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TAXATION LAW

IMPORTANT DOCTRINES AND PROVISIONS FOR THE BAR

PREPARED BY: ATTY. ANGELI P. ALBANA, LL.M.


 A taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that the public
money is being deflected to any improper purpose, or
that there is wastage of public funds through the
enforcement of an invalid or unconstitutional law. A
person suing as a taxpayer, however, must show that the
act complained of directly involves the illegal
Taxpayer’s Suit disbursement of public funds derived from taxation. He
must also prove that he has sufficient interest in
preventing the illegal expenditure of money raised by
taxation and that he will sustain a direct injury because
of the enforcement of the questioned statute or contract.
 For a taxpayer’s suit to prosper, two requisites must be met:
(1) public funds derived from taxation are disbursed by a
political subdivision or instrumentality and in doing so, a
law is violated or some irregularity is committed; and, (2)
the petitioner is directly affected by the alleged act. As to
the second requisite, the Supreme Court, in recent cases,
has relaxed the stringent "direct injury test" bearing in
mind that locus standi is a procedural technicality. By
invoking "transcendental importance", "paramount public
interest", or "far-reaching implications", ordinary citizens
and taxpayers were allowed to sue even if they failed to
Taxpayer’s Suit show direct injury. In cases where serious legal issues were
raised or where public expenditures of millions of pesos
were involved, the Supreme Court did not hesitate to give
standing to taxpayers.

 A taxpayer need not be a party to the contract to challenge


its validity. As long as taxes are involved, people have a
right to question contracts entered into by the government.
(Mamba vs. Lara, GR No. 165109 dated December 14, 2009)
Q: A law imposes a tax of 1/5 of 1% if the export price of prawns
produced in the Philippines. The law provides that the proceeds
of the tax shall be turned over to the Philippine Prawn Growers
Association, Inc. (PPGA), a non-profit private corporation
registered with the Securities and Exchange Commission to be
used by PPGA exclusively to undertake activities that promote
the growth of the Philippine prawns industry, such as
undertaking research on how to improve the productivity of
prawn farms in the Philippines, undertaking marketing
activities that will directly further the growth of the industry.
The members of PPGA constitute 90% of all the Prawn growers in

