REVIEWER ON TAXATION
contributions
BY: ATTY. VICTORINO C. MAMALATEO
CHAPTER I: GENERAL PRINCIPLES AND LIMITATIONS
ON THE POWER OF
TAXATION
Q: Describe the power of taxation. May a legislative
body enact laws to raise revenues in the absence
of a constitutional provision granting said body the
power to tax? Explain.
A: The power of taxation is inherent in the State,
being an attribute of sovereignty. As an incident of
sovereignty, the power to tax has been described
as unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is
to be found only in the responsibility of the
legislature which imposes the tax on the
constituency who are to pay it (Mactan Cebu Int’l
Airport Authority v. Marcos)
Q: It is an attribute of sovereignty
A: The power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of
right to every independent government, without
being expressly conferred by the people (Pepsi-
Cola Bottling Co v Mun of Tanauan, Leyte)
Q: Why is the power to tax considered inherent in a
sovereign State?
A: It is considered inherent in a sovereign State
because it is a necessary attribute of sovereignty.
Without this power, no sovereign State can exist nor
endure. The power to tax proceeds upon the theory
that the existence of a government is a necessity.
The power to tax is an essential and inherent
attribute of sovereignty, belonging as a matter of
right to every independent State. No sovereign
State can continue to exist without the means to
pay its expenses, and for those means, it has the
right to compel all citizens and property within its
limits to contribute; hence, the emergence of
power to tax.
Q: May Congress under the 1987 Constitution,
abolish the power to tax of local governments?
A: No, Congress cannot abolish what is expressly
granted by the fundamental law. The only authority
conferred to Congress is to provide guidelines and
limitations on the local government’s exercise of
the power to tax (Sec. 5, Art. X, 1987 Constitution)
Q: In our jurisdiction, which of the following
statements may be erroneous?
Justify your answer.
• Taxes are pecuniary in nature
• Taxes are enforced charges and
• Taxes are imposed on persons and property
within the territorial jurisdiction of a State
• Taxes are levied by the executive branch of
government
• Taxes are assessed according to a
reasonable rule of apportionment A: Taxes
are levied by the executive branch of
government. This statement is erroneous
because “levy” refers to the act of
imposition by the legislature which is done
through the enactment of a tax law. Levy is
an exercise of the power to tax, which is
exclusively legislative in nature and
character. Clearly, taxes are not levied by
the executive branch of government. (NPC
v Albay)
Q: Enumerate the 3 stages or aspect of taxation.
Explain each.
A: The 3 stages or aspects of taxation are:
• Levy – this refers to the enactment of a law
by Congress imposing a tax.
• Assessment and collection – this is the act of
administration and implementation of the
tax law by the executive department
through the administrative agencies
• Payment – this is the act of compliance by
the taxpayer including such options,
schemes or remedies as may be legally
available to him
Q: Discuss the meaning and the implications of the
following statement: “Taxes are the lifeblood of
government and their prompt and certain
availability is an imperious need”
A: The phrase “taxes are the lifeblood of
government, etc.” expresses the underlying basis of
taxation which is governmental necessity, for
indeed, without taxation, a government can
neither exist nor endure. Taxation is the
indispensable and inevitable price for civilized
society; without taxes, the government would be
paralyzed. This phrase has been used to justify the
validity of the laws providing for summary remedies
in the collection of taxes. In Valley Trading Co. v CFI,
when the Supreme Court ruled that the damages
that may be caused to the taxpayer by being
made to pay the taxes cannot be said to be a
irreparable as it would be against the government’s
inability to collect taxes.
Q: 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
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A: The power to tax is an inherent power of the
sovereign, 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 as 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.
Q: For failure to comply with certain corporate
requirements, the stockholders of ABC Corp. were
notified by the SEC that the corporation would be
subject to involuntary dissolution. The stockholders
did not do anything to comply with the
requirements, and the corporation was dissolved.
Can the stockholders be held personally liable for
the unpaid taxes of the dissolved corporation?
Explain briefly.
A: No. As a general rule, stockholders cannot be
held personally liable for the unpaid taxes of a
dissolved corporation. The rule prevailing under our
jurisdiction is that a corporation is vested by law with
a personality that is separate and distinct from
those persons composing it (Sunio v NLRC).
However, stockholders may be liable for the unpaid
taxes of a dissolved corporation, if it appears that
the corporate assets have passed into their hands
(Tan TIong Bio v CIR). Likewise, when the
stockholders have unpaid subscriptions to the
capital of the corporation, they can be made liable
for unpaid taxes of the corporation.
Q: Among the taxes imposed by the BIR are income
tax, estate tax and donor’s tax, value added tax,
excise tax, other percentage taxes and
documentary stamp tax. Classify these taxes into
direct and indirect taxes, and differentiate direct
from indirect taxes.
A: Income tax, estate tax and donor’s tax are
considered as direct taxes. On the other hand, VAT,
excise tax, OPT and DST are indirect taxes. A direct
tax is demanded from the very person who, as
intended should pay the tax which he cannot shift
to another, while an indirect tax is demanded in the
first instance from one person with the expectation
that he can shift the burden to someone else, not
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as a tax but as part of the purchase price (Maceda
v. Macaraig).
Q: The police power, the power to tax and the
power of eminent domain are inherent powers of
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.
A: The police power may be exercised for the
purpose of requiring licenses for which licenses fees
may have to be paid. The amount of the license
fees for the regulation of useful occupations should
only be sufficient to pay for the cost of the license
and the necessary expense of police surveillance
and regulations. For non-useful occupations, the
license fee may be sufficiently high to discourage
the particular activity sought to be regulated. It is
clear from the foregoing that police power may not
be exercised by itself alone for the purpose of
raising taxes. However, police power may be
exercised jointly with the power of taxation for the
purpose of raising revenues (Lutz v. Araneta).
Q: “X” is the owner of a residential lot situated at
Quirino Avenue, Pasay City. The lot has an area of
300 square meters. On June 1, 1994, 100 sq meters
of said lot owned by “X” was expropriated by the
government to be used in the widening of Quirino
Avenue for P300,000.00, representing the estimated
assessed value of said portion. From 1991 to 1995,
“X”, who is a businessman, has not been paying his
income tax. X is now being assessed for the unpaid
income taxes in the total amount of P150,000.00. X
claims his income tax liability has already been
compensated by the amount of P300,000.00 which
the government owes him for the expropriation of
his property. Decide.
A: The income tax liability cannot be compensated
with the amount owed by the government as
compensation for his expropriated property. Taxes
are distinct kind, essence and nature than ordinary
obligations. Taxes and debts cannot be subject of
compensation because the government and X are
not mutually creditors and debtors of each other
and a claim for taxes is not a debt, demand
contract or judgment as it is allowable to be set off
(Francis v. IAC).
Q: A municipality, BB, has an ordinance which
requires that all stores, restaurants and other
establishments selling liquor should pay a fixed
annual fee of P20,000.00. Subsequently, the
municipal board proposed an ordinance imposing
a sales tax equivalent to 5% of the amount paid for
the purchase or consumption of liquor in stores,
restaurants and other establishments. The municipal
mayor, CC, refused to sign the ordinance on the
ground that it would constitute double taxations. Is
the refusal of the mayor justified? Reason briefly.
A: No. The refusal of the mayor is not justified. The
impositions are of different nature and character.
The fixed annual fee is in the nature of a license fee
imposed through the exercise of police power,
while the 5% tax on purchase or consumption is a
local tax imposed through the exercise of taxing
powers. Both a license fee and a tax may be
imposed on the same business or occupation, or for
selling the same article and this is not in violation of
the rule against double taxation (Compania
General de Tobacos de Filipinas v. City of Manila).
Q: (a) Is double taxation a valid defense against the
legality of 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 unusual
methods of avoiding the occurrence of double
taxation?
A: (a) No, double taxation standing alone and not
being forbidden by our fundamental law is not a
valid defense against legality of a tax measure
(Pepsi-Cola Bottling Company of the Phil v. Mun of
Tanauan, Leyte). 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
for the same purpose by the same taxing authority,
within the same jurisdiction or taxing district, for the
same taxable period and for the same kind or
character of a tax, then it becomes legally
objectionable for being oppressive and
inequitable.
(b) Yes, but it is only a 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
law or by treaty;
2. Allowance of tax credit for foreign taxes
paid;
3. Allowance of deduction for foreign
taxes paid; and
4. Reduction of the Philippine tax rate
Q: X, a lessor of a property, pays real estate tax on
the premises, a real estate dealer’s tax based on
rental receipts and income tax on the rentals. He
claims that this is double taxation. Decide
A: 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
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once, by the same taxing authority for the same
purpose and with the same kind or character of tax.
The real estate tax is a tax on property; the real
estate dealer’s tax is a tax on the privilege to
engage in business; while the income tax is a tax on
the privilege to earn an income. These taxes are
impose by different taxing authorities and are
essentially of different kind and character.
Q: Why are tax exemptions strictly construed
against the taxpayer?
A: Tax exemptions are strictly construed against the
taxpayer because such provisions are highly
disfavored and may almost be said to be odious to
the law (Manila Electric Company
v. Vera). The exception contained in the tax
statutes must be strictly construed against the one
claiming the exemption because the law does not
look with favor on tax exemptions, they being
contrary to the lifeblood theory which is underlying
basis for taxes. The natural rule is that everyone in
the state must contribute to the support of
government. Exemptions are in derogation of
sovereignty; hence, they must be strictly construed
against the person claiming it (Commissioner v.
Guerrero).
Q: As an incentive for investors, a law was passed
giving newly established companies in certain
economic zone 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. (a) Normally, the sale is subject to a sales
tax. XYZ, Inc. claims, however, that since it sold the
equipment to ABC Corp., which is tax exempt, XYZ
should not be liable to pay sales tax. Is this claim
tenable? (b) Assume arguendo that XYZ had to and
did pay the sales tax. ABC Corp. later found,
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 BIR in an amount corresponding to the tax
passed on to it, since it is tax exempt. Is the claim of
ABC Corp meritorious?
A: (a) 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 XYX, Inc.
is directly liable for the sales tax and no tax
exemption privilege is ever given to it, therefore its
claim that the sale is exempt is not tenable. A tax
exemption is construed in strictissimi juris and it
cannot be permitted to exist upon vague
implications (Asiatic Petroleum Co Ltd v Llanes).
(b) No. The claim of ABC Corp is not meritorious.
Although the tax was shifted to ABC Corp. by the
seller, what is paid by it is not a tax but part of the
cost it has assumed. The taxpayer who can file a
claim for refund is the person statutorily liable for the
payment of the tax. Since ABC Corp. is not said
taxpayer, it has no capacity to file a claim for
refund.
Q: Due to an uncertainty w/n a new tax law is
applicable to printing companies, DEF Printers
submitted a legal query to the BIR on that issue. The
BIR issued a ruling that printing companies are not
covered by the new law. Relying on this ruling, DEF
Printers did not pay said tax.
Subsequently, however, the BIR reversed the ruling
and issued a new one stating that the tax covers
printing companies. Could the BIR now assess DEF
for back taxes corresponding to the years before
the new ruling? Reason briefly.
A: No. The reversal of a ruling shall not be given a
retroactive application, if said reversal will be
prejudicial to the taxpayer. Therefore, BIR cannot
assess DEF Printers for back taxes because it would
be violative of the principle of non-retroactivity of
ruling and doing so would result in grave injustice to
the taxpayer who relied on the first ruling in good
faith.
Q: In view of the unfavorable balance of payment,
condition and the increasing budget deficit, the
President of the Philippines, upon recommendation
of the NEDA, issues during a recess of Congress, an
EO imposing an additional duty on all imports at the
rate of 10% ad valorem. The EO also provides that
the same shall take effect immediately. Ricardo
San Miguel, an importer, questions the legality of
the EO on the grounds that only Congress has the
authority to fix the rates of import taxes and in any
event, such an EO can take effect only 30 days after
promulgation and the President has no authority to
shorten said period. Are objections of Mr. San
Miguel tenable?
A: No, the objections are not tenable as the EO
cannot take effect immediately. Being an external
law and having the effect of law, the EO cannot
become effective without publication, a
requirement of due process (Tañada v Tuvera).
Q: Mr. Pascual’s income tax from leasing his
property reaches the maximum rate of tax under
the law. He donated ½ of his said property to non-
stock, non-profit educational institution whose
income and assets are actually, directly and
exclusively used for educational purposes, and
therefore qualified for tax exemption under Article
XIV, Section 4(3) of the Constitution and Section 3(h)
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of the Tax Code. Having thus transferred a portion
of his said asset, Mr. Pascual succeeded in paying
a lesser tax on the rental income derived from his
property. Is there tax avoidance or tax evasion?
Explain.
A: There is tax avoidance. Mr. Pascual exploited a
legally permissive alternative method to reduce his
income tax for transferring part of his rental income
to a tax exempt entity through a donation of one
half of the income producing property. The
donation is likewise exempt from the donor’s tax.
The donation is the legal means employed to
transfer the incidence of income tax on the rental
income.
Q: Distinguish tax evasion from tax avoidance.
A: Tax evasion is a scheme used outside of those
lawful means to escape tax liability and, when
availed of, it usually subjects the taxpayer to further
or additional civil or criminal liabilities. Tax
avoidance, on the other hand, is a tax saving
device within the means sanctioned by law; hence,
lega.
Q: When may a taxpayer suit be allowed?
A: A taxpayer’s suit may only be allowed when an
act complained of, which may include a legislative
enactment, directly involves the illegal
disbursement of public funds derived from taxation
(Pascual v. Secretary of Public Works). No money
shall be paid out of the Treasury, except in
pursuance of an appropriation made by law. (Sec
29, Art VI, 1987 Constitution).
Q: May taxes be the subject of set-off or
compensation? Explain.
A: No. Taxes cannot be the subject of set-off or
compensation for the following reasons: (1) taxes
are of distinct kind, essence and nature, and these
impositions cannot be classed in merely the same
category as ordinary obligations; (2) the applicable
laws and principles governing each are peculiar,
not necessarily common, to each; and (3) public
policy is better subserved if the integrity and
independence of taxes are maintained (Republic
v. Mambulao Lumber Company).
Q: Can an assessment for a local tax be the subject
of set-off or compensations against a final
judgment for a sum of money obtained by the
taxpayer against the local government that made
the assessment? Explain.
A: No. Taxes and debts are of different nature and
character; hence, no set-off or compensation
between these two different classes of obligations
is allowed. The taxes assessed are the obligation of
the taxpayer arising from law, while the money
judgment against the government is an oblgation
arising from contract, whether express or implied.
Inasmuch as taxes are not debts, it follows that the
two obligations are not susceptible to set-off or
legal compensation. It is only when the local tax
assessment and final judgment are both overdue,
demandable, as well as fully liquidated may set-off
or compensation be allowed.
CHAPTER II: INHERENT AND CONSTITUTIONAL
LIMITATIONS
Q: To provide means for rehabilitation and
stabilization of the sugar industry so as to prepare it
for the eventuality of the loss of the quota allocated
to the Philippines resulting from the lifting of US
sanctions against an African country, Congress
passes a law increasing the existing tax on the
manufacture of sugar on a graduated basis. All
collections made under the law are to accrue to a
special fund to be spent only for the purpose
enumerated therein, among which are to place the
sugar industry in a position to maintain itself and
ultimately to insure its continued existence despite
the loss of that quota, and to afford laborers
employed in the industry a living wage and to
improve their working conditions. X, a sugar
planter, files a suit questioning the constitutionality
of the law alleging that the tax is not for public
purpose as the same is being levied exclusively for
the aid and support of the sugar industry. Decide
the case.
A: The suit filed by the sugar planter questioning the
constitutionality of the sugar industry stabilization
measure is untenable. Taxation is no longer merely
for raising revenue to support the existence of the
government; the power may also be exercised to
carry out legitimate objects of the government. It is
a legitimate object of government to protect is
local industry on which the national economy
largely depends. Where the aim of the tax measure
is to achieve such a governmental objective, the
tax imposition can be said to be for a public
purpose (Gaston v Republic Bank)
Q: The Municipality of Malolos passed an ordinance
imposing a tax on any sale or transfer of real
property located within the municipality at arate of
¼ of 1% of the total consideration of such
transaction. X sold a parcel of land in Malolos which
he inherited from his deceased parents and refused
to pay the aforesaid tax. He instead filed
appropriate case asking that the ordinance be
declared null and void since such a tax can only
be collected by the national government, as in fact
he has paid BIR the required CGT. The Municipality
countered that under the Constitution, each local
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government is vested with the power to create its
own sources of revenue and to levy taxes, and it
imposed the subject tax in the exercise of said
constitutional authority. Resolve the controversy.
A: The ordinance passed by the Municipality of
Malolos imposing a tax on the sale-or transfer of real
property is void. The Local Tax Code only allows
provinces and cities to impose a tax on the transfer
of ownership of real property (Secs 7 and 23, Local
Tax Code). Municipalities are prohibited from
imposing said tax that provinces are specifically
authorized to levy (Sec 22, Local Tax Code). While it
is true that the Constitution has given broad powers
of taxation to LGU’s, this delegation, however, is
subject to such limitations as may be provided by
law (Sec 5, Art X, 1987 Constitution).
Q: Ace Tobacco Corp bought a parcel of land
situated in Pateros and donated it to the Municipal
Gov’t of Pateros for the sole purpose of devoting
the said land as a relocation site for the less
fortunate constituents of said municipality. In
accordance therewith, the Municipal Government
of Pateros issued to the occupants/beneficiaries
Certificates of Award giving them the respective
areas where their houses are erected. Through
Ordinance No. 2, Series of 1998, the said municipal
government ordained that the lots awarded to the
awardees/donees be finally transferred and
donated to them. Determine the tax consequence
of the foregoing dispositions with respect to the
Municipal Government of Pateros. A: The
Municipality of Pateros is not subjected to any
donor’s tax on the value of land it subsequently
donated, it being exempt from taxes as a political
subdivisions of National Government.
Q: Mr. Cortez is a non-resident alien based in HK.
During the calendar year 1999, he came to the
Philippines several times and stayed in the country
for an aggregate period of more than 180 days.
How will Mr. Cortez be taxed on his income derived
from sources within the Philippines?
A: Mr. Cortez, being a non-resident alien individual
who has stayed for an aggregate period of more
than 180 days during the calendar year 1999, hsall
for that taxable year be deemed to be a non-
resident alien doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject
to an income tax in the same manner as an
individual citizen and a resident alien individual, on
taxable income received from all sources within the
Philippines (Sec. 25[A][1], NIRC). Thus, he is allowed
to avail of the itemized deductions including the
personal and additional exemptions but subject to
the rule on reciprocity on the personal exemptions
(Sec. 34[A] to [J] and [M] in relation to Sec. 25[A][1]
and Sec. 35[D], NIRC).
Q: X, a multinational corporation doing business in
the Philippines, donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines. What is the tax liability, if any, of X
corporation?
A: Foreign corporations effecting a donation are
subject to donor’s tax only if the property donated
is located in the Philippines. Accordingly, donation
of a foreign corporation of its own shares of stocks
in favor of resident employees is not subject to
donor’s tax. However, if 85% of the business of the
foreign corporation is located in the Philippines or
the shares donated have acquired business situs in
the Philippines, the donation may be taxed in the
Philippines subject to the rule of reciprocity.
Q: The President of the Philippines and the Prime
Minister of Japan entered into an executive
agreement in respect of a loan facility to the
Philippines from Japan, whereby it was stipulated
that interest on loans granted by private Japanese
financial institutions to private financial institutions in
the Philippines shall not be subject to Philippine
income taxes. Is this tax exemption valid? Explain.
A: Yes. The tax exemption is valid because an
executive agreement has the force and effect of a
treaty under the provision of Revenue Code.
Taxation is subject to international comity.
Q: An EO was issued pursuant to law, granting tax
and duty incentives only to businesses and
residents within the “secured area” of the Subic
Economic Special Zone, and denying said
incentives to those who live within the Zone but
oustside such “secure area”. Is the constitutional
right to equal protection of the law violated by the
EO? Explain.
A: No. Equal protection of the law clause is subject
to reasonable classification. Classification, to be
valid, must: (a) rest on substantial distinctions; (b) be
germane to the purpose of the law; (c) not be
limited to existing conditions only; and (d) apply
equally to all member of the same class. There are
substantial differences between big investors being
in the “secured area” and the business operations
outside the “secured area”.
Q: Explain the requirement of uniformity as a
limitation in the imposition and/or collection of
taxes.
A: The tax is uniform when it operates with the same
force and effect in every place where the subject
of it is found. It does not signify an intrinsic, but simply
a geographical uniformity. Uniformity does not
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require the same treatment; it simply requires
reasonable basis for classification.
Q: The City of Makati, in order to solve the traffic
problem in its business districts, decided to impose
a tax, to be paid by the driver, on all private cars
entering the city during peak hours from 8am to
9am from Mondays to Fridays, but it exempts those
cars carrying more than two occupants, excluding
the driver. Is the ordinance valid? Explain.
A: The ordinance is in violation of the rule of
uniformity and equality, which requires that all
subjects or objects of taxation, similarly situated
must be treated alike and must not be classified in
an arbitrary manner. In the case at bar, the
ordinance exempts cars carrying more than two
occupants from the said ordinance. Furthermore,
the ordinance imposes the tax only on private cars
and exempts public vehicles from the imposition of
the tax, although both contribute to the traffic
problem. There exists no substantial standard used
in the classification used by the City of Makati.
Another issue is the fact that the tax is imposed on
the driver of the vehicle and not on the registered
owner thereof. The ordinance does not only violate
the requirement of uniformity; the same is also unjust
because it places the burden on someone who
had no control over the route of the vehicle. Hence,
the ordinance is invalid for violating the rules of
uniformity and equality as well as for being unjust.
Q: X Corporation was the recipient in the 1990 of two
tax exemptions both from Congress, one law
exempting the company’s bond issues from taxes
and the other exempting the company from taxes
in the operation of its public utilities. The two laws
extending the tax exemptions were revoked by
Congress before their expiry dates. Were the
revocations constitutional?
A: Yes. The exempting statutes are both granted
unilaterally by Congress in the exercise of taxing
powers. Since taxations is the rule and tax
exemption is the exception, any tax exemption
unilaterally granted can be withdrawn at the
pleasure of the taxing authority without violating
the Constitution (Mactan Cebu Int’l Airport
Authority v Marcos).
Q: A law was passed granting tax exemption to
certain industries and investments for a period of
fiver years. But the three years later, the law was
repealed. With the repeal, the exemptions were
considered revoked by the BIR, which assessed the
investing companies for unpaid taxes effective on
the date of th repeal of the law. NPC and KTR
companies questioned the assessments on the
ground that, having made their investments in full
reliance with the period of exemption granted by
the law, its repeal violated their constitutional right
against the impairment of the obligations and
contracts. Is the contention of the companies
tenable or not?
Reason.
A: The contention is not tenable. The exemption
granted is in the nature of a unilateral tax
exemption. Since the exemptions is spontaneous on
the part of the legislature and no service or duty or
other remunerative conditions have been imposed
on the taxpayers receiving the exemption, it may
be revoked at will by the legislature. What
constitutes an impairment of the obligation of
contracts is the revocation of an exemption which
is founded on a valuable consideration because it
takes the form and essence of a contract.
Q: ART VI Section 28(3) of the 1987 Constitution
provides that charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries and all lands,
buildings, and improvements actually, directly and
exclusively used for religious, charitable or
educational purposes shall be exempt from
taxation. (a) To what kind of tax does this exemption
apply? (b) Is proof of actual use necessary for tax
exemption purposes under the Constitution? A: (a)
This tax exemption applies only to property taxes.
What is exempted is not the institution itself but the
lands, buildings and improvements actually,
directly and exclusively used for religious, charitable
and educational purposes.
(b) Yes, because tax exemptions are strictly
construed against the taxpayer. There must be
evidence to show that the taxpayer has complied
with the requirements for exemption. Furthermore,
RPT is based on use and not on ownership; hence,
the same rule must also be applied for RPT
exemptions.
Q: The Roman Catholic Church owns a 2-hectare lot
in a town in Tarlac province. The southern side and
middle part are occupied by the Church and a
convent, the eastern side, by a school run by the
Church itself, the southern side, by some
commercial establishments, while the rest of the
property, in particular, the northwestern side, is idle
or unoccupied. May the Church claim tax
exemption on the entire land? Decide with reasons.
A: No, The portions of land occupied and used by
the Church, convent and school run by the church
are exempt from real property taxes, while the
portion of the land occupied by commercial
establishments and the portion, which is idle, are
subject to real property taxes. The usage of the
7
property and not the ownership is the determining
factor whether or not the property is taxable.
Q: The Constitution exempts from taxation
charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques and non-
profit cemeteries and lands, buildings and
improvements actually, directly and exclusively
used for religious, charitable and educational
purposes. Mercy Hospital is a 100-bed hospital
organized for charity patients. May said hospital
claim exemption from taxation under the above-
quoted constitutional provision? Explain.
A: Yes. Mercy Hospital can claim exemption from
taxation under the provision of the Constitution, but
only with respect to real property taxes provided
that such real properties are used actually, directly
and exclusively for charitable purposes.
Q: In 1991, Imelda gave her parents a Christmas gift
of P100,000.00 and a donation of P80,000.00 to her
parish church. She also donated a parcel of land for
the construction of a building to the PUP Alumni
Association, a non-stock, nonprofit organization.
Portions of the building shall be leased to generate
income for the association. Is the donation to the
parish church subject to tax?
A: The donation of P80,000.00 to the parish church,
even assuming that it is exclusively for religious
purposes, is no tax-exempt because exemption
granted under ART VI, Section 28(3) of the
Constitution applies only to real estate taxes.
Q: X sold a piece of land to the United Church of
Christ of Quezon City, Inc. The land is to be devoted
strictly for religious purposes by the Church. When
the Church tried to register the title of the land, the
Registry of Deeds refused claiming that the CGT was
not paid. Is the transaction exempt from the CGT?
Reason.
A: No. Under section 21(e) in relation to Section
49(a)(4) of the NIRC, the seller is the one liable for
the payment of the CGT from the sale of real
property by an individual taxpayer. Meanwhile, the
Church in this instant case is the buyer. Hence,
Section 28(4) of the 1987 Constitution, which
exempts church lands, buildings and
improvements, does not apply because the
obligation to pay the CGT herein is imposed on X,
the seller, and not on the Church. Since payment of
the CGT is a condition precedent for the registration
of the transfer certificate of the title to real property,
the non-payment herein by the seller is a valid
reason for the Registry of Deeds to deny the transfer
of title to the subject land.
Q: Under Article XIV, Section 4(3) of the 1987
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.
A: 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 income are included in the school's annual
information return and duly audited financial
statements, together with: (a) certifications from
depository banks as to the amount of interest
income earned from passive investments not
subject to the 20% FWT; and (b) certification of
actual, direct and exclusive utilization of said
income for educational purposes; (c)!Board
resolution on proposed project to be funded out of
the money deposited in banks or placed in money
market placements, 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
Constitution does not distinguish with respect to the
sources or origin of the income. Th distinction is with
respect to the use which should be actual, direct
and exclusive for educational purposes.
Consequently, the provisions of Section 30 of the
NIRC, that a non-stock and non-profit 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
sources or origin, the Tax Code should not make
distinctions.
Q: The HR introduced HB No. 7000, which was
envisioned to levy a tax on various transactions.
After the bill was approved by the House, the bill
was sent to Senate as so required by the
Constitution. In the upper house, instead of a
deliberation on the House Bill, the Senate
introduced Senate Bill no. 8000 which was its own
version of the same tax. The Senate deliberated on
this Senate Bill and approved the same. The House
bill and Senate billNewer then consolidated in the
Bicameral Committee. Eventually, the consolidated
bill was approved and sent to the President who
signed the same. The private sectors affected by the
new law questioned the validity of the enactment
on the ground that the constitutional provision
8
requiring that all revenue bills should originate from
the HR had been violated. Resolve the issue.
A: There is no violation of the constitutional
requirement that all revenue bills should originate
from the HR. What is prohibited is for the Senate to
enact revenue measures on its own without a bill
originating from the House. But once the revenue
bill was passed by the House and sent to the
Senate, the latter's power to propose or concur with
amendments. This follows from the co-equality of
the two chambers of Congress.
Q: XYZ Colleges is a non-stock, non-profit
educational institution, run by the Archdiocese of BP
City. It collected and received the following: Tuition
fees; Dormitory fees; Rentals from canteen
concessionaires; Interest from money market
placements of the tuition fees; Donation of a lot and
building by school alumni.
