ARELLANO UNIVERSITY SCHOOL OF LAW Long Quiz

Income Taxation II Term 2019-2020

VAT, PT, Remedies November 27, 2019

PART I (10%) 2 pts. each

1. Open Sesame Corporation, a closely held corporation, decided to open itself to the public. The initial
public offering of its shares had a selling price of P6,250,000 which is 22.5% of its total outstanding
shares after the listing in the local stock exchange. The percentage tax due is?

A. P31,250
B. P125,000
C. P1,406,250
D. P250,000

2. Given the following statements:

Statement 1: A domestic carrier of passengers by land shall be exempt from VAT and common
carrier’s tax if its gross annual sales do not exceed P100,000

Statement 2: A radio broadcasting company whose gross annual receipts do not exceed P10 million
shall not be subject to VAT if it decides to be subject to VAT

Statement 3: A television broadcasting company with annual gross receipts of not exceeding P10
million but who voluntarily registers under the VAT system cannot revert back to franchise tax even if it
decides to revoke its VAT registration

Statement 4: Gate entrance fee in the women’s UAAP volleyball game between Ateneo Lady Eagles
and De la Salle Lady Spikers are not subject to amusement tax

Which of the following options are correct?

A. Statement 1 is true; Statement 4 is false

B. Statement 2 is false while statement 3 is true
C. Statements 1, 3 and 4 are false
D. Statements 2 and 3 are true

3. The income tax payable (net of withholding tax of P29,500) in the 2011 tax return of Lito is P2,950. He
filed the return on April 8, 2012. Assuming he paid the balance in the tax return on June 28, 2012, the
last day for the BIR to make an assessment is:

A. June 28, 2015

B. April 15, 2015
C. July 15, 2015
D. April 8, 2015

4. Which of the following statements is false? Zero-rated VAT taxpayer files a claim for refund -

A. The claim must be filed anytime within two years after the close of the taxable quarter when the
sales were made
B. The CIR shall grant a refund or issue a tax credit certificate within 90 days from the date of
submission of complete documents in support of the application filed
C. In case the claim is denied by the CIR, the taxpayer can file an appeal with the CTA within 30
days from receipt of the decision, even if it is beyond the 2-year period
D. If the claim is denied by the BIR, the taxpayer can appeal only within the 2-year period
from the close of the taxable quarter

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 5. The distinction between actual distraint and constructive distraint is that

A. Actual distraint may be made on the property of any taxpayer whether delinquent or not while
constructive distraint is made on the property only of a delinquent taxpayer
B. In actual distraint, there is taking of possession, while in constructive distraint, the
taxpayer is merely prohibited from disposing of the property
C. Actual distraint is effected by requiring the taxpayer to sign a receipt of the property or by the
revenue officer preparing and leaving a list of the distrained property or by service of a warrant
or distraint or garnishment
D. Answer not given

PART II (90%)

I.
A. Is the issuance of an assessment a condition precedent before the filing of a criminal case
for tax evasion against a taxpayer? Explain (5%)

Answer:

In a tax evasion case, the issuance of an assessment is not a condition precedent before a
criminal action can be filed. The crime is complete when the taxpayer knowingly and did not deliberately
declare an income in his income tax returns. (Commissioner vs. Pascor Realty) However, if the alleged
fraudulent acts consist in the wrongful declaration of the correct price in the statements filed and
approved by the BIR, an assessment must first be issued before the taxpayer can be placed in the
crucible of criminal prosecution. This is so because the taxpayer enjoys the presumption of regularity
in its tax payments, which can only be overcome by a precise computation of the tax alleged to have
been evaded (Fortune Tobacco v. CIR)

B. Enumerate the instances when a notice of preliminary assessment is not required (5%)

Answer: MEDIC

II.

A. Carlos operates the Peacock Nightclub along Avenida Avenue, Manila. His gross receipts during the
month amounted to P126,700. The foods and drinks being served inside the night club are being
delivered by Tiberio, a non-VAT taxpayer. During the month, Tiberio sold P32,400 worth of goods and
drinks to Carlos.

How much will be the amusement tax payable. Explain briefly. (5%)

Answer: P126,700 x 18%

B. Tito own shares of stock of domestic corporations which are actively traded in the Philippine Stock
Exchange. Due to the unstable prices in the stock exchange, he decided to sell the shares to the public.
The data of which are as follows:

Selling Price Cost Gain/Loss

Vic Corporation P230,000 P220,000 P10,000

Joey Corporation P360,000 P395,000 (P35,000)

How much will be the aggregate stock transaction tax (5%)

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 Answer: P590,000 x .6 of 1% or in narrative form

III.