Taxpayer’s Suit the country representing 100% of the country’s prawn exports.
JN, a practicing lawyer and taxpayer, filed a suit with the
Supreme Court questioning the constitutionality of the law on the
ground that the funds raised through taxation will be used for a
private purpose. Will said suit prosper? Explain. (1990 Bar)
 A: No, because Atty. JN is not prejudiced by the law. It is not his tax
money that is being used. In short, he has no locus standi.
Furthermore, assistance to the prawn industry is for a public
purpose because the industry is one of the pillars of the economy
contribution to employment and foreign exchange
 An ordinance which imposes a fee to regulate certain
construction activities of identified special projects,
including "cell sites" or telecommunications towers is
regulatory in nature, and not primarily revenue-raising.
Thus, the fee imposed in the said ordinance is not a tax.
Tax vs. Fee If the generating of revenue is the primary purpose of the
ordinance and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also
obtained does not make the imposition a tax. (Smart vs.
Municipality of Malvar, Batangas, GR No. 204429 dated
February 18, 2014)
 Q: The City of Manila passed an ordinance
imposing an annual tax of P5,000.00 to be paid by an
operator of a massage clinic and an annual fee of
P50.00 to be paid by every attendant or helper in the
said clinic. Is the imposition a tax or a license fee?
(1989 Bar)
 A:The imposition on the operator of the massage clinic
Tax vs. Fee is both a tax and a license fee. The amount of P5,000.00
exceeds the cost of regulation, administration and
control but it is likewise imposed to regulate a non-
useful business in order to protect the health, safety and
morals of the citizenry in general. The P50.00
impositions on the helpers or attendants are license
fees sufficient only for regulation, administration and
control.
 The BIR cannot deprive a taxpayer the benefits of a
lower tax rate under a tax treaty for failure to strictly
comply with a treaty relief application under Revenue
Memorandum Order (“RMO”) No. 1-2000. The
obligation to comply with a tax treaty must take
precedence over the objective of RMO No. 1-2000. The
BIR must not impose additional requirements that would
*Tax Treaties negate the availment of the reliefs provided for under
international agreements. More so, when the tax treaty
does not provide for any pre-requisite for the availment
of the benefits under said agreement. (Deutsche Bank
AG Manila Branch vs. CIR, GR No. 188550 dated August 19,
2013
 Any revocation, modification or reversal of a ruling or
circular issued by the Commissioner of Internal Revenue
(“CIR”) shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to a
taxpayer, except: (a) where the taxpayer deliberately
misstates or omits material facts from his return or any
document required of him by the Bureau of Internal
*Non-retroactivity Revenue; (b) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from
of Rulings Rule the facts on which the ruling is based; or (c) where the
under Sec. 246 of taxpayer acted in bad faith. (Sec. 246 of the NIRC)
 Sec. 246 is not limited to a reversal only by the CIR because
the NIRC this Section expressly states, "Any revocation, modification
or reversal" without specifying who made the revocation,
modification or reversal. Hence, a reversal by the Supreme
Court is covered under Sec. 246. (CIR vs. San Roque, GR No.
187485 dated February 12, 2013)
 Under Sec. 246, taxpayers may rely upon a rule or
ruling issued by the CIR from the time the rule or ruling
is issued up to its reversal by the CIR or the Supreme
Court. The reversal is not given retroactive effect. This,
in essence, is the doctrine of operative fact. There must,
however, be a rule or ruling issued by the CIR that is
*Non-retroactivity relied upon by the taxpayer in good faith. A mere
of Rulings Rule administrative practice, not formalized into a rule or
ruling, will not suffice because such a mere
under Sec. 246 of administrative practice may not be uniformly and
consistently applied. An administrative practice, if not
the NIRC formalized as a rule or ruling, will not be known to the
general public and can be availed of only by those
within formal contacts with the government agency.
(CIR vs. San Roque Power Corporation, GR No. 187485
dated October 8, 2013)
 In order for Sec. 246 to apply, the ruling must be issued to
the taxpayer invoking the same. (CIR vs. Filinvest
Development Corporation, GR No. 163653 dated July 19,
2011) But, if the ruling issued is a general interpretative rule,
all taxpayers may rely on the ruling and invoke Sec. 246, if
proper.
 An example of a general interpretative rule is BIR Ruling No.
DA-489-03 dated December 10, 2003. BIR Ruling No. DA-
*Non-retroactivity 489-03 is a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but
of Rulings Rule by a government agency tasked with processing tax refunds
and credits, that is, the One Stop Shop Inter-Agency Tax
under Sec. 246 of Credit and Drawback Center of the Department of Finance.
This government agency is also the addressee, or the entity
the NIRC responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the CIR the
administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the CIR what to do in
cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the
lapse of the 120-day period. (CIR vs. San Roque Power
Corporation, GR No. 187485 dated February 12, 2013)
 The powers of the Commissioner may be delegated,
subject to certain exceptions, to a subordinate official with
a rank of division chief or higher. Thus, as a general rule,
a BIR ruling need not be signed or issued by the CIR.
However, there are two (2) rulings which must be issued
or signed by the CIR in order to be valid: (1) rulings of
first impression; and, (2)rulings which reverse, revoke
or modify any existing ruling of the BIR. (Sec. 7(b) of the
Tax Rulings NIRC)
 A ruling of the CIR may be appealed to the Secretary of
Finance (“SOF”) by filing a Request for Ruling Review
within thirty (30) days from receipt of the unfavorable
ruling. (DOF Department Order No. 23-2001 dated
October 25, 2001)
 The rule on exhaustion of administrative remedies,
particularly, appeal to the SOF, may be dispensed with
if, among others: (1) the question involved is purely
legal; (2) when there are circumstances indicating the
Tax Rulings urgency of judicial intervention; and, (3) when
exhaustion will result in an exercise in futility. (BDO vs.
Republic, GR No. 198756 dated January 13, 2015)
 The ruling of the SOF or the ruling of the CIR (if appeal
to the SOF may be dispensed with) is appealable to the
Court of Tax Appeals (“CTA”). The CTA has undoubted
jurisdiction to pass upon the constitutionality or validity
of a tax law or regulation when raised by the taxpayer
as a defense in disputing or contesting an assessment
or claiming a refund.The CTA may likewise take
Tax Rulings cognizance of cases directly challenging the
constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue
memorandum circulars, rulings).Jurisdictional basis
under RA No. 9282 is “other matters arising under the
NIRC or other laws administered by the BIR.” (BDO vs.
Republic, GR No. 198756 dated August 16, 2016)
 Q: In the examination conducted by the revenue officials against the
corporate taxpayer in 2010, the BIR issued a final assessment notice and
demand letter which states: “It is requested that the above deficiency
tax be paid immediately upon receipt hereof, inclusive of penalties
incident to delinquency. This is our final decision based on
investigation. If you disagree, you may appeal this final decision within
30 days from receipt hereof, otherwise said deficiency tax assessment
shall become final, executory and demandable.” The assessment was
immediately appealed by the taxpayer to the Court of Tax Appeals,
without filing its protest against the assessment and without a denial
thereof by the BIR. If you were the judge, would you deny the petition for
review filed by the taxpayer and consider the case as prematurely filed?
Explain you answer. (2012 Bar)
 A: No, the Petition for Review should not be denied. The case is an exception
to the rule on exhaustion of administrative remedies. The BIR is estopped
Tax Rulings from claiming that the filing of the Petition for Review is premature because
the taxpayer failed to exhaust all administrative remedies. The statement of
the BIR in its Final Assessment Notice and Demand Letter led the taxpayer to
conclude that only a final judicial ruling in his favor would be accepted by the
BIR. The taxpayer cannot be blamed for not filing a protest against the Formal
Letter of Demand with Assessment Notices since the language used and the
tenor of the demand letter indicate that it is the final decision of the
respondent on the matter. The CIR should indicate, in a clear and unequivocal
language, whether his action on a disputed assessment constitutes his final
determination thereon in order for the taxpayer concerned to determine
when his or her right to appeal to the tax court accrues. Although there was
no direct reference for the taxpayer to bring the matter directly to the CTA, it
cannot be denied that the word “appeal” under prevailing tax laws refers to
the filing of a Petition for Review with the CTA. (Allied Bank vs CIR, GR No
175097, February 5, 2010)
 The taxpayer may compromise a tax liability by: (a) paying
40% of the basic assessed tax on the ground of doubtful
validity of an assessment; or (b) paying 10% of the basic
assessed tax on the ground of financial incapacity. A
criminal violation that has already been filed in court or a
criminal violation involving fraud cannot be the subject of
a compromise between the BIR and the taxpayer. (Sec.
204(A) of the NIRC)
Compromise  A compromise penalty is an amount paid by the taxpayer
and Abatement in lieu of criminal prosecution. It is an amount paid to
compromise a violation of the penal provisions of the NIRC.
Since a compromise is in the nature of a contract, it is now a
well settled doctrine that a compromise penalty cannot be
imposed or collected without the agreement or conformity
of the taxpayer. (Wonder Mechanical Engineering
Corporation vs. CTA, GR Nos. L-22805 & L-27858 dated June
30, 1975)
 Good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and
interest. (CIR vs. St. Luke’s Medical Center, Inc., GR Nos.
195909 and 195960 dated September 26, 2012)
 The CIR may abate or cancel a tax liability when: (a) the tax
or any portion thereof appears to be unjustly or
excessively assessed; or (b) the administration and
collections costs involved do not justify the collection of the
Compromise amount due. The CIR has the sole power or authority to
abate taxes. (Sec. 204(B)and Sec. 7(c) of the NIRC)
and Abatement  Under Revenue Regulations (“RR”) No. 15-2006 dated
September 27, 2006, an application for abatement is
considered approved only upon issuance of a termination
letter. Based on the guidelines of RR No. 15-2006, 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. (Asiatrust Development Bank, Inc. vs.
CIR, GR No. 201530 dated April 19, 2017)
 Good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and
interest. (CIR vs. St. Luke’s Medical Center, Inc., GR Nos.
195909 and 195960 dated September 26, 2012)
 The CIR may abate or cancel a tax liability when: (a) the tax
or any portion thereof appears to be unjustly or
excessively assessed; or (b) the administration and
collections costs involved do not justify the collection of the
Compromise amount due. The CIR has the sole power or authority to
abate taxes. (Sec. 204(B)and Sec. 7(c) of the NIRC)
and Abatement  Under Revenue Regulations (“RR”) No. 15-2006 dated
September 27, 2006, an application for abatement is
considered approved only upon issuance of a termination
letter. Based on the guidelines of RR No. 15-2006, 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. (Asiatrust Development Bank, Inc. vs.
CIR, GR No. 201530 dated April 19, 2017)
Q: State and discuss briefly whether the following cases may be compromised or may
not be compromised:
a. Delinquent accounts;
b. Cases under administrative protest, after issuance of the final assessment notice to
the taxpayer, which are still pending;
c. Criminal tax fraud cases;
d. Criminal violations already filed in court;
e. Cases where final reports of reinvestigation or reconsideration have been issued
resulting in the reduction of the original assessment agreed to by the taxpayer when
he signed the required agreement form. (2005 Bar)
 A:
Compromise  a. Delinquent accounts may be compromised if either of the two conditions is present: (1)
the assessment is of doubtful validity, or (2) the financial position of the taxpayer

