tax bar exams

8/12/2019 Tax Bar Exams

1/85

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 1 of 73ANSWERS TO BAREXAMINATION QUESTIONSINTAXATION LAW* ARRANGED BY TOPIC *(19942006)Edited and Arranged by:ROMUALDO L. SEERIS IISilliman University - College ofLawFrom the ANSWERS TO BAR EXAMINATION QUESTIONSby the UP LAW COMPLEX & PHILIPPINE ASSOCIATIONOF LAW SCHOOLSJune 3, 2007Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 2 of 73FOREWARDThis work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may befreely copied and distributed, nevertheless, PERMISSION TO COPY from the editors isADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of thismaterial. It is primarily intended for allthose who desire to have a deeper understanding ofthe issues commonly touched by the Philippine Bar Examinations and its trend on specificallyon Taxation Laws. It is specifically intended for law students from the provinces who, very

often, are recipients of deliberately distorted notes from other unscrupulous law schools andstudents.I would like to seek the indulgence of the reader for some Bar Questions which are improperlyclassified under a topic and for some topics which are improperly or ignorantly phrased, forthe arranger is just a Bar Reviewee who has prepared this work while reviewing for the 2ndtime for the Bar Exams 2007 under time constraints and within his limited knowledge of thelaw. I would like to seek the readers indulgence also fora number of typographical errors inthis work.The ArrangerAnswers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 3 of 73Detailed Table of ContentsGENERAL PRINCIPLES........................................................................................................................... 8Basic Features: Present Income Tax System

(1996).................................................................................................... 8 Basic Stages or Aspects of Taxation(2006)................................................................................................................ 8 Collection of Taxes: Authority;Ordinary Courts (2001)............................................................................................... 8 Collection of Taxes:Prescription (2001) ..................................................................................................................... 8 Direct Tax vs.Indirect Tax (1994)................................................................................................................................ 8 Direct Taxvs. Indirect Tax (2000)................................................................................................................................ 8 DirectTax vs. Indirect Tax (2001)................................................................................................................................ 8Direct Tax vs. Indirect Tax (2006)................................................................................................................................9 Double Taxation (1997)...............................................................................................................................................9 Double Taxation: What Constitutes DT?(1996)........................................................................................................... 9 Double Taxation; Indirect DuplicateTaxation (1997) ................................................................................................... 9 Double Taxation; License Fee vs.Local Tax (2004)..................................................................................................... 9 Double Taxation; Methods ofAvoiding DT (1997) ....................................................................................................... 9 Imprescriptibility of TaxLaws (1997) .......................................................................................................................... 9 Power of Taxation:Equal Protection of the Law (2000) ............................................................................................ 10 Power ofTaxation: Inherent in a Sovereign State (2003) ........................................................................................... 10Power of Taxation: Legality; Local Govt Taxation(2003).......................................................................................... 10 Power of Taxation: Legislative in Nature(1994) ........................................................................................................ 10 Power of Taxation: Limitations of theCongress (2001) ............................................................................................. 10 Power of Taxation: Limitations:Passing of Revenue Bills (1997) .............................................................................. 11 Power of Taxation:Limitations; Power to Destroy (2000) .......................................................................................... 11 Power ofTaxation: Revocation of Exempting Statutes (1997) ................................................................................... 11Power of Taxation; Inherent in a Sovereign State (2005) ...........................................................................................11 Power of Taxation; Legislative in Nature (1996)


2/85

........................................................................................................ 12 Purpose of Taxation; Interpretation(2004)................................................................................................................ 12 Purpose of Taxation; Legislativein Nature (2004) ..................................................................................................... 12 Rule on Set-Off orCompensation of Taxes (1996)..................................................................................................... 12 Rule on Set-Offor Compensation of Taxes (2001)..................................................................................................... 12 Rule on Set-Off or Compensation of Taxes (2005)..................................................................................................... 13 Rule onSet-Off or Compensation on Taxes (2005).................................................................................................... 13 TaxAvoidance vs. Tax Evasion (1996)...................................................................................................................... 13Tax Avoidance vs. Tax Evasion (2000)......................................................................................................................13 Tax Exemptions: Nature & Coverage; Proper Party (2004)........................................................................................ 13 Tax Laws; BIR Ruling; Non-Retroactivity of Rulings(2004) ....................................................................................... 14 Tax Pyramiding; Definition & Legality (2006)............................................................................................................ 14 Taxpayer Suit; When Allowed(1996)......................................................................................................................... 14 Uniformity in the Collectionof Taxes (1998) ............................................................................................................. 14INCOME TAXATION................................................................................................................................ 14Basic: Allowable Deductions vs. Personal Exemptions (2001).................................................................................. 14 Basic: Meaning of Taxable Income (2000)................................................................................................................. 15 Basic: Principle of Mobi l iaSequuntur Personam (1994)............................................................................................ 15 Basic: ProperAllowance of Depreciation (1998) ....................................................................................................... 15 Basic:Sources of Income: Taxable Income (1998) .................................................................................................... 15Basic: Tax Benefit Rule (2003) ..................................................................................................................................

15 Basic; Basis of Income Tax (1996) ............................................................................................................................16 Basic; Gross Income: Define (1995)..........................................................................................................................16 Basic; Income vs. Capital (1995)...............................................................................................................................16 Basic; Schedular Treatment vs. Global Treatment (1994)......................................................................................... 16 Compensation; Income Tax: Due to ProfitableBusiness Deal (1995) ........................................................................ 16 Corporate: Income: Donors tax; TaxLiability (1996) ................................................................................................ 17 Corporate; Income Tax;Reasonableness of the Bonus (2006) .................................................................................. 17 Corporate; Income:Coverage; "Off-Line" Airline (1994)............................................................................................ 17 Corporate;Income: Coverage; "Off-Line" Airline (2005)............................................................................................ 17Dividends: Disguised dividends (1994)..................................................................................................................... 18Dividends; Income Tax; Deductible Gross Income (1999) .........................................................................................18

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 4 of 73Effect; Condonation of Loan in Taxation (1995)........................................................................................................ 18 Fringe Benefit Tax: Covered Employees(2001)......................................................................................................... 18 Fringe Benefit Tax: Employerrequired to Pay (2003) ................................................................................................ 19 Interest: DeficiencyInterest: define (1995 Bar).......................................................................................................... 19 Interest:Delinquency Interest: define (1995)............................................................................................................. 19ITR: Personal Income; Exempted to File ITR(1997)................................................................................................... 19 ITR; Domestic Corporate Taxation(1997).................................................................................................................. 19 ITR; Domestic CorporateTaxation (2001).................................................................................................................. 20 ITR; PersonalIncome: Two Employment (2001) ........................................................................................................ 20 ITR;Personal Income; GSIS Pension (2000) ............................................................................................................. 20ITR; Personal Income; Married Individual (2004)....................................................................................................... 20 ITR; Taxpayer; Liabilities; Falsified TaxReturn (2005) .............................................................................................. 20 Partnership: Income Tax (1995)................................................................................................................................ 21 Personal; Income Tax: Non-Resident Alien (2000) .................................................................................................... 21 Personal; Income Tax:Non-Resident Citizen (1999).................................................................................................. 21 Personal; IncomeTax: Tax-Free Exchange (1997)..................................................................................................... 22 Personal;Income Tax; Contract of Lease (1995) ....................................................................................................... 22Personal; Income Tax; Married Individual(1997)....................................................................................................... 22 Personal; Income Tax; RetiringAlien Employee (2005) ............................................................................................. 23 Personal; IncomeTaxation: Non-Resident Citizen (1997) .......................................................................................... 23 TaxableIncome: Illegal Income (1995 Bar)................................................................................................................ 23


3/85

Taxable or Non-Taxable; Income and Gains (2005)................................................................................................... 23 Withholding Tax: Non-Resident Alien(2001)............................................................................................................. 24 Withholding Tax: RetirementBenefit (2000).............................................................................................................. 24 Withholding Tax:Retirement Benefit (2000).............................................................................................................. 24 WithholdingTax: Royalty (2002) ............................................................................................................................... 24Withholding Tax; Coverage (2004)............................................................................................................................ 25 Withholding Tax; DomesticCorporation; Cash Dividends (2001) .............................................................................. 25 Withholding Tax;Income subject thereto (2001) ....................................................................................................... 25 WithholdingTax; Non-Resident Alien (1994)............................................................................................................. 25Withholding Tax; Non-Resident Corporation (1994).................................................................................................. 26 Withholding Tax; Reader's Digest Award(1998)........................................................................................................ 26 Withholding Tax; Time DepositInterest; GSIS Pension (1994) .................................................................................. 26DEDUCTIONS, EXEMPTIONS, EXCLUSIONS & INCLUSIONS.....................................................Deduction: Facilitation 26 Fees or "kickback"(1998)..................................................................................................... 26 Deductions: Ordinary BusinessExpenses (2004) .................................................................................................... 26 Deductions: Amount forBribe (2001)........................................................................................................................ 27 Deductions: CapitalLosses; Prohibitions (2003) ...................................................................................................... 27 Deductions:Deductible Items from Gross Income (1999).......................................................................................... 27Deductions: Income Tax: Donation: Real Property (2002)

