SUGGES

SUGGESTE
GESTED
TE ANSWER
D ANSWERS
ER TAXA
S IN TAXATI
AXATION
TION LLAW QUESTI
AW BAR QUESTIONS
ESTI (2014-2017)
ONS (2014 Compiled
-2017) | Comp Mendoza
iled by JR Mendo za | PAGE 1
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2019 T
TAXA
AXA
AXATION
TION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

A.1
A.1.

On October 5, 2016, the Bureau of Internal Revenue (BIR) sent KLM Corp. a Final Assessment Notice
(FAN), stating that after its audit pursuant to a Letter of Authority duly issued therefor, KLM Corp. had
deficiency value-added and withholding taxes. Subsequently, a warrant of distraint and/or levy was issued
against KLM Corp. KLM Corp. opposed the actions of the BIR on the ground that it was not accorded due
process because it did not even receive a Preliminary Assessment Notice (PAN) after the BIR’s
investigation, which the BIR admitted.

(a)Distinguish a PAN from a FAN. (2%)

(b) Are the deficiency tax assessment and warrant of distraint and/or levy issued against KLM Corp. valid?
Explain. (3%)

SUGGESTED ANSWERS:

(a) A PAN is a communication issued by the Regional As Assessment

sessment Division, or any other concerned BIR Office,
informing a Taxpaye Officer,, following the review of these
axpayerr who has been audited of the findings of the Revenue Officer
findings. If the Taxpaye
axpayerr disagrees with the findings stated in the PAN, he sh
shall
all then have fifteen (15) days from
his receipt of the P
PAN
AN to file a written reply contesting the proposed assessment.

A FFAN,
AN, on the other hand, is a declar
declaration
ation of deficiency taxes issued to a tax
taxpayer
payer who:

(1) fails to respond to a PAN within the prescribed period of time, or (2) whose reply to the PAN was found to be
without merit. A FAN contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. The formal letter o off demand calling for payment of the taxpayer’
taxpayer’ss deficiency tax or taxes shall stat
statee
the facts, the law
law,, rules and regulations, or jurisprudence on w hich the assessment is based, otherwise, the formal
letter o
off demand and tthehe notice of assessment shall bbee void. If the Taxpayer disagrees with the findings stated in the
FAN, he shall then have thirty (30) days from receipt of FAN to file a p protest,
rotest, either a reque
request
st for reconsideration or a
request for re
reinvest
invest
investigation.
igation.

(b) No, the deficiency tax assessment and warr

warrant
ant of distr
distraint
aint and/or levy issued against KLM Corp. are not valid
because KLM Corp. did not receive a PAN. After the investigation of BIR, if it is determined that there exists sufficient
basis to assess the tax
taxp
payer for any deficiency tax or taxes, the BIR shall issue to the taxpayer
issue taxpayer,, at least by registered
mail, a

PAN for the proposed assessment, showing in detail the facts and the law on which the assessment is based. The
taxp
taxpay
ay
ayer
er must be infor
informed
med of his liabil
liability
ity for deficiency taxes through a PAN and the non- service of a PAN is
fatal to the validit
validity
y of the assessment.

A.2.

For purposes of value-added tax, define explain or distinguish the following terms:

(a)Input tax and output tax (3%)

(b)Zero-rated and effectively zero-rated transactions (3%)

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 (c)Destination principle (2%)

SUGGESTED ANSWERS:

(a) Input tax is the VAT that is added to the price on the purchase of goods and services, and on the importation
VAT
of goods or services; w hile an Output tax is the VAT that is calculated and charged on the sale of goods and
services, and on the lease of property from a VA
VATT-registered person. Input tax may either be a regular 12% input
VAT, a 2% transitional input VAT, or a 4% presumptive input VA
VATT; while Output tax may either be a regular 12%
VAT or 0% VAVATT.

(b)
(b)Ze
Ze
Zero-r
ro-r
ro-rated
ated transactions generally refer to the export sale of good and supply of services. The tax rate is set at
zero. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate
for the V
VAAT previously charged by suppliers.

Eff
Effectively
ectively zero-rated tr
transactions,
ansactions, however
however,, re
refer
fer to the sale of goods or supply of services to per
persons
sons or entities
whose exemption under special la laws
ws or international agreements to which the Philippines is a signatory effectively
subjects such tra
transactions
nsactions to zero rate. The seller can also claim a re refund
fund of a tax credit certificate for the VAT
previously charged to customers.

A zero
zero-r
-r
-rated
ated tr
trans
ans
ansaction
action benefits the seller
seller,, while an effe
effectively
ctively zero-r
zero-rated
ated transactions benefits the purchaser
purchaser..

(c) The des tination principle provides that the destination of the goods determines taxation or exempt
destination exemption
ion from
tax. Export sales of goods are subject tto
o 0% rate (o
(orr zero-rated), while importations o
off goods are subject to the 12%
VAT. Exports are zero-rated because the consumption of such goods will be made outside the Philippines, while
imports of goods are subj
subject
ect to 12% V VAAT because they are for consumption within the Philippines.

A.3.

All the homeowners belonging to ABC Village Homeowners’ Association elected a new set of members
of the Board of Trustees for the Association effective January 2019. The first thing that the Board
looked into is the need to increase the prevailing association dues. Mr. X, one of the trustees, proposed an
increase of 100% to account for the payment of the 12% value-added tax (VAT) on the association dues
which were being collected for services allegedly rendered “in the course of trade or business” by ABC
Village Homeowners’ Association.

(a)What constitutes transactions done “in the course of trade or business” for purposes of applying
VAT? (2%)

(b)Is Mr. X correct in stating that the association dues are subject to VAT? Explain. (3%)

SUGGESTED ANSWERS:

(a) Transactions done “in the course of tr trade

ade or business” refer to the sale, barter
barter,, exchange, lease of goods or
properties, service by persons, and the impoimportation
rtation o f goods in the regular conduct or pu
pursuit
rsuit of a commercial or an
economic activity
activity,, including transactions incidental thereto.
transactions

(b) Yes, Mr
Mr.. X is correct in stating that the association dues are subject to VA
VAT
T. Association dues, membership
fees, and other assessments and charges are ex exempt
empt from VAT but only to the extent of

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those collected on a purely reimb
reimbursement
ursement basis by homeowners’ a associations.
ssociations. In this case, the association dues
were being collected for services allegedly rendered “in the course of trade or business”
business”.. Thus, the association
dues collected by ABC V
Village
illage Homeowners’ Association are subject to VAT.

A.4.

Due to rising liquidity problems and pressure from its concerned suppliers, P. Corp. instituted a flash
auction sale of its shares of stock. P. Corp. was then able to sell its treasury shares to Z, Inc., an
unrelated corporation, for P1, 000, 000.00, which was only a little below the valuation of P Corp.’s shares
based on its latest audited financial statements. In connection therewith, P Corp. sought a Bureau of
Internal Revenue ruling to confirm that, notwithstanding the price difference between the selling price of
the shares and their book value, the said transaction falls under one of the recognized exemptions to
donor’s tax under the Tax Code.

(a)Cite the instances under the Tax Code where gifts made are exempt from donor’s tax. (3%)

(b)Does the above transaction fall under any of the exemption? Explain. (2%)

SUGGESTED ANSWERS:

(a) The following are the instances where gifts made are ex
(a)The exempt
empt from donor’
donor’ss tax:

i. 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 prprofit, politicall subdivision of the said Government; and,
ofit, or to any politica
ii. Gifts in favo
favorr of an educational and/or charitable, religious, cultural or social welfare corporatio
corporation,
n, inst
instituti
ituti
itution,
on,
accr
accredited
edited nongovernment organization, trust or philanthropic organization or research institution or
organization, not more than 3 0% of said gifts shall be used by such donee for administr
30% administration
ation purposes.

(b)
(b)No,
No, the transaction does not fall under aany
ny of the exemption. However
However,, the transaction may still be exem
exempt
pt from
donor’
donor’ss tax even when the shares o f stock were sold on a selling price that is less than the fair market value of the
shares provided that the sale is made in the ordinary course of business, in a tr transaction
ansaction which is a bona fide, at
arm’
arm’ss length, and free fro
from
m any donativ
donative
e intent.

A.5.

A, a resident Filipino citizen, died in December 2018. A’s only assets consist of a house and lot in Alabang,
where his heirs currently reside, as well as a house in Los Angeles, California, USA. In computing A’s
taxable net estate, his heirs only deducted:

1.10, 000,000.00 Pesos constituting the value of their house in Alabang as their family home;

2.200,000.00 in funeral expenses because no other expenses count be substantiated.

a. Are both deductions claimed by A’s heirs correct? Explain. (2%)

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b. May a standard deduction be claimed by A’s heirs? If so, how much and what proof needs to be
presented for the same to be validly made? (2%)

c. In determining the gross estate of A, should the heirs include A’s house in Los Angeles, California, USA?
Explain. (2%)

SUGGESTED ANSWERS:

(a) No, only the amount pert

pertaining
aining to the value of the decedent’
decedent’ss family home is deductible from the gross
estate, provided that the conditions for the deductibility of a family are com
complied
plied with. Funeral expenses are not
considered deductible items under R. A. No. 1
10963.
0963.

Estate taxation is gove

governed
rned by the s tatute in forc
force
e at the time of the death of the decedent. The tax rates and
procedures prescribed by R. A. No. 10963, otherwise known as the T ax Reform for Acceler
Tax Acceleration
ation and Inclusion Law
and R.R. No. 12-2018 shall govern the estate of dec edent who died on or after the effectivity date of the TRAIN
decedent
Law which is Janua
January
ry 1, 2018. Since the decedent died on December 2018, the oper
operative
ative law in fo
force
rce at this time is
the TRAIN Lawn. The said law remove
removed d funer
funeraal expenses from the list of deductible items for purposes of estate
taxation.

The conditions for the d

deductibility
eductibility of family home fro
from
m the gross estate of the decedent are as fo
folllows:

i. The family home must be the actual residential h

home
ome of the decedent and his family at the time of his death,
as certified by the bar
barangay
angay captain of th
the
e locality where the ffamily
amily home is situated;

ii. The total vvalue

alue of the family home must be inclu
included
ded as part of the gross esta
estate
te of the decedent; and

iii. Allowable deduction must be an amount equiv equivalent

alent to the current fair market value of the decedent’s
family home as declared or included in the gross estate; or the extent of the decedent’
decedent’ss interest (w
(whether
hether
conjugal/community
conjugal/community,, or exclusive property
property,, whichever is lower
lower,, but no
nott exceeding 10, 000,000.00 pesos. (
R.R. No. 12-20
12-2018,
18, Sec 6(7) (7
(7.2)).
.2)).

Considering that all the s aid requisites are complied with, the Php 10,000,000.00 pesos, the amount pertaining
to the vvalue
alue of the decedent’
decedent’ss family home is deduc
deductible
tible from the gross estate of A.

(b)
(b)YYes, the heirs can claim a standard deduction in the am
amount
ount of 5,000,000.00.

As provided under R.R. No. 12-2018, the value of the net estate of a citizen or resident alien of the Philippines
shall be subject to a standard deduction. A deduction in the amoun
amountt of five million pesos shall be allowed without
need o f a substantiation. The full amount of the five million pesos shall be allowed as deduction for the benefit of
the decedent (R.R.

No. 12-2018, Se
Sec.
c. 6(1). Since A is a resident filipino citizen, the heirs of the said decedent can claim a s tandard
deduction in the amount of 5,000,000.00.

(c) Yes, for estate tax purposes, the heirs should include the value of the A’s house in Los Angeles Califo
California,
rnia,
USA.

As provided under the the TRAIN Law and R.R. No. 12-2018, for purposes of computing the estate estate tax of a resident or
a Filipino citizen, all properties, real or personal, tangible o r inta
intangible,
ngible, wherever situated shall be included in
determining the gross estate. Since A was a resident Filipino citizen, the properties of A within and outside the
Philippines should be included in determining his or her gross estate. Hence,

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the heirs of A shou
should
ld include A
A’’s house in Los Angeles, C
California,
alifornia, USA in determining the latt
latter’
er’
er’ss gross estate.

A.6.

XYZ Air, a 100% foreign-owned airline company based and registered in Netherlands, is engaged in
the international airline business and is a member signatory of the International Air Transport Association.
It’s commercial airplanes neither operate within the Philippine territory nor as its service passengers
embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its airplane tickets in the
Philippines through ABC Agency, it’s general agent in the Philippines. As XYZ Air’s ticket sales, sold
through ABC Agency for the year 2013, amounted to 5,000,000. 00, the Bureau of Internal Revenue (BIR)
assessed XYZ Air deficiency income taxes on the ground that the income from the said sales
constituted income derived from sources within the Philippines.

Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident foreign corporation, it should only
be taxed for income derived from sources within the Philippines. However, since it only serviced
passengers outside the Philippine territory, the situs of the income from its ticket sales should be
considered outside the Philippines. Hence, no income tax should be imposed on the same.

Is XYZ Air’s protest meritorious? Explain. (5%)

SUGGESTED ANSWER:

No, the pro

protest
test of XYZ Air is not meritorious.

Under the law

law,, an international air carrier with no landing rights in the Philippines iiss a resident foreign corpor
corporation
ation if
its local sales agent sells and issues tickets in its behalf
behalf.. An offline international carrier sellin
selling
g passage ticke
tickets
ts in
the Philippines through a loc local
al general sales agent, is considered a resid resident
ent foreign corporation doing business
in the Philippines. As such, it is taxable on income derived from sources within the Philippines and not on Gross
Philippine Billings, subject to any applicable tax treaty
treaty.. (Ai
(Airr Cana
Canada
da vs. Com
Commiss
miss
missioner
ioner o f Internal Rev
Revenue
enue G.R. No.
169507
169507,, January 11,2016).

In the case at bar Agency,, it’s gener

bar,, XYZ Air was able to sell its airplane tickets in the Philippines through ABC Agency general
al
agent in the Philippines. As such, it is taxable on income derived from sources within the Philippines and not o n
Gross Philip
Philippine
pine Bill
Billings,
ings, subject to any applica
applicable
ble tax treaty
treaty..

A7
A7..

Differentiate tax exclusions from tax deductions. (3%)

SUGGESTED ANSWER:

Tax exc
exclusions
lusions pertain tto
o the computation of gross Inc
Income
ome while tax deductions pertain to co computation
mputation of net Income.
Tax exclusions are so
something
mething received o r earned by the taxpay
taxpayer
er which do no nott form part of gross income while tax
deductions are something spent o orr paid in earning gross income. Lastly
Lastly,, the for
former
mer is flow of wealth to the taxpaye
taxpayerr
which are not treated as part of gross income for purposes of computing the taxpayer’ taxpayer’ss taxable income due to the
following reasons
following

a.
a.it
it is exe
exempted
mpted by the fundamenta
fundamentall law;

b.
b.b.
b. It is ex
exem
em
empted
pted by a sstatute;
tatute; and

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 c. c. IItt does n
not
ot fall within the def
definition
inition of income.

On the other hand, tax deductions are the amounts which the law allows to be subtracted from gross income in
order to arrive at net income.

A.8.

B transferred his ownership over a 1,000-square meter commercial land and three-door apartment to ABC
Corp., a family corporation of which B is a stockholder. The transfer was in exchange of 10,000 shares
of stock of ABC Corp. As a result, B acquired 51% ownership of ABC Corp., with all the shares of stock
having the right to vote. B paid no tax on the exchange, maintaining that it is a tax avoidance scheme
allowed under the law. The Bureau of Internal Revenue, on the other hand, insisted that B’s alleged
scheme amounted to tax evasion.

Should B pay taxes on the exchange? Explain. (3%)

SUGGESTED ANSWER:

No, B sshould
hould not pay taxes on tthe
he said exchange.

As a general rule, upon the sale or exchange of propertyproperty,, the entire amount of the gain or loss, as the case may
be, shall be recognized. One of the accepted exceptions to th said rule is when a property is transferre transferred
d to a
corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result
of such exchange said person, alone or together with o thers, not exceeding four persons, gains control of said
corpora
corporation:
tion: provided, that stocks issued for services shall not be considered as issued in return for property (NIRC.
Sec. 40 C (6)(c)). Moreo
Moreover
ver
ver,, control, in the said case, means ownership of stocks in a corpor
corporation
ation possessing at least
totall voting power of all classes of stocks entitled to vote.
(51%) of the tota

In the case, B transferred his o wnership over a 1,000-square meter commercial land and three-door
three-door.. As a result, B
acquired 51% ownership of ABC Corp
Corp.., with all the shares of stock h
having
aving the right to vote.

A.9.

GHI Inc., is a corporation authorized to engage in the business of manufacturing ultra-high density
microprocessor unit packages. After its registration on July 5, 2005, GHI, Inc. constructed buildings and
purchased machineries and equipment. As of December 31, 2005, the total cost of the machineries and
equipment amounted to P250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory
was temporarily closed effective Sept 15, 2010. On October 1, 2010, it sold its machineries and equipment
to JKL Integrated for P300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.

(a)Is the sale of machineries and equipment to JKL Integrated subject to normal corporate income tax
or capital gains tax? Explain. (3%)

(b)Distinguish an ordinary asset from a capital asset. (2%)

SUGGESTED ANSWER:

(a) The sale of machineries and equipment to JKL Integrated is subject to normal corporacorporate
te income tax. Under S
Sec.
ec.
27 D sub. Par
Par.. 5 of the NIRC, a corporation is only subject to capital gains tax for tthe
he sale o
off

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lan
land
d and buildings. In this case, GHI Inc.
Inc.,, a corporation, sold machineries and equipment. Hence, the sale is subject
to normal corporate income tax.

(b)
(b)The
The follo
following
wing are the distinctions between an ordinary asset from a ca
capital
pital asset:

1. As to taxability
taxability,, an ordinary asset is subject to income tax; whereas, a capital asset is subject to capital gains
tax;
2. As to nature, as a rule, an ordinary asset is regularly used in the normal course of tr ade or business;
trade
whereas, a capital asset is an asset not regularly used in the normal course of tr trade
ade or business

Under Sec. 39 of the NIRCNIRC,, the term 'cap

'capital
ital assets' means property held by the taxpayer (whether or not
conn
connected
ected with his trad
tradee or business), but does not include stock in trad
tradee of the ta
taxpay
xpay
xpayer
er or other propert
propertyy of a
kind which would properl
properlyy be included in the inventory of the taxpayer if on h hand
and at the close of the taxable year
or property held by the taxp
taxpayer
ayer primarily for sale to customers in the ordinary course of his tratrade
de or business, or
property used in the trade or business, of a chara
haracter
cter which is subject to the allowance for depreciation provided in
propertyy used in trade or business of the taxpayer
Subsection (F) of Section 34; or real propert taxpayer..

A.10.

In 2018, City X amended its Revenue Code to include a new provision imposing a tax on every sale of
merchandise by a wholesaler based on the total selling price of the goods, inclusive of value-added taxes
(VAT). ABC Corp., a wholesaler operating within the city, challenged the new provision based on the
following contentions: 1. The new provision is a form of prohibited double taxation because it essentially
amounts to City X imposing VAT which was already being levied by the national government; and 2. since
the tax being imposed is akin to VAT, it is beyond the power of City X to levy the same.

Rule on each of ABC Corp.’s contentions. (5%)

SUGGESTED ANSWER:

With regard to the first contention, ABC Corp is incorrect. Under the NIRC, direct double taxation exists only when all
of the following requisites are present:

The two taxes must be im

imposed
posed on the same:

1.
1.subj
subj
subject
ect matter
matter,,

2. purpose,

3. by the same taxing auth

authority
ority
ority,,

4. within the same jurisdiction

5. during the same taxing period;

6. the tax
taxes
es must be of the same kind or character
character..

In this case, the taxing authorities are different. Hence, the tax to be imposed by the LGU is not a form o f direct
double taxation.

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With regard to the second contention
contention,, ABC Corp is incorrect. Under the LGC, LGU’ LGU’ss are empowered to enact
ordinances that will aid in their revenue generation, which is co
consonance off the fiscal autonomy of
nsonance with the principle o
LGU’
LGU’s.
s. Although the tax to be imposed is akin to V VA
AT, the LGU may nevert
nevertheless
heless impose such local business tax.

B.11.

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 (5%)

SUGGESTED ANSWER:

Mr
Mr.. D’
D’ss winnings from the casino in Pasay City
City,, worth P30,000,000.00 is subject to income tax. Under the TRAIN Law
Law,,
other prizes and winnings in excess of P10,000 shall be subject to a 20% final tax on the entire amount of the
winnings. In this case, MrMr.. D’s winnings from the casino in Pasay City are more than P10,000. Hence, it shall be
subject to income tax.

With regard to Mr
Mr.. D’
D’ss cash prize award after winning in an Olympic qualifying tournament held in Las Vegas, it is not
subject to income tax. Under the NIRC, prizes and award awardss granted to athletes in local and int
international
ernational sport
sportss
competitions and tournaments whether held in the PH or abroad and sanctioned by their national sports associations,
which in this case is the Philippine Olympic Co
Committee,
mmittee, shall not be subject to income tax.

With regard to MrMr.. D’s Lotto winnings, it is not subject tto

o income tax. Under the NIRC, any winnings through the
PCSO Lotto tha
thatt are in the amount of P10,000 or less shall be exexempt
empt from inco
income
me tax. In this case, Mr
Mr.. D won P5,000
thru the PCSO Lott
Lotto.
o. Hence, it shall not be subject to income tax.

B.12.

JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-based information technology

company with affiliates across the world. Mr. F is a Filipino engineer employed by JKL-Philippines. In 2018,
Mr. F was sent to the Tokyo branch of JKL-Japan based on a contract entered into between the two (2)
companies. Under the said contract, Mr. F would be compensated by JKL-Philippines for the months spent
in the Philippines, and JKL-Japan for months spent in Japan. For the entirety of 2018, Mr. F spent ten (10)
months in the Tokyo branch.

On the other hand, Mr. J., a Japanese engineer employed by JKL-Japan, was sent to Manila to work with
JKL- Philippines as a technical consultant. Based on the contract between the two (2) companies, Mr. J’s
annual compensation would still be paid by JKL-Japan. However, he would be paid additional compensation
by JKL- Philippines for the months spent working as a consultant. For 2018, Mr. J stayed in the Philippines
for five (5) months.

In 2019, the Bureau of Internal Revenue (BIR) assessed JKL-Philippines for deficiency withholding taxes for
both Mr. F and Mr. J for the year 2018. As to Mr. F, the BIR argued that he is a resident citizen, hence, his
income tax should be based on his worldwide income. As to Mr. J, the BIR argued that he is a resident
alien; hence, his income tax should be based on his income from sources within the Philippines at a
schedular rate

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under Sec 24 (A) (2) of the Tax Code, as amended by Republic Act No. 10963, or the “Tax Reform for
Acceleration and Inclusion” Law.

(a)Is the BIR correct in basing its income tax assessment on Mr. F’s worldwide income? Explain. (3%)

(b) Is the BIR correct in basing its income tax on Mr. J’s income within the Philippines at a schedular
rate Explain (3%).

SUGGESTED ANSWER:

(a) No, the BIR is not correct in basing its in

(a)No, income
come tax assessment on Mr
Mr.. F’
F’ss worldwide income. Under the NIRC, non-
resi
resident
dent citiz
citizens
ens are only tax
taxeed for income earned within the Philippines. In this case, the hybrid status of the
taxpayer cannot be applied, regardless of his initial 2-month stay in the Philipp
Philippines
ines and subsequent transf
transfer
er tto
o JJapan.
apan.
For all intents and purposes, F is considered a non-resident citizen in the year 2 018. Hence, the income tax for
2018 should only be assessed on income earned within the Philippines.

(b) No, the BIR is not corre

correct
ct in basing its income tax on Mr J’ss income within the Philippines at a schedular rrate.
Mr.. J’ ate.
Under the NIRC, non-resident aliens not engaged in trade or business are subject to a flat of rate of 25% based on
the gross income. The NIRC states that non-resident aliens that have an aggregate number of days staying in
the

Philippines less than 180 days, are considered to be not engaged in trade or business. In this case, Mr
Mr.. J only stayed
for five months or 150 days in the Philippines. Hence, he is considered as a NRANETB, and shall be subjected to flat
rate of 25% based on gross income earned within the Philippines
Philippines..

B.13.

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 P50,000.00 for the first vacation leave that any
employee takes during a given calendar year. In addition, the senior engineers were also giving housing
inside the factory compound for the purpose of ensuring that there are available engineers within the
premises everytime there is a breakdown in the factory machineries and equipment.

a. Is the special stipend part of the taxable income of the employees receiving the same? I f so, what tax is
applicable and what tax rate? Explain. (3%)

b. Is the cash equivalent value of the housing facilities received by the senior engineers subject to
fringe benefits tax? Explain. (3%)

SUGGESTED ANSWER:

(a) Yes, the special stipend is part of the taxable income of the employees since the same may very well be
considered income on his part.

(b)
(b)No,
No, the cash equiva
equivalent
lent value of the housing facilities received by the senior engineers is not subject to fringe
benefits tax. The same is exempt from FBT since the ho using is located within the Company's premises and is
housing
gener
generally
ally for the convenience of the employer
employer..

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 B.14.

City R owns a piece of land which it leased to V Corp. In turn, V Corp. constructed a public market thereon
and leased the stalls to vendors and small storeowners. The City Assessor then issued a notice of
assessment against V Corp. for the payment of real property taxes (RPT) accruing on the public market
building, as well as on the land where the said market stands.

Is the City Assessor correct in including the land in its assessment of RPT against V Corp., even if the same
is owned by City R? Explain (3%)

SUGGESTED ANSWER:

Yes. Under Section 234 of the Local Government Code, real property owned by the Republic of the Philippines or
any of its political subdivision is exempt from payment of real property tax except when the beneficial use thereof has
been grante
granted,
d, for consider
consideration
ation or otherwise, to a taxable person or entity
entity..

B.15.

Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual compensation of
P10,000,000.00 while Mr. S is a security guard in the same company earning an annual compensation
of P200,000.00. Both of them source their income only from their employment with MNO Company.

a. At the end of the year, is Mr. C personally required to file an annual income tax return? Explain. (2.5%)

b. How about Mr. S? Is he personally required to file an annual income tax return? Explain. (2.5%)

SUGGESTED ANSWER:

(a) No
No,, individuals receiving purely compensation income from a single employer
employer,, which has been correctly
withheld are no longer required to file their annual ITR.

(b) No, individuals receiving purely compensation income from a single employer
employer,, which has been correctly
withheld are no longer required to file their annual ITR.

B.16.

a. Differentiate between a calendar year and a fiscal year. (2.5%)

b. When is the deadline for the filing of a corporation’s final adjustment return for a calendar year?
How about for a fiscal year? (2.5%)

SUGGESTED ANSWER:

(a) Calendar year means an accounting period of twelve months ending on the last day of December
December.. On the other
hand, fiscal year means an aaccounting
ccounting period of twelve mo nths ending on the last day of any month other than the
months
month of December
December..

(b) For a calendar year

year,, the fi
final
nal return should be filed on or before the 15th day of April fo
following
llowing the close of the
taxable year
year.. For a fiscal year
year,, the final return is filed on or before the 15th day of the 4th month following the
close of the taxable year
year..

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 B.17
B.17..

XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal Revenue. It
secured a loan from ABC Bank with a 6% per annum interest. All interest payments made by XYZ Corp. to
ABC Bank is subject to a 2% creditable withholding tax. At the same time, XYZ Corp. has a trust deposit
with ABC Bank in the amount of Php100,000,000.00, which earns a 2% interest per annum, but is subject
to a 20% final withholding tax on the interest income received by XYZ Corp.

