more than P1,500.00;
(d) Uniforms and clothing allowance not exceeding
P5,000.00 per annum;
(e) Actual yearly medical benefits not exceeding
P10,000.00 per annum;
(f) Laundry allowance not exceeding P300 per month;
(g) Employees achievement awards, e.g. for length of
service or safety achievement, which must be in the form of a
tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding P10,000.00
received by an employee under an established written plan
which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per employee
per annum;
(i) Flowers, fruits, books, or similar items given to
employees under special circumstances, e.g. on account of
illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not
exceeding twenty five percent (25%) of the basic minimum
wage.” [Rev. Reg. 3-98, Sec. 2.33 (C), last par., as amended by Rev. Reg.
No. 10-2000, Rev. Reg. No. 5-2008; Rev. Reg. No. 5-2011; and Rev. Reg. No.
8-2012)
Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive schemes,
provided that the total annual monetary value received from both CBA
and productivity incentive schemes combined do not exceed P10,000
per employee per taxable year . (Rev. Reg. 2-98, Sec. 2.78.1 (A) (3), as
amended by Rev. Reg. No. 8-2000, Rev. Reg. No. 5-2008, Rev. Reg. No. 10-2008,
Rev. Reg. No. 5-2011, and Rev. Reg. No. 8-2012, amount adjusted by the author to
conform with the increase provided for in the TRAIN]
79
*13.A fringe benefit is defined as being any good,
service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee. Would it
be the employer or the employee who is legally required to
pay an income tax on it ? Explain.
SUGGESTED ANSWER: The employer should pay the tax. It
is a final tax subject to withholding. As such, the obligation devolves
upon the withholding agent, in this case the employer to collect the tax
from itself.
**
14. Mr. Psalmir is an executive of Baldago
Corporation. Aside from his salary, his employer provides
him with the following benefits: the free use of a
residential house in an exclusive subdivision, free use of
limousine and membership in a country club where he can
entertain customers of the corporation.
Which of these benefits, if any, must Mr. Psalmir
report as income ? Explain.
SUGGESTED ANSWER: None. All are subject to the fringe
benefits tax, except the value of the use of the country club which is
not taxable as it is for the convenience of the corporation.
The fringe benefits tax is a final tax, hence the items that are
subject to it are not reportable anymore as income in the annual
income tax return.
80
Income from within and income from without the
Philippines
81
**1. Distinguish an ordinary asset from a capital
asset.
SUGGESTED ANSWER: The following are the distinctions
between an ordinary asset and a capital asset:
a. Nature. An ordinary asset is used in trade, business or
exercise of a profession while a capital asset is not used in trade,
business or exercise of a profession.
b. Diminution in value. The diminution in value of an
ordinary asset may be allowed as a deduction from gross income in
the form of depreciation or otherwise while the diminution in value of a
capital asset, in the form of depreciation, or otherwise is not allowed
as a deduction from gross income because it is not used in trade,
business or exercise of a profession.
c. Taxability of income. The incomes derived from ordinary
assets are subject to inclusion in the income tax return of the earner
while In general, the incomes derived from the disposition of a capital
asset, is subject to a final tax, hence not to be included anymore in the
income tax return.
d. Deductibility of losses. Ordinary losses arising from the
use of ordinary assets, in trade, business or exercise of a profession
may be deducted from capital gains while capital losses arising from
disposition of a capital asset may only be deductible from a capital
gain.
e. Carry-over of losses. The concept of net operating loss
carry-over finds application in the taxation of losses incurred from the
transactions involving ordinary assets while it is the concept of the net
loss carry-over that applies to losses incurred as a result of
transactions involving capital assets.
f. Period for carry-over of losses. The loss incurred from
transactions involving ordinary assets may be carried over for a period
of three (3) or five (5) years while the carry-over of losses suffered
from the disposition of capital assets is only one (1) year.
g. Holding period. The holding period never find application
to the taxability of ordinary assets while the taxability of certain kinds
of capital assets may be subject to the holding period.
82
December. Atty. Krimson recently grew tired of the long
commute from Katipunan to his office in Makati City and
caused the company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in real
property.
Is the sale subject to 6% capital gains tax or regular
corporate income tax of 30%?
SUGGESTED ANSWER: The sale is not subject to the 6%
capital gains tax but the gain derived from the sale is subject to the
regular corporate income tax of 30% because the house and lot is an
ordinary asset used in the trade of business of Klaus, Inc.
The house and lot is an ordinary asset. It is real property used
in the trade and business of Klaus, Inc.because it is being used by its
President as his residence. [NIRC of 1997, Sec. 39 (A) (1);
It should be noted that while the house and lot is an ordinary
asset used in the trade and business of Klaus, Inc., it is not part of the
“Goods or properties” the sale, barter or exchange of which may be
subject to VAT which include real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or
business. [NIRC of 1997, Sec. 106 (A) (1)], 1 st par.; Rev. Regs. No. 16-2005, Sec.
4.106-2]
83
This despite the fact they were not actually used because GHI,
Inc. failed to commence operations.
*
4. What is capital asset ? Illustrate with an
example.
SUGGESTED ANSWER: The term “capital assets” means
property held by the taxpayer (whether or not connected with his trade
or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the
taxable year, or
c. Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character
which is subject to the allowance for depreciation; or real property
used in the trade or business of the taxpayer . [NIRC of 1997, Sec. 39 (A)
(1); Rev. Reg. No. 6-2008, Sec. 2 (u)] arrangement and numbering supplied]
The following are examples of capital assets:
a. Stock and securities held by taxpayers other than dealers
in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts
which are not used in trade or business;
f. Inherited large tracts of agricultural land which were
subdivided pursuant to the government mandate under land reform,
then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26,
1968) Improvements made on the property converts it to an ordinary
asset.
g. “Real property used by an exempt corporation in its
exempt operations, such as a corporation included in the enumeration
of Section 30 of the Code, shall not be considered used for business
purposes, and therefore considered as capital asset .” (Rev. Reg. No. 7-
2003, Sec. 3.b, 3rd par., last sentence)
h. “Real property, whether single detached, townhouse, or
condominium unit, not used in trade or business as validated from the
existing available records of the Bureau of Internal Revenue, owned
by an individual engaged in business, shall be treated as capital asset .
(Rev. Reg. No. 7-2003, Sec. 3.b., last par., as adjusted by the TRAIN)
84
and in 2019, he was promoted to Vice-President of the
company. With more responsibilities comes higher pay. In
2020, he decided to buy a new car worth P2 Million and he
traded in his old car with a market value of P800,000.00,
and paid the difference of P1.2 Million to the car company.
The old car, which was bought three (3) years ago by the
father of Mr. Pedro Aguirre at a price of P700,000.00, was
donated by him and registered in the name of his son. The
corresponding donor’s tax thereon was duly paid by the
father.
a. What is the nature of the old car – capital asset
or ordinary asset? Explain your answer. (2012, dates
supplied)
SUGGESTED ANSWER: The old car is in the nature of a
capital asset because it is not used in trade of business of Mr.
Aguirre.
b. How much is the cost basis of the old car to Mr.
Aguirre? Explain your answer.
SUGGESTED ANSWER: The cost basis of the old car to Mr.
Aguirre is the value paid for by his father at the time the donation was
made. In this case, it is the value of P700,000.00 the price which the
father paid for the car.
85
c. From certain types of capital gains may be deducted
ordinary losses, while only ordinary losses may be deducted from
ordinary gains.
d. The concept of net loss carryover applies to capital gains
taxation, while the concept of net operating loss carryover applies to
ordinary gains taxation.
e. Generally no deductions are allowed from capital gains
while deductions are usually allowed for ordinary gains.
f. Generally capital gains are subject to final taxes, while
this is not so with regard to ordinary gains;
g. The income from capital gains are not generally to be
included in the annual income tax return, while ordinary income is to
be included in the annual income tax return.
NOTE NOT PART OF THE ANSWER: The capital gains derived from
the sale, exchange or other disposition of capital assets which are not real
property, nor shares of stock are “lumped” with ordinary income reportable in
the income tax return. To this combined income would be deducted the
optional standard or itemized deductions, if any, to arrive at income subject to
tax.
Tax-free exchanges
86
On March 27, 2012, PUREGOLD’s Board of Directors
approved the issuance of 766,406,250 PUREGOLD common
shares to the COs and SY in exchange for the transfer to
PUREGOLD of KAREILA’s 1,703,125.
On May 8, 2012, during PUREGOLD’s annual
stockholders meeting, this exchange was approved by the
stockholders representing two-thirds of PUREGOLD’s
outstanding capital stock.
On May 11, 2012, the COs and SY entered into a Deed
of Exchange with PUREGOLD wherein they agreed to
transfer all their KAREILA shares to PUREGOLD in
exchange for its shares.
Under the Deed of Exchange, the COs and SY each
would receive four hundred fifty (450) PUREGOLD shares
for every one (1) KAREILA share that they would transfer
to PUREGOLD. Accordingly, PUREGOLD issued to the
COSs and SY a total of 766,406,250 PUREGOLD shares
from the unissued portion of its authorized capital stock in
exchange for the 1,703,125 KAREILA shares:
As a result of the share swap under the Deed of
Exchange:
1. PUREGOLD acquired majority ownership of
KAREILA; and,
2. The COs who, prior to the share swap, already
collectively owned 66.5720% of the outstanding capital
stock of PUREGOLD consequently increased their
stockholdings to 75.8329% after the swap:
Is the exchange subject to tax ?
SUGGESTED ANSWER: No. The “requisites for the non-
recognition of gain or loss are as follows: (a) the transferee is a
corporation; (b) the transferee exchanges its shares of stock for
property/ies of the transferor; (c) the transfer is made by a person,
acting alone or together with others, not exceeding four persons; and,
(d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.”
(Commissioner of Internal Revenue v. Co, G.R. No. 241424, February 26,
2020)
It is not necessary that, after the exchange, each of the
transferors individually gains control of the transferee corporation.
Also not prohibited are instances when the transferor gains further
control of the transferee corporation.
87
The element of control is satisfied even if one of the transferors
is already owning at least 51% of the shares of the transferee
corporation, as long as after the exchange, the transferors, not more
than five, collectively increase their equity in the transferee corporation
by 51% or more.” (Ibid.)
The share swap transaction between the COs and PUREGOLD
is covered the rules on tax-free exchange because after the
exchange, the COs collectively increased their control over
PUREGOLD from 66.57% to 75.83%. Accordingly, the COs cannot be
held liable for income taxes on the supposed gain which may have
resulted from such transfer. (Ibid.)
88
***
1. What is the manner of taxation of any peso
currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and
similar arrangements derived from sources within the
Philippines ?
SUGGESTED ANSWER: A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from
any peso currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements derived from sources within the Philippines. [NIRC of
1997, Sec. 24 (B) (1)]
**
2. What is the tax treatment of interest income of a
domestic commercial bank derived from a peso loan to a
domestic corporation in 2021 ?
SUGGESTED ANSWER: It shall be subject to 30% corporate
income tax rate bcause the interest income is derived from the regulat
business of a domestic commercial bank.
89
**
4. What is the tax treatment of dividends on life
insurance received during a taxable year ? Explain your
answer briefly.
SUGGESTED ANSWER: The dividends on life insurance do
not fall under taxable income.
Such dividends are not dividends, in the accepted and ordinary
sense of the word, but represent an excess premium or surcharge
paid by the policy holder, and then returned to him, without interest,
less the costs attendant on collection and administration and various
other deductions. (Commissioner of Internal Revenue v. The Insular Life
Assurance Company, Ltd., CA-G.R. SP No. 46516, September 29, 1998)
Such dividends are strictly speaking, not profits as in the case
of an ordinary corporation, but really constitute a return to the policy
holder of the amount he has been overcharged for his insurance.
(Ibid.)
**5.
MIGGY Corp. secured an income tax holiday for
5 years as a pioneer industry. On the fourth year of the tax
holiday, MIGGY Corp. declared and paid cash dividends to
its stockholders, all of whom are individuals. Are the
dividends taxable ?
SUGGESTED ANSWER: Yes. The dividends are taxable
because the tax exemption of MIGGY Corp. does not extend to its
stockholders. (Sunio v. NLRC, G.R. No. L-57767, January 31, 1984)
***
6. BARAKO, Inc. a domestic corporation enjoyed a
particularly profitable year in 2020. In June 2021, its Board of
Directors approved the distribution of cash dividends to its
stockholders. BARAKO, Inc. has individual and corporate
stockholders. What is the tax treatment of the cash dividends
received from BARAKO, Inc. by the following stockholders.
a) American citizen.
SUGGESTED ANSWER: A final withholding tax for ten percent
(10%) shall be imposed upon the cash dividends actually or constructively
received from BARAKO, Inc. a domestic corporation if the American citizen
is a resident alien. [NIRC of 1997, Sec. 24 (B)(2), as retained by the TRAIN]
b) Resident Filipino citizen.
SUGGESTED ANSWER: They are subject to a final tax of ten
percent (10%) on the gross amount of the dividends. [Ibid,]
c) Non-resident alien engaged in trade or
business.
90
SUGGESTED ANSWER: A final withholding tax of twenty percent
(20%) shall be imposed upon the cash dividends actually or constructively
received by a non-resident alien engaged in trade or business from
BARAKO, Inc., a domestic corporation. [NIRC of 1997, Sec. 25 (A)(2)]
d) Non-resident alien not engaged in trade or
business.
SUGGESTED ANSWER: A final withholding tax equal to twenty-
five percent (25%) of the entire income received from all sources within the
Philippines, including the cash dividends received from BARAKO, Inc.
[NIRC of 1997, Sec. 25 (B)]
e) Domestic corporation.
SUGGESTED ANSWER: Dividends received by a domestic
corporation from another domestic corporation, such as BARAKO, Inc. shall
not be subject to tax. [NIRC of 1997, Sec. 27 (D)(4)]
f) Non-resident foreign corporation.
SUGGESTED ANSWER: Dividends received by a non-resident
foreign corporation from a domestic corporation are generally subject to an
income tax of 30% to be withheld at source . [NIRC of 1997, Sec. 28 (B)(1), as
amended by Rep. Act No. 9337]
However, a final withholding tax of fifteen percent (15%) is imposed
on the amount of cash dividends received from a domestic corporation like
BARAKO, Inc. If the country in which the non-resident foreign corporation
is domiciled would allow as tax credit against the tax due from it, taxes
deemed paid in the Philippines of 15% representing the difference between
the 30% regular income tax rate and the 15% preferential rate. [NIRC of 1997,
Sec. 28 (B)(5)(b),as amended by Rep. Act No. 9337]
NOTE NOT PART OF THE ANSWER: In all of the above instances
the cash dividends are not reportable in the income tax return because they
are either exempt or subjected to a final tax.
*
7. On 03 January 2020, Randy, a Filipino citizen
residing in the Philippines, purchased one hundred (10)
shares in the capital stock of ABC Corporation, a domestic
corporation. On 03 January 2022, ABC Corporation
declared, out of the profits of the company earned after 01
January 2020, a hundred percent (100%) stock dividends
on all stockholders of record as of 31 December 2021 as a
result of which Randy’s holding in ABC Corporation
became two hundred (200) shares.
Are the stock dividends received by Randy subject to
income tax ? Explain.
91
SUGGESTED ANSWER: The stock dividend declared under
the circumstances obtaining in the problem may or may not be the
subject of income taxation.
As a general rule, stock dividend representing the transfer of
surplus to capital account shall not be subject to tax. [NIRC of 1997, Sec.
73 (B), 1st sentence]
Where stock dividends are given as returns on investment, the
dividends are subject to tax when the distribution results in changes in
the in the proportionate interest of the stockholder . (Rev. Regs. No. 2, Sec.
252)
It appears in the problem that the stock dividends were given
only to stockholders of record as of 31 December 2020. If all the
stockholders are stockholders as of said date, then there would be no
proportionate change in ownership, hence not taxable. If not all are
stockholders of record as of 31 December 2020, then the declaration
of the stock dividends would result in disproportionate change in
ownership. In such a case, the stock dividend declaration would be
taxable.
*
1. What are excluded from gross income under the
National Internal Revenue Code of 1997 (NIRC of 1997) ?
SUGGESTED ANSWER:
a. Life Insurance proceeds.
b. Amount received by insured as return of premium.
c. Gifts, bequest and devises.
d. Compensation for injuries or sickness.
e. Income exempt under treaty.
f. Retirement benefits, pensions; gratuities, etc.
g. Miscellaneous Items:
1) Income derived by foreign government.
2) Income derived by the government or its
political subdivisions.
3) Prizes and awards.
4) Prizes and awards in sports competitions.
92
5) 13th month pay and other benefits.
6) GSIS, SSS, Medicare and other
contributions.
7) Gains from the sale of bonds, debentures or
other certificate of indebtedness.
8) Gains from redemption of shares in mutual
fund. [NIRC of 1997, Sec. 32 (B)]
The above are the recognized substantive
exclusions from gross income. Provisions of special laws
may recognize other exclusions from gross income.
**
2. Differentiate “Exclusion from Gross Income”
from “Deductions from Gross Income”. Give an example of
each.
SUGGESTED ANSWER: “Exclusions from Gross Income” are
distinguished from “Deductions from Gross Income” in the following
manner:
a. Exclusions from gross income refer to a flow of wealth to
the taxpayer which are not treated as part of gross income for
purposes of computing the taxpayer’s taxable income, due to the
following reasons:
(1) It is exempted by the fundamental law;
(2) It is exempted by statute; and
(3) It does not come within the definition of income (RR
No. 2, Sec. 61), while deductions are the amounts which the law
allows to be subtracted from gross income in order to arrive at
net income.
b. Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net income.
c. Exclusions are something received or earned by the
taxpayer which do not form part of gross income, while deductions are
something spent or paid in earning gross income.
Example of an exclusion from gross income: Life insurance
proceeds.
Example of a deduction: Ordinary and necessary expenses.
93
P1,000,000.00 received by Salvador subject to tax? Explain
your answer.
SUGGESTED ANSWER: No. Not all of the P1,000,000.00 is
subject to tax. The amount of P250,000.00 is not subject to tax
because it is the amount received by A, as a return of the premiums
paid by him under a life insurance contract at the maturity of the term
mentioned in the contract. [NIRC of 1997, Sec. 32 (B) (2)] The premiums
returned are not income but return of capital. They represent earnings
which were previously taxed.
On the other hand, the amount of P750,000.00 is subject to tax
because it represents income being interest or earnings of the
premium and not return of capital. (Ibid.)
***
6. Vynette, a Filipino national, worked with the
LEB Group of Companies, Inc. (LEB), and was seconded to
various LEB-affiliated corporations:
a. from 2003 to 2008 as Vice President of LEB
Land Holdings, Inc.,
94
b. from 2008 to 2011 as Vice President of LEB
Bank;
c. from 2011 to 2015 as COO of LEB Airlines
Inc.;
d. from 2015 to 2021 as CEO of LEB Energy
Corporation, where Vynette served as CEO for seven
years until her retirement last December 12, 2021
upon reaching the compulsory retirement age of 60
years.
