UPDATES & SELECTED Q&A IN TAXATION LAW (For the 2010 Bar Examinations)

By:

Jason R. Barlis Head of the Department of Commercial Laws and Taxation,

Saint Louis University School of Law, Baguio City Bar Reviewer in Taxation Law, Excellent Bar Review Center

To those who will use these notes: Please be reminded that these notes contain mere selected topics in Taxation Law. By the nature of how the topics were chosen, it is intended to supplement your readings in the subject, especially during the last phases of your review. However, it is not designed to be a reviewer. Feel free to share these notes to others. The portions of these notes referring to past bar examination questions and the answers thereto were lifted from the Suggested Answers to Bar Examination Questions in Taxation published by the U.P Law Center.

I. GENERAL PRINCIPLES OF TAXATION

Nature of the Power of Taxation Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme Court) sits.” Describe the power to tax and its limitations. (#1, 2000 Bar Exams)

The power to tax is an inherent power of the sovereignty which is exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it, no government can exist nor endure. Accordingly, it has the broadest scope of all the powers of government because in the absence of limitations, it is considered an unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court’s role to see to it that the exercise of the power does not transgress these limitations.

Discuss the importance of taxes

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A

principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. (NAPOCOR v. City of Cabanatuan, G.R. No. 149110, April 9, 2003).

Tax exemptions are strictly construed against taxpayers. Discuss the reason for this rule. Discuss also the exceptions to this rule.

Because taxes are the lifeblood of the government, anything which tends to be in derogation of the lifeblood

doctrine should be strictly construed against taxpayers. Taxation is the rule and exemption is the exception. Thus, any claim for tax exemption must be proven to be granted by law and expressed in clear and unambiguous terms. Tax exemptions are never presumed, and the burden is upon the taxpayer to establish the basis of his claim for exemption.

However, the rule on strictissimi juris construction of tax exemptions does not apply in the following

situations: 1. When the statute granting the exemption expressly provides for a liberal interpretation;

2. When the exempting law refers to special taxes relating to special cases and affecting special classes of persons;

3. When the exemption is in favor of traditional exemptees such as religious and charitable organizations; 4. When the exemption is granted in favor of the government, its political subdivisions or instrumentalities; 5. When the exemption refers to public properties owned by the State or its political subdivisions; 6. When the taxpayer falls within the purview of the exemption by clear legislative intent. (Please see Dimaampao, Tax Principles and Remedies)

One of the fundamental principles of taxation is that taxes are personal in nature. Is the shifting of the burden of an indirect tax a contravention of this principle? Do we have taxes that are not personal in nature? Discuss.

Suggested Answer:

All our taxes are personal in nature. Even in the shifting of the burden of an indirect tax, there is no contravention of the basic principle that taxes are personal in nature. In indirect taxation, the person upon whom the tax is imposed (e.g. seller, service provider, lessor, etc.) is the statutory taxpayer—meaning, he is the one liable to pay the tax to the government. While it is true that the economic burden of the tax may be shifted to another person, this does not change the requirement of law that the statutory taxpayer should be responsible for the payment of the tax to the government.

The police power, the power of eminent domain, and the power of taxation are inherent powers of the government. May a tax be validly imposed in the exercise of the police power and not of the power to tax? If your answer is in the affirmative, give an example. Similarly, may a tax be validly imposed in the exercise of the power of eminent domain and not of the power to tax? If your answer is also in the affirmative, give an example.

Suggested Answer:

Yes, it is possible to impose a tax based on the exercise of police power. Taxation may, in fact, be used as a means of achieving a police power objective of the State. An example of this is the imposition of a regulatory tax where the primary objective of the State is to regulate a particular activity, and the tax aspect is but a mere incident of this primary objective.

In CIR v. Central Luzon Drug Corporation, April 15, 2005, the Supreme Court said that the power of taxation may also be used as an implement for the exercise of the power of eminent domain. In the said case, the just compensation that the law grants to establishments granting senior citizens discount is the tax credit granted to such taxpayers.

Inherent Limitations of Territoriality and International Comity May the Philippine government require tax withholding on the salaries of Filipino employees working in the American Embassy in the Philippines?

No, because this will violate the principle of international comity. If the Philippine government would impose the requirement of tax withholding on the salaries of Filipino employees working in the American Embassy in the Philippines, this would in effect require that the American government be constituted as the withholding agent of the Philippine government insofar as the taxes on the salaries of the Filipino employees are concerned. This is obviously violative of the inherent limitation that taxation is subject to the principle of international comity

May the Philippine government require tax withholding on the interest income earned by a resident citizen from a bank deposit abroad?

No, because this will violate the principle of territoriality. While it is true that the interest income is subject to income tax here in the Philippines considering that the same was earned by a resident citizen, still, the same could not be the subject of tax withholding. This is because if the Philippine government would impose the requirement of tax withholding on the interest income earned by a resident citizen from a bank deposit abroad, this would in effect require that the foreign bank be constituted as the withholding agent of the Philippine government. This is obviously violative of the inherent limitation that taxation is subject to the principle of

territoriality because a foreign taxpayer which is outside the territorial jurisdiction of the country would then be subjected to our tax laws.

Tax Exemption of Non-Stock, Non-Profit Educational Institution Under Art. XIV, Sec. 4(3) of the 1987 Philippine Constitution, all revenues and assets of non-stock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. (#9, 2000 Bar Exams)

No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from taxation. There must be a showing that the incomes are included in the school’s annual information return and duly audited financial statements together with:

1. Certification from depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax;

2. Certification of actual, direct, and exclusive utilization of said income for educational purposes; 3. Board resolution on proposed project to be funded out of the money deposited in banks or placed in

money market placements (Financial Order No. 149-95, November 24, 1995) which must be used actually, directly and exclusively for educational purposes;

The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Phil. Constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes.

Note: Not part of the answer: Consequently, the provisions of Sec. 30 of the NIRC of 1997, that a non-stock and nonprofit educational institution is exempt from taxation only in respect to income received by them as such could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions.

Distinguish the tax treatment of non-stock, non-profit educational institutions with proprietary educational institutions

Non-stock, non-profit educational institutions are constitutionally exempted from all kinds of taxes for all its revenues and assets that are actually, directly and exclusively USED for educational purposes. Their tax exemption, therefore, is omnibus, provided that the requirements of actual, direct and exclusive utilization for educational purposes shall be complied with. On the other hand, proprietary educational institutions do not enjoy the same automatic tax exempt privileges. The only constitutionally mandated tax exemption that it may avail of is the exemption from property taxes of all its properties actually, directly and exclusively used for educational purposes. At present, income generated by proprietary educational institutions are subject to a preferential tax rate of 10% of their taxable income, provided that after compliance with the predominance test, it is proven that their income from school-related activities is higher than the income from non-school related activities.

XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of Baguio City. It collected and received the following:

(a) Tuition fees (b) Dormitory fees (c) Rentals from canteen concessionaires (d) Interest from money-market placements of the tuition fees (e) Donation of a lot and building by school alumni

Which of these above-cited income and donation would not be exempt from taxation? Explain briefly.

All of the income derived by the non-stock, non-profit educational institution will be exempt from taxation provided they are used actually, directly and exclusively for educational purposes. The Constitution provides that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and exclusively used for educational purposes are exempt from taxation (Section 4 par. 3 Article XIV, 1987 Constitution).

The donation is, likewise, exempt from the donor’s tax if actually, directly and exclusively used for educational purposes, provided that not more than 30% of the donation is used by the donee for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation subject to the conditions prescribed by law (Section 4 (4), Article XIV, 1987 Constitution, in relation to Section 101 (A)(3), NIRC). (BAR 2004)

Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop's family, rather than the Archdiocese, which of those abovecited income and donation would be exempt from taxation? Explain briefly.

If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school related activities will be subject to the income tax based on its aggregate net income derived from both activities (Section 27(B), NIRC). Accordingly, all of the income will be taxable.

The donation of lot and building will likewise be subject to the donor’s tax because a donation to an

educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable. (Section 101(A)(3), NIRC).

ABC School, a ”non-stock, non-profit” educational institution, bought from JB, a resident citizen, his residential house and lot located at Cebu City. JB would be using the proceeds of the sale to buy his new residential house and lot. ABC School will use the said parcel of land to construct a new building for its dormitory for its medical students. Discuss the income tax implications of this transaction.

Suggested Answer:

JB would be liable for capital gains tax on the sale of a real property classified as capital asset. However, if what he sold was his principal residence, he may apply for capital gains tax exemption, provided that he complies with the requirements laid down in the last paragraph of Section 24(b) of the National Internal Revenue Code.

The fact that the sale is made in favor of a non-stock, non-profit educational institution, and that the property will be used for educationally-related functions, will not affect the liability for capital gains tax. This is because the capital gains tax is imposed on the seller; thus, notwithstanding any exemption enjoyed by the buyer, the tax shall still be imposed.

Tax Exemption of Properties used for Traditionally-Exempt Purposes The tax exemption of traditional exemptees under Section 28(3), Article VI of the 1987 Constitution refers only to real property taxes on properties that are ACTUALLY, DIRECTLY AND EXCLUSIVELY USED for religious, charitable or educational purposes. What do you mean by the term “EXCLUSIVELY” in the aforesaid provision of the Constitution?

"Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes (Lung Center of the Philippines v. QC, GR No. 144104, 29 June 2004, En Banc).

Portions of the Lung Center of the Philippines are used for the treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private doctors for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Are these properties of the Lung Center exempt from real property tax?

The land leased to private entities for the orchids and garden center, the canteen, as well as those parts of the hospital leased to the private doctors are not exempt from such taxes. To be exempt from real property tax, the Constitution provides the property must be actually, directly, and exclusively used for religious, educational and charitable purposes. Considering that the aforesaid portions of the hospital are being used for business related private purposes, then, the requirements laid down in the Constitution were not met. Consequently, the said portions must be subject to real property tax.

On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution (Lung Center of the Philippines v. QC, GR No. 144104, 29 June 2004).

H Hospital is a 100 bed hospital organized for charity patients. However, out of its 100-bed capacity, 40 beds are allotted for paying patients, while the rest are intended for charity patients. The revenues generated from these paying patients, however, are being used to improve the facilities of the hospital. Can said hospital claim exemption from income as well as real property taxes relying on the 1987 Constitution? Explain.

H Hospital can claim exemption from real property tax. As a general principle, a charitable institution does

not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution (Lung Center of the Philippines v. QC, GR No. 144104, 29 June 2004).

However, with regard to income tax, Section 27 B imposes a tax of 10% on the taxable income of non-profit

hospitals, subject to compliance with the predominance test; i.e., it is proven that their income from its primary function is greater than its income from unrelated trade, business or activity.

Non-Impairment Clause What are contractual tax exemptions? Are exemptions granted under special franchises contractual in nature?

While the Court has, not too infrequently, referred to tax exemptions contained in 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 waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 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 v. Province of Laguna, G.R. No. 131359, May 5, 1999)

The legislative franchise of Smart, which was granted after the effectivity of the Local Government Code of 1991, contained the “in lieu of all taxes” provision, provided that Smart shall pay a 3% franchise tax to the national government. Will the imposition by the City of Davao of a local franchise tax despite the “in lieu of all taxes” clause in the franchise of Smart amounting to a violation of the non-impairment clause of the Constitution?

There is no violation of Article III, Section 10 of the 1987 Philippine Constitution. The franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the franchise, the same must be ruled against Smart. The "in lieu of all taxes" clause in the franchise of Smart leaves much room for interpretation. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption. Further, the truth is that the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. (Smart v. City of Davao, 16 September 2008).

Due Process A law imposed a 5% percentage tax on the gross receipts of lending investors. Without notice, hearing and publication, the CIR issued a Revenue Memorandum Order (RMO) applying the above-cited law to pawnshops, on the theory that the principal activity of pawnshops is lending money at interest, and that such RMO is merely interpretative in nature; thus, no notice, hearing and publication is required. Is the RMO valid?

It is not valid. When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

The questioned RMO cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without the disputed CIR issuance, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in the basic provisions of the law imposing such tax. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored. (CIR v. M.J. Lhuiller Pawnshop, Inc. G.R. No. 150947, July 15, 2003)

Equal Protection Sections 193 and 234 of the Local Government Code withdrew all tax exemptions granted to all taxpayers except those specifically mentioned therein. Among the taxpayers whose tax exemption was maintained are electric cooperatives registered with the Cooperative Development Authority. On the other hand, electric cooperatives registered under the National Electrification Authority were not granted the same privilege. Are the aforementioned provisions of the LGC valid?

Yes. The equal protection clause under the Constitution does not prohibit reasonable classification.

Classification, to be reasonable, must (1) rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be limited to existing conditions only; and (4) apply equally to all members of the same class.

There is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by P.D. No. 269, as amended, and electric cooperatives under R.A. No. 6938.

First, substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and cooperatives under R.A. No. 6938. These two basic distinctions are referring to (a) the matter involving capital contributions of members, and (b) the difference on the extent of governmental control over these cooperatives.

Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. The Constitutional mandate that every local government unit shall enjoy local autonomy does not mean that the exercise of power by local governments is beyond regulation by Congress. Thus, while each government unit is granted the power to create its own sources of revenue, Congress, in light of its broad power to tax, has the discretion to determine the extent of the taxing powers of local government units consistent with the policy of local autonomy.

Finally, Sections 193 and 234 of the Local Government Code permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class. Exemptions from local taxation, including real property tax, are granted to all cooperatives covered by R.A. No. 6938 and such exemptions exist for as long as the Local Government Code and the provisions therein on local taxation remain good law.

Revenue Bills Should Originate Exclusively From the House of Representatives Undue Delegation of Legislative Power of Taxation Due Process Clause Case in Point: ABAKADA Guro Party-List v. Sec. Ermita, GR No. 168056, 1 September 2005 (and companion cases) Facts: HB 3555 and 3705 initiated the move to amend the provisions of the NIRC concerning Value Added Tax. Upon transmittal of the bills to the Senate, the Senate came out with SB 1950 proposing amendments not only to NIRC provisions on VAT but also on other kinds of taxes. Since the Senate version and the House version of the amendments had conflicting provisions, a bicameral conference committee was formed. The committee, however, introduced provisions not found in either the Senate or House versions. In fact, the committee even deleted some provisions found in both the Senate and House versions and introduced entirely new ones. After reaching a concurrence, Republc Act No. 9337 came to life. The law contains a so-called “standby authority” of the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Questions: Considering the changes effected by the bicameral conference committee which were no in accord with the house and senate versions of the bill, was there a violation of the constitutional mandate that revenue bills should originate exclusively from the House of Representatives?