(a)Who are the withholding agents in the case of: 1. The 20% final withholding tax; and 2. The 2%
creditable withholding tax? Explain. (2.5%)

(b) When is the deadline for filing a judicial claim for refund for any excess or erroneous taxes paid in the
case of: 1. The 20% final withholding tax; and 2. The 2% creditable withholding tax? (2.5%)

SUGGESTED ANSWER:

(a)
(a)For
For the 20% final withholding tax, the withholding agent is ABC Bank being in control o f the paymen
paymentt subject to
withholding tax. (R(R.R.
.R. 2-98, Sec. 2.57
2.57.3).
.3). On the other hand, XYZ Corporatio
Corporation
n is the withholding agent for the
2% creditable withholding tax being the party paying for the interest payments on the loan secured, and being
listed as a top 20,00
20,000
0 Philippine Corpor
Corporati
ati
ation
on by the BIR. (RR No. 6-2009).

(b) The deadline for filing a judicial claim for re

(b)The refund
fund for any excess o
orr erroneous taxes paid for both the (1) 20% final
withholding tax and (2) the 2% creditable withholding tax is two (2) yea rs from the date of payment of the tax.
years
(Section 229, NIRC).

B.18.

After a Bureau of Internal Revenue (BIR) audit, T. Corp., a domestic corporation engaged in buying and
selling of scrap metals, was found to have deficiency income tax of Php 25,000,000.00, including
interests and penalties, for the year 2012. For 2012, T Corp. filed its income return (ITR) on April 15, 2013
because it used the calendar year for its accounting. The BIR sent the Preliminary Assessment Notice
(PAN) on December 23, 2015, and eventually, the Final Assessment Notice (FAN) on April 11, 2016,
which were received by T Corp. on the same dates that they were sent. Upon receipt of the FAN, T Corp.
filed it protest letter on June 25, 2016.

Thereafter, and without action from the Commissioner of Internal Revenue (CIR), T. Corp. filed a petition
for review before the Court of Tax Appeals, alleging that the assessment has prescribed. For its part, the
CIR moved to dismiss the case, pointing out that the assessment had already become final because the
protest was filed beyond the allowable period.

(a)Is T Corp.’s contention regarding the prescription of the assessment meritorious? Explain. (2.5%)

(b)Should the CIR’s motion to dismiss be granted? Explain (2.5%)

SUGGESTED ANSWER:

(a) No, T C
(a)No, Corp.
orp.
orp.’’s contention regarding prescription of the aassessment
ssessment is not meritorious.

Under Section 203 of the National Internal Reve

Revenue
nue Code, as a g
gener
ener
eneral
al rule, internal revenue taxes shall be assessed
withi
within
n three (3) years after the last day prescribed by law for the filing of the return. The

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deadline for filing the annual income tax return (ITR) of corpor
corporations
ations is the 15th day o
off the 4th m
month
onth following the
close of the fiscal year
year..

Here, the 15 day of the 4th month follo

following
wing the close of the fiscal year 2012 of T Corp. is April 15, 2013, which is also
the date the ITR of T Corp. was filed. The BIR has until A pril 15, 2016 to assess for pro
April per taxes. The FFAN
proper AN was sent to
and receive
received
d by T Corp. on April 11, 2016, which is within ththe
e prescriptive period.

(b)
(b)YYes, the CIR
CIR’’s motion to dismiss should be granted.

The taxpayer or authorized repres

representative AN to protest the
entative or agent has thirty (30) days from date of receipt of the FFAN
same. If the taxpayer fails to file a valid protest against the FAN within 30 days, the assess
assessment
ment shall become
final exe
executory
cutory and demandable. (RR18-13).

Here, T Corp. re
receiv
ceived the FAN on April 11, 2016. T. Corp has until May 11, 2016 to protest the same. However
ceived However,, T
Corp. only filed the protest letter on June 25, 2016.

Thus, the motion to dismiss should be gr

granted.
anted.

B.19.

On May 10, 2011, the final withholding tax for certain income payments to W Corp. was withheld and
remitted to the Bureau of Internal Revenue (BIR), and the corresponding return therefor was
concomitantly filed on the same date. Upon discovering that the amount

withheld was excessive, W Corp. filed with the BIR a claim for refund for erroneously withheld and
collected final withholding income tax on May 3, 2013. A week after, and without waiting for any
decision from the Commissioner of Internal Revenue (CIR), W Cor. Filed a petition for review before the
Court of Tax Appeals (CTA) to make sure that the petition was filed within the two (2)-year period for
claiming refunds.

In resisting the claim, the BIR contended that the claim must be dismissed by the CTA on the ground of
non- exhaustion of administrative remedies because it did not give the CIR the opportunity to act on the
claim of refund.

(a)Is the BIR’s contention meritorious? Explain (2.5%)

(b) Assuming that the claim for refund filed by W Corp. is for excess and/or unutilized input VAT for the
second quarter of 2011, and for which the return was timely filed on July 25, 2011, would your answer be
the same? Explain. (2.5%)

SUGGESTED ANSWER:

(a) No, the B

(a)No, BIR
IR
IR’s
’s contention is not meritorious.

Sections 2 04 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section 204
applies to administra
administrative
tive claims for refund, while Section 229 to judicial claims for refund. In both instances, the
taxpayer’
taxpayer’ss claim must be filed within two (2) years from the date of payment of tthe
he tax or penalt
penalty
y. H
However
owever
owever,, Section
229 of the NIRC further states the condition that a judicial claim for refund may not be maintained until a claim
for refund or credit has been duly filed with the Commissioner
Commissioner.. Howeve
Howeverr, Section 229 does nonott imply that the
Collector of Internal Revenue (CIR) first act upon the taxpaye
taxpayer’s
r’s claim, and that the taxpayer shall not go to court
before he is notified of the Collector’s action.

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The claim with the CIR was intended primarily as a notice of warning that unless the tax or penalty alleged to
have been collected erroneously o r ilillegally
legally is refunded, court action will follow
follow,, but the period of two years prov
provided
ided
in the last claus
clause
e shal
shalll not be deemed interrupted pending considerconsideration
ation of the claim. (CBK Power Company vs
CIR, G.R. No. 1 93383-84, January 14
193383-84, 14,, 2014).

(b)
(b)No,
No, the answer will not b
be
e the same.

For value-ad
lue-added
ded tax (VA
(VAT
T) refunds, Section 112 of the Tax Code proviprovides
des that the taxpayer
taxpayer,, whose sales are zero
zero--
rated or ef
effect
fect
fectively
ively zero-
zero-rrated, h
has
as two ye
years
ars aft
after
er the clos
close
e of the taxab
taxable
le quarter when the sales were made, to
apply for an administr
administrative
ative claim for ref
refund. Thereafter,, the Commissioner of Internal R
und. Thereafter Revenue
evenue (CIR) has 120 days
from the submission of complete supporting documents to act upon the claim for refund. In case of full or partial
denial of the claim or failure of the CIR to act on the application within 120 d days,
ays, the taxpayer may appeal with the
Court of T
Tax
ax Appeals ((CT
CT
CTA)
A) within 30 days from rece
receipt
ipt of the decision or upon expirati
expiration
on of the 120-day period.

In the case of CIR vs. Aichi (GR No. 184823 dat dated
ed October 6, 2010), the Supr Supreme
eme Court (SC) held that the
observ
observa
ance of the 120-day period is a mandatory and jurisdictional requisite to the filing of a judicial claim for refund
before tthe
he CT
CTA.
A. As such, its non
non-observance
-observance would wa
warrant
rrant th
the
e dismissal of the ju
judicial
dicial claim for lack of jurisdiction.

B.20.

ABC, Inc. owns a 950-square meter commercial lot in Quezon City. It received a notice of assessment from
the City Assessor, subjecting the property to real property taxes (RPT). Believing that the assessment was
erroneous, ABC, Inc. filed a protest with the City Treasurer. However, for failure to pay the RPT, the
City Treasurer dismissed the protest.

(a)Was the City Treasurer correct in dismissing ABC, Inc.’s protest. Explain. (2.5%)

(b)Assuming that ABC, Inc. decides to appeal the dismissal, where should the appeal be filed. (2.5%)

SUGGESTED ANSWER:

(a)
(a)YYes, the City T
Treasurer
reasurer wa
wass correct in dismissing ABC Inc.
Inc.’’s protest

Under Section 252 of the Local Govern ment Code, no protest

Government protest shall be enter
entertain
tained unle
tained ss the taxp
unless taxpay
ayer first pays
ayer
the tax, in which the words “paid under protes
protest”
t” shall be annotated on the tax receip
receipts.
ts.

Here, ABC Inc. failed to first pay the real property tax assessed by the Quezon City when it file
filedd a protest before the
City T
Treasurer
reasurer
reasurer..

(b) Assuming that ABC, Inc. decides to appeal the dismissal, the appeal should be filed with the Local Board of
Assessment Appeals (LBAA).

If the local treasurer denies the protest or fails to act upon it within the 60-day period provided for in Section
252, the taxpayer
taxpayer/real
/real property owner may then appeal or directly file a verified petition with the LBAA within sixty
days fro
from
m denial of the p
protest
rotest or receipt of the notice of assessment, as provided in Section 226 of R.A. No. 7160
notice

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 2018 T
TAXA
AXA
AXATION
TION LA
LAW
W BAR EXAM QUESTIONS AND SUGGESTED ANSWERS I

KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and
household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on
Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City
(Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting
Section 21 which imposes a tax on "Businesses Subject to Excise, Value-Added and Percentage Taxes
under the National Internal Revenue Code (NIRC)," at the rate of 50% of 1 % per annum on the gross
sales and receipts on persons "who sell goods and services in the course of trade or business." KM
Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units
could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double
taxation, since its business was already taxed under Sections 15 and 17 of the Code.

(a)May local government units impose a tax on businesses already subjected to tax under the NIRC? (2.5%)

(b)Does this amount to double taxation? (2.5%)

SUGGESTED ANSWER:

(a) Yes. “Each local government unit shall have the power to create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy
autonomy.. Such taxes, fees, and charges shall accrue exclusively to the local governments.
governments.””
(Article 10, Section 5 of the 1987 Constitution)
Constitution)..

Sec 133 of the LGC – Common limita

limitations
tions on the taxing power of LGC

Re
Relate
late with Sec 143 (h) of the LGC – “T
“Ta
ax on Businesses: (h) On any business
business,, not otherwise specified

in the preceding parag raphs, which the sanggunian concerned may deem proper to tax: Provided, That on any
paragraphs,
business subject to the excise, valu
value-added
e-added or percentage tax under the National Internal Re Revenue
venue Code, as
amended, the rate of tax shall not exceed two percent (2%) of gross sale
saless or receipts of tthe
he preceding calendar year
year..
The sanggunian concerned may prescribe a schedule of graduated tax rate ratess but in no case to exceed the rates
prescribed herein.
herein.””

(b) Yes, it will amount to indirect double taxation. Under the law, dire
direct
ct double taxation exists if the following
requisites exist:
i. Both taxes are impimposed
osed on the same property or subject ma
matter;
tter;
ii. For the same purpose;
iii. Imp
Imposed
osed by the same ttaxi
axi
axing
ng auth
authority
ority
ority;;  Within the sam
same
e jurisdiction;
iv
iv.. During the same taxing period;
v. Coverin
Coveringg the same kind or character of tax.

If there is an element lacking, only indirect double taxation exists. The Constitution only prohibits direct double
taxation.

II

Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering,
and construction work. Its principal office is located in Makati City, but it has various infrastructure
projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company
has adopted a

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policy that the employees' salaries are paid in the currency of the country where they are assigned or
detailed.

Below are some of the employees of KKI. Determine whether the compensation they received from KKI in
2017 is taxable under Philippine laws and whether they are required to file tax returns with the Bureau
of Internal Revenue (BIR). (2% each)

(a)Kris Konejero, a Filipino accountant in KKl's Tax Department in the Makati office, and married to a
Filipino engineer also working in KKI;

(b)Klaus Kloner, a German national who heads KKl's Design Department in its Makati office;

(c)Krisanto Konde, a Filipino engineer in KKl's Design Department who was hired to work at the
principal office last January 2017. In April 2017, he was assigned and detailed in the company's
project in Jakarta, Indonesia, which project is expected to be completed in April 2019;

(d) Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project in Taipei, Taiwan. Since KKI
provides for housing and other basic needs, Kamila requested that all his salaries, paid in Taiwanese
dollars, be paid to his wife in Manila in its Philippine Peso equivalent; and

(e)Karen Karenina, a Filipino architect in KKl's Design Department who reported back to KKl's Makati
office in June 2017 after KKl's project in Kuala Lumpur, Malaysia was completed.

SUGGESTED ANSWER:

The TTax
ax Code provides that only resident citizen who is a citizen of Philippines residing therein is taxable o
onn all income
derived from sources within and without the Philippines.

Substituted filing requisites:

• Employee re receives
ceives purely compensation income (regard
(regardless
less of amount) during the taxable year;
• Employee re receives
ceives income from a sin
single
gle employer in the Philippines during the taxable ye
year;
ar;
• The am amount
ount of tax due from the employee at the end of the year equals the amount of tax withheld
by the employer;
• If marmarried,
ried, th
thee employ
employee’
ee’
ee’ss spou
spouse
se also comp
complies
lies with all three aforementioned conditions, or otherwise
receives no income;
• The employe
employerr files BIR Form 1604CF
1604CF;; and
• Employee has BIR F Form
orm 2316 or Certificate of Final TTax
ax Withheld At Source (BIR Form 23 2306)
06) issued by
his employer
employer..

(a)
(a)(R
(R
(Reside
eside
esident
nt ccitize
itize
itizens)
ns) T
Ta
axab
xable;
le; Not require
required
d (if compliant with the substituted filing)

(b)
(b)(R
(R
(Reside
esident ali
esident en) T
alien) axable; Not requ
Taxable; ired (if co
required mpliantt with th
complian
mplian e subs
the substitut
tituted filing)
tituted

(c) (Non-resident citizen) T Tax

ax
axable
able only on the Philippine sourced income; Not required (if comp
compliant
liant with the
substituted filing)
◦ Sec 22 (E)(3): “Most of the time” – At leleast
ast 183 days abroad
◦ A citizen of the Philippines who works and derives in income
come from abroad and whose eemployment
mployment
◦ thereat requires him to be physically present abro
abroad
ad most of the time during the taxable year
year..

(d)
(d)(Non-resident
(Non-resident citizen) No Philippine sour
sourced
ced income; Not required
◦ Sec 22 (E)(2): RReside
eside abroad for em
employment
ployment on a permanent basis
◦ A citizen of the Philippines who leaves the Philippines during the taxable year tto
o reside abroad,
◦ either as an immigran
immigrantt or for employment on a permanent basis.

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(e) (Non-resident cit
citizen)
izen) Taxable only o n the Philippine sourced income; Not required (if compliant with the
substituted filing)
◦ Sec 22 (E)(4): Prev
Previously
iously a non-resident citizen who arrives in the Philippines
◦ A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at
any time during the taxable year to reside permanently in the Philippines shall
likewise be tr eated as a nonresident citizen for the taxable year in which he arrives in the Philippines
treated
with respect to his income derived fro
from
m sources abroad ununtil
til the date of his arrival in the Philippines.
arrival

III

Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSl-affiliated
corporations:

1.from 1999 to 2004 as Vice President of K-Gold Inc.,

2. from 2004 to 2007 as Vice President of KPB Bank;

3. from 2007 to 2011 as CEO of K-Com Inc.;

4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his
retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.

All the corporations mentioned are majority-owned in common by the Koh 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 KSI subsidiary or affiliate to another)
without loss of seniority rights or break in the tenure. Kim was well-loved by his employer and
colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car worth
PhP 5 million as a surprise, with a streamer that reads: "You'll be missed. Good luck, Sir Kim."

(a)Are the retirement benefits paid to Kim pursuant to the MEERP taxable? (2.5%)

(b)Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company? (2.5%)

SUGGESTED ANSWER:

(a)
(a)Exempt.
Exempt. Sec 32 (B)(6)(a): Retirement benefits received under RA No. 7641 (Retirement Pa Payy Law
Law,, Art. 287 of the
Labor Code); or those received by officials and employees of private firms, whe whether
ther individual or corporate, under a
reasonable priv
private
ate benefit plan maintaine
maintained
d by the employer
employer,, provided the followin
following
g requisites are present:
• The retiree hhas
as been in the service of the same employer for aatt least 10 years;
• The retiree is nnot
ot less than 50 years of age;
Ex
• Exemption is ava
emption availediled of only once.

Considered as within 10 years due to the fact that “employees may be moved around within the controlled group
without loss of seniority rrights
ights or break in the tenure”
tenure”..

(b)
(b)Donor’
Donor’
Donor’ss tax. Not in consideration of sservices
ervices rendered but by reas
reason
on of gratuity
gratuity..

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 IV

Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He donated the land to
his son, Kornelio, in 1980 when the property had a fair market value of PhP75,000, and paid the
corresponding donor's tax.

Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and paid the capital gains
tax, documentary stamp tax, local transfer tax, and other fees and charges. Katrina, in turn, donated the
land to Klaret School last August 30, 2017 to be used as the site for additional classrooms. No donor's tax
was paid, because Katrina claimed that the donation was exempt from taxation. At the time of the
donation to Klaret School, the land had a fair market value of PhP 65 million.

(a)Is Katrina liable for donor's tax? (2.5%)

(b)How much in deduction from gross income may Katrina claim on account of the said donation? (2.5%)

SUGGESTED ANSWER:

(a) Yes. Sec 101 (a) (3) – Exem

Exempt
pt fro
from
m donor’
donor’ss tax: Gifts in favo
favorr of an educational and/or charitable, religious,
cultur
cultural
al or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization: Prov
Provided,
ided, howev
howeverer
er,, That not more than thirty percent (30%) of
said gifts shall be used by such donee for administr
administration
ation purposes.

For the purpose of the exemption, a 'non-profit educational and/or charitabl

charitable
e corporation, institution, accredited
nongovernmen
nongovernmentt organiz ation, trust or philanthropic organization and/or research institution or organization' is a
organization,
school, college or university and/or charitable corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization, incorporated as a nonstock ententity
ity
ity,, paying no
dividends, governe
governed
d by trustees who receive no compensation, and devoting all its income, whether sstudents'
tudents' fees
or gifts, donation, subsidies or other formformss of phila
philanthro
nthro
nthropy
py
py,, to the accomp
accomplishm
lishm
lishment
ent and promotio
promotion n of the
purp
purposes
oses en
enumer
umer
umerate
ate
ated
d in its Articles of Incorporation.

(b) None. Sec 34 (H)(1)- Contributions or gifts actually paid or made within the taxable year to, or for the use of the
(b)None.
Government of the Philippines or any of it itss agencies or any political subdivision thereof exclusive
exclusively
ly for public
purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious,
charitable, scientific, youth and sports development, cultur al or educati
cultural onal purpose
educational purposess or for the rehabili
rehabilitatio
tation of
tation
vet
veter
er
erans,
ans, or to social welfare ins
institutions,
titutions, or to non - govern
government
ment organ
organizat
izat
izations,
ions, in accorda
accordancence with rules and
reg
regulati
ulati
ulations
ons promul
promulgate
gate
gated
d by the Secretary of financfinance,
e, upon recomme
recommendatio
ndatio
ndation n of the Comm
Commissio
issio
issioner
ner
ner,, no part of the
net income of which inures to the benefit of any priv private
ate stockholder or individual in an amount not in excess of ten
percent (10%) in the case o off an individual, and five percent (%) in the case of a corporation, of the taxpayer'
taxpayer'ss taxable
income derived from trade, business or profession as computed without the benefit of this and the following
subpar
subparaagraphs. Here, the donee is not qua qualified
lified and thus, no deduction from gross in inccome is allowed.

Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a restaurant
chain, Karina's, Inc. The restaurant's principal office is in Makati City, Philippines.

Korina's became so popular as a Filipino restaurant that the owners decided to expand its operations
overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout North America and five

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(5) stores in various parts of Europe where there were large Filipino communities. Each store abroad was
in the name of a corporation organized under the laws of the state or country in which the store was
located. All stores had identical capital structures: 60% of the outstanding capital stock was owned by
Karina's, Inc., while the remaining 40% was owned directly by the spouses Konstantino and Korina.

Beginning 2017, in light of the immigration policy enunciated by US President Donald Trump, many
Filipinos have since returned to the Philippines and the number of Filipino immigrants in the US dropped
significantly. On account of these developments, Konstantino and Karina decided to sell their shares of
stock in the five
(5) US corporations that were doing poorly in gross sales. The spouses' lawyer-friend advised them
that they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in
excess of PhP100,000.

Is the lawyer correct? If not, how should the spouses Konstantino and Karina be taxed on the sale of their
shares? (5%)

SUGGESTED ANSWER:

No. FForeign
oreign shares are not within the purview of Sec 24(C) or CGT
CGT..

Sec 24(C) - Capital Gains from Sale o f Shares of St Stock

ock not Traded in the Stock Exchange - The provisions of Sect
Section
ion
39(B) notwithstanding, a final ta
taxx at the rates prescribed below is hereby imposed upon the net capital gains realized
barter,, exchange or other disposition of shares of stock in a domestic
during the taxable year from the sale, barter
corporation, except shares sold, or di disposed
sposed of through the stock e exchange.
xchange.

But the shares are considered capital assets, as defined un under

der Sec 39(A) - "capital assets" means property held
by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the
taxpayer or other property o
off a kind which would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year
year,, or property held by the taxpaye
taxpayerr primarily for sale to customers in the ordina
ordinary
ry
course of his trade or business, or property used in the trade or business, of a character which is subject to the
allowance for deprecia tion provided in Subsection (F) of Section 34; or real property used in trade or business of the
depreciation
taxpaye
taxpayerr.

Thus, must be taxed based on the holding period as provided in Sec 39(B) - Percentage T Ta
aken Into Account. • In
the case o f a taxpayer
taxpayer,, o ther than a corpor
corporation,
ation, only the fo
following
llowing percentages of the gain o r loss recognized upo
uponn
the sale o r eexchange
xchange of a capital ass
asset
et shall be taken into account iin
n computing net capital gain, net capital loss, and
net inc
income:
ome: (1) O One
ne hundred percent (100%) if the capital asset has been hel held
d for not mo
more
re tha
thann twelv
twelvee (1
(12)
2) months
months;;
and (2) Fifty per cent (50%) if the capital asset has been held for more than twelve (12) months.
percent

VI

Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established
a branch office in the Philippines in 2010. 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 2014.

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.

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(a)Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated above? (2.5%)

(b)Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)

SUGGESTED ANSWER:

(a) No. Sec 29 (A) – IAET covers only domestic corporations. Br

Branch
anch is considered a resident foreign
corporation, thu
thus,
s, not subject to IAET

(b)
(b)No.
No. Sec 28 (A)(5) – BPR
BPRT
T is imposed only on actual remittance. Here
Here,, no remittance wa
wass made. Thus, not subject
to BPRT
BPRT..

VII

Karissa is the registered owner of a beachfront property in Kawayan, Quezon which she acquired in 2015.
Unknown to many, Karissa was only holding the property in trust for a rich politician who happened to be
her lover. It was the politician who paid for the full purchase price of the Kawayan property. No deed of
trust or any other document showing that Karissa was only holding the property in trust for the
politician was executed between him and Karissa.

Karissa died single on May 1, 2017 due to a freak surfing accident. She left behind a number of personal
properties as well as real properties, including the Kawayan property. Karissa's sister, Karen, took charge of
registering Karissa's estate as a taxpayer and reporting, for income tax and VAT purposes, the rental
income received by the estate from real properties. However, it was only on October 1, 2017 when Karen
managed to file an estate tax return for her sister's estate. The following were claimed as deductions in
the estate tax return:

1.Funeral expenses amounting to PhP250,000;

2. Medical expenses amounting to PhP100,000, incurred when Karissa was hospitalized for pneumonia
a month before her death; and

3. Loss valued at PhP6 million arising from the destruction of Karissa's condominium unit due to fire
which occurred on September 15, 2017.

(a)Should the beachfront property be included in Karissa's gross estate? (2.5%)

(b)Are the claimed deductions proper? (2.5%)

SUGGESTED ANSWER:

(a) Yes. Sec 90 (A) of the Tax Code provides that the gross value of the estate exceeds Two hundred thousand
pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or
registr
registrab
ab
able
le property
property.. Hence, the beachfront pro
property he gross estate.
perty should be included in tthe

(b) For the funeral

funeral expenses, it is limited up to Php 200,000 only; For the medical expenses, the actual amount can
be claimed (Php 100,
100,000);
000); and for the loss, the total amount of ssuch
uch loss.

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 VIII

Upon the death of their beloved parents in 2009, Karla, Karla, and Karlie inherited a huge tract of farm
land in Kanlaon City. The siblings had no plans to use the property. Thus, they decided to donate the
land, but were not sure to whom the donation should be made. They consult you, a well-known tax law
expert, on the tax implications of the possible donations they plan to make, by giving you a list of the
possible donees:

1.The Kanlaon City High School Alumni Association (KCHS AA), since the siblings are all alumni of the same
school and are active members of the organization. KCHS AA is an organization intended to promote
and strengthen ties between the school and its alumni;

2. The Kanlaon City Water District which intends to use the land for its offices; or

3. Their second cousin on the maternal side, Kikay, who serves as the caretaker of the property.

Advise the siblings which donation would expose them to the least tax liability. (5%)

SUGGESTED ANSWER:

I wi
willll advise the siblings that the donation to the Kanlaon City Water District would expose them to the least tax
liability
liability.. Sec 101 (A)(2) ooff the Tax Cod
Code he use of the National Government or any
e provides that gifts made to or for tthe
entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said
Gover
Governmentnment are considered exempt gifts.

While the other donations will be subject to 30% Donors tax based on the net gifts since they are considered
donations to stra
strangers
ngers under Sec 99(B) of the Tax Code. A stra nger as defined is a person wh
stranger who
o is no
nott a: (1)
Brot
Brother
her
her,, sister (whethe
(whetherr by whole or half half-blood),
-blood), spous
spouse,
e, ances
ancestor
tor and lineal descendan
descendant;
t; o r (2) Relat
Relative
ive by
consanguinity in the collater
collateral
al line within the fourth de
degree
gree of relationship.

IX

Karlito, a Filipino businessman, is engaged in the business of metal fabrication and repair of LPG cylinder
tanks. He conducts business under the name and style of "Karlito's Enterprises," a single proprietorship.
Started only five (5) years ago, the business has grown so enormously that Karlito decided to incorporate it
by transferring all the assets of the business, particularly the inventory of goods on hand, machineries and
equipment, supplies, parts, raw materials, office furniture and furnishings, delivery trucks and other
vehicles, buildings, and tools to the new corporation, Karlito's Enterprises, Inc., in exchange for 100% of
the capital stock of the new corporation, the stock subscription to which shall be deemed fully paid in the
form of the assets transferred to the corporation by Karlito.

As a result, Karlito's Enterprises, the sole proprietorship, ceased to do business and applied for cancellation
of its BIR Certificate of Registration. The BIR, however, assessed Karlito VAT on account of the cessation of
business based on the current market price of the assets transferred to Karlito's Enterprises, Inc.

