Taxation

2016 Bar Examinations

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

Lifeblood doctrine states that taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need. The phrase expresses the underlying basis of taxation which is
governmental necessity, for indeed, without taxation, a government can neither exist nor endure.
Taxation is a principal attribute of sovereignty. The exercise of the taxing power derives its source from
the very existence of the State whose social contract with its citizens obliges it to promote public interest
and the public good.

Necessity theory states that taxation is predicated upon necessity. It is a necessary burden to preserve
the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend
its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the
citizenry, and those which come within the States territory and facilities and protection which a
government is supposed to provide.

The power of taxation proceeds upon the theory that the existence of government is a necessity; that it
cannot continue without means to pay its expenses; and that for those means it has the right to compel
all citizens and property within its limits to contribute.

Benefits received theory states that the basis of taxation is found in the reciprocal duties of protection
and support between the State and its inhabitants. The State receives taxes that it may be enabled to
carry its mandates into effect and perform the functions of government and the citizen pays the portion
of taxes demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits
of an organized society.

Symbiotic Relationship Doctrine involves the power of the State to demand and receive taxes based on
the reciprocal duties of support and protection between the State and its citizen. 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.

Special benefits to taxpayers are not required. A person cannot object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out arising from the tax. (Lorenzo v. Posadas,
64 Phil. 353)

II

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

1. Exclusive appellate jurisdiction to review by appeal (CTA en Banc)

a. Decisions of the Commissioner on Internal Revenue in cases involving:

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i. Disputed assessments;

Note: Ordinary courts have jurisdiction over undisputed assessments.

ii. Refunds of internal revenue taxes, fees or other charges and penalties imposed thereto;
iii. Other matters arising under NIRC or other laws administered by the BIR.

b. Inaction by the Commissioner of Internal Revenue in cases involving:

i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees or other charges and penalties imposed thereto;
iii. Other matters arising under NIRC or other laws administered by the BIR, where the NIRC provides a
specific period for action, in which case the inaction shall be deemed a denial.

c. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction.

d. Decisions of the Commissioner of Customs in cases involving:

i. Liability for customs Duties, fees or other money charges;
ii. Seizure, detention or release of property affected;
iii. Fines, forfeitures or other penalties in relation thereto;
iv. Other matters arising under Customs Law or other laws administered by the Bureau of Customs

e. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over
cases involving the assessment and taxation of real property originally decided by the provincial or city
board of assessment appeals;

f. Decisions of the Secretary of Finance on custom cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of
the Tariff and Customs Code;

g. Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity
or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Sections 301 and 302, respectively of the Tariff and
Customs Code, and safeguard measures under RA 8800, where either party may appeal the decision to
impose or not to impose said duties.

2. Exclusive appellate jurisdiction over criminal offenses (CTA -------- )

i. Over appeals from the judgments, resolutions or orders of the RTC in tax cases originally decide by
them, in their respective territorial jurisdiction.
ii. Over petitions for review of the judgments, resolutions or orders of the RTC in the exercise of their
appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

3. Exclusive appellate jurisdiction over tax collection cases (CTA------ Division)

i. Over appeals from the judgments, resolutions or orders of the RTC; in tax collection cases originally
decided by them, in their respective territorial jurisdiction.
ii. Over petitions for review of the judgments, resolutions or orders of the RTCs in the exercise of their
appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

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Exclusive Appellate Jurisdiction (CTA Division)
(1) Decisions and Inaction of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
(a) Inaction of the Commissioner shall be deemed a denial in which the taxpayer may appeal.
(b) Inaction does not necessarily constitute a formal decision and the taxpayer may opt to await the final
decision of the Commissioner by constitute a formal decision and the taxpayer may opt to await the final
decision of the Commissioner beyond the 180 days and may appeal such final decision.
(c) For claim for refund, the taxpayer must file a petition for review with the CTA prior to the expiration
of the two year prescriptive period.

(2) Decisions, orders or resolutions of the RTC in local tax cases and in tax collection cases originally
decided or resolved by them in their ORIGINAL jurisdiction.

(3) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property affected, fines, forfeitures or
other penalties in relation thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;

(4) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of
the Tariff and Customs Code;

(5) Decisions of the Secretary of Trade and Industry, in the case of non-agricultural product, commodity
or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No.
8800, where either party may appeal the decision to impose or not to impose said duties. (Sec. 7, RA No.
1125 as amended)

Exclusive Appellate Jurisdiction (CTA en Banc)

(1) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the
exercise of its exclusive appellate jurisdiction over:
(a) Cases arising from administrative agencies
Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and
Industry, Department of Agriculture;
(b) Local tax cases decided by the Regional Trial Courts in the exercise of their original
jurisdiction; and
(c) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction
involving final and executory assessments for taxes, fees, charges and penalties, where the principal
amount of taxes and penalties claimed is less than one million pesos;

(2) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases and in tax collection
cases decided or resolved by them in the exercise of their APPELLATE jurisdiction;

(3) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in

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Division in the exercise of its exclusive original jurisdiction over tax collection cases;

(4) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally decided by the
provincial or city board of assessment appeals;

Exclusive appellate jurisdiction in criminal cases (CTA Division)

(1) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases
originally decided by them, in their respected territorial jurisdiction.
(2) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts
in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

Exclusive appellate jurisdiction in criminal cases (CTA En Banc)

(1) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in
Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses
arising from violations of the National Internal Revenue Code or the Tariff and Customs Code
and other laws administered by the Bureau of Internal Revenue or Bureau of Customs;
(2) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in
Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the
preceding subparagraph; and
(3) Decisions, resolutions or orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over criminal offenses mentioned in subparagraph (f).