All the corporations mentioned are majority-owned in
common by the de la Cruz family and covered by a BIR-
qualified multiemployer-employee retirement plan (MEE
RP), under which the employees may be moved around
within the controlled group (i.e., from one LEB subsidiary
or affiliate to another) without loss of seniority rights or
break in the tenure. Vynette was well-loved by her
employer and colleagues, so upon retirement, and on her
last day in office, LEB gave her a Land Rover SUV worth
PhP8 million as a surprise, with a streamer that reads:
“You’ll be missed. Good luck, Ma-am Vynette.”
(a) Are the retirement benefits paid to Vynette
pursuant to the MEE RP taxable ?
SUGGESTED ANSWER: No. The retirement benefits paid to
Vynette pursuant to the MEERP are not taxable because they are
excluded from gross income for purposes of determining income
subject to tax.
This is so, because the retirement benefits were received by
Vynette, an official of LEB a corporate private firm, in accordance with
the MEERP which is a reasonable private benefit plan maintained by
his employer. Furthermore, Vynette the retiring official or employee is
considered as been in the service of same employer for at least ten
(10) years because of the MEERP provision that service with one
affiliate is considered part of service with LEB. So also, Vynette is not
less than fifty (50) years of age at time of retirement because she was
already 60, and there is no showing that she previously enjoyed tax-
free retirement benefits. [NIRC of 1997, Sec. 32 (B) (6) (a)]
The Land Rover SUV is not part of Ms. Vynette’s retirement
package but should be considered as a donation made by LEB as an
act of pure liberality. Since this is a donation, it is not income on the
part of Ms. Vynette but subject to the payment of donor’s tax by LEB.
95
***
7. Are moral damages awarded a litigant for
mental anguish an account of a libelous article written
about him taxable as income or not ? Why ?
SUGGESTED ANSWER: Yes. Moral damages arising from
libel or slander, breach of contracts are not excluded from gross
income and are part of taxable income.
Such kinds of damages are separate and different from the
moral damages received on account of sickness and personal injuries.
The express provision of law requires that the damages must be
received “on account of such injuries or sickness” referring to personal
physical injuries or sickness, and from no other . [NIRC of 1997, Sec. 32 (B)
(4)]
ALTERNATIVE ANSWER: Yes. The moral damages that are
awarded a litigant for mental anguish an account of a libelous article
written about him are taxable as income. Mental anguish is not
physical injuries, therefore moral damages awarded due to moral
anguish are not excluded from income.
Amounts received as compensation for personal injuries plus
the amounts of any damages received on account of such injuries are
excluded from taxable income if the personal injuries are physical in
character.
Exclusions from taxable income are considered as exemptions
from taxation, hence to be interpreted in strictissimi juris against the
taxpayer. The words “personal injuries” should be given a restrictive
meaning to refer only to physical injuries. This interpretation finds its
basis in the provision of law which refers to “Accident or Health
Insurance or under Workmen’s Compensation Acts,” both of which
refers to “personal injuries or sickness.” [NIRC of 1997, Sec. 32 (B) (4)] This
could only mean, physical injuries.
96
Which, if any, of the amounts he received are subject
to income tax ? Explain.
SUGGESTED ANSWER: The only amount received by JR that
may be subject to income tax is the portion of the P200,000.00 which
exceeds the monetized equivalent of ten (10) days unutilized vacation
and sick leave credits. [Rev. Regs. No. 3-98, Sec. 2.78.1 (A), 2 nd sentence as
amended by Rev. Regs. No. 10-2000] The portion equivalent of the
monetized equivalent that does not exceed ten (10) days unutilized
vacation and sick leave credits are non-taxable de minimis benefits.
The other amounts represent amounts of damages received as
compensation for JR’s injuries as a result of an accident, the plane
crash. The express provision of law requires that, to be excluded from
gross income, the damages must be received on account of personal
injuries [NIRC of 1997, Sec. 32 (B) (4)], referring to physical injuries
Consequently, such amounts are excluded from gross income
and not be subject to income taxation. (Ibid.)
97
**
1. What is meant by “Income from whatever
source derived” as a component of gross income for
purposes of income taxation ?
SUGGESTED ANSWER: “Income from whatever source
derived” refers to all income not expressly excluded or exempted from
the class of taxable income, irrespective of the voluntary or involuntary
action of the taxpayer in producing the income. (Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, August 31, 1965)
The source of the income may be legal or illegal.
They include the following:
a. Condonation or forgiveness of indebtedness in certain
instances.
b. Recovery of written-off debts, or refund of tax payments.
Under the so-called “tax benefit” rule where there is recovery of
written-off debts, or refund of tax payments.
c. Taxable illegal income.
98
SUGGESTED ANSWER: The P750,000.00 refund is subject to tax. I
would advise my client to report the P750,000.00 refund as miscellaneous
income which is a part of its gross income for the 2021.
My advice is based on the application of the concept of the tax benefit
rule. In 2019 when my client claimed deduction of the P750,000.00 taxes
paid, it realized a tax benefit in the form of the reduction of the income tax
due from it on account of the said deduction.
It’s subsequent recovery thereof from a refund of the P750,000.00
from the government in 2021 shall be treated as a receipt of realized taxable
income for the year 2021.
a. Supposing under the same above set of facts except
that in 2019 your client was not able to deduct the amount of
P750,000.00 because it already suffered a net operating loss even
without such deduction.
Would your advice of treating the P750,000.00 refund it
received as a receipt of realized taxable income for the year 2021
being taxable still hold water ? Explain your answer.
SUGGESTED ANSWER: No more. My answer is not the same
because this time the P750,000.00 that is received is not subject to income
taxation.
My client did not benefit from P750,000.00 tax paid because the result
of his business operation was a net loss even without deduction of the taxes
paid. The P750,000.00 tax paid did not help in reducing my client’s income
tax liability for 2019.
Its subsequent recovery in 2021 of the P750,000.00 shall be treated as
a mere recovery or a return of capital, hence, not treated as receipt of realized
taxable income. There is no need for my client to report it in the ITR.
NOTE NOT PART OF THE ANSWER: The above discussion on the “tax
benefit” rule finds application whether the tax is a national or local tax so as it is
allowed as a deduction from gross income.
99
The phrase “income from whatever source derived,” is so broad
that it includes all income not expressly excluded or exempted from
the class of taxable income, irrespective of the voluntary or involuntary
action of the taxpayer in producing the income. (Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, August 31, 1965)
NOTE NOT PART OF THE ANSWER: The author submits that the above
also finds application in the case of erroneous receipts of payments. (Javier v.
Commissioner, G.R. 78953, July 31, 1991, 199 SCRA 824)
100
No more exemptions for estates and trusts. The TRAIN has also
expressly repealed NIRC Sec. 62 entitled, Exemption Allowed to Estates and
Trusts.
Rationale for the repeal of NIRC Secs. 35 and 62, The TRAIN has
adopted a minimum income tax base of P250,000.00 for individuals, estates
and trusts. Furthermore, the tax rates were also reduced.
Not deductible are personal, living or family expenses. [NIRC
of 1997, Sec. 36 (A) (1)]
**
2. State the essential conditions which must be
satisfied in order that an expense may be validly
considered deductible for income tax purposes ?
SUGGESTED ANSWER: The conditions that must be
complied with in order that an expense must be considered deductible
for income tax purposes:
a. There must be a specific provision of law allowing the
deductions, since deductions do not exist by implication . (Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, L-26911, January 27, 1981)
b. The requirements for deductibility of the expense
must be met.
1) It must be paid or incurred within the taxable
year.
2) The expense must be ordinary and necessary.
3) It must meet the business test rule and be paid or
incurred in carrying on a trade or business.
4) The substantiation rule must be complied through
substantially proving by evidence or records the deductions
claimed under the law. Otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction. (Esso
Standard Eastern, Inc. v. Commissioner of Internal Revenue, 175 SCRA 149)
5) The business expense must not be an
illegal expenditure, such as bribes, kickbacks, for immoral
purposes, etc.
c. There must be proof of entitlement to the deductions.
(Paper Industries Corporation of the Philippines v. Court of Appeals, et al., 250 SCRA
434)
d. The deductions must not have been waived . (Rev. Regs.
No. 2, Sec. 76)
e. The withholding and payment of the tax required must be
shown. [NIRC of 1997, Sec. 34 (K), Secs. 58 and 81]
**
3. Atty. Jerome, a practicing lawyer, owns a car
which he uses exclusively in his law practice. He also
101
spends for the driver’s salary, gasoline, oil, and
maintenance. In the taxable year in question, he had the
upholstery done and the body repainted which would last
for 3 years. He also pays a monthly rental on his office
space that he uses as his law office. While on his way to
court to attend a hearing, his attache case, with some
cash were stolen from his car. His bad luck continued
when his wallet was stolen while he was unwinding in a
disco bar.
He deducted all these expenses, supported by
receipts, in his annual income tax return.
Enumerate which of these expenses are allowable as
deductions and which are not. Explain.
SUGGESTED ANSWER: Atty. Jerome is allowed to deduct all
of the expenses except the value of the loss of his wallet and the cost
of the upholstery and the body repaint which maybe included in the
cost of his car to be depreciated.
The office rent is fully deductible because it is payment for the
continued use or possession of property for the exercise of the Atty.
Jerome’s profession. There is no showing that he is paying the office
rent with the end in view of taking title to the office.
The value of the loss of the wallet is not allowed to be deducted
because it is a loss that is not connected with Atty. Jerome’s exercise
of his profession. The cost of the upholstery and the body repaint are
not allowed to be deducted in full because they are capital
expenditures which prolong the life of an asset (the car). [NIRC of 1997,
Sec. 36 (A) (3)]
102
Decide if all the representation and entertainment expenses
claimed by Golden Dragon are deductible. Explain.
SUGGESTED ANSWER: Not all of the representation and
entertainment expenses claimed by Golden Dragon are deductible.
Only those that are reasonable in amount and nature should be
deductible. It should be noted that the total expenses is P430,000.00
for the five (5) investors or P86,000.00 each.
I would allow only a deduction in such amounts as are
reasonable under the circmstances but in no case shall all deductions
for representation and entertainment expenses, including those above
enumerated, exceed 0.50% of net sales . [NIRC of 1997, Sec. 34 (A) (1) (iv);
Rev. Regs. 10-2002]
103
SUGGESTED ANSWER: A loss may be deductible if the
general and specific requisites for its deductibility are met.
a. There must be compliance with the general
requisites for deductibility as applied to losses:
1) There must be a specific provision of law
allowing the deductions, since deductions do not exist by
implication. (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, L-26911, January
27, 1981)
2) There must be proof of entitlement to the
deductions. (Paper Industries Corporation of the Philippines v. Court
of Appeals, 250 SCRA 434)
3) The deductions must not have been waived.
(Rev. Regs. No. 2, Sec. 76)
b. The specific requirements for deductibility of
losses must be met:
1) They must be ordinary losses that are
incurred by a taxable entity as a result of its day to day
operations conducted for profit or otherwise, or casualty
losses.
2) They must have been losses that are
actually sustained during the taxable year.
3) They must not have been compensated for
by insurance or other forms of indemnity.
4) If they are casualty losses, they are of
property connected with trade, business, or profession
and the lose arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement.
5) They must not have been claimed as a
deduction for estate tax purposes in the estate tax return.
[NIRC of 1997, Sec. 34 (D) (1), (a), 1st par., paraphrasing supplied]
104
SUGGESTED ANSWER: I would advise A not to claim for
casualty loss because it would be disallowed.
A earns from gross compensation only. He is not allowed to
deduct any items including losses.
*
8. What is meant by “depreciation” as used in the
Tax Code ?
SUGGESTED ANSWER: Depreciation as used in the Tax Code
is the reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in
the trade or business. [NIRC of 1997, Sec. 34 (F) (1)]
The term is also applied to amortization of the value of
intangible assets, the use of which in the trade or business is definitely
limited in duration. (Basilan Estates, Inc. v. Commissioner of Internal Revenue, 21
SCRA 17) Example: Incorporation expenses.
105
from taxation. At the time of the donation to Calabarzon
School, the land had a fair market value of PhP 65 million.
How much in deduction from gross income may
Eleanne claim on account of the said donation?
SUGGESTED ANSWER: Eleanne may claim a deduction from
her gross income an amount not in excess of ten percent (10%) of her
taxable income derived from trade, business or profession as
computed prior to the deduction of the value of the donation made to
Calabarzon School, if Calabarzon School is a non-profit non-stock
educational institution and other charitable contributions that may
have been made by Eleanne [NIRC of 1997, Sec. 34 (H)] after compliance
with the substantiation requirements.
*
11. Hidilyn, an amateur swimmer, won in a
swimming competition sponsored by the Kalayaan
Swimmers, a sports association duly accredited by the
Philippine Swimming Association. Hidilyn received the
amount of P500,000.00 as her prize which was donated by
Robinson Land Corporation. Could Robinson Land
Corporation deduct the P500,000.00 from its gross
income ? Decide. .
SUGGESTED ANSWER: Yes. The amount is fully deductible if
the Philipppine Swimming Association is duly accredited with the
Philippine Olympic Committee. [Rep. Act No. 7549, Sec. 1]
**
12. Harold, a Filipino citizen and a professional
golfer, filed his income tax return for 2020 claiming
optional standard deductions (OSD). Realizing that he has
enough documents to substantiate his profession-
connected expenses, he now plans to file an amended tax
return for 2020, in order to claim itemized deductions, since
no audit has been commenced by the BIR on the return he
previously filed. Will Harold be allowed to amend his
return ? Why or why not ?
SUGGESTED ANSWER: No more. Once the election to avail
of OSD is signified in the return, it shall be irrevocable for the taxable
year for which the return is made. This means that a taxpayer who
initially filed a return availing OSD is precluded from amending said
return in order to shift to the itemized deductions.” (Rev. Regs. No. 16-
2008, Sec. 7, 1st and 2nd sentences, 1st par.)
106
* 13. In 2021, the Commissioner of Internal Revenue
assessed against a manufacturing corporation the amount
of P1,000,000 as deficiency income tax. The deficiency was
brought about by the disallowance of items claimed by the
corporation as deductible business expenses for the
taxable year. These were a) expenses paid to an
advertising firm in order to create a favorable image for the
corporation; and b) litigation expenses incurred in defense
of a title to corporate property.
The corporation argued that they were ordinary and
necessary business expenses incurred during the taxable
year in carrying out its business and were, therefore,
deductible. The Commissioner of Internal Revenue
contended otherwise.
Resolve the controversy, giving reasons.
SUGGESTED ANSWER: Public relations fees for enhancing
the image of the corporation are in the nature of capital expenditures
(Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, L-26911, January 27, 1981), hence not deductible as business
expenses. This is so because the enhanced image of the corporation
benefits numerous taxable periods.
The litigation expenses incurred in defense of a title to
corporate property are not properly deductible as ordinary and
necessary expenses because they constitute part of the cost of the
property. (Rev. Regs. No. 2, Sec. 120; Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, supra)
107
*
15. ABC Co., a Philippine corporation, issued
preferred shares of stock with the following features:
a. Non-voting.
b. Preferred and cumulative dividends at the rate
of 10% per annum, whether or not in any period the amount
is covered by earnings or projects.
c. In the event of dissolution of the issuer, holders
of preferred stock shall be paid in full or ratably as the
assets of the issuer may permit before any distribution
shall be made to common stockholders.
d. The issuer has the option to redeem the
preferred stock.
ABC Co. declared dividends on the preferred stock
and claimed the dividends as interests deductible from its
gross income for income tax purposes. The BIR
disallowed the deduction. ABC Co. maintains that the
preferred shares with their features are really debt and
therefore the dividends are really interests. Decide.
SUGGESTED ANSWER: The dividends are not interests
considered as deductible expense.
Preferred shares are not loans but considered capital
regardless of the conditions under which such shares are issued and
dividends or “interests” paid thereon are not allowed as deductions
from the gross income of Corporations . (Rev. Regs. No. 2, Sec. 78, par.3;
Rev. Memo. Circ. No. 17-71)
Stated otherwise, the preferred shares are not considered as
indebtedness because they do not help earn the income from which
they are deductible.
108
official and the prospective capitalist, respectively. The
expenses were duly supported by official receipts issued in
his name. At month’s end, he requested the reimbursement
of his expenses, and LOGINC granted his request.
Can LOGINC claim an allowable deduction for the
expenses incurred by Roberto? Explain your answer.
SUGGESTED ANSWER: The expenses incurred for treating to
lunch the Bureau of Customs official for the purpose of discussing the
release of LOGINC’s clients electronic imports may be considered as
a bribe and not deductible as an expense. It is highly irregular to
discuss the subject over lunch instead at the office of the Bureau of
Customs official. Thus, such expense is not deductible.
Also not deductible are the expenses for treating the
prospective capitalist to breakfast because they were not incurred for
the purpose of earning income but for the purpose of raising capital.
**
1. Mr. D, a Filipino amateur boxer, joined an
Olympic qualifying tournament held in Las Vegas, USA,
where he won the gold medal. Pleased with Mr. D’s
accomplishment, the Philippine Government, through the
Philippine Olympic Committee, awarded him a cash prize
amounting to P1,000,000.00. Upon receipt of the funds, he
went to a casino in Pasay City and won the P30,000,000.00
jackpot in the slot machine. The next day, he went to a
nearby Lotto outlet and bought a Lotto ticket which won
him a cash prize of P5,000.00.
Which of the above sums of money is/are subject to
income tax ? Explain.
SUGGESTED ANSWER: Only the amount of P30,000,000.00
won in the slot machine is subject to income taxes because it is
considered “income from whatever source derived” [NIRC of 1997, Sec. 32
(A)], hence taxable.
The phrase “income from whatever source derived,” is so
broad that it includes all income not expressly excluded or exempted
from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income. (Gutierrez v.
Collector of Internal Revenue, CTA Case No. 65, August 31, 1965) This includes
winnings from gambling such as those derived from the slot machine.
Upon the other hand, the amount of P1,000,000.00 given by the
Philippine Government is not subject to income taxation because it is
109
excluded from gross income. It is a gift or donation which is not
considered as income subject to tax because it is excluded from gross
income.
Finally, the Lotto prize of P5,000.00 is not subject to income
tax because it is below P10,000.00. [NIRC of 1997, Sec. 24 (B) (1), as
amended by the TRAIN]
The above conclusion finds application whether Mr. D is a
resident or non-resident Filipino citizen.
NOTES NOT PART OF THE ANSWER:
a. It is error on the part of some quarters to claim that the
P30,000,000.00 is not subject to income tax because the final tax was already
withheld, Withheld taxes are nothing more than the advance payment of tax
at source, in this case the income tax due on the earnings.
b. Others likewise erroneously submit that the P1,000,000.00
given by the Philippine Government, through the Philippine Olympic
Committee, is taxable income because there is no specific provision of law
that exempts it from income taxation. The author insists on his interpretation
that this is a gift or donation that is excluded from income taxation.