(a)Is the transfer subject to VAT? (2.5%)

(b)Is the transfer subject to income tax? (2.5%)

SUGGESTED ANSWER:

(a) Not subject to VA

VAT
T. Sec 106 (C) - Changes in or Cessation of Status of a VA
VAT
T- registered P
Person.
erson. - The tax imposed
in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a

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certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner
Commissioner,, the s tatus of a person as a VA VAT
T- registered person
changes or is terminated.

However
However,, Sec 40(C)(2) transactions are cover
transactions ed by the exceptions laid down in RR 2-98.
covered

(b) No, not subject to income tax. Sec 40 (C)(2) - No gain or loss shall be recognized if in pursuance of a plan of
merger or consolidation: (a) A corp corporatio
oratio
oration,
n, which is a party to a merger or consolidation, exchanges property
solely for stock in a ccorpor
orpor
orporation,
ation, which is a party to the merger or co
consolidation;
nsolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for
the stock of another corporation also a party to the me merger
rger or consolidation; or (c) A security holder of a corpor
corporation,
ation,
which is a party to the merger or consolid
consolidation,
ation, exch
exchanges
anges his securities in such corpor
corporation,
ation, solely for stock or
securities in such corporation
corporation,, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transfe

transferred
rred to a corporation by a person in exc
exchange
hange fo
forr
sto
stock
ck or unit of participa
participation
tion in such a corp
corpor
or
oratio
atio
ation
n of whi
which
ch as a result of such excha
exchange
nge said person, alone or
together with o thers, not exceeding four (4) persons, gains control of said corporatio
corporation:
n: Provided, That stocks
issued for services shall not be considered as issued in return for property
property..

Klaus, Inc., a domestic, VAT-registered corporation engaged in the land transportation business, owns
a house and lot along Katipunan St., Quezon City. This property is being used by Klaus, lnc.'s president
and single largest shareholder, Atty. Krimson, as his residence. No business activity transpires there except
for the company's Christmas party which is held there every 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.

(a)Is the sale of the said property subject to VAT? (2.5%)

(b)Is the sale subject to 6% capital gains tax or regular corporate income tax of 30%? (2.5%)

SUGGESTED ANSWER:

(a)
(a)YYes. Incidental sale subject to VAT
VA

In the Supreme Court (SC) case of Commissioner of Internal Revenue vs. Magsaysay Lines (G.R. No. 146984.
July 28, 2006), the Supreme Court upheld a 1992 CT CTA
A decision which ruled that the sale of shipping vessels,
made by a corporation engaged iin n the sale of ser
services,
vices, would not be subject tto
o VA
VATT. The Court further ruled that the
VAT is imposed on transactions which occur in the course of trade or business. Although there are incidental
tran
transactions
sactions which invariably cocontribute
ntribute to the production chain, these should not be subjected to VA VATT because
since they do not occur within the course of trade or business, “the provid providers
ers of such goods or sservices
ervices would
hardly
hardly,, if at all, have the opportunity to approp
appropriately
riately credit any VAT liability as against their own accumulated
VAT collections since the accumulation of output VA VATT arises in the first place only through the ordinary course of
trade or business.
business.”” Applying this SC decision to the facts provided in RMC 15-2011, the sale of the vehicles
should not be subjected to VA VAT
T because, although th the
e com
company
pany would profit from the sale, it was not made in the
course of trade or business or incidental thereto.

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(b)
(b)Subject
Subject to RCIT beca
because
use it became a property which wo
would
uld properly be included in the inventory of a taxpayer
taxpayer..
The corporate income tax rate both for domestic and resident foreign corporations is 30% based on net taxable
income.

XI

Koko's primary source of income is his employment with the government. 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 2005.

Last January, the school offered to buy the land from Koko for an amount equivalent to its zonal value plus
15% of such zonal value. Koko agreed but required the school to pay, in addition to the purchase price, the
12% VAT. The school refused Koko's proposal to pass on the VAT contending that it was an entity exempt
from such tax. Moreover, it said that Koko was not regularly engaged in the real estate business and,
therefore, was not subject to VAT. Consequently, Koko should not charge any VAT to the school.

(a)Is the contention of the school correct? (2.5%)

(b)Will your answer be the same if Koko signed up as a VAT-registered person only in 2017? (2.5%)

SUGGESTED ANSWER:

(a) No. sale of real properties held primarily for sale to custome
(a)No. customers
rs or held for lease in th
thee ordinary course of trade or
business of the seller shall be subject to V VAAT

(b)
(b)No.
No. If V
VA
AT-registered, no need to qualify
qualify.. Subject to V
VA
AT regardless of the gross annual revenu
revenue.
e.

XII

The BIR Commissioner, in his relentless enforcement of the Run After Tax Evaders (RATE) program, filed
with the Department of Justice (DOJ) charges against a movie and television celebrity. The Commissioner
alleged that the celebrity earned around PhP 50 million in fees from product endorsements in 2016 which
she failed to report in her income tax and VAT returns for said year. The celebrity questioned the
proceeding before the DOJ on the ground that she was denied due process since the BIR never issued any
Preliminary Assessment Notice (PAN) or a Final Assessment Notice (FAN), both of which are required
under Section 228 of the NIRC whenever the Commissioner finds that proper taxes should be assessed.

Is the celebrity's contention tenable? (2.5%)

SUGGESTED ANSWER:

No. No need fo
forr P
PAN
AN and FFAN
AN may be issued automatically
automatically..

Sec. 222 (A) of the Tax Code provides that in the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be
filed without assessment, at any time within ten (10) years after the di scovery of the falsit
discovery falsityy, fraud or omission:
Provi
Provided,
ded, That in a fraud assessment w hich has become final and ex executory
ecutory
ecutory,, the fact of fr
fraud
aud shall be judicially
taken cognizance of in the civil or criminal action for the collection thereof
thereof..

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 XIII

The Collector at the Port of Koronadal seized 100 second-hand right-hand drive buses imported from
Japan. He issued warrants of distraint and scheduled the vehicles for auction sale. Kamila, the importer of
the second-hand buses, filed a replevin suit with the Regional Trial Court (RTC). The RTC granted the
replevin upon filing of a bond.

Did the RTC err in granting the replevin? (2.5%)

SUGGESTED ANSWER:

Yes. RT
RTC
C has no jurisdiction. Sec 202 (j) - Exercise of exclusive original jurisdiction over forfeiture cases under
“Customs Modernization and TTa
ariff Act (GMT
(GMTA)”
A)”
A)”.. RA10863.

XIV

The City of Kabankalan issued a notice of assessment against KKK, Inc. for deficiency real property
taxes for the taxable years 2013 to 2017 in the amount of PhP 20 million. KKK 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
Negros Occidental.

The RTC denied the application for TRO. Its motion for reconsideration having been denied as well,
KKK filed a petition for certiorari with the Court of Appeals (CA) assailing the denial of the TRO.

Will the petition prosper? (5%)

SUGGESTED ANSWER:

No. The jurisdiction is with the CT

CTA
A and not with the CA. RA 9282 provided that CT
CTA
A Exclusive appellate jurisdiction in
tax collection cases:

"a. Over appeals frofrom

m the judgments, resolutions or orde orders
rs of the Regional Trial Courts in tax collection cases
originally decided by them, in their respect
respective
ive territorial jurisdiction.

XV

In 2015, Kerwin bought a three-story house and lot in Kidapawan, North Cotabato. The property has a
floor area of 600 sq.m. and is located inside a gated subdivision. Kerwin initially declared the property as
residential for real property tax purposes.

In 2016, Kerwin started using the property in his business of manufacturing garments for export. The
entire ground floor is now occupied by state-of-the-art sewing machines and other equipment, while the
second floor is used as offices. The third floor is retained by Kerwin as his family's residence. Kerwin's
neighbors became suspicious of the activities going on inside the house, and they decided to report it
to the Kidapawan City Hall. Upon inspection, the local government discovered that the property was being
utilized for commercial use. Immediately, the Kidapawan Assessor reclassified the property as commercial
with an assessment level of 50% effective January 2017, and assessed Kerwin back taxes and interest.
Kerwin claims that only 2/3 of the building was used for commercial purposes since the third floor
remained as family residence. He argues that the property should have been classified as partly
commercial and partly residential.

(a)Is the Kidapawan assessor correct in assessing back taxes and interest? (2.5%)

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(b)Is Kerwin correct that only 2/3 of the property should be considered commercial? (2.5%)

(c) If Kerwin wants to file an administrative protest against the assessment, is he required to pay the
assessment taxes first? With whom shall the protest be filed and within what period? (2.5%)

SUGGESTED ANSWER:

(a)
(a)Sec
Sec 222 of the LGC - Assessment of Property Subject to Back T Tax
ax
axes.
es. - Real property declared fo
forr the first time shall
be assessed f or taxes for the period during which it would have been liable but in no case for more than ten (10)
however,, That such taxes shal
years prior to the date of initial assessment: Provided, however shalll be computed on the basis of
the applicable schedule of values in force during the corresponding period. If such taxes are paid on or before
the end of the quarter following the date the notice of assessment was received by the owner or his
representative,, no interest for delinquency shall be imposed thereon; otherwise, such taxes shall be subject to an
representative
interest at the rate of two percent (2%) per month or a fraction thereof from the date of the receipt of the
assessment until suc
such
h taxes ar
are
e fully paid.

(b) No. Sec 198(B) of the LGC - Real property shall be classified, valued and assessed on the basis of actual use
regardless of wher
where
e located, whoever owns it, and whoever uses it.

(c) No. Pro

Protest
test – wit
within
hin 60 day
dayss from receipt of ass
assessmen
essmen
essmentt (sec. 195, LGC). Payment under protest is not
necessary
necessary..

When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not be beenen
paid, he shall issue a notice of asse
assessment
ssment stating the nature of the tax, fee or charge, the amount of deficiency
deficiency,, the
surcharges
surcharges,, ininterests
terests and penalties. Within sixty (60) days from the receipt of th the
e notice ooff assessment, the taxpaye
axpayerr
may file a written protes
protestt with the local treasur
treasurer
er contesting the assessment; otherwise, the assessment shall
become final and executory
executory.. The local treasurer shall decide the protest within sixty (60) days from the time of its
filing. If the local treasurer finds the protest to be wholly or ppartly
artly meritorious, he shall issue a notice canceling wholly
or partially the assessment. However
However,, if the local treasurer finds the assessment to be wholly or partly correct, he
shall deny the protest whollwhollyy or partly with notic
notice
e to the ta
taxpay
xpay
xpayer
er
er.. The taxpay
taxpayer
er shall have thirt
thirty
y (30) days from
the receipt of the d denial
enial of the protest or from the lapse of tthe
he sixty (60) day period pprescribed
rescribed herein within which tto o
appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive and
unappealable.cr
unappealable.cralaw alaw

Remedy against the Assessment/Appeal, within 60 days

Remedy days from notice of assessment of provincial, city or municipal
assessor to Local Board of Assessment Appeals (Sec. 226, LGC)

Local Board of Assessm

Assessment
ent Appeals. - Any owner or person havin g legal interest in the property who is not satisfied
having
with the action of the provincial, city or municipal assessor in the assessment of his property may may,, within sixty
(60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment appeals
of the province or city by filing a petition under oath in the form prescribed for the purpose, together with
copies of the tax declar
declara
ations and such affidavit
affidavitss or documents submitted in support of the appeal.

XVI

In an action for ejectment filed by Kurt, the lessor-owner, against Kaka, the lessee, the trial court ruled in
favor of Kurt. However, the trial court first required Kurt to pay the realty taxes due on the property for
2016 before he may recover possession thereof.

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Kurt objected, arguing that the delinquent realty taxes were never raised as an issue in the ejectment
case. At any rate, Kurt claimed that it should be Kaka who should be made liable for the realty taxes since
it was Kaka who possessed the property throughout 2016.

Is Kurt correct in resisting the trial court's requirement to pay the taxes first? (2.5%)

SUGGESTED ANSWER:

LGC Sec 268. Pa Payment

yment of Delinquent Taxes on Property Subject of Controversy Controversy.. - In any action involv
involving
ing the
ownership or possession of of,, or succession to, real property
property,, the court may
may,, motu propio or upon representation
of the provincia
provincial,
l, city
city,, or municipal treasurer or his deputy
deputy,, award such ownership
ownership,, possession, or succession to
any party to the actio
actionn upon payment to the court of the taxes wit with
h in
interest
terest due on the property and all other costs
that may have accrued, subject to the final outcome of the action

XVII

Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract of land in
Kalinga.

KKI 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 KKI Board of Trustees decided to lease the remaining 1 /2 portion to a real estate developer
which constructed a community mall over the property.

Since the rental income from the lease of the property was substantial, the KKI decided to use the amount
to finance (1) the medical expenses of the charity patients in the KKI Hospital and (2) the purchase of
books and other educational materials for the students of KKI School.

(a)Is KKI liable for real property taxes on the land? (2.5%)

(b)Is KKl's income from the rental fees subject to income tax? (2.5%)

SUGGESTED ANSWER:

Test is the use of the property

property.. (Lung Center Case)

(a) Yes. The Court he

held
ld that the petitioner is a charitable iinstitution
nstitution within the context of the 1973 and 1987
Constitutions.

The test whether an enterprise is charita

charitable arry out a purpose reorganized in law
ble or not is whether it exists to ccarry
as charitable or whether it is maintained for gain, profit, or private advantage. Hence, the Lung Center was organized
for the welf
welfare
are and benefit of the Filipino people
people..

As a general principle, a charitable

charitable institution does not lose its character as such and its exemption from taxes simply
because it deriv
derives
es income fro
from
m paying patients, so lon
long
g as the money receive
received
d is devoted to charitable objects and no
money inures to the private benefit of the persons m anaging o r operating the institution. As well as the reason of
donation in the form of ssubsidies
ubsidies granted by the gov
goveernment.

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(b) No. Those portions of its real property that are leased to private entities are not exempt from rea
reall property
tax
taxes
es as these are not actually
actually,, directly and exclus
exclusively
ively used for charitable purposes.

The petitioner failed to prove that the entirety of its real property is actually
actually,, directly and exclusively used for
charitable purposes. While portions of the hospital are used for the treatment of patients and the dispensation o f
medical se
services
rvices to them, whether payin
payingg or non-paying, other portions thereof are being lea leased
sed to private
individuals for their clinics and a canteen.

Hence, the portions of the land leased to private entities as well as those parts of the hoshospital
pital leased to private
individuals are not exempt from such taxes. On the other hand, the portions o
off the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property
taxes.

ADE = eexe
xe
xempt
mpt from inc
income
ome tax (De lasalle)

The requisites for availing the tax exe exemption

mption under Article XIVXIV,, Section 4 (3), namely: (1) tthe
he taxpayer falls under the
classification non-stock, non-profit educational institution ; and (2) the in come it seeks to be exempted from taxation
income
actually,, directly and exclusively for educational purposes. The records of the case showed that the
is used actually
foun
foundation’
dation’
dation’ss op
oper
er
eration
ation is not for profit, but in pursuit of its primary purpose which is “to establish a school xxx the
primary intention being tto o form the whole man through the integrintegration
ation of a liber
liberal
al Christian education wi
with
th professional
competence for participation in Philippine development.
development.””

XVIII

Kathang Isip, Inc. (Kii) is a domestic corporation engaged in the business of manufacturing,
importing, exporting, and distributing toys both locally and abroad. Its principal office is located in
Kalookan City, Philippines. It has 50 branches in different cities and municipalities in the country.
When Kii applied for renewal of its mayor's permit and licenses in its principal office in January this
year, Kalookan City demanded payment of the local business tax on the basis of the gross sales reported
by the corporation in its audited financial statements for the preceding year. Kil protested, contending that
Kalookan City may tax only the sales consummated by its principal office but not the sales
consummated by its branch offices located outside Kalookan City.

When Kalookan City denied the protest, Kil engaged the services of Atty. Kristeta Kabuyao to file the
necessary judicial proceedings to appeal the decision of Kalookan City. Atty. Kabuyao is a legal expert, but
resides in Kalibo, Aklan where her husband operates a resort. She, however, practices in Metro Manila,
including Kalookan City. The counsel representing the city, in the case filed in Kalookan City by KII,
questioned the use of Atty. Kabuyao's Professional Tax Receipt (PTR) issued in Aklan for a case filed in
Kalookan City.

(a)Is Kll's contention that Kalookan City can only collect local business taxes based on sales consummated
in the principal office meritorious? (2.5%)'

(b)Is the Kalookan City counsel correct in saying that Atty. Kabuyao's PTR issued in Aklan cannot be used
in Kalookan? (2.5%)

SUGGESTED ANSWER:

(a) Sec 150 of the LGC – For ppurposes

urposes of collection of the taxes under Section 143 (tax on business), businesses
maintaining or oper
operating
ating branch or sales ou
outlet
tlet elsewhere shall record the sale in the br
branch
anch

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or sales outlet making the sale or tran
transaction,
saction, aand
nd the tax thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located.

(b)
(b)Sec
Sec 139(B) of the LGC – Pro
Professional
fessional T
Tax
ax

(B) Every per

person
son legally authorized to practi
practice
ce his profession shall pay the professiona
rofessionall tax to the province
where he practices his profession or where he maintains his principal office in case he practices his profe profession
ssion in
sever
severaal places: Provided, however
however,, That such person w who
ho has paid the corresponding professional tax shall be entitled
to practice his profess
profession
ion in any papart
rt of the Philippines without being subjected to any other national or local tax,
license, or fee for the pr
practice
actice of such profession.

XIX

The BIR assessed Kosco, Inc., an importer of food products, deficiency income and value-added taxes, plus
50% surcharge after determining that Kosco, Inc. had under-declared its sales by an amount exceeding
30% of that declared in its income tax and VAT returns. Kosco, Inc. denied the alleged under-declaration,
protested the deficiency assessment for income and value-added taxes and challenged the imposition of
the 50% surcharge on the ground that the surcharge may only be imposed if Kosco, Inc. fails to pay the
deficiency taxes within the time prescribed for their payment in the notice of assessment.

(a)Is the imposition of the 50% surcharge proper? (2.5%)

(b) If your answer to {a) is yes, may Kosco, Inc. enter into a compromise with the BIR for reduction of the
amount of surcharge to be paid? (2.5%)

SUGGESTED ANSWER:

(a)
(a)YYes. P
Penalty:
enalty: 50% of the tax or of the defic
deficiency
iency tax, in case any payment has been made o
on
n the basis of a return
before the discove
discovery
ry of the falsity or fr
fraud.
aud.

• In case of: [ FiF

FiFaa ]
a) Willful neglect to File the return within the perio
period
d prescribed; or
b) False or fraudulent return is w willfully
illfully made, in case any payment has been made on the basis of such return
before the discove
discovery ry of the falsity or fr
fraud.
aud.

Prima facie evidence of a false or fraudulen

fraudulentt return as determined by the Commissioner pursuant to the rules and
regulations promulgated by the Sec. of Finance:
a.
a.)) substantial under declar
declaration
ation of taxable sales, rreceipts
eceipts or income - fa
failure
ilure to report sales, re
receipts
ceipts or income in an
amount exceeding 30% of that declared per return
b.
b.)) substantial oversta
overstatement
tement of deductions - claim of deductions in an amount exceedin
exceeding
g 30% of actual deductions

(b)
(b)YYes. Compromis
Compromise
e based on 2 grounds: a) financial capacity; aand
nd b) assessment is of doubtful vvalid
alid
alidity
ity
ity..

XX

Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and processing of steel and its by-
products. It is both registered with the Board of Investments with a pioneer status, and with the BIR as a
VAT entity. On October 10, 2010, it filed a claim for refund/credit of input VAT for the period January 1 to
March 31, 2009 before the Commissioner of Internal Revenue (CIR). On February 1, 2011, as the CIR had
not

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yet made any ruling on its claim for refund/credit, KKI, fearful that its period to appeal to the courts might
prescribe, filed an appeal with the Court of Tax Appeals (CTA).

(a)Can the CTA act on KKl's appeal? (2.5%)

(b) Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not yet acted on its
claim? (2.5%)

SUGGESTED ANSWER:

Aich
Aichii case

120+30 days is man

mandatory
datory and jurisdictional

(a) The prescriptive period of 2 year . Sec. 204 (c) and 229 are applied only in in instances
stances of erroneous payment
and illegal collection. Sec. 112 (A) of NIRC applies here. Sec. 31 Chapter VIII Book I of the Administr Administrative
ative Code
of 1987 being the more recent law governing legal period app applies
lies making 1 year = 12 months. The principle of Lex
Posterioni Derogati PPriori
riori applies. Thus, since it is filed on exactly Sept. 30, 2004 filing is timely
timely..

(b) Filin
Filing
g an admin
administ
ist
istrat
rat
rative
ive claim is a condition precedent to a judicial claim for refund . Sec. 112 (D) of the NIRC
clearly provides that the CIR has 120 days from date of the submission of the complete documents in support o f the
application within which to grant or deny the claim. In case of full or partial denial by the CIR, the recourse is to
appeal before the CT CTAA within 30 days from receipt of the decision of the CIR. However
However,, if after the 120-day period
the CIR fails to act on the application for tax refund, the remedy is to appeal the inaction of the CIR to the CT CTAA
within 30 days.

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 2017 T
TAXA
AXA
AXATION
TION LA
LAW
W BAR EXAM QUESTIONS AND SUGGESTED ANSWERS II.

SMZ, Inc. is a VAT-registered enterprise engaged in the general construction business. HP International
contracts the services of SMZ Inc, to construct HP International’s factory building located in the Laguna
TechnoPark, a special economic zone HP International is registered with the Philippine Economic Zone
Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the
Special Economic Zone Act of 1995.

SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-rating of its sale
of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP
International already enjoys income tax holiday: Is the BIR correct in denying SMZ, Inc.’s application?
Explain your answer: (6%)

SUGGESTED ANSWER

No. All sales of goods, properties, and se services

rvices made by a VA VAT T-registered supplier from the Customs Territory to
an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’ latter’ss type or class of
PEZA registration (Cor
(Coral
al Bay Nicke
Nickell Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing Commissioner of
Internal R
Revenue
evenue vv.. T
Toshi
oshi
oshiba
ba Information Equi
Equipment
pment (Phils.
(Phils.),
), Inc.
Inc.,, G.R. No. 150154, Augu
Augustst 9, 2005).

Moreover
Moreover,, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or entities
whose exemption under special laws effective
effectively
ly subjects the supply of such services to zero percent (0%) ra rate
te
are considere
considered
d zero-r
zero-rated.
ated. Consid
Considering
ering the law doés not provid
provide
e for any additio nal qualification or disqualification,
additional
the BIR cannot deny the app
application
lication on the ground that HP Internation al already enjoys income tax holiday
International holiday..

An administr
administrative
ative agency may not enlarge, alter or restrict a provision of law
law.. It cannot add to the requirements
provided by law
law.. To do so constitutes lawmaking, which is gener
generally
ally reserved for Congress (Soriano v. Secretary of
Finance, et al, G.R. Nos. 18445
184450,
0, 184508, 184538, 185234, January 24, 2 2017).
017).

AL
ALT
TERN
ERNA
ATI
TIVE
VE A
ANS
NS
NSWE
WE
WER
R

The BIR is wrong. Under Sec 108(B)(3) o f the NIRC, the sale is effective
effectively
ly zero-r
zero-rated
ated and there is no need to file an
application for zero-r
zero-rating
ating w
with
ith tthe
he BIR The BIR in pointing out that HP International enjoys incom
income e tax holiday is of
no moment, because a sale of services to an ecozone enterprise by a supplier from the customs territory is
considered as an effectively zero-rated sale of service in view of the exemption enjoyed by the Peza enterprise
from indirect tax
taxes.
es.

II
II.

Wreck Corporation is a domestic corporation engaged in the business of importing, refining and selling
petroleum products. During the period from September 1, 2014 to December 31, 2014, Wreck 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, 2014, to December 31, 2014. Wreck Corporation did not pass on to the international carriers the excise
taxes it paid on the importation of petroleum products.

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On June 25, 2015, Wreck 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-l
aviation fuel.

If you were the Commissioner of Internal Revenue, will you grant Wreck Corporation’s administrative claim
for refund or issuance of tax credit certificate? Explain your answer. (6%)

SUGGESTED ANSWER:

Yes, but only the excis

excisee tax which correspon
correspondsds to the 75% of the total volume of aviati
aviation
on fuel imported that were
actually sold to the inter national carriers. Wreck Corpor ation, as the statutory taxpayer who is dire
Corporation, directly
ctly liable to pay
the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum
products sold to internati
international
onal carriers, the latter having been granted exe
exemptio
mptio
mptionn from the payment of said excise
tax under Sec. 135 (a) of the NIRC(CIR v. Pilipinas. Shell PetroPetroleum
leum Corporation, G.R. No. 188497
188497,, February 19,
2014).

III

Vanderful, Inc.’s income tax return for taxable year 2015 showed an overpayment due to excess creditable
withholding taxes in the amount of P750,000. The company. opted to carry over the excess income
tax credits: as tax credit against its quarterly income tax liabilities for the next succeeding years. For
taxable year 2016, the company’s income tax return showed an overpayment due to excess creditable
withholding taxes in the amount of PI,100,000, which included the carry-over from year 2015 in the
amount of P750,000 because its operations resulted in a net loss hence, there was no application for any
tax liability. This time, the company opted and marked the box “To be refunded” in respect of the total
amount of P1,100,000.

Vanderful, Inc. now files in the BIR a claim for refund of unutilized overpayments of P1,100,000, Is the
claim meritorious? (4%).

SUGGESTED ANSWER:

No, but only to the extent of the amount of P750,000.00 which was carried over from year 2 2015.
015. Section 76 of
the NIRC of 1997 clearly states: Once the op option
tion to carry-ove
carry-overr and apply the excess quarterly income tax” against
income tax due for the taxable quarters of the succeedin
succeedingg taxable years has been m ade, such option shall be
considered irrevocable ffor
or that taxable period and no application for cash refund or issuance of a tax credit certificate
shall be allowed ther
therefor
efor
efor.. Sec
Section
tion 76 expressly states that the op
option
tion shall be considered irrevoca
irrevocable
ble for that taxable
period referring to the period comprising the succeeding taxable year years.
s. Section 76 further state
statess that no application
for cash refun
refundd or issuance of a tax credit certificate shall be allowed therefore referring to that taxable period..period..””
comprising the succeeding taxable years (Asiaworld Properties Philippine Co Corpor
rpor
rporation
ation v. CIR, G.R. No. 171766, July
29, 2010).

IV.

On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose
of enforcing the Tariff and Customs Code, assorted brands of liquor and cigarettes said to have been
illegally imported into the Philippines were seized from a store operating in a Freeport zone. The store
owner moved for the quasáhal of the warrant on the ground that the col-… lector of Customs had no
jurisdiction to enforce it within the Freeport zone..

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Should the motion to quash be granted (3%)

SUGGESTED ANSWERS

No. The treatment of the Freeport zone as a separate customs territory cannot completely divest the
Government of its right to intervene in the oper
operations
ations and management of such Freeport, especially when
pate
patent
nt violat
violations
ions of the custo
customs
ms and tax laws arare
e discovered. After all, Section 602 of the Tariff and Customs
Code vests exclusive original jurisdiction in the Bureau of Customs over seizure and forfeiture cases in the
enforcement of the tariff and customs laws (Agrier Co.
Co.,, Ltd. v. Hon. Fitus B. Villanueva, e
ett al.
al.,, G.R. No. 158150,
September 10, 2014).

V.