1. Which of these above-cited income and
donation would not be exempt from taxation?
Explain briefly.
2. Suppose that XYZ Colleges is a proprietary
educational institution owned by the Archbishop's
family, rather than the Archdiocese, which of those
above-cited income and donation would be
exempt from taxation?
A: (1) 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
are exempt from taxation. The donation is likewise
exempt from 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 done for administration purposes. The donee,
being a non-stock, non-profit educational
institution, is a qualified entity to receive an exempt
donation, subject to conditions prescribed by law.
Accordingly, none of the cited income and
donation collected and received by the non-stock,
non-profit educational institution would not be
exempt from taxation.
(2) If XYZ Colleges is a proprietary educational
institution, all of its income from schoolrelated and
non-school-related activities will be subject to the
income tax, based on its aggregate net income
derived from both activities. Accordingly, all of the
income enumerated in the problem 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 proprietary
educational institution, the donation is taxable.
Q: Anne Lapada, a student activist, wants to impugn
the validity of a tax on text messages. On what
grounds may she do so?
A: She may claim that the law adversely affects her
since she sends messages by text and that the tax
money is being extracted and spent in violation of
the constitutionally guaranteed right to freedom of
communication.
CHAPTER III: INCOME AND WITHHOLDING TAXES
Q: Distinguish “scheduler treatment” from “global
treatment” as used in income taxation.
A: Under a schedular system, the various
types/items of income (e.g. compensation;
business/professional income) are classified
accordingly and are accorded different tax
treatments, in accordance with schedules
characterized by graduated tax rates. Since these
types of income are treated separately, the
allowable deductions shall likewise vary for each
type of income.
Under the global system, all income received by the
taxpayer are grouped together, without any
distinction as to the type or nature of the income,
and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a
graduated or fixed rate.
Q: (a) Discuss the meaning of the global and
schedular systems of taxation. (b) To which
system would you say that the method of
taxation under the NIRC belong?
A: (a) A global system of taxation in one where the
taxpayer is required to lump all items of income
earned during a taxable period and pay tax under
a single set of income tax rules on these different
items of income. A schedular system of taxation
provides for a different tax treatment of different
types of income so that a separate tax return is
required to be filed for each type of income and
the tax is computed on a per return or per schedule
basis. (b) The current method of taxation under the
Tax Code belongs to a system which is partly
schedular and partly global.
Q: (1) What are the basic features of the
present “income tax system?” A: Our
present income tax system can be said to
have the following basic features:
(a) It has adopted a comprehensive tax situs by
using the nationality, residence and source
rules. This makes citizens and resident aliens
taxable on their income derived from all
sources while non-resident aliens are taxed
only on their income derived from within the
Philippines. Domestic corporations are also
9
taxed on universal income while foreign
corporations are taxed only on income from
within. [NOTE: If the question is asked today,
the answer should be: Resident citizens and
domestic corporations are subject to tax on
their worldwide income, while the other
types of taxpayers (whether individual or
corporation) are taxed only from sources
within the Philippines beginning Jan 1, 1998
under RA 8424]
(b) The individual income tax system is mainly
progressive in nature in that it provides
graduated rates of income tax.
Corporations in general are taxed at a flat
rate of
35% on net income [NOTE: tax rates 1998 =
34%; 1999 = 33%; 2000 = 32%; Nov 1 2005 =
35%; Jan 1 2009 = 30%]
(c) It has retained more schedular than global
features with respect to individual taxpayers
but has maintained a more global
treatment on corporations.
Q: Distinguish a direct tax from an indirect tax.
A: A direct tax is on in which the taxpayer who pays
the tax is directly liable therefor; that is, the burden
of paying the tax falls directly on the persons
paying the tax. The impact and incidence of
taxation remain with the person upon whom the
tax was imposed. An indirect tax is one paid by a
person who is not directly liable therefor, and who
may therefore shift or pass on the tax to another
person or entity, which ultimately assumes the tax
burden. In this case, the impact of taxation is with
the taxable seller of goods or service; while the
incidence of taxation rests with the final consumer.
Q: When is income taxable?
A: Income, gain or profit is subject to income tax,
when the following requisites are present:
(a) The money or property received is income, gain
or profit (and not return of capital)
(b) The income, gain or profit is receid (actually,or
constructively), accrued, or realized during the
taxable year; and
(c) The income, gain or profit is not exempt from
income tax under the Constitution, treaty or
statute
CHAPTER IV: KINDS OF TAXPAYERS
Q: Juan, a Filipino citizen, has emigrated to the US
in 1997, where he is now a permanent resident. He
owns certain income earning property in the
Philippines from which he continues to derive
substantial income. He also receives income form
the employment in the United States on which the
US income tax is paid. On which of the above
income is the taxable. If at all in the Philippines, and
how, in general terms, would such income or
income be taxed?
A: Juan will be taxed on both his income from the
Philippines and on his income from the US because
his being a citizen makes him taxable on all income
wherever derived. For the income he derives from
his projects in the Philippines, Juan shall be taxed on
his net income under the Simplified Net Income
Taxation Scheme whereby he shall be considered
as a self-employed individual. His income as
employee in the US, on the other hand, shall be
taxed in accordance with the schedular
graduated rates of 1%, 2% and 3%, based on the
adjusted gross income derived by non-resident
citizens from all sources without the Philippines
during each taxable year. [Note: New law
beginning 1998 = income from sources within the
Philippines of a non-resident citizen remains subject
to Philippine income tax, but his income from
sources outside the Philippines is exempt)
Q: Federico, a Filipino citizen, migrated to the US
some 6 years ago and got a permanent resident
status or green card. Should he pay his Philippine
income tax on the gains he derived from the sale in
the NYSE in PLDT, a Philippine corporate whose
shares are listed thereat?
A: Yes. The gains from the sale of shares of stock in
a domestic corporation shall be treated as derived
entirely from sources within the Philippines,
regardless of where the said shares are sold. By this
provision of law, the gain if any from the sale of
shares of stocks of a domestic corporation by any
person shall be treated for income the Philippines.
Q: From what sources of income are the following
persons/corporations taxable by the Philippine
government?
1. Citizen of the Philippines and Residing therein
2. Nonresident citizen
3. Citizen who is working and deriving income
from abroad as an overseas contract worker
4. An alien individual, whether a resident or not of
the Philippines;
5. A domestic corporation.
A: 1. Taxable on all income within and without the
Philippines 2. Taxable on income derived from
sources within the Philippines
3. Taxable only on income from
sources within the Philippines.
4. Taxable on income derived from
sources within the Philippines
5. Taxable on all income derived from
sources within and without.
10
Q: Four Catholic parishes hired the services of Frank
Binatra, a foreign nonresident entertainer, to
perform for four nights at the Folk Arts Theatre,
Binatra was paid P200,000.00 a night. The parishes
earned P1,000,000.00which they can be used for
the support of the orphans in the city. Who are liable
to pay taxes?
A: (a) The four Catholic parishes because the
income received by them, not being income
earned as such in the performance of their religious
functions and duties, is taxable income under the
last paragraph of Section 26; in relation to Section
26(e) of the Tax Code. In promoting and operating
the Binatra Show, they engaged in an on activity
conducted for profit.
(b) The income of Frank Binatra, a non-resident alien
under our law, is taxable at the rate of 30% (now
25%) FWT based on the gross income from the show.
Mr. Binatra is not engaged in any trade or business
in the Philippines.
Q: Mr. Sebastian is a Filipino seaman employed by
a Norwegian company which is engaged
exclusively in international shipping. He and his
wife, who manages their business, filed a joint
income tax return for 1997 on March 15, 1998. After
an audit of the return, the BIR issued on April 20, 2001
a deficiency income tax assessment for the sum of
P250,000.00, inclusive of interest and penalty. For
failure of Mr. and Mrs. Sebastian to pay the tax
within the period stated in the notice of assessment,
the BIR issued on August 19, 2001 warrants of
distraint and levy to enforce collection of the tax.
(a) What is the rule of income taxation with respect
to Mr. Sebastian’s income in 1997 as a seaman
on board the Norwegian vessel engaged in
international shipping? Explain your answer.
(b)If you are the lawyer of Mr. and Mrs. Sebastian,
what possible defense or defenses will you raise
in behalf of your clients against the action of the
BIR in enforcing collection of the tax by the
summary remedies of warrants of distraint and
lavy? Explain your answer.
A: (a) The 1997 income of Mr. Sebastian as a
seaman is considered as income of a nonresident
citizen derived from without the Philippines. The
total gross income, in US dollars (or if in other foreign
currency, its dollar equivalent) from without the
Philippines shall be declared by him for income tax
purposes using a separate income tax return which
will not include his income from business derived
within the Philippines (to be covered by another
return). He is entitle of $4,500 and foreign national
income taxes paid to arrive at his adjusted income
during the year. His adjusted income will be subject
to the graduated tax rates of 1% to 3% (Note: The
above provision was amended already by RA 8424
[Tax Code of 1997] effective January 1, 1998.
Income from foreign sources of nonresident citizens
is exempt from income tax)
(b) I will raise the defense of prescription. The right
of the BIR to assess prescribes after three years
counted from the last day prescribed by law for
the filing of income tax return, when the said
return is filed on time. The last day for filing the
1997 income tax return is April 15, 1998. Since the
assessment was issued only on April 20, 2001, the
BIR’s right to assess has already prescribed
Q: Alain Descartes, a French citizen permanently
residing in the Philippines, received several items of
income during the taxable year, such as
consultancy fees received for designing a
computer program and installing the same in the
Shanghai facility of a Chinese firm; interests from his
deposits in a local bank of foreign currency earned
abroad converted to Philippine pesos; dividends
received from an American corporation which
derived 60% of its annual gross receipts from
Philippine sources for the past 7 years; and gains
derived from the sale of his condominium unit
located in Taguig City to another resident alian.
Which item of income is not subject to Phlippine
income tax?
A: The consultancy fees are not subject to Philippine
income tax. Being an alien, it is subject to income
tax only on income from sources within the
Philippines. Since the consultancy fees are received
by him for designing a computer program and
installing the same in China, the same shall be
treated as income from sources outside the
Philippines.
Q: Newtex International (Phils), Inc. is an American
firm dully authorized to engage in business in the
Philippines as a branch office. In its activity of acting
as a buying agent for foreign, buyers of shirts and
dresses abroad and performing liaison work
between its home office and the Filipino garment
manufacturers and exporters, Newtex does not
generate any income. To finance its office
expenses here, its head office abroad regularly
remits to it the needed amount. To oversee its
operations and manage its office here, which had
been in operation for two years, the head office
assigned three foreign personnel. Are the three
foreign personnel subject to Philippine income tax?
A: The three foreign personnel are subject to tax on
the income that they receive for services rendered
in the Philippines. Non-resident aliens are subject to
tax on income from sources within the Philippines.
Income is deemed derived from sources within the
country when it is earned for services rendered in
the Philippines.
11
Q: Mr. Cortez is a nonresident alien based in HK.
During the calendar year 1999, he came to the
Philippines several times and stayed in the country
for an aggregated period of more than 180 days.
How will Mr. Cortez be taxed on his income derived
from sources within the Philippines and from
abroad?
A: Mr. Cortez being a nonresident alien individual
who has stayed for an aggregate period of more
than 180 days during the calendar year 1999, shall
for that taxable year be deemed to be a
nonresident alien doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject
to an income tax in the same manner as a resident
citizen on taxable income received from all
sources within the Philippines. Thus, he is allowed
to avail of the itemized deductions including the
personal and additional exemptions, but subject
to the rule on reciprocity on the personal
exemptions.
Q: Jonny transferred a valuable 10-door
commercial apartment to a designated trustee,
Miriam, naming in the trust instrument Santino,
Johnny’s 10-year old son, as the sole beneficiary.
The trustee is instructed to distribute the yearly
rentals amounting to P720,000. The trustee consults
you if she has to pay the annual income tax on the
rentals received from the commercial apartment.
(a) What advice will you give the trustee? (b) Will
your advice be the same, if the trustee is directed
to accumulate the rental income and distribute the
same only when the beneficiary reaches the age of
majority. Why or why not?
A: (a) It depends. Where the trust document
transferring the property is revocable, the rental
income shall be included in computing the taxable
income of the grantor. On the other hand, if the
trust document is irrevocable and the donor’s tax
on the value of the transferred property was duly
paid by the grantor at the time of the creation of
the trust, the rental income shall be reported by the
trustee in the income tax return to be filed by her.
Income tax shall apply to the income of the
property held in trust, including income which is to
be distributed currently by the fiduciary to the
beneficiary. However, the taxable income of the
trust shall be computed by allowing as deduction
the amount of the income of the trust for the
taxable year, which is to be distributed currently by
the fiduciary to the beneficiary, but the amount so
allowed as a deduction shall be included in
computing the taxable income of the beneficiary,
whether distributed to them or not. (b) No, my
advice will be different if the trustee is directed to
accumulate the rental income and distribute the
same only when the beneficiary reaches the age of
majority. Income tax shall also apply to income
accumulated or held for future distribution under
the terms of the trust document. However, the
trustee is allowed as an additional deduction in
computing he taxable year, which is property paid
or credited during such year to any beneficiary, but
the amount so allowed as deduction shall be
included in computing the taxable income of the
beneficiary.
Q: Mr. Santos died intestate in 1989 leaving his
spouse and five children as the only heirs. The
estate consisted of a family home and a four-door
apartment which was being rented to tenants.
Within the year, an extrajudicial settlement of the
estate was executed from the heirs, each of them
receiving his/her due share. The surviving spouse
assumed administration of the property. Each year,
the net income from the rental property was
distributed to all, proportionately, on which they
paid respectively, the corresponding income tax. In
1994, the income tax returns of the heirs were
examined and deficiency income tax assessments
were issued against each of them for the year 1989
to 19993, inclusive, as having entered into an
unregistered partnership. Were the assessments
justified? A: Yes, the assessments were justified
because for income tax purposes, the co-
ownership of inherited property is automatically
converted into an unregistered partnership form
the moment the said properties are used as a
common fund with intent to produce profits for the
heirs in proportion to their shares in the inheritance.
From the moment of such partition, the heirs are
entitled already to their respective definite shares of
the estate and the income thereof, for each of
them to manage and dispose of as exclusively their
own, without the intervention of the other heirs, and
accordingly, he becomes liable individually for all
taxes in connection therewith. If after such partition,
he allows his shares to be held in common with his
co-heirs under a single management to be used
with the intent of making profit thereby in
proportion to his share, there can be no doubt that,
even if no document or instrument were executed
for the purpose, for tax purposes, at least, an
unregistered partnership is formed.
Q: Noel Langit and his brother, Jovy, bought a
parcel of land which they registered in their names
as pro indiviso owners (Parcel A). Subsequently,
they formed a partnership, duly registered with SEC,
which bought another parcel of land (Parcel B).
Both parcels of land were sold, realizing a net profit
of P1,000,000.00 for parcel A and P500,000.00 for
parcel B.
12
1. The BIR claims that the sale of parcel A should
be taxed as a sale by an unregistered
partnership. Is the BIR correct?
2. The BIR also claims that the sale of parcel B
should be taxed as a sale by a corporation. Is
the BIR correct?
A: (1) The BIR is not correct , since there is not
showing that the acquisition of the property by Noel
and Jovy Langit as pro indivisio owners, and prior to
the formation of the partnership, was used,
intended for use, or bears any relations whatsoever
to the pursuit or conduct of the partnership
business. The sale of parcel A shall therefore not be
treated as a sale by an unregistered partnership,
but an ordinary sale of a capital asset, and hence
will be subject to the 5% (now 6%) CGT and
documentary stamp tax on transfers of real
property, said taxes to be borne equally by the co-
owners. (2) The BIR is correct, since a “corporation”
as deemed under the Tax Code includes
partnerships, no matter how created or organized,
except general professional partnerships. The
business partnership, in the instant case, shall
therefore be taxed in the same manner as a
corporation on the sale of parcel B. The sale shall
thus be subject to the creditable withholding tax on
the sale of parcel B, and the partnership shall report
the gain realized from the sale when it files its
income tax return.
Q: Roberto Ruiz and Conrado Cruz bought 3 parcels
of land from Rodrigo Sabado on 4 May 1976. Then
on 8 July 1977, they bought 2 parcel of land from
Miguel Sanchez. In 1988, they sold the first three
parcels of land to Central Realty, Inc. In 1989, they
sold the two parcels to Jose Guerrero. Ruiz and Cruz
realized a net profit of P100,000.00 for the sale in
1988 and P150,000.00 for the sale in 1989. The
corresponding CGT were individually paid by Ruiz
and Cruz. On 20 September 1990, however, Ruiz
and Cruz received a letter from the Commissioner
of Internal Revenue assessing them deficiency
corporate income taxes for the years 1988 and 1989
because, according to the Commisioner, during
said years they, as co-owners in the real estate
transactions, formed an unregistered partnership or
joint venture taxable as a corporation and that the
unregistered partnership was subject to corporate
income tax, as distinguished from profits derived
from the partnership by them, which is subject to
individual income tax.
Are Robert Ruiz and Conrado Cruz liable for
deficiency corporate income tax? A: Roberto Ruiz
and Conrado Cruz are not liable for corporate
income tax. Evidently abandoning the Gatchalian
ruling,, the Supreme Court in a recent ruling in
Pascual v. Court of Tax Appeals (G.R. No. 78133,
October 18, 1988) held that isolated transactions by
two or more persons do not warrant their being
considered as an unregistered partnership. They will
instead be considered as mere co-owners, no
corporate income tax is due on mere
coownerships. It was, therefore, correct for Ruiz and
Cruz to merely pay their individual tax income tax
liabilities on the gain from sale of real estate
transactions.
Q: Five years ago, Marquez, Peneyra, Jayme,
Posadas, and Manguit, all lawyers, formed a
partnership which they named Marquez and
Peneyra Law Offices. The Commissioner of Internal
Revenue thereafter issued Revenue Regulations[s]
No. 2-93 implementing R.A.7496, known as the
Simplified Net Income Taxation Scheme (SNITS).
Revenue Regualtion[s] No. 2-93 provides in part:
“Sec. 6. General Professional Partnership. - The
general professional partnership and the partners
are covered by R.A. 7496. Thus, in determining profit
of the partnership, only the direct costs mentioned
in said law are to be deducted from partnership
income. Also, the expenses paid or incurred by
partners in their individual capacities in the practice
of their profession which are not reimbursed or paid
by the partnership but are not considered as direct
costs are not deductible from his gross income.”
(1)Marquez and Peneyra Law Offices Law Offices
filed a taxpayer’s suit alleging that Revenue
Regulations No. 2-93 violates the principle of
uniformity in taxation because general
professional partnerships are now subject to
payment of income tax and that there is a
difference in the tax treatment between
individuals engaged in the practice of their
respective professions and partners in general
professional partnership. Is this contention
correct? Explain.
(2)Is Revenue Regulations No. 2-93 now considered
as having adopted a gross income method instead
of retaining the net income taxation scheme?
Explain. A: (1) The contention is not correct.
General professional partnerships remain to be a
nontaxable entity. The partners comprising the
same are taxable and they are obligated to report
as income their share in the income of the general
professional partnership during the taxable year,
whether distributed or not. The Simplified Net
Income Tax System (SNITS) treats professionals as
one class of taxpayers so that they shall be treated
alike, irrespective of whether they practice their
profession alone or in association with other
professionals under a general professional
partnership. What are taxed differently are
individuals and corporations. All individuals similarly
situated are taxed alike under the regulations.
13
Therefore, the principle of uniformity in taxation is
not violated. On the contrary, all the requirements
of a valid regulation have been complied with. (2)
No. Revenue Regulation No. 2-93, implementing RA
No. 7496, has indeed significantly reduced the
items of deduction by limiting it to direct costs and
expenses, or 40% of gross receipts maximum
deduction in cases where the direct costs are
difficult to determine. The allowance of the limited
deductions, however, is still in consonance with the
net income taxation scheme rather than the gross
income method. While it is true that not all the
expenses of earning the income might be allowed,
this can well be justified by the fact that deductions
are not matters of right but are matters of legislative
grace.
Q: Another Banking Corporation, which was
organized in 2000 and existing under the laws of the
Philippines and owned by the Sy Family of Makati
City, set up in 2010 a branch office in Shanghai City,
China, to take advantage of the presence of many
Filipino workers in that area and its booming
economy. During the year, the bank management
decided not to include the P20 million net income
of the Shanghai Branch in the annual Philippine
income tax return filed with the BIR, which showed
a net taxable income of P30 million, because the
Shanghai Branch is treated as a foreign corporation
and is taxed only on income from sources within the
Philippines, and since the loan and other business
transactions were done in Shanghai, these incomes
are not taxable in the Philippines
(a) Is the bank correct in excluding the net income
of its Shanghai Branch in the computation of its
annual corporate income tax for 2010? Explain
your answer
(b)Should the Shanghai Branch of another Bank
remit profit to its Head Office in the Philippines in
2011, is the branch liable to the 15% branch
profit emittance tax imposed under Section
28A(A)(5) of the 1997 Tax Code? Explain your
answer.
A: (a) No. A domestic corporation is taxable on all
income derived from sources within and without the
Philippines (Sec. 23, NIRC). The income of the
foreign branch and that of the Head Office will be
summed up for income tax purposes, following the
“single entity” concept and will all be included in
the gross income of the domestic corporation in the
annual Philippine income tax return.
(b) No. The branch profit remittance tax is imposed
only on remittance by branches of foreign
corporation in the Philippines to their Head Office
abroad. It is the outbound branch profits that is
subject to the tax, not the inbound profits.
Q: XYZ Law Offices, a law partnership in the
Philippines and a VAT-registerd taxpayer, received
a query by email from Gainsburg Corporation, a
corporation organized under the laws of Delaware,
USA, but the email came from California, where
Gainsburg has an office. Gainsburg has no office in
the Philippines and does no business in the
Philippines. XYZ Law Offices rendered its opinion on
the query and billed Gainsburg $1,000 from the
opinion. Gainsburg remitted its payment through
Citibank, which converted the remitted $1,000 to
pesos. What are the implications of the payment to
XYZ Law offices in terms of VAT and income taxes?
A: The payment of XYZ Law Offices by Gainsburg
Corporation is subject to income tax and VAT in the
Philippines. For income tax purposes, the
compensation for services is part of the gross
income of the law partnership. From its total gross
income within and without, it has to compute its
nect income in the same manner as a corporation.
The net income of the partnership, whether
distributed or not, will be declare by the partners
based on their agreement as part of their gross
income who are to pay the income tax thereon in
their individual capacity (Sec. 26, NIRC). For VAT
purposes, the transaction is a zero-rated sale of
services where the output tax is zero percent and
XYZ is entitled to claim as refund or tax credit
certificate the input taxes attributable to the zero
rated sale, if the same is not utilized by the
partnership. The services were rendered to a
nonresident person, engaged in business outside
the Philippines, which services are paid for in foreign
currency inwardly remitted through the banking
system, thereby making the sale of services subject
to tax at zero-rated.
Q: HK Co. is a Hong Kong company, which has a
duly licensed Philippine branch engaged in trading
activities in the Philippines. HK Co. also invested
directly in 40% of the shares of stack of A Co., a
Philippine corporation. These shares are booked in
the Head Office of HK Co. and are not reflected as
assets of the Philippine branch. In 1998, A Co.
declared dividends to its stockholders. Before
remitting the dividends to HK Co., A Co. seeks your
advice as to whether it will subject the remittance
to withholding tax. No need to discuss withholding
tax rates, if applicable. Focus your discussion on
what is the issue.
A: I will advise A Co. to withhold and remit the
withholding tax on the dividends. While the general
rule is that a foreign corporation is the same juridical
entity as its branch office in the Philippines, when,
however, the corporation transacts business in the
Philippines directly and independently of its branch,
the taxpayer would be the foreign corporation itself
14
and subject to the dividend tax similarly imposed on
nonresident foreign corporation. The dividends
earned by a resident foreign corporation, which is
exempt from tax.
Q: Foster Corporation (FC) is a Singapore-based
foreign corporation engaged in construction and
installation projects. In 2010, Global Oil Corporation
(GOC), a domestic corporation engaged in the
refinery of petroleum products, awarded an anti-
pollution project to Foster Corporation, whereby FC
shall design, supply machinery, and equipment,
and install an anti-pollution device for GOC’s
refinery in the Philippines, provided that the
installation part of the project may be
subcontracted to a local construction company.
Pursuant to the contract, the design and supply
contracts were done in Singapore by FC, while the
installation works were subcontracted by FC with
Philippine Construction Corporation (PCC), a
domestic corporation. The project with a total cost
of P100M was completed in 2011 at the following
cost components; (design – P20M, machinery and
equipment – P50M and installation – P30M). Assume
that the project was 40% complete in 2010 and
100% complete in 2011, based on the certificates
issued by the architects and engineers working on
the poject. GOC paid FC as follows: P60M in 2010
and P40M in 2011, and FC paid PCC in foreign
currency through a Philippine bank as follows: P10M
in 2010 and P20M in 2011.
(a) Is FC liable to Philippine income tax, and if so,
how much revenue shall be reported by it in
2010 and in 2011? Explain your answer.
(b)Is PCC, which adopted the percentage of
completion method of reporting income and
expenses, liable to value added tax in 2010 and
in 2011? Explain your answer.
A: (a) No. FC is not liable to Philippine income tax.
The revenues from the design and supply contracts,
having been all done by FC (a foreign corporation),
hence, not taxable to a foreign corporation in the
Philippines. With respect to the installation works
which was subcontracted by FC to PCC, a
domestic corporation, it is PCC (not FC) that does
the work in the Philippines and should report the
income thereon.
(b) Yes. PCC is liable to VAT as seller of services done
in the Philippines for a fee. However, the sale of
services to FC is subject to VAT at zero percent.
Services rendered by a VATregistered local
contractor to a nonresident foreign corporation
who is outside the Philippines, paid for in foreign
currency inwardly remitted through the Philippine
banking system are zero-rated sales of services
Q: Aplets Corporation is registered under the laws of
the British Virgin Islands. It has extensive operations
in Southeast Asia. In the Philippines, its products are
imported and sold at a mark-up by its exclusive
distributor, Kim’s Trading, Inc. The BIR compiled a
record of all the imports of Kim from Aplets and
imposed a tax on Aplets’ net income derived from
its exports to Kim. Is the BIR correct?
A: No. Aplets Corporation is a non-resident foreign
corporation not engaged in trade or business in the
Philippines and its sources of income from outside
the Philippines. As a foreign corporation, it is subject
to Philippine income tax only on income from
sources within the Philippines. Gains, profits and
income from the sale of personal property outside
the Philippines shall be treated as income from
sources outside the Philippines.
CHAPTER V: GROSS INCOME
Q: 1. What is gross income for purposes of income
tax?
2. How does income differ from capital? Explain.
A: 1. Gross income means all income from whatever
source derived, including (but not limited to)
compensation for services, including fees,
commissions, and similar items; gross income from
business; gains derived from dealings in property;
interest; royalties; dividends; annuities; prized and
winnings; pensions; and partner’s distributive share
of the gross income of general professional
partnership
2. Income differs from capital in that income is any
wealth which flows into the taxpayer other than a
return of capital, while capital constitutes the
investment which is the source of income.
Therefore, capital is fund, while income is the flow.
Capital is wealth, while income is the fruit. Income is
liable to income tax, while capital ore return of
capital is exempt from tax.
Q: Mr. Francisco borrowed P10,000.00 from his
friend, Mr. Gutierrez, payable in one year without
interest. When the loan became due, Mr. Francisco
told Mr. Gutierrez that he was unable to pay
because of business reverses. Mr. Gutierrez took
pitty on Mr. Francisco and condoned the loan. Mr.
Francisco was solvent at the time he borrowed the
P10,000.00 and at the time the loan was condoned.
Did Mr. Francisco derived any income from the
cancellation or condonation of his indebtedness?
Explain.
No. Mr Francisco did not derive any income from
the cancellation or condonation of his
indebtedness. Since it is obvious that the creditor
merely desired to benefit the debtor in view of the
15
absence of consideration for the cancellation, the
amount of the debt is considered as a gift from the
creditor to the debtor and need not be included in
the latter’s gross income. The gift may, however, be
subject to donor’s tax at 30%, since Mr. Francisco
and Mr. Gutierrez are not members of the same
family.