and Abatement demonstrates a clear inability to pay the tax. [Sec. 204(A), NIRC; Sec. 2 of Revenue
Regulations No. 30- 2002]
 b. These may be compromised, provided that it is premised upon doubtful validity of the
assessment or financial incapacity to pay. (ibid)
 c. These may not be compromised, so that the taxpayer may not profit from his fraud,
thereby discouraging its commission. (ibid)
 d. These may not be compromised in order that the taxpayer will not profit from his
criminal acts. (ibid)
 e. Cases where final reports of reinvestigation or reconsideration have been issued
resulting in the reduction of the original assessment agreed to by the taxpayer when he
signed the required agreement form, cannot be compromised. By giving his conformity
to the revised assessment, the taxpayer admits the validity of the assessment and his
capacity to pay the same. (Sec. 2 of Revenue Regulations No. 30-2002)
 Excise tax may refer to: (a) specific and ad valorem tax
on articles enumerated under the NIRC or on goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
*Concept of disposition and to things imported; or (b) a tax imposed
“Excise Tax” upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation, profession
or business. (CIR vs. Pilipinas Shell Petroleum
Corporation, GR No. 188497 dated February 19, 2014)
 The grant of a tax deduction scheme covering the 20%
Senior Citizen’s discount under Republic Act (“RA”) No.
9257 is constitutional as a valid exercise of police power.
Even if RA No. 9258 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
*Tax Treatment of intended to improve the welfare of senior citizens who, at
the 20% Senior their age, are less likely to be gainfully employed, more
prone to illnesses and other disabilities, and, thus, in need
Citizen’s Discount of subsidy in purchasing basic commodities. It may not be
amiss to mention also that 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.
 The grant of the 20% discount as a tax deduction
scheme is not an exercise of the power of eminent
domain. It does not purport to appropriate or burden
specific properties, used in the operation or conduct of
*Tax Treatment of the business of private establishments, for the use or
benefit of the public, or senior citizens for that matter,
the 20% Senior but merely regulates the pricing of goods and services
Citizen’s Discount relative to, and the amount of profits or income/gross
sales that such private establishments may derive from,
senior citizens. (Manila Memorial Park Inc. vs. DSWD, GR
No. 175356 dated December 3, 2013)
 A subsequent law may repeal a tax exemption under a
franchise or special law and the same will not violate
the non-impairment clause under the Constitution. A
franchise partakes the nature of a grant, which is beyond
Non-impairment the purview of the non-impairment clause of the
Constitution. While the Supreme Court has, not too
Clause of the infrequently, referred to tax exemptions contained in
Constitution special franchises as being in the nature of contracts
and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from
being strictly contractual in nature.
 Contractual tax exemptions, in the real sense of the term
and where the non-impairment clause of the Constitution
can rightly be invoked, are those agreed to by the taxing
authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting
in its private capacity, sheds its cloak of authority and
Non-impairment waives its governmental immunity. Truly, tax exemptions of
this kind may not be revoked without impairing the
Clause of the obligations of contracts. Article XII, Sec. 11, of the 1987
Constitution Constitution, like its precursor provisions in the 1935 and
the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under
the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as and when
the common good so requires. (MERALCO vs. Province of
Laguna, GR No. 131359 dated May 5, 1999)
Q: A law was passed granting tax exemption to certain industries
and investments for a period of five years. But three 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
Non-impairment the period of exemption granted by the law, its repeal violated
their constitutional right against the impairment of the
Clause of the obligations and contracts. Is the contention of the companies
tenable or not? Reason briefly.
Constitution  A: The contention is not tenable. The exemption granted is in the
nature of a unilateral tax exemption. Since the exemption given is
spontaneous on the part of the legislature and no service or duty
or other remunerative conditions have been imposed on the
taxpayers receiving the exemption, it may be revoked at will by the
legislature.[Manila Railroad Company v. Insular Collector of
Customs, 12 PhiL 146 (1915)]
 The Voluntary Arbitrator has no jurisdiction to settle tax
matters. The Voluntary Arbitrator’s jurisdiction is limited
to labor disputes. The issues raised before the Panel of
Voluntary Arbitrators are: (1) whether the cash
conversion of the gasoline allowance shall be subject to
fringe benefit tax or the graduated income tax rate on
* CIR’s Power to compensation; and, (2) whether the company
wrongfully withheld income tax on the converted gas
Interpret the allowance. Under Sec. 4 of the NIRC, the CIR shall have
Provisions of the the exclusive and original jurisdiction to interpret the
provisions of the NIRC and other tax laws, subject to
NIRC review by the SOF. Consequently, if the company and/or
the union desire/s to seek clarification of these issues,
it/they should have requested for a tax ruling from the
BIR. (Honda Cars Philippines, Inc. vs. Honda Cars
Technical Specialist Supervisors Union, GR No. 204142
dated November 19, 2014)
 In order to be exempt from income tax as a charitable
institution under Sec. 30(E), the charitable institution must
be: (1) A non-stock corporation or association; (2)
Organized exclusively for charitable purposes; (3)
Operated exclusively for charitable purposes; and, (4) No
part of its net income or asset shall belong to or inure to
Proprietary Non- the benefit of any member, organizer, officer or any
specific person.
profit Hospitals  In order to be exempt from income tax as a charitable
under Sec. 27(B) Institution under Sec. 30(E) of the NIRC, the non-stock non-
profit hospital must be “organized and operated
vs. 30(E) of the exclusively” for charitable purposes.It cannot be disputed
NIRC that a hospital which receives approximately P1.73 billion
from paying patients is not an institution "operated
exclusively" for charitable purposes. Thus, insofar as its as
its revenues from paying patients are concerned, St. Luke’s
is not “operated exclusively” for charitable purposes.
 Income from paying patients is considered income from
an activity conducted for profit. The last paragraph of
Sec. 30 of the NIRC provides that: “income of whatever
kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of
Proprietary Non- their activities conducted for profit regardless of the
profit Hospitals disposition made of such income, shall be subject to
income tax.” Based on the foregoing, the hospital,
under Sec. 27(B) insofar as its income from paying patients, is
vs. 30(E) of the considered a proprietary non-profit hospital which is
subject to the 10% income tax based on taxable income
NIRC under Sec. 27(B) of the NIRC. (J. del Castillo, CIR vs. St.
Luke’s Medical Center, Inc., GR No. 203514 dated
February 13, 2017; CIR vs. St.Luke’s Medical Center, Inc.,
GR Nos. 195909 and 195960 dated September 26, 2012)
Q: The Philippine-British Association, Inc. (Association) is a non-
stock, non-profit organization which owns the St. Michael's Hospital
(Hospital). Sec. 216 in relation to Sec. 215 of the LGC classifies all
lands, buildings and other improvements thereon actually, directly,
and exclusively used for hospitals as "special." A special
classification prescribes a lower assessment than a commercial
classification.
Within the premises of the Hospital, the Association constructed the
St. Michael's Medical Arts Center (Center) which will house medical
practitioners who will lease the spaces therein for their clinics at
Proprietary Non- prescribed rental rates. The doctors who treat the patients confined in
the Hospital are accredited by the Association.
profit Hospitals The City Assessor classified the Center as "commercial" instead of

under Sec. 27(B) "special" on the ground that the Hospital owner gets income from the
lease of its spaces to doctors who also entertain out-patients. Is the
City Assessor correct in classifying the Center as "commercial?"
vs. 30(E) of the Explain. (2016 Bar)

NIRC  A: No. The City Assessor is not correct in classifying the Center as
“commercial.”
 The fact alone that the separate St. Michael’s Medical Arts Center will
house medical practitioners who shall treat the patients confined in the
Hospital and are accredited by the Association takes away the said
Medical Arts Center from being categorized as “commercial” since a
tertiary hospital is required by law to have a pool of physicians who
comprise the required medical departments in various medical fields.
[City Assessor of Cebu City v Association of Benevola de Cebu, Inc., 524
SCRA 128 (2007)]
 All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and
duties. (Sec. 4(3), Art. XIV of the Constitution)
 The last paragraph of Sec. 30 of the NIRC is without force and
effect with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit
Proprietary Non- educational institutions prove that its assets and revenues
profit Educational are used actually, directly and exclusively for educational
purposes. The tax-exemption constitutionally-granted to
Instutions under non-stock, non-profit educational institutions, is not subject
to limitations imposed by law. The tax exemption granted by
Sec. 27(B) of the the Constitution to non-stock, non-profit educational
institutions is conditioned only on the actual, direct and
NIRC exclusive use of their assets, revenues and income for
educational purposes. To avail of the exemption, the
taxpayer must factually prove that it used actually, directly
and exclusively for educational purposes the revenues or
income sought to be exempted.
 A plain reading of the Constitution would show that
Article XIV, Sec. 4(3) does not require that the revenues
and income must have also been sourced from
Proprietary Non- educational activities or activities related to the
profit Educational purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of
Instutions under revenues. Thus, so long as the revenues and income are
Sec. 27(B) of the used actually, directly and exclusively for educational
purposes, then said revenues and income shall be
NIRC exempt from taxes and duties. (CIR vs. De La Salle
University, GR No. 196596 dated November 9, 2016)
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 a school run by the Church itself, the
southeastern side by some commercial establishments,
while the rest of the property, in particular the
Proprietary Non- northwestern side, is idle or unoccupied.
profit Educational May the Church claim tax exemption on the entire land?
Decide with reasons. (2005 Bar)
Instutions under  A: No. The portions of the land occupied and used by the
Sec. 27(B) of the church, convent and school run by the church are exempt
from real property taxes while the portion of the land
NIRC 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.
[Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)].
 A Bureau of Internal Revenue (“BIR”) ruling which
states that all government bonds are deposit substitutes
regardless of the number of lenders is not valid
because it completely disregards the “20 or more
lender rule” found under Sec. 22(Y) of the NIRC. The
term “deposit substitutes” means an alternative form of
*Deposits and obtaining funds from the public. The term “public”
means borrowing from twenty (20) or more individual or
Deposit corporate lenders at any one time. Moreover, the phrase
"at any one time" does not mean at the point of
Substitutes origination alone. From the point of view of the financial
market, the phrase “at any one time” for purposes of
determining the “20 or more lender rule” would mean
every transaction executed in the primary or secondary
market in connection with the purchase or sale of
securities.
 If the bonds are considered deposit substitutes (20 or
more lenders), the interest income is generally subject
to the 20% Final Withholding Tax. If the bonds are not
considered deposit substitutes (19 or less lenders), the
interest income forms part of gross income and is
subject to the regular income tax rates. (BDO vs.
Republic, GR No. 198756 dated January 13, 2015)
 Sec. 24(B)(1) of the NIRC provides that interest from any
*Deposits and currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and
Deposit similar arrangements is subject to a 20% Final

Substitutes Withholding Tax.