The foregoing question had been squarely answered in the Tolentino v. Secretary of Finance case, wherein the Court held, thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the

Constitution to “originate exclusively” in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s power not only to “concur with amendments” but also to “propose amendments.” It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

…

…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the House.

. . . Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or

tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws. Since there is no question that the revenue bill exclusively originated in the House of

Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

Considering the “stand-by authority” cited above, does the law constitute abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution which states that “[t]he Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government?”

The present case is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited against the output tax. It states, in part: “[P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: …” Petitioners argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law. Is there merit in this argument?

No. The input tax is not a property or a property right within the constitutional purview of the due process

clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights.

Tax Exemption and the Government The Mactan-Cebu International Airport Authority is a government owned and controlled corporation which operates the Mactan International Airport and Lahug Air Port. Under its charter, RA6958, it was exempted from real property taxes. The City of Cebu, however, assessed it for real property tax on the theory that the tax exemption of the MCIAA was deemed withdrawn by the Local Government Code. Should the MCIAA pay the real property tax?

Yes. Since the last paragraph of Section 234 of the LGC unequivocally withdrew, upon the effectivity of the LGC, exemptions from payment of real property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. As a GOCC, it does not enjoy automatic exemption from taxation. Thus, when the LGC withdrew its tax exemption and required it to pay real property tax, it should undoubtedly pay the tax. NOTE: In Manila International Airport Authority v. City of Paranaque, GR No. 155650, 20 July 2006, the Supreme Court sustained MIAA’s claim that it should not be liable for real property taxes assessed by the City of Paranaque on the ground that MIAA is a government instrumentality because it is exercising regulatory functions. So if you are faced with a problem similar to this, check the facts—if it is stated that the airport authority is a GOCC, apply MCIAA; but if the facts stated that the airport authority is an instrumentality, apply MIAA.

Taxes and Set-Off May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his other tax liabilities? Explain your answer. (#1, 2001 Bar Exams)

No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. In the instant case, the claim of the taxpayer for VAT refund is still pending and the amount is still to be determined. A fortiori, the liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor. (Philex Mining Corp v. CIR, August 29, 1998) Alternative Answer: No. Taxes and claims for refund cannot be the subject of set-off for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is material distinction between a tax and a claim for refund. Claims for refunds just like debts are due from the governments in its corporate capacity, while taxes are due to the government in its sovereign capacity. (Philex Mining Corp v. CIR, August 29, 1998) Note: It is only when the tax assessment and the claim of the taxpayer for a refund had been finally adjudged thereby resulting to both as due, demandable and fully liquidated that set-off or compensation may be allowed (Domingo v. Garlitos, 8 SCRA 443).

Prescription Taxes were generally imprescriptible; statutes however, may provide otherwise. State the rules that have been adopted on this score by (a) The National Internal Revenue Code; (b) The Tariff and Customs Code; and (c) The Local Government Code (#4, 1997 Bar Exams) The rules that have been adopted on prescription are as follows:

(a) National Internal Revenue Code – the statue of limitation for assessment of tax if return is filed is within three (3) years from the last day prescribed by the law for the filing of the return or if filed after the last day, within three years from the date of actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from the discovery of the omission, fraud or falsity.

The period to collect the tax is within three years from date of assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to collect is within ten years from the discovery without the need of an assessment.

(b) Tariffs and Customs Code – It does not express any general statute of limitation; it provided, however,

that “when the articles have entered and passed free of duty or final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative” (Sec. 1603, TCC).

(c) Local Government Code – Local taxes, fees or charges shall be assessed within five (5) years from the

date they become due. In the case of fraud or intent to evade the payment of taxes, fees or charges the same maybe assessed within ten years from discovery of fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from the date of assessment (Sec. 194 LGC).

Tax v. Regulatory Fee May an exaction be both a tax and a regulatory fee?

Yes. There is nothing proscribed about this exaction. While it may be true that regulatory fees are intended merely to defray the cost of regulation, there is nothing wrong for the government to raise revenues out of such act of regulating.

Tax Amnesty v. Tax Exemption Distinguish a tax amnesty from a tax exemption. (#2a, 2001 Bar Exams)

Tax Amnesty is an immunity from all criminal, civil and administrative liabilities arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application. (People v. Castaneda, GR No. L-46881, 1998) Tax Exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. It is generally prospective in application.

Tax Avoidance v. Tax Evasion

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. (CIR v. The Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004).

Taxation is an Inherently Legislative Function

R.A. No. 7227 created the Bases Conversion and Development Authority (BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate objective of utilizing the base areas in accordance with the declared government policy. Among its provisions is the creation of the Subic Special Economic Zone which, under section 12 of the law, was granted incentives ranging from tax and duty-free importations, exemption of businesses therein from local and national taxes, including real property taxes. Subsequently, the President, through Presidential Proclamation No. 420, created the John Hay Special Economic Zone, which shall be governed by the BCDA. Considering this, all the benefits/incentives being enjoyed by the Subic Special Economic Zone was consequently extended to the John Hay Special Economic Zone.

The City of Baguio subsequently assessed the John Hay Special Economic Zone for real property taxes on all real properties that it owns. The John Hay SEZ denied liability on the ground that it enjoys exemption from all forms of taxes. Rule on the validity of the ground relied upon by John Hay SEZ.

The ground relied upon by the John Hay SEZ lacks merit. It is well-settled that it is only the legislature, unless limited by a provision of the Constitution, that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. A mere Presidential Proclamation could not be a valid basis for a claim of tax exemption.

The challenged grant of tax exemption would circumvent the Constitution's imposition that a law granting any

tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. The claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. (John Hay Peoples Alternative Coalition v. Lim, et al., G.R. No. 119775, October 24, 2003, En Banc)

The Bangko Sentral ng Pillipinas obtained a loan from a private international bank whereby it was stipulated that all payments of interest by the Bangko Sentral shall be free from all Philippine taxes which may otherwise be imposable thereon. Is this stipulation valid?

No. The act of exemption is an act of taxation which is inherently legislative and, therefore, a mere executive

agreement without concurrence by Congress cannot provide for a tax exemption. Alternative: It is valid. The stipulation in the agreement that the lender “shall be made free and clear” from

all Philippine taxes simply meant that the Bangko Sentral will assume the tax liability which is not contrary to law, morals, good customs, public order or public policy (Bar 1992)

Double Taxation (a) Is a double taxation a valid defense against the legality of a tax measure? (b) When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation? (c) What are the usual methods of avoiding the occurrence of double taxation? (#1, 1997 Bar Exams)

(a) No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure (Pepsi cola v. Tanauan, 69 SCRA 460). However, if double taxation amounts to a direct duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a fashion that both taxes are imposed fro the same purpose by the same taxing authority, within the same jurisdiction or taxing district, for same taxable period and for the sane kind character of a tax, then it becomes legally objectionable for being oppressive and inequitable.

(b) Yes, but it is only in case of indirect duplicate taxation which is not legally prohibited because the taxes

are imposed by different taxing authorities.

(c) The usual methods of avoiding the occurrence of double taxation are: 1) Allowing reciprocal exemption either by the law or by treaty; 2) Allowance of tax credit for foreign taxes paid; 3) Allowance of deduction for foreign taxes paid; 4) Reduction of Philippines tax rate.

Taxes are personal in nature Indirect taxes In a sale of real property classified as capital asset, the vendor and the vendee agreed that the capital gains tax shall be shouldered by the vendee. Is this a form of shifting?

No. Only the burdens of indirect taxes may be shifted by the vendor to the vendee. Capital gains tax on the sale of real property classified as capital asset is a direct income tax imposed on the vendor; hence, the burden of which may not be shifted by the vendor.

Is the stipulation valid?

Yes. There is no law which prohibits the parties from agreeing on the abovementioned set-up. However, the stipulation will be binding only on the parties but not the government. Thus, notwithstanding such stipulation, the government may still require payment of the tax from the vendor if the vendee would not pay the tax.

Is the shifting of the burden of an indirect tax in derogation of the principle that taxes are personal in nature?

No. An Indirect tax is still a liability of the person upon whom the tax is imposed. The person liable for the tax does not change despite the shifting. The only effect of the shifting is that the money to be used for the payment of the tax by the person liable therefor shall come from another person upon whom he shifted the burden.

Considering the principle that taxes are personal in nature, may a stockholder, director or officer of a corporation become personally liable for the tax liabilities of the corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. The same holds true even for liability from unpaid taxes of a corporation. Thus, ordinarily, the stockholder may be held personally liable only to the extent of their unpaid subscription. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action. Consequently, an undertaking by a stockholder, director or officer of a corporation to hold the

corporation free from any all income tax liabilities of for a certain number of years, he thereby voluntarily held himself personally liable therefor, and he cannot later on deny liability for the corporation’s unpaid taxes by invoking the doctrine of separate corporate personality (CIR v. The Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004).

As an incentive for investors, a law was passed giving newly established companies in certain economic zones exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was

organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax. 1. XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ should not be liable to pay the sales tax. Is this claim tenable? 2. Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found out, however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price. ABC Corp. now claims for a refund from the Bureau of Internal Revenue in an amount corresponding to the tax passed on to it since it is tax exempt. Is the claim of ABC Corp. meritorious? (BAR 2004)

1. No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYZ is directly liable for the sales tax and no tax exemption privilege is ever given to it, therefore, its claim that the sales tax is exempt is not tenable.

2. No. The claim of ABC is not meritorious. Although the burden of the tax was shifted to ABC, what it paid is not a tax but part of the cost it has assumed. Hence, since ABC Corp. is not a taxpayer, it has no personality to file a claim for refund. The taxpayer who can file a claim for refund is the person statutorily liable for the payment of the tax.

II. INCOME TAXATION What are the amendments introduced by RA9337 affecting income tax law?

1. Increase of corporate income tax rate to 35% (from 32%) but reduction to 30% by the year 2009. IMPORTANT: THE APPLICABLE INCOME TAX RATE OF CORPORATIONS, AT PRESENT, IS 30% OF THE TAXABLE INCOME

2. Removal of income tax exemption of PAGCOR 3. Exemption from income taxes of the income of OBUs and FCDUs 4. Dividends received by non-resident foreign corporations are still taxed at 15% (tax sparing rule) but the rate

of credit was adjusted to 20% (now 15%). 5. The adjustment to allowable interest expenses shall no longer be 38% of interest income subject to final tax

but 42% (now 33%). What are the notable amendments introduced by RA9504 affecting income tax law?

1. Minimum wage earners (as defined in Section 22(HH) of the Tax Code) shall be exempt from the payment of income tax on their taxable income

2. Holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

3. Optional Standard Deduction for individual income taxpayers engaged in business has been increased to forty percent (40%) of his gross sales or gross receipts

4. Corporation may now elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income

5. Increase of basic personal exemption to P50,000.00 per individual taxpayer 6. Increase of additional exemption to P25,000.00 per qualified dependent child 7. Individuals earning pure compensation income derived from sources within the Philippines, the income tax

on which has been correctly withheld, are no longer required to file an income tax return 8. Minimum wage earners are not required to file an income tax return

What are the requirements for retirement payments to be excluded from taxation?

Under RA No. 4917 (those received under a reasonable private benefit plan), as adopted in Section 32B of the NIRC:

a. The retiring official or employee must have been in service of the same employer for at least ten years. b. That he is not less than fifty years of age at the time of retirement; and c. That the benefit is availed of only once.

Under RA No. 7641 (those received from employers without any retirement plan):

a. Those received under existing collective bargaining agreement and other agreements are exempt; and b. In the absence of retirement plan or agreement providing for retirement benefits the benefits are

excluded from gross income and exempt from income tax if: i. Retiring employee must have served at least five years; and ii. That he is not less than sixty years of age but not more than sixty five.

When would separation payments be excluded from taxation?

Separation payments are excluded if the reason for the separation from the service is due to involuntary causes.

A Co., a Philippine corporation has two divisions – manufacturing and construction. Due to the economic situation, it had to close its construction division and lay-off the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are two groups of employees to be laid off: a. Employees who are at least 50 years of age and has at least 10 years of service at the time of termination of

employment. b. Employees who do not meet either the age or length of service A Co. plans to give the following:

1. For category (A) employees – the benefits under the BIR approved plan plus an ex gratia payment of the month of every year of service.

2. For category (B) employees – one month for every year of service. 3. For both categories, the cash equivalent of unused vacation and sick leave credits.

A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your advice. (#10, 1999 Bar Exams)

For category A employees, all the benefits received on account of their separation are not subject to income tax, hence no withholding tax shall be imposed. The benefits received under the BIR approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employee’s control (Sec. 33B NIRC). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income (CIR v. CA October 17, 1991)

For category B employees, all the benefits received by them will also be exempt from income tax, hence not

subject to withholding tax. These are benefits received on account of separation due to causes beyond the employee’s control, which are specifically excluded from gross income. (Sec. 32B NIRC)

Alternative Answer:

All of the payments are not subject to income tax and should not also be subject to WT. The employees were laid off, hence, separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation has rendered less then ten years of service and/or is below fifty years of age. (Sec. 32B NIRC)

X died leaving behind several properties. In his will, X bequeathed all his properties to his children A, B and C. D, asserting that he is an illegitimate child of X, opposed the probate of the will, claiming that it is intrinsically invalid because of preterition. The probate court appointed A as the administrator of the properties of X. Having an entrepreneurial mind, A continued the businesses of X. As per agreement by the heirs, no one shall take any portion of the estate, as such will be used for the furtherance of the business of X. The Commissioner of Internal Revenue (CIR), having received reliable information that the administrator is generating a lot of income for the estate, assessed the heirs of deficiency corporate taxes. Discuss the propriety of this move by the CIR.

The action by the BIR was not proper. If an estate is under judicial settlement, it is an income taxpayer in its own right. Hence, there is no legal basis for the BIR to have assessed upon the estate corporate taxes.

