Taxation:
Phil. v. Mun. of
Taxation is the power by which the sovereign,
through
its law-making body, raises revenue to defray the
necessary expenses of 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
1. Primary or Revenue purpose – to raise
funds or
property to enable the State to promote the
general
welfare and protection of the people.
NATURE AND CHARACTERISTICS OF TAXATION
The nature of the State’s power to tax is two-fold.
It is
both an inherent and a legislative power (1996
Bar).
I. Inherent Attribute of Sovereignty
The power to tax is an attribute of sovereignty and
is
inherent in the State. It is a power emanating from
necessity because it imposes a necessary burden to
preserve the State's sovereignty (Phil. Guaranty
Co. v.
Commissioner, L-22074, April 30, 1965).
It is an essential and inherent attribute of
sovereignty,
belonging as a matter of right to every independent
government, without being expressly conferred by
the
people (Pepsi-Cola Bottling Company of the
Tanauan, Leyte, 69 SCRA 460).
It does not need constitutional conferment.
Constitutional provisions do not give rise to the
power to
tax but merely impose limitations on what
would
otherwise be an invincible power
Q: Why is the power to tax considered inherent
in a
sovereign State? (2003 Bar)
A: It is considered inherent in a sovereign State
because
it is a necessary attribute of sovereignty.
Without this
power no sovereign State can exist or endure. The
power
to tax proceeds upon the theory that the existence
of a
government is a necessity and this power is an
essential
and inherent attribute of sovereignty, belonging as
a
matter of right to every independent state or
government. No sovereign state can continue to
exist
without the means to pay its expenses; and that for
those
means, it has the right to compel all citizens and
property within its limits to contribute, hence, the
emergence of the power to tax
Q: Is the grant of the power of taxation
inherent for
both National and Local Government?
A: NO. It is inherent in the National Government
but not
in the Local Government Unit (LGU) since the latter
is
merely a State’s agency to carry out in detail the
objects
of the government. The LGU can only impose taxes
when
it is granted by the:
a. Constitution - e.g. LGU’s taxation power outside
autonomous region (Art. X, Sec. 5, 1987
Constitution)
b. Legislation by Congress - e.g. LGU’s taxation
power
within the autonomous region (Art. X, Sec. 20,
1987
Constitution)
Characteristics of Taxation [CUPS]
1. Comprehensive - It covers persons,
businesses,
activities, professions, rights and privileges.
2. Unlimited - It is so unlimited in force and
searching
in extent that courts scarcely venture to declare
that
it is subject to any restrictions, except those that
such rests in the discretion of the authority which
exercises it (Tio v. Videogram Regulatory
Board, G.R.
No. 75697, June 18, 1987).
3. Plenary - It is complete. Under NIRC, the BIR
may
avail of certain remedies to ensure the collection of
taxes.
Taxes, being the lifeblood of the government, that
should be collected without unnecessary
hindrance,
every precaution must be taken not to unduly
suppress it (Republic v. Caguioa, 536 SCRA
193
(2007)).
4. Supreme - It is supreme insofar as the
selection of
the subject of taxation is concerned, but it does not
mean that it is superior to the other inherent
powers
of the State.
Distinctions between the three inherent
powers of the State
Page 31
Similarities between taxation, eminent domain
and
police power
1. They are inherent powers of the State.
2. All are necessary attributes of the sovereign.
3. They exist independently of the Constitution.
4. They constitute the three methods by which the
State interferes with private rights and property.
5. They presuppose equivalent compensation.
6. The legislature can exercise all three powers.
---
Q: Can police power and taxation co-exist in
one act
of the government?
A: YES. Taxation is no longer envisioned as a
measure
merely to raise revenue to support the existence of
the
government. Taxes may be levied with a regulatory
purpose to provide a means for the rehabilitation
and
stabilization of a threatened industry which is
affected
with public interest as to be within the police
power of
the state (Caltex Philippines, Inc. v.
Commission on Audit,
208 SCRA 726). Thus, the power of taxation
may be
exercised to implement police power
A: The 20% discount given to senior citizens is a
valid
exercise of police power. Thus, even if the
current law,
through its tax deduction scheme (which
abandoned the
tax credit scheme under the previous law), does
not
provide for a peso for peso reimbursement of the
20%
discount given by private establishments, no
constitutional infirmity obtains because, being a
valid exercise of police power, payment of just
compensation
is not warranted.
The 20% discount is intended to improve the
welfare of
senior citizens who, at their age, are less likely to
be
gainfully employed, more prone to illnesses and
other
disabilities, and thus, in need of subsidy in
purchasing
basic commodities. The discount serves to honor
senior
citizens who presumably spent the productive
years of
their lives on contributing to the development and
progress of the nation. This distinct cultural
Filipino
practice of honoring the elderly is an integral part
of this
law. As to its nature and effects, the 20% discount
is a
regulation affecting the ability of private
establishments
to price their products and services relative to a
special
class of individuals, senior citizens, for which the
Constitution affords preferential concern
Q: Discuss the meaning and the implications of
the
statement: “Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need” (1991
Bar).
A: It expresses the underlying basis of taxation
which is
governmental necessity, for indeed, without
taxation, a
government can neither exist nor endure.
Considering that taxes are the lifeblood of the
government and in Holmes’s memorable metaphor,
the
price we pay for civilization, tax laws must be
faithfully
and strictly implemented (CIR v. Acosta, G.R.
No. 154068,
August 3, 2007). Taxes should be collected
promptly. No
court shall have the authority to grant an
injunction to
restrain the collection of any internal revenue tax,
fee or
charge imposed by the NIRC
Necessity Theory
The theory behind the exercise of the power to tax
emanates from necessity. Without taxes, the
government
cannot fulfill its mandate of promoting the general
welfare and wellbeing of the people (Gerochi v.
DOE, 527
SCRA 696, 2007). It is a necessary burden to
preserve the
State’s sovereignty and a means to give the
citizenry an
army to resist aggression, a navy to defend its
shores
from invasion, a corps of civil servants to serve,
public
improvements for the enjoyment of the citizenry,
and
those which come within the State’s territory and
facilities and protection which a government is
supposed
to provide
Benefits-Protection Theory
(Doctrine of Symbiotic Relationship)
It involves the power of the State to demand and
receive
taxes based on the reciprocal duties of support and
protection between the State and its citizen.
Taxes are what we pay for a civilized society.
Without taxes, the government would be
paralyzed for lack of motive power to activate
and operate it. Hence, despite the natural
reluctance to surrender part of one’s earned
income to the taxing authorities, every person
who is able must contribute his share in the
running of 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”
PRINCIPLES OF SOUND TAX SYSTEM
Basic principles of a sound tax system (Canons
of
Taxation) [FAT]
1. Fiscal adequacy
a. Revenue raised must be sufficient to meet
government/public expenditures and other
public needs (Chavez v. Ongpin, G.R. No.
76778,
June 6, 1990). Neither an excess nor
a deficiency of revenue vis-à-vis the needs of
government would be in keeping with the
principle (Vitug, 2006).
2. Administrative feasibility
a. The tax system should be capable of being
effectively administered and enforced with the
least inconvenience to the taxpayer (Diaz v.
Secretary of Finance, G.R. No. 193007,
July 19,
2011).
3. Theoretical justice
a. Must take into consideration the taxpayer’s
ability to pay (Ability to Pay Theory).
b. Art. VI, Sec. 28(1), 1987 Constitution
mandates
that the rule on taxation must be uniform and
equitable and that the State must evolve a
progressive system of taxation.
Q: Is the VAT law violative of the
administrative
feasibility principle?
A: NO. The VAT law is principally aimed to
rationalize
the system of taxes on goods and services. Thus,
simplifying tax administration and making the
system
more equitable to enable the country to attain
economic
Recovery Sec. 28)

iv. Prohibition against taxation of religious,

Q: Is the imposition of VAT on tollway
charitable entities, and educational
operations
entities (Art. VI, Sec. 28)
valid?

A: YES. Administrative feasibility is one of the v. Prohibition against taxation of non-stock,

canons of
non-profit educational institutions (Art. IX ,
a sound tax system. Non-observance of the canon,
Sec. 4)
however, will not render a tax imposition invalid
“except vi. Majority vote of Congress for grant of tax
to the extent that specific constitutional or
exemption (Art. VI , Sec. 28)
statutory

limitations are impaired.” Thus, even if the vii. Prohibition on use of tax levied for special
imposition of
purpose (Art. VI, Sec. 29)
VAT on tollway operations may seem burdensome
to viii. President’s veto power on appropriation,
implement, it is not necessarily invalid unless some
revenue, tariff bills (Art. VI, Sec. 27)
aspect of it is shown to violate any law or the
ix. Non-impairment of jurisdiction of the
Constitution
Supreme Court (Art. VI, Sec. 30)

SCOPE AND LIMITATION OF TAXATION x. Grant of power to the LGUs to create its

Inherent limitations [PITIE] own sources of revenue (Art. IX, Sec. 5)

1. Public Purpose xi. Origin of Revenue and Tariff Bills (Art. VI,
2. Inherently Legislative
Sec. 24)
3. Territorial
xii. No appropriation or use of public money
4. International Comity
for religious purposes (Art. VI, Sec. 28)
5. Exemption of government entities, agencies

and instrumentalities b. Provisions indirectly affecting taxation (Art.

III,
Constitutional limitations

a. Provisions directly affecting taxation 1987 Constitution)

i. Prohibition against imprisonment for i. Due process (Sec. 1)

nonpayment

of poll tax (Art. III, Sec. 20) ii. Equal protection (Sec. 1)

ii. Uniformity and equality of taxation (Art. iii. Religious freedom (Sec. 5)

iv. Non-impairment of obligations of

VI, Sec. 28)
contracts (Sec. 10)
iii. Grant by Congress of authority to the

president to impose tariff rates (Art. VI , v. Freedom of the press (Sec. 4)

 case asking that the ordinance be declared
null and
Q: In order to raise revenue for the repair and
void since such a tax can only be collected by
maintenance of the newly constructed City Hall the
of
national government, as in fact he has paid the
Makati, the City Mayor ordered the collection BIR
of
the required capital gains tax.
P1.00, called “elevator tax”, every time a
The Municipality countered that under the
person
Constitution, each local government is vested
rides any of the high-tech elevators in the
with
City Hall
the power to create its own sources of revenue
during the hours of 8am to 10am, and 4pm to 6pm.
and
Is
to levy taxes, and it imposed the subject tax
the imposition of elevator tax valid? (2003
in the
Bar)
exercise of said Constitution authority.
A: No. The imposition of a tax, fee or charge, or the
Resolve the
generation of revenue under the Local Government
Code controversy. (1991 Bar)

(LGC), shall be exercised by the Sanggunian of the A: The ordinance is void. The LGC only allows
LGU
provinces and cities to impose a tax on the transfer
concerned through an appropriate ordinance (Sec. of

132, ownership of real property (Secs. 135 and 151,

LGC).
LGC). The city mayor alone could not order the
collection Municipalities are prohibited from imposing said
tax that
of the tax; as such, the "elevator tax" is an invalid

imposition. provinces are specifically authorized to levy.

While it is true that the Constitution has given

broad
Q: The Municipality of Malolos passed an
ordinance powers of taxation to LGUs, this delegation,
however, is
imposing a tax on any sale or transfer of real
subject to such limitations as may be provided by
property located within the municipality at a law
rate of

¼ of 1% of the total consideration of the Q: LLL is a government instrumentality created

transaction. by
“X” sold a parcel of land in Malolos which Executive Order to be primarily responsible
he for
inherited from his deceased parents and integrating and directing all reclamation
refused to projects for
pay the aforesaid tax. He instead filed the National Government. It was not organized
appropriate as a
stock or a non-stock corporation, nor was it real property tax unless the beneficial use thereof
intended
has been granted to a taxable person (Sec. 234,
to operate commercially and compete in the LGC).
private When the title of the real property is transferred to
market. LLL, the Republic remains the owner of the real
By virtue of its mandate, LLL reclaimed property. Thus, such arrangement does not result
several in

portions of the foreshore and offshore areas the loss of the tax exemption (Republic of the
of the
Philippines, represented by The Philippine
Manila Bay, some of which were within the

territorial jurisdiction of Q City. Reclamation Authority v. City of Paranaque,

Certificates of title to 677
the reclaimed properties in Q City were issued
SCRA 246 [2012]).
in the

name of LLL in 2008. In 2014, Q City issued b. NO. As a rule, properties owned by the Republic
Warrants of

of Levy on said reclaimed properties of LLL the Philippines are exempt from real property tax
based on
except when beneficial use thereof has been
the assessment for delinquent property taxes granted,
for the for consideration or otherwise, to a taxable person.
years 2010 to 2013. When LLL leased out portions of the reclaimed
a. Are the reclaimed properties registered in properties to taxable entities, such as popular fast
the
food restaurants, the reclaimed properties are
name of LLL subject to real property tax?
subject to real property tax
b. Will your answer be the same in (a) if from
2010
Q: A law was passed exempting doctors and
to the present time, LLL is leasing portions
lawyers
of the
from the operation of the value-added tax.
reclaimed properties for the establishment
Other
and
professionals complained and filed a suit
use of popular fastfood restaurants J Burgers,
G questioning the law for being discriminatory
and
Pizza, and K Chicken? (2015 Bar)
violative of the equal protection clause of
A:
the
a. The reclaimed properties are not subject to
Constitution since complainants were not
real
given the
property tax because LLL is a government
same exemption. Is the suit meritorious or
instrumentality. Under the law, real property not?
owned
Reason briefly (2004 Bar).
by the Republic of the Philippines is exempt from
A: YES, the suit is meritorious. The VAT is A: YES. The principle of progressive taxation has
designed for no

economic efficiency; hence, should be neutral to relation with the VAT system in as much as the
those VAT paid

who belong to the same class. Professionals are a by the consumer or business for every goods
class of bought or

taxpayers by themselves who, in compliance with services enjoyed is the same regardless of income.
the rule of equality of taxation, must be treated In
alike for tax
other words, the VAT paid eats the same portion of
purposes. Exempting lawyers and doctors from a an
burden
income, whether big or small. The disparity lies in
to which other professionals are subjected will the
make the
income earned by a person or profit margin
law discriminatory and violative of the equal marked by a
protection
business, such that the higher the income or profit
clause of the Constitution. While singling out a
class for margin, the smaller the portion of the income or
profit
taxation purposes will not infringe upon this
that is eaten by VAT.
constitutional limitation (Shell v. Vano, 94 Phil.
389
. Grant by Congress of authority to the
president to
[1954]), singling out a taxpayer from a class will
no impose tariff rates
doubt transgress the constitutional limitation
Basis: The Congress may, by law, authorize the
(Ormoc
President

Sugar Co. Inc., v. Treasurer of Ormoc City,
22 SCRA 603
[1968]). Treating doctors and lawyers as a
different class
of professionals will not comply with the
requirements
of a reasonable, hence valid classification, because
the
to fix within specified limits and subject to such
limitations and restrictions at it may impose, tariff
rates,
import and export quotas, tonnage and wharfage
dues
and other duties or imposts within the framework
of the
national development program of the Government

classification is not based upon substantial

distinction Properties exempt under the Constitution from
the
which makes real differences. The classification
does not payment of property taxes
comply with the requirement that it should be
1. Charitable institutions
germane
2. Churches and parsonages or convents
to the purpose of the law either
appurtenant

thereto
Is VAT regressive? 3. Mosques
4. Non-profit cemeteries
5. All lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes shall be exempt
from taxation
Q: In 1991, Imelda gave her parents a Christmas
gift
of P100,000 and a donation of P80,000 to the
parish
church. She also donated a parcel of land for
the
construction of a building to the PUP Alumni
Association a non-stock, non-profit
organization.
Portions of the Building shall be leased to
generate
income for the association.
a. Is the Christmas gift of P100,000 to Imelda’
s provision?
Parents subject to tax?
b. How about the donation to the parish church?
c. How about the donation to the PUP alumni
association? (1994 Bar)
A:
a. The Christmas gift of P100,000 given by Imelda
to
her parents is not taxable because under the law
(Section 99[A], NIRC), net gifts not exceeding
P100,000 are exempt.
b. The donation of P80,000.00 to the parish church
even is tax exempt provided that not more than
30% of the said bequest shall be used by such
institutions for administration purposes (Section
101[A][3], NIRC).
c. The donation to the PUP alumni association does
not also qualify for exemption both under the
Constitution and the aforecited law because it is
not
an educational or research organization,
corporation, institution, foundation or trust.
---
---
Q: The Constitution exempts from taxation
charitable institutions, churches,
parsonages, or
convents appurtenant thereto, mosques, and
nonprofit
cemeteries and lands, buildings and
improvements actually, directly, and
exclusively
used for religious, charitable or educational
purposes. Mercy hospital is a 100 bed hospital
organized for charity patients. Can said
hospital
claim exemption from taxation under the
(1996 Bar)
A: Yes. Mercy hospital can claim exemption from
taxation under the provision of the Constitution,
but
only with respect to real property taxes provided
that
such real properties are used actually, directly, and
exclusively for charitable purposes.
Q: Art. VI, Sec. 28(3) of the Constitution
provides
that charitable institutions, churches and
parsonages or covenants 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 taxes does this exemption
apply?
(2000 Bar)
A: This exemption applies only to property taxes.
What
is exempted is not the institution itself but the
lands,
buildings, and improvements actually, directly and
exclusively used for religious, charitable, and
educational purposes (CIR v. CA, et al., G.R.
No. 124043,
October 14, 1998).
---
---
Q: The Roman Catholic Church owns a 2 hectare
lot
in a town in Tarlac province. The southern side
and
middle part are occupied by the church and a
convent, the eastern side by the school run by
the
church itself. The south eastern side by some
commercial establishments, while the rest of
the
property, in particular, the northwestern
side, is idle
or unoccupied. May the church claim tax
exemption
on the entire land? (2005 Bar)
A: NO. The portion of the land occupied and used
by the
church, convent and school run by the church are
exempt
from real property taxes while the portion of the
land
occupied by commercial establishments and the
portion,
which is idle, are subject to real property taxes.
The
“usage” of the property and not the “ownership” is
the
determining factor whether or not the property is
Taxable
NOTE: Under the 1987 Constitution, the doctrine of
exemption by incidental purpose is no longer
applicable.
Such doctrine is only applicable to cases where the
cause of action arose under the 1935 Constitution.
Under the 1987 Constitution, it must be prove that
the
properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY
used for the purpose of institution for the
exemption to
be granted
Actually, directly, and exclusively used
The use of the term “actually, directly, and
exclusively
used” referring to religious institutions cannot be
applied to non-stock, non-profit educational
institutions.
The provision of Article VI, Section 28(3)
applies to
religious, charitable, and educational institutions –
while
Article XIV applies solely to non-stock, non-profit
educational institutions.
Hence, in this case, we should apply its literal
interpretation – “solely” – in consonance with the
principle of strictissimi juris. The word
“exclusively”
indicates that the provision is mandatory
Q: Why must appropriation, revenue or tariff
bills
originate from the Congress?
A: On the theory that, elected as they are from the
districts, the members of the House of 1. Under authority of a law that is valid or the
Representatives
Constitution itself (substantive due process);
can be expected to be more sensitive to the local
and
needs
2. After compliance with fair and reasonable
and problems.
methods

of procedure prescribed by law (procedural due

Q: May Congress, under the 1987 Constitution,
process).
abolish the power to tax of local governments?
---
(2003 Bar)
---
A: No. The Congress cannot abolish the local

government’s power to tax as it cannot abrogate Q: When may violation of due process be invoked
what is by

expressly granted by the fundamental law. The the taxpayer?

only
authority conferred to Congress is to provide the
guidelines and limitations on the local
governmenr’s
exercise of the power to tax.
A: The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no
support in
the Constitution, as where it can be shown to
amount to

a confiscation of property (Reyes v. Almanzor,

Due Process G.R. Nos. L-

Basis: No person shall be deprived of life, liberty,
or
property without due process of law xxx (Art. III,
Sec. 1).
49839-46 April 26, 1991).
While it is true that the Philippines as a State is not
obliged to admit aliens within its territory, once an
alien

Requirements of due process in taxation is admitted, he cannot be deprived of life without

due
Substantive Due Process
process of law. This guarantee includes the means
1. Tax must be for public purpose; of

2. It must be imposed within territorial livelihood. The shelter of protection under the due
jurisdiction;
process and equal protection clause is given to all
Procedural Due Process
persons, both aliens and citizens
1. No arbitrariness or oppression either in the

assessment or collection.
: What is the “rational basis” test? Explain
--- briefly.