........................................................................................ 27 Deductions: Non-Deductible Items; Gross Income(1999) ......................................................................................... 28 Deductions: Requisites; Deducibility of aLoss (1998) .............................................................................................. 28 Deductions; Income Tax: AllowableDeductions (2001)............................................................................................. 28 Deductions; VanishingDeduction; Purpose (2006) ................................................................................................... 28 Exclusion &Inclusion; Gross Receipts (2006) .......................................................................................................... 28Exclusion vs. Deduction from Gross Income(2001).................................................................................................. 28 Exclusions & Inclusions: Benefits onAccount of Injury (1995) ................................................................................. 29 Exclusions & Inclusions:Executive Benefits (1995).................................................................................................. 29 Exclusions &Inclusions; Assets; Resident Alien (2005) ........................................................................................... 29Exclusions & Inclusions; Benefits on Account of Death (1996)................................................................................. 30 Exclusions & Inclusions; Benefits on Account of Injury

(2005) ................................................................................. 30 Exclusions & Inclusions; Compensation forpersonal injuries or sickness (2003) ..................................................... 30 Exclusions & Inclusions; Facilitiesor Privileges; Military Camp (1995) ..................................................................... 30 Exclusions & Inclusions;Gifts over and above the Retirement Pay (1995) ................................................................ 31 Exclusions &Inclusions; ITR; 13th month pay and de minimis benefits (2005) ......................................................... 31Exclusions & Inclusions; ITR; Dividends received by a domestic corporation (2005)................................................ 31 Exclusions & Inclusions; ITR; Income realized from sale(2005)................................................................................ 31 Exclusions & Inclusions; ITR; Interest on deposits(2005)......................................................................................... 31 Exclusions & Inclusions; ITR; Proceeds oflife insurance (2005) ............................................................................... 32 Exclusions & Inclusions; LifeInsurance Policy (2003) .............................................................................................. 32Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 5 of 73Exemptions: Charitable Institutions (2000)............................................................................................................... 32 Exemptions: Charitable Institutions;Churches (1996) .............................................................................................. 32 Exemptions: Educationalinstitution (2004)............................................................................................................... 32 Exemptions: Gifts &Donations (1994) ...................................................................................................................... 32 Exemptions:Head of the Family: (1998)................................................................................................................... 33Exemptions: Non-Profit Educational Institutions (2000)............................................................................................ 33 Exemptions: Non-Profit Entity; AncillaryActivity & Incidental Operations (1994) ...................................................... 33 Exemptions: Non-Stock/ Non-Profit Association (2002) ............................................................................................ 34 Exemptions: Prize ofPeace Poster Contest (2000).................................................................................................... 34 Exemptions:Prizes & Awards; Athletes (1996) ......................................................................................................... 34Exemptions: Retirement Benefits: Work Separation (1999)....................................................................................... 34 Exemptions: Separation Pay (1994)


4/85

.......................................................................................................................... 35 Exemptions: Separation Pay(1995) .......................................................................................................................... 35 Exemptions: SeparationPay (2005) .......................................................................................................................... 36 Exemptions: StockDividends (2003) ........................................................................................................................ 36 Exemptions:Strictly Construed (1996) ..................................................................................................................... 36Exemptions: Terminal Leave Pay (1996)................................................................................................................... 36 Exemptions; Charitable Institutions(2006) ............................................................................................................... 36 Exemptions; Educationalinstitution (2004)............................................................................................................... 36 Exemptions;Exemptions are Unilateral in Nature (2004)........................................................................................... 37Exemptions; Govt Bonus, Gifts, & Allowances (1994).............................................................................................. 37 Exemptions; Personal & Additional Exemption(2006) .............................................................................................. 37 Exemptions; Roman Catholic Church;Limitations (2005) ......................................................................................... 38CAPITAL GAIN TAX................................................................................................................................ 38Capital Asset vs. Ordinary Asset(2003).................................................................................................................... 38 Capital Gain Tax; Nature(2001) ................................................................................................................................ 38 Ordinary Sale of aCapital Asset (1994)..................................................................................................................... 38 Sales of Shareof Stocks: Capital Gains Tax Return (1999) ....................................................................................... 39 TaxBasis: Capital Gains: Merger of Corporations (1994) ..........................................................................................39 Tax Basis: Capital Gains: Tax-Free Exchange of Property (1994)CO..R....P..O....R...A...T...I.O....N... .&... .P...A...R....T..N...E...R....S...H...I.P........................... .3..9.

...................................................................................... 39Bad Debts; Factors; Elements thereof(2004)............................................................................................................ 39 Condominium Corp.; Sale ofCommon Areas (1994) ................................................................................................. 40 Corporation; Sale;Creditable Withholding Tax (1994)............................................................................................... 40 Dividends:Withholding Tax (1999) ........................................................................................................................... 40 Effect:Dissolution; Corporate Existence (2004)........................................................................................................ 41Minimum Corporate Income Tax(2001)..................................................................................................................... 41 Minimum CorporateEISnTcoAmTeE T a&x ;D EOxeNmOpRtioSn (T2A00X1E) .S....................................................................................................................................................................................... 4..1.......................Donors Tax: Electio4n1 Contributions (1998)

.............................................................................................................. 41 Donors Tax; Basis for DeterminingGain (1995) ....................................................................................................... 41 Donors Tax; Dacion en Pago;Effect: Taxation (1997) .............................................................................................. 42 Donors Tax; Donationto a Sibling (2001)................................................................................................................. 42 Donors Tax;Donation to Non-Stock, Non-Profit Private Educational Institutions (2000)........................................... 42Donors Tax; Donation to Political Candidate (2003)................................................................................................. 43 Donors Tax; Donee or Beneficiary; Stranger(2000) ................................................................................................. 43 Donors Tax; Sale of shares of Stock & Sale of Real Property (1999)......................................................................... 43 Estate Tax: ComprehensiveAgrarian Reform Law (1994).......................................................................................... 43 Estate Tax: DonationMortis Causa (2001) ................................................................................................................ 43 Estate Tax:Donation Mortis Causa vs. Inter Vivos (1994) ......................................................................................... 44Estate Tax: Gross Estate: Allowable Deduction(2001).............................................................................................. 44 Estate Tax: Gross Estate: Deductions(2000) ............................................................................................................ 44 Estate Tax: Inclusion: ResidentAlien (1994) ............................................................................................................. 44 Estate Tax: Payment vs.Probate Proceedings (2004) ............................................................................................... 45 Estate Tax: Situs ofTaxation: Non-Resident Decedent (2000)................................................................................... 45 Estate Tax:Vanishing Deductions (1994).................................................................................................................. 45 EstateTax; Payment vs. Probate Proceedings (2005) ............................................................................................... 45BUSINESS TAXES ..................................................................................................................................45Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 6 of 73VAT: Basis of VAT(1996).......................................................................................................................................... 45 VAT:Characteristics of VAT (1996)........................................................................................................................... 45


5/85

VAT: Exempted Transactions(1996)......................................................................................................................... 45 VAT: Liable for Payment(1996) ................................................................................................................................ 46 VAT: Transactions"Deemed Sales (1997) ............................................................................................................... 46 VAT; CoveredTransactions (1998) ........................................................................................................................... 46 VAT;Exemption: Constitutionality (2004) ................................................................................................................. 46VAT; Non-VAT taxpayer; Claim for Refund (2006)..................................................................................................... 47REMEDIES IN INTERNAL REVENUE TAXES ...................................................................................47BIR: Assessment: Unregistered Partnership (1997).................................................................................................. 47 BIR: Collection of Tax Deficiency (1999)................................................................................................................... 47 BIR: Compromise; Conditions(2000)........................................................................................................................ 48 BIR: Compromise; Extentof Authority (1996) ........................................................................................................... 48 BIR: Compromise;Withholding Agent (1998)............................................................................................................ 48 BIR:Corporation: Distraint & Levy (2002) .................................................................................................................48 BIR: Court of Tax Appeals: Collection of Taxes; Grounds for Compromise (1996).................................................... 49 BIR: Criminal Prosecution: Tax Evasion(1998)......................................................................................................... 49 BIR: Extinction; Criminal Liabilityof the Taxpayer (2002).......................................................................................... 49 BIR: Fraudulent Return;Prima Facie Evidence (1998)............................................................................................... 50 BIR: FraudulentReturn; Prima Facie Evidence (2002)............................................................................................... 50 BIR:

Garnishment: Bank Account of a Taxpayer (1998).............................................................................................50 BIR: Pre-Assessment Notice not Necessary (2002)................................................................................................... 51 BIR: Prescriptive Period: Civil Action (2002)............................................................................................................. 51 BIR: Prescriptive Period; Assessment& Collection (1999)........................................................................................ 51 BIR: Prescriptive Period;Criminal Action (2002)....................................................................................................... 51 BIR: Secrecy ofBank Deposits Law (1998) ............................................................................................................... 52 BIR:Summary Remedy: Estate Tax Deficiencies (1998) ............................................................................................52 BIR: Unpaid Taxes vs. Claims for Unpaid Wages(1995)............................................................................................ 53 BIR; Assessment; Criminal Complaint(2005)............................................................................................................ 53 BIR; Authority; Refund or Creditof Taxes (2005) ...................................................................................................... 53 BIR; Compromise(2004)........................................................................................................................................... 53 BIR;

Compromise (2005)........................................................................................................................................... 54BIR; Deficiency Tax Assessment vs. Tax Refund / Tax Credit (2005)......................................................................... 54 BIR; Distraint; Prescription of the Action(2002)........................................................................................................ 54 BIR; False vs. Fraudulent Return(1996).................................................................................................................... 55 BIR; Jurisdiction; ReviewRulings of the Commissioner (2006)................................................................................. 55 BIR; PrescriptivePeriod; Assessment; Fraudulent Return (2002).............................................................................. 55 BIR;Prescriptive Period; Criminal Action (2006)....................................................................................................... 55BIR; Taxpayer: Civil Action & Criminal Action (2002)................................................................................................ 55 Custom: Violation of Tax & Custom Duties(2002)..................................................................................................... 56 Customs; Basis; Automatic Review(2002)................................................................................................................ 56 Delinquent Tax Return (1998)................................................................................................................................... 57 Jurisdiction: Customs vs.CTA (2000)...................................................................................................................... 57 LGU: Collection ofTaxes, Fees & Charges (1997) ..................................................................................................... 57 Tax Amnestyvs. Tax Exemption (2001) .................................................................................................................... 57Taxpayer: Administrative & Judicial Remedies(2000)............................................................................................... 57 Taxpayer: Assessment: Protest: Claimsfor refund (2000)......................................................................................... 58 Taxpayer: Assessment; Injunction(2004) ................................................................................................................. 58 Taxpayer: BIR Audit orInvestigation (1999).............................................................................................................. 58 Taxpayer: CityBoard of Assessment Decision; Where to appeal (1999).................................................................... 59Taxpayer: Claim for Refund; Procedure(2002).......................................................................................................... 59 Taxpayer: Deficiency Income Tax(1995)................................................................................................................... 59 Taxpayer: Exhaustion ofAdministrative Remedies (1997)......................................................................................... 60 Taxpayer: Failure


6/85

to Withheld & Remit Tax (2000)..................................................................................................... 60 Taxpayer:NIRC vs. TCC Remedies (1996)................................................................................................................. 60Taxpayer: Overwitholding Claim for Refund (1999)................................................................................................... 61 Taxpayer: Prescriptive Period: Suspended(2000)..................................................................................................... 61 Taxpayer: Prescriptive Period; Claimfor Refund (1997) ............................................................................................ 61 Taxpayer: Prescriptive Period;Claims for Refund (1994) .......................................................................................... 61 Taxpayer: PrescriptivePeriod; Claims for Refund (2004) .......................................................................................... 62Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 7 of 73Taxpayer: Protest against Assessment (1998).......................................................................................................... 62 Taxpayer: Protest against Assessment(1999) .......................................................................................................... 62 Taxpayer: Protest againstAssessment (1999) .......................................................................................................... 62 Taxpayer: Protest;Claim of Refund (1996)................................................................................................................ 63 Taxpayer;Appeal to the Court of Tax Appeals (2005)................................................................................................ 63Taxpayer; Claim for Tax Credits (2006)..................................................................................................................... 63 Taxpayer; Compromise afterCriminal Action (1998) ................................................................................................. 63 Taxpayer; Protestagainst Assessment; Donors Tax (1995) ..................................................................................... 64 Taxpayer;Withholding Agent; LOCAL & REAL PR COlPaiEmR oTf YTa Tx ARXefEuSnd.. .(.2..0..0..5.)......................................................................................................................................................................... .6.4.. . 64Local Taxation: Actual Use of Property (2002).......................................................................................................... 64 Local Taxation: Coverage

(2002)............................................................................................................................... 64 Local Taxation:Exemption; Real Property Taxes (2002) ........................................................................................... 65 LocalTaxation: Imposition of Ad Valorem Tax (2000) ............................................................................................... 65Local Taxation: Legality/ Constitutionality; Tax Ordinance (2003)............................................................................. 65 Local Taxation: Legality; Imposition of Real Property TaxRate (2002) ...................................................................... 65 Local Taxation: Power to Impose (2003)................................................................................................................... 65 Local Taxation:Remission/Condonation of Taxes (2004).......................................................................................... 66 LocalTaxation: Rule of Uniformity and Equality (2003)............................................................................................. 66Local Taxation; Situs of Professional Taxes(2005)................................................................................................... 66 Local Taxation; Special Levy on IdleLands (2005).................................................................................................... 66 Real Property Tax:Underground Gasoline Tanks (2003)........................................................................................... 67 Real

Property Tax; Requirements; Auction Sales of Property for Tax Delinquency (2006)......................................... 67 Real Property Taxation: Capital Asset vs. Ordinary Asset (1995).............................................................................. 67 Real Property Taxation: Capital Gains vs. OrdinaryGains (1998) .............................................................................. 67 Real Property Taxation: Coverage ofOrdinary Income (1998) ................................................................................... 67 Real Property Taxation:Exchange of Lot; Capital Gain Tax (1997)............................................................................ 68 Real PropertyTaxation: Exemption/Deductions; Donors Tax (1998)......................................................................... 68 RealProperty Taxation: Exemption: Acquiring New Principal Residence (2000)....................................................... 68 Real Property Taxation: Fundamental Principles (1997)............................................................................................ 69 Real Property Taxation: Principles &Limitations: LGU (2000)................................................................................... 69 Real Property Taxation:Property Sold is an Ordinary Asset (1998)........................................................................... 69 Real PropertyTaxation: Underground Gasoline Tanks (2001) ................................................................................... 69 RealProperty Taxation; Exempted Properties (2006) ................................................................................................69TARIFF AND CUSTOMS DUTIES ........................................................................................................Customs: Flexible 70T ariff Clause (2001).................................................................................................................. 70 Customs: Administrative vs. JudicialRemedies (1997) ............................................................................................ 70 Customs: Importation (1995).................................................................................................................................... 70 Customs: Jurisdiction;Seizure & Forfeiture Proceedings (1996) ............................................................................. 70 Customs: Kindsof Custom Duties (1995) ................................................................................................................. 70 Customs:Kinds of Custom Duties (1997) ................................................................................................................. 71Customs: Remedies of an Importer (1996)................................................................................................................ 71 Customs: Returning Residents:Tourist/Travelers (2003) .......................................................................................... 71 Customs: Seizure &


7/85

Forfeiture: Effects (1994) .......................................................................................................... 71 Customs: Stepsinvolving Protest Cases (1994)........................................................................................................ 72 Customs;Basis of Dutiable Value; Imported Article (2005) ....................................................................................... 72Customs; Countervailing Duty vs. Dumping Duty(2005)........................................................................................... 72 Customs; Taxability; Personal Effects(2005)............................................................................................................ 72OTHER RELATED MATTERS............................................................................................................... 73BIR: Bank Deposits Secrecy Violation(2000)............................................................................................................ 73 BIR: Secrecy of Bank DepositLaw (2003) ................................................................................................................. 73Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)