On March 30, 2016, XL Co. filed an administrative claim for refund of unutilized Input VAT for taxable year
2014, together with supporting documents, XL Co. claimed that its sale of generated power and delivery of
electric capacity was VAT zero-rated. Due to the inaction of the Commissioner of Internal Revenue (CIR),
XL Co. filed with the Court of Tax Appeals (CTA) the following judicial claims for refund.

Period Covered Date Filed

1st Quarter of 2014 March 31, 2016

2nd Quarter of 2014 June 30, 2016

3rd and 4th quarter of 2014 August 12, 2016

Is XL Co.’s claim for VAT refund timely filed? Explain your answer. (5%)

SUGGESTED ANSWER:

As regards th
the
e claims for VAVAT
T refund w hich are administr
administrative
ative in nature, all have been timely filed. The law requires
that th
thee administra
dministrative
tive claim should be filed within two years from the end o f the quarter when the sale was made
(Sec. 112(A), NIRC); hence, the filing o f the administra
administrative
tive claim for refund on March 30, 2016 covering the four
quarters of 2014, com
complies
plies with the period prescribed by law
law..

The same is not true, however

however,, as to the judicial clai
claims.
ms. Only the jjudicial
udicial claim filed on August 12, 2016 is timely filed.
As provided by Se
Section
ction 112(C), 11997
997 NIRC, as amended, o one
ne ooff the conditions for a judicial claim of refund or credit
under the VA
VAT
T System is compliance wit with
h the 120+30 day mandatory and jurisdictional periods. Strict compliance
with the 120+30 dday
ay periods is, thus, nec
necessary
essary for such claim to prosper (CIR V. San Roque Power Corporation, G.R.
Nos. 187485, 1961
19611313 and 197156
197156,, October 8, 2013).

The Commissioner has been granted by law 120 days within which to decide the taxpayer’ taxpayer’ss claim. Then, if the
Commissioner does not act on the taxpayer’
taxpayer’ss claim within the 120-day period, the taxpayer may appeal to the CT CTA
A
within 30 days from the expir
expirat
at
ation
ion of the 120-day
120-day.. period. Applying tthis presentt case, the 120+ day from the
his to the presen
filing of the administr
administra
ative claim fell on July 28, 2016. XL Co. may ile the judicial claim from July 29, 2016 to
August 2727,, 2016; thus, only the judicial claim filed on August 12. 2016 has been timely filed.

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 VI
VI.

Heeding the pronouncement of the President that the worsening traffic condition in the metropolis was
a sign of economic progress, the Congress enacted Republic Act No. 10701, also known as An Act
Imposing, a Transport Tax on the Purchase of Private Vehicles. Under RA 10701, buyers of private vehicles
are required to pay a transport tax equivalent to 5% of the total purchase price per vehicle purchased.
RA 10701 provides that the Land Transportation Office (LTO) shall not accept for registration any new
vehicles without proof of payment of the 5% transport tax. RA 10701 further provide that existing owners
of private vehicles shall be required to pay a tax equivalent to 5% of the current fair market : value of
every vehicle registered with the LTO. However, RA 10701 exempts owners of public utility vehicles and
the Government from the coverage of the 5% transport tax.

A group of private vehicle owners sue on the ground that the law is unconstitutional for contravening
the Equal Protection Clause of the Constitution.

Rule on the constitutionality and validity of RA 10701. (5%).

SUGGESTED ANSWER

RA 10701 is valid and constitutional. A levy of tax is not unconstitutional because it is not intrinsically equal and
unifor
uniform
m in its operation. The uniformity
uniformity,, rule does not prohibit classification for purposes of taxation (Brit
(British
ish American
Tobacco vv.. Jose Isidr
Isidro
o N. Camacho
Camacho,, G.R. No. 163583, AuAugust
gust 20, 2008, 562 SCRA 511).

Uniformity of taxation, like the kindred concept of equal protection, mermerely

ely requires that all subjects or objects of
taxation, similarly situated are to be treated alike both in privileges and liabilities. Unifor-. mity does not forfforfend
end
classification as lo
long
ng as: (1) the standards that are used therefore are substantial and not arbitrary arbitrary,, (2) the
categorization is germane to achieve the legislativ
legislative
e purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all tho
those
se belonging to the same class
(Rufino R. Tan v. Ramon R. Del Rosario, Jr nd 109446, October 13, 1994, 237 SCRA 324, 331).
Jr.., G.R. Nos. 109289 aand
All of the foregoing requirements of a valid classification having been net and those which are singled out are
a.class. in themselves, there is no violation of the “Equal Protection Clause” of the Constitution.

VII
VII.

Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation
(SPRC). He invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to
lunch at the Sulo Hotel in Quezon City to discuss the approval of SPRC’s application for a development
permit in connection with its subdivision development project in Pasig City, At breakfast the following day,
Calvin met a prospective client interested to enter into a joint venture with SPRC. for the construction
of a residential condominium unit in Cainta, Rizal.

Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director of HLURB
and the prospective client, 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 SPRC granted his request.

(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your answer.
(2.5%)

SUGGESTED ANSWER

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(a) SPRC cannot claim as a deduction, the amount spent for lunch in the mee meeting
ting with the Regiona
Regionall Director of
HLURB: While the expense is business connected, the same is not allowed as deduction becau because
se it was incurr
incurred
ed
as an indirect paymen
paymentt to a government official which, not only amounts to a violat violation
ion of the Anti Graft and
Corru
Corrupt
pt Pr
Pra
actice
cticess Act but als
also
o consti
constitutes
tutes br
bribes,
ibes, kickbacks and similar payments (See Şec: 34 (a) (C) NIRC).

With respect, however

however,, to the amount spent for breakfast with a prospective client, the same is deduc deductib
tib
tible
le from
gro
gross
ss income of SPRC. The expense comp complies
lies with the requir
requireme
eme
ements
nts for deduc
deductib
tibility,, namel
tibility
ility namely:
y: (a) the exp
expense
ense
must be ordinary aand
nd necessary (b) it m
must
ust have been paid o orr incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer
taxpayer,, and (d) it must be supported by receipts, records
or other pertinent papers (CIR vv.. General FFoods
oods (Phils.
(Phils.),
), Inc, GR No: 143672, April 4, 2003, 401 SCRA 545, 553).

Section 34 (A )(b) of the 1997 NIRC, as amended, does not require that the substantiation be in the form o f official
receipts or invoices issued in the name of the tataxpaye
xpaye
xpayerr claiming the expense. It must only be proven that there is a
direct connection or relation of the expense being deducted to the development, management, oper operation
ation and/o
and/orr
conduct of the trade business or pr
profession
ofession of the taxpaye
taxpayer”r”
r”..

(b)
(b)is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. (2.5%)

SUGGESTED ANSWER:

(b) No. Any amount paid as reimbursements for representation incurred by the employee in the perfo performan
rman
rmancece of
his duties is not compensation subject to withholding, if the following conditions are satisfied: (1) It is for o
ordinary
rdinary
and nec
necessary
essary repre
representation
sentation expense paid or incurred by the employee in the pursuit of the tra rade,
de, business o r
profes
profession,
sion, and (ii) The employee is requir
required
ed to account/liquidate (for such expense in accordance with the specific
requirements of substantiation pursuant to Seç, 34 of the 1997 NIRC, as amended. The amounts are actually spent
requirements
by the employe
employee e for the benefit of his employer
employer,, so no income is considere
considered
d to have flowed to the employ
employee.
ee.

VIII

On April 30, 2015 Daryl resigned as the production manager of 52nd Avenue, a television studio owned by
SSS Entertainment Corporation. 52nd Avenue issued to her a Certificate of Withholding Tax ori
Compensation (BIR Form No. 2316), which showed that the tax withheld from her compensation was equal
to her income tax due for the period from January 2015 to April 30, 2015.

A month after her resignation, Daryl put up her own studio and started producing short films. She was able
to earn a meager income from her short films but did not keep a record of her production expenses.

Is Daryl qualified for substituted filing for taxable year 2015? Explain your answer. (3%)

SUGGESTED ANSWER :

No. Following the relev

relevant
ant revenue issuance, only an individual receiving purely compensation income, regardless of
amount; from only one employer in the Philippines for the calendar year year,, the income tax of which has been withheld
correctly by the said employer
mployer,, shall qualif
qualifyy for substituted filing of income tax re retur
tur
turn
n (R
(Reven
even
evenue
ue Regula
egulatio
tio
tions
ns No:3
No:3--
2002)
2002).. Daryl, within the same ca calendar
lendar year
year,, derive
derived
d income frofromm producing short films; thus, she did not
receive purely compensation income for calendar year 2015. Accordin Accordingly
gly
gly,, the amount withheld from her
compensation incom
incomee is not equal to the income tax d ue on his aggregate taxable income during the taxable year
due year..

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 IX
IX.

Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant
to a time deposit with AAB Bank. The bank regularly deducted 20% final withholding tax on the interest
income from the time deposit.

Alfredo contends that the 20% final tax on the interest income.con stituted double taxation because his
salary had been already subjected to withholding tax.

Is Alfredo’s contention correct? Explain your answer. (3%)

SUGGESTED ANSWER:

No Double taxation means taxing for the same tax period the same thing or activity twice; when it s hould be
taxed but once, for the same purpose and with the same kind of character of tax (CIR v. Citytrust Inve Investment
stment
Phils.
Phils.,, G.R. Nos. 139786, 140857
140857,, September 27 27,, 2006). The 20% final tax is imposed on the interest income,
while the tax earlier withheld is on the salary or compensation income. Thus, though both pertain to income tax,
they do not pertain to the same thing or activity and consequently
consequently,, no double taxation exists.

X.

On January 27, 2017, Ramon, the comptroller of Vantage Point, Inc., executed a document entitled “Waiver
of the Statute of Limitations” in connection with the BIR’s investigation of the tax liabilities of the company
for the year 2012. However, the Board of Directors of Vantage Point, Inc., did not adopt a board resolution
authorizing Ramon to execute the waiver.

On October 14, 2017, Vantage Point, Inc. received a preliminary assessment notice from the BIR indicating
its deficiency withholding taxes. for the year 2012. Vantage Point, Inc., filed its protest. On October 30,
2017, the BIR issued a formal letter of demand and final assessment notice. Vantage Point, Inc., again
filed a protest. The Commissioner of Internal Revenue denied the protests and directed the collection
of the assessed deficiency taxes,

Accordingly, Vantage Point, Inc., filed a petition for review in the CTA to seek the cancellation and
withdrawal of the assessment on the ground of prescription.

(a) What.constitutes a valid waiver of the statute of limitations for the assessment and collection of taxes?
Explain your answer.(3%)

SUGGESTED ANSWER

(a)
(a)Generally
Generally
Generally,, a valid waiver of the statute of limitations for th
the
e assessment and collection of taxes must be executed
by the taxpaye
taxpayerr and accepted by the BIR prior to the expirexpiration
ation of the period which it se
seeks
eks to extend. The same must
also be eexecuted
xecuted by the taxpayer
taxpayer..or
or..
.. his duly authorized representative, or in the case of a corporation, it mus
uthorized mustt be
signed by any of its responsible officers (CIR V V.. Kudos Metal Corpora
Corporation,
tion, G.R. No. 178087
178087,, May 5, 2010, 620 SCRA
232, 243, 244). Such requirements m mustust be met considering that a waiver of the statute of limitations under the NIRC,
to a certain extent, is a derogation of the taxpayer’taxpayer’ss right to se
security
curity against prolonged and unscrupulous
investig
investigations
ations and must therefore be carefully and strictly construed (Philippine journalists, Inc. x. CIR, G.R. No.
162852, December 16, 2004).

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(b)Has the right of the Government to assess and collect deficiency taxes from Vantage Point, Inc. for the
(b)
year 2012 prescribed? Explain your answer. (4%)

SUGGESTED ANSWER.

(b) Yes, the final assessment was issued beyond the three year prescriptive period to ma makeke an assessment
(Section 203, 1997 NIRC, as amended). The W Waiver
aiver did not extend the three-year prescriptive period, since it was
three-year
exe
executed
cuted after the expiration of such period.

XI
XI.

The Board of Directors of Sumo Corporation, a company primarily engaged in the business of marketing
and distributing pest control products, approved the partial cessation of its commercial operations,
resulting in the separation of 32 regular employees. Only half of the affected employees were notified
of the board resolution.

Rule on the taxability of the separation pay and indemnity that will be received by the affected employees
as the result of their separation from service. Explain your answer. (3%)

SUGGESTED ANSWER

It sha
shallll be tax
tax-ex
-ex
-exempt
empt
empt.. Section 30(B)(
30(B)(6)(b)
6)(b) of the 1997 NIRC, as amend
amended,
ed, provi
provides amountt received by
des that any amoun
an official or employee or by h his
is heirs from the employer as a consequence of separa
separation
tion of such official or employee
from the service o off the employer because of death, ssickness
ickness or other physical disability or for any cause beyond the
control of the said offofficial
icial or employe
employee e shall be exempt from taxation.

XII
XII.

On September 17, 2015, Data Realty, Inc., a real-estate corporation duly organized and existing under
Philippine law, sold to Jenny Vera a condominium unit at Freedom Residences in Malabon City with an area
of 32.31 square meters for a contract price of P4,213,000. The condominium unit had a zonal value
amounting to P2,877,000 and fair market value amounting to P550,000.

(a) is the transaction subject to value-added tax and documentary stamp tax? Explain your answer. (3%)

SUGGESTED ANSWER

(a) Yes. As to the VA VAT T liability

liability,, sale of real properties held primarily for sale to customer or held for lease in the
ordinary course of trade or business is subject to VA VATT (Section 106 (A) 1)(a), 1997 NIRC, as amended); further
further,,
the contract price, which is the highest compared to the zonal value and the fair market value, is beyond the
tran
transactional
sactional . thresho
threshold
ld amount for residential dwellings thereby making the sale transaction VATable. As to the DSTDST..
liability
liability,, all deeds o f sale and convey
conveyances
ances of real property are likewise subject to DST (Section 196, 1997 NIRC, as
amended).

(b)Would your answer be the same if the property was sold by a bank in a foreclosure sale? Explain
(b)
your answer. (3%)

SUGGESTED ANSWER

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(b) No, the sale made by the bank is exempt from VAT. Banks are exempt from VA VATT because they are subject to
percentage tax under Title V of the N IRC (Section 109 in relation to Section 121 of 1997 NIRC, as amended). The
sale
sale,, howev
however
er
er,, will s till be subjec
subjectt to DST because con
conve
ve
vey
yances of real property are gener
generally
ally subject to DST
(Section 196, NIRC).

XIII

BATAS Law is a general professional partnership operating in the City of Valenzuela. It regularly pays value-
added tax on its services. All its lawyers have individually paid the required professional tax for the
year 2017. However, as a condition for the renewal of its business permit for the year 2017, the City
Treasurer of Valenzuela assessed BATAS Law for the payment of percentage business tax on its gross
receipts for the year 2016 in accordance with the Revenue Tax Code of Valenzuela.

Is BATAS Law liable to pay the assessed percentage business tax? Explain your answer. (3%)

SUGGESTED ANSWER

No Section 133 (i) of the Local G

Gove
ove
overnment
rnment Code provides that tthe
he exercise of the taxing powers of local government
units such as the City of V alenzuela shall not extend to the levy of percentage or value- added tax (V
Valenzuela (VA
AT) on sales,
barters or exchanges or si similar
milar transactions on goods or services excep
exceptt as otherwise provided in the LGC;
therefore, BA
BAT
TAS Law may not be assessed with and required to pay percentage business tax.

XIV
XIV.

Globesmart Services, Inc, received a final assessment notice with formal letter of demand from the BIR for
deficiency income tax, value-added tax and withholding tax for the taxable year 2016 amounting to
P48 million. Globesmart Services, Inc., filed a protest against the assessment, but the Commissioner of
Internal Revenue denied the protest. Hence, Globesmart Services, Inc. filed a petition for review in the CTA
with an urgent motion to suspend the collection of tax.

After hearing, the CTA Division issued a resolution granting the mo tion to suspend but required
Globesmart Services, Inc., to post a surety bond equivalent to the deficiency assessment within 15 days
from notice of the resolution. Globesmart Services, Inc, moved for the partial reconsideration of the
resolution and for the reduction of the bond to an amount it could obtain.

The CTA division issued another resolution reducing the amount of the surety bond to P24 million.
The latter amount was still more than the net worth of Globesmart Services, Inc., as reported in its
audited financial statements.

(a) May the collection of taxes be suspended? Explain your answer. (3%)

SUGGESTED ANSWER

(a) Yes. As provided by RA No. 1125, as amended by RA No. 9282, that when in the opinion of the Court the
collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the
taxpaye
taxpayerr, the Court
Court at any stage of the proceeding may suspend the collection and require the taxpayer either to
deposit the amount cclaimed
laimed or to file a suret
suretyy bond for n
not
ot more than double the amount with the Court.

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(b)
(b)Is the CTA Division justified in requiring Globesmart Services, Inc., to post a surety bond as a condition
for the suspension of the deficiency tax collection? Explain your answer. (3%)

SUGGESTED ANSWER

(b). No. The Supreme Court in the Tridharma Case cited the case of Pacquiao v. Court of Tax Appeals (G.R. No.
213394, ApApril
ril 6, 2016) where it ruled that the CT CTA
A should first conduct a preliminary hearing for th the
e proper
determination of the necessity of a surety bond o orr the reduction thereof
thereof.. In the conduct of its p
preliminary
reliminary hearing, the
CT
CTAA must balance the scale between the inherent power of the State to tax and its rig right
ht to prosecute perceived
tran
transgressors
sgressors of tthe
he law, on one side, and the cconstitutional
onstitutional rights of petitioners to d due
ue process o f law and the equal
protection of the laws, on the o
other
ther
ther.. In this case, the CT
CTAA failed to consider that the amount o off the surety bond that it
is asking Globesmart Services, Inc. to pay is more than it itss net worth. It is, thus, necessary for the CT CTA
A to first conduct
a preliminary hearing to give the taxpa
taxpayer
yer an opportunit
opportunityy to prove its inability to ccome
ome up with such amount.

XV
XV.

Casimira died on June 19, 2017, after three weeks of confinement

due to an unsuccessful liver transplant. For her confinement, she had incurred substantial medical
expenses that she financed through personal loans secured by mortgages on her real properties. Her heirs
are still in the process of making an inventory of her assets that can be used to pay the estate taxes, if
any, which are due on December 19, 2017.

(a) Are the medical expenses, personal loans and mortgages incurred by Casimira deductible from her
gross estate? Explain your answer.

SUGGESTED ANSWER

(a) Yes, subject to certain conditions set by the NIRC. As for the medical expenses, they must be incurred within one
year from death, whether paid or unpaid, and the amount must not exceed P500,000. As for the personal loans, it is
require
required
d that the loan document must be notarized and if incurred within three years from the date of death, the
executor or administrator shall submit a statement showing the disposition of the proceeds o off the loan. As to th
thee
mortgages, it is required that the fair
fair.. market value of Casimira’
Casimira’ss interest in said property
property,, undiminished by such
mortgage or indebtedness, is included in the valu
value
e of the gross estate. The claims for personal loans and mortgages
must have be
been
en contracted bona fide and for an adequate consideration in money or money money’’s worth (Section 86, 199
1997 7
NIRC, as amende
amended).
d).

(b). May the heirs of Casimira file the estate tax return and pay the corresponding estate tax beyond
December 19, 2017, without incurring interest and surcharge? Explain your answer. (3%)

SUGGESTED ANSWER

(b). The heirs may file the estate tax return beyond December 19, 2017 2017,, as long as they filed a req
request
uest for a
reasonable extension, not exceeding 30 days. Once the reques
requestt for extension has been granted and the return filed
within the extended period following the “pay-as-
“pay-as-you
you file” procedure, only the interest on exten
extended
ded payment may be
impo
imposed
sed but not the surcharge. Interest and surcharge, however
however,, may be imposed upon failure of the heirs to file
and pay the estate tax within the ext
extended
ended period gran ted by the CIR (Sections 248(A) and 249 (D), 1997 NIRC, as
granted
amended).

Section 91, on the other hand, allows for the extension o f time to pay the estate tax due, for a period not exceeding
five (5) years in case the estate is settled through the courts, or two (2) years in case the

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estat
estate
e is sett
settled
led extraju
extrajudici
dici
dicially
ally
ally,, If an extension is granted, the interest on ex extended
tended payment may be imposed.
The Commissioner may require the exe executor
cutor
cutor,.
,. or administr
administrator
ator
ator,, or beneficiary
beneficiary,, as the case may be, to furnish a bond in
an amount not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary necessary,,
conditioned u
upon
pon the pay
pay.. ment of the said tax in acc
accordance
ordance with the terms of the extension.

XVI
XVI.

The BIR assessed the Babuyan Water District (BWD) with deficiency income taxes amounting to P8.5
million, inclusive of interest and surcharge. The BWD disputed the assessment, and argued that it was
a wholly-owned government entity performing essential government functions. However, the BR denied the
protest.

The BWD filed a petition for arbitration in the Office of the Secretary of Justice pursuant to Sections
66 to 71, Chapter 14, Book IV of the Administrative Code of 1987 to assail the denial of its protest, and to
seek the proper interpretation of Section 32(B)(7)(b) of the Tax Code that excluded from gross income the
income derived by the Government or its political subdivisions. The Secretary of Justice rendered a
decision declaring the BWD exempt from the payment of income tax.

The Commissioner of Internal Revenue appealed to the CTA on the sole ground that the Secretary of
Justice had no jurisdiction to review the assessment of the BIR.

Is the appeal meritorious? Explain your answer. (4%)

SUGGESTED ANSWER

No. Section 7(a) of RA No. 1125, as amended by RA 9282 enu me merates

rates the CT
CTA‘s
A‘s exclusive appellate jurisdiction
to review by appeal cert
certain
ain decisions or inaction but not that of a Secretary of Justice.

Mor
Moreo
eo
eover
ver
ver,, de
despi
spi
spitete the issue inv
involve
olve
olvess th
the
e CI
CIR
R’s as
asse
se
sessm
ssm
ssment
ent
ent,, howev
however
er
er,, Secti
Section
on 7(a)
7(a)(1)
(1) of the same law
law,, specifically
the phrase “other matters arising under the National Internal Revenu Revenue e or other laws admini
administered
stered by the Bureau
of In
Internal
ternal Rev
Revenue”
enue” mumust
st be rea
readd toget
together
her wit
with
h words preceding it, i.e.
i.e.,, “decisions of the Commissioner o f
Internal Revenue in cases involving disputed assessments, following the statutory construction principle of ejusdem
generis (CIR V V.. CT
CTAA (Second Division) and P Petron
etron Corporation, GR No. 207843, July 15, 2015).

ALTERN
ALT ATI
ERNA VE A
TIVE ANS
NS
NSWE
WE
WER
R

Yes. G OCCs are taxable entities and they are not exempt from BIR assessment and collection, unless their
charter or the law creating them p
provides
rovides otherwise. Hence, in case of tax dispute between a GOCC and the BIR, the
controv
controversy
ersy is cogniza
cognizable
ble and appealable to the CT
CTA.
A. The issue cannot be rresolved
esolved by the DOJ.

PD 242 is a gener
general
al law that deals with adadministrative
ministrative set
settlement
tlement or adjudication of disputes, claims, and controv
controversies
ersies
between o orr among governmen
governmentt offices, agencies and instrumentalities, including GOCCs; whereas, RA 1125 (the law
creatin
creatingg CT
CTA)A) is a special law
law.. A special law
law.. prev
prevails
ails ove
overr a gener
general law.. The fact that PD 242 iiss the more recent law
al law
is of no significance, CT CTAA has jurisdiction when a GOCC is assessed tax taxe
es. Dispu
Disputes,
tes, cla
claims,
ims, and controv
controversi
ersi
ersies
es
falling under RA 1125, even though solely among gov government
ernment off
offices,
ices, agencies
agencies,, and instr
instrument
ument
umentali
ali
alities,
ties, inc
includi
ludi
luding
ng
GOCC
GOCCs, s, remain solely in the exclusive jurisdict
jurisdiction
ion of the CT CTA.
A.

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[Note: (On recent jurisprudence not covered by the 2017 Bar S Syllabus)
yllabus) The Supreme Court held in Commissioner
of Internal Rev
Revenue
enue vv.. Secretary of Ju tice and PAGCOR (G.R. No. 177387
177387,, November 9, 2016) that the Secretary of
Justice does not have any jurisdiction ttoo review aany
ny disputed assessments arising under the Tax Code. The Secretary
of Justice should have desisted from dealing with the petitio
petition
n and referred the matter to th
thee Court of T
Tax
ax Appeals that
has jurisdiction over ap peals on the decisions of the BIR in tax assessment cases).
appeals

XVII

San Juan University is a non-stock, non-profit, educational institution, It owns a piece of land in
Caloocan City on which its three.2-storey school. buildings stood. Two of the buildings are devoted to
classrooms, laboratories, à canteen, a bookstore, and administrative offices. The third building is reserved
as dormitory for student athletes who are granted scholarships for a given academic year.

In 2017, San Juan University earned income from tuition fees and from leasing a portion of its premises to
various concessionaires of food, books, and school supplies.

(a) Can the City Treasurer of Caloocan City collect real property taxes on the land and building of San Juan
University? Explain your answer. (5%)

SUGGESTED ANSWER

(a) Yes, but only on the leased p portion.

ortion. Article XIV
XIV,, Section 4(3) of the 1987 Constitution provides that tthe
he assets o
off a
non-stock, non-profit educational institution shall be ex empt from taxes and duties only if the same a
exempt are
re used aactually
ctually
ctually,,
directly
directly,, and exclusively for educational purposes. The test of exemption from ta taxation
xation is the use of the property
for purposes mentione
mentionedd in the Constitution. The leased portion of the building may be subject to real property tax
since such lease is for commercial purposes, thereb
therebyy, it removes the asset from the property tax exemption granted
under the Constitution (CİR vv.. De La Salle University
University,, Inc.
Inc.,, G.R. Nos. 196596, 19884
198841;
1; 198941, November 9, 2 2016).
016).

(b) is the income earned by San Juan University for the year 2017 subject to income tax? Explain your
answer. (5%)

SUGGESTED ANSWER

(b) No, prov

provided
ided that the revenues are used actually
actually,, directly
directly,, and exclus
exclusively
ively for educational purposes as provided
under Article XIV, Section 4(3) of the 1987 Constitution. The requisites for availing the tax exempti
XIV, Section on under
exemption
Article XIV
XIV,, Section 4 (3) are aass follows: (1) the tax
taxpayer
payer ffalls
alls under the classification non-stock, non-profit educational
institution, and (2) the income it seeks to be exempted from taxation is used actually actually,, directly and exclus
exclusively
ively for
educational purposes; thus, so long as the requisites are met, the revenu revenues
es may be exempt from ttax ax (CIR v. De La
Salle University
University,, Inc.
Inc.,, G.R. Nos. 196596, 198841, 198941, November 9, 2016).

XVIII
XVIII.

Distinguish outright smuggling from technical smuggling. (3%)

SUGGESTED ANSWER

(a)In outright smuggling (or unlawful importation), goods and articles o f commerce are brought into the country
without the required importation documents, or are disposed of in the local market Without

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having been cleared by the BOC or other authorized government agencies, to evevade
ade the payment of correct
tax
taxes,
es, duties and other charges. (Bureau of Customs v. The Honor
Honorable
able Agnes VST Devanadera, er al, G.R.. No.
Devanadera
193253, September 8, 2015)

Sec, 102. (FI) CMT A: Outright Smugg

CMTA: ling refe
Smuggling rs to an act of importing goods into the country without complete
refers
customs prescribed importation documents, or without being cleared by customs or other regul regulator
ator
atory
y
gov
governm
ernm
ernment
ent agencies, for the purpose of evading payment of prescribed taxes, duties and other government
charges.

