You are on page 1of 75

4C

Antonio, Regatta Marie Blasco, Leana Mae Cachapero, Oliver Calingasan, Charlene Calvan, Myrtle Cardino, Gian Carlo Casibang, Ruben Castillo, Beverly Cayaban, Iva Freyritz Galvez, Jerico Angelo Lambino, Kaye Coleen Madridijo, Marlon Mutia, Nabil Panganiban, Victoria Payumo, Margielyn Quilates, Donelle Quinto, Ramiila Revilla, Rodrigo Rosalejos, Chyrs Anne Sampaga, Genelou Sandoval, Camhella Santos, Hanzel Sta. Ana, Micaela Sulit, Dioxenos Taguba, Jezreel Caridad Tan, Ma. Theresa Zulueta, Isabel

Taxation Law Review

able of Contentss

The Professor ..............................................................................................2 Dos ................................................................................................................3 Donts ............................................................................................................4 Tips................................................................................................................5 Samplex Collection of Taxation Law of Atty. Anthony Dy ..................9 Assumimg Youre Correct: The Recit Questions ..................................24 2011 Tax Case Doctrines ..........................................................................57

Taxation Law Review

he Professor

Atty. Anthony Dy
Atty. Dy always comes to class donning a huge smile and starts the meeting by a roll call and shuffling of index cars. Come recit time, students find themselves gripping their seats, waiting for their names to be called, for 30-40 minutes worth of recitation. Merely memorizing the codal provisions and commentaries in Atty. Dys class is not enough. One has to learn the law by heart because he asks very unpredictable and out-of-this-world questions ranging from other law subjects to anything under the sun. Students love his class because despite the surprise quizzes, extended class hours, and his cardinal rule that only handwritten notes are allowed in his class, Atty. Dys witty remarks and anecdotes make law subjects interesting and his class, fun and lively. Atty. Dy teaches Property, Taxation I and II, and Taxation Law Review. He ranked No. 16 in the 2002 Bar Examinations and is currently working at SGV & Co.

Taxation Law Review

os

1.) Come to class early. Atty. Dy checks the class attendance on time. 2.) Try to achieve perfect attendance if you want an additional point on your final grade. 3.) Memorize every single detail, from tax remedies, to requisites for exemptions from income tax to tax rates. Youll never know what Atty. Dy will ask you in your recit. 4.) Never take any topic for granted. Read religiously like theres no tomorrow. 5.) Know your laws. Atty. Dy loves to correlate. 6.) Pray. Really hard. But syempre, study harder

Taxation Law Review

Donts
1.) Never come to class unprepared. Atty. Dy is fond of shuffling class cards. 2.) Do not ask for a class party especially when there are only a few meetings left during the sem. Chances are, your request will not be granted. But if youre persistent, you can still try and experience having your first recit with balloons and videoke in the background.

3.) Do not justify your inability to answer a question with an excuse that you were not present when that particular topic was discussed in class. Atty. Dy will always remember you for that.

4.) If you do not know the answer to a question, dont attempt to invent one unless youre willing to risk your former professors name.

5.) Do not attempt to bluff. You will only look like a fool in the end. Atty. Dy knows who really studied and those who really didnt.

6.) Do not ever make the mistake of having a class boycott. Its going to be an automatic 65 for you.

Taxation Law Review

ips

What you need?


1. Books The books of Mamalateo, Domondon, and Dimaampao are highly recommended. 2. Notes Notes of those who previously took the subjects are particularly helpful when it comes to questions during recitations. The Dimaampao notes or more popularly known as tapsi notes also give students a simple approach to tax. Your own personal notes of important topics will also be a great help in easily remembering ideas and concepts which appear to be challenging. Make this a habit. They may even be helpful come bar time. Take down notes during recitations. The questions will be a great help in determining topics which the professor wanted to focus on. They might even be questions which could be asked during examinations. 3. The green codal or the National Internal Revenue Code, and its amendments. Atty. Dy told the class that the tax codal must be read as much as we read the other codals like the Civil code and the Rules of Court. The best evidence of the extent of the use of your tax codal depends on the cleanliness and condition of it compared to other codals. As Atty. Dy puts it, just compare. 4. Supreme Court decisions in Taxation law, Revenue regulations and BIR rulings.

Taxation Law Review


Recent Supreme Court decisions in Taxation law may be found in certain websites like the Supreme Court of the Philippines, Chan Robles website, and Arellano website also known as the lawphil site. Visit the BIR website for recent rulings and Revenue Regulations. You might also want to check websites of certain Accounting firms which publish on their sites monthly Tax briefs . (e.g. Punongbayan & Araullo) 5. Preparation Do not come to class unprepared. Preparation is key, both in recitations and examinations. Taxation I and Taxation II are both 3-unit subjects. If you want a definite number of hours study, 9 hours of quality study time before the class should be a reasonable period (Period of study = No. of units x 3). But of course, every one of us has his or her own style of studying so the period of study time will always depend on you. For a review class, more time is demanded despite the review being a mere 2 unit subject. The class might be lucky enough if Atty. Dy asks for volunteers and asks the person reciting to choose a topic. But do not rely on this as Att. Dy, as a general rule, calls students by shuffling the class cards.

Tax Tips
1. Expect the class to have on overtime every meet ing. Atty. Dys class usually dismisses the class 30 minutes later than the designated time. 2. The types of questions usually asked are classified as follows: a. Enumeration. You know you are being asked to enumerate when Atty. Dy says, There are three theories of a sound tax system, and they are? b. Defintion. What do you understand by the term/concept of <insert concept or term>?

Taxation Law Review


c. Situational questions. These questions are of practical use as Atty. Dy usually begins by saying, A clients asks you on how to., what will you say to your client? In these type of questions, Atty. Dy expects you to explain the concept in the simplest way possible. Explain as if you are talking to a client. As a follow up, Atty. Dy will subsequently ask, You are now the BIR or the counsel for the defense, what would be your arguments? In this type of question, you are being asked to counter the arguments you mentioned in the first place. d. Correlation questions. In these types of questions interrelated topics, concepts, and provisions are usually asked. One must be able to define the relation of, say, one provision to another provision; how a concept is different from the other; or which fact or factor is common between two concepts. e. Out of this world questions or General Information questions. It pays to know a lot of different things when it comes to Atty. Dys class. He usually asks questions which are not related to the topics but which nevertheless make the class laugh. These questions are asked maybe to t est ones knowledge or to simply make learning fun. I do not know. But one will definitely enjoy this. 3. Exams. You should expect a long and difficult exam. The types of questions maybe in the form of True or False, Enumeration, MCQs, and Essay. He giv es bonus questions at the end of an exam. He even asks questions for those who have not recited. A final exam usually asks for a final grade you expect from the subject. Answer briefly but completely. Do not enumerate more than what was asked for. Give three if the question asks for three even if you know ten of them. 4. Have a complete attendance if you can. The benefit is an additional 1% on your final grade. But there is really nothing wrong if you do not come to class because you are unprepared. Weigh the consequences.

Taxation Law Review


5. In the words of Atty. Dy, Do not give reasons for me to fail you. Looking at the brighter side of this, always give him reasons to pass the subject with flying colors. Or give yourself a favor, learn the topics assigned not for the purpose of getting a good grade but for your own benefit in the future (e.g. bar time and future career) Disclaimer and this is a serious one. By the time you finished reading this, Atty. Dy could already have changed his manner of asking questions, making exam questions, and his style of teaching in general. But hey, thats history for you. You are most welcome.

Taxation Law Review

amplex Collection of Atty. Dy Tax Exams

I. TRUE OR FALSE (a) Any excess in allowable de minimis benefit granted by an employer shall form part of the taxable income of the employee. TRUE. Generally, de minimis benefits granted by an employer to an employee are exempt from tax, except wherein there is a provided threshold amount, and such amount is exceeded. The excess will be subject to tax. (b) Taxes paid by a taxpayer are deductible as expenses for purposes of income taxes. FALSE. Taxes paid or incurred within the taxable year in connection with the taxpayers profession, trade or business, shall be allowed as deductions, except (a) the income tax provided for under the NIRC and (b) income taxes imposed by authority of any foreign country. (NIRC, Sec. 34, C) (c) Charitable contributions made by a taxpayer are deductible in full. FALSE. Charitable contributions which are not actually paid or made to the Philippine government or any political subdivision thereof exclusively for public purposes, or exceeds 10% in the case of an individual or 5% in the case of a corporation, of the taxpayers taxable income are not deductible in full. (Sec 34, H) (d) Political contributions by a corporate taxpayer to the campaign of a Presidentiable are deductible for income tax purposes. FALSE. Contributions to partisan political activities are not deductible. II. OBJECTIVE (a) Distinguish a VAT Automatically zero-rated transaction from VAT Effectively zero-rated transaction. An automatically zero-rated sale refers to a sale of goods, properties and services to a Freeport Zone-registered enterprise by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. An effectively zero-rated sale, On the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated. (b) Give 3 areas of distinction between Donors tax and Value Added Tax. 9

Taxation Law Review


DONORS TAX tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of transfer; VALUR ADDED TAX is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties. DONORS TAX is a direct tax; VALUED ADDED TAX is an indirect tax, it can be passed to the buyer DONORS TAX is computed on the basis of the total net gifts made during the calendar year; VAT is equivalent to 10% of the gross selling price of or gross value in money of the goods or properties sold, bartered or exchanged paid by the seller or transferor. (c) Explain the concept of de minimis benefits in relation to fringe benefits tax. Give 3 examples of de minimis benefits. Fringe benefits are goods, services or any benefits furnished or granted in cash or in kind by an employer to an individual employee. Under the NIRC, there is a special treatment of fringe benefits, which shall be taxed at 32%, payable by the employer. De minimis benefits are benefits of a small value granted to rank-and-file employees and are ordinarily not taxed. Examples of this would be: 1) Monetized unused vacation leaves per year (maximum of 10 days); 2.) Medical cash allowance (maximum of P750/semester or Php125/month); and 3.) Rice subsidy (maximum Php1,500/month). (d) Enumerate the requisites of bad debts deductions. 1. There must be an existing indebtedness due to the taxpayer, which must be valid and legally demandable; 2. Debt must be connected with the taxpayers trade, business or profession; 3. Must not be between related parties under Sec. 36B; and 4. Debt must be actually ascertained to be worthless and uncollectible or charged off the books of accounts of the taxpayer. III. ESSAY ABC Corporation, a domestic corporation, is owned by DEF Corporation (owned by Mr. Sy), a foreign corporation, and GHI Corporation (owned by Mr. Tee), a domestic Corporation. ABC Corporation intended to expand its business and to restructure its company. Part of the plan is to buy the shares of stock of DEF Corporation (Mr. Sy) worth Php 100M. Instead of paying Mr. Sy cash, ABC Corporation decided to transfer its shareholdings in XYZ Corporation as substitute for cash. The said shareholdings worth Php 50M and its present value is P100M.

10

Taxation Law Review


Discuss tax implications in the said transaction, if any. If said transaction is taxable, what are the applicable tax rates? The transaction is a tax-free exchange. Under Section 40 (c) of the NIRC, No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding 4 persons, gains control of said corporation, provided that stocks issued for services shall not be considered as issued in return for property. Leah is a single mother with a 15 year old son. In 2009, her reported income includes ff: a. Determine the Gross Income to be reported by Lea. Explain how you arrived at your answer. b. What are the exceptions to be recognized by Lea in 2009.

Income reported

Amount

ITR/ (Final tax)

Explanation/Basis If the land is classified as a capital asset:

1. FMV of the expropriation sale of land to NAPOCOR

P1M

Under Sec. 24 D(1), the taxpayer is given the option to treat the gains Qualify if the from sales or other dispositions of land is a real property to the government or capital (6% any of its political subdivisions or CGT-final agencies or to government-owned or tax) or an controlled as a capital gain on sale of ordinary real property classified as capital asset (gross asset or as part of her gross income income-ITR). subject to the graduated tax rate 532%. In either case the proceeds can If the land is an ordinary asset, then form part of the income from the sale shall form gross part of gross income subject to the income. graduated tax rate. My instincts tell me this should be treated as 1) a capital asset in the absence of any other facts that tell it is an ordinary asset. 2) subject to

11

Taxation Law Review


CGT since only the FMV is given. Final verdict: Final Tax Under the NIRC, all earned income and profits, whether legal or illegal/regardless of the source are taxable. Under section 32 B (1), the proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise. The proceeds under the life insurance policy are compensation for the loss or indemnity and not income. Under Sec. 24 B (2) of the Tax Code, a final tax at the rate of 10% shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation. A resident citizen is liable to income tax on her worldwide income. The dividend received from the foreign corporation is subject to the graduated tax rate. However, the foreign income tax paid or withheld on such dividend may be credited against the Philippine income tax due.