Q: When is deprivation of life, liberty and (2010 Bar)

property
A: The rational basis test is applied to gauge the
by the government done in compliance with due
constitutionality of an assailed law in the face of an
process?
equal protection challenge. It has been held that “in
A: If the act is done:
areas of social and economic policy, a statutory
classification that neither proceeds along suspect legislation. Will a suit prosper? (2004 Bar)
lines
A: NO. The remission or condonation of taxes due
nor infringes constitutional rights must be upheld and
against equal protection challenge if there is any payable to the exclusion of taxes already collected
does
reasonably conceivable state of facts that could
provide not constitute unfair discrimination. Each set of
taxes is
a rational basis for the classification.” Under the
rational a class by itself and the law would be open to
attack as
basis test, it is sufficient that the legislative
class legislation only if all taxpayers belonging to
classification is rationally related to one
achieving some legitimate State interest
(British American Tobacco v. class were not treated alike (Juan Luna
Subdivision, Inc.,
Camacho and Parayno, GR No. 163583,
April 15, 2009). v. Sarmiento, G.R. L-3538, May 28,
1952).
---
---
---
---
Q: RC is a law abiding citizen who pays his real
Q: An E.O. was issued pursuant to law, granting
estate taxes promptly. Due to a series of
tax
typhoons
and duty incentives only to businesses and
and adverse economic conditions, an ordinance
residents
is
within the “secured area” of the Subic
passed by MM City granting a 50% discount for
Economic
payment of unpaid real estate taxes for the
Special Zone, and denying said incentives to
preceding year and the condonation of all those
penalties
who live within the zone but outside such
on fines resulting from the late payment. “secured
Arguing
area:” Is the Constitutional right to equal
that the ordinance rewards delinquent protection
taxpayers
of the law violated by the Executive Order?
and discriminates against prompt ones, RC (2000
demands
Bar)
that he be refunded an amount equivalent to ½
A: NO. Equal protection of the law clause is subject
of
to
the real taxes he paid. The municipal attorney
reasonable classification. Classification, to be valid,
rendered an opinion that RC cannot be must
reimbursed (1) rest on substantial distinctions; (2) be
because the ordinance did not provide for such germane to

reimbursements. RC files suit to declare the the purpose of the law; (3) not be limited to
existing
ordinance void on the ground that it is a class
conditions only, (4) apply equally to all
members of
the same class. There are substantial differences
between big investors being enticed to the
“secured
area” and the business operators outside that are
in
accord with the equal protection clause that does
not
require territorial uniformity of laws.
The classification applies equally to all the resident
individuals and businesses within the “secured
area.”
The residents, being in like circumstances to
contributing directly to the achievement of the end
purpose of the law, are not categorized further.
Instead,
they are similarly treated, both in privileges
granted and
obligations required
A: NO. Equal protection clause applies only to
persons or
things identically situated and does not bar a
reasonable
classification of the subject of legislation. The
classification, to be reasonable, should be in terms
applicable to future conditions as well. The taxing
ordinance should not be singular and exclusive as
to
exclude any substantially established sugar central,
of
the same class as Ormoc Sugar Co., from the
coverage of
the tax
Q: X Corporation was the recipient in 1990 of
two
tax exemptions both from Congress, one law
exempting the company’s bond issues from taxes
and the other exempting the company from taxes
in
the operation of its public utilities. The two
laws
extending the tax exemptions were revoked by
Congress before their expiry dates. Were the
revocations Constitutional? (1997 Bar)
A: YES. The exempting statutes are both granted
unilaterally by Congress in the exercise of taxing
powers.
Since taxation is the rule and tax exemption, the
exception, any tax exemptions unilaterally granted
can
be withdrawn at the pleasure of the taxing
authority
without violating the Constitution (Mactan Cebu
International Airport Authority v. Marcos,
G.R. No. 120082,
September 11, 1996).
---
---
Q: A law was passed granting tax exemptions to
certain industries and investments for a
period of 5
years but 3 years later, the law was repealed.
With
the repeal, the exemptions were considered
revoked
by the BIR, which assessed the investing
companies
for unpaid taxes effective on the date of the
repeal of
the law.
NPC and KTR companies questioned the
assessments
on the ground that, having made their
investments in
full reliance with the period of exemption
granted by
the law, its repeal violated their revenue to be used for public needs. Taxation
Constitutional right itself is

against the impairment of the obligations and the power by which the State raises revenue to

contracts. Is the contention of the company defray the expenses of government. A jurist
tenable said that

or not? (2004 Bar) a tax is what we pay for civilization. In our

A: The contention is untenable. The exemption jurisdiction, which of the following

granted is statements may

in the nature of a unilateral exemption. Since the be erroneous?:

exemption given is spontaneous on the part of the 1. Taxes are pecuniary in nature.
legislature and no service or duty or other 2. Taxes are enforced charges and
remunerative
contributions.
conditions have been imposed on the taxpayer
3. Taxes are imposed on persons and property
receiving

the exemption, it may be revoked by will by the within the territorial jurisdiction of a
State.
legislature (Christ Church v. Philadelphia, 24
4. Taxes are levied by the executive branch of
How 300 the

[1860]). What constitutes an impairment of the government.

obligation of contracts is the revocation of an 5. Taxes are assessed according to a

exemption reasonable rule

which is founded on a valuable consideration of apportionment. (2004 Bar)

because it
A: (4) Taxes are levied by the executive branch of
takes the form and essence of a contract
government. This statement is erroneous because
levy

STAGES OF TAXATION refers to the act of imposition by the legislature

which is
Stages/aspects of a system of taxation [LAPR]
(2006 done through the enactment of a tax law. Levy is an

Bar) exercise of the power to tax which is exclusively

1. Levy or Imposition (Tax Legislation) – This legislative in nature and character. Clearly, taxes
are not
refers
levied by the executive branch of government
to the enactment of a law by Congress authorizing
(NPC v.
the imposition of tax. It further contemplates the

determination of the subject of taxation, purpose Albay, G.R. No. 87479, June 4, 1990).
for
---
which the tax shall be levied, fixing the rate of
2. Assessment and Collection (Tax
taxation and the rules of taxation in general. Administration)

--- – This is the act of administration and

Q: Taxes are assessed for the purpose of implementation of the tax law by executive
generating through
its administrative agencies.
The act of assessing and collecting taxes is
administrative in character, and therefore can be
delegated (J. Dimaampao, 2015,).
NOTE: The term “assessment” which here means
notice and demand for payment of a a tax liability,
should not be confused with “assessment” relative
to a real property taxation, which refers to the
listing and valuation of taxable real property.
---
Q: Is the approval of the court, sitting as
probate or
estate settlement court, required in the
enforcement
of the estate tax? (2005 Bar)
A: NO. The approval of the court, sitting in probate,
is not
a mandatory requirement in the collection of
estate tax.
On the contrary, under Section 94 of the NIRC, it is
the
probate or settlement court which is forbidden to
authorize the executor or judicial administrator of
the
decedent’s estate, to deliver any distributive share
to any
party interested in the estate, unless a certification
from
the Commissioner of the Internal Revenue that the
estate
tax has been paid is shown (Marcos II v. CA,
G.R.
No.120880, June 5, 1997).
---
NOTE: Assessment and collection may be delegated
but
not levy since it is exclusively conferred with the
Congress.
3. Payment – The act of compliance by the taxpayer,
including such options, schemes or remedies as
may
be legally available.
GR: Tax shall be paid by the person subject thereto
at the
time the return is filed (Sec. 56[A][1], NIRC).
XPN: When the tax due is in excess of P2,000, the
taxpayer other than a corporation may elect to pay
the
tax in 2 equal installments in which case, the first
installment shall be paid at the time the return is
filed
and the second installment, on or before July 15
following the close of the calendar year (Sec.
56[A][2],
NIRC).
NOTE: If any installment is not paid on or before
the date
fixed for its payment, the whole amount of the tax
unpaid
becomes due and payable, together with
delinquency
penalties.
4. Refund – The recovery of any alleged to have
been
erroneously or illegaly assessed or collected, or of
any penalty claimed to have been collected without
authority, or of any sum alleged to have been
excessively, or in any manner wrongfully collected.
TAX AS DISTINGUISHED FROM
OTHER FORMS OF EXACTIONS
Page 50 to 51
Q: Distinguish a direct from an indirect tax.
Give
examples (Bar 1994, 2000, 2001, 2006).
A: (1) Direct taxes are demanded from the very
person
who, as intended, should pay the tax which he
cannot
shift to another.
(2) Indirect taxes are demanded in the first
instance
from one person with the expectation that he can
shift
the burden to someone else, not as a tax but as a
part of
the purchase price.
Application of the doctrine of mobilia
sequuntur
personam not mandatory in all cases
Such doctrine has been decreed as a mere "fiction
of
law having its origin in considerations of general
convenience and public policy, and cannot be
applied to limit or control the right of the State to
tax property within its jurisdiction," and must
"yield
to established fact of legal ownership, actual
presence and control elsewhere, and cannot be
applied if to do so would result in inescapable and
patent injustice"
c. Excise Tax
Income Tax (Criteria: Place, Nationality, Residence)
Place (applied to NRA, NRFC, NRC) - From
sources
of income derived within the Philippines
Nationality (applied to RC, DC) - From sources
of
income derived within and without the Philippines
Residence (applied to RA, RFC) - From sources of
income derived within the Philippines
Donor’s Tax and Estate Tax (Criteria: Place,
Nationality, Residence)
Place (applied to NRA) - Taxed on properties
situated within the Philippines
Nationality (applied to RC, NRC) - Taxed upon
their properties wherever situated
Residence (applied to RA) - Taxed upon their
properties wherever situated
VAT – Place where the transaction is made. If the
transaction is made (perfected and consummated)
outside of the Philippines, we can no longer tax
such
transaction (J. Dimaampao, 2015).
NOTE: Situs of taxation of excise tax is the place
where
the privilege is exercised. In case of a franchise,
which is
a right or privileges granted to it by the
government, the
situs of taxation is the place where the franchise
holder
exercises its franchise regardless of the place
where its
services or products are delivered. Thus, in a
franchise of
electric power distribution, the franchisee is liable
within the jurisdiction it exercises its privilege
Rules Observed in Fixing Tax Situs
a. Poll/Capitation/Community Tax - Residence of
taxpayer, regardless of the source of income or
location of property of the taxpayer
b. Property Tax
Real Property - Location of the property (lex
reisitae
/ lex situs), regardless of whether the owner is a
resident or non-resident
Rationale:
1. The taxing authority has control because of the
stationary and fixed character of the property.
2. The place where the real property is situated
gives protection to the real property; hence the
property or its owner should support the
government of that place.
Personal Property
Tangible – Location of the property
Intangible -
GR: Domicile of the owner, wherever it is actually
kept or located, pursuant to the principle of the
mobilia sequntur personam, which literally
means
“movable follows the person/owner.”
XPN:
1. When the property has acquired a business
situs in another jurisdiction, such that it has
definite location there, accompanied by some
degree of permanency;
2. When an express provision of the statute
provides for another rule.
NOTE: Under Sec. 104 of the NIRC, in case of
donor’s
and estate tax, the following properties are
considered as situated, thus taxed, in the
Philippines
and the residence of their owners are immaterial,
EXCEPT where the foreign country grants
exemption or does not impose taxes on intangible
properties to Filipino citizens.
Q: Differentiate between double taxation in
the strict
sense and in a broad sense and give an example
of
each (2015 Bar).
A: Double taxation in the strict sense pertains to
the
direct double taxation. This means that the
taxpayer is
taxed twice by the same taxing authority, within
the
same taxing jurisdiction, for the same property and
same
purpose. On the other hand, double taxation in
broad
sense pertains to indirect double taxation. This
extends
to all cases in which there is a burden of two or
more
impositions. It is the double taxation other than
those
covered by direct double taxation.
Q: BB Municipality has an ordinance which
requires
that all stores, restaurants, and other
establishments
selling liquor should pay an annual fee of
P20,000.
Subsequently, the municipal board proposed an
ordinance imposing a sales tax equivalent to
5% of
the amount paid for the purchase or
consumption of
liquor in stores, restaurants and other
establishments. The municipal mayor, CC,
refused to
sign the ordinance on the ground that it would
constitute double taxation. Is the refusal of
the
mayor justified? Reason briefly. (2004 Bar)
A: NO. The impositions are of different nature and
character. The fixed annual fee is in the nature of a
license fee imposed through the exercise of police
power,
while the 5% tax on purchase or consumption is a
local
tax imposed through the exercise of taxing powers.
Both
license fee and tax may be imposed on the same
business
or occupation, or for selling the same article and
this is
not in violation of the rule against double taxation
Power to tax involves the power to destroy
---
Q: Is the power to tax a power to destroy?
A: There are two views on this:
1. US Chief Justice Marshall dictum - The
power to tax
involves the power to destroy.
It is a destructive power which interferes with the
personal and property rights of the people and
takes
from them a portion of their property for the
support of the government (Paseo Realty &
Development Corporation v. CA, G.R. No.
119286,
October 13, 2004).
Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the ‘hen that
lays the golden egg’ (McCulloch v. Maryland, 4
Wheat, 316 4 L ed. 579, 607) (Roxas v.
CTA, 23 SCRA
276).
NOTE: It is more reasonable to say that the maxim
“the power to tax is the power to destroy” is to
describe degree of vigor with which the taxing
power may be employed in order to raise revenue,
and not the purposes for which the taxing power
may be used (Cooley, 1876).
2. Justice Holmes dictum – “The power to tax
is not
the power to destroy while this Court sits.”
While taxation is said to be the power to destroy, it
is by no means unlimited. When a legislative body
having the power to tax a certain subject matter
actually imposes such a burdensome tax as
effectually to destroy the right to perform the act
or
to use the property subject to the tax, the validity
of
the enactment depends upon the nature and
character of the right destroyed. If so great an
abuse is manifested as to destroy natural and
fundamental rights which no free government
consistently violate, it is the duty of the judiciary to
hold such an act unconstitutional.
Reconciliation of the two dicta:
Marshall’s view refers to a valid tax while Holmes’
view
refers to an invalid tax.
The power to tax involves the power to destroy
since
the power to tax includes the power to regulate
even to
the extent of prohibition or destruction, when it is
used
validly as an implement of police power in
discouraging
and prohibiting certain things or enterprises
inimical to
the public welfare.
However, if it is employed solely to raise revenues,
the
modern view is that it cannot be allowed to
confiscate or
destroy. If this is to be done, the tax may be Constitution overrides any legislative or executive
successfully act

attacked as an unconstitutional exercise of that runs counter to it

discretion,

which is usually vested in the legislature (Cruz,

Q: Mr. Pascual’s income from leasing his
2007). property

While the power to tax is so unlimited in force and reaches the maximum rate of tax under the law.
so He donated ½ of his said property to a
non-stock, nonprofit
searching in extent that the courts scarcely venture
to educational institution whose income and
declare that it is subject to any restrictions assets are actually, directly, and
whatever, it
exclusively used for
is subject to the inherent and constitutional
educational purposes, and therefore qualified
limitations
for
which are intended to prevent abuse on the
exercise of tax exemption under Art. XIV, Sec. 4 (3) of the

the otherwise plenary and unlimited powers. It is Constitution and Sec. 3 (h) of the NIRC. Having
the thus

court’s role to see to it that the exercise of the transferred a portion of his said asset, Mr.
power Pascual

does not transgress these limitations (Tio v. succeeded in paying a lesser tax on the rental
Videogram income derived from his property. Is there tax

Regulatory Board et al., 151 SCRA 213). avoidance or tax evasion? Explain. (2000 Bar).

In order to maintain the general public’s trust and A: YES. Mr. Pascual has exploited a legally
permissive
confidence in the government, this power must be
used alternative method to reduce his income by
transferring
justly and not treacherously (Roxas y Cia v. CTA,
part of his rental income to a tax exempt entity
23 SCRA through

276). It should be exercised with caution to a donation of ½ of the income producing property.
The
minimize
donation is likewise exempt from donor’s tax. The
injury to the proprietary rights of the taxpayer. It
must donation is the legal means employed to transfer
the
be exercised fairly, equally and uniformly, lest the
tax incidence of income tax on the rental income.

collector kills the ‘hen that lays the golden egg’

(CIR v.
3. Tax Evasion / Tax Dodging

SM Prime Holdings, Inc., 613 SCRA 774 Tax evasion is a scheme where the taxpayer uses
(2010)). illegal

or fraudulent means to defeat or lessen payment of

Taxpayers may seek redress before the courts in a tax.
case of

illegal imposition of taxes and irregularities as the

It is a scheme used outside of those lawful means thru its authorized representative Ms. Pares,
and sold a
when availed of, it usually subjects the taxpayer to 16-storey commercial building known as
further or additional civil or criminal liabilities Haeltown

(CIR v. Building to Mr. Belly for P100 million. Mr.