III

Rakham operates the lending company that made a loan to Alfonso in the amount of Pl20,000.00
subject of a promissory note which is due within one (1) year from the note's issuance. Three years
after the loan became due and upon information that Alfonso is nowhere to be found, Rakham asks
you for advice on how to treat the obligation as "bad debt." Discuss the requisites for deductibility of
a "bad debt?" (5%)

For debts to be considered as worthless, and thereby qualify as bad debts making them deductible, the
taxpayer should show that:

1. The debts are Uncollectible even in the future despite diligent effort exerted by the taxpayer;
Note: To prove that the taxpayer exerted diligent efforts to collect the debts:
a. Sending of statement of accounts;
b. Sending of collection letters;
c. Giving the account to a lawyer for collection; and
d. Filing a collection case in court.

2. Existing indebtedness Subsisting due to the taxpayer which must be valid and legally demandable;

3. Connected with the taxpayers Trade, business or practice of profession;

4. Actually Charged off in the books of accounts of the taxpayer as of the end of the taxable year;

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5. Actually Ascertained to be worthless and uncollectible as of the end of the taxable year; and

Note: In lieu of requisite No. 5, the BSP, thru its Monetary Board, shall approve the writing off of said
indebtedness from the banks books of accounts at the end of the taxable year.

In no case may a receivable from an insurance or surety company be written off from the taxpayers
books and claimed as bad debts deduction unless such company has been declared closed due to
insolvency or for any such similar reason by the Insurance Commissioner.

6. Must not be sustained in a transaction entered into between Related parties.

IV

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

a. The Philippine Constitution provides for the power to tax of the LGU, to wit:

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. (Section 5 Art. X)

b. Congress delegated the power to tax to the LGU with the passage of the Local Government Code
which provides the same scope of taxing powers between the province and the city:

Section 135. Tax on Transfer of Real Property Ownership.

(a) The province may impose a tax on the sale, donation, barter, or on any other mode of transferring
ownership or title of real property at the rate of not more than fifty percent (50%) of the one percent
(1%) of the total consideration involved in the acquisition of the property or of the fair market value in
case the monetary consideration involved in the transfer is not substantial, whichever is higher. The sale,
transfer or other disposition of real property pursuant to R.A. No. 6657 shall be exempt from this tax.

Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city, may levy the
taxes, fees, and charges which the province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and independent component cities shall
accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.

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 V

Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of
Nigeria. Its commercial airplanes do not operate within Philippine territory, or service passengers
embarking from Philippine airports. The firm is represented in the Philippines by its general agent,
Narotel.

SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside the
Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to
Pl0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at
the rate of 30% on its taxable income, finding that SAA's airline ticket sales constituted income derived
from sources within the Philippines.

SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as
income derived exclusively from sources outside the Philippines since SAA only serviced passengers
outside Philippine territory. It, thus, asserted that the imposition of such income taxes violated the
principle of territoriality in taxation.

Is the theory of SAA tenable? Explain. (5%)

No.

In CIR vs British Overseas Airways Corporation (BOAC), which was decided under similar factual
circumstances, the Supreme Court ruled that off-line air carriers having general sales agents in the
Philippines are engaged in or doing business in the Philippines and that their income from sales of
passage documents here is income from within the Philippines. Thus, it was held that the off-line air
carrier is liable for the 32% tax on its taxable income.

(cited in SOUTH AFRICAN AIRWAYS, , v. COMMISSIONER OF INTERNAL REVENUE,)

VI

Mapagbigay Corporation grants all its employees (rank and file, supervisors, and managers) 5%
discount of the purchase price of its products. During an audit investigation, the BIR assessed the
company the corresponding tax on the amount equivalent to the courtesy discount received by all the
employees, contending that the courtesy discount is considered as additional compensation for the
rank and file employees and additional fringe benefit for the supervisors and managers. In its defense,
the company argues that the discount given to the rank and file employees is a de minimis benefit and
not subject to tax. As to its managerial employees, it contends that the discount is nothing more than
a privilege and its availment is restricted.

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

Yes.

The Revenue Regulations No. 5-2011 enumerated the de minimis benefit. It categorically provides that
all other benefits given by employers which are not included in the enumeration shall not be

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considered as "de minimis" benefits, and hence, shall be subject to income tax as well as
withholding tax on compensation income.

The courtesy discount provided by the employer is not among the enumeration provided by the
regulation. Thus it is subject to tax.

VII

Philippine National Railways (PNR) operates the rail transport of passengers and goods by providing
train stations and freight customer facilities from Tutuban, Manila to the Bicol Province. As the
operator of the railroad transit, PNR administers the land, improvements and equipment within its
main station in Tutuban, Manila.

Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax exemption
privileges of government-owned and controlled corporations upon the effectivity of the Code in 1992,
the City Government of Manila issued Final Notices of Real Estate Tax Deficiency in the amount of
P624,000,000.00 for the taxable years 2006 to 2010. On the other hand, PNR, seeking refuge under the
principle that the government cannot tax itself, insisted that the PNR lands and buildings are owned
by the Republic.

Is the PNR exempt from real property tax? Explain your answer. (5%)

(PNR as government instrumentality)

Case similar to MIAA vs. CA (where MIAA is considered as government instrumentality)

Yes.

The Local Government Code provides for limitations of the power to tax of the LGUs. The taxing power of
the LGUs does not extend to the levy of the taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities.
In the case at hand, PNR is not a government-owned and controlled corporation but a government
instrumentality of the National Government by virtue of its charter. PNR is a government instrumentality
vested with corporate powers to perform efficiently its governmental functions. Thus, it cannot be taxed
by the city of government of Manila. Consequently, PNRs real properties are exempt from real property
tax.

The LGC categorically exempts from real property tax real property owned by the Republic of the
Philippines or any of its political subdivisions. The real properties owned by the Republic are titled either
in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. Such real properties remain owned by the Republic and continue to be exempt from real
estate tax. In the case of PNR, it acts as trustee of the Republic.

Alternate answer:

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does not

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result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person." PNR, as a government instrumentality, is
not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume that
the Republic has granted to PNR the beneficial use of real property, such fact does not make these real
properties subject to real estate tax.

NB: In the case MCIAA vs MARCUS, MCIAA is considered a GOCC and therefore not exempt from real
property tax. This is an earlier case. Reason for non-exemption: there is explicit withdrawal of tax
exemption privileges to GOCCs, except local water districts, cooperatives duly registered under R.A.
6938, non-stock and non-profit hospitals and educational institutions under the LGC.

VIII

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

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

No. the assignment is not considered as a gift subject to gift tax.

The assignment is merely a continuation and confirmation of title in favor of the trustor, the ultimate
beneficiary of the shares. Furthermore, there is lack of donative intent which is one of the requisites for
a valid donation. Thus, it is not a gift subject to tax.

IX

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

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply to the CIR for the issuance of a
tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against output tax.

The 30-day period of appeal to the CTA need not necessarily fall within the two-year prescriptive period,
as long as the administrative claim before the CIR is filed within the two-year prescriptive period. This is
because Sec. 112 (D) of the 1997 Tax Code mandates that a taxpayer can file the judicial claim: (1) only
within thirty days after the Commissioner partially or fully denies the claim within the 120-day period, or
(2) only within thirty days from the expiration of the 120-day period if the Commissioner does not act
within the 120-day period (CIR v. San Roque Power Corporation, G.R. Nos. 187485, 196113, 197156,
February 12, 2013

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Outline of the procedure:
1. A VAT-registered person, whose sales are zero-rated or effectively zero-rated (Sec. 112 [A])

2. A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes
paid on capital goods imported or locally purchased, to the extent that such input taxes have not been
applied against output taxes (Sec. 112 [B]).

The claim, which must be in writing, for both cases, must be filed within 2 years after the close of the
taxable quarter when the sales were made apply for:
1. The issuance of a tax credit certificate;
2. Refund of creditable input tax due or paid attributable to such sales. (Ibid.)

In proper cases, the Commissioner may grant TCC/ refund for creditable input taxes within 120 days from
the day of submission of the complete documents in support of the application filed.

The taxpayer may appeal the full or partial denial of the claim to the Court of Tax Appeal (CTA) within 30
days from the receipt of said denial, otherwise the decision shall become final. The taxpayer may also
appeal to the CTA within 30 days after the lapsed of 120 days from the submission of the complete
documents if no action has been taken by the Commissioner.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the
sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed
within two years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly puts it, albeit
it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from the close of
the taxable quarter when the sales were made and not from the time the input VAT was paid nor from
the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year
after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the
pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it may, and
given that the last creditable input VAT due for the period covering the progress billing of September 6,
1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input
VAT refund or tax credit for said quarter prescribed two years after September 30, 1996 or, to be precise,
on September 30, 1998. Consequently, MPCs claim for refund or tax credit filed on December 10, 1999
had already prescribed.

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission
of the complete documents in support of the application [for tax refund/credit]," within which to grant
or deny the claim. In case of full or partial denial by the CIR, the taxpayers recourse is to file an appeal
before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day

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period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to
appeal the inaction of the CIR to CTA within 30 days.

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

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner wrongfully collected without
authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid.

(Period to file an administrative claim before the CIR and judicial claim with the CTA must fall within the
2 year prescriptive period.)
X

Congress issued a law allowing a 20% discount on the purchases of senior citizens from, among others,
recreation centers. This 20% discount can then be used by the sellers as a "tax credit." At the initiative
of BIR, however, Republic Act No. (RA) 9257 was enacted amending the treatment of the 20% discount
as a "tax deduction." Equity Cinema filed a petition with the RTC claiming that RA 9257 is
unconstitutional as it forcibly deprives sellers a part of the price without just compensation.