*
2. X, a multinational corporation doing business
in the Philippines donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines.
Assuming the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, what are
the tax implications ? Explain. (1996)
SUGGESTED ANSWER: The value of the shares shall be
taxable as compensation income because it was paid as a result of
employer-employee relationship.
It is apparent that the intention of X is to compensate, Mr. Y its
employee, for services rendered because the shares of stock would
not have been given if Mr. Y was not an employee.
*
3. Mr. Barrios is a non-resident alien based in
California, U.S.A. During the calendar year 2021, he came to
the Philippines several times and stayed in the country for
an aggregated period of more than 180 days. How will Mr.
Barrios be taxed on his income derived from sources within
the Philippines and from abroad ?
SUGGESTED ANSWER: Mr. Barrios having stayed in the
Philippines for more than 180 days is considered as a non-resident
alien engaged in trade or business in the Philippines. As such, he
should be subject to taxation in the same manner as an individual
110
citizen or resident alien on his taxable income received from all sources
within the Philippines. [NIRC of 1997, Sec. 25 (A) (1)]
*
1. Define or explain the meaning of corporation for
income tax purposes.
SUGGESTED ANSWER: The term corporation shall
a. include:
1) partnerships, no matter how created organized,
2) joint stock companies,
3) joint accounts (cuentas en participacion),
4) associations or insurance companies.
b. but does not include:
1) general professional partnerships and
2) a joint venture or consortium formed
a) for purpose of undertaking construction
projects or
b) engaging in
(1) petroleum,
(2) coal,
(3) geothermal, and
(4) other energy operations, pursuant to
(a) an operation or consortium
agreement
(b) under a service contract with
the Government.” [NIRC of 1997, Sec. 22 (B), 1st
sentence, arrangement and numbering supplied]
111
imposed on net income.” (Sponsorship Speech, Chairman of Senate Ways and
Means Committee)
112
of the corporation. (NIRC of 1997, Sec. 27(A) and (E); Rev. Regs. No. 9-
98)
113
***7.What is the “immediacy test” ? Explain briefly.
SUGGESTED ANSWER: This is a test that has been
developed under Amercian jurisprudence in order to determine the
“reasonable needs” of the business in order to justify an accumulation
of earnings and not subject the accumulation to the improperly
accumulated earnings tax of ten percent (10%) of the improperly
accumulated taxable income. [NIRC, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec.
3, 1st par.)
The term “reasonable needs of the business” meanS the
immediate needs of the business, including reasonably anticipated
needs. (Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
ALTERNATIVE ANSWER: It is a test to determine whether the
accumulated earnings are to be subject to the improperl accumulated
earnings tax of ten percent (10%) of the improperly accumulated
taxable income. [NIRC, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
“An accumulation of earnings, profits or profits (including
undistributed earnings or profits of prior years) is unreasonable if it is
not necessary for the purpose of the business, considering all the
circumstances of the case. To determine the ‘reasonable needs of the
business’ in order to justify an accumulation of earnings, these
Regulations hereby adhere to the so-called “Immediacy Test” under
American jurisprudence as adopted in this jurisdiction. Accordingly,
the term ‘reasonable needs of the business’ are hereby construed to
mean the immediate needs of the business, including reasonably
anticipated needs. In either case, the corporation should be able to
prove an immediate need for the accumulation of the earnings and
profits, or the direct correlation of anticipated needs to such
accumulation of profits. Otherwise, such accumulation would be
deemed to be not for the reasonable needs of the business, and the
penalty tax shall apply.”
The tax is ten percent (10%) of the improperly accumulated
taxable income. [NIRC of 1997, Sec. 29 (A), Rev. Regs. No. 2-2001, Sec. 3, 1st
par.)
***
8. In 2019, AMORSECO, Inc.’s net profit before
tax was P35 million while its operating expenses was P31
million. In 2020, its net profit before tax was P40 million and
its operating expenses was P38 million. It did not declare
dividends for 2019 and 2020. And it has no proposed
capital expenditures for 2020 and the immediate future. It
has a paid-up capital of P20 million each for years ended
2019 and 2020.
114
May AMORSECO be subject to the improperly
accumulated tax on its retained profits for 2019 and 2020 ?
SUGGESTED ANSWER: Yes, since the accumulation is not
reasonably necessary for the immediate needs of the business.
AMORSECO’s paid-up capital is only P20 million but it has an
accumulation of earnings or profits (including undistributed earnings or
profits of prior years) of more than 100% of such paid-up capital.
It is evident that the accumulation is unreasonable because it is
not necessary for the purpose of the business, considering the
immediate needs of the business, including reasonably anticipated
needs. The facts of the problem do not show a direct correlation of
anticipated needs to such accumulation of profits. Thus the
accumulation made by AMORSECO is deemed not for the reasonable
needs of the business.
AMORSECO is subject to the ten percent (10%) tax on the
improperly accumulated earnings tax for the years 2019 and 2020.
(Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
*
10. Kria, Inc., a Korean corporation engaged in the
business of manufacturing electric vehicles, established a
branch office in the Philippines in 2014. The Philippine
branch constructed a manufacturing plant in Kabuyao,
Laguna, and the construction lasted three (3) years.
Commercial operations in the Laguna plant began in 2018.
115
In just two (2) years of operation, the Philippine
branch had remittable profits in an amount exceeding 175%
of its capital. However, the head office in Korea instructed
the branch not to remit the profits to the Korean head office
until instructed otherwise. The branch chief finance officer
is concerned that the BIR might hold the Philippine branch
liable for the 10% improperly accumulated earnings tax
(IAET) for permitting its profits to accumulate beyond
reasonable business needs.
Is it subject to 15% branch profit remittance tax
(BPRT)? (2018, dates supplied)
SUGGESTED ANSWER: No. The branch profits remittance tax
of fifteen (15%) which is imposed on any profit remitted by a branch to
its head office “which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component”. [NIRC of 1997, Sec. 28 (A) (5), 1st sentence]
No tax is due until actual remittance is made. No such
remittance took place because of the instructions from the head office.
The phrase “which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax
component” [NIRC of 1997, Sec. 28 (A) (5), 1st sentence] provides the basis for
computing the amount of the tax to be paid when the actual remittance
is to be made and does not determine whether or not Kria, Inc. is
subject to the tax.
116
For the period ranging from the third quarter of 2000
to the second quarter of 2002, Air Canada, through Aerotel,
filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount
of ₱5,185,676.77, detailed as follows:
1âwphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
TOTAL P 5,185,676.77
1
117
and from the Philippines shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings while international air carriers that do not
have flights to and from the Philippines but nonetheless earn income
from other activities in the country like sale of airline tickets will be
taxed at the rate of 32% (now 30%) of such taxable income. (Ibid.)
While Air Canada is taxable as a resident foreign corporation
subject to 32% (now 30%) on its taxable income from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1
1/2% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to Canada as a “foreign
corporation organized and existing under the laws of Canada.” (Ibid.)
b. Rule on the application for refund.
SUGGESTED ANSWER: Refund denied.
The P5,185,676.77 Gross Philippine Billings tax paid by Air
Canada was computed at the rate of 1 ½% of its gross revenues
amounting to P345,711,806.08 from the third quarter of 2000 to the
second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code
[32% of taxable income, that is, gross income less deductions, now
30%] will exceed the maximum ceiling of 1 ½% of gross revenues as
decreed in Article VIII of the Republic of the Philippines-Canada Tax
Treaty. Hence, no refund is forthcoming. (Air Canada v. Commissioner of
Internal Revenue, G.R. No. 169507, January 11, 2016)
118
(6) Capital gains from the sale of McJolli
shares of stock of not traded in the stock exchange
(7) Interest derived from its US Dolllar deposit
under the Expanded Foreign Currency Deposit
System
(8) Capital gains from the sale of a parcel of
landit bought for investment purposes.
(9) Fees to answer for breakage of laboratory
equipment
(10) Fees collected for the school newspaper.
a. Which among the following receipts are
exempted from income taxation ?
SUGGESTED ANSWER: None. All of the above cited income shall
be subject to income taxation because University of Bigain is a proprietary
educational institution. It is exempt from taxation on its income only in
accordance with law, and up to the present, there is no law that grants income
tax exemption.
b. If your answer to the first question is in the negative,
how are the above receipts subject to taxation ?
SUGGESTED ANSWER: University of Bigain is a proprietary
educational institution because it is a private school maintained and
administered by private individuals or groups with an issued permit to
operate from the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA) in
accordance with existing laws and regulations.” [NIRC of 1997, Sec. 27
(B), 3rd sentence]
As such it shall pay a tax of ten percent (10%) on its taxable
income except on its passive income [items no. (4) up to (8))],
provided that if the gross income from unrelated trade, business or
other activity (such as items no. (2) and (3)] exceeds fifty percent
(50%) of the total gross income derived by University of Bigain from all
sources, the regular or normal income tax of thirty percent (30%) shall
be imposed on the entire taxable income. [NIRC of 1997, Sec. 27 (B), 3rd
sentence, in relation to Sec. 27 (A) and (D)]
119
Is the hospital subject to tax on its income? If it is, at
what rate? (2013)
SUGGESTED ANSWER: Yes. The hospital is subject to tax at
the rate of ten percent (10%) on its taxable income except those
on certain passive income provided that if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such hospital from all sources the
regular or normal income tax of thirty percent (30%) shall be imposed
on its entire taxable income. [NIRC of 1997, Sec. 27 (B), 3rd sentence, in
relation to Sec. 27 (A) and (D)]
Thus, the income derived by the hospital from its paying
patients, even if not distributed to its members, is considered as
taxable income. (CIR v. St Luke’s Medical Center, Inc., G.R. Nos. 195909 &
195960, September 26, 2012)
120
the implementations or RA No. 8424 or CTRP was repealed,
thereby, requiring the taxpayer to apply for a new Revenue
Ruling for exemption taking consideration of its income
earning activities.
a. Has De La Salle-St. Benilde lost its tax-exempt
status under the 1987 Constitution ?
SUGGESTED ANSWER: No because the 1987 Constitution
expressly exempts all revenues and assets of non-stock, non-profit
educational institutions from taxes provided that they are actually,
directly and exclusively used for educational purposes. (La Sallian
Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No.
202792, February 27, 2019 citing 1987 Constitution, Article XIV)
“(T)he constitutionally mandated tax privilege granted to non-
stock non-profit educational institutions plays an important role in
promoting quality and affordable education in the country.” (Ibid.) “The
tax exemption was seen as beneficial to students who may otherwise
be charged unreasonable tuition fees if not for the tax exemption
extended to all revenues and assets of non-stock, non-profit
educational institutions.” (Ibid.)
Where a previous BIR Ruling was issued declaring a
Foundation as a non-stock, non-profit educational institution exempt
from taxes there is no need to secure a new BIR Ruling to claim its
exemption after amendment of the Tax Code considering that the BIR
Ruling was never revoked, and the primary purpose of petitioner
Foundation remained the same.” (Ibid.) “The tax exemption expressly
granted by the 1987 Constitution, the supreme law of the land, cannot
be set aside by any statute, especially by a mere technicality in
procedure.” (Ibid.)
Finally, earning profits does not change the character of non-
profit institution. “The Constitution does not require that the revenues
and income must have also been earned from educational activities or
activities related to the purposes of an educational institution. The
phrase ‘all revenues’ is unqualified by any reference to the source of
revenues.” (Ibid.) “Every responsible organization must be so run as to,
at least insure its existence, by operating within the limits of its own
resources, especially its regular income. In other words, it should
always strive, whenever possible, to have a surplus.” (Ibid.)
b. Is the belated payment of the docketing fee
sufficient ground to dismiss De La Salle-St. Benilde’s
petition ? Why ?
SUGGESTED ANSWER: No.
The general rule is that a petition for review is perfected by
timely filing it and paying the requisite docket fees and other lawful
fees. However, there are exceptions to the stringent requirement as to
call for a relaxation of the application of the rules, such as:
121
(1) most persuasive and weighty reasons;
(2) to relieve a litigant from an injustice not commensurate
with his failure to comply with the prescribed procedure;
(3) good faith of the defaulting party by immediately paying
within a reasonable time from the time of the default;
(4) the existence of special or compelling circumstances;
(5) the merits of the case;
(6) a cause not entirely attributable to the fault or negligence
of the party favored by the suspension of the rules;
(7) a lack of any showing that the review sought is merely
frivolous and dilatory;
(8) the other party will not be unjustly prejudiced thereby;
(9) fraud, accident, mistake or excusable negligence without
appellant's fault;
(10) peculiar legal and equitable circumstances attendant to
each case;
(11) in the name of substantial justice and fair play;
(12) importance of the issues involved; and
(13) exercise of sound discretion by the judge guided by all
the attendant circumstances. Concomitant to a liberal interpretation of
the rules of procedure should be an effort on the part of the party
invoking liberality to adequately explain his failure to abide by the
rules.” (La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal
Revenue, G.R. No. 202792, February 27, 2019)
In other words, while procedural rules are important in the
administration of justice, they may be excused for the most persuasive
and meritorious reasons in order to relieve a litigant of an injustice that
is not commensurate with the degree of his thoughtlessness in not
complying with the procedure prescribed. (Ibid.)
To reiterate, De La Salle-St. Benilde was able to establish that it
is a tax exempt entity under the 1987 Constitution. It has timely filed
its Protest to the tax deficiency assessment. It was also able to
actually pay the full amount of the required docket and legal fees in
the amount of P861,178.34, but it was nine (9) days late. Evidently, it
immediately paid the docket and legal fees upon the CTA's
assessment of the proper amount which showed petitioner's good
faith. (Ibid.)
Moreover, the issue involved in this case is no less than the tax
assessment over a non-stock, non-profit educational institution, which
the 1987 Constitution mandated to be tax exempt. Otherwise stated,
what is at stake is the opportunity for the proper and just determination
of De La Salle-St. Benilde's status as a tax-exempt entity under the
1987 Constitution, and a deprivation of a substantial amount of
property. (Ibid.)
122
Taking into account the importance of the issues raised in the
petition filed before the CTA Division, what De La Salle-St. Benilde
stands to lose, and considering the merits of said petition, it should not
be dismissed solely based on the technicality of belated payment of
the docketing fee to better sercve the ends of justice. (Ibid.)
123
2) Inclusion in their annual information return and
duly audited financial statements.
3) Certification from depository banks as to the
amount of interest income earned from passive investments not
subject to the 20% final withholding tax.
4) Certification of actual utilization of said income.
5) Board resolution on proposed project to be
funded out of the money deposited in banks or placed in money
market placements. (Finance Department Order No. 149-95, November
24, 1995)
***
5. CMI School, Inc., a non-stock, non-profit
corporation, donated its three parcels of idle land situated
in the Municipality of Cuyapo, Nueva Ecija to SLC
University, another non-stock, non-profit corporation, in
recognition of the latter’s contribution to and participation
in the spiritual and educational development of the former.
If SLC University later sells the three parcels of idle
land to Puregold Supermarket, Inc., a stock corporation,
will SLC University be liable for capital gains tax? Explain
your answer. (2017, paraphrasing supplied)
SUGGESTED ANSWER: No. “The Constitution does not require
that the revenues and income must have also been earned from educational
activities or activities related to the purposes of an educational institution. The
phrase ‘all revenues’ is unqualified by any reference to the source of revenues.”
(La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No.
202792, February 27, 2019 citing 1987 Constitution, Article XIV)
The sale by SLC University to Puregold Supermarket, Inc. is
not subject to capital gains tax if the proceeds are actually, directly
and exclusively used for educational purposes.
***
6. Disciples of Jesus, Inc. (DOJI) is a non-stock,
non-profit religious organization which owns a large parcel
of land in a mountainous area in Cuenca, Batangas.
DOJI has devoted 1/2 of the land for various uses: a
church with a cemetery exclusive for deceased priests and
nuns, a school providing K to 12 education, and a hospital
which admits both paying and charity patients. The
remaining 1/2 portion has remained idle.
The DOJI Council of Elders (the counterpart of a
Board of Trustees) decided to lease the remaining 1/2
124
portion to a real estate developer which constructed a
forest sanctuary/resort over the property.
Since the rental income from the lease of the property
was substantial, the DOJI decided to use the amount to
finance (1) the medical expenses of the charity patients in
the DOJI Hospital and (2) the purchase of books and other
educational materials for the students of the DOJI School.
Is DOJI’s income from the rental fees subject to
income tax?
SUGGESTED ANSWER: Yes. Notwithstanding that DOJI is a
non-stock, non-profit religious organization, is generally not to be
taxed in respect to income received by it as such, its of income of
whatever kind and character from its activities conducted for profit
regardless of the disposition of such income shall be subject to
income tax. [NIRC of 1997, Sec. 30, last par., in relation to Sec. 30, par. (E)]
NOTE NOT PART OF THE ANSWER: Take note of the difference
between non-profit, non-stock educational instutions and other corporations
under Sec. 30. The exemption from income taxation of non-profit, non-stock
educational institutions is constitutionally granted and does not emanate from
the NIRC, Sc. 30, so they are not subject to the limitations under the last
par.of Sec. 30.
125
Taxation of general professional partnerships
(GPPs), in general
126
While the above statement is correct, the payment received by
XYZ Law Offices for services rendered to Gainsburg, is considered as
income derived from sources without the Philippines, which is taxable
as the income of the partners of XYZ Law Offices.
For income tax purposes, payment of Gainsburg is going to be
included as part of XYZ Law Offices’ gross income. From its total
gross income derived within and without the Philippines, it has to
compute its net income in the same manner as a corporation. The net
income of the partnership whether distributed or not will be declared
by the partners as part of their gross income who are to pay the
income tax thereon in their individual capacity. (NIRC, Sec. 26)
127
compensation derived from rendering legal services . [NIRC of 1997, Sec.
22 (A) (1).
(3) Gains derived from sale of excess computers and
laptops are also included because the excess computers and laptaps
are used in the rendition by ABC Law of Firm of legal services. The
gains derived sale being incidental to the rendition of legal services,
although isolated in character, must be included as part of the gross
income of ABC Law Firm . (Applying by analogy RMC No. 15-2011, and
Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue, G.R. Nos.
193301 and 194637, March 11, 2013) The gains should be included in gross
income because they may be considered as gains derived from
dealings in property. [NIRC of 1997, Sec. 32 (A), (3)]
(B) What are the items in the above-mentioned
payments which may be considered as deductions from
the gross income of ABC Law Firm ? Explain. (2014, dates
and paraphrasing supplied)
SUGGESTED ANSWER: The items in the above mentioned
payments which may be considered as deductions from the gross
income of ABC Law Firm are all those shown under the heading
“Payments:”, which include the following:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meeting with clients
This is so, because ABC Law Firm is a general professional
partnership whose net income shall be computed in the same manner
as a corporation. (NIRC of 1997, Sec. 26, 2nd par.)
The net income of a corporation is determined by deducting
from its gross income all ordinary and necessary expenses that are
incurred or paid in earining the income. The items of payment
described in the problem are considered as ordinary and necessary
expenses.