2. Jueteng income

P50,000

ITR

3. Proceeds of life insurance policy undertaken by her mother, designated her as a revocable beneficiary

P100,000

Exclusion

4. Dividend from a local company

P20,000

Final Tax (10%)

5. Dividend from an Off-shore real estate company

P30,000

ITR

Gross income to be reported: 50,000 Jueteng income + 30,000 dividend from an offshore real estate company = Php 80,000 b) What are the exemptions to be recognized by Lea in 2009. Pursuant to the amendments of RA 9504, Lea is entitled to: 1. Basic personal exemption of P50,000 given to each individual taxpayer, regardless of status. 2. Additional Exemption for each qualified dependent amounting to P25,000. (Maximum of 4)

12

Taxation Law Review


A "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

Matchbox Phils is engaged in the selling of cars. Due to slow demand and business slow down, it sells all its properties to Micro-Phil Inc. amounting to Php 10M. It also transfers the warranty liabilities of its customers amounting to Php 20,000.00 whereby in the event that warranty expense exceeds said amount, Matchbox Phils agreed to pay the excess. However, in the event that warranty expense is less than that amount, the balance will belong to Micro-Phil Inc. Are the warranty liabilities subject to 12% VAT? Explain. I think yes. Kindly verify this. Absent ata ako nung tinuro ito. Hehehe. In a tax-free exchange pursuant to Sec. 40(C )(2) of the Tax Code, transfer of real property between two real estate dealers in exchange for shares shall be VAT-exempt. If the exchange is not solely in kind (for example, money plus property was exchanged or shares of stock or vice-versa), then there is no tax-free exchange because the gain is taxed but the loss is not allowed to be deductible. Exchange of property (1) General rule: Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exceptions: No gain or loss shall be reorganized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. (3) Exchanges not solely in kind; (a) If, in connection with an exchange described in the above exceptions, a shareholder or security holder receives not only stock or securities permitted to be received without recognition of gain or loss, but also money and/or other property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and the fair market value of such other property received.

13

Taxation Law Review


Manny Billar employed Willy Quizon to do the architectural design of the proposed Condominium unit projects to be undertaken by the former. The agreed price amounted to Php1M. Due to business crisis, only half of the Condo units were purchased by the public. As a result, Manny could not settle the payment of his outstanding liability to Quizon. On account of their friendship, Manny offered the two bedroom units to Quizon as a mode of settling his obligations. In turn, Quizon transferred the same two bedroom units to Manny Pacman as payment of the gambling debt owing to the latter. a) Does the transfer of the two bedroom units by Manny Billar to Quizon subject to 12% VAT? Why or why not. b. Does the transfer of the two bedroom-units by QWuizon to Pacman subject to 12% VAT? Why or why not? Answers: Caveat. a. No. Under Section 109 (V) of the Tax Code, the transfer is a VAT-exempt transaction. The said provision states that sale or lease of goods or properties or the performance of services other than the transactions other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1.5M. Pursuant to RR 3-2012, the threshold amount has been increased to P 1,919,500.00 beginning January 1, 2012. b. No. Transfer of the property is not an exchange of property in the course of trade or business. Under Section 105, the phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto. The transfer of the bedroom units was only an isolated transaction. ABC is a school owned by 3 wealthy monks. Their receipts include: a. Educational tuition fees; b. School canteen and university bookstore profits; c. billboard advertisement. The proceeds of the three shall go to the construction of a state-of-theart library. Are they taxable income? Qualify if Educational tuition fees Taxability/ Tax consequences Non-profit, non-stock educational Proprietary Educational institution Institution Not taxable Taxable Under the 1987 Constitution, All revenues and assets of non-stock, non-profit educational institutions used actually, Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals which are non-profit shall pay a tax of 14

Taxation Law Review


directly, and exclusively for 10% (preferential tax rate) on educational purposes shall be their taxable income except for exempt from taxes and duties. passive incomes which are subject to different tax rates. Also, it is granted exemption from corporate income tax as (Proprietary schools are private embodied in Section 30 of the educational institutions which NIRC. are stock and non-profit; those which are organized as stock corporations.) Not Taxable Taxable Pursuant to Department of Finance Order 137-87, revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises. Under Section 27(B), it is subject to pay 10% of its taxable income. The normal corporate income tax rate of 30% shall be imposed on the entire taxable income if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by it from all sources. The term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

School canteen and university bookstore profits

15

Taxation Law Review


billboard advertisement Taxable/ Not Taxable Under the Department of Finance Order 145-85, it is subject to internal revenue tax on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institution of its educational purposes or functions. Also, under the last paragraph of Section 30 of the NIRC, its income of whatever kind and character from any of its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. There can be an alternative answer because of the inconsistency between the Constitution and the last paragraph of Sec.30 of the NIRC. The former does not distinguish the source of income. Hence so long as it is used actually, directly, and exclusively for educational purposes, the income is exempt. Atty. Dy believes that the constitution must be followed. VIII. A is very rich. He donated P10M to the government for youth sports program. Is the donation subject to donors tax? No. The donation is exempt from donors tax in accordance with Section 101(A)(2) of the Tax Code, which provides that gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision shall be exempt from tax. Taxable Same reason as above. (The only constitutionally mandated tax exemption that it may avail of is the exemption from property taxes of all its properties actually, directly and exclusively used for educational purposes.)

16

Taxation Law Review


The question is trying to elicit a wrong answer by mentioning for youth sports program. This would have been relevant had the question been: Is the donation deductible? The question on which rate is applicable makes the question trickier because the donation is really an exempt transaction. A is not liable for donors tax. Concerning deductibility, the transaction is fully deductible because Youth and Sports development is a priority activity. If the donation is for a non-priority activity, then there is limited deductibility: not to exceed 10% (individual) or 5% (corporation) of taxable income. I. TRUE OR FALSE (20 pts) 1.Purely compensation Income earners are not allowed any deduction on their gross income. FALSE. They are allowed deductions on premium payments on health and/or hospitalization insurance. 2.Sellers of Marine food products are subject to 12% VAT when their gross sales exceed the P1.5M threshold provided in Section 109(v) of the Tax Code. FALSE. They are exempt from value added tax under Sec 109(a). 3.Fringe benefit tax paid by the employer is allowed to be claimed as expenses. FALSE. This applies only when the fringe benefit is given to managerial or supervisory employees. 4.Expenses to be allowed as deductions must be supported by official receipts or invoices. TRUE. As a general rule. There are however exceptions. The lack of supporting vouchers, receipts and other documentary proof however may be excused under Sec. 235. 5. All individual taxpayers are required to file an income tax return. FALSE. The following are those not required to file an ITR: a. An individual who is a minimum wage earner b. An individual whose gross income does not exceed his total personal and additional exemptions c. An individual whose compensation income derived from one employer does not exceed P 60,000 and the income tax on which has been correctly withheld d. An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshorebanking units, non-resident aliens not engaged in trade or business) 17

Taxation Law Review


e. Those who are qualified under substituted filing. II. 1. Differentiate between ordinary and necessary expenses 2 pts An expense is ordinary when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances. An expense is necessary where the expenditure is appropriate or helpful in the development of the taxpayers business or that the same is proper for the purpose of realizing a profit or minimizing a loss. (General Electric v CTA, July 14, 1963) 2. Give 2 differences between resident foreign corporation and non-resident foreign corporation 4 pts A Resident Foreign Corporation is engaged in trade or business within the Philippines, while a Non Resident Foreign Corporation is not engaged in trade or business within the Philippines. Resident Foreign Corporations are subject to preferential tax rate or normal corporate income tax rate or minimum corporate income tax rate, whichever is higher, while a NonResident Foreign corporation-As a general rule is subject to final corporate income tax, which must be withheld by the Philippines payor of the income. 3.Give 2 difference between NOLCO and MCIT 2 pts. 4. Give 2 instances where although there is an accumulation of retained earnings, the corporation would be exempt from paying the improperly accumulated tax. 4 pts 1.Banks and other non-bank financial intermediaries; 2.Insurance companies. 5. Explain the concept of Optional Standard Deduction. Is the concept available to all taxpayers? 4 pts The OSD is a privilege that may be enjoyed by certain individual taxpayers in lieu of the itemized deductions. It is available to citizens or resident aliens; thus non-resident aliens are not entitled to claim the optional standard deduction. III. a. Explain the procedure in filing income tax return of domestic corporation. 4 pts Every corporation subject to tax shall render in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of Title II. The return shall be filed by the president, vicepresident or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer(Sec.52). As required by the BIR, it shall be filed with

18

Taxation Law Review


the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the City or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where the main books of accounts and other data from which the return is prepared are kept.(Sec 76A). The corporate quarterly declaration shall be filed within 60 days following the close of each of the first three quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth day of April, or on or before the fifteenth day of the fourth month following the close of the fiscal year as the case may be (Sec 76-B). b.Is the same procedure applicable to a general professional partnership. 4 pts No. There is a difference. The BIR requires in Sec. 55 that every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners. IV. Leah obtained a loan from 5-6 Universal Bank with an interest rate of 12%. After one year the interest payable by Leah amounted to P1 M. Before she can claim the whole amount as deductions, it was found out that the loan was obtained by Leah was re-lent by the latter to Janice. Can Leah claim as deduction the full amount of P1 Million as interest expense? 5 pts Pursuant to the Sec 34(B) of the Tax Code, the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade, business or exercise of profession shall be allowed as a deduction from his gross income, the said interest expense however, shall be reduced if the taxpayer has derived certain interest income which had been subject to final withholding tax. The said reduction shall be equal to the percentages of the interest income earned depending on the year when the interest income was earned. (BIR Ruling No. 006-2000) V. Aga and Lucy got ,married on January 1, 2007. On her 9-month pregnancy she gave birth to triplets named Tito, Vic, and Joey. On October 7, 2007, 18 hours after his birth, Tito died. One month later Joey also died. How much additional exemptions can Aga claim at the end of the taxable year? 5 pts Personal Exemption P50,000.00 Additional Exemption 75,000.00 (P25,000 x 3 ) Total Personal and Additional Exemptions P125,000.00 a)Individual taxpayers regardless of status are entitled to P50,000 personal exemption.

19

Taxation Law Review


b)An individual, whether single or married, shall be allowed an additional exemption P25,000 for each qualified dependent child, provided that the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents. If any of such dependents dies during the taxable year, the taxpayer may still claim the exemptions as if any of the dependendents dies at the close of such year.( RR 102008.) VI. Dolphy was overwhelmed when Vandolph, his favourite son, was about to get married to Marsha. One day before the celebration of the marriage, Dolphy gave a gift check in the amount of P8,888.88 to Marsha. Is Dolphy liable to donors tax? 5 pts Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first P10,000.00 of the value thereof such gift should have been given to a legitimate recognized natural or adopted child of the donor. (Sec 101-A) VII. Joanne the manager of SM Bank, while reading her favourite tabloid, The Buzz , found out in the obituary that Don Juan died. Don Juan had left a P1M account in the name of Don Juan and his wife Dona Juanita, in the the SM Bank. On the following day, Dona Juanita requested to withdraw P10,000 from said account. a. If you were the bank manager, would you allow the withdrawal request of Dona Juanita? b. What steps should be taken by Dona Juanita, including the periods to be observed, to withdraw the full amount? 5 pts 1. In all cases of transfers subject to tax, or where though exempt from tax, the gross value of the estate exceeds P20,000, the executor, administrator, or any of the legal heirs, as the case may be, within two (2) months after the decedents death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. (Sec 90-A). 2. File the return within six (6) months from decedent's death. However, the Commissioner may, in meritorious cases, grant extension not exceeding thirty (30) days. 3. A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within 30 days after the promulgation of such order. (Sec. 90) 4. The Estate Tax imposed shall be paid at the time the return is filed by the executor or administrator or the heirs. However, when the Commissioner finds that payment on the due date of the Estate Tax or of any part thereof would impose undue

20

Taxation Law Review


hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts or two (2) years in case the estate is settled extra-judicially. VIII. Pedro, one of the billionaires in Metro Manila celebrated his birthday on February 29, 2008. As a tradition in celebrating his birthday, he donated a vacant lot to a non-governmental organization and said organization would use the lot in constructing a sports complex. The fair market value of the land at the time it was given was P10,000 but Pedro had bought the said Land for only 1 million. a. Is Pedro exempted from paying the donors tax and if so what circumstances should the donee comply with? Yes. In order that donations shall be exempt from donors gift tax, it is required that not more than 30% of the said gifts shall be used by the done-institution for administration purposes. (Sec 101-A) b. Can Pedro claim as a deduction the donation given and if so, what amount can he claim? The amount of 1 Million. The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (Sec.34-H) IX. Romulo a wealthy businessman gave to his friend Jun a lot valued at 20M so that Jun can retire from his work and fulfill his dream of having a goat farm. a. If Romulo died, what deductions can his estate claim? 2 pts 1.Expenses,Losses, Indebtedness and Taxes 2.Property Previously Taxed 3.Transfers for Public Use 4.The Family Home 5.Standard Deduction 6.Medical Expenses 7.Amount Received by Heirs under R.A.4917 b.Between giving the lot to Jun during his lifetime or giving the lot as a devise to Jun in his last will and testament, which mode is more tax efficient from the point of view of the donor? 2 pts Estate Tax. The donors gift tax is much higher considering the donation was given to a stranger. Romulo will pay 30% of the net gifts because Jun can be considered a stranger if he chooses to make the donation intervivos as compared to estate taxes X. Determine whether the following is, a) subject to 12%VAT; b)vat exempt or c) zero rated:

21

Taxation Law Review


a.) sale of miner of gold amounting to P10 M to a gold jewelry manufacturer . 3 pts Subject to 12% VAT b.)importation of smoked salmon meat.3 pts Vat Exempt. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore. Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market such as freezing, drying salting, broiling, roasting, smoking or stripping. 1. Who Are Entitled To Duty And Tax Free Privileges? Section 105 of the Tariff and Customs Code of the Philippines as amended by Executive Order No. 206 provides duty and tax free privileges to the following individuals, the extent of which depends on their particular status: 1. Returning Resident. A Returning Resident is a Filipino national who has gone abroad and is now returning. Only those Returning Residents who have an uninterrupted stay abroad for at least six (6) months prior to their return to the Philippines are entitled to duty and tax free privileges. 2. Overseas Filipino Worker (OFW) is a Filipino national who worked in a foreign country under an employment contract. Only OFWs who have an uninterrupted stay abroad for more than six (6) months are entitled to duty and tax free privileges. 3. Former Filipino. A Filipino national who has acquired foreign citizenship abroad and is now returning. Only former Filipinos who are coming to settle permanently in the Philippines and have stayed abroad for at least six months are entitled to the duty and tax exemption privileges.

Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? (5%) SUGGESTED ANSWER: Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997] Thus, he is

22

Taxation Law Review


allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. (Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of P's dependents will be shouldered by HK Co. A Co. will credit the 50% of P's salary to P's Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to the Philippine income tax? (5%) SUGGESTED ANSWER: The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a nonresident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year. (Section 22(E), NIRC). A nonresident citizen is taxable only on income derived from Philippine sources. (Section 23, NIRC). The salaries and allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the Philippines. (Section 42, NIRC). However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines. (Section 42, NIRC). Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense. 1) Interest on loans used to acquire capital equipment or machinery. 2) Depreciation of goodwill. SUGGESTED ANSWER: 1) Interest on loans used to acquire capital equipment or machinery is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession. (Section 34(B) (3), NIRC). 2) 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.

23

Taxation Law Review

ssuming Youre Correct

Recitation Questions

General Principles
Panganiban, Victoria
Q: What is taxation? Taxation is an inherent power of the sovereign, exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for raising revenues to carry out the legitimate objects of the government. It is merely a way of apportioning the costs of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Q: Is revenue the only purpose of taxation? What are the other purposes and objectives of taxation? No. The purposes and objectives of taxation are as follows: 1. Revenue 2. Regulation 3. Promotion of General Welfare 4. Reduction of Social Inequality 5. Encourage Economic Growth 6. Protectionism Q: Distinguished tax from license fee 1. A tax is levied in the exercise of the taxing power; license fee emanates from the police power of the State. 2. The purpose of tax is to generate revenue; whereas a license fee is regulatory. 3. The amount of exaction or charge, if it is to be a license fee, must only be of sufficient amount to include expenses of (a) issuing the license; and (b) cost of necessary inspection or police surveillance. Q: How is taxation distinguished from police power? 1. As to Purpose Taxation is levied for the purpose of raising revenue; police power is exercised to promote public welfare through regulations. 2. As to Amount of Exaction In taxation there is no limit; in police power, the exaction should only be such as to cover the cost of regulation, issuance of the license or surveillance. 3. As to Benefits Received In taxation, no special or direct benefit is received by the taxpayer other than the fact that the Government only 24

Taxation Law Review


secures to the citizen that general benefit resulting from the protection of his person and property and welfare of all. As to police power, however, while no direct benefits are received, a healthy economic standard of society known as damnum absque injuria is attained. 4. As to Non-Impairment of Contracts In taxation, the non-impairment of contracts rule subsists. A taxing act cannot impair the obligation of contracts. In the exercise of police power, however, this limitation does not apply. 5. As to Transfer of Property Rights In taxation, taxes paid become part of the public funds; in police power, no transfer, but only restraint on the exercise, of property rights exists. Calvan, Myrtle Q: In what part of a proposed bill can you find the declaration of public purpose? Whenever a bill is passed, public purpose is always presumed. No need to expressly state it in the bill itself. Q: Requisites of Equal Protection To start with, the equal protection clause does not require the universal application of the laws to all persons or things without distinction. What it simply requires is equality among equals as determined according to a valid classification. The test developed by jurisprudence here and yonder is that of reasonableness, which has four requisites: (1) The classification rests on substantial distinctions; (2) It is germane to the purposes of the law; (3) It is not limited to existing conditions only; and (4) It applies equally to all members of the same class. Q: State the doctrine in British American Tobacco Case. Does the assailed law violate the equal protection clause? The assailed law does not violate the equal protection and uniformity of taxation clauses. Petitioner argues that the classification freeze provision violates the equal protection and uniformity of taxation clauses because Annex D brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present day net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc City, petitioner asserts that the assailed provisions accord a special or privileged status to Annex D brands while at the same time discriminate against other brands.

25

Taxation Law Review


These contentions are without merit and a rehash of petitioners previous arguments before this Court. As held in the assailed Decision, the instant case neither involves a suspect classification nor impinges on a fundamental right. Consequently, the rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection challenge. It has been held that in the areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification. Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. As the Court ruled in the assailed Decision, viz: A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands under Annex D as of October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex D brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in the future. (However, as will be discussed later, the intent to apply the freezing mechanism to newer brands was already in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain, however, why the classification is frozen after its determination based on current net retail price and how this is germane to the purpose of the assailed law. An examination of the legislative history of RA 8240 provides interesting answers to this question. xxxx From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor older brands over newer brands. Congress was unequivocal in its unwillingness to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Congress doubted the constitutionality of such delegation of power, and likewise, considered the ethical implications

26

Taxation Law Review


thereof. Curiously, the classification freeze provision was put in place of the periodic adjustment and reclassification provision because of the belief that the latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is being foisted by petitioner upon the classification freeze provision. To our mind, the classification freeze provision was in the main the result of Congresss earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. In particular, the questioned provision addressed Congresss administrative concerns regarding delegating too much authority to the DOF and BIR as this will open the tax system to potential areas for abuse and corruption. Congress may have reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers would address the problems of tax avoidance and tax evasion. Cardino, Gian Carlo Q: What is tax evasion? Answer: It is a term that connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. It is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. The requirements of tax evasion are the following: a. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that the tax is due. b. An accompanying state of mind which is described as being evil, in bad faith, wilful, or deliberate and not coincidental c. A course of action which is unlawful. Q: Is there a test in determining tax evasion? Answer: Yes. The proofs of tax evasion are as follows: a. Failure to declare for taxation purposes true and actual income derived from business for two consecutive years. b. Substantial underdeclaration of income in the tax returns of the taxpayer for four consecutive years coupled with intentional overstatement of deductions. Substantial underdeclaration of taxable sales, receipts, or income or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return. Substantial underdeclaration means failure to report sales, receipts, or income in an amount exceeding 30% of that declared

27

Taxation Law Review


per return. Substantial overstatement means claim of deductions in an amount exceeding 30 % of actual deductions. Q: What are the differences between tax evasion and tax avoidance? Answer: Tax avoidance is legal and not subject to criminal penalty. Its effect is the minimization of taxes. Tax Evasion is illegal and subject to criminal penalty. It almost always results in the absence of tax payments. Q: Angel Locsin failed to report some of her income in her income tax return. Is it a case of tax evasion? Answer: Mere failure to report some income does not constitute tax evasion. There must be an accompanying state of mind which is described as being evil, in bad faith, wilful, or deliberate and not coincidental. The course of action must be unlawful. However, Substantial underdeclaration of taxable sales, receipts, or income or a substantial overstatement of deductions shall constitute prima facie evidence of a false or fraudulent return. Substantial underdeclaration means failure to report sales, receipts, or income in an amount exceeding 30% of that declared per return. Substantial overstatement means claim of deductions in an amount exceeding 30 % of actual deductions. Sandoval, Camhella Q: What is the basis of the theory of Taxation? Answer: Necessity Theory- The existence of the government is a necessity. It cannot continue without a means to pay its expenses and therefore has a right to compel all citizens and property within its power to contribute; and BenefitsProtection/ Reciprocity Theory (Doctrine of Symbiotic Relationship) - Every person who is able must contribute his share in the burden of running the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values. Q: If you are going to give another name for the Lifeblood theory, what will it be? Q: Give one inherent limitation of Taxation. Answer: Non- Delegation of Taxing Power. General rule: A delegated power cannot be further delegated. Since the power of taxation is a power that is exercised by Congress as delegates of the people, then as a general rule, Congress could not re-delegate this delegated power. Exceptions: a) Delegation of Tariff powers by Congress to the President under the flexible tariff clause. b) Delegation of Emergency powers to the President. c) Delegation to the President to enter into Executive agreements and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President. d) Delegation to the people at large. e) Delegation to administrative bodies (Power of Subordinate Legislation).

28

Taxation Law Review


Q: Give a Constitutional limitation of Taxation. Answer: Origin of Revenue or Tariff Bills (Section 24, Article VI of the 1987 Constitution) Q: What is the reason behind why the title of the Bill must contain only one subject? Answer: To inform the public and to prevent hodgepodge legislation or log-rolling legislation. Q: What is a private law? Answer:

Antonio, Regatta Marie


Q: What is hodgepodge or log-rolling legislation? Legislation which the one bill-one title principle seeks to prevent. It is including other topics not germane to the title of the bill to trick the legislators into enacting the whole bill. Q: What is the bill-making process? 3 readings before it is signed by the legislators and brought to the President for signing. Q: Are educational institutions exempt from real property tax? Yes. Provided the property is used actually, directly and exclusively for educational purposes. Q: Bookstore inside San Beda, exempt from tax? Yes. Generally, if it is incidental to the conduct of business of the school in connection to education, exempt. Q: Cafeteria, exempt? Yes. For the sustenance of the students. Q: Photocopying businesses in the library, exempt? Depends. If they belong to the school, exempt from taxes. If not, owner is liable to business taxes. Q: What are poll taxes? Poll taxes are taxes paid by an individual to the place where he resides as a personal tax. Revilla, Rodrigo Q: What is the ratification requirement for treaties? 2. Is publication a requirement? The power to ratify a treaty is vested in the President, but "no treaty or international agreement shall be valid and effective unless concurred in by at

29

Taxation Law Review


least 2/3 of all the members of the Senate." (Sec. 21, Art. VII, Philippine Constitution) Publication is not required. The treaty enters into force as soon as the consent of all the parties to be bound by the treaty is established. But note: Article 102 of the UN Charter requires that every treaty and international agreement entered into by any UN member as soon as possible with the Secretariat and published by it. Failure to register would not, however, affect the validity of the treaty; however, the unregistered instrument cannot be invoked by any party thereto before any organ of the UN. Q: When a treaty grants a tax exemption, can the government by regulation prescribe additional requirements before a taxpayer can avail the tax exemption under the treaty? Q: If you were a taxpayer, what can you argue against such tax regulation? Q: If you were the government, what can you argue against the taxpayer? Rules and regulations must not override, but must remain consistent and in harmony with the law or tax treaty that is sought to be applied and implemented. They are intended to carry out, neither to supplant nor to modify, the law. Thus a taxpayer who intends to avail of an exemption under a tax treaty can argue that a regulation is in the guise of legislation by not only imposing additional burden but depriving the taxpayer of a tax exemption, which, if without the regulation, will be available to him under the law or tax treaty. The government, may, however, argue that the issuance of the regulation is for mere administration and collection purposes, or that the government is expressly granted by the law or tax treaty to prescribe additional requirements by regulation. Q: How are tax laws construed? 6. Are there exceptions? 7. Why are the exceptions construed that way? Tax laws are construed most strongly against the Government, and liberally in favor of the citizen because burdens are not to be imposed beyond what the statute expressly and clearly import. Tax exemptions, however, are highly disfavored in law and construed strictly against he who claims an exemption. So as not to defeat the purpose for which certain tax exemptions are granted, this rule of strict construction of tax exemptions does not apply: a) When the statute granting exemption provides for liberal construction thereof, b) In case of special taxes relating to special cases and affecting only special classes of persons, c) If the tax exemption refers to public property, and d) in cases of those granted to 1) organizations performing strictly religious, charitable and education functions and 2) government political subdivisions or instrumentality. Zulueta, Isabel Q: Give the distinctions between a tax and a license fee 30

Taxation Law Review


1. A tax is levied in the exercise of the taxing power; license fee emanates from the police power of the State. 2. The purpose of tax is to generate revenue; whereas a license fee is regulatory 3. The amount of the exaction or charge, if it is to be a license fee, must only be of sufficient amount to include expenses of (1) issuing the license; and (2)costs of necessary inspection or police surveillance. Q: Can an exaction be both a tax and a regulatory fee at the same time? Yes as in the case of license taxes. A law like PD 1987 which regulates the videogram industry may validly impose a tax of 30% on the gross receipts of videogram operators. In the case of Tio v. Videogram Regulatory Board, it was held that the provisions of Sec.26 of the Constitution which requires that every bill must contain only one subject which must be expressed in the title thereof is not violated. Q: Why is it important to distinguish a tax between a license? Give two. To determine who are entitled to exemptions; and To determine the legality or illegality of non-payment. Because non-payment of a license fee for a business makes that business illegal. However, nonpayment of a tax for a business does not necessarily make that business illegal although this might be a ground for criminal prosecution against the person or persons violating the law. Q: With regard to the exemption I n the Constitution: Sec. 28(3), Art Vi, of the Constitution provides Cha ritable Institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation, to what kind of tax does this exemption apply? This applies only to property or realty taxes assessed on such properties used directly, actually and exclusively for religious, charitable and educational purposes. Q: Give examples of property taxes. Real property tax and additional levies on real property. Q: What is Real Property Tax? It is a direct tax on the ownership of lands and buildings or other improvements thereon not specifically exempted and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor. Q: Can the local government also impose other taxes on the same property aside from the basic real property tax? Yes. The local taxing power extends not only to the imposition of the basic real property tax, which has already been discussed, but it also includes the

31

Taxation Law Review


imposition of the special levies. These are: (1) the 1% additional real estate tax to finance the Special Education Fund (SEF) which is levied on an ad valorem basis (Sec.235 LGC); (2) the 5% additional tax on idel lands likewise imposed on an ad valorem basis (Sec. 236,LGC); and (3) the special levy or special assessment which is not actually a tax (Sec.240, LGC).

