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

T able of Contentss

The Professor ..............................................................................................2

Do’s ................................................................................................................3

Dont’s ............................................................................................................4

Tips................................................................................................................5

Samplex Collection of Taxation Law of Atty. Anthony Dy ..................9

Assumimg You’re Correct: The Recit Questions ..................................24

2011 Tax Case Doctrines ..........................................................................57

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 Taxation Law Review

T 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. Dy’s

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. Dy’s 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.

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 Taxation Law Review

D
o’s

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. You’ll never know what Atty. Dy will

ask you in your recit.

4.) Never take any topic for granted. Read religiously like there’s no tomorrow.

5.) Know your laws. Atty. Dy loves to correlate.

6.) Pray. Really hard. But syempre, study harder

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 Taxation Law Review

Don’t’s
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 you’re

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, don’t attempt to invent one

unless you’re willing to risk your former professor’s 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 didn’t.

6.) Do not ever make the mistake of having a class boycott. It’s going to be an

automatic 65 for you.

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 Taxation Law Review

T 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.

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 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 meeting. Atty. Dy’s 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>?”

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 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. Dy’s 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 test one’s 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, MCQ’s, and Essay. He gives 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.

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 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, that’s history for you.

You are most welcome.

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 Taxation Law Review

S 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
taxpayer’s 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 taxpayer’s 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 Donor’s tax and Value Added Tax.

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 Taxation Law Review

DONOR’S 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.

DONOR’S TAX – is a direct tax; VALUED ADDED TAX – is an indirect tax, it can
be passed to the buyer

DONOR’S 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 taxpayer’s 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.

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 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 Explanation/Basis

tax)
If the land is classified as a capital
asset:

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
1. FMV of the
asset (gross asset or as part of her gross income
expropriation P1M
income-ITR). subject to the graduated tax rate 5-
sale of land to
32%.
NAPOCOR
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

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 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
P50,000
2. Jueteng income ITR illegal/regardless of the source are
taxable.

Under section 32 B (1), the proceeds

3. Proceeds of life of life insurance policies paid to the
insurance policy heirs or beneficiaries upon the death
undertaken by of the insured, whether in a single
P100,000
her mother, Exclusion sum or otherwise. The proceeds
designated her as under the life insurance policy are
a revocable compensation for the loss or
beneficiary 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
4. Dividend from P20,000 Final Tax property dividends actually or
a local company (10%) 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
5. Dividend from corporation is subject to the
P30,000
an Off-shore real ITR graduated tax rate. However, the
estate company foreign income tax paid or withheld
on such dividend may be credited
against the Philippine income tax
due.

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)

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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.

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 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-the-
art library. Are they taxable income?

Taxability/ Tax consequences

Qualify if Non-profit, non-stock educational Proprietary Educational
institution Institution
Educational Not taxable Taxable
tuition fees
Under the 1987 Constitution, “All Under Section 27(B) of the
revenues and assets of non-stock, NIRC, proprietary educational
non-profit educational institutions and hospitals which
institutions used actually, are non-profit shall pay a tax of

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 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.)
School canteen Not Taxable Taxable
and university
bookstore Pursuant to Department of Under Section 27(B), it is subject
profits Finance Order 137-87, revenues to pay 10% of its taxable
derived from and assets used in income.
the operation of
cafeteria/canteens, dormitories, The normal corporate income
and bookstores are exempt from tax rate of 30% shall be imposed
taxation provided they are owned on the entire taxable income if
and operated by the educational the gross income from unrelated
institution as ancillary activities trade, business or other activity
and the same are located within exceeds fifty percent (50%) of
the school premises. 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.

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billboard Taxable/ Not Taxable Taxable

advertisement
Under the Department of Finance Same reason as above.
Order 145-85, it is subject to
internal revenue tax on income (The only constitutionally
from trade, business or other mandated tax exemption that it
activity, the conduct of which is may avail of is
not related to the exercise or the exemption from property
performance by such educational taxes of all its properties
institution of its educational actually, directly and exclusively
purposes or functions. used for educational
purposes.)
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 donor’s tax?

No. The donation is exempt from donor’s 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.