Belly, in
The Estate of Benigno Toda Jr. G.R. No.
turn, sold the same property on the same day
30554, February
to Bell

28, 2004). Gates, Inc. (BGI) for P200 million. These two
(2)
Elements to be considered in determining that
there transactions were evidenced by two (2)
separate
is tax evasion [USE]
Deeds of Absolute Sale notarized on the same
1. Course of action is Unlawful; day by
2. Accompanying State of mind which is described the same notary public.
as
Investigations by the Bureau of Internal
being evil, in bad faith, willful or deliberate and not
Revenue
accidental; and
(BIR) showed that:
3. End to be achieved, i.e., payment of less than that
(1) the Deed of Absolute Sale between Mr. Belly
and
known by the taxpayer to be legally due, or
nonpayment
BGI was notarized ahead of the sale between HC
of tax when it is shown that the tax is due. and

Mr. Belly; (2) as early as May 17, 2014, HC

received
Tax Evasion vs Tax Avoidance:
P40 million from BGI, and not from Mr. Belly;
(3) the
Tax Evasion:
said payment of P40 million was recorded by BGI
Illegal and subject in

to criminal penalty; Almost always its books as of June 30, 2014 as investment in
results in absence Haeltown Building; and (4) the substantial
of tax payment. portion of

P40 million was withdrawn by Ms. Pares through

the
Tax Avoidance:
declaration of cash dividends to all its
Legal and not stockholders.
subject to criminal
Based on the foregoing, the BIR sent Haeltown
Penalty; Minimization of
Corporation a Notice of Assessment for
Taxes deficiency

income tax arising from an alleged simulated

sale of
Q: On August 31, 2014, Haelton Corporation
(HC),
the aforesaid commercial building to escape
the
higher corporate income tax rate of thirty
percent
(30%). What is the liability of Haeltown
Corporation,
if any? (2014 Bar)
A: The tax planning scheme adopted by Haeltown
Corporation constitutes tax evasion. According to
CIR v.
Estate of Benigno Toda (G.R. No. 147188,
September 14,
2004), a transaction where a taxpayer made it
appear
that there were two sales of the property was
considered
“tainted with fraud.” The sole purpose of acquiring
and
transferring title of the property on the same day
was to
create a tax shelter. The sale to Mr. Belly (which is
subject to individual capital gains tax) was to
mislead the
BIR and avoid the higher corporate income tax.
Q: CIC entered into an alleged simulated sale
of a 16-
storey commercial building. CIC authorized
Benigno
Toda, Jr., its President to sell the Cibeles
Building
and the two parcels of land on which the
building
stands. Toda purportedly sold the property for
P100
million to Altonaga, who, in turn, sold the
same
property on the same day to Royal Match Inc.
(RMI)
for P200 million evidenced by Deeds of
Absolute Sale
notarized on the same day by the same notary
public.
For the sale of the property to RMI, Altonaga
paid
capital gains tax in the amount of P10 million.
The
BIR sent an assessed deficiency income tax
arising
from the sale alleging that CIC evaded the
payment of
higher corporate income tax of 35% with regard
to
the resulting gain. Is the scheme perpetuated
by
Toda a case of tax evasion or tax avoidance?
A: It is a tax evasion scheme. The scheme resorted
to by
CIC in making it appear that there were two sales
of the
subject properties, i.e., from CIC to Altonaga, and
then
from Altonaga to RMI cannot be considered a
legitimate tax planning (one way of tax avoidance).
Such scheme is
tainted with fraud.
In the case, it is obvious that the objective of the
sale to
Altonaga was to reduce the amount of tax to be
paid
especially that the transfer from him to RMI would
then
subject the income to only 6% individual capital
gains
tax and not the 35% corporate income tax
Q: Gloria Kintanar who is engaged in the
business of
distribution of Forever Living Products, was
charged
of violation of Art. 255 of the NIRC, with the
obligation to file her ITR for the year 2000
and 2001
with the BIR, to the prejudice of the they hired.
government.
Hence, the natural presumption is that the
Petitioner Kintanar averred that she has no petitioner

personal knowledge of actual filing of said knows what are her tax obligations under the law.
As a
returns
businesswoman, she should have taken ordinary
because it was her husband who filed their
care of
ITRs,
her tax duties and obligations and she should know
through their hired accountant. Petitioner that
has no
their ITRs should be filed, and should have made
record of filing of the required ITRs within sure
the
that their ITRs were filed. She cannot just left
reglementary period. Is Gloria Kintanar entirely to
guilty of tax her husband the filing of her ITR. Petitioner also
evasion and be held liable? testified that she does not know how much was her
tax
A: YES. Supreme Court, in its resolution, affirmed
the obligations, nor did she bother to inquire or
determine
conviction of a taxpayer for tax evasion due to
non-filing the facts surrounding the filing of her ITR. Such
neglect
of income tax returns (ITR). The accused or omission as aptly found by the former second
Gloria Kintanar division

was not able to satisfactorily convince the court is tantamount to “deliberate ignorance or
that she conscious
did not deliberately and willfully neglect to file her avoidance.” Further, such non-compliance with
ITR,
the
considering that she entrusted the filing to her
BIR’s notices clearly shows petitioner’s intent not
husband
to file
who caused the filing through an accountant. The
her ITR
court

believed that the accused was not relieved from

her Taxpayer’s Suit distinguished from a Citizen’
s Suit
criminal liability. As principal, she must assume
The plaintiff in a taxpayer’s suit is in a different
responsibility over the acts of her accountant (Sec. category
51(f)
from the plaintiff in a citizen’s suit. In the former,
the
NIRC). The CTA doctrine on willful blindness
simply plaintiff is affected by the expenditure of public
funds,
means that an individual or corporation can no
longer while in the latter, he is but the mere instrument of
the
say that the errors on their tax returns are not
their public concern

responsibility or that it is the fault of the

accountant
Q: Through E.O. No. 30, the President created
a trust
for the benefit of the Filipino People under
the name
and style of the CCP. The trust was to
undertake the
construction of a national theater and music
hall to
awaken the nation’s consciousness on cultural
heritage and to promote, preserve and enhance
the
same. Pursuant thereto, CCP’s Board of
Trustees
received foreign donations and financial
commitments. Petitioner, however, claims that
in
issuing E.O. No. 30, there was an encroachment
by
the President on the legislative’s
prerogative to
enact laws. The trial court dismissed the
petition on
the ground that Gonzales did not have the
personality to question the issuance of EO No.
30
since the funds administered by the CCP came
from
donations, without a single centavo raised by
taxation. Does the petitioner have the
personality to
question the validity of EO No. 30 based on a
taxpayer’s suit?
A: NO. Gonzales did not meet the requisite burden
to
warrant the reversal of the trial court’s decision. It
was
pointed out therein that one valid reason why such
an outcome was unavoidable was that the funds
administered by the Center came from donations
and
contributions and not from taxation. Accordingly,
there
was the absence of the pecuniary requisite or
monetary
interest. Gonzales has not satisfied an element for a
taxpayer’s suit
Doctrine of Transcendental Importance
The following determines the importance of
transcendental importance:
1. The character of the funds or other assets
involved
in the case;
2. The presence of a clear case of disregard of a
constitutional or statutory prohibition by the
public respondent agency or instrumentality of the
government;
3. The lack of any other party with a more direct
and
specific interest in raising the questions being
raised (CREBA v. ERC, 624 SCRA 556, G.R.
No.
174697, July 8, 2010).
In the exercise of its discretion, the Court may
brush
aside these technicalities and take cognizance of
the
petition considering the (transcendental)
importance to
the public of the case and in keeping with the duty
to
determine whether the other branches of the
government have kept themselves within the limits
of
the Constitution
Ripeness for Judicial Determination
The constitutional question is ripe for adjudication
when
the government’s act being challenged has a direct probate over the supposed will of the
decedent?
adverse effect on the individual challenging it.
Personal (1998 Bar)
injury or benefit must be shown for judicial A: YES, the BIR is authorized to collect estate tax
controversy
deficiency through the summary remedy of levying
to be ripe for judicial determination.
upon
NOTE: However, where the public interest requires and sale of real properties of a decedent without
the the
resolution of the constitutional issues raised by the cognition and authority of the court sitting in
taxpayer, the doctrine of “ripe for judicial probate
determination” over the supposed will of the deceased because of
is within the Court’s discretion to set aside the

collection of estate tax is executive in character. As

such
JURISDICTION, POWER AND FUNCTIONS OF THE
the estate tax is exempted from the application of
COMMISSIONER OF INTERNAL REVENUE the

Powers and duties of the BIR [AEJ-AdR] statute of non-claims, and this is justified by the

1. Assessment and collection of all national internal necessity of government funding, immortalized in
the
revenue taxes, fees and charges;
maxim that taxes are the lifeblood of the
2. Enforcement of all forfeitures, penalties and government
fines;

3. Execution of judgments in all cases decided in

What are the powers of the BIR which cannot be
its
delegated?
favor (by the CTA and regular courts);

4. Give effect and administer the supervisory and A: [RICA]

police powers conferred to it by the NIRC and 1. To Recommend promulgation of rules and
other
regulations by the Secretary of Finance;
laws;
2. To Issue rulings of first impression or to
5. Recommend to the Secretary of Finance all
reverse, revoke or modify any existing rule of
needful
the BIR;
rules and regulations for the effective enforcement
3. GR: To Compromise or abate any tax liability;
of the provision of the NIRC.
XPN: The Regional Evaluation Board may

compromise assessments involving deficiency

Q: Is the BIR authorized to collect estate tax

deficiencies by the summary remedy of levy taxes of P500,000 or less and minor crime
upon
violations.
and sale of real properties of the decedent
4. To Assign or reassign internal revenue officers
without
to establishments where articles subject to
first securing the authority of the court
sitting in excise tax are kept.
Q: Due to an uncertainty whether or not a new
tax
law is applicable to printing companies, DEF
Printers
submitted a legal query to the BIR on that
issue. The
BIR issued a ruling that printing companies
are not
covered by the new law. Relying on this ruling,
DEF
Printers did not pay said tax. Subsequently,
however,
the BIR reversed the ruling and issued a new
one
stating that the tax covers printing companies.
Could
the BIR now assess DEF Printers for back taxes
corresponding to the years before the new
ruling?
Reason briefly. (2004 Bar)
c. A: No. Reversal of a ruling shall not be given a
retroactive application if said reversal will be
prejudicial to the taxpayer. Therefore, the BIR
cannot
assess DEF printers for back taxes because it
would
be violative of the principle of non-retroactivity of
rulings and doing so would result in grave injustice
to the taxpayer who relied on the first ruling in
good
Faith
Income tax systems
1. Global Tax System – system employed
where the tax
system views indifferently the tax base and
generally treats in common all categories of
taxable
income of the individual (Tan v. Del Rosario,
Jr., 237
SCRA 324, 331).
2. Schedular Tax System – system employed
where the
income tax treatment varies and is made to depend
on the kind or category of taxable income of the
taxpayer (Tan v. Del Rosario, Jr., 237 SCRA
324, 331).
3. Semi- schedular or semi- global tax
system – all
compensation income, business or professional
income, capital gain, passive income, and other
income not subject to final tax are added together
to
arrive at the gross income. After deducting the
allowable deductions and exemptions from the
gross income, the taxable income is subjected to
one
set of graduated tax rate (individual) or normal
corporate income tax rate
Types of Philippine income tax [MC2F3 – BINGS]
1. Minimum corporate income tax (MCIT)
2. Capital gains tax on sale or exchange of unlisted
shares of stock of a domestic corporation classified
as a capital asset
3. Capital gains tax on sale or exchange of real
property located in the Philippines classified as
capital asset
4. Final withholding tax on certain passive
investment
incomes
5. Final withholding tax on income payments made
to
non-residents (individual or corporation)
6. Fringe benefit tax (FBIT)
7. Branch profit remittance tax
8. Improperly accumulated earnings tax (IAET)
9. Normal corporate income tax on corporations Restriction

10. Graduated income tax on individuals

11. Special income tax on certain corporations Q: Mr. X borrowed P10,000 from his friend Mr.
Y

payable in one year without interest. When the

State Partnership Theory loan
It is the basis of the government in taxing income. became due, Mr. X told Mr. Y that he (Mr. X)
It
was
emanates from its partnership in the production of
unable to pay because of business reverses. Mr.
income by providing the protection, resources, Y
incentive
took pity on Mr. X and condoned the loan. Mr.
and proper climate for such production X was

solvent at the time he borrowed the P10,000 and

at
Income vs. Capital (1995 Bar)
the time the loan was condoned. Did Mr. X
derive any
Income: income from the cancellation or condonation of
Any wealth which flows his

into the taxpayer other indebtedness? Explain. (1995 Bar)

than a mere return of A: NO. Mr. X did not derive any income from the

Capital; Is the service of wealth; Is the fruit; Flow; cancellation or condonation of his indebtedness.
Income is subject to Since it

income tax is obvious that the creditor merely desired to

benefit the

debtor in view of the absence of consideration for

Capital: the
Constitutes the cancellation, the amount of the debt is considered
as a
investment which is the
gift from the creditor to the debtor and need not be
source of income; Is the wealth; Is the tree; Fund;
Return or recovery of included in the latter’s gross income.
capital is not subject to

income tax Q: Mr. Castillo is a resident Filipino citizen.

He

Income held in trust for another purchased a parcel of land in Makati in 1970
at a
As a general rule, income held in trust for another
is not consideration of P1 million. In 2011, the land
had a
taxable since the trustee has no free disposal of the
fair market value of P20 million. Mr. Ayala
amount thereof except if the income under trust offered to
may be
buy the same for P20 million. Is Mr. Castillo
disposed of by the trustee without limitation or liable to
pay for income tax in 2011 based on the offer 2007, Express Transport earned ₱1 million
to buy interest,

by Mr. Ayala? (2011 Bar) after deducting the 20% final withholding tax
from
A: NO. Mr. Castillo is not liable for income tax in
2011 its time deposits with the bank. The BIR wants
to
because no income is realized by him during that
year. collect a 5% gross receipts tax on the interest
Tax liability for income tax attaches only if there is income
a gain
of Express Transport without deducting the 20%
realized resulting from a closed and complete
final withholding tax. Is the BIR correct?
Transaction (2006 Bar)

A: YES. The term "Gross Receipts" is broad enough

to
Q: Is money received under payment by mistake,
include income constructively received by the
income subject to income tax? taxpayer.
A: Income paid or received through mistake may The amount withheld is paid to the government on
be its

considered as “income from whatever source behalf, in satisfaction of withholding taxes. The fact
derived” that

irrespective of the voluntary or involuntary action it did not actually receive the amount does not
of the alter the

taxpayer in producing income. Moreover, under fact that it is remitted in satisfaction of its tax
the obligations.
“claim of right doctrine,” the recipient even if he Since the income withheld is an income owned by
has the
Express Transport, the same forms part of its gross
obligation to return the same has a voidable title to
the receipts (CIR v. Solidbank Corp., G.R. No.

money received through mistake (Guttierez v. 148191,

CIR, CTA November 25, 2003).

Case No. 65, August 31, 1955). ---

--- ---

--- Q: Explain briefly whether the following items

are
Q: Congress enacted a law imposing a 5% tax on
the taxable or non-taxable:

gross receipts of common carriers. The law 1. Income from jueteng;

does not
2. Gain arising from expropriation of
define the term “gross receipts.” Express property;
Transport a
3. Taxes paid and subsequently refunded
bus company has time deposits with ABC Bank.
4. Recovery of bad debts previously charged
In
off;

5. Gain on the sale of a car used for personal

purposes. (2005 Bar)
1. Taxable. Gross income includes "all income
derived
from whatever source" (Sec. 32[A], NIRC), which
was interpreted as all income not expressly
excluded or exempted from the class of taxable
income, irrespective of the voluntary or
involuntary
action of the taxpayer in producing the income.
Thus, the income may proceed from a legal or
illegal
source such as from jueteng. Unlawful gains,
gambling winnings, etc. are subject to income tax.
The NIRC stands as an indifferent neutral party on
the matter of where the income comes from (CIR
v.
Manning, G.R. No. L-28398, August 6,
1975).
2. Taxable. Sale, exchange or other disposition of
property to the government of real property is
taxable. It includes taking by the government
through condemnation proceedings (Gonzales v.
CTA,
G.R. No. L-14532, May 26, 1965).
3. Taxable if the taxes were paid and
subsequently
claimed as deduction and which are subsequently
refunded or credited. It shall be included as part of
gross income in the year of the receipt to the
extent
of the income tax benefit of said deduction (NIRC,
Sec. 34 C [1]). However, it is not taxable if the
taxed
refunded were not originally claimed as
deductions.
4. Taxable under the tax benefit rule. Recovery
of bad
debts previously allowed as deduction in the
preceding years shall be included as part of the
gross income in the year of recovery to the extent
of
the income tax benefit of said deduction (NIRC,
Sec.
34 E [1]). This is sometimes referred as the
Recapture Rule.
NOTE: “Tax benefit rule” refers to the principle
that if a taxpayer recovers a loss or expense that
was deducted in a previous year, the recovery
must
be included in the current year’s gross income to
the
extent that it was previously deducted (Black,
2004).
5. Taxable. Since the car is used for personal
purposes,
it is considered as a capital asset hence the gain is
considered income
Q: Lao is a big-time swindler. In one year he
was able
to earn ₱1 Million from his swindling
activities.
When the CIR discovered his income from
swindling,
the CIR assessed him a deficiency income tax
for such
income. The lawyer of Lao protested the
assessment
on the following grounds:
a. The income tax applies only to legal income,
not
to illegal income;
b. Lao’s receipts from his swindling did not
constitute income because he was under
obligation to return the amount he had
swindled,
hence, his receipt from swindling was similar
to
a loan, which is not income, because for every
peso borrowed he has a corresponding liability
to pay one peso; and
c. If he has to pay the deficiency income tax
assessment there will be hardly anything left
to
return to the victims of the swindling. How
will
you rule on each of the three grounds for the
protest? (1995 Bar)
A:
a. Sec. 32 of the NIRC includes within the purview
of
gross income all Income from whatever source
derived. Hence, the illegality of the income will not
preclude the imposition of the income tax thereon.
b. When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition,
express or implied, of an obligation to repay and
without restriction as to their disposition, he has
received taxable income, even though it may still
be
claimed that he is not entitled to retain the money,
and even though he may still be adjudged to
restore its equivalent. To treat the embezzled
funds as not
taxable income would perpetuate injustice by
relieving embezzlers of the duty of paying income
taxes on the money they enrich themselves with,
by
embezzlement, while honest people pay their taxes
on every conceivable type of income (James v.
U.S.,
202 US 401).
c. The deficiency income tax assessment is a direct
tax
imposed on the owner which is an excise on the
privilege to earn an income. It will not necessarily
be paid out of the same income that was subjected
to the tax. Lao’s liability to pay the tax is based on
his having realized a taxable income from his
swindling activities and will not affect his
obligation
to make restitution. Payment of the tax is a civil
obligation imposed by law while restitution is a
civil
liability arising from a crime.
Fringe benefit is any good, service or other benefit
furnished or granted by an employer in cash or in
kind in
addition to basic salaries, to an individual
employee,
except a rank and file employee, such as but not
limited
to:
[HEV-HIM-HEEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel such as maid, driver and
others
5. Interest on loans at less than market rate to the
extent of the difference between the market rate
and the actual rate granted
6. Membership fees, dues and other expenses
athletic
clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents
10. Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of
what the law allows
Q: Distinguish “capital asset” from
“ordinary asset”
(2003 Bar)
A: “Capital assets” includes property held by the
taxpayer whether or not connected with his trade
or
business, but the term does not include any of the
following, which are consequently considered
“ordinary
assets”:
1. 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;
2. property held by the taxpayer primarily for sale
to
customers in the ordinary course of trade or
business;
3. property used in the trade or business of a
character which is subject to the allowance for
depreciation provided in Sec. 34 (F) of the NIRC; or
4. real property used in trade or business of the
taxpayer.
Q: State with reason the tax treatment of the
following in the preparation of annual income
tax
returns: Income realized from sale of:
a. Capital assets; and
b. Ordinary assets. (2005 Bar)
A:
a. Generally, income realized from the sale of
capital
assets are not reported in the income tax return as
they are already subject to final taxes (capital gains
tax on real property and shares of stocks not
traded
in the stock exchange). What are to be reported in
the annual income tax return are the capital gains
derived from the disposition of capital assets
other than real property or shares of stocks in
domestic corporations, which are not subject to
final
tax.
. Income realized from sale of ordinary assets is
part
of Gross Income, included in the Income Tax
Return
Q: May capital asset be reclassified as
ordinary
asset?
A: YES. Property initially classified as capital asset
may
thereafter be treated as an ordinary asset if a
combination of the factors indubitably tends to
show
that the activity was in furtherance of or in the
course of
the taxpayer’s trade or business.
---
---
Q: In January 1970, Juan bought 1 hectare of
agricultural land in Laguna for ₱100,000. This
property has a current fair market value of ₱10
million in view of the construction of a
concrete road
traversing the property. Juan agreed to
exchange his
agricultural lot in Laguna for a one-half
hectare
residential property located in Batangas,
with a fair
Q: Hopeful Corporation obtained a loan from
market value of ₱10 million, owned by Alpha
Generous Bank and executed a mortgage on its
Corporation, a domestic corporation engaged real
in the
property to secure the loan. When Hopeful
purchase and sale of real property. Alpha
Corporation failed to pay the loan, Generous
Corporation acquired the property in 2007 for Bank
₱9
extrajudicially foreclosed the mortgage on
million. What is the nature of the real the
properties
property and acquired the same as the highest
exchanged for tax purposes – capital or
bidder. A month after the foreclosure, Hopeful
ordinary
Corporation exercised its right of redemption
asset? (2008 Bar)
and
A: The one-hectare agricultural land owned by
was able to redeem the property. Is Generous
Juan is a
Bank
capital asset because it is not a real property used
in liable to pay capital gains tax as a result of
the
trade or business. The one-half hectare residential
foreclosure sale? Explain. (2014 Bar)
property owned by Alpha Corporation is an
ordinary A: NO. In a foreclosure of a real estate mortgage,
the
asset because the owner is engaged in the
purchase and capital gains tax accrues only after the lapse of the
sale of real property redemption period because it is only then that
there