 Interest of members’ savings and time deposits with
duly registered cooperatives are not subject to income
and withholding tax. Sec. 24(B)(1) of the NIRC applies to
interest paid by banks and does not cover interest paid
by cooperatives. Moreover, members’ deposits with the
cooperatives are not currency bank deposits nor deposit
substitutes.
 The legislative intent under RA No. 6938 (“Cooperative
Code of the Philippines”) is to give cooperatives a
preferential tax treatment and tax exemption under
Arts. 61 and 62 of RA No. 6938. This tax exemption
should be construed to extend to members of
cooperatives. Subsequently, Article 61 of RA 9520 (which
*Deposits and amends RA No. 6938), now specifically provides that
members of cooperatives are not subject to final taxes
Deposit on their deposits. This affirms the previous
Substitutes interpretation of the BIR (in two BIR Rulings cited by the
Supreme Court) that Sec. 24(B)(1) of the NIRC does not
apply to cooperatives and confirms that such
ruling/interpretation carries out the legislative intent.
(Dumaguete Cathedral Credit Cooperative vs. CIR, GR No.
182722 dated January 22, 2010)
 For domestic corporations, the 6% capital gains tax only
applies to the sale of land and/or buildings in the
Philippines held as a capital asset. It does not include
the sale of machineries and equipment which should be
subject to the 30% Regular Corporation Income Tax.
(SMI-ED Technology Corporation, Inc. vs. CIR, GR No.
175410 dated November 12, 2014)
Capital Gains  It is settled that the transfer of property through
Tax expropriation proceedings is a sale or exchange within
the meaning of Secs. 24(D) and 56(A)(3) of the NIRC,
and profit from the transaction constitutes capital gain.
Since capital gains tax is a tax on passive income, it is
the seller, or respondents in this case, who are liable to
shoulder the tax.
 In fact, the BIR, in BIR Ruling No. 476-2013 dated December
18, 2013, has constituted the DPWH as a withholding agent
tasked to withhold the 6% final withholding tax in the
expropriation of real property for infrastructure projects.
Thus, as far as the government is concerned, the capital
gains tax in expropriation proceedings remains a liability
of the seller, as it is a tax on the seller's gain from the sale of
real property.
 If only part of the property of the owners was expropriated,
Capital Gains the amount of capital gains tax cannot be awarded to the
owners as consequential damages. Consequential damages
Tax are only awarded if as a result of the expropriation, the
remaining property of the owner suffers from an
impairment or decrease in value. Given that the payment of
capital gains tax on the transfer of the subject property has
no effect on the increase or decrease in value of the
remaining property, it can hardly be considered as
consequential damages that may be awarded to owners.
(Republic vs. Spouses Salvador, GR No. 205428 dated June 7,
2017)
Q: The City of Maharlika passed an ordinance imposing a tax on any sale
or transfer of real property located within the city at a rate of fifty percent
(50%) of one percent (1%) of the total consideration of the transaction. Jose
sold a parcel of land in the city, which he inherited from his deceased
parents, and refused to pay the aforesaid tax. He instead filed a case asking
that the ordinance be declared null and void since the tax it imposed can
only be collected by the national government, as in fact he has paid the
Bureau of Internal Revenue (BIR) the required capital gains tax. If you
were the City Legal Officer of Maharlika, what defenses would you raise to
sustain the validity of the ordinance? (2016 Bar)
 A: The defenses I would raise are the following:
Capital Gains  a. Cities like the City of Maharlika have the power to pass an ordinance
imposing a tax on the sale, donation, barter, or on any other mode of
Tax transferring ownership of title to real property located within its territorial
boundaries; (LGC, Sec. 135, in relation to Secs. 142 and 151)
 b. The required capital gains tax collected by the national government is
different from the tax that is imposable by the local government units such as
the City of Maharlika;
 c. The transfer tax imposed and collected by cities are not among those
included in the common limitations on the power of taxation which are
reserved solely for the exercise by the national government;
 d. There is no direct duplicate taxation because there are two different taxing
authorities, the national government and a local government unit.
 An offline international carrier with no landing rights in
the Philippines, is not liable to the 2.5% Gross
Philippine Billings Tax (“GPBT”). The Gross Philippine
Billings Tax attaches only when the carriage of persons,
excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold.
Gross Philippine Thus, to be liable to the 2.5% GPBT, the international
carrier must have landing rights in the Philippines. If the
Billings Tax offline carrier (has no landing rights in the Philippines)
sells tickets in the Philippines through an agent, the
offline carrier becomes as a resident foreign
corporation subject to the 30% Regular Corporate
Income Tax. If a tax treaty is applicable, it must be
considered in applying the correct income tax rate. (Air
Canada vs. CIR, GR No. 169507 dated January 11, 2016)
 Sec. 28(A)(3)(a) of the NIRC as amended by RA No.
10378 provides that international carriers doing
business in the Philippines may avail of a preferential
rate or exemption from the 2.5% Gross Philippine
Billings Tax on the basis of an applicable tax treaty or
Gross Philippine international agreement to which the Philippines is a
Billings Tax signatory or on the basis of reciprocity such that an
international carrier, whose home country grants
income tax exemption to Philippine carriers, shall
likewise be exempt from the 2.5% Gross Philippine
Billings Tax. (Sec. 1 of RA No. 10378 dated July 23, 2012)
Q: Kenya International Airlines (KIA) is a foreign corporation, organized
under the laws of Kenya. It is not licensed to do business in the Philippines.
Its commercial airplanes do not operate within Philippine territory, or
service passengers embarking from Philippine airports. The firm is
represented in the Philippines by its general agent, Philippine Airlines
(PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and these tickets are serviced by
KIA airplanes outside the Philippines. The total sales of airline tickets
transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The
Commissioner of Internal Revenue assessed KIA deficiency income taxes
at the rate of 35% on its taxable income, finding that KIA’s airline ticket
sales constituted income derived from sources within the Philippines.
KIA filed a protest on the ground that the P2,968,156.00 should be
Gross Philippine considered as income derived exclusively from sources outside the
Philippines since KIA only serviced passengers outside Philippine

Billings Tax territory.