While this may be so, there is need to comply with requisites of
deductibility such as the limitation on the deductibility of the
representation expenses to the extent of 1.00 percent (1%) of net
revenue (i.e., gross revenue less discounts). [Rev. Regs. No. 10-2002, Sec.
5 which implements NIRC of 1997, Sec. 34 (A) (1) (a) (iv)]
(C) If ABC Law Firm earns net income in 2020, what,
if any, is the tax consequence on the part of ABC Law Firm
insofar as the payment of income tax is concerned ? What,
if any, is the tax consequence on the part of A, B, and C as
individual partners, insofar as the payment of income tax is
concerned ? (2014, dates and paraphrasing supplied)
SUGGESTED ANSWER: ABC Law Firm is not subject to pay
income tax as it is a general professional partnership formed by A, B,
128
and C “for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business” [NIRC of 1997, Sec. 22 (B), last sentence in relation to Sec. 26, 1st
sentence]
ABC Law Firm is not subject to income tax because it is
deemed to be no more than a mechanism or flow-through entity in the
generation of income by, and the ultimate distribution of income to,
respectively, each of the individual partners . (Tan v. Del Rosario, Jr. et al.,
and Companion case, 237 SCRA 324, 335)
“Clearly, a general professional partnership shall not be
subject to income tax xxx.” (RMC No. 2-2012,3rd par., 1st sentence, paraphrasing
supplied)
A, B, and C, as partners of ABC Law Firm, shall each “report as
gross income his distributive share, actually or constructively received,
in the net income of the partnership” (NIRC of 1997, Sec. 26, last par.,
paraphrasing supplied), and they shall then “be subject to income tax in
their separate and individual capacities.” (RMC No. 2-2012, 3rd par., 1st
sentence, paraphrasing supplied)
Taxation of co-ownerships
**
1. Rosa Arroyo died in 2020. Her heirs executed a
project of partition of her estate which was approved by the
Court. However, Rosa’s estate was not actually distributed
among the heirs but remained under the management of
their father (widower-spouse) who used the properties in
business and so their value increased yearly. The profits
were credited on the books of account of the common fund
to the heirs in proportion to their respective hereditary
shares. The heirs allowed their father to continue using
their shares for his ventures, although they paid income
taxes on their respective shares of the profits of their
common business. Is there a partnership here subject to
corporate income tax under the Tax Code ? Why ? (1975,
date supplied)
SUGGESTED ANSWER: No. There was no partnership
formed subject to the corporate income tax , when her widower-
spouse and her heirs did not partition the estate they inherited from
Rosa. However, when the heirs allowed their father (the widower
spouse) to continue using their shares for his ventures, resulting in a
common business, there was formed a partnership.
Co-heirs who own properties which produce income should not
automatically be considered partners of an unregistered partnership,
129
or a corporation, within the purview of the income tax law. To hold
otherwise, would subject the income of all co-ownership of inherited
properties to the tax on corporations resulting in oppressive taxation
and confirm the dictum that the power to tax involves the power to
destroy. This eventuality should be obviated.
Article 1769 (3) of the Civil Code provides that “the sharing of
gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in
any property from which the returns are derived.” There must be an
unmistakable intention to form a partnership or joint venture . (Obillos, Jr.
v. Commissioner of Internal Revenue, 139 SCRA 440) Such is not present in the
instant case.
For tax purposes when the heirs allowed their father (the
widower-spouse) to continue using their shares for his ventures,
resulting in a common business there was in fact, a contribution of the
incomes of the heirs to a common fund for the purpose of dividing the
rentals earned among themselves. Thus, a partnership was formed
subjecting them to corporate income tax rates. (Ona v. Commissioner, 45
SCRA 74)
130
the partnership with the SEC is a manifest showing of the bother’s
intention to engage in business together and divide the profits.
Withholding tax
*
1. Explain the concept of the withholding tax
system or “taxation at source”. What is the rationale
behind it ?
SUGGESTED ANSWER: The concept of the withholding
system or “taxation at source” refers to the deduction made by a
payor, as an agent of the government, from paymentrs of income to a
payee of the estimated taxes to be paid by the payee.
The basic rationale is to facilate the collection of taxes and to
prevent tax evasion.
131
ALTERNATIVE ANSWER: The concept of “taxation at
source,” refers to the requirement that taxes imposed or prescribed by
the National Internal Revenue Code (NIRC) are to be deducted and
withheld by the payor-corporations and/or persons from payments
made to payees-corporations and/or persons for the former to pay the
same directly to the Bureau of Internal Revenue (BIR). Thus, the
taxes are collected practically at the time the transaction is made or
when the taxable act occurs. It is also known as the “withholding tax
system.”
The following are considered as the rationale behind the
concept of “taxation at source”:
a. To provide the taxpayer a convenient manner to
meet his probable income tax liability.
b. To ensure the collection of the income tax which
could otherwise be lost or substantially reduced through failure
to file the corresponding returns.
c. To improve the government’s cash flow
[Confederation for Unity, Recognition and Advancement of Government
Employees (COURAGE), v. Commissioner, etc., G.R. No. 213446, and
companion cases, July 03, 2018] to enable it to meet its obligations as
they fall due.
d. To minimize tax evasion, thus resulting in a more
efficient tax collection system.
“This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means
and remedies.”
132
2) The 2% creditable withholding tax ? Explain.
SUGGESTED ANSWER: The withholding agent for the
2% creditable withholding tax is Argus Corp, because it is the
payor of the fund.
133
2) be liable upon conviction to a penalty equal
to the total amount of the tax not withheld, or not
accounted for and remitted. (NIRC of 1997, Sec. 251,
paraphrasing supplied)
Any person required under the NIRC of 1997 to withhold
shall upon conviction be punished by a penalty equal to the
total amount of the tax not withheld (NIRC of 1997, Sec. 251 ) and a
fine of not less than Php10,000.00 and suffer imprisonment of
not less than one (1) year but not more than ten (10) years.
(Ibid., Sec. 255, 1st par.)
b. Penal liability of corporations to fines. Any
corporation, association or general co-partnership liable for any
of the acts or omissions penalized under the NIRC of 1997, in
addition to the penalties imposed herein upon the responsible
corporate officers, partners, or employees shall, upon
conviction for each act or omission, be punished by a fine of not
less P50,000) but not more than P100,000. (NIRC of 1997, Sec.
256, paraphrasing supplied)
c. Personal liability of government employee if the
withholding agent is the Government. If the withholding agent
is the Government or any of its agencies, political subdivisions
or instrumentalities, or a government-owned or -controlled
corporation, the employee thereof responsible for the
withholding and remittance of the tax shall be personally liable
for the deficiency taxes. [NIRC of 1997, Sec. 247 (b)]
134
shuttles between here and the Malaysia regularly up to the
present. He does not stay longer than thirty (30) days in
the Philippines in any given year. He is presently
employed as consultant with an European company
situated at the Bonifacio Global City (BGC). For the year
2020, he earned US$10,650.00 in consultation fees.
Sometime in 2021, the District Revenue Office of the
Bureau of Internal Revenue served him a notice informing
him that he did not file his income tax return for the year
2020 and directing him to file said return in 10 days. He
refused to file any return claiming that he is not a resident
alien and is therefore not required to file any income tax
return. Is Hassan’s claim correct ?
SUGGESTED ANSWER: No. Hassan’s claim is not correct.
He is an alien individual engaged in business or practice of profession
within the Philippines who is required to file an income tax return,
regardless of the amount of gross income. [NIRC of 1997, Sec. 51 (A) (2) (a),
as amended by the TRAIN]
135
photographer. What should she file with the Bureau of
Internal Revenue ?
SUGGESTED ANSWER: Bian being a resident Filipino
individual subject to income tax who is receiving self-employment
income, whether it constitutes the sole source of his income or in
combination with salaries, wages and other fixed or determinable
income, shall make and file a declaration of his estimated income for
the current taxable year on or before May 15 of the same taxable
year.” [NIRC of 1997, Sec. 74 (A), 1st sentence, as amended by the TRAIN]
Would your answer be the same if Bian is a non-
resident Filipino or a non-resident alien ? Explain your
answer.
SUGGESTED ANSWER: No more. “Non-resident Filipino
citizens, with respect to income from without the Philippines, and non-
resident aliens not engaged in trade or business in the Philippines, are
not required to render a declaration of estimated income tax.” [NIRC of
1997, Sec. 74 (A) 3rd sentence, paraphrasing supplied]
*
7. H, husband, and W, wife; Filipinos with four (4)
minor children, are both employed in the Philippines. Due
to their desire to save on income tax, should they file
separate returns? Explain your answer.
SUGGESTED ANSWER: Yes. They should file separate
returns. Combining the compensation income of H and W would bring
136
them to a high tax bracket. Filing separate returns would place them
within a lower tax bracket which results to lower taxes.
137
*** 9. Policarpio, who is married with four (4) minor
dependent children, works as a driver in a government
office which pays him P16,000.00 monthly. He asks you
whether he is still required to file an income tax return
What will your answer be? Why?
SUGGESTED ANSWER: A is not required anymore to
file an income tax return because his taxable income does not
exceed Two hundred fifty thousand pesos (P250,000). [NIRC of
1997, Sec. 51 (A) (2) (a), as amended by the TRAIN]
***
10. Who are NOT required to file Income Tax
Returns (ITRs) because they are allowed to avail of the
system of Substituted Filing of Income Tax Returns ?
SUGGESTED ANSWER: “Individual taxpayers receiving purely
compensation income, regardless of amount, from only one employer
in the Philippines for the calendar year, the income tax of which has
been withheld correctly by the said employer (tax due equals tax
withheld) shall not be required to file an annual income tax return.
The certificate of withholding filed by the respective employers,
duly stamped ‘received’ by the BIR, shall be tantamount to the
substituted filing of income tax returns by said employees.” [NIRC of
1997, Sec. 51-A, as inserted by the TRAIN. This is a new provision]
In Lieu of BIR Form No. 1700, the Annual Information Return of
Income Taxes Withheld on Compensation and Final Withholding
Taxes (BIR Form No. 1604-CF) (hard copy) filed by their respective
employers, duly stamped “received” by the BIR, shall be tantamount to
the substituted filing of income tax returns by said employees.” (Rev.
Regs. Nos. 2-98 as amended by Rev. Regs. No. 3-2002, Sec. 2.83.4, 1st par.)
138
(i.e. tax due is not equal to the tax withheld) resulting to collectible or
refundable return.
c. Employees whose monthly gross compensation income
does not exceed Five Thousand Pesos (P5,000.00) or the statutory
minimum wage, whichever is higher, and opted for non-withholding of
tax on said income.
d. Individuals deriving other non-business, non-profession-
related income in addition to compensation income not otherwise
subject to a final tax.
e. Individuals receiving purely compensation income from a
single employer, although the income tax of which has been correctly
withheld, but whose spouse falls under Section 2.83.4 (A), (B), (C)
and (D) of these regulations.
f. Non-resident aliens engaged in trade or business in the
Philippines deriving purely compensation income or compensation, or
compensation income and other non-business, non-profession-related
income.
In case of married individuals who are still required to file
returns under existing provisions of the law, i.e. in those instances not
covered by the substituted filing of returns, only one return for the
taxable year shall be filed by either spouse to cover the income of the
spouses, which return shall be signed by the husband and the wife
unless it is physically impossible to do so, in which case signature of
one of the spouses would suffice. (Rev. Regs. No 2-98, as amended by Rev.
Regs. No. 3-2002, Sec. 2.83.4, 2nd and 3rd pars.)
***
12. On April 30, 2021, Psalmir was among those
retrenched as a production manager of ABS-CBN which
issued to him a Certificate of Withholding Tax on
Compensation (BIR Form No. 2316), which showed that the
tax withheld from his compensation was equal to his
income tax due for the period from January 2021 to April
30, 2021.
A month after his retrenchment, Psalmir put up his
own studio and started producing film commercials for
advertising companies. He was able to earn a meager
income from his films commercials but did not keep record
of his production expenses.
Is Psalmir qualified for substituted filing for taxable
year 2021? Explain your answer.
SUGGESTED ANSWER: No. Psalmir is not entitled to
substituted filing because he did not receive purely compensation
income, regardless of amount, from only one employer in the
139
Philippines for the calendar year, the income tax of which has been
withheld correctly by the said employer (tax due equals tax withheld).
Specifically, Psalmir is not qualified for substituted filing and still
required to file an Income Tax Return (BIR Form No. 1700) because
he is an individual who derived other non-profession-related income in
addition to compensation income not otherwise subject to a final tax.
(Rev. Regs. No 2-98, as amended by Rev. Regs. No. 3-2002, Sec. 2.83.4, 2 nd and 3rd
pars.)
***
13. Atty. Aaron Barrios is employed as the Chief
Operating Officer of ABC Company receiving an annual
compensation of P10,000,000.00, while Mr. Elmer Lusung is
a security guard in the same company earning an annual
compensation of P20,000.00. Both of them source their
income only from their employment with ABC Company.
(a) At the end of the year, is Atty. Barrios
personally required to file an annual income tax return ?
Explain.
SUGGESTED ANSWER: No. Since Atty. Barrios is receiving
compensation income only from a single employer, ABC Company,
during the taxable period, he is qualified for substituted filing provided
the employer has withheld the correct income taxes on income paid to
and received by Atty. Barrios.
(b) How about Mr. Lusung ? Is he personally
required to file an annual income tax return ? Explain.
SUGGESTED ANSWER: No. Mr. Lusung is not personally
required to file an annual income tax return for the reason that his total
annual compensation income is P240,000.00 which is below the
threshold of taxable annual income of P250,000.00. Thus, Mr. Lusung
is not required to file an income tax return. [NIRC of 1997, sec. 51 (A) (2) (a)]
140
District Officer, Collection Agent or duly authorized Treasurer of the
city or municipality in which such person has his legal residence or
principal place of business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the Office of the
Commissioner. [NIRC of 1997, Sec. 51 (B)]
141
Corporate income tax returns
142
pass along the production and distribution chain, the tax being limited
only to the value added to such goods, properties or services by the
seller, transferor or lessor. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), 451 SCRA 132 citing various cases, percentages supplied]
143
final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several
acts of consumption.
The VAT system assures fiscal adequacy through the collection
of taxes one very level of consumption, yet assuages the
manufacturers or providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next link of the chain until
finally the end consumer shoulders the entire tax liability. (Commissioner
of Internal Revenue v. Magsaysay Lines, Inc., G. R. No. 146984, July 28, 2006)
*
6. Masarap Kumain, Inc. (MKI) is a Value-Added
Tax (VAT)-registered company which has been engaged in
the catering business for the past 10 years. It has invested
a substantial portion of its capital on flat wares, table
linens, plates, chairs, catering equipment, and delivery
vans. MKI sold its first delivery van, already 10 years old
and idle. to Magpapala Gravel and Sand Corp. (MGSC), a
corporation engaged in the business of buying and selling
gravel and sand. The selling price of the delivery van was
way below its acquisition cost. Is the sale of the delivery
van by MKI to MGSC subject to VAT? (2014)
SUGGESTED ANSWER: Yes. The sale of the delivery van by
MKI to MGSC is subject to VAT.
MKI is a VAT-registered company engaged in ‘in the course of
trade or business’ catering which means the regular conduct or pursuit
of a commercial or an economic activity, including transactions
incidental thereto (NIRC of 1997, Sec. 105, 3 rd par.;(Rev. Regs. No. 16-2005,
Sec. 4.105-3, 1st par.) which are subject to VAT.
The delivery van being used in MKI’s trade or business of
catering is part of its assets. The sale of a fully depreciated asset (the
delivery van) that has been used in business is subject to VAT as an
incidental transaction, although such sale may be considered isolated.
(Mindanao 11 Geothermal Partnership v. CIR, G.R. Nos. 193301, 194637, March 11,
2013)
144
deemed sold in the Philippines. (Rev. Regs. No. 16-2005, Sec. 4.106-1, in
relation to RMC No. 7-2006)
145
amount of P80 million plus.
Due to the BIR’s inaction on its claim, Team Energy
filed a Petition for Review before the CTA in Division which
in its July 13, 2010 Decision ordered the BIR to refund or, in
the alternative, issue a tax credit certificate in the amount
of P79 million plus. Subsequently,the CTA Division
reversed itself upon a motion for reconsideration filed by
the BIR. The En Banc then reinstated the Division’s July
13. 2010.
Rule on the Commissioner of Internal Revenue’s
(CIR’s) contention that the CTA en banc erred in not
requring Team Energy to secure a Certificate of
Compliance (COC) from the Energy Regulatory
Commission (ERC) because of the requirement under
Section 13 of the NPC Charter which the Team Energy to
qualify as a "generation company" under the EPIRA before
its sale of services to NPC may be subject to VAT zero-
rating.
SUGGESTED ANSWER: The CIR’s contention is bereft of
merit.
The Supreme Court “rejected the contention of the CIR that
Team Energy is not entitled to tax refund or tax credit because it
cannot qualify for VAT zero-rating for its failure to submit its ERC
Registration and COC required under the EPIRA considering that
Team Energy's refund claim is premised on Section 108(B)(3) of the
1997 NIRC, in relation to NPC's charter, the requirements under the
EPIRA are inapplicable.
To qualify its electricity sale to NPC as zero-rated, Team
Energy needs only to show that it is a VAT-registered entity and that it
has complied with the invoicing requirements under the 1997 NIRC, in
conjunction with Revenue Regulations. (Commissioner of Internal Revenue v.
Team Energy, etc., G.R. No. 230412, March 27, 2019)
Effective zero-rating is not intended as a benefit to the person
legally liable to pay the tax, such as Team Energy but to relieve
certain exempt entities, such as the NPC, from the burden of indirect
tax so as to encourage the development of particular industries.
Effective zero-rating was intended to relieve the exempt entity from
being burdened with the indirect tax which is or which will be shifted to
it had there been no exemption. In this case, Team Energy is being
exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that Team Energy may shift to NPC by
adding to the cost of the electricity sold to the latter. (Ibid.)
146
3. Illustrate the concept that zero-rating is not for
the benefit of the person legally liable for the tax but for the
benefit of the person to whom the indirect tax is to be
passed on.
SUGGESTED ANSWER: The Supreme Court emphasized that
effective zero-rating is not intended as a benefit to the person legally
liable to pay the tax, such as San Roque Power Corporation, but to
relieve certain exempt entities, such as the NPC, from the burden of
indirect tax so as to encourage the development of particular
industries. Before, as well as after, the adoption of the VAT, certain
special laws were enacted for the benefit of various entities and
international agreements were entered into by the Philippines with
foreign governments and institutions exempting sale of goods or
supply of services from indirect taxes at the level of their suppliers.
Effective zero-rating was intended to relieve the exempt entity
from being burdened with the indirect tax which is or which will be
shifted to it had there been no exemption. In this case, San Roque
Power Corporation is being exempted from paying VAT on its
purchases to relieve NPC of the burden of additional costs that
petitioner may shift to NPC by adding to the cost of the electricity sold
to the latter. (San Roque Power Corporation v. Commissioner of Internal Revenue,
G.R. No. 180345, November 25, 2009)
147
nos distinguere debemos (Where the law does not distinguish we
should not distinguish) finds application.