Are the following transactions subject to Capital Gains Tax on the Sale of Real Property classified as Capital Asset?

1. Conditional Sales—Yes. Please see Section 24D, NIRC

2. Sales on Execution—Yes. The CGT is imposed on all forms of sale, barter, or exchange, even involuntary sales

3. Foreclosure Sale—Yes. Same reason in number 2. 4. Sales by Expropriation—Yes. Same reason in number 2. However, for gains from sales or other

dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or -controlled corporations, the taxpayer has the option whether to declare the income under Section 24(A) of the NIRC or to subject the transaction to CGT under Section 24(D).

5. Pacto de Retro Sale—Yes. Same reason in number 1. M filed a case against C for illegal dismissal. A decision, which had become final and executory, found C guilty of illegal dismissal and awarded the following in favor of M: 1. Backwages from the time of dismissal up to the date of the decision computed in the total amount of P300,000.00; 2. Proportionate 13th month pay from in the amount of P35,000.00; and 3. Considering the strained relationship of the parties where reinstatement would not be wise, separation pay was granted in the aggregate amount of P65,000.00; The aforesaid award totaled to P400,000.00. To satisfy the said judgment award, C and M, during the pre-execution conference, agreed that C will give to M her 100 square meter parcel of land in Baguio City, which is presently idle. Pursuant to the aforesaid arrangement during the pre-execution conference, C and M executed a “Deed of Quitclaim and Conveyance in Satisfaction of Judgment Award.” Discuss the income tax consequences of the aforesaid transaction.

Insofar as M is concerned, her backwages should form part of her taxable income considering that the same had been received by her during the year. With regard to the 13th month pay, only the amount in excess of P30000 shall be taxable. The separation pay shall not be taxable because it was given due to involuntary separation. With regard to C, she will be liable for capital gains tax on the sale/transfer of real property classified as capital asset. This is because the liability for capital gains tax accrues on all types of onerous transfer of real property classified as capital asset. Moreover, the judgment award may be declared by C as part of her business expenses.

What are the conditions for the exclusion of the gain from the sale of a real property classified as capital asset from capital gains taxation?

The conditions are: 1. The proceeds are fully utilized in acquiring or constructing a new principal residence within 18 calendar

months from the sale or disposition of the principal residence or 18 months from July 12, 2000. 2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the

new principal residence built or acquired. 3. The CIR must have been informed within thirty (30) days from the date of sale or disposition on July 12,

2000 through a prescribed return of their intention to avail of the tax exemption. 4. That the said exemption can only be availed of once every ten (10) years.

If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax (Sec. 24 D2, NIRC of 1997)

In a suit for damages filed by X against Y due to the latter’s negligence in driving his motor vehicle, the court awarded the following in favor of X: Php100,000 representing the amount spent by X for his hospitalization and medication; Php200,000 for moral and exemplary damages; Php150,000 representing 3 months unearned salary; Php300,000 lost profits; and Php600,000 representing the current replacement cost of the X’s car, originally valued at Php500,000. Which of these receipts, if any, are part of taxable income?

The amount representing expenses for hospitalization and medication are not taxable because they are mere reimbursements of actual damages suffered by X. The payments of moral and exemplary damages, as well as the 3 months unearned salary, are likewise excluded from taxation as they are considered as compensation from personal injuries or sickness (Section 32B4, NIRC). The lost profits are taxable, since there is a gain/income on the part of X that are not considered as part of compensation from personal injuries or sickness.

The P100,000 representing the difference between the current replacement cost of the car (P600,000) and its original value (P500,000) will be considered as a capital gain, since such gain was considered to have been derived from a dealing with a capital property—the personal car of X. (See: Tax Law and Jurisprudence by Vitug and Acosta)

Distinguish Final Tax from Creditable Withholding Tax

A final tax is a full settlement of the income tax liability corresponding to the income to which it is imposed. Consequently, such income would no longer be forming part of the gross income of the taxpayer. On the other hand, a creditable withholding tax is merely considered as an advanced payment of whatever tax liability the taxpayer may incur during the year, hence, such income subject to creditable withholding tax should be made part of the gross income of the taxpayer.

What are capital assets?

All assets are capital except the following: (a) stocks-in-trade, inventoriable properties, and properties held for sale in the ordinary course of business; (b) real properties used in business; (c) depreciable assets used in business (Section 39, NIRC)

Distinguish Ordinary Losses from Capital Losses

Ordinary losses arise from (a) losses of ordinary assets due to theft, robbery, embezzlement or casualties or (b) losses due to a taxpayer’s dealings with ordinary assets. On the other hand, capital losses arise due to a taxpayer’s dealings with capital assets.

Stock dividends are generally not taxable because there is no income realized by the taxpayer upon receipt of additional shares. Are there instances when even stock dividends may be subject to tax?

Yes. Stock dividends may become a source of tax liability if such declaration of stock dividends was made use to evade payment of taxable dividends such as when stock dividends are first issued and later would be redeemed or cancelled in such a manner that such redemption or cancellation would be essentially equivalent to a declaration of taxable dividends (Section 73B)

Stock dividends may also be taxable if the stockholders were given the option between cash or stock dividends, and then some taxpayers opted for cash while the others opted for stock dividends which resulted to a change in the proportionate ownership in the business.

JBN is a non-resident German who serves as the President of Jubanitex Corporation, a domestic corporation. JBN and Jubanitex agreed that JBN shall be paid 10% commission on all sales that she makes for the corporation. For her sales made in Germany, JBN was paid the agreed 10% commission. The BIR assessed JBN for the income tax on this commission, arguing that the same is sourced from the Philippines, since JBN was paid due to her service for a domestic corporation. On the other hand, JBN argued that the amount is not Philippine-sourced, as the same was paid for the services she rendered in Germany. Decide.

The commission is not sourced from the Philippines. The commission was given to JBN for a service rendered. Since the service was physically rendered in Germany, the source of the income is therefore in Germany (Section 42, NIRC). The fact that the payor is a domestic corporation is immaterial because it is not the residence of the payor which is the determining factor but the place where the service was rendered. Since JBN is a non-resident alien who is liable for taxes only on income sourced from within the Philippines, JBN should not be liable for the income taxes on the said commission. (Cf. CIR v. Juliane Baier-Nickel, GR No. 153793, 29 August 2006)

A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in Hong Kong and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of P’s dependents will be shouldered by HK Co. A Co. will credit the 50% of P’s salary to P’s Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to the Philippine income tax? (#11, 1999 Bar Exams)

The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a non-resident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year (Sec. 22E), NIRC). A non-resident citizen is taxable only on income

derived from Philippine sources (Sec. 23 NIRC). The salaries and allowances from being employed abroad are incomes from without because these are compensation for services rendered outside the Philippines (Sec. 42, NIRC). However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines (Sec. 42, NIRC).

NDC contracted the services of Marubeni Corporation, a resident foreign corporation established in Japan, for the construction and installation of a wharf in Leyte. The contract was perfected in the Philippines. The whole contract price was subdivided into several portions, among which is the “Japanese Phase” portion. In this “Japanese Phase” portion, all the engineering and design works, as well as its fabrication were all done in Japan. After manufacture, they were rolled on to a barge and transported to Leyte, where they were bolted on to the pier for purposes of installation. Is the income of Marubeni from the “Japanese Phase” of the contract taxable in the Philippines?

The tax situs for services rendered under Section 42 of the NIRC is the place where the service was performed. Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. They were already finished products when shipped to the Philippines. All services for the design, fabrication, engineering and manufacture of the materials and equipment under the Japanese Phase were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to [income] tax. (CIR v. Marubeni Corp., GR No. 137377, 18 December 2001—with some modifications)

What is meant by 'Gross Philippine Billings'?

'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.(Section 28A3a, NIRC)

A foreign airline carrier has no landing rights in the Philippines but is selling tickets here. Is the airline subject to Philippine income taxes? How will it be taxed?

A foreign airline carrier which is selling tickets in the Philippines is classified for income tax purposes as a resident foreign corporation. Since it cannot be subjected to the gross Philippine billings tax as it doesn’t have landing rights in the Philippines, then, the general rule on liability of resident foreign corporations shall apply, in that its taxable income from within the Philippines shall be subject to the normal tax of 30%.

X was hired by Y to watch over Y’s fishponds with a salary of P 10,000. To enable him to perform his duties well, he was also provided a small hut, which he could use as his residence in the middle of the fishponds. Is the fair market value of the use of the small hut by X a “fringe benefit” that is subject to the 32% tax imposed by Sec. 33 of the NIRC? Explain your answer. (#11, 2001 Bar Exams)

No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or supervisory employee, the small hut is provided for the convenience of the employer, hence does not constitute a taxable fringe benefit. (Sec. 33 NIRC)

A "fringe benefit" is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain. (BAR 2003)

It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the employer,

such that, if the tax is not paid the legal recourse of the BIR is to go after the employer. Any amount or value received by the employee as a fringe benefit is considered tax paid, hence, net of income tax due thereon. The person who is legally required to pay (same as statutory incidence as distinguished from economic incidence) is that person who, in case of non-payment, can be legally demanded to pay the tax.

A sale of realty qualifies as a sale on installment. For the unpaid balance of the purchase price, the buyer issued a promissory note. Immediately after the issuance of the promissory note by the buyer, the seller discounts the promissory note to the buyer. How will the income from the sale be reported for income tax purposes?

The whole profit accruing from the sale is taxable income during the year the sale was made. Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income to be returned, during the respective year it was realized. Non-dealer sales of real or personal property may be reported as income under the installment method provided that the obligation is still outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must report the balance of the income from the discounting not only income from the initial installment payment.

Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American courts on our parallel tax laws have persuasive effect on the interpretation of these laws. Thus, by analogy, all the more would a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth. (Banas v. CA, G.R. No. 102967. February 10, 2000)

D bought a parcel of land with an old building erected on it. The cost of the land is P10M, and the building is P2M. The intention of D in buying the lot is that she will erect thereon a commercial building, after demolishing the old building. Pursuant to this, D demolished the old building and constructed a new building. On the same year that the old building was demolished, D decided to declare the P2M value of the old building as part of her deductible loss. Comment on the procedure.

Suggested Answer:

The procedure by D is not proper. The cost of the demolished building is not a deductible loss. Because the intention of D in demolishing the building is to pave the way for the construction of a new one, the cost of the demolished building should have been capitalized and made part of the cost of construction of the new building.

Distinguish “tax deduction” and “tax credit”

Although the term is not specifically defined in our Tax Code, tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance against the tax itself” or “a deduction from what is owed” by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction “from income for tax purposes,” or an amount that is “allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax which is due.” An example of a tax deduction is any of the allowable deductions enumerated in Section 34 of the Tax Code. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before. (CIR v. Central Luzon Drug Corp., GR No. 159647, 15 April 2005)

Is the existence of tax liabilities essential prior to the availment or use of a tax credit? Also, are prior tax payments essential for the grant of “tax credits”?

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government.

However, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our government. (CIR v. Central Luzon Drug Corp., GR No. 159647, 15 April 2005)

What is the “all events test” in the claim for allowable deductions? The “all events test” requires the right to income or the liability be determined, not with absolute certainty, but with reasonable accuracy. Under the “all events test” in claiming deductions, the amount of deduction need not be determined exactly for as long as the same may be determined with reasonable accuracy. The terms “reasonable accuracy” clearly implies something less than an exact or completely accurate amount. (CIR v. Isabela Cultural Corporation, February 12, 2007) What are basic personal and additional exemptions? What is the rationale behind their grant to individual taxpayers?

Personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. (Pansacola v.CIR, GR No. 159991, 16 November 2006)

Discuss the rules on change of status as affecting the entitlement to personal exemptions of a taxpayer Favorable changes occurring during the year such as marriage of a taxpayer or birth of a dependent shall be

considered during the year the change occurred, irrespective of the date of its occurrence. On the other hand, if the changes are unfavorable to the taxpayer, such as death of a spouse or a dependent; the dependent reaching the age of 21, or his marriage, or becoming gainfully employed, the said change shall be considered to have occurred only at the end of the year; hence, its effect shall be taken into consideration only the following taxable year (Section 35C, NIRC)

The above rule, however, are limited only to those instances found in Section 35C; otherwise, the status of the taxpayer, or the qualification of the dependent, shall be determined only at the end of the year. Thus, any change occurring during the year, even if unfavorable (such as obtaining a decree of legal separation, or change in the residence of the dependent) shall be considered during the year the change occurred.

Could the personal and additional exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the income tax liability for the taxable year 1997?

No. What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. For the taxable year 1997, the law fixes certain arbitrary amounts representing the personal and additional exemptions of taxpayers based on the old law prevailing at that time. The amendments introduced by the present NIRC should not be applied retroactively, absent any specific provision giving it retroactive application.

Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks

categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms. (Pansacola v.CIR, GR No. 159991, 16 November 2006)

What are the non-deductible items for purposes of income taxation?

The following are non-deductible: (1) Personal, living or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy; (5) Illegal expenses; (6) Losses obtained from transactions between related taxpayers.

X Co. took two insurances covering the life of its employee, Y. The first insurance designated W, wife of Y as the beneficiary; while in the second insurance, it was X Co. which was the designated irrevocable beneficiary. In both insurances, it was X Co. paying the premiums. Y died. Questions:

1. Are the proceeds forming part of the taxable income on the part of the recipients? 2. Are the proceeds forming part of the taxable estate of the deceased? 3. Are the premiums income tax deductible?

Answers: 1. The proceeds are not part of the taxable income of the recipients. Section 32(B)(1) expressly excludes

from income taxation proceeds of life insurance. This is based on the theory that such proceeds, for income tax purposes, are considered as forms of indemnity. Thus, they are non-taxable regardless of who the recipient is.

2. The proceeds of the first insurance form part of the gross estate; while the proceeds of the second insurance will not. This is because for estate tax purposes, the determining factor of whether the proceeds of insurance shall be excluded is when the designation of the beneficiary is irrevocable.

3. The premium paid for the first insurance is income tax deductible. It is a fringe benefit of Y. Fringe benefit expenses are tax deductible as ordinary business expenses. On the other hand, the premium paid for the second insurance is not deductible. This is explicitly prohibited from being declared as a deduction under Section 36 of the NIRC.