On the other hand, in technical smuggling, the goods and articles are brought int into
o the country through fraudulent,
falsifie
falsified
d or erroneous declar
eclarations, nott totally avoid, the payment of correct taxes, duties
ations, to substantially reduce, if no
and other charges. Such goods and articles pass through the BOC, but the proce processing
ssing and cleari
clearing
ng procedu
procedures
res
are attended by fraudulent acts in order to evade the payment of correct tax taxes,
es, du ties, and other charges (Bureau
of Customs vv.. The Honor
Honorable
able Agnes VST Dev
Devanader
anader
anadera,a, et al, G.R. No. 193253, September 8, 2015).

Sec. 102. (pp) CMT A: Technical Smuggling refers to the act of importing goods into the country by means of
CMTA:
fr
fraudulent,
audulent, falsified or erroneous declaration of the goods to its nature, kin
kind, quality,, quantity or weight, for the
d, quality
purpose of reducing or a avoiding
voiding pay
payment
ment of prescribed tax
taxes,
es, duties, and other charges.

(b)
(b)Distinguish compromise from abatement of taxes (3%)

SUGGESTED ANSWER:

(b) A compromise of tax is a remedy which is availa

available
ble when there is a reasonable doubt as tto
o the validit
validityy of the claim
against the taxpayer exists, or when the financial position of the taxpayer demonstr ates a clear inability to pay the
emonstrates
assessed tax.

Abatement of tax, on the other hand, is available as a remedy when the tax or any portion thereof appears to be
unjustly or excessively assessed, or when the administration and collection costs involved d
doo not justify the collection
of the amount due (Section 204, NIRC).

XIX.

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.

(a) Is CMI School, Inc., liable for the payment of donor’s tax? Explain your answer. (2.5%)

SUGGESTED ANSWER

(a)
(a)No.
No. Gifts made by a resident in favor o
off an educational corporation or instit
institution
ution shall be exempt from donor
donor’’s tax
(Section 101(A)(3), 1997 NIRC, as amended). Considering that SLC Universit
Universityy is a non-stock, no
non-profit
n-profit corpor
corporation,
ation,
and the property donated was made by a resident, then, such exemption under the law applies to the present
cases.

(b) 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. (3%)

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SUGGESTED ANSWER

(b) Yes. The gain presumed to have been realize

realized
d on the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets shall be subject to capital gains
tax (Section 27(D)(5), 1997 NIRC, as amended). Likewise, Section 30 of the N IRC subjects to income tax (capital
gains ttax)
ax) all income from prop
properties,
erties, real or personal, or from any ac
activity
tivity conducted for profit, irrespective of the
disposition of the income, by a allll tax exempt corporations.

(c)If SLC University donates the three parcels of idle land in favor of the Municipality of Cuyapo, Nueva
(c)
Ecija, will SLC University be ii able for donor’s tax? Explain your answer. (2.5%)

SUGGESTED ANSWER

(C) No. Gifts made by a resident to any political subdivision of the National Government shall be exempt from donor’s
tax (Section 101(A)2), 1997 NIRC, as amended).

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 2016 T
TAXA
AXA
AXATION
TION LAW BAR EXAM Q
QUESTIONS
UESTIONS AND SUGGESTED ANSWERS

Briefly explain the following doctrines: lifeblood doctrine; necessity the benefits received principle;
and, doctrine of symbiotic relationship (5%)

SUGGESTED ANSWER

The follo
following
wing doctrines, explained:

✓ Lifeblood doctrine – Without revenue raised from taxation, the government will not su survive,
rvive, resulting in detriment
to society
society.. With
Without
out tax
taxes,
es, tthe
he government would be paralyz
paralyzed
ed for lack of motive power to activate and operate it (CIR
v. Algue, Inc.
Inc.,, G.R. No. LL-28896,
-28896, February 17
17,, 1988, 158 SCRA 9).

✓ Necessity theory – The exercise of the power to tax emanates from necessitnecessityy, because without taxes, government
cannot fulfill its man
mandate
date of promoting the gener
general
al welfare and well bein
being
g of the people (CIR
v. Bank of Philippine Islands, G.R. No. 13406
134062,
2, April 17
17,, 2007
2007,, 521 SCRA 373).

✓ Benefits received principle – Taxpay ers receive benefits from taxes through the protection the State affords to
axpayers
them. FFo
o r the protecti
protection
on they get arises their obligation to supp
support
ort the government thro
through
ugh the payment of tax
taxes
es (CIR
V. Algue, Inc.
Inc.,, G.R. No. LL-28896,
-28896, FFebruary
ebruary 17
17,, 1988, 158 SCRA 9 9).
).

reciprocal relation of protection a taxpayers. The state gives protection an protection, it must be supported by
(CIR vv.. Algue, Inc.
Inc.,, G.R. No. LL-28896,
-28896, Februar

✓ Doctr
Doctrine
ine of sym
symbioti
bioti
bioticc relat
relationsh
ionsh
ionshipip – T
Taxat
axat
axation
ion arises beca
because
use of the rerecipro
cipro
ciprocal
cal rel
relatio
atio
ation
n of protection and sup
support
port
betw
between
een the state and taxpa taxpayeye
yers.
rs. The state gives protection and for it to continue giving protection, it must be
supported by the taxpayers in the form of tax taxes.
es. (CIR vv.. Algue, Inc.
Inc.,, GR. No. LL--
28896, FFeb
eb
ebruary
ruary 17
17,, 1988, 1158
58 SCRA 9).

II

State at least five (5) cases under the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA).

(5%) SUGGESTED ANSWER

The following cases are under the exclusive appellate jurisdiction of the Court of Tax Appeals.
• Exclusive appellate jurisdiction to review by appeal:
• Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the NIRC or other laws administered by the BIR;
• Inaction of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the NIRC or other laws administered by the BIR, where the NIRC provides a
specific period of action, in which case the inaction shall be deemed a denial;
• Decisions, orders or resolutions of the RTC in local tax cases originally decided or resolved by them
in the exercise of their original or appellate jurisdiction;
• Decisions of the Commissioner of Customs in cases involving liability of customs duties, fees or
other money charges, seizure, detention or release of property affected, fines, forfeitures or other

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 penalties in relation thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs; and
• Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally decided
by the provincial or city board of assessment appeals.
• 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 Sec.
2315 of the Tariff and Customs Code; and
• 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 Sec. 301 and 302. respectively, of the Tariff and
Customs Code, and safeguard measures under R.A. No. 8800, where either party may appeal
the decision to impose or not impose said duties.
• Exclusive app ellate jurisdiction in criminal offenses:
◦ Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax
cases originally decided by them, in their respective territorial jurisdiction; and
◦ Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in
the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan
Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective
jurisdiction.

NOTE: It is recommended that any five (5) of the above-enumerated cases be given credit].

III
III.

Rakham operates the lending company that made a loan to Alfonso in the amount of P120,000.00 subject
of a promissory note which is due within one (1) year from the note’s issuance. Three years after the loan
became due and upon information that Alfonso is nowhere to be found, Rakham asks you for advice on how
to treat the obligation as “bad debt.” Discuss the requisites for deductibility of a “bad debt?” (5%)

SUGGESTED ANSWER

Iwwill
ill advise Rakham that the obligation of Alfonso may now be co considered
nsidered aass bad debts for having met the yardstick
of a debt which had become worthless. In order to be considered worthless, the taxpayer should establish tthat hat during
the year frfrom
om which a deduction is sought, a situation deve
developed
loped as a result of which it became evident in the exexercise
ercise
of sound, objective business judgment that there remained no practical, but onl onlyy vaguely theoretical, prospect that
the debt would ever be paid (Collector of Internal Revenue v. Goodrich International Rubber Co. Co.,, G.R. No. L-22265,
1967,, 21 SCRA 1336). A bad debt is deductible if it complies with the following requisites:
December 22, 1967

(a)
(a)There
There must be a vvalid
alid and subsisting debt
debt..

(b)
(b)The
The obligation is connected with the taxpay
taxpayer’
er’
er’ss trade or business and is not

between related parties.

(C) There is an actual ascertainment tthat

hat the debt is worthless.

(d)
(d)The
The debt is charged-off durin
during
g the taxable year
year.. A partial write-off is not allowed.(PRC vv.. CA, G.R. No. 118794,
May 8, 1996, 256 SCRA 667).

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 IV
IV.

The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real property
located within the city at a rate of fifty percent (50%) of one percent (1%) of the total consideration
of the transaction, Jose sold a parcel of land in the city, which he inherited from his deceased parents, and
refused to pay the aforesaid tax. He instead filed a case asking that the ordinance be declared null and
void since the tax it imposed can only be collected by the national government, as in fact he has paid the
Bureau of Internal Revenue (BIR) the required capital gains tax. If you were the City Legal Officer of
Maharlika, what defenses would you raise to sustain the validity of the ordinance? (5%)

SUGGESTED ANSWER

I would argue that the City is aallowed

llowed to levy a tax on tr
transfer
ansfer of real property ownership (Sec. 135, LGC). The ca
capital
pital
gains tax which is an income tax collected by the national gove overnment
rnment is entirely differ
different
ent from the tax on sale o r
tran
transfer
sfer imposed by the ordinance. The tax imposed by the ordinance not being in the nature of an income tax, the
imposition o f the income tax by the national government will not pre- empt the tax sought to be impos imposed
ed by the
ord
ordinanc
inanc
inance.e. I would furthe
furtherr arg
argue
ue that the imposition by the national government of a tax will pre-empt Local
Government Units (LGU) only if there is no s pecific provision under the Local Government Code giving said
power (Bulacan vv.. CA, G.R. No. 126232, November 1998, 299 SCRA 442),

V.

Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of Nigeria. Its
commercial airplanes do not operate within Philippine territory, or service passengers embarking from
Philippine airports. The firm is represented in the Philippines by its general agent, Narotel. SAA sells
airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside the
Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to
PIO,000,000.00 The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes
at the rate of 30% on its taxable income, finding that SAA’s airline ticket sales constituted income
derived from sources within the Philippines. SAA filed a protest on the ground that the alleged
deficiency income taxes should be considered as income derived exclusively from sources outside the
Philippines since SAA only serviced passengers outside Philippine territory. It, thus, asserted that the
imposition of such income taxes violated the principle of territoriality in taxation. Is the theory of SAA
tenable? Explain. (5%)

SUGGESTED ANSWER

No. The activity which gives rise to the income is the sale of ticket in the Philippines, hence, the income from ssale
ale of
tickets is an income derived from Philippine sources which is subject to the Philippine income tax. Accordingly
Accordingly,,
there is no violation of the principle of territoriality in taxation (Air Canada v. CIR, G.R. No. 169507
169507,, January 11,
2016, 778 SCRA 131).

[Note: As the case which is the basis of the answer was decided before the cut-off date for the 2016 Bar
Examinations, it iiss recommended that this question be considered a bonus question, with any answer to be given full
credit.
credit.]]

VI

Mapagbigay Corporation grants all its employees (rank and file, supervisors, and managers) 5% discount
of the purchase price of its products. During an audit investigation, the BIR assessed the company the
corresponding tax on the amount equivalent to the courtesy discount received by all the employees,

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contending that the courtesy discount is considered as additional compensation for the rank and file
employees and additional fringe benefit for the supervisors and managers. In its defense, the
company argues that the discount given to the rank and file employees is a de minimis benefit and not
subject to tax. As to its managerial employees, it contends that the discount is nothing more than a
privilege and its availment is restricted.

Is the BIR assessment correct? Explain. (5%)

SUGGESTED ANSWER

No. The courtesy discounts given to rank and file employe employees es are considere
considered d “de minimis benefits” fall
falling
ing under the
category of other facilities and privileges furnished or offered by an employe employerr to his employees which are of
relatively small value intended to promote the health, goodwill, contentment or eff efficienc
icienc
iciency
y of the employ
employee. ee. The
These
se
benef
benefits
its are no
nott consid
considere
ere
eredd as compensation subject to income tax
an d con se qu
queen tly t o the wit hh
hhol
ol
olddi ng tax ( Sec. 2. 78
78..1 ′ of RR No . 10-2
10-200
00
0088 ). I f these “de mi
min
nim is ben efi
fitt s”
are furnished to supervisors and managers, the same are also exem exemptpt from the fringe benefits tax (RR
No. 3-98; Sec. 33, N NIRC).
IRC). AL
ALTERNA
TERNA
TERNAT TIVE

ANSWER

Yes, the BIR assessment is correct. De minimis benefits are benefits of relatively small values provided by the
employ
employers
ers to the employ
employee
ee on top of tthe
he basic compensation intended for the general welfare o off the employees. It is
considered exempt from income tax on compensation as we wellll as from fringe benefit tax, provided it does not exceed
P10,000 per employee ppertaxable
ertaxable year
year..

Pursuant to RR No. 1-2015, which amended RR No. 2-98, 3-98, 5-2008, 5-2011 and 8-2012, the following are
considered de minimis benefits:

a) Monetized unused vacatvacation

ion leave credits of privriva
ate employees notexceeding 10 days during the year;
b) Monetized vvalue
alue of vvacation
acation and sick leave cr credits
edits paid to gov
government
ernment officials and employees
c) Medica
Medicall cash allo
allowan
wan
wancece to depend
dependentsents of em
employ
ploy
ployees,
ees, no
nott exc
exceedi
eedi
eeding
ng Php75
Php750 0 per employee per semester
or Php125 per month.
d) Rice subsidy of Php1,500
e) Uniform and cloth
clothing
ing allowance not exceeding Php5,000 per annum
f ) Actual medical assistance not exceeding Php10,000 per annum
g) Laundry allowance not exce eding Php300 per month
exceeding
h) Employees
Employees’’ achievement awa award
rd
rds,
s, e.g. for length of service or safety achievement, which must be in the form
of tangible personal property other than cash or gift certificate, with an annual monetary value not
exceeding Php10,000 received by the employee under an established written pl plan
an which does not
discriminate in favo
favorr of highly paid employ
employees.
ees.
i) Gifts made during Christmas and major anniversary celebr celebrations
ations not exceedi
exceeding
ng Php5,000 per employee
per annum
j) Dai
Daily
ly meal allowa
allowance
nce for overt
overtime
ime work and night/g
night/gra
ra
rave
ve
veyar
yar
yardd shift not exceed
exceeding
ing twent
twenty
y-fiv
-five
e perc
percent
ent
(25%) of the basic minimum wage on a per re region
gion basis
k) Benefits rereceived
ceived by an employee by virtue of a collective bargaining agreement and productivity
incentive schemes provided that the total monetary value received from both CBA and productive incentive
schemes combined do not eexceedxceed Php10,000 per eemployee
mployee per taxa
taxable
ble year
year..

This list is exclusive and anything th

that
at is given which is not on the lis
list,
t, shall not be considered de minimis. The 5%
discount of purchase price of its products, not being in this enumeration, is subject to tax as well as to withholding
tax on compensation.

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 VIII

In 2011, Solar Computer Corporation (Solar) purchased a proprietaru membership share covered by
Membership Certificate No. 8 from the Mabuhay Golf Club, Inc.. for P500,000.00. On December 27, 2012,
it transferred the same to David, its American consultant, to enable him to avail of the facilities of the Club.
David executed a Deed of Declaration of Trust and Assignment of Shares wherein he acknowledged the
absolute ownership of Solar over the share; that the assignment was without any consideration; and that
the share was placed in his name because the Club required it to be done. In 2013, the value of the share
increased to P800,000.00

Is the said assignment a “gift” and, therefore, subject to gift tax? Explain. (5%)

SUGGESTED ANSWER

No. The transf

transfer
er is not a taxable donation because there is no divestmen
divestmentt of ownership by tthe
he transfer
transferor
or
or.. The purpose
of the trans
transfer
fer is simply to allow David to avail of the facilities of the Club. The execution of a “Deed of Declaration of
Trust and Assignment of Shares” w here the absolute ownership by Solar of the share is acknowledged would show
that there is no relinquishment o f ownership by Solar Solar.. The transf
transfer
er being merely a transfer in form but not in
substance, the same is not subject to gift tax.

IX

(A)Explain the procedure for claiming refunds or tax credits of input Value Added Tax (VAT) for zero-rated
or effectively zero-rated sale. under Sec. 112 of the National Internal Revenue Code (NIRC) from the filing
of an application with the CIR up to the CTA. (2.5%)

(B)Explain the procedure for claiming refunds of tax erroneously or illegally collected under Sec. 229 of the
NIRC from the filing of the claim for refunds with the CIR up to the CTA. (2.5%)

SUGGESTED ANSWER

(A) In order to be entitled to a refu

refund/tax
nd/tax credit of exces
excesss input VAT attributable to zero-rated or effect
VAT effectively
ively
zero-rated sales, the following requisite
zero-rated requisitess must be complied with:

a) The cla
claim
im for refu
refund
nd must be filed with the Commis
Commission
sion
sionerer within 2 years count
counteded from the last day of the
quart
quarter
er whe
when
n the zer
zero.
o. rrated
ated sale wa
wass mad
madee (Sec. 1112,
12, NIRC);
b) The claim for refund must be accompanied by a statement under oath th that
at all documents to support the
claim has been submitted at the time of filing of the claim ffor or refun
refund
d (RMC 54-14);
c) The Commissioner must decide o onn the claim wit
within
hin 120 d days
ays from date of filing and the adverse decision is
appealable to the CTCTA
A within 30 days frofrom
m receipt (Sec. 112, NIRC; CI CIR
R vv.. Aichi Forg
Forging
ing of Asia, Inc.
Inc.,, G.R.
No. 184823, October 6, 2010, 632 SCRA 422);
d) If no decisio
decision
n is made within the 120-d
120-day
ay period, there is a deemed denial or adverse decision which is
appealable to the CT
CTA
A within 30 days from the lapse o off th
thee 120-day period (Sec. 112, NIRC; Sec. 7(a)(1) of
RA 1125, as amended by RA 9282).

Congress issued a law allowing a 20% discount on the purchases of senior citizens from, among
others, recreation centers. This 20% discount can then be used by the sellers as a “tax credit.” At the
initiative of

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BIR, however, Republic Act No. (RA) 9257 was enacted amending the treatment of 20% discount as a “tax
deduction.” Equity Cinema filed a petition the RTC claiming that RA 9257 is unconstitutional as it
forcibly deprives sellers a part of the price without just compensation.

(A)What is the effect of converting the 20% discount from a “tax credere to a “tax deduction”? (2.5%)

(B)If you are the judge, how will you decide the case? Briefly explain your answer. (2.5%)

SUGGESTED ANSWER

(A) The effect of converting the 20% discount from a “tax credit” to a “tax deduction” is that the tax benefit
enjoyed by sellers of goods and services to senior citizens is effec tively reduced. A tax credit reduces the ta
effectively taxx
liability while a tax deduction merely reduces the tax base. Under the tax credit scheme, the establishments are paid
back 100% of the discount they give to senior citizens while under the tax deduction scheme, they are only paid back
about 32% of the 20% discount gr granted
anted to senior citizens.

(B) I will decide in favor of the Constitutionality of the law. Th

The
e 20% discount as well as the tax deduction scheme is a
valid exercise of the police power of the State (Manila Memorial Park Inc. v. Department on Social Welfare an andd
Develop
Development,
ment, G.R. No. 175356, December 3, 2013, 711 SCRA 302)

XI

Soaring Eagle paid its excise tax liabilities with Tax Credit Certificates (TCCs) which it purchased
through the One Stop Shop Inter-Agency Tax Credit Center (Center) of the Department of Finance. The
Center is a composite body of the DOF, BIR, BOC and the BOI. The TCCs were accepted by the BIR as
payments. A year after, the BIR demanded the payment of alleged deficiency excise taxes on the ground
that Soaring Eagle is not a qualified transferee of the TCCs it purchased from other BOl-registered
companies. The BIR argued that the TCCs are subject to post-audit as a suspensive condition. On the
other hand, Soaring Eagle countered that it is a buyer in good faith and for value who merely relied on
the Center’s representation of the genuineness and validity of the TCCs. If it is ordered to pay the
deficiency, Soaring Eagle claims the same is confiscatory and a violation of due process. Is the
assessment against Soaring Eagle valid? Explain. (5%)

SUGGESTED ANSWER

No. The assessment is inv invalid

alid because the TCC’
TCC’ss used by Soaring Eagle are valid and effective. A TCC is an
undertaking by the govern
government
ment through the BIR or DOF
DOF,, acknowledging that a taxpayer is ent
entitled
itled to a certain amount
of tax credit from either an overpayment of income taxes, a di rect benefit granted by law or other sources and
direct
instances granted by law such as on specific unused input taxes and excise taxes on cert certain
ain goods. As such, tax
credit is transf
transfera
era
erable
ble in accordan
accordancce with pertinent laws, rules, and regu
regulatio
latio
lations
ns (Pilip
(Pilipinas
inas Shel
Shelll Pe
Petrol
trol
troleum
eum Corp
Corp.. v.
Comm
Commission
ission
issioner
er of Interna
Internall Reve
Revenue,
nue, G.R. No. 172598, December 21, 20072007,, 541 SCRA 316).

XII

The Philippine-British Association, Inc. (Association) is a non-stock non-profit organization which owns the
St. Michael’s Hospital (Hospital) Sec. 216 in relation to Sec. 215 of the LGC classifies all lands, buildings
and other improvements thereon actually, directly, and exclusively used for hospitals as “special.” A
special classification prescribes a lower assessment than a commercial classification.

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Within the premises of the Hospital, the Association constructed the St. Michael’s Medical Arts Center
(Center) which will house medical practitioners who will lease the spaces therein for their clinics at
prescribed rental rates. The doctors who treat the patients confined in the Hospital are accredited by
the Association. The City Assessor classified the Center as “commercial” instead of “special” on the ground
that the Hospital owner gets income from the lease of its spaces to doctors who also entertain out-
patients. Is the City Assessor correct in classifying the Center as “commercial?” Explain. (5%)

SUGGESTED ANSWER

No. The Medi

Medicalcal Arts Center is an integr
integra
al part of the Hosp
Hospital
ital and should be classified for assessment purposes
“special”.. The fact alone that the doctors holding clinics in the Center are those duly accredited by the
as “special”
Association who o owns
wns the Hospital, and these doctors are the ones who can treat the Hospital’
Hospital’ss patients confined in
it, takes away the said Medical Arts Center from being categorized as “commercial” since a tertiary hospital is
require
requiredd by law to have a pool of physicia ns who comprise the required medical departments in various medical
physicians
fields (City Assessor
Assessora a Cebu City v. Association of Benevola de Cebu, Inc.
Inc.,, G.R. No. 152904, June 2007
2007,, 524 SCRA
128).

XIII

Pursuant to Sec. 11 of the “Host Agreement between the United Nations and the Philippine government, it
was provided that the World Health Organization (WHO), “its assets, income and other properties shall be:
a) exempt from all direct and indirect taxes.” Precision Construction Corporation (PCC) was hired to
construct the WHO Medical Center in Manila. Upon completion of the building, the BIR assessed a 12%
VAT on the gross receipts of PCC derived from the construction of the WHO building. The BIR contends
that the 12% VAT is not a direct nor an indirect tax on the WHO but a tax that is primarily due from the
contractor and is therefore not covered by the Host Agreement. The WHO argues that the VAT is deemed
an indirect tax as PCC can shift the tax burden to it. Is the BIR correct? Explain. (5%)

SUGGESTED ANSWER

No. Sinc
Since
eW World
orld Health Orga
Organiza
niza
nization
tion (WHO), the contractee, is exempt from direct and indirect taxes pursuant to
an international agreement where the Philippines is a signatory
signatory,, the exem
exemption
ption from indirect taxes should me mean
an that
the entity or person exempt is the contactor itself because the manifest intention of the agreement is to ex exempt
empt
the contractor so tthat
hat no tax may be shifted to the contractee (CIR v. John Gotamco & Sons, Inc. Inc.,, G.R. No. L-31092
-31092,,
1987,, 148 SCRA 36). The immunity of WHO from indirect taxes ex
February 24, 1987 extends
tends to the contract
contractoror by treating
the sale of service as effeeffectively
ctively zero- rated when the law provided that, “services rendered to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a signatory
effe
effectively
ctively subjects the supply of such service to zero percent (0%) rate” (Section 108(B) 3, NIRC). AccordinAccordingly
gly
gly,, the
BIR is wrong in assessing the 12% V VA
AT from the contr
contractor
actor
actor,, Precision Construction Corporation.

XIV

Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000 Sous meter lot in the City of
Makati. It sold the lot and building to Rainiere P80million. One month after, Rainier sold the lot and
building to Health Smoke Company (HSC) for P200 million. Lucky filed its annual tax return and declared
its gain from the sale of the lot and building in the amount of P750,000.00

An investigation conducted by the BIR revealed that two months prior to the sale of the properties to
Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was debited
by HSC and reflected in its trial balance as “other inv. — Lucky Bldg.” The month after, another P40million

0 0
was reflected in HSC’s trial balance as “other inv. — Lucky Bldg.” The BIR concluded that there is tax
evasion since the real buyer of the properties of Lucky is HSC and not Rainier. It issued an assessment for
deficiency income tax in the amount of P79 million against Lucky. Lucky argues that it resorted to tax
avoidance or a tax saving device, which is allowed by the NIRC and BIR rules since it paid the correct
taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the prescribed taxes
arising from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on Lucky? Explain. (5%)

SUGGESTED ANSWER

Yes. The sale of the property by Lucky V Corporation (Lucky) to Rainer and consequently the sale by Rainer tto o
HSC being prompted more on the mit mitigation
igation of tax liabilities than for legitimate business purposes, therefo therefore,
re,
constitutes tax evasion. The real buyer from Lucky is HBC as evidenced by the direct receipt of payments by the
former from the latter where the latter recorded “o“other
ther investments – Lucky Building”
Building”.. The scheme of resorting to a
two-step transaction in selling the property to the ultimate buyer in order to escape pay paying
ing higher taxes is
considered as outside of those lawful means allo allowed
wed in miti
mitigatin
gatin
gating
g tax liabilitie
liabilitiess which makes LuckyLucky,, crimina
criminally
lly
and civ
civilly
illy liable. Hence, the BIR is correct in assessing tax
liable. taxes
es on Lucky (CIR vv.. Estate of Benigno PP.. T
Toda,
oda, Jr
Jr.., G.R. No.
147188, September 14, 2004, 438 SCRA 290).

XV

Peter is the Vice President for Sales of Golden Dragon Realty Conglomerate Inc. (Golden Dragon). A group
of five (5) foreign investors visited the country for possible investment in the condominium units and
subdivision lots of Golden Dragon. After a tour of the properties for sale, the investors were wined and
dined by Peter at the posh Conrad’s Hotel at the cost of P150,000.00. Afterward, the investors were
brought to a party in a videoke club which cost the company P200,000.00 for food and drinks, and the
amount of P80,000,00 as tips for business promotion officers. Expenses at Conrad’s Hotel and the
videoke club were receipted and submitted to support the deduction for representation and
entertainment expenses. Decide if all the representation and entertainment expenses claimed by
Golden Dragon are deductible. Explain. (5%)

SUGGESTED ANSWER

Re
Reasonable
asonable allowance for entertainment, amusement, and recreation expenses during the taxable year that are
directly connected or re
related
lated to the oper
operation
ation or conduct of the tra
trade,
de, business or prof ession, or that are directly
profession,
related to or in furtherance of the conduct of his/its trade, business, or exerc
furtherance ise of a profe
exercise ssion not to exceed
profession
such ceilings prescribed by rules and regulations, are allowed as deduction from gross income. In this case, the
expenses incurred were to entertain the investors of Golden Dragon; thus, the amo
amount
unt deduc
deductibl
tibl
tible
e for enter
entertainm
tainm
tainment
ent
ent,,
amusement and recreation expenses is limited to the actual amount paid or incurred but in no case shall the
deduction exceed 0.50% of net sales for taxpayers engaged in the sale of goods or properties (Sec. 34(A)(1)(a)
(iv), NIRC as imp
implemented
lemented by RR No. 10-2002).