exists a transfer of property. Thus, if the right to

Q: Federico, A Filipino citizen, migrated to redeem
the
the foreclosed property was exercised by the
United States some six years ago and got a mortgagor

permanent resident status or green card. before the expiration of the redemption period, as
Should he in this

pay his Philippine income tax on the gains he case, the foreclosure is not a taxable event

derived from the sale in the New York Stock

Exchange of shares of stock in PLDT, a Q: Manalo, Filipino citizen residing in Makati

Philippine City,

corporation? (2011 Bar) owns a vacation house and lot in Tagaytay,

which he
A: YES. The gain from the sale of shares of stock in
a acquired in 2000 for ₱15 million. On Jan. 10,
2013,
domestic corporation shall be treated as derived
he sold said real property to Mayaman, another
entirely from sources within the Philippines,
regardless Filipino residing in Quezon City for ₱20
million. On
of where the said shares are sold
Feb. 9, 2013, Manalo filed the capital gains
return
and paid ₱1.2 million representing 6% capital
gains
tax. Since Manalo did not derive any ordinary
income, no income tax return was filed by him
for
2013. After the tax audit conducted in 2014,
the BIR
officer assessed Manalo for deficiency income
tax
computed as follows: P5 million (₱20million
less
₱15 million) x 30%= ₱1.5 million, without the
capital gains tax paid being allowed as tax
credit.
Manalo consulted a real estate broker who said
that
the ₱1.2 million capital gains tax should be
credited
from the ₱1.5 million deficiency income tax.
a. Is the BIR officer’s tax assessment correct?
Explain.
b. If you were hired by Manalo as his tax
consultant,
what advice would you give him to protect his
interest? Explain. (2008 Bar)
a. No. The BIR officer’s tax assessment is wrong
for two
reasons. First, the rate of income tax used is the
corporate income tax although the taxpayer is an
individual. Second, the computation of the gain
recognized from the sale did not consider the
holding
period of the asset. The capital asset having been
for
more than 12 months, only 50% of the gain is
recognized (Sec. 39B, NIRC).
b. I will advise him to ask for the issuance of the
final
assessment notice and request for the crediting of
the
capital gains tax paid against the income tax due.
The
taxpayer should explain that the capital gains tax
was
paid in good faith because the property sold is a
capital
asset and considering that what was paid is also an
income tax it should be credited against the income
tax
assessment on the ground of equity. Once the final
assessment is made, I will advise him to protest
within
30 days from receipt, invoking the holding period
and
the wrong tax rate used.
Q: A corporation, engaged in real estate
development, executed deeds of sale on various
subdivided lots. One buyer, after going around
the
subdivision, bought a corner lot with a good
view of
the surrounding terrain. He paid ₱1.2 million,
and
the title to the property was issued. A year
later, the
value of the lot appreciated to a market value
of ₱1.6
million, and the buyer decided to build his
house
thereon. Upon inspection, however, he
discovered
that a huge tower antenna had been erected on
the
lot frontage totally blocking his view. When
he
complained, the realty company exchanged his
lot
with another corner lot with an equal area but
affording a better view. Is the buyer liable presumed to have been realized from the sale
for capital which is

gains tax on the exchange of the lots? (1997 the fair market value or selling price thereof,
Bar) whichever

is higher Actual gain is not required for the

A: YES. The buyer is subject to capital gains tax on
the
exchange of lots on the basis of prevailing fair
market
value of the property transferred at the time of the
exchange or the fair market value of the property
received, whichever is higher (NIRC, Sec. 21
[E]).
Real property transactions subject to capital gains
tax
are not limited to sales but also exchanges of
property
unless exempted by a specific provision of law.
Q: A, a doctor by profession, sold in the year
2000 a
parcel of land which he bought as a form of
investment in 1990 for ₱1 million. The land was
sold
to B, his colleague and at a time when the real
estate
prices had gone down, for only ₱800,000 which
was
then the fair market value of the land. He used
the
proceeds to finance his trip to the United
States. He
claims that he should not be made to pay the
6%
imposition of the tax
but it is the gain by fiction of law which is taxable.
---
---
Q: In Jan. 1970, Juan bought 1 hectare of
agricultural
land in Laguna for ₱100,000. This property has
a
current fair market value of ₱10 million in
view of
the construction of a concrete road traversing
the
property. Juan agreed to exchange his
agricultural
lot in Laguna for a one-half hectare
residential
property located in Batangas, with a fair
market
value of ₱10 million, owned by Alpha
Corporation, a
domestic corporation engaged in the purchase
and
sale of real property. Alpha Corporation
acquired
the property in 2007 for ₱9 million.
a. What is the nature of real properties
exchanged
for tax purposes – capital asset or ordinary

final tax because he did not have any actual asset? Explain.
gain on b. Is Juan Gonzales subject to income tax on
the sale. Is his contention correct? (2001 the
Bar) exchange of property? If so, what is the tax
A: NO. The 6% capital gains tax on sale of a real based

property held as capital asset is imposed on the and rate? Explain.

income
c. Is Alpha Corporation subject to income tax
on
the exchange of property? If so, what is the
tax
base and rate? Explain. (2008 Bar)
A:
a. The one hectare agricultural land owned by
Juan
Gonzales is a capital asset because it is not a real
property used in trade or in business. The one half
hectare residential property owned by Alpha
Corporation is an ordinary asset because the
owner is
engaged in the purchase and sale of real property
(Sec.
39, NIRC, Revenue Regulations No. 7-03).
b. YES. The tax base in a taxable disposition of a
real
property classified as a capital asset is the higher
between two values; the fair market value of the
property received in exchange and the fair market
value
of the property exchanged. Since the fair market
value of
these two properties is the same, the said fair
market
value should be taken as the tax base which is P10
Million. The income tax rate is 6 % (Sec. 24D (1)
NIRC).
c. YES. The gain from the exchange constitutes an
item
of gross income, and being a business income, it
must be
reported in the annual income tax return of Alpha
Corporation. From the pertinent items of gross
income,
deductions allowed by law from gross income can
be
claimed to arrive at the net income which is the tax
base
for the corporate income tax rate of 30%
Q: Mr. H decided to sell the house and lot
wherein he
and his family have lived for the past 10
years,
hoping to buy and move to a new house and lot
closer to his children’s school. Concerned
about the
capital gains tax that will be due on the sale
of their
house, Mr. H approaches you as a friend for
advice if
it is possible for the sale of their house to
be
exempted from capital gains tax and the
conditions
they must comply with to avail themselves of
said
exemption. How will you respond? (2015 Bar)
A: Mr. H may avail the exemption from capital
gains tax
on sale of principal residence by natural persons.
Under
the law, the following are the requisites:
1) proceeds of the sale of the principal residence
have been fully utilized in acquiring or
constructing new principal residence within
eighteen (18) calendar months from the date of
sale or disposition;
2) The historical cost or adjusted basis of the real
property sold or disposed will be carried over to
the new principal residence built or acquired;
3) The Commissioner has been duly notified,
through a prescribed return, within thirty (30)
days from the date of sale or disposition of the
person’s intention to avail of the tax exemption;
and
4) Exemption was availed only once every ten (10)
years.
Q: What is meant by “income subject to final
tax?”
(2001 Bar)
A: Income subject to final tax refers to an
income wherein
the tax due is fully collected through the
withholding tax
system. Under this procedure, the payor of the
income
withholds the tax and remits it to the government
as a
final settlement of the income tax due on said
income.
The recipient is no longer required to include the
item of
income subjected to “final tax” as part of his gross
income in his income tax returns.
Q: Is the interest income of a NRFC under EFCDS
subject to final income tax of 7.5%? (2008 Bar)
A: NO. Any interest income derived by
nonresidents,
whether individuals or corporations, from
transactions
with depository banks under the expanded foreign
currency deposit system shall be exempt from
income
Tax
Q: Maribel, a retired public school teacher,
relies on
her pension from the GSIS and the Interest
Income
from a time deposit of P500,000 with ABC Bank.
Is
Maribel liable to pay any tax on her income?
A: Yes. Maribel is exempt from tax on the pension
from
the GSIS (Sec. 28 b [7] F, NIRC). However, with
her time
deposit, the interest she receives thereon is subject
to
20% final withholding tax.
Q: In 2007, spouses Renato and Judy Garcia
opened
peso and dollar deposits at the Philippine
branch of
the Hong Kong Bank in Manila. Renato is an
overseas
worker in Hong Kong while Judy lives and works
in
Manila. During the year, the bank paid
interest
income of P10,000 on the peso deposit and
USS1,000
on the dollar deposit. The bank withheld final
income tax equivalent to 20% of the entire
interest
income and remitted the same to the BIR.
a. Are the interest incomes on the bank
deposits
of spouses Renato and Judy Garcia subject to
income tax? Explain.
b. Is the bank correct in withholding the 20%
final tax on the entire interest income?
Explain. (2008 Bar)
A:
a. YES. The interest income from the peso bank
deposit is subject to 20% final withholding tax. The
interest income from the dollar deposit is subject
to
7.5% final withholding tax but only on the portion
of
the interest attributable to Judy or $500. The
interest on the dollar deposit attributable to
Renato,
a non-resident is exempt from income tax (Sec.
24B(1) NIRC).
b. NO. Only the interest income on a peso deposit is A: Disguised dividends are those income
subject to 20%. The interest income from a dollar payments

deposit is subject to 7.5% if the earner is a resident made by a domestic corporation, which is a
subsidiary of
Individual
a non-resident foreign corporation, to the latter

ostensibly for services rendered by the latter to the

Q: What is the tax treatment of the following
former, but which payments are
interest
disproportionately
on deposits with:
larger than the actual value of the services
a. BPI Family Bank? rendered. In

such case, the amount over and above the true

b. A local offshore banking unit of a foreign
value of
bank?
the service rendered shall be treated as a dividend,
(2005 Bar) and
A: shall be subjected to the corresponding tax on
Philippine
a. It is a passive income subject to a withholding
tax
sourced gross income. E.g. Royalty payments
rate of 20%. under a

b. It is a passive income subject to final corresponding licensing agreement.

withholding

tax rate of 7.5% (NIRC, Sec. 24 [B][1]). Q: Mr. Gipit borrowed from Mr. Maunawain

Both interests are not to be declared as part of P100,000.00, payable in five (5) equal monthly
gross
installments. Before the first installment
income in the income tax return. became

due, Mr. Gipit rendered general cleaning

services in
Tax sparing rule
the entire office building of Mr. Maunawain,
Under this rule, the dividends received shall be
and as
subject to 15% FWT, provided, that the
compensation therefor, Mr. Maunawain
country in which the corporation is domiciled cancelled

either (i) allows a tax credit of 15% against the the indebtedness of Mr. Gipit up to the amount
of
taxes due from the foreign corporation for
P75,000.00. Mr. Gipit claims that the
taxes deemed paid or (ii) does not impose cancellation of

income tax on such dividends his indebtedness cannot be considered as gain

on

his part which must be subject to income tax,

because according to him, he did not actually

Q: What are disguised dividends in income
taxation? receive payment from Mr. Maunawain for the

(1994 Bar) general cleaning services. Is Mr. Gipit

correct?
Explain. (2014 Bar)
A: NO. Section 50 of Rev. Regs. No. 2, otherwise
known
as Income Tax Regulations, provides that if a
debtor
performs services for a creditor who cancels the
debt in
consideration for such services, the debtor realizes
income to that amount as compensation for his
services.
In the given problem, the cancellation of Mr.
Gipit’s
indebtedness up to the amount of Php 75,000.00
gave
rise to compensation income subject to income tax,
since Mr. Maunawain condoned such amount as
consideration for the general cleaning services
rendered
by Mr. Gipit.
Q: ABC, a domestic corporation, entered into
a
software license agreement with XYZ, a
non-resident
foreign corporation based in the U.S. Under
the
agreement which the parties forged in the U.S.,
XYZ
granted ABC the right to use a computer system
program and to avail of technical know-how
relative
to such program. In consideration for such
rights,
ABC agreed to pay 5% of the revenues it
receives
from customers who will use and apply the
program
in the Philippines. Discuss the tax
implication of the
transaction. (2010 Bar)
A: The amount payable under the agreement is in
the
nature of a royalty. The term royalty is broad
enough to
include compensation for the use of an intellectual
property and supply of technical know-how as a
means
of enabling the application or enjoyment of any
such
property or right (Sec 42(4) NIRC). The
royalties paid to
the non-resident US Corporation, equivalent to 5%
of the
revenues derived by ABC for the use of the
program in
the Philippines, is subject to a 30% final
withholding tax,
unless a lower tax rate is prescribed under an
existing
tax treaty
Is Quiroz correct in claiming that the
additional ₱1
Million was gift and therefore excluded from
income?
A: NO. The amount received was in consideration
of his
loyalty and invaluable services to the company
which is
clearly a compensation income received on
account of
employment. Under the employer’s ‘motivation
test,’
emphasis should be placed on the value of Quiroz
services to the company as the compelling reason
for
giving him the gratuity; hence it should constitute
a
taxable income. The payment would only qualify as
a gift
if there is nothing but ‘good will, esteem and
kindness’
which motivated the employer to give the gratuity
(Stonton v. U.S., 186 F. Supp. 393). and daughter should work in C’s Restaurant and
part
---
of their salary will be applied to the
--- obligation. What

Q: C is a creditor of D. The debt is condoned is the tax implication?

by C.
A: The wife and daughter should pay income tax
What is the tax implication of the condonation because
of
it is fruit of labor. They should also pay donor’s tax
debt?
because they gave D ₱250,000.00. For C, since he
pays
A: For D, that amount is a remuneratory
donation and is the salary of D, it is not subject to tax; it is a
deductable
subject to income tax. It is not a gift because it item. It is a business expense and therefore it is an
started
allowable deduction. For D, there is no tax because
from an obligation and not from pure liberality of
the payment of obligation is not taxable.

donor. C should pay donor’s tax if the amount ---

condoned
---
is more than ₱100,000.00.
Q: Capt. Canuto is a member of the Armed Forces
---
of
--- the Philippines. Aside from his pay as captain,
Q: C lends D ₱150,000.00 but D failed to pay the
the debt.
government gives him free uniforms, free
C told D that D should work in C’s Restaurant living
and
quarters in whatever military camp he is
part of D’s salary will be applied to the assigned,
obligation.
and free meals inside the camp. Are these
What is the tax implication there? benefits

A: For D, it is fruit of labor and it is subject to income of Capt. Canuto? Explain. (1995 Bar)
income tax.
A: NO. The free uniforms, free living quarters and
For C, since he pays the salary of D, it is not subject the
to
free meals inside the camp are not income to Capt.
tax; it is a deductable item. It is a business expense
Canute because these are facilities or privileges
and
furnished by the employer for the employer’s
therefore it is an allowable deduction.
convenience which are necessary incidents to
---
proper
--- performance of the military personnel’s duties.
Q: C lends D ₱250,000.00 but D failed to pay
the debt.
Q: On 30 June 2000, X took out a life insurance
D is a government employee. C told D that D’ policy
s wife
on his own life in the amount of P2,000,000.00. with a face value of ₱20 million. The parents
He of Noel

designated his wife, Y, as irrevocable are made the beneficiaries of the insurance
beneficiary to policy.

P1,000,000.00 and his son, Z, to the balance Will the proceeds of the insurance form part
of of the

P1,000,000.00 but, in the latter designation, income of the parents of Noel and be subject
to
reserving his right to substitute him for
another. On income tax? (2007 Bar)

01 September 2003, X died and his wife and son A: NO. The proceeds of life insurance policies are
went paid to

to the insurer to collect the proceeds of X’ the heirs or beneficiaries upon the death of the
s life insured

insurance policy. Are the proceeds of the are not included as part of the gross income of the
insurance recipient. There is no income realized because
nothing
subject to income tax on the part of Y and Z
for their flows to Noel’s parents other than a mere return of

respective shares? Explain. (2003 Bar) capital, the capital being the life of the insured

A: NO. The law explicitly provides that proceeds of

life
Q: A, an employee of the Court of Appeals,
insurance policies paid to the heirs or beneficiaries retired
upon
upon reaching the compulsory age of 65 years.
the death of the insured are excluded from gross Upon
income and is exempt from taxation. The proceeds
of life compulsory retirement, A received the money
value
insurance received upon the death of the insured
of his accumulated leave credits in the amount
constitute a compensation for the loss of life, hence
of
a

return of capital, which is beyond the scope of P500.000.00. Is said amount subject to tax?
income Explain.