[a] What is the effect of converting the 20% discount from a "tax credit" to a "tax deduction"? (2.5%)

TAX CREDIT TAX DEDUCTION

Subtracted from Tax due
The taxpayers tax liability peso for peso
Taxes are deductible from the Phil. Income tax
itself
Effect: Reduces Philippine income tax liability
Sources: Only foreign income taxes may be claimed
as credits against Philippine income tax.
Income before tax Reduces
Income upon which tax liability is computed
Taxes are deductible from gross income in
computing the taxable income
Effect: Reduces taxable income upon which the tax
liability is calculated

Tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the government of the
amount of discounts such establishment has granted to a senior citizen. The establishment recovers the

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full amount of discount given to a senior citizen and hence, the government shoulders 100% of the
discounts granted.

It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover this
tax payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is, therefore,
inapplicable since no tax payments have previously occurred.

Under the tax deduction scheme, the establishment concerned is allowed to deduct from gross income,
in computing for its tax liability, the amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount equivalent to the marginal tax rate the said
establishment is liable to pay the government. This will be an amount equivalent to 32% of the twenty
percent (20%) discounts so granted. The establishment shoulders the remaining portion of the granted
discounts.

It may be necessary to note that while the burden on [the] government is slightly diminished in terms of
its percentage share on the discounts granted to senior citizens, the number of potential establishments
that may claim tax deductions, have however, been broadened. Aside from the establishments that may
claim tax credits under the old law, more establishments were added under the new law such as:
establishments providing medical and dental services, diagnostic and laboratory services, including
professional fees of attending doctors in all private hospitals and medical facilities, operators of domestic
air and sea transport services, public railways and skyways and bus transport services.

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

I will declare the law as constitutional. It is a legitimate exercise of police power which, similar to the
power of eminent domain, has general welfare for its object. Police power is not capable of an exact
definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet
all exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as the most
essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It
is the power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth,
and of the subjects of the same.

Police power as an attribute to promote the common good would be diluted considerably if on the mere
plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in view of the presumption of validity which
every law has in its favor. (CARLOS SUPERDRUG CORP. vs. DSWD G.R. No. 166494)

XI

Soaring Eagle paid its excise tax liabilities with Tax Credit Certificates (TCCs) which it purchased
through the One Stop Shop Inter-Agency Tax Credit Center (Center) of the Department of Finance. The
Center is a composite body of the DOF, BIR, BOC and the BOI. The TCCs were accepted by the BIR as

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payments. A year after, the BIR demanded the payment of alleged deficiency excise taxes on the
ground that Soaring Eagle is not a qualified transferee of the TCCs it purchased from other BOI-
registered companies. The BIR argued that the TCCs are subject to post-audit as a suspensive
condition. On the other hand, Soaring Eagle countered that it is a buyer in good faith and for value
who merely relied on the Center's representation of the genuineness and validity of the TCCs. If it is
ordered to pay the deficiency, Soaring Eagle claims the same is confiscatory and a violation of due
process. Is the assessment against Soaring Eagle valid? Explain. (5%)

(CIR vs. PETRON CORPORATION, G. R. No. 185568)

No. The assessment is not valid. The Soaring Eagle validly paid its tax liabilities with TCCs which it
purchased through the one Stop Inter-Agency Tax Credit Center of the Department of Finance.

On the argument that Soaring Eagle is not a qualified transferee

Tax Credit Certificate means a certification, duly issued to the taxpayer named therein, by the
Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance
with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally
entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his
internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may
otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be
prescribed by the provisions of these Regulations.

The processing of a TCC is entrusted to a specialized agency called the One-Stop-Shop Inter-Agency Tax
Credit and Duty Drawback Center (Center), created on 07 February 1992 under Administrative Order
(A.O.) No. 226. Its purpose is to expedite the processing and approval of tax credits and duty drawbacks.
The Center is composed of a representative from the DOF as its chairperson; and the members thereof
are representatives of the Bureau of Investment (BOI), Bureau of Customs (BOC) and Bureau of Internal
Revenue (BIR), who are tasked to process the TCC and approve its application as payment of an assignees
tax liability.

RR 5-2000 prescribes the regulations governing the manner of issuance of TCCs and the conditions for
their use, revalidation and transfer. Under the said regulation, a TCC may be used by the grantee or its
assignee in the payment of its direct internal revenue tax liability. It may be transferred in favor of an
assignee subject to the following conditions: 1) the TCC transfer must be with prior approval of the
Commissioner or the duly authorized representative; 2) the transfer of a TCC should be limited to one
transfer only; and 3) the transferee shall strictly use the TCC for the payment of the assignees direct
internal revenue tax liability and shall not be convertible to cash. A TCC is valid only for 10 years subject
to the following rules: (1) it must be utilized within five (5) years from the date of issue; and (2) it must
be revalidated thereafter or be otherwise considered invalid.