MGP filed with the BIR its Quarterly VAT Returns for the four quarters of taxable year 2002. MGP
declared zero-rated sales and input VAT on domestic purchases of goods and services. On May 30,
2003, MGP filed with the BIR Revenue District a claim for refund or issuance of a Tax Credit Certificate
(TCC) of its unutilized input VAT attributable to its zero-rated sales for the taxable year 2002. However,
the CIR failed to act on the claim. Thus, on March 31, 2004, MGP filed a Petition for Review with the
CTA First Division. On July 30, 2004 MGP filed on Motion for Leave of Court to Amend its Petition for
Review in order to correct its claim. This was granted by the CTA First Division on September 22, 2004.
Meanwhile, pending the resolution of CTA Case no. 6909, the CIR issued to MGP TCC. The issuance
of the TCC belatedly and partially granted the claim of MGP. For this reason, MGP filed a Motion for
Leave of Court to file Attached Supplemental Petition for Review which was granted by the CTA First
Division on February 13, 2008. On June 4, 2008, the CTA First Division rendered the assailed decision
partially granting MGP’s claim. Since the CIR already issued the aforementioned TCC in favor of MGP,
the CTA First Division ordered the fulfillment of only the balance of MGP’s claim. On June 23, 2008,
the CIR filed a Motion for Partial Consideration which was denied by the CTA First Division in its
Resolution dated October 7, 2008.On November 12, 2008, the CIR filed a Petition for Review with the
CTA En Banc raising the issue of prescription of MGP’s judicial claim for refund must be filed within two
years from the close of the taxable quarter when the relevant sales were made as this prescriptive
period only refers to taxes erroneously or illegally assessed or collected. Is the CTA En Banc correct?
(10%) Correction: Should be “Is the CIR correct?”

Answer:

No. Notwithstanding the timely filing of MGP’s administrative claim, MGP’s judicial claim for tax refund
or tax credit was filed beyond the mandatory and jurisdictional periods provided in Section 112(C) of
the NIRL. Section 112 (C) expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner of Internal Revenue (CIR). The law is clear, plain, and
unequivocal. Following the well-settled verba legis doctrine, the law should be applied exactly as
worded since it is clear, plain, and unequivocal. As the law states, the taxpayer may, if he wishes,
appeal the decision, or if the CIR does not act on the taxpayer’s receipt of the CIR’s decision, or if the
CIR does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the
CTA within 30 days from receipt of the CIR’s decision, or if the CIR does not act on the taxpayer’s claim
within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of
the 120-day period. In Commissioner, of Internal Revenue v. Aichi Forging Company of Asia, Inc., the
Court clarified the mandatory and jurisdictional nature of the 120+30-day period provided under Section
112(C) of the NIRC. The Court clarified that the two-year prescriptive under Section 112(A) of the NIRC
refers only to the filing of an administrative claim with the BIR. Meanwhile, the judicial claim under
Section 112(C) of the NIRC must be filed within a mandatory and jurisdictional period of 30 days from
the expiration of the 120-day period for deciding the claim. Thus, the Court mandated strict compliance
with the “120+30” day period. Thus, as long as the administrative claim is filed within the two-year
prescriptive period under Section 112(A) of the NIRC, the 30-day prescriptive period under Section
112(C) can extend beyond two years after the close of the taxable quarter where the sales were made.
In Commissioner of Internal Revenue v. San Roque Power Corporation, the Court reiterated that the
30-day period for filing the judicial claim is mandatory and jurisdictional. In the present case, MGP filed
its administrative claim on May 30, 2003. The CIR therefore had only until September 27, 2003 to
decide the claim, and the following the CIR’s inaction, MGP had until October 27, 2003, the last day of
the 30-day period to file its judicial claim. However, MGP filed its judicial claim with the CTA only on
March 31, 2004 or 155 days late. Clearly, MGP’s judicial claim has prescribed and the CTA did not
acquire jurisdiction over the claim. Well to remember, the right to appeal to the CTA from a decision or
“deemed a denial” decision of the CIR is merely a statutory privilege requires strict compliance with the
conditions and must thus bear the consequences. Further, well settled is the rule that tax refunds or
credits, just like tax exemptions, are strictly construed against the taxpayer. The burden is on the
taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit.
(Commissioner of Internal Revenue vs. Mindanao II Geothermal Partnership, G.R. No. 189440, June
18, 2014)

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 IV.