III. TRANSFER TAXATION What law governs the imposition of the estate tax? How are properties included in the estate valued?

The statute in force at the time of death of the decedent shall govern the liability for estate tax. The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. For this reason, properties should be valued at the moment of death.

Discuss the Concept and Nature of Estate Taxes:

Estate tax is an excise tax—a tax on the right of a person to transmit his estate to his lawful heirs and beneficiaries, which transfer will take effect at the moment of death. It is not a tax on property. Estate tax is a tax imposed on the privilege of transmitting property upon the death of the owner. The liability for estate tax is generated by death and accrues at the time of death. It is governed by the law in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. Consequently, all properties that are included in the taxable estate should be valued at the moment of death of a decedent.

For estate tax purposes, what are the properties considered situated in the Philippines:

1. Franchise which must be exercised in the Philippines. 2. Shares, obligations or bonds issued by corporation or sociedad anonima organized or constituted in the Philippines. 3. Shares, obligations or bonds issued by a foreign corporation eighty- five per centum of the business of, which is located in the Philippines. 4. Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines. 5. Shares or rights in any partnership, business or industry established in the Philippines. (Section 104, NIRC)

What are the rules governing the inclusion of the proceeds of life insurance in the gross estate?

The following proceeds of life insurances are included in gross estate: a) The appointment of the beneficiary is revocable. b) Appointed beneficiary is the estate, executor or administrator. The following are not included in gross estate: a) Received from the GSIS and SSS. b) Received due to a designation as an irrevocable beneficiary

Spouses X and Y entered into a Survivorship Agreement whereby they agreed that (a) their money in an “and/or” bank account, are theirs in common and (b) upon the death of either of them, the said properties shall belong to the surviving party. In case X dies, may Y be allowed to withdraw the money in the account even without prior estate tax clearance from the BIR?

Suggested Answer: No. While the case of Vitug v. Court of Appeals (183 SCRA 755) involved the question of whether

the money of a couple in an “and/or” account with survivorship stipulation is to form part of the decedent’s estate for purposes of dividing his property among his heirs or whether it belonged to the survivor and not part of the decedent’s inheritance, it is nevertheless to be considered as a “transfer in contemplation of death” for tax purposes and is subject to the estate tax under Section 85(B) of the Tax Code.

What are the requisites for vanishing deductions to be deducted?

The following are the requisites: a) Present decedent must have died within five (5) years from the date of death of prior decedent or date of gift. b) The property with respect to which deduction is claimed must have formed part of the gross estate situated in the Philippines of the prior decedent or taxable gift of the donor. c) The property must be identified as the same property received from the prior decedent or donor or the one received in exchange therefore. d) The estate taxes on the gift must have been finally determined and paid. e) No vanishing deduction on the property was allowed to the prior estate.

What are included in the deduction “judicial expenses” for estate tax purposes? Are the notarial fees for the extrajudicial settlement of estate deductible? What about fees for the guardian of the property during the decedent’s lifetime?

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 essential to the proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible. This distinction has been carried over to our jurisdiction. Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of the testamentary or intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a bond is in the nature

of a qualification for the office, and not necessary in the settlement of the estate. Neither may attorney's fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate.

The notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such

settlement effected a distribution of the decedent’s estate to his lawful heirs. Similarly, the attorney's fees paid for acting as the guardian of the decedent’s property during his lifetime should also be considered as a deductible administration expense. The guardian 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. (CIR v. CA, GR No 123206, 22 March 2000)

Is the BIR authorized to collect estate tax deficiency through the summary remedy of levying upon and sale of real properties of a decedent without first securing the authority of the court sitting in probate over the supposed will of the decedent? (#8, 1998 Bar Exams)

Yes. The BIR is authorized to collect estate tax deficiency through the summary remedy of the levying upon and sale of properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed will of the deceased, because the collection of estate tax is executive in character. As such the estate tax is exempted from the application of the statute of the non – claims, and this is justified by the necessity of the government finding, immortalized in the maxim that taxes are the lifeblood of the government (Marcos v. CIR, G.R. No. 120880, June 5, 1997).

Alternative Answer: Yes, if the tax assessment has already become final, executory and enforceable. The approval of the court sitting in probate over the supposed will of the deceased is not a mandatory requirement for the collection of the estate tax.

The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. (Marcos v. CIR. G.R. No. 120880, June 5, 1997).

NOTE: The probate court may take cognizance of issues involving unpaid taxes of the deceased. If the estate is found liable, the court has the discretion to order the payment of such taxes (Gabriel v. Court of Appeals, 11 October 2007). The BIR discovered that the proper estate tax liability of a person has not been paid. After learning that some of the heirs had already left the Philippines, the BIR is now collecting the estate tax from only one of the heirs. Is this action of the BIR proper?

Yes. The BIR may collect the deficiency estate tax from all or some or any of the heirs. However, the said heir may be liable only up to the extent of his distributive share in the estate.

A’s estate tax liability is being settled by her heirs. In the estate tax return, there was an inclusion in the gross estate amounting to P10M, which was the claim of A from D. However, at the time of the death of A, D was insolvent; hence, in the estate tax return of A, the amount of P10M was declared as a deduction from the gross estate as a claim from insolvent persons. Two years after the settlement of the estate tax liability of A, D won the first prize in the Philippine Lottery. He then immediately paid the estate of A the amount of P10M. Would this payment give rise to any internal revenue tax liability? Discuss.

Suggested Answer: No, it will not give rise to an internal revenue tax liability. Since the estate tax liability takes into

consideration the net estate at the moment of death, this necessarily means that deductions for estate tax purposes should be valued at the time of the death of the decedent. If at the time of the death of the decedent, there is a legal basis for claiming a deduction, such as the deduction for claims against insolvent persons in the present case, the fact that the estate subsequently recovered the amount by reason of the voluntary payment by the insolvent person does not preclude the estate from deducting the entire amount of the claim against insolvent persons for estate tax purposes. Post-death developments are not material in determining the amount of the deduction. (Cf. Dizon v. Court of Tax Appeals. G.R. No. 140944 dated May 6, 2008).

What Constitutes A "Gift" For Gift Tax Purposes? It covers not only “direct gifts” but also “indirect gifts.” Examples of indirect gifts are: condonation of indebtedness due to mere liberality of the creditor; transfer of property without consideration; sales, exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred exceeds the value in money or money's worth of the consideration received therefor.

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. Explain if the above transactions are subject to donor’s tax. (# 3, 1999 Bar Exams)

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 if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration, which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax (Sec. 100 NIRC). However, if the lot sold is an ordinary asset the excess of the fair market value over the consideration received shall be considered as a gift subject to the donor’s tax. The sale of shares of stock below the fair market value thereof is subject to the donor’s tax pursuant to the provisions of Sec. 100 of the Tax Code. The excess of the fair market value over the selling price is a deemed gift.

Are political contributions for election purposes subject to donor’s tax? No. Under Section 99(c) of the NIRC, election contributions are governed by the pertinent provisions of the Election Code. Republic Act 7166, approved 25 November 1991, provides that political contributions are not subject to donor’s tax. Hence, political contributions made before the effectivity of the said law are subject of donor’s tax. (Abello et al. v. CIR, GR No. 120721, 23 February 2005). Note: In the case of Abello et al. v. CIR, the petitioners were made liable for donor’s taxes on the donations made to the campaign funds of Sen. Angara because the donations were made before the effectivity of R.A.7166. Is renunciation of inheritance subject to donor’s tax?

Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donor’s tax whereas general renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor’s tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. (Rev. Regs 2-2003)

IV. VALUE-ADDED TAXATION

What is the Nature of the Value Added Tax (VAT)?

The VAT is a uniform tax ranging, at present, from 0 percent to 12 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business as they pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller, transferor or lessor.

The VAT is a tax on consumption, an indirect tax the burden of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. While the liability is imposed on one person, the burden may be passed on to another. (CIR v. Seagate)

Distinguish VAT as an indirect tax from direct taxes

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may

pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone else. Examples are individual and corporate income taxes, transfer taxes, and residence taxes. (ABAKADA Guro)

Who are the persons liable for VAT?

The persons liable for VAT are those engaged in importation (whether or not in the regular course of business), or those who are engaged in selling, bartering, exchanging of goods or services, or leasing of properties, provided that the sale, barter, exchange or lease is done in the regular course of business. Present law requires a threshold amount of P1,500,000.00 gross sale or gross receipt to become liable for value-added tax.

Our VAT system makes use of the tax credit method. Discuss this method.

The law that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method. Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada. Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded 44 to the taxpayer or credited 45 against other internal revenue taxes.

What is an input tax? What about output tax?

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.

Differentiate the following: (a) VAT exemption; and (b) VAT zero-rating

Suggested Answer: In VAT exemption, the law identifies the transaction itself to be free from VAT. Thus, in exemption,

because no VAT is imposed, there could be no liability for output VAT; neither could there be acquisition of input VAT by the taxpayer. On the other hand, in VAT zero-rating, the transaction is subject to VAT, but at the rate of 0%. This means that while there could be no output VAT for which a taxpayer could be liable, such taxpayer may however acquire input taxes for the transactions had with VAT-registered enterprises, which, if unutilized, may be the subject of a refund.

May a transitional input vat credit be claimed on inventory of real property (including land), regardless of whether or not input vat was actually paid on the purchase of such inventory?

Yes. Under the then Section 105 of the NIRC (now Section 111), the inventory of goods that forms part of the valuation of the transitional input tax credit may include real properties provided that these properties are included in the products that the VAT registered person offers for sale to the public. The law does not distinguish between inventory whose acquisition cost was subjected to VAT and that which was not subjected to VAT. Transitional input VAT is available once a taxpayer becomes liable to VAT or elects to be VAT-registered. (Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, GR Nos. 158885 & 170680, dated April 2, 2009)

X Corporation is engaged in leasing its building to several tenants. After several years of leasing, it decided to sell the building. Is the sale subject to VAT?

No. The sale, not being in the regular course of business, is not subject to VAT. For sales to be subject to VAT, the same must be done in the regular course of business. In this case, the business of X is leasing and not selling. (Cf. CIR v. Magsaysay Lines, Inc., GR No. 146984, 28 July 2006)

V. TAX ADMINISTRATION AND ENFORCEMENT, INTERNAL REVENUE TAX REMEDIES & THE COURT OF TAX APPEALS

What actions of the Commissioner of Internal Revenue are reviewable by the Secretary of Finance? What about those that are reviewable by the Court of Tax Appeals?

The power to interpret the provisions of the NIRC and other internal revenue tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. (Section 4, NIRC)

Discuss the jurisdiction of the Court of Tax Appeals.

The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;

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

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

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

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

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

(b) Jurisdiction over cases involving criminal offenses as herein provided: (1) Exclusive original jurisdiction over all criminal offenses arising from violations of the National

Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized.

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

(c) Jurisdiction over tax collection cases as herein provided: (1) Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. (2) Exclusive appellate jurisdiction in tax collection cases: (a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. (b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

Congress passed a law amending certain provisions of the NIRC. Pursuant to the said law, the Secretary of Finance issued the implementing revenue regulation thereof. Marian, a taxpayer aggrieved by the amendment and its implementing rules, filed a petition for prohibition and/or injunction before the Regional Trial Court, Cebu City, seeking to prohibit and/or enjoin the enforcement of the said law and its implementing rules. In her Petition, Marian advanced the argument that the said law and its implementing rules are violative of certain provisions of the Constitution. The Solicitor General, on the other hand, moved to dismiss the case due to lack of jurisdiction on the ground that the case should have been filed before the Court of Tax Appeals. If you were the judge who will resolve the motion, would you grant it?

Suggested Answer: No, I would not grant the motion. While the CTA has the jurisdiction to resolve tax disputes in general,

where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the regular courts and the not the CTA have jurisdiction to pass upon the same. (British American Tobacco v. Camacho, et al., G.R. No. 163583 dated August 20, 2008).

The collection of an internal revenue tax may not generally be enjoined. Is there any exception to this? Discuss the requirements, if any, for the exception to apply.

Suggested Answer: Yes, there is an exception. The Court of Tax Appeals, upon proper motion duly filed therefor, on a case

pending before it, may validly issue a writ of injunction against the collection of an internal revenue tax, provided that it can be shown that the collection of a tax will be prejudicial to the interest of the government and/or the taxpayer, and that the taxpayer must post a bond equivalent to not less than the tax involved, but not more than double the amount thereof, upon the discretion of the CTA.

Does the CTA possess jurisdiction to hear and decide cases involving:

(a) Disputed Assessments? (b) Seizure and Detention cases concerning imported articles?

Suggested Answer: No. The jurisdiction of the CTA is to hear and decide cases, upon appeal via Petition for Review,

from the decisions of the Commissioner of Internal Revenue on matters involving, among other, dispute assessments, and from the decisions of the Commissioner of Customs on matters involving, among others, seizure and detention cases. The disputed assessment itself, or the seizure case, is not what is appealable to CTA—it is the decision taken from such matters which is appealable.

What are the cases that may be appealed directly to the Court of Tax Appeals (CTA) en banc without having to pass through the CTA acting in division?

Suggested Answer:

The following are the cases that may be appealed directly to the Court of Tax Appeals (CTA) en banc without having to pass through the CTA acting in division:

1. Decisions by the Central Board of Assessment Appeals; and 2. Decisions by the Regional Trial Courts, when the RTC decided the case in the exercise of its

appellate jurisdiction. A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer? (#17, 2000 Bar Exams)

No, as this would be violative of RA NO. 1405, the Bank Deposit Secrecy Law. The CIR or his duly authorized representative may be allowed to inquire or look into the bank deposit of a taxpayer in the following cases:

a. For purposes of determining the gross estate of a decedent; b. Where the taxpayer has filed an application for compromise of his tax liability by reason of financial

incapacity to pay such tax liability (Sec. 6F NIRC of 1997) and the taxpayer, as a condition for the compromise, executes a waiver of the provisions of RA1405

c. Where the taxpayer has signed a waiver authorizing the CIR or his duly authorized representative to inquire into the bank deposits.

Considering the provisions of Section 71 of the 1997 Tax Code which provides that tax returns shall constitute public records, may the BIR divulge the contents of a tax return of a person?