Q: Bates advertising Company is a nonresident
corporation duly organized and existing under the
laws of Singapore. It is not doing business and has
no office in the Philippines. Pilipinas Garment, Inc.,
a domestic corporation, retained the services of
Bates to do all the advertising of its products
abroad. For said services, Bates’ fees are paid
through outward remittances. Are the fees received
by Bates subject to any withholding tax?
A: The fees paid to Bates Advertising Company, a
non-resident foreign corporation, are not subject to
withholding tax, since they are not subject to
Philippine income tax. They are exempt because
they do not constitute income from Philippine
sources, the same being compensation for labor or
personal services performed outside the Philippines.
Q: A Co., is an off-line international carrier without
any flight operation in the Philippines. It has,
however, a liaison office in the Philippines which is
duly licensed, with the SEC, established for the
purpose of providing passenger and flight
information, reservation and ticketing services. Are
the revenues of A Co. from tickets reserved by its
Philippine office subject to tax?
A: The revenues in the Philippines of A Co. as an off-
line airline from ticket reservation services are
taxable income from whatever source under
Section 28(a) of the Tax Code. This case in
analogous to Commissioner v. BOAC, where the SC
ruled that income received in the Philippines from
the sale of tickets by an off-line airline is taxable as
income from whatever source.
Q: An international airline with no landing rights in
the Philippines sold tickets in the Philippine s for air
transportation. Is income derived from such sales of
tickets considered taxable income of the said
international air carrier from Philippine sources
under the Tax Code? Explain.
A: No. While the tickets are sold here by the
international airline, this is for carriage of persons,
excess baggage, cargo and mail not originating
from the Philippines, because the airline has no
landing rights in the Philippines. The income from
the sale of tickets is actually the gross revenue
derived from the carriage of persons, excess
baggage, cargo and mail and these revenues are
considered as income from Philippine sources only
if the flight originates from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of payment of the ticket or passage
document. Accordingly, the income mentioned is
not derived from Philippine sources.
Q: Pacific, Inc. is engaged in overseas shipping. It
time chartered one of its ships to a Japanese
company on a five-year term. The charter was
consummated through the efforts of Kamino Moto,
a Tokyo based broker. The negotiation took place
in Tokyo. The agreement calls the Pacific, Inc. to
pay Kamino Moto $50,000.00. Your opinion is sought
whether Pacific, Inc. should withhold the tax before
sending the compensation of Kamino Moto.
A: The compensation of Kamino Moto is not subject
to withholding tax. Compensation for labor or
personal services performed outside the Philippines
are considered as income from sources without the
Philippines. Kamino Moto’s effort in consummating
the Charter is a form of labor or services.
Considering further that Kamino Moto is a Tokyo-
based broker, presumably a non-resident foreign
corporation, it is taxable only on income within the
Philippines.
Q: ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-
resident foreign corporation based in the US. Under
the agreement which the parties forged in the US,
XYZ granted ABC the right to use a computer system
program and to avail of technical know-how
relative to such program. In consideration for such
rights, ABC agreed to pay 5% of the revenues it
receives from customers who will use and apply the
program in the Philippines. Discuss the tax
implications of the transactions.
The royalty received by XYZ from ABC will be subject
to Philippine income tax because the source of the
royalty income is from the Philippines. Rentals and
royalties from property located in the Philippines or
from any interest in such property shall be treated
as income from sources within the Philippines.
Considering that XYZ is a nonresident foreign
corporation, such royalty income is subject tot the
30% final withholding income tax under Section 29
(B) of the Tax Code, such tax to be withheld by ABC
and paid in the same manner as provided in
Section 58 of the Tax Code. XYZ does not have to
file a Philippine income tax return on the royalty
income. For VAT purposes, ABC must withhold and
assume the payment of the 12% VAT on the royalty
income, which input tax can be credited against
ABC’s output tax for the taxable period.
Q: A is a resident Filipino citizen. He purchased a
parcel of land in Makati city in 1970 at a
16
consideration of P1M. In 2011, the land, which
remained undeveloped and idle, had a fair market
value of P20M. Mr. B, another Filipino citizen, is very
much interested in the property and he offered to
buy the same for P20M. (a) Is A liable for income tax
in 2011 based on the offer to buy by MR B? (b)
Should A agree to sell the land in 2012 for P20M,
subject to the condition as stated in the Deed of
Sale that the buyer shall assume the capital gains
tax thereon, how much is the income tax due on the
transaction and when must the tax return be filed
and tax be paid by the taxpayer?
A: (a) A is not liable for income tax in 2011 because
no income is realized by him during that year. Tax
liability for income tax attaches only if there is a gain
realized resulting from a closed and complete
transaction. (b) He shall be liable to pay the 6%
capital gains tax based on the gross selling price of
the property of P20M plus the capital gains tax
assumed by the buyer (following the doctrine of
constructive receipt of income). He should file the
return within 30 days from the date of sale and pay
the tax as he files the return.
Q: What is meant by taxable income?
A: Taxable income means the pertinent items of
gross income specified in the Tax Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such types of
income by the Tax Code or other special laws.
Q: ABC Computer Corp. purchased some years
ago Membership Certificate No. 7 from the Calabar
Golf Club, Inc. for P300,000.00. In September 4,
1985, it transferred the same to Mr. John Johnson, its
American computer consultant, to enable him to
avail of the facilities of the Club during his stay here.
The consultancy agreement expired two year later
in the meantime, the value of the Club share
appreciated and what was purchased by the
corporation at P300,000.00, commanded a market
value of P800,000.00 in 1987. Before he returned
home a few days after his tenure ended, Mr.
Johnson transferred the subject share to Mr. Robert
James, the new consultant of the firm and the newly
designated playing representative, under a Deed
of Declaration of Trust and Assignment of Shares,
wherein the former acknowledged the absolute
ownership of ABC Computer Corp. over the share,
that the assignment was without any consideration
and that the share was placed in his name because
the Club required it to be done. (a) Is the
assignment/transfer of the shares from Johnson to
James subject to income tax? (b) Is the said
assignment a gift and, therefore, subject to gift tax?
A: (a) The assignment or transfer of shares from
Johnson to James is not subject to income tax.
There had been no real change of ownership that
took place. There having been no actual sale or
exchange, no income tax incidence can be said to
have occurred. In addition, there was really no
income realized or received considering that in the
Deed of declaration of Trust and Assignment of
Shares, the absolute ownership of ABC Computer
Corp was explicitly recognized. (b) The assignment
can neither be held to be a gift. To be considered
a gift within the context of the NIRC, there must be
a transfer of ownership or a quantifiable interest.
More importantly, the transfer of the membership
certificate was merely a designation of the
consultant to be the “playing representative” of
ABC Computer Corporation in the Calabar Golf
Club.
Q: X, a multinational corporation doing business in
the Philippines donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines.
(1)What is the tax liability, if any, of X corporation?
(2)Assuming the shares of stocks were given to Mr.
Yin consideration of his services to the corporation
which are the tax implication? Explain. A: (1)
Foreign corporations effecting a donation are
subject to donor’s tax only if the property donated
is located in the Philippines. Accordingly, donation
of a foreign corporation of its own shares of stocks
in favor of a resident employee is not subject to
donor’s tax. However, if 85% of the business of the
foreign corporation is located in the Philippines of
the shares donated have acquired business situs in
the Philippines the donation may be taxed in the
Philippines subject to the rule of reciprocity.
(2) If the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, the
same shall constitute taxable compensation
income to the recipient because it is a
compensation for services rendered under an
employee-employer relationship, hence, subject to
income tax.
Q: X is employed as a driver of a corporate lawyer
and he receives a monthly salary of P 5,000.00 with
free board and lodging with an equivalent value of
P 1,500.00.
1. What will be the basis of X’s income tax?
Why?
2. Will your answer in question (1) be the
same if X’s employer is an obstetrician?
Why?
A: 1. The basis of X’s income tax would depend on
whether his employer is an employee or a
practicing corporate lawyer. If his employer is an
employee, the basis of X’s income tax is P 6,500.00
equivalent the total of the basic salary and the
17
value of the board and lodging. This is so because
the employer has no place of business where the
free board and lodging may be given. On the other
hand, if the corporate lawyer is a practicing lawyer
(selfemployed), X should be taxed only on P
5,000.00, provided that the free board and lodging
is given in the business premises of the lawyer and
for his convenience, and that the free lodging was
given to X as a condition for his employment.
2. If the employer is an obstetrician who is self-
employed, the basis of his income will only be P
5,000.00, if it is proven that the free board and
lodging is given within premises of said employer for
his convenience and that the free lodging is
required to be accepted by X as condition for
employment. Otherwise, X would be taxed on P
6,500.00.
Q: 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 HK 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?
A: 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. 22[E], NIRC). A non-resident
citizen is taxable only on income derived from
Philippine sources (Sec. 23, NIRC). The salaries and
allowances received from being employed abroad
are incomes from without because these are
compensation for services rendered outside of 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).
Q: Citing Section 10, Article VIII of the 1987
Constitution, which provides that salaries of judges
shall be fixed by law and that during their
continuance in office their salary shall not be
decreased, a judge of MM Regional Trial Court
questioned the deduction of withholding taxes from
his salary since it results into a net deduction of his
pay. Is the contention of the judge correct? Reason
briefly.
A: No. The contention is incorrect. The salaries of
judges are not tax-exempt and their taxability is not
contrary to the provisions of Section 10, Article VIII
of the Constitution on the non-diminution of the
salaries of the judiciary during their continuance in
office. The clear intent of the Constitutional
Commission that framed the Constitution is to
subject their salaries to tax as in the case of all
taxpayers. Hence, the deduction of withholding
taxes, being a manner of collecting the income tax
on their salary, is not a diminution contemplated by
the fundamental law (Nitafan, et al. v.
Commissioner, 152 SCRA 284 [1987]).
Q: 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.
A: It is the employer who is legally required to pay
an income tax on the fringe benefit paid to
supervisory or managerial employee. The fringe
benefit paid to supervisory or managerial
employee. The fringe benefit tax is imposed as a
final withholding income tax on the fringe benefits
of the employee, but the legal obligation to remit
the tax is placed 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, or net of the income tax due thereon. The
person who is legally required to pay is that person
who, in case of non-payment, can be legally
demanded to pay the tax. However, fringe benefit
paid to a rank-and-file employee is taxable to said
employee, which the employer is required to
deduct the corresponding withholding tax, unless it
is considered as de minimis benefit exempt from
income tax.
Q:1. Mr. Adrian is an executive of a big business
corporation. Aside from his salary, his employer
provides him with the following benefits: free use of
a residential house to an exclusive subdivision, free
use of a limousine and membership in a country
club where he can entertain customers of the
corporation. Which of these benefits, if any, must Mr.
Adrian report as income? Explain.
2. Capt. Canuto is a member of the Armed
Forces of the Philippines. Aside from his pay as
captain, the government gives him free uniforms,
free living quarters in whatever military camp he is
assigned, and free meals inside the camp. Are
these benefits income to Capt. Canuto? Explain.
18
3. Mr. Infante was hit by a wayward bus while
on his way to work. He survived but had to pay
P400,000.00 for his hospitalization. He was unable to
work for six months which meant that he did not
receive his usual salary of P10,000.00 a month or a
total of P60,000.00. he sued the bus company and
was able to obtain a final judgment awarding him
P 400,000.00 as reimbursement for his
hospitalization, P60,000.00 for the salaries he failed
to receive while hospitalized, P200,000.00 as moral
damages for his pain and suffering, and P100,000.00
as exemplary damages. He was able to collect in
full from the judgment. How much income did he
realize when he collected on the judgment?
Explain.
A: 1. Mr. Adrian must report the imputed rental
value of the house and limousine as
income. If the rental value exceeds the personal
needs of Mr. Adrian because he is expected to
provide accommodation in said house for
company guests or the car is used partly for business
purpose, then Mr. Adrian is entitled only to a ratable
rental value of the house and limousine as exclusion
from gross income and only a reasonable amount
should be reported as income. This is because the
free housing and use of the limousine are given
partly for the convenience and benefit of the
employer (Henderson v. Collector, 1 SCRA 548).
2. No, the free uniforms, free living quarters
and the free meals inside the camp area are not
income to Capt. Canuto because these are
facilities or privileges furnished by the employer for
the employer’ convenience which are necessary
incidents to proper performance of the military
personnel’s duties.
3. None. The P200,000.00 moral and
exemplary damages are compensation for injuries
sustained by Mr. Infante. The P400,000.00
reimbursement for hospitalization expenses and the
P60,000.00 for salaries he failed to receive are
amounts of any damages received whether by suit
or agreement on account of such injuries. Section
28(b)(5) of the Tax Code specifically excludes these
amounts from the gross income of the injured
individual (Sec. 28[b], NIRC and Sec. 63, Rev. Regs.
No. 2).
4.
Q: The University of Bigaa, a non-stock, non-profit
entity, operates a canteen for its students and a
bookstore inside the campus. It also operates two
dormitories for its students, one of which is in the
campus. Is the University liable to pay income taxes
for the operation of the:
1. Canteen?
2. Bookstore?
3. Two dormitories?
A: 1. For the operation of the canteen inside the
campus, the income thereon being incidental to
the operations of the university as a school, is
exempt (Art. XIV[4][3], Constitution; DECS
Regulations No. 137-87, December 16.
2. For the same reasons, the University of Bigaa
is not liable to pay income taxes for the operation
of the bookstore, since this is an ancillary activity the
conduct of which is carried out within the school
premises.
3. The University of Bigaa shall not be liable to
pay income taxes for the operation of the dormitory
located in the campus, for same reasons as the
foregoing.
However, the latter shall be liable for income taxes
on income from operations of the dormitory
located outside the school premises.
Q: Spouses Pablo Gonzales and Teresita Gonzales,
both resident citizens, acquired during their
marriage a residential house and lot located in
Makati City, which is being leased to a tenant for a
monthly rental of P100,000. Mr. Pablo Gonzales is
the President of PG Corporation and he receives
P50,000 salary per month. The spouses have only
one minor child. In late June 2010, he was
immediately brought to the hospital because of a
heart attack and he was pronounced dead on June
30, 2010. With no liabilities, the estate of the late
Pablo Gonzales was settled extra-judicially in early
2011.
1. Is Mr. Gonzales required to file income tax
return for 2010? If so, how much income
must he declare for the year? How much
personal and additional exemption is he
entitled to?
2. Is Mrs. Gonzales required to file income tax
return for 2010? If so, how much income
must be declare for the year and how much
personal exemption is she entitled to?
3. Is the Estate of the late Pablo Gonzales
required to file income tax return for 2010? If
so, how much income must it declare for the
year and how much personal exemption is
it entitled to?
A: 1. Yes, Mr. Pablo Gonzales is required to file
income tax return and pay income tax on the
following incomes for 2010: P300,000 – rental
income (P100,000 / 2 x 6 months), and P300,000
(P50,000 x 6 months) – salary, from January to June
30. Only 50% of the rental is to be reported by him
because the leased property is a property of the
conjugal partnership of gains belonging to the
spouses. He will be entitled to personal exemption
of P50,000 and additional personal exemption of
P25,000 for one minor child. If the taxpayer dies
during the taxable year, his estate may still claim
19
the personal and additional exemptions for himself
and his dependent as if he died at the close of such
year (Sec. 35, NIRC).
2. Yes, Mrs. Teresita Gonzales is required to file
her income tax return and pay income tax on
P600,000 (P50,000 x 12 months), rental income for
the year (January to December 2010). If any
income of the spouses cannot be definitely
attributed to or identified as income exclusively
earned or realized by either of the spouses, the
same shall be divided equally between them for
the purpose of determining their respective taxable
income (Sec. 24 [A], NIRC). Since the deceased
husband already claimed the additional personal
exemption for the minor child, Mrs. Gonzales could
no longer claim the additional personal exemption
(Sec. 35[B], NIRC).
3. Yes, the Estate of the late Pablo Gonzales
(through his Administrator or Executor) is also
required to file its income tax return and pay tax, if
applicable. Income tax imposed by Title II upon
individuals shall apply to the income of estates,
including income received by estates of deceased
persons during the period of administration or
settlement of the estate (Sec. 60, NIRC), and the
estate of a decedent (which shall have its own TIN)
shall be entitled to personal exemption of P20,000
(Sec. 61, NIRC). It is believed, however, that since
the personal exemption of individuals has been
increased to P50,000 under R.A. 9504 (social
legislation) in 2008, the same amount of P50,000
shall also be extended to estates and trusts. The
rental income to be reported by the estate shall be
P300,000 (P100,000 / 2 x 6 months (from July 1 to
December 31, 2010).
Q: Mr. Domingo owns a vacant parcel of land. He
leases the land to Mr. Enriques for ten years at a
rental of P12,000.00 per year. The condition is that
Mr. Enriquez will erect a building on the land which
will become the property of Mr. Domingo at the end
of the lease without compensation or
reimbursement whatsoever for the value of the
building. Mr. Enriquez erects the building. Upon
completion, the building had a fair market value of
P1 million. At the end of the lease, the building is
worth only P900,000.00 due to depreciation. Will Mr.
Domingo have income when the lease expires and
becomes the owner of the building with a fair
market value of P900,000.00? How much income
must he report on the building? Explain.
A: When building is erected by a lessee in the
leased premises in pursuance of an agreement with
the lessor that the building becomes the property of
the lessor at the end of the lease, the lessor has the
option to report income as follows:
 a. The lessor may report as income the
market value of the building at the
time when such building is completed;
or
b. The lessor may spread over the life of
the lease the estimated depreciated
value of such building a the
termination of the lease and report as
income for each year of the lease an
aliquot part thereof (Sec. 49, Rev.
Regs. No. 2).
c.
Q: John McDonald, a U.S. citizen residing in Makati
City, bought shares of stocks of a domestic
corporation whose shares are listed and traded in
the Philippine Stock Exchange, at the price of Php2
million. Yesterday, he sold the shares of stocks
through his favorite Makati stockbroker at a gain of
Php200,000. Is John McDonald directly sold the
shares to his best friend, who is another U.S. citizen
residing in Makati, at a gain of Php 200,000. Is he
liable to Philippine income tax? If so, what is the tax
base and rate?
A: 1. No, John McDonald is exempt from Philippine
income from his sale of shares of stocks of a
domestic corporation that are listed and traded in
the Philippine Stock Exchange by express provision
of law (Sec. 24[c], NIRC, as amended by B.P. 221,
May 25, 1982). He is, however subject to the stock
transaction tax equivalent to one-half of one
percent (1/2 of 1%) of the gross selling price or gross
value in money of the shares of stock sold or
exchanged (Sec. 127[A], NIRC).
2. Yes, John McDonald will be subject to Philippine
income tax on the Php 200,000 gain arising from his
direct sale of the listed shares of stocks of a
domestic corporation to his friend residing in
Makati. An alien individual, whether or not a
resident of the Philippines, is taxable on income
derived from sources within the Philippines (Sec.
23[D], NIRC). Gain from the sale of shares of stock in
a domestic corporation shall be treated as derived
entirely from sources within Philippines, regardless of
where the said shares are sold (Sec. 42[E], NIRC). A
final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during
the taxable year from the sale of shares of stock in
a domestic corporation, except shares sold or
disposed of through the stock exchange:
Not over P100,000
5%
On any amount in excess of P100,000
10%
(Sec. 24[c], NIRC)
Q: In 2000, Mr. Belen bought a residential house and
lot for P1,000,000. He used the property as his and
his family’s principal residence. It is now year 2013
20
and he is thinking of selling the property to buy a
new one. He seeks your advice on how much
income tax he would pay if he sells the property.
The total zonal value of the property is P5,000,000
and the fair market value per tax declaration is
P2,500,000. He intends to sell it for P6,000,000. What
material considerations will you take into account
in computing the income tax? Please explain the
legal relevance of each of these considerations.
A: Since the planned sale involves a real property
classified as a capital asset, the material
considerations to take into account to compute
the income tax are:
1. The current fair market value of the
property to be sold. The current fair
market value is the higher between the
zonal value and the fair market value
per tax declaration;
2. The gross selling price of the property;
3. Determination of the tax base, which is
the higher amount between the gross
selling price and the current fair market
value of the property.
The income tax is computed at 6% of the tax base,
which is in the nature of a final capital gains tax
(Sec. 24[D][1], NIRC).
However, since the property to be sold is a principal
residence and the purpose is to buy a new one, I
will advise Mr. Belen that the sale can be exempt
from the 6% capital gains tax if he is willing to
comply with the following conditions:
a. He must utilize the entire proceeds of
sale in acquiring a new principal
residence within 18 months from date of
disposition;
b. He should notify the Commissioner of his
intention to avail of the exemption
within 30 days from date of sale;
c. He should open an escrow account with
a bank and deposit the 6% capital gains
tax due on the sale. If he compliers with
the utilization requirement, he will be
entitled to get back his deposit of the
tax payment; otherwise, the deposit will
be applied against the capital gains tax
due (Sec. 24[D][2], NIRC).
Q: Melissa inherited from the father a 300-sq.m. lot.
At the time of her father’s death on March 14, 1995,
the property was valued at P720,000. On February
28, 1996, to defray the of the medical expenses of
her sick son, she sold the lot for P600,000 on cash
basis. The prevailing market value of the property at
the time of sale was P3,000 per sq. m.
1. Is Melissa liable to pay capital gains tax on
the transaction? If so, how much and why? If not,
why not?
2. Is Melissa liable to pay VAT on the sale of the
property? If so, how much and why? If not, why not?
A: 1. Melissa is liable to pay the 6% capital gains tax
based on the gross selling price (P600,000) or fair
market value at the time of sale (P900,000 = P3,000
x 300 sq. m.), whichever is higher. The capital gains
tax is P54,000 (P900,000 x 6%). Although Melissa
actually incurred a loss in the sale of the real
property, this loss is disregarded for income tax
purposes because Section 24(D) of the Tax Code
presumes that the seller realized a gain from the
sale of such real property classified as a capital
asset and it imposes the tax on the higher amount
between the gross selling price and the fair market
value, The real property is a capital asset, since it is
not used in the trade or business of Melissa (Sec.
39[A], NIRC).
3. No. Melissa is exempt from VAT on the sale
of the real property classified as a capital asset. To
be subject to VAT, the real property must be
classified as an ordinary asset, the seller must be
engaged in the real estate business, and the
amount of gross sales must have exceeded P1.5
million. In this case all the above requisites are not
present.
Q:Josel agreed to sell his condominium unit to Jess
for P2.5 million. At the time of the sale, the property
had a zonal value of P2.0 million. Upon the advice
of a tax consultant, the parties agreed to execute
two deeds of sale, one indicating the zonal value
P2.0 million as the selling price and the other,
showing the true selling price of P2.5 million. The tax
consultant filed the capital gains tax return, using
the deed of sale showing the zonal value of P2.0
million as the selling price. Discuss the tax
implications and consequences of the action taken
by the parties. A: The capital gains tax due on the
sale shall be based on the actual selling price of
P2.5 million, which is higher than the zonal value of
the property (Sec. 24[D][1], NIRC). The
documentary stamp tax on the conveyance of real
property shall likewise be based on the higher value
(Sec. 196, NIRC). Accordingly, a deficiency capital
gains tax and documentary stamp tax are due from
Josel plus the 50% surcharge imposable on a
fraudulent return. Both Josel and his tax consultant
are criminally liable for tax evasion. Here, it is clear
that the three (3) requisite factors to constitute tax
evasion are present, viz.; (1) the end to be
achieved, which is the payment of less than that
known by them to be legally due; (2) an
accompanying state of mind, which is evil, in bad
faith, willful or deliberate and not merely accidental
and (3) a course of action, which is unlawful (CIR v.
Estate of Benigno P. Toda, Jr., 438 SCRA 290 [240]).
21
Q: Juan Panalo won a damage suit for P500,000.00
against Juana Talo. Panalo got a writ of execution
and made a levy on the lot of Talo. The lot was sold
at public auction where Panalo was the highest
bidder for P500,000.00 Panalo refused to pay any
capital gains tax on his purchase of said lot. Your
opinion.
A: The capital gains tax from sales of real property is
payable by the seller (Section 21[e] in relation to
Section 49[a][4] of the NIRC). Hence, Panalo
cannot refuse to pay the capital gains tax on his
purchase of said lot, because he is treated as the
statutory seller.
Q: Pedro Manalo, a Filipino citizen residing in Makati
City, owns a vacation house and lot in San
Francisco, California, U.S.A., which he acquired in
2000 for P15,000,000. On January 10, 2006, he sold
said real property to Juan Mayaman, another
Filipino citizen residing in Quezon City, for
P20,000,000. On February 9, 2006, Manalo filed the
capital gains tax return and paid P1,200,000
representing 6% capital gains tax. Since Manalo
did not derive any ordinary income, no income tax
return was filed by him for 2006. After the tax audit
conducted in 2007, the BIR officer assessed Manalo
for deficiency income tax computed as follows:
P5,000,000 (P2,000,000 less P15,000,000) x 35% =
P1,750,000, without the capital gains tax paid being
allowed as tax credit. Manalo consulted a real
estate broker who said that the P1,200,000 capital
gains tax should be credited from the P1,750,000
deficiency income tax.
1. Is the BIR officer’s tax assessment correct?
Explain.
2. If you were hired by Manalo as his tax
consultant, what advice would you give him to
protect his interest? Explain.
A: 1. A resident citizen like Pedro Manalo is taxable
on all income derived from sources within and
without the Philippines (Sec. 23[A], NIRC). Gains,
profits and income from the sale of real property
located without the Philippines are considered as
incomes from sources without the Philippines (Sec.
42[C][5], NIRC).
The vacation house and lot in California, USA is a
capital asset, since it is not used in the taxpayer’s
trade or business (Sec. 39[A][1], NIRC). However, it
is not subject to the 6% capital gains tax under
Section 24(D)(1) of the Tax Code, since the real
property is not located in the Philippines. Said
preferential rate of income tax applies only when
the seller is a resident citizen and the real property
is classified as a capital asset located in the
Philippines. Accordingly, the gain of P5 million (P20
million less P15 million) shall be included in the
taxable income of Pedro Manalo for 2006 subject
to the graduated income tax rates of 5% to 32%
(Sec. 24[A][1], NIRC). It is, therefore, erroneous for
the BIR to apply the corporate income tax rate of
35% on the taxable income of Pedro Manalo, a
resident citizen.
3. The amount of P1,200,000 (6% times P15
million), representing capital gains tax
erroneously paid by Pedro Manalo, may be
credited against the ordinary income tax due on
the taxable income for 2006, since capital gains
tax is another form of income tax under Title II of
the Tax Code. If the BIR official insists on not
allowing such tax credit of capital gains tax
erroneously paid against ordinary income tax
due for the year, I would advise my client to file
a written claim for tax credit or refund for the
capital gains tax erroneously paid with the BIR
within two (2) years from the date of payment
(Secs. 204[c] and 229, NIRC).
Q: Last July 12, 2000, Mr. & Mrs. Peter Camacho sold
their principal residence situated in Tandang Sora,
Quezon City for Ten million pesos (P10,000,000.00)
with the intention of using the proceeds to acquire
or construct a new principal residence in Aurora
Hills, Baguio City. What conditions must be met in
order that the capital gains presumed to have been
realized from such sale may not be subject to
capital gains tax? A: The conditions are:
1. The proceeds are fully utilized in
acquiring or constructing a new
principal residence within eighteen (18)
calendar months from the sale or
disposition of the principal residence;
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 Commissioner of Internal Revenue
must have been informed by Mr. & Mrs.
Peter Camacho within thirty (30) days
from the date of sale or disposition on
July 12, 2000, through a prescribed
statement / 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;
and
5. If there is no full utilization of the
proceeds of sale or disposition, the
unused portion of the gain presumed to
have been realized from the sale or
disposition shall be subject to capital
gains tax (Sec. 24[D][2],NIRC).
Q: Mr. Pedro Aguirre, a resident citizen, is working
for a large real estate development company in the
22
country and in 2010, he was promoted to
VicePresident of the company. With more
responsibilities comes higher pay. In 2011, he
decided to buy a new car worth P2 million and he
traded-in his old car with a market value of
P800,000, and paid the difference of P1.2 million to
the car company. The old car, which was bought
three (3) years ago by the father of Mr. Pedro
Aguirre at a price of P700,000, was donated by him
and registered in the name of his son. The
corresponding donor’s tax thereon was duly paid
by the father.
1. How much is the cost basis of the old car to Mr.
Aguirre?
2. What is the nature of the old car – capital asset
or ordinary asset?
3. Is Mr. Aguirre liable to pay income tax on the
gain from the sale of his old car? A: 1. P700,000.