A TCC may be assigned through a Deed of Assignment, which the assignee submits to the Center for its
approval. Upon approval of the deed, the Center will issue a DOF Tax Debit Memo (DOF-TDM), which will
be utilized by the assignee to pay the latters tax liabilities for a specified period. Upon surrender of the
TCC and the DOF-TDM, the corresponding Authority to Accept Payment of Excise Taxes (ATAPET) will be
issued by the BIR Collection Program Division and will be submitted to the issuing office of the BIR for
acceptance by the Assistant Commissioner of Collection Service. This act of the BIR signifies its
acceptance of the TCC as payment of the assignees excise taxes.

12
In addition, Shell and Petron cases recognized an exception that holds the transferee/assignee liable if
proven to have been a party to the fraud or to have had knowledge of the fraudulent issuance of the
subject TCCs. The parties entered into a joint stipulation of facts stating that Petron did not participate in
the procurement or issuance of those TCCs.

On the argument that TCCs are subject to post-audit as a suspensive condition.

The post-audit report does not have the effect of a suspensive condition that would determine the
validity of the TCCs. In numerous cases, the Supreme Court categorically held that TCCs are valid and
effective from their issuance and are not subject to a post-audit as a suspensive condition for their
validity. Thus, Soaring Eagle has the right to rely on the validity and effectivity of the TCCs that were
assigned to it. In finally determining their effectivity in the settlement of respondents excise tax
liabilities, the validity of those TCCs should not depend on the results of the DOFs post-audit findings.

Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the
Civil Code. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code,
Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs
Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned
laws does the post-audit become necessary for the validity or effectivity of the TCCs. Nowhere in the
aforementioned laws is it provided that a TCC is issued subject to a suspensive condition.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very
purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored
by the government as payment for taxes. No investor would take the risk of utilizing TCCs if these were
subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise
of said post-audit.

XII

The Philippine-British Association, Inc. (Association) is a non-stock, non-profit organization which

owns the St. Michael's Hospital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC classifies all
lands, buildings and other improvements thereon actually, directly, and exclusively used for hospitals
as "special." A special classification prescribes a lower assessment than a commercial classification.

Within the premises of the Hospital, the Association constructed the St. Michael's Medical Arts Center
(Center) which will house medical practitioners who will lease the spaces therein for their clinics at
prescribed rental rates. The doctors who treat the patients confined in the Hospital are accredited by
the Association.

The City Assessor classified the Center as "commercial" instead of "special" on the ground that the
Hospital owner gets income from the lease of its spaces to doctors who also entertain out-patients. Is
the City Assessor correct in classifying the Center as "commercial?" Explain. (5%)

(City Assessor of Cebu City vs. Association of Benevola De Cebu, Inc. G.r. No. 152904)

No. The City Assessor is not correct in classifying the Center as commercial. In the case of City Assessor
of Cebu City vs. Association of Benevola De Cebu, Inc which has a similar milieu in this case, the Court

13
upheld that the Medical Arts Center is an integral part of the hospital. It is undisputed that the doctors
and medical specialists holding clinics in St. Michaels Medical Arts Center are those duly accredited by
the Hospital, that is, they are consultants of the hospitals and the ones who can treat the Hospitals
patients confined in it. This fact alone takes away the center from being categorized as commercial.

The physicians holding offices or clinics in Center, duly appointed or accredited by Hospital, precisely
fulfill and carry out their roles in the hospitals services for its patients through the Center. The fact that
they are holding office in a separate building, like at Center, does not take away the essence and nature
of their services vis--vis the over-all operation of the hospital and the benefits to the hospitals patients.
Given what the law requires, it is clear that Center is an integral part of Hospital.

These accredited physicians normally hold offices within the premises of the hospital; in which case
there is no question as to the conduct of their business in the ambit of diagnosis, treatment and/or
confinement of patients. Verily, their transfer to a more spacious and, perhaps, convenient place and
location for the benefit of the hospitals patients does not remove them from being an integral part of
the overall operation of the hospital.

Verily, being an integral part of Hospital, the Center should be under the same special assessment level
of as that of the former.

The Local Government Code classifies real property for assessment purposes, to wit:

SEC. 215. Classes of Real Property for Assessment Purposes.For purposes of assessment, real property
shall be classified as residential, agricultural, commercial, industrial, mineral, timberland or special.

SEC. 216. Special Classes of Real Property.All lands, buildings, and other improvements thereon
actually, directly and exclusively used for hospitals, cultural or scientific purposes, and those owned and
used by local water districts, and government-owned or controlled corporations rendering essential
public services in the supply and distribution of water and/or generation and transmission of electric
power shall be classified as special.

Thus, applying the above provisos in line with City Tax Ordinance, the 10% special assessment should be
imposed for the St. Michaels Medical Art Center building which should be classified as "special."

XIII

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

(G.R. No. L-31092 CIR vs. JOHN GOTAMCO & SONS, INC. and CTA)

14
No.

Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay
them; while indirect taxes are those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone else. The contractor's tax is of course
payable by the contractor but in the last analysis it is the owner of the building that shoulders the
burden of the tax because the same is shifted by the contractor to the owner as a matter of self-
preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is
payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO
that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no
bearing upon the World Health Organization.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which,
although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid
by it. This is made clear in Section 12 of the Host Agreement which provides:

While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from
excise duties, and from taxes on the sale of movable and immovable property which form part of the
price to be paid, nevertheless, when the Organization is making important purchases for official use of
property on which such duties and taxes have been charged or are chargeable the Government of the
Republic of the Philippines shall make appropriate administrative arrangements for the remission or
return of the amount of duty or tax.
The above-quoted provision, although referring only to purchases made by the WHO, elucidates the
clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor,
Gotamco, from any taxes in connection with the construction of the WHO office building. The 3%
contractor's tax would be within this category and should be viewed as a form of an "indirect tax" On the
Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in
the construction cost of the building.