(1996 Bar)
taxation (Section 32(B)(1), NIRC).
A: NO. The commutation of leave credits, more
---
commonly known as terminal leave pay, i.e., the
--- cash
Q: Noel is a bright computer science graduate. equivalent of accumulated vacation and sick leave
He
credits given to an officer or employee who retires,
was hired by HP. To entice him to accept the or
job, he
separated from the service through no fault of his
was offered the arrangement that part of his own,

compensation package would be an insurance is exempt from income tax. Compulsory retirement
policy is

considered as cause beyond the control of the

employee.
Hence, all benefits received are tax exempt (BIR Q: Jacobo worked for a manufacturing firm. Due
to
Ruling
business reverses the firm offered voluntary
238-91 dated November 8, 1991;
redundancy program to reduce overhead
Commissioner v. CA and expenses.

Efren Castaneda, GR No. 96016, October
17, 1991; Re:
Request of Atty. Zialcita for
Reconsideration, A.M. No. 90-
Under the program an employee who offered to
resign would be given separation pay
equivalent to
his 3 month’s basic salary for every year of
service.

6-015-SC, October 18, 1990). Jacobo accepted the offer and received ₱
400,000 as
---
separation pay under the program.
---
After all the employees who accepted the offer
Q: Assuming it does not form part of the
were
terminal
paid, the firm found its overhead is still
leave pay, as when it is given annually to the
excessive.
employee, wherein the vacation or sick leave
Hence it adopted another redundancy program.
may be
Various unprofitable departments were closed.
converted into cash. What is the tax treatment
As a
of the
result, Kintanar was separated from the
cash equivalent of such vacation leave
service. He
credits?
also received ₱400,000 as separation pay.
A: It depends.
a. Did Jacobo derive income when he received
1. For private employees – vacation leaves are his
exempt
separation pay?
from tax up to 10 days while sick leaves are always
b. Did Kintanar derive income when he received
taxable.
his separation pay? (1995 Bar)
2. For government employees – both vacation
A:
and sick

leaves are tax exempt irrespective of the number of a. YES. Because his separation from employment
was
days.
voluntary on his part in view of his offer to resign.
---
What is excluded from gross income is any amount
Tax treatment of sick leave credits
receivedby an official or employee as a
They are taxable irrespective of the number of consequence
days. This
of separation of such official or employee from the
applies if the sick or vacation leave credits do not
service of the employer for any cause beyond the
form
control of the said official or employee (NIRC, Sec
part of the compulsory retirement benefit.
28).
---
b. NO. Because his separation from employment is taxable income to the widow? Why? (1996 Bar)
due
A: NO. Any amount received by an official or
to causes beyond his control. The separation was employee

involuntary as it was a consequence of the closure or by his heirs from the employer as a
of consequence of
various unprofitable departments pursuant to the separation of such official or employee from the
service
redundancy program.
of the employer because of death sickness or other
---
physical disability or for any cause beyond the
--- control of
Q: Z, a Filipino immigrant living in the United the said official or employee are excluded from
States gross
for more than 10 years. He is retired and came Income
back

to the Philippines a balikbayan. Every time he

comes Q: A Co., a Philippine corporation, has two
divisions
to the Philippines, he stays here for about a
month. manufacturing and construction. Due to the

He regularly receives a pension from his economic situation, it had to close its
former construction

employer in the United States, amounting division and lay-off the employees in that
US$1,000 a division. A

month. Does the US$1,000 pension become Co. has a retirement plan approved by the BIR,
taxable which

because he is now residing in the Philippines? requires a minimum of 50 years of age and 10
years
A: NO. The law provides that pensions received by
of service in the same employer at the time of
resident or non-resident citizens of the Philippines
from retirement. There are 2 groups of employees to
be
foreign government agencies and other
institutions, laid off:
private or public, are excluded from gross income 1. Employees who are at least 50 years of age
(NIRC, and

Sec. 32 B [6] c). has at 10 years of service at the time of

--- termination of employment.

--- 2. Employees who do no meet either the age or

Q: X, an employee of ABC Corporation died. ABC length of service A Co. plans to give the

Corporation gave X’s widow an amount following:

equivalent to a. For category (A) employees – the benefits
X’s salary for one year. Is the amount under the BIR approved plan plus an ex
considered
gratia payment of one month of every year
of service. subject to withholding tax. These are benefits
received
b. For category (B) employees – one month for
on account of separation due to causes beyond the
every year of service.
employees’ control, which are specifically excluded
For both categories, the cash equivalent of from
unused
gross income
vacation and sick leave credits. A Co. seeks
your
Q: JR was a passenger of an airline that
advice as to whether or not it will subject any crashed. He
of these payments to WT. Explain your advice.
(1999 survived the accident but sustained serious
physical
Bar)
injuries which required hospitalization for 3
A: For category A employees, all the benefits months.
received on
Following negotiations with the airline and
account of their separation are not subject to
its
income tax,

hence no withholding tax shall be imposed. The insurer, an agreement was reached under the
benefits terms

received under the BIR-approved plan upon
meeting the
service requirement and age requirement are
explicitly
excluded from gross income. The ex gratia
payment also
qualifies as an exclusion from gross income being
in the
nature of benefit received on account of separation
due
to causes beyond the employees’ control (Section
32(B),
NIRC). The cash equivalent of unused vacation
and sick
leave credits qualifies as part of separation
benefits
excluded from gross income (CIR v. Court of
Appeals, GR
No. 96O16, October 17, 1991).
For category B employees, all the benefits received
by
them will also be exempt from income tax, hence
not
of which JR was paid the following amounts:
₱500,000 for his hospitalization; ₱250,000 as
moral
damages; ₱300,000 for loss of income during
the
period of his treatment and recuperation. In
addition,
JR received from his employer the amount of
₱200,000 representing the cash equivalent of
his
earned vacation and sick leaves. Which if any,
of the
amounts are subject to income tax? (2005 Bar)
A: The amount of ₱200,000 that JR received from
his
employer is subject to income tax, except the
money
equivalent of 10 days unutilized vacation leave
credits
which is not taxable. Amounts of vacation
allowances or
sick leave credits which are paid to an employee
constitute compensation (RR 2-98, as
amended by R.R.
10-2000, Sec. 2.78 A [7]).
The amounts that JR received from the airline are
excluded from gross income and not subject to
income
tax because they are compensation for personal
injuries
suffered from an accident as well as damages
received as
a result of an agreement on account of such
injuries
Q: Mr. A, a citizen and resident of the
Philippines, is a
professional boxer. In a professional boxing
match
held in 2013, he won prize money in United
States
(US) dollars equivalent to P300,000,000.
a. Is the prize money paid to and received by
Mr. A
in the US taxable in the Philippines? Why?
b. May Mr. A's prize money qualify as an
exclusion
from his gross income? Why?
. The US already imposed and withheld income
taxes from Mr. A's prize money. How may Mr. A
use or apply the income taxes he paid on his
prize money to the US when he computes his
income tax liability in the Philippines for
2013?
(2015 Bar)
A:
a. YES. Under the NIRC, the income within and
without
of a resident citizen is taxable. Since Mr. A is a
resident Filipino citizen, his income worldwide is
taxable in the Philippines.
b. NO. Under the law, all prizes and awards granted
to
athletes in local and international sports
competitions whether held in the Philippines or
abroad and sanctioned by their national sports
association are excluded from gross income.
However, in this case, there is no showing that the
boxing match was sanctioned by the Philippine
National Sports Commission. Therefore, the prize
money is not excluded.
c. Mr. A may avail of tax credit against his tax
liability
in the Philippines for taxes paid in foreign
countries.
He has to signify in his income tax return his desire
to avail the deduction.
---
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup Boxing
Council, a sports association duly accredited
by the
Philippine Boxing Association. Onyoc received
the
amount of ₱500,000 as his prize which was
donated
by Ayala Land Corporation. The BIR tried to
collect
income tax on the amount received by Onyoc who
refuses to pay. Decide. (1996 Bar)
A: The prize will not constitute a taxable income to
Onyoc, hence the BIR is not correct in imposing the
income tax. R.A. 7549 explicitly provides that “All
prizes
and awards granted to athletes in local and
international
sports tournaments and competitions in the
Philippines
or abroad and sanctioned by their respective
national
sports association shall be exempt from income
tax.”
Neither is the BIR correct in collecting the donor’s customary. Another reason for its
tax non-deductibility is

from Ayala Land Corporation. The law is clear the fact that it can be considered as an illegal
when it
compensation made to a government employee.
categorically stated “That the donors of said prizes This is
and
so because if the insured, his estate or heirs were
awards shall be exempt from the payment of the made
donor’s
as the beneficiary (because of the requirement of
tax.”
insurable interest), the payment of premium will

constitute bribes which are not allowed as

Q: OXY is the president and CEO of ADD deduction
Computers,
from gross income (Sec. 34[A][1][c], NIRC).
Inc. When OXY was asked to join the government
Even if the company was made the beneficiary,
service as director of a bureau under the whether

Department of Trade and Industry, he took a directly or indirectly, the premium is not allowed
leave as a

of absence from ADD. Believing that its deduction from gross income (Sec. 36[A}14],
business
NIRC).
outlook, goodwill and opportunities improved
---
with
---
OXY in the government, ADD proposed to obtain
a policy of insurance on his life. On ethical Q: Masarap Food Corporation (MFC) incurred
grounds,
substantial advertising expenses in order to
OXY objected to the insurance purchase but ADD protect
purchased the policy anyway. Its annual its brand franchise for one of its line
premium products. In its
amounted to ₱100,000. Is said premium income tax return, MFC included the
deductible advertising
by ADD Computers, Inc.? (2004 Bar) expense as deduction from gross income,
claiming it
A: NO. The premium is not deductible because it is
not as an ordinary business expense. Is MFC
an ordinary business expense. The term "ordinary" correct?
is
Explain. (2009 Bar)
used in the income tax law in its common
significance A: NO. The protection of taxpayer’s brand
franchise is
and it has the connotation of being normal, usual
or analogous to the maintenance of goodwill or title
to one’s
customary (Deputy v. Du Pont, 308 US 488
property which is in the nature of a capital
[1940]). expenditure.

Paying premiums for the insurance of a person not An advertising expense, of such nature does not
qualify
connected to the company is not normal, usual or
as an ordinary business expense, because the
benefit to
be enjoyed by the taxpayer goes beyond one
taxable year
(CIR v General Foods Inc. 401 SCRA 545).
---
---
Q: Freezy Corporation, a domestic corporation
engaged in the manufacture and sale of ice
cream,
made payments to an officer of Frosty
Corporation, a
competitor in the ice cream business, in
exchange for
said officer’s revelation of Frosty
Corporation’s trade
secrets. May Freezy Corporaton claim the
payment to
the officer as deduction from its gross
income?
Explain. (2014 Bar)
A: NO. payments made in exchange for the
revelation of
a competitor’s trade secrets is considered as an
expense
which is against law, morals, good customs or
public
policy, which is not deductible (3M Philippines,
Inc. v. CIR,
G.R. No. 82833, September 26, 1988).
Also, the law will not allow the deduction of bribes,
kickbacks and other similar payments. Applying
the
principle of ejusdem generis, payment made by
Freezy
Corporation would fall under “other similar
payments”
which are not allowed as deduction from gross
income
Q: Amounts of income accrue where the right to
receive them become fixed, where there is
created
an enforceable liability. Similarly,
liabilities are
accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time
of
payment. For a taxpayer using the accrual
method,
when do the facts present themselves in such
a
manner that the taxpayer must recognize income
or
expense? (2012 Bar)
A: The accrual of income and expense is permitted
when
the ALL-EVENTS TEST has been met. This test
requires:
(1) fixing of a right to income or liability to pay;
and (2)
the availability of the reasonable accurate
determination
of such income or liability. The all-events test
requires
the right to income or liability be fixed, and the
amount
of such income or liability be determined with
reasonable accuracy
Q: Gold and Silver Corporation gave extra 14 th
month bonus to all its officials and employees
in the
total amount of ₱75 million. When it filed its
corporate income tax return the following year,
the
corporation declared a net operating loss.
When the
income tax return of the corporation was
reviewed
by the BIR the following year, it disallowed equipment or machinery deductible from gross
as item
income? (1999 Bar)
of deduction the ₱75 million bonus the
A: YES. The law gives the taxpayer the option to
corporation
claim it
gave its officials and employees on the ground
as a deduction or treat it as capital expenditure
of
interest
unreasonableness. The corporation claimed incurred to acquire property used in trade,
that the business or
bonus is an ordinary and necessary expense exercise of a profession
that

should be allowed. If you were the CIR, how

Q: Are taxes paid and subsequently refunded
will you
taxable
resolve the issue? (2006 Bar)
or non-taxable? (2005 Bar)
A: I will rule against the deductibility of the bonus.
A: Taxable only if the taxes were paid and claimed
The
as
extra bonus is not normal to the business and
deduction and which are subsequently refunded or
unreasonable. Giving an extra bonus at a time that
the credited. It shall be included as part of gross
income in
company suffers operating losses is not a payment
done the year of the receipt to the extent of the income
tax
in good faith and is not normal to the business,
hence benefit of said deduction (Sec. 34[C][1], NIRC).
Not
unreasonable and would not qualify as ordinary
and taxable if the taxes refunded were not originally
claimed
necessary expense.
as deductions.

Q: How is interest as a deduction from gross

income Q: X, a travelling salesman in Sulu. In the
course of
defined? (1992 Bar)
his travel, a band of MNLF seized his car by
A: Interest shall refer to the payment for the use or
force and
forbearance or detention of money, regardless of
used it to kidnap a foreign missionary. The
the
next day,
name it is called or denominated. It includes the
amount the military and the MNLF band had a chance

paid for the borrower’s use of money during the encounter which caused X’s car to be a total
term of wreck.

the loan, as well as for his detention of money after Can X deduct the value of his car from his
the income as
due date for its repayment casualty loss? (1993 Bar)

