University of Santo Tomas Faculty of Civil Law
TAXATION LAW Questions Asked More Than Once
(QuAMTO 2017) *QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct luminaries in the academe, and updated by the UST Academics Committee to fit for the 2017 Bar Exams. *Bar questions are arranged per topic in accordance with the bar syllabus released by the Supreme Court and were selected based on their occurrence on past bar examinations from 1987 to 2016.
ACADEMICS COMMITTEE CAMILLE ANGELICA B. GONZALES
SECRETARY GENERAL
EMNIE VALERIE B. DURAN IRVIN L. PALANCA LARA NICOLE T. GONZALES MARIELLA A. MARASIGAN
EXECUTIVE COMMITTEE
CAMILLE ANGELICA B. GONZALES
LAYOUT AND DESIGN
QUAMTO COMMITTEE MEMBERS JACKIELYN KRYSTYL NIHAMA BANA KARL ANTHONY BULAONG MERVIN MARCOS KELLY ANN RUBIN NESTOR FERNANDO SIAZON
ATTY. AL CONRAD B. ESPALDON ADVISER
QUAMTO (1987-2016) TAXATION QUAMTO
GENERAL PRINCIPLES OF TAXATION 3. NATURE AND CHARACTERISTICS OF TAXATION (1996, 2003, 2005) Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain. (2005 Bar)
4.
A:The power of taxation is inherent in the State being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituents who are to pay it. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667)
Public Purpose (1989, 1991)
Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power in the Constitution. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of the power of taxation to the Government, but instead merely constitute limitations upon a power which would otherwise be practically without limit. (Cooley, Constitutional Limitations, 1927 8th Ed., p. 787)
Q: An ordinance of Quezon City on the operation of market stalls and the collection of market stall fees created a market committee “to formulate, recommend and adopt subject to the ratification of the SangguniangPanglungsod regulations in the operations of the market stalls.” It also entrusted the collection of the market stall fees to a private corporation. Does the entrusting of the collection of the market stall fees destroy the “public purpose” of the ordinance? (1989 Bar)
Power of Taxation as distinguished from Police Power and Eminent Domain (1989, 1991, 2003) Q: The City of Manila passed an ordinance imposing an annual tax of P5,000.00 to be paid by an operator of a massage clinic and an annual fee of P50.00 to be paid by every attendant or helper in the said clinic. Is the imposition a tax or a license fee? (1989 Bar)
A: Yes, because a portion of the fees collected would be diverted as fees to private corporation. Entrusting of the collection of the market stall fees violates the limitation that local government units shall in no case let to any private person the collection of local taxes, fees, charges and other impositions. [Sec. 130 (c), R.A. No. 7160, The Local Government Code] As a result of this prohibition, public funds are therefore utilized for a private purpose, which is to pay the private corporation for its services.
A:The imposition on the operator of the massage clinic is both a tax and a license fee. The amount of P5,000.00 exceeds the cost of regulation, administration and control but it is likewise imposed to regulate a non-useful business in order to protect the health, safety and morals of the citizenry in general. The P50.00 impositions on the helpers or attendants are license fees sufficient only for regulation, administration and control.
CONSTITUTIONAL LIMITATIONS Equality and Uniformity (1988, 2000, 2003, 2004) Q: RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by MM City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment.
Theory and Basis of Taxation (1991, 2016) Q: Briefly explain the following doctrines: lifeblood doctrine xxx (2016 Bar) A: Lifeblood doctrine. Taxes are the lifeblood of the government [Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] for without taxes, the government can neither exist nor endure. (National Power Corporation v. City of Cabanatuan, G.R. No. 149110, April 9, 2003 citing various cases)
Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC demands that he be refunded an amount equivalent to one-half of the real taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper? Explain your answer briefly. (2004 Bar)
INHERENT LIMITATIONS Q: Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (2009 Bar) A: The inherent limitations on the power to tax are: 1.
2.
occupation or business to be taxed provided these are all within the State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection. (1 Cooley 176184) Taxation is territorial– Taxation may be exercised only within the territorial jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the place of taxation” or “tax situs." Taxation is subject to international comity– This is a limitation which is founded on reciprocity designed to maintain a harmonious and productive relationships among the various states. Under international comity, a state must recognize the generally-accepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken in that capacity.
Taxation is for a public purpose– The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community. Taxation is inherently legislative– Only the legislature has full discretion as to the persons, property,
A: The suit will not prosper. The remission or condonation of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to
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TAXATION LAW one class were not treated alike. [Juan Luna Subdivision, Inc., v. Sarmiento, 91 Phil 371 (1952)]
transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such importation”. Tax exemptions are to be construed strictly and are not considered transferable in character.
Non Impairment of Obligations of Contracts (1997, 2004) Q: A law was passed granting tax exemption to certain industries and investments for a period of five years. But three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law.
DOUBLE TAXATION (1996, 1997, 2004, 2015) Q: Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (2015 Bar)
NPC and KTR companies questioned the assessments on the ground that, having made their investments in full reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the impairment of the obligations and contracts. Is the contention of the companies tenable or not? Reason briefly.
A: Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same purpose. Example: Imposition of final withholding tax on cash dividend and requiring the taxpayer to declare this tax-paid income in his income tax returns.
A: The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the exemption given is spontaneous on the part of the legislature and no service or duty or other remunerative conditions have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the legislature.[Manila Railroad Company v. Insular Collector of Customs, 12 PhiL 146 (1915)]
On the other hand, double taxation in the broad sense pertains to indirect double taxation. This extends to all cases in which there is a burden of two or more impositions. It is the double taxation other than those covered by direct double taxation (CIR v.Solidbank Corp., 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 tax (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.
KINDS OF TAXES Direct and Indirect Taxes (1994, 2000, 2001, 2006) Q: Distinguish “direct taxes” from “indirect taxes". Give examples. (2006 Bar)
Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental receipts and income tax on the rentals. X claims that this is double taxation. (1996 Bar)
A: Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an indirect tax is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a tax, but as part of the purchase price. (Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]) Examples of direct taxes are income tax, estate tax and donor’s tax. Examples of indirect taxes are value-added tax, percentage tax and excise tax on excisable articles.
A: There is no double taxation. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kind and character (Villanueva v. City of Iloilo, 26 SCRA 578).
CONSTRUCTION AND INTERPRETATION OF TAX LAWS Tax Exemption and Exclusion (1996,2005, 2007) Q: Why are tax exemptions strictly construed against the taxpayer? (1996 Bar)
ESCAPE FROM TAXATION (TAX AVOIDANCE V. TAX EVASION)
A: Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Manila Electric Company vs. Vera, 67 SCRA351). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions, they being contrary to the lifeblood theory which is the underlying basis for taxes.
Tax avoidance and Tax Evasion (1989, 1996, 2000, 2005, 2008, 2014, 2016) Q: Distinguish tax evasion from tax avoidance. (1996 Bar) A: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law, hence legal.
Q: An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter which is recognized by the tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (2005 Bar)
Q:Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million down payment; and (b) balance,
A: Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that: "In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, UST BAR OPERATIONS
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QUAMTO (1987-2016) payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000x 5% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion.
liabilities than for legitimate business purpose constitutes one of tax evasion. EXEMPTION FROM TAXATION Constitutional Limitation to the power of Congress in granting tax exemptions (1989, 1992) 1) The President of the Philippines and the Prime Minister of Japan entered into an executive agreement in respect of a loan facility to the Philippines from Japan whereby it was stipulated that interest on loans granted by private Japanese financial institutions to private financial Institutions in the Philippines shall not be subject to Philippine income taxes. (1992 Bar) Is this tax exemption valid? Explain. A: Yes. The tax exemption is valid because an executive agreement has the force and effect of a treaty under the provision of the Revenue Code. Taxation is subject to International Comity.
Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain.(2008 Bar)
ALTERNATIVE ANSWER:
A: The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and it is the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v. Commissioner). There is nothing illegal about transferring first the property to a corporation in a tax free exchange and later selling the shares obtained in the exchange at a lower tax than what could have been imposed if the property was sold directly.
a) The act of tax exemption is an act of taxation which is inherently legislative. Therefore, a mere executive agreement cannot provide for a tax exemption.
COMPENSATION AND SET-OFF (1990, 1992, 1996, 2001, 2005) Q: May taxes be the subject of set-off or compensation? Explain. (2005 Bar)
Q: Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000 square meter lot in the City of Makati. It sold the lot and building to Rainier for P80 million. One month after, Rainier sold the lot and building to Healthy Smoke Company (HSC) for P200 million, Lucky filed its annual return and declared its gain from the sale of the lot and building in the amount of P750, 000.00.
A: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common, to each; and (3) public policy is better subserved if the integrity and independence of taxes are maintained. [Republic v. Mambulao Lumber Company, 4 SCRA 622 (1962)].
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 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 the 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. (2016 Bar)
However, if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. [Domingo v. Garlitos, 8 SCRA 443 (1963)]. Q: Can an assessment for a local tax be the subject of setoff or compensation against a final judgment for a sum of money obtained by the taxpayer against the local government that made the assessment? Explain. (2005 Bar) A: No. Taxes and debts are of different nature and character; hence, no set-off or compensation between these two different classes of obligations is allowed. The taxes assessed are the obligations of the taxpayer arising from law, while the money judgment against the government is an obligation arising from contract, whether express or implied. Inasmuch that taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal compensation. [Francia v. Intermediate Appellate Court, 162 SCRA 753 (1988)].
A: Yes. The BIR is correct in assessing the taxes on Lucky. There was no tax avoidance, instead there was tax evasion on the part of Lucky because of the simulated sale to Rainier which had its apparent purpose to reduce the income tax to be paid by Lucky on the sale to HSC. The sale to Rainier was simulated as evidenced by the fact that two months prior to the sale of the properties to Rainier, Lucky received P40 million from HSC and not from Rainier.
It is only when the local tax assessment and the final judgment are both overdue, demandable, as well fully
The intermediary transaction (the simulated sale to Rainier), was prompted more on the mitigation of tax
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TAXATION LAW liquidated may set-off or compensation be allowed. [Domingo v. Garlitos, 8 SCRA 443 (1963)].
unless and until he waives in writing his privilege under R.A. No. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
TAXPAYER’S SUIT (1990, 1996) Q: When may a taxpayer’s suit be allowed? (1996)
NATIONAL TAXATION
A: A taxpayer's suit may only be allowed when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation. (Pascual vs. Secretary of Public Works, 110 Phil. 331)
REALIZATION AND RECOGNITION OF INCOME (1989, 1993, 2009, 2010, 2012) Q: What is the “all event test”? Explain Briefly. (2010 Bar)
Q: A law imposes a tax of 1/5 of 1% if the export price of prawns produced in the Philippines. The law provides that the proceeds of the tax shall be turned over to the Philippine Prawn Growers Association, Inc. (PPGA), a non-profit private corporation registered with the Securities and Exchange Commission to be used by PPGA exclusively to undertake activities that promote the growth of the Philippine prawns industry, such as undertaking research on how to improve the productivity of prawn farms in the Philippines, undertaking marketing activities that will directly further the growth of the industry.
A: The “all events test” is a test applied in the realization of income and expense by an accrual-basic taxpayer. The test requires (1) the fixing to the right to the income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability, to warrant the inclusion of the income or expense the gross income or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, GR No. 172231, Feb 12, 2007) Q: Mr. Jose Castillo is a resident Filipino Citizen. He purchased a parcel of land in Makati City in 1970 at a consideration of P1 Million. In 2011, the land, which remained undeveloped and idle, had a fair market value of P20Million. Mr. Antonio Ayala, another Filipino citizen, is very much interested in the property and he offered to buy the same for P20 Million. The Assessor of Makati City re-assessed in 2011 the property at P10 Million. Is Mr. Castillo liable for income tax in 2011 based on the offer to buy by Mr. Ayala? Explain your answer. (2012 Bar)
The members of PPGA constitute 90% of all the Prawn growers in the country representing 100% of the country’s prawn exports. JN, a practicing lawyer and taxpayer, filed a suit with the Supreme Court questioning the constitutionality of the law on the ground that the funds raised through taxation will be used for a private purpose. Will said suit prosper? Explain. (1990 Bar) A: No, because Atty. JN is not prejudiced by the law. It is not his tax money that is being used. In short, he has no locus standi. Furthermore, assistance to the prawn industry is for a public purpose because the industry is one of the pillars of the economy contribution to employment and foreign exchange (Domondon, Remedies, pg 815)
A: No. Mr. Castillo is not liable for income tax in 2011 because no income is realized by him during that year. Tax liability for income tax attaches only if there is a gain realized resulting from a closed and complete transaction (Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918)
POWERS AND FUNCTIONS OF THE COMMISSIONER OF INTERNAL REVENUE
CLASSIFICATION OF INCOME SUBJECT TO TAX Taxable Income
Power to inquire into bank deposits (1998, 1999, 2000, 2003, 2012)
Fringe Benefits (1991, 1993, 1995, 2001, 2003, 2016) Q: A “fringe benefit’ is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain. (2003 Bar)
Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does this power of the Commissioner conflict with RA 1405 (Secrecy of Bank Deposits Law) (1998 Bar) A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of: 1. 2. 3. 4.