XIV

Lucky V Corporation (Lucky) owns a IO-storey building on a 2,000 square meter lot in the City of
Makati. It sold the lot and building to Rainier for P80 million. One month after, Rainier sold the lot and
building to Healthy Smoke Company (HSC) for P200 million. Lucky filed its annual tax return and
declared its gain from the sale of the lot and building in the amount of P750,000.00.

An investigation conducted by the BIR revealed that two months prior to the sale of the properties to
Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was
debited by HSC and reflected in its trial balance as "other inv. - Lucky Bldg." The month after, another
P40 million was reflected in HSC's trial balance as "other inv. - Lucky Bldg." The BIR concluded that
there is tax evasion since the real buyer of the properties of Lucky is HSC and not Rainier. It issued an
assessment for deficiency income tax in the amount of P79 million against Lucky. Lucky argues that it
resorted to tax avoidance or a tax saving device, which is allowed by the NIRC and BIR rules since it
paid the correct taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the

15
prescribed taxes arising from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on Lucky?
Explain. (5%)

(Commissioner v. Benigno Toda Jr., GR No. 147188, Sept. 14, 2004)

Yes.

The scheme resorted to by Lucky in making it appear that there were two sales of the subject properties,
i.e., from Lucky to Rainier, and then from Rainier to HSC cannot be considered a legitimate tax planning
(one way of tax avoidance). Such scheme is tainted with fraud.

Tax evasion 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. Tax evasion connotes the integration of three
factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of
mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and
(3) a course of action or failure of action which is unlawful.

All these factors are present in the instant case. It is significant to note that 2 months prior to the sale to
Rainier, Lucky received P40 million from HSC, and not from Rainier. That P40 million was debited by HSC
and reflected in its trial balance as "other inv. - Lucky Bldg." The month after, another P40 million was
reflected in HSC's trial balance as "other inv. - Lucky Bldg." This would show that the real buyer of the
properties was HSC, and not the intermediary Rainier.
In the case, it is obvious that the objective of the sale to Rainier was to reduce the amount of tax to be
paid especially that the transfer from him to HSC would then subject the income to only 5% individual
capital gains tax and not the 35% corporate income tax.

Here, it is obvious that the objective of the sale to Rainier was to reduce the amount of tax to be paid
especially that the transfer from him to HSC would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Rainier sole purpose of acquiring and transferring title
of the subject properties on the same day was to create a tax shelter. Rainier never controlled the
property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a
tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of
the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income
tax liability.

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our
tax laws. Hence, the sale to Rainier should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by Lucky to HSC.

XV

Peter is the Vice-President for Sales of Golden Dragon Realty Conglomerate, Inc. (Golden Dragon). A
group of five (5) foreign investors visited the country for possible investment in the condominium
units and subdivision lots of Golden Dragon. After a tour of the properties for sale, the investors were
wined and dined by Peter at the posh Conrad's Hotel at the cost of Pl 50,000.00. Afterward, the
investors were brought to a party in a videoke club which cost the company P200,000.00 for food and

16
drinks, and the amount of P80,000.00 as tips for business promotion officers. Expenses at Conrad's
Hotel and the videoke club were receipted and submitted to support the deduction for representation
and entertainment expenses. Decide if all the representation and entertainment expenses claimed by
Golden Dragon are deductible. Explain. (5%)

Yes. The representation and entertainment expenses claimed by Golden Dragon are deductible.

Representation expenses refer to expenses incurred by a taxpayer in connection with the conduct of his
trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or
meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert,
play, sporting event and similar events or places.

Entertainment facilities shall refer to a yacht, vacation home or condominium; and any other similar item
of real or personal property used by the taxpayer primarily for the entertainment, amusement, or
recreation of guests or employees. (Sec. 2, RR 10-2002)

To avail of this deduction the following requisites must concur:

1. Paid or incurred during the taxable year

2. Directly connected to the development, management, and operation of the business, trade or
profession of the taxpayer; or directly related to or in furtherance of the conduct of its trade, business or
exercise of a profession.
3. Not contrary to law, morals, good customs, public policy or public order.
4. Must not constitute as a bribe, kickback, or other similar payment;
5. Duly substantiated by adequate proof or receipt.
6. Withholding tax, if any, should have withheld therefrom and paid.

All these requisites are complied with for the availment of representation and entertainment expenses.

XVI

Amor Powers, Inc. (API) is a domestic corporation registered with the BIR as a value-added taxpayer.
API incurred excess input VAT in the amount of P500,000,000.00 on August 3, 2008. Hence, it filed with
the BIR an administrative claim for the refund or credit of these input taxes on August 15, 2010.
Without waiting for the CIR to act on its claim, API filed a Petition for Review with the CTA on
September 15, 2010 before the lapse of two years after the close of the taxable quarter concerned.