It is apparent that NPC’s exemption is from payment “of all
taxes.” An exemption from “all taxes” excludes indirect taxes. Hence,
NPC’s exemption covers both direct and indirect taxes. (Maceda v.
Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771)
148
direct and indirect taxes.” (“Host Agreement” between the United
Nations and the Philippine Government, Sec. 11) Astro
Construction, Inc. (ACI) was hired to construct the WHO Center
in Manila. Upon completion of the building, the BIR assessed a
12% VAT on the gross receipts of ACI derived from the
construction of the WHO building. WHO contends that the 12%
VAT is not a direct tax nor an indirect tax on it but a tax that is
primarily due from the contractor and is therefore covered by the
Host Agreement. The BIR argues that the VAT is deemed an
indirect tax as ACI can shift the tax burden to it. Is the BIR
correct ? Explain.
SUGGESTED ANSWER: No. The BIR is not correct.
While it is true that the VAT is an indirect tax, It is clear from the
agreement that WHO is “exempt from all direct and indirect taxes.”
Since the 12% VAT is an indirect tax whose burden was shifted by
PCC to WHO then it is evident that the BIR is not correct. (CIR v. John
Gotamco & Sons, Inc., 148 SCRA 36 [1987])
To allow the shifting of the burden to WHO would negate its
exemption and in violation of the international agreement entered into by the
Philippines.
***
4. Thomas’ primary source of income is his
employment managing a poultry farm. He earns extra from
the land he inherited from his parents, and which land he
has been leasing to a private, non-stock, non-profit school
since 2017.
Last January, the school offered to buy the land
from Thomas for an amount equivalent to its zonal value
plus 15% of such zonal value. Thomas agreed but required
the school to pay, in addition to the purchase price, the
12% VAT. The school refused Thomas’ proposal to pass on
the VAT contending that it was an entity exempt from such
tax. Moreover, it said that Thomas was not regularly
engaged in the real estate business and, therefore, was not
subject to VAT. Consequently, Thomas should not charge
any VAT to the school.
a. Is the school’s contention correct ?
SUGGESTED ANSWER: The contention of the school is
partially correct.
Of possible merit is the contention that Tjomas was not
regularly engaged in the real estate business and thus is not subject
to VAT. While continuity of the lease agreement from 2006 to the
149
present could characterize Thomas as a lessor of property regularly
engaged in the real estate business (NIRC of 1997, Sec. 108 (A) , 2nd par)
there is no showing that the gross annual rentals received by Thomas
exceeds P3 million [Ibid., Sec. 109 (BB)] which would make him subject
to VAT.
Finally, Thomas does not appear to be a VAT-registered
person. Hence, there is no VAT to be paid by Thomas that could be
passed on to the school.
As a result of the foregoing there is no need to discuss whether
or not the school is exempt from the VAT.
Finally, granting arguendo that Thomas is a VAT-registered
person and he has paid the VAT and passed on the same to the
school it’s contention that Thomas could not pass on to it the because
it is exempt from VAT is without merit. The school is not exempt from
VAT but its transactions. [NIRC of 1997, Sec. 109 (H) as reiterated by the TRAIN]
An exempt transaction differs from a VAT exempt party.
“The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services.” (NIRC OF 1997, Sec. 105, 2nd par.) Thus, Thomas may pass on the
VAT, if any, to the school.
b. Will your answer be the same if Thomas signed
up as VAT-registered person only in 2021 ?
SUGGESTED ANSWER: Yes but only partially.
Thomas shall be then be subject to VAT after his registration as
such a person. He could pass on to the school the VAT that he paid.
150
SUGGESTED ANSWER: No. The fact that PACKARD Co.
Ltd. already enjoys income tax holiday is not a valid ground for
denying KONSTRUCT, Inc.’s application for VAT zero-rating of its sale
of services to PACKARD Co. Ltd..
Services rendered to persons or entitities whose exemption
under special laws subjects the supply of such services to zero
percent (0%) rate. [NIRC of 1997, Sec. 108 (B) (3)]
“PEZA shall manage and operate the ECOZONES as a
separate customs territory; thus, creating the fiction that the
ECOZONE is a foreign territory. As a result, sales made by a supplier
in the Customs Territory to a purchaser in the ECOZONE shall be
treated as an exportation from the Customs Territory.” (Coral Bay Nickel
Corporation v. Commissioner of Internal Revenue, G.R. No. 190506, June 13, 2016)
All sales of goods, properties, and services made by a VAT-
registered supplier from the Customs Territory, such as KONSTRUCT,
Inc. to an ECOZONE enterprise like PACKARD Co. Ltd, shall be
subject to VAT, at zero percent (0%) rate, regardless of the tatter's
type or class of PEZA registration; and, thus, affirming the nature of a
PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.
(Ibid.)
*
6. The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues and
membership fees collected by condominium corporations
from its member condominium-unit owners. The RMC’s
validity is challenged before the Supreme Court (SC) by the
condominium corporations. The Solicitor General, counsel
for BIR, claims that association dues, membership fees,
and other assessment/charges collected by a
condominium corporations are subject to VAT since they
constitute income payments or compensation for the
beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium
corporations argues that such dues and fees are merely
held in trust by the condominium corporations exclusively
for their members and used solely for administrative
expenses in implementing the condominium corporations’
purposes. Accordingly, the condominium corporations do
not actually render services for a fee subject to VAT.
Whose argument is correct? Decide.
SUGGESTED ANSWER: The argument of the condominium
corporations’ lawyer is correct.
151
The provisions of the NIRC are clear in describing the
characteristics of a person who is subject to VAT, as any person who,
in the course of his trade or business, renders services. (NIRC of 1997,
Sec. 105, 1st par., paraphrasing supplied)
To be “in the course of trade or business” means ”trade or
commercial activity regularly engaged in as a means of livelihood or
with a view to profit.” (Yamane , etc. v. BA Lepanto Condominium Corporation, G.
R. No. 154993, October 25, 2005) By its very nature a condominium
corporation is not engaged in business, and any profit that it derives is
merely incidental. (Ibid.)
The money paid by the unit owners are pooled together to be
spent exclusively for the purpose of maintaining and preserving the
condominium building and the common areas which they themselves
own and possess.
***
1. What real estate transactions are not subject
to the Value-Added Tax (VAT) ?
SUGGESTED ANSWER: The following sales of real properties
are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business,
b. real property utilized for low-cost and socialized housing
as defined by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws,
c. residential lot valued at One million five hundred
thousand pesos (P 1,500,000) and below,
d. house and lot, and other residential dwellings valued at
Two million five hundred thousand pesos (P2,500,000) and below:
Provided, That beginnning January 1, 2021, the VAT exemption
shall only apply to sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as
defined by Republic Act No. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than Two million
pesos (P2,000,000): Provided, further, That every three (3) years
thereafter, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index, as published by the Philippine
Statistics Authority (PSA).” [NIRC of 1997, Sec. 109 (P) as amended by the
TRAIN, paraphrasing supplied ]
152
**
2. Romina Quinajon is engaged in the business of
leasing out several residential apartment units she owns.
The monthly rental for each unit ranges from P10,000.00 to
P12,000.00. Her gross rental income for one year is
P4,000,000.00. She consults you on whether it is
necessary for her to register as a VAT taxpayer. What legal
advice will you give her, and why ?
SUGGESTED ANSWER: She is not required to register as a
VAT taxpayer.
Her transactions of leasing residential units for an amount not
exceeding P15,000.00 per unit per month is exempt from the VAT.
The total gross rental income of P4,000,000.00, which exceeds
the P3,000,000.00 threshold does not matter because such threshold
applies only non-exempt sale or lease of goods or properties or the
performance of services. [NIRC of 1997, Sec. 109 (BB) as added by the TRAIN]
153
The sale of parking lots in a condominium is a separate and distinct
transaction and is not covered by the rules on threshold amount not
being a residential lot, house and lot or a residential dwelling, thus,
should be subject to VAT regardless of amount of selling price . (Rev.
Regs. No. 16-2005, Sec. 4.106.3, last par., as added by Rev. Regs. No. 13-2012)
b. Would your answer be the same if the property
was sold by a bank in a foreclosure sale? Explain your
answer.
SUGGESTED ANSWER: Yes. The sale of foreclosed real
property is not considered as part of the services rendered by a bank
to its client-borrowers because it sells the foreclosed property for
purposes of collecting. The sale benefits the bank and therefore
subject to VAT.
The foreclosure sale is not part of the service rendered by the
bank to its borrower-clients which is not subject to VAT but to
percentage tax. [NIRC of 1997, Sec. 109 (U), as amended by Rep. Act No. 9337,
and renumbered by the TRAIN as Sec. 109 (V)]
154
Krimson as his residence is subject to VAT if the gross selling price
exceeded P3,199,200.00 and the sale notarization was after January
1, 2012.
The sale of residential lot with gross selling price exceeding
P1,919,500.00, residential house and lot or other residential dwellings
with gross selling price exceeding P3,199,200.00, where the
instrument of sale (whether the instrument is nominated as a deed of
absolute sale, deed of conditional sale or otherwise) is executed and
notarized on or after January 1, 2012 and shall be subject to twelve
percent (12%) output VAT. (Rev. Regs. No. 16-2005, Section 4.106-3, 3rd par.,
as amended by Rev. Regs. No. 16-2011, and further amended by Rev. Regs. No. 3-
2012)
NOTE NOT PART OF THE ANSWER: The author suggests that for
purposes of answering a Bar examination question with similar statement of
facts as the foregoing question, that the examinee should discuss both the
SUGGESTED and ALTERNATIVE ANSWERS. While this may be so there
must be an indication that the SUGGESTED ANSWER is the primary choice
for the answer. Without this indication the examinee has no answer.
155
a. agricultural and marine food products in their original
state,
b. livestock and poultry of
1) a kind generally used as, or yielding or producing
foods for human consumption;
2) and breeding stock and genetic materials therefor.
[NIRC of 1997, Sec. 109 (1) (A), 1 st par.as amended by Rep. Act No. 9337,
reiterated by the TRAIN, arrangement and numbering supplied]
**
2. Is the sale of fresh vegetables and fish by Aling
Toneng at her pwesto in the Pamilihang Bayan ng San
Jose, Batangas subject to VAT ?
SUGGESTED ANSWER: No. The sale of agricultural
and marine products are VAT exempt. [NIRC of 1997, Sec. 109 (1)
(A), 1st par.as amended by Rep. Act No. 9337, reiterated by the TRAIN]
**3.
Is the sale of orchids by a flower shop in
Dangwa, Sampaloc, Manila which raises its flowers in
Benguet subject to VAT ?
SUGGESTED ANSWER: Yes. It is subject to the 12% VAT
because flowers are non-food agricultural items. Only agricultural
food items are exempted from VAT . [NIRC of 1997, Sec. 109 (1) (A), as
amended by Rep. Act No. 9337, reiterated by the TRAIN)
**
4. On August 3, 2012, the Bureau of Internal
Revenue (BIR) issued RMC No. 35-2012, entitled "Clarifying
the Taxability of Clubs Organized and Operated Exclusively
for Pleasure, Recreation, and Other Non-Profit
Purposes," which was addressed to all revenue officials,
employees, and others concerned for their guidance
regarding among others the Valued Added Tax (VAT)
liability of the said recreational clubs.
RMC No. 35-2012 provides that "the gross receipts of
recreational clubs including but not limited to membership
fees, assessment dues, rental income, and service fees
are subject to VAT." As basis, the BIR relied on Section
105, Chapter I, Title IV of the 1997 NIRC, which states that
even a nonstock, nonprofit private organization or
government entity is liable to pay VAT on the sale of goods
or services.
156
Is the imposition of VAT under RMC No. 35-2012
valid ?
SUGGESTED ANSWER: No. The Supreme Court declared
invalid “the BIR's interpretation in RMC No. 35-2012 that membership
fees, assessment dues, and the like are part of ‘the gross receipts of
recreational clubs’ that are ‘subject to VAT.” [Association of NonProfit Clubs,
Inc. (ANPC), etc., v. Bureau of Internal Revenue (BIR), etc., G.R. No. 228539, 26 June
2019]
“It is a basic principle that before a transaction is imposed
VAT, a sale, barter or exchange of goods or properties, or sale of a
service is required.” (Ibid.) “This is true even if such sale is on a cost-
reimbursement basis.” (Ibid.) ,
Membership fees, assessment dues, and the like are not
subject to VAT because in collecting such fees, the club is not selling
its service to the members. Conversely, the members are not buying
services from the club when dues are paid; hence, there is no
economic or commercial activity to speak of as these dues are
devoted for the operations/maintenance of the facilities of the
organization. As such, there could be no “sale, barter or exchange of
goods or properties, or sale of a service" to speak of, which would
then be subject to VAT under the 1997 NIRC. (Ibid.)
157
application with the Commissioner of Internal Revenue
(CIR) up to the Supreme Court.
SUGGESTED ANSWER:
a. An administrative claim for refund of or issuance of tax
credit for unutilized excess input VAT must be filed with the CIR within
two (2) years counted from the last day of the quarter when the
relevant zero-rated sale was made [NIRC of 1997, Sec. 112 (A)] pertaining
to the input Value Added Tax (VAT) regardless of whether said tax
was paid or not. (Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,
565 SCRA 154)
b. The claim for refund must be accompanied with a
statement under oath that all documents to support the claim has
been submitted at the time of filing of the claim for refund. (RMC 54-14)
c. The CIR shall within ninety (90) days from the date of
submission of complete documents to support the application filed
VAT-registered person on his zero-rated or effectively zero rated sale
to decide the matter. [Ibid., Sec. 112 (C), 1st par., as amended by the TRAIN, in
relation to Sec. 112 (A), to reduce the period from 120 days to 90 days.]
d. In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the CIR to act on the
application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the ninety (90) day period, appeal
the decision or the unacted claim with the Court of Tax Appeals (CTA)
division [Ibid., Sec. 112 (C), 2nd par., as amended by the TRAIN]
As a general rule, the case would be dismissed, for premature
filing, if recourse was made to the CTA division without waiting for the
expiration of the 90-day period within which the CIR should render his
decision. The 90-day period took effect only on January 1, 2018.
Before that date the period was 120 days.
e. The adverse decision of the CTA division may be the
subject of a motion for reconsideration or new trial within fifteen (15)
days from receipt of the adverse decision, filed with the same division
that rendered the decision
f. The adverse decision of the CTA division on the motion
for reconsideration or new trial, shall the the subject of a petition for
review filed within fifteen (15) days from receipt of the decision filed
with the CTA en banc.
g. The adverse decision of the CTA en banc shall, within
fifteen (15) days from receipt be the subject of a petition for review on
certiorari filed with the Supreme Court. The period may be extended
to thirty (30) days upon payment of the requisite docketing fee.
158
*** 2. Tiktok Inc. (TI) filed its quarterly tax returns for
the calendar year 2019 as follows:
First quarter – April 25, 2019
Second quarter – July 23, 2019
Third quarter – October 25, 2019
Fourth quarter – January 27, 2020
On December 22, 2020, TI filed with the Bureau of
Internal Revenue (BIR) an administrative claim for refund of
its unutilized input Value-Added Tax (VAT) for the calendar
year 2019. After several months of inaction by the
Commissioner of Internal Revenue (CIR) on its claim for
refund, Tiktok, Inc, decided to elevate its claim directly to
the Court of Tax Appeals (CTA) on April 22, 2021. In due
time, the CTA denied the tax refund relative to the input
VAT of TI for the first quarter of 2019, reasoning that the
claim was filed beyond the two-year period prescribed
under Section 112 (A) of the National Internal Revenue
Code (NIRC).
(A) Is the CTA correct ?
SUGGESTED ANSWER: No. The CTA is not correct.
The phrase “within two (2) years” prescribed under Section 112
(A) of the NIRC refers to applications for administrative refund/credit
filed with the CIR and not to appeals made to the CTA.
Applying the two-year period to judicial claims would render
nugatory Section 112 (C) of the NIRC of 1997, as amended by the
TRAIN which already provides for a specific 90-day period within
which a taxpayer should appeal to the CTA the decision or inaction of
the CIR.
The 90 period within which the CIR must decide is counted from
December 22, 2020 and ends on March 29, 2021. The BIR’s inaction
after 90 days or on March 29, 2021 is a deemed an adverse decision
on the claim, appealable to the CTA within 30 days from the lapse of
the 90-day period or not later than April 28, 2021.
TI has 30 days from March 29, 2021 or until April 28, 2021
within which to appeal to the CTA. The April 22, 2021 claim with the
CTA was seasonably filed.
(B) Assuming that TI filed its claim before the CTA
on February 22, 2021, would your answer be the same ?
SUGGESTED ANSWER: No. This time the CTA was correct in
denying the claim for refund.
159
The claim made before the CTA on February 22, 2021 is
premature. The 90 period within which the CIR must decide is counted
from December 22, 2020 and ends on March 29, 2021.
As of February 22, 2021 there is as yet no decision subject to
appeal because the 90-day period for the CIR to act on the claim for
refund has not yet lapsed.
160
***
3. Enumerate gifts which are not subject to
donor’s taxes.
SUGGESTED ANSWER: The following gifts are not subject to
donor’s taxes:
a. Total gifts NOT in excess of Two hundred fifty thousand
pesos (P250,000) exempt gift made during the calendar year. [NIRC of
1997, Sec. 99 (A), as amended by the TRAIN]
b. Any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign purposes shall be
exempted under the Election Code, as amended. [Ibid., Sec. 99 (B), as
amended by the TRAIN]
c. Gifts made to or for the use of the National Government or
any entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government. [Ibid., Sec.
101 (A) (1), as amended by the TRAIN, and Sec. 101 (B) (1)]
d. Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthropic organization or
research institution or organization: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for
administration purposes. [Ibid,, Sec. 101 (A) (2), as amended by the TRAIN, and
Sec. 101 (B) (2), paraphrasing supplied]
e. Donations of intangibles subject to reciprocity.
f. Donations for athlete’s prizes and awards.
g. Donations under special laws.
h. Donations under international agreements.
Author’s observation. The reader should distinguish between those
donations that are not covered under the NIRC of 1997 and those that are
exempt under the provisions of the said law. Donations that are not covered
under the NIRC of 1997 are not subject to donor’s taxes. These were
discussed under Situs of Taxation, supra.
**
4. Can you name one kind of gift that is exempt
from donor’s tax which is extendible to both residents and
non-residents or non-citizens of the Philippines? Include
qualifications, if any.
SUGGESTED ANSWER: A gift made in favor of an educational
and/or charitable, religious, cultural or social welfare organization or
research institution or organization. [NIRC of 1997, Sec.. 101 (A) (3) and (B)
(2)]
The qualification for said gift to be exempt from donor’s tax is
that not more than thirty per centum (30%) of said gifts shall be used
by the donee for administration purposes. (Ibid.)