No. Although Section 71 of the Tax Code provides that tax returns shall constitute public records, these returns are still confidential in nature and may not be inquired into in unauthorized cases under pain of penalty provided under Section 270. Except in the following cases, inquiry into the income tax returns of taxpayers may not be authorized:

1. When the inspection of the return is upon the order of the President of the Philippines; 2. When inspection is authorized under Finance Regulation No. 33 of the Secretary of Finance; 3. When the production of the tax return is material evidence in a criminal case wherein the government is

interested in the result; 4. When the production or inspection thereof is authorized by the taxpayer himself.

Distinguish abatement of tax liabilities with compromise.

Abatement of tax liabilities is allowed if the tax appears to have been unjustly or excessively assessed, or when the administration and collection costs involved do not justify the collection of the amount due. On the other hand, a taxpayer asks for a compromise based on reasonable doubt as to the tax liability of a taxpayer, or when he is financially incapable of paying the tax. In abatement, there is no minimum payment required. This is unlike compromise where certain minimum payments are required by the NIRC, depending on the ground availed of by the taxpayer. (People v. Tan, GR No. 152532, 16 August 2005)

During the lifetime of a decedent, her business affairs were conducted by a trustee. Two days after the death of the decedent on April 3, 1979, the trustee filed the decedent’s income tax return for the taxable year 1978, without indicating therein that the decedent had died. Subsequently, the BIR found a deficiency income tax by the decedent for the taxable year 1977. Thus, it sent by registered mail a demand letter and assessment notice addressed to the decedent “c/o the trustee.” The assessment was actually sent to the trustee’s address, which was the address indicated in the return filed by the trustee for the decedent for the taxable year 1978. Was there valid service of the assessment? Did the assessment lapse into finality?

There was no valid service of assessment. The first point to be considered is that the relationship between the decedent and trustee was one of agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the death of the decedent on April 3, 1979 automatically severed the legal relationship between her and

the trustee, and such could not be revived by the mere fact that the trustee continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the year 1978.

Since the relationship between the trustee and the decedent was automatically severed at the moment of the

Taxpayer's death, none of the trustee’s acts or omissions could bind the estate of the Taxpayer. Service on the trustee of the demand letter and assessment notice was therefore improperly done.

Since there was never any valid notice of this assessment, it could not have become final, executory and

incontestable, and, for failure to make the assessment within the three-year period provided in Section 203 of the NIRC, respondent's claim against the petitioner Estate is barred.(Estate of the Late Juliana Diez Vda. De Gabriel v. CIR, G.R. No. 155541, January 27, 2004.)

Under Section 220 of the NIRC, it is provided that “civil and criminal actions and proceedings instituted in behalf of the Government under the authority of the Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue, but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner.”

Using the above provision, can the legal officers of the BIR prosecute a case on appeal before the Supreme Court, or Is the participation of the Office of the Solicitor General still necessary?

The Solicitor General’s participation is necessary. The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax Reform Act must not be understood as overturning the long established procedure before this Court in requiring the Solicitor General to represent the interest of the Republic. This Court continues to maintain that it is the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings. (CIR v. La Suerte Cigar and Cigarette Factory, G.R. No. 144942, 4 July 2002—En Banc resolution on the motion for clarification) (Note: Initially, the Third Division of the Court dismissed the petition of the CIR by reason of the fact that it was not the OSG which prosecuted the case on appeal, representing the government (See the June 28, 2001 Resolution). However, the Court En Banc subsequently allowed the reinstatement of the case, but directed the OSG to enter its appearance for the BIR, stating that “aware that the dismissal of the petition could have lasting effect on government tax revenues, the lifeblood of the state, the Court heeds the plea of petitioner for a chance to prosecute its case.”)

What is the period within which the government may assess internal revenue tax liabilities?

General rule: Internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return; or, in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed.

Exceptions: In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be

assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission.

If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.

A waiver of the statute of limitations to assess and collect internal revenue taxes worth more than P1M was signed by the comptroller of a corporate taxpayer. The waiver did not specify a definite agreed date between the BIR and the taxpayer, within which the former may assess and collect revenue taxes. The said waiver bore the acceptance of the Revenue District Officer of the tax district where the principal place of business of the taxpayer was located. Is the waiver valid?

The waiver is not valid. The NIRC, under Sections 203 and 222, provides for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. The waiver subject of this case was unlimited in time, hence violating Section 222 (b) of the NIRC.

The waiver is also defective from the government side because it was signed only by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain. The conformity of the BIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and executed almost seven months before the expiration of the three-year prescription period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR. (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004)

What is the purpose of a waiver of the statute of limitations to assess and collect internal revenue taxes?

A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers' right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004)

Does the Court of Tax Appeals have jurisdiction to determine the validity of a warrant of distraint and levy issued by the BIR and to rule if a Waiver of Statute of Limitations was validly effected?

Yes. The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the Commissioner of Internal Revenue on matters relating to assessments or refunds. The law also covers other matters or cases that arise out of the NIRC or related laws administered by the Bureau of Internal Revenue. The wording of the provision is clear and simple. It gives the CTA the jurisdiction to determine if the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of Limitations was validly effected. (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004)

What are the circumstances that would warrant the suspension of the period to assess and collect?

The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines.

Distinguish the different forms of administratively protesting an assessment.

The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation:

(a) Request for reconsideration — refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both.

(b) Request for reinvestigation — refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both.

The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 223 of the NIRC distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted (given due course) by the CIR. (CIR v. Philippine Global Communication, GR No. 167146, 31 October 2006).

A taxpayer requested for reinvestigation of his tax liability. Did it suspend the period to assess and collect? No. A mere request for reinvestigation does not suspend the period to assess and collect. Section 223 of the NIRC provides that the period shall be suspended “when the taxpayer requests for a reinvestigation which is granted by the Commissioner.” Thus, it is not only the request for reinvestigation which will toll the period. There must be a showing that the same was granted by the CIR. (BPI v. CIR, GR No. 139736, 17 October 2005) After an audit by BIR examiners, a taxpayer received a notice from the BIR stating as follows:

“Please be notified that after investigation by our examiners, you have an outstanding internal revenue tax liability amounting to Php750,000.00, computed as follows: Basic Income Tax P500,000.00 Surcharge 125,000.00 Interest 100,000.00 Compromise Penalty 25,000.00 TOTAL P750,000.00 Please settle the foregoing amount on or before 30 August 2006 to avoid further surcharges and penalty.”

Is the above notice considered a valid assessment? No. Under Section 228 of the NIRC, an assessment, to be valid, must contain the factual and legal bases upon which the assessment was based. The above notice merely contained a computation of the tax liability of the taxpayer, without any discussion on the factual and legal bases thereof. Internal Revenue Authorities issued a formal assessment against a taxpayer and indicated therein the supposed tax, surcharge, interest and compromise penalty due thereon. The taxpayer, however, was not provided with the written basis of the law and facts on which the assessment is based. Revenue authorities did not explain how it arrived at such an assessment and also failed to mention the specific provision of the NIRC or rules and regulations which were not complied with by the taxpayer. The revenue officers, however, justified its action by stating that the basis of the assessment was advised upon the taxpayer during the pre-assessment stage. Is the assessment valid?

No. The law requires that the assessment itself should contain the facts and the law upon which the assessment is based. Advice of tax deficiency given to the taxpayer’s employee during the preassessment stage, as well as other preliminary stages, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. (Commissioner of Internal Revenue v. Enron Subic Power Corporation, G.R. No. 166387 dated January 19, 2009).

Will the failure to serve a Pre-Assessment Notice upon a taxpayer prior to a formal assessment be considered as a denial of due process?

No. The failure to serve a pre-assessment notice is not, in itself, amounting to a denial of due process. For as long as the formal assessment is issued and served upon a taxpayer, the requirement of due process had been complied with. After all, the taxpayer is still afforded ample administrative remedies such as protesting the assessment. (CIR v. Menguito, 17 September 2008).

Before assessing a taxpayer, the CIR may avail himself of the “Best Evidence Obtainable Rule.” Does the best evidence obtainable include hearsay evidence? What about mere photocopies of documents?

The best evidence obtainable may consist of hearsay evidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts. Moreover, the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which

cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness.

However, the best evidence obtainable does not include mere photocopies of records/documents. In making

a preliminary and final tax deficiency assessment against a taxpayer, the BIR cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey, the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering. (CIR v. Hantex Trading Co., Inc. GR No. 136975, 31 March 2005)

Without the consent of a taxpayer subject of an audit, its accountant, which has a grudge against the taxpayer’s officers, submitted before the BIR the books of accounts as well as various documents that will establish the tax liability of the taxpayer. The taxpayer complained on the ground that the documents should not be used in evidence as the same was illegally obtained. Decide. The lack of consent of the taxpayer to the submission of the books of accounts and various documents does not warrant the non-use of the said documents. Establishment of the tax liability of a taxpayer partakes the nature of administrative proceedings which are not governed by technical rules of evidence. Moreover, the BIR is vested with ample powers to secure all relevant documents in connection with the establishment of tax liabilities, even without the consent of taxpayers. Thus, it cannot be said that the documents were illegally obtained. (Fitness by Design v. CIR) Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels (#18, 2000 Bar Exams)

The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. The procedures for the administrative remedies for assessment are as follows:

a. After receipt of the Pre-Assessment Notice, he must within 15 days from receipt explain why no additional taxes should be assessed against him.

b. If the CIR issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within 30 days from receipt of the notice of assessment. (4th paragraph Sec. 228 NIRC of 1997)

c. Within 60 days from filing of the protest, the taxpayer shall submit all relevant supporting documents. The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:

a. Where the CIR has not acted on the taxpayer’s protest within a period of 180 days from submission of all relevant documents, then the taxpayer has a period of 30 days from the lapse of said 180 days within which to interpose a petition for review with the CTA.

b. Should the CIR deny the taxpayer’s protest, then he has a period of 30 days from receipt of said denial within which to interpose a petition for review with the CTA acting in division.

c. In both cases, the taxpayer must apply with the CTA for the issuance of an injunctive writ to enjoin the BIR from collecting the disputed tax during the pendency of the proceedings.

d. The adverse decision of the CTA (division) is appealable to the CTA (en banc) by means of petition for review within a period of 30 days from receipt of the adverse decision.

e. The adverse decision of the CTA en banc is appealable to the SC by means of a petition for review on certiorari with a period of 15 days from receipt of the adverse decision of the CTA en banc.

The employment by the BIR of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the CTA under other manner arising under the provisions of the NIRC. The judicial appeals start with the CTA, and continues in the same manner as shown above. Should the BIR decide to utilize its judicial tax remedies for collecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the

same going up the ladder of the judicial processes from the MTC (as the case may be) to the RTC, to the CTA, thence to the Supreme Court. The remedies of an aggrieved taxpayer on a claim for refund is to appeal to the adverse decision of the Commissioner to the CTA in the same manner outlined above. (Discussions modified per RA9282).

Facts: Petitioner is the trustee of various retirement plans established by several companies for its employees. As trustee of the retirement plans, petitioner was authorized to hold, manage, invest and reinvest the assets of these plans. These investments necessarily earned interest income. Petitioner's claim for refund centers on the tax withheld by the various withholding agents, and paid to the CIR for the four (4) quarters of 1993, on the aforementioned interest income. It is alleged that the total final withholding tax on interest income paid for that year amounted to P6,049,971.83. On four dates, 12 May 1993, 16 August 1993, 31 January 1994, and 29 April 1994, petitioner filed its written claim for refund with the Bureau of Internal Revenue (BIR) for the first, second, third and fourth quarters of 1993, respectively, citing that employees' trusts are exempted by specific mandate of law from income taxation. Nonetheless, the claims for refund were denied. By this time, petitioner already had a pending petition before the Court of Tax Appeals (CTA), docketed as CTA Case No. 4848, and apparently involving the same legal issue but a previous taxable period. Hoping to comply with the two (2)-year period within which to file an action for refund under Section 230 of the then Tax Code, petitioner filed a Motion to Admit Supplemental Petition in CTA Case No. 4848 on 28 April 1995, seeking to include in that case the tax refund claimed for the year 1993. However, the CTA denied the admission of the Supplemental Petition in a Resolution dated 25 August 1995. The CTA reasoned then that CTA Case No. 4848 had already been pending for more than two and a half (2 1/2) years, and the admission of the supplemental petition, with a substantial enlargement of petitioner's original claim for refund, would further delay the proceedings, causing as it would, an effective change in the cause of action. Nonetheless, the CTA advised that petitioner could instead file a separate petition for review for the refund of the withholding taxes paid in 1993. Petitioner decided to follow the CTA's advice, and on 9 October 1995, it filed another petition for review with the CTA, docketed as CTA Case No. 5292, concerning its claim for refund for the year 1993. The CIR posed various defenses, among them, that the claim for refund had already prescribed. The petitioner argued that the claim for refund has not expired because the filing of the Supplemental Petition tolled the running of the period to file the claim. Issue: could the two (2)-year prescriptive period for the refund of erroneously paid taxes be deemed tolled by the filing of the Supplemental Petition?

Held: Petitioner argues that Section 230 of the then Tax Code does not specify the form in which the judicial claim should be made. That may be so, but it does not follow that the two (2)-year period may be suspended by the filing of just any judicial claim with any court. For example, the prescriptive period to claim for the refund of corporate income tax paid by a Makati-based corporation cannot be suspended by the filing of a complaint with the Municipal Circuit Trial Court of Sorsogon. At the very least, such judicial claim should be filed with a court which would properly have jurisdiction over the action for the refund.

In this case, there is no doubt that the CTA has jurisdiction over actions seeking the refund of income taxes erroneously paid. But it should be borne in mind that petitioner initially sought to bring its claim for refund for the taxes paid in 1993 through a supplemental petition in another case pending before the CTA, and not through an original action. The admission of supplemental pleadings, including supplemental complaints, does not arise as a matter of right on the petitioner, but remains in the sound discretion of the court, which is well within its right to deny the admission of the pleading. Section 6, Rule 10 of the 1997 Rules of Civil Procedure, governing supplemental pleadings, is clear that the court only "may" admit the supplemental pleading, and is thus not obliged to do so.