Tax Administration and Enforcement


Calingasan, Charlene Mae
Q: Congressman Manny pacquiao will pass a bill imposing tax upon all residents of General Santos. Valid or not? ANSWER: not valid, violative of the equal protection clause. No substantial difference between the residents of General Santos and other residents of other provinces or regions of the country.

Taguba, Jezreel Caridad


Q: What are the principles of a sound tax system? a. FISCAL ADEQUACY- sources of government revenue must be sufficient to meet government expenditures and other public needs b. ADMINISTRATIVE FEASIBILITY- tax laws must be capable of being effectively enforced with the least inconvenience to the taxpayer c. THEORETICAL JUSTICE- a sound tax system must be based on the taxpayers ability to pay (Ability to Pay Theory) Q: Will a violation of these principles invalidate a tax law? It depends. A validity of a tax law will not be affected even if it is not in consonance with the principles of Fiscal Adequacy and Administrative Feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs counter to the principle of Theoretical Justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation must be uniform and equitable. Q: The City of Manila intends to impose local tax to the LRT, can they validly do so? Section 5, Article 10, 1987 Constitution provides that Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. However, in the case at bar, the City of Manila cannot impose local tax to the LRT by virtue of the Principle of Pre-emption where the National Government

32

Taxation Law Review


elects to tax a particular area, it impliedly withholds from the local government the delegated power to tax the same field. This doctrine principally rests on the intention of the Congress. LRT is being taxed by the National Government, hence, the City of Manila cannot impose its local tax upon it. Q: How do you arrive at the net taxable estate of a decedent. Gross estate Less: (1) Deductions (2) Net Share of the Surviving Spouse in the CPP --------------------------------------------------------------------------Net Taxable Estate Q: Procedure for the settlement of net estate tax. A. Filing of Notice of death 1. When notice of death is filed: a. When the transfer is subject to tax, or b. Although exempt, the gross value of the estate exceeds P20,000 2. Not all transfers mortis causa requires a written notice of death to be filed with the Commissioner. It is only when the transfer is subject to tax or when the gross estate exceeds P20,000 3. Period of filing is 2 months after the death of the decedent or within like period after qualifying as executor or administrator, the notice must be filed with the Commissioner. B. Filing of Estate Tax Return 1. When the gross estate exceeds P200,000 or regardless of the value of the estate, where the estate consists of registered or registrable properties -When the gross estate exceeds P2M, the estate tax return be supported by a statement duly certified by a Certified Public Accountant. -There is an additional requirement of registering the estate and getting a separate TIN. 2. Period to file: As a general rule, 6 months from the decedent s death. Except, in meritorious cases, the Commissioner may grant reasonable extension not exceeding 30 days. C. Payment of Tax 1. General Rule: Pay-as-you-file

33

Taxation Law Review


2. Exception: The Commissioner may grant extension. The extension must be for a period not exceeding 5 years if the estate is settled judicially or 2 years if settled extrajudicially.

Rosalejos, Chyrs Anne


Q: What are the general powers of the BIR? a. To assess and collect national internal taxes, fees and charges. b. To enforce all forfeitures, penalties and fines connected with the assessment and collection of taxes, fees and charges. c. To execute judgment in all cases decided in its favor by the CTA and the ordinary courts; and d. To effect and administer the supervisory and police power conferred upon it by the Tax Code and other special laws. Q: What are the powers of the Commissioner of Internal Revenue? a. Power to interpret tax laws. b. Power to decide tax cases. c. Power to obtain information and to summon, examine and take testimony of persons; and d. Power to make assessments and prescribe additional requirements for tax administration and enforcement. Q: When is Presumptive Gross Sales or Receipts applicable? a. When a person fails to issue receipts or invoice; or b. There is reason to believe that the book or accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provision of the Tax Code. Q: What are those powers which cannot be delegated by the Commissioner? a. Power to recommend the promulgation of rules or regulations by the Secretary of Finance; b. Power to issue rulings of first impressions or the reverse, revoke or modify any existing ruling of the Bureau. c. Power to compromise or abate any tax liabilty. Except assessments issued by the regional offices involving basic deficiency taxes of Php. 500,000.00 or less, and minor criminal violations discovered by regional and district officials. d. Power to assign or re-assign internal revenue officers to establishments where articles subject to excise tax are produced or kept. Q: What are the exceptions to the non-retroactivity of rulings?

34

Taxation Law Review


a. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR. b. Where facts subsequently gathered by the BIR are materially different from the facts on which the ruling was based. c. Where the taxpayer acted in bad faith.

Sampaga, Genelou
Q: What are the powers and duties of the Commissioner of Internal Revenue? Q: Can the powers and duties of the Commissioner be delegated? Q: What are the powers and duties of the Commissioner which cannot be delegated? Q: From the decision of the Commissioner of Internal Revenue, what is the remedy of the taxpayer? Under what rule in the Rules of Court?

Income Taxation
Cachapero, Oliver
Q: What is the effect if administrative agencies like the BIR make an interpretation of tax laws through a regulation? ANSWER: Such interpretation must be given much weight and respect since even if it is not a law, it has the efficacy of a law applying the doctrine of subordinate legislation. Q: In a taxicab business, how will you categorize the vehicle used in such business? ANSWER: It cannot be considered as a capital asset because it is a property used in his trade or business. (Sec.39 of NIRC) Q: Which is broader in concept, gross sale or gross income? ANSWER: Gross sale because you have to deduct some allowable items from the gross sale to come up with the gross income. Q: What is tax arbitrage? ANSWER: It is an unsound taxation practice wherein back to back loan is used to take advantage of the lower rate of tax on interest (20%) and a higher rate of tax on interest expense deduction (33%). Q: What are the rates that are needed to be considered in dealing with interests on individuals? ANSWER:

35

Taxation Law Review


The imposable 20% final tax rate on interests and the 33% allowable interest deduction on interest expenses.

Casibang, Ruben
Q: What are the governing principles relating to income taxation that are embodied in Section 23 of the Tax Code? a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines b. A nonresident citizen is taxable only on income derived from sources within the Philippines c. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income 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 d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines e. A domestic corporation is taxable on all income derived from sources within and without the Philippines f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines Q: What rules may be inferred from such principles? a. Citizenship principle b. Residence principle c. Source principle Q: What is the importance of knowing the tax treatment of individuals? It is important to know the tax treatment of individuals and corporations because, each and every category has distinct characteristics in a sense that not all income earned by these individuals and corporations are taxable. Some are entitled to preferential rates, some are not. Some income are excluded in computing the gross income and some individuals are entitled to additional exemptions while other are not. Q: Nora Aunor is a known actress. She went to the US and stayed there for several years and earned income. In the middle of the year, say June , she came back and accepted projects in the movie industry. how will her tax on income be treated?

36

Taxation Law Review


Under Sec 22 (e) (4) of the Tax Code, Nora aunor shall be considered as a nonresident citizen. It states that a citizen who has been previously considered as nonresident and who arrives in the Philippines at anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Thus, income she received while she was in the US shall be treated as income from sources without and is not taxable because was then a nonresident citizen. On the other hand upon arrival in the Philippines, income within shall be taxable. Q: Pilots and stewardess of Philippine Airlines, how will their tax on income be treated? Are their tax treatment similar to seaman? Employees of Philippine Airlines are residents of the Philippines, thus income from sources within and without are taxable. However, pilots, stewardesses and other crews of airlines plying international routes, who are holders of immigrant visas or foreign working visas and have left the Philippines, qualify as nonresident citizens. The fact that their salaries are paid locally does not remove them from this category.

Quinto, Ramiila
Q: what are the three classification of taxpayers? 1. individual 2. corporations 3. estate and trust Q: who are considered individual taxpayers? 1. resident citizen 2. non resident citizen 3. resident alien 4. non resident alien engaged in business and trade in the Philippines 5. non resident alien not engaged in business and trade in the Philippines 6. aliens employed in multinational companies, offshore banking and petroleum service contractors 7. OCW Q: Gen Principles of Income Taxation 1. A citizen of the Philippines, residing therein in taxable on all income derived from sources within and without the Philippines. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. 3. An individual citizen of the Philippines who is working and deriving income from abroad as an Overseas Filipino Worker is taxable only on income from sources within the Philippines: Provided that a seaman who is a citizen of the Philippines and receives compensation abroad as a member of the complement

37

Taxation Law Review


of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. 4. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 6. A foreign corporation whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines. Q: what are the sources of income? Within the Philippines Outside the philippines Q: Suppose a Filipino branch manager is assigned in hongkong. He is receiving two salaries, one from the Philippines and the other from Hongkong. The work is being performed in Hongkong. Is he liable for both salaries? No. with respect to compensation for labor or personal services performed, the place of performance is controlling. The services rendered in hongkong are income from sources without the philipinnes.

Lambino, Kaye Coleen


Q: Every corporation is subject to 30% regular coporate income tax except Non resident foreign corporation, Why? They are subject to final tax on gross income without the benefit of any deductions. 30% on gross income received feom all sources within the Philippines Q: What else? GSIS, SSS, PHIC, PCSO. Generally all government owned and controlled corporations have the same rules governing domestic corporations engaged in similar business industry, or activity applies. Q: What else, Special domestic corporations - proprietary educational institutions and non profit hospitals Tax base 10 % on NET INCOME Requisites: a. Stock and non profit institution, b. Private educational institution c. Gross income from unrelated trade, business activity does not exceed 50% of gross income from all sources

38

Taxation Law Review


d. For educational institutions, issued a permit to operate from decs, ched, tesda,. Exceptions: 30 % if the the gross income from unrelated trade and business or other activity exceeds 50% of the total gross income derived from all sources Exempt if non stock non profit educational institutions Q: What is unrelated trade, business, or other activity It is an undertaking that are not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function Q: Determine whether or not unrelated: a. Concessionaires, such as Jollibee for example, or fior, canteens etc - Food services by the school are related but for it to be exempt it must be owned and operated by the school as ancilliary activities and is located inside. - B. car stickers for parking related, they are for the students benefit - C . bookstore related.

Payumo, Margielyn Q: Is there a difference between the taxability of dividends received by a resident individual and by a domestic corporation from domestic corporation? Answer: Yes. Dividends received from a domestic corporation by a resident citizen is subject to 10% final tax while those received by a domestic corporation is exempt.
Q: ABC Corp, a domestic corporation declared dividends in favor of X a non-resident alien not engage in trade or business,Y resident alien and EFG Corp a non-resident foreign corporation. Tax implication. Answer:X, Non-resident alien not engage in trade or business in the Philippines - 25% final tax Y, resident alien - 10% final tax EFG non-resident foreign corporation General Rule: Subject to 15% final tax as long as the country in which the NRFC is domiciled allows a tax credit for taxes "deemed paid" in the Philippines equivalent to 15% or does not impose tax on dividends. The fact that the country in which the NRFC is domiciled does not impose any tax on.the dividends received by such corporation should be held as a full satisfaction ofthe condition for the availment of the 15% final tax.

39

Taxation Law Review


Exception: It is subject to final tax of 30% IF the country within which the NRFC is domiciled does NOT allow a tax credit. Q: What is the rationale of the imposition of Minimum Corporate Income Tax? Ans: It is intended to put a stop to the practice of corporations which while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses called tax shelters Q: What are the conditions for its imposition? Answer: It is applied when the taxable income is zero or negative such as when there is net loss or when the MCIT is greater than Normal corporate income tax due. Q: When does MCIT commence? MCIT is imposed beginning the fourth taxable year immediately following the year in which such corporation commenced its business operations, which is the year when the corporation registers with the BIR and NOT when the corporation started commercial operation.

Quilates, Donelle
1. What are capital assets? 2. In the impeachment proceeding, is the sale of Megaworld of the Bellagio unit to the Chief Justice subject to the capital gains tax? 3. What is the tax base of the capital gains tax from the sale of real property located in the Philippines? Why? 4. What do you mean by tax arbitrage? 5. Is the 33% tax arbitrage reduction an arbitrary amount? ANSWERS: 1. Capital asset is defined in the NIRC in the negative. Meaning, if the asset is not included within the meaning of an ordinary asset, it is considered to be a capital asset. The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. 2. No, the sale of Megaworld to the Chief Justice is not subject to the capital gains tax on sale of real property located in the Philippines. In order to subject the said transaction to the capital gains tax, it is necessary that the real property be

40

Taxation Law Review


treated as a capital asset. In the case at bar, since Megaworld is engaged in the trading and selling of real estate, the said Bellagio unit should not be considered as a capital asset. This is so because the said property is included in the inventory of the Megaworld. 3. The tax base of the capital gains tax from the sale of real property located in the Philippines is 6% of the higher between: (a) The gross selling price; and (b) prescribed zonal value of real properties as prescribed by the commissioner OR the fair market value based on schedule of values of the of the provincial or city assessors whichever is higher. 4. Tax arbitrage is the mandatory deduction of the interest income subject to final tax against the interest expense to be recognized under deductions of the gross income. The purpose is to discourage back to back loan to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction. 5. No, the rate is not arbitrary. The 33% reduction is derived from the ratio of the difference between the 30% corporate income tax and 20% final tax on interest income over the 30% corporate income tax rate [(30% - 20%) / 30% = 33%]. In this way the 10% advantage in case of back to back loans will be avoided.