In the investigation of the withholding tax returns of Lynssey and Gelo Nayve (LG Nayve) for the
taxable years 2007 and 2008, a discrepancy between the taxes withheld from its employees and
the amounts actually remitted to the government was found. Accordingly, before the period of
prescription commenced to run, the BIR issued an assessment and a demand letter calling for
the immediate payment of the deficiency withholding taxes in the total amount of P250,000.00.
Counsel for LG Nayve protested the assessment for being null and void on the ground that no pre-
assessment notice had been issued. However, the protest was denied. Counsel then filed a
petition for prohibition with the Court of Tax Appeals to restrain the collection of the tax.

A. Is the contention of the counsel tenable? Explain (5%)

SUGGESTED ANSWER:

A. No, the contention of the counsel is untenable. Section 228 of the Tax Code expressly provides
that no pre-assessment notice is required when a discrepancy has been determined between the
tax withheld and the amount actually remitted by the withholding agent. Since the amount assessed
relates to deficiency withholding taxes, the BIR is correct in issuing the assessment and demand letter
calling for the immediate payment of the deficiency withholding taxes. (Sec. 228, NIRC).

B. Will the special civil action for prohibition brought before the CTA under Sec. 9 of R.A,
No. 9282 prosper? Discuss your answer. (5%)

SUGGESTED ANSWER:

The special civil action for prohibition will not prosper, because the CTA has no jurisdiction to entertain
the same. The power to issue writ of injunction provided for under Section 9 of RA 9282 is only
ancillary to its appellate jurisdiction. The CTA is not vested with original jurisdiction to issue writs of
prohibition or injunction independently of and apart from an appealed case. The remedy is to appeal
the decision of the BIR. (Collector v. Yuseco, 3 SCRA 313 [1961]).

V.

On separate dates in February 2000, ADB received from the CIR three Formal Letters of Demand
(FLD) with Assessment Notices for deficiency internal revenue taxes for fiscal years ending June 30,
1996, 1997, and 1998, respectively. On March 17, 2000, ADB timely protested the assessment notices.
Due to the inaction of the CIR on the protest, ADB filed before the CTA a Petition for Review praying
for the cancellation of the tax assessments. On December 28, 2001, the CIR issued against ADB new
Assessment Notices for deficiency taxes, covering the fiscal years ending June 30, 1996, 1997, and
1998, respectively. On the same day, ADB partially paid said deficiency tax assessments. On April 19,
2005, the CIR approved ADB’s Offer of Compromise of regular assessments. During the trial, ADB
manifested that it availed of the Tax Abatement Program for its deficiency final withholding tax – trust
assessments. ADB attached the photocopies of its Application for Abatement Program, BIR Payment
Form, BIR Tax Payment Deposit Slip, Improved Voluntary Assessment Program Application Forms,
Tax Amnesty Return, Tax Amnesty Payment Form, Notice of Availment of Tax Amnesty and Statement
of Assets and Liabilities and Networth (SALN). The CTA, however, refused to consider ADB’s availment
of the Tax Abatement Program due to its failure to submit a termination letter from the BIR. Is
termination letter from the BIR required for Tax Abatement Program? (10%)

Answer:

Yes. Section 204(b) of the NIRC empowers the CIR to abate or cancel a tax liability. Sec. 4 of RR No.
15-06 provides:

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 SEC. 4. Who May Avail – Any person/taxpayer, natural or juridical, may settle thru this
abatement program any delinquent account or assessment which has been released as of June 30,
2006, by paying an amount equal to One Hundred Percent (100%) of the Basic Tax assessed with the
Accredited Agent Bank (AAB) of the Revenue District Office (RDO)/Large Taxpayers Service
(LTS)/Large Taxpayers District Office (LTDO) that has jurisdiction over the taxpayer. In the absence of
an AAB, payment may be made with the Revenue Collection Officer/Deputized Treasurer of the RDO
that has jurisdiction over the taxpayer. After payment of the basic tax, the assessment for
penalties/surcharge and interest shall be cancelled by the concerned BIR Office following existing rules
and procedures. Thereafter, the docket of the case shall be forwarded to the Office of the
Commissioner, thru the Deputy Commissioner for Operations Group, for issuance of Termination Letter.

Based on the guidelines, the last step in the tax abatement process is the issuance of the termination
letter. The presentation of the termination letter is essential as it proves that the taxpayer’s application
for tax abatement has been approved. Thus, without a termination letter, a tax assessment cannot be
considered closed and terminated.