A: It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the employer, such that, if the tax is not paid the legal recourse of the BIR is to go after theemployer. Any amount or value received by the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is legally required to pay (same as statutory incidence as distinguished from economic incidence) is that person who, in case of non-payment, can be legally demanded to pay the tax.
any taxpayer upon his written consent; a decedent to determine his gross estate; any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tax liability; A specific taxpayer or taxpayers subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory. [Sec. 6(F), NIRC]
The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a later legislation.
Q: In 2011, Solar Computer Corporation (Solar) purchased a proprietary 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
Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered UST BAR OPERATIONS
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QUAMTO (1987-2016) 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.
revenues. Capital gains are generally taxed at a lower rate to prevent, among others, the bunching of income in one taxable year which is a liberality in the law begotten from motives of public policy (Rule on Holding Period). It stands to reason therefore, that if the transaction results in loss, the same should be allowed only from and to the extent of capital gains and not to be deducted from ordinary gains which are subject to a higher rate of income tax.
Is the said assignment a “gift” and, therefore, subject to gift tax? Explain. (2016 Bar) A: No. The assignments are not gratuitous, and there is no intent to transfer ownership hence not subject to gift tax.
Q: In 1990, Mr. Naval bought a lot for P1, 000, 000.00 in a subdivision with the intention of building his residence on it. In 1994, he abandoned his plan to build his residence on it because the surrounding area became a depressed area and land values in the subdivision went down; instead, he sold it for P800, 000.00. At the time of the sale, the zonal value was P500, 000.00.
The value of the right to avail of the privileges attendant to Mabuhay Golf Club, Inc. Membership Certificate is due to David’s merits or services as a computer consultant. It is a fringe benefit taxable to the employer. [NIRC of 1997, Sec. 33 (B) (6)] INCOME FROM DEALINGS IN PROPERTY (1987, 1988, 1989, 1991, 1992, 1993, 1994, 1997, 1998, 2001, 2003, 2005, 2007, 2008, 2009, 2012, 2014, 2015)
1. Is the land a capital asset or an ordinary asset? Explain.
Q: Distinguish a “capital asset" from an “ordinary asset". (2003 Bar)
A: The land is a capital asset because it is neither for sale in the ordinary course of business nor a property used in the trade or business of the taxpayer. (Sec. 33. NIRC).
A: The term “capital asset” regards all properties not specifically excluded in the statutory definition of capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains or ordinary losses. Accordingly, “capital assets” includes property held by the taxpayer whether or not connected with his trade or business, but the term does not include any of the following, which are consequently considered “ordinary assets:” 1.
2. 3. 4.
2. Is there any income tax due on the sale? Explain. (1994 Bar) A: Yes. Mr. Naval is liable to the 6% capital gains tax imposed under the Tax Code based on the gross selling price of P800, 000.00 which is an amount higher than the zonal value. Q: In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100, 000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million.
stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; property used in the trade or business of a character which is subject to the allowance for depreciation provided in Section 34 (F) of the Tax Code; or real property used in trade or business of the taxpayer.
What is the nature of the real properties exchanged for tax purposes - capital asset or ordinary asset? Explain.
The statutory definition of “capital assets” practically excludes from its scope, it will be noted, all property held by the taxpayer if used in connection with his trade or business.
A: The one hectare agricultural land owned by Juan Gonzales is a capital asset because it is not a real property used in trade or business. The one-half hectare residential property owned by Alpha Corporation is an ordinary asset because the owner is engaged in the purchase and sale of real property. (Section 39, NIRC, Revenue Regulations No. 703)
Q: What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain. (2003 Bar)
Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain.
A: It is to insure that only costs or expenses incurred in earning the income shall be deductible for income tax purposes consonant with the requirement of the law that only necessary expenses are allowed as deductions from gross income. The term “necessary expenses” presupposes that in order to be allowed as deduction, the expense must be business connected, which is not the case insofar as capital losses are concerned. This is also the reason why all nonbusiness connected expenses like personal, living and family expenses, are not allowed as deduction from gross income. [Section 36(A)(1) of the 1997 Tax Code]
A: Yes. The tax base in a taxable disposition of a real property classified as a capital asset is the higher between two values: the fair market value of the property received in exchange and the fair market value of the property exchanged. Since the fair market value of two properties are the same, the said fair market value should be taken as the tax base which is P10 million. The income tax rate is 6%. [Section 24(D) (1), NIRC]. Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (2008 Bar)
ALTERNATIVE ANSWER: The prohibition of deduction of capital losses from ordinary gains is designed to forestall the shifting of deductions from an area subject to lower taxes to an area subject to higher taxes, thereby unnecessarily resulting in leakage of tax
A: Yes. The gain from the exchange constitutes an item of gross income, and being a business income, it must be reported in the annual income tax return of Alpha
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TAXATION LAW Corporation. From the pertinent items of gross income, deductions allowed by law from gross income can be claimed to arrive at the net income which is the tax base for the corporate income tax rate of 35%. (Section 27 (A) and Section 31, NIRC)
PASSIVE INVESTMENT INCOME (1994, 1995, 1997, 2000, 2003, 2005, 2015) Q: BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June 2015, its Board of Directors approved the distribution of cash dividend 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:
Exemptions from capital gains tax Q: 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. (2015 Bar)
1. A resident citizen A: A final withholding tax for ten percent (10%) shall be imposed upon the cash dividends actually or constructively received by a resident citizen from BBB, Inc. (Sec. 24 (b)(2), NIRC).
A: I would advise Mr. H that he may be exempted from the payment of the capital gains tax on the sale or disposition of the house and lot where his family lives because the sale of principal residence by a natural person is exempt provided the following conditions are complied with:
2. Non-resident alien engaged in trade or business
1.
The proceeds of the sale is fully utilized in acquiring or construction new principal residence within 18 calendar months from the date of the sale or disposition; The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired; The Commissioner has been duly notified, through a prescribed return, within 30 days from the date of sale or disposition of the person’s intention to avail of the tax exemption; and The exemption was availed only once every 10 years. [Sec 24 (d)(2), NIRC]
3. Non-resident alien not engaged in trade or business
Q: Cebu Development Inc. (CDI) has an authorized capital stock of P5, 000, 000.00 divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock, twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of P950, 000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only P500,000.00. Is Mr. Legaspi liable for any taxable gain? (1991 Bar)
A: Dividends received by a non-resident foreign corporation from a domestic corporation are generally subject to an income tax of 30% to be withheld at source (Sec. 28(b)(1), NIRC). However, a final withholding tax of fifteen percent (15%) is imposed on the amount of cash dividends received from a domestic corporation like BBB, Inc. if the tax sparing rule applies (Sec. 28(B)(5)(b), NIRC). Pursuant to this rule, the lower rate of tax would apply if the country in which the non-resident foreign corporation is domiciled would allow as tax credit against the tax due from it, taxes deemed paid in the Philippines of 15% representing the difference between the regular income tax rate and the preferential rate.
2. 3.
4.
A: A final withholding tax of twenty percent (20%) shall be imposed upon the cash dividends actually or constructively received by a non-resident alien engaged in trade or business from BBB, Inc. (Sec. 25 (a)(2), NIRC).
A: A final withholding tax equal to twenty-five percent (25%) of the entire income received from all sources within the Philippines, including the cash dividends received from BBB, Inc. (Sec. 25(b), NIRC). 4. Domestic corporation A: Dividends received by a domestic corporation from another domestic corporation, such as BBB, Inc., shall not be subject to tax (Sec. 27(d)(4), NIRC). 5. Non-resident foreign corporation
Q: Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? (2000 Bar)
A: The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation by virtue of the transfer of the land. His percentage of stockholdings in the capital stock of the corporation remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic gain which was realized by virtue of the exchange of the land for the liability for the subscription.
A: Mr. Javier is exempt from income tax on his monthly GSIS pension [Sec. 32(B)(6)(f). NIRC of 1997] but not on the interest income that might accrue on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Javier’s sole taxable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return. [Sec. 51 (A) (2) (c)NIRC].
ALTERNATIVE ANSWER: Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange of shares of property for shares of stock as a result of which the property transferor acquired control of the corporation. The 13,000 shares of stock acquired in exchange of property was more than fifty percent (50%) of the total subscribed capital stock of Cebu Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the provisions of Sec. 34 (c) (2) of the National Internal Revenue Code. UST BAR OPERATIONS
Q: What are disguised dividends in income taxation? Give an example. (1994 Bar) A: Disguised dividends are those income payments made by a domestic corporation, which is a subsidiary of a nonresident foreign corporation, to the latter ostensibly for
6
QUAMTO (1987-2016) services rendered by the latter to the former, but which payments are disproportionately larger than the actual value of the services rendered. In such case, the amount over and above the true value of the service rendered shall be treated as a dividend, and shall be subjected to the corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate as may be provided under a corresponding Tax Treaty.
b. May Mr. A’s prize money qualify as an exclusion from his gross income? Why? A: No. Under the law, all prizes and awards granted 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 from gross income. The exclusion find application only to amateur athletes where the prize was given in an event sanctioned by the appropriate national sports association affiliated with the Philippine Olympic Committee and not to professional athletes like Mr. A. Therefore, the prize money would not qualify as an exclusion from Mr. A’s gross income. [SEC 32 B (7)(d), NIRC]
Example: Royalty payments under a corresponding licensing agreement. ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF INSURANCE (1988, 1991, 2003, 2005, 2007)
c.
Q: Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer of employment, he was offered the arrangement that part of his compensation would be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance policy.
A: The income taxes withheld and paid to the US government maybe claimed by 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 taxable year 2013. [Sec. 34 (C) (1) (b), NIRC]
Will the proceeds of the insurance form part of the income of the parents of Noel and be subject to income tax? Reason briefly. (2007 Bar)
PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY (1988, 1991, 1994, 1995, 1996, 1999, 2000, 2005, 2007)
A: No. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are not included as part of the gross income of the recipient. [Section 32(B)(1), NIRC] There is no income realized because nothing flows to Noel’s parents other than a mere return of capital, the capital being the life of the insured.
Q: Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a month. While in the Philippines, with his pension pay from his former employer, he purchased three condominium units in Makati which he is renting out for P15, 000 a month each.
Q: Born of a poor family on 14 February 1944. Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985, he received P400, 000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of P1, 520.00 since 1965 also matured. He was then paid the face value of his insurance policy in the amount of P50, 000.00.
Does the US$1,000 pension become taxable because he is now residing in the Philippines? Reason briefly. (2007 Bar) A: No. The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by a resident citizens of the Philippines , such as Z, from a foreign private institutions, is excluded from income taxation. [Sec. 32 (B) (6) (c), NIRC]
Is his P50, 000.00 insurance proceeds exempt from income taxation? (1991 Bar) A: The P50, 000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that portion which corresponds to the premiums that he had paid since 1965. At the rate of P1,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must have paid a total of P30, 400.00. Accordingly, he will be subject to report as taxable income the amount of P 19,600.00.
Q: X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary for one year. Is the amount considered taxable income to the widow? Why? (1996) A: No. The amount received by the widow from the decedent’s employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the Tax Code.
PRIZES AND AWARDS (1993, 1996, 2000, 2015) Q: 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, 000.00. a.
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? (2015 Bar)
ALTERNATIVE ANSWER: No. Since the amount was given to the widow and not to the estate, it becomes obvious that the amount is more of a gift. In one U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), it was held that payments to the widow of the president of a corporation of the amount the president would have received in salary if he lived out the year constituted a gift and not an income.
Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why?
A: Yes. Under the Tax Code, the income within and without of a resident citizen is taxable. Since Mr. A is a resident Filipino citizen, his income worldwide is taxable in the Philippines. [Sec. 23 (A), NIRC]
The controlling facts which would lead to the conclusion that the amount received by the widow is not an income are as follows:
7
TAXATION LAW a. b. c. d. e.
the gift was made to the widow rather than the estate: there was no obligation for the corporation to make further payments to the deceased; the widow had never worked for the corporation; the corporation received no economic benefit; and the deceased had been fully compensated for his services. [Estate of Sydney Carter us. Commissioner, 453 F. 2d 61 (2d Cir. 1971)]
A: No. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations, provides that if a debtor performs services for a creditor who cancels the debt in consideration for such services, the debtor realizes income to that amount as compensation for his services. In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the amount of Php 75,000.00 gave rise to compensation income subject to income tax, since Mr. Maunawain condoned such amount as consideration for the general cleaning services rendered by Mr. Gipit.
Q: A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500, 000.00. Is said amount subject to tax? Explain. (1996 Bar)
Q: In 2010, Mr. Platon sent his sister Helen $1, 000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen. Would the BIR be correct if it determines that Helen earned taxable income under these facts? (2013 Bar)
A: No. The commutation of leave credits, more commonly known as terminal leave pay, ie., the cash equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991; Commissioner v. CA and Efren Castaneda, GR No. 96016, October 17, 1991)
(A) No, she had no income because she had no right to the mistakenly credited funds. (B) Yes, income is income regardless of the source. (C) No, it was not her fault that the funds in excess of $1,000 were credited to her. (D) No, the funds in excess of$1,000 were in effect donated to her.
Q: Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? (2000 Bar)
A: (B) Yes, income is income regardless of the source.
A: Retirement benefits received under R.A. No. 7641 and those received by officials and employees of private firms, whether, individual or corporate, in accordance with the employer’s reasonable private benefit plan approved by the BIR, are excluded from gross income and exempt from income taxation if the retiring official or employee was: 1. 2. 3. 4.