It is only upon the admission by the court of the supplemental complaint that it may be deem to augment the original complaint. Until such time, the court acquires no jurisdiction over such new claims as may be raised in the supplemental complaint. Assuming that the CTA erred in refusing to admit the Supplemental Petition, such action is now beyond the review of this Court, the order denying the same having long lapsed into finality, and it appearing that petitioner did not attempt to elevate such denial for judicial review with the proper appellate court.

We thus cannot treat the Supplemental Petition as having any judicial effect. It cannot even be deemed as having been filed, the CTA refusing to admit the same. Moreover, the CTA could not have acquired jurisdiction

over the causes of action stated in the Supplemental Petition by virtue of the same pleading owing to that court's non-admission of that complaint. The CTA acquired jurisdiction over the claim for refund for taxes paid by petitioner in 1993 only upon the filing of the new Petition for Review on 9 October 1995.

A corporate taxpayer filed its income tax return for 1998 showing excess payment of quarterly income taxes. For the taxable year 1999, it carried-over the said excess quarterly payment as a credit against its 1999 tax liability. Suppose that the said credit has not been consumed for the year 1999, may the taxpayer file a claim for refund of the remaining credit?

No. The carry-over option under Section 76 of the NIRC is permissive. A corporation that is entitled to a tax refund or a tax credit for excess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a given taxable year against the estimated income tax liabilities of the succeeding quarters. Once chosen, the carry-over option shall be considered irrevocable for that taxable period, and no application for a tax refund or issuance of a tax credit certificate shall then be allowed.

Once the carry-over option is taken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable withholding taxes. Thus, it is no longer entitled to a tax refund of the remaining amount which corresponds to its 1998 excess tax credit. Nonetheless, the amount will not be forfeited in the government's favor, because it may be claimed by petitioner as tax credits in the succeeding taxable years. (Philam Asset Management v. CIR, G.R. Nos. 156637/162004, December 14, 2005)

The imposition of a surcharge is ordinarily mandatory. Are there situations where the imposition of the surcharge may be dispensed with?

The settled rule is that 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.

In Tuason, Jr. v. Lingad, the Supreme Court deleted the order to pay interest and surcharges, and in

Commissioner of Internal Revenue v. Republic Cement Corporation, where the same surcharge was dispensed with because of the taxpayer's good faith and the BIR's previous erroneous interpretation of the laws involved. We see no reason not to apply the same doctrine in the instant case which settles the divergent rulings of the BIR on DST and establishes the foremost categorical pronouncement of the Court that pledge transactions entered into by pawnshops are subject to DST. (MICHEL J. LHUILLIER PAWNSHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 166786, September 11, 2006)

Facts: Petitioner Manila Banking Corporation was registered with the BIR in 1961. However, in 1987, it was found insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation which was approved on June 22, 1999. Issue: Whether petitioner is entitled to a refund of its minimum corporate income tax paid to the BIR for taxable year 1999.

Held: It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum

corporate income tax on corporations, provides that for purposes of this tax, the date when business operations commence is the year in which the domestic corporation registered with the BIR. However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate income tax after four (4) years from 1999. (THE MANILA BANKING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 168118, August 28, 2006.)

CASE: BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.), v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 157064. August 7, 2006.

Under Section 203 of the National Internal Revenue Code (NIRC), respondent had three (3) years from the last day for the filing of the return to send an assessment notice to petitioner. In the case of Collector of Internal Revenue v. Bautista, this Court held that an assessment is made within the prescriptive period if notice to this effect is released, mailed or sent by the CIR to the taxpayer within said period. Receipt thereof by the taxpayer within the prescriptive period is not necessary. At this point, it should be clarified that the rule does not dispense with the requirement that the taxpayer should actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed and sent.

In the present case, records show that petitioner filed its Annual Income Tax Return for taxable year 1987 on

14 April 1988. The last day for filing by petitioner of its return was on 15 April 1988, thus, giving respondent until 15 April 1991 within which to send an assessment notice. While respondent avers that it sent the assessment notice dated 1 February 1991 on 6 February 1991, within the three (3)-year period prescribed by law, petitioner denies having received an assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax assessment only on 17 March 1992 when it was served with the Warrant of Distraint and Levy.

In Protector's Services, Inc. v. Court of Appeals, this Court ruled that when a mail matter is sent by registered

mail, there exists a presumption, set forth under Section 3(v), Rule 131 of the Rules of Court, that it was received in the regular course of mail. The facts to be proved in order to raise this presumption are: (a) that the letter was properly addressed with postage prepaid; and (b) that it was mailed. While a mailed letter is deemed received by the addressee in the ordinary course of mail, this is still merely a disputable presumption subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.

In the present case, petitioner denies receiving the assessment notice, and the respondent was unable to

present substantial evidence that such notice was, indeed, mailed or sent by the respondent before the BIR's right to assess had prescribed and that said notice was received by the petitioner.

In the case of Nava v. Commissioner of Internal Revenue, this Court stressed on the importance of proving

the release, mailing or sending of the notice.

While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayer's intervention, notice, or control, without adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense.

In the present case, the evidence offered by the respondent fails to convince this Court that Formal

Assessment Notice No. FAN-1-87-91-000649 was released, mailed, or sent before 15 April 1991, or before the lapse of the period of limitation upon assessment and collection prescribed by Section 203 of the NIRC. Such evidence, therefore, is insufficient to give rise to the presumption that the assessment notice was received in the regular course of mail. Consequently, the right of the government to assess and collect the alleged deficiency tax is barred by prescription.

X’s claim for refund was denied by the Commissioner of Internal Revenue on 12 September 2007. He intended to file his Petition before the Court of Tax Appeals on 12 October 2007, but the said date was declared as a non-working holiday. X thus filed his Petition on 15 October 2007, which is the next working day. (a) Was the Petition before the Court of Tax Appeals timely filed? (b) Assume that 12 October 2007 is incidentally also the last day of the two-year period of X to file a case of refund

pursuant to Section 229 of the National Internal Revenue Code, would your answer be the same? (a)Yes. It is well-settled that if the last day to file a Petition for Review falls on a Saturday, Sunday or Holiday, the same may be filed during the next working day. (b) No. If 12 October 2007 is also the last day of the two-year period to file a case for refund, the filing of the Petition must be done the working day prior to the holiday. This is because the two-year period is a prescriptive period of filing a claim for refund. It is therefore not just a mere reglementary period. Thus, if the taxpayer files the Petition after 12 October 2007, the same is already time-barred.

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? 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 return on 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). X Corporation was able to secure a favorable judgment from the courts granting its claim for refund. The judgment became final. At the time the judgment was to be executed, the BIR refused to grant the refund on the ground that the corporation is presently subject of an audit by the BIR, which might result to potential tax liabilities. Is the action of the BIR proper? No. While the general rule is that claims for refund and proceedings regarding the determination of the liability of a taxpayer for deficiency taxes must, as far as practicable, be settled only under one proceedings to avoid multiplicity of suits, the said rule is not applicable in the present case since the entitlement of the taxpayer to the refund was already determined with finality; hence, was removed already from the jurisdiction of the BIR. (CIR v. Citytrust Banking Corporation, 22 August 2006). NOTES:

1. Before filing an petition for refund with the CTA, it is a jurisdictional requisite that there must first be filing of a written claim for refund with the BIR unless on the face of the return of the taxpayer, there is an obvious overpayment

2. The two-year prescriptive period in filing claims for refund of internal revenue taxes covers not only the filing of a written claim with the BIR but also the filing of the petition before the CTA

3. The two-year prescriptive period in filing claims for refund of internal revenue taxes starts at the time of the filing of the final adjustment return

4. The two-year prescriptive period in filing claims for refund of internal revenue taxes cannot be extended by a mere amendment of the return, even if the amendment is substantial. However, a substantial amendment of a return will give to the government a fresh period within which a taxpayer may be assessed.

5. The waiting period of 180 days within which the BIR should act (as provided under Section 228 of the NIRC) applies only to protest and not to claims for refund. Thus, if a claim for refund is still pending despite the

lapse of 180 days, the taxpayer should not immediately appeal to the CTA, unless in the meantime, the two-year period of filing a petition for refund is about to lapse

6. The 3-year period to assess is to commence at the day the amended return is filed, if the amended is substantial.

7. An assessment is a notice to a taxpayer of his tax liability and a demand for the taxpayer to pay such liability. A mere affidavit of a revenue official detailing the liability of a taxpayer is not an assessment.

8. In order to constitute a valid waiver of the 3-year period to assess, there must be an agreement in writing between the taxpayer and the CIR to extend such period. A mere waiver, without any showing that it was accepted by the BIR, is not sufficient to extend the period to assess.

9. Payment under protest is not necessarily for internal revenue taxes and local taxes, but it is mandatory in real property taxation.

10. A mere withholding agent has a personality to file a claim for refund. However, in the event that the withholding agent receives the refund, such withholding agent should hold the proceeds in trust for the taxpayer from whom such taxes were withheld.

11. Where the taxpayer failed to submit relevant supporting documents within the 60-day period from filing of the protest, and in case of inaction by the BIR, and the taxpayer chooses to appeal in the court of tax appeals, the same must be made within 30 days from the lapse of the 180-day period, which 180-day period is reckoned from the date the protest was filed. (ABN AMRO Bank, inc. v. Commissioner of Internal Revenue, CTA Case no. 7089, September 10, 2008).

VI. LOCAL TAXATION AND REAL PROPERTY TAXATION

LOCAL TAXATION Considering the provisions of Article X, Section 5 of the 1987 Constitution, can we now say that in the Philippines, local government units have the inherent power to tax? Discuss

No. While the power of local government units to tax is a power that is expressly granted, vested, and guaranteed by the 1987 Constitution, still, the power of local government units to tax could not be considered as inherent. Inherent taxing power belongs only to the State, not to its political subdivisions. It is only the State which may exercise the power of taxation even absent any Constitutional grant.

What is the principle of pre-emption in local taxation?

The principle of pre-emption states that when the national government (through Congress) elects to tax a particular area, it is impliedly withholding from the local government the power to tax the same field (Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental, No. L-21183, 27 September 1968).

Under the present local government code, the principle of pre-emption was explicitly made to apply, as evidenced by Section 133 thereof (Common Limitations of the Local Taxing Power).

What is the Residual Power to Tax of Local Government Units?

The residual power to tax is provided under Section 186 of the Local Government Code, viz.: Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose.

The City of Cebu passed an ordinance imposing a tax of P5.00 on every kilo of lechon taken out of the City. Is the tax valid?

Suggested Answer: No, it is not valid. Section 133 of the Local Government Code clearly proscribes the imposition of a

tax by local government units concerning all articles that are going in or out, or passing through, the territorial jurisdiction of the local government unit.

A law was passed granting a taxpayer the franchise to operate a public utility. In the said franchise, it was expressly stated that “in lieu of all other kinds of taxes”, the franchisee should just pay franchise tax to the government. Subsequently, a new taxpayer applied for and was granted, the right to operate a similar public utility. In the franchise of the second taxpayer, the law gave the latter corporation all the "powers, rights reservations, restrictions, and liabilities" of the former corporation. Question: Can the latter corporation be required to pay the “tax on businesses enjoying a franchise” under the Local Government Code, which is being levied in an ordinance by the municipality where the latter corporation is having business?

Yes, the latter corporation may be required to pay the said tax on business. Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be mistaken. They cannot be extended by mere implication or inference. Thus, it was held in Home Insurance & Trust Co. v. Tennessee that a law giving a corporation all the "powers, rights reservations, restrictions, and liabilities" of another company does not give an exemption from taxation which the latter may possess. In Rochester R. Co. v. Rochester, the U.S. Supreme Court, after reviewing cases involving the effect of the transfer to one company of the powers and privileges of another in conferring a tax exemption possessed by the latter, held that a statute authorizing or directing the grant or transfer of the "privileges" of a corporation which enjoys immunity from taxation or regulation should not be interpreted as including that immunity. (PLDT v. City of Davao, G.R. No. 143867, March 25, 2003)

The Municipality of Malangas passed and ordinance levying service fees for the use of municipal roads and police surveillance fees on all goods and all equipment harbored or sheltered in the premises of the port owned and operated by the municipality. The pertinent portion of the ordinance reads:

Imposition of fees. — There shall be collected service fee for its use of the municipal road[s] or streets leading to the wharf and to any point along the shorelines within the jurisdiction of the municipality and for police surveillance on all goods and all equipment harbored or sheltered in the premises of the wharf and other within the jurisdiction of this municipality in the following schedule: a) For Vehicles and Equipment: fixed fee of P10.00 per unit b) Other Goods, Construction Material products, the fee shall be in accordance with the following schedule:

1. Bamboo craft P20.00 2. Bangus/Kilo 0.30 xxx xxx xxx 41. Rice and corn grits/sack 0.50"

J is engaged in milling and selling rice and corn. He uses the municipal port of Malangas as transshipment point for his goods. J paid the tax levied under the afore-quoted ordinance under protest, and subsequently questioned the validity of the aforesaid ordinance on the ground that it is ultra vires. Comment on the validity of the ordinance.

By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees — as well as all other taxes or charges in any form whatsoever — on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e). (Palma Development Corporation v. Municipality of Malangas, Zamboanga Del Sur, G.R. No. 152492. October 16, 2003)

K is engaged in the business of producing mineral water. In order to trim down the cost of operations, K decided to produce her own plastic bottles for her mineral water. K is producing the said plastic bottles exclusively for her mineral water business. The City of Cebu, where K has her principal place of business, enacted an ordinance levying taxes on the business of producing mineral water. It also enacted an ordinance levying taxes on the production of plastic bottles. K asked your learned advice whether or not she should pay the said taxes. Discuss your advice.

Suggested Answer: I would advise K to pay the tax on her business of producing mineral water, but not on her production of plastic bottles. This is because her main line of business is the production of mineral water, for which she is liable for the local business tax. On the other hand, her production of plastic bottles is done exclusively for her mineral water business; hence, the same should not be treated as a separate business. It is well-settled that where a taxpayer is engaged in a distinct business and, as a feature thereof, in an activity merely incidental which serves no other person or business, the incidental activity should not be separately or additionally taxed.