[Not
[Note:
e: R
Reasonable
easonable
easonableness
ness a
and
nd lib
liber
er
eralit
alit
ality
yaare
re re
recom
com
commended
mended in consid
considering
ering an exami
examinee’
nee’
nee’ss answer to this question.
question.]]

XVI

Amor Powers, Inc. (API) is a domestic corporation registered with the BIR as a value-added taxpayer. API
incurred excess input VAT in the amount of P500,000,000.00 on August 3, 2008. Hence, it filed with
the BIR an administrative claim for the refund or credit of these input taxes on August 15,2010. Without
waiting

0 0
for the CIR to act on its claim, API filed a Petition for Review with the CTA on September 15, 2010 before
the lapse of two years after the close of the taxable quarter concerned.

In its Comment on the Petition, the CIR argues that API’s Petition should be dismissed as it was filed
before the lapse of the 120-day period given to the CIR by Sec. 112(D) of the NIRC, which became
effective on January 1, 1998. For the CIR, the 120-day period is mandatory and jurisdictional so that any
suit filed before its expiration is premature and, therefore, dismissible, API, on the other hand, invokes BIR
Ruling No. DA- 489-03 issued by the CIR on December 10, 2003 in answer to a query posed by the
Department of Finance regarding the propriety of the actions taken by Lazi Bay Resources Development,
Inc., which filed an administrative claim for refund with the CIR and, before the lapse of the 120-day
period from its filing, filed a judicial claim with the CTA. BIR Ruling No. DA-489-03 stated that the
taxpayer-claimant need not wait for the lapse of the 120-day period before It could seek judicial relief with
the CTA.

Will API’s Petition for Review prosper? Decide with reasons. (5%)

SUGGESTED ANSWER

Yes. The pet petitio

itio
ition
n for revi
eview
ew filed by API falls within the exemp
exemption
tion from the mandatory 120 + 30-day
require
requirement
ment in pursuing a judicial remedy fo forr a claim of refun
refund
d of input taxes attributable to zero-rated sales. All
claims f or refund filed between Octo
October
ber 6, 2003 when BIR Ruling No. DA-489-03 was issued unti untill the promul
promulgati
gati
gation
on
of the decisio n by the Supreme Court ruling on the period by which a taxpayer may pursue a judicial remedy for a
decision
claim for refu
refund,
nd, mus
mustt follow the period pr
prescribed
escribed in the BIR Ruling (CIR v. Aichi Forging of Asia, Inc.
Inc.,, G.R. No.
184823, October 6, 2010, 632 S SCRA
CRA 422).

XVII

The requisites for a valid waiver of the three-year (3-year) prescriptive period for the BIR to assess
taxes due in the taxable year are prescribed by Reven ue Mem orandum Orde r (RMO) No . 2 0-90:

1. The waiver must be in the proper form prescribed by RMO 20-90.

2. 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.
3. The waiver should be duly notarized.
4. The 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.
5. 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.
6. 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.

After being assessed by the BIR with alleged deficiency income taxes, VVV Corporation (VVV) through
Enrique, its President, executed a waiver of the prescriptive period. The waiver was signed by
Revenue District Officer (RDO) Alfredo. However, the waiver did not state the date of execution by the
taxpayer and date of acceptance by the BIR. Enrique was also not furnished a copy of the waiver by the
BIR.

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VVV claims that the waiver ‘is void due to non-compliance with RMO 20-90. Hence, the period for
assessment had already prescribed. Moreover, since the assessment involves P2million, the waiver should
have been signed by the CIR and instead of a mere RDO. On the other hand, the BIR contends that
the requirements of RMO No. 20-90 are merely directory; that the execution of the waiver by VVV was
a enunciation of its right to invoke prescription and that the government cannot be estopped by the
mistakes committed by its revenue officers. Is VVV liable? Explain. (5%)

SUGGESTED ANSWER

No. The waiver was executed after VVV Corpor Corporation

ation (VVV) was assessed for deficiency income tax taxes
es obvious
obviously
ly
to justif
justify
y the asses
assessment
sment made after prescr
prescriptio
iptio
iption
n had set in. This is the reason why WWV is invokin
invokingg prescription
due to the alleged inval
invalidity
idity of the waiver for failure to comply with the requisites set forth ununder
der RMO 20-90. A
waiver executed beyo
beyond
nd the prescriptive period is ineffec
ineffective
tive (CIR v. The Stanley Wo rks Sales (Phils)
(Phils),, Inc.
Inc.,, G.R. No.
187589, December 3, 2014, 743 SCRA 642).

XX

Patrick is a successful businessman in the United States and he is a sole proprietor of a supermarket which
has a gross sales of $10 million and an annual income of $3million. He went to the Philippines on a visit
and, in a party, he saw A tty . Agaton w ho boa st s of be ing a t ax expert. Pat rick asks Atty. Agat on: if he
(Patrick) decides to reacquire his Philippine citizenship under RA 9225, establish residence in this country,
and open a supermarket in Makati City, will the BIR tax him on the income he earns from his U.S.
business? If you were Atty. Agaton, what advice will you give Patrick? (5%)

SUGGESTED ANSWER

I will advise Patrick that once he re-acquires his Philippine citizenship and establishes his re
residence
sidence in this country
country,, his
income tax classification would then be a ‘resident citizen’. A resident citizen is taxable on all his income, whether
derived w ithin or without the Philippines; accordingly
accordingly,, the income he ea earns
rns from his business abroad will now be
subject to the Philippine income tax (Sec. 23, NIRC).

AL
ALT
TERN
ERNA
ATI
TIVE
VE A
ANS
NS
NSWE
WE
WER
R

If Patric k becomes a dual citizen under RA 9225 in our country

Patrick country,, he shall be allowed to acquire real propert
properties
ies
and engage himself in business here just like an ordinary Filipino without renouncing his for foreig
eig
eign
n citizenship. In
addition, his income abroad will not be taxed here. These are among the Incentives we have extended to former
Filipinos under the Dual Citizenship Law so that they will be encouraged to come home and inv invest
est their money in
our country
country..

XVIII

Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire Philippine citizenship under RA
9225. His mother left him a lot and building in Makati City and he wants to make use of it in his
trading business. Considering that he needs money for the business, he wants to sell his lot and building
and make use of the consideration. However, the lot has sentimental value and he wants to reacquire it in
the future. A friend of Henry told him of the “sale-leaseback transaction” commonly used in the U.S., which
is also used for tax reduction. Under said transaction, the lot owner sells his property to a buyer on the
condition that he leases it back from the buyer. At the same time, the property owner is granted an option
to repurchase the lot on or before an agreed date. Henry approaches you as a tax lawyer for advice.

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Explain what tax benefits, if any, can be obtained by Henry and the buyer from the sale-leaseback
transaction? (5%)

SUGGESTED ANSWER

Henry will be entitled to claim rental expense as a deduction from his gross income in the trading business. His
lease payments plus interest would be substantially h
higher
igher than the depreciation expense he ma mayy claim iin
n computing
his taxable income; hence, the lease would result in the additional benefit of iincreasing
ncreasing his additional tax deductions.
The buyer will be deriving rent
rental
al income from the property and be able to claim business deductions such as real
property taxes, repairs and maintenance, depreciation and other expenses necessary for the renting out of the
property
property..

XIX

Jennifer is the only daughter of Janina who was a resident in Los Angeles California, U.S.A. Janina died in
the
U.S. leaving to Jennifer one million shares of Sun Life (Philippines), Inc., a corporation organized and
existing under the laws of the Republic of the Philippines. Said shares were held in trust for Janina by the
Corporate Secretary of Sun Life and the latter can vote the shares and receive dividends for Janina.
The Internal Revenue Service (IRS) of the U.S. taxed the shares on the ground that Janina was domiciled
in the U.S. at the time of her death.

(A)Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)

(B)Explain the concept of double taxation. (2.5%)

SUGGESTED ANSWER

(A) Yes. The property being a property located in the Philippines, it is subject to the Philippine estate tax irrespective
of the citizenship or residence of the decedent (Se
(Sec.
c. 85, NIRC). However
However,, if Janina is a non- resident alien at the time
of her death, the transmission of the shares o f stock can only be taxed applying the principle of reciprocity (Sec.
104, NIRC).

(B) Double taxation occurs when the same subject or o bject of taxation is taxed twice when it should be taxed but
once. Double taxation is prohibited. when it is an imposition of taxestaxes on the same subject mat ter,, for the same
matter
ter
purpose, by the ssame
ame taxing authority
authority,, within the same jurisdiction, during the same taxing period, with the ssame ame
kind or character of a tax (84 C.J.S. 131-132). It is permissible if taxes are of diffe
different
rent nature or char
character
acter
acter,, or the
two taxes are imposed by different taxing authorities (Villanuev
(Villanuevaa v. City of Iloilo, G.R. No. L-26521, December 28,
1968, 26 SCRA 578).

XX

Patrick is a successful businessman in the United States and he is a sole proprietor of a supermarket which
has a gross sales of $10 million and an annual income of $3million. He went to the Philippines on a visit
and, in a party, he saw A tty . Agaton w ho boa st s of be ing a t ax expert. Pat rick asks Atty. Agat on: if he
(Patrick) decides to reacquire his Philippine citizenship under RA 9225, establish residence in this country,
and open a supermarket in Makati City, will the BIR tax him on the income he earns from his U.S.
business? If you were Atty. Agaton, what advice will you give Patrick? (5%)

SUGGESTED ANSWER

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I will advise Patrick that once he re-acquires his Philippine citizenship and establishes his re
residence
sidence in this country
country,, his
income tax classification would then be a ‘resident citizen’. A resident citizen is taxable on all his income, whether
derived w ithin or without the Philippines; accordingly
accordingly,, the income he ea earns
rns from his business abroad will now be
subject to the Philippine income tax (Sec. 23, NIRC).

AL
ALT
TERN
ERNA
ATI
TIVE
VE A
ANS
NS
NSWE
WE
WER
R

If Patric
Patrick
k becomes a dual citizen under RA 9225 in our country
country,, he shall be allowed to acquire real propert
properties
ies
and engage himself in business here just like an ordinary Filipino without renouncing his for foreig
eig
eign
n citizenship. In
addition, his income abroad will not be taxed here. These are among the Incentives we have extended to former
Filipinos under the Dual Citizenship Law so that they will be encouraged to come home and inv invest
est their money in
our country
country..

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 2015 T
TAXA
AXA
AXATION
TION LAW BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

I.

Explain the principles of a sound tax system. (3%)

SUGGESTED ANSWER

The principles of a sound tax system and their res

respective
pective explanations, are as foll
follows:
ows:

a) Fiscal adequacy which means that the sources of revenue should be suffic
sufficient
ient to meet the demands of public
expe
expendit
ndit
nditures
ures (Cha
(Chavez
vez vv.. Ongpin, G.R. No. 76778, June 6, 1990);

b) Equality or theoretical justice which means that the tax burden should be proportionate to the tax
taxpaye
paye
payer’
r’
r’ss
abi
ability
lity to pa
payy (S
(Sec.
ec. 28(
28(1),
1), A
Art.
rt. VI, 1
1987
987 Co
Consti
nsti
nstituti
tuti
tution);
on); and

c) Administrativ
Administrativee feasibility which means that the tax law should be capable of convenient, just and effective
administr
administration,
ation, as well as, easy compliance by taxpaye
taxpayerr.

II

Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing match held
in 2013, he won prize money in United States (US) dollars equivalent to P300,000,000.

(A)Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why? (2%)

(B)May Mr. A’s prize money qualify as an exclusion from his gross income? Why? (2%)

(C) The US already imposed and withheld income taxes from Mr. A’s prize money. How may Mr. A use
or apply the income taxes he paid on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (4%)

SUGGESTED ANSWER

(A) Yes. Under the Tax Code, the income within and without o f a resident citizen is taxable. Since Mr
Mr.. A is a resi
resident
dent
Filipino citizen, his income world
worldwide
wide is taxable in the Philippines (Sec. 23 A, NIRC).

(B) No. Under the lawlaw,, all prizes and awards gr granted
anted to athletes in local and international sports competitions
and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations
are excluded frfrom
om gross income. Th e exclusion find application only to amateur athletes where the pr
The prize
ize was given
in an event ssanctioned
anctioned by the appropriate national sports association aaffiliated
ffiliated wi
with
th the Philippine Olympic Committee
and not to professional athletes like Mr
Mr.. A. Therefore, the prize money would not qualify as an exclusion from Mr Mr.. A’s
gross income (Sec. 32 B [[7]
7] [d], NIRC).

(C) The income taxes withheld and paid to the U.S. government maybe claimed by Mr
Mr.. A, either as a deduction
from his gross income or as a tax credit from the income tax due, when he computes his Philippine income tax
liability for ttaxable
axable year 2013 (Sec. 34(C)(1)(b), NIRC).

AL
ALTERNA
TERNA
TERNATIVE
TIVE ANSWER

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(A) Yes, the income of Ms. B from the sale of re
ready-t
ady-t
ady-to-wear
o-wear goods to C is taxable. A nonresident citiz
citizen
en is taxable only
on incorne deriv ed from sources within the Philippines (Sec. 23(B), NIRC). In line with the source rule of income
derived
taxation, since the goods are produced and sold within the Philippines, Ms. B’s Philippine-sourced income is
taxable in the Philippines.

(B) Yes, but only a proportionate part of the income. Gains, profits and income from the sale of personal property
produce
producedd by the tataxxpayer without and sold within the Philippines, shall be treate
treated
d as deriv
derived
ed partly from sources
within and partly from sources wi
without
thout the Philippines (Sec. 42E, NIRC).

Note: The problem does not indicate where the sale took place. The suggested answers in a and b above assume that
the sale took place in the Philippines. A non-resident alien is to be taxed by the Philippine gove
government
rnment only on he
herr
income derive
derived
d from an aactivity
ctivity conducted in the Philippines such as the sale of goods irrespective where produced.
Philippines

III
III.

Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a non-resident citizen.

(A)If the goods were produced from Ms. B’s factory in the Philippines, is Ms. B’s income from the sale to
Ms. C taxable in the Philippines? Explain. (2%)

(B)If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. B’s income
from the sale of the goods to Ms. C taxable in the Philippines? Explain. (2%)

SUGGESTED ANSWER

(A) Yes, the income of Ms. B from the sale of re

ready-t
ady-t
ady-to-wear
o-wear goods to C is taxable. A nonresident citiz
citizen
en is taxable only
on income derived from sources within the Philippines (Sec. 23(B), NIRC). In line with the source rule of income
taxation, since the goods are produced and sold within the Philippines, Ms. B’s Philippine-sourced income is
taxable in the Philippines.

(B) Yes, but only a proportionate part of the income. Gains, profits and income from the sale of personal property
produce
producedd by the tataxxpayer without and sold within the Philippines, shall be treate
treated
d as deriv
derived
ed partly from sources
within and partly from sources wi
without
thout the Philippines (Sec. 42E, NIRC).

Note: The problem does not indicate where the sale took place. The suggested answers in a and b above assume that
the sale took place in the Philippines. A non-resident alien is to be taxed by the Philippine gove
government
rnment only on he
herr
income derive
derived
d from an aactivity
ctivity conducted in the Philippines such as the sale of goods irrespective where produced.
Philippines

IV
IV.

Mr. E and Ms. Fare both employees of AAA Corp. They got married on February 14, 2011. On December
29, 2011, the couple gave birth to triplets. On June 25, 2013, they had twins. What were the personal
exemptions or deductions which Mr. E and Ms. F could claim in the following taxable years:

(A) For 2010 (2%)

(B) For 2011 (3%)

(C) For 2013 (2%)

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SUGGESTED ANSWER

(A) For 2010, Mr

Mr.. E and Ms. FFare
are each entitled to personal exem
exemptions
ptions of P50,000.00 (Sec. 35A, NIRC).

(B) For 2011, Mr

Mr.. E and Ms. Fare each entitled to basic personal ex exemption
emption of P50,000.00. In addition to his basic
personal exemption, Mr
Mr.. E could claim aadditional
dditional personal exemptions for three (3) qualified dependent children in the
amount of P25,000.00 for each child (Sec. 35B, NIRC)
NIRC)..

(C) For 2013, Mr

Mr.. E and Ms. Fare each entitled basic personal exemptions of P50,000.00. MrMr.. E could claim
additional personal exemptions for four (4) qualified dependent children in the amount of P25,000.00 for each
child (Sec. 35B, NIRC).

V.

BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June 2015, its Board of
Directors approved the distribution or cash dividends to its stockholders. BBB, Inc. has individual and
corporate stockholders. What is the tax treatment of the cash dividends received from BBB, Inc. by
the following stockholders:

(A) A resident citizen (1%)

(B)Non-resident alien engaged in trade or business (1%)

(C)Non-resident alien not engaged in trade or business (1%)

(D)Domestic corporation (1%)

(E)Non-resident foreign corporation (1%)

SUGGESTED ANSWER

(A) A final withholding tax for ten percent (10%) shall be imposed upon the cash dividends actually or construc
constructive
tive
tively
ly
re
receiv
ceiv
ceived
ed by a re
resid
sid
sident
ent citiz
citizen
en from BBB, Inc. (Sec. 24 (b)(2)
(b)(2),, NIRC).

(B) A final withholding tax of twenty percent (20%) shall be imposed upon the cash dividends actually or
constructively received by a non-resident alien enga
engaged
ged in trade or business from BBB, Inc. (Sec. 25(a) (2), NIRC).
trade

(C) A final withh

withholdi
oldi
olding
ng tax equal to twenty
twenty-five
-five percent (25%) of the entire income received from all sourc
sources
es
withi
within
n the Philippines, inclu
including
ding the cash dividends received from BB
BBB,
B, Inc. (Sec. 25(b), NIRC).

(D) Dividends received by a domestic corporation from another domestic corporation, such as BBB, Inc.
Inc.,, shall not be
subject to tax (Sec. 27(d) (4), NIRC).

(E) Dividends received by a non-resident forei

(E)Dividends gn corporation from a domestic corporation aare
foreign re generally subject to an
income tax of 30% to be wit withheld
hheld at source (Sec. 28 28(b)(1),
(b)(1), NIRC). However
owever,, a final withh
withholdi
oldi
olding
ng tax of fifte
fifteen
en
perc
percent
ent (15%) is imposed on the amount of cash dividen dividends
ds received from a domestic corporation llike
ike BBB, Inc. if
the tax sparing rule applies (Sec. 28(B) (5)(b), N IRC). Pursuant to this rule, the lower rate o f tax would apply if the
country in which the non-resident for
foreign
eign corpora
corporation
tion is

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domiciled would allow as tax credit against the tax due from it, tax taxes
es deemed paid in the Philippines o f 15%
representin
representing
g the difference between the regular income tax rrat
at
atee and the preferent
preferential
ial rate.

VI
VI.

Differentiate between double taxation in the strict sense and in a bro sense and give an example of
each. (4%)

SUGGESTED ANSWER

Double taxation in the strict sense pertains to the d

direct
irect double taxation. Thi
Thiss means that th
thee taxpayer is taxe
axed
d twi
twice
ce
by the same taxing authority
authority,, within the same taxing jurisdiction, for the same property and same purpose. purpose.,,
Examp
Example:
le: Impositi
Imposition
on of fin
final
al withho
withholdin
lding tax on cash dividend and requiring the taxpayer to declare this tax-pa
lding tax-paid
id
income in his income tax returns..

On the other hand, double taxation in the broad sense perta

pertains
ins to indirect double taxation. This exte
extends
nds to all cases
in which ther e is a burden of two or more impositions. It is the double taxation other than those covered by
there
direct double taxation (CIR v. Solidbank Corp.
Corp.,, G.R. No. 148191, November 25, 2003, 436 SCRA 416). Example:
Subjecting the interest income of banks on their deposits with other banks to the 5% Gross Receipts Tax (GRT)
despite of the same income having been subjected to 20% Final Withholding T Tax
ax (FWT
(FWT),
), is only a case of indirect
double taxation. The GRT is a tax on the privilege of engaging in business, while the FWT is a tax on the privilege
of earning income (CIR vv.. Bank of Commerce, G.R. NO. 149636, June 8, 2005, 459 SCRA 638).

VII
VII.

On May 15, 2013, CCC, Inc., received the Final Decision on Disputed Assessment issued by the
Commissioner of Internal Revenue (CIR) dismissing the protest of CCC, Inc. and affirming the assessment
against said corporation. On June 10, 2013, CCC, Inc., filed a Petition for Review with the Court of Tax
Appeals (CTA) division. On July 31, 2015, CCC, Inc. received a copy of the Decision dated July 22, 2015 of
the CTA division dismissing its Petition. CCC, Inc. immediately filed a Petition for Review with the CTA en
banc on August 6, 2015. Is the immediate appeal by CCC, Inc. to the CTA en banc of the adverse Decision
of the CTA division the proper remedy? (3%)

SUGGESTED ANSWER

No, CCC, Inc. sho

should
uld first file a motion for re
reconsider
consider
consideration
ation or motion for new trial with the CT
CTA
A Division. Before the
CT
CTAA en banc could take cognizance of the petitio
petition
n for review concerning a ca
case
se falling under its exclusive appellate
jurisdiction, the litigant must sufficiently show that it sought prior reconsider
reconsideraation or moved for a new trial with the
concerned CTCTAA Division (Commissioner of Customs v. Marina Sale, G.R. No. 183868, November 22, 2010, 635 SCRA
606; Rule 8, Sec. 1 of the R Revi
evi
evised
sed Rules of Court of TTax
ax Appeals).

VIII

In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real properties in the
Philippines, entered into a lease agreement of a residential house and lot with EEE, Inc., a non-
resident foreign corporation. The residential house and lot will be used by officials of EEE, Inc. during the
visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc.
in Singapore.

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DDD Corp. did not subject the said lease to VAT believing that it was not a domestic service contract. Was
DDD Corp. correct? Explain. (3%)

SUGGESTED ANSWER

DDD Corp. is not correct. Lease of properties shall be subject to VAVAT

T irrespective of the place where the contract of
lease was ex
executed
ecuted if the property is leased or used in the Philippines (Sec. 108(A), NIRC)

IX

For calendar year 2011, FFF, Inc., a VAT-registered corporation, reported unutilized excess input VAT in the
amount of P1,000,000.00 attributable to its zero-rated sales. Hoping to impress his boss, Mr. G, the
accountant of FFF, Inc., filed with the Bureau of Internal Revenue (BIR) on January 31, 2013 a claim for
tax refund/credit of the P1,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. Not having
received any communication from the BIR, Mr. G. filed a Petition for Review with the CTA on March 15,
2013, praying for the tax refund/credit of the P1,000,000.00 unutilized excess input VAT of FFF, Inc. for
2011. –

(A)Did the CTA acquire jurisdiction over the Petition of FFF, Inc.? (2%)

(B) Discuss the proper procedure and applicable time periods for administrative and judicial claims for
refund/credit of unutilized excess input VAT. (4%)

SUGGESTED ANSWER

(A) The CT CTA

A has not acquired jurisdiction over the Petition of FFF FFF,, Inc. because the judicial claim has been
prematurely filed on March 15, 2013. The Supreme Court ruled that the 30-day period after the expiratio expirationn of the
120-day period fixed by law for the Comm Commissioner
issioner of Internal Revenue to ac actt on the claim for rerefund
fund is
jurisdictional and failure to comply would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to
entertain tthe
he appeal (CIR v. Aichi For
Forging
ging Company of Asia Inc.. G.R. No. 183421, October 22, 2014, 632 SCRA 422).
in this case, Mr
Mr.. G filed the administrative claim on January 31, 2013. The petition for relief should have been filed
on June 30, 2013. Filing the indicial claim on March 15, 2013 is p premature,
remature, thus the CT
CTAA did not acquir
acquire
e jurisdiction.

(B) The administrativ

administrative
e claim must be filed with the Commissioner of Internal RRevenue
evenue (CIR) within two years from the
close of the taxable quarter when the zero-r ated sales were made. The CIR has 120 days from the date of submission
zero-rated
of complete documents in support of the cl claim
aim to decide. If the CIR decides within the 120-day period or the 120-
day period expires without the CIR rendering a decision, the taxpayer has 30 days to file a petition for review
with the CT
CTA
A reckoned from the receipt of adverse decision or from the lapse of the 120-day period.

As a general rule, the 30-day period to appeal is both mandatory and jur jurisdictional.
isdictional. As an exception to the general
rule, premature filing is allowed only if filed between December 10, 2003 and October 5, 201 2010,
0, when BIR Ruli
Ruling
ng
No
No.. DA
DA-4
-4
-489-
89-
89-03
03 wa
wass stil
stilll in forc
force
e prior to the rev
reversa
ersa
ersall of the afo
aforesa
resa
resaid
id ruling by the CTCTA
A in the Aichi case on
October 6, 2010 (Mindanao Il Geothermal Partn Partnership
ership v. CIR, G.R. No. 204745, December 8, 2014, 713 SCRA
645).

X.

Indicate whether each of the following individuals is required or not required to file an income tax return;

(A)Filipino citizen residing outside the Philippines on his income from sources outside the Philippines. (1%)

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(B)Resident alien on income derived from sources within the Philippines. (1%)

(C)Resident citizen earning purely compensation income from two employers within the Philippines, whose
income taxes have been correctly withheld. (1%)

(D)Resident citizen who falls under the classification of minimum wage earners. (1%)

(E)An individual whose sole income has been subjected to final with holding tax. (1%)

SUGGESTED ANSWER

(A) Not required. The income of a non-resident Filipino citizen are taxable only on income sour sourced
ced within the
Philippines. Accordingly
Accordingly,, his income from sources outside the Philippines is exempt from income ta
taxx (Sec. 51A (1)(b),
NIRC).

(B) Require
Required.
d. A resident alien is taxable only for income derived from sources wit
within
hin the Philippines (Sec. 51A (1)(c),
NIRC).

(C) Require
Required.
d. A resident citizen who is earning purely compensation income from two employers should file income
tax return. If the compens
compensation
ation income is received concurrently from two employers during the taxab
taxable
le year
year,, the
em
employ
ploy
ployee
ee is not qual
qualifie
ifie
ified
d for ssubstit
ubstit
ubstituted
uted fi
filing
ling (S
(Sec.
ec. 5
51A
1A (2)(b), NIRC).

(D) Not required. Under the law

law,, all minimum wage earners in the private and public sector shall be exempt fro
from
m
payment of inc
income
ome tax (Sec. 51A (2)(d), NIRC in relation to R
Republic
epublic Act No. 9504)
9504)..

(E)
(E)Not
Not required. Under tthe
he law
law,, an individual w
whose
hose sole income hhas
as been subjected of final withholding tax pursuant
to Sec. 57(A), NIRC, need not file a rereturn.
turn. What he received is a ta
tax-pai
x-pai
x-paid
d income (Sec. 51A (2)(c) NIRC).