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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 donor’s 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 offshore-
banking units, non-resident aliens not engaged in trade or business)

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 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 taxpayer’s 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, vice-
president 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

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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 76-
A). 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.

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 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 10-
2008.)

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 donor’s
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 decedent’s 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

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 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 donor’s tax and if so what
circumstances should the donee comply with?
Yes. In order that donations shall be exempt from donor’s 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 donor’s 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:

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 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

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 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.

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A ssuming You’re 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

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 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.

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 Taxation Law Review

These contentions are without merit and a rehash of petitioner’s 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

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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
Congress’s 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 Congress’s
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

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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 Benefits-
Protection/ 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).

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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

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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

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 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, non-
payment 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 “Charitable 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

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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 taxpayer’s
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

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 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

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 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?

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 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:

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 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?

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 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

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 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

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 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.

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 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

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 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 Grace’s 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 donor’s tax to a stranger.

Q: What are the basic principles of an insurance contract?

Contract of adhesion, Aleatory contract, Contract of indemnity

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 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, non-
stock 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?

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 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 taxpayer’s 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
taxpayer’s gross income; and
p. The amount of interest deducted from gross income does not exceed
the limit set forth in the law. Thus, the taxpayer’s 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

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 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. There is an indebtedness
2. The indebtedness must be that of the taxpayer
3. The interest must be legally due
4. The interest must be stipulated in writing
5. The interest expense must have been paid or incurred during the taxable year
6. The indebtedness must be connected with the taxpayer’s 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
taxpayer’s gross income. However, to deal with the tax arbitrage, the

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 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. The loss must be that of the taxpayer

2. Actuall sustained and charged off during the taxable year
3. Evidenced by a close and completed transaction
4. Not claimed as a deduction for estate tax purposes (for individuals)
5. Not compensated for by insurance or other form of indemnity
6. 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

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 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, what’s 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?

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 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 Donor’s 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 donor’s tax?

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 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 donor’s 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.

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(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 it’s a leap year or not (RMC No. 48-90).

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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

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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?

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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

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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.

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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

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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 NEDA’s 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;

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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.

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2 011 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 non-
impairment 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

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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 PAGCOR’s 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
PAGCOR’s 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 PAGCOR’s 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

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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 therefore, 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
Cainta’s 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 Pasig’s and Cainta’s respective territorial

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jurisdictions. The resolution of this dispute would necessarily ascertain the extent and
reach of each local government’s 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 Micro-
Electronics 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
petitioner’s 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 Custom’s] ineptitude and gross negligence in
the safekeeping of respondent’s 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 respondent’s
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

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resolution. The Court granted petitioner taxpayer’s 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
taxpayer’s request for the issuance of a tax credit certificate for insufficiency of
evidence, it may no longer be included in petitioner taxpayer’s 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 arm’s length with another uncontrolled taxpayer.” Despite the broad
parameters provided, however, the CIR’s 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 taxpayer’s
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 CIR’s assertion that taxpayer had deducted substantial

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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 taxpayer’s shareholdings
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 taxpayer’s 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, 27-
89 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

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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 transferee. The taxpayer’s
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 taxpayer’s 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 taxpayer’s 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.

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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 allowed 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.

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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 zero-
rated 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 taxpayer’s VAT returns. Thus, an application for tax
refund or credit must be accompanied by copies of the taxpayer’s 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.

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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 PAGCOR’s exemption 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. PAGCOR’s charter, Presidential
Decree No. 1869, is a special law that grants it exemption from taxes. Moreover,
PAGCOR’s 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. PAGCOR’s 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 PAGCOR’s 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 VAT-
registered 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 taxpayer’s 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.”
Taxpayer’s 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.

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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 latter’s 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 the
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 user’s 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

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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 “user’s tax,” value-added
tax (VAT) on tollway operations cannot be a tax on tax. VAT is assessed against the
tollway operator’s 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

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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

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on the rule that “an admission or representation is rendered conclusive 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

B OOKLET ON TAXATION LAW REVIEW

~~COMMITTEE~~
The Professor
By: Cayaban, Iva Freyritz

House Rules ; Do’s and Dont’s ; 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