For purposes of imposing local business taxes, distinguish Gross Sales from Gross Receipts

Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased. Gross sales, on the other hand, include all sales, even if the payment of which is yet to be received. (Ericsson Telecommunications v. City of Pasig, 22 November 2007).

A business tax is imposed only if the taxpayer is engaged in business. Discuss when is a taxpayer considered as engaged in business

Under the Local Government Code, a taxpayer is engaged in business if he is undertaking trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. (Yamane v. BA Lepanto Condominium Corporation, 25 October 2005).

Are local government units authorized to impose business taxes on persons or entities engaged in the sale of petroleum products?

No. This is prohibited by Section 133(h) of the Local Government Code. While Section 133h does not normally prohibit the imposition of a business tax on articles subject to excise tax under the NIRC, the prohibition in Section 133h clearly shows a legislative intention to prohibit local government units from extending the levy of taxes, fees or charges on petroleum products. This prohibition includes business taxes on persons engaged in the sale of petroleum products. (Petron Corporation v. Tiangco, 16 April 2008).

REAL PROPERTY TAXATION Distinguish “fair market value” from “assessed value” for purposes of real property taxation with respect to the process on how they are determined and the basis for their determination. Suggested Answer:

Fair market value is current trade price of a property. It is a price for which a seller, who is not compelled to sell a property, may be willing to sell it; and the price for which a buyer, who is not compelled to buy a property, may be willing to buy the same. It is determined by the local assessor, taking into consideration the location of the property, the transactions involving properties in the said area, and other similar considerations. On the other hand, an assessed value takes into consideration the actual use of the property. This actual use of the property, in turn, determines the assessment level (taxable level) of the property to determine which portion of the property shall be subject to property taxes. Thus, the use of the property, which may be residential, agricultural, commercial, industrial, mineral, timberland, or special, would be determinative of the extent of what portion of the fair market value shall be taxable. Expressed in mathematical formula, the following will show the difference between fair market value and assessed value:

Fair Market Value x Assessment Level = Assessed Value.

A non-stock non-profit educational institution applied for real property tax exemption for the properties that it claims to be actually, directly and exclusively used for educational purposes. The local government denied such application. The school filed a case for mandamus with the Regional Trial Court. Should the suit prosper?

The suit will not prosper. Mandamus will lie only if there is no other plain, speedy, and adequate remedy in the ordinary course of law. Where administrative remedies are available, a petition for mandamus does not lie. Under Section 226 of RA 7160, the remedy of appeal to the Local Board of Assessment Appeals is available from an adverse ruling or action of the provincial, city or municipal assessor in the assessment of property.

Petitioner also argues that it is seeking to enforce, through the petition for mandamus, a clear legal right

under the Constitution and the pertinent provisions of the Local Government Code granting tax exemption on properties actually, directly and exclusively used for educational purposes. But petitioner is taking an unwarranted shortcut. The argument gratuitously presumes the existence of the fact which it must first prove by competent and sufficient evidence before the City Assessor. It must be stressed that the authority to receive evidence, as basis for classification of properties for taxation, is legally vested on the respondent City Assessor whose action is appealable to the Local Board of Assessment Appeals and the Central Board of Assessment Appeals, if necessary. (Systems Plus Computer College v. Caloocan City, G.R. No. 146382, August 7, 2003)

What is meant by “assessment” under the Local Government Code?

Under Section 199(f), Title II, Book II, of the Local Government Code of 1991, "assessment" is defined as the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification and appraisal of properties. Viewed from this broader perspective, a determination made by a City Assessor with regard to the taxability of a real property squarely falls within its power to assess properties for taxation purposes.

X owns several real properties located in Baguio City. He received a notice of real property tax assessment from the Office of the City Treasurer of Baguio City. X protested said notice and sought reinvestigation on the grounds that: some of the taxes being collected have already prescribed and may no longer be collected; (2) some properties have been doubly taxed/assessed; (3) some properties being taxed are no longer existent; (4) some properties are exempt from taxation as they are being used exclusively for educational purposes; and (5) some errors are made in the assessment and collection of taxes due on petitioners' properties. The City Treasurer of Baguio failed to act on the said protest. By reason of this inaction, X filed a petition for certiorari, prohibition and mandamus before the RTC seeking, among others, the annulment of the assessments and that respondents be ordered to act on their protest immediately.

The respondents in the said case filed a motion to dismiss on the grounds that: (1) the trial court has no jurisdiction over tax assessment matters; and (2) petitioners failed to comply with the requirements of a tax protest.

Citing the case of Ty v. Trampe, G.R. No. 117577, December 1, 1995, 250 SCRA 500, X opposed the motion, arguing that the trial court has jurisdiction over the case as the issue raised pertains to the authority of respondents to assess and collect the real estate taxes. Rule on the motion.

The motion to dismiss should be granted. The extraordinary remedies of certiorari, prohibition and mandamus may be resorted to only when there is no other plain, available, speedy and adequate remedy in the course of law. In this case, there are administrative remedies available to the taxpayer, in that should the taxpayer/real property owner question the excessiveness or reasonableness of the assessment, Section 252 directs that the taxpayer should first pay the tax due before his protest can be entertained. There shall be annotated on the tax receipts the words "paid under protest." It is only after the taxpayer has paid the tax due that he may file a protest in writing within thirty days from payment of the tax to the Provincial, City or Municipal Treasurer, who shall decide the protest within sixty days from receipt. In no case is the local treasurer obliged to entertain the protest unless the tax due has been paid.

If the local treasurer denies the protest or fails to act upon it within the 60-day period provided for in Section 252, the taxpayer/real property owner may then appeal or directly file a verified petition with the LBAA within sixty days from denial of the protest or receipt of the notice of assessment, as provided in Section 226 of R.A. No. 7160. And, if the taxpayer is not satisfied with the decision of the LBAA, he may elevate the same to the CBAA, which exercises exclusive jurisdiction to hear and decide all appeals from the decisions, orders and resolutions of the Local Boards involving contested assessments of real properties, claims for tax refund and/or tax credits or overpayments of taxes. An appeal may be taken to the CBAA by filing a notice of appeal within thirty days from receipt thereof. In view of these administrative remedies, the action before the RTC is clearly premature. (Olivares v. Marquez, G.R. No. 155591, September 22, 2004).

May the local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions? (#19b, 2000 Bar Exams)

Not all local government units may do so. Only provinces, cities and municipalities within the Metro Manila Area (Sec. 232, LGC) may impose an ad valorem tax not exceeding five percent of the assessed

value (Sec. 236 LGC) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area. (Sec. 237 LGC)

X Corporation is a non-stock, non-profit corporation owning a hospital. X constructed a medical arts center which is used to house doctors in exchange for a minimal fee. For real property tax purposes, the hospital was classified as belonging to “special class” with an assessment level of 10%. On the other hand, the medical arts center was classified as “commercial” with a higher assessment level. Was the classification of the medical arts center as “commercial” proper?

No. The medical arts center should have been classified also as “special”. The fact that the medical arts center is exclusively for the doctors of the hospital clearly removes it from being classified as “commercial”. The operation of the medical arts center is clearly incidental to the operation of the hospital; thus, it is but proper that the activity which is incidental to the main function of the hospital should be classified in the same manner as that of the hospital. (City Assessor of Cebu v. Association of Benevola De Cebu, 8 June 2007).

VII. TARIFF AND CUSTOMS DUTIES Does the RTC possess jurisdiction to review and declare ineffective the declaration of the District Collector of Customs in an abandonment proceedings that the shipment was abandoned cargo and that, thenceforth, the government ipso facto became the owner thereof?

Evidently, the resolution of the foregoing issues is within the exclusive competence of the District Collector of Customs, the Commissioner of Customs and within the appellate jurisdiction of the Court of Tax Appeals. Indeed, in Alemar’s, Inc. v. Court of Appeals, we held that:

Petitioner primarily seeks the annulment of the act of the Collector of Customs declaring the subject importation abandoned and ordering it sold at public auction, claiming that the abandonment proceeding held by the Collector of Customs was irregular since the latter did not give notice to petitioner of the abandonment before declaring the importation abandoned.

Consequently, the case falls within the jurisdiction of the Commissioner of Customs and the Court of Tax Appeals vis-à-vis the averments in the amended petition, not with the regional trial court. In Jao v. Court of Appeals, we held that the RTC is devoid of any competence to pass upon the validity or

regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs, and to enjoin or otherwise interfere with the said proceedings even if the seizure was illegal. Such act does not deprive the Bureau of Customs of jurisdiction thereon. (R.V. Marzan Freight Inc. v. Court of Appeals, G.R. No. 128064. March 4, 2004)

M/V Floria, a vessel of Philippine registry, was hired to transport beans from Singapore to India. The vessel was allegedly hijacked at the sea and found its way to Bataan. It is also alleged that said beans are now with the ListCo, and fake documents were used to show that the beans were imported from Japan. The Collector of Customs seized t he M/V Floria and its cargo. The owner of M/V Floria filed a complaint in the Regional Trial Court to obtain possession of the vessel and beans, Does the RTC have jurisdiction over the case? (#9, BAR 1993)

The RTC has no jurisdiction. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive and primary jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The RTC has no jurisdiction to pass upon the validity or regularity of the seizure and forfeiture proceedings conducted by the Bureau of Customs. Neither has the RTC review powers over actions concerning seizure and forfeiture proceedings conducted by the Collector of Customs which is reviewable by the Commissioner of Customs whose decision, in return, is reviewable by the Court of Tax Appeals.

When does importation begin and when does it end? Under the Tariff and Customs code, what are dumping duties, countervailing duties, marking duties, and discriminatory duties (#16, 1995 Bar Exams)

(1.) Importation begins from the time the carrying vessel or aircraft enters Philippine territorial jurisdiction with the intention to unload therein and ends at the time the goods are released or withdrawn from the

customhouse upon payment of the customs duties or with legal permit to withdraw (Viduya vs. Berdiago, 73 SCRA 553). (2.)(a.)Dumping duties are special duties imposed by the Secretary of Finance upon recommendation of the Tariff Commission when ot is found that the price of the imported articles is deliberately or continually fixed at less than the fair market value or cost of production, and the importation would cause or likely cause an injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment. (b.) Countervailing duties are special duties imposed by the Secretary of Finance upon prior investigation and report of the Tariff Commission to offset an excise or inland revenue tax upon articles of the same class manufactured at home or subsidies to foreign producers or manufacturers by their respective governments. (c.) Marking duties are special duties equivalent to 5% ad valorem imposed on articles not properly marked. These are collected by the Commissioner of Customs except when the improperly marked articles are exported or destroyed under customs supervision and prior to final liquidation of the corresponding entry. These duties are designed to prevent possible deception of the customers. (d.) Discriminatory duties are special duties collected in an amount not exceeding 100% ad valorem, imposed by the President of the Philippines against goods of a foreign country which discriminates against Philippine commerce or against goods coming from the Philippines and shipped to a foreign country.

The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of filing an action. When does the Bureau of Customs normally avail itself—

(a) of the administrative instead of the judicial remedy, or (b) of the judicial instead of the administrative remedy.

Suggested Answer: When the goods are still within the jurisdiction of the Bureau of Customs, administrative remedy of

collection is normally availed of. On the other hand, when importation has been legally terminated by reason of the release of the goods to the taxpayer due to the payment of the proper duties (for dutiable importation) and the issuance of a lawful permit for the release thereof, the Bureau would have no other recourse except to avail itself of administrative remedy of collection.

A disgruntled employee of Apache Corporation reported to the Commissioner of Custom that the company is illegally importing electronic equipment by way of unlawful “shipside” activities thereby evading payment of custom duties and taxes on goods. Accordingly, the Commissioner of Customs, upon the request of the Economic intelligence and Investigation Bureau (EIIB), issued warrants of seizure and detention and directed EIIB to seize the goods listed in the warrants. After the seizure of the goods and considering the magnitude of the value of the goods, counsel for Apache Corporation filed a petition with the Supreme Court for certiorari, prohibition and mandamus to enjoin the Commissioner of Customs and his agents from continuing further with the forfeiture proceedings and praying that the Commissioner return the confiscated articles on the ground that the warrants were in violation of the Rules of the Court and the Bill of Rights. If you are a newly appointed Solicitor of the office of the Solicitor General representing the commissioner of Customs, how would you defend the latter? Give the specific defenses. (# 8, 1992 Bar Exams)

Appurtenant to its power under the Tariff and Customs Code to enforce the provisions of such law, the Bureau of Customs may conduct searches and seizures even without the benefit of a warrant issued by a judge upon probable cause. This is historically considered an exemption from the constitutional guarantee against unreasonable searches and seizures.

Assuming that the enforcement of the warrant had been extended to the residence of the President of Apache Corporation, is such enforcement valid? Explain. (Question No. 8, 1992 Bar Exams)

No. The Tariff and Customs Code authorizes custom officials and agents to search any building, except dwelling houses.

What is the basis of dutiable value under the TCC?

The dutiable value of an imported article subject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export for the Philippines, adjusted by certain factors. The home consumption value is thus no longer the basis for the imposition.

Dagat-dagatan Shipping Corp. (DSC) brought to the country two (2) non-propelled foreign barges which DSC chartered for use in the Philippines coastwise trade under a Temporary Certificate of Philippine Registration, to be returned to the foreign owner upon termination of the charter period but not beyond 1999, pursuant to P.D. 760, as amended. Upon their arrival, the barges were subjected to the duty by the Bureau of Customs. DSC, refused to pay any customs duty contending that the carter or lease of the barges, which will be returned to the foreign owner when the charter expires, is not an importation and, therefore cannot be subjected to any customs duty. Is DSC’s refusal with or without legal basis? (#18, 1991 Bar Exams)

DSC’s refusal is without legal basis. The term imposition includes the entry into the country of any article from a foreign country. The fact that imported goods are to be re-exported does not mean that the customs duties may not be imposed, although, in certain cases and subject to limitations prescribed by the Tariff and Customs Code a drawback may be available to the taxpayer so as to be able to obtain the refund. An example of which are articles which are used in the manufacture of products for export within three (3) years after the importation.