XI
XI.

What are de minimis benefits and how are these taxed? Give three (3) examples of de minimis benefits.
(4%)

SUGGESTED ANSWER

De minimis benefits are facilities and privileges furnished or offered by an employer to his employees,
which are not considered as compensation subject to income tax and consequently to withholding tax,
if such facilities or privileges are of relatively small value and are offered or furnished by the employer
merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. If
received by rank- and-file employees, they are exempt from income tax on wages; if received by
supervisory or managerial employees, they are exempt from the fringe benefits tax (RR No. 2-98, as
amended by RR No. 8-2000). The following shall be considered as de minimis benefits: (Note: The
examinee may choose any three)
• Monetized unused vacation leave credits of private employees not exceeding 10 days during the
year;
• Monetized value of vacation and sick leave credits paid to government officials and employees;
• Medical cash allowance to dependents of employees, not exceeding P750 per employee per
semester or P125 per month;
• Rice subsidy of P1,500 or 1 sack of 50 kg rice per month amounting to not more than P1,500;
• Uniform and clothing allowance not exceeding P5,000 per annum;
• Actual medical assistance not exceeding P10,000 per annum;

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 • Laundry allowance not exceeding P300 per month;
• 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 received by the employee under an established
written plan which does not discriminate in favor of highly paid employees;
• Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum;
• Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis;
• 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. Regs. 2-98, as amended).

XII
XII.

Mr. H decided to sell the house and lot wherein he and his family have lived for the past 10 years, hoping
to buy and move to a new house and lot closer to his children’s school. Concerned about the capital gains
tax that will be due on the sale of their house, Mr. H approaches you as a friend for advice, if it is possible
for the sale of their house to be exempted from capital gains tax and the conditions they must comply with
to avail themselves of said exemption. How will you respond?(4%)

SUGGESTED ANSWER

I would advise MrMr.. H, that he may be exempted from the payment of the capital gains tax on the sale or disposition of
the house and lot w here his family lives because the sale o f princ principal
ipal residence by a natur
natural
al person is exemp
exempt,t,
provided the following conditions are complied with, viz: 1. The proceeds of the sale is fu fully
lly utiliz
utilized
ed in acquiri
cquiring
ng or
const
construct
ruct
ructing
ing new principa
principall residenc
residence
e within 18 calenda
calendarr months from the date of sale or disposition; 2. The
historical cost or adju
adjusted
sted basis of the real pro
property
perty sold or disposed will be carried over to the new principal residence
built or acquired; 3. The Commissioner has been duly notified, through a prescribed return, within 30 days from the
date of sale or disposition of the person’
person’ss intention to avail of the tax exemption; and The exempt
exemptionion was availed only
once every 10 yeyeaars (Sec. 24(d)(2), NIRC).

XIII

GGG, Inc. offered to sell through competitive bidding its shares in HAH Corp., equivalent to 40% of the
total outstanding capital stock of the latter. JJJ, Inc. acquired the said shares in HHH Corp. as the highest
bidder. Before it could secure a certificate authorizing registration/tax clearance for the transfer of the
shares of stock to JIJ, Inc., GGG, Inc. had to request a ruling from the BIR confirming that its sale of the
said shares was at fair market value and was thus not subject to donor’s tax. In BIR Ruling No. 012-14, the
CIR held that the selling price for the shares of stock of HHH Corp, was lower than their book value, so
the difference between the selling price and the book value of said shares was a taxable donation. GGG,
Inc. requested the Secretary of Finance to review BIR Ruling No. 012-14, but the Secretary affirmed said
ruling. GGG, Inc. filed with the Court of Appeals a Petition for Review under Rule 43 of the Revised
Rules of Court. The Court of Appeals, however, dismissed the Petition for lack of jurisdiction declaring
that it is the CTA which has jurisdiction over the issues raised. Before which Court should GGG, Inc.
seek recourse from the adverse ruling of the Secretary of Finance in the exercise of the latter’s power of
review? (3%)

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SUGGESTED ANSWER

GGG, Inc.
Inc.,, should seek recourse with the Court of Tax Appeals (CT (CTA)
A) which has jurisdiction. There is no provision in
law that expressly provides where exactly the adverse ruling of the Secretary of Finance under Section 4 of the
NIRC is appealable. However
However,, RA No. 1125, as amended, addresses the seeming gap in the law as it vests upon the
CT
CTA,
A, albeit impliedly
impliedly,, with jurisdiction over the case as “o “other
ther mat
matters”
ters” arising under the NIRC or other laws
administered by the BIR. Furthermore, the Supreme Court held th that
at the jurisdiction to revreview
iew the rulings o f the
Secretary of Finance on the issues raised against a rulin
ruling
gooff the Commissioner of Internal Revenue, pertains to the
Court of T
Taxax Appeals in the exercise of its appellate jurisdiction (Philamlife vv.. The S
Sec.
ec. of Finance and CIR, G.R. No.
210987
210987,, Nov
November
ember 24, 2014).

XIV

KKK Corp. secured its Certificate of Incorporation from the Securities and Exchange Commission on June 3,
2013. It commenced business operations on August 12, 2013. In April 2014, Ms. J, an employee of KKK
Corp. in charge of preparing the annual income tax return of the corporation for 2013, got confused on
whether she should prepare payment for the regular corporate income tax or the minimum corporate
income tax.

(A)Ás Ms. J’s supervisor, what will be your advice? (2%),

(B) What are the distinctions between regular corporate income tax and minimum corporate income
tax? (3%)

SUGGESTED ANSWER

(A) As Ms. J’
J’ss supervisor
supervisor,, I will advise that KKK Corp. should prepare payment for the regular corporate income tax
and not the minimum corporate income tax. Under the Tax Code, minimum corpor ate income tax is only applicable
corporate
beginning on the fourth taxable year followfollowing
ing the commencement of business operation (Sec. 27(e)(1), NIRC).

(B) The distinctions between re regular

gular corpor
corporate
ate income tax and the minimu
minimum m corporate income tax aare
re the following:
• As to taxpayer: Regula Regularr corporate income tax applies to all corpor corpora
ate taxpayers; while minimum
corporate incom
income e tax applies to domestic corpor
corporations
ations and resident foforeign
reign corporations.
• As to tax rate
rate:: Regular corp
corporate
orate inc
income
ome tax is 30%; while minimum corpor
corporate
ate income tax is 2%.
• As to tax base: Regular corporate income tax is based on the net taxable income; while minimum
corporate income tax is bas based
ed on gross income.
• As to period of applicability: Re Regular
gular corporate income ttax
ax is applicable once the corpor
corporation
ation commenced
its business operation, while minimum corporate income tax is applicable beginning on the fourth
taxable year fo
following
llowing the commencement of business operati
operation.
on.
• As to imposition: The minimum corpor corporate
ate income tax is imposed whenever it iiss greater than the regular
corporate income tax of the cor corp
poration (Sec. 27(A) and (E), NIRC; RR No. 9-98).

XV
XV.

In 2012, Dr. K decided to return to his hometown to start his own practice. At the end of 2012, Dr. K found
that he earned gross professional income in the amount P1,000,000.00, while he incurred expenses
amounting to P560,000.00 constituting mostly of his office space rent, utilities, and miscellaneous
expenses related to his medical practice. However, to Dr. K’s dismay, only P320,000.00 of his expenses

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were duly covered by receipts. What are the options available for Dr. K, so he could maximize the
deductions from his gross income? (3%)

SUGGESTED ANSWER

In orde
orderr to maximize his deductions, Dr
Dr.. K may avail of the optional standard deduction (OSD) which iiss an amount not
excee
exceeding
ding forty percent (40%) of his gross sales or gross receipts. The OSD can be cla imed without being required
claimed
to present proof or evidence of expenses paid or incurred by him (Sec. 34(L), NIRC; Rev Rev.. Regs. 16-08, as
amended).

XVI

LLL is a government instrumentality created by Executive Order to be primarily responsible for integrating
and directing all reclamation projects for the National Government. It was not organized as a stock or a
non- stock corporation, nor was it intended to operate commercially and compete in the private market. By
virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of the Manila Bay,
some of which were within the territorial jurisdiction of Q City. Certificates of title to the reclaimed
properties in Q City were issued in the name of LLL in 2008. In 2014, Q City issued Warrants of Levy
on said reclaimed properties of LLL based on the assessment for delinquent property taxes for the
years 2010 to 2013.

(A)Are the reclaimed properties registered in the name of LLL subject to real property tax? (4%)

(B) Will your answer be the same in (A) if from 2010 to the present time, LLL is leasing portions of the
reclaimed properties for the establishment and use of popular fastfood restaurants J Burgers, G Pizza, and
K Chicken? (2%)

SUGGESTED ANSWER

(A) The reclaimed properties are not subject to real property tax because LLL is a government instrumentality
instrumentality..
Under the law, real property o wned by the Republic of the Philippines is ex
exempt
empt from real property tax unless the
beneficial use thereof has been granted to a taxable person (Sec. 234, Local Gove
Governm
rnm
rnment
ent Code). Wh
Whenen the title of
the rea
reall prope
property
rty is transf
transferred
erred to LLL, the Republic remains the owner of the re real
al property
property.. Thus, such
arr
arrangement
angement does not result in the loss of the tax exemption (Republic of the Philippines, represented by The
Philippine RReclamation
eclamation Authority (PRA) vv.. City of Par
Paranaque,
anaque, G.R. No. 191109, July 8, 2012, 677 SCRA 246):

AL
ALT
TERN
ERNA
ATI
TIVE
VE A
ANS
NS
NSWE
WE
WER
R

(A) No. LLL is an instrumentality of the national government which cannot be taxed by local government units. LLL is
not a government-o
government-owned
wned or controlled corpora tion taxable for real property taxes (City of LapuLapu v. PEZA, G.R.
corporation
No. 184203, Novemb
November er 26, 2014).

(B) No. As a rule, properties owned by the ReRepublic

public of the Philippines are exempt from real property tax exc
except
ept when
the benefi
beneficial
cial use thereof has been grantgranted,
ed, for consid
consider
er
era
atio
tion
n or otherwi
otherwise,
se, to a taxable person. When LLL
leased out portions of the reclaimed properties to taxable entities, such as the populapopularr fast food restaurants, the
reclaimed properties are subject to real property tax (Sec. 234(a), Local Government Code; GSIS v. City Treasurer
and City Asse
Assessor
ssor of the City of Manila, G.R. No. 1862
186242,
42, December 23, 2009).

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 XVII

Mr. L owned several parcels of land and he donated a parcel each to his two children. Mr. Lacquired
both parcels of land in 1975 for P200,000.00. At the time of donation, the fair market value of the two
parcels of land, as determined by the CIR, was P2,300,000.00; while the fair market value of the same
properties as shown in the schedule of values prepared by the City Assessors was P2,500,000.00.
What is the proper valuation of Mr. L’s gifts to his children for the purpose of computing donor’s tax? (3%)

SUGGESTED ANSWER

Mr.. L’s gift to his children is the fair market value (FMV) the property at the time of donation.
The valuation of Mr
Commissioner,, or the FMV as shown in the schedule of
The FMV is the higher of the EMV as determined by the Commissioner
values fixed by the provincial and city assessors. In this case, for the purpose of computing donor’ donor’ss tax, the
pro
proper
per valuat
luation
ion is the valu
valuee pre
prepare
pare
pared
d by the City Asse
Assessors
ssors amountin
amounting g to P2,500,000.00, because it is higher
than the FMV determined by the CIR (Sec. 102 in relation to Sec. 88(B), NIRC).

XVIII

Under the Tariff and Customs Code, as amended:

(A)When does importation begin and when is it deemed terminated? (2%)

(B)In what case/s is the decision of the Collector automatically reviewed by the Commissioner of Customs?
In what instance/s is the decision of the Commissioner automatically appealed to the Secretary of Finance?
(4%)

SUGGESTED ANSWER

(A) Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to
unlade therein. Importat
Importation
ion is d
deemed
eemed terminated upon payment of the duties, taxestaxes,, and other charges due upon
the articles, or secured to be ppaid,
aid, at a port of e ntry and the legal permit for withdr
entry withdrawal
awal shall have been grgranted,
anted,
or in case said articles are free of duties, taxes and other charges, until they have legally lef leftt the jurisdiction o f
Customs (Sec. 1202 of the T Tariff
ariff aand
nd Customs Code).

(B) Whenever the decision of the Collector of Customs in any seizure proceedings is adverse to the government,
the said decision is automatica
automatically
lly elevated to the Commissioner of Customs for revie
review
w, and if such decision is affirmed
by the Commissioner of Customs, the same shall be aut automatically
omatically elev
eleva
ated to and be finally reviewed by the
Secretary of Finance (Sec. 2315 of the T Tariff
ariff and Customs Code):

XIX

In 2014, M City approved an ordinance levying customs duties and fees on goods coming into the territorial
jurisdiction of the city. Said city ordinance was duly published on February 15, 2014 with effectivity date on
March 1, 2014.

(A)Is there a ground for opposing said ordinance? (2%)

(B)What is the proper procedural remedy and applicable time periods for challenging the ordinance? (4%)

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SUGGESTED ANSWER

(A) Yes, on the ground that the ordinance is ultra vires. The taxing powers of local government units, such as M
City,, cannot extend to the levy of taxes, fees and charges already imposed by the national government, aand
City nd this
includes, among others, the levy o f customs duties un under
der the Tarif
arifff and Customs Code (Sec. 133(e), Loca
Locall
Government Code).

(B) Any question on the constitutionality or legali

legality
ty of tax ordinances may be raised on appeal wit
within
hin 30 days from
the effectivity to the Secretary of J ustice. The Secretary of Justice shall render a decision within 60 days from
Thereafter.. within 20 days after receipt of the decision or the lapse o
the date of receipt of the appeal. Thereafter off th
thee sixty-
day period without the Secretary of J ustice acting upon the appeal, the aggrieve
aggrieved
d party may file the appropriate
proceedings wi
with
th the Re
Red
d Court (Sec. 187
187,, Loca
Locall Government Code).

XX

After filing an Information for violation of Section 254 of the National Internal Revenue Code (Attempt
to Evade or Defeat Tax) with the CTA, the Public Prosecutor manifested that the People is reserving the
right to file the corresponding civil action for the recovery of the civil liability for taxes. As counsel for
the accused, comment on the People’s manifestation. (3%)

SUGGESTED ANSWER

The manifes
manifestation
tation is not proper
roper.. The criminal action and the corresponding civil action for the recovery of the civil
liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same
proceeding before the Court of Tax Appeal (CT A). The filing of the criminal action is deemed to necessarily carry
(CTA).
with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal
action shall be recognized (Sec. 7(b 7(b)(1)
)(1) of Republic Act. No. 9282: Judy Anne Sa Santos
ntos v. People, G.R. No. 173176,
August 26, 2008, 563 S SCRA
CRA 341).

XXI

MMM, Inc., a domestic telecommunications company, handles incoming telecommunications services

for non-resident foreign companies by relaying international calls within the Philippines. To broaden
the coverage of its telecommunications services throughout the country, MMM, Inc. entered into
various interconnection agreements with local carriers. The non-resident foreign corporations pay MMM,
Inc. in US dollars inwardly remitted through Philippine banks, in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas. MMM, Inc. filed its Quarterly VAT Returns for 2000.
Subsequently, MMM, Inc. timely filed with the BIR an administrative claim for the refund of the amount
of P6,321,486.50, representing excess input VAT attributable to its effectively zero-rated sales in 2000.
The BIR ruled to deny the claim for refund of MMM, Inc. because the VAT official receipts submitted by
MMM, Inc. to substantiate said claim did not bear the words “zero-rated” as required under Section
4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division and the CTA en banc
affirmed the BIR ruling. MMM, Inc. appealed to the Supreme Court arguing that the NIRC itself did not
provide for such a requirement. RR No. 7-95 should not prevail over a taxpayer’s substantive right to
claim tax refund or credit.

(A)Rule on the appeal of MMM, Inc. (3%)

(B)Will your answer in (A) be any different if MMM, Inc. was claiming refund of excess input VAT
attributable to its effectively zero-rated sales in 2012? (2%) ;

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SUGGESTED ANSWER

(A) The appeal of MMM, Inc. must be denied. MMM, Inc. Inc.’’s position that the requirements under RR No. 7- 95 should
not prev ail over a taxp
prevail ayer’ss substantive right to claim tax refund or credit is unmeritorious. The Secretary of Finance
taxpayer’
ayer’
has the authorit
authority y to promulgate the necessary rules and re regulations
gulations for the effect
effective
ive enforcement of the
provisions of the National Internal Revenue Code (NIRC). Such rules and regulations are given we weight
ight and respect
by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in
their respective fields. An applicant for a claim for tax refund or tax credit must not only prove entitlement to the
claim, but also compliance with all the documentary and evidentiary requirements. Consequently Consequently,, the Court o f Tax
Appeal (CT
(CTA),
A), an
andd tthe
he CT
CTA
A en banc correctly ruled that the failure to indicate the words “zero-rated” on the invoices
and receipts issued by a taxpay taxpayer
er
er,, would result in the denial of the claim for refund or tax credit (Eastern
Tele
elecommu
commu
communicanica
nication
tion
tionss Philipp
Philippines
ines
ines,, Inc. v. CIR, G.R. No. 183531, March 25, 2015).

(B) No, my answer will not be different if the claim for refund is for effectively zero-r zero-rat
at
ated
ed sales in 2012. The
requirement to print the word “zero-r
“zero-rated”
ated” is no longer by me re regulations, but is now clearly pro
mere provide
vide
vided
d by law as
follows — “If the sale is subject to žero percent (0%) va value-added
lue-added tax, the term “zero- rated sale” shall be w ritten oorr
printed prominently o n the invoi
invoice
ce or receipt. Failure to comply with this invoicing requirement is fatal to a claim for
refun
refundd of input taxes attributable to the zero-r
zero-rated
ated sale (Sec. 11
113(B)(2)(c),
3(B)(2)(c), NIRC). Moreov
Moreover
er
er,, as recently ruled by the
Supreme Court, the subsequen
subsequentt incorporation of Sec. 4. 4.108-1
108-1 of RR 7-95 in Sec. 113 of the NI
NIRCRC as introduced in R.A.
9337,, actually confirmed the validity of the imprinting requirement on VA
No. 9337 VAT
T invoices or official receipts-a case
falling under the pri rinci
nci
ncipl
pl
ple
e of legis
legisla
la
lativ
tiv
tive
e appr
approoval of adadministr
ministr
ministrativ
ativ
ative
e interpre
interpretation
tation by reeneenactme
actme
actmentnt (Northern
Minda
Mindan nao Pow
Power
er Corp. vv.. CIR, G
G.R.
.R. No. 185115, F February
ebruary 18, 2015).

XXII

State the conditions for allowing allowing the following as deductions from the gross estate of a citizen
or resident alien for the purpose of imposing estate tax:

(A) Claims against the estate (2%) (B) Medical expenses (2%)

SUGGESTED ANSWER

(A) In ord
order
er tha
thatt claims against the estate may be allowed as deductions from the gross es estate
tate of a citizen or
resident alien for purposes of imposing the estate tax, the law requires that at the time the indebtedness was
incurred, the debt instrument was duly notarized. In addition, if the loan was contr contracted
acted within three (3) years
before the death of the decedent, the executor o r administr
administrator
ator shall subm
submit
it a state
statement
ment showing the disp
dispositi
ositi
osition
on o f
the pro
proceeds
ceeds of the loan (S
(Sec.
ec. 86(a)(1)(c), NIRC).

(B) The conditions for the allowa

allowance
nce of medical expenses as deductions from the gross estate of a citiz
citize
en or
res
residen
iden
identt alien are
are:: (1) the medic
medical
al expens
expenses
es must ha
have
ve been incurre
incurred
d within one (1) year before the death of the
decedent; (2) that the medical expenses are duly substantiated wit with
h receipts; and (3) the total amount thereof
thereof,,
whether paid or unpaid, does not excexceed
eed P500,000.00 (Sec. 86A(6), NIRC).

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 2014 T
TAXA
AXA
AXATION
TION LA
LAW
W BAR EXAM QUESTIONS AND SUGGESTED ANSWERS

I.

On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue
Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate
income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said
assessment and demanding that the same be cancelled or set aside

However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR
informed BWI that the latter’s letter protest was denied on the ground that the assessment had already
become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180
days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax
Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day
period as mandated by the provisions of the last paragraph of Section 228 of the National Internal
Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the
assessment final, executory and demandable.

Is the contention of the BIR correct? Explain. (5%)

SUGGESTED ANSWER:

No, the contention of BIR is n

not
ot correct. The right of BWI to consider the inaction of the Commissioner on the protest
within 180 days as an appealable decision is only optional and will not make the assessment final, executory and
demandable (Section 228, NIRC; Lascona Land Co. Co.,, Inc. V
V,, CIR, G.R. No. 171251, March 5, 2012, 667 SCRA 455).

II
II.

Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen, believing in the
sincerity and ability of Mr. De Sarapen to introduce much needed reforms in the country, contributed
P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen purchased
tarpaulins, t-shirts, umbrellas; caps and other campaign materials that he also donated to Mr. De Sarapen
for use in his campaign,”

Is the contribution of cash and campaign materials subject to donor’s tax? (4%)

SUGGESTED ANSWER:

The Tax Co Code

de provides that any contribution in cash or in kind to any candidate, political party or coalition of
parties for campaign purposes shall be governed by the Election Code (Section 99(C), NIRC). On the other hand, the
Omnibus Election provides, that any provision of the law to the contrary notwithstanding, any contribution in
cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to
the Commission shall not i be subject tto
o axy payment of gift tax (Section 13, R.A. 7166). Hence, the contributions will
be exempt from donor’s tax if they are duly reported to the Commission. Otherwise, the contributions will be subject
to donor’
donor’ss tax.

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 III
III.

Dr. Taimtim is an alumnus’ of the College of Medicine of Universal University (UU), a privately-owned
center for learning which grants yearly dividends to its stockholders, UU has a famous chapel located
within the campus where the old folks used to say that anyone who wanted to pass. the medical board
examinations should offer a dozen roses on all the Sundays of October. This was what Dr.Taimtim did when
he was still reviewing for the board examinations. In his case, the folk saying proved to be true
because he is now a successful cardiologist. Wanting to give back to the chapel and help defray the
costs of its maintenance, Dr.Taimtim donated P50,000.00 to the caretakers of the chapel which was
evidenced by an acknowledgment receipt.

In computing his net taxable income, can Dr. Taimtim use his donation to the chapel:as an allowable
deduction from his gross income under the National Internal Revenue Code (NIRC)? (4%)

SUGGESTED ANSWER:

No, the donation is not deductible. The chapel is owned by privately-ow

privately-owned
ned university hence the donation for the
maintenance of the chapel is a donation to the university
university.. The donation to be deductible must co comply
mply with the
require
requirement
ment that the net income of the donee must not inure to the benefit of aany ny priv
private
ate sto
stockho
ckho
ckholder
lder or individ
individual.
ual.
In the inst
instant
ant case, the unive
universit
rsit
rsity
y is granting yearly dividends to its stockholders which is a clear violation of the
law appertaining to the so-called “private inurement do doct
ct
ctrin
rin
rine”
e” tther
her
hereby
eby makin
making
g the donati
donation
on non-dedu
non-deductibl
ctibl
ctible
e (Section
34(H
34(H)(1)
)(1)
)(1),, NIRC)
NIRC)..

IV

Gangwain Corporat ion. (GC) filed its quarterly tax returns f or the ca lendar year 2012 a s follo ws:

First quarter – April 25, 2012

Second quarter – July 23, 2012

Third quarter – October 25, 2012

Fourth quarter – January 27, 2013

On December 22, 2013, GC 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 2012. After several
months of inaction by the BIR on. its claim for refund, GC decided to elevate its claim directly to the
Court of Tax Appeals (CTA) on April 22, 2014. In due time, the CTA denied the tax refund relative to the
input VAT of GC for the first quarter of 2012, 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? (3%)

(B] Assuming that GC filed its claim before the CTA on

February 22, 2014, would your answer be the same?

(3%) SUGGESTED ANSWER:

(A) No. CT
CTA
A is not correct
correct.. The two-year per
period
iod to file à claim for re
refund
fund refers to the administra
administrative
tive claim
: and does not refer to period within which to elev elevate
ate the claim to the CT CTA.
A. The filing of the

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administr
administrative
ative claim for refun
refund
d was timely done because it is: made within two years from the end o f the quarterquarter,,
when the zero-rated transaction took place (Section 112(A); N IRC). When GC decided to elevate its claim to the CT CTAA
on April 22, 2014
2014,, it was after the lapse of 120 days from the filing of the claim for refund with the BIR, hence, the
appeal is seasonably filed. The rule o n VAT refunds is two years to file the claim with the BIR, plus 120 days for the
deemed adverse decision on the claim, appealable to the CTA
Commissioner to act and inaction after 120 days is a deemed CTA
within 3 0 days from the lapse of the 120-day period (CIR 3:0. Aichi Forging Co Company
mpany of Asia, Inc.
Inc.,, G.R. No: 1.
184823, October 6, 2 010; CIR vv.. San Roq
2010; Roque,
ue, G.R. No. 187485, February 12, 2013)

(B) Yes. The two-

two-year
year prescriptive period to file a claim fforor refund refers to the administra
administrative
tive claim w
with:
ith: the BIR and
not to the period to elev
elevate
ate the claim to the CTCTA.
A. Hence, the CT CTA
A cannot deny the re refund
fund for reasons that the first
quarter claim was filed beyond the two-year period prescribed by law law.. However
However,, when the claim is made before the
CT
CTAA on February 24, there is definitely no appealable decision as yet because the 120-day period for the
Commissioner to act on the claim for refund has not yet lapsed. Hence, the act of the taxpayer in elevating the
claim to the CTCTA
A is premature and the CT CTAA has no jurisdiction to rule thereon (CIR V.. Aichi Forgi Forging
ng Company of
Asia, Inc.
Inc.,, G.R. No. 184823, October 6, 2010; CIR ..v ..v.. San Roque, G.R. No. 187 187485,
485, February 12, 2013).

V.

The City of Liwliwa assessed local business taxes. against Talin Company, Claiming that there is
double taxation, Talin Company filed a complaint for Refund or Recovery of Illegally and/or Erroneously-
collected Local “Business Tax Prohibition with Prayer to Issue Temporary Restraining Order and Writ of
Preliminary Injunction with the Regional Trial Court (RTCİ: The RTC denied the application for a Writ of
Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special
civil action for certiorári w ith the Cour t of App e als (CA): The gov ern ment la wyer re presenting th e City of
Liwliw a prayed for the dismissal of the petition on the ground that the same should have been filed
with the Court of Tax Appeals (CTA) Talin Company, through its lawyer, Atty. Frank, countered that the
CTA cannot entertain a petition for certiorari since it is not one of its powers and :. authorities under
existing laws and rules.

Decide. (5%)

SUGGESTED ANSWER:

The government lawyer is corre

correct
ct that it is the Court of T
Tax
ax App
Appeals
eals that is vested with prop
proper
er juris
jurisdiction.
diction.