In this case, ADB failed to present a termination letter from the BIR. Instead, it presented a
Certification issued by the BIR to prove that it availed of the Tax Abatement Program and paid the basic
tax. It also attached copies of its BIR Tax Payment Deposit Slips and a Letter issued by RDO. These
documents, however, do not prove that ADB’s application for tax abatement has been approved. If at
all, these documents only prove ADB’s payment of basic taxes, which is not a ground to consider its
deficiency tax assessment closed an terminated. Since no termination letter has been issued by the
BIR, there is no reason for the Court to consider as closed and terminated the tax assessment on ADB’s
final withholding tax for fiscal year ending June 30, 1998. ADB’s application for tax abatement will be
deemed approved only upon the issuance of a termination letter, and only then will the deficiency tax
assessment be considered closed and terminated. However, in case ADB’s application for tax
abatement is denied, any payment made by it would be applied to its outstanding tax liability. (Asiatrust
Development Bank, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 201530 & 201680-81,
April 19, 2017)

VI.

Explain the “best evidence obtainable rule” in tax assessment. When can the Commissioner
assess taxes based on best evidences obtainable? (5%)

Answer:

The law authorizes the Commissioner to assess taxes on the basis of “best evidence obtainable” in the
following cases: (a) if a person fails to file a return or other document at the time prescribed by law; or
(b) he willfully or otherwise files a false or fraudulent return or other document. By the use of this method,
the Commissioner makes or amends the return from his own knowledge and from such information as
he can obtain through the testimony or otherwise. Assessments made as such are deemed prima facie
correct and sufficient for all legal purposes. (See Sec. 6[B], NIRC) The “best evidence obtainable”
includes the corporate and the accounting records of other taxpayers engaged in the same line of
business, including their gross profit and net profit sales.” It also includes data, record, paper, document
or any evidence gathered by internal revenue officers from other taxpayers who had personal
transactions or from whom the subject taxpayer received any income; and record, data, document and
information secured from government offices or agencies, such as the SEC, the Central Bank of the
Philippines, the Bureau of Customs, and the “Tariff and Customs Commission.” (Commissioner of
Internal Revenue vs. Hentex Trading Co., Inc., GR. No. 136975, March 31, 2005)

VII

Delayed Corporation, filed a false or fraudulent return on April 10, 2011 and was assessed of deficiency
income tax amounting to P100,000. The corporation timely protested the assessment. After exhaustion
of all administrative remedies, the assessment was upheld and became final, executory and
demandable on April 15, 2014. However, payment was made on April 15, 2016. Excluding

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 compromise penalty, what are the additions to the deficiency income tax. How will it be
computed? Explain (10%)

Answer:

Deficiency Income Tax P100,000

False or fraudulent return (50%) 50,000

Interest 4/15/11 - 4/15/16 100,000

Delinquency interest (4/15/11 – 4/15/16)

Basic Tax P100,000

Surcharge 50,000

Interest 4/15/14 - 4/15/16

(100,000 x 20% x 2) 40,000

Total (190,000 x20% x 2) 76,000 226,000

Total amount due P326,000

Or in narrative form discussing the above additions to tax

VIII.

X’s filed his income tax return on 15 April 2006. On 15 April 2008, he filed a Petition for Review with
the CTA asking the tax court to grant to him his claim for refund, considering that as of the said date,
he has not yet received any action from the BIR regarding his claim. The CTA denied the claim
for refund on the ground of prescription, considering that the two-year period of X to file a claim for
refund ended on 14 April 2008, in view of the fact that during the year 2008, the month of February
consisted of 29 days (in view of the leap year). According to the CTA, since one year, as per Civil
Code provision,is equivalent to 365 days only, the two year period would thus have 730 days;
thus, the filing of the case for refund on15 April 2008 was one day late. Is the CTA correct? (5%)

Answer:

No, the CTA is not correct. It is true that under the Civil Code, a year is equivalent to 365 days whether
it be a regular year or a leap year. However, Under Section 31, Chapter VIII, Book I of the Administrative
Code of 1987, a year is composed of 12 calendar months, regardless of the number of days.
There obviously exists a manifest incompatibility in the manner of computing legal periods under the
Civil Code and the Administrative Code of 1987.

For this reason, Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being
the more recent law, governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-
year prescriptive period (reckoned from the time of the filing of the final adjusted returnon April 15,
2006) consisted of 24 calendar months, ending on April 15, 2008. Thus, the Petition was filed within
the period allowed by law. (CIR v. Primetown Property Group, GR No. 162155, 28 August 2007)

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 IX.