Antonio, Regatta
Q: What is an insurance contract? An insurance contract is an agreement whereby one undertakes to indemnify another for any loss, damage or injury arising from a known or contingent event. Q: Are insurance contracts excluded from Income taxes? Yes. Specifically excluded under the NIRC. Q: If, for example, Iggy Arroyo, designated Grace Ibuna, his mistress as the beneficiary in an insurance contract, tax implication? Grace Ibuna, as a mistress, may not be designated as a beneficiary to the insurance contract because she fall sunder the exceptions of void donations under Art. 329 of the NCC. Q: What if Iggy designates Graces sister as beneficiary, can that be done? Yes. She is not among those excepted to receive donations from Iggy. The tax implication would be that Iggy would be liable for donors tax to a stranger. Q: What are the basic principles of an insurance contract? Contract of adhesion, Aleatory contract, Contract of indemnity

41

Taxation Law Review


Q: What if I donated a painting to a church worth P1 million, and the church sells it for the renovation of the church building, what are the tax implications? The first transaction your donation to the church not taxable. Donation to a religious organization. The second transaction the selling of the painting not taxable the fund will be used to rebuild the church. Q: LSG selling of shirts and jackets, taxable? No. LSG is not an entity which is taxable by the BIR. Its existence is connected with San Beda as an educational institution. All revenue of a non-profit, nonstock school is tax exempt under the Constitution. Q: What if they put up a store outside San Beda and made a business of selling shirts and jackets? Taxable, if the selling is done on a commercial level with an economic end, it will be subject to tax. Q: Can you sell your blood? Generally, all parts of the body, once severed from your body are considered as put blood may not be sold legally. Q: Can you sell your kidneys? Not legally. Q: If articles are already subject to final tax, can they still be subject to the scheduler rates? No. There will be double taxation. Q: If capital would be equated to a tree, what would it be? Branch, roots, leaves, fruits? Tree. Q: What about income? Fruits of the tree.

Castillo, Beverly
Q: Kinds of Deductions There are three types of deductions from gross income. These are: a. The itemized deductions in Section 34(A)to (J) and (M) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines; b. The optional standard deduction in Section 34(L) available only to individual taxpayers deriving business, professional, capital gains and passive income not subject to final tax, or other income; and c. The special deductions in Section 37 and 38, both of the Tax Code, and in special laws like the BOI law (E.O.226) ( Mamalateo, Reviewer on taxation, Second Edition 2008). Q: Explain Optional Standard Deduction. This is in lieu of what?

42

Taxation Law Review


The optional standard deduction, which is in lieu of itemized deductions, is merely a privilege that may be enjoyed by certain individual taxpayers. The requisites for its exercise are as follows: d. OSD is available only to citizens or resident aliens; thus, nonresident aliens are not entitled to claim the optional standard deduction; e. The standard deduction is optional, unless taxpayer signifies in his return his intention to elect this deduction, he is considered as having availed of the itemized deductions; f. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made but he can change to itemized deductions in succeeding year; g. The amount of standard deduction is limited to 40% of gross income(corporation)or gross sales of receipts(individual); and h. Proof of actual expenses is not required ( Mamalateo, Reviewer on taxation, Second Edition 2008). Q: Conditions for deductibility of interest In general, subject to certain limitations, the following are the requisites for the deductibility of interest from gross income: i. There must be a valid and existing indebtedness; j. The indebtedness must be that of the taxpayer; k. The interest must be legally due and stipulated in writing; l. The interest expense must be paid or incurred during the taxable year; m. The indebtedness must be connected with the taxpayers trade or business; n. The interest payment arrangement must not be between related taxpayers as mentioned in Section 36(B) of the Tax Code of 1997; o. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income; and p. The amount of interest deducted from gross income does not exceed the limit set forth in the law. Thus, the taxpayers otherwise allowable deduction for interest expense by 33% of interest income subjected to final tax (Mamalateo, Reviewer on taxation, Second Edition 2008). Q: Retirement benefits as exclusion in gross income Retirement benefits that are generally excluded from gross income include retirement benefits received under Republic Act No.7641; retirement received from reasonable private benefit plan after compliance with certain conditions; amounts received for beyond control separation; foreign social security, retirement gratuities, pensions, etc.; USVA benefits; SSS benefits; and GSIS benefits. Reasonable private benefit plan maintained under R.A 4917 requires that the retiring official or employee has been in the service of the same employer for at least ten years and is not less than 50 years of age at the time of his retirement, and the benefit shall be availed of by an official or employee only once. R.A 7641 only requires the employee to render services to his

43

Taxation Law Review


employer for at least five years and that he be not less than 65 years of age at the time of his retirement (Domondon, Taxation Volume II, 2009 Eight Edition). Q: If you were an employer, and your top rank in-house counsel acquired HIV, will the separation benefits be excluded in the gross income? The answer must be qualified. To be excluded from gross income, amounts received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer must be because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. For any cause beyond the control of the said official or employee means that the separation of the employee must be involuntary and not initiated by him. No withholding of tax is thus necessary to be deducted by the employer from the separation pay. The separation of the official or employee must be compelled. He should not voluntarily seek his separation. Even if the separation was the result of sickness, or other physical disability, retrenchment, redundancy or partial closure or cessation of business, if the employee or official voluntarily resigned as result of the mentioned causes, the amounts received should not be excluded from the gross income (Domondon, Taxation Volume II, 2009 Eight Edition).

Cayaban, Iva Freyritz


Q: Requisites of Interest as Deduction 1. 2. 3. 4. 5. 6. There is an indebtedness The indebtedness must be that of the taxpayer The interest must be legally due The interest must be stipulated in writing The interest expense must have been paid or incurred during the taxable year The indebtedness must be connected with the taxpayers trade, business or exercise of profession 7. The interest arrangement must not be between related taxpayers 8. The interest is not expressly disallloed by law to be deducted from gross income of the taxpayer 9. The amount of interest deducted from gross income does not exceed the limit set forth in the law Q: What is tax arbitrage? Tax arbitrage is one wherein back-to-back loan is used to take advantage of the lower rate of tax on interest income and a higher rate of tax on interest expense deduction. As a general rule, the entire amount shall be allowed as a deduction from the taxpayers gross income. However, to deal with the tax arbitrage, the

44

Taxation Law Review


deductible interest shall be reduced by the following rates of the interest income earned which had been subjected to final withholding tax. Q: Illustrate tax arbitrage. ABC Corporation borrowed P1million from XYZ Savings Bank at 10% per annum. Since it did not really need the money, it placed the proceeds of the loan in a time deposit, which earns interest at 10% per annum with the same bank. The interest income in the amount of P100,000 of ABC Corporation was subjected to 20% final withholding tax, but the interest expense of ABC Corporation in the amount of P100,000 was deducted from its gross income during the taxable year. The tax benefit of the corporation on such interest expense deduction was 33%. Q: Requisites for deductibility of Losses 1. 2. 3. 4. 5. 6. The loss must be that of the taxpayer Actuall sustained and charged off during the taxable year Evidenced by a close and completed transaction Not claimed as a deduction for estate tax purposes (for individuals) Not compensated for by insurance or other form of indemnity The loss must be connected with his trade, business or profession or incurre din any transaction entered into for profit though not connected with his trade, business, or profession 7. Notice of loss must be filed with the BIR

Q: You own a Taxi Company. One cab driven by your employee was lost due to theft. Can you deduct the value of the car as a loss from the gross income? YES. Ordinary Losses include losses of property connected with trade, business, or profession, if the loss arises from fires, storms, shipwreck or other casualties, or from ROBBERY, THEFT, or embezzlement. Q: What are the essential requisites in allowing necessary and ordinary expenses as deduction? The expense must be a) ordinary or necessary, b) paid/incurred within the taxable year, c) paid/incurred in carrying on a trade or business, d) substantiated with official receipts or other adequate records, e) reasonable, and f) not contrary to law, public policy or morals. If the transaction giving rise to the expense is subject to withholding tax, proof of payment to the BIR must be shown. Q: When is an expense necessary? Q: When is an expense ordinary

45

Taxation Law Review


Q: In order to be an allowable deduction, must an expense be both necessary and ordinary? An expense is necessary when it is appropriate and helpful in the development of the taxpayer's business and are intended to minimize losses or to increase profits. An expense is ordinary when it is normal or usual in relation to the taxpayer's business and the surrounding circumstance. An expense need not be necessary and ordinary at the same time to be allowed as deduction. Q: A school purchased classroom chairs. Is it a necessary expense or an ordinary expense? Q: How will it be substantiated, with a receipt or an invoice? The expense in the purchase of classroom chairs is an ordinary expense because it is normal or usual in relation to the business of a school. It can be substantiated by an invoice (invoices refer to the sale, barter or exchange of goods or properties, while receipts refer to the lease of goods or properties or sale, barter or exchange of services. Q: In the absence of a receipt/invoice, can a necessary and ordinary expense still be allowed as a deduction? Yes, Section 34 (A) (1)(b), NIRC, is explicit: "x x x the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. Q: When a withholding agent fails to withhold and remit, whats the liability of such withholding agent? 9. Can the withholding agent treat the payment of such liability as a necessary or business expense? The withholding agent shall be liable for the amount not withheld and remitted. Such amount, however, cannot be allowed as a business expense because it is not paid/incurred in carrying on a trade or business. It is instead a penalty which is paid/incurred by the withholding agent for his failure to comply with his duties under the law as withholding agent. Q: What taxes paid/payable are allowable as deduction? The following are non-deductible taxes: a) income tax, b) estate and donor's tax, c) special assessments, d) excess electric consumption tax, e) foreign income tax, war profits, and excess profits tax, if the taxpayer makes use of tax credit and f) final taxes, being in the nature of income tax. Q: What components of the tax paid/payable are allowable as deduction?

46

Taxation Law Review


Only the tax proper paid/incurred by the taxpayer shall be allowable as deduction. Hence, payments for interests, surcharges and penalties or fines, incident to delinquency, are not included.

Value Added tax


Sampaga, Genelou Q: Who is liable to pay VAT? Q: What is the rate of VAT? Q: What is the tax base in the computation of VAT? Q: If the seller has gross receipts amounting to P100,000 and input tax amounting to P20,000, is the taxpayer liable for VAT? Q: What if the seller has gross receipts amounting to P100,00 and input tax amounting to P20,000, is the taxpayer liable for VAT? What are the options of the taxpayer? Q: Is there a prescriptive period if the taxpayer avails of the tax refund remedy?

Transfer Taxes
Calvan, Myrtle
Q: Difference between Donors Tax and Estate Tax Estate tax is a tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries. It is not a tax on property. Estate tax is held to be an excise tax imposed on the privilege of transmitting property upon the death of the owner. The estate tax is generated by death and accrues at the time of death. It is governed by the law in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. Gift tax is an excise on the transfer by a living person to another of money or other property without consideration. Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it Q: Who is a stranger? In connection with donors tax?

47

Taxation Law Review


For the purpose of this tax, a "stranger", is a person who is not a: (1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within the fourth degree of relationship. (3) Donation made between business organizations and (4) those made between an individual and a business organization Q: What are the exemptions from donors tax? Distinguish those made by a resident and those made by a non-resident. Gifts made by resident (1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000): (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and (3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Q: Gifts made by non-residents (1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government.

48

Taxation Law Review


(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.

NIRC Remedies
Sulit, Dioxenos Q: Abatement vs. Compromise? Abatement involves the cancellation of the whole tax liability, while compromise involves a reduction of the tax liability. Q: Grounds for abatement? - A tax or a portion thereof has been unjustly or excessively assessed. - The collection and administrative cost does not justify the amount of tax collected. Q: Period to assess? What is the exact date? If your 2009 income is filed on April 15 2010, when will the prescription period begin and end? For ordinary assessment, the period to assess is 3 years after the last day prescribed by law for filing a return (April 16, the day after April 15). For extraordinary assessment, the BIR may assess or collect without assessment within 10 years from the discovery of the omission, falsity, and fraud. The period to assess begins on April 16, 2010 and will end April 16, 2013. If you file your return before March 16, when will the prescription period to assess start? What is the reason behind the provision if a return is filed before the last day for filing thereof, it shall be considered filed on such last day? The prescription period to assess will still start April 16. If a return is filed before the last day for filing thereof, it shall be considered filed on such last day The reason is that there will be uniformity in the assessment of the BIR; otherwise there will be different starting points upon which the BIR would assess. Q: How do you compute the 3-year prescription period? Do you consider the leap year? The last day to assess is always the 1095th day from April 16 regardless whether its a leap year or not (RMC No. 48-90).