A: It depends. If X is an employee of a company, he

Q: Is the interest on loans used to acquire cannot deduct the losses incurred since an
capital individual
taxpayer who derives income from compensation
is
allowed only personal and additional deductions
and the
reasonable premiums for health and
hospitalization
insurance.
If X is engaged in trade or business, he can deduct
the
value of the car from his gross income provided he
can
recover only up to the amount of the casualty loss
that
does not exceed its book value, and that it is not
compensated by insurance or otherwise.
Q: What is the rationale for the rule
prohibiting the
deduction of capital losses from ordinary
gains?
Explain. (2003 Bar)
A: It is to insure that only costs or expenses
incurred in
earning the income shall be deductible for income
tax
purposes consonant with the requirement of the
law that
only necessary expenses are allowed as deductions
from
gross income. The term “necessary expenses”
presupposes that in order to be allowed as
deduction,
the expense must be business connected, which is
not
the case insofar as capital losses are concerned.
This is
also the reason why all nonbusiness connected
expenses
like personal, living and family expenses, are not
allowed
as deduction from gross income
Q: Are worthless securities deductible from
gross
income for income tax purposes? (1999 Bar)
A: Worthless securities, which are ordinary assets,
are
not allowed as deduction from gross income
because the
loss is not realized. However, if these worthless
securities are capital assets, the owner is
considered to
have incurred a capital loss as of the last day of the
taxable year and therefore, deductible to the extent
of
capital gains. This deduction, however, is not
allowed to
a bank or trust company
: What factors will determine whether or not
the
debts are bad debts? (2004 Bar)
A: The factors to be considered include, but are not
limited to, the following:
1. The debtor has no property or visible income;
2. The debtor has been adjudged bankrupt or
insolvent;
3. There are numerous debtors with small
amounts of debts and further action on the
accounts would entail expenses exceeding the
amounts sought to be collected;
4. The debt can no longer be collected even in the
future; and
5. Collateral shares have become worthless.
NOTE: "Worthless" is not determined by an
inflexible formula or slide rule calculation, but
upon
the exercise of sound business judgment. In order
that debts be considered as bad debts because they
have become worthless, the taxpayer should:
a. Ascertain the debt to be worthless in the year
for which the deduction is sought; and
b. Act in good faith in ascertaining the debt to be
Worthless
Q: Is depreciation of goodwill deductible from
gross
income? (1999 Bar)
A: Goodwill may or may not be subject to
depreciation.
GR: 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.
XPN: If the goodwill is acquired through capital
outlay
and is known from experience to be of value to the
business for only a limited period (Sec. 107,
RR No. 2). In
such case, the goodwill is allowed to be amortized
over
its useful life.
Q: Z purchased fully depreciated machineries
and
entered the machineries in his books at ₱
120,000.
Based on the independent appraisal and
engineering report, Z assigned to the
machineries an
economic life of 5 years. Adopting the
straight-line
method, Z claimed a depreciation deduction of
₱24,000 in his income tax return. Is the
deduction
proper, considering that in the hands of the
original
owner, the said machineries were already fully
depreciated? (1983 Bar)
A: YES. The starting point for the computation of
the
deductions for depreciation is the reasonable cost
of
acquiring the asset and its economic life. The fact
that
the machineries were already depreciated by its
original
owner does not matter. Z is allowed a depreciation
allowance for the exhaustion, wear and tear
(including
reasonable allowance for obsolescence) of the
machineries which he is using in his trade or
business
Q: When can an employer claim as deduction the
payment of reasonable pension?
A: If the employer contributes to a private pension
plan
for the benefit of its employee.
---
---
Q: Are the following expenses deductible from
gross
income:
a. Employer’s contribution to the Christmas
fund
of his employees
b. Contribution to the construction of a
chapel of a
university that declares dividends to its
stockholders
c. Premiums paid by the employer for the life
insurance of his employees
d. Contribution to a newspaper fund for needy
families when such newspaper organizes a
group of civic spirited citizens solely for
charitable purposes. (1968 Bar)
A:
a. Yes. Under No. 27 RAMO 1-87 subject to
the
condition that the contribution does not exceed ½
month’s basic salary of all the employees. It is part
of the ordinary and necessary expenses.
b. No, part of the net income of the university
inures
to the benefit of its private stockholders (NIRC,
Sec.
34 [H]).
c. No, for the beneficiary is the employer (NIRC,
Sec.
36 A [4]).
d. No, contributions to a newspaper fund for needy
families are not deductible for the reason that the
income inures to the benefit of the private
stockholder of the printing company.
---
---
Q: On December 6, 2001, LVN Corp. donated a
piece
of vacant lot situated in Mandaluyong City to
an
accredited and duly registered non-stock,
non-profit
educational institution to be used by the
latter in
building a sports complex for students.
May the donor claim in full as deduction from
its
gross income for the taxable year 2001 the
amount
of the donated lot equivalent to its fair
market
value/zonal value at the time of the donation?
(2002
Bar)
A: NO. Donations and/or contributions made to
qualified 101one institutions consisting of
property
other than money shall be based on the acquisition
cost
of the property. The donor is not entitled to claim
as full
deduction the fair market value/zonal value of the
lot
donated (NIRC, Sec. 34 [H]).
---
---
Q: The Filipinas Hospital for Crippled
Children is a
charitable organization. X visited the
hospital and
gave ₱100,000 to the hospital and ₱5,000 to a
crippled girl whom he particularly pitied. A
crippled son of X is in the hospital as one of
its patients. X
wants to exclude both the ₱100,000 and the
₱,000
from his gross income. Discuss. (1993 Bar)
A: If X is earning from compensation income, he
could
not deduct either the ₱100,000 and the ₱5,000. If
he is
earning from trade or business, he could deduct
the
₱100,000 if the hospital is accredited as a 102one
institution. If not, then no deduction is allowed.
However, he could not deduct the ₱5,000 because
to
qualify for exemption, the charitable contribution
must
be given to accredited organizations or
associations
(NIRC, Sec. 34 H [1]).
---
---
Q: On the part of the contributor, are
contributions
to a candidate in an election allowable as a
deduction from gross income? (1998 Bar)
A: The contributor is not allowed to deduct the
contributions because the said expense is not
directly
attributable to the development, management
and/or
operation and/or conduct of trade or business or
profession.
Q: In 2012, Dr. K decided to return to his
hometown
to start his own practice. At the end of 2012,
Dr. K
found that he earned gross professional income
in
the amount of P1,000,000.00; while he incurred
expenses amounting to P560,000.00
constituting
mostly of his office space rent, utilities,
and
miscellaneous expenses related to his medical
practice. However, to Dr. K’s dismay, only
P320,000.00 of his expenses were duly covered
by
receipts. What are the options available for
Dr. K so
he could maximize the deductions from his
gross
income? (2015 Bar)
A: Dr. K may opt to use the optional standard
deduction
(OSD) in lieu of the itemized deduction. OSD is a
maximum of forty percent (40%) of gross receipts
during the taxable year. Proof of actual expenses is
not
required, but Dr. K shall keep such records
pertaining to
his gross receipts.
Q: Ms. C, a resident citizen, bought
ready-to-wear
goods from Ms. B, a nonresident citizen.
a. If the goods were produced from Ms. B’s
factory
in the Philippines, is Ms. B’s income from the
sale to Ms. C taxable in the Philippines?
Explain.
b. If Ms. B is an alien individual and the goods
were
produced in her factory in China, is Ms. B’
s
income from the sale of the goods to Ms. C
taxable in the Philippines? Explain. (2015
Bar)
A:
a. YES. The income of Ms. B from the sale of
ready-towear
goods to Ms. C is taxable. A nonresident citizen
is taxable only on income derived from sources
within the Philippines. In line with the source rule
of
income taxation, since the goods are produced and
sold within the Philippines, Ms. B’s
Philippinesourced
income is taxable in the Philippines.
b. YES. But only a proportionate part of the
income.
Gains, profits and income from the sale of personal
property produced by the taxpayer without and
sold
within the Philippines, shall be treated as derived
part.
Q: X was hired by Y to watch over Y’s fishponds
with
a salary of ₱10,000. To enable him to perform
his
duties well, he was also provided a small hut,
which
he could use as his residence in the fishponds.
Is the
fair market value of the use of the small hut
by X a
“fringe benefit” that is subject to the 32%
tax
imposed by Sec. 33 of the NIRC? (2001 Bar)
A: NO. X is neither a managerial nor a supervisory
employee. Only managerial or supervisory
employees
are entitled to a fringe benefit subject to the FBT.
Even
assuming that he is a managerial or supervisory
employee, the small hut is provided for the
convenience
of the employer, hence does not constitute a
taxable
fringe benefit
Q: Charlie, a widower, has two sons by his
previous
marriage. Charlie lives with Jane who is
legally
married to Mario. They have a child named Jill.
The
children are all minors and not gainfully
employed.
a. How much personal exemption can Charlie
claim?
b. How much additional exemption can Charlie
claim? (2006 Bar)
A:
a. Charlie may claim the basic personal exemption
of
₱50,000. Under R.A. 9504, an individual taxpayer
may
claim the BPE irrespective of status.
b. His children from his previous marriage who are
legitimate children and his illegitimate child with
Jane
will all entitle him to additional personal
exemption of
₱25,000 for each dependent, if apart from being
minor
and not gainfully employed, they are unmarried,
living
with and dependent upon Charlie for their chief
support.
Q: Mar and Joy got married in 1990. A week
before
their marriage, Joy received, by way of
donation, a
condominium unit worth ₱750,000 from her
parents.
After the marriage, some renovations were made
at a
cost of ₱150,000. The spouses were both
employed
in 1991 by the same company. On 30 Dec. 1992,
their
first child was born, and a second child was
born on
November 7, 1993. In 1994, they sold the
condominium unit and bought a new unit.
Under the foregoing facts, what were the
events in
the life of the spouses that had income tax
incidence?
(1997 Bar)
A: The events in the life of spouses, Mar and Joy,
which
had income tax incidence, are:
1. Their marriage in 1990 had no effect on their
entitlement to the basic personal exemption of
₱50,000 which may be enjoyed irrespective of the
individual taxpayer’s status;
2. Their employment in 1991 by the same company
will make them liable to the income tax imposed
on
gross compensation income;
3. Birth of their first child in 1992 would give rise
to an
additional exemption of ₱25,000 for taxable year
1992;
4. Birth of their second child in 1993 would
likewise
give rise to an additional exemption of ₱25,000 for
1993.
NOTE: If the spouses are qualified under
“substituted
filing,” they need not file Income Tax Returns.
A: NO. Since the arrangement between Weber
Realty Co.
and Prime Development Co. is for the purpose of
undertaking a construction project, there is no
separate
taxable entity pursuant to Sec. 22[B] of the NIRC.
The term 'corporation' shall include partnerships,
no
matter how created or organized, joint-stock
companies,
joint accounts (cuentas en participacion),
association, or
insurance companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum,
coal,
geothermal and other energy operations pursuant
to an
operating consortium agreement under a service
contract with the Government
Q: KKK Corp. secured its Certificate of
Incorporation
from the Securities and Exchange Commission on
June 3, 2013. It commenced business operations
on
August 12, 2013. In April 2014, Ms. J, an
employee of
KKK Corp. in charge of preparing the annual
income
tax return of the corporation for 2013, got
confused
on whether she should prepare payment for the
regular corporate income tax or the minimum
corporate income tax.
a. As Ms. J's supervisor, what will be your
advice?
b. What are the distinctions between regular
corporate income tax and minimum corporate
income tax? (2015 Bar)
A:
a. As Ms. J’s supervisor, I will advise that KKK Corp.
should prepare payment for the regular corporate
income tax and not the minimum corporate income
tax (MCIT). Under the NIRC, MCIT is only
applicable
beginning the 4th taxable year following the
commencement of business operation (Sec.
27(e)(1),
NIRC).
b. The distinctions between regular corporate
income
tax and the minimum corporate income tax are the
following: 1. As to taxpayer: Regular corporate
income tax applies to all corporate taxpayers while
minimum corporate income tax applies to
domestic
corporations and resident foreign corporations. 1. Salaries of office staff;

2. As to tax rate: Regular corporate income tax is 2. Rentals for office space;

30% while minimum corporate income tax is 2%. 3. Representation expenses incurred in
meetings
3. As to tax base: Regular corporate income tax is
with clients
based on the net taxable income while minimum

corporate income tax is based on gross income. a. What are the items in the above mentioned

4. As to period of applicability: Regular earnings which should be included in the

corporate
computation of ABC Law Firm’s gross income?
income tax is applicable once the corporation
Explain.
commenced its business operation, while
minimum corporate income tax is applicable b. What are the items in the above-mentioned
beginning on the
payments which may be considered as
4th taxable year following the commencement of
deductions from the gross income of ABC Law
business operations.
Firm? Explain.
5. As to imposition: The minimum corporate
c. If ABC Law Firm earns net income in 2012,
income tax is imposed whenever it is greater than what,

the regular corporate income tax o the corporation if any, is the tax consequence on the part of
ABC

Q: A, B, and C, all lawyers, formed a Law Firm insofar as the payment of income tax
partnership is

called ABC Law Firm so that they can practice concerned? What, if any, is the tax
their consequence

profession as lawyers. For the year 2012, ABC on the part of A, B, and C as individual
Law partners,

Firm received earnings and paid expenses, insofar as the payment of income tax is
among concerned? (2014 Bar)
which are as follows: A:
Earnings:
a. The three (3) items of earnings should be
1. Professional/legal fees from various included
clients;
in the computation of ABC Law Firm’s gross
2. Cash prize received from a religious income.
society in
The professional/legal fees from various clients is
recognition of the exemplary service of ABC
Law included as part of gross income being in the
nature
Firm;
of compensation for services (Section 32(A)(1),
3. Gains derived from sale of excess computers
and NIRC). The cash prize from a religious society in
laptops recognition of its exemplary services is also
Payments: included there being no law providing for its
exclusion. This is not a prize in recognition of any
of
the achievements enumerated under the law
hence,
should form part of gross income (Section
32(B)(7)(c), NIRC). The gains from sale of
excess
computers and laptops should also be included as
part of the firm’s gross income because the term
gross income specifically includes gains derived
from dealings in property b. The law firm being
formed as general professional
partnership is entitled to the same deductions
allowed to corporation (Section 26, NIRC).
Hence,
the three (3) items of deductions mentioned in the
problem are all deductible, they being in the nature
of ordinary and necessary expenses incurred in the
practice of profession (Section 34(A), NIRC).
However, the amount deductible for
representation
expenses incurred by a taxpayer engaged in sale of
services, including a law firm, is subject to a ceiling
of 1% of net revenue (RR No. 10-2002).
c. The net income having been earned by the law
firm
which is formed and qualifies as a general
professional partnership, is not subject to income
tax because the earner is devoid of any income tax
personality. Each partner shall report as gross
income his distributive shares, actuality or
constructively received, in the net income of the
partnership. The partnership is merely treated for
income tax purposes as a pass-through entity so
that its net income is not taxable at the level of the
partnership bur said net income should be
attributed to the partners, whether or not
distributed to them, and they are liable to pay the
income tax based on their respective taxable
income
as individual taxpayers
Q: Tong Siok, a Chinese billionaire and a
Canadian
resident, died and left assets in China valued
at P80
billion and in the Philippines assets valued
at P20
billion. For Philippine estate tax purposes
the
allowable deductions for expenses, losses,
indebtedness, and taxes, property previously
taxed,
transfers for public use, and the share of his
surviving
spouse in their conjugal partnership amounted
to
P15 billion. Tong's gross estate for
Philippine estate
tax purposes is? (2011 Bar)
A: P20 billion. Being a non-resident alien, the
estate tax to
be paid will be based on his properties situated in
the
Philippines. The deductions are not included since
the
question pertains to gross estate, not the net
estate.
NOTE: Gross estate tax is arrived at after adding all
those
included and deducting the exclusions while net
estate is
arrived at after subtracting the allowable
deductions
from the gross estate.
Q: Ralph Donald, an American citizen, was a top
executive of a U.S company in the Philippines
until he
retired in 1999. He came to like the considered a resident alien for tax purposes since
Philippines so he is an

much that following his retirement, he decided American citizen and was a permanent resident of
to the

Philippines at the time of his death. The value of

spend the rest of his life in the country. He
the gross
applied for
estate of a resident alien decedent shall be
and was granted permanent resident status the determined by
following year. In the spring of 2004, while including the value at the time of his death of all
property,
vacationing in Orlando Florida USA, he
suffered a real or personal, tangible or intangible, wherever
situated
heart attack and died. At the time of his death
he left (Sec. 85, NIRC).

the following properties: The other item, (h) proceeds from a life insurance
policy,
a. Bank deposits with Citibank Makati and
Citibank may be included in his gross estate only when it
was
Orlando Florida;
Ralph Donald who took out the insurance upon his
b. Rest house in Orlando, Florida; own

c. A condominium unit in Makati; life, payable upon his death to his estate, or when
the
d. Shares of stock in the Phil subsidiary of
the U.S beneficiary is a third person other than his estate
who is
company where he worked;
not designated as an irrevocable beneficiary
e. Shares of stock in San Miguel Corporation
and
Q: Jose Ortiz owns 100 hectares of
PLDT
agricultural land
f. Shares of stock in Disney World in Florida
planted with coconut trees. He died on May 30,
g. U.S treasury bonds 1994.

h. Proceeds from a life insurance policy Prior to his death, the government, by
issued by a operation of

US corporation. law, acquired under the Comprehensive

Agrarian
Which of the foregoing assets shall be
included in the Reform Law all his agricultural lands except
five (5)
taxable gross estate in the Philippines?
Explain. hectares. Upon the death of Ortiz, his widow
asked
(2005 Bar)
you how she will consider the 100 hectares of
A: All of the properties enumerated except (h), the
agricultural land in the preparation of the
proceeds from life insurance, are included in the estate tax
taxable
return. What advice will you give her? (1994
gross estate in the Philippines. Ralph Donald is
Bar)
A: The 100 hectares of land that Jose Ortiz owned estate?
but
A: NO, it will be considered as a receivable of the
which prior to his death on May 30, 1994 were estate.
acquired
Q: Antonia Santos, 30 years old, gainfully
by the government under CARP are no longer part employed,
of his
is the sister of Eduardo Santos. She died in
taxable gross estate, with the exception of the
an
remaining
airplane crash. Edgardo is a lawyer and he
five (5) hectares which under Sec. 78{a) of the
NIRC still negotiated

forms part of "decedent's interest". with the airline company and insurance company
and

they were able to agree to settlement of P10

Q: In his last will and testament, X bequeathed million.
a
This is what Antonia would have earned as
painting to his only son, Z. The will also somebody
granted Z the
who was gainfully employed. Edgardo was her
power to appoint his wife, W, as successor to only
the
heir.
painting in the event of Z’s death. Z died and
W a. Is the P10 million subject to estate tax?

succeeded to the property. Should the painting b. Should Edgardo report the 10 million as his
be
income being Antonia’s only heir? (2007 Bar)
included in the gross estate of Z and thus be
A:
subject
a. NO. The estate tax is a tax on the privilege
to estate tax? (2009 Bar)
enjoyed
A: NO. Only property passing under a general
by an individual in controlling the disposition of
power of
her
appointment is included in the gross estate of the
properties to take effect upon her death. The P10
decedent. In this case, the painting has to be
million is not a property existing at the time of the
transferred
decedent’s death; hence it cannot be said that she
by Z only to his wife, W, based on the will of his
father, X. exercised control over its disposition. Since the
Since the power of appointment is specific (i.e., privilege to transmit property is not exercised by
only to his the
wife), such property should not be included in his decedent, the estate tax cannot be imposed
gross thereon.
estate. b. NO. The amount received in a settlement
agreement

with the airline company and insurance company

Q: If the property insured was destroyed after
is
the
an amount received from the accident insurance
taxpayer’s death, will it still form part of
the gross covering the passenger of the airline company and
is
in the nature of compensation for personal injuries (Sec. 32 B (1), NIRC)
and for damages sustained on account of such
b. Only the proceeds of 1M given to the son, Z, shall
injuries, which is excluded from the gross income
form part of the Gross Estate of X. Under the NIRC,
of
proceeds of life insurance shall form part of the
the recipient.
gross estate of the decedent to the extent of the
---
amount receivable by the beneficiary designated in
---
the policy of the insurance except when it is
Q: On June 30, 2000, X took out a life insurance
policy expressly stipulated that the designation of the

on his own life in the amount of P2,000,000.
He designated his wife, Y, as irrevocable
beneficiary to
P1,000,000 and his son Z, to the balance of
beneficiary is irrevocable. As stated in the problem,
only the designation of Y is irrevocable while the
insured/decedent reserved the right to substitute
Z

P1,000,000, but in the latter designation, as beneficiary for another person. Accordingly, the
reserving
proceeds received by Y shall be excluded while the
his right to substitute him for another.
proceeds received by Z shall be included in the
On September 1, 2003 X died and his wife and gross
son estate of X
went to the insurer to collect the proceeds of
X’s life

insurance policy.
Q: Remedios, a resident citizen, died on
a. Are the proceeds of the insurance subject November
to
10, 2006. She died leaving three condominium
income tax on the part of Y and Z for their units

respective shares? Explain. in Quezon City valued at P5M each. Rodolfo was
her
b. Are the proceeds of the insurance to form
part of only heir. He reported her death on December
6,
the gross estate of X? Explain. (2003 Bar)
2006 and filed the estate tax return on March
A:
30,
a. NO. The law explicitly provides that the proceeds
2007. Because she needed to sell one unit of
of
the
life insurance policies paid to the heirs or
condominium to pay for the estate tax she asked
beneficiaries upon the death of the insured are the