The basis of the property in the hands of the
done-son is the carry-over basis, the same basis
as if it would be in the hands of the donor-father
(Sec. 40[B][3], NIRC).
2. The old car is a capital asset. It is a property
held by the taxpayer (whether or not connected
with his trade or business), but is not stock in trade
or other property of a kind which would properly be
included in the inventory of the taxpayer, if on hand
at the close of the year, or property held primarily
for sale to customers in the ordinary course of his
trade or business, or property used in the trade or
business of a character subject to depreciation, or
real property used in trade or business of the
taxpayer (Sec. 39[A],NIRC).
3. Yes, he is liable to income tax on his capital
gain of P100,000 (P800,000 less P700,000), but only
50% of the taxable gain shall be recognized and
subject to income tax, considering that the holding
period of the old car is more than one year (Sec.
39, NIRC).
Q: In 2007, Mr. & Mrs. Renato Garcia, an overseas
Filipino contract worker in Hong
Kong, opened peso and dollar deposits at the
Philippine branch of the Hong Kong Bank in Manila.
During the year, the bank paid interest income of
Php10,000 on the peso deposit and US$1,000 on the
dollar deposit. The bank withheld final income tax
equivalent to 20% of the entire interest income and
remitted the same to BIR.
1. Are the interest incomes on the bank
deposits of Mr. & Mrs. Renato Garcia subject to
income tax? Explain.
2. Is the ban correct in withholding the 20%
final tax on the entire interest income? Explain.
A: 1. The interest income on the foreign currency
deposit of Renato Garcia, a non-resident citizen,
with the FCDU of HK Bank in Makati is exempt from
Philippine income tax by express provision of law
(Sec. 24[B] in relation to Sec. 28[A][7][b], NIRC). His
interest income on peso deposit with HK Bank in
Makati will be subject to the 20% final withholding
tax (Sec. 24[B][1], NIRC in relation to Secs. 23[B] and
57[A], NIRC).
The interest income on the foreign currency deposit
of Mrs. Garcia, a resident citizen, with the FCDU of
HK Bank in Makati is subject to the 7.5% final
withholding tax (Sec. 24[B][1], NIRC), while her
interest income on the peso deposit with the bank
will be subject to the 20% final withholding tax.
2. No, as discussed above, the 20% final withholding
tax applies only on the interest income on peso
deposits. Since 20% FWT is higher that the 7.5% FWT
on interest income on foreign currency deposit of
Mrs. Garcia, she can file a written claim for refund
or tax credit for the excess tax paid, and Renato
Garcia can also file a written claim for refund or tax
credit for the 20% FWT erroneously deducted and
remitted to the BIR on his interest income on foreign
currency deposit which is exempt from income tax.
Q: On 3 January 1998, X, a Filipino citizen residing in
the Philippines, purchased one hundred (100)
shares in the capital stock of Y Corporation, a
domestic company. On 3 January 2000, Y
Corporation declared, out of the profits of the
company earned after 1 January 1998, a hundred
percent (100%) stock dividends on all stockholders
of record as of 31 December 1999 as a result of
which X holding in Y Corporation became two
hundred (200) shares. Are the stock dividends
received by X subject to income tax? Explain.
A: No. Stock dividends are not realized income.
Accordingly, the different provisions of the Tax
Code, imposing a tax on dividend income covers
cash and property dividends only, making stock
dividends in the equivalent of cash or property
dividend, as when the distribution results to a
change in ownership interest of the shareholders,
the stock dividends will be subject to income tax
(Sec. 24[B][2]; Sec. 2[A] and [B]; Sec. 28[B][5][b],
NIRC).
Q: In 2009, Caruso, a resident Filipino citizen,
received dividend income from a
U.S.-based corporation which owns a chain of
Filipino restaurants in the West Coast, USA. The
dividend remitted to Caruso is subject to U.S.
withholding tax with respect to a non-resident alien
like Caruso.
1. What will be your advice to Caruso in order
to lessen the impact of possible double taxation on
the same income?
2. Would you answer in 1 be the same, if
Caruso became a U.S. immigrant in 2008 and had
23
become a non-resident Filipino citizen? Explain the
difference in treatment for Philippine income tax
purposes.
A:1. In order to lessen the impact of double taxation
on the same income, I would advise Caruso to
credit the U.S. income tax on the dividend paid to
the U.S. Federal Government against the Philippine
income tax to be paid to the Philippine
Government. This privilege is, however, subject to
limitation as to amount and proof of tax payment
made to the U.S. government must be attached to
the Philippine income tax return.
2. If Caruso became an immigrant in 2008 and thus
became a non-resident Filipino citizen, such
dividend income received from a U.S. corporation
will be treated as a foreign-source income, exempt
from the Philippine income tax. A non-resident
Filipino citizen is taxed only on income from sources
within the Philippines (Sec. 23[B],NIRC), and
dividends received from a foreign corporation
whose gross income for the three-year period was
derived from sources outside the Philippines (Sec.
42[B], NIRC).
Q: What do you think is the reason why cash
dividends, when received by a resident citizen or
alien from a domestic corporation, are taxed only
at the final tax of 10% and not at the progressive tax
rate schedule under Section 24(A) of the Tax Code?
Explain your answer.
A: The reason for imposing final withholding tax
(rather than the progressive tax schedule) on cash
dividends received by a resident citizen or alien
from a domestic corporation is to ensure the
collection of income tax on said income. If we
subject the dividend to the progressive tax rate,
which can only be done through the filing on
income tax returns, there is no assurance that the
taxpayer will declare the income, especially when
there are other items of gross income earned during
the year. It would be extremely difficult for the BIR
to monitor compliance considering the huge
number of stockholders. By shifting the responsibility
to remit the tax to the corporation, it is very easy to
check compliance because there are fewer
withholding agents compared to the number of
income recipients. Likewise, the imposition of a final
withholding tax will make the tax available to the
government at an earlier time. Finally, the final
withholding tax will be a sure revenue to the
government unlike when the dividend is treated as
a returnable income where the recipient thereof
who is in a tax loss position is given the change too
offset such loss against dividend income thereby
depriving the government of the tax on said
dividend income.
Q: What are disguised dividends in income
taxation? Give an example.
A: Disguised dividends are those income payment
made by a domestic corporation, which is a
subsidiary of a non-resident foreign corporation, to
the latter ostensibly for services rendered by the
latter to the former, but which payments are
disproportionately larger than the actual value of
the services rendered. In such case, the amount
over and above the true value of the service
rendered shall be treated as a dividend, and shall
be subjected to the corresponding tax of 35% on
Philippine sourced gross income, or such other
preferential rate as may be provided under a
corresponding Tax Treaty.
Example: Royalty payments under a corresponding
licensing agreement.
Q: The MKB-Phils is a BOI-registered domestic
corporation licensed by the MKB of the United
Kingdom to distribute, support and use in the
Philippines its computer software systems, including
basic and related materials for banks. The MKB-Phils
provides consultancy and technical services,
incidental thereto by entering into licensing
agreements with banks. Under such agreements,
the MKB-Phils will not acquire any proprietary rights
in the licensed systems. The MKB-Phils pays royalty
to the MKB-UK, net of 15% withholding tax
prescribed by the RP-UK Tax Treaty. Is the income of
the MKB-Phils under the licensing agreement with
banks considered royalty subject to 20% final
withholding tax? Why? If not, what kind of tax will its
income be subject to? Explain.
A: Yes. The income of MKB-Phils under the licensing
agreement with banks shall be considered as
royalty subject to 20% final withholding tax. The term
royalty is broad enough to include technical
advice, assistance or services rendered in
connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture, project or
scheme (Sec. 42[4][f], NIRC). Accordingly, the
consultancy and technical services rendered by
MKB-Phils which are incidental to the distribution,
support and use of the computer systems of MKB-
UK are taxable as royalty.
Q: X is employed as security guard o Excel
Supermarket, Inc. X lives in a room within the
compound of Excel but he is not charged any rent.
The rental value of the room is P300.00 a month. X
wants your opinion on whether BIR can tax the
value of the free use of his room.
A: The rental value of the room is not taxable.
Section 2.2 of the Revenue Audit Memorandum
Order No. 1-87 provides that if the lodging is
24
furnished in the business premises of the employer
and the employee is required to accept such
lodging as a condition of his employment, then the
value of said lodging will be not taxable. It is merely
for the convenience, comfort and pleasure of the
employer.
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup Boxing
Council, a sports association duly accredited by
the Philippine Boxing Association. Onyoc received
the amount of P500,000 as his prize which was
donated by Ayala Land Corporation. The BIR tried
to collect income tax on the amount received by
Onyoc and donor’s tax from Ayala Land
Corporation, which taxes, Onyoc and Ayala Land
Corporation refuse to pay. Decide.
A: The prize will not constitute a taxable income to
Onyoc; hence, the BIR is not correct in imposing the
income tax R.A. No. 7549 explicitly provides that “All
prized and awards granted to athletes in local and
international sports tournaments and competitions
held in the Philippines or abroad and sanctioned by
their respective national sports associations shall be
exempt from income tax.”
Neither is the BIR correct in collecting the donor’s
tax from Ayala Land Corporation. The law is clear
when it categorically stated that the donor of said
prizes and awards shall be exempt from the
payment of the donor’s tax.
Q: Evelyn is a graduate student of U.P. In January
1991, she won the Palanca Award for an
outstanding short story she wrote. The award was
P25,000.00 in cash. In February, 1991, she was also
named Most Valuable Player of the Varsity
volleyball team and she was given a trophy plus
P10,000.00. Finally, in March 1991, she received a
Fellowship Award from the University of California to
pursue a master’s degree in American literature.
The fellowship is for $10,000.00 plus free board and
lodging for two (2) semesters. Should Evelyn include
these awards and fellowship in her gross income?
Reason.
A: Gross income include prizes and winnings (Sec.
27, NIRC), except those stated in Section 28B(8), (E)
of the NIRC, to wit:
“(E) Prizes and awards made primarily in recognition
of religious charitable, scientific, educational,
artistic, literary, or civil achievement but only if:
i. The recipient was selected without any
action on his part to enter the contest or
proceeding; and
ii. The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.”
The first award granted to Evelyn was a Palanca
award. This kind of award requires submission of
literary works. Hence, this is included in the gross
income because it fails to meet the legal requisites
provided for in the afore-quoted provisions of law
specifically item
(i).
The second award granted to Evelyn was the Most
Valuable Player Award. In this kind of award, Evelyn
did not file any application to enter into any
contest. The award was given to her in recognition
for her outstanding performance in the field of
sports. However, the recognition in the field of sports
is not among those stated in the afore-quoted
provision of law. Thus, the award granted to her
does not fall under the afore-quoted provision of
law. The last award granted to her was the
Fellowship Award. This requires also submission of
application to quality for such award. Hence, it fails
to meet the necessary requisites of the afore-
quoted provision of law specifically item (1).
Q: Is the prize of one million pesos awarded by the
Reader’s Digest subject to withholding tax? Who is
responsible for withholding the tax? What are the
liabilities for failure to withhold such tax?
A: It depends. If the prize is considered as winning
derived from sources within the Philippines, it is
subject to withholding of final tax (Sec. 24[B] in
relation to Sec. 57[A], NIRC). If derived from sources
without the Philippines, it is not subject to
withholding of final tax because the Philippine tax
law and regulations could not reach out to foreign
jurisdictions.
The tax shall be withhold by the Reader’s Digest or
local agent who has control over the payment of
the prize.
Any person required to withhold or who willfully fails
to withhold, shall, in addition to the other penalties
provided under the Code, be liable upon
conviction to a penalty equal to the total amount
of tax not withheld (Sec. 251, NIRC). In case of
failure to withhold the tax or in case of under
withholding, the deficiency tax shall be collected
from the payer / withholding agent (1st par., Sec.
2.S7[A], Rev. Regs. No. 2-98). Any person required
under the Tax Code or by rules and regulations to
withhold taxes at the time or times required by law
or rules and regulations shall, in addition to other
penalties provided by law, upon conviction be
punished by a fine of not less than Ten thousand
pesos (Php10,000.00) and suffer imprisonment of not
less than one (1) year but not more than ten (10)
years (1st par., Sec. 255, NIRC).
Q: Jose Miranda, a young artist and designer,
received a prize of P100,000.00 for winning in the
on-the-spot peace poster contest sponsored by a
local Lions Club. Shall the reward be included in the
25
gross income of the recipient for tax purpose?
Explain.
A: No. It is not includable in the gross income of the
recipient because the same is subject to a final tax
of 20%, the amount thereof being in excess of
P10,000.00 (Sec. 24[B][1], NIRC). The prize constitute
a taxable income because it was made primarily in
recognition of artistic achievement which he won
due to an action on his part to enter the contest
(Sec. 32[B][7][c], NIRC). Since it is an on-the-spot
contest, it is evident that he must have joined the
contest in order to earn the prize or award.
Q: Mr. Lajojo is a big-time swindler. In one year he
was able to earn P1 million from his swindling
activities. When the Commissioner of Internal
Revenue discovered his income from swindling, the
Commissioner assessed him a deficiency income
tax for such income. The lawyer of Mr. Lajojo
protested the assessment on the following grounds:
1) The income tax applies only to legal income,
not to illegal income;
2) Mr. Lajojo’s receipts from his swindling
did not constitute income because he
was under obligation to return amount
he had swindled, hence, his receipt
from swindling was similar to a loan,
which is not income, because for every
peso borrowed he has a corresponding
liability to pay one peso; and
3) If he has to pay the deficiency income
tax assessment, there will be hardly
anything left to return to the victims of
the swindling.
How will you rule on each of the three grounds for
the protest? Explain.
A:1. The contention that the income tax applies to
legal income and not to illegal income is not
correct. Section 28(a) of the Tax Code includes
within the purview of gross income all income from
whatever source derived. Hence, the illegality of
the income will not preclude the imposition of the
income tax thereon.
2. The contention that the receipts from his
swindling did not constitute income because of his
obligation to return the amount swindled is likewise
not correct, When a taxpayer acquires earnings,
lawfully or unlawfully, without the consensual
recognition, express or implied, of an obligation to
repay and without restriction as to their disposition,
he has received taxable income, even though it
may still be claimed that he is not entitled to retain
the money, and even thought he may still be
adjudged to restore its equivalent (James v. U.S.,
366 US 213, 1961). To treat the embezzled funds not
as taxable income would perpetuate injustice by
relieving embezzlers of the duty of paying income
taxes on the money they enrich themselves with
through embezzlement, while honest people pay
their taxes on every conceivable type of income.
3. The deficiency income tax assessment is a
direct tax imposed on the owner which is an excise
on the privilege to earn an income. It will not
necessarily be paid out of the same income that
was subjected to the tax. Mr. Lajojo’s liability to pay
the tax is based on his having realized a taxable
income from his swindling activities and will not
affect his obligation to make restitution. Payment of
the tax is a civil obligation imposed by law while
restitution is a civil liability arising from a crime.
Q: Mr. Osorio, a bank executive, while playing golf
with Mr. Perez, a manufacturing firm executive ,
mentioned to the latter that this (Osorio) bank had
just opened a business relationship with a big
foreign Importer of goods which Perez’ company
manufactures. Perez requested Osorio to introduce
him to this foreign Importer and put in a good word
for him (Perez), which Osorio did. As a result, Perez
was able to make a profitable business deal with
the foreign importer. In gratitude, Perez, in behalf of
his manufacturing firm, send Osorio an expensive
car as a gift. Osorio called Perez and told him that
there was really no obligation on the part of Perez
or his company to give such an expensive gift. But
Perez insisted that Osorio keep the car. The
company of Perez deducted the cost of the car as
a business expense. The Commissioner of Internal
Revenue included the fair market value of the car
as income of Osorio who protested that the car was
a gift and therefore excluded from income. Who is
correct, the Commissioner or Osorio? Explain.
A: The Commissioner is correct. The car, having
been given to Mr. Osorio in consideration of having
introduced Mr. Perez to a foreign imported which
resulted to a profitable business deal, is considered
to be a compensation for services rendered. The
transfer is not a gift because it is not made out of a
detached or disinterested generosity but for a
benefit accruing to Mr. Perez. The fact that the
company of Mr. Perez takes a business deduction
for the payment indicates that it was considered as
a pay rather than a gift. Hence, the fair market
value of the car is includible in the gross income
pursuant to Section 28(a)(1) of the Tax Code (See
1974 Federal Tax Handbook, p. 145). A payment
though voluntary, if it is in return for services
rendered, or proceeds from the constraining force
of any moral or legal duty a benefit characterized
as a “gift” by the payor (Commissioner v.
Duberstein, 363 U.S. 278).
Q: An insolvent company had an outstanding
obligation of P100,000.00 form a creditor. Since it
26
could not pay the debt, the creditor agreed to
accept payment through dacion en pago a
property which had a market value P30,000.00. In
the dacion en pago document, the balance of the
debt was condoned.
1. What is the tax effect on the discharge of the
unpaid balance of the obligation on the debtor
corporation?
2. Insofar as the creditor is concerned, how is
he affected tax-wise as a consequence of the
transaction?
A:1. The condonation of the unpaid balance of the
obligation has the effect of a donation made on
the part of the creditor. It is obvious that the creditor
merely desires to benefit the debtor and without
any consideration therefore cancels the debt, the
amount of the debt cancelled is a gift from the
creditor to the debtor and need not be included in
the latter’s gross income (Sec. 50, Rev. Regs. No. 2).
2. For the difference of P70,000.00, the creditor shall
be subject to donor’s tax at the applicable rates
provided for under the National Internal Revenue
Code.
Q: Mr. Francisco borrowed P10,000.00 from his
friend, Mr. Gutierrez, payable in one year without
interest. When the loan became due, Mr. Francisco
told Mr. Gutierrez that he (Mr. Francisco) was
unable to pay because of business reverses. Mr.
Gutierrez took pity on Mr. Francisco and condoned
the loan. Mr. Francisco was solvent at the time he
borrowed the P10,000.00 and at the time the loan
was condoned. Did Mr. Francisco derive any
income from the cancellation or condonation of his
indebtedness? Explain.
A: No. Mr. Francisco did not derive any income from
the cancellation or condonation of his
indebtedness. Since it is obvious that the creditor
merely desired to benefit the debtor in view of the
absence of consideration for the cancellation, the
amount of the debt is considered as a gift from the
creditor to the debtor and need not be included in
the latter’s gross income.
Q: During the year, a domestic corporation derived
the following items of revenue: (a) gross receipts
from a trading business; (b) interests from money
placements in the banks; (c) dividends from its
stock investments in domestic corporations; (d)
gains from stock transactions through the Philippine
Stock Exchange; (e) proceeds under an insurance
policy in the loss of goods. In preparing the
corporate income tax return, what should be the
tax treatment on each of the above items?
A:The gross receipts from trading business is
includible as an item of income in the corporate
income tax return and subject to corporate income
tax rate based on net income. The other items of
revenue will not be included in the corporate
income tax return. The interest from money market
placements is subject to a final withholding tax of
20% dividends from domestic corporations are
exempt from income tax; and gains from stock
transactions with the Philippine Stock Exchange are
subject to transaction tax which is in lieu of the
income tax. The proceeds under an insurance
policy on the loss of goods in of an item of income
is but merely a return of capital; hence, not taxable.
Q: XYZ Foundation is a non-stock, non-profit
association duly organized for religious, charitable
and social welfare purposes. Last January 3, 2000, it
sold a portion of its lot used for religious purposes
and utilized the entire proceeds for the construction
of a building to house its free Day and Night Care
Center for children of single parents. In order to
subsidize the expenses of the Day and Night Care
Center and to support its religious, charitable and
social welfare projects, the Foundation leased the
300 square meter area of the second and third
floors of the building for use as a boarding house.
The Foundation also operates a canteen and a gift
shop within the premises, all the income from which
is used actually, directly, and exclusively for the
purposes for which the Foundation was organized.
1. Considering the constitutional provision granting
tax exemption to non-stock corporations, such as
those formed exclusively for religious, charitable or
social welfare purposes, explain the meaning of the
last paragraph of said Section 30 of the 1997 Tax
Code, which states that "Income of whatever kind
and character of the foregoing organizations from
any of their properties, real or personal, or from any
of their activities conducted for profit, regardless of
the disposition made of such income shall be
subject to tax imposed under this Code.”
2. Is the income derived by XYZ Foundation form the
sale of a portion of its lot, rentals from its boarding
house and the operation of its canteen and gift
shop subject to tax? Explain.
A: 1. The exemption contemplated in the
Constitution covers real estate tax on real
properties actually, directly and exclusively used for
religious, charitable or social welfare purposes. It
does not cover exemption from the imposition of
income tax, which is within the context of Section
30 of the Tax Code. As a rule, non-stock, non-profit
corporations organized for religious, charitable or
social welfare purposes are exempt from income
tax on their income received by them as such.
However, if these religious charitable or social
welfare corporations derive income from their
properties or any of their activities conducted for
profit, the income tax shall be imposed on said
27
items of income, irrespective of their disposition
(Sec. 30, NIRC; Commissioner v. YMCA, G.R. No.
124043, October 14, 1998; CIR v. St. Luke’s Medical
Center, G.R. No. 195909, September 26, 2012).
2. Yes, The income derived from the sale of lot and
rentals from its boarding house are considered as
income from properties which are subject to tax.
Likewise, the income from its activities conducted
for profit, which are subject to tax. The income tax
attaches irrespective of the disposition of these
incomes.
Q: Explain briefly whether the following items are
taxable or non-taxable: (a) income from jueteng;
(b) gain arising from expropriation of property; (c)
taxes paid and subsequently refunded; (d)
recovery of bad debts previously charged off; and
(e) gain on the sale of a car used for personal
purposes.
A: a. It is taxable, The law imposes a tax on ‘income
from any source whatever,’ which means that is
includes income whether legal or illegal (Sec. 32[A],
NIRC).
b. Taxable. There is a material gain, not excluded
by law, realized out of a closed and completed
transaction. Gains from dealings in property are
part of gross income (Sec.
32[A][3], NIRC).
c. It depends. Taxes paid which are allowed as a
deduction from gross income are taxable when
subsequently refunded but only to the extent of
the income tax benefit of said deduction (Sec.
34[C][1], NIRC). If follows that taxes paid which
are not allowed as deduction from gross income,
i.e., income tax, donor’s tax and estate tax, are
not taxable when refunded.
d. Recovery of bad debts previously charged off is
taxable to the extent of income tax benefit of
said deduction (Sec. 34[E][1], NIRC).
e. Gain on the sale of a car used for personal
purposes is taxable. This is a gain derived
from dealing in property which is part of the
taxpayer’s gross income (Sec. 32[A][3], NIRC). There
is a materials gain, not excluded by law, realized
out of a closed and completed transaction.
Q: State with reasons the tax treatment of the
following in the preparation of annual income tax
returns:
1. Proceeds of life insurance received by a child as
irrevocable beneficiary;
2. 13th month pay and de minimis benefits;
3. Dividends received by a domestic corporation
from (i) another domestic corporation; and (ii) a
foreign corporations;
4. Interest on deposits with (i) BPI Family Bank; and
(ii) a local offshore banking unit of a foreign
bank;
5. Income realized from sale of (i) capital assets,
and (ii) ordinary assets. A: 1. The proceeds of life
insurance received by a child as irrevocable
beneficiary are not to be reported in the annual
income tax return, because they are excluded
from gross income. This kind of receipt does not
fall within the definition of income – “any wealth
which flows into the taxpayer other than a mere
return of capital.” Since insurance is
compensatory in nature, the receipt is merely
considered as a return of capital (Sec. 32 [B][1],
NIRC); Fisher v. Trinidad, 43 Phil. 73 [1992]).
2. 13th month pay is excluded from gross income for
income tax purposes to the extent of P30,000. Any
excess will be included in the gross income as part
of gross compensation income (Sec. 32[B][7][e],
NIRC).
3.i. De minimis benefits are non-taxable fringe
benefits. They are not to be reported in the income
tax return because they are tax exempt. They are
also exempt from the imposition of the fringe
benefits tax (Sec. 33[C], NIRC).
3.ii. Dividends received by a domestic corporation
from another domestic corporation are not subject
to income tax; hence, should not be declared in
the income tax return (Se.
27[D][4], NIRC).
4.i. Dividends received by a domestic corporation
from a foreign corporation are subject to income
tax and shall form part of the gross income. There is
no law exempting this type of dividend from
income tax (Sec. 32[7], NIRC).
4.ii. Interest on deposit with BPI Family Bank is a
passive income subject to a final withholding tax
rate of 20% the interest on deposit with a local
offshore banking unit of a foreign bank is a passive
income subject to a final withholding tax rate of
7.5% (Sec. 24[B][1],NIRC). Both interest incomes are
not to be declared as part of gross income in the
income tax return.
5.i. Generally, income realized from the sale of
capital assets are not to be reported in the income
tax return, as they are already subject to final taxes
(capital gains tax on real property located in the
Philippines and shares of stocks of a domestic
corporation). What are to be reported in the annual
income tax return are the capital gains derived
from the disposition of capital assets other than real
property located in the Philippines or shares of
stocks in domestic corporations which are not
subject to final taxes.
5.ii. Income realized from the sale of ordinary assets
is taxable and the said income shall be declared in
the annual income tax return. The income
28
constitutes either income derived from the conduct
of trade or business or a gain derived from dealings
in property (Sec. 32[A][2] and [3], NIRC).
CHAPTER VI: EXCLUSIONS FROM GROSS INCOME
Q: On 30 June 2000, X took out a life insurance
policy on his own life in the amount of P2,000,000.00
He designated his wife, Y, as irrevocable
beneficiary to P1,000,000.00 and his son, Z, to the
balance of P1,000,000.00, but in a latter designation,
reserving his right to substitute him for another. On 1
September 2003, X died and his wife and son went
to the insurer to collect the proceeds of X’s life
insurance policy. Are the proceeds of the insurance
subject to income tax on the part of Y and Z for their
respective shares? Explain.
A: No. The law explicitly provides that proceeds of
life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
taxation. The proceeds of life insurance received
upon death of the insured constitutes a
compensation for the loss of life; hence, a return of
capital, which is beyond the scope of income
taxation (Sec. 32[B][1], NIRC). [NOTE: The
reservation as to his right to designate or substitute
the beneficiary for another is not important for
income tax purposes, although it is material for
estate tax purposes.]
Q: X, while driving home from his office, was
seriously injured when his automobile was bumped
from behind by a bus driven by a reckless driver. As
a result, he had to pay P200,000.00 to his doctor and
P100,000.00 to the hospital where he was confined
for treatment. He filed a suit against the bus driver
and the bus company and was awarded and paid
actual damages of P300,000.00 (for his doctor and
hospitalization bills), P100,000.00 by way of moral
damages, and P50,000.00 for what he had to pay
his attorney for bringing his case to court. Which, if
any, of the following awards are taxable income to
x and which are not? Explain.
A: Nothing is taxable. Under the Tax Code, any
amount received as compensation for personal
injuries or sickness, plus the amounts for any
damages received whether by suit or agreement,
on account of such injuries or sickness shall be
excluded from gross income. Since the entire
amount of P450,000.00 received represents award
of damages on account of the injuries sustained, all
shall be excluded from his gross income. Obviously,
these damages are considered by law as mere
return of capital (Sec. 32[B][4], NIRC).
Q: JR was a passenger on an airline that crashed.
He survived the accident but sustained serious
physical injuries which required hospitalization for 3
months. Following negotiations with the airline and
its insurer, an agreement was reached under terms
of which JR was paid the following amounts:
P500,000.00 for his hospitalization; P250,000.00 as
moral damages; P300,000.00 for loss of income
during the period of his treatment and recuperation.
In addition, JR received from his employer the
amount of P200,000.00, presenting the cash
equivalent of his earned vacation and sick leaves.
Which, if any, of the amounts he received are
subject to income tax? Explain.
A: The amount of P200,000.00 that JR received from
his employer is subject to income tax, except the
money equivalent of ten (10) days unutilized
vacation leave credits which is not taxable.
Amounts of vacation allowances or sick leave
credits which are paid to an employee constitutes
compensation (Sec. 2.78[A][7], Rev. Regs. No. 2-98,
as amended by Rev. Regs No. 10-2000).
The amounts that JR received from the airlines are
excluded from gross income and not subject to
income tax because they are compensation for
personal injuries suffered from an accident as well
as damages received as a result of an agreement
on account of such injuries (Sec. 32[B][4], NIRC).