8/85

GENERAL PRINCIPLESBasic Features: Present IncomeTWahxa tS yasrete tmhe ( 1b9a9s6ic) features of the presentincome tax system"?SUGGESTED ANSWER:Our present income tax system can be said to have the following basic features:(a) It has adopted a COMPREHENSIVETAX SITUS by using the nationality,residence, and source rules. This makescitizens and resident aliens taxable on theirincome derived from all sources while nonresidentaliens are taxed only on their incomederived from within the Philippines.Domesticcorporations are also taxed on universal income while foreign corporations are taxed only on income from within.(b) The individual income tax system is mainly PROGRESSIVE IN NATURE in that it provides a graduated rates ofincome tax.Corporations in general are taxed at a flat rateof thirty five percent (35%) of net income.(c) It has retained MORE SCHEDULAR THAN GLOBAL FEATURES with respect toindividual taxpayers but hasmaintained a more global treatment on corporations.Note: The following might also be cited by the bar candidates as features of the income Itnadxi vsiydsuteaml c:ompensation income earners are taxed on modified Gross Income (Gross compensation income less personalexemptions). Self-employed and professionals are taxed on net income with deductions limited to seven items or in lieuthereofthe forty percent (40%) maximum deduction plus the personal exemptions. Corporations aregenerally taxed on netincome except for non-resident foreign corporations which are taxed on gross income.The income tax is generallyimposed via the selfassessment system or pay-as-you-file concept of imposing the tax although certain incomes.Including income of non-residents, are taxed on the pay-asyou-earn concept or the so called withholding tax.The corporate income tax is a one-layer tax in that distribution of profits to stockholders (except to nonresidents) are notsubject to income tax.Basic Stages or Aspects ofETnauxmateiroante (2 0th0e6) 3 stages or aspects of taxation. Explain each. (5%)

SUGGESTED ANSWER:The aspects of taxation are:(1) LEVYING the act of the legislature inchoosing the persons, properties, rights orprivileges to be subjected totaxation.(2) ASSESSMENT and COLLECTION Thisis the act of executing the law through theadministrative agencies ofgovernment.(3) PAYMENT the act of the taxpayer insettling his tax [email protected] 8 of 73Collection of Taxes: Authority;Ordinary May the Ccoouurrttss (e2n0j0o1in) the collection ofrevenue taxes? Explain your answer. (2%)SUGGESTED ANSWER:As a general rule, the courts have no authorityto enjoin the collection of revenue taxes. (Sec.218, NIRC). However, theCourt of TaxAppeals is empowered to enjoin the collectionof taxes through administrative remedieswhen collection couldjeopardize the interestof the government or taxpayer. (Section 11,RCAo l1le1c2t5io).n of Taxes:PMraeys ctrhiep

tcioonlle (c2ti0o0n1 o) f taxes be barred byprescription? Explain your answer. (3%)SUGGESTED ANSWER:Yes. The collection of taxes may be barred byprescription. The rescriptive periods forcollection of taxes are governed bythe taxlaw imposing the tax. However, if the tax lawdoes not provide for prescription, the right ofthe government to collect taxes becomesimprescriptible.

Direct Tax vs. IndirectTDaisxti n(1gu9i9s4h) a direct from an indirecttSaUxG.G ESTED ANSWER:A DIRECT TAX is one in which the taxpayer who pays the tax is directly liable therefor,that is, the burden of paying the taxfallsdirectly on the person paying the tax.An INDIRECT TAX is one paid by a person whois not directly liable therefor, andwho maytherefore shift or pass on the tax to anotherperson or entity, which ultimately assumesthe tax burden. (Maceda vMacaraig, 197SCRA 771) Direct Tax vs. IndirectTAmaxo n(2g0 t0h0e) taxes imposed by the Bureau ofInternal Revenue are income tax, estate anddonor's tax, value-added tax, excise tax, otherpercentage taxes, and documentary stamptax. Classify these taxes into direct andindirecttaxes, and differentiate direct fromISnUdGiGreEcSTt EtDa xAeNsS.W (E5R%: )Income tax, estate and donor's tax areconsidered as direct taxes. On the otherhand, value-added tax, excise tax,otherpercentage taxes, and documentary stamptax are indirect taxes.DIRECT TAXES are demanded from the verypersonwho, as intended, should pay the taxwhich he cannot shift to another; while anINDIRECT TAX is demanded in hefirstinstance from one person with theexpectation that he can shift the burden tosomeone else, not as a tax but as a partoftDhier epcutr cThaaxse v psr.i cIen.d irectTDaisxti n(2gu0i0s1h) direct taxes from indirect taxes,and give an example for each one. (2%)SUGGESTED ANSWER:DIRECT TAXES are taxes wherein both theincidence (or liability for the payment of thetax) as well as the impact orburden of thetax falls on the same person. AnAnswers to the BAR: Taxation 1994-2006 (Arranged by Topics)example ofthis tax is income tax where theperson subject to tax cannot shift the burdenof the tax to another person.INDIRECT


9/85

TAXES, on the other hand, are taxeswherein the incidence of or the liability for thepayment of the tax falls on one personbut theburden thereof can be shifted or passed on toanother person. Example of this tax is thevalue-added tax.ALTERNATIVE ANSWER:A direct tax is a tax which is emanded fromthe person who also shoulders the burden ofthe tax. Example: corporate andindividualincome tax.An indirect tax is a tax which is emandedfrom one person in the expectation andintention that heshall indemnify himself atthe expense of another, and the burden finallyresting on the ultimate purchaser orconsumer.Example: value added tax.Direct Tax vs. IndirectTDaisxti n(2gu0i0s6h) "direct taxes" from "indirecttaxes." Give examples. (5%)SUGGESTED ANSWER:DIRECT TAXES are demanded from the veryperson who should pay the tax and which hecan not shift to another. AnINDIRECT TAX isdemanded from one person with theexpectation that he can shift the burden tosomeone else, not as atax but as part of thepurchase price. Examples of direct taxes arethe income tax, the estate tax and thedonor's tax. Examples of indirect taxes arethe value-added tax, the percentage tax andtDhoeu ebxlcei se tax onexciseable articles.ITsa dxoautbiolen t (a1x9at9io7n) a valid defense against thelegality of a tax measure?SUGGESTED ANSWER:No, double taxation standing alone and notbeing forbidden by our fundamental law is nota valid defense against thelegality of a taxmeasure (Pepsi Cola v. Tanawan, 69 SCRA460). However, if double taxation amounts toa1 idni rtehcattdthuep lsicaamtee tsauxbajteioctn ,i s taxed twice when itshould be taxed but once,2in a fashion that both taxes areimposed for thesame purpose3by the same taxing authority, within the samejurisdiction or taxing district,4for the same taxable period and5for the same kind or character of a taxthen itbecomeslegallyobjectionable forbeingoppressive and inequitable.

Double Taxation: WhatXC,o an sletistsuotre osf DaT p?r o(p1e9r9ty6,) pays real estate taxon the premises, a real estate dealer's taxbased on rental receipts and income tax onthe rentals. X claims that this isdoubletSaUxGaGtEioSTnE?D D AeNcSiWdEeR. :9 There is no double taxation. DOUBLE TAXATION means taxing for the same tax period the same thing or activity twice,when it should be taxed but once, by the sametaxing authority for the same purpose and with the same kind or characterof tax. The REAL ESTATE TAX is a tax on property; the REAL ESTATE DEALER'S TAX is a tax on theprivilege to engage in business; while theINCOME TAX is a tax on the privilege to earnan income. These taxes areimposed bydifferent taxing authorities and are essentiallyof different kind and character (Villanueva vs.CDiotyu obfl eIloTialox,a 2t6io SnC;R IAn d5i7r8e)c.t DuplicateTWahxeant iaonn i t(e1m9 9o7f )in come is taxed in thePhilippines andthe same income is taxed inanother country, is there a case of doubletSaUxGaGtEioSTnE?D ANSWER:Yes, but it is only a case of indirect duplicatetaxation which is not legally prohibitedbecause the taxes are imposed bydifferenttaxing authorities.