Is the position of KIA tenable? Reasons. (2009 Bar)
 A: KIA’s position is not tenable. The revenue it derived in 1997 from sales of
airplane tickets in the Philippines, through its agent PAL, is considered as
income from within the Philippines, subject to the 35% tax based on its
taxable income pursuant to the Tax Code. The transacting of business in the
Philippines through its local sales agent, makes KIA a resident foreign
corporation despite the absence of landing rights, thus, it is taxable on
income derived from within. The source of an income is the property, activity
or service that produced the income. In the instant case, it is the sale of tickets
in the Philippines which is the activity that produced the income. KIA’s
income being derived from within, is subject to Philippine income tax. [CIR v.
British Overseas Airways Corporation, 149 SCRA 395, (1987)]
 If the taxpayer claims bonuses as a deduction in its
income tax return, the withholding tax on the said
bonuses should be withheld and remitted to the BIR in
the year of accrual and not during the year of payment.
Withholding The obligation of the payor/employer to deduct and
withhold the related withholding tax on bonuses arises
Taxes at the time the income was paid or accrued or recorded
as an expense in the payor’s/employer’s books,
whichever comes first. (ING Bank N.V. vs. CIR, GR No.
167679 dated July 22, 2015)
 PAGCOR’s exemption from direct and indirect taxes under its
Charter – Presidential Decree No. 1869 does not cover exemption
from Fringe Benefits Tax (“FBT”). The FBT is treated as a final
income tax on the employee that shall be withheld and paid by the
employer on a calendar quarterly basis. As such, PAGCOR is a
mere withholding agent inasmuch as the FBT is imposed on
PAGCOR's employees who receive the fringe benefit. PAGCOR's
liability as a withholding agent is not covered by the tax exemptions
under its Charter.
 A fringe benefit may be exempt from FBT if the same is required by
the nature of, or is necessary to the trade, business or profession of
the employer, or when the fringe benefit is for the convenience or
Fringe Benefits advantage of the employer.

Tax  The amount paid by PAGCOR for amenities such as playing rights
to golf clubs is not a fringe benefit subject to the FBT. The
membership of PAGCOR to these golf clubs and other
organizations are intended to benefit its customers and not its
employees. Aside from this, the membership is under the name of
PAGCOR, and as such, cannot be considered as fringe benefits
because it is the customers and not the employees of PAGCOR who
benefit from such memberships. Considering that the payments of
membership dues and fees are not borne by PAGCOR for its
employees, they cannot be considered as fringe benefits which are
subject to FBT under Sec. 33 of the NIRC. (CIR vs. Secretary of
Justice and PAGCOR, GR No. 177387 dated November 9, 2016)
Q: In 2011, Solar Computer Corporation (Solar)
purchased a proprietary membership share covered by
Membership certificate No. 8 from the Mabuhay Golf
Club, Inc. for P500, 000.00. On December 27, 2012, it
transferred the same to David, its American consultant,
to enable him to avail of the facilities of the Club. David
executed a Deed of Declaration of Trust and Assignment
of Shares wherein he acknowledged the absolute
ownership of Solar over the share; that the assignment
was without any consideration; and that the share was
Fringe Benefits placed in his name because the Club required it to be
done. In 2013, the value of the share increased to
Tax P800,000.00.
Is the said assignment a “gift” and, therefore, subject to
gift tax? Explain. (2016 Bar)
 A: No. The assignments are not gratuitous, and there is no
intent to transfer ownership hence not subject to gift tax.
 The value of the right to avail of the privileges attendant to
Mabuhay Golf Club, Inc. Membership Certificate is due to
David’s merits or services as a computer consultant. It is a
fringe benefit taxable to the employer. [NIRC of 1997, Sec.
33 (B) (6)]
 The term “capital assets” means property held by the taxpayer
(whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of
his trade or business, or property used in the trade or business, of
a character which is subject to the allowance for depreciation
provided in Sec. 34(F); or real property used in trade or business of
the taxpayer. (Sec. 39(A)(1) of the NIRC)
 An equity investment is a capital, not ordinary, asset of the investor
Capital Assets the sale or exchange of which results in either a capital gain or a
capital loss. Shares of stock like the other securities defined in Sec.
22(T) of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In the hands,
however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the
shares held by such investor become worthless, the loss is deemed
to be a loss from the sale or exchange of capital assets.
 The term “capital assets” means property held by the taxpayer
(whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of
his trade or business, or property used in the trade or business, of
a character which is subject to the allowance for depreciation
provided in Sec. 34(F); or real property used in trade or business of
the taxpayer. (Sec. 39(A)(1) of the NIRC)
 An equity investment is a capital, not ordinary, asset of the investor
Capital Assets the sale or exchange of which results in either a capital gain or a
capital loss. Shares of stock like the other securities defined in Sec.
22(T) of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In the hands,
however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the
shares held by such investor become worthless, the loss is deemed
to be a loss from the sale or exchange of capital assets.
 The loss limitation rule under Sec. 39(C) of the NIRC provides that
capital losses are allowed to be deducted only to the extent of
capital gains, i.e., gains derived from the sale or exchange of
capital assets, and not from any other income of the taxpayer.
(China Banking Corporation vs. CA, GR No. 125508 dated July 19,
2000)
 The buildings, machineries and equipment of a Philippine
Economic Zone Authority (“PEZA”)-registered corporation whose
primary purpose is "to engage in the business of manufacturing
ultra high-density microprocessor unit package" but did not
commence business operations are capital assets. They are not
Capital Assets among the exclusions enumerated in Sec. 39(A)(1) of the NIRC.
None of the properties were used in the taxpayer’s trade or
ordinary course of business because the taxpayer never
commenced operations. They were not part of the inventory. None
of them were stocks in trade. Based on the definition of capital
assets under Sec. 39 of the NIRC, they are capital assets. (SMI-ED
Technology Corporation, Inc. vs. CIR, GR No. 175410 dated November
12, 2014)
Q: In January 1970, Juan Gonzales bought one hectare of
agricultural land in Laguna for P100, 000. This property has a
current fair market value of P10 million in view of the
construction of a concrete road traversing the property. Juan
Gonzales agreed to exchange his agricultural lot in Laguna for a
one-half hectare residential property located in Batangas, with a
fair market value of P10 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 P9
million.
What is the nature of the real properties exchanged for tax
Capital Assets purposes - capital asset or ordinary asset? Explain.
 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
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. (Section 39,
NIRC, Revenue Regulations No. 7-03)
 In order to be considered as a deductible business
expense, the following requisites must concur: (a) the
expense must be ordinary and necessary; (b) it must have
been paid or incurred during the taxable year; (c) it must
have been paid or incurred in carrying on the trade or
business of the taxpayer; and, (d) it must be supported by
receipts, records or other pertinent papers.
 On the other hand, a sworn declaration of loss must be filed
with the BIR within forty-five (45) days from the date of
Deductions occurrence in order to substantiate a deduction for
casualty loss. (H. Tambunting Pawnshop, Inc. vs. CIR, GR No.
173373 dated July 29, 2013)
 Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income
shall be allowed as a deduction only if it is shown that the
withholding tax required to be deducted and withheld
therefrom has been paid to the BIR. (Sec. 34(K) of the NIRC)
Q.Peter is the Vice-President for Sales of Golden Dragon Realty
Conglomerate, Inc. (Golden Dragon). A group of five (5) foreign
investors visited the country for possible investment in the
condominium units and subdivision lots of Golden Dragon. After
a tour of the properties for sale, the investors were wined and
dined by Peter at the posh Conrad's Hotel at the cost of
P150,000.00. Afterward, the investors were brought to a party in a
videoke club which cost the company P200,000.00 for food and
drinks, and the amount of P80,000.00 as tips for business
promotion officers. Expenses at Conrad's Hotel and the videoke
club were receipted and submitted to support the deduction for
representation and entertainment expenses. Decide if all the