After a Bureau of Internal Revenue (BIR) audit, Tuks Corp., a domestic corporation engaged in buying
and selling of textile materials, was found to have deficiency income tax of ₱50,000,000.00, including
interests and penalties, for the year 2012. For 2012, Tuks Corp. filed its income tax return (ITR) on April
15, 2013 because it used the calendar year for its accounting. The BIR sent the Preliminary Assessment
Notice (PAN) on December 23, 2015, and eventually, the Final Assessment Notice (FAN) on December
30, 2015, which were received by Tuks Corp. on the same dates that they were sent. Upon receipt of
the FAN, Tuks Corp. filed its protest letter on February 25, 2016.

Thereafter, and without action from the Commissioner of Internal Revenue (CIR), Tuks Corp. filed a
petition for review before the Court of Tax Appeals, alleging that the assessment has prescribed. For
its part, the CIR moved to dismiss the case, pointing out that the assessment had already become final
because the protest was filed beyond the allowable period.

Should the CIR's motion to dismiss be granted? Explain. (10%)

No. In deciding the above case, the Court emphasized the importance of observing the due process
requirements laid down in tax regulations. The right of the taxpayer to respond to the PAN is an
essential part of the due process requirements. However, what happened in the above case was the
issuance by the BIR of the FAN within the 15-day period, which was supposed to be the period within
which the taxpayer had the right to reply first to the previous PAN. Hence, as explained by the Court,
the failure of the BIR to strictly comply with the rules is a denial of the taxpayer’s right to due
process. That being said, the FAN subsequently issued by the BIR against the taxpayer was
adjudged to be void.

The above decision is consistent with other CTA cases such as the cases of Nippo Metal Tech Phils.
vs. CIR (CTA case EB No. 1273) and CIR vs. Hermano San Miguel (CTA case No. 8095).

Due process must be observed. This is provided for by the tax laws and recognized by the courts. While
it is a cardinal principle that taxes are the lifeblood of the government, it is a fundamental and primordial
rule that no person shall be deprived of life, liberty and property without due process of law. Although
taxation is vital and indispensable to our society, this must be exercised within the bounds of law and
procedural requirements. As rights of the citizens are protected by the Bill of Rights under the
Constitution, the due process clause is paramount to the power to tax by the government.

Needless to say, the 15-day period afforded to the taxpayers is to give them a reasonable opportunity
to be heard at the PAN stage. However, it is the sentiment of the taxpayers that the essence of due
process in BIR assessments will be defeated if taxpayers are merely given such opportunity but they
are not actually heard. Consider the efforts exerted by the taxpayers at the PAN stage in extracting
documents dating years back and the meticulous drafting of explanations and reconciliations, just to
know later that their efforts will just be summarily disregarded as their reply to PAN has no value. We
could just imagine how distressing that would be.

It is a plea from taxpayers that, aside from respecting the prescribed 15-day period to reply to PAN
afforded to the taxpayers, the BIR should take more time to read and consider any meritorious
arguments of the taxpayers. Perhaps, the BIR may need to revisit its procedures and personnel
requirements to give the revenue officers ample time to effectively read, review and consider the
arguments laid down by the taxpayers at the PAN stage. After all, a reply to PAN is part of due process
in a tax assessment case.

X.

A. May the Commissioner of the Internal Revenue compromise the payment of withholding
tax (tax deducted and withheld at source) where the financial position of the taxpayer
demonstrates a clear inability to pay the assessed tax? (5%)

Answer: Section 204 of the NIRC

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 B. After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue
initiated the filing of a civil action to collect the tax due from MX3. After several years, a decision was
rendered by the court ordering MX3 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, MX3 offered the Commissioner a compromise settlement of 50% of the judgment award,
representing that this amount is all he could really afford. Does the Commissioner have the power
to accept the compromise offer? Is it legal and ethical? Explain briefly. (5%)

Answer:

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 Commissioner shall not
accept unless accompanied by a waiver of the secrecy of bank deposits (Section 6[F}, NIRC).
The waiver will enable the Commissioner 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 Commissioner demonstrates a clear

inability to pay the tax, the acceptance of the offer is legal and ethical because 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.

Bonus (2 pts)

November 26, 2019 (Tuesday)

November 26, 2050 will fall on what day?
_____________

“He that can have patience can have what he will”

dqesguerra_2019

Nothing follows
***

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