Double Taxation; License Fee vs.LAo mcauln iTcaipxa l(i2ty0, 0B4B), has an ordinance which requires that all stores, restaurants, and otherestablishments selling liquor should pay afixed annual fee of P20.000. Subsequently,the municipal board proposed anordinance imposing a sales tax equivalent to 5% of theamount paid for the purchase or consumption of liquor in stores, restaurants and otherestablishments. The municipalmayor, CC,refused to sign the ordinance on the groundthat it would constitute double taxation. Is therefusal of the mayorjustified? Reason briefly.(5%)SUGGESTED ANSWER:No. The refusal of the mayor is not justified.The impositions are of different nature andcharacter. The fixed annual fee is inthenature of a license fee imposed through theexercise of police power while the 5% tax onpurchase or consumption is a local taximposed through the exercise oftaxingpowers. Both a license fee and a tax may beimposed on the same business or occupation,or for selling the samearticle an this is not inviolation of the rule against double taxation{Campania General de Tabacos deFilipinos v. City of Manila, 8 SCRA 367[1963]).Double Taxation; Methods ofAWvhoaitd ainreg t DheT u(s1u9a9l 7m)e thods of avoiding theoccurrence of doubletaxation?SUGGESTED ANSWER:The usual methods of avoiding theoccurrence of double taxation are:1Allowing reciprocal exemption either by lawor bytreaty;2Allowance of tax credit for foreigntaxespaid;3Allowance of deduction for foreign taxespaid; and4Reduction of thePhilippine tax rate.Note: Any three of the methods shall begiven full credit.Imprescriptibility of TaxTLaaxwess (w1e9r9e7 g)e nerally imprescriptible;statutes, however, may provideotherwise.State the rules that have been adopted onthis score by -Answers to the BAR: Taxation 1994-2006 (Arranged byTopics)(a) The National Internal(Rbe)v Tehneu eT aCroifdf ea;n d Customs(Cco)d Teh;e a nLodc al Government Code

SAUnGsGwEeSrT:E D ANSWERS:The rules that have been adopted onprescription are as follows:


10/85

(a) National Internal Revenue Code -The statute of limitation for ssessment of taxif a return is filed is within three (3)yearsfrom the last day prescribed by law for thefiling of the return or if filed after the last day,within three years from dateof actual filing. Ifno return is filed or the return filed is false orfraudulent, the period to assess is within TENYEARS fromdiscovery of the omission, fraudor falsity.The period to collect the tax is withinTHREE YEARS from date of assessment.Inthe case, however, of omission to file or ifthe return filed is false or fraudulent, theperiod to collect is within TEN YEARSfromdiscovery without need of an assessment.(b) Tariff and Customs Code - It doesnot express any general statute of limitation;it provided, however, that "whenarticles haveentered and passed free of duty or finaladjustment of duties made, with subsequentdelivery, such entry and passage free of dutyor settlement of duties will, after theexpiration of ONE (1) YEAR, from thedate ofthe final payment of duties, in the absence offraud or protest, be final and conclusive uponall parties, unless the liquidation of Import(ecn)t ry wLaos cmale rGeolyv teernntmateivnet" C(Soedce 1 -6 0 L3o, cTaClC).taxes, fees, or charges shall be assessedwithin FIVE (5) YEARS from the date theybecame due. In case of fraud orintent toevade the payment of taxes, fees or chargesthe same maybe assessed within TEN YEARSfrom discovery of thefraud or intent to evadepayment. They shall also be collected eitherby administrative or judicial action within FIVE(5)YEARS from date of assessment (Sec. 194,LGC).Power of Taxation: Equal ProtectionAonf tEhxee Lcuatwiv e(2 O00rd0e)r was issued pursuant tolaw, granting tax and duty incentives onlytobusinesses and residents within the "securedarea" of the Subic Economic Special Zone,and denying said incentives tothose who livewithin the Zone but outside such "securedarea". Is the constitutional right to equalprotection of the lawviolated by theExecutive Order? Explain. (3%)SUGGESTED ANSWER:No. Equal protection of the law clause issubject to reasonable classification.(C1la) s sreifsicta toionn ,s tuob bsteavnatilaidl , dmisutsint ctions, (2) begermane to the purpose of the law, (3) not belimited to existing conditions only, (4)

applyequally to all members of the same [email protected] 10 of 73There are substantial differences betweenbiginvestors being enticed to the "secured area"and the business operators outside that are inaccord with the equalprotection clause thatdoes not require territorial uniformity of laws.The classification applies equally to all theresidentindividuals and businesses within the"secured area". The residents, being in likecircumstances to contributing directly totheachievement of the end purpose of the law,are not categorized further. Instead, they aresimilarly treated, both inprivileges grantedand obligations required. (Tiu, et al, v. Courtof 4npeals, et al, G.R. No. 127410, January 20,1999)Power of Taxation: Inherent in aSWohvye irse tihgen p Sotwaetre t (o2 t0a0x 3c)o nsidered inherentin a sovereign State? (4%)SUGGESTED ANSWER:It is considered inherent in a overeign Statebecause it is a necessary attribute ofsovereignty. Without this power nosovereignState can exist or endure. The power to taxproceeds upon the theory that the existenceof a government is anecessity and thispower is an essential and inherent attributeof sovereignty, belonging as a matter of rightto every

independent state or government.No sovereign state can continue to existwithout the means to pay its expenses; andthatfor those means, it has the right tocompel all citizens and property within itslimits to contribute, hence, the emergenceofthe power to tax. (51 Am. Jur.,Taxation 40).Power of Taxation: Legality; LocalGMoayv Ct oTnagxreastsio, nu n(d2e0r0 t3h)e 1987 Constitution,abolish the power to tax oflocalSgUoGvGeErnSTmEDe nAtNsS?W (E4R%: )No. Congress cannot abolish what isexpressly granted by the fundamental law.The only authority conferred to Congressis toprovide the guidelines and limitations on thelocal government's exercise of the power totax (Sec. 5, Art. X, 1987Constitution).Power of Taxation: LegislativeiTnh eN Saetucrreet a(r1y9 o9f4 F)i nance, uponrecommendation of the Commissioner ofInternal Revenue, issued aRevenueRegulation using gross income as the taxbase for corporations doing business in the SPUhGilGipEpSiTnEeDs A.NIsS WthEeR : Revenue Regulation valid?The regulation establishing gross income asthe tax base for orporations doingbusinessin the Philippines (domestic as well asresident foreign) isnotvalid.Thisisnolongerimplementation of the law butactually itconstitutes legislation because among thepowers that are exclusivelywithinthelegislative authority to taxisthepowertodetermine -the amount of the tax. (See 1Cooley 176-184). Certainly, if the tax is limitedto gross incomewithout deductions of thesecorporations, this is changing the amount ofthe tax as said amount ultimately depends onthetaxable base.Power of Taxation: Limitations of theCCoonnggrreessss, a(f2te0r0 m1)u publichearingandconsultations with varioussectors of society,came to the conclusion that it will be good forthe country to have only oneAnswers to the BAR: Taxation1994-2006 (Arranged by Topics)system of taxation by centralizing theimposition and collection of all taxes in thenational government. Accordingly, it isthinking of passing a law that would abolishthe taxing power of all localgovernmentunits. In your opinion, would such a law bevalid under the present Constitution? Explainyour answer. (5%)SUGGESTED ANSWER:


11/85

No. The law centralizing the mposition andcollection of all taxes in the nationalgovernment would contravenetheConstitution which mandates that: . . . "Eachlocal government unit shall have the power tocreate their own sources ofrevenue and tolevy taxes, fees, and charges subject to suchguidelines and limitations as Congress mayprovide consistentwith the basic policy oflocal autonomy." It is clear that Congress canonly give the guidelines and limitations on theexercise by the local governments of thepower to tax but what was granted by thefundamental law cannot be withdrawnbyCongress.Power of Taxation: Limitations: Passingof Revenue Bills (1997)The House of Representatives introduced HB7000 which envisioned to levy a tax onvarious transactions. After the billwasapproved by the House, the bill was sent tothe Senate as so required by the Constitution.In the upper house, insteadof a deliberationon the House Bill, the Senate introduced SB8000 which was its own version of the sametax. The Senatedeliberated on this SenateBill and approved the same. The House Billand the Senate Bill were then consolidated intheBicameral Committee. Eventually, theconsolidated bill was approved and sent tothe President who signed the same.Theprivate sectors affected by the new lawquestioned the validity of the enactment onthe ground that the constitutionalprovisionrequiring that all revenue bills shouldoriginate from the House of Representativeshad been violated. Resolve theissue.SUGGESTED ANSWER:There is no violation of the constitutionalrequirement that all revenue bills shouldoriginate from the House ofRepresentatives.What is prohibited is for the Senate to enactrevenue measures on its own without a billoriginating fromthe House. But once therevenue bill was passed by the House andsent to the Senate, the latter can pass its ownversionon the same subject matter consonantwith the latter's power to propose or concurwith amendments. This follows from thecoequalityof the two chambers of Congress(Tolentino v. Secretary of Finance, GRNo. 115455, Oct. 30, 1995).Power of Taxation: Limitations; PowerJtuos tDicees tHroolmy e(2s 0o0n0ce) said: The power to tax isnot the power to destroy while this Court(the Supreme Court) sits." Describe theSpUoGwGeErS tToE Dt aAxN SaWnEdR

:i ts limitations. (5%)The power tax is an inherent power of thesovereign which is exercised through thelegislature, to impose burdens uponsubjectsand objects within its Jurisdiction for thepurpose of raising revenues to carry out thelegitimate objects ofgovernment. Theunderlying basis for its exercise isgovernmental necessity for without it nogovernment can exist norendure.Accordingly, it has the11 of 73broadest scope of all the powers ofgovernment because in the absenceoflimitations, it is considered as unlimited,plenary, comprehensive and supreme. Thetwo limitations on the power oftaxation arethe inherent and constitutional limitationswhich are intended to prevent abuse on theexercise of the otherwiseplenary andunlimited power. It is the Court's role to see toit that the exercise of the power does nottProanwsegrre ssotfhe sTea lximaittiaotnio:ns .Revocation ofExempting Statutes (1997)"X" Corporation was the recipient in 1990 oftwo tax exemptions both from Congress, onelaw exempting the comany'sbond issuesfrom taxes and the other exempting thecompany from taxes in the operation of itspublic utilities. The two lawsextending the taxexemptions were revoked by Congress beforetheir expiry dates. Were the revocationsconstitutional?