161
Gifts made to or for the use of the National Government
or any entity created by any of its agencies which is not conducted
for profit, or to any political subdivisions of the said Government [NIRC
of 1997, Sec. 101 (A), (2), and (B) (1)] are exempted from donor’s tax
whether made by residents and non-residents or non-citizens of the
Philippines.
162
NOTE NOT PART OF THE ANSWER: The above answer should be
distinguished from a sale for insufficient consideration. There was full
consideration paid for the property but it is considered a donation to the
children because the complete absence of consideration makes the giving a
pure act of liberality. This is a characteristic of a donation.
**
8. Don Pancrasio, Filipino, married, and resident
of Pasig City, died intestate on November 15, 2021. He was
survived by his wife, Amelia and three children: Psalmir,
Darylle and Aexandra.
a. If Psalmir, one of the compulsory heirs,
renounces his share in the inheritance in favor of the other
co-heirs, is there any tax implication of Psalmir’s
renunciation ? What about the other coheirs ?
SUGGESTED ANSWER: There is no tax implication with
regard to X’s renunciation. There is a general renunciation because
there is no specific identification in favor of a specified person.
General renunciation by the compulsory heir of his share in the
hereditary estate left by the decedent is not subject to donor’s tax,
163
unless specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the hereditary
estate. [Rev. Regs. No. 2-2003, Sec. 11, 4th par.]
There is no tax implication with regard to the other coheirs
because they are not the ones required to pay the estate taxes but the
administrator of the estate of Don Pancrasio. There would a tax
implication for the other co-heirs if there is no administrator because
their share in the estate taxes would increase in the proportion of the
increase in their shares resulting from the renunciation.
b. Amelia renounced her inheritance and her share
of the conjugal property in favor of their children. The BIR
determined that there was a taxable gift and thus assessed
Amelia as a donor.
Was the BIR correct ?
SUGGESTED ANSWER: No. The BIR is only partially correct.
The renunciation by Amelia, the surviving spouse, of her share
in the conjugal partnership after the dissolution of the marriage,
resulting from the death of Don Pancrasio, in favor of her children
who are the heirs of the deceased spouse is subject to donor’s tax .
[Rev. Regs. No. 2-2003, Sec. 11, 4th par.]
This is so, because the transfer that resulted from the
renunciation of her share in the conjugal property was without
consideration.
The BIR is wrong with regard to Amelia’s renunciation of her
share in the inheritance left by the late Don Pancrasio. There was a
general renunciation by Amelia, the surviving spouse, of her share in
the hereditary estate left by the decedent which is is not subject to
donor’s tax, because it was not specifically and categorically done in
favor of identified heir/s to the exclusion or disadvantage of the other
co-heirs in the hereditary estate. (Rev. Regs. No. 2-2003, Sec. 11, 4th par.)
164
showing in the problem that not more than thirty percent (30%) of said
gifts shall be used by SJU for administration purposes.
SPMSI is exempt from the payment of the donor’s tax because
SJU is a non-stock, non-profit educational university, incorporated as a
non-stock entity, paying no dividends, governed by trustees who receive
no compensation, and devoting all its income, whether students’ fees or
gifts, donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation. [NIRC of 1997, Sec. 101 (A) (2) as amended by the
TRAIN]
b. If San Jose University (SJU) donates the three
parcels of idle land in favor of the Municipality of San Jose,
Batangas, will SJU be liable for donor’s tax ? Explain your
answer.
SUGGESTED ANSWER: No. Exempt from donor’s tax are
gifts made to or for the use of any political subdivisions of the said
National Government such as the Muncipality of San Jose, Batangas .
[NIRC of 1997, Sec. 101 (A), (1), and (B) (1), as amended by the TRAIN]
**
10. Spouses Jerome and Lily de la Cruz, both
Filipino citizens are the owners of a small residential house
and lot in Lipa City. After the recent wedding of their son,
Mark, to Annie, the spouses donated said real property to
them. At the time of donation, the real property has a fair
market value of P1 million.
a. Are Mark and Annie subject to income tax for
the value of the real property donated to them ? Explain.
SUGGESTED ANSWER: No. The giving was a pure act of
liberality that is considered as a gift and excluded from gross income
hence not subject to income tax.
b. Are Jerome and Lily subject to donor’s tax ? If
so, how much is the taxable gift of each spouse and what
rate shall be applied to the gift ? Explain.
SUGGESTED ANSWER: Yes. The total value of the donation
is P1million which if divided between the spouses Jerome and Lily,
would result to a donation worth P500,000.00 for each of them.
If they would donate the P500,000.00 equally between Mark
and Lily, both Jerome and Lily would have an gift of P250,000.00
each for their donation to Mark because the first P250,000.00 net
donation is exempt from donor’s tax. After deducting the first
P250,000.00 the balance of P250,000.00 shall be subject to the 6%
donor’s tax.
165
Assuming that the donation given to Mark and Annie were given
during the same calendar year, then the total donation of P500,000.00
made to Annie (P250,000.00 each from Jerome and Lily) would not
anymore be subject to the first P250,000.00 exemption because the
spouses already availed of the same when they made the donation of
Mark.
Consequently, the Jerome and Lily shall pay the 6% donor’s tax
on their donation of P250,000.00 each they made to Annie.
166
SUGGESTED ANSWER: No. Exempt donations for campaign
purposes are not deductible from gross income for income tax
purposes because such amounts did not help earn the income.
Furthermore, they are not among those which are considered as
charitable and other contributions, which are allowable deductions.
d. Would your answers still be the same, if instead
of Mr. Rodrigo it was his corporation that made the
donation ?
SUGGESTED ANSWER: No more for my answers to
questions to a and b, but still the same for the answer to question c.
Corporations are not allowed to make donations for partisan
political activities including for political campaign purposes. The tax
exemption provided for by the Election Code should be construed
strictly against the taxpayers. Corporations are prohibited from
making political contributions.
No corporation, domestic or foreign, shall give donations in aid of
any political party or candidate or for purposes of partisan political
activity. [Corp. Code, Title IV, Sec. 36.9]
167
In this manner Alexandra does not have to pay any donor’s tax,
because the donations, made during each of the calendar years, 2021
and 2022, not exceeding Two hundred fifty thousand pesos
(P250,000) are exempt gifts [NIRC of 1997, Sec. 99, as amended by the TRAIN]
Would Atty. Reyes’ answer be the same despite the
fact that Alexandra Baldago’s “ajijada” is not even related
to her whether by affinity or consanguinity ?
SUGGESTED ANSWER: Yes. The special rate of 30% for
donations to strangers was eliminated by the TRAIN. The rate is now
6% in excess of the first P250,000.00 for donations made during the
calendar year.
168
What criminal cases fall within the exclusive original
jurisdiction of the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts ?
SUGGESTED ANSWER: Jurisdiction over violations of criminal
offenses arising from violations of the National Internal Revenue Code or
Tariff and Customs Code (now Customs Modernization and Tariff Act) and
other laws administered by the Bureau of Internal Revenue or the Bureau of
Customs where the principal amount of taxes and fees, exclusive of charges
and penalties, claimed is less than One million pesos (P1,000,000.00) or
where there is no specified amount claimed and the imposable penalty is not
exceeding six (6) years imprisonment shall be tried by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts. [Rep. Act
No. 1125, Sec. 7.b (1), as amended by Rep. Act No. 9282, in relation to B.P. Blg. 129,
Sec. 32 (2), as amended by Rep. Act No. 7691]
169
COURT OF TAX APPEALS, IN DIVISIONS
170
(4) Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected,
fines, forfeitures of other penalties in relation thereto, or other
matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
(5) Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review from decisions of
the Commissioner of Customs adverse to the Government
under Section 2315 of the Tariff and Customs Code (now Secs.
1127 & 1128, Customs Modernization and Tariff Act); and
(6) Decisions of the Secretary of Trade and Industry,
in the case of nonagricultural product, commodity or article, and
the Secretary of Agriculture, in the case of agricultural product,
commodity or article, involving dumping and countervailing
duties under Section 301 and 302, respectively, of the Tariff
and Customs Code (now Secs. 711 & 713, Customs
Modernization and Tariff Act), and safeguard measures under
Republic Act No. 8800, where either party may appeal the
decision to impose or not to impose said duties;” (RRCTA, Rule 4,
Sec. 3, words in parenthesis supplied)
**2.
What is the exclusive original jurisdiction of
Court of Tax Appeals, in divisions, over collection of
taxes ?
SUGGESTED ANSWER: The Court in Divisions shall exercise
“Original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties, where
the principal amount of taxes and fees, exclusive of charges and
penalties, claimed is one million pesos or more ” [A.M. No. 05-11-07-CTA,
November 22, 2005, RRCTA, Rule 4, Sec. 3 (c) (1)]
171
**4. Quezon City issued a notice of assessment
against Mondejar, Inc. for deficiency real property taxes for
the taxable years 2017 to 2020 in the amount of PhP 20
million. Mondejar paid the taxes under protest and
instituted a complaint entitled “Recovery of Illegally and/or
Erroneously-Collected Local Business Tax, Prohibition
with Prayer to Issue TRO and Writ of Preliminary
Injunction” with the RTC of Quezon City.
The RTC denied the application for TRO. Its motion
for reconsideration having been denied as well, Mondejar
filed a petition for certiorari with the Court of Appeals (CA)
assailing the denial of the TRO.
Will the petition prosper ?
SUGGESTED ANSWER: No because the Court of Appeals has no
jurisdiction. The petition should have been filed with the Court of Tax
Appeals (CTA).
It was once held that the CTA has certiorari powers over the issue of
grave abuse of discretion on the part of the RTC in issuing an interlocutory
order in cases falling within the exclusive jurisdiction of the tax court, as this
is inherent to its exercise of appellate jurisdiction. (City of Manila v. Hon. Grecia-
Cuerdo, G.R. No. 175723, Feb. 4, 2014)
**
5. Does the Court of Tax Appeals (CTA) have
jurisdiction over tax cases that raise constitutional
issues ? Explain.
SUGGESTED ANSWER: Yes, the CTA has exclusive
jurisdiction over tax cases that raise constitutional issues.
“The Court of Tax Appeals has undoubted jurisdiction to pass
upon the constitutionality or validity of a tax law or regulation when
raised by the taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the lawful exercise of its
power to pass upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.
The CTA may likewise take cognizance of cases directly
challenging the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum
circulars, rulings. (Banco de Oro, etc. v. Republic of the Philippines, G.R. No.
198756, August 16, 2016)
172
**
6. What procedural remedy is available in order to
raise constitutional issues before the Court of Tax Appeals
(CTA) ? Explain.
SUGGESTED ANSWER: Prohibition may be filed to question
the constitutionality of a law.
“Generally, the office of prohibition is to prevent the unlawful
and oppressive exercise of authority and is directed against
proceedings that are done without or in excess of jurisdiction, or with
grave abuse of discretion, there being no appeal or other plain,
speedy, and adequate remedy in the ordinary course of law. It is the
remedy to prevent inferior courts, corporations, boards, or persons
from usurping or exercising a jurisdiction or power with which they
have not been vested by law.” (Southern Luzon Drug Corporation v. The
Department of Social Welfare and Development, G.R. No. 199669, April 25, 2017)
“This is, however, not the lone office of an action for
prohibition.” There was an instance where “prohibition was also
recognized as a proper remedy to prohibit or nullify acts of executive
officials that amount to usurpation of legislative authority.” (Ibid.)
173
**9. First E-Bank filed with the Regional Trial Court
(RTC), a petition for declaratory relief seeking to declare as
invalid Revenue Memorandum Circular No. 65-2012 (RMC
No. 65-2012) entitled “Clarifying the Taxability of
Association Dues, Membership Fees and Other
Assessments/Charges Collected by Condominium
Corporations. The RTC took cognizance and declared as
invalid RMC No. 65-2012 for it purportedly expanded the
law, created an additional tax burden on condominium
corporations, and was issued without the requisite notice
and hearing,
a. Was the trial court correct when it resolved the
petition for declaratory relief ?
SUGGESTED ANSWER: No. A petition for declaratory relief is
not the proper remedy to seek the invalidation of a Revenue
Memorandum Circular. (In the Matter of declaratory relief on the invalidity of BIR
Revenue Memorandum Circular No. 65-2-12. “ClarIfying the taxability of association
dues, membership fees and other assessments/charges collected by condominium
corporations”, G.R. No. 215801, January 15, 2020) Certiorari or prohibition, not
declaratory relief, is the proper remedy to assail the validity or
constitutionality of executive issuances. (Ibid.)
One of the requisites for declaratory relief is that it must be filed
before any breach or violation of an obligation. Thus, there is no actual
case involved in a Petition for Declaratory Relief. It cannot, therefore,
be the proper vehicle to invoke the judicial review powers to declare a
statute unconstitutional.
It is elementary that before the Supreme Court can rule on a
constitutional issue, there must first be a justiciable controversy. A
justiciable controversy refers to an existing case or controversy that is
appropriate or ripe for judicial determination, not one that is
conjectural or merely anticipatory. (Ibid.)
b. If the trial court was not correct when it resolved
the petition for declaratory relief, should it dismiss the
petition ?
SUGGESTED ANSWER: No. The case “has far-reaching
implications and raises questions that need to be resolved for the
public good; or if the assailed act or acts of executive officials are
alleged to have usurped legislative authority.” (In the Matter of
declaratory relief on the invalidity of BIR Revenue Memorandum Circular No.
65-2-12. “ClarIfying the taxability of association dues, membership fees and
other assessments/charges collected by condominium corporations”, G.R. No.
215801, January 15, 2020)
174
**
10. Since a petition for declaratory relief is not the
proper procedural remedy to raise constitutional issues are
there any instances when petition for declaratory relief may
be treated as one for prohibition ? If so give examples.
SUGGESTED ANSWER: Yes, if the case has far-reaching
implications and raises questions that need to be resolved for the
public good; or if the assailed act or acts of executive officials are
alleged to have usurped legislative authority.” (In the Matter of declaratory
relief on the invalidity of BIR Revenue Memorandum Circular No. 65-2-12. “ClarIfying
the taxability of association dues, membership fees and other assessments/charges
collected by condominium corporations”, G.R. No. 215801, January 15, 2020)
a. A petition for declaratory relief on the subject of VAT was
treated as one for prohibition. This is so because “the imposition of
VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the
tollways everyday, but more so on the government’s effort to raise
revenue for funding various projects and for reducing budgetary
deficits.” (Ibid.)
b. A petition for declaratory relief seeking to declare as
invalid Revenue Memorandum Circular No. 65-2012 (RMC No. 65-
2012) entitled ”Clarifying the Taxability of Association Dues,
Membership Fees and Other Assessments/Charges Collected by
Condominium Corporations was treated as one for prohibition. This is
so because “RMC No. 65-2012 has far-reaching ramifications among
condominium corporations which have proliferated throughout the
country. For numerous Filipino families, professionals, and students
have, for quite sometime now, opted for condominium living as their
new way of life. The matter of whether indeed the contributions of unit
owners solely intended for maintenance and upkeep of the common
areas of the condominium building are taxable is imbued with public
interest. Suffice it to state that taxes, being the lifeblood of the
government, occupy a high place in the hierarchy of State priorities,
hence, all questions pertaining to their validity must be promptly
addressed with the least procedural obstruction.” (Ibid.)
175
May this action of the Commissioner of Internal Revenue
(CIR) be deemed a denial of Harold’s request for reconsideration
to entitle him to appeal to the Court of Tax Appeals (CTA) ?
Decide with reasons.
SUGGESTED ANSWER: Yes. Not only is the Notice the only
response received: its content and tenor supports the theory that it was the
CIR’s final act regarding the request for reconsideration. The very title
expressly indicated that it was a final notice prior to seizure of property.
(Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11,
2001)
176
(3) Tax collection cases decided by the Regional Trial
Courts in the exercise of their original jurisdiction involving final
and executory assessments for taxes, fees, charges and
penalties, where the principal amount of taxes and penalties
claimed is less than one million pesos;
(b) Decisions, resolutions or orders of the Regional Trial
Courts in local tax cases decided or resolved by them in the exercise
of their appellate jurisdiction;
(c) Decisions, resolutions or orders of the Regional Trial
Courts in tax collection cases decided or resolved by them in the
exercise of their appellate jurisdiction;
(d) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in the exercise of
its exclusive original jurisdiction over tax collection cases;
(e) Decisions of the Central Board of Assessment Appeals
(CBAA) in the exercise of its appellate jurisdiction over cases involving
the assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals;
(f) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in Division in the exercise of
its exclusive original jurisdiction over cases involving criminal offenses
arising from violations of the National Internal Revenue Code or the
Tariff and Customs Code (now Customs Modernization and Tariff Act),
and other laws administered by the Bureau of Internal Revenue or
Bureau of Customs. [Rep. Act No. 1125, Sec. 7 (a), as amended by Rep. Act No.
9282; A.M. No. 05-11-07-CTA, November 22, 2005, RRCTA, Rule 4, Sec. 2,
arrangement, numbering and words in parenthesis supplied]
NOTE NOT PART OF THE ANSWER: The CTA en banc’s jurisdiction
is limited only to an appellated review
177
c. An appeal from a decision or resolution of the Court of Tax
Appeals in Division on a motion for reconsideration or new trial shall be
taken to the Court of Tax Appeals en banc by filing before it a petition for
review as provided in Rule 43 of the Rules of Court.” [RRCTA, Rule 8, Sec. 4 (b)]
To standardize the appeal periods provided in the Rules and to
afford litigants fair opportunity to appeal their cases, it is deemed
practical to allow a fresh period of 15 days within which to file the
notice of appeal in the Regional Trial Court, counted from receipt of
the order dismissing a motion for a new trial or motion for
reconsideration.” [Domingo Neypes v. Court of Appeals, et al., 469 SCRA 633
(2005)]
Supreme Court
PRESCRIPTION
178
or fraudulent, or no return was filed, the deficiency taxes may be collected
even without an assessment within ten (10) years from discovery of the
falsity, fraud or failure to file the tax return. If there is an assessment made
upon a false or fraudulent return, or no return was filed, then the prescriptive
period is five (5) from issuance of an assessment notice. This is the same
period for the payment of an assessment issued within the period agreed upon
between the BIR and the taxpayer.
Lastly, the prescriptive period for a refund is within two (2) years
from payment of the tax sought to be refunded.
**2. State the instances where the general three (3) year
period for assessment does not apply.
SUGGESTED ANSWER: The following are the instances where an
assessment could be made despite the lapse of three (3) years from the time
the return was filed or should have been filed whichever is the later:
a. In case of a false or fraudulent return to evade the
payment of a tax. At anytime within ten (10) years after the discovery
of the falsity or fraud. [NIRC of 1997, Sec. 222 (a)]
b. In case of failure to file a return. At anytime within ten (10)
years after the discovery of the omission to file a return. (Ibid.)
c. If before the expiration of the three (3) year period for the
assessment of the tax, there is an agreement in writing between the taxpayer
and the BIR Commissioner.