In its Comment on the Petition, the CIR argues that API's Petition should be dismissed as it was filed
before the lapse of the 120-day period given to the CIR by Sec. 112(D) of the NIRC, which became
effective on January 1, 1998. For the CIR, the 120- day period is mandatory and jurisdictional so that
any suit filed before its expiration is premature and, therefore, dismissible.

API, on the other hand, invokes BIR Ruling No. DA-489-03 issued by the CIR on December 10, 2003 in
answer to a query posed by the Department of Finance regarding the propriety of the actions taken by
Lazi Bay Resources Development, Inc., which filed an administrative claim for refund with the CIR and,
before the lapse of the 120-day period from its filing, filed a judicial claim with the CTA. BIR Ruling No.
DA-489-03 stated that the taxpayer-claimant need not wait for the lapse of the 120-day period before
it could seek judicial relief with the CTA.

17
Will API's Petition for Review prosper? Decide with reasons. (5%)

Yes. The petition is meritorious.

BIR Ruling No. DA-489-03 stated that the taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of a petition for review. This rule, however,
was nullified in CIR vs. Aichi, promulgated on October 6, 2010. Aichi emphasized that the failure to await
the decision of the Commissioner or the lapse of 120-day period prescribed in Section 112(C) amounted
to a premature filing.

To elucidate on the seemingly conflicting doctrines, San Roque clarified, once and for all, that BIR Ruling
No. DA-489-03 was a general interpretative rule. Thus, all taxpayers can rely on the said BIR ruling from
the time of its issuance on December 10, 2003 up to its reversal by this Court in Aichi on October 6,
2010, where it was held that the 120+30-day periods are mandatory and jurisdictional. In other words,
the Aichi ruling was prospective in application.

In the present case, API can benefit from BIR Ruling No. DA-489-03. It filed its judicial claim for VAT credit
certificate on December 29, 2009, well within the interim period from December 10, 2003 to October 6,
2010, so there was no need to wait for the lapse of 120 days prescribed in Section 112 (c) of the NIRC.

San Roque, held that BIR Ruling No. DA-489-03 was a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits. Thus, it applies to all taxpayers alike, and not only to one particular
taxpayer.

Indeed, BIR Ruling No. DA-489-03 is a general interpretative law and it applies to each and every
taxpayer. To subscribe to the contention of the CIR would alter the Courts ruling in San Roque. It will
lead to an unreasonable classification of the beneficiaries of BIR Ruling No. DA-489-03 and further
complicate the doctrine. API cannot be faulted for not specifically invoking BIR Ruling No. DA-489-03 as
the rules for its application were not definite until the San Roque case was promulgated.

In the furtherance of the doctrinal pronouncements in San Roque, the better approach would be to
apply BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claim for VAT refund within the
period of exception from December 10, 2003 to October 6, 2010.

XVII

The requisites for a valid waiver of the three-year (3-year) prescriptive period for the BIR to assess
taxes due in the taxable year are prescribed by Revenue Memorandum Order (RMO) No. 20-90:

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

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case
of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is
delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.

18
3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue official authorized by him must make sure
that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly
authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before
the expiration of the period of prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the
case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact
of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the
taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.

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

VVV claims that the waiver is void due to non-compliance with RMO 20-90. Hence, the period for
assessment had already prescribed. Moreover, since the assessment involves P2 million, the waiver
should have been signed by the CIR and instead of a mere RDO. On the other hand, the BIR contends
that the requirements of RMO No. 20-90 are merely directory; that the execution of the waiver by VVV
was a renunciation of its right to invoke prescription and that the government cannot be estopped by
the mistakes committed by its revenue officers. Is VVV liable? Explain. (5%)

(Philippine Journalists, Inc. vs. CIR G.R. No. 162852)

No. VVV is not liable as there was no valid waiver of the statute of limitation.

The NIRC, under Sections 203 and 222, provides for a statute of limitations on the assessment and
collection of internal revenue taxes in order to safeguard the interest of the taxpayer against
unreasonable investigation. Unreasonable investigation contemplates cases where the period for
assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer
be subjected to further investigation for taxes after the expiration of a reasonable period of time.

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act promptly
in the making of assessment, and to citizens because after the lapse of the period of prescription citizens
would have a feeling of security against unscrupulous tax agents who will always find an excuse to
inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every
opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would
furthermore be under obligation to always keep their books and keep them open for inspection subject
to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be

19
interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which recommend the approval of the law.

RMO No. 20-90 implements these provisions of the NIRC relating to the period of prescription for the
assessment and collection of taxes. A cursory reading of the Order supports petitioners argument that
the RMO must be strictly followed.

A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers
right to security against prolonged and unscrupulous investigations and must therefore be carefully and
strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the
defense of prescription as erroneously held by the Court of Appeals. It is an agreement between the
taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a
date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription
unequivocally particularly where the language of the document is equivocal. For the purpose of
safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law
provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial
measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions
to the law on prescription should perforce be strictly construed.