The law is clear when it sai

said
d that The Court of Tax Appeals shall have exclusive appellate jurisdiction to review by
appeal decisions, orders or resolutions of : the Regional Trial Courts in local tax cases originally decided or
resolve
resolvedd by them in the exe
exercise
rcise of their original or appellate jurisdiction (Section 7(3), RA 9282). In a recent case
decided by the Supreme Court, it was beld that the CT CTA
A 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 wit within
hin the exclusive appellate
jurisdiction of the tax court, as this is inherent to its exe
exercis
rcis
rcise
e of appellat
appellate
e jurisdiction (City of Manila v. Hon.
Caridad H. Grecia-Cuerdo
Grecia-Cuerdo,, G.R. No. 175723, February 4, 20 2014).
14).

VI
VI.

Choose the correct answer. Smuggling (1%)

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(A) does not extend to the entry of imported or ex exported
ported articles by means of any false or fr
fraudulent
audulent invoice;
statement or practices; the entry of goods at less than the true weight or measure; or the filing of any false ..or
fr
fraudulent
audulent entry for the payment of dr
drawback
awback or refund of duties.

(B) is limited to the import of contraband or highly dutiable cargo beyond the reach of custo
contraband ms auth
customs authorities
orities

(C) is committe
committedd by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any
article, contr
contra
ary to law
law,, or shall receive, conceal, buy; sell or any manner facilitate the tr transportation,
ansportation,
concealment or sale of such article after ..,import
,import
,importation,
ation, knowing the ssame
ame to have been imported contrary to law

(D) is punishable by administr

administrative
ative penalty only

SUGGESTED ANSWER:

(C) is committed by any person who shall fraudulently import or bring into the Phi Philippines,
lippines, o r assist in so doing, any
article, contr
contrary
ary to law
law,, or shall receive, conceal, buy
buy,, sell or any manner ffacilitate
acilitate the trans
transportation,
portation, concealment
or sale of such article’. af
after
ter impo
importation,
rtation, knowin
knowing
g the same to have been imported contrary to law (Section 3601,
Tariff and Cus
Customs
toms Code).

VII

In accordance with the Local Government Code (LGC), the Sangguniang Panglungsod (SP) of Baguio
City enacted : Tax Ordinance No.19, Series of 2014, imposing a P50.00 tax on all the tourists and travellers
going to Baguio City. In imposing the local tax, the SP reasoned that the tax collected will be used to
maintain the cleanliness of Baguio City and for the beautification of its tourist attractions. Claiming the tax
to be unjust, Baguio Travellers Association (BTA); an association of travel agencies in Baguio City; filed
a petition for declaratory relief before the Regional Trial Court (RTC because. BTA was apprehensive that
tourists: might cancel their bookings with BTA’s member agencies. BTA also prayed for the issuance of
a Temporary Restraining Order (TRO) to enjoin Baguio City from enforcing the local tax on their
customers and on all tourists: going to Baguio City. The RTC issued a TRO enjoining Baguio City from
imposing the local tax Aggrieved, Baguio City filed a petition for certiorari before the Supreme Court (SC)
seeking to set aside the TRO issued by the RTC on the ground that collection of taxes cannot be enjoined.

Will the petition prosper? (5%)

SUGGESTED ANSWER:

Yes. The petition for certiorari will prosper

prosper.. The RT
RTCC has no jurisdiction to entertain any action concerning the
validity of a Tax Ordinance and to enjoin the imposition of taxes levied by it it.. Any question. on the legality of the
tax o
ordinance
rdinance can only be raised on appeal with th
the
e Secretary of Justice and the appeal shall not have the effeeffect
ct of
suspe
suspending
nding the effect
effectivity
ivity of the ord
ordina
ina
inance
nce and the accru
accrual
al and the payment of the tax levied therein (Se (Section
ction
187
187,, LGC).

VIII

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

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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? (4%)

SUGGESTED ANSWER:

Yes, the sale of the delivery vvan

an is subject to V
VA
AT being a transa
transaction
ction incidental to the catering business

which is a VA
VAT
T-registered activity of MKI. Transactions that are undertaken incidental to the pursuit of a commercial
or economic activity are considered as entered into in the course of trade or business (Section 105, N NIRC).
IRC). A sale
of a fully depreciated vehicle that has been used in business is subject to VA
VAT
T as an incidental transa
transaction,
ction, although
such sale may be consider
considered
ed *. isolated (Mindanao II Geothermal PaPartnership
rtnership V. CIR, G.R. N os. 193301, 194637
194637,,
March 11, 2013).

IX

Mr. Gipit borrowed from Mr. Maunawain P100,000,00, payable in five (5) equal monthly installments.
Before the first installment became due, Mr. Gipit rendered general cleaning services in the entire office
building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of
Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness
cannot be considered as gain on his part which must be subject to income tax, because according to
him, he did not actually receive payment from Mr. Maunawain for the general cleaning services.

Is Mr: Gipit correct? Explain. (4%)

SUGGESTED ANSWER:

No. The cancella

cancellation
tion of the indebtedness o f up to P75,000 is intended as a compensation for the gener
general
al cleaning
Mr.. Gipit. Compensation for services in whatever form paid is part of gross income (Section
services rendered by Mr
32(A), NIRC).

X.

Which of the following is an exclusion from gross income? (1%)

(A)salaries and wages

(B)cash dividends

(C)liquidating dividends after dissolution

of a corporation

(D)de minimis benefits

(E)embezzled money

SUGGESTED ANSWER:

(D) de minimis benefits (Section 33

33(C)(4);
(C)(4); RR NO. 3-98).

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 XI

Triple Star, à domestic corporation, entered into a Management Service Contract with Single Star, a
non resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall
provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hong
Kong.

Is the compensation for the services of Single Star taxable as income from sources within the Philippines?
Explain. (4%)

SUGGESTED ANSWER:

No. The compensation for services rendered by Single Star is an income derived from ssources
ources without tthe
he Philippines.
To be considered as income from within, the labor or service must be performed within the Philippines (Section
42(A)(3) and Section 42(C)(3) NIRC). Since all the services required to be performed by Single Star Star,, a non-
resident for
foreign
eign corpora
corporation,
tion, is to be performed in Hongkon
Hongkong,
g, the entire income is from sources without.

XII
XII.

Which of the following should not be claimed as deductions from gross income? (1%)

(A)discounts given to senior citizens on certain goods and :: services

(B)advertising expense to maintain some form of goodwill for the taxpayer’s business

(C)salaries and bonuses paid to employees

(D)interest payment on loans for the purchase of machinery and equipment used in business

SUGGESTED ANSWER:

(B) ad
adver
ver
vertising
tising expense to maintain some form of . goodwill for the taxpayer’
taxpayer’ss business (General FFoods
oods Corporation vv..
CIR, G.R. No. 143672, April 24, 2003)

XIII

Hopeful Corporation obtained a loan fron Generous. Bank and executed a mortgage on its real property to
secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed
the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure,
Hopeful Corporation exercised its right of redemption and was able to redeem the property.

Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (4%)

SUGGESTED ANSWER:

No. In a foforec
rec
reclosure
losure of a real esta
estate
te mortg
mortgage,
age, the capi
capital
tal gains tax accrues only af after
ter the lapse of the
redemption period because it is only then that there exists a transfer of property
property.. Thus, if the right to redeem
the fo
forecl
recl
reclosed
osed pro
propert
pert
perty
y was ex
exercised
ercised by the mortgagor before expir
expiration
ation of the redemption

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period, as in tthis
his case, the foreclosure is not a taxable event (See RR No. 4-99, Supreme Tran
ansliner
sliner
sliner,, Inc. v. BPI FFamily
amily
Şav
Şavings
ings Bank, Inc
Inc.., G.
G.R.
R. No
No.. 1656
165617
17
17,, FFebruary
ebruary 25, 201
2011).
1).

XIV

Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a major heart

surgery. He left behind to his wife and two (2) kids several properties, to wit: (4%)

(1) family home in Makati City

(2)condominium unit in Las Piñas City

(3)proceeds of health insurance from Take Care, a health maintenance organization in the Philippines; and
(4) land in Alabama, U.S.A.

The following expenses were paid:

(1) funeral expenses

(2)medical expenses, and

(3)judicial expenses in the testate proceedings.

(A)What are the items that must be considered as part of the gross estate income of Mr. X?

(B)What are the items that may be considered as deductions from the gross estate?

SUGGESTED ANSWER:

(A) All the items of properties enumerated in the problem shall form part of the gross estate of Mr Mr.. X. The
composition of the gross es estate
tate of a decedent who is a Filipino citizen shall include all of his properties, real o r
personal, tangible or intangib
intangible,
le, wherever situated (Section 85, NIRC).

NOTE: It is
NOTE: is suggested that if the examinee answered NONÉ, the same should be given full credit because there is no
gross estate INCOME in the problem. Likewise, it is suggested that any answer should be given full credit
because of the question is worded in a conf
confusing
using manner
manner..

(B) All the items o f expenses in the problem are deductible from bis gross estate. However
However,, the allowable amount o f
funer
funeral
al expenses shall be 5% of the gross estate or actual, whichever is lowelowerr, but in no case shall the amount
deductible go beyond P200,000.. Likewise, the deductible medical expenses must be limite
limited
d to those iincurred
ncurred within
one year prior his death but not to exceed P5 P500,000.
00,000. In addition to the items of expenses mentioned in the
problem, the standard deduction amounting to Pl million is also allowed as a deduction from the gross estate
(Section 86, NIRC).

XV
XV.

When is a pre-assessment notice required under the following cases? (1%).

(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

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(B)when a discrepancy has been determined between the tax withheld and the amount actually remitted
by the withholding agent

(C)when the excise tax due on excisable articles has been paid.

(D)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.

SUGGESTED ANSWER::.

(C) when the excise tax du

due
e on excisable articles has been pa
paid
id (Section 228, NIRC)

XVI

Mr. Tiaga has been a law-abiding citizen diligently paying his income taxes. On May 5, 2014, he was
surprised to receive an assessment notice from the Bureau of Internal Revenue (BIR) informirig him
of a deficiency tax assess ment as a result of a mathematical error in the compu tation of his income
tax, as appearing on the face of his income tax return for the year 2011, which he filed on April 15, 2012.
Mr. Tiaga believes that there was no such error in the computation of his income tax for the year 2011.

Based on the assessment received by Mr. Tiaga; may he: already file a protest thereon? (4%)

SUGGESTED ANSWER:

Yes. Mr
Mr.. Tiaga may consider the assessment notice : as a final assessment notice and his rig
right
ht to protest within 30
days from receipt may now be exercised by him. When the finding of a deficiency tax is the re result
sult of
mathematical error in the computation of the tax appearing on the face of the return, a pre- assessment notice
shall not be required hence, the assessment notice is a final assessment notice (Section 228, NIRC; RR NO: 18-
2013).

XVII

In a civil case for Annulment of Contract of Sale, plain iff Ma: Reklamo presented in evidence the Contract
of Sale: which she sought to be annulled. No documentary stamp:. tax on the Contract of Sale was
paid because according to plaintiff Ma. Reklamo, there was no need to pay the same since the sale
was not registered with the Register of Deeds. Plaintiff Ma. Reklamo is now offering the Contract of
Sale as her evidence.

Is the Contract of Sale admissible? (4%)

SUGGESTED ANSWER

No. The Contract of Sale cannot be admitted in evidence. The document is clearly taxable because the law imposes a
documentary stamp tax (DST) on Sales and Agreements to Sell, and Memoranda o f Sal e: (Section 175, N IRC). Since
Sale:
the (DST) thereon is not paid the effect is that the instrument, document or paper which is required by law to be
stamped and which has been signed, issued, accepted and transferre
transferred
d without being duly stamped shall not be
recorded, nor shall it be used in evidence in any court until the requisite stamp or stamps shall have been
affix
affixed
ed thereto and cancelled (Section 201,

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NIRC). In the case at bar
bar,, no documentary stamp tax was paid on the Contract of Sale, hence, it. ccannot
annot be used as
hex evidence in court.

NOT
NOTE:
E: This must be considered as a bonus question because it is outside the cov
cover
er
erage
age of the bar ex
examination.
amination.

XVIII
XVIII.

Madam X owns real property in Caloocan City. On July 15, 2014, she received a notice of assessment from
the City Assessor, informing her of a deficiency tax on her property. She wants to contest the assessment.
(4%)

(A) What are the administrative remedies available to Madam X in order to contest the assessment and
their respective prescriptive periods?

(BJ May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal?

SUGGESTED ANSWER:

(A) The administr

administrative
ative remed
remedies
ies av
available
ailable to Madam X to contest the assessment and their respective
prescriptive periods are as follow
follows:
s:

1. Pa
Payy the deficiency re
real
al property tax under protest

(Section 252, LGC);

2. File the protest with local treasurer – The protest in writing must be filed within thirty (30) days from payment o f
the tax to the provincial city treasurer o
orr municipal treasurer
treasurer,, in the case of a municipality within Metropolitan Manila
Area, who shall decide : tthehe protest within sixty (6
(60)
0) days from receipt (Section 252, LGC);

3. Appea
Appeall to the LBAA – If protest is deni
denied
ed or upon the lap
lapse
se of the 60-d
60-day
ay period for the treasurer to decide,
the taxpayer may appeal ttoo the LBAA within 60 days and the case decided within 120 days (Section 226 & 229,
LGC):

4. Appeal to the CBAA – If not satisfied wit

with
h the decision of the LBAA, appeal to the CBAA within 30 days from
receipt of a copy of the decision (Section 229(c), LGC).

(B) No. The payment of the deficiency tax is a condition before she can protest the deficiency assessment. It is
the decision on the protest or ina
inaction
ction thereon that gives her the right to appeal. This means that she ca
cannot
nnot refuse
to pay the deficiency tax assessment during the pendency of the appeal because it is the payment itself which gives
rise to the remedy
remedy.. The law provides that no protest (which is the beginning of the disputation process) shall be
entertained unless the taxpayer first pays the tax. (Section 252, LGC).

XIX

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,

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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 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. (5%)

SUGGESTED ANSWERS: (either answer should be given credit):

SUGGESTED ANSWER 1:

The lawyer of the condominium corporatio

corporations
ns is correct. The association dues, membership fees, and other
assessments/charges do not constitute incoine payments because they were collected for the benefit ‘ “of the
unit owners and the condominium corporatio
corporationn is not created as a business entity
entity.. The collection is the money of the
unit owners pooled together and will be .. spent exclusively for the purpose of maintaining and preserving the
building and its premises which they themselves own and possess (First e-Bank T Tower
ower Condominium Corp.
Corp.,, V
V.. BIR,
Special Civil Acti
Action
on No. 12-1
12-1236,
236, RT
RTC
C Br
Br.. 146, Makati City).

SUGGESTED ANSWER 2:

In the case of office Metro Philippines, Inc. (formerly Regus Centres, Inc.
Inc.)) v. Commissioner of Internal Revenue, CT
CTAA
Case No. 8382, the Court only dealt with the EWT issue as the VA VATT Section 105 shows that transactions in the
course of a trade or business (sells, barters, exchanges, leases goods or properties, renders services, imports
goods) are those subject to VA
VAT T, In the case of a condominium corpor
orporation,
ation, the function of the entity is merely for
administr
administrative
ative purposes and not a tratrade
de or business. Thus, payments in the form of association dues should not be
subjected to V
VAAT.

XX

During his lifetime, Mr. Sakitin obtained a loan amounting to ten million pesos from Bangko Uno for the
purchase of a parcel of land located in Makati City, using such pro perty as collateral for the loan. The loan
was evidenced by a duly notarized promissory note, Subsequently, Mr. Sakitin died. At the time of his
death, the unpaid balance of the loan amounted to P2 million, The heirs of Mr. Sakitin deducted the
amount of P2 million from the gross estate, as part of the “Claims against the Estate.” Such deduction was
disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was
not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%).

SUGGESTED ANSWER:

Yes. Unpaid mortgages upon, or any indebtedness with respect to property are deductible from the gross eestate state
only if the value of the decedent’
decedent’ss interest in said property
property,, undiminished by such mortgage o r indebtedness, is
included in the gross.
gross.estate
estate (Section 86(AX1)(e)) In the instant case, the interest of the decedent in the property
purchased from the loan where the said pro perty was used as the collater collateral,
al, was not included in the gross estate.
Accordin
Accordingly
gly
gly,, the unpaid balance of the loan : at the time of Mr
Mr.. Sakitin’
Sakitin’ss death is not deductible as “Claims against the
Estate”
Estate”..

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 XXI

On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Mş Pares, sold a 16-
storey. commercial building known as Haeltown Building to Mr. Belly for P100 million: Mr. Belly, in turn,
sold the same property on the same day to Bell Gates, Inc (BGI) for P200 million. These two (2)
transactions were evidenced by two. separate Deeds of Absolute Sale notarized on the same day by the
same notary public: Investigations by the Bureau of Internal Revenue (BIR) showed that:

(1)the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and
Mr. Belly;

(2)as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly;

(3)the said payment of P40 million was recorded … by BGI in its books as of June 30, 2014 as investment
in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through
the declaration of cash: dividends to all its stockholders.

Based on the foregoing, the BIR sent Haeltown Corpo tation, a Notice of Assessment for deficiency
income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the
higher corporate income tax rate of thirty percent (30%).

What is the liability of Haeltown Corporation, if any?

SUGGESTED ANSWER:

Haelton Corporation is liable for the deficiency income tax as a result of tax evasion. The purpose of selling first
the property to Mr Mr.. Belly is to create a tax shelter
shelter.. He never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax ploy ploy,, a shan, and without business purpose
and economic s ubstance. The intermediary transa ction, which was prompted more on the mitigation of tax
ransaction,
liabilities than for lelegitimate
gitimate busi ness purpose constitutes one of tax evasioevasion.n. However
However,, being a corporation,
Haelton can only be liable for civil fraud which is a civil liability rather than a criminal fr frau
au
audd which can only be
committ
committed ed by natura
naturall persons (CIR 1.
1.-Benigno
-Benigno Toda, JrJr.G.R.
.G.R. No. 147188, September 14, 2004, 438 SCRA 290).

XXII

Choose the correct answer Double Taxation (1%)

(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter,
by the same taxing authority, within the same jurisdiction, I during the same period, with the same kind or
character of tax, even if the purposes of imposing the same are different

(B)is forbidden by. law; and therefore, it is a valid defense against the validity of a tax measure

(C)means taxing the same property twice when it should be taxed only once; it is tantamount to taxing
the same person twice by the same jurisdiction for the same thing

(D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time,
value-added tax as a person selling goods in the course of trade or business.

SUGGESTED ANSWER:

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(C) means taxing the same property ttwice
wice when it should

be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same
thing (Victorias Milling Co. Vi Municipality of Victorias, Negros Occidental, G.R. No. L- 21183, September 27
27,,
1968).

XXIII

Choose the correct answer. Tax Avoidance (1%).

(A)is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.

(B)is a tax saving device within the means sanctioned by law

(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax
liabilities. than for legitimate business purpose.

(D)is any form of tax deduction scheme, regardless if the same is legal or not.

SUGGESTED ANSWER:

(B) is a tax sav

saving
ing device within the means sanctioned by law (Phili
(Philip
p Manufacturing Corp
Corp.. vv.. CIR, G.R. No. L- 19737
19737,,
August 26, 1968).

XXIV
XXIV.

A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their
profession as awyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among
which are as fo llows: (6%)

Earnings

(1) professional/legal fees from various clients

(2)cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm

(3)gains derived from sale of excess computers

and Payments:

(1) salaries of office staff

(2)rentals for office space

(3)representation expenses incurred in meetings with clients

(A) What are the items in the abovementioned earnings which should be included in the computation
of ABC Law Firm’s gross income? Explain.

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(B)What are the items in the abovementioned payments which may be considered as deductions from the
gross income of ABC Law Firm? Explain.

(C). If ABC Law Firm earns net income in 2012, 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?

SUGGESTED ANSWER:

(A) The three (3) items of earnings should be in

included
cluded in

the computation of ABC Law Firm’s gross income. The professional/lega

professional/legall fees from: various clients is included as
part of gross income being in the nature of compensation for services (Section 32(A) (I), NIRC)NIRC).. The cash prize
from a religious society … in recognition of its exemplary services is also :** included there being no law
providing for its exclusion. This is not a prize in recognition of any of the achievements enumerated under the law
hence, should form part of gross income (Section 32(B)(7):

(c), NIRC). The gains from sale of excess computers . and laptops should also be included as part ooff the : firm’
firm’ss gross
income because the term gross income speci fically includes gains derived from dealings in property (Section 32(A)
specifically
(3), NIRC).

(B) The law firm being formed as a general professional partnership is entitled to the same deductions as allowed to
corpora
corporations
tions (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all
deductible, they being in the nature i of ordinary and necessary expenses incurred in the practic
practice
e of profession
(Section 34(A), NIRC).

AL
ALTERNA
TERNA
TERNAT
TIVE ANSWER:

The law firm being formed as a gener

generaal prof
professio
essio
essional
nal partners hip is entitled to the s ame deductions as allowed tto
partnership o
corpora
corporations
tions (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all
deductible, they bein
being
g in the nature of ordinary and necessary expenses incurred in the practic practice
e of profe
profession
ssion
However,, the amount deductible for representation expenses incurred by a taxpayer
(Section 34(A), NIRC). However
firm,, is subject to a ceiling of 1% of net revenue (RR No. 10-2002)
engaged in sale of services, including a law firm

(C) The net income having been e earned

arned by the law firm, which is formed and qualifies as a general Prof Professio
essio
essional
nal
partnership
partnership,, is not subject to income tax because the earner is devoid of any income tax personality
personality.. Each partner
shall report as gross income his distributive share, actually or constructively received, in the net income of the
partnership. The partnership is merely treated for income tax purposes as a pass-through entit entityy so that its net
income is not taxable at the level of the partnership but said net income should be attributed to the partners, whether
or not distributed to them, and they are liable to pay the income tax ba based
sed on their respective taxable income as
individual taxp
taxpayers
ayers (S
(Section
ection 26, NIRC).

XXV

Which of the following transactions is subject to Value Added Tax (VAT)? (1%)

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(A) sale of shares of stock-listed and traded through the local stock (B) importation of personal and
household effects belonging to residents of the Philippines returning from abroad subject to custom: duties
under the Tariff and Customs Code.

(C) services rendered by individuals pursuant to an employer-employee relationship.

(D).gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with
the Cooperative Development Authority.

SUGGESTED ANSWER:

(B) imp
importat
ortat
ortation
ion of per
persona
sona
sonall and hous
household
ehold ef
effec
fec
fects
ts belon
belongin
gin
ging
g to residents of the Philippines returning from abroad
subject to custom duties under the Tarifi and Customs Code (ex (exempt
empt from VAT only if exempt from customs
duties, Section 109(1)(C), NIRC).

XXVI
XXVI.

Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice cream, made
payments: to an officer of Frosty Corporation, a competitor in the ice cream business, in exchange for said
officer’s revelation of Frosty Corporation’s trade secrets.

May Freezy Corporation claim the påyment to the Officer as deduction from its gross income? Explain. (4%)

SUGGESTED ANSWERS

No, The payments ma madede in exchange for the revelation o f a competitor’s trtrade
ade secrets is considered as an expense
which is against law policy,, which is not deductible (3M Philippines, · Inc. V
law,, morals, good customs or public policy V.. CIR,
GR No. 82833, Septem
September
ber 26, 1988). Also, the law will not allow the deduction of brib
bribes,
es, kickbacks and other similar
payments. Applying the principle of ejusdem generis, payment made by Freezy Corporation would fall under
“other similar payments which are not allowed as deduction from gross income (Section 34(A)(1)(C), NIRC).

XVII

In January 2013; your friend got his first job as an office clerk. He is upon him for financial support.
His parents have long retired from their work, and his two (2) siblings are still minors and studying in
grade school. In February 2014, he consulted you as he wanted to comply”: with all the rules
pertaining to the pre par at ion and filing of his income t ax return. He now asks you the following:

{A} Is he entitled to personal exemptions? If so, how much? (1%). (B) Is he entitled to additional exemptions?
If so, how much? (1%) (C) What is the effect of the taxes withheld from his salaries on his taxable income?
(2%)

SUGGESTED ANSWER:

(A) Yes. The law allows a basic personal exemption of P50,000 for each individual taxpayer (Section 3 5(A),
NIRC).

(B) No. While his parents and minor siblings are living with and dependent upon him for financial support, they are
not qualified dependents for purposes of
of.. additional exemptions. The term “dependent” for

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purp
purposes
oses of the ad
addition
dition
ditional
al persona
personall exempt
exemption
ion would include only legitimate, illegitimate or legally adopted child
(Section 35(B), NIRC).

(C) The taxes withheld from his salaries will not affect his taxable income because they are not allowed as tax
deductions but as tax credits. Tax deductions: redu
Tax ce the taxable income while ta
reduce taxx credits reduce the tax liability (CIR
v. Central Luzon Drug Co
Corpo
rpo ration, G.R. No. 159647
159647,, April 15, 2005).

XXVIII
XXVIII.

Choose the correct answer. Tax laws – (1%)

(A) may be enacted for the promotion of private enterprise or business for as long as it gives
incidental advantage to the public or the State

(B)are inherently legislative; therefore, may not be delegated

(C)are territorial in nature; hence, they do not recognize the generally-accepted tenets of international law

(D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class
are taxable at the same rate.

SUGGESTED ANSWER:

(D) adhere to unif

uniformity
ormity and equa
equality
lity when all taxable articles or kinds of property of the same class are taxable at the
same rrate
ate (City of Baguio vv.. de Leon, G.R. No. LL-24756,
-24756, October 31, 1968, 25 SCRA 938).

XIX
XIX.

Doña Evelina, a rich widow engaged in the business of currency exchange; was assessed a
considerable amount of local business taxes by the City Government of Bagnet by virtue of Tax
Ordinance No. 24. Despite her objections thereto, Doña Evelina paid the taxes. Nevertheless,
unsatisfied with said Tax Ordinance; Doña Evelina, through her counsel Atty. ELP, filed a written claim
for recovery of said :local business. taxes and contested the assessment. Her claim was denied, and so
Atty. ELP elevated her case to the Regional Trial Court (RTC).

The RTC declared. Tax Ordinance No. 24 null and void and without legal effect for having been enacted in
violation of the publication requirement of tax ordinances: and revenue measures under the Local
Government Code (LGC) and on the ground of double taxation. On appeal, the Court of Tax Appeals (CTA)
affirmed the decision of the RTC. No:motion for reconsideration was filed and the decision became final
and executory: (4%)

(A) If you are Atty. ELP, what advice will you give Doña Evelina so that she can recover the subject
local business taxes? ;

(B) If Doña Evelina eventually recovers the local business taxes, must the same be considered as
income taxable. by the national government?

SUGGESTED ANSWER::

(A] The remedy availed of by Doña Evelina to question the validity of the assessment was to file a written claim for
recov
recovery
ery which was denied by the city treasurer
treasurer.. It appears that after th
thee denial, the judicial

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remedies wewere
re proper
properly
ly pursued. Since the decision by the CT
CTA
A had already bbecome
ecome final and executory
executory,, the counsel
should advice Doña Evelina to press for the execution of the judgment. Should the city treasurer refuse to refun refund
d
the local taxes :paid, they should push for the issuance of a writ of execution by the CT
CTA
A to force the local treasurer
to make the refund.

(B) Y
Yes,
es, subject to tthe
he tax benefit rule. The llocal
ocal business tax paid is a business connected ta
taxx hence, deductible from
gross income. IIff at the time of its deduction it resulted to a tax benefit to Doña Evelina, then the recovery will form
part of gross income to the exte
extentnt of the tax benefit on the previous deduction (Section 34(C)(1), NIRC).

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