Section 32 of the NIRC defines gross income as all income derived from whatever source. Consequently, the flow of wealth, without any distinction as to the lawfulness of its source, is subject to income tax. In other words, the phrase “income from whatever source” discloses a legislative policy to include all income not expressly exempted within the class of taxable income under the law
In service of same employer for at least 10 years; Not less than fifty years of age at time of retirement; Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer [RR 2-98, Section 2.78 (B) (1), 1st par.]
EXCLUSIONS FROM GROSS INCOME EXCLUSIONS UNDER THE TAX CODE Proceeds of life insurance policy (1988, 1991, 2003, 2005, 2007)
INCOME FROM ANY SOURCE WHATSOEVER (1989, 1995, 2001, 2005)
Q: State with reasons the tax treatment of the following in the preparation of annual income tax returns:
Q: Explain briefly whether the following items are taxable or non- taxable:
a.
Proceeds of life insurance received by a child as irrevocable beneficiary; b. xxx (2005 Bar)
a) Income from jueteng b) xxx (2005 Bar)
A: The proceeds of life insurance received by a child as irrevocable beneficiary are not to be reported in the annual income tax returns, because they are excluded from gross income. This kind of receipt does not fall within the definition of income –“Many wealth which flows into the taxpayer other than a mere return of capital.” Since insurance is compensatory in nature, the receipt is merely considered as a return of capital. [Section 32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 73 (1922)]
A: It is taxable. The law imposes a tax on income from any source whatever which means that it includes income whether legal or illegal. [Sec. 32(A), NIRC] TAXABLE INCOME Gross Income (2012, 2013, 2014, 2015) Q: 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 or the general cleaning services. Is Mr. Gipit correct? Explain. (2014 Bar) UST BAR OPERATIONS
Gifts, bequests and devises (1988, 1995, 1996, 1997, 2008) Q: Mr. Rodrigo, an 80-year old retired businessman, fell in love with 20-year old Tetchie Sonora, a night club hospitality girl. Although she refused to marry him she agreed to be his “live-in" partner. In gratitude Mr. Rodrigo transferred to her a condominium unit, where they both live, under a deed of sale for P10 Million. Mr. Rodrigo paid the capital gains tax of 5% of P10 Million.
8
QUAMTO (1987-2016) The Commissioner of Internal Revenue found that the property was transferred to Tetchie Sonora by Mr. Rodrigo because of the companionship she was providing him. Accordingly, the Commissioner made a determination that Sonora had compensation income of P10 Million in the year the condominium unit was transferred to her and issued a deficiency income tax assessment.
equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation allowances or sick leave credits which are paid to an employee constitutes compensation. [Sec. 2.78(A)(7), RR No. 2-98, as amended by RR No. 10-2000]
Tetchie Sonora protests the assessment and claims that the transfer of the condominium unit was a gift and therefore excluded from income.
The amounts that JR received from the airline are excluded from gross income and not subject to income tax because they are compensation for personal injuries suffered from an accident as well as damages received as a result of an agreement (negotiation) on account of such injuries. [Sec. 32(B)(4), NIRC]
How will you rule on the protest of Tetchie Sonora? Explain. (1995 Bar)
Retirement benefits, gratuities, pensions etc. (1988, 1991, 1994, 1995, 1996, 1999, 2000, 2005, 2007)
A: I will grant the protest and cancel the assessment. The transfer of the property by Mr. Rodrigo to Ms. Sonora was gratuitous. The deed of sale indicating a P10 million consideration was simulated because Mr. Rodrigo did not receive anything from the sale. The problem categorically states that the transfer was made in gratitude to Ms. Sonora’s companionship. The transfer being gratuitous is subject to donor’s tax. Mr. Rodrigo should be assessed deficiency donor’s tax and a 50% surcharge imposed for fraudulently simulating a contract of sale to evade donor’s tax. [Sec. 91(b), NIRC]
Q: A Co., a Philippine corporation, has two divisions — manufacturing and construction. Due to the economic situation, it had to close its construction division and lay-off the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off: a.
Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. b. Employees who do not meet either the age or length of service, A Co. plans to give the following:
Awards and agreements for damages paid on account of or resulting from injuries or sickness (1995, 2003, 2005, 2007)
For category (A) employees – the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service.
Q: Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay P400, 000.00 for his hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of P10,000.00 a month or a total of P60, 000.00. He sued the bus company and was able to obtain a final judgment awarding him P400, 000.00 as reimbursement for his hospitalization, P60, 000 for the salaries he failed to receive while hospitalized, P200, 000.00 as moral damages for his pain and suffering, and P100,000.00 as exemplary damages. He was able to collect in full from the judgment.
For category (B) employees – one month for every year of service. For both categories, the cash equivalent of unused vacation and sick leave credits. A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your advice. (1999) A: For category A employees, all the benefits received on account of their separation are not subject to income tax, hence no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees' control. [Section 32(B), NIRC] The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income. (CIR v. Court of Appeals, GR No. 96016, October 17, 1991)
How much income did he realize when he collected on the judgment? Explain. (1995 Bar) A: None. The P200.000 moral and exemplary damages are compensation for injuries sustained by Mr. Infante. The P400, 000.00 reimbursement for hospitalization expenses and the P60, 000.00 for salaries he failed to receive are amounts of any damages received whether by suit or agreement on account of such injuries. Section 28(b)(5) of the Tax Code specifically exclude these amounts from the gross income of the individual injured. [Section 28(b), NIRC; Sec. 63 Rev. Reg. No. 2]
For category B employees, all the benefits received by them will also be exempt from income tax, hence not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees' control, which are specifically excluded from gross income. [Section 32(B), NIRC]
Q: JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement was reached under the terms of which JR was paid the following amounts: P500, 000.00 for his hospitalization; P250, 000.00 as moral damages; P300, 000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his employer the amount of P200,000.00 representing the cash equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain. (2005 Bar)
ALTERNATIVE ANSWER: All of the payments are not subject to income tax and should not also be subject to WT. The employees were laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation has rendered less than ten years of service and/or is below fifty years of age. [Section 32(B), NIRC]
A: The amount of P200,000.00 that JR received from his employer is subject to income tax except the money
9
TAXATION LAW Prizes and awards (1993, 1996, 2000, 2015)
advertising expense, of such nature does not qualify as an ordinary business expense, because the benefit to be enjoyed by the taxpayer goes beyond one taxable year. [CIR v. General Foods Inc., 401 SCRA 545 (2003)]
Q: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide. (1996 Bar)
Losses (1993, 1998, 1999, 2010) Q: Give the requisites for deductibility of a loss. (1998 Bar) A: 1.
A: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax".
2. 3. 4.
Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the donor’s tax."
5.
They must be ordinary losses that are incurred by a taxable entity as a result of its day to day operations conducted for profit or otherwise, or casualty losses. They must have been losses that are actually sustained during the taxable year. Must not have been compensated for by insurance or other forms of indemnity. If they are casualty losses, they are of property connected with trade, business, or profession and the lose arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. Must not have been claimed as a deduction for estate tax purposes in the estate tax return.
Q: A is a travelling salesman working full time for Nu Skin Products. He receives a monthly salary plus 3% commission on his sales in a Southern province where he is based. He regularly uses his own car to maximize his visits even to far flung areas. One fine day a group of militants seized his car. He was notified the following day by the police that the marines and the militants had a bloody encounter and his car was completely destroyed after a grenade hit it.
DEDUCTIONS FROM GROSS INCOME ITEMIZED DEDUCTIONS Ordinary and necessary trade, business or professional expenses (1988, 1989, 1990, 1993, 2006, 2009, 2016) QPeter 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. (2016 Bar)
A wants to file a claim for casualty loss. Explain the legal basis of your tax advice. (2010 Bar) A: A is not entitled to claim a casualty loss because all of his income partake the nature of compensation income. Taxpayers earning compensation income arising from personal services under an employer-employee relationship are not allowed to claim deduction except that allowed under Section 34(M) referring only to the P2,400 health and/or hospitalization insurance premium; perforce, the claim of casualty loss has no legal basis. (Sec. 34, NIRC) Bad Debts (1999, 2004, 2016) Q: 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.” (2016 Bar)
A: Not all of the representation and entertainment expenses claimed by Golden Dragon are deductible. Only those that are reasonable in amount and nature should be deductible. It should be noted that the total expenses is P430,000.00 for the five (5) investors or P86,000.00 each. I would allow only a deduction in such amounts as are reasonable under the circumstances but in no case shall all deductions for representation and entertainment expenses, including those above enumerated, exceed 0.50% of net sales. [NIRC of 1997, Sec. 34 (A) (1) (iv); RR 10-2002] (Domondon)
A: I shall advise Rakham to treat the obligation as “bad debt” by deducting the same from his income tax return, and proving compliance with the following requisites for the deductibility of a “bad debt.”
Q: Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (2009 Bar)
The requisites for the deductibility of a “bad debt” are:
A: No. The protection of taxpayer’s brand franchise is analogous to the maintenance of goodwill or title to one’s property which is in the nature of a capital expenditure. An
d.
UST BAR OPERATIONS
a. b. c.
10
There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. The same must be connected with the taxpayer’s trade, business or practice of profession. The same must not be sustained in a transaction entered into between related parties. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year.
QUAMTO (1987-2016) e. f.
g.
The debt must be actually ascertained to be worthless and uncollectible during the taxable year. The debts are uncollectible despite diligent effort exerted by the taxpayer. [NIRC of 1997, Sec. 34 (E) (1), arrangement and numbering supplied; RR No. 5-99, Sec. 3, reiterated in RR No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667] Must have been reported as receivables in the income tax return of the current or prior years. (RR No. 2, Sec. 103)
contribution to the crippled girl cannot be claimed as a deduction. ALTERNATIVE ANSWER: a.
Depreciation (1989, 1998, 1999) Q: Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense.
b.
xxx b. Depreciation of goodwill. (1999 Bar) A: Depreciation for goodwill is not allowed as deduction from gross income. While intangibles maybe allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17) Such is not the case with goodwill.
c.
ALTERNATIVE ANSWER: Depreciation of goodwill is allowed as a deduction from gross income if the goodwill is acquired through capital outlay and is known from experience to be of value to the business for only a limited period. (Section 107, Revenue Regulations No. 2) In such case, the goodwill is allowed to be amortized over its useful life to allow the deduction of the current portion of the expense from gross income, thereby paving the way for a proper matching of costs against revenues which is an essential feature of the income tax system.
OPTIONAL STANDARD DEDUCTION (2009, 2015) Q: 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 of 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 were duly covered by receipts. What are the options available for Dr. K so he could maximize the deductions from his gross income? (2015 Bar)
Charitable and other contributions (1993, 1996, 1998) Q: The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday, as was his custom. He gave P100, 000.00 to the hospital and P5, 000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the P100, 000.00 and the P5, 000.00 from his gross income. Discuss. (1993 Bar)
A: In order to maximize his deductions, Dr. K may avail of the optional standard deduction (OSD) which is an amount not exceeding forty percent (40%) of his gross sales or gross receipts. The OSD can be claimed without being required to present proof or evidence of expenses paid or incurred Sec. 34 (L), NIRC; Rev. Regs. 16-08, as amended by him. []
A: Under the National Internal Revenue Code, charitable contributions to be deductible must be: a.
b. c.
The P100,000.00 donation may properly be deducted from X’s gross income, but not the P5, 000.00 donated to the crippled girl, as charitable and other contributions that may be deducted from taxable income do not contemplate those given to individuals. While it may be that X’s son is a patient in the hospital, it cannot be said that part of its net income inures to the benefit of X as to be disallowed as a deduction from taxable income. Assuming X is a self-employed individual, he may not deduct the donations made because under Section 29 of the NIRC as amended by RA 7496 better known as SNITS, only contribution to the government or to an accredited relief organization for the rehabilitation of calamity stricken areas declared by the President may be deducted for income tax purposes. Clearly, the donees do not qualify as relief organizations. Assuming X is receiving purely compensation income, he can only deduct from gross compensation income personal exemption, additional personal exemption and special additional personal exemption. (Section 29, NIRC as amended)
PERSONAL AND ADDITIONAL EXEMPTIONS (1993, 1998, 2004, 2006, 2012, 2014, 2015)
actually paid or made to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for rehabilitation of veterans or to social welfare institutions no part of which inures to the benefit of any private individual; made within the taxable year; not more than 10% (for individuals) of 5% (for corporations) of the taxpayer’s taxable income to be computed without including the contribution.
Q: Mr. E and Ms. F are 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/deductions which Mr. E and Ms. F could claim in the following taxable years? (2015 Bar) a.
For 2010
A: For 2010, Mr. E and Ms. F are each entitled to personal exemptions of P50,000.00. [Sec. 35 (A), NIRC]
Applying the above-provisions of law to the case at bar, it is clear therefore that only the P100,000.00 contribution of X to Filipinas Hospital for Crippled Children qualified as a deductible contribution.
b. For 2011 A: For 2011, Mr. E and Ms. F are each entitled to basic personal exemption of P50,000.00. In addition to his basic personal exemption, Mr. E could claim additional personal exemptions for three qualified dependent children in the amount of P25, 000.00 for each child. [Sec. 35 (B), NIRC]
The NIRC expressly provides that the same must be actually paid to a charitable organization to be deductible. Note that the law accorded no privilege to similar contributions extended to private individuals. Hence, the P5,000.00
c.