49

Taxation Law Review


Cayaban, Iva Freyritz
Q: Explain the concept of Levy under the NIRC. is a remedy whereby the collection of delinquent taxes is enforced on the real property belonging to the delinquent taxpayer. Real property may be levied upon, before, simultaneously, or after the distraint of personal property belonging to the delinquent taxpayer, and the remedy by distraint and levy may be repeated if necessary until the full amount, including all expenses, is collected. Q: Is there a difference between levy under the NIRC and levy under the LGC? Aside from difference between 1) laws governing the levy, NIRC- Sec 207-227 LGC- Sec 176-180 and 2) Issuance of certificate of levy, in NIRC there is Warrant of Levy served upon the Register of Deeds and delinquent taxpayer while in LGC, there is only Certificate of Levy to be served upon the Assessor, Registrar of Deeds, and taxpayer, ALL other aspects and procedure are the same. Q: Prescription of assessment. What if April 15 falls on a Sunday, when is the last day of filing a return? When will assesment prescribe? If April 15 falls on a Sunday, the last day of filing of a return shall be the next working day after Sunday which is Monday, April 16. With respect to the prescription of assessment, count (365 x 3) days from the day the return was filed. Q: When is Notice of Informal Conference and PAN not required? 1. When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return 2. When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent 3. When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed agaisnt the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year 4. When the excise tax due on excisable articles has not been paid 5. When an article locally purchased or imported by an exempt person such as but not limited to, vehicles, capital equipment, machineries adn spare parts has been sold, traded, or transferred to non-exempt persons Q: Constructive destraint, when is it issued? 1. When the taxpayer is retiring from any business subject ot tax 2. When the taxpayer is intending to leave the Philippines 3. When the taxpayer is intending to remove his property from the Philippines or to conceal the same

50

Taxation Law Review


4. When the taxpayer is intending to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him

Madridijo, Marlon
Q: When can the government assess deficiency tax? It depends. The government can assess deficiency tax under normal circumstances; within 3 years reckoned from the time the tax return is actually filed if the same is filed after the date prescribed by law for its filing otherwise counted from the date set by law for its filing, if no return is filed or in case it is filed earlier than that time. Under abnormal circumstances, the government may assess within ten years from the discovery of the non-filing or the filing of fraudulent or false return. Q: What are the circumstances contemplated by abnormal assessment? There are three instances namely; 1) in cases where no return is filed, 2) in case taxpayer filed a fraudulent return, 3) in case taxpayer files an false return Q: Can tax fraud be presumed? For purposes of determining the prescriptive period of assessing deficiency tax, fraud maybe presumed when there is substantial undervaluation of income, which amounts to more than thirty percent of the actual income earned. Q: When should the ten-year period for prescription be reckoned? It should be reckoned from the date of DISCOVERY of the non-filing, or the filing of a false or fraudulent tax return Q: Is there a difference between a false and fraudulent tax return? False return signifies defect in the execution, that which purports to be true and genuine a falsified or fictitious return; Fraudulent return traces the defect with the substance in case the amount reflected as income is substantially undervalued so as to clearly reflect an intention to evade taxes. Fraud may be presumed in case there is undervaluation of income by more than 30 %.

Sampaga, Genelou Q: What is the procedure in the issuance of a Deficiency Tax Assessment? Q: What is a Letter of Authority? Q: What are the instances when a Preliminary Assessment Notice is not required? Q: What happens when the taxpayer fails to respond after receipt of the Preliminary Assessment Notice?

51

Taxation Law Review

Court of Tax Appeals


Cardino, Gian Carlo
Q: What is the legal basis of the CTA? Answer: The Court of Tax Appeals was originally created by virtue of Republic Act no.1125 enacted June 16, 1954. Republic Act no. 9282 amended Republic Act 1125. Republic Act no, 9282 was enacted on March 30, 2004 and took effect on April 23, 2004. Republic Act no. 9503 which was enacted June 12, 2008 further amended Republic Act no. 1125. Q: What are some of the amendments brought about by Republic Act no. 9282? Answer: The Court of Tax appeals was elevated to the same level as the Court of Appeals. Appeals from its decision shall now be made before the Supreme Court. The expanded jurisdiction of the Tax Court included the following: a. Exclusive original jurisdiction over all criminal offense under the NIRC and TCC and other laws admissible by the BIR and BOC where the amount of taxes and fines is P1 million or more; b. Exclusive appellate jurisdiction in criminal offense over appeals from the RTC whether in the exercise of its original or appellate jurisdiction over tax cases where the amount involved is less than P1 million. c. Appellate jurisdiction over decisions of the RTC on local taxes. d. Exclusive original jurisdiction over tax collection cases where the amount involved is P1 million or more e. Exclusive appellate jurisdiction over tax collection where the amount is less than P1 million. Q: How many justices are there in the CTA? Supreme Court? Answer: Republic Act no. 9503 enlarged the organizational structure of the Court of Tax Appeals by increasing the number of CTA justices from 6 to 9 and increasing the number of Divisions from 2 to 3, each division constituting of 3 justices. The Supreme Court is composed of a Chief Justice and 14 Associate Justices. It may sit en banc or in its discretion, in divisions of three, five or seven members. Q: How do the CTA and Supreme Court render decision? What is the quorum of CTA? Answer: The CTA may sit en banc or in three Divisions, each Division consisting of three Justices. Five Justices shall constitute a quorum for sessions en banc and two Justices for sessions of a Division provided, that when the required quorum cannot be

52

Taxation Law Review


constituted due to any vacancy, disqualification, inhibition, disability, or any other lawful cause, the Presiding Justice shall designate any Justice of other Divisions of the Court to sit temporarily therein. The affirmative votes of five members of the Court en banc shall be necessary to reverse a decision of a Division but a simple majority of the Justices present necessary to promulgate a resolution or decision in all other cases or two members of a Division, as the case may be, shall be necessary for the rendition of a decision or resolution in the Division level. In the Supreme Court, all cases involving the constitutionality of a treaty, international or executive agreement, or law; and all other cases which, under the Rules of Court, are to be heard en banc, including those involving the constitutionality, application or operation of presidential decrees, proclamations, orders, instructions, ordinances and other regulations. These cases are decided with the concurrence of a majority of the members who actually took part in the deliberations. Other cases or matters may be heard in division, and decided or resolved with the concurrence of a majority of the members who actually took part in the deliberations on the issues and voted thereon, but in no case without the concurrence of at least three such members. Q: What is the procedure in appeals in tax cases? Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law. Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction, from the expiration of the period fixed by law to act. A Division of the CTA shall hear the appeal provided, however, that with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a procedure analogous to that provided for under rule 43 of the 1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc. All other cases involving rulings, orders or decisions filed with the CTA shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteens (15) days from notice thereof: provided, however, that in criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply.

53

Taxation Law Review


No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: provided, however, that when in the opinion of the Court the collection by the aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

No civil proceeding involving matter arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained until and unless an appeal has been previously filed with the CTA. A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc. A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.

Panganiban, Victoria
Q: Does Court of Tax Appeals exercise original jurisdiction? Yes. 1. Exclusive original jurisdiction over all criminal offenses arising from violation of NIRC, Tariff and Customs Code and other laws administered by the BIR of the Bureau of Customs where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one Million pesos (Php1,000,000.00) or more. 2. Exclusive original jurisdiction in tax collection cases involving final and executory assessment for taxes, fees, charges and penalties where the principal amount of taxes, fees, exclusive of charges and penalties, claimed is One Million Pesos (Php1,000,000.00) or more.

Real Property and Local Taxation


Deemed Cover no recit but part of the mid term exams

54

Taxation Law Review

Tariff and Customs Laws


Blasco, Leana Mae
Q: What are the classifications of goods for customs purposes? a. Articles subject to duty b. Prohibited importations b.1. absolutely prohibited importations b.2. qualifiedly prohibited importations c. Conditionally- free importations Q: What is the difference of qualifiedly prohibited importations from conditionally- free importations? Conditionally- free importations are articles which are exempt from import duties upon compliance with the formalities prescribed or with regulations promulgated by the Commissioner of Customs with the approval of Secretary of Finance. This article includes: a. Those prohibited for in Sec. 105 of the Tariff and Customs Code; b. Those granted to government agencies, government-owned or controlled corporations with agreement with foreign countries; c. Those given to international institutions, entitled to exemption by agreement or special laws; and; d. Those that maybe granted by the President upon NEDAs recommendation. Qualifiedly prohibited importations refer to those which maybe imported but subject to, and after compliance with, certain conditions. Where such conditions as to warrant lawful importation do not exist, the legal effects of the importation of qualifiedly prohibited articles are the same as those of absolutely prohibited articles. Q: What are the articles prohibited from being imported into the Philippines? a. Dynamite, gunpowder, ammunitions and other explosives, firearms and weapons of war, and parts thereof, except when authorized by law; b. Written or printed articles advocating or inciting treason or rebellion, insurrection, sedition or subversion against the Government of the Philippines, or forcible resistance to any law of the Philippines, or containing any threat to take the life of, or inflict bodily harm upon any person in the Philippines; c. Written or printed articles, negatives of cinematography films, photographs, engraving, lithographs, objects, paintings, drawings or other representations of an obscene or immoral character; d. Articles, instruments, drugs and substances, designed, intended or adapted for producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly information where, how or by whom unlawful abortion is produced;

55

Taxation Law Review


e. Roulette, wheels or gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling or distribution of money, cigars, cigarettes or other articles when such distribution is dependent on chance, including jackpot and pinball machine or similar contrivances or parts thereof; f. Lottery and sweepstakes tickets except those authorized by the Philippine Government, advertisements thereof and lists of drawing therein; g. Any article manufactured in whole or in part of gold, silver or other precious metals or alloys thereof, the stamps, brands or marks of which do not indicate the actual fineness of quality of said metals or alloys; h. Any adulterated or misbranded articles of food or any adulterated or misbranded drug in violation of the provisions of the Food and Drug Act; i. Marijuana, opium poppies, coca leaves, heroine or any other narcotics or synthetic drugs which are or may hereafter be declared habit- forming by the President of the Philippines, or any compound manufactured salt, derivative, or preparation thereof, except when imported by the Government of the Philippines or any person duly authorized by the Dangerous Drug Board, for medicinal purposes only; j. Opium pipes and parts thereof of whatever material; k. All other articles and parts thereof, importation of which is prohibited by law or rules and regulations issued by competent authority (Sections 101, TCC, as amended by PD 34) Q: What are the conditions for aquatic products to be exempt from import duties? Aquatic products caught or gathered by fishing vessels of Philippine registry: provided that they are imported in such vessels or in crafts attached thereto: and provided further, that they have not been landed in any foreign territory or if so landed, they have been landed solely for transshipment without having been advanced in condition. Q: What are the special duties imposed under the Tariff and Customs Code? a. Dumping duties b. Countervailing duties c. Marking duties d. Discriminatory duties Q: Can tariff and customs duties be the subject of a claim for refund or credit? If yes, within what period must the claim for refund be filed? Yes, all claims for refund of duties shall be made in writing and forwarded to the Collector to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office, and if found to be correct and in accordance with law, shall certify the same to the Commissioner with his recommendation together with all necessary papers and documents. Upon receipt by the Commissioner of such certified claim he shall cause the same to be paid if found correct. If a result of the refund of customs duties there would necessarily result a corresponding refund of internal revenue taxes on the same importation, the Collector shall likewise certify the same to the Commissioner who shall cause the said taxes to be paid, refunded, or tax credited in favor of the importer, with advice to the Commissioner of Internal Revenue.

56

Taxation Law Review

011 Tax Case Doctrines

1. General Principles
a. Non Impairment of Contracts In Philippine Amusement and Gaming Corporation (PAGCOR) vs. The Bureau of Internal Revenue, (G.R. No. 172087, March 15, 2011), PAGCOR contends that Section 1 (c) of Republic Act (RA) No. 9337 is null and void ab initio for violating the non-impairment clause of the Constitution. PAGCOR avers that laws form part of, and is read into, the contract even without the parties expressly saying so. PAGCOR states that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and indumenta for their decision to transact or invest with it. PAGCOR argues that the withdrawal of its exemption from corporate income tax by RA No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties with it and thus violative of the non-impairment clause. This contention lacks merit. The nonimpairment clause, which provides that no law impairing the obligations of contracts shall be passed, is limited in application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner changing the intention of the parties. There is impairment of a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties. As regards franchises, Section 11, Article XII of the Constitution provides that no franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. In Timbol vs. Sec. of Finance,( G.R. No. 193007; July 19, 2011), Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution of return of investments that may result from the value-added tax imposition. She has no interest at all in the profits to be earned under the toll operating agreements. The interest in and right to recover investments solely belongs to private investors. b. Administrative feasibility. In the same case of Timbol vs. Sec. of Finance,( G.R. No. 193007; July 19, 2011) Administrative feasibility is one of the canons of a sound tax system. It simply means 57

Taxation Law Review


that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired. Thus, even if the imposition of value-added tax on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. . c. Equal Protection of the Laws According to the case of Philippine Amusement and Gaming Corporation (PAGCOR) vs. The Bureau of Internal Revenue, (G.R. No. 172087, March 15, 2011), Under Section 1 of Republic Act (RA) No. 9337, amending Section 27(c) of the National Internal Revenue Code of 1997, Philippine Amusement and Gaming Corporation (PAGCOR) is no longer exempt from corporate income tax as it has been omitted from the list of the government owned and controlled corporations (GOCCs) that are exempt from it. PAGCOR argues that such omission is unconstitutional as it violates the right to equal protection under the Constitution. A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of Committee on Ways and Means to the request of PAGCOR that it be exempt from such tax. Thus, the previous exemption of PAGCOR from paying corporate income tax was not based on a classification showing substantial distinctions which make for real differences but was granted upon PAGCORs request. With the subsequent enactment of RA No. 9337, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax. The express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim- exceptio firmat regulam in casibus non exceptis. PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCORs previous exemption from payment of corporate income tax was not made pursuant to a valid classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the equal protection clause but was made upon PAGCORs own request to be exempted.