Deductions representation and entertainment expenses claimed by Golden


Dragon are deductible. Explain. (2016 Bar)
 A: Not all of the representation and entertainment expenses
claimed by Golden Dragon are deductible. Only those that are
reasonable in amount and nature should be deductible. It should
be noted that the total expenses is P430,000.00 for the five (5)
investors or P86,000.00 each.
 I would allow only a deduction in such amounts as are reasonable
under the circumstances but in no case shall all deductions for
representation and entertainment expenses, including those above
enumerated, exceed 0.50% of net sales. [NIRC of 1997, Sec. 34 (A)
(1) (iv); RR 10-2002]
 Judicial expenses are expenses of administration. Administration
expenses, as an allowable deduction from the gross estate of the
decedent for purposes of arriving at the value of the net estate,
have been construed by the federal and state courts of the United
States to include all expenses "essential to the collection of the
assets, payment of debts or the distribution of the property to the
persons entitled to it." In other words, the expenses must be
Deductions essential to the proper settlement of the estate.

from the Gross  Thus, the notarial fee paid for the extrajudicial settlement is
clearly a deductible expense since such settlement effected a

Estate distribution of Pedro Pajonar's estate to his lawful heirs. Similarly,


the attorney's fees paid to PNB for acting as the guardian of Pedro
Pajonar's property during his lifetime should also be considered as
a deductible judicial expense. PNB provided a detailed accounting
of decedent's property and gave advice as to the proper settlement
of the latter's estate, acts which contributed towards the collection
of decedent's assets and the subsequent settlement of the estate.
 The following expenses are not deductible for estate tax
purposes: (a) Expenditures incurred for the individual
benefit of the heirs, devisees or legatees; (b)
Compensation paid to a trustee of the decedent's estate
when it appears that such trustee was appointed for the
purpose of managing the decedent's real estate for the
Deductions benefit of the testamentary heir; (c) Premiums paid on
the bond filed by the administrator as an expense of
from the Gross administration since the giving of a bond is in the
nature of a qualification for the office, and not necessary
Estate in the settlement of the estate; and, (d) Attorney's fees
incident to litigation incurred by the heirs in asserting
their respective rights. Thus, expenditures incurred for
the individual benefit of the heirs, devisees or legatees
are not deductible. (CIR vs. CA and Pajonar, GR No.
123206 dated March 22, 2000)
 In determining the amount of deductible claims against the estate,
it is the amount of the claim at the time of the decedent’s death that
is deductible and not the amount actually paid to settle the
obligation or claim after the decedent’s death. We follow the date of
death valuation principle made pursuant to the ruling of the U.S.
Supreme Court in Ithaca Trust Co. v. United States. First. There is no
law, nor do we discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in
determining the net value of the estate. It bears emphasis that tax
Deductions burdens are not to be imposed, nor presumed to be imposed,
beyond what the statute expressly and clearly imports, tax statutes
from the Gross being construed strictissimi juris against the government. Any
doubt on whether a person, article or activity is taxable is

Estate generally resolved against taxation. Second. Such construction


finds relevance and consistency in our Rules on Special
Proceedings wherein the term "claims" required to be presented
against a decedent's estate is generally construed to mean debts
or demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime, or liability contracted by the
deceased before his death. Therefore, the claims existing at the
time of death are significant to, and should be made the basis of,
the determination of allowable deductions. (Dizon vs. CTA, GR No.
140944 dated April 30, 2008)
 In order to claim Vanishing Deduction for Estate Tax
purposes, the following requisites must concur: (a) The
property respecting which the deduction is sought must
have been received by the decedent as a gift within five
(5) years from the date of his death, or received by him
by bequest, devise or inheritance from a prior
decedent who died within five (5) years from the date of
Deductions the decedent’s death; (b) The property with respect to
which deduction is claimed must have formed part of
from the Gross the Gross Estate situated in the Philippines of the prior
Estate decedent or taxable gift of the donor; (c) The property
must be the same property received from the prior
decedent or donor or the one received in exchange
therefor; (d) Estate Tax and Donor’s Tax on the previous
transfer must have been paid; and, (e) No vanishing
deduction on the property was allowed to the prior
estate. (Sec. 86(A)(2) of the NIRC)
Q: In 1999, Xavier purchased from his friend, Yuri, a painting for
P500,000.00. The fair market value (FMV) of the painting at the
time of the purchase was P1 million. Yuri paid all the
corresponding taxes on the transaction. In 2001, Xavier died. In
his last will and testament, Xavier bequeathed the painting,
already worth P1.5 million, to his only son, Zandro. The will also
granted Zandro the power to appoint his wife, Wilma, as
successor to the painting in the event of Zandro’s death. Zandro
died in 2007, and Wilma succeeded to the property.

Deductions May a vanishing deduction be allowed in either or both of the


estates? Explain. (2009 Bar)
from the Gross  A: Vanishing deduction shall be allowed to the estate of Xavier but
only to the extent of the property which is the portion acquired by
Estate gift. (Section 100, NIRC) The donation took place within 5 years
(1999 to 2001) from the death of Xavier; hence, there is a vanishing
deduction. However, Zandro’s estate will not be entitled to claim
vanishing deduction because, first and foremost, the property
previously taxed is not includable in his gross estate and second,
even if it is includable, the present decedent died more than 5
years from the death of the previous decedent, and that a vanishing
deduction is already claimed by the previous estate involving the
same property.
 The following transfers are exempt from Estate Tax: (a)
The merger of usufruct in the owner of the naked title;
(b) The transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary; (c) The transmission from the first
heir, legatee or donee in favor of another beneficiary, in
Exemption of accordance with the desire of the predecessor; and, (d)
Certain All bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions, no part of
Transmissions the net income of which insures to the benefit of any
individual: Provided, however, That not more than thirty
percent (30%) of the said bequests, devises, legacies or
transfers shall be used by such institutions for
administration purposes. (Sec. 87 of the NIRC)
 If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said
deposit account, unless the CIR has certified that the Estate
Tax has been paid. However, the administrator of the estate
or any one of the heirs of the decedent may, upon
authorization by the CIR, withdraw an amount not
exceeding Twenty thousand pesos (P20,000.00) without
certification that the Estate tax has been paid. (Sec. 97 of
Exemption of the NIRC)

Certain  Taxes are created primarily to generate revenues for the


maintenance of the government. However, this particular
Transmissions tax may also serve as guard against the release of deposits
to persons who have no sufficient and valid claim over the
deposits. Based on the assumption that only those with
sufficient and valid claim to the deposit will pay the taxes
for it, requiring the certificate from the BIR(that the Estate
Tax has been paid) increases the chance that the deposit
will be released only to them. (PNB vs. Santos, GR No.
208295 dated December 10, 2014)
Q: X dies in year 2000 leaving a bank deposit of P2, 000,000.00
under joint account with his associates in a law office. Learning
of X’s death from the newspapers, the Commissioner of Internal
Revenue wrote to every bank in the country asking them to
disclose to him the amount of deposits that might be outstanding
in his name or jointly with others at the date of his death. May the
bank holding the deposit refuse to comply on the ground of the
Secrecy of Bank Deposit Law? Explain. (2003 Bar)
 A: No. The Commissioner of Internal Revenue has the authority to
inquire into bank deposit accounts of a decedent to determine his
Exemption of gross estate notwithstanding the provisions of the Bank Secrecy
Law. Hence, the banks holding the deposits in question may not
Certain refuse to disclose the amount of deposits on the ground of secrecy
of bank deposits. [Section 6(F) of the 1997 Tax Code] The fact that

Transmissions the deposit is a joint account will not preclude the Commissioner
from inquiring thereon because the law mandates that if a bank has
knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon have
been paid. (Sec. 97, 1997 Tax Code) Hence, to be able to give the
required certification, the inclusion of the deposit is imperative,
which may be made possible only through the inquiry made by the
Commissioner.
 If property, whether real or personal, is sold below its
fair market value, the difference between the fair market
value and the selling price is considered a donation
subject to donor’s tax. The only exception would be the
sale of real property subject to the 6% capital gains tax.
(Sec. 100 of the NIRC)
Transfer for  If a person sells property below its fair market value,
Insufficient except for real property subject to the 6% capital gains
tax, even if there is no actual donation, the difference
Consideration between the fair market value and the selling price is
considered a donation by fiction of law. (Philamlife
Company vs. SOF, GR No. 210987 dated November 24,
2014)
Q: A, an individual, sold to B, his brother-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
his shares of stock in X Co. to his 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 his key executives to acquire a
propriety interest in the business and have a personal stake in its
business.
Transfer for Explain if the above transactions are subject to donor's tax. (1999)