Q: Company A decides to close its operations due
to continuing losses and to terminate the services of
its employees. Under the Labor Code, employees
who are separated from service for such cause are
entitled to minimum of one-half month pay for
every year of service. Company A paid the
equivalent of one month pay for every year of
service and the cash equivalent of unused vacation
and sick leaves as separation benefits. Are such
benefits taxable and subject to withholding tax
under the Tax Code? Decide with reasons.
A: The separation benefits paid by Company A to
its employees are excluded from gross income,
being in the nature of benefits given to employees
whose services were terminated due to causes
beyond their control (Sec. 32[B][6][b], NIRC). The
entire benefits, thus, are not taxable and not
subject to withholding tax under the Tax Code.
Q: A group of philanthropists organized a non-
stock, non-profit hospital for charitable purposes to
provide medical services to the poor. The hospital
also accepted paying patients although none of its
income accrued to any private individual; all
income were plowed back for the hospital’s use
and not more than 30% of its funds were used for
administrative purposes. Is the hospital subject to
tax on its income? If it is, at what rate?
A: Yes, a non-stock, non-profit hospital organized for
charitable purpose, although generally exempt
29
from income tax, becomes taxable on income
derived from activities conducted for profit.
Services rendered to paying patients are
considered activities conducted for profit which
are subject to income tax, regardless of the
disposition of the said income. The rate is 10% of net
income, considering that the income earned
appears to be derived solely from hospital-related
activities (CIR v. St. Luke’s Medical Center, ibid).
Private educational institution that engages in
profitable undertaking is subject to tax. – A private
educational institution which deviates from its
purely educational purposes and activities shall be
treated like any private domestic corporation
engaged in business for profit with respect to
income derived there from. The protective mantle
of income tax benefit or exemption cannot be
extended to a private educational institution which
chooses to descend from its high pedestal of tax
preference or immunity to the level of an ordinary
private corporation engaged in profitable
undertaking or business (Xavier School, Inc. v.
Commissioner, CTA Case 1682, October 8, 1969).
Q: 1. X, an employee of ABC Corporation died. ABC
Corporation gave X’s widow an amount equivalent
to X’s salary for one year.
2. Is the amount considered taxable income to the
widow? Why?
3. Is said amount subject to tax? Explain.
A: 1. No. the amount received by the widow from
the decedent’s employer may either be a gift or a
separation benefit on account of death. Both are
exclusions from gross income pursuant to provisions
of Section 28(b) of the Tax Code.
2. A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of 65
years. Upon compulsory retirement, A received the
money value of his accumulated leave credits in
the amount of P 500,000.00.
3. No. The commutation of leave credits, more
commonly known as terminal leave pay, i.e., the
cash equivalent of accumulated vacation and sick
leave credits given to an officer or employee who
retires, or separated from the service through no
fault of his own, is exempt from income tax (BIR
Ruling No. 238-91, November 8, 1991; Commissioner
v. Castañeda, G.R. No. 96016, October 17, 1991).
Q: Maribel Santos, a retired public school teacher,
relies on her pension from the GSIS and the interest
income from a time deposit of P 500,000.00 with
ABC bank. Is Miss Santos liable to pay any tax on
her income?
A: Maribel Santos is exempt from tax on the pension
from the GSIS (Sec. 28[b][7][F], NIRC). However, as
regards her time deposit, the interest she receives
thereon is subject to 20% final withholding tax (Sec.
21[a][c], NIRC).
Q: X owns a half-hectare property in Bacoor, Cavite
which in 1980 was expropriated by the national
government, through the Department of Public
Works and Highways. After 10 years, X was paid P
2,000,000.00 as just compensation plus 6% annual
interest by the DPWH but minus the withholding tax.
Is the action of DPWH proper? Reason.
A: No, the action of DPWH is not proper. In the case
of Province of Tayabas v. Perez (66 Phil. 467), just
compensation was defined as “the just and
complete equivalent of the loss which the owner of
a thing expropriated has to suffer by reason of the
expropriation.” Further, in BIR Ruling No. 61-91, “just
compensation” was defined as that which is paid
by the Government equivalent to the value of the
property at the time of its taking. It is the fair and full
equivalent for the indemnity.
Based on the foregoing it is clear therefore that the
amount received after 10 years as just
compensation is not in any way a profit, gain or
income on the part of X, in the same vein, the 6%
annual interest paid by DPWH is not income. The
same partakes of the nature of a penalty or
indemnity due and accruing to X for having been
deprived of the use and benefit by not being paid
of the fair market value of the property since its
taking 10 years ago. Hence, the DPWH should not
have withheld taxes.
Q: The employees of Travelers, Inc. staged a strike.
X, a non-union member joined the strike and
volunteered to picket the company premises from
8:00 A.M. to 12: P.M. Monday to Friday. Six months
into the strike. X ran out of money and asked
financial aid from the union since he has no other
source of income and needed financial assistance
in order to live. The union gave him P 1,000.00 a
month to take care of his food requirements plus P
500.00 to take care of his monthly rent. When X filed
his return, he excluded these benefits from his gross
income. The exclusion was denied by the BIR.
Decide.
A: The P 1,500.00 is not compensation income
because compensation income arises out of
employer-employee relationship as payment for
services without compensation. The P 1,500.00 is a
gift from the labor union. According to Section
28(b)(3) of the NIRC, gifts are to be excluded from
gross income. Thus, the BIR’s denial is not valid.
Q: Born of a poor family on 14 February 1944, Mario
worked his way through college. After working for
more than 2 years in X Manufacturing Corporation,
Mario decided to retire and avail of the benefits
30
under the very reasonable retirement plan
maintained by his employer. He planned to invest
whatever retirement benefits he would receive in a
business that will provide his employer with the
needed raw materials. On the day of his retirement
on 30 April 1985, he received P 400,000.00 as
retirement benefit. In addition, his endowment
insurance policy, for which he was paying an
annual premium of P 1,520.00 since 1965, also
matured. He was then paid the face value of his
insurance policy in the amount of P 50,000.00.
1. Is Mario’s P 400,000.00 retirement benefit subject
to income tax?
2. Is his P 50,000.00 insurance proceeds exempt
from income taxation?
A: 1. Mario’s P 400,000.00 retirement benefit is
subject to income tax. To be exempt, the retirement
pay must have been extended to an employee
who is at least 50 years of age and who would have
worked for at least ten (10) years with the employer.
The amount cannot be considered as a separation
pay that would have exempted benefits from
income tax since it was Mario who had decided to
retire instead of being required to do so (Sec. 28,
NIRC).
2. The P 50,000.00 insurance proceeds is not totally
exempt from income tax. The excluded amount is
only that portion which corresponds to the
premiums that he had paid since 1965. At the rate
of P 1,520.00 per year multiplied by twenty (20)
years which was the period of the policy, he must
have paid a total of P 30,400.00. Accordingly, he will
be subject to report as taxable income the amount
of P 19,6000.00 (Sec. 28, NIRC).
Q: Delstar Emmanuel Perez, a government
employee, retires from the service upon reaching
the compulsory retirement age of 65. Would the
amount he is entitled to receive by way of
commutation of his accumulated leave credits, of
his terminal leave pay, be subject to income tax?
A: The amount that Emmanuel Perez is to receive
should not be subjected to income tax, and such
was the ruling by the Supreme Court in the Re:
Zialcita Administrative Case (Adm. Matter No. 90-
6015-SC, October 18, 1990). The ruling apparently
repudiated, or at least is inconsistent with, its earlier
decision in Commissioner v. Victoriano, G.R. No.
83176, August 10, 1989.
Q: Pedro Reyes, an official of Corporation X, asked
for an “earlier retirement” because he was
emigrating to Australia. He was paid P 2,000,000.00
as separation pay in recognition of is valuable
services to the corporation. Juan Cruz, another
official of the same company, was separated for
occupying a redundant position. He was given P
1,000,000.00 as separation pay. Jose Bautista was
separated due to his falling eyesight. He was given
P 5,000.00 as separation pay. All the three (3) were
not qualified to retire under the BIR approved
pension plan of the corporation.
1. Is the separation pay given to Reyes subject to
income tax?
2. How about the separation pay received by
Cruz?
3. How about the separation pay received by
Bautista?
A: 1. The separation pay given to Reyes is subject to
income tax as compensation income because it
arises from a service rendered pursuant to an
employer-employee relationship. It is
considered an exclusion from gross income
because the rule in taxation is tax construed in
strictissimi juris or the rule on strict interpretation of
tax exemptions.
2. The separation pay received by Cruz is not
subject to income tax because his separation from
the company was involuntary (Sec. 28[b][7], NIRC).
3. The separation pay received by Bautista is
likewise not subject to his separation is due to
disability, hence involuntary.
Under the law, separation pay received through
involuntary causes is exempt from taxation.
Q: 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 2 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; and
(b)Employees who do not meet either the
age or length of service.
A Co. plans to give the following:
For category (A) employees – the benefits
under the BIR approved plan plus an ex
gratia payment of one month of every year
of service.
For category (B) employees – one month
for every year of service. 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 withholding tax.
Explain your advice.
A: 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 he
employees’ control (Sec 32[B], NIRC). The cash
equivalent of unused vacation and sick leave
credits qualifies as part of separation benefits
excluded from gross income (CIR v. Court of
Appeals, G.R. No. 96016, October 17, 1991). For
category ‘B’ employees, all the benefits received
not 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 employees’ control, which are
specifically excluded from gross income (Sec. 32[B],
NIRC).
Q: Mr. Jacobo worked for a manufacturing firm. Due
to business reverse the firm offered voluntary
redundancy program in order to reduce overhead
expenses. Under the program an employee who
offered to resign would be given separation pay
equivalent to his three month’s basic salary for
every year of service. Mr. Jacobo accepted the
offer and received P 400,000.00 as separation pay
under the program. After all the employees who
accepted the offer were paid, the firm found its
overhead still excessive. Hence it adopted another
redundancy program. Various unprofitable
departments were closed. As a result, Mr. Kintanar
was separated from the service. He also received P
400,000.00 as separation pay. Did Mr. Jacobo
derive income when he received his separation
pay? Explain.
A: Yes, Mr. Jacobo derived a taxable income when
he received his separation pay because his
separation from employment was voluntary on his
part in view of his offer to resign. What is excluded
from gross income is any amount received by an
official or employees as a consequence of
separation of such official or employee from the
service of the employer for any cause beyond the
control of the said official or employee (Sec. 28,
NIRC).
Q: Mr. Quiroz worked as chief accountant of a
hospital for forty-five years. When he retired at 65 he
received retirement pay equivalent to two months’
salary for every year of service as provided in the
hospital BIR approved retirement plan. The Board of
Directors of the hospital felt that the hospital should
give Quiroz more than what was provided for in the
hospital’s retirement plan. In view of his loyalty and
Invaluable services for forty-five years; hence, it
31
resolved to pay him a gratuity of P1 Million over and
above his retirement pay.
The Commissioner of Internal Revenue taxed the P1
Million as part of the gross compensation income of
Quiroz who protested that it was excluded from
income because (a) it was a retirement pay, and
(b) it was a gift.
1. Is Mr. Quiroz correct in claiming that the
additional P1 Million was retirement pay and
therefore excluded from income? Explain.
2. Is Mr. Quiroz correct in claiming that the
additional P1 Million was gift and therefore
excluded from income? Explain.
A:1. No. The additional P1 Million is not a retirement
pay but a part of the gross compensation income
of Mr. Quiroz. This is not a retirement benefit
received in accordance with a reasonable private
benefit plan maintained by the employer as it was
not paid out of the retirement plan. Accordingly,
the amount received in excess of the retirement
benefits that he is entitled to receive under the BIR-
approved retirement plan would not quality as an
exclusion from gross income.
2. No. The amount received was in consideration of
his loyalty and invaluable services to the company
which is clearly a compensation income received
on account of employment.
Under the employer’s motivation test, ‘emphasis
should be placed on the value of Mr. Quiroz
services to the company as the compelling reason
for giving him the gravity; hence it should constitute
a taxable income. The payment would only qualify
as a gift if there is nothing but good will, esteem and
kindness’ which motivated the employer to give the
gratuity (Stanton v. U.S., 186 F. Supp. 393). Such is
not the case in the herein problem.
Q: XYZ Foundation is a non-stock, non-profit
association duly organized for religious, charitable
and social welfare purposes. Last January 3, 2000, it
sold a portion of its lot used for religious purposes
and utilized the entire proceeds for the construction
of a building to house its free Day and Night Care
Center for children of single parents. In order to
subsidize the expenses of the Day and Night Care
Center and to support its religious, charitable and
social welfare projects, the Foundation leased the
300 square meter area of the second and third
floors of the building for use as a boarding house.
The Foundation also operates a canteen and a gift
shop within the premises, all the income from which
is used actually, directly, and exclusively for the
purposes for which the Foundation was organized.
1. Considering the constitutional provision granting
tax exemption to non-stock corporations, such as
those formed exclusively for religious, charitable or
social welfare purposes, explain the meaning of the
32
last paragraph of said Section 30 of the 1997 Tax
Code, which states that "Income of whatever kind
and character of the foregoing organizations from
any of their properties, real or personal, or from any
of their activities conducted for profit, regardless of
the disposition made of such income shall be
subject to tax imposed under this Code.”
2. Is the income derived by XYZ Foundation form the
sale of a portion of its lot, rentals from its boarding
house and the operation of its canteen and gift
shop subject to tax? Explain.
A: 1. The exemption contemplated in the
Constitution covers real estate tax on real
properties actually, directly and exclusively used for
religious, charitable or social welfare purposes. It
does not cover exemption from the imposition of
income tax, which is within the context of Section
30 of the Tax Code. As a rule, non-stock, non-profit
corporations organized for religious, charitable or
social welfare purposes are exempt from income
tax on their income received by them as such.
However, if these religious charitable or social
welfare corporations derive income from their
properties or any of their activities conducted for
profit, the income tax shall be imposed on said
items of income, irrespective of their disposition
(Sec. 30, NIRC; CIR v. CA and YMCA, 298 SCRA 83).
2. Yes, The income derived from the sale of lot and
rentals from its boarding house are considered as
income from properties which are subject to tax.
Likewise, the income from its activities conducted
for profit, which are subject to tax. The income tax
attaches irrespective of the disposition of these
incomes. (Sec. 30, NIRC; CA and CIR v. YMCA,
ibid.).
Q: X sold a piece of land to the United Church of
Christ of Quezon City, Inc. The land is to be devoted
strictly for religious purposes by the Church. When
the Church tried to register the title of the land, the
Register of Deeds refused, claiming that the capital
gains tax was not paid. Is the transaction exempt
from the capital gains tax? Reason.
A: 1. No. Under Section 21(e) in relation to Section
49(a)(4) of the National Internal Revenue Code, the
seller is the one liable for the payment of the capital
gains tax from the sale of real property by an
individual taxpayer. Meanwhile, the Church in this
instant case is the buyer. Hence, Section 28(4) of
the 1987 Constitution, which exempts church lands,
buildings and improvements, does not apply
because the obligation to pay the capital gains tax
herein is imposed on X, the seller, and not on the
Church. Since payment of the capital gains tax is a
condition precedent for the registration of the
transfer certificate of title to real property, the non-
payment herein by the seller is a valid reason for the
Registry of Deeds to deny the transfer of title to the
subject land.
2. No. The tax exemption granted to churches in the
Constitution refers to property tax and not to capital
gains tax which is an income tax. Besides, the
capital gains tax is the liability of the seller X and not
the purchaser.
Q: Under Article XIV, Section 4(3) of the 1987
Philippine Constitution, all revenue s and assets of
non-stock, non-profit education 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.
A: 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. Certifications 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
education purposes;
3. Board resolution on proposed project to
be funded out of the money deposited
in banks or placed in money market
placements (Finance Department
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
Philippine 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.
Consequently, the provisions of Section 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.
33
CHAPTER VII: RETURN OF CAPITAL
Q: In 1990, X started constructing a commercial
building with spaces for lease to the public. X
required Y, a prospective lessee to sign a pre-lease
agreement, which principally provided: (a) that the
lessee shall extend to the lessor a non-interest
bearing loan of P100,000.00 payable within twelve
(12) months; and (b) that in consideration of the
loan, the lessee shall be given preference in the
lease and his rentals shall not be increased while
the loan remains unpaid. Upon completion of the
building, Y extended the loan of P100,000.00 to X
and he was given a space in its ground floor. May
the BIR consider the P100,000.00 as taxable income
of X? Reason.
A: Section 28 of the NIRC defines “gross income” as
all income from whatever sources derived including
but not limited to the following items:
a) Compensation for services, including
fees, commissions, and similar items;
b) Gross income derived from business;
c) Gains derived from dealings in property;
d) Interest;
e) Rents;
f) Royalties;
g) Dividends;
h) Annuities;
i) Prizes and winnings;
j) Pensions; and
k) Partner’s distributive share of the gross
income of general professional
partnership.
Further, under Section 36 of Revenue Regulations
No. 2, “taxable income” in a broad sense means
all wealth which flows into the taxpayer other than
as a mere return of capital. It includes the forms of
the income specifically described as gains and
profits, including gains derived from the sale or
other disposition of assets. Gross income, means
income (in the broad sense) less income which is
by statutory provision or otherwise exempt from
the tax imposed by law.
Applying the above provision of law to the case at
bar, the amount P100,000.00, being a loan or an
indebtedness, is an outlay, not a taxable income or
gain.
Q: Distinguish “Exclusion from Gross Income” from
“Deductions From Gross Income.” Give an example
of each.
A: Exclusive from gross income refer to a flow of
wealth to the taxpayer which are not treated as
part of gross income, for purposes of computing the
taxpayer’s taxable income, due to the following
reasons: (1) It is exempted by the fundamental law;
(2) It is exempted by statute; (3) it does not come
within the definition of income (Sec. 61, Rev. Regs.
No. 2). Deductions from gross income, on the other
hand, are the amounts, which the law allows to be
deducted from gross income in order to arrive at
net income. Exclusions pertain to the computation
of gross income, while deduction pertain to the
computation of net income. Exclusions are
something received or earned by the taxpayer,
which do not form part of gross income while
deductions are something spent or paid in earning
gross income. Example of an exclusion from gross
income is proceeds of life insurance received by
the beneficiary upon the death of the insured
which is not an income or 13th month pay of an
employee not exceeding P30,000.00, which is an
income not recognized for tax purposes. Example
of a deduction is business rental.
Q: Atty. Gambino is a partner in a general
professional partnership. The partnership computes
its gross revenues, claims deductions allowed
under the Tax Code, and distributes the net income
to the partners, including Atty. Gambino, in
accordance with its articles of partnership. In filing
his own income tax return, Atty. Gambino claimed
deductions that the partnership did not claim, such
as purchase of law books, entertainment expenses,
car insurance and car depreciation. The BIR
disallowed the deductions. Was the BIR correct?
A: No, the BIR is wrong in disallowing the deduction
claimed by Atty. Gambino. It appears that the
general professional partnership claimed itemized
deductions from its gross revenues in arriving at its
distributable net income. The share of a partner in
the net income of the partnership must be reported
by him as part of his gross income from practice of
profession and he is allowed to claim further
deductions which are reasonable, ordinary and
necessary in the practice of profession and were
not claimed by the partnership in computing its net
income (Sec. 26, NIRC; Rev. Regs. No. 16-2008,
February, 2010). [NOTE: The examinee may want to
qualify his answer further by citing the rules on (a)
purchases of law books, which can be a capital
expenditure; (b) entertainment of law books, which
can be a capital ceiling for sellers of services; (c)
car insurance and depreciation, which are
deductible only to the extent that it was used for
business or practice of law].
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to protect
its brand franchise for one of its line products. In its
income tax return, MFC included he advertising
expense as deduction from gross income, claiming
it as an ordinary business expense. Is MFC correct?
34
A: In 1995, respondent paid P9.4 million for
advertising a product. This was disallowed by the
BIR as ordinary and necessary expense and
considered the same as capital expenditure, since
the amount was staggering, which was incurred to
create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or
profession of which the taxpayer is a member. The
court held that “goodwill” generally denotes the
benefit arising from connection and reputation,
and efforts to establish reputation are akin to
acquisition of capital assets. Therefore, expenses
related thereto are not (ordinary and necessary)
business expenses but are capital expenditures
(that are not deductible pursuant to the provisions
of Section 36 of the Tax Code) (Commissioner v.
General Foods Phils., G.R. No. 143672, April 24,
2003).
Q: In December 1993, the Sangguniang Bayan
authored a Christmas bonus of P3,000.00, a cash gift
of P5,000.00, and transportation and representation
allowance of P6,000.00 for each of the municipal
employees.
1) Is the Christmas bonus subject to any tax? 2)
How about the cash gift?
3) How about the transportation and
representation allowances?
A: 1.The Christmas bonus given by the Sangguniang
Bayan to the municipal employees is taxable as
additional compensation (Sec. 21 [a], NIRC).
2. The cash gift per employee of P5,000.00 being
substantial may be considered taxable also. It is n
the nature of additional compensation income as it
is highly doubtful if municipal governments are
authorized to make gifts in substantial sums such as
this. It is not furthermore gift of “small value” which
employers might give to their employees on special
occasions like Christmas – items which could be
exempt under BIR Revenue Audit Memorandum
Order No. 1-87. [NOTE: It is considered as de minimis
benefits under Rev.
Regs. No. 3-98, as amended; hence exempt
from income tax and fringe benefits tax.] 3. The
transportation and representation allowances
are actually reimbursements for expenses
incurred by the employee for the employer.
Said allowances spent by the employee for the
employer are designed to enhance the quality
of the service that the employer is supposed to
perform for its clientele like the people of the
municipality.
Q: Gold and Silver Corporation gave extra 14th
month bonus to all its officials and employees in the
total amount of P75 million. When it filed its
corporate income tax return the following year, the
corporation declared a net operating loss. When
the income tax return of the corporation was
reviewed by the BIR the following year, it disallowed
as item of deduction the P75 million bonus the
corporation gave its officials and employees on the
ground of unreasonableness. The corporation
claimed that the bonus is an ordinary and
necessary expense that should be allowed.
A: I will rule against the deductibility of the bonus.
The extra bonus is both not normal to the business
and unreasonable. Admittedly, there is no fixed test
for determining the reasonableness of a bonus as
an additional compensation. This depends upon
many factors, such as the payment must be made
in good faith; the character of the taxpayer’s
business; the volume and amount of its net
earnings; the locality; the type and extent of the
services rendered; the salary policy of the
corporation; the size of the particular business; the
employees’ qualification and contributions to the
business venture; and general economic conditions
(C.M. Hoskins & Co., Inc. v. CIR, 30 SCRA 434 [1969]).
Giving an extra bonus at a time that the company
suffers operating loss is not a payment in good faith
and is not normal to the business; hence
unreasonable and not qualify as ordinary and
necessary expense.
Q: X just hurdled the bar examinations and
immediately engaged in the practice of law. In
preparing his income tax return he listed the
following as deductible items: (a) fees paid to the
Supreme Court to be able to take the bar
examinations; (b) fees paid to a law school to enroll
in its pre-bar review classes; (c) malpractice
insurance; and (d) amount spent to entertain a
judge who decided his first case.
Which deductions are allowable? Reason.
A: Section 29 of the National Internal Revenue
Code on deductions, among other things, provide:
“(a) Expenses
1) Business Expenses (a) In General – All the
ordinary and necessary expenses paid
or incurred during the taxable year in
carrying on any trade or business.
Including a reasonable allowance for
salaries or other compensation for
personal services actually rendered;
traveling expenses while away from
home in the pursuit of a trade,
profession or business: rentals or other
payments required to be made as a
condition to the continued use or
possession, for the purpose of the trade,
profession or business of property to
which the taxpayer has not taken nor is
35
not taking title or in which he has no
equity.”
Further, Section 69 of Revenue Regulations No. 2, as
amended, otherwise known as “Income Tax
Regulations,” reads:
“Sec. 69. Professional Expenses - A professional may
claim as deductions the cost of supplies used by
him or in the practice of his profession, expenses
paid in the operation and repair of transportation
equipment used in making professional calls, dues
not professional societies and subscriptions to
professional journals; the rent paid for office rooms,
the expenses of the fuel, light, water, telephone,
etc. used on such offices, and me hire of office
assistants. Amounts currently expended for books,
furniture and professional instruments and
equipment, the useful life of which is short, may be
deducted. But amounts expended for books,
furniture and professional instruments and
equipment of a permanent character are not
allowable deductions.”
From the foregoing provisions of law that ordinary
and necessary expenses incurred during a taxable
year pertaining directly to the practice of a
profession may be allowed as deductions, it may
be inferred from a keen reading of Section 69 of
Revenue Regulations No. 2 that aside from personal
exemptions, only direct costs or overhead expenses
incurred in the actual practice of a profession may
be claimed; i.e., supplies, fuel, light, electricity,
salaries, etc. Applying the above considerations in
the case at bar, it appears that among the
expenses, the same being an ordinary and
necessary expense in the pursuit of a profession as
defined by Section 29 of the NIRC and further
qualified by Revenue
Regulations No. 2. The tuition fees for the pre-bar
classes and the bar examination fees paid to the
Supreme Court by X do not qualify as deductible
expenses under Revenue
Regulations No. 2. As for the amount spent by X to
entertain the Judge who decided his first case, the
same may not be claimed as an expense. A
business expenses to be deductible must be
sustained by adequate proof and that the same
must not be against the law or public policy
(Consolidated Mines v. Court of Tax Appeals and
Commissioner, 58 SCRA 618).
Q: X is the Advertising Manager of Mang Douglas
Ham, Inc. X had dinner with Y, owner of a chain of
burger restaurants, to convince the latter to carry
Mang Douglas’ hamburger. After Y agreed, both X
and Y went their separate ways. X celebrated by
going to as single’s bar. He picked up a partner and
consumed a bottle of beer. He drove home at 3:00
a.m. On his way, he sideswiped a pedestrian who
died as a result of the accident. X settled the case
extra-judicially by paying the heirs of the
pedestrian P50,000.00. The money, however, came
from Mang Douglas Hamburger, Inc. Discuss
whether the P50,000.00 can be claimed by Mang
Douglas Hamburger, Inc. as an ordinary and
necessary expense.
A: No. As the expenditure had not been incurred in
carrying on his trade or business, the same cannot
be considered an ordinary and necessary expense
for which deduction may be claimed. Such
expense is a personal expense which is not
deductible form the gross income pursuant to
Section 36 of the 1997 Tax Code.
Q: MC Garcia, a contractor who won the bid for the
construction of a public highway, claims as
expenses, facilitation fees which according to him
are standard operating procedure in transactions
with the government. Are these expenses allowable
as deduction from gross income?
A: No. The alleged facilitation fees which he claims
as standard operating procedure in transactions
with the government comes in the form of bribes or
“kickback” which are not allowed as deductions
from gross income (Sec. 34 [A][l][c], NIRC).
Q: In order to facilitate the processing of its
application for a license from a government office,
Corporation A found it necessary to pay the amount
of Php100,000 deductible from the gross income of
Corporation A? On the other hand, is the
Php100,000 taxable income of the approving
official? Explain your answers.
A: Since the amount of Php100,000 constitutes a
bribe, it is not allowed as a deduction from gross
income of Corporation “A” (Sec. 34[A][1][c], NIRC).
However, to the recipient government official, the
same constitutes a taxable income. All income from
legal or illegal sources is taxable absent any clear
provision of law exempting the same. This is the
reason why gross income had been defined to
include income derived from whatever source
(Sec. 32[A], NIRC). Illegally acquired income
constitutes realized income under the claim of right
doctrine (Rutkin v. U.S., 343 U.S. 130). Q: (1993)
Q: X is the proprietor of Vanguard, which is a
security and detective agency. X was able to get
the contract to provide the security services of a
government agency calling for the deployment of
100 security guards on a 24-hour basis. The director,
X gives him at the end of the month P100,000.00 per
guard hired. May X deduct from his income the
money he paid to the director? Reasons.
A: The money to please the director is not
deductible. This is a form of bribery. Deductions shall
not be allowed if the expense is contrary to law,
36
public policy or for immoral purposes (Zamora v.
Commissioner, 8 SCRA 163; Roxas v. CTA and
Commissioner, 23 SCRA 276).
Q: Are contributions to a candidate in an election
subject to donor’s tax? On the part of the
contributor, is it allowable as a deduction from gross
income?
A: 1. No, provided the recipient candidate had
complied with the requirement for filing of returns of
contributions with the Commission on Elections as
required under the Omnibus Election Code.