11
For 2013
TAXATION LAW A: For 2013, Mr. E and Ms. F are each entitled basic personal exemptions of P50,000.00. Mr E could claim additional personal exemptions for four qualified dependent children in the amount of P25,000.00 for each child. [Sec 35 (B), NIRC]
May Freezy Corporation claim the payment to the officer as deduction from its gross income? Explain. (Bar) A: No. The payments made in exchange for the revelation of a competitor’s trade secrets is considered as an expense which is against law, morals, good customs or public policy, which is not deductible. (3M Philippines, Inc. v. CIR, GR No. 82833, 1988) Also, the law will not allow the deduction of bribes, 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]
ITEMS NOT DEDUCTIBLE Premiums paid on life insurance policy(1989, 2004, 2007) Q: OXY is the president and chief executive officer of ADD Computers Inc. When OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry, he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in the government, ADD proposed to obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to P100,000. Is said premium deductible by ADD Computers, Inc.? Reason. (2004 Bar)
INCOME TAX ON INDIVIDUALS Income tax on Resident Citizens, Non-resident Citizens and Resident Aliens(1997, 1999, 2000, 2001, 2002, 2007, 2015, 2016) Q: 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 $3 million. He went to the Philippines on a visit and in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: 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? (2016 Bar)
A: No. The premium is not deductible because it is not an ordinary business expense. The term "ordinary’ is used in the income tax law in its common significance and it has the connotation of being normal, usual or customary. (Deputy v. Du Pont, 308 US 48) Paying premiums for the insurance of a person not connected to the company is not normal, usual or customary. Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to a government employee. This is so because if the insured, his estate or heirs were made as the beneficiary (because of the requirement of insurable interest), the payment of premium will constitute bribes which are not allowed as deduction from gross income. [Section 34(A)(1)(c), NIRC]
A: I will advise Patrick that if he reacquires his Philippine citizenship and establish residence in the Philippines, he shall be considered as a resident citizen subject to tax on incomes derived from sources within or without the Philippines. [NIRC of 1997, Sec. 23 (A)]
On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium is not allowed as a deduction from gross income. [Section 36(A)(4), NIRC]
Consequently, the BIR could now tax him on his income derived from sources without the Philippines which is the income he earns from his U.S. business. (Domondon) Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15,1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19,2001 warrants of distraint and levy to enforce collection of the tax.
Q: Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer of employment, he was offered the arrangement that part of his compensation would be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance policy. xxx b. Can the company deduct from its gross income the amount of the premium? Reason briefly. (2007 Bar)
What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer. (2002 Bar)
A: Yes. The premiums paid are ordinary and necessary business expenses of the company. They are allowed as a deduction from gross income so long as the employer is not a direct or indirect beneficiary under the policy of insurance. [Section 36(A)(4), NIRC] Since the parents of the employee were made the beneficiaries, the prohibition for their deduction does not exist.
A: Mr. Sebastian’s income as seaman on board the Norwegian vessel engaged in international shipping shall not be subjected to income tax. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. [Sec. 23(C), NIRC] Mr. Sebastian shall be considered as an overseas contract worker. His income as seaman, which is an income from without the
Bribes (1993, 1998, 2014) Q: 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.
UST BAR OPERATIONS
12
QUAMTO (1987-2016) Philippines, shall not be liable for income tax in the Philippines.
8.
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; 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum’ 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; 11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes combined do not exceed P10,000 per employee per taxable year (Rev. Regs. 2-98, as amended).
EXCLUSIONS De minimis benefits (1994, 2005, 2015, 2016) Q: 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, 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.
Leave Credits (1991, 1996) Q: A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500,000.00.
Is the BIR assessment correct? Explain. (2016 Bar) A: No. The 5% discount of the purchase price of its products, so-called “courtesy discounts” on purchases, granted by Mapagbigay Corporation to all its employees (rank and file, supervisors, and managers) otherwise known as “de minimis benefits,” furnished or offered by an employer to his employees merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees, are not considered as compensation subject to income tax and consequently to withholding tax. [Rev. Regs. 2-98, Sec. 2.78.1 (A) (3), as amended by RR No. 8-2000, RR No. 5-2008, RR No. 10-2008, RR No. 5-2011, and RR No. 8-2012]
A: No. The accumulated leave credits in the amount of P500,000.00 is not subject to tax. The monetized value of leave credits paid to government officials and employees shall not be subject to income tax and consequently to withholding tax. [RR No. 3-98, Sec. 2.78.1 (A) (7), 3rd sentence, as amended by RR No. 10-2000] INCOME TAX ON CORPORATIONS Minimum Corporate Income Tax (2001, 2015)
As such, de minimis benefits, if given to supervisors and managerial employees, they are also exempt from the fringe benefits tax.
Q: 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 oncome tax or the minimum corporate income tax.
Q: What are de minimis benefits and how are these taxed? Give three (3) examples of de minimis benefits. (2015) A: 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).
a.
A: As Ms. J’s 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 corporate income tax is only applicable beginning on the fourth taxable year following the commencement of business operation. [Sec. 27 (e) (1), NIRC] b. What are the distinctions between regular corporate income tax and minimum corporate income tax? (2015 Bar)
The following shall be considered as de minimis benefits: 1. 2. 3. 4. 5. 6. 7.
As Ms. J’s supervisor, what will be your advice?
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 pf 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 PP10,000 per annum; Laundry allowance not exceeding P300 per month
A: As to taxpayer: Regular corporate income tax applies to all corporate taxpayers; while minimum corporate income tax applies to domestic corporations and resident foreign corporations. As to tax rate: Regular corporate income tax is 30%; while minimum corporate 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 based on gross income. As to period of applicability: Regular corporate income tax is applicable beginning on the fourth taxable year following
13
TAXATION LAW the commencement of business operation, while minimum corporate income tax is applicable beginning on the fourth taxable year following the commencement of business operation.
A: Yes. the assessments were justified because for income tax purposes, the co-ownership of inherited property is automatically converted into an unregistered partnership from the moment the said properties are used as a common fund with intent to produce profits for the heirs In proportion to their shares in the inheritance.
As to imposition: The minimum corporate income tax is imposed whenever it is greater than the regular corporate income tax of the corporation [Sec. 27 (A) and (E), NIRC; RR No. 9-98]
From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his shares to be held in common with his co-heir under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed (Lorenzo Ona, et al v. CIR, 45 SCRA 74).
Off-line International carriers (1987, 1990, 1994, 2005, 2009) Q: Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine corporation.
ALTERNATIVE ANSWER: No, the assessments are not justified. The mere sharing of income does not of itself establish a partnership absent any clear intention of the coowners who are only awaiting liquidation of the estate.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constituted income derived from sources within the Philippines.
Tax on General Professional Partnerships (1988, 1989, 1990, 2013, 2014) Q: A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows:
KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory.
Earnings:
Is the position of KIA tenable? Reasons. (2009 Bar)
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 laptops.
A: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to the Tax Code. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produced the income. KIA’s income being derived from within, is subject to Philippine income tax. [CIR v. British Overseas Airways Corporation, 149 SCRA 395, (1987)]
Payments: 1. Salaries of office staff; 2. Rentals for office space; 3. Representation expenses incurred in meetings with clients. a.
Tax on Co-ownerships (1990, 1991, 1994, 1997)
A: The three (3) items of earnings should be included in the computation of ABC Law Firm’s gross income. The professional/legal fees from various clients is included as part of gross income being in the nature of compensation for services. [Section 32(A)(1), 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 of the firm’s gross income because the term gross income specifically includes gains derived from dealings in property. [Section 32(A)(3), NIRC]
Q: Mr. Santos died Intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs, each of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding income tax. In 1994, the income tax returns of the heirs were examined and deficiency income tax assessments were is-sued against each of them for the years 1989 to 1993, inclusive, as having entered into an unregistered partnership. Were the assessments justified? (1997 Bar) UST BAR OPERATIONS
What are the items in the above mentioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain.
b. What are the items in the above-mentioned payments which may be considered as
14
QUAMTO (1987-2016) deductions from the gross income of ABC Law Firm? Explain.
A: The correct value to use for estate tax purposes is P20 million which is the current fair market value of the property at the time of the decedent's death. [Section 88(B), NIRC]
A: The law firm being formed as general professional partnership is entitled to the same deductions allowed to corporation. (Section 26, NIRC) Hence, the three (3) items of deductions mentioned in the problem are all deductible, they being in the nature of ordinary and necessary expenses incurred in the practice of profession. [Section 34(A), NIRC] However, the amount deductible for representation expenses incurred by a taxpayer engaged in sale of services, including a law firm, is subject to a ceiling of 1% of net revenue. (RR No. 10-2002) c.
CLASSIFICATION OF DECEDENT FOR PURPOSES OF DETERMINING COMPOSITION OF GROSS ESTATE (1987, 1990, 1994, 2010) Q: Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10, 000 shares of Meralco, a condominium unit at the Twin Towers Building at Pasig. Metro Manila and a house and lot in Los Angeles, California.
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? (2014 Bar)
What assets shall be included in the Estate Tax Return to be filed with the BIR? (1994 Bar) A: All of Mr. Robertson’s assets consisting of 10, 000 shares in the Meralco, a condominium unit in Pasig, and his house and lot in Los Angeles, California are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable wherever situated.
A: The net income having been earned by the law firm which is formed and qualifies as a general professional partnership, is not subject to income tax because the earner is devoid of any income tax personality. Each partner shall report as gross income his distributive shares, actuality or constructively received, in the net income of the partnership. The partnership is merely treated for income tax purposes as a pass-through entity so that its net income is not taxable at the level of the partnership but saidnet income should be attributed to the partners, whether or not distributed to them, and they are liable to pay the income tax based on their respective taxable income as individual taxpayers. (Section 26, NIRC)
ITEMS TO BE INCLUDED AS PART OF GROSS ESTATE Transfers in Contemplation of Death (2001, 2013) Q: A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter-vivos gifts to his children. Ten days later, he died. In your opinion, are the inter-vivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate? Explain your answer. (2001 Bar) A: Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are considered as having been made in contemplation of death. (Roces v. Posadas, 58 Phil. 108) Obviously, the intention of the donor in making the inter-vivos gifts is to avoid the imposition of the estate tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were made mortis causa, hence, the properties donated shall be included as part of A's gross estate.
TRANSFER TAXES TIME AND TRANSFER OF PROPERTIES (DATE OF DEATH VALUATION RULE) (1994, 2007, 2008,) Q: Jose Cernan, Filipino citizen, married to Maria Ceman, died in a vehicular accident in NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million, which was the subject matter of a Joint Venture Agreement about to be implemented with Star Land Corporation (SLC), a wellknown real estate development company. He bought the said real property for P2 million fifty years ago. On January 5, 2008, the administrator of the estate and SLC jointly announced their big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-class residential and commercial centers. As a result, the prices of real properties in the locality have doubled.
Proceeds of Life Insurance Policy(2003, 2005, 2007) Q: Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo Santos. She died in an airplane crash. Edgardo is a lawyer and he negotiated with the airline company and insurance company and they were able to agree to a total settlement of P10 Million. This is what Antonia would have earned as somebody who was gainfully employed. Edgardo was her only heir. Is the P10 Million subject to estate tax? Reason briefly. (2007 Bar)
The Administrator of the Estate of Jose Cernan filed the estate tax return on January 9,2008, by including in the gross estate the real property at P2 million. After 9 months, the BIR issued deficiency estate tax assessment, by valuing the real property at P40 million. a.
A: No. The estate tax is a tax on the privilege enjoyed by an individual in controlling the disposition of her properties to take effect upon her death. The P10M is not a property existing as of the time of decedent’s death; hence, it cannot be said that she exercised control over its disposition. Since the privilege to transmit the property is not exercised by the decedent, the estate tax cannot be imposed thereon. (Definition of Estate Tax p. 184, Vitug, Compendium of Tax Law and Jurisprudence, Third Revised Edition).
Is the BIR correct in valuing the real property at P40 million? Explain.
A: No. The value of the property for estate tax purposes shall be the fair market value thereof at the time of death. [Section 88(B), NIRC]
DEDUCTIONS FROM GROSS ESTATE Vanishing Deduction (2008, 2009)
b. If you disagree, what is the correct value to use for estate tax purposes? Explain. (2008 Bar)
15
TAXATION LAW Q: In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was P1 million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5 million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death. Zandro died in 2007, and Wilma succeeded to the property.
A: The conditions for the allowance of medical expenses as deductions from the gross estate of a citizen or resident alien are:
xxx
Q: State the Conditions for allowing the following as deductions from the gross estate of a citizen or resident alien for the purpose of imposing estate tax:
1. 2. 3.
Claims against the Estate (2010, 2015)
c. May a vanishing deduction be allowed in either or both of the estates? Explain. (2009 Bar)
a.
A: Vanishing deduction shall be allowed to the estate of Xavier but only to the extent of the property which is the portion acquired by gift. (Section 100, NIRC) The donation took place within 5 years (1999 to 2001) from the death of Xavier; hence, there is a vanishing deduction. However, Zandro’s estate will not be entitled to claim vanishing deduction because, first and foremost, the property previously taxed is not includable in his gross estate and second, even if it is includable, the present decedent died more than 5 years from the death of the previous decedent, and that a vanishing deduction is already claimed by the previous estate involving the same property.