2. Local Government Code and Real Property Tax


In Republic of the Philippines vs. City of Mandaluyong, (G.R. No. 184879, February 23, 2011), A writ of possession is mere incident in the transfer of title. In this case, it stemmed from the exercise of alleged ownership by respondent city over EDSA MRT III properties by virtue of a tax delinquency sale. The issue of whether the auction sale should be enjoined is still pending before the Court of Appeals. Pending

58

Taxation Law Review


determination, it is premature for the respondent city to have conducted the auction sale and caused the transfer of title over the real properties to its name. The denial by the Regional Trial Court (RTC) to issue an injunction or a temporary restraining order does not automatically give the respondent city the liberty to proceed with the actions sought to be enjoined, especially so in this case where a certiorari petition assailing the denial is still being deliberated in the Court of Appeals (CA). All the more it is premature for the RTC to issue a writ of possession where the ownership of the subject properties is derived from an auction sale, the validity of which is still being threshed out in the CA. The RTC should have held in abeyance the issuance of a writ of possession. At this juncture, the writ issued is premature and has no force and effect. According to Sta. Lucia Realty & Development, Inc. vs. City of Pasig, (G.R. No. 166838, June 15, 2011), Under Presidential Decree No. 464, or the Real Property Tax Code, the authority to collect real property taxes is vested in the locality where the property is situated. This requisite was reiterated in Republic Act No. 7160, or the Local Government Code. Thus, while a local government unit is authorized under several laws to collect real estate tax on properties falling under its territorial jurisdiction, it is imperative to first show that these properties are unquestionably within its geographical boundaries. The Court cited the case of Mariano, Jr. v Commission on Elections which stated that the importance of drawing with precise strokes the territorial boundaries of a local unit of government cannot be overemphasized. The boundaries must be clear for they define the limits of the territorial jurisdiction of a local government unit. It can legitimately exercise powers of government only within the limits of its territorial jurisdiction. Beyond these limits, its acts are ultra vires. Clearly theref ore, the local government unit entitled to collect real property taxes from Sta. Lucia must undoubtedly show that the subject properties are situated within its territorial jurisdiction; otherwise, it would be acting beyond the powers vested to it by law. In the same case of Sta. Lucia the Supreme Court said that while a certificate of title is conclusive as to its ownership and location, this does not preclude the filing of an action for the very purpose of attacking the statements therein. As the Court proclaimed in the case of De Pedro vs Romasan Development Corporation: [W]hile certificates of title are indefeasible, unassailable and binding against the whole world, including the government itself, they do not create or vest title. They merely confirm or record title already existing and vested. That cannot be used to protect a usurper from the true owner, nor can they be used as a shield for the commission of fraud; neither do they permit one to enrich himself at the expense of other. Although it is true that Pasig is the locality stated in the transfer certificates of title of the subject properties, both taxpayer and the municipality of Cainta aver that the metes and bounds of the subject properties, as they are described in the certificates, reveal that they are within Caintas boundaries. This only means that there may be a conflict between the location as stated and the location as technically described in the certificates. Mere reliance therefore on the face of the certificates will not suffice as they can only be conclusive evidence of the subject properties locations if both the stated and described locations point to the same area. The Antipolo regional trial court, wherein the boundary dispute case between Pasig and Cainta is pending, would be able to best determine once and for all the precise metes and bounds of both Pasigs and Caintas respective territorial

59

Taxation Law Review


jurisdictions. The resolution of this dispute would necessarily ascertain the extent and reach of each local governments authority, a prerequisite in the proper exercise of their powers, one of which is the power of taxation.

3. Tariff and Customs


In the case of Commissioner of Customs vs AGHFA Incorporated, (G.R. No. 187425, March 28, 2011), the owner is entitled to recover the value of its lost shipment based on the acquisition cost at the time of payment. In the case of C.F. Sharp and Co., Inc. vs Northwest Airlines, Inc., the Court ruled that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment. In said case, the Court cited the case of Zagala vs. Jimenez and said that under Republic Act No. 529, as amended by RA No. 4100, stipulations on the satisfaction of obligations in foreign currency are void. Thus payments of monetary obligations, subject to certain exceptions, must be discharged in the currency which is the legal tender in the Philippines. However, since RA No. 529 does not provide for the rate of exchange for the payment of foreign currency obligations incurred after its enactment, the Court held in a number of cases that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment. Also, in the case of Republic of the Philippines represented by the Bureau of Customs vs UNIMEX MicroElectronics GmBH, which involved the seizure and detention of a shipment of computer game items which disappeared while in the custody of the Bureau of Customs, the Court upheld the decision of the Court of Appeals holding that the petitioners liability may be paid in Philippine currency, computed at the exchange rate prevailing at the time of actual payment. In the same case of AGFHA, the Commissioner of Customs cannot escape liability for the lost shipment for goods. As discussed in the case of Republic of the Philippines represented by the Bureau of Customs vs UNIMEX Micro-Electronics GmBH, the Court cannot turn a blind eye to [the Bureau of Customs] ineptitude and gross negligence in the safekeeping of respondents goods. [The Court is] not likewise unaware of its lackadaisical attitude in failing to provide a cogent explanation on the goods disappearance, considering that they were in its custody and that they were in fact the subject of litigation. The situation does not allow [the Court] to reject respondents claim on the mere invocation of the doctrine of state immunity. Succinctly, the doctrine must be fairly observed and the State should not avail itself of this prerogative to take undue advantage of parties that may have legitimate claims against it.

4. Court of Tax Appeals


Under the ruling in Central Luzon Drug Corporation vs. Commissioner of Internal Revenue, (G.R. No. 181371, March 2, 2011), Section 1, Rule 13 of the Internal Rules of the Supreme Court a case is deemed submitted for decision or resolution upon the filing of the last pleasing, brief or memorandum that the Court or its Rules require. In this case, the Court required petitioner taxpayer to file a reply; however, petitioner taxpayer opted to file a motion to withdraw. Clearly, by requiring petitioner taxpayer to file its reply, the Court has not yet deemed the case submitted for decision or

60

Taxation Law Review


resolution. The Court granted petitioner taxpayers motion to withdraw. By withdrawing the appeal, petitioner taxpayer is deemed to have accepted the decision of the Court of Tax Appeals (CTA). And since the CTA had already denied petitioner taxpayers request for the issuance of a tax credit certificate for insufficiency of evidence, it may no longer be included in petitioner taxpayers future claims. Petitioner taxpayer cannot be allowed to circumvent the denial of its request for a tax credit by abandoning its appeal and filing a new claim. As stated in a previous case, n appellant who withdraws his appeal must face the consequences of his withdrawal, such as the decision of the court a quobecoming final and executory

5. Income taxation
a. Power of Commissioner of Internal Revenue In Commissioner of Internal Revenue vs. Filinvest Development Corporation, (G.R. No. 163653, July 19, 2011 ), Section 43 [now Section 50] of the 1993 National Internal Revenue Code (NIRC) provides that. (i)n case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue [(CIR)] is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade of business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business, Section 179 of Revenue Regulations No. 2 provides in part that (i)n determining the true net income of a controlled taxpayer, the [CIR] is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce of avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer. Despite the broad parameters provided, however, the CIRs power of distribution, apportionment or allocation of gross income and deductions under the NIRC and Revenue Regulations No. 2 do not include the power to impute theoretical interests to the taxpayers transactions. Pursuant to Section 28 [now Section 32] of the NIRC, the term gross income is understood to mean all income from whatever source derived, including, but not limited to certain items. While it has been held that the phrase from whatever source derived indicates a legislative policy to include all income not expressly exempted within the class of taxable income under Philippine laws, the term income has been variously interpreted to mean cash received or its equivalent, the amount of money coming to a person within a specific time or something distinct from principal or capital. Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. In this case, there is no evidence of actual or possible showing that the advances taxpayer extended to its affiliates had resulted to interests subsequently assessed by the CIR. Even if the Court were to accord credulity to the CIRs assertion that taxpayer had deducted substantial

61

Taxation Law Review


interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. Further, pursuant to Article 1959 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. b. Gross income In the same case of Filinvest, there is no deficiency tax that can be assessed on the gain on the supposed dilution and/or increase in the value of taxpayers sharehol dings in the transferee which the Commissioner of Internal Revenue (CIR), at any rate, failed to establish. Bearing in mind the meaning of gross income, it cannot be gainsaid that a mere increase or appreciation in the value of the shares cannot be considered income for taxation purposes. Since a mere advance in the value of the property of a person or corporation in no sense constitute the income specified in the revenue law, it has been held in the early case of Fisher vs. Trinidad that it constitutes and can be treated merely as an increase of capital. Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of the taxpayers shareholdings in the transferee until the same is actually sold. c. Capital gains tax The Supreme Court in Supreme Transliner, Inc., Moises C. Alvarez and Paulita S. Alvarez vs BPI Family Savings Bank, Inc., G.R. No. 165617, February 25, 2011, said that Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition of real property classified as capital asset under the National Internal Revenue Code (NIRC) shall be subject to final capital gains tax. The term sale includes pacto de retro and other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86, as amended by RMO Nos. 16-88, 2789 and 6-92, states that these conditional sales necessarily includes mortgage foreclosure sales (judicial and extrajudicial foreclosure sales). Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank. Under Section 63 of Presidential Decree No. 1529, or the Property Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds on the certificate of title. It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135, or An Act or Regulate the Sale of Property Under Special Powers Inserted In or Annexed to Real Estate Mortgages, and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership. RR No. 4-99 (March 16, 1999), further amends RMO No. 6-92 relative to the payment of capital gains tax and documentary stamp tax on extrajudicial foreclosure sale of

62

Taxation Law Review


capital assets initiated by banks, finance and insurance companies. Under this RMO, in case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gain has been derived by the mortgagor and no sale or transfer of real property was realized. Moreover, the transaction will be subject to documentary stamp tax of only PhP 15 because no land or realty was sold or transferred for a consideration. d. Tax-free exchange Under the abovementioned case of Filinvest the requisites for the non-recognition of gain or loss under section 34 (c) (2) [now Section 40 (c) (2)] of the 1993 National Internal Revenue Code (NIRC) are the following: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee. [Prior to the exchange, transferor already had a controlling interest in the transferee. The taxpayer, together with another affiliate which was not an existing stockholder of the transferor prior to the exchange, exchanged property for shares of stock in the transfe ree. The taxpayers controlling interest went down from 67.42% prior to the exchange to 61.03% after the exchange. The affiliate acquired 9.96% of the transferee as a result of the exchange.]The Commissioner of Internal Revenue (CIR) argues that taxable gain should be recognized for the exchange considering that the taxpayers controlling interest in the transferee was decreased as a result of the transfer while the affiliate acquired only 9.96% of the transferee. Rather than isolating the same as proposed by the CIR, the taxpayers 61.03% control of transferee should be appreciated in combination with the 9.96% which as issued to its affiliate. Since, the term control is clearly defined as ownership of stocks in a corporation possessing at least fifty -one percent of the total voting power of classes of stock entitled to vote, the exchange of property for stocks between taxpayer, the affiliate and the transferee clearly qualify as a tax free exchange under the NIRC. e. Irrevocability of option to carry-over excess income tax payments In Commissioner of Internal Revenue vs. PL Management International Philippines, Inc., G.R. No. 160949, April 4, 2011 , When the taxpayer opted to carry over its unutilized creditable withholding tax from 1997 to taxable year 1998, the carry-over could no longer be converted into a claim for tax refund because of the irrevocability rule provided in Section 76 of the National Internal Revenue Code of 1997. Thereby, the taxpayer became barred from claiming the refund. In view of its irrevocable choice, taxpayer remained entitled to utilize that amount of excess creditable withholding tax as tax credit in succeeding taxable years until fully exhausted. In this regard, prescription did not bar it from applying the amount as tax credit considering that there was no prescriptive period for the carrying over of the amount as tax credit in subsequent taxable years. Also in Commissioner of Internal Revenue vs. Mirant (Philippines) Operations, Corporation, G.R. No. 171742; Mirant (Philippines) Operations, Corporation vs.

63

Taxation Law Review


Commissioner of Internal Revenue, G.R. No. 176165; June 15, 2011, The last sentence of Section 76 of the National Internal Revenue Code, stating that [o]nce the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years 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 a llowed therefor, is clear in its mandate. Once the corporation exercises the option to carry-over and apply the excess quarterly income tax against the tax due for the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period. Having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount representing such overpayment. f. Withholding agent According to Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue, (G.R. No. 170257, September 7, 2011) , the liability of the withholding agent is independent from that of the taxpayer. The former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by him. While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax due on the transaction, petitioner, as the taxpayer and the one which earned income on the transaction, remains liable for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due. Taxpayer bank cannot evade its liability for foreign currency deposit unit onshore tax by shifting the blame on the payor-borrower as the withholding agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans, pursuant to Section 24(c) (3) of the National Internal Revenue Code.

6. Tax Remedies
The requisites for claiming a tax credit or a refund of creditable withholding tax are as follows: (1) the claim must be filed with the Commissioner of Internal Revenue within the two-year period from the date of the payment of the tax; (2) it must be shown on the return that the income received was declared as part of the gross income; and (3) the fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld. Commissioner of Internal Revenue vs. Mirant (Philippines) Operations, Corporation, G.R. No. 171742; Mirant (Philippines) Operations, Corporation vs. Commissioner of Internal Revenue, G.R. No. 176165; June 15, 2011.