SUGGESTED ANSWER:Yes. The exempting statutes are both grantedunilaterally by Congress in the exercise oftaxing powers. Since taxation isthe rule andtax exemption, the exception, any taxexemption unilaterally granted can bewithdrawn at the pleasure of thetaxingauthority without violating the Constitution(Mactan Cebu International AirportAuthority v, Marcos, G.R No. 120082,SNeepittheemr bofe rt h1e1s,e 1 w99er6e). issued by the taxing authority in a contract lawfully entered by itso that theirrevocation would not constitutean impairment of the obligations of contracts.ALTERNATIVE ANSWER:No. The withdrawal of the tax exemptionamounts to a deprivation of property withoutdue process of law, henceunconstitutional.Power of Taxation; Inherent in aSDoesvcerribeeig nt hSeta tpeo w(2e0r0 5o)f taxation. Mayalegislative body enact laws to raise revenuesin the absence of a constitutional provisiongranting said body the power totax? Explain.SUGGESTED ANSWER:Yes, the legislative body may enact laws evenin the absence of a constitutional provisionbecause the power to tax isinherent in thegovernment and not merely a onstitutionalgrant. The power of taxation is an essentialand inherent attributeof sovereigntybelonging as a matter of right to everyindependent government without beingexpressly granted by thepeople. (Pepsi-ColaBottling Company of theP hilippines, Inc. v.Municipality ofTanauan, Leyte, G.R. No. L-31156,February27,1976)Taxation is the inherent power of a State tocollect enforced proportional contribution tosupport the expenses ofgovernment. Taxationis the power vested in the legislature toimpose burdens or charges upon persons andproperty in order to raise revenue for publicpurposes.The power to tax is so unlimited in force andso searching in extentthat courts scarcelyventure to declare it isAnswers to the BAR: Taxation 1994-2006 (Arranged by Topics)subject to anyrestrictions whatever, exceptsuch as rest in the discretion of the authoritywhich exercises it. (Tio v. VideogramRegulatoryBoard, G.R. No. L-75697, June 18, 1987) Sopotent is the power to tax that it was onceopined that "the power


12/85

to tax involves thepower to destroy."(C.J. Marshall in McCulloch v. Maryland, 4Wheat, 316 4 L. Ed. 579, 607)Power ofTaxation; LegislativeiWnh Nata tuisr et h(1e9 9n6a)t ure of the power oftSaUxGaGtEioSTnE?D ANSWER:The POWER TO TAX is an attribute of sovereignty and is inherent in the State. It is apower emanating from necessitybecause itimposes a necessary burden to preserve theState's sovereignty (Phil Guarantee Co. vs.Commissioner, L-22074, April 30, 1965). It isinherently legislative in nature and characterin that the power of taxation can onlybeeAxLTeErRcNisAeTdIV Eth ArNoSuWgEhR t: he enactment of law.The nature of the power of taxation refers toits ownlimitations such as the requirementthat it should be for a public purpose, that itbe legislative, that it is territorial and thatitshould be subject to international comity.Purpose of Taxation;IWnhteicrhp oref tthaeti ofonll o(w20in0g4 p) ropositions may nowbe untenable: 1) The court should construe alawgranting taxexemption strictly against the taxpayer. 2)The court should construe a law granting amunicipal corporation thepower to tax mosts3t)r ictly.T he Court of Tax Appeals hasjurisdiction over decisions of the ustomsCommissioner in casesinvolving liability forc4u) sTthoem Cs oduurtti eosf .A ppeals has jurisdiction toreview decisions of the Court of TaxAppeals.5) The Supreme Court has jurisdiction toreview decisions of the Court of Appeals.Justify your answer or choicebriefly. (5%)SUGGESTED ANSWER:2. The court should construe a law granting amunicipal corporation the power to tax mostTsthriisc tplyr.o position is nowuntenable. The basicrationale for the grant of tax power to localgovernment units is to safeguard theirviability and self-sufficiency by directlygranting them general and broad tax powers(Manila Electric Company v. Province ofLaguna et. al., 306 SCRA 750 [1999]).Considering that inamuch as the power to taxmay be exercised by local legislativebodies,no longer by valid congressional delegationbut by direct authority conferred by theConstitution, in interpretingstatutoryprovisions on municipal fiscal powers, doubtswill, therefore, have to be resolved in favor ofmunicipal corporations(City Government ofSan Pablo, Laguna v. Reyes, 305 SCRA 353[1999]). This means that the court must adopta libera

construction of a law granting amunicipal corporation the power to tax.Note: If the examinee chose propositionno. 4 ashis answer, it should be give fullcredit considering that the present CTAAct (R.A. No. 9282) has made the CTA acoequaljudicial body of the Court ofAppeals. The question "Which of thefollowing [email protected] 12 of 73maynow be untenable" may lead theexaminee to choose a proposition which isuntenable on the basis of the new lawdespitethe cut-off date adopted by theBar Examination Committee. R.A. No.9282 was passed on March 30, 2004.Purpose of Taxation; LegislativeiTna xNeast aurree a (s2s0e0ss4e)d for the purpose ofgenerating revenue to be used for publicneeds. Taxation itself isthe power by whichthe State raises revenue to defray theexpenses of government. A jurist said that atax is what we pay for civilization.In ourjurisdiction, which of the following statementsmay be erroneous: 1) Taxes arepecuniary innature. 2) Taxes are enforced charges andcontributions. 3) Taxes are imposed onpersons and property withinthe territorial jurisdiction of a State. 4) Taxesare levied by the executive branch of thegovernment. 5) Taxes are assessedaccording toa reasonable rule of apportionment. Justify youranswer or choice briefly. (5%)SUGGESTED ANSWER:

A. 4. Taxes are levied by the executivebranch of government. This statement iserroneous because levy refers to the actofimposition by the legislature which is donethrough the enactment of a tax law. Levy isan exercise of the power to taxwhich isexclusively legislative in nature andcharacter. Clearly, taxes are not levied by theexecutive branch of government.(JVPC v.Albay, 186 SCRA 198 [1990]).Rule on Set-Off or CompensationXof i sT tahxee osw (n1e9r9 o6f) a residentialot situated atQuirino Avenue, Pasay City. The lot has anarea of 300 square meters. On June 1, 1994,100 square metersof said lot owned by X wasexpropriated by the government to be used inthe widening of Quirino venue, forP300.000.00representing the estimatedassessed value of said portion. From 1991 to1995, X, who is a businessman, has notbeenpaying his income taxes. X is now beingassessed for the unpaid income taxes in thetotal amount of P150,000.00. Xclaims hisincome tax liability has already beencompensated by the amount of P300.000.00which the government oweshim for theexpropriation of his property. Decide.SUGGESTED ANSWER:The income tax liability of X can not becompensated with the amount owed by theGovernment as ompensation for hispropertyexpropriated, taxes are of distinct kind, essenceand nature than ordinary obligations. Taxes anddebts cannot bethe subject of compensationbecause the Government and X are not mutuallycreditors and debtors of each other and aclaimfor taxes is not a debt, demand, contract, orJudgment as is allowable to be set off. (Franciavs. IAC. G.R 76749,June28. 1988)

Rule on Set-Off or CompensationoMfa Ty aax teasx p(a2y0e0r1 w) ho has pending claims forVAT input credit or refund, set-off said claimsagainst his other tax liabilities? Explain yourSaUnGsGwEeSrT.E (D5 A%N)S WER:Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)No. Set-off is available only if both obligationsare liquidated and demandable. Liquidateddebts are those where the exactamountshave already been determined. In the instantcase, the claim of the taxpayer for VAT refundis still pending and theamount has still to bedetermined. A fortiori, the liquidatedobligation of the taxpayer to the governmentcan not, therefore,be set-off against the unliquidated claim which thetaxpayer conceived to exist in his favor. (Philex MiningCorp. v. CIR,GR No. 125704, August 29,1998).