The period agreed upon which may be extended by subsequent written
agreements made before the period previously agreed upon. [Ibid., Sec. 222 (b)]
The assessment issued in this instance is known as an “extended assessment”.
NOTE NOT PART OF THE ANSWER: Do not confuse the above instances
with the instances where the prescriptive periods are suspended or do not run.
The provisions of the Civil Code on prescription does not apply to tax cases
because the NIRC of 1997 being a special law takes precedence over a general law,
the Civil Code. Furthermore, the provisions of the Tax Code, were crafted to ensure
expeditious collection of tax money to ensure the continuous delivery of government
services.
179
a. for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty (60) days thereafter;
b. when the taxpayer requests for a reinvestigation which is
granted by the Commissioner;
c. when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or
collected.
Where the summons to the taxpayer-defendant was not served because
the defendant could not be located. The period within which the defendant’s
whereabouts are not known suspends the running of the prescriptive period .
(Republic v. Philips, CA-G.R. No. 66236, November 20, 1983)
d. when the warrant of distraint or levy is duly served upon
the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located;
e. and when the taxpayer is out of the Philippines. (NIRC of
1997, Sec. 223, arrangement, numbering, and paraphrasing supplied)
NOTE NOT PART OF THE ANSWER: In all of the above instances, the BIR
is effectively given extended periods within which to assess or collect the intetrnal
revenue taxes. These instances are favorable to the BIR.
What about the instances when the running of the
prescriptive period are not suspended ?
a. If the taxpayer informs the Commissioner of any change in
address, the running of the Statute of Limitations will not be suspended.
(NIRC of 1997, Sec. 223)
b. Where an information return indicated therein the taxpayer’s
new address as its “present address”, the same falls short of the legal
requirement for the suspension of the prescriptive period. The law clearly
states that the prescriptive period will not be suspended only “if the taxpayer
informs the Commissioner of any change in address.” (Afisco Insurance
Corporation v. Court of Appeals, et al., G.R. No. 112675, January 25, 1999)
c. If the defendants whereabouts are known, the prescriptive
period is not suspended.
NOTE NOT PART OF THE ANSWER: The above events are favorable to
the taxpayer because the prescriptive periods continue to run and are not extended. So
the BIR could not anymore assess or collect.
180
b. The waiver must be in the proper form prescribed by RMO
20- 90. The phrase "but not after __________ 20 __", which indicates
the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription, should be filled up.
(Commissioner of Internal Revenue v. Systems Technology Institute, Inc., G.R. No.
220835, July 26, 2017)
c. The waiver must be for a definite period beyond the ordinary
prescriptive periods for assessment and collection. The period agreed upon
can still be extended by a subsequent written agreement, provided that it is
executed prior to the expiration of the first period agreed upon. (Bank of
Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 139736, October 17, 2005)
d. The waiver must be signed by the taxpayer himself or his
duly authorized representative. In the case of a corporation, the waiver
must be signed by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such delegation
should be in writing and duly notarized. (Commissioner of Internal Revenue v.
Systems Technology Institute, Inc., G.R. No. 220835, July 26, 2017)
e. The Commissioner of Internal Revenue (CIR) or the
revenue official authorized by him must sign the waiver indicating that
the BIR has accepted and agreed to the waiver. The date of such
acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must
make sure that the waiver is in the prescribed form, duly notarized,
and executed by the taxpayer or his duly authorized representative.
(Ibid.)
Thus, neither implied consent can be presumed nor can it be
contended that the waiver required under the Tax Code is one which is
unilateral nor can it be said that concurrence to such an agreement is a mere
formality because it is the very signatures of both the CIR and the taxpayer
which give birth to such a valid agreement. (Commissioner of Internal Revenue v.
Court of Appeals, G.R. No. 115712, February 25, 1999)
f. Both the date of execution by the taxpayer and date of
acceptance by the Bureau should be before the expiration of the
period of prescription or before the lapse of the period agreed upon in
case a subsequent agreement is executed. (Commissioner of Internal
Revenue v. Systems Technology Institute, Inc., G.R. No. 220835, July 26, 2017)
g. The waiver must be executed in three copies, the original
copy to be attached to the docket of the case, the second copy for the
taxpayer and the third copy for the Office accepting the waiver. The
fact of receipt by the taxpayer of his/her file copy must be indicated in
the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement. (Ibid.)
*
5. What should the BIR do when the prescriptive
period for the assessment of a tax deficiency is about to
181
prescribe but the taxpayer has not yet complied with the
BIR requirements for the production of books of accounts
and other records to substantiate the claimed deductions,
exemptions or credits?
SUGGESTED ANSWER: The BIR should issue a jeopardy
assessment coupled with a letter of demand.
When as in this case the BIR has reason to believe that the assessment
and collection of a deficiency tax will be jeopardized by delay because of the
taxpayer’s failure to comply with the audit and investigation requirements to
present his books of accounts and/or pertinent records, or to substantiate all
or any of the deductions, exemptions, or credits claimed in his return.
182
*7. “X”, a taxpayer, received his notice of assessment
from the BIR on May 5, 2013 requiring him to pay a deficiency
tax of P50,000.00 within thirty 30 days from notice. On May 28,
2014 “X” ask for and was granted a reinvestigation. The
reinvestigation was terminated on June 18, 2020, with the
Commissioner of Internal Revenue maintaining the original
assessment of P10,000.00. Having defaulted in payment “X” was
sued, today April 26, 2021 in the Court (RTC) of Pangasinan for
the collection of the deficiency tax. “X” pleads prescription. Will
the government suit prosper? Reasons. (1976, amount and dates
supplied)
SUGGESTED ANSWER: No. The RTC of Pangasinan has no
jurisdiction to entertain the case considering that the amount of the tax is only
P50,000.00. Since the RTC is outside Metro Manila, it would have
jurisdiction only if the basic tax is P300,000.00 or over but does not reach P1
million.
183
This is so because the BIR itself recognized that the return is not false or fraudulent, when it did
not impose the fraud surcharge
184
November 11, 2021 within which to issue the assessment notice. Thus, the
issuance of the assessment on August 5, 2021 was within the three (3) year
prescriptive period.
185
petition, alleged that the claim for refund was filed beyond the
reglementary period.
Did the claim for refund prescribe ?
SUGGESTED ANSWER: No. The tax is considered as having been
paid on 10 January 2020, the date when the income tax return was filed. The
income tax return was deemed filed on 10 January 2020, the date when the
written claim for refund was made because the written claim for refund is
made by ticking the appropriate box in the income tax return.
Thus, it has a period of two years from that date or until 11 January
2022 within which to file its petition with the Court of Tax Appeals. The
petition filed on 02 March 2021 was seasonably filed.
186
SUGGESTED ANSWER: Yes. The collection of taxes may be
barred by prescription.
The prescriptive period for collecting internal revenue taxes is three
(3) years from the issuance of an assessment notice.
Where the return is false or fraudulent, or no return was filed, the
deficiency taxes may be collected even without an assessment within ten (10)
years from discovery of the falsity, fraud or failure to file the tax return.
If there is an assessment made upon a false or fraudulent return, or no
return was filed, then the prescriptive period is five (5) years from issuance
of an assessment notice. This is the same period for the payment of an
assessment issued within the period agreed upon between the BIR and the
taxpayer.
Collection of taxes undertaken by the BIR beyond the periods above
stated would be barred by prescription.
*** 15. In connection with the income tax return for 2014
filed by Darylle , an assessment was made in January 2020.
Darylle asked for a reinvestigation, which was granted. After
reinvestigation, another assessment was made by the
Commissioner of Internal Revenue on June 1, 2020. Has the
period of collection of the income tax due from Darylle for the
year 2014 expired ? Explain your answer.
SUGGESTED ANSWER: Yes. The period of collection of the
income due from Darylle for the year 2014 has expired.
The Bureau of Internal Revenue has a period of three (3) years from
the filing of the income tax return, or when it should have been filed to make
an assessment.
The income tax return was for the 2014 income so it should have been
filed not later than April 15, 2015. Since, there is no showing that the return
filed by Darylle was made beyond April 15, 2015 and that there exists
fraud, then the BIR has only up to April 16, 2018 within which to make the
assessment. The assessment made in January 2020 was therefore made out of
time. Taxes could not be collected on a prescribed assessment.
NOTE NOT PART OF THE ANSWER: The examinee should be careful in
answering problems similar to the above problem which lack factual basis. There was
no showing when the return was filed, neither was there a showing whether the return
was fraudulent. Finally, the question refers to collection, not assessment.
Assumptions should be made upon which your answer should be based.
187
alleged tax liability, while Bian moved for a reinvestigation which
was granted by the Commissioner. The reinvestigation of Bian
was terminated in January 2020, reiterating the assessment of
P25,000.00 of which Bian was duly informed. In January 2020,
Annie was finally furnished with the details requested for. In
2021, the government levied on the properties of Annie and Bian
to answer for their tax liabilities mentioned above. Was the levy
on the properties of Annie and Bian valid and proper ? Discuss.
SUGGESTED ANSWER: No. The levy on the properties of
Annie and Bian was not proper because the right of the government to
collect was already lost through prescription.
In March 2019 when Annie requested for a copy of the
detailed computation and Bian moved for a reinvestigation, the
January 2017 assessment was already final and collectible. This is so,
because Annie and Bian did not seasonably dispute the assessment
within 30 days from receipt. Even if there is no showing of the date
when Annie and Bian received the assessments in January 2017, it
could be presumed as having been furnished by the BIR to them
within a reasonable period of time from January 2017.
In view of the foregoing, the government has a period of
only three (3) years from the time the assessment notice was issued in
January, 2017. This is so because there is no showing that the return
filed was false or fraudulent, or that there is a waiver of the
prescriptive period by either Annie or Bian. Presupposing that the
assessment became final in February 2017 for failure on the part of
Annie and Bian to seasonably dispute the same, then the government
had only three (3) years from in January, 2017 up to February, 2020
within which to collect.
Since the government was collecting through levy in 2021,
then it has lost its right to do so because of prescription. The levy
was therefore not valid and is improper.
NOTE NOT PART OF THE ANSWER: This is another vague question.
The answer was dependent on a lot of assumptions because there was no showing
when Annie and Bian actually received the assessment notice.
17. What is the prescriptive period for violations of
the penal provisions of the Tax Code ?
SUGGESTED ANSWER: All violations of any provision of Tax
Code shall prescribe after five (5) years. (NIRC of 1997, Sec. 281, 1st par.)
a. When does the prescriptive period start to run ?
SUGGESTED ANSWER: Prescription shall begin to run from
the day of the commission of the violation of the law, and if the same
be not known at the time, from the discovery thereof and the institution
188
of judicial proceedings for its investigation and punishment . (NIRC of
1997, Sec. 281, 2nd par.)
b. When is an offense considered as discovered ?
SUGGESTED ANSWER: An offense under the Tax Code is
considered discovered only after the manner of commission and the
nature and extent of fraud has been definitely ascertained. (RMC No.
101-90)
This occurs when the BIR renders its final decision and requires
the taxpayer to pay the deficiency tax.
c. When is the prescriptive period interrupted ?
SUGGESTED ANSWER: The prescription shall be interrupted
when proceedings are instituted against the guilty persons and shall
begin to run again if the proceedings are dismissed for reasons not
constituting jeopardy. (NIRC of 1997, Sec. 281, 3rd par.)
“The institution of the criminal action shall interrupt the running
of the period of prescription.” (RRCTA, Rule 9, Sec. 2, 2nd par.)
d. When does prescription not run ?
SUGGESTED ANSWER: The term of prescription shall not run
when the offender is absent from the Philippines. (NIRC of 1997, Sec. 281,
3rd par.)
189
c) States in his report whether or not there are
violations of the compliance requirements, whether there are
tax deficiencies, the deficiency taxes, fines and penalties due
from the taxpayer. The report shall also state whether the
taxpayer agrees with his findings that the taxpayer is liable for
deficiency taxes, fines and penalties.
1) If the taxpayer agrees, he pays the tax.
2) If the taxpayer does not agree with the
Revenue Officer’s submitted report of investigation, he
does not pay.
3. Assessment Division (Revenue Regional Office) or
Commissioner of Internal Revenue or his duly authorized
representative.
a) Reviews and evaluates the finding of the
Revenue Officer.
1) If he finds no sufficient basis, the case is
dismissed.
2) Determines that there exists sufficient
basis to assess the taxpayer for any deficiency tax, fines
and penalties,
3) Issues to the taxpayer, at least by
registered mail, a Preliminary Assessment Notice (PAN)
for the proposed assessment (NIRC of 1997, Sec. 228; Rev.
Regs. 12-99, Sec. 3.1.2) unless the case within the
exceptions where there is no need to issue a PAN in
which case there is immediately issued a formal letter of
demand (FLD) and a final assessment notice (FAN).
190
a) Does not do anything within thirty (30) days from
receipt of the FLD/FAN
1) the assessment becomes final, executory,
demandable and not appealable to the Court of Tax Appeals
(Rev. Regs. 12-99, Sec. 3.1.5, 4th par.); and
2) the BIR could avail of its administrative or
judicial remedies to collect the tax.
b) Administratively protests or disputes the assessment by
filing a request for reconsideration or reinvestigation within thirty (30)
days from receipt of the notice of assessment. (NIRC of 1997, Sec. 228, 4th
par.; Rev. Regs. 12-99, Sec. 3.1.5, 1st par.)
1) Within sixty (60) from filing of the protest
(request for reinvestigation), all relevant supporting documents
shall be submitted. (Ibid.)
2) If the documents are not seasonably submitted,
the assessment shall become final, executory, demandable, not
appealable to the Court of Tax Appeals (Ibid.), and the BIR
could avail of its administrative or judicial remedies to collect
the tax.
5. Commissioner acts on the administrative protest (request for
reinvestigation) within one hundred eighty (180) days from receipt of the
relevant supporting documents. If the protest is a request for reconsideration,
the Commissioner acts on the same within one hundred eighty (180) days
from filing of the request for reconsideration.
a) The BIR Commissioner grants the protest (request for
reinvestigation or request for reconsideration), the case is dismissed.
b) The BIR Commissioner denies the administrative
protest (request for reinvestigation or request for reconsideration) or
dispute, or
c) The BIR Commissioner does not act on the
administrative protest (request for reinvestigation within 180 days
from submission of the complete supporting documents or if it’s a
request for reconsideration within 180 days from filing of the protest)
or dispute.
6. Taxpayer
a) Receives the BIR Commissioner's denial of his
administrative protest (whether request for reinvestigation or
reconsideration) or dispute
1) within thirty (30) days from receipt of the denial,
appeals the decision of the BIR Commissioner to the Court of
Tax Appeals in division by means of a petition for review
coupled with a motion for the issuance of an order
suspending the collection of the tax pending resolution of the
petition.
191
2) If the taxpayer does not seasonably interpose an
appeal, the decision of the BIR Commissioner denying his
administrative protest (whether request for reinvestigation or
request for reconsideration), or dispute, the assessment
becomes final, executory, demandable (Rev. Regs. 12-99, Sec. 3.1.5,
5th par.), and not anymore appealable to the Court of Tax
Appeals. The BIR could then avail of its administrative or
judicial remedies to collect the tax.
3) A denial by the Commissioner’s duly
authorized representative may be elevated to the Commissioner
within thirty (30) days from receipt of the final decision by the
representative.
b) Learns of the inaction by the BIR Commissioner or
his duly authorized representative on his administrative protest or
dispute within 180 days from submission of the required documents to
support the dispute (if a request for reinvestigation) of within 180 days
from filing of the request for reconsideration;
1) Within thirty (30) days from the lapse of 180
days from the taxpayer's submission of all the relevant
supporting documents (if a request for reinvestigation) or from
the lapse of 180 days from filing of the request for
reconsideration,
(a) must interpose an appeal to the Court of
Tax Appeals division by means of a petition for review
coupled with a motion for the issuance of an order
suspending the collection of the pending the resolution
of the petition. Otherwise, the assessment shall become
final, executory, and demandable (Rev. Regs. 12-99, Sec.
3.1.5, 7th par; Rep. Act No.1125, Sec. 7, as amended by Rep. Act
No.9282), and not appealable to the Court of Tax Appeals.
The BIR could then avail of its administrative or judicial
remedies to collect the tax.
(b) If the Commssioner does not act within
the 180 period described above, the taxpayer may decide
to wait for a denial by the BIR and when the denial is
received, the taxpayer would have thirty (30) days from
receipt of the denial within which to appeal to the Court
of Tax Appeals division. Failing to so appeal, the denial
would attain a state of finality and the BIR could then
avail of its administrative or judicial remedies to collect
the tax.
7. The Court of Tax Appeals
a) The Court of Tax Appeals division has a period
of twelve (12) months from the time the case is submitted for
192
decision within which to decide. (Rep. Act No. 1125, Sec. 13, as
amended by Rep. Act. No. 9282)
b) The CTA division grants the petition or reverses
the decision of the BIR Commissioner in which case the
Commissioner may, within fifteen (15) days from receipt, files
a motion for reconsideration or new trial with the same
division. If the BIR does not do anything, the grant of the
petition results to dismissal of the case against the taxpayer.
c) The CTA division dismisses the petition or
affirms the decision of the BIR Commissioner in which case
the taxpayer may, within fifteen (15) days from receipt, files a
motion for reconsideration or new trial with the same division.
If the taxpayer does not do anything, the dismissal of the
petition results to a case against the taxpayer attaining a state
of finality and BIR could now resort to its administrative or
judicial remedies to collect the tax.
d) The party adversely affected by the decision of a
Division of the Court of Tax Appeals may file one motion for
reconsideration or new trial with the same division. A denial of
the motion for reconsideration or new trial may be the subject of
a petition for review filed with the Court of Tax Appeals, en
banc.
If the decision of the CTA division is not seasonably
questioned by the party adversely affected by the decision of
the Court of Tax Appeals, the decision lapses into finality. The
assessment then becomes final, executory and demandable or of
no force and effect depending upon the nature of Court of Tax
Appeals division’s decision.
e) The Court of Tax Appeals division may grant or
deny the motion for reconsideration or new trial.
f) The party adversely affected by the decision of
the Court of Tax Appeals division on the motion for
reconsideration or new trial has a period of fifteen (15) days
from receipt within which to interpose a petition for review with
Court of Tax Appeals en banc.
The party adversely affected by the decision of the
Court of Tax Appeals en banc, may then file a verified petition
for review on certiorari with the Supreme Court.
The petition shall be filed and served, with full
payment of the docket and other lawful fees and the deposit for
costs within fifteen (15) days from receipt of the adverse
judgment. Before the expiration of the reglementary period, the
Supreme Court may for justifiable reasons grant an extension of
thirty (30) days only within which to file the petition . (ROC,
Rule 45, Sec. 2)
193
8. The Supreme Court
a) Grants the petition and reverses the decision of
the Court of Tax Appeals, or
b) Dismisses the petition or affirms the decision of
the Court of Tax Appeals.
c) A motion for reconsideration may be posed
after which the Supreme Court decision becomes final.