Period for Filing of Estate Tax Return, Payment and Extension (2000, 2007, 2010) Q: Mr. Felix de la Cruz, a bachelor resident citizen suffered from a heart attack while on a business trip to the USA. He died intestate on June 15, 2013 in New York City, xxx xxx where shall the return be filed and estate tax be paid? (2000 Bar)
Q: While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an accident that caused the instantaneous death of Jaime. The following day, Assunta also died in the hospital. The spouses and their son had the following assets and liabilities at the time of death:
A: The estate tax return shall be filed within six (6) months from the decedent’s death [Sec. 90 (B), NIRC of 1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. [Sec. 90 (c) Ibid]
Assunta Jaime Conjugal
Exclusive
Cash
P 10,000,000
P 1,200,000
Cars
P 2,000,000
500,000
Land
P 5,000,000
2,000,000
Residential house
4,000,000
Mortgage payable
2,500,000
Funeral expenses
300,000
a.
Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his death. [Sec. 90 (D), NIRC of 1997] Q: Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on December 5, 2006 and filed the estate tax return on March 30,2007. Because he needed to sell one unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue to give him one year to pay the estate tax due. The Commissioner approved the request for extension of time provided that the estate tax be computed on the basis of the value of the property at the time of payment of the tax.
Is the Estate of Jaime Asuncion liable for estate tax? Explain. (2008)
A: No. The estate comprised of properties of only P1.2 million is not liable to any estate tax. The estate is entitled to a standard deduction of P1 million deductible from the gross estate without the benefit of substantiation, thereby placing the net estate at only P200,000. Under the graduated tax rates of the estate tax, a net estate of P200, 000 is exempt. [Section 86(A)(5) and Section 84, NIRC] Medical Expenses (2010, 2015)
a.
Q: State the conditions for allowing the following as deductions from the gross estate of a citizen or resident alien for the purpose of imposing estate tax:
Does the Commissioner of Internal Revenue have the power to extend the payment of estate tax? If so, what are the requirements to allow such extension? (2007 Bar)
A: Yes. The Commissioner may allow an extension of time to pay the estate tax if the payment on the due date would impose undue hardship upon the estate or any of the heirs. The extension, in any case, will not exceed two years if the estate is not under judicial settlement or five years if it is under judicial settlement. The Commissioner may also
xxx b. Medical Expenses (2015 Bar)
UST BAR OPERATIONS
Claims against the estate (2015 Bar)
A: In order that claims against the estate may be allowed as deductions from the gross estate of a citizen or resident alien for purposes of imposing the estate tax, the law requires at the time the indebtedness was incurred, the debt instrument was duly notarized. In addition, if the loan was contracted within three (3) years before the death of the decedent, the executor or administrator shall submit a statement showing the disposition of the proceeds of the loan. [Sec. 86 (a) (1) (c), NIRC]
Standard Deduction (2000, 2008)
Exclusive
The medical expenses must have been incurred within one (1) year before the death of the decedent; That the medical expenses are duly substantiated with receipts; and The total amount thereof, whether paid or unpaid, does not exceed P500, 000.00. [Sec. 86A(6), NIRC]
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QUAMTO (1987-2016) require the posting of a bond to secure the payment of the tax. [Section 91(B), NIRC]
Sale/exchange/transfer of property for insufficient consideration (1989, 1991, 1993, 1995, 1996, 1999)
ALTERNATIVE ANSWER: Yes. The requirements to be complied with so that an extension may be allowed are: (1) a request for extension must be filed before the expiration of the original period to pay which is within 6 months from death; (2) there must be a finding that the payment on the due date of the estate tax would impose undue hardship upon the estate or any of the heirs; (3) the extension must be for a period of not exceeding 5 years if the estate is settled judicially or 2 years if settled extrajudicially; and (4) the Commissioner may require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment thereof. [Section 91(B), NIRC]
Q: The employees of Travellers, Inc. staged a strike. X, a non-union member joined the strike and volunteered to picket the company premises from 8:00 A.M. to 12:00 P.M., Monday to Friday. Six months into the strike, X ran out of money and asked financial aid from the union since he has no other source of income and needed financial assistance in order to live. The union gave him P1, 000.00 a month to take care of his food requirements plus P500.00 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR Decide. (1993 Bar)
Collection of Estate Taxes pending probate proceeding (1998, 2004, 2005)
A: The P1, 500.00 is not compensation income because compensation income arises out of employer-employee relationship as payment for services without compensation. The P1, 500.00 is a gift from the labor union. According to Section 28 (b) (3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR's denial is not valid.
Q: Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement and collection of estate tax? Explain. (2005 Bar) A: No. The approval of the court, sitting in probate, is not a mandatory requirement in the collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate or settlement court which is forbidden to authorize the executor or judicial administrator of the decedent’s estate, to deliver any distributive share to any party interested in the estate, unless a certification from the Commissioner of Internal Revenue that the estate tax has been paid is shown. [Marcos II v. Court of Appeals, 273 SCRA 47 (1997)].
ALTERNATIVE ANSWER: Under the law, gross income consists of all gains, profits, and income of the taxpayer during a taxable year of whatever kind and in whatever form derived from any source, whether legal or illegal, except items of gross income subject to final income tax and income exempt from taxation under Sec. 28 (b) of the NIRC. Moreover, in the case of Gutierrez vs. Collector of Internal Revenue, CTA Case No. 65, 31 August 1965, it was held that the phrase income from whatever source derived covers all other forms of income. It discloses a legislative policy to include all income not expressly exempted, as within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gain.
Power of the Commissioner of Internal Revenue to inquire into bank accounts for purposes of determining the Gross Estate of a Decedent (1992, 2003) Q: X dies in year 2000 leaving a bank deposit of P2, 000,000.00 under joint account with his associates in a law office. Learning of X’s death from the newspapers, the Commissioner of Internal Revenue wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain. (2003 Bar)
Therefore based on the foregoing considerations, the benefits subject in the case at bar, not expressly exempted by law, are considered as income. Q: A, an individual, sold to B, his brother-in-law, his lot with a market value of P1, 000.000 for P600.000. A’s cost in the lot is P100, 000. B is financially capable of buying the lot.
A: No. The Commissioner of Internal Revenue has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question may not refuse to disclose the amount of deposits on the ground of secrecy of bank deposits. [Section 6(F) of the 1997 Tax Code] The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon have been paid. (Sec. 97, 1997 Tax Code) Hence, to be able to give the required certification, the inclusion of the deposit is imperative, which may be made possible only through the inquiry made by the Commissioner.
A also owns X Co., which has a fast growing business. A sold some of his shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is P3, 000.000, which is the book value of the shares sold but with a market value of P5,000,000. A’s cost in the shares sold is P1 , 000, 000. The purpose of A in selling the shares is to enable his key executives to acquire a propriety interest in the business and have a personal stake in its business. Explain if the above transactions are subject to donor's tax. (1999) A: The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value will not be subject to donor's tax if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration, which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax. (Section 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair market value over the consideration received shall be considered as a gift subject to the donor's tax.
DONOR’S TAX TRANSFERS WHICH MAY BE CONSTITUTED AS DONATION
The sale of shares of stock below the fair market value thereof is subject to the donor's tax pursuant to the
17
TAXATION LAW provisions of the Tax Code. The excess of the fair market value over the selling price is a deemed gift.
totally relieve the donor from the donor’s tax because the first Php100,000 donation in the graduated brackets is exempt. (Section 99, NIRC) While the donor’s tax is computed on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one calendar year.
ALTERNATIVE ANSWER: The sale of shares of stock below the fair market value will not give rise to the imposition of the donor's tax. In determining the gain from the transfer, the selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred. (Section 6, RR No. 2- 82). In which case, the reason for the imposition of the donor's tax on sales for inadequate consideration does not exist.
Donations in favor of the government, educational, charitable, religious etc. insitutions (1992, 1994, 2000, 2002, 2007, 2014) Q: On December 06, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaluyong City to an accredited and duty registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students.
CLASSIFICATION OF DONORS (1992, 1996, 2009) Situs of Donor’s Tax Q: Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario, sends a gift check of $20,000.00to his future Filipino daughter-in-law who is to be married to his only son in the Philippines.
A. May the donor claim in full as deduction from its gross income for the taxable year 2001 the amount of the donated lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer.
Is the donation by Mr. Morgan subject to tax? Explain. (1992 Bar)
A: No. Donations and/or contributions made to qualified donee institutions consisting of property other than money shall be based on the acquisition cost of the property. The donor is not entitled to claim as full deduction the fairmarket value/zonal value of the lot donated. [Sec. 34(H), NIRC]
A: Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first P10, 000.00 (now P50, 000.00) of the value thereof, such gift should have been given to a legitimate, recognized natural or adopted child of the donor. ALTERNATIVE ANSWER: It is not subject to tax because the gift was made outside the Philippines.
B. In order that donations to non-stock, non-profit educationalinstitution may be exempt from the donor’s gift tax, what conditions must be met by the donee? (2002 Bar)
DETERMINATION OF GROSS GIFT Renunciation of share of surviving spouse (2010, 2013)
A: In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, it is required that not more than 30% of the said gifts shall be used by the donee-institution for administration purposes. [Sec. 101(A)(3), NIRC]
Q: In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor. Was the BIR correct? (2013 Bar)
VALUE ADDED TAX
A: The BIR is correct that there was a taxable gift but only insofar as the renunciation of the share of the wife in the conjugal property is concerned. This is a transfer of property without any consideration which takes effect during the lifetime of the transferor/wife and thus qualifies as a taxable gift (RR No. 2-2003).
CONCEPT, NATURE AND CHARACTERISTICS OF VAT (1988, 1996, 2015) Q: 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 their visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp. did not subject the said lease to VAT believing that it was not a domestic service contract. Was DDD Corp. correct? Explain. (2015 Bar)
But the renunciation of the wife’s share in the inheritance during the settlement of the estate is not a taxable gift considering that the property is automatically transferred to the other heirs by operation of law due to her repudiation of her inheritance (BIR Ruling DA No. 333-07) EXEMPTION OF GIFTS FROM DONOR’S TAXES Gift Splitting (1995, 2001, 2008) Q: Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of Php200, 000.00. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all of the Php200, 000.00 on Christmas 2001 or to give Php100, 000.00 on Christmas 2001 and the other Php100,000.00 on January 1, 2002. Please explain your advice. (2001 Bar)
A: DDD Corp. is not correct. Lease of properties shall be subject to VAT irrespective of the place where the contract of lease was executed if the property is leased or used in the Philippines [Sec. 108(A), NIRC]. Q: What are the characteristics of the Value-Added Tax? (1996) A: The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.
A: I would advice him to split the donation. Giving the Php200, 000 as a one-time donation would mean that it will be subject to a higher tax bracket under the graduated tax structure thereby necessitating the payment of donor's tax. On the other hand, splitting the donation into two equal amounts of Php100, 000 given on two different years will UST BAR OPERATIONS
ALTERNATIVE ANSWER: The value-added tax has the following characteristics:
18
QUAMTO (1987-2016) a. b. c. d. e.
It is an indirect tax where tax shifting is always presumed; It is consumption-based; It is imposed on the value-added in each stage of distribution; It is a credit-invoice method value-added tax; and It is not a cascading tax.
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.
VAT on Sale of Properties (1988, 1998, 2014)
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 CT A en bane affirmed the BIR ruling.
Q: MasarapKumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC) a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost.
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. (2015)
Is the sale of the delivery van by MKI to MGSC subject to VAT? (2014 Bar) A: Yes, the sale of the delivery van is subject to VAT being a transaction incidental to the catering business which is a VAT-registered activity of MKI. Transactions that are undertaken incidental to the pursuit of a commercial or economic activity are considered entered into in the course of trade or business. (Sec 105, NIRC) A sale of a fully depreciated vehicle that has been used in business is subject to VAT as an incidental transaction, although such sale may be considered isolated. (Mindanao II Geothermal Partnership v. CIR)
1. Rule on the appeal of MMM, Inc. A: The appeal of MMM, Inc. must be denied. MMM, Inc.’s position that the requirements under RR No. 7-95 should not prevail over a taxpayer’s substantive right to claim tax refund or credit is unmeritorious. The Secretary of Finance has the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC). Such rules and regulations are given weight 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.
VAT ON SERVICES Zero-rated Sale of Services (1998, 2010, 2013, 2015 2016)
An applicant for a claim for tax refund or tax credit must not only prove entitlement tot eh claim, but also compliance with all the documentary and evidentiary requirements. Consequently, the Court of Tax Appeal (CTA), and the CTA en banc correctly ruled that the failure to indicate the words “zero-rated” on the invoices and receipts issued by a taxpayer, would result in the denial of the claim for refund or tax credit (Eastern Telecommunications Philippines, Inc. v. CIR, G.R. No. 183531, March 25, 2015).
Q: 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. (2016 Bar)
2. 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? A: No, my answer will not be different if the claim for refund is for effectively zero-rated sales in 2012. The requirement to print the word “zero-rated” is no loinger by mere regulations, but is now clearly provided by law as follows – “If the sale is subject to zero percent (0%) value-added tax, the term “zero-rated sale” shall be written or printed prominently on the invoice or receipt. Failure to comply with this invoicing requirement is fatal to a claim for refund of input taxes attributable to the zero-rated sale (Sec. 113B)(2)(c), NIRC).