excluded from gross income and is exempt from CIR to give her one year to pay the estate tax
due.
taxation. The proceeds of life insurance received
The CIR approved the request of extension of
upon the death of the insured constitute a
time
compensation for the loss of life, hence a return of
provided that the estate tax be computed on the
capital, which is beyond the scope of income
taxation
basis of the value of property at the time of
payment
of tax.
a. Does CIR have the power to extend the
payment
of estate tax?
b. Does the condition that the basis of the
estate
tax will be the value at the time of the payment
have legal basis? (2007 Bar)
A:
a. YES. The CIR may allow an extension of time to
pay
the estate tax if the payment on the due date would
impose undue hardship upon the estate or any of
the heirs. The extension in any case, will not
exceed
2 years if the estate is not under judicial settlement
of 5 years if it is under judicial settlement. The CIR
may require the posting of a bond to secure the
payment of the tax (Sec. 91[B], NIRC).
b. NO. The valuation of properties comprising the
estate of a decedent is the fair market value as of
the
time of death. No other valuation date is allowed
by
Law
Q: A is indebted to B while B is indebted to
C. A paid
the debt of B to C. Is this subject to donor’
s tax?
A: YES. This is considered as an indirect donation
in
favor of B.
Q: Your bachelor client, a Filipino residing
in Quezon
City, wants to give his sister a gift of
P200,000. He
seeks your advice, for purposes of reducing if
not
eliminating the donor's tax on the gift, on
whether it
is better for him to give all of the
P200,000.00 on
Christmas 2001 or to give P100,000.00 on
Christmas
2001 and the other P100,000.00 on January 1,
2002.
Please explain your advice. (2001 Bar)
A: I would advise him to split the donation. Giving
the
P200,000 as a one-time donation would mean that
it will
be subject to a higher tax bracket under the
graduated
tax structure thereby necessitating the payment of
donor's tax. On the other hand, splitting the
donation
into two equal amounts of P100,000 given on two
different years will totally relieve the donor from
the
donor’s tax because the first Pl00, 000 donation in
the
graduated brackets is exempt (Sec. 99, NIRC).
While the
donor’s tax is computed on the cumulative
donations, the
aggregation of all donations made by a donor is
allowed
only over one calendar year.
Q: A, an individual, sold to B, her
sister-in-law, his lot
with a market value of P1,000,000 for P600,000.
A's
cost in the lot is P100,000. B is financially
capable of
buying the lot. A also owns X Co., which has
a fast
growing business.
A sold some of her shares of stock in X Co. to
her key
executives in X Co. These executives are not
related
to A. The selling price is P3, 000,000, which
is the
book value of the shares sold but with a market
value of P5, 000,000. A's cost in the shares
sold is P1,
000,000. The purpose of A in selling the shares
is to
enable her key executives to acquire a
proprietary
interest in the business and have a personal
stake in
its business.
Explain if the above transactions are subject
to
donor's tax. (1999 Bar)
A: The first transaction where a lot was sold by A
to her
sister-in-law for a price below its fair market value
will
not be subject to donor's tax if the lot qualifies as a
capital asset. The transfer for less than adequate
and full
consideration, which gives rise to a deemed gift,
does not
apply to a sale of property subject to capital gains
tax
(Sec. 100, NIRC). However, if the lot sold is an
ordinary
asset, the excess of the fair market value over the
consideration received shall be considered as a gift
subject to the donor's tax.
The sale of shares of stock below the fair market
value
thereof is subject to the donor's tax pursuant to the
provisions of Section 100 of the NIRC. The excess
of the
fair market value over the selling price is a deemed
gift.
---
---
Q: In 2011, Mr. Vicente Tagle, a retiree,
bought
10,000 CDA shares that are unlisted in the
local stock
exchange for P10 per share. In 2015, the said
shares
had a book value per share of P60. In view of
a car
accident in 2015, Mr. Tagle had to sell his CDA
shares
but he could sell the same only for P50 per
share.
The sale is subject to tax as follows: (2012
Bar)
A: 5%/10% capital gains tax on the capital gain
from sale
of P40 per share (P50 selling price less P10 cost)
plus
donor’s tax on the excess of the fair market value
of the
shares over the consideration.
Q: Kenneth Yusoph owns a commercial lot which
she
bought many years ago for P1 Million. It is now
worth P20 Million although the zonal value is
only
P15 Million. She donates one-half
pro-indiviso
interest in the land to her son Dino on 31
December
1994, and the other one-half pro-indiviso
interest to
the same son on 2 January 1995.
a. How much is the value of the gifts in 1994
and
1995 for purposes of computing the gift tax?
Explain.
b. The Revenue District Officer questions the
splitting of the donations into 1994 and 1995.
He says that since there were only two (2) days
separating the two donations they should be
treated as one, having been made within one
year. Is he correct? Explain.
c. Dino subsequently sold the land to a buyer
for P
20 Million. How much did Dino gain on the sale?
Explain.
d. Suppose, instead of receiving the lot by way
of
donation, Dino received it by inheritance.
What
would be his gain on the sale of the lot for
P20
Million? Explain. (1995 Bar)
A:
a. The value of the gifts for purposes of computing
the
gift tax shall be P7.5million in 1994 and
P7.5million
in 1995. In valuing a real property for gift tax
purposes the property should be appraised at the
higher of two values as of the time of donation
which are (a) the fair market value as determined
by the Commissioner (which is the zonal value
fixed
pursuant to Section 16(e) of the NIRC), or (b) the
fair market value as shown in the schedule of
values
fixed by the Provincial and City Assessors. The fact
that the property is worth P20 million as of the
time
of donation is immaterial unless it can be shown
that this value is one of the two values mentioned
as
provided under Sec. 81 now 88(B) of the NIRC.
b. NO, because the computation of the gift tax is
cumulative but only insofar as gifts made within
the
same calendar year. There is no legal justification
for treating two gifts effected in two separate
calendar years as one gift.
c. Dino gained an income of 19 million from the
sale.
Dino acquires a carry-over basis which is the basis
of the property in the hands of the donor or P1
million. The gain from the sale or other disposition
of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis
for determining gain [Sec. 34(a), NIRC]. Since the
property was acquired by gift, the basis for
determining gain shall be the same as if it would be
in the hands of the donor or the last preceding
owner by whom the property was not acquired by
gift. Hence, the gain is computed by deducting the
basis of P1 million from the amount realized which
is P20 million.
d. If the commercial lot was received by
inheritance,
the gain from the sale for P20 million is P5 million
because the basis is the fair market value as of the
date of acquisition. The stepped-up basis of P15
million which is the value for estate tax purposes is
the basis for determining the gain
Q: Mr. L owned several parcels of land and he
donated a parcel each to his two children. Mr.
L
acquired both parcels of land in 1975 for
112,000,000.00. At the time of donation, the should donate P100,000.00 in 2016.
fair
---
market value of the two parcels of land, as
---
determined by the CIR, was 112,300,000.00;
Q: The Congregation of Mary Immaculate donated
while
a
the fair market value of the same properties
parcel of land and a dormitory building
as
located along
shown in the schedule of values prepared by the
Espana St. in favor of Sisters of the Holy
City
Cross, a
Assessors was 112,500,000.00. What is the
group of nuns operating a free clinic and high
proper
school
valuation of Mr. L's gifts to his children for
teaching basic spiritual values. Is the
purposes
donation
of computing donor's tax? (2015 Bar)
subject to donor’s tax? (2007 Bar)
A: The valuation of Mr. L’s gift to his children is the
A: NO. Gifts in favor of educational and/or
fair
charitable,
market value (FMV) of the property at the time of
religious, social welfare corporation or cultural
donation. It is the higher of the FMV as determined
institution, accredited non-government
by
organization,
the Commissioner or the FMV as shown in the
trust or philanthropic organization or research
schedule
institution or organization are exempt from
of values fixed by the provincial or city assessors.
donor’s tax,
In this
provided, that, no more than 30%of the gifts are
case, for the purpose of computing donor’s tax, the
used for
proper valuation is the value prepared by the City
administration purposes. The donation being in
Assessors amounting to P12,500,00.00 because it the
is
nature of real property complies with the
higher than the FMV determined by the CIR. utilization

Q: The spouses Helena and Federico wanted to Requirement

donate a parcel of land to their son Dondon who

is Q: Levox Corporation wanted to donate P5
getting married in December, 2015. The parcel million as
of prize money for the world professional
land has a zonal valuation of P420,000.00. billiard
What is championship to be held in the Philippines.
the most efficient mode of donating the Since the
property? Billiard Sports Confederation of the
(2011 Bar) Philippines does

A: The spouses should each donate a P110,000.00 not recognize the event, it was held under the

portion of the value of the property in 2015 then auspices of the International Professional
each Billiards
Association, Inc. Is Levox subject to the
donor's tax
on its donation? (2011 Bar)
A: Yes, since the national sports association for
billiards
does not sanction the event.
Q: The Bureau of Internal Revenue (BIR) issued
Rvenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association
dues and membership fees collected by
condominium corporations from its member
condominium-unit owners. The RMC’s validity
is
challenged before the Supreme Court (SC) by
the
condominium corporations. The Solicitor
General,
counsel for BIR, claims that association dues,
membership fees, and other assessment/
charges
collected by a condominium corporation are
subject
to VAT since they constitute income payments
or
compensation for the beneficial services it
provides
to its members and tenants. On the other hand,
the
lawyer of the condominium corporations argues
that
such dues and fees are merely held in trust by
the
condominium corporations exclusively for
their
members and used solely for administrative
expenses in implementing the condominium
corporations’ purposes. Accordingly, the
condominium corporations, do not actually
render
services for a fee subject to VAT. Whose
argument is
correct? Decide. (2014 Bar)
A: The lawyer of the condominium corporations is
correct. The association dues, membership fees,
and
other assessment/charges do not constitute
income
payments because they were collected for the
benefit of
the unit owners and the condominium corporation
is not
created as a business entity. The collection is the
money
of the unit owners pooled together and will be
spent exclusively for the purpose of maintaining
and
preserving the building and its premises which
they
themselves own and possess (First e-Bank
Tower
Condominium Corp., v. BIR, Special
Q: Is VAT a withholding tax?
A: NO. Indirect taxes, like VAT and excise tax, are
different from withholding taxes. To distinguish, in
indirect taxes, the incidence of taxation falls on one
person but the burden thereof can be shifted or
passed
on to another person. On the other hand, in
withholding
taxes, the incidence and burden of taxation fall on
the
same entity, the statutory taxpayer. The burden of
taxation is not shifted to the withholding agent
who
merely collects, by withholding, the tax due from
income
payments to entities arising from certain
transactionsand remits the same to the shifted to Lily’s Fashion, Inc. the 10% (now
government 12%)

(Asia International Auctioneers, Inc., v. CIR, VAT on the purchased items amounting to
P500,000.
G.R. No.
Lily’s Fashion Inc. filed with the BIR a claim
179115, September 26, 2012). for

--- refund for the input tax shifted to it by the

suppliers.
---
If you were the CIR will you allow the refund?
Q: Mr. A, a VAT-exempt retailer sells to Mr.
(2006
O, a non
Bar)
VAT-exempt purchaser. Is Mr. O liable to pay
VAT on A: NO. The exemption of Lily’s Fashion Inc. is only
for
the transaction?
taxes for which it is directly liable, hence, it cannot
A: YES. The purchaser is subject to VAT because claim
he is not
exemption for tax shifted to it, which is not at all
exempted from the indirect burden of VAT passed
on to considered a tax to the buyer but part of the
purchase
him as part of the purchase price. The VAT is
added as price. Lily’s Fashion Inc. is not a taxpayer in so far
as the
part of the purchase price and not as a tax
passed-on tax is concerned and therefore, it cannot
because the
claim
burden is merely shifted. On the other hand, the
for a refund of a tax merely shifted to it. Only
seller is
taxpayers
still exempt because he could pass on the burden
are allowed to file a claim for refund.
of

paying the tax to the purchaser.

Q: Cebu Toyo Corp., an export enterprise, is
---
a
---
subsidiary of a foreign corporation duly
Q: Lily’s Fashion Inc. is registered as a Subic registered
Bay
with the Philippine Economic Zone Authority
Freeport Enterprise under R.A. 7227 and a
pursuant to PD 66 and is also registered with
non-VAT
the BIR
taxpayer. As such, it is exempt from payment
as a VAT taxpayer. It sells 80% of its products
of all
to its
local and national internal revenue taxes.
mother corporation, and the rest are sold to
During its
various
operations, it purchased various supplies and
enterprises doing business in the Mactan
materials necessary in the conduct of its Export

manufacturing business. The supplier of these Processing Zone. Inasmuch as both sales are
goods
considered export sales subject to VAT at 0%
rate
under the National Internal Revenue Code, as
amended, it filed an application for tax
credit/refund
of VAT paid for the said period representing
excess
VAT input payments. The CIR belies the claim
for refund. Is the grant of a refund
representing
unutilized input VAT to Cebu Toyo proper?
A: YES. Cebu Toyo is engaged in taxable rather
than
exempt transactions. Taxable transactions are
those
transactions which are subject to VAT either at the
rate
of twelve percent (12%) or zero percent (0%). In
taxable
transactions, the seller shall be entitled to tax
credit for
the value-added tax paid on purchases and leases
of
goods, properties or services. An exemption means
that
the sale of goods, properties or services and the
use or
lease of properties is not subject to VAT (output
tax) and
the seller is not allowed any tax credit on VAT
(input tax)
previously paid. A VAT-registered purchaser of
goods,
properties or services that are VAT exempt, is not
entitled to any input tax on such purchases despite
the
issuance of a VAT invoice or receipt. Under the
system, a
zero rated sale by a VAT-registered person, which
is a
taxable transaction for VAT purposes, shall not
result in
any output tax, but the input tax on his purchase of
goods, properties or services related to such
zero-rated
sale shall be available as tax credit or refund (CIR
v. Cebu
Toyo Corporation, G.R. No. 149073,
February 16, 2005).
---
---
Q: SEAGATE is a resident foreign corporation
duly
registered with the SEC to do business in the
Philippines. It is also registered with the
PEZA to
engage in the manufacture of recording
components
primarily used in computers for export.
SEAGATE is
a VAT-registered entity. An administrative
claim for
refund of VAT input taxes in the amount of
P28,369,226.38 with supporting documents was
filed with Revenue District Office in Cebu.
The
administrative claim for refund was not acted
upon
by the petitioner prompting the respondent to
elevate the case to the CTA. The CIR contended
that
since ‘taxes are presumed to have been
collected in
accordance with laws and regulations, Seagate
has
the burden of proof that the taxes sought to
be
refunded were erroneously or illegally
collected.
Unfortunately, Seagate failed to do so. Is
Seagate
entitled to the refund or issuance of Tax
Credit
Certificate representing alleged unutilized
input VAT
paid on capital goods purchased?
A: YES. As a PEZA-registered enterprise within a
special
economic zone, it is entitled to the fiscal incentives
and
benefits provided for in either PD 66 or EO 226
which
would not subject respondent to internal revenue
laws
and regulations, among others. Thus, Seagate
enjoys
preferential tax treatment. The VAT on capital
goods is
an internal revenue tax from which the entity is
exempt.
Although the transactions involving such tax are
not
exempt, Seagate as a VAT-registered person,
however, is
entitled to their credits.
Since the purchases of Seagate are not exempt
from the
VAT, the rate to be applied is zero. Its exemption
under
both P.D. 66 and R.A. 7916 effectively subjects such
transactions to a zero rate, because the ecozone
within
which it is registered is managed and operated by
the
PEZA as a separate customs territory. This means
that in
such zone is created the legal fiction of foreign
territory.
Under the cross-border principle of the VAT
system being enforced by the BIR, no VAT shall be
imposed to
form part of the cost of goods destined for
consumption
outside of the territorial border of the taxing
authority. If
exports of goods and services from the Philippines
to a
foreign country are free of the VAT, then the same
rule
holds for such exports from the national territory –
except specifically declared areas – to an ecozone
Q: Are the following transactions subject to
VAT? If
yes, what is the applicable rate for each
transaction.
State the relevant authority/ies for your
answer.
a. Construction by XYZ Construction Co. of
concrete
barriers for the Asian Development Bank in
Ortigas
Center to prevent car bombs from ramming the
ADB
gates along ADB Avenue in Mandaluyong City.
b. Call Center operated by a domestic
enterprise in
Makati that handles exclusively the
reservations of a
hotel chain which are all located in North
America.
The services are paid for in US$ and duly
accounted
for with the Bangko Sentral ng Pilipinas.
(2010 Bar)
A:
a. The transaction is subject to VAT at the rate of
zero
percent (0%). ADB is exempt from direct and
indirect
taxes under a special law, thereby making the sale
of
services to it by a VAT-registered construction
company
effectively zero-rated (Sec. 108(B)(3), NIRC).
b. The sale of services subject to VAT at zero
percent
(0%). Zero-rated sale of services includes services
rendered to a person engaged in business outside
the
Philippines and consideration is paid in acceptable
foreign currency duly accounted for by the Bangko
Sentral ng Pilipinas
Q: Danilo, who is engaged in the trading
business,
entrusted to his accountant the preparation of
his
income tax return and the payment of the tax
due.
The accountant filed a falsified tax return by
underdeclaring the sales and overstating the
expense deductions by Danilo. Is Danilo liable
for the deficiency tax and the penalties
thereon? What is the
liability, if any, of the accountant? Discuss.
(2005
Bar)
A: Danilo is liable for the deficiency tax as well as
for the
deficiency interest. He should not be held liable for
the
fraud penalty because the accountant acted beyond
the
limits of his authority. There is no showing in the
problem that Danilo signed the falsified return or
that it
was prepared under his direction. On the other
hand the
accountant may be held criminally liable for
violation of
the NIRC when he falsified the tax return by under
declaring the sale and overstating the expense
deductions. If Danny's accountant is a Certified
Public
Accountant, his certificate as a CPA shall
automatically
be revoked or cancelled upon conviction.
Q: Businessman Lincoln filed an income tax
return
for 1993 showing business net income of
P350,000
on which he paid an income tax of P61,000.
After filing the return he realized that he
forgot to include
an item of business income in 1993 for P50.000.
Being an honest taxpayer, he included this
income in
his return for 1994 and paid the corresponding
income tax thereon. In the examination of his
1993
return the BIR examiner found that Lincoln
failed to
report this item of P50.000 and assessed him
a
deficiency income tax on this item, plus a 50%
fraud
surcharge.
a. Is the examiner correct?
b. If you were the lawyer of Lincoln, what
would
you have advised your client before he
included
in his 1994 return the amount of P50.000 as
1993 income to avoid the fraud surcharge?
c. Considering that Lincoln had already been
assessed a deficiency income tax for 1993 for
his
failure to report the P50.000 income, what
would you advise him to do to avoid the
penalties for tax delinquency?
d. What would you advise Lincoln to do with
regard to the income tax he paid for the
P50.000
in his 1994 return? In case your remedy fails,
what is your other recourse? (1995 Bar)
A:
a. The examiner is correct in assessing a deficiency
income tax for taxable year 1993 but not in
imposing the 50% fraud surcharge. The amount of
all items of gross income must be included in gross
income during the year in which received or
realized (Sec. 38, NIRC). The 50% fraud
surcharge
attaches only if a false or fraudulent return is
willfully made by Lincoln (Sec. 248, NIRC). The
fact
that Lincoln included it in his 1994 return belies
any
claim of willfulness but is rather indicative of an
honest mistake which was sought to be rectified by
a subsequent act that is the filing of the 1994
return.
b. Lincoln should have amended his 1993 income
tax
return to allow for the inclusion of the P50,000
income during the taxable period it was realized.
c. Lincoln should file a protest questioning the 50%
surcharge and ask for the abatement thereof.
d. Lincoln should file a written claim for refund
with
the CIR of the taxes paid on the P50.000 income
included in 1994 within 2 years from payment
pursuant to Sec. 204 [3] of the NIRC. Should this
remedy fail in the administrative level, a judicial
claim for refund can be instituted before the
expiration of the two-year period.
Q: A domestic corporation failed to withhold
and
remit the tax on income received from
Philippine
sources by a non-resident foreign corporation.
In
addition to the civil penalties provided for
under the
NIRC, a compromise penalty was imposed for
violation of the withholding tax provisions.
May the
Commissioner of Internal Revenue legally
enforce
the collection of compromise penalty? (2000
Bar)
A: NO. There is no showing that the compromise
penalty
was imposed by the Commissioner of Internal
Revenue
with the agreement and conformity of the taxpayer
Q: In 2010, pursuant to a LA issued by the
Regional
Director, Mr. Abcede was assessed deficiency
income
taxes by the BIR for the year 2009. He paid the
deficiency. In 2011, Mr. Abcede received
another LA
for the same year 2009, this time from the
National
Investigation Division, on the ground that Mr.
Abcede's 2009 return was fraudulent. Mr.
Abcede
contested the LA on the ground that he can only
be
investigated once in a taxable year. Decide.
(2013
Bar)
A: Mr. Abcede’s contention is not correct.
While the
general rule is to the effect that for income tax
purposes,
a taxpayer must be subject to examination and
inspection by the internal revenue officers only
once in a taxable year, this will not apply if there is
fraud,
irregularity or mistakes as determined by the
Commissioner. In the instant case, what triggered
the
second examination is the findings by the BIR that
Mr.
Abcede’s 2009 return was fraudulent, accordingly, ---
the
---
examination is legally justified
Q: Mr. Tiaga has been a law-abiding citizen
diligently
Q: In the investigation of the withholding tax
paying his income taxes. On May 5, 2014, he was
returns
surprised to receive an assessment notice from
of AZ Medina Security Agency (AZ) for the
the
taxable
BIR informing him of a deficiency tax
years 1997 and 1998, a discrepancy between the
assessment as
taxes withheld from its employees and the
a result of a mathematical error in the
amounts
computation
actually remitted to the government was found.
of his income tax, as appearing on the face of
Accordingly, before the period of his
prescription
income tax return for the year 2011, which he
commenced to run, the BIR issued an assessment filed