Insufficient  A: The first transaction where a lot was sold by A to his brother-in-law
for a price below its fair market value will not be subject to donor's tax

Consideration 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. (Section 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 the Tax Code. The excess
of the fair market value over the selling price is a deemed gift.
 Any contribution in cash or in kind to any candidate, political party
or coalition of parties for campaign purposes, provided the same is
duly reported to the COMELEC, is exempt from donor’s tax. (Sec.
99(C) of the NIRC in relation to Sec. 13 of RA No. 7166)
 Unutilized/excess campaign funds, that is, campaign contributions
net of the candidate’s campaign expenditures, shall be considered
as subject to income tax. Corollary thereto, failure to submit
*Rules on statement of expenditures to the COMELEC subjects the entire
contributions to income tax. Since, the candidate will be precluded
Political from claiming expenditures as “deductions” from his campaign
contributions. (Revenue Regulations No. 7-2011 dated February 16,
Contributions 2011)
 Political contributions which are not utilized during the campaign
period is subject to Donor’s tax. Also, political contributions made
by a corporation is subject to Donor’s tax. (Revenue Memorandum
Circular No. 30-2016 dated March 14, 2016)
 Renunciation by the Surviving Spouse of his/her share
in the conjugal partnership or absolute community after
the dissolution of marriage in favor of the heirs of the
deceased spouse or any other person is subject to
Donor’s Tax.
Rules on Renunciation of
 General Renunciation by an heir, including the
the
surviving spouse, of his/her share in the hereditary
Conjugal/Community estate is not subject to Donor’s tax, unless specifically
Share and Share in the and categorically done in favor of identified heir/s to the
Inheritance exclusion or disadvantage of the other co-heirs in the
hereditary estate. (Revenue Regulations No. 2-2003 dated
December 16, 2002)
Q: In the settlement of the estate of Mr. Barbera who died
intestate, his wife renounced her inheritance and her
share of the conjugal property in favor of their children.
The BIR determined that there was a taxable gift and thus
assessed Mrs. Barbera as a donor.
Was the BIR correct? (2013 Bar)
Rules on Renunciation of  A: The BIR is correct that there was a taxable gift but only
the insofar as the renunciation of the share of the wife in the
Conjugal/Community conjugal property is concerned. This is a transfer of
property without any consideration which takes effect
Share and Share in the during the lifetime of the transferor/wife and thus qualifies
Inheritance as a taxable gift (RR No. 2-2003).
 But the renunciation of the wife’s share in the inheritance
during the settlement of the estate is not a taxable gift
considering that the property is automatically transferred
to the other heirs by operation of law due to her
repudiation of her inheritance (BIR Ruling DA No. 333-07)
 The Destination Principle provides that goods and services
are taxed only in the country where these are consumed. In
connection with the said principle, the Cross Border
Doctrine mandates that no VAT shall be imposed to form
part of the cost of the goods destined for consumption
outside the territorial border of the taxing authority. Hence,
*Destination actual export of goods and services from the Philippines to
a foreign country must be free of VAT, while those destined
Principle and for use or consumption within the Philippines shall be
imposed with 12% VAT. Export processing zones are to be
Cross Border managed as a separate customs territory from the rest of
Doctrine the Philippines and, thus, for tax purposes, are effectively
considered as foreign territory. For this reason, sales by
persons from the Philippine customs territory to those
inside the export processing zones are taxed as exports.
(Atlas Consolidated Mining and Development Corporation,
GR Nos. 141104 and 148763 dated June 8, 2007)
 Under the Cross Border Doctrine and Destination Principle,
the sale of goods by a VAT-registered person located
outside the Economic Zone (“ECOZONE”) to a taxpayer
located inside the ECOZONE is subject to zero-percent
(0%) VAT. Since the transaction does not result to input VAT
on the part of the buyer, the buyer is not entitled to a claim
for refund. The buyer’s remedy is to go after the seller for
*Destination the erroneously passed on VAT. (Coral Bay Nickel
Corporation vs. CIR, GR No. 190506 dated June 13, 2016)
Principle and
 RR No. 2-2012 dated February 17, 2012 which requires
Cross Border payment of VAT and excise tax on the importation of all
petroleum and petroleum products coming directly from
Doctrine abroad and brought into the Philippines, including Freeport
and economic zones (“FEZs”) is invalid and unconstitutional
despite allowing a credit or refund of any VAT or excise tax
paid if the taxpayer proves that the petroleum previously
brought in has been sold to a duly registered FEZ locator
and used pursuant to the registered activity of such locator.
 RR No. 2-2012 is invalid because it illegally imposes
taxes upon FEZ enterprises, which, by law, enjoy tax-
exempt status. It effectively amends the law (i.e., RA
7227, as amended by RA 9400) which provides that
importations of raw materials and capital equipment
into the FEZs shall be tax and duty-free. It is the specific
*Destination transaction (i.e., importation) that is exempt from taxes
Principle and and duties. The law also grants FEZ enterprises tax and
duty-free importation and a preferential rate in the
Cross Border payment of income tax, in lieu of all national and local
taxes. These incentives exempt the establishment itself
Doctrine from taxation. In line with this comprehensive
interpretation, the tax exemption enjoyed by FEZ
enterprises covers internal revenue taxes imposed on
goods brought into the FEZ, including the Clark FEZ,
such as VAT and excise tax.
 RR No. 2-2012 is unconstitutional because encroaches upon the
legislative authority reserved exclusively by the Constitution for
Congress. The power to enact, amend, or repeal laws belong
exclusively to Congress. In passing RR No. 2-2012, the SOF and the
CIR illegally amended the law - a power solely vested on the
Legislature.
 RR No. 2-2012 which allows a credit or refund of the VAT and excise
tax paid if the taxpayer proves that the petroleum previously
brought in has been sold to a duly registered FEZ locator and used
pursuant to the registered activity of such locator does not amount
*Destination to a tax exemption.

Principle and  The essence of a tax exemption is the immunity or freedom from a
charge or burden to which others are subjected. It is a waiver of the
Cross Border government's right to collect the amounts that would have been
collectible under our tax laws. Thus, when the law speaks of a tax
Doctrine exemption, it should be understood as freedom from the imposition
and payment of a particular tax.
 Based on this premise, the refund mechanism provided by RR No. 2-
2012 does not amount to a tax exemption. Even if the possibility of a
subsequent refund exists, the fact remains that FEZ enterprises
must still spend money and other resources to pay for something
they should be immune to in the first place. This completely
contradicts the essence of their tax exemption. (Secretary of
Finance vs. Lazatin, GR No. 210588 dated November 29, 2016)
 As long as an entity renders services in the Philippines for a
fee, its services are subject to VAT. It is immaterial whether
profit is derived from rendering the service. Thus, an entity
which renders service in the Philippines to its affiliates on a
reimbursement-of-cost basis is liable to VAT on its sale of
services. (CIR vs. CA and COMASERCO, GR No. 125355
dated March 30, 2000)
 Subsidized advertising expenses paid for by a parent
Persons Liable company for a subsidiary which was treated as income by
the subsidiary for income tax purposes is not subject to
for VAT VAT. Under Sec. 105 of the NIRC, there must be a sale,
barter or exchange of goods or properties before any VAT
may be levied. Certainly, there was no such sale, barter or
exchange in the subsidy given by the parent company to
the subsidiary. It was but a dole out by the parent company
and not in payment for goods or properties sold, bartered
or exchanged by the subsidiary. (CIR vs. Sony Philippines,
Inc., GR No. 178697 dated November 17, 2010)
Q: In June 2013, DDD Corp., a domestic corporation
engaged in the business of leasing real properties in
the Philippines, entered into a lease agreement of a
residential house and lot with EEE, Inc., a non-
resident foreign corporation. The residential house
and lot will be used by officials of EEE, Inc. during
their visit to the Philippines. The lease agreement was