A: No. The BIR is not correct. While it is true that the VAT is an indirect tax, it is clear from the agreement that WHO is “exempt from all direct and indirect taxes.” Since the 12% VAT is an indirect tax whose burden was shifted by PCC to WHO then it is evident that the BIR is not correct. [CIR v. John Gotamco & Sons, Inc., G.R. No. L-31092, Feb. 27, 1987, 148 SCRA 36 (1987)]
Moreover, as recently ruled by the Supreme Court, the subsequent incorporation of Sec. 4.108-1 of RR 7-95 in Sec. 113 of the NIRC as introduced in R.A. No. 9337, actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts – a case falling under the principle of legislative approval of administrative interpretation by reenactment (Northern Mindanao Power Corp. v. CIR, G.R. No. 185115, February 18, 2015).
To allow the shifting of the burden to WHO would negate its exemption and in violation of the international agreement entered into by the Philippines. (Domondon) Q: MMM, Inc., a domestic telecommunications company, handles incoming telecommunications services for non-resident foreign companies by relaying international calls within the Philippines. To broaden
19
TAXATION LAW Q: State whether the following transactions are: a) VAT exempt; b) subject to VAT at 12%; or c) subject to VAT at 0%: xxx
xxx
owns. The monthly rental for each unit ranges from P8, 000.00 to P10, 000.00. His gross rental income for one year is P1, 650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (2009 Bar)
xxx
b. Services rendered by Jake’s Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila. (1998 Bar)
A: I will advise Emiliano that he is not required to register as a VAT taxpayer. His transactions of leasing residential units for an amount not exceeding P12,800.00 per unit per month are exempt from VAT irrespective of the aggregate amount of rentals received annually.
A: VAT at 0%. Since Jake's Construction Company has rendered services to the World Health Organization, which is an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate.
Q: Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44 million for the year, starting January 2007.
VAT EXEMPT TRANSACTIONS Sale or importation of agricultural and marine food products in their original state and certain kinds of livestock, poultry, breeding stock and genetic materials (1998, 2010)
a.
Q: State whether the following transactions are: a) VAT Exempt; b) subject to VAT at 10%; or c) subject to VAT at 0%: a.
Sale of fresh vegetables by AlingIning at the Pamilihang Bayan ngTreceMartirez. (1998 Bar)
A: No. Since the association’s annual gross receipts do not exceed P1, 919,500.00, it is exempt from the VAT. It is, however, liable to the 3% percentage tax which is imposed on persons exempt from value-added tax on account of failure to reach the P1, 919, 500 threshold.
A: VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind generally used as, or producing foods for human consumption is exempt from VAT.
b. Will the association be liable for value added tax in 2008 if it increases the rental to P150,000 a month beginning January 2008? Explain. (2008 Bar)
Sale of certain Real Estate (1996, 2009) Q: Melissa inherited from her father a 300-squaremeter lot. At the time of her father’s death on March 14, 1995, the property was valued at P720, 000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600, 000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3, 000.00 per square meter.
A: Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will now exceed P1,919,500.00. It is liable to the VAT beginning January 2008. Refund or tax credit of excess input tax (2014, 2015, 2016) Q: 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 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.
xxxxxxxxx b. Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (2009 Bar) A: No. The real property sold, being in the nature of a capital asset, is not subject to VAT. The sale is subject to VAT only if the real property sold is held primarily for sale to customers or held for lease in the ordinary course of trade or business. A real property classified as a capital asset does not include a real property held for sale or for lease, hence, its sale is not subject to VAT. (Section 39 and Section 106, NIRC)
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.
Q: Give at least three (3) real estate transactions which are not subject to the Value-Added Tax. (1996 Bar) A: Real estate transactions which are exempt from the value-added tax are: a. b. c.
API, on the other hand, invokes BIR Ruling No. DA-48903 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. DA489-03 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.
Sale of real property not primarily held for sale or lease in the ordinary course of trade or business; Sale of real property utilized for socialized housing under RA. No. 7279; Sale of real property utilized under the low-cost housing under BP Big. 220.
Lease of residential unit (1998, 2008, 2009) Q: Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he UST BAR OPERATIONS
Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in the negative, is it liable for another kind of business tax?
20
QUAMTO (1987-2016) Will API's Petition for Review prosper? Decide with reasons. (2016 Bar)
Q: Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. (Bar)
A: Yes. API’s petition for review will prosper. Since API’s petition for review was filed on September 15, 2010, it is an exception to the general rule. The premature filing is allowed because it was filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue, G.R. No. 193301, March 11, 2013 and companion case)
A: The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. The procedures for the administrative remedies for assessment are as follows:
Q: For calendar year 2011, FFF, Inc., a VAT-registered corporation, reported unutilized excess input VAT in the amount of Pl ,000,000.00 attributable to its zerorated 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 Pl,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 Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. (2015)
a. b.
c.
1. Did the CTA acquire jurisdiction over the Petition of FFF, Inc.?
After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him. If the Commissioner of Internal Revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par., Sec. 228, NIRC of 1997) Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents.
The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:
A: The CTA has not acquired jurisdiction over the Petition of 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 expiration of the 120-day period fixed by law for the Commissioner of Internal Revenue to act on the claim for refund is jurisdictional and failure to comply would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain the appeal (CIR v. Aichi Forgin Company of Asia, Inc., G.R. No. 183421, October 22, 2014, 632 SCRA 422).
a.
b.
In this case, Mr. G filed the administrative claim on January 31, 2013. The petition for relief should have been filed on June 30, 2013. Filing the judicial claim on March 15, 2013 is premature, this the CTA did not acquire jurisdiction.
Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals. Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals.
In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings.
2. Discuss the proper procedure and applicable time periods for administrative and judicial claims for refund/credit of unutilized excess input VAT.
The adverse decision of the Court of Tax Appeals is appealable to the Court of Appeals by means of a petition for certiorari within a period of fifteen (15) days from receipt of the adverse decision, extendible for another period of fifteen (15) days for compelling reasons, but the extension is not to exceed a total of thirty (30) days in all.
A: The administrative claim must be filed with the Commissioner of Internal Revenue (CIR) within two years from the close of the taxable quarter when the zero-rated sales were made. The CIR has 120 days from the date of submission of the complete documents in support of the claim 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 CTA reckoned from the receipt of adverse decision or from the lapse of the 120-day period.
The adverse decision of the Court of Appeals is appealable to the Supreme Court by means of a petition for review on certiorari within a period of fifteen (15) days from receipt of the adverse decision of the Court of Appeals. The employment by the Bureau of Internal Revenue of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under the provisions of the National Internal Revenue Code. The judicial appeals starts with the Court of Tax Appeals, and continues in the same manner as shown above.
As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. As an exception to the general rule, premature filing is allowed only if filed between December 10, 2003 and October 5, 2010, when BIR Ruling No. DA-489-03 was still in force prior to the reversal of the aforesaid ruling by the CTA in the Aichi case on October 6, 2010 (Mindanao II Geothermal Partnership v. CIR, G.R. No. 204745, December 8, 2014, 713 SCRA 645).
Should the Bureau of Internal Revenue decide to utilize Its judicial tax remedies for collecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same by going up the ladder of judicial processes from the Municipal
TAX REMEDIES REMEDIES AVAILABLE TO TAXPAYERS UNDER THE NIRC, IN GENERAL (1992, 2000)
21
TAXATION LAW Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court.
warrants of distraint and levy to enforce collection of the tax.
The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the CTA in the same manner outlined above.
a. xxx b. If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraints and levy? Explain your answer. (2002 Bar)
ASSESSMENT Requisites of a valid assessment (2008, 2013) Q:After examining the books and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of P1,000,000., deficiency interest of P400,000, and due date for payment of April 30, 2007 but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on April 25, 2007. a.
A: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time. (Section 203, NIRC) The last day for filing the 1997 income tax return is April 15,1998. Since the assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed.
What is an assessment notice? What are the requisites of a valid assessment? Explain.
False or fraudulent returns and non-filing of returns (1989, 1996, 1998, 2002, 2009)
A: An assessment notice is a formal notice to the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof. [Alhambra Cigar and Cigarette Mfg. Co. v. Collector, 105 PR 1337 (1959); CIR v. Pascor Realty and Development Corp., 309 SCRA 402 (1999)] To be valid, the taxpayer must be informed in writing of the law and the facts on which the assessment is made. (Section 228, NIRC)
Q: Distinguish a false return from a fraudulent return. (1996 Bar) A: The distinction between a false return and a fraudulent return is that the first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim of evading the correct tax due. (Aznar vs. Commissioner, L-20569. August 23, 1974)
ANOTHER SUGGESTED ANSWER: An assessment is a written notice and demand made by the Bureau on the taxpayer for the settlement of a tax liability that is due, definitely set and fixed therein. The requisites of a valid assessment are:
ALTERNATIVE ANSWER: A false return contains deviations from the truth which may be due to mistakes, carelessness or ignorance of the person preparing the return. A fraudulent return contains an intentional wrongdoing with the sole object of avoiding the tax and it may consist in the intentional under declaration of income, intentional over declaration of deductions or the recurrence of both. A false return is not necessarily tainted with fraud because the fraud contemplated by law is actual and not constructive. Any deviation from the truth on the other hand, whether intentional or not, constitutes falsity. (Aznar vs. Commissioner, L-20569, August 23, 1974)
1.
It must be made within the prescriptive period to assess; (Section 203, NIRC) 2. There must be a preliminary assessment previously issued, except in those instances allowed by law; (Section 228, NIRC) 3. The taxpayer must be informed in writing about the law and facts on which the assessment is based; (Section 228, NIRC) and 4. It must be served upon the taxpayer or any of his authorized representatives. [Estate of Juliana Diezvda. De Gabriel v. CIR, 421 SCRA 266(2004)] b. As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain. (2008 Bar)
Q: Mr. Castro inherited from his father, who died on June 10, 1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250, 000.00 was paid on December 06, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 06, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1, 250, 000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment on the ground of prescription.
A: I will question the validity of the assessment because of the failure to send the demand letter which contains a statement of the law and the facts upon which the assessment is based. If an assessment notice is sent without informing the taxpayer in writing about the law and facts on which the assessment is made, the assessment is void. [Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 382 (2006)]. Prescriptive Period for Assessment
Decide Mr. Castro’s protest. (2002 Bar)
General Rule (1989, 1997, 1999, 2000, 2002, 2006)
A: The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment ten (10) years from discovery of the fraud. (Section 222, NIRC) Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a fraudulent return.
Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250, 000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 UST BAR OPERATIONS
Issuance of Preliminary Assessment Notice (2002, 2014)
22
QUAMTO (1987-2016) Q: 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) informing him of a deficiency tax assessment as a result of a mathematical error in the computation 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.
of 30 days from the expiration of such 180 day period while for a request for reinvestigation the period is the expiration of the 180 day period from the submission of the complete supporting documents. Effect of failure to file protest (1997, 2009) Q: A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same.
Based on the assessment received by Mr. Tiaga, may he already file a protest thereon? (2014 Bar) A: Yes. Mr. Tiaga may consider the assessment notice as a final assessment notice and his right to protest within 30 days from receipt may now be exercised by him. When the finding of a deficiency tax is the result 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.
a.
A: Yes. The protest was filed out of time, hence the CTA does not acquire jurisdiction over the matter. [CIR v. Atlas Mining and Development Corp. (2000)]
COLLECTION
Q:
Prescriptive Periods (1994, 1997, 2001, 2002, 2009)
a.
Q: A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same.
A: No. The protest was filed out of time and, therefore, did not suspend the running of the prescriptive period for the collection of the tax. Once the right to collect has prescribed, the Commissioner can no longer enforce collection of the tax liability against the taxpayer. (CIR v. Atlas Mining and Development Corp., February 14, 2000)
b. Under the above factual setting, the taxpayer, instead of questioning the assessment he received on 15 January 1996, paid on 01 March 1996 the "deficiency tax" assessed. The taxpayer requested a refund from the Commissioner by submitting a written claim on 01 March 1997. It was denied. The taxpayer, on 15 March 1997, filed a petition for review with the Court of Appeals. Could the petition still be entertained? (1997 Bar)
TAXPAYERS REMEDIES PROTESTING AN ASSESSMENT Forms of Administrative Protest (1992, 2012)
A: No, the petition for review cannot be entertained by the Court of Appeals, since decisions of the Commissioner on cases involving claim for tax refunds are within the exclusive and primary jurisdiction of the Court of Tax Appeals.
Q: What are the differences between a request for reconsideration and a request for reinvestigation? (2012 Bar) A:
2. 3.
4.
A taxpayer received, on 15 January 1996, an assessment for an internal revenue tax deficiency. On 10 February 1996, the taxpayer forthwith filed a petition for review with the Court of Tax Appeals. Could the Tax Court entertain the petition?
A: No. Before taxpayer can avail of judicial remedy he must first exhaust administrative remedies by filing a protest within 30 days from receipt of the assessment. It is the Commissioner's decision on the protest that give the Tax Court jurisdiction over the case provided that the appeal is filed within 30 days from receipt of the Commissioner’s decision. An assessment by the BIR is not the Commissioner's decision from which a petition for review may be filed with the Court of Tax Appeals. Rather, it is the action taken by the Commissioner in response to the taxpayer's protest on the assessment that would constitute the appealable decision.
Assume that the CTA’s decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (2009 Bar)
1.