2. The contributor is not allowed to deduct the
contributions because the said expenses is not
directly attributable to, the development,
management, operation and/or conduct of a
trade, business or profession (Sec. 34[A][l][a], NIRC).
Furthermore, if the candidate is an incumbent
government official or employee, it may even be
considered as a bribe or a kickback (Sec.
34[A][l][c], NIRC).
Q: Sometime in December 1980, a taxpayer
donated to his son 3,000 shares of stock of San
Miguel Corporation. For failure to file a donor’s
return on the donation within the statutory period,
the taxpayer was assessed the sum of P102,000.00,
as donor’s tax plus 25% surcharge or P25,500.00 and
20% interest or P20,400,00 which he paid on June
24, 1985. On April 10, 1986, he filed his income tax
return for 1985 claiming among others, a deduction
for interest amounting to P9,500.00 and reported a
taxable income of P96,000.00. On November 10,
1986, the taxpayer filed an amended income tax
return for the same calendar year 1985, claiming
therein an additional deduction in the amount of
P20,400.00 representing interest paid on the donor’s
gift tax. A claim for refund of alleged overpaid
income tax for 1985 was filed with the
Commissioner which was subsequently denied.
Upon appeal with the Court of Tax Appeals, the
Commissioner took issue with the Court of Tax
Appeals’ determination that the amount paid by
the taxpayer for interest on his delinquent taxes is
deductible from the gross income for the same year
pursuant to Section 29 (b)(1) of the National Internal
Revenue Code. The Commissioner of Internal
Revenue pointed out that a tax is not indebtedness.
He argued that there is a fundamental distinction
between a “tax” and a “debt”. According to the
Commissioner, the deductibility of interest on
indebtedness from a person’s income tax cannot
extend to interest on taxes. What is your opinion on
the argument of the Commissioner that a tax is not
indebtedness so that deducibility on the interest on
taxes should not be allowed?
A: The Commissioner’s argument is misplaced
because the interest on the donor’s tax is not one
that can be considered as having been incurred in
connection with the taxpayer’s trade, business or
exercise of profession. Tax obligations constitute
indebtedness for purposes of deduction from gross
income of the amount of interest paid on
indebtedness (CIR v. Palanca, 18 SCRA 496).
Although interest payment for delinquent taxes is
not deductible as tax, the taxpayer is not
precluded from claiming said interest as deduction
as such (Collector v. Magalona, L-15802,
September 30, 1960).
Q: Explain if the following items are deductible from
gross income for income tax purposes. Disregard
who is the person claiming the expense.
1) Interest on loans used to acquire
capital equipment or machinery; 2)
Depreciation of good will.
A:1. This is a deductible item from gross income. The
law gives the taxpayer the option to claim as a
deduction or treat as capital expenditure interest
incurred to acquire property used in trade, business
or exercise of a profession (Sec. 34[B][3], NIRC).
2. Depreciation for goodwill is not allowed as
deduction from gross income. While intangibles
may be allowed to be depreciated or amortized, it
is only allowed to those intangibles whose use in the
business or trade is definitely limited in duration
(Basilan Estates v. CIR, 21 SCRA 17). Such is not the
case with goodwill.
Q: A Co., a Philippine corporation, issued preferred
shares of stock with the following features:
1. Non-giving;
2. Preferred and cumulative dividends at
the rate of 10% per annum, whether or
not in any period the amount is covered
by earnings or projects;
3. In the event of dissolution of the issuer,
holders of preferred stock shall be paid
in full ratably as the assets of the issuer
may permit before any distribution shall
be made to common stockholders; and
4. The issuer has the option to redeem the
preferred stock.
A Co. declared dividends on the preferred stock
and claimed the dividends as interest deductible
from its gross income for income tax purposes. The
BIR disallowed the deduction. A Co. maintains that
the preferred shares with their features are really
debt and therefore the dividends are really interest.
Decide. A: The dividends are not deductible from
gross income. Preferred shares shall be considered
capital, regardless of the conditions under which
such shares are issued and, therefore, dividends
37
paid thereon are not considered “interest” which
are allowed to be deducted from the gross income
of the corporation (RMC No. 17071, July 12, 1971).
Q: “A” is a travelling salesman working full time for
Nu Skin Products. He received a monthly salary plus
3% commission on his sales in a Southern province
where he is based. He regularly uses his own car to
maximize his visits even to far-flung areas. One fine
day, a group of militants seized his car. He was
notified the following day by the police that the
marines and the militants had a bloody encounter
and his car was completely destroyed after a
grenade hit it. “A” wants to file a claim for casually
loss. Explain the legal basis of your tax advice. A: I
would advise “A” not to file a claim for casualty loss
deduction from gross income, because he derives
purely compensation income, which includes the
3% commission on his sales, from his employer. An
individual who receives compensation income
under an employer- employee relationship is not
entitle to any kind of deduction (whether itemized
or the standard deduction) from gross income (Sec.
34, NIRC). Indeed, he is allowed to deduct from his
gross compensation income only the personal and
additional exemptions authorized in Section 35 of
the Tax Code. Besides, to be deductible from gross
income, casualty loss must relate to a property
connected with the trade, business or profession of
the taxpayer (Sec. 34[D][2], NIRC).
Q: Give the requisites for deductibility of a loss.
A: The requisites for deductibility of a loss are: (a) loss
belongs to the taxpayer; (b) actually sustained and
charged off during the taxable year; (c) evidenced
by a closed and completed transaction; (d) not
compensated by insurance or other forms of
indemnity; (e) not claimed as a deduction for
estate tax purposes in case of individuals taxpayers;
and (f) if it is a casualty loss it is evidenced by a
declaration of loss filed within 45 days with the BIR.
Q: X is a traveling salesman in Jolo, Sulu. In the
course of this travel, a band of MNLF seized his car
by force and used it to kidnap a foreign missionary.
The next day, X learned that the military and the
MNLF band had a chance encounter. Using heavy
weapons, the military fired at the MNLF band that
tried to escape with the use of X’s car. All the
members of the band died and X’s car was a total
wreck. Can X deduct the value of his car from his
income as casualty loss? Reason.
A: Section 29(1)(c) of the National Internal Revenue
Code provides that in cases of individual
taxpayers, losses to be deductible must:
a) Actually be sustained and charged off
within the taxable year;
 b) Have been incurred in trade, profession
or business or in any transaction entered
into for profit, though not connected
with trade, profession, or business;
c) Be evidenced by a closed and
completed transaction.
Moreover, Section 1 of Revenue Regulations No. 12-
77 defined “casualty loss” as a complete or partial
destruction of property resulting from an identifiable
event of sudden, unexpected, or unusual nature. It
denotes accidents, some sudden invasion by
hostile agency, and excludes progressive
deterioration.
Based on the above-mentioned laws the
circumstances of the case at bar, the value of the
wrecked car is deducible as casualty loss provided
the regulations governing substantiation
requirements for losses are complied with.
Q: Explain if the following items are deductible from
gross income for income tax purposes. Disregard
who is the person claiming the deduction. 1)
Reserves for bad debts; 2) Wrthless securities.
A: 1. Reserves for bad debts are not allowed as
deduction from gross income. Bad debts must be
charged off during the taxable year to be allowed
as deduction from gross income.
The mere setting up of reserves will not give rise to
any deduction (Sec. 34[E],NIRC).
2. Worthless securities, which are ordinary assets, are
not allowed as deduction from gross income
because the loss is not realized. However, if these
worthless securities are capital assets, the owner is
considered to have incurred a capital assets, the
owner is considered to have incurred a capital loss
as of the last day of the taxable year and, therefore,
deductible to the extent of capital gains (Sec.
34[D][4], NIRC). This deduction, however, is not
allowed to a bank or trust company (Sec. 34[E][2],
NIRC).
Q: PQR Corporation claimed as a deduction in its
tax return the amount of P1,000,000.00 as bad
debts. The corporation was assessed by the
Commissioner of Internal Revenue for deficiency
taxes on the ground that the debts cannot be
considered as “worthless,” hence, they do not
quality as bad debts. The company asks for your
advice on “What factors will hold in determining
whether or not the debts are bad debts?” Answer
and explain briefly.
A: In order that debts shall be considered as bad
debts because they have become worthless, the
taxpayer should establish that during the year for
which it became evident in the exercise of sound,
objective business judgment that there remained
no practical, but only vaguely theoretical ,
38
prospect that the debt would ever be paid
(Collector of Internal Revenue v. Goodrich
International Rubber Co., 21 SCRA 1336 [1967]).
“Worthless” is not determined by an inflexible
formula or slide rule calculation, but upon the
exercise of sound business judgment. The factors to
be considered include, but are not limited to, the
following: (a) the debtor has no property nor visible
income; (b) the debtor has been adjudged
bankrupt or insolvent; (c) collateral with small
amounts of debts and further action on the
accounts would entail expenses exceeding the
amounts sought to be collected.
Q: 1. What is meant by the “tax benefit rule”?
2. Give an illustration of the application of the tax
benefit rule.
A: 1. Tax benefit rule states that the taxpayer is
obliged to declare as taxable income subsequent
recovery of bad debts in the year they were
collected to the extent of the tax benefit enjoyed
by the taxpayer when the bad debts were written-
off and claimed as deduction from gross income. It
also applies to taxes previously deducted from
gross income but which were subsequently
refunded or credited. The taxpayer is also required
to report as taxable income the subsequent tax
refund or tax credit granted to the extent of the tax
benefit of the taxpayer enjoyed when such taxes
were previously claimed as deduction from
income.
2. X Company has a business connected
receivable amounting to P100,000.00 from Y who
was declared bankrupt by a competent court.
Despite earnest efforts to collect the same, Y was
not able to pay, prompting X Company to write-off
the entire liability. During the year of write-off, the
entire amount was claimed as a deduction for
income tax purposes reducing the taxable net
income of X Company to only P1,000,000.00. Three
93) years later, Y voluntarily paid his obligation
previously written-off to X Company. In the year of
recovery, the entire amount constitutes part of
gross income of X Company because it was able to
get full tax benefit three (3) years earlier.
Q: 1. What is the proper allowance for depreciation
of any property used in trade or business?
2. What is the annual depreciation of a depreciable
fixed asset with a cost of P100,000.00 and an
estimated useful life of 20 years and salvage value
of P10,000.00 after its useful life?
A: 1. The proper allowance of depreciation of any
property used in trade or business refers to the
reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for
obsolescence) said property. The reasonable
allowance shall include, but not limited to, an
allowance computed under any of the following
methods: (a) straight-line method; (b) declining-
balance method; (c) sum-of-years-digit method;
and (d)any other method which may be prescribed
by the Secretary of Finance upon recommendation
of the Commissioner of Internal Revenue (Sec. 34[F],
NIRC).
2. The annual depreciation of the depreciable fixed
asset may be computed on the straightline method
which will allow the taxpayer to deduct an annual
depreciation of P4,500, arrived at by dividing the
depreciable value of P100,000 by the estimated
useful life (20 years).
Q: The Filipinas Hospital for Crippled Children is a
charitable organization. X visited the hospital, on his
birthday, as was his custom. He gave P1,000,000.00
to the hospital and P5,000.00 to a crippled girl whom
he particularly pitied. A crippled son of X is in the
hospital as one of its patients. X wants to exclude
both the P100,000.00 and the P5,000.00 from his
gross income. Discuss.
A: Under Section 29 (h)(1) of the National Internal
Revenue Code charitable contributions to be
deductible must be:
a. Actually paid or made to domestic
corporations or associations organized
and operated exclusively for religious,
charitable, scientific, youth and sports
development, cultural or educational
purposes or for rehabilitation of veterans
or
to social welfare institutions no part of
which inures to the benefits of any
private individuals;
b. Made within the taxable year;
c. Not more than 6% (for individuals) or 3%
(for corporations) of the taxpayer’s
taxable income to be computed
without including the contribution.
Applying the above-provisions of law to the case at
bar, it is clear therefore that only the P100,000.00
contribution of X to Filipinas Hospital for Crippled
Children qualified as a deductible contribution.
Section 29(h)(1) of the NIRC expressly provides that
the same must be actually paid to a charitable
organization to be deductible. Note that the law
accorded no privilege to similar contributions
extended to private individuals. Hence, the
P5,000.00 contribution to the crippled girl cannot be
claimed as a deduction.
Q: X’s favorite charity organization is the Philippine
National Red Cross (PNRC). To raise money, PNRC
sponsored a concert featuring the Austria Boys
Choir. X advanced P100,000.00 to the PNRC for
39
which he was issued a promissory note. Before its
maturity, X cancelled and returned the note to
PNRC. An advertising man, X also undertook the
promotions of the Austria Boys Choir. Part of the
promotions campaign was to ask prominent
personalities to publicly donate blood to the PNRC
a day before the concert. X himself donated 100cc.
of blood. X intends to claim as deductions the value
of the note, the cash value of the promotions
campaign and the cash value of the blood he
donated. Give your legal advice.
A: The value of the note can be claimed as
deduction as charitable contribution. While the
amount was originally a loan, it can be
considered to have become a gift or contribution
when X cancelled and returned the note to PNRC,
a charitable organization. On the other, the cash
value of the promotions campaign cannot be
claimed as a d deduction. Advertising expenses
can only be deducted from the revenues where
the expense were incurred. In the case at hand,
PNRC is the revenue-producing entity not X. X did
not derive any revenue. Thus, the cash value of his
promotions campaign cannot be claimed as
deduction.
Finally, the cash value of the blood donated by X
cannot be claimed as deduction. Blood has no
monetary value in this case as it is not disbursed in
the form of expense.
Q: Taxpayers, whose only income consist of salaries
and wages from their employers, have long been
complaining that they are not allowed to deduct
any item from their gross income for purposes of
computing their net taxable income. With the
passage of the Comprehensive Tax Reform Act of
1997, is this complaint still valid? Explain your
answer.
A: No more. Gross compensation income earners
are now allowed at least an item of deduction in
the form of premium payments on health and / or
hospitalization insurance in an amount not
exceeding P2,400.00 per annum (Sec. 34[M], NIRC).
This deduction is allowed if the aggregate family
income do not exceed P 250,000.00 and by the
spouse, in case of married individual, who claims
additional personal exemption for dependents.
Q: Ernesto, a Filipino citizen and a practicing lawyer,
filed his income tax return for
2007, claiming optional standard deductions.
Realizing that he has enough documents to
substantiate his profession-connected expenses,
he now plans to file an amended income tax return
for 2007, in order to claim itemized deductions,
since no audit has been commenced by the BIR on
the return he previously filed. Will Ernesto to allowed
to amend his return? Why or why not?
A: Ernesto will not be allowed to file an amended
return for 2007, not because of Section 6(A) of the
1997 Tax Code which allows the filing of amended
tax return provided that no audit notice has been
served upon him by the BIR in the meantime, but
because of Section 34 (L) of the Tax Code, which
provides that “Such election (of the itemized or
standard deduction) when made in the return shall
be irrevocable for the taxable year for which the
return is made.”
Q: Distinguish allowable deductions from personal
exemptions. Give an example of an allowable
deduction and another example for personal
exemption.
A: The distinction between allowable deductions
and personal exemptions are as follows:
1. As to amount – Allowable deductions
generally refer to actual expenses
incurred in the pursuit of trade, business
or practice of profession while personal
exemptions are arbitrary amounts
allowed by law.
2. As to nature – Allowable deductions
constitute business expenses while
personal exemptions pertain to personal
expenses.
3. As to purpose – Deductions are allowed
to enable the taxpayer to recoup his
cost of doing business while personal
exemptions are allowed to cover
personal, family and living expenses.
4. As to claimants – Allowable deductions
can be claimed by all taxpayers,
corporate or otherwise, while personal
exemptions can be claimed only by
individual taxpayers.
Q: Mar and Joy got married in 1990. A week before
their marriage, Joy received, by way of donation, a
condominium unit worth P750,000.00 from her
parents. After marriage, some renovations were
made at a cost of P150,000.00. The spouses were
both employed in 1991 by the same company. On
30 December 1992, their first child was born, and a
second child was born on 07 November 1993. In
1994, they sold the condominium unit and bought a
new unit. Under the foregoing facts, what were the
events in the life of the spouses that had income tax
incidence?
A: The events in the life of Spouses Mar and Joy,
which have income tax incidences, are the
following:
40
a. Their marriage in 1990 qualifies them to
claim personal exemption for married
individuals;
b. Their employment in 1991 by the same
company will make them liable to the
income imposed on gross
compensation income;
c. Birth of the first child in December 1992
would give rise to an additional
exemption of P5,000.00 (now
P25,000.00) for the taxable year 1992;
d. Birth of their second child in November
1993 would likewise entitle them to claim
additional exemption of P5,000.00 (now
P25,000.00) raising their additional
personal exemptions to P10,000.00 for
taxable year 1993;
e. Sale of their condominium unit in 1994
shall make the spouses liable to the 5%
(now 6%) capital gains tax on the gain
presumed to have been realized from
the sale.
Q: RAM got married to LISA last January 2003. On
November 30, 2003, LISA gave birth to twins.
Unfortunately, however, LISA died in the course of
her delivery. Due to complications, one of the twins
also died on December 15, 2003. In preparing his
income tax return for the year 2003, what should
RAM indicate in the return as his civil status; (a)
single; (b) married; (c) head of the family; (d)
widower, (e) none of the above? Why Reason.
A: RAM should indicate “(b) married” as his civil
status in preparing his income tax return for the year
2003. The death of his wife during the year will not
change his status because should the spouse die
during the taxable year, the taxpayer may still claim
the same exemptions (that of being married) as if
the spouse died at the close of such year (Sec.
35[c], NIRC).
Q: OXY is the president and chief executive officer
of ADD Computers, Inc. When
OXY was asked to join the government service as
director of a bureau under the Department of Trade
and Industry, he took a leave of absence from ADD.
Believing that its business outlook, goodwill and
opportunities improved with OXY in the
government, ADD proposed to obtain a policy of
insurance on this life. On ethical grounds, OXY
objected to the insurance purchase but ADD
purchased the policy anyway. Its annual premium
amounted to P100,000.00. Is said premium
deductible by ADD Computers? Reason.
A: No. The premium is not deductible because it is
not an ordinary business expense. The term
“ordinary” is used in the income tax law in its
common significance and it has the connotation of
being normal, usual or customary (Deputy v. Du
Pont, 308 US 488 [1940]). Paying premium for the
insurance of a person not connected to the
company is not normal, usual or customary.
Another reason for its non-deductibility is the fact
that it can be considered as an illegal
compensation made to a government employee.
This is so because if the insured, his estate or heirs
were made as the beneficiary (because of the
requirement of insurable interest), the payment of
premium will constitute bribes which are not
allowed as deduction from gross income (Sec.
34[A][1][c], NIRC).
On the other hand, if the company was made the
beneficiary, whether directly or indirectly, the
premium is not allowed as a deduction from gross
income (Sec. 36[A][4], NIRC).
CHAPTER VIII: TAX BASES AND RATES
Q: ABC, a domestic corporation, sold in 1989 two (2)
condominium units of Legaspi Towers in Roxas
Boulevard for P8,158,142.00. The corporation
declared in its income tax return for taxable year
1989 its gains derived from the sale of two (2)
condominium units as follows:
UNIT A
(316.5 sq.ft.)
Proceeds from sale P3,933,679
Less:
(a) Acquisition 1,501,295
costs (Deed of
Sale 9/9/83)
(b) Payments of 49,248
Realty Tax
Total of (a)(b) 1,550,543
41
Gains 2,383,136
Without going into computations, answer the
following question: Since ABC derived gains from
the sale of the condominium units, should it pay the
5% capital gains tax, 35% corporate income tax or
none of the above because the corporation is not a
real estate dealer? Discuss.
A: ABC Corporation must pay the 35% corporate
income tax. The National Internal Revenue Code
does not provide for the payment by corporations
of 5% (now 6%) capital gains tax on the sale of real
property, whether considered capital assets or not.
Such income is included in the computation of net
income (gross taxable income less deductions) and
is subject to the tax rate of 35%. [NOTE: Existing law
imposes the final tax of 6% on the gain presumed to
have been realized on the sale of lands and/or
buildings of corporations treated as capital assets.
The applicable corporate income tax rate
beginning January 1, 2000 under R.A. 8424 is 32%
and starting November 1, 2005 under R.A. 9337 is
35%, but starting January 1, 2009, the rate is 30%].
Q: What is the “immediacy test”? Explain briefly.
A: To determine the reasonable needs of the
business in order to justify an accumulation of
earnings (and not impose the 10% tax on improperly
accumulated earnings of corporations), the
“immediacy test” under American jurisprudence
has been adoptedUNIT in
B the Philippines. Thus, the term
“reasonable needs of the business” is construed to
mean the immediate needs of the business to
accumulate earnings
(322 sq.ft.)and profits (instead of
declaring dividends to shareholders), including
reasonably anticipated needs.
CHAPTER IX:P4,224,463
ORDINARY ASSETS AND CAPITAL
ASSETS
Q: Oriental, Inc. holds a proprietary share of Capital
Gold Club, Inc. It assigned without any
consideration this share to X, one of its foreign
consultants, to enable him to use its facilities for the
duration of his 1,529,755
stay in the Philippines. X signed a
Declaration of Trust where he acknowledged that
the share is owned by Oriental, Inc. and where he
promised to transfer the same to whoever will
55,413
succeed him as consultant. When X’s contract with
Oriental, Inc. expired, he left the Philippines and
assigned for free the share to Y, his successor in
1,585,168
office. What tax, if any, can be imposed by the BIR
on the transaction?
A: The BIR cannot impose any tax because there
was no real transfer of the ownership of the subject
Capitol Golf Club, Inc. (“Capitol”) proprietary share
from X to Y. Oriental, Inc. is the true owner of the
Capitol proprietary share. It remained the true
owner from the time of the Capitol share’s use by X,
to the transfer of the Capitol share’s use to Y.
Oriental remained the legal owner thereof all
throughout, while X and Y are only the beneficial
owners.
Q: X-land Condominium Corporation was
organized by the owners of units in Xland Building
Corporation in accordance with the Master Deed
with Declaration of Restrictions. The X-land Building
Corporation, the developer of the building,
conveyed the common areas in favor of the X-land
Condominium Corporation. Is the conveyance
subject to tax?
A: The conveyance is not subject to any tax. The
same is without consideration, and not in
connection with a sale made to X-land
Condominium Corporation, and the purpose of the
conveyance to the latter is for the management of
the common areas for the common benefit of the
unit owners.
The same is not subject to income tax since no
income was realized as a result of the conveyance,
which was made pursuant to the Condominium Act
(R.A. 4264), and the purpose of which was merely
to vest title to the common areas in favor of the X-
land Condominium Corporation.
There being no monetary consideration, neither is
the conveyance subject to the creditable
withholding tax imposed under Resume Regulation
No. 1-90, as amended.
The second conveyance was actually no
conveyance at all because when the units were
sold to the various buyers, the common areas were
already part and parcel of the sale of said units
pursuant to the Condominium Act. However, the
Deed of Conveyance is subject to documentary
stamp tax.
Q: In 1990, Mr. Naval bought a lot for P1,000,000.00
in a subdivision with the intention of building his
residence on it. In 1994, he abandoned his plan to
build his residence on it because the surrounding
area became a depressed area and land values in
the subdivision went down; instead, he sold it for
P800,000.00. At the time of the sale, the zonal value
was P500,000.00.
Is the land a capital asset or an ordinary asset?
Explain.
Is there any income tax due on sale? Explain.
A: (1) The land is a capital asset because it is
neither for sale in the ordinary course of business
42
nor a property used in the trade or business of the
taxpayer (Se. 33, NIRC). Yes, Mr. Naval is liable to
the 5 % (now 6%) capital gains tax imposed under
Section 21(e) of the Tax Code based on the gross
selling price of P800,000.00, which is an amount
higher than the zonal value.
Q: In January, 1970, Juan Gonzales bought one
hectare of agricultural land in Laguna for P100,000.
This property has a current fair market value of P10
million in view of the construction of a concrete
road traversing the property. Juan Gonzales agrees
to exchange his agricultural lot in Laguna for a one-
half hectare residential property located in
Batangas, with a fair market value of P10 million,
owned by Alpha Corporation, a domestic
corporation engaged in the buy and sale of real
property. Alpha Corporation acquired the property
in 2007 for P9 million. What is the nature of the real
properties exchanged for tax purposes--capital
asset or ordinary asset? Explain.
Is Juan Gonzales subject to income tax on the
exchange of property? If so, what is the tax base
and rate? Explain.
Is Alpha Corporation subject to income tax on the
exchange of property? If so, what is the tax base
and rate? Explain.
A: a. The term “capital assets” means property held
by the taxpayer (whether or not connected with his
trade or business), but does not include stock in
trade of the taxpayer or other property of a kind
which would properly be included in the inventory
of the taxpayer, if on hand at the close of the
taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade
or business, of a character which is subject to the
allowance for depreciation, or real property used in
trade or business, of a character which is subject to
the allowance for depreciation, or real property
used in trade or business of the taxpayer (Sec.
39[A][1], NIRC). Based on the foregoing definition,
the agricultural land of Juan Gonzales is a capital
asset, while the residential property of Alpha
Corporation is an ordinary asset.
Yes, Juan Gonzales is subject to the capital gains
tax equal to 6% of the gross selling price or fair
market value at the time of the exchange,
whichever is higher, on the agricultural land in
Laguna he exchanged to Alpha Corporation. In this
case, the law presumes that Juan Gonzales makes
a profit from sale or transfer of property (Sec.
24[D][1], NIRC).
Yes, Alpha Corporation is liable to pay corporate
income tax on the net taxable income
(gross sales less cost of sales and deductions)
realized by it from the sale or exchange of its
Batangas property for the agricultural land in
Laguna owned by Juan Gonzales. The net profit of
P1 million (P10 million selling price less P9 million cost)
will be added to the other ordinary incomes and
from such gross income, business expenses and
other allowable deductions will be deducted to
arrive at net taxable income for the year to which
we will apply the regular corporate income tax rate
of 35%.
Q:1. What is the difference between capital gains
and ordinary gains?
What does the term “ordinary income” include?
A: 1. Capital gains are gains realized from the sale
or exchange of capital assets, while ordinary gains
refer to gains realized from the sale or disposition of
ordinary assets.
The term ordinary income includes any gain from
the sale or exchange of property which is not a
capital asset. These are the gains derived from the
sale or exchange of property such as stock in trade
of the taxpayer or other property of a kind which
would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year,
or property held by the taxpayer primarily for sale to
customers in the course of his trade or business, or
property used in trade or business of a character
which is subject to the allowance for depreciation,
or real property used in trade or business of the
taxpayer (Sec. 22[Z] in relation to Sec. 39[A][1],
NIRC).
Q: An individual, who owns a ten (10)-door
apartment with a monthly rental of P10,000.00 each
residential unit, sold this property to another
individual taxpayer.
Is the seller liable to pay the capital gains tax?
A: No. The seller is not liable to pay the capital gains
tax because the property sold is an ordinary asset,
i.e., real property used in trade or business. It is
apparent that the taxpayer is engaged in the real
estate business, regularly renting out the 10-door
apartment.
Q: A corporation, engaged in real estate
development, executed deeds of sale on various
subdivided lots. One buyer, after going around the
subdivision, bought a corner lot with a good view of
the surrounding terrain. He paid P1.2 million, and the
title to the property was issued. A year later, the
value of the lot appreciated to a market value of
P1.6 million, and the buyer decided to build his
house thereon.
Upon inspection, however, he discovered
that a huge tower antenna had been erected on
the lot frontage totally blocking his view. When he
complained, the realty company exchanged his lot
43
with another corner lot with an equal area but
affording a better view. Is the buyer liable for capital
gains tax on the exchange of the lots?
A: Yes, the buyer is subject to capital gains tax on
the exchange of lots on the basis of prevailing fair
market value of the property transferred at the time
of the exchange of the fair market value of the
property received, whichever is higher (Sec. 21[e],
NIRC). Real property transaction subject to capital
gains tax are not limited to sales but also exchanges
of property unless exempted by a specific provision
of law.
Q: A, a doctor by profession, sold in the year 2000 a
parcel of land which he bought as a form of
investment in 1990 for Php1 million. The land was
sold to B, his colleague, at a time when the real
estate prices had gone down and so the land was
sold only for Php800,000 which was then the fair
market value of the land. He used the proceeds to
finance his trip to the United States. He claims that
he should not be made to pay the 6% final tax
because he did not have any actual gain on the
sale. Is his contention correct? Why?