The Waiver of Statute of Limitations is not valid and binding because it does not conform with the
provisions of RMO No. 20-90. It did not specify a definite agreed date between the BIR and petitioner,
within which the former may assess and collect revenue taxes. Thus, petitioners waiver became
unlimited in time, violating Section 222(b) of the NIRC.

The waiver is also defective from the government side because it was signed only by a revenue district
officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a
unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the
period to a date certain. The conformity of the BIR must be made by either the Commissioner or the
Revenue District Officer. This case involves taxes amounting to more than One Million Pesos
(P1,000,000.00) and executed almost seven months before the expiration of the three-year prescription
period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR.

Finally, the records show that petitioner was not furnished a copy of the waiver. Under RMO No. 20-90,
the waiver must be executed in three copies with the second copy for the taxpayer. A waiver is not a
unilateral act but an agreement between the taxpayer and the BIR. There is compliance with the
provision of RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted by the BIR.
The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the
existence of the document but of the acceptance by the BIR and the perfection of the agreement.

The waiver document is incomplete and defective and thus the three-year prescriptive period was not
tolled or extended and continued to run. Consequently, the Assessment was invalid because it was
issued beyond the three (3) year period.

XVIII

Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire Philippine citizenship
under RA 9225. His mother left him a lot and building in Makati City and he wants to make use of it in
his trading business. Considering that he needs money for the business, he wants to sell his lot and

20
building and make use of the consideration. However, the lot has sentimental value and he wants to
reacquire it in the future. A friend of Henry told him of the "sale-leaseback transaction" commonly
used in the U.S., which is also used for tax reduction. Under said transaction, the lot owner sells his
property to a buyer on the condition that he leases it back from the buyer. At the same time, the
property owner is granted an option to repurchase the lot on or before an agreed date. Henry
approaches you as a tax lawyer for advice.

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

The sale-leaseback transaction carries potential tax benefits as the leasing costs are offset as an
operating expense.

The main tax advantage of a valid sale-leaseback is that rental payments under the lease are fully
deductible.

With such an arrangement, the seller-lessee secures capital, whilst retaining continued use over the
property, and the buyer-lessor, as owner, may receive tax benefits such as deductions on depreciation
and interest arising from loan indebtedness. The seller-lessee may also take deductions on rental
payments; these deductions generally outweigh the depreciation deductions the seller-lessee foregoes
in giving up ownership of the property.

XIX

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

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

(Not sure of my answer)

Yes. Janina is considered as a non-resident alien and as such is taxable from sources within the
Philippines.

Legal Basis:
2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or
Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. -
Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an
insurance or mutual fund company or from a regional operating headquarter of multinational company,
or the share of a nonresident alien individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable as a

21
corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof:

Provided, furthermore, That interest income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment certificate based on the remaining maturity
thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%

[b] Explain the concept of double taxation. (2.5%)

Double taxation means taxing twice for the same tax period the same thing or activity, when it should be
taxed but once, for the same purpose and with the same kind of character of tax.

Strict sense (Direct duplicate Taxation)

(1) the same property must be taxed twice when it should be taxed once;
(2) both taxes must be imposed on the same property or subject matter;
(3) for the same purpose;
(4) by the same State, Government, or taxing authority;
(5) within the same territory, jurisdiction or taxing district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.

Broad sense
There is double taxation in the broad sense or there is indirect duplicate taxation if any of the elements
for direct duplicate taxation is absent.
It extends to all cases in which there is a burden of two or more pecuniary impositions. For example, a
tax upon the same property imposed by two different states.

Double taxation, standing alone and not being forbidden by our fundamental law, is not a valid defense
against the legality of a tax measure (Pepsi Cola v. Mun. of Tanauan). But from it might emanate such
defenses against taxation as oppressiveness and inequality of the tax.

Constitutionality of double taxation

There is no constitutional prohibition against double taxation in the Philippines. It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated.
[Villanueva v. City of Iloilo (1968)]

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If the tax law follows the constitutional rule on uniformity, there can be no valid objection to taxing the
same income, business or property twice.[China Banking Corp. v. CA, G.R.No. 146749 (2003)]

Double taxation in its narrow sense is undoubtedly unconstitutional but that in the broader sense is not
necessarily so. (De Leon, citing 26 R.C.L 264- 265).Where double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity rule or the equal protection guarantee. (De Leon,
citing 84 C.J.S.138).

XX

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

(Qualify whether or not Patrick is a resident or a non-resident citizen. And if non-resident, whether his
residence is permanent or not.)

If he is a resident citizen then he is taxable on all income derived from sources within and without the
Philippines.

If he is a non-resident citizen then he is taxable only on income derived from sources within the
Philippines as a rule.

My humble answer:

Patrick would be considered as a non-resident citizen. He falls under the fourth definition of non-
resident citizen under the NIRC, to wit: a citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be 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, if Patrick decides to permanently reside in the Philippines, he is treated as a non-resident citizen
for the taxable year in which he arrives in the Philippines. In which case, he is taxable for income derived
within the country during the taxable year he arrived in the Philippines.

NB:
Some sources argue that dual citizens are not subject to income tax from sources abroad.

In accordance with current tax laws of the Philippines, all income derived by Filipino citizens from
sources abroad are not subject to income taxes.

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