Is the CTA correct in dismissing the petition for review? Explain your answer. (2009)
Decision/Inaction of the Commissioner on the protest filed (1987, 1999, 2005, 2009, 2012, 2014)
A request for reinvestigation suspends the running of the prescriptive period for collection of taxes while a motion for reconsideration does not. A request for reinvestigation requires the presentation of newly discovered or additional evidence while a motion for reconsideration does not. The period of 60 days for submission of the relevant supporting documents finds application only to a request for reinvestigation and not to a request for reconsideration. The failure of the Commissioner of Internal Revenue to act on the request for reconsideration after a period of 180 days from filing thereof authorizes the taxpayer to file a petition for review with the CTA within a period
Q: In the examination conducted by the revenue officials against the corporate taxpayer in 2010, the BIR issued a final assessment notice and demand letter which states: “It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal this final decision within 30 days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” The assessment was immediately appealed by the taxpayer to the Court of Tax Appeals,
23
TAXATION LAW without filing its protest against the assessment and without a denial thereof by the BIR. If you were the judge, would you deny the petition for review filed by the taxpayer and consider the case as prematurely filed? Explain you answer. (2012 Bar)
A: The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal revenue tax where:
A: No, the Petition for Review should not be denied. The case is an exception to the rule on exhaustion of administrative remedies. The BIR is estopped from claiming that the filing of the Petition for Review is premature because the taxpayer failed to exhaust all administrative remedies. The statement of the BIR in its Final Assessment Notice and Demand Letter led the taxpayer to conclude that only a final judicial ruling in his favor would be accepted by the BIR. The taxpayer cannot be blamed for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. The CIR should indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Although there was no direct reference for the taxpayer to bring the matter directly to the CTA, it cannot be denied that the word “appeal” under prevailing tax laws refers to the filing of a Petition for Review with the CTA. (Allied Bank vs CIR, GR No 175097, February 5, 2010)
2.
1.
Tax cases which may be subject of compromise (1998, 2002, 2005) Q: State and discuss briefly whether the following cases may be compromised or may not be compromised: a. Delinquent accounts; b. Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending; c. Criminal tax fraud cases; d. Criminal violations already filed in court; e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form. (2005 Bar) A: a.
Q: 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.
b. c.
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 CTA by filing a petition for review within 30 days after the expiration of the 180day period as mandated by the provisions of the last paragraph of Section 228 of the NIRC. Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable.
d. e.
Authority and Conditions to abate taxes (1989, 1996, 2000)
A:No, the contention of BIR is not 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. (Sec 228, NIRC; Lacsona Land Co., Inc. v. CIR, GR No. 171251, March 5 2012)
Q: Under what conditions may the Commissioner of Internal Revenue be authorized to: a. Xxx b. Abate or cancel a tax liability (2000 Bar) A: The Commissioner of Internal Revenue may abate or cancel a tax liability when:
COMPROMISE OF TAXES Authority, Grounds and Conditions to Compromise taxes (1989, 1996, 2000, 2009)
1.
Q: Under what conditions may the Commissioner of Internal Revenue be authorized to:
2.
Compromise the payment of any internal revenue tax? (2000 Bar)
UST BAR OPERATIONS
Delinquent accounts may be compromised if either of the two conditions is present: (1) the assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a clear inability to pay the tax. [Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 302002] These may be compromised, provided that it is premised upon doubtful validity of the assessment or financial incapacity to pay. (ibid) These may not be compromised, so that the taxpayer may not profit from his fraud, thereby discouraging its commission. (ibid) These may not be compromised in order that the taxpayer will not profit from his criminal acts. (ibid) Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form, cannot be compromised. By giving his conformity to the revised assessment, the taxpayer admits the validity of the assessment and his capacity to pay the same. (Sec. 2 of Revenue Regulations No. 30-2002) ABATEMENT OF TAXES
Is the contention of the BIR correct? Explain. (2014 Bar)
a.
A reasonable doubt as to the validity of the claim against the taxpayer exists; or The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
The tax or any portion thereof appears to be unjustly or excessively assessed; or The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B). NIRC of 1997] RECOVERY OF TAX ERROUNEOUSLY OR ILLEGALY COLLECTED
24
QUAMTO (1987-2016) Conditions for the grant of a refund or credit (2002, 2005)
Q: ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR.
Q: State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit of taxes erroneously or illegally received. (2005 Bar) A: The conditions are: 1. 2. 3.
A written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue. (NIRC); The claim for refund must be a categorical demand for reimbursement. [Bermejo v. Collector of Internal Revenue, 87 Phil. 96 (1950)]; The claim for refund or tax credit must be filed with the Commissioner, or the suit or proceeding therefore must be commenced in court within 2 years from date of payment of the tax or penalty regardless of any supervening cause (NIRC).
On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund.
OPTION TO CARRY OVER EXCESS QUARTERLY INCOME TAX PAID(2012, 2013)
a.
Q: In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its overwithholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a refund of the excess tax credits.
A: Yes, withholding agents is not only an agent of the government but is also an agent of the taxpayer/income earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such for refund and to bring an action for recovery of such claim [CIR v. Procter& Gamble, 204 SCRA 377, (1991)]
Will the claim for refund prosper? (2013 Bar) A: No. The claim for refund will not prosper. While the law gives the taxpayer an option whether to carry-over or claim as refund the excess tax credits shown on its final adjustment return, once the option to carry over has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed (Sec. 76, NIRC; CIR v. PL Management International Phils, Inc., GR No. 160949, April 4, 2011)
GOVERNMENT REMEDIES Non-availability of injunction to restrain collection of tax (1996, 1998, 2001)
Period for filing claim for refund or credit (1992, 1994, 1997, 2008)
Q: May the courts enjoin the collection of revenue taxes? Explain your answer. (2001 Bar)
Q: DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15, 2004. DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return was filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals involving the tax credit claim for 2004 and 2005. a.
Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (2009 Bar)
A: As a general rule, the courts have no authority to enjoin the collection of revenue taxes. (NIRC) However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (RA 1125) JUDICIAL REMEDIES JURISDICTION OF THE COURT OF TAX APPEALS (1989, 1997, 1998, 2004, 2006, 2014, 2015, 2016)
As a BIR lawyer handling the case, would you raise the defense of prescription in your answer to the claim for tax credit? Explain. (2008 Bar)
Q: State At least five (5) cases under the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA) (2016 Bar)
A: YesThe claim for refund for the 2004 erroneously paid income tax was filed out of time because the claim was only filed after more than two years had elapsed from the payment thereof. [Section 204 (c) and 229, NIRC]
A: Exclusive original or appellate jurisdiction to review by appeal the following: 1.
WITHHOLDING AGENT AS A PROPER PARTY TO FILE A CLAIM FOR REFUND OR CREDIT (1992, 1999, 2995, 2008, 2009)
25
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;
TAXATION LAW 2.
3. 4.
5.
6.
Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty dayperiod abovementioned, the taxpayer may appeal such final decision to the Court under Section 3 (a),Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code. Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their original jurisdiction; Decisions of the Commissioner of Customs in cases involving liability for customs duties,fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2325 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 Sections 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties. ”[RRCTA, Rule 4, Sec. 3 (a)]
c. d.
e.
f.
g.
h.
Q: 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) in division. On July 31, 2015, CCC, Inc. received a copy of the Decision dated July 22, 2015 of the CT A division dismissing its Petition. CCC, Inc. immediately filed a Petition for Review with the CT A 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? (2015 Bar) A: No. CCC, Inc. should first file a motion for reconsideration or motion for new trial with the CTA Division. Before the CTA en banc could take cognizance of the petition for review concerning a case falling under its exclusive appellate jurisdiction, the litigant must sufficiently show that it sought prior reconsideration or moved for a new trial with the concerned CTA Division (Commissioner of Customs v. Marina Sale, G.R. No. 183868, November 22, 2010, 635 SCRA 606; Rule 8, Sec. 1 of the Revised Rules of Court of Tax Appeals).
The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following: a.
b.
Q: GGG, Inc. offered to sell through competitive bidding its shares in HHH 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 JJJ, 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,
Decisions or resolutions on motion for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: 1. Cases arising from administrative agencies – Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; 2. Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and 3. Tax collection cases decided by the Regional Trial Court in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos; Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their appellate jurisdiction; UST BAR OPERATIONS
Decisions, resolutions or orders of the Regional Trial Courts in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction; Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in division in the exercise of its exclusive original jurisdiction over tax collection cases; Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs; Decisions, resolutions or orders on motion for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; and Decisions, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph (f).” (RRCTA, Rule 4, Sec. 2)
26
QUAMTO (1987-2016) 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? (2014)
liabilities of the erring taxpayer. The corporation filed a motion to dismiss the criminal complaint on the ground that there has been, as yet, no assessment of its tax liability; hence, the criminal complaint was premature. The DOJ denied the motion on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint and that in any event, the joint affidavit of the BIR examiners may be considered as an assessment of the tax liability of the corporation.
A: GGG, Inc. should seek recourse with the Court of Tax Appeals (CTA) which has jurisdiction. There is no provision in law that expressly provides where exactly the adverse ruling the Secretary of Finance under Section 4 of the NIRC is appealable. However, RA No. 1125, as amended, addresses the seeming gap in the law as it vests upon the CTA, albeit impliedly, with jurisdiction over the case as “other matters” arising under the NIRC or other laws administered by the BIR. Furthermore, the Supreme Court held that the jurisdiction to review the rulings of the Secretary of finance on the issues raised against a ruling of the Commissioner of Internal Revenue, pertains to the Court of Tax Appeals in the exercise of its appellate jurisdiction (Philamlife v. The Sec. of Finance and CIR, G.R. No. 210987, November 24, 2014).
Is the ruling of the DOJ correct? Explain. (2005 Bar) A: Yes. The ruling of the DOJ in denying the motion is correct. The issuance of the deficiency assessment notice prior to prosecution is not necessary because the facts of the case show that the crime of evasion is complete since the violator has knowingly and willfully filed a fraudulent return with intent to evade/defeat a part or all of the tax. [Ungab v.Cusi, Jr., 97 SCRA 877 (1980)] What is involved here is not the collection of taxes but a criminal prosecution for violation of the National Internal Revenue Code. However, the contention that the joint affidavit of the BIR examiners showing the computation of tax liabilities maybe considered an assessment is erroneous. It is not an assessment which may entitle the taxpayer to protest. [CIR v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)] An assessment is a formal notice to the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof. [Alhambra Cigar & Cigarette Mfg. Co. v. Collector, 105 Phil. 1337 (1959)]
Q: Mr. Abraham Eugenio, a pawnshop operator, after having been required by the Revenue District Officer to pay value-added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case? (2006 Bar) A: Yes. A RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is lodged with the Court of Tax Appeals (CTA) and not with the Regional Trial Court. A ruling falls within the purview of “other matters arising under the Tax Code, ’’ appealable only to the CTA. [CIR v. Leal, 392 SCRA 9 (2002)]
LOCAL GOVERNMENT CODE OF 1991 NATURE AND SOURCE OF TAXING POWER Grant of Local Taxing power under the local government code (1987, 1998, 2001, 2003, 2007) Q: What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers? (2007 Bar)
CRIMINAL ACTIONS Q: 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. (2015)
A: The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving them the authority to create their own sources of revenue. The local government units do not exercise the power to tax as an inherent power or by a valid delegation of the power by Congress, but pursuant to a direct authority conferred by the Constitution. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan, 401 SCRA 259 [2003])
A: The manifestation is not proper. 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 Appeals (CTA). The filing of the criminal action is deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action shall be recognized (Sec. 7(b)(1) of Republic Act No. 9282; Judy Ann Santos v. People, G.R. No. 173176, August 26, 2008, 563 SCRA 341).
The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic policy of local autonomy, and to assess and collect all these taxes, fees and charges which will exclusively accrue to them. The local government units are authorized to pass tax ordinances (levy) and to pursue actions for the assessment and collection of the taxes imposed in said ordinances. (Section 129, and 132, Local Government Code)
Necessity of an assessment in criminal prosecution (1998, 2005)
Q: May Congress, under the 1987 Constitution, abolish the power to tax of local governments? (2003 Bar)
Q: In 1995, the BIR filed before the Department of Justice (DOJ) a criminal complaint against a corporation and its officers for alleged evasion of taxes. The complaint was supported by a sworn statement of the BIR examiners showing the computation of the tax
A: No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax. (Sec. 5, Art X, 1987 Constitution)
27
TAXATION LAW CHALLENGING LOCAL TAX ORDINANCES (1991, 2003, 2015)
practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession. (Sec. 139 in relation to 151, Local Government Code)
Q: What is the proper procedural remedy and applicable time periods for challenging a tax ordinance? (2015 Bar)
b. May Quezon City, where he has his residence and where he also practices his two professions, go after him for the payment of his professional tax as a CPA and a lawyer? Explain. (2005 Bar)
A: Any question on the constitutionality or legality of tax ordinances may be raised on appeal within 30 days from the effectivity to the Secretary of Justice. The Secretary of Justice shall render a decision within 60 days from the date of receipt of the appeal. Thereafter, within 30 days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file the appropriate proceedings with the Regional Trial Court. (Section 187, LGC)
A: No. The professional tax shall be paid only once for every taxable year and the payment shall be made either in the city where he practices his profession or where he maintains his principal office. The city of residence cannot require him to pay his professional taxes. (Sec. 139 in relation to Sec. 151, Local Government Code)
TAXING POWER OF PROVINCES
TAXING POWERS OF MUNICIPALITIES
Tax on transfer of real property ownership (1991, 2016)
Fees and charges for regulation and licensing (2008, 2009)
Q: 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? (2016 Bar)
Q: The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality’s jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest.