A: No. The 6% capital gains tax on sale of real
property held as capital asset is imposed on the
income presumed to have been realized from the
sale which is the fair market value or selling price
thereof, whichever is higher (Sec. 24[D], NIRC).
Actual gain is not required for the imposition of the
tax, but it is the gain by fiction of law which is
taxable
Q: What is the rationale for the rule prohibiting the
deduction of capital losses from ordinary gains?
Explain.
A: Losses from sales or exchanges of capital assets
shall be allowed only to the extent of the gains from
such sales or exchanges (Sec. 39[c], NIRC). Thus,
capital losses are not deductible from ordinary
gains. The rationale for this rule is that a capital asset
refers to property held which is not considered as
an ordinary asset. Generally, capital assets are
properties of the taxpayer that are not used in his
trade or business, as distinguished from ordinary
assets which are used in the trade or business of the
taxpayer. To allow the deduction of non-business
(capital) losses from business (ordinary) income or
gain could mean the reduction or even elimination
of taxable income of the taxpayer through
personal, non-business related expenses, resulting in
substantial losses of revenue to the government.
CHAPTER X: TAX-FREE EXCHANGES
Q: HK Co. is a Hong Kong corporation not doing
business in the Philippines. It holds 40% of the shares
of A Co., a Philippine company, while the 60% is
owned by P Co., a Filipino-owned Philippine
corporation. HK Co. also owns 100% of the shares of
B Co., an Indonesian company which has a duly
licensed Philippine branch. Due to worldwide
restructuring of the HK Co. group, HK Co. decided
to sell all its shares in A and B Companies. The
negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines.
The agreement provides that the purchase price
shall be subject to withholding tax. Explain your
advice.
A: P Co. should not subject the payments of the
purchase price to withholding tax. While the seller is
a non-resident foreign corporation which is not
normally required to file returns in the Philippines
and therefore, ordinarily all its income earned from
Philippine sources is taxed via the withholding tax
system, this is not the procedure availing with
respect to sales of shares of stock. The capital gains
tax on the sale of shares of stock of a domestic
corporation is always required to be paid through
capital gains tax return filed. The sale of the shares
of stock of the Indonesian Corporation is not subject
to income tax under our jurisdiction because the
income derived therefrom is considered as a
foreign-source income.
Q: Cebu Development Inc. (CDI) has an authorized
capital stock of P5,000,000.00 divided into 50,000
shares with a par value of One Hundred Pesos
(P100.00) per share. Of the authorized capital stock,
Legaspi is a stockholder of CDI where he has
subscription amounting to 13,000 shares. To fully
pay his unpaid subscription in the amount of
P950,000.00, Mr. Legaspi transferred to the
corporation a parcel of land that he owns by virtue
of a Deed of Assignment.
Upon investigation, the BIR discovered that
Mr. Legaspi acquired said property for only
P500,000.00.
1) Is Mr. Legaspi liable for any taxable gain?
2) Is the CDI liable for any taxable gain?
A: 1) The transfer by Mr. Legaspi to the corporation
of the parcel of land in payment of his unpaid
subscription did not increase his stockholdings in the
corporation. It cannot be said that he acquired
control of the corporation by virtue of the transfer
of the land. His percentage of the stockholding in
the capital stock of the corporation remains the
same after the transfer as before. Therefore, Mr.
Legaspi derived taxable gain for his economic gain
which was realized by virtue of the exchange of the
land for the liability for the subscription.
44
CDI itself is not liable for any taxable gain since
subscription payments are not considered as
taxable income being merely investments in the
corporation. However, a taxable incidence may
occur as and when the corporation sells the parcel
of land for a price over and above the value of the
shares of stock or in this case over and above
P950,000.00. Until such time, however, there is no
realizable income on the part of the corporation.
Q: 1) In a qualified tax-free exchange of property
for shares under Section
34(c)(2) of the Tax Code, what is the tax basis for
computing the capital gains on: (a) the sale of the
assets received by the corporation; and (b) the sale
of the shares received by the stockholders in
exchange of the assets?
In a qualified merger under Section 34(c)(2) of the
Tax Code, what is the tax basis for computing the
capital gains on: (a) thesale of the assets received
by the surviving corporation from the absorbed
corporation; and (b) the sale of the shares of stock
received by the stockholders from the surviving
corporation?
A: 1) In a qualified tax-free exchange of property for
shares of stock under Section 34(c)(2) of the Tax
Code, the tax basis for computing the gain on the:
sale of the assets received by the corporation shall
be the original/historical cost (i.e., purchase price
plus expenses of acquisition) of the property/assets
given in exchange of the shares of stock.
sale of the shares of stock received by the
stockholders in exchange of the assets shall be
the original/historical cost of the property given
in exchange of the shares of stock. In a qualified
merger under Section 34(c)(2) of the Tax Code,
the tax basis for computing the capital gains on:
the sale of the assets received by the surviving
corporation from the absorbed corporation shall be
the original/historical cost of the assets when still in
the hands of the absorbed corporation.
the sale of the shares of stock received by the
stockholders from the surviving corporation shall be
the acquisition/historical cost of assets transferred
to the surviving corporation.
Q: Three brothers inherited in 1992 a parcel of land
valued for real estate tax purposes at P3.0 million
which they held in co-ownership. In 1995, they
transferred the property to a newly organized
corporation as their equity which was placed at the
zonal value of P6.0 million. In exchange for the
property, the three brothers thus each received
shares of stock of the corporation with a total par
value of P2.0 million or, altogether, a total of P6.0
million. No business was done by the Corporation,
and the property remained idle. In the early part of
1997, one of the brothers, who was in dire need of
the funds, sold his shares to the two brothers for P2.0.
Is the transaction subject to any internal revenue
tax (other than the documentary stamp tax)?
A: Yes. The exchange in 1995 is a tax-free exchange
so that the subsequent sale of one of the brothers
of his shares to the other two (2) brothers in 1997 will
be subject to income tax. This is so because the tax-
free exchange merely deferred the recognition of
income on the exchange transaction. The gain
subject to income tax in the sale is measured by the
difference between the selling price of the shares
transferor at the time of exchange which is the fair
market value of his share in the real property at the
time of inheritance (Sec. 34[b][2], NIRC). The net
gain from the sale of shares of stock is subject to the
schedular capital gains tax of 10% for the first
P100,000.00 and 20% for the excess thereof (Sec.
21[d], NIRC). [NOTE: The current capital gains tax
rates are 5% on the first P100,000.00 net capital gain
and 10% on the amount over P100,000.00].
Q: Last July 12, 2000, Mr. and Mrs. Peter Camacho
sold their principal residence situated in Tandang
Sora, Quezon City, for ten million pesos
(P10,000,000.00) with the intention of using the
proceeds to acquire or construct a new principal
residence in Aurora Hills, Baguio City.
What conditions must be met in order that
the capital gains presumed to have been realized
from such sale may not be subject to capital gains
tax?
A: When the real property sold or disposed by a
natural person (e.g., citizen or resident alien) is a
capital asset and his principal residence, the
capital gains presumed to have been realized from
the sale or disposition thereof shall be exempt from
the 6% capital gains tax, provided that:
The proceeds of sale is fully utilized in acquiring or
constructing a new principal residence within 18
calendar months from the date of sale or
disposition;
The Commissioner is duly notified by the taxpayer
within 30 days from the date of sale or disposition
through a prescribed return of his intention to avail
of the tax exemption; and The tax exemption is
availed only once every 10 years. 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.
CHAPTER XI: ACCOUNTING METHODS AND PERIODS
Q: What is the "all events test"? Explain briefly.
45
A: Accrual of income and expense is permitted
when the "all events test" has been met. This test
requires (1) fixing a right to the income or the liability
to pay, and (2) availability of reasonably accurate
determination of such income or liability. It does
not, however, demand that the amount of income
or liability be known absolutely; it only requires that
a taxpayer has at its disposal the information
necessary to compute the amount with reasonable
accuracy, which implies something less than an
exact or completely accurate amount.
Q: Mr. Javier is a non-resident senior citizen. He
receives a monthly pension from the GSIS, which he
deposits with the PNB-Makati Branch. Is he exempt
from income tax and therefore not required to file
an income tax return?
A: Mr. Javier is exempt from income tax on his
monthly GSIS pension (Sec. 32[B][6][f], NIRC), but
not on the interest income that might accrue on the
pensions deposited with PNB which are subject to
final withholding tax.
Consequently, since Mr. Javier's sole
taxable income would have been subjected to a
final withholding tax, he is not required anymore to
file an income tax return (Sec. 51[A][2][c], NIRC).
Q: In the year 2000, X worked part time as a waitress
in a restaurant in Mega Mall for 8am to 4pm and
then as a cashier in a 24-hour convenience store in
her neighborhood. The total income of X for the
year from the two employees does not exceed her
total personal and additional exemption for the
year 2000. Was she required to file an income tax
return last April? Explain your answer.
A: Yes. An individual deriving compensation
concurrently from two or more employers at any
time during the taxable year shall file an income tax
return (Sec. 51[A][2][b], NIRC).
Q: Robert Patterson is an American who first arrived
in the Philippines in 1944 as a member of the US
Armed Forces that liberated the Philippines. After
the war he returned to the United States but came
back to the Philippines in 1958 and stayed here up
to the present. He is presently employed in the
United States Naval Base, Olongapo City. For the
year 1985, he earned US$10,856.00. Sometime in
1986, the District Revenue Office of the Bureau of
Internal Revenue served him a notice, informing
him that he did not file his income tax return for the
year 1985 and directing him to file said return in 10
days. He refused to file any return claiming that he
is not a resident alien and is therefore not required
to file any income tax return. Is Patterson's claim
correct?
A: Patterson's claim is not correct. While Patterson is
exempt from income tax, an exemption from
income tax does not, however, necessarily mean
an exemption likewise from the filing of an income
tax return (Garrison v Court of Appeals, 187 SCRA
525).
Q: a) How often does a domestic corporation
file income tax return for income earned
during a single taxable year? Explain the
process. b) What is the reason for such
procedure?
A: a) A domestic corporation is required to file
income tax returns four (4) times for income earned
during a single taxable year. Quarterly returns are
required to be filed for the first three quarters where
the corporation shall declare its quarterly summary
of gross income and deductions on a cumulative
basis (Sec. 75, NIRC). Then, a final adjustment return
is required to be filed covering the total taxable
income for the entire year, calendar or fiscal (Sec.
76, NIRC).
b) The reason for this procedure is to ensure the
timeliness of collection tomeet the budgetary
needs of the government. Likewise, it is designed to
ease the burden on the taxpayer by providing it
with an installment payment scheme, rather than
requiring the payment of the tax on a lump-sum
basis after the end of the year.
CHAPTER XII: WITHHOLDING TAXES
Q: What is meant by income subject to "final tax"?
Give at least two examples of income of resident
individuals that is subject to the final tax.
A: Income subject to the final tax refers to an
income wherein the tax due is fully collected
through the withholding tax system. Under this
procedure, the payor of the income withholds the
tax and remits it to the government as a final
settlement of the income tax due on said income.
The recepient is no longer required to include the
item of income subjected to "final tax" as part of his
gross income in his income tax returns. Examples of
income subject to final tax are divided income,
interest from bank deposits, royalties, etc.
Q: Is a non-resident alien who is not engaged in
trade or business or in the exercise of profession in
the Philippines but who derived rental income from
the Philippines required to file an income tax return
on April of the year following his receipt of said
income? If not, why not?
A: No. The income tax on all income derived from
Philippine sources by a non-resident alien who is not
engaged in trade or business in the Philippines is
withheld by the lessee as a Final Withholding Tax
46
(Sec. 57[A], NIRC). The government cannot require
persons outside of its territorial jurisdiction to file a
return; for this reason, the income tax on income
derived from within must be collected through the
withholding tax system and thus relieve the
recipient of the income the duty to file income tax
returns (Sec. 51, NIRC).
Q: To start a business of his own, Mr. Mario de
Guzman oped for an early retirement from a private
company after ten (10) years of service. Pursuant to
the company's qualified and approved private
retirement plan, he was paid his retirement benefit
which was subjected to the withholding tax. Is the
employer correct in withholding the tax? Explain.
Under what conditions are retirement benefits
received by officials and employees of private firms
excluded from gross income and exempt from
taxation?
A: (a) It depends. An employee retiring under a
company's qualified and private retirement plan
can only be exempt from income tax on his
retirement benefits if the following requisites are
met: (1) that the retiring employee must have been
in service of the same employer for at least 10 years;
(2) that he is not less than 50 years of age at the
time of retirement; and (3) the benefit is availed of
only once. In the instant case, there is no mention
whether the employee has likewise complied with
requisites number (2) and (3). The conditions to be
met in order that retirement benefits received by
officials and employees of private firms are
excluded from gross income and exempt from
taxation are as follows:
Under R.A. 4917 (those received under a
reasonable private benefit plan):
the retiring official or employee must have been in
service of the same employer for at least 10 years;
that he is not less than 50 years of age at the time
of retirement; and that the benefit is availed of only
once. Under R.A. 7641 (those received from
employers without any retirement plan): Those
received under existing collective bargaining
agreement and other agreements are exempt;
and In the absence of retirement plan or
agreement providing for retirement benefits, the
benfits are excluded from gross income and
exempt from income tax if: (i) retiring employee
must have served at least five (5) years; and (ii) that
he is not less than 60 years of age but not more than
65.
CHAPTER XIII: ESTATE TAX
Q: (1) What is the principle of mobilia sequuntur
personam?
(2) Are donations inter vivos and donations mortis
causa subject to estate taxes? A: (1) Principle of
mobilia sequuntur personam refers to the principle
that taxation of intangible personal property
generally follows the residence or domicile of the
owner thereof.
Donations inter vivos are subject to donor's gift tax
(Sec. 91[a], Tax Code) while donations mortis causa
are subject to estate tax (Sec. 77, Tax Code).
However, donations inter vivos constituted lifetime
like transfers in contemplation of death or
revocable transfers (Sec. 78[b] and [c], Tax Code)
may be taxed for estate tax purposes, the theory
being that the transferor's control thereon extends
up to the time of his death.
Q: John Cerna, Filipino citizen, married to Maria
Cerna, died in a vehicular accident in NLEX on July
10, 2007. The spouses owned, among others a 100-
hectare agricultural land in Sta. Rosa, Laguna with
current fair market value of P20 million, which was
subject matter of a Joint Venture Agreement about
to be implemented with Star Land Corporation
(SLC), a well-known real estate development
company. He bought the said real property for P2
million fifty [50] years ago. On January 5, 2208, the
administrator of the estate and SLC jointly
announced their big plans to start conversion and
development of the agricultural lands in Sta. Rosa,
Laguna into first-class residential and commercial
centers. As a result, the prices of real properties in
the locality have doubled. The administrator of the
Estate of Jose Cernan filed the estate tax return on
January 9, 2008, by including in the gross estate the
real property at P2 million. After 9 months, the BIR
issued deficiency estate tax assessment, by valuing
the real property at P40 million. (a) Is the BIR correct
in valuing the real property at P40 million? (b) If you
disagree, what is the correct value to be used for
estate tax purposes?
A: a. No, BIR is wrong in valuing the real property at
P40 million. The P40 million represents the value of
the real property in 2008, after the announcement
by the joint venture partners that development
plans would be pursued in the area. The value of
the gross estate of the decedent shall be
determined by including the value at the time of
death in 2007 of all property, real or personal,
tangible or intangible, wherever situated (Sec. 85,
NIRC). Since the fair market value of the real
property at the time of death of Mr. Jose Cerna in
2007 was P20 million, this market value should be the
one used for purposes of determining the gross
estate. Whatever is the value of the property after
47
his death--whether it increases or decreases-- is of
no moment for estate tax purposes.
Q: Ralph Donald, an American Citizen, was a top
executive of a U.S. company in the Philippines until
he retired in 1999. He came to like the Philippines so
much that following his retirement, he decided to
spend the rest of his life in the country. He applied
for and was granted a permanent resident status
the following year. In the spring of 2004, while
vacationing in Orlando, Florida, USA, he suffered a
heart attack and died. At the time of his death, he
left the following properties: (a) bank deposits with
Citibank Makati and Citibank Orlando, Florida; (b)
a rest house in Orlando, Florida; (c) a condominium
unit in Makati; (d) shares of stock in the Philippine
subsidiary of the U.S. company where he worked;
(e) shares of stock in San Miguel Corp. and PLDT; (f)
shares of stock in Disney World in Florida; (g) U.S.
treasury bonds; and (h) proceeds from a life
insurance policy issued by a U.S. corporation.
Which of the following assets shall be included in
the taxable gross estate in the Philippines? Explain.
A: Being a resident of the Philippines at the time of
his death, the gross estate of Ralph Donald shall
include all his property, real or personal, tangible or
intangible, wherever situated at the time of his
death (Sec. 85, NIRC). Thus, the following shall be
included in his taxable gross estate in the
Philippines:
a. bank deposits with Citibank Makati and Citibank
Orlando, Florida
b. a rest house in Orlando, Florida
c. a condominium unit in Makati
d. shares of stock in the Philippine subsidiary of the
U.S. company
e. shares in San Miguel Corp. and PLDT
f. shares of stock in Disney World in Florida
g. U.S. treasury bonds
The proceeds from a life insurance policy
issued by a U.S. corporation is included as part of
the gross estate of Ralph Donald, if the designation
of the beneficiary is revocable or irrespective of the
nature of the designation, if the designated
beneficiary is either the estate of the deceased, his
executor or administrator. If the designated
beneficiary is other than the estate, executor or
administrator and the designation is irrevocable,
the proceeds shall not form part of his gross estate
(Sec. 85[E], NIRC).
Q: Jose Ortiz owns 100 hectares of agricultural land
planted to coconut trees. He died on May 30, 1994.
Prior to his death, the government, by operation of
law, acquired under the Comprehensive Agrarian
Reform Law all his agricultural lands except five (5)
hectares. Upon the death of Ortiz, his widow asked
you how she will consider the 100 hectares of
agricultural land in the preparation of the estate tax
return. What advice will you give her?
A: The 100 hectares of land, which Jose Ortiz owned
but which prior to his death on May 30, 1994 were
by the government under CARP, are no longer part
of his taxable gross estate, with the exception of the
remaining five (5) hectares which under Section
78(a) of the Tax
Code still forms part of "decedent's interest."
Q: Cliff Robertson, an american citizen, was a
permanent resident of the Philippines. He died in
Miami, Florida. He left 10,000 shares of Meralco, a
condominium unit at the Twin Towers Building at
Pasig, Metro Manila and a house and lot in Los
Angeles, California.
What assets shall be included in the Estate
Tax Return to be filed with the BIR?
A: All of Mr. Robertson's assets, consisting of 10,000
shares in the Meralco, a condominium unit in Pasig,
and his house and lot in Los Angeles, California, are
taxable. The properties of a resident alien
decedent like Mr. Robertson are taxable wherever
situated (Secs. 77, 78 and 98, NIRC).
Q: Mr. Agustin, 75 years old and suffering from an
incurable disease, decided to sell for valuable and
sufficient consideration, a house and lot to his son.
He died one year later. In the settlement of Mr.
Agustin's estate, the BIR argued that the house and
lot were transferred in contemplation of death and
should therefore form part of the gross estate for
estate tax purposes. Is the BIR correct? A: No. The
house and lot were not transferred in
contemplation of death; therefore, these
properties should not form part of the decedent's
gross estate. To qualify as a transfer in
contemplation of death, the transfer must be
either without consideration or for insufficient
consideration. Since the house and lot were sold
for valuable and sufficient consideration, there is
no transfer in contemplation of death for estate
tax purposes (Sec. 85[B], NIRC).
Q: A, aged 90 years and suffering from incurable
cancer, on August 1, 2001 wrote a will and, on the
same day, made several inter vivos gifts to his
children. Ten days later, he died. In your opinion,
are the inter vivos gifts considered transfers in
contemplation of death for purposes of
determining properties to be included in his gross
estate? Explain your answer.
A: Yes. When the donor makes his will within a short
time of, or simultaneously with, the making of gifts,
the gifts are considered as having made in
contemplation of death (Roces v. Posadas, 58 Phils.
48
108). Obviously, the intention of the donor in making
the inter vivos gifts is to avoid the imposition of the
estate tax and since the donees are likewise his
forced heirs who are called upon to inherit, it will
create a presumption juris tantum that said
donations were made mortis causa; hence, the
properties donated shall be included as part of A's
estate.
Q: In 1999, Xavier purchased from his friend, Yuri, a
painting for P500,000. The fair market value of the
painting at the time of purchase was P1 million. yuri
paid all the corresponding taxes on the transaction.
In 2001, Xavier died. In his last will and testament,
Xavier bequeathed the painting, already worth P1.5
million, to his only son, Zandro. The will also granted
Zandro the power to appoint his wife, Wilma, as
successor to the painting in the event of Zandro's
death. Sandro died in 2007, and Wilma succeeded
to the property. (a) Should the painting be included
in the gross estate of Xavier in 2001 and thus, be
subject to estate tax? (b) Should the painting be
included in the gross estate of Zandro in 2007 and
thus, be subject to estate tax? (c) May a vanishing
deduction be allowed in either or both of the
estates?
A: a. The value of the gross estate of the decedent
shall be determined by including the value at the
time of his death of all property, real or personal,
tangible or intangible, wherever situated (Sec. 85,
NIRC). Accordingly, the fair market value of the
painting in 2001, which was owned by Xavier at the
time of his death, should be included in the gross
estate of Xavier and be subject to estate tax.
The value of the painting in 2007, which was
bequeathed by Xavier to Zandro by will in 2001 with
power to appoint his wife, Wilma, as successor to
the painting, should not be included in the gross
estate of Zandro. Only property passing under a
general power of appointment is included in the
gross estate of the decedent. In this case, the
painting has to be transferred by Zandro to his wife,
Wilma, based on the will of his father, Xavier, and
since the power of appointment granted by Xavier
to Zandro is specific (i.e. only to his wife), such
property should not be included in his gross estate
in 2007.
No, vanishing deduction is not available to both
Estates of Xavier and Zandro because in the case
of Xavier, he acquired the painting by purchase,
and in the case of Zandro, the painting shall not be
included in his gross estate; hence, there would be
no double taxation of the same property, for estate
tax purposes. Moreover, the two (2) deaths must
occur within a period of five (5) years. In this case,
the death of Zandro occurred in 2007, and more
than five (5) years have, therefore, elapsed from
the date of death of Xavier in 2001.
Q: In June 2000, X took out a life insurance policy of
his own life in the amount of P2,000,000.00. He
designated his son, Z, as his beneficiary with respect
to P1,000,000.00, reserving his right to substitute him
for another. X died in September 2003. are the
proceeds of life insurance to form part of the gross
estate of X? Explain.
A: Only the proceed of P1,000,000,00 given to the
son, Z, shall form part of the gross estate of X. Under
the Tax Code, proceeds of life insurance shall form
part of the gross estate of the decedent to the
extent of the amount receivable by the beneficiary
designated in the policy of insurance except when
it is expressly stipulated that the designation of the
beneficiary is irrevocable. As stated in the problem,
only the designation of Y is irrevocable, and the
decedent reserved the right to substitute Z as
beneficiary for snother person. Accordingly, the
proceeds received by Y shall be excluded, while
the proceeds received by Z shall be included in the
gross estate of X (Sec. 85[E],NIRC).
Q: A died, survived by his wife and three children.
The estate tax was properly paid and the estate
settled and divided and distributed among the four
heirs. Later the BIR found out that the estate failed to
report the income received by the estate during
administration. The BIR issued a deficiency income
tax assessment plus interest, surcharges and
penalties. Since the 3 children are residing abroad,
the BIR sought to collect the full tax deficiency only
against the widow. Is the BIR correct?
A:Yes. The BIR is correct. In a case where the estate
has been distributed to the heirs, the collection
remedies available to the BIR in collecting tax
liabilities of an estate may either (1) sue all the heirs
and collect from each of them the amount of tax
proportionate to the, inheritance received or (2) by
virtue of the lien created under Section 219, sue
only one heir and subject the property he received
from the estate to the payment of the estate tax.
The BIR, therefore, is correct in pursuing the second
remedy although this will give rise to the right of the
heir who pays to seek reimbursement from the other
heirs (Collector v. Pineda, 21 SCRA 105). In no case,
however, can the BIR enforce the tax liability in
excess of the share of the widow in the inheritance.
Q: While driving his car to Baguio City last month,
Pedro Asuncion, together with his wife, Assunta, and
only son, Jaime, met an accident that caused the
instantaneous death of Jaime. The following day,
Assunta also died in a hospital. The spouses and
49
their son had the following assets and liabilities at
the time of death:
Assunta
Exclusive Conjugal
Cash P10,000,000
Cars 2,000,000 500,000
Land 5,000,000
Residential
4,000,000
house
Mortgage
2,500,000
payable
Funeral
300,000
expenses
a. Is the Estate of Jaime Asuncion liable to estate
tax? Explain.
b. Is vanishing deduction applicable to the Estate
of Assunta Asuncion? Explain.
A: a. The Estate of Jaime Asuncion is not liable to
estate tax. At the time of death, his gross estate
amounted to P1,200,000. Since his estate is entitled
to standard deduction of P1 million and funeral
expenses equivalent to 5% of his gross estate not
exceeding P200,000, plus the fact that the first
P200,000 of his net estate is exempt from estate tax,
there would be no estate tax due on his net estate.
No, there would be no vanishing deduction
allowed to the Estate of Assunta Asuncion, since she
did not inherit or receive any property from her
deceased son, Jaime, that was previously
subjected to estate tax or donor's tax. While her
estate could be entitled to receive one-half of P1.2
million (or P600,000) cash deposit from her
deceased son, this is exempt from estate tax, as
explained above. To be entitled to the vanishing
deduction, it is important that the property (cash of
P600,000 in the instant case) must have been taxed
in the estate of a prior decedent.
Q: What is vanishing deductions in estate taxation?
A: Vanishing deductions or property previously
taxed in estate taxation refers to the diminishing
deductibility/exemption, at the rate of 20% over a
period of five (5) years until it is lost after the fifth
year, of any property (situated in the Philippines)
forming part of the gross estate, acquired by the
decedent from a prior decedent who died within a
period of five (5) years from the decedent's death.
Q: Vanishing deduction is availed of by taxpayers
to:
a. correct his accounting records to reflect the
actual deductions made;
b. reduce his gross income;
c. reduce his output value-added tax liability;
d. reduce his gross estate.
Choose the correct answer. Explain.
A: I choose (d), reduce his gross estate. Vanishing
deduction or property previously taxed is one of the
items of deductions allowed in computing the net
estate of a decedent (Sec. 86[A][2] and 86[B][2],
NIRC).
Q: Mr. Castro inherited from his father, who died in
June 10, 1994, several pieces of real property in
Metro Manila. The estate tax return was filed and
the estate tax due in the amount of P250,000.00
was paid on December 6, 1994. The Tax Fraud
Division of the BIR investigated the case on the
basis of confidential information given by Mr.
Santos on January 6, 1998 that the return filed by
Mr. Castro was fraudulent and that he failed to
declare all properties left by his father with intent to
evade payment of the correct tax. As a result, a
deficiency estate tax assessment for P1,250,000.00,
inclusive of 50% surcharge for fraud, interest and
penalty, was issued against him on January 10,
2001. Mr. Castro protested the assessment, on the
ground of prescription. A. Decide Mr.
Castro's protest.
B. What legal requirement must Mr. Santos
comply with so that he can claim his reward?
Explain.
A: A. The protest should be resolved against Mr.
Castro. What was filed is a fraudulent return making
the prescriptive period for assessment 10 years from
discovery of the fraud (Sec. 222, NIRC).
Accordingly, the assessment was issued within the
prescriptive period to make an assessment based
on a fraudulent return.
B. The legal requirements that must be satisfied by
Mr. Santos to entitle him to reward are as follows:
He should voluntarily file confidential information
under oath with the Law Division of the
Bureau of Internal Revenue alleging therein the
specific violations constituting fraud; The
information must not yet be in the possession of
the Bureau of Internal Revenue, or refer to a
case already pending or previously investigated
by the Bureau of internal Revenue;
Mr. Santos should not be a government employee
or a relative of a government employee within the
sixth degree of consanguinity; and
The information must result to collections of
revenues and/or fines and penalties (Sec. 282,
NIRC).
Q: a) Discuss the rule on situs of taxation with
respect to the imposition of the estate tax on
property left behind by a non-resident decedent.