13/85

ALTERNATIVE ANSWER:No. Taxes and claims for refund cannot be thesubject of set-off for the simple reason thatthe government and thetaxpayer are notcreditors and debtors of each other. There isamaterial distinction between a tax and a claimfor refund.Claims for refunds just like debtsare due from the government in its corporatecapacity, while taxes are due tothegovernment in its sovereign capacity. (PhilexMining Corp. v. CIR, GR No. 25704,ARuugleu sotn 2 9S,e 1t-9O9f8f)o. r CompensationoMfa yTa xtaexse (s2 0b0e5 ) the subject of set-off orcompensation? Explain.SUGGESTED ANSWER.No, taxes cannot be the subject of set-off orcompensation for the following reasons: 1)The lifeblood theory requires thatthere shouldbe no unnecessary impediments to thecollection of taxes to make available to thegovernment the wherewithato meet itslegitimate objectives; and2) The payment of taxes is not a contractualobligation but arises out of a duty to pay,andin respect of the positive acts of government,regarding the making and enforcing of taxes,the personal consent of theindividualtaxpayer is not required. (Republic v.Mambulao Lumber Co., G.R. No. L-17725,February 28, 1962; Caltex v.Commission onAudit, G.R. No. 92585, May 8, 1992; andPhilex v. Commissioner of Internal Revenue,G.R. No. 125704, August 28, 1998)However, there is a possibility that set-off mayarise, if the claims against thegovernment havebeen recognized and an amount has alreadybeen appropriated for that purpose. Where bothclaims havealready become overdue anddemandable as well as fully liquidated.Compensation takes place by operation of lawunderArt. 1200 in relation to Articles 1279 and1290 of the New Civil Code.(Domingo v. Garlitos, G.R. No. L-18994, June29,1963)Rule on Set-Off or CompensationoCnan T aaxne sa s(s2e0s0sm5)e nt for a local tax be thesubject of set-off or compensation against afinal judgment for asum of money obtainedby the taxpayer against the local governmentt ShUaGtG mESaTEdDe AtNhSeW aEsRs: essment?Explain.No, taxes cannot be the subject of set-off evenwhen there is a final judgment for a sum ofmoney against the localgovernment makingthe assessment. The government and thetaxpayer are not the "mutual creditors anddebtors" of each

other who can avail of theremedy of compensation which Art. 1278(CivilCode)[email protected] 13 of 73referring toRepublic of the Philippines v.Mambulao Lumber Co., G.R. No. L-17725,February 28, 1962; and Francia v.Intermediate Appellate Court, G.R. No. L-67649, June 28,1998. There is, however, legal basis to state that anassessment for a local tax may be the subjectof set-off or compensation against a finaljudgment for a sum of moneyobtained by thetaxpayer against the local government byoperation of law where the local governmentand the taxpayer arein their own rightreciprocally debtors and creditors of eachother, and that the debts are both due anddemandable. This isconsistent with the rulingin Domingo v. Garlitos, G.R. No. L-18994, June29,1963, relying upon Arts. 1278 and 1279ofthe Civil Code, where these provisions wereapplied in relation to the national tax, andsThaoxul dA thveoriedfaonrecebe avpsp. l icTaablxe to a local tax.EDvisatisnigouni s(h19 9t6a)x evasion from axSaUvGoGidEaSnTEcDe .ANSWER:Tax evasion is a scheme used outside ofthose lawful means to escape tax liabilityand, when availed of, itusually subjects thetaxpayer to further or additional civil orcriminal liabilities. Tax avoidance, on theother hand, is a taxsaving device within themeans sanctioned by law, hence legal.Tax Avoidance vs. Tax

EMvr.as iPoans c(u2a0l0's0 ) income from leasing hisproperty reaches the maximum rate of taxunder the law. Hedonated one-half of his saidproperty to a non-stock, non-profiteducational institution whose income andassets areactually, directly and exclusivelyused for educational purposes, and thereforequalified for tax exemption under ArticleXIV,Section 4 (3) of the Constitution and Section30 (h) of the Tax Code. Having thustransferred a portion of his saidasset, Mr.Pascual succeeded in paying a lesser tax onthe rental income derived from his property.Is there tax avoidanceor tax evasion?Explain. (2%)SUGGESTED ANSWER:There is tax avoidance. Mr. Pascual hasexploited a fully permissive alternativemethod to reduce his income taxbytransferring part of his rental income to a taxexempt entity through a donation of one-half of the income producingproperty. Thedonation is likewise exempt from the donor'stax. The donation is the legal meansemployed to transfer theincidence of incometTaaxx o nE xtheem rpentitoanl isn:c oNmaet.u re & Coverage;APsro paenr iPnacertnyt iv(2e00fo4r) investors, a law waspassed giving newly established companies incertain economic zone exemption from alltaxes, duties, fees, imposts and other chargesfor a period of three years. ABC Corp. wasorganized and was granted suchincentive. Inthe course of business, ABC Corp. purchasedmechanical equipment from XYZ Inc.XNYoZrm Inacll.y c,ltahime ss,a lheo iws esvuebrj,e tcht atto sain scael eits stoalxd. theequipment to ABC Corp. which is tax exempt,XYZAnswers to the BAR: Taxation 1994-2006 (Arranged by Topics)should not be liable to pay the sales tax. Isthis claimtenable? (5%)SUGGESTED ANSWER:A. No. Exemption from taxes is personal innature and covers only taxes for which thetaxpayer-grantee is directly liable.The salestax is a tax on the seller who is not exemptfrom taxes. Since XYZ Inc. is directly liable forthe sales tax and notax exemption privilegeis ever given to him, herefore, its claim thatthe sale is tax exempt is not tenable. A taxexemption isconstrued in strictissimi juris andit can not be permitted to exist upon vagueimplications (Asiatic Petroleum Co., Ltd.V.Llanes, 49Assume a rPghuiel n4d6o6 [t1h9a2t6 X])Y.Z had to and didpay the sales tax. ABC Corp. later foundout,however, that XYZ merely shifted or passedon to ABC the amount of the sales tax byincreasing the purchase price.ABC Corp. nowclaims for a refund from the Bureau ofInternal Revenue in an amount correspondingto the tax passed onto it since it is taxexempt. Is the claim of ABC Corp.meritorious? (5%)


14/85

SUGGESTED ANSWER;B. No. The claim of ABC Corp. is notmeritorious. Although the tax was shifted toABC Corp. by the seller, what is paid by itisnot a tax but part of the cost it has assumed.Hence, since ABC Corp. is nota taxpayer, ithas no capacity to file a claimfor refund. Thetaxpayer who can file a claim for refund is theperson statutorily liable for the payment oftThaex t aLxa.w s;BIR Ruling; Non-RetroactivityoDfu eR utoli nagns u (n2c0e0rt4a)i nty whether or not a newtax law is applicable toprinting companies,DEF Printers submitted a legal query to theBureau of Internal Revenue on that issue. TheBIRissuedarulingthatprintingcompaniesare not covered by the new law. Relying onthis ruling, DEF Printers did not pay saidtax.Subsequently, however, the BIR reversed theruling and issued a new one stating that thetax covers printingcompanies. Could the BIRnow assess DEF Printers for back taxescorresponding to the years before thenewrSuUlGinGgE?S TREeD aAsNoSnW EbRri:e fly. (5%)No. Reversal of a ruling shall not be given aretroactive application if said reversal will beprejudicial to the taxpayer.Therefore, the BIRcan not assess DEF printers for back taxesbecause it would be violative of the principleof non-retroactivity of rulings and doing sowould result in grave injutice to the taxpayerwho relied on the first ruling in goodfaith(Section 246, NIRC; CIR v. Burroughs, Inc.,1T4a2x S PCRyrAa 3m2i4d[i1n9g8;6 ]D).e finition &LWehgaat liist yt a(x2 0p0yr6a)m iding? What is its basis in law?(S5U%GG)E STED ANSWER:Tax Pyramiding is the imposition of a tax uponanother tax. It has no basis in fact or in law (People v.andiganbayan, G.R.No. 152532,August 16, 2005). There is also tax pyramidingwhen sales taxes are incorrectly applied togoods severaltimes from production to [email protected] 14 of 73sale, thus, shifting the tax burden tothe ultimateconsumer.(NOTABENE: This concept pertains to the VAT lawwhich is excluded from the bar coverage,Guidelines for2006 Bar Examinations, June 15,2006)Taxpayer Suit; WhenAWlhloewn e dm (a1y9 9a6) taxpayer's suit beaSlUloGwGeEd?S TED ANSWER:

A taxpayer's suit may only be allowed whenan act complained of, which may include alegislative enactment, irectlyinvolves theillegal disbursement of public funds derivedfrom taxation (Pascual vs. Secretary ofPublic Works, 110 Phil.331).Uniformity in the Collection ofETxapxleasin ( 1th9e9 8r)e quirement of uniformity as alimitation in the impositionand/or collectionSoUf GtaGxEeSTsE. D( 5A%NS|W ER:Uniformity in the imposition and/or collection oftaxes means that all taxable articles, or kinds ofproperty of the same classshall be taxed at thesame rate. Therequirement of uniformity iscomplied with when the tax operates with the sameforceand effect in every place where the subject ofit is found (Churchill & Tail v. Conception, 34 Phil.969). It does not meanthat lands, chattels,securities, income, occupations, franchises,privileges, necessities and luxuries shall beassessed atthe same rate. Different articles maybetaxed at different amounts provided that the rate isuniform on the same classeverywhere with allpeople at all times. Accordingly, singling out oneparticular class for taxation purposes does notinfringe the requirement of uniformity.FIRST ALTERNATIVE ANSWER:The criteria is met when the tax laws operateequally and uniformly on all persons undersimilar circumstances. All persons

are treated inthe same manner, the conditions not beingdifferent, both in privileges conferred andliabilities imposed.Uniformity in taxation alsorefers to geographical uniformity. FavoritismaSnEdC pOrNefDer eAnLcTeE iRs NnoAtT aIlVloEw eAdN. SWER:A tax is deemed to have satisfied theuniformity rule when it operates with thesame force and effect in every place wherethe subject maybe found. (Phil. Trust& Co. v.Yatco, 69 Phil. 420).

INCOME TAXATIONBasic: Allowable Deductions vs. PersonalExemptions (2001)Distinguish Allowable Deductions fromPersonal Exemptions. Give an example of anallowable deduction andanotherexampleforSpUeGrsGoEnSTaEl De xANeSmWpEtRio: n. (5%)The distinction between allowable deductionsand personal exemptions are as follows:a. As to amount Allowabledeductions generally refer to actualexpenses incurred in the pursuit of trade,business or practice of professionwhileAnswers to the BAR: Taxation 1994-2006 (Arranged by Topics)personal exemptions are arbitraryamounts allowedby law.As to nature Allowable deductions constitutebusiness expenses while personal exemptionspertain to personalexpenses.As to purpose Deductions are allowed toenable the taxpayer to recoup his cost of doingbusiness while personal exemptions are allowedto cover personal, family and living expenses.As to claimants Allowable deductions can beclaimed by all taxpayers, corporate or otherwise,while personal exemptions can be claimed onlyby individual taxpayers.Basic: Meaning of TaxableIWnhcaotm ies (m20e0a0n)t by taxable income?(S2U%GG)E STED ANSWER:TAXABLE INCOME means the pertinent itemsof gross income specified in the Tax Code,less the deductions and/orpersonal andadditional exemptions, if any, authorized forsuch types of income by the Tax Code orother special laws.(Sec. 31, NIRC of 1997)


15/85

Basic: Principle of Mobi l ia SequunturPWehrasto nisa mth e(1 p9r9in4c)i ple of mobilia sequunturpersonam in incometaxation?SUGGESTED ANSWER:Principle of Mobilia Sequuntur Personam inincome taxation refers to the principle thattaxation follows the property or person whoshall be subject to the tax.Basic: Proper Allowance of1DWephraet cisia tthieo np r(o1p9e9r 8a)ll owance for depreciation ofany property used in trade or business? [3%)2What is the annual depreciation of a depreciablefixed asset with a cost of P100,000 and anestimated useful life of 20 years and salvagevalue of P 10,000 after its useful life?SUGGESTED ANSWER:1. The proper allowance of depreciationof any propertyused in trade o businessrefers to the reasonable allowance fortheexhaustion, wear and tear (includingreasonable allowance for obsolescence) ofsaid property. The reasonableallowance shallinclude, but not limited to, an allowancecomputed under any of the followingmethods:(a) straight-line(mbe)thodd; eclining-balance(mc)e thods;u m-of-years-digit(mde) thoda; nayn dot her method which may beprescribed by theSecretary of Financeupon recommendation of theCommissioner of Internal Revenue (Sec.34(F). NIRC).2. The annualdepreciation of the depreciablefixed asset may be computed on the straightlinemethod which will allow the taxpayertodeduct an annual depreciation of Php4,500,arrived at by dividing the depreciable value(Php l00.000-Phpl0.000) ofPhp90,000 by theestimated useful life (20 years).NOTE: The bar canddate may give a differentfigure depending on themethod he used incomputing [email protected] 15 of 73The facts given in the problem aresufficient tocompute the annual depreciation either under thedeclining-balance method or sum-of-years-digitmethod. Anyanswer arrived at by usinganyoftherecognized methods should be given full credit. Itis suggested that no questionrequiringcomputation should be given in future bareBxaasmicin:a Stioonusr.c es of Income: TaxableIFnrocmom weha(1t 9so9u8r)c es of incomearethefollowingpersons/corporationstaxablebythePhilippinegovernment? 2) Citizen of the

Philippinesresiding therein; [1%] 3) Non-resident citizen;[1%1 4) An individual citizen of the Philippineswho isworking andderiving income from abroad asan overseas contract worker; [1%] 5) An alienindividual, whether a resident or not ofthePhilippines; [1%] 6) A domestic corporation;[1%] SUGGESTED ANSWER: (Section 23, NIRC of1997) 1) A citizen of the Philippines residingtherein istaxable on allincome derived from sourceswithinandwithoutthePhilippines. 2) Anonresident citizen is taxable only on incomederivedfrom sources within the Philippines.3)AnindividualcitizenofthePhilippineswho is working and deriving income fromabroadas an overseas contract worker istaxable only on income from sources withint4h)e PhilAipnp ainlieesn. individual, whethera residentor not of the Philippines, is taxable only onincome derived from sources within theP5h) ilippiAne dso. mesticcorporation is taxable on allincome derived from sources within andwithout the Philippines.Basic: Tax Benefit(Rau) le (2W0h0a3t) i s meant by the "tax benefitSruUlGeG"E?S TED ANSWER:(a) TAX BENEFIT RULE states that thetaxpayer is obliged to declare as taxableincome subsequent recovery of bad debtsinthe year they were collected to the extent ofthe tax benefit enjoyed by the taxpayer whenthe bad debts were written-offand claimed asa deduction from income. It alsoappliestotaxespreviouslydeducted from gross incomebut which were

subsequently refunded orcredited. The taxpayer is also required toreport as taxable income the subsequent taxrefund ortax credit granted to the extent ofthe tax benefit the taxpayer enjoyed whensuch taxes were previously claimedasdeduction from income.(b) Give an illustration of the applicationof the tax benefit rule.SUGGESTED ANSWER:(b) X Company has a business connectedreceivable amounting to P100,000.00 from Ywho was declared bankrupt by acompetentcourt. Despite earnest efforts to collect thesame, Y was not able to pay, prompting XCompany to write-off theentire liability.During the year of write-off, the entireamount was claimed as a deduction forincome tax purposes reducingthe taxable netincome of X Company to only P1,000,000.00.Three years later, YAnswers to the BAR: Taxation 1994-2006(Arranged by Topics)voluntarily paid his bligation previouslywritten-off to X Company. In the year ofrecovery, the entireamount constitutes partof gross income of X Company because it wasable to get full tax benefit three years earlier.Basic; Basis of IncomeTXa xis ( 1e9m9p6lo)y ed as a driver of a orporatelawyer and receives a monthly salaryofP5,000.00 with free board and lodging witha1nW ehqaut iwvaillle bnet tvhaelu bea osfis P o1f, 5X0's0 .i0n0co. me tax?Why2Will your answer in question (a) be the same ifX's employer is an bstetrician? Why?SUGGESTED ANSWERS:1) The basis of Xs income tax would dependon whether his employer is an employee or apracticing corporate lawyer.Ifhis employer is an employee, the basis of X'sincome tax is 6,500.00 equivalent to the total ofthe basic salary a

tax bar exams

Documents