and a demand letter calling for the immediate on April 15, 2012. Mr. Tiaga believes that
there was
payment of the deficiency withholding taxes in
the no such error in the computation of his income
tax
total amount of P250,000.00. Counsel for AZ
for the year 2011. Based on the assessment
protested the assessment for being null and received
void on
by Mr. Tiaga, may he already file a protest
the ground that no pre-assessment notice had thereon?
been
(2014 Bar)
issued. Is the contention of the counsel
tenable? A: YES. Mr. Tiaga may consider the assessment
notice as
(2002 Bar)
a final assessment notice and his right to protest
A: NO. The contention of the counsel is untenable. within
Sec.
30 days from receipt may now be exercised by him.
228, NIRC expressly provides that no
When the finding of a deficiency tax is the result of
pre-assessment
mathematical error in the computation of the tax
notice is required when a discrepancy has been
appearing on the face of the return, a
determined between the tax withheld and the
pre-assessment
amount
notice shall not be required, hence, the assessment
actually remitted by the withholding agent. Since
the notice is a final assessment notice
amount assessed relates to deficiency withholding
taxes,

the BIR is correct in issuing the assessment and

demand : After the tax assessment had become final and

letter calling for the immediate payment of the unappealable, the CIR initiated the filing of
a civil
deficiency withholding taxes.
action to collect the tax due from NX. After
several
years, a decision was rendered by the court
ordering
NX to pay the tax due plus penalties and
surcharges.
The judgment became final and executory, but
attempts to execute the judgment award were
futile.
Subsequently, NX offered the CIR a compromise
settlement of 50% of the judgment award,
representing that this amount is all he could
really
afford. Does the CIR have the power to accept
the
compromise offer? Is it legal and ethical?
(2004 Bar)
A: YES, the CIR has the power to accept the offer of
compromise if the financial position of the
taxpayer
clearly demonstrates a clear inability to pay the tax
(Sec.
204, NIRC).
As represented by NX in his offer, only 50% of the
judgment award is all he could really afford. This is
an
offer for compromise based on financial incapacity
which
the CIR shall not accept unless accompanied by a
waiver
of the secrecy of bank deposits (Sec. 6 [F],
NIRC). The
waiver will enable the CIR to ascertain the financial
position of the taxpayer, although the inquiry need
not
be limited only to the bank deposits of the taxpayer
but
also as to his financial position as reflected in his
financial statements or other records upon which
his
property holdings can be ascertained.
If indeed, the financial position of NX as
determined by
the CIR demonstrates a clear inability to pay the
tax, the
acceptance of the offer is legal and ethical for the
ground
upon which the compromise was anchored is
within the
context of the law and the rate of compromise is
well
within and far exceeds the minimum prescribed by
law
which is only 10% of the basic tax assessed.
---
---
Q: Does the Court of Appeals have the power to
review compromise agreements forged by the
Commissioner of Internal Revenue and a
taxpayer?
Explain. (2010 Bar)
A: As a general rule, the Court of Appeals does not
have
the power to review compromise agreements
made
between the Commissioner of Internal Revenue
and the
tax payer considering that the Commissioner is
vested
with the authority to compromise and such
authority is
exercised according to his discretion. Such
authority
should be exercised in accordance with the CIR
discretion and courts have no power, as a general
rule, to
compel him to exercise such discretion one way or
another. If the CIR abuses his discretion by not
following
the parameters set by law, the CTA, not the CA,
may
correct such abuse if the matter is appealed to it. In
case
of arbitrary or capricious exercise by the CIR of the
power to compromise, the compromise can be
attacked
and reversed through judicial process. It must be
noted
however, that a compromise is considered as other
matters arising under the NIRC which vests the
CTA with
jurisdiction and since the decision of the CTA is
appealable to the Supreme Court, the Court of
Appeals is
devoid of any power to review a compromise
settlement
forged by the CIR.
Q: On Mar. 12, 2001, REN paid his taxes. Ten
months
later, he realized that he had overpaid and
immediately filed a claim for refund with the
CIR. On
Feb. 27, 2003, he received the decision of the
CIR
denying REN's claim for refund. On Mar. 24,
2003,
REN filed an appeal with the CTA. Was his
appeal
filed on time or not? (2004 Bar)
A: NO, his appeal was not filed on time. The 2-year
period for filing a claim for refund is not only a
limitation
for pursuing the claim at the administrative level
but
also for appealing the case to the CTA. The law
provides
that "no suit or proceeding shall be filed after the
expiration of 2 years from the date of the payment
of the
tax or penalty regardless of any supervening cause
that
may arise after payment. Since the appeal was only
made
on Mar. 24, 2003, more than two years had already
elapsed from the time the taxes were paid on Mar.
12,
2003. Accordingly, REN had lost his judicial
remedy
because of prescription.
Q: Does a withholding agent have the right to
file an
application for tax refund? Explain. (2005
Bar)
A: YES. A withholding agent should be allowed to
claim
for tax refund, because under the law said agent is
the
one who is held liable for any violation of the
withholding tax law should such violation occur
Q: Is the BIR authorized to issue a warrant of
garnishment against the bank account of a
taxpayer
despite the pendency of taxpayer’s protest
against
the assessment with the BIR or appeal with the
CTA?
(1998 Bar)
A: YES, the BIR is authorized to issue a warrant of
garnishment against the bank account of a
taxpayer
despite the pendency of protest (Yabes v. Flojo,
GR L-
46954 July 20, 1982). Nowhere in the NIRC
is the CIR
required to first, rule on the protest before he can
institute collection proceedings on the tax assessed.
The
legislative policy is to give the CIR much latitude in
the
speedy and prompt collection of taxes because it is
in
taxation that the Government depends to obtain The obligation to pay the tax is not a mere
the
consequence of the felonious acts charged in the
means to carry on its operations.
information, nor is a mere civil liability derived
NOTE: The taxpayer may request that the warrant from
be
crime that would be wiped out by the judicial
lifted. The CIR may, in his discretion, allow the
declaration that the criminal acts charged did not
lifting of

the order of distraint. He may ask for a bond as a exist (Castro v. Collector of Internal Revenue,

condition for the cancellation of the warrant L-12174,

April 26, 1962).

Q: Explain the following statements:
b. YES. If the failure to file tax return or to supply
a. The acquittal of the taxpayer in a criminal
action correct information resulted to unpaid taxes the

amount of which is proven during trial, the CTA

under the NIRC does not necessarily result in
shall
an
not only impose the criminal penalty but must
exoneration of said taxpayer from his civil
likewise order the payment of the civil liability
liability to pay taxes.
(Sec.
b. Should the accused be found guilty beyond
205(b), NIRC). As a matter of fact, it is
reasonable doubt for violation of Sec. 255 of wellrecognized
the
that in the case of failure to file a return, a
NIRC for failure to file tax return or to proceeding
supply
in court for the collection of the tax may be filed
correct information, the imposition of the
without the need of an assessment
civil

liability by the CTA should be automatic and

no Q: Mr. Chan, a manufacturer of garments, was

assessment notice from the BIR is necessary? investigated for failure to file tax returns
and to pay
(2012 Bar)
taxes. Despite the subpoena duces tecum
A:
issued to
a. In taxation, the taxpayer becomes criminally
liable him, he refused to submit his books of accounts
and
because of a civil liability. While he may be
acquitted allied records. Investigators, raided his
factory and
on the criminal case, his acquittal could not
operate seized several bundles of manufactured
to discharged him from the duty to pay tax, since garments,
that
supplies and unpaid imported textile
duty is imposed by statute prior to and materials. After
independent
his apprehension and based on the testimony of
of any attempt on the taxpayer to evade payment. a
former employee, deficiency income and c. It must not be partial or discriminatory;
business
d. It may prohibit or regulate trade. (2012
taxes were assessed against Mr. Chan. It was Bar)
then
A: d. It may prohibit or regulate trade. To be valid,
that he paid the taxes. Action was instituted an
against
ordinance must not prohibit but may regulate
him in the RTC for violation of the NIRC. Mr. trade
Chan

demanded the return of the garments and Q: The City of Makati, in order to solve the
materials traffic
seized from his factory on the ground that he problem in its business districts, decided to
had impose
already paid the taxes assessed against him. a tax, to be paid by the driver, on all private
How cars
will you resolve Mr. Chan's motion? (2002 Bar) entering the city during peak hours from 8:00
a.m.
A: The motion to dismiss should be denied. The

satisfaction of the civil liability is not one of the to 9:00 a.m. from Mondays to Fridays, but
grounds for the extinction of criminal action exempts
(People v. Ildefonso those cars carrying more than two occupants,

Tierra, 12 SCRA 666 [1964]). Likewise, the excluding the driver. Is the ordinance valid?
payment of the (2003

tax due after apprehension shall not constitute a Bar)

valid

defense in any prosecution for violation of any

provision Q: Does the ARMM and CAR have the same source
of
of the NIRC (Sec. 253[a], NIRC). However, the
power as the LGUs?
garments

and materials seized from the factory should be A: NO. The LGUs derive their power to tax from Sec.
ordered 5,
returned because the payment of the tax had
released Article X of the 1987 Constitution. The
constitutional
them from any lien that the Government has over
them. provision is self-executing. This is applicable only
to

LGUs outside the Autonomous Region namely the

Q: Which of the following statements is NOT a
test of Muslim Mindanao and the Cordilleras since the
authority
a valid ordinance?
to tax the LGUs within their region is delegated by
a. It must not contravene the Constitution or the
any
Organic Act creating them.
statute;
Sec. 20, Article X of the 1987 Constitution
b. It must not be unfair or oppressive; authorizes the
Congress to pass the Organic Act which shall
provide for
legislative powers over creation of sources of
revenues.
This provision is not self-executing unlike Sec. 5,
Article
X of the Constitution.
---
NOTE: The LGU’s power to tax is subject to such
guidelines and limitations as Congress may
provide
while the Autonomous Region’s power to tax is
based on
the Organic Act which the Constitution authorizes
Congress to pass.
Paradigm shift in local government taxation
means
the power to tax is no longer vested exclusively on
Congress. Local legislative bodies are now given
direct
authority to levy taxes, fees and other charges
pursuant
to Art. X, Sec. 5 of the Constitution (NAPOCOR v.
City of
Cabanatuan, G.R. No. 149110, April 9,
2003).
The reason of the shift results from the realization
that
genuine development can be achieved only by
strengthening local autonomy and promoting
decentralization of governance (Ibid.).
The nature of the taxing power of the
provinces,
municipalities and cities is directly conferred
by the
Constitution by giving them the authority to create
their
own sources of revenue. The local government
units do
not exercise the power to tax as an inherent power
or by
a valid delegation of the power by Congress, but
pursuant to a direct authority conferred by the
Constitution. (2007 Bar)
The Congress, under the 1987 Constitution,
cannot
abolish the power to tax of local governments;
it is
expressly granted by the fundamental law. The
only
authority conferred to Congress is to provide the
guidelines and limitations on the local
government's
exercise of the power to tax (Sec. 5, Art. X,
1987
Constitution). (2003 Bar)
NOTE: The authority to tax of LGUs within the
Autonomous Regions (Muslim Mindanao and the
Cordilleras) is not delegated by the Constitution,
but by
the Organic Act creating them.
Q: The Local Government Code took effect on
January
1, 1992. PLDT’s legislative franchise was
granted
sometime before 1992. Its franchise provides
that
PLDT will pay only 3% franchise tax in lieu of
all
taxes.
The legislative franchise of Smart and Globe
Telecoms were granted in 1998. Their
legislative
franchises state that they will pay only 5%
franchise
tax in lieu of all taxes.
The Province of Zamboanga del Norte passed an
ordinance in 1997 that imposes a local
franchise tax
on all telecommunications companies operating
within the province. The tax is 50% of 1% of
the
gross annual receipts of the preceding
calendar year
based on the incoming receipts, or receipts
realized,
within its territorial jurisdiction.
Is the ordinance valid? Are PLDT, Smart and
Globe
liable to pay franchise taxes? Reason briefly
(2007
Bar).
A: The ordinance is valid as it was passed pursuant
to
the powers of provinces and cities to impose taxes
on
businesses with franchises under the Local
Government
Code (LGC). The LGC, which took effect on January
1,
1992, withdrew tax exemptions or incentives
previously
enjoyed by all persons, except certain entities
Q: Prior to the enactment of the Local
Government
Code, consumer's cooperatives registered
under the
Cooperative Development Act enjoyed exemption
from all taxes imposed by a local government.
With
the Local Government Code’s withdrawal of
exemptions, could these cooperatives continue
to
enjoy such exemption? (2011 Bar)
A: YES. Their exemption is specifically mentioned
among
those not withdrawn by the Local Government
Code.
Q: In order to raise revenue for the repair and
maintenance of the newly constructed City Hall
of
Makati, the City Mayor ordered the collection
of
P1.00, called "elevator tax", every time a
person
rides any of the high-tech elevators in the
city hall
during the hours of 8:00 a.m. to 10:00 a.m. and
4:00
p.m. to 6:00 p.m. Is the "elevator tax" a valid
imposition? Explain. (2003 Bar)
A: No. The imposition of a tax, fee or charge or the
generation of revenue under the Local Government
Code,
shall be exercised by the SANGUNIAN of the local
government unit concerned through an
appropriate
ordinance (Sec. 132 of the Local
Government Code). The
city mayor alone could not order the collection of
the tax;
as such, the "elevator tax" is an invalid imposition.
When an ordinance takes effect
In case the effectivity of any tax ordinance or
revenue
measure falls on any date other than the beginning
of the
quarter, the same shall be considered as falling at
the
beginning of the next ensuing quarter, and the
taxes, fees,
or charges due shall begin to accrue therefrom.
Test in determining the validity of an
ordinance
1. It must not contravene the Constitution or a
statute
2. It must not prohibit but may regulate trade
3. It must not be discriminatory, unfair, unjust, b. NO, the situs of the professional tax is the city
confiscatory, unreasonable, and oppresive where

4. It must be general and consistent with the the professional practices his profession or where
national
he maintains his principal office in case he
or public policy of the government practices

his profession in several places. The local

Q: Mr. Fermin, a resident of Quezon City, is government of Quezon City has no right to collect
a the professional tax from Mr. Fermin as the place
of
Certified Public Accountant-Lawyer engaged in
the residence of the taxpayer is not the proper situs in

practice of his two professions. He has his the collection of the professional tax.
main office

in Makati City and maintains a branch office

Q: It is City of Cagayan de Oro’s humble
in Pasig
opinion that
City. Mr. Fermin pays his professional tax as
the allowable rate of increase provided under
a CPA in
Section 151 of the LGC applies only to those
Makati City and his professional tax as a
lawyer in businesses identified and enumerated under
Section
Pasig City.
143 thereof. Thus, it is respectfully
a. May Makati City, where he has his main
submitted by City
office,
of Cagayan de Oro that the 2% limitation
require him to pay his professional tax as a
prescribed
lawyer? Explain.
under Section 143(h) applies only to the tax
b. May Quezon City, where he has his residence rates on

and where he also practices his two the businesses identified thereunder and does
professions, not

go after him for the payment of his apply to those that may thereafter be deemed
professional
taxable under Section 186 of the LGC, such as
tax as a CPA and a lawyer? Explain. (2005 Bar) the

A: herein assailed Ordinance No. 9503-2005. On

the
a. NO. Makati City where Mr. Fermin has his main
same vein, it is the respectful submission of
office may not require him to pay his professional City of
tax as a lawyer. Mr. Fermin has the option of Cagayan de Oro that the limitation under
paying
Section 151
his professional tax as a lawyer in Pasig City where
of the LGC likewise does not apply in our
he practices law or in Makati City where he particular

maintains his principal office (Sec. 139[b], instance; otherwise it will run counter to the
intent
LGC).
and purpose of Section 186 of the LGC. Is the contractor or one that sells services for a fee.
City of Is the

Cagayan correct? City of Makati correct? (2013 Bar)

A: NO. The City of Cagayan de Oro’s imposition of a A: The City of Makati is wrong in assessing ABC
tax Corp. as

on the lease of poles falls under Section 143(h)
which
speaks of any business, not otherwise specified in
the
preceding paragraphs, which the sanggunian
concerned
may deem proper to tax. The treatment of the lease
of
poles as a separate line of business is evident in
Section
4(a) of the ordinance requiring CEPALCO to apply
for a
separate business permit. And since "any person,
who in
the course of trade or business x x x leases goods
or
properties x x x shall be subject to the value-added
tax,"
the imposable tax rate should not exceed two
percent of
gross receipts of the lease of poles of the preceding
calendar year.
a contractor. First, ABC Corp. is not a contractor as
defined in Section 131(h) of Republic Act No. 7160
or the
Local Government Code (LGC). This provision
defines a
contractor as a person, natural or juridical, not
subject to
professional tax under the LGC, but whose activity
consists essentially of the sale of all kinds of
services for
a fee, regardless of whether or not the
performance of
the service calls for the exercise or use of the
physical or
mental faculties of such contractor or his
employees. In
the given problem, ABC Corp. is merely a holding
company whose earnings are limited to dividends,
interests on bank deposits and foreign exchange
gains
from foreign currency account. Evidently, ABC
Corp. is

not engaged in the sale of services for a fee.

Q: ABC Corp. is registered as a holding company
and Second,

has an office in the City of Makati. It has no Section 186 of LGC provides that local government
actual units

cannot levy taxes, fees or charges on any base or

business operations. It invested in another
subject
company
tax under the provisions of the NIRC.
and its earnings are limited to dividends from
this In the given problem, ABC Corp.’s dividends,
interest
investment, interests on its bank deposits,
and income and foreign exchange gains from foreign

foreign exchange gains from its foreign currency account are already subject to final
income tax
currency
under the NIRC, specifically, Sections 27(D)(4),
account. The City of Makati assessed ABC Corp.
27(D)(1),
as a
32(A), respectively. Consequently, the City of
Makati
cannot levy from ABC Corp. taxes on these
incomes.

Q: Pheleco is a power generation and

distribution

company operating mainly from the City of

Taguig. It

owns electric poles which it also rents out to

other

companies that use poles such as telephone and

cable companies. Taguig passed an ordinance

imposing a fee equivalent to 1% of the annual

rental

for these poles. Pheleco questioned 'the

legality of

the ordinance on the ground that it imposes an

income tax which local government units (LGUs)

are

prohibited from imposing. Rule on the validity

of the

ordinance. (2013 Bar)

A: The ordinance is void. The fee is based on

rental

income and is therefore a tax on income. The Sec.

32(A)(5) of the NIRC includes “rents” in the

enumeration

of taxable income. Under Section 1331 of the LGC,

the

exercise of the taxing powers of provinces, cities,

municipalities, and barangays shall not extend to

the

levy of income tax except when levied on banks

and

other financial institutions.