64

Taxation Law Review

7. Value added tax


In its section 112 (A), the National Internal Revenue Code sets down the following requirements in a claim for credit or refund of input value-added tax (VAT): (1) the taxpayer must be VAT registered, (2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated, (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made, and (4) the creditable input VAT due or paid must be attributable to such sales, except the transitional input VAT, to the extent that such input VAT has not been applied against the output VAT. Silicon Philippines, Inc. (formerly Intel Philippines Manufacturing, Inc.) vs Commissioner of Internal Revenue, G.R. No. 172378, January 17, 2011. The authority to print (ATP) need not be reflected or indicated in the invoices or receipts because there is no law or regulation requiring it. In the absence of such law or regulation, failure to print the ATP on the invoices or receipts should not result in the outright denial of a claim or the invalidation of the invoices or receipts for purposes of claiming a refund. However, section 238 of the National Internal Revenue Code (Tax Code) expressly requires persons engaged in business to secure an ATP from the Bureau of Internal Revenue prior to printing invoices or receipts. Under section 112 (A) of the Tax Code, a claimant must be engaged in sales which are zerorated or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales must be presented. However, since the ATP is not indicated in the invoices or receipts, the only way to verify whether the invoices or receipts are duly registered is by requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or receipts would have no probative value for the purpose of refund. Silicon Philippines, Inc. (formerly Intel Philippines Manufacturing, Inc.) vs Commissioner of Internal Revenue, G.R. No. 172378, January 17, 2011. Failure to print the word zero-rated on the sales invoices or receipts is fatal to a claim for refund of input value-added tax on zero-rated sales. As explained in the case of Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine Corporation of the Philippines) vs Commissioner of Internal Revenue, compliance with section 4.108-1 of Revenue Regulations No. 7-95, requiring the printing of the word zero -rated on the invoice covering zero -rated sales, is essential as this regulation proceeds from the rule-making authority of the Secretary of Finance under section 244 of the National Internal Revenue Code. Silicon Philippines, Inc. (formerly Intel Philippines Manufacturing, Inc.) vs Commissioner of Internal Revenue, G.R. No. 172378, January 17, 2011. When claiming tax refund or credit, the value-added taxpayer must be able to establish that it does have refundable or creditable input value-added tax (VAT), and the same has not been applied against its output VAT liabilities- information which are supposed to be reflected in the taxpayers VAT returns. Thus, an application for tax refund or credit must be accompanied by c opies of the taxpayers VAT return or returns for taxable quarter or quarters concerned. Atlas Consolidated Mining and Development Corporation vs Commissioner of Internal Revenue, G.R. No. 159471, January 26, 2011.

65

Taxation Law Review


The provision in Revenue Regulation (RR) No. 16-2005 subjecting PAGCOR to 10% value-added tax (VAT) is invalid for being contrary to Republic Act (RA) No. 9337. Nowhere in RA No. 9337 is it provided that PAGCOR can be subjected to VAT. RA No. 9337 is clear only as to the removal of PAGCORs ex emption from the payment of corporate income tax. RA No. 9337 itself exempts PAGCOR from VAT pursuant to Section 7 (k) thereof which provides among the transaction exempt from VAT, transactions which are exempt under special laws. PAGCORs charter, Preside ntial Decree No. 1869, is a special law that grants it exemption from taxes. Moreover, PAGCORs exemption from VAT is supported by Section 6 of RA No. 9337, which retained Section 108 (B)(3) of RA No. 8424. Under this Section 108 (B)(3), among transactions subject to zero percent (0%) rate are services rendered to persons or entities whose exemption under special laws effectively subject the supply of such services of zero percent (0%) rate. PAGCORs exemption from VAT has been discussed in the case ofCommissioner of Internal Revenue vs Acesite (Philippines) Hotel Corporation, where the Court held that Section 13 of PAGCORs charter clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, G.R. No. 172087, March 15, 2011 Taxpayer insists that Sections 113 and 237 of the National Internal Revenue Code (NIRC) and Section 4.108-1 of Revenue Regulations (RR) No. 7-95 do not provide that failure to indicate the word zero-rated in the invoices or receipts would result in the outright invalidation of these invoices or receipts and the disallowance of a claim for tax credit or refund. Sections 113 (A) and 237 of the NIRC provide for the invoicing requirements for value-added tax (VAT) registered persons. Related to these provisions, Section 4.108-1 of RR No. 7-95 enumerates the information which must appear on the face of the official receipts or invoices for every sale of goods by VATregistered persons. At the time taxpayer filed its claim for credit of VAT input tax, RR No. 7-95 was already in effect and it required, among others, that the word zero rated be imprinted on the invoice covering zero -rated sales. It also provided that only VAT-registered persons are required to print their tax identification number followed by the word VAT in their invoices or receipts and this shall be considered as a VAT invoice. All purchases covered by invoices other than a VAT invoice shall not give rise to any input tax. The invoicing requirements for VAT-registered taxpayer as provided in the NIRC and revenue regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing requirements to be able to file a claim for input taxes on domestic purchases for goods or services attributed to zero-rated sales. A VAT invoice is an invoice that meets the requirements of Section 4.108 -1 of RR No. 7-95. Contrary to taxpayers claim, RR No. 7-95 expressly states that purchases covered by invoices other than a VAT invoice shall not give rise to any input tax. Taxpayers invoice, lacking the word zero -rated, is not a VAT invoice, and this cannot give rise to any input tax. The subsequent enactment of Republic Act No. 9337 [amending the NIRC] on 1 November 2005 elevating provisions of RR No. 7-95 into law merely codified into law administrative regulations that already had the force and effect of law. Such codification does not mean that prior to the codification the administrative regulations were not enforceable. Microsoft Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 180173, April 6, 2011 .

66

Taxation Law Review


As the Court has ruled in several cases, the printing of the word zero -rated is required to be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled to claim for tax credit or refund. In Panasonic vs. Commissioner of Internal Revenue, the Court held that the appearance of the word zero-rated on face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid. Absent such word, the government may be refunding taxes it did not collect. Microsoft Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 180173, April 6, 2011 . In Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011, Section 108 of the National Internal Revenue Code (NIRC) imposes value added tax on all kinds of service rendered in the Philippines for a fee, including those specified in the list. The enumeration of affected services is not exclusive. By qualifying services with the words all kinds, Congress has given the term services an all-encompassing meaning. Thus, every activity that can be imagined as a form of service rendered for a fee should be deemed included unless some provision of law especially excludes it. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. In this sense, the tollway operator is no different from those enumerated under Section 108 of the NIRC who allow others to use their properties or facilities for a fee. Section 108 of the National Internal Revenue Code (NIRC) also imposes value added tax (VAT) on all other franchise grantees other than those under Section 119 of t he NIRC. Tollway operators are franchise grantees and they do not belong to the exceptions (the low-income radio and/or television broadcasting companies with gross annual incomes of less than PhP 10 million and gas and water utilities) that Section 119 spares from VAT. The word franchise broadly covers government grants of a special right to do an act or series of acts of public concern. It has been broadly construed as referring, not only to authorization that Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by Congress. Tollway operators are, owning to the nature and object of their business, franchise grantees. The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. Apart from Congress, tollway franchise may also be granted by the Toll Regulatory Board, pursuant to the exercise of its delegated powers under Presidential Decree No. 1112. The franchise in this case is evidence by a Toll Operation Certificate. Petitioners argue that toll fee is a users tax and to impose value -added tax on toll fees is tantamount to taxing a tax. Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance

67

Taxation Law Review


and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, they are not government exactions that can be properly treated as tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. VAT is not a tax on tax. Even if toll fees were deemed as a users tax, value -added tax (VAT) on tollway operations cannot be a tax on tax. VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT simply becomes part of the toll fees that one has to pay in order to use the tollways.

8. Excise tax
According to Exxonmobil Petroleum and Chemical Holdings, Inc.- Philippine Branch vs Commissioner of Internal Revenue, G.R. No. 180909, January 19, 2011, Excise taxes are imposed under Title VI of the National Internal Revenue Code (Tax Code). They apply to specific goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition, and to those that are imported. In effect, these taxes are imposed when the following conditions concur: (1) the articles subject to tax belong to any of the categories of goods enumerated in Title VI of the Tax Code and (2) that said articles are for domestic sale or consumption, excluding those that are actually exported. There are certain exemptions to the coverage of excise taxes, such as petroleum products sold to international carriers and exempt entities or agencies such as under section 135 of the Tax Code. Under section 135 of the National Internal Revenue Code (Tax Code), petroleum products sold to international carriers of [Philippine or] foreign registry for their use or consumption outside the Philippines are exempt from excise tax, provided that the petroleum products sold to such international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue. Excise taxes are of the nature of indirect taxes, the liability for payment of which may fall on a person other than he who actually bears the burden of the tax. Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase price of the goods or services. Although the manufacturer/seller is the one who is statutorily liable for the tax, it is the buyer who actually shoulders or bears the burden of the tax, albeit not in the nature of a tax, but part of the purchase price or the cost of the goods or services sold. The proper party to question, or to seek a refund of, an indirect tax, is the statutory taxpayer, or the person on whom the tax is imposed by law and who paid the same, even if he shifts the burden thereof to another. Under the case of Commissioner of Internal Revenue vs. Fortune Tobacco Corporation, G.R. No. 180006, September 28, 2011, The provision in Section 1 of Revenue Regulations No. 17-99 (that requires the payment of excise tax actually being paid prior to January 1, 2000 if this amount is higher than the new specific tax rate) clearly went beyond the terms of the law it was supposed to implement and, therefore, entitles the taxpayer to claim a refund of the overpaid excise taxes collected pursuant

68

Taxation Law Review


to the provision. It effectively extended the qualification stated in the third paragraph of Section 145 (c) of the National Internal Revenue Code that was supposed to apply only during the transition period. The said paragraph states: [t]he excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996 [

9. Documentary Stamp Tax


When read in conjunction with Section 173 of the NIRC, Section 180 concededly applies to [a]ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines. Section 3 (b) of Revenue Regulations No. 9-94 provides in part that the term loan agreement shall include credit facilities, which may be evidenced by credit memo, advice or drawings. Section 6 of the same revenue regulations further provides that [i]n cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip Applying the foregoing to the case, the instructional letters as well as the journal and cash vouchers evidencing the advances taxpayer extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011. The savings account plus (SAP) product is subject to documentary stamp tax (DST) under Section 180 [now 179] of the National Internal Revenue Code where, although the money is payable anytime, the withdrawal of the money before the expiration of the term results in the reduction of the interest rate. The fact that the SAP is evidence by a passbook does not remove it from the coverage of Section 180. A document to be considered a certificate of deposit need not be in a specific form. Thus, a passport issued by a bank qualifies as a certificate of deposit drawing interest because it is considered a written acknowledgment by a bank that it has accepted a deposit of a sum of money from a depositor. Prudential Bank vs. Commissioner of Internal Revenue, G.R. No. 180390; July 27, 2011.

10. Estoppel
Taxpayer assails the validity of the waivers of the statute of limitations on the ground that the waivers were merely attested to by the coordinator for the Commissioner of Internal Revenue (CIR) and he failed to indicate the acceptance or agreement of the CIR, as required under Section 223 of the National Internal Revenue Code. Taxpayer argues that the principle of estoppel cannot be used against it because its payment of the other tax assessment does not signify a clear intention on its part to give up its right to question the validity of the waivers. The Court ruled that estoppel applied to the taxpayer. Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored

69

Taxation Law Review


on the rule that an admission or representation is rendered conc lusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Thus, a party is precluded from denying his own acts, admissions or representation to the prejudice of the other party in order to prevent fraud and falsehood. In this case, taxpayer, through its partial payment of the revised assessments issued within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had taxpayer believed that the waivers were invalid and that the assessments were issued beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. Its subsequent action effectively believes its insistence that its waivers are invalid. The records show that taxpayer immediately made payment on the uncontested taxes immediately upon receipt of the revised assessment. It is thus estopped from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act of deny rights which it had previously recognized would run counter to the principle of equity which the Court holds dear. Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue, G.R. No. 170257, September 7, 2011

11. Non- retroactivity


Any revocation, modification or reversal of a Bureau of Internal Revenue (BIR) ruling shall not be applied retroactively if to so apply it would be prejudicial to the taxpayer. This rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. The foregoing principle of non-retroactivity of BIR may be invoked by the taxpayer who, in the first place, sought the ruling from the Commissioner of Internal Revenue. Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

12. Special Tax Law


Prior to its amendment, Section 4 of Republic Act No. 7432, allows the 20% senior citizens discount to be claimed by the private establishment as a tax credit and not merely as a tax deduction from gross sales or gross income. [Note that currently the law treats the discount as a tax deduction instead of as a tax credit.] The law is however is silent as to how the cost of discount as a tax credit should be construed. Following other cases on this issue, the term cost is the amount of the 20% discount extended by a private establishment to senior citizens. Mercury Drug Corporation vs. Commissioner of Internal Revenue, G.R. No. 164050; July 20, 2011 .

70

Taxation Law Review

OOKLET ON TAXATION LAW REVIEW


~~COMMITTEE~~
The Professor By: Cayaban, Iva Freyritz House Rules ; Dos and Donts ; Tips ; Suggested Reading Materials By: Calvan, Myrtle Cayaban, Iva Freyritz Santos, Hanzel Samplex Collection of Taxation Law of Atty. Anthony Dy By: Antonio, Regatta Marie Cachapero, Oliver PPayumo, Margielyn Quilates, Donelle Quinto, Ramiila Santos, Hanzel Zulueta, Isabel Assuming You re Correct : The Recit Questions By: Antonio, Regatta Marie Blasco, Leana Marie Cachapero, Oliver Calingasan, Charlene Calvan, Myrtle Cardino, Gian Carlo Casibang, Ruben Castillo, Beverly Cayaban, Iva Freyritz Erika Lambino, Kaye Coleen Madridijo, Marlon Panganiban, Victoria Payumo, Margielyn Quilates, Donelle Quinto, Ramiila Revilla, Rodrigo Sampaga, Genelou Sandoval, Camhella

Taxation Law Review


Sulit, Dx Taguba, Jezreel Caridad Zulueta, Isabel The 2011 Tax Case Doctrines By: Cardino, Gian Carlo Galvez, Jerico Angelo The Lay out, Collation and Documentary By: Cayaba, Iva Freyritz Quinto, Ramiila Santos, Hanzel

Submitted on: March 29, 2012 San Beda Collge of Law, 2012 CLASS 4C Taxation Law Review by Atty. Anthony Dy