J borrowed the vessel of his friend, G. J represented to G that the vessel shall be used to cruise the Mactan Bay. Unknown to G, J made use of the vessel to commit smuggling. J was apprehended by the Coast Guards. Criminal proceedings were commenced against J and G for violation of Section 3601 in relation to 3602 of the Tariff and Customs Code. Simultaneously, the Collector of Customs also commenced forfeiture proceedings against the smuggled articles and the vessel of Gerald. Will the actions prosper?

Suggested Answer: The criminal proceedings will prosper against Jake only but not against Gerald. Gerald did not do anything that would amount to a crime. He simply lent his vessel to Jake, which, definitely, is not an act amounting to a violation of Sections 3601 and 3602 of the Tariff and Customs Code. However, the forfeiture proceedings may prosper against the smuggled articles and against the vessel of Gerald. Forfeiture proceedings are in rem proceedings. As such, it can bind the whole world, and its effects may even be directed against the res—the articles involves in the smuggling activities. Because the vessel of Gerald was used for the commission of smuggling, the strong arm of a forfeiture case may reach the said vessel.

What is meant by “entry” under the Tariff and Customs Code?

The term “entry” in customs law has a triple meaning. It means (1) the documents filed at the customs house; (2) the submission and acceptance of the documents and (3) the procedure of passing goods through the customs house. The operative act that constitutes “entry” of the imported articles at the port of entry is the filing and acceptance of the “specified entry form” together with the other documents required by law and regulations. Under our present law, the term “entry” refers to the filing and acceptance of the the import entry declarations (IEDs) AND the import entry and internal revenue declarations (IEIRDs). The IED serves as basis for the payment of advance duties on importations whereas the IEIRD evidences the final payment of duties and taxes. The filing of the IEIRDs has several important purposes: to ascertain the value of the imported articles, collect the correct and final amount of customs duties and avoid smuggling of goods into the country. It is the IEIRD which accompanies the final payment of duties and taxes. These duties and taxes must be paid in full before the BOC can allow the release of the imported articles from its custody.

Under Section 1301 of the TCC, import entries must be filed within a non-extendible period of 30 days from the date of discharge of the last package from the vessel or aircraft. Chevron filed its IED within 30 days but it filed the IEIRD after the said period. What is the effect of such?

The law is clear and explicit. It gives a non-extendible period of 30 days for the importer to file the entry which we have already ruled pertains to both the IED and IEIRD. Thus under Section 1801 in relation to Section 1301, when the importer fails to file the entry within the said period, he “shall be deemed to have renounced all his interests and property rights” to the importations and these shall be considered impliedly abandoned in favor of the government (Chevron Philippines v. Commissioner of Customs, 11 GR No. 178759, August 2008).

SUGGESTED CODAL READINGS: If you have sufficient time, go over the following provisions (those with “*” are must-read provisions) NIRC: 6E 6F 23 in relation to 42* 24B 24C 24D** 27B 27E 28A3a 30 32B** 33C 34A1 34B3* 34 in general* 35C* 36 51 52 71 73 85E 89 90 100** 203 204* 218* 222** 223 228** 229** 246* Local: 130* 133* 150 166 186* 187* 194* 195* RPTx: 198* 222 252 253 TCC: 105 301 302 303 304 603*

2308* et seq

SURVEY OF BAR EXAM QUESTIONS IN TAXATION (1999-2008) 2008

Internal Revenue Taxes Capital v Ordinary Asset (Q1) Valuation of Properties for Estate Taxation (Q2) VAT on Importation (Q4) Tax Avoidance v. Evasion, Capital Gains Tax on Sale of Shares v. Share of Real Prop (Q5)

Vanishing Deduction (Q6) Sale of Shares (Q10) Capital Gains Tax (Q11) VAT on Leasing (Q12) Donor’s Tax (Q14) Interest Income on Bank Deposit (Q15)

Tax Administration and Remedies Person to File Claim for Refund/Credit (Q3) Prescription (Q3, Q7) Requirements re Assessment (Q7) Local Taxation and Real Property Taxation

Common Limitation (Q8) Business Taxes (Q13)

Tariff and Customs Code

Tax Base (Q4) Forfeiture Proceedings (Q9)

2007 Internal Revenue Taxes Classification of IR Taxes (Q3) Basis of IR Tax on Real Properties, Sec 6E (QV) Inclusion in Gross Income (Q6, Q7, Q10) Inclusion in Gross Estate (Q7)

De Minimis Benefit (Q8)

Determination of Corporate Existence (Q9) Deduction (Q10) Donors Tax (Q11) Estate Tax Period of Payment and Valuation of Estate (Q12)

Tax Administration and Remedies Rulings (Q4) Effect of Assessment against claim for Refund/TCC (Q13) Local Taxation and Real Property Taxation

Nature of Taxing Power of LGUs (Q1) Franchise Tax (Q2)

2006

General Principles Stages or aspects of taxation (Q1-1) Direct v. Indirect Taxes (Q1-2) Tax Exemption of Properties used for Exempt Purposes (QV2) Tax Effect of Transfer of Properties from Exempt to Non-exempt Taxpayer (Q11) Internal Revenue Taxes Vanishing Deduction (QV1) Personal Exemptions (QXI) Tax Refund v. Tax Credit (QVI) Reasonableness of Deductions (QXIV) Tax Administration and Remedies Effect of a Request for Reconsideration (QVIII) Prescription (QIX) Remedies to Question the validity of an RMO/Jurisdiction (QXII) Prescription of Criminal Action (QXIII) Local Taxation and Real Property Taxation Property Exempt from Real Property Tax (QIII) Tariff and Customs Code Remedies from an assessment (QX)

2005

General Principles Nature of the Power of Taxation (Q1a) Taxes and Set-Off (Q1b, Q1c) Tax Exemption of Properties used for Religious Purposes (Q10) Tax Effect of Transfer of Properties from Exempt to Non-exempt Taxpayer (Q11) Internal Revenue Taxes Inclusion/Exclusion (Q2-1, Q4-1) Tax Exemption of Proprietary Educ. Inst. (Q3b) Situs of Sale of Personal Property (Airline Tickets) (Q7) Compensation for Personal Injuries (Q8)

Separation Pay (Q9) Gross Estate of Resident Decedent (Q12) Tax Administration and Remedies Effect of Assessment with Claim for Refund (Q1d) Collection of Taxes During Pendency of Probate Proceedings (Q1e) Compromise of Taxes (Q2-2) Conditions re Claim for Refund (Q4-2) Personality of Withholding Agent to File Claim for Refund (Q4-2b) Effect of Issuance Final Notice before Seizure pending Protest (Q5) Effect of Falsification by Taxpayer's Accountant (Q6) Effect of Underdeclaration of Income (Q13) Is assessment necessary before criminal prosecution? (Q14-2) Is a sworn statement by BIR officers an assessment?(Q14-2) Local Taxation and Real Property Taxation Idle Lands (Q3-1) Tax Exemption of Properties used for Religious Purposes (Q10) Professional Taxes (Q14) Tariff and Customs Code Basis of dutiable value (Q3-2a) Special Duties (Q3-2b) Conditionally Free Importation (Q3-3)

2004

General Principles Characteristics of Taxes (Q1a) Equal Protection Clause (Q2a, Q10b) Non-Impairment Clause (Q2b) Tax Exemption of NS/NP Educ Inst (Q3a) Tax Exemption of Proprietary Educ. Inst. (Q3b) Non-Diminution of Salaries of Judges (Q4a) Double Taxation (Q4b) Tax Exemption vis-à-vis Indirect Taxes (Q6) Liability for Unpaid Taxes (Q7a) Internal Revenue Taxes Tax Exemption of NS/NP Educ Inst (Q3a) Tax Exemption of Proprietary Educ. Inst. (Q3b) Requisites for Deductibility-Bad Debts (Q5b) Personal and Additional Exemptions (Q8a) Non-Deductibility of Insurance Premiums (Q8b) Tax Administration and Remedies Jurisdiction Over Tax Cases (Q1b) Non-Retroactivity of Rulings (Q5a) Liability for Unpaid Taxes (Q7a) Compromise of Taxes (Q7b) Levy Effected Pending Probate Proceedings (Q9a)

Levy Effected Pending Appeal to the CTA (Q9b) Period for Filing Claim for Refund (Q10a) Local Taxation Pre-Emption/Exclusionary Rule (Q4b)

2003 General Principles Nature of the Power of Taxation (Q1) Nature of the Local Government's Power to Tax (Q2) Equal Protection Clause (Q12) Taxation - Inherently Legislative (Q13) Internal Revenue Taxes Fringe Benefit Taxes (Q3) Exclusions from Gross Income - Life Insurance Proceeds (Q4a) Inclusion of Life Insurance Proceeds in the Gross Estate (Q4b) Exclusions - Compensation for Personal Injury (Q5) Capital Asset v. Ordinary Asset (Q6a) Rationale re Loss Limitation Rule (Q6b) Non-taxability of Stock Dividends (Q7) Tax Benefit Rule (Q8) Donor's Tax for Donations Made in Favor of Political Parties (Q10) Tax Administration and Remedies Extent of Power to Inquire Into Bank Deposits (Q9) Local Taxation and Real Property Taxation Nature of the Local Government's Power to Tax (Q2) Taxation - Inherently Legislative (Q13) Appeal to the Secretary of Justice - Sec. 187 of the LGC (Q14) Definition of Real Properties Tariff and Customs Code Returning Residents (Q11)

2002 General Principles Tax Exemption of Traditional Exemptees (Q6) Internal Revenue Taxes Tax on Seamen engaged in international shipping (Q1a) Royalties (Q3) Allowable Deduction - Charitable Contribution (Q8a) Exemptions from Donor's Tax (Q8b) Tax Administration and Remedies Remedies v. Warrants of Distraint and Levy (Q1b) Period to Collect Internal Revenue Taxes (Q2a, Q15, Q17a) Instances That Would Suspend Period of Collection (Q15) Requisites for Claiming Informer's Rewards (Q2b)

Prescription of Criminal Actions (Q4) Requisites for Filing Claim for Refund (Q5) False or Fraudulent Return (Q7) Filing of Tax Collection Suit Pending Admin Investigation (Q13) Pre-Assessment Notice (Q16a) Cases Cognizable by the CTA (Q16b) Compromise (Q17b) Effect of Payment of Taxes on the Criminal Liability (Q18) Local Taxation and Real Property Taxation Taxes that may be imposed by LGUs (Q9a) Procedure re Revision of Real Property Taxes (Q9b) Classification of Real Properties (Q10) Tariff and Customs Code Rationale behind Automatic Review (Q12) Primary Jurisdiction of the Collector of Customs (Q14a) Refund of Overpaid Import Taxes (Q14b)

2001

General Principles Set-Off of Claims for Refund v. Tax Liability (Q1) Tax Amnesty v. Tax Exemption (Q2a) Direct Taxes v. Indirect Taxes (Q2b) Prescription and Collection of Taxes (Q3a) Injunction v. Collection of Taxes (Q3b) Internal Revenue Taxes Corporate Tax Return (Q4) Deductions Allowed for Purely Compensation Income Earner (Q5) Meaning of Income Subject to "Final Tax" (Q6a) Exclusions v. Deductions (Q6b) Rationale re Final Taxation (Q7) Basis for Capital Gains Tax on Sale of RP (Q8) Deductions v. Personal Exemptions (Q10) Fringe Benefit v. Employer's Convenience Rule (Q11) Non-Deductible Expenses-Bribes (Q12) Taxability of Illegal Income (Q12) Income Tax Return for Individuals (Q13) Filing of returns by NRANEBT (Q14) Transfers in Contemplation of Death (Q15) Deductions from the Gross Estate - Funeral Expenses (Q16) Splitting of Donations for Tax Avoidance (Q17) Local Taxation and Real Property Taxation Abolition of Local Taxing Power (Q19) Definition of Real Properties (Q20) Tariff and Customs Code

Flexible Tariff Clause (Q18) 2000 General Principles Power to Tax - Power to Destroy (Q1) Tax Avoidance v. Tax Evasion (Q2a) Equal Protection Clause (Q2b) Tax Exemption of Traditional Exemptees (Q3) Direct v. Indirect Taxes (Q4) Tax Exemption of NS/NP Educ Inst (Q9) Internal Revenue Taxes Retirement Benefits -Requisites for Exemption (Q6) Exclusion - GSIS Pension (Q7) Taxes on NRAEBT (Q8) Tax Exemption of NS/NP Educ Inst (Q9) Definition of Taxable Income (Q10a) Exclusion - Prizes and Awards (Q10b) Donor's Tax - Definition of Strangers (Q12a) Requisites - Exemption of Donations to NS/NP Educ(Q12b) Requisites - Exemption of Sale of Principal Residence (Q13) Situs of Estate Tax on Properties of Non-Resident Decedent (Q15a) Determination of Gross and Net Estate (Q15b) Tax Administration and Remedies Compromise Penalty (Q5) Rationale re Written Claim for Refund with the CIR (Q11) Period to Assess and the Suspension thereof (Q14) Compromise and Abatement (Q16) Extent of Power to Inquire Into Bank Deposits (Q17) Procedures on the legal remedies (Q18) Local Taxation and Real Property Taxation Fundamental Principles re Real Property Taxation (Q19a) Idle Land Tax (Q19b) Tariff and Customs Code Appeals from the Decision of the Collector (Q20a) Primary Jurisdiction (Q20b)

1999 Internal Revenue Taxes Donor's taxes on indirect gifts (Q3) Collection of Estate Taxes (Q4a) Sourcing of Income -Sale of Shares (Q7) Dividends earned by NRFC (Q9) Requisites - Exemption of Retirement and Separation Pay (Q10) Sourcing of Income -Services (Q11) Deductions - Interest on loan for capital expenditure (Q12) Deductions - Amortization of Goodwill (Q12)

Deductions - Reserves for Bad Debts (Q13) Deductions - Worthless Securities (Q13) Deductions - Interest v. Dividends (Q15) Tax Administration and Remedies Period to Assess for Amended Returns (Q1) Jurisdiction of the CTA (Q2**-read in rel. to RA 9282) Procedure in case of Protest (Q4b) What constitutes the "appealable decision"? (Q5) Third Party Verification (Q6) Extent of Power to Inquire Into Bank Deposits (Q17) Personality of Withholding Agent to File Claim for Refund (Q8)