A: The defenses I would raise are the following:
Is the ordinance valid? Explain your answer. (2009)
a.
A: Yes. The municipality is authorized to impose reasonable fees and charges as a regulatory measure in an amount commensurate with the cost of regulation, inspection and licensing. (Section 147, LGC) In the case at bar, the storage of copra in any warehouse within the municipality can be the proper subject of regulation pursuant to the police power granted to municipalities under the Revised Administrative Code or the “general welfare clause.” A warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra, when ignited, is difficult to put under control by water and the use of chemicals is necessary to put out the fire. It is, thus, reasonable that the Municipality impose storage fees for its own surveillance and lookout (Procter & Gamble Philippine Manufacturing Corporation v. Municipality of Jagna, Province of Bohol, 94 SCRA 894 [1979]).
b.
c.
d.
Cities like the City of Maharlika have the power to pass an ordinance imposing a tax on the sale, donation, barter, or on any other mode of transferring ownership of title to real property located within its territorial boundaries; (LGC, Sec. 135, in relation to Secs. 142 and 151) The required capital gains tax collected by the national government is different from the tax that is imposable by the local government units such as the City of Maharlika; The transfer tax imposed and collected by cities are not among those included in the common limitations on the power of taxation which are reserved solely for the exercise by the national government; There is no direct duplicate taxation because there are two different taxing authorities, the national government and a local government unit. (Domondon) PROFESSIONAL TAX (1991, 2005)
COMMON LIMITATIONS ON THE TAXING POWERS OF LGU’S
Q: Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the Practice of his two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City. a.
Levy upon goods carried into, leaving or passing through and LGU’s territorial boundaries (1987, 2015) Q: 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.
May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain.
A: No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where he maintains his principal office in case he practices his profession in several places. The professional tax paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to UST BAR OPERATIONS
Is there a ground for opposing said ordinance? (2015 Bar) 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
28
QUAMTO (1987-2016) imposed by the national government, and this includes, among others, the levy of customs duties under the Tariff and Customs Code (Sec. 133 (e), LGC)
assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC. In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration of the assessment on the ground that the power barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a government-owned and controlled corporation. Furthermore, even assuming that the power barges are subject to real property tax, RPC should be held liable therefore, in accordance with the terms of the lease agreement. Is the contention of JEC correct? Explain your answer. (2009 Bar)
REAL PROPERTY TAXATION Actual Use Principle (1988, 1990, 2000, 2005) Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied.
A: The contention of JEC is not correct. The owner of the power barges is JEC which is required to operate, manage and maintain the power barges for the purpose the claim that RPC, a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power, is the actual, direct and exclusive user of the barge, hence, does not fall within the purview of the exempting provision of Section 234[c] of R.A. 7160. Likewise, the argument that RPC should be liable to the real property taxes consonant with the contract is devoid of merit. The liability for the payment of the real estate taxes is determined by law and not by the agreement of the parties. [FELS Energy Inc. v. The Province of Batangas, 516 SCRA 186 (2007)]
May the Church claim tax exemption on the entire land? Decide with reasons. (2005 Bar) A: No. The portions of the land occupied and used by the church, convent and school run by the church are exempt from real property taxes while the portion of the land occupied by commercial establishments and the portion, which is idle, are subject to real property taxes. The “usage” of the property and not the “ownership" is the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)]. Real properties for purposes of taxation (2001, 2003, 2009)
EXEMPTION FROM REAL PROPERTY TAX
Q: Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, the pieces must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies install underground tanks in the gasoline stations located on land leased by the oil companies from the owners of the land where the gasoline stations [are] located. Are those underground tanks, which were not placed there by the owner of the land but which were instead placed there by the lessee of the land, considered real property for purposes of real property taxation under the local Government Code? Explain. (2003 Bar)
Constitutional Exemptions (1987, 1988, 1990, 1996, 2000, 2005, 2006) Q: The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain.
A: Yes. The properties are considered as necessary fixtures of the gasoline station, without which the gasoline station would be useless. Machinery and equipment installed by the lessee of leased land is not real property for purposes of execution of a final judgment only. They are considered as real property for real property tax purposes as “other improvements to affixed or attached real property under the Assessment Law and the Real Property Tax Code. [Caltex v. Central Board of Assessment Appeals, 114 SCRA 296 (1982)]
A: Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. Exemptions under the LGC (1987, 1990 2002, 2006, 2009, 2015, 2016) Q: Philippine National Railways (PNR) operates the rail transport of passengers and goods by providing train stations and freight customer facilities from Tutuban, Manila to the Bicol Province. As the operator of the railroad transit, PNR administers the land, improvements and equipment within its main station in Tutuban, Manila.
Q: Republic Power Corporation (RPC) is a governmentowned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC’s power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and
Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax exemption privileges of government-owned and controlled corporations upon the effectivity of the Code in 1992, the City Government of Manila issued Final Notices of Real Estate Tax Deficiency in the amount of P624, 000, 000.00 for the taxable years 2006 to 2010. On the other hand, PNR, seeking refuge under the principle that the
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TAXATION LAW government cannot tax itself, insisted that the PNR lands and buildings are owned by the Republic.
reclaimed properties for the establishment and use of popular fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 Bar)
Is the PNR exempt from real property tax? Explain your answer. (2016 Bar)
A: No. As a rule, properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. When LLL leased out portions of the reclaimed properties to taxable entities, such as the popular fast food restaurants, the reclaimed properties are subject to real property tax. [Sec. 234(a), LGC; GSIS v. City Treasurer and City Assessor of the City of Manila]
A: Yes. The Philippine National Railways (PNR) was created as a corporation to serve as an instrumentality of the Government of the Philippines (Rep. Act No. 10638, amending Sec. 1 of Rep. Act No. 4156) upon which the local governments are not allowed to levy taxes, fees or other charges including real property taxes. [Manila International Airport Authority v. Court of Appeals, et al., G. R. No. 155650, July 20, 2006; Manila International Airport Authority v. City of Pasay, G. R. No. 163072, April 2, 2009, 583 SCRA 234 (2009) citing Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 150301, 2 October 2007, 534 SCRA 490]
Q: 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.
PNR is not a government and controlled corporation but an instrumentality of the government hence it is not included in the withdrawal of exemptions. Finally, under the common limitations on local government units’ power of taxation, it shall not extend to the levy of “taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.” [LGC, Sec. 133 (o), paraphrasing supplied)
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 railroad tracks, train stations, freight customer facilities, land improvements, and equipment within its main station in Tutuban, Manila are properties of public dominion intended for public use, and as such are exempt from real property tax under Section 234 (a) of the Local Government Code (LGC). (Manila International Airport Authority v. City of Pasay, supra)
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. (2016 Bar)
Q: 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 corporation, nor was it intended to operate commercially and compete in the private market.
A: No. The City Assessor is not correct in classifying the Center as “commercial.” The fact alone that the separate St. Michael’s Medical Arts Center will house medical practitioners who shall treat the patients confined in the Hospital and are accredited by the Association takes away the said Medical Arts Center from being categorized as “commercial” since a tertiary hospital is required by law to have a pool of physicians who comprise the required medical departments in various medical fields. [City Assessor of Cebu City v Association of Benevola de Cebu, Inc., 524 SCRA 128 (2007)] (Domondon)
By virtue of its mandate, LLL in 2008 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 titles 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.
REFUND OR CREDIT OF REAL PROPERTY TAX Payment under protest (1988, 1991, 1993, 2014)
Are the reclaimed properties registered in the name of LLL subject to real property tax?
Q: Madam X owns real property in Caloocan City. On July 1, 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.
A: The reclaimed properties are not subject to real property tax because LLL is a government instrumentality. Under the law, real property owned by the Republic of the Philippines is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person. (Sec 234, LGC) When the title of the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, such arrangement does not result in the loss of the tax exemption. (Republic of the Philippines, represented by The Philippine Reclamation Authority v. City of Paranaque)
a.
A: The administrative remedies available to Madam X to contest the assessment and their respective prescriptive periods are as follows:
ALTERNATIVE ANSWER: No. LLL is an instrumentality of the national government which cannot be taxed by local government units. LLL is not a government-owned or controlled corporation taxable for real property taxes. (City of Lapu-Lapu v. PEZA, GR No. 184203, Nov. 26, 2014)
1. 2.
b. Will your answer be the same in (a) if from 2010 to the present time, LLL is leasing portions of the UST BAR OPERATIONS
What are the administrative remedies available to Madam X in order to contest the assessment and their respective prescriptive periods? (2014 Bar)
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Pay the deficiency real property tax under protest (Sec 252, LGC); File the protest with the local treasurer – The protest in writing must be filed within 30 days from payment of the tax to the provincial, city or municipal treasurer, in the case of municipality within Metro Manila Area, who shall decide the protest within 60 days from receipt (Sec. 252, LGC)
QUAMTO (1987-2016) 3.
4.
Appeal to the LBAA – If the protest is denied or upon the lapse of the 60-day period for the treasurer to decide, the taxpayer may appeal to the LBAA within 60 days and the case decided within 120 days (Sec. 226 and 229) Appeal to the CBAA – If not satisfied with the decision of the LBAA, appeal to the CBAA within 30 days from receipt of a copy of the decision. [Sec. 229 (c), LGC]
a. xxx b. xxx c. marking duties A: Marking duties are special duties equivalent to 5% ad valorem imposed on articles not properly marked. These are collected by the Commissioner of Customs except when the improperly marked articles are exported or destroyed under customs supervision and prior to final liquidation of the corresponding entry. These duties are designed to prevent possible deception of the customers.
b. May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal? (2014 Bar)
Discriminatory duties (1995, 1997)
A: 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 inaction thereon that gives her the right to appeal. This means that she cannot 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. 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)
Q: Under the Tariff and Customs Code, what are: a. b. c. d.
A: Discriminatory duties are special duties collected in an amount not exceeding 100% ad valorem, imposed by the President of the Philippines against goods of a foreign country which discriminates against Philippine commerce or against goods coming from the Philippines and shipped to a foreign country.
TARIFF AND CUSTOMS CODE
FLEXIBLE TARIFF CLAUSE (1991, 2001)
Basis of dutiable value (1989, 2005, 2008)
Q: What do you understand by the term “flexible tariff clause" as used in the Tariff and Customs Code? (1991 Bar)
Q: What are the bases for and purposes of computing customs duties and VAT? (2008 Bar) A: The tax base for the customs duties is the transaction value while for VAT purposes, the tax base is the value used in computing customs duties plus customs duties, excise taxes and other charges incident to importation. [Section 107 (A), NIRC] These taxes on importation must be paid to the Bureau of Customs before the Authority to Release Imported Goods will be issued by the BIR. (Revenue Regulations No. 16-2005)
A: The term "flexible tariff clause "refers to the power of the President upon recommendation of the NEDA to increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than 100% ad valorem, to establish import quota or to ban importation of any commodity as may be necessary and to impose additional duty on all import not exceeding 10% ad valorem whenever necessary. (Sec. 102, CMTA)
SPECIAL DUTIES
Q: In view of the unfavorable balance of payment condition and the increasing budget deficit, the President of the Philippines. upon recommendation of the National Economic and Development Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all imports at the rate of ten (10%) percent ad valorem. The Executive Order also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive Order on the grounds that only Congress has the authority to fix the rates of import duties and, in any event, such an Executive Order can take effect only thirty (30) days after promulgation and the President has no authority to shorten said period.
Dumping Duties (1995, 1997, 2005) Q: Under the Tariff and Customs Code, what are: a.
xxx xxx xxx discriminatory duties
dumping duties
A: Dumping duties are special duties imposed by the Secretary of Finance upon recommendation of the Tariff Commission when it is found that the price of the imported articles is deliberately or continually fixed at less than the fair market value or cost of production, and the importation would cause or likely cause an injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment. Countervailing Duties (1995,1997, 2005)
Are the objections of Mr. San Miguel tenable? (2001 Bar)
Q: Under the Tariff and Customs Code, what are: a. xxx b. countervailing duties
A: No. Under the Flexible Tariff clause, any order issued by the President pursuant to the provision shall take effect thirty (30) days after promulgation, except in the imposition or additional duty not exceeding ten (10) percent ad valorem which shall take effect at the discretion of the President. [Section 1608 (d), CMTA]
A: Countervailing duties are special duties imposed by the Secretary of Finance upon prior investigation and report of the Tariff Commission to offset an excise or inland revenue tax upon articles of the same class manufactured at home or subsidies to foreign producers or manufacturers by their respective governments.
BEGINNING AND ENDING OF IMPORTATION (1995, 2015)
Marking duties (1995, 1997)
Q: Under the Tariff and Customs Code, as amended, when does importation begin and when is it deemed terminated? (2015 Bar)
Q: Under the Tariff and Customs Code, what are:
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TAXATION LAW A: Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unload therein. (Sec. 103, 1st par., CMTA) Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles or secured to be paid at a port of entry and the legal permit for withdrawal shall have been granted [Sec. 103 (a), CMTA], or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of Customs. [Sec. 103 (b), CMTA]
UST BAR OPERATIONS
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