Persons Liable signed by representatives from DDD Corp. and EEE,


Inc. in Singapore. DDD Corp. did not subject the said
for VAT lease to VAT believing that it was not a domestic
service contract. Was DDD Corp. correct? Explain.
(2015 Bar)
 A: DDD Corp. is not correct. Lease of properties shall be
subject to VAT irrespective of the place where the
contract of lease was executed if the property is leased
or used in the Philippines [Sec. 108(A), NIRC].
 Amounts earmarked and eventually paid by HMOs
(MEDICARD) to medical service providers do not form
part of gross receipts for VAT purposes. The definition of
gross receipts of HMOs under RR No. 16-2005 merely
presumed that the amount received by an HMO as
membership fee is the HMO's compensation for their
services. As a mere presumption, an HMO is, thus, allowed
to establish that a portion of the amount it received as
membership fee does not actually compensate it but some
other person, which in this case are the medical service
providers themselves.
VAT on Services  Under RR No. 4-2007, “Gross receipts” refers to the total
amount of money or its equivalent representing the
contract price, compensation, service fee, xxx and deposits
applied as payments for services rendered and advance
payments actually or constructively received during the
taxable period for the services performed or to be
performed for another person, excluding the VAT, except
those amounts earmarked for payment to unrelated third
(3rd) party or received as reimbursement for advance
payment on behalf of another which do not redound to the
benefit of the payor.
 An HMO per se does not render medical services. However, if the
HMO has laboratory facilities, its fees received for laboratory and
diagnostic services is exempt from VAT under Sec. 109(1)(G) of the
NIRC. Sec. 109(1)(G) of the NIRC provides that medical, dental,
hospital and veterinary services except those rendered by
professionals are exempt from VAT. (MEDICARD Phils., Inc. vs, CIR,
GR No. 222743 dated April 5, 2017)
 A cursory reading of Sec. 108 of the NIRC clearly shows that the
enumeration of the sale or exchange of services subject to VAT is
not exhaustive. The words, “including,” “similar services,” and “shall
likewise include,” indicate that the enumeration is by way of
example only.
VAT on Services  Since the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors is not included in the
enumeration, it is incumbent to the determine whether such
activity falls under the phrase “similar services.” The intent of the
legislature must therefore be ascertained.
 The legislature never intended operators or proprietors of
cinema/theater houses to be covered by VAT. Only lessors or
distributors of cinematographic films are included in the coverage
of VAT. Thus, the gross receipts derived by cinema/ theater
operators or proprietors from admission tickets in showing motion
pictures, film or movie are not subject to VAT. (CIR vs. SM Prime
Holdings, Inc., GR No. 183505 dated February 26, 2010)
Q: Pursuant to Sec. 11 of the "Host Agreement" between the
United Nations and the Philippine government, it was provided
that the World Health Organization (WHO), "its assets, income
and other properties shall be: a) exempt from all direct and
indirect taxes." Precision Construction Corporation (PCC) was
hired to construct the WHO Medical Center in Manila. Upon
completion of the building, the BIR assessed a 12% VAT on the
gross receipts of PCC derived from the construction of the WHO
building. The BIR contends that the 12% VAT is not a direct nor an
indirect tax on the WHO but a tax that is primarily due from the
contractor and is therefore not covered by the Host Agreement.
The WHO argues that the VAT is deemed an indirect tax as PCC
can shift the tax burden to it. Is the BIR correct? Explain. (2016
VAT on Services Bar)
 A: No. The BIR is not correct.
 While it is true that the VAT is an indirect tax, it is clear from the
agreement that WHO is “exempt from all direct and indirect taxes.”
Since the 12% VAT is an indirect tax whose burden was shifted by
PCC to WHO then it is evident that the BIR is not correct. [CIR v.
John Gotamco & Sons, Inc., G.R. No. L-31092, Feb. 27, 1987, 148 SCRA
36 (1987)]
 To allow the shifting of the burden to WHO would negate its
exemption and in violation of the international agreement entered
into by the Philippines.
 Under Sec. 109(1)(A) of the NIRC, the sale of agricultural food products in
their original state is exempt from VAT. Agricultural food products that have
undergone simple processes of preparation or preservation for the market
are nevertheless considered to be in their original state. Sugar is an
agricultural food product. For internal revenue purposes, the sale of raw
cane sugar is exempt from VAT because it is considered to be in its original
state. On the other hand, refined sugar is an agricultural product that can no
longer be considered to be in its original state because it has undergone
the refining process, its sale is thus subject to VAT.
 Although the sale of refined sugar is generally subject to VAT, such
transaction may nevertheless qualify as a VAT-exempt transaction if the sale
is made by a cooperative. Under Sec. 109(1)(L) of the NIRC, sales by
agricultural cooperatives are exempt from VAT provided the following

*VAT Exemption conditions concur: (1) the seller must be an agricultural cooperative duly
registered with the Cooperative Development Authority (“CDA”); and, (2)
the cooperative must sell either: (a) exclusively to its members; or (b) to
both members and non-members, its produce, whether in its original state
or processed form.
The second requisite differentiates cooperatives according to its customers. If
the cooperative transacts only with members, all its sales are VAT-exempt,
regardless of what it sells. On the other hand, if it transacts with both members
and non-members, the product sold must be the cooperative's own produce in
order to be VAT-exempt. Stated differently, if the cooperative only sells its
produce or goods that it manufactures on its own, its entire sales is VAT-
exempt. (CIR vs. United Cadiz Sugar Farmers Association Multi Purpose
Cooperative, GR No. 209776 dated December 7, 2016)
 A person who becomes liable to VAT or any person who
elects to be a VAT-registered person shall, subject to the
filing of an inventory according to rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be allowed a
transitional input tax on his beginning inventory of goods,
materials and supplies equivalent to two percent (2%) of
the value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever is
*Transitional higher, which shall be creditable against the output
tax. (Sec. 111(A) of the NIRC)
Input VAT  Under RR No. 16-2005, the following taxpayers may claim
transitional input VAT under Sec. 111(A) of the NIRC: (a)
Taxpayers who became VAT-registered persons upon
exceeding the minimum turnover of P1,919,500.00 in any
12-month period, or (b)Taxpayers who voluntarily register
even if their turnover does not exceed P1,919,500.00
(except franchise grantees of radio and television
broadcasting whose threshold is P10,000,000.00).
 Prior payment of VAT is not necessary in order to claim
transitional input VAT credit under Sec. 111(A) of the NIRC.
What the NIRC merely requires is the filing of a beginning
inventory with the BIR. Since Sec. 111(A) does not require
prior payment of VAT in order to claim transitional input
VAT, to require the same would tantamount to judicial
legislation.Moreover, prior payment of taxes is not
required to avail of the transitional input tax credit because
*Transitional it is not a tax refund per se but a tax credit. Tax credit is not
synonymous to tax refund. Tax refund is defined as the
Input VAT money that a taxpayer overpaid and is thus returned by the
taxing authority. Tax credit, on the other hand, is an amount
subtracted directly from one’s total tax liability. It is any
amount given to a taxpayer as a subsidy, a refund, or an
incentive to encourage investment. Thus, unlike a tax
refund, prior payment of taxes is not a prerequisite to avail
of a tax credit. (Fort Bonifacio Development vs. CIR, GR No.
173425 dated September 4, 2012)