UNDISPUTED ASSESSMENT
1. The Commissioner of Internal Revenue files an
ordinary action for the collection of the tax before a regular trial court
or the CTA), depending upon the jurisdictional amount.
2. Court that has jurisdiction.
a) Municipal or Metropolitan Trial Court. If the
basic amount of the tax to be collected (except interests, and
surcharges) is P300,000.00 or less, then the case should be
filed before the proper Municipal or Metropolitan Trial Court
outside of Metropolitan Manila or if the court is in
Metropolitan Manila area, then the jurisdictional amount is
P400,000.00 or less. (The Rule on Summary Procedure may find
application)
1) The decision of the Municipal or
Metropolitan Trial Court shall be the subject of a notice
of appeal directed to the Regional Trial Court.
2) The decision of the Regional Trial Court
in aid of its appellate jurisdiction shall be the subject of
a petition for review directed to the Court of Tax
Appeals, en banc.
3) The decision of the CTA en banc is the
subject of a motion for reconsideration or new trial after
which the matter is elevated to the Supreme Court on a
pure question of law on a petition for review on
certiorari under Rule 45.
b) Regional Trial Court. If the basic
amount of the tax to be collected (except interests, and
surcharges) is more than P300,000.00 but less than
P1,000,000.00, the case should be filed before the
proper Regional Trial Court outside of Metropolitan
Manila or if the court is in Metropolitan Manila area,
then the jurisdictional amount is P400,000.00 or more
but less than P1,000,000.00.
1) The decision of the Regional Trial
Court shall be the subject of one motion for
reconsideration or new trial, thence of a petition
for review directed to a Court of Tax Appeals
division.
194
2) The decision of the Court of Tax
Appeals division shall be the subject of a motion
for reconsideration or motion for new trial
directed to the same Court of Tax Appeals
division that rendered the decision.
3) The resolution of the CTA
division on the subject of a motion for
reconsideration or new trial is the subject of a
petition for review directed to the Court of Tax
Appeals en banc after which the matter is
elevated to the Supreme Court on a pure
question of law on a petition for review on
certiorari under Rule 45.
Author’s Observation. The above process should be mastered because it is a
rich source of Bar problems.
195
Appeals division by filing a petition for review under Rule 42 of the Rules of
Court, with an application for the issuance of an order suspending the
collection of the tax.
If the Commissioner has not acted upon the protest despite the
expiration of the 180 day period the taxpayer has the option to wait for the
decision of the Commissioner after which the taxpayer has a period of thirty
(30) days from receipt of the decision within which to appeal to the Court of
Tax Appeals division by filing a petition for review under Rule 42 of the
Rules of Court, with an application for the issuance of an order suspending
the collection of the tax.
If the taxpayer fails to file a petition for review under Rule 42 of
the Rules of Court with the Court of Tax Appeals division within thirty
(30) days from receipt of the denial of the protest (dispute) of the final
letter of demand (FLD) and the final assessment notice (FAN), the
same shall become final, executory and demandable. (Rev. Regs. No.
12-99, Sec. 3.1.4, 9th par., as amended by Rev. Regs. No. 18-2013)
The Bureau of Internal Revenue could then utilize its
administrative or judicial remedies for collecting the tax.
If the Division’s decision is unfavorable to the taxpayer, he could then
file a motion for reconsideration or new trial with the Division within 15 days
from notice. The Division’s unfavorable action on the motion for new trial or
reconsideration may be the subject of a petition for review under Rule 43 of
the Rules of Court filed within fifteen (15) days with the Court of Tax
Appeals en banc. The adverse decision or ruling of the Court of Tax Appeals
en banc is appealable to the Supreme Court through a verified petition for
review on certiorari under Rule 45 of the Rules of Court within a period of
15 days from receipt of the Court of Tax Appeals’ adverse decision, which
period is extendible for 30 days.
If the assessment notice has become final, executory and collectible
and the BIR files a collection suit in court, the taxpayer may use affirmative
defenses such as prescription, res judicata, payment, etc. but not the negative
defenses which are deemed waived for failure to raise the same in the
administrative proceedings. Estoppel could not be raised as a defense
because the government is not estopped by the acts of its agents.
Whether the BIR intends to collect the taxes judicially or
administratively, the taxpayer may try to enter into a compromise in order to
obtain a reduction of the taxes being demanded.
*
2. The BIR issued in 2021 a final assessment
notice and demand letter against Lebmo Corporation
covering deficiency income tax for the year 2020 in the
amount of P10 Million. Lebmo Corporation earlier
requested the advice of a lawyer on whether or not it
should file a request for reconsideration or a request for
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reinvestigation. The lawyer said it does not matter whether
the protest filed against the assessment is a request for
reconsideration or a request for reinvestigation, because it
has the same consequences or implications.
a. What are the differences between a request for
reconsideration and a request for reinvestigation ?
SUGGESTED ANSWER: The differences between a request
for reconsideration as a mode of protest and a request for
reinvestigation also as a mode of protest are the following:
1) A request for reconsideration does not suspend the
running of the prescriptive period for collection of taxes while a
request for reinvestigation suspends the running of the prescriptive
period.
2) A request for reconsideration does not require the
presentation of newly discovered or additional evidence while a
request for reinvestigation requires it.
3) The period of 60 days for submission of the relevant
supporting documents does not find application to a request for
reconsideration while such period is applied to a request for
reinvestigation.
4) The failure of the Commissioner of Internal Revenue to
act on the request for reconsideration after a period of 180 days from
the filing thereof authorizes the taxpayer to file a petition for review
with the Court of Tax Appeals within a period of thirty (30) days from
the expiration of such 180 day period while for a request for
reinvestigation, the period is the expiration of the 180 day period from
the submission of the complete supporting documents.
b. Do you agree with the advice of the lawyer?
Explain your answer.
SUGGESTED ANSWER: No, in view of the foregoing
differences between a request for reconsideration and a request for
reinvestigation.
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considered in default, in which case, a Final Assessment Notice
(FAN) coupled with a Formal Letter of Demand (FLD) shall be issued
calling for payment of her deficiency tax liability, inclusive of the
applicable penalties. (Rev. Regs. No. 12-99, Sec. 3.1.1 2nd par., as amended by
Rev. Regs. No. 18-2013)
**
4. A taxpayer received on 15 January 2021, an
assessment for an internal revenue tax deficiency. the
taxpayer instead of questioning the assessment he
received on 15 January 2021, paid on 01 March 2021, the
“deficiency tax” assessed. The taxpayer requested a
refund from the Commissioner by submitting a written
claim on 01 March 2021. It was denied. The taxpayer, on
15 March 2021, filed a petition for review with the Court of
Tax Appeals. Could the petition still be entertained ?
SUGGESTED ANSWER: No. The petition could not be
entertained anymore.
When the taxpayer paid the tax assessed on 01 March 2021,
the assessment he received on 15 January 2021 has already attained
a state of finality for failure to seasonably protest the same within a
period of thirty (30) days from receipt of the assessment notice.
An assessment that has already become final, executory and
demandable for failure to appeal the same within the reglementary
period of thirty (30) days from receipt of the assessment notice, could
not be paid, apply for a refund and then if denied appeal the denial to
the Tax Court. The Tax Court can no longer amend, modify, much
less set aside such final assessment. (Adez Realty v. Inc. v. Court of Appeals,
212 SCRA 623)
The taxpayer would be doing indirectly, what he could not do directly,
that is open an assessment that has become final.
This would be disadvantageous to the government and be violative of
the life blood doctrine because the reopening might result to lower taxes or
at the very least, results to delay in collection of taxes upon which the
government depends for the continued performance of its functions.
On the other hand, a reopening that would result to increasing the tax
would violate the taxpayer’s right to due process.
198
Relleve, apprehensive because he had not yet received notice of a
decision by the Commissioner on his protest, sought your advice.
What remedy or remedies are available to the taxpayer ?
SUGGESTED ANSWER: The remaining remedy available to Mr.
Relleve is to wait for the decision of the Commissioner on the protest he
filed. If his protest is denied, he would have a period of thirty (30) days from
receipt of the denial within which to interpose a petition for review with the
Court of Tax Appeals Division.
The Commissioner has a period of 180 days from the submission of
the relevant documents on February 10, 2021 or until August 11, 2021, after
which Mr. Relleve has the option of either filing a petition for review with
the Court of Tax Appeals within a period of 30 days from the expiration of
the 180 day period or until September 9, 2021 or he could choose to wait for
the decision on the protest. In case of a denial of Mr. Relleve’s protest, he
may file the petition for review with the Court of Tax Appeals within a
period of thirty (30) days from receipt of the decision. (Rev. Regs. No. 12-99, Sec.
3.1.4, 8th par. as amended by Rev. Regs. No. 18-2013)
The 180-day period lapsed on August 11, 2021, thus Mr. Relleve has
only 30 days from August 11, 2021, or until September 9, 2018 within which
to file a petition for review with the Court of Tax Appeals in divisions.
Since, it is already September 11, 2021, then Mr. Relleve could not anymore
avail of the remedy of appeal.
He has to await the decision of the Commissioner on his protest
before he could appeal to the Court of Tax Appeals, in divisions.
*5.
In February 2021, pursuant to a Letter of
Authority (LOA) issued by the Regional Director, Mr. “A”
was assessed deficiency income taxes by the BIR for the
year 2020. He paid the deficiency. In the August 2021, Mr.
Abcede received another LOA for the same year 2020, this
time from the National Investigation Division, on the
ground that Mr. “A”’s 2020 return was fraudulent.
Mr. “A” contested the LA on the ground that he can
only be investigated once in a taxable year. Decide.
SUGGESTED ANSWER: Mr. “A” is not correct.
For income tax purposes, the examination and inspection of Mr.
“A’s tax records shall be made only once in a taxable year, except in
case of fraud as determined by the Commissioner. (NIRC of 1997, Sec.
235, 1st par.)
Mr. “A”’s 2020 return was fraudulent hence, it could be the
subject of another investigation.
a. Aside from fraud, are there any other instances
when the books of accounts and accounting records shall
be subject to examination and inspection for income tax
199
purposes may be made by internal revenue officers more
thanonce in a taxable year ? Discuss.
SUGGESTED ANSWER: Yes, in the following instances:
1) The taxpayer requests for reinvestigation.
2) Verification of compliance with withholding tax laws and
regulations.
3) Verification of capital gains tax liabilities. and
4) In the exercise of the Commissioner's power to obtain
information from other persons in which case, another or separate
examination and inspection may be made. (NIRC of 1997, Sec. 235, 1st par.,
arrangement, paraphrasing, and numbering supplied)
200
d. Bank deposit method.
e. Unit and value method.
f. Third party information or access to records method.
g. Inventory method.
h. Surveillance and assessment method.
The above methods are not exclusive in character because there may
be such methods used in the opinion of the BIR Commissioner which
clearly reflects the income.
***
7. When are the instances where a final
assessment notice (FAN) coupled with a formal letter of
demand (FLD) and may be issued even without preliminary
assessment notice (PAN) ? Othrwise stated, when shall a
PAN not a requirement before issuance of a FAN/FLD ?
SUGGESTED ANSWER: The following are the instances:
a. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the face of
the return filed by the taxpayer; or
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent; or
c. When a taxpayer who has opted to claim a refund or tax credit
of excess creditable withholding tax for a taxable period was determined to
have carried over and automatically applied the same amount claimed against
the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or
d. When the excise tax due on excisable articles has not been paid; or
e. When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment, machineries
and spare parts, has been sold, traded or transferred to non-exempt persons.
(NIRC of 1997; Sec. 228)
In the above-cited instances, a FLD/FAN shall be issued outright. (Rev.
Regs. No. 12-99, Sec. 3.1.2, last sentence as amended by Rev. Regs. No. 18-2013)
201
in 2021, the BIR officer assessed Matibag for deficiency
income tax computed as follows: P5 million (P20 million
less P15 million) x 35% = P1.75 million, without the capital
gains being allowed as tax credit. Matibag consulted a real
estate broker who said that the P1.2 million capital gains
tax should be credited from the P1.75 million deficiency
income tax.
If you were hired by Matibag as his tax consultant,
what advice would you give him to protect his interest?
Explain.
SUGGESTED ANSWER: I would advise him to protest the
assessment within a period of thirty (30) days from receipt on the
ground that the assessment is invalid for the following reasons:
a. His right to due process was violated because no pre-
assessment notice was made before the issuance of the assessment.
b. The assessment is erroneous and he should show what
is the correct computation. The income tax rate for individuals is not is
a progressive rate with a top rate of 35% on amounts of income
subject to tax exceeding P8 Million.
Since it is apparent that the gain should be subject to ordinary
income taxation, I would likewise advise him to file an application for
refund of the capital gains taxes he paid. He should file a suit for
recovery of the tax within two years from the payment of the tax if his
application for refund is not acted upon or if it is denied.
202
to the tax delinquency. If the proceeds are not sufficient, then, further
distraint or levy should be exercised.
ALTERNATIVE ANSWER: Yes. The BIR should grant
permission to pay in kind because there is no law, rule nor principle in
taxation that requires that deficiency taxes should only be paid in
cash. Furthermore, the lifeblood doctrine mandates the collection of
taxes in the most expeditious manner possible whether in cash or in
kind.
*
11. Is initiation by the BIR of criminal prosecution an
assessment notice ? Why ?
SUGGESTED ANSWER: No. The initiation by the BIR of criminal
prosecution is not an assessment notice because of the following reasons:
a. To consider the initiation of criminal prosecution as a disputed
assessment would render nugatory the requirement set by the Supreme Court
regarding final decisions of the Commissioner of Internal Revenue . (Cargo
Lane Realty Development Corporation, v. Vinzons-Chato, etc., CA-G.R. SP No. 47950, March
19, 1999)
b. An affidavit-report of BIR examiner showing computation of
tax liabilities, and recommending the issuance of a notice of assessment, is
not an assessment itself which is the subject of a motion for
reconsideration/investigation or protest by the taxpayer. This is so, because it
was not sent to the taxpayer, and does not demand payment of the tax within
a certain period of time. An assessment is deemed made only when the BIR
releases, mails or sends such notice to the taxpayer. (Commissioner of Internal
Revenue v. Pascor Realty and Development Corporation, G.R. No. 128315, June 29, 1999)
203
**12. What are the requisites of a valid assessment ?
Explain.
SUGGESTED ANSWER:
a. The investigation that resulted to the assessment must have
been authorized by a Letter of Authority.
b. It must have been preceded by a Notice of Informal
Conference, which actually took place, issued by a properly
authorized revenue officer.
c. It must have been issued within the prescriptive period for the
issuance of assessment notices.
d. As a general rule, it may be issued only after a pre-assessment
notice has been served upon the taxpayer.
The constitutional requirement for due process also finds application
in the field of taxation, especially in the matter of issuance of a deficiency tax
assessment.
The requirement of due process for the validity of a formal letter of
demand (FLD) or a final assessment notice (FAN) is complied with by
furnishing a pre-assessment notice to the taxpayer advising him that proper
taxes are being assessed. (Rev. Regs. No. 12-99, Sec. 3.1.1, 1 st par., as amended by Rev.
Regs. No. 18-2013)
e. It shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the assessment
shall be void. (Rev. Regs. No. 12-99, Sec. 3.1.3, 2 nd sentence, as amended by Rev. Regs.
No. 18-2013)
f. The taxpayer must have personally received the assessment
notice [Estate of the late Juliana Diez vda. De Gabriel v. Commissioner of Internal Revenue,
421 SCRA 266 (2004)] or a tax agent/practitioner, who is appointed by the
taxpayer. (Rev. Regs. No. 12-99, Sec. 3.1.6, last par., as amended by Rev. Regs. No. 18-
2013)
204
In short, a false return is not the same as a fraudulent return.
NOTE NOT PART OF THE ANSWER: The similarity in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax,
(3) failure to file a return, is that the tax may be assessed, or a proceeding in
court for the collection of such tax may be begun without assessmeμt, at any
time within ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. (Commissioner of Internal Revenue v. Philippine Daily Inquirer, G.R. No.
213943, March 22, 2017)
205
In the examination of his 2020 return the BIR
examiner found that Jorell Francisco failed to report this
item of P50,000.00 and assessed him a deficiency income
tax on this item, plus a 50% fraud surcharge.
a. Is the examiner correct? Explain.
SUGGESTED ANSWER: The examiner is partially correct.
The examiner is correct with respect to the deficiency
income tax. This is so, because the amount due under the Tax
Code exceeds the tax reported by the taxpayer in his return . [NIRC of
1997, Sec. 56 (B) (1)]
However, the examiner erred in imposing the 50% fraud
surcharge as it is evident that the taxpayer committed a mistake.
Mere mistake cannot be considered fraudulent intent. There is no
showing of intentional fraud (Aznar v. CTA, 103 Phil. 1167) because the
taxpayer “rectified” the mistake during the next taxable year.
b. If you were the lawyer of Jorell Francisco,
what would you have advised your client before he
included in his 2020 return the amount of P50,000.00 as
2020 income to avoid the fraud surcharge ? Explain.
SUGGESTED ANSWER: I would have advised him to show
that there was no intent to induce the government to give up its right to
collect the tax, and the failure to include the P50,000.00 was not
tainted with deception willfully or and deliberately done . (Aznar, supra)
c. Considering that Jorell Francisco had already
been assessed a deficiency income tax for 2014 for his
failure to report the P50,000.00 income, what would you
advise him to do to avoid the penalties for tax
delinquency ? Explain.
SUGGESTED ANSWER: He should immediately pay in
order not to be subject to the penalties for delinquency.
d. What would you advise Jorell Francisco to do
with regard to the income tax he paid for the P50,000.00 in
his 2020 return? In case your remedy fails, what is your
other recourse ? Explain.
SUGGESTED ANSWER: I would advise him to request that
the same be credited to the 2020 income, or be refunded on the
ground that there was a mistake in reporting it under the 2020 income.
If this fails, I would advise him to appeal to the Court of Tax Appeals
division. If the decision of the division is adverse, I would advise him
to file a motion for reconsideration or new trial and if still unavailing to
the CTA en banc and ultimately to the Supreme Court.
206
**
16. Aaron was preparing his income tax return
and had some doubt on whether a commission he earned
should be declared for the current year or for the
succeeding year. He sought the opinion of his lawyer who
advised him to report the commission in the succeeding
year. He heeded his lawyer’s advice and reported the
commission in the succeeding year. The lawyer’s advice
turned out to be wrong; in Mr. Aaron’s petition against the
BIR assessment, the court ruled against Mr. Aaron.
Is Mr. Aaron guilty of fraud ?
SUGGESTED ANSWER: No. A is not guilty of fraud as he
simply followed the advice of his lawyer.
Fraud in relation to filing income tax return is actual not constructive.
It must amount to intentional wrong doing with the sole object of which is to
avoid the tax. A mere mistake cannot be considered as fraudulent intent.
There was mere mistake as Mr. Aaron did not deliberately
escape the payment of the tax. This is evident as he merely
postponed the payment of the tax from one period to another. There
was at the most what is referred to as a false return, not a fraudulent
return.
207