50
Mr. Felix de la Cruz, a bachelor resident citizen,
suffered from a heart attack while on a business trip
to the USA. He died intestate on June 15, 2000 in
New York City, leaving behind real properties
situated in New York; his family home in Valle
Verde, Pasig City; an office condominium in Makati
City; shares of stocks in san Miguel Corporation;
cash in bank; and personal belongings. The
decedent is
heavily insured with Insular Life. He had no known
debts at the time of his death. As the sole heir and
appointed Administrator, how would you determine
the gross estate of the decedent? What deductions
may be claimed by the estate and when and where
shall the return be filed and estate tax paid?
A: a) The value of the gross estate of a non-resident
decedent who is a Filipino citizen at the time of his
death shall be determined by including the value
at the time of his death of all property, real or
personal, tangible or intangible, wherever situated
to the extent of the interest therein of the decedent
at the time of his death (Sec. 85[A], NIRC). These
properties shall have a situs of taxation in the
Philippines; hence, subject to Philippine estate
taxes.
On the other hand, in the case of a non-
resident decedent who at the time of his death was
not a citizen of the Philippines, only that part of the
entire gross estate which is situated in the Philippines
to the extent of the interest therein of the decedent
at the time of his death shall be included in his
taxable estate, provided that with respect to
intangible personal property, we apply the rule of
reciprocity.
The gross estate shall be determined by including
the value at the time of his death all of the
properties mentioned, to the extent of interest he
had at the time of his death because he is a Filipino
citizen (Sec. 85[A], NIRC).
With respect to the life insurance proceeds,
the amount includible in the gross estate for
Philippine tax purposes would be to the extent of
the amount receivable by the estate of the
deceased, his executor, or administrator, under
policies taken out by decedent upon his own life,
irrespective of whether or not the insured retained
the power of revocation or to the extent of the
amount receivable by any beneficiary designated
in the policy of insurance, except when it is expressly
stipulated that the designation of the beneficiary is
irrevocable (Sec. 85[E], NIRC).
The deductions that may be claimed by the estate
are:
The actual funeral expenses or in an amount of
equal to five percent (5%) of the gross estate,
whichever is lower , but in no case to exceed two
hundred thousand pesos (P200,000.00) (Sec.
86[A][1][a],NIRC);
The judicial expenses in the testate or intestate
proceedings (Sec. 86[A][1], NIRC); The value of the
decedent's family home located in Valle Verde,
Pasig City in an amount not exceeding one million
pesos (P1,000,000.00) and upon presentation of a
certification of the barangay captain of the
locality that the same has been the decedent's
family home (Sec. 86[A][4], NIRC);
The standard deduction of P1,000,000.00 (Sec.
86[A][5], NIRC);
Medical expenses incurred within one year from
death in an amount not exceeding P500,000.00
(Sec. 86[A][6], NIRC).
The estate tax return shall be filed within six
(6) months from the decedent's death (Sec. 90[B],
NIRC), provided that the Commissioner of Internal
Revenue shall have authority to grant in meritorious
cases, a reasonable extension not exceeding thirty
(30) days for filing the return (Sec. 90[C], NIRC).
Except in cases where the Commissioner of
Internal Revenue otherwise permits, the estate tax
return shall be filed with an authorized agent bank,
or Revenue District Officer, Collection Officer, or
duly authorized Treasurer of Pasig City, the City in
which the decedent, Mr. de la Cruz, was domiciled
at the time of his death (Sec. 90[D], NIRC).
CHAPTER XIV: DONOR’S TAX
Q: Celia donated P110,000 to her friend Victoria,
who was getting married. Celia gave no other gift
during the calendar year. What is the donor's tax
implication on Celia's donation?
A: Celia shall pay a 30% donor's tax on the P100,000
cash donation, since Victoria, the donee, is a
stranger to her. A "stranger" is a person who is not a
brother, sister (whether by whole or half-blood),
spouse, ancestor and lineal descendant; or a
relative by consanguinity in the collateral line within
the fourth civil degree of relationship (Sec. 99[B],
NIRC). Celia is not entitled to deduct the amount of
P10,000 as dowry or gift on account of marriage
because that privilege is given only to parents of
the donee who is getting married (Sec. 101[A],
NIRC).
Q: X, a multinational corporation doing business in
the Philippines, donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines. What is the tax liability, if any, of X
corporation? Assuming the shares of stocks were
given to Mr. Y in consideration of his services to the
corporation, what are the tax implications? Explain.
51
A: (1) Foreign corporations effecting a donation are
subject to donor’s tax only if the property donated
is located in the Philippines. Accordingly, donation
of a foreign corporation of its own shares of stocks
in favor of resident employees is not subject to
donor’s tax (BIR Ruling No. 018-87, January 26, 1987).
However, if 85% of the business of the foreign
corporation is located in the Philippines or the
shares donated have acquired business situs in the
Philippines, the donation may be taxed in the
Philippines subject to the rule of reciprocity.
If the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, the
same shall constitute taxable compensation
income to the recipient because it is a
compensation for services rendered an employer-
employee relationship; hence, subject to income
tax.
The par value or stated value of the shares issues
also constitutes deductible expense to the
corporation, provided it is subjected to withholding
tax on wages.
Q: Mr. Bill Morgan, a Canadian citizen and a
resident of Scarborough, Ontario sends a gift check
of $20,000.00 to his future Filipino daughter-in-law
who is to be married to his only son in the
Philippines. Is the donation by Mr. Morgan subject
to tax? Explain. What is the tax consequence, if any,
to the donee (Filipino daughter-in-law of Mr.
Morgan)?
Can you name one kind of gift that is exempt from
donor’s tax which is extendible to both residents
and non-residents or non-citizens of the Philippines?
Include qualifications, if any.
A: 1) Yes. While the gift has been made on account
of marriage, to qualify for exemption to the extent
of the first P10,000.00 of the value thereof, such gift
should have been given to a legitimate, recognized
natural or adopted child of the donor. The gift, with
respect to the donee, is excluded from the gross
income and is exempt from income taxation. There
is no donee’s gift tax. Gifts made to or for the use of
the National Government or any entity created by
any of its agencies which is not conducted for
profit, or to any political subdivision of the said
Government, are exempt from gift tax with respect
to both residents and non-residents.
Q: In the settlement of the estate of Mr. Barbera who
died Intestate, his wife renounced her inheritance
and her share of the conjugal property in favor of
their children. The BIR determined that there was a
taxable gift and thus assessed Mrs. Barbera as a
dono. Was the BIR correct?
A: The BIR is correct that there was a taxable gift but
only insofar as the renunciation of the share of the
wife in the conjugal property is concerned. This is a
transfer of property without consideration, which
takes effect during the lifetime of the transfer/wife,
and it thus qualifies as a taxable gift (Rev. Regs. No.
2-2003).
Q: Spouses Jose San Pedro and Clara San Pedro,
both Filipino citizens, are the owners of a
residential house and lot in Quezon City. After the
recent wedding of their son, Mario, to Maria, the
spouses donated said real property to them. At
the time of the donation, the real property has a
fair market value of P2 million. Are Mario and
Maria subject to income tax for the value of the
real property donated to them? Explain. Are Jose
and Clara subject to donor’s tax? If so, how much
is the taxable gift of each spouse and what rate
shall be applied to the gift? Explain.
A: a) Mario and Maria, donees, are exempt from
income tax on the value of the real property
received by them through donation of their
parents. The value of the property acquired by gift,
bequest, devise, or descent, shall not be included
in the gross income of the donees. However,
income from such property shall be included in their
gross incomes during the year (Sec. 23[B][3], NIRC).
Spouses Jose and Clara are subject to donor’s tax
on the fair market value (P2 million) of real property
donated to their son, Mario, and on the donation
made to Mario’s wife, Maria. There are four (4)
taxable donations of P500,000 made by the
spouses. Donor Jose made P500,000 donation to his
son, Mario, and another donation of P500,000 to his
daughter-inlaw, Maria. Donor Clara also made
P500,000 donation to her son, Mario, and another
donation of P500,000 to her daughter-in-law, Maria.
Since the donations to their son, Mario, were made
by the Spouses Jose and Clara on account of his
marriage, Jose and Clara can each deduct
P10,000 from his or her gross gift. Their net gifts of
P490,000 (P500,000 less P10,000) will be subject to
the graduated donor’s tax rates ranging from 2% to
15% (Sec. 99[A], NIRC). With respect to their
donations to their daughter-in-law, Maria, their
gross gifts of P500,000 shall be subject to the 30%
donor’s tax rate, considering that the donee is a
stranger in relation to the donors. A “stranger” is a
person who is not a: (i) brother, sister (whether by
whole or half-blood), spouse, ancestor and lineal
ascendant; or (ii) relative by consanguinity to the
collateral line within the fourth degree of
relationship (Sec. 99[B], NIRC).
Q: Ace Tobacco Corporation bought a parcel of
land situated at Pateros and donated it to the
Municipal Government of Pateros for the sole
purpose of devoting the said land as a relocation
52
site for the less fortunate constituents of aid
municipality. In accordance therewith, the
Municipal Government of Pateros issued to the
occupants/beneficiaries Certificates of Award
giving to them the respective areas where their
houses are erected. Through Ordinance No. 2,
Series of 1998, the said municipal government
ordained that the lots awarded to the awardees be
finally transferred and donated to them. Determine
the tax consequence of the foregoing dispositions
with respect to Ace Tobacco Corporation, the
Municipal Government of Pateros, and the
occupants/beneficiaries.
A: The donation by Ace Tobacco Corporation is
exempt from the donor’s tax because it qualifies as
a gift to or for the use of any political subdivision of
the National Government (Sec. 101[2], NIRC). The
conveyance is likewise exempt from documentary
stamp tax because it is a transfer without
consideration. Since the donation is to be used as a
relocation site for the less fortunate constituents of
the municipality, it may be considered as an
undertaking for human settlements; hence, the
value of the land may be deductible in full from the
gross income of Ace Tobacco Corporation if it is in
accordance with National Priority Plan determined
by the National Economic Development Authority
(Sec. 34[H][2][a], NIRC). If the utilization is not in
accordance with a National Priority Plan
determined by the National Economic
Development Authority, then Ace Tobacco
Corporation may deduct the value of the land
donated only to the extent of five percent (5%) of
its taxable income derived from trade or business as
computed without the benefit of the donation
(Sec. 34[H][2][a] in relation to Sec.34[H][1], NIRC).
The Municipality of Pateros is not subject to any
donor’s tax on the value of land it subsequently
donated, it being exempt from taxes as a political
subdivision of the National Government.
The occupants/beneficiaries are subject to real
property taxes because they now own the land.
Q: A, an individual, sold to B, his brother-in-law, his
lot with a market value of P1,000,000.00 for
P600,000.00. A’s cost in the lot is P100,000.00. b is
financially capable of buying the lot. A also owns X
Co., which has a fast growing business. A sold some
of shares of stock in X Co. to his key executives in X
Co. These executives are not related to A. The
selling price is P3,000,000.00 which is the book
value of the shares sold but with a market value of
P5,000,000.00. A’s cost in the shares sold is
P1,000,000.00. The purpose of A in selling the shares
is to enable his key executives to acquire
proprietary interest in the business and have a
personal stake in the business. Explain if the above
transactions are subject to donor’s tax.
A: The first transaction where a lot was sold by A to
his brother-in-law for a price below its fair market
value will not be subject to donor’s tax if the lot
qualifies as a capital asset. The transfer for less than
adequate and full consideration which gives rise to
a deemed gift, does not apply to a sale of property
subject to capital gains tax (Sec. 100, NIRC).
However, if the lot sold is an ordinary asset, the
excess of the fair market value over the
consideration received shall be considered as a gift
subject to the donor’s tax.
The sale of shares of stock below the fair
market value thereof is subject to the donor’s tax
pursuant to the provisions of Section 100 of the Tax
Code. The excess of the fair market value over the
selling price is a deemed gift.
Q: Levox corporation wanted to donate P5 million
as prize money for the world professional billiard
championship to be held in the Philippines. Since
the Billiard Sports Federation of the Philippines does
not recognize the event, it was held under the
auspices of the International Professional Billiards
Association, Inc. Is Levox subject to donor’s tax on
its donation?
A: Yes, since the national sports association for
billiards does not sanction the event, and the
donation is not included among the exempt
donations under the law.
Q: On December 6, 2001, LVN Corporation donated
a piece of vacant lot situated in Mandaluyong City
to an accredited and duly registered non-stock,
non-profit educational institution to be used by the
latter in building a sports complex for students. May
the donor claim in full as deduction from its gross
income for the taxable year in 2001 the amount of
the donated lot equivalent to its fair market
value/zonal value at the time of the donation?
Explain your answer. In order that donations to non-
stock, non-profit educational institution may be
exempt from the donor’s gift tax, what conditions
must be met by the donee?
A: a. No. Donations and/or contributions made to
qualified donee institutions consisting of property
other than money shall be based on the acquisition
cost of the property. The donor is not entitled to
claim as full deduction the fair market value/zonal
value of the lot donated (Sec.34[H], NIRC).
In order that donations to non-stock, non-profit
educational institution may be exempt from the
donor’s gift tax, it is required that not more than 30%
of the said gifts shall be used by the donee-
institution for administration purposes (Sec.
101[A][3], NIRC).
53
Q: In 1991, imeda gave her parents a Christmas gift
of P100,000.00 and a donation of P80,000.00 to her
parish church. She also donated a parcel of land for
the construction of a building to the PUP Alumni
Association, a non-stock, nonprofit organization.
Portions of the building shall be leased to generate
income for the association.
(1) Is the Christmas gift of P100,000.00 to Imelda’s
parents subject to tax?
(2) How about the donation to the parish church?
(3) How about the donation to the PUP Alumni
Association?
A: (1) The Christmas gift of P100,000.00 (now
P200,000.00) given by Imelda to her parents is
taxable up to P50,000.00 (now P100,000.00)
because under the law (Sec. 92[a] now Sec.
99[A], NIRC), net gifts not exceeding P50,000 are
exempt.
The donation of P80,000.00 to the parish church
even assuming that it is exclusively for religious
purposes is not tax-exempt because the exemption
granted under Article VI, Section 28(3) of the
Constitution applies only to real estate taxes
(Lladoc v. Commissioner, 14 SCRA 292).
The donation to the PUP Alumni Association does
not also qualify for exemption both under the
Constitution and the afore-cited law because it is
not an educational or research organization,
corporation, institution, foundation or trust.
Q: Are contributions to a candidate in an
election subject to donor’s ta? On the part of the
contributor, is it allowable as a deduction from
gross income? A: No, provided the recipient
candidate had complied with the requirement
for filing of returns of contributions with the
Commission on Elections as required under the
Omnibus Election Code.
The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to, the development,
management, operation and/or conduct of a
trade, business or profession (Sec. 3[A][1][a], NIRC).
Furthermore, if the candidate is an incumbent
government official or employee, it may even be
considered as bribe or a kickback (Sec. 34[A][1][c],
NIRC).
Q: Miguel, a citizen and resident of Mexico,
donated US$1,000 worth of stocks in Barack Motors
Corporation, a Mexican company, to his legitimate
son, Miguelito, who is residing in the Philippines and
about to be married to a Filipino girlfriend. Mexico
does not impose any transfer tax of whatever nature
on all gratuitous transfers of property. (a) Is Miguel
entitled to claim a dowry exclusion? Why or why
not? (b) Is Miguel entitled to the rule of reciprocity
in order to be exempt from the Philippine donor’s
tax? Why or why not?
A: a. Dowries or gifts made on account of marriage
and before its celebration or within one year
thereafter by parents to each of their legitimate,
recognized natural or adopted children to the
extent of the first Ten thousand pesos (P10,000) is
exempt from donor’s tax (Sec. 101[A], NIRC). To be
entitled to the dowry exemption under the donor’s
tax law, the donor must be a resident of the
Philippines. SInce Miguel is a non-resident alien, he
does not qualify to claim such exemption.
Miguel is not entitled to the rule of reciprocity in
order to be exempt from the Philippine donor’s tax.
In the first place, the donation by Miguel, a non-
resident Mexican citizen, of the shares of stock of
Barack Motors Corporation, a Mexican company,
which has not acquired business situs in the
Philippines, to his son, Miguelito, is exempt from
donor’s tax under Section 104 of the 1997 TAx Code,
which provides that “...where the donor was a non-
resident alien at the time of his donation, his real
and personal property so transferred but which are
situated outside the Philippines shall not be
included as part of his ‘gross gift.’” In other words,
there is nothing to be subject to donor’s tax, and
there is no reciprocity rule necessary to claim
exemption.
Q: Kenneth Yusoph owns a commercial lot which he
bought many years ago for P1 million. It is now
worth P20 million although the zonal value is only
P15 million. He donates one-half pro indiviso interest
in the land to his son Dino on 31 December 1994,
and the other one-half pro indiviso interest to the
same son on 2 January 1995. How much is the
value of the gifts in 1994 and 1995 for purposes of
computing the gift tax? Explain. The Revenue
District Officer questions the splitting of the
donations into 1994 and 1995. He says that since
there were only two (2) days separating the two (2)
donations they should be treated as one, having
been made within one year. Is he correct? Explain.
Dino subsequently sold the land to a buyer for P20
million. How much did Dino gain on the sale?
Explain. Suppose, instead of receiving the lot by
way of donation, Dino received it by inheritance.
What would be his gain on the sale of the lot for P20
million? Explain.
A: (1) The value of the gifts for purposes of
computing the gift tax shall be P7.5 million in 1994
and P7.5 million in 1995. In valuing a real property
for gift tax purposes the property should be
appraised at the higher of two values as of the time
of donation which are (a) the fair market value as
determined by the Commissioner (which is the
54
zonal value fixed pursuant to Sec.16[e] of the Tax
Code), or (b) the fair market value as shown in the
schedule of values fixed by the Provincial and City
Assessors. The fact that the property is worth P20
million as of the time of donation is immaterial,
unless it can be shown that this value is one of the
two values mentioned as provided under Section
81 of the Tax Code. The Revenue District Officer is
not correct because the computation of the gift tax
is cumulative but only insofar as gifts made within
the same calendar year. Therefore, there is no legal
justification for treating two (2) gifts effected in two
(2) separate calendar years as one gift. Dino
gained an income of P19 million from the sale. Dino
acquires a carry-over basis which is the basis of the
property in the hands of the donor or P1 million. The
gain from the sale or other disposition of property
shall be the excess of the amount realized
therefrom over the basis or adjusted basis for
determining gain (Sec. 34[a], NIRC). Since the
property was acquired by gift, the basis for
determining gain shall be the same as if it would be
in the hands of the donor or the last preceding
owner by whom the property was not acquired by
gift. Hence, the gain is computed by deducting the
basis of P1 million from the amount realized which is
P20 million. If the commercial lot was received by
inheritance the gain from the sale for P20 million is
P5 million because the basis is the fair market value
as of the date of acquisition. The steppedup basis
of P1.5 million which is the value for estate tax
purposes is the basis for determining the gain (Sec.
34[b][2], NIRC).
Q: Your bachelor client, a Filipino residing in
Quezon City, wants give his sister a gift of P200,000.
He seeks your advice, for purposes of reducing if
not eliminating the donor’s tax on the gift, on
whether it is better for him to give all of the P200,000
on Christmas 2001 or to give P100,000 on Christmas
2001 and the other P100,000 on January 1, 2002.
Please explain your advice.
A: I would advice him to split the donation. Giving
the P200,000 as a one-time donation would mean
that it will be subject to a higher tax bracket under
the graduated tax structure, thereby necessitating
the payment of donor’s tax. On the other hand,
splitting the donation into two equal amounts of
P100,000 given on two (2) different years will totally
relieve the donor from the donor’s tax because the
first P100,000 donation in the graduated brackets is
exempt (Sec. 99, NIRC). While the donor’s tax is
computed on the cumulative donations, the
aggregation of all donations made by a donor is
allowed only over one calendar year.
Q: a) When the donee or beneficiary is a stranger,
the tax payable by the donor shall be 30% of the
net gifts. For purposes of this tax, who is a stranger?
What conditions must concur in order that all
grants, donations and contributions to non-stock,
non-profit private educational institutions may be
exempt from the donor’s tax under Section 101(a)
of the Tax Code?
A: a) A “stranger” is a person who is not a: Brother
or sister (whether by whole or half-blood), spouse,
ancestor and lineal descendant; or Relative by
consanguinity in the collateral line within the fourth
degree of relationship (Sec. 98[B], NIRC) The
following are the conditions:
Not more than 30% of said gifts shall be used by such
donee for administration purposes; The educational
institution is incorporated as a non-stock, non-profit,
paying no dividends, governed by trustees who
receive no compensation, and devoting all its
income. whether students’ fees or gifts, donations,
subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation (Sec.
101[A][3], NIRC).
CHAPTER XV: INTRODUCTION TO VAT
Q: Characteristics of Value Added Tax
A: 1. It is a tax on the value added by the taxpayer.
It is collected through the “tax credit method” or
“invoice method.” It is a transparent form of sales
tax. It is a broad-based tax on consumption of
goods, properties or services in the Philippines as it
applies to all stages of manufacture, production,
and distribution of goods and services. It is an
indirect tax. The Philippines adopted the “separate
indication of tax method.” There is no cascading in
the value added tax system.
CHAPTER XVI: PERSONS LIABLE TO TAX
Q: Greenhills Condominium Corporation is an
existing non-stock, non-profit association of unit
owners in Greenhills Tower, San juan City since
2001. To be able to reduce the association dues
being collected from the unit owners, the Board of
directors of the corporation agreed to lease part of
the ground floor of the condominium building to DEF
Savings Bank for P120,000 a month starting January,
2007. Is the non-stock, non-profit association liable
to value added tax in 2007? If your answer is in the
negative, is it liable to another kind of business tax?
Will the association be liable to value added tax in
2008, if it increases the rental to P150,000 a month
beginning January, 2008? Explain.
55
A: a. No, Greenhills Condominium Corporation will
not be subject to value added tax, since its gross
rental income for the year 2007 will be P1,440,000
(P120,000 times 12). The sale or lease of goods or
properties or the performance of properties other
than the transactions mentioned in the preceding
paragraphs, where the gross annual sales and/or
receipts do not exceed the amount of One million
five hundred thousand pesos (P1,500,000), shall be
exempt from value added tax (Sec. 109[V], NIRC).
However, it would be subject to the 3% percentage
tax on its gross rental income under Section 116 of
the Tax Code. Yes. If Greenhills Condominium
Corporation increases the monthly rental income to
P150,000, it will be subject to the 12% value added
tax beginning November 1, 2008, unless it registers
as a VAT person effective January 1, 2008. The
reason for this is that the gross annual rental income
of the association for 2008 would be P1,800,00
(P150,000 times 12) (Sec. 109[V], NIRC). Moreover,
the association will be deemed to be engaged in
the leasing, despite its being a non-stock, non-profit
organization. The phrase “in the course of trade or
business” means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person,
regardless of whether or not the person engaged
therein is a non-stock,non-profit private
organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to
members or their guests), or government entity
(Sec. 105, NIRC).
Q: Newtex International (Phils.), Inc. is an
American firm duly authorized to engage in
business in the Philippines as a branch office. In its
activity as a buying agent for foreign buyers of
shirts and dresses abroad and performing liaison
work between its home office and the Filipino
garment manufacturers and exporters, Newtex
does not generate any income. To finance its
office its office expenses here, its head office
abroad regularly remits to it the needed amount.
To see its operation and manage its office here,
which had been in operation for two years, the
head office assigned three foreign personnel. Is
Newtex subject to VAT? A: Newtex is not subject to
VAT. The VAT is imposed on sellers and not on
buyers. The branch office did not derive any
income or compensation so as to possibly permit
the imposition of a value added tax on
compensation for services rendered. In addition,
since the transactions are direct export sales, the
VAT does not apply. Export sales are among those
that are either zero-rated or exempt from value
added tax (Secs. 99-100,NIRC
CHAPTER XVII: OUTPUT TAX ON SALE OF GOODS OR
PROPERTIES AND SERVICES
Q: Deemed sale
A: The following transactions are considered as
deemed sales:
Transfer, use or consumption not in the course of
business of goods or properties originally intended
for sale or for use in the course of business;
Distribution or transfer to shareholders or investors as
share in the profits of the VAT-registered persons or
to creditors in payment of debt;
Consignment of goods, if actual sale is not made
within sixty days following the date such goods
were consigned; and
Retirement from or cessation of business, with
respect to inventories of taxable goods existing as
of such retirement or cessation.
Q: An alien employee of the Asian Development
Bank (ADB) who is retiring soon has offered to sell
his car to you, which he imported tax-free for his
personal use. The privilege of exemption from tax is
granted to qualified personal use under the ADB
Charter, which is recognized by the tax authorities.
If you decide to purchase the car, is the sale subject
to tax? Explain.
A: Yes. The sale is subject to tax. Section 107(B) of
the Tax Code provides that “[I]n the case of tax-free
importation of goods into the Philippines by persons,
entities or agencies exempt from tax, where such
goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees, or
recipients shall be considered the importer thereof,
who shall be liable for any internal revenue tax on
such importation.”
Q:State whether the following transactions are (a)
VAT exempt; (b) subject to VAT at 10% (now 12%);
or (c) subject to VAT at 0%: Sale of fresh vegetables
by Aling Ining at the Pamilihang Bayan ng Trece
Martirez; Services rendered by Jake’s Construction
Company, a contractor to the World Health
Organization in the renovation of its offices in
Manila; Sale of tractors and other agricultural
implements by Bungkal Incorporated to local
farmers; Sale of RTW by Cely’s Boutique, a Filipino
dress designer, in her dress shop and other outlets;
Fees for lodging paid by students to Bahay-
Bahayan dormitory (monthly fee P1,500).
A: 1. VAT exempt. Sale of agricultural products such
as fresh vegetables in their original state, of a kind
generally used as, or producing foods for human
consumption, is exempt from VAT (Sec. 109[c],
NIRC). VAT at 10%. Since Jake’s Construction
56
Company has rendered services to the World
Health Organization, which is an entity exempted
from taxation under international agreements to
which the Philippines is a signatory, the supply of
services is subject to zero percent (0%) rate (Sec.
108[B][3], NIRC). VAT at 10%. Tractors and other
agricultural implements fall under the definition of
goods which include all tangible objects which are
capable of pecuniary estimation (Sec. 106[A][1],
NIRC), the sales of which are subject to VAT at 10%.
This is subject to VAT at 10%. This transaction also falls
under the definition of goods, the sales of which are
subject to VAT at 10%.
VAT exempt. The monthly fee paid by each student
falls under the lease of residential units with a
monthly rental per unit not exceeding P8,000 (now
P10,000), which is exempt from VAT, regardless of
the amount of aggregate rentals received by the
lessor during the year (Sec. 109[x], NIRC). The term
“unit” shall mean per person in the case of
dormitories, boarding houses, and bed spaces
(Sec. 4.103-1, Rev. Regs. No. 7-95).
Q: Your client, United Market Cooperative, is
requesting the Commissioner of Internal Revenue to
exempt it from the payment of VAT on its purchases
of prime commodities from food
suppliers/manufacturers on the ground that it is
exempt from all taxes, including VAT, under R.A. No.
6938, the Cooperative Code of the Philippines. Do
you think our client can obtain the necessary
exemption from the BIR? If your answer is in the
affirmative, explain the basis for the grant. If your
answer is in the negative, state the basis for the
rejection of the request.
A: 1. An exemption is not necessary. The value
added tax is not imposed on the purchaser but on
the seller, except in importation of goods. No. The
exemption to which the taxpayers are entitled to
refers to those that are levied on the exempt
taxpayer or directly imposed on the exempted
goods. The value added tax is imposed on the
sellers of goods and services, not on the purchasers.
Q:Royal Mining is a VAT-registered domestic mining
entity. One of its products is silver being gold to the
Bangko Sentral ng Pilipinas. It filed a claim with the
BIR for tax refund on the ground that under Section
106 of the Tax Code, sales of precious metals to the
Bangko Sentral are considered export sales subject
to zerorated VAT. Is Royal Mining’s claim
meritorious? Explain.
A:No, Royal Mining’s claim is not meritorious
because it is the sale of gold (and not silver) to the
BSP that is considered as export sale subject to zero-
rated VAT.
Q:Emiliano Paupahan is engaged in the business of
leasing out several residential apartment units he
owns. The monthly rental for each unit ranges from
P8,000 to P10,000. His gross rental income for one
year is P1,650,000. He consults you on whether it is
necessary for him to register as a VAT taxpayer.
What legal advice will you give him, and why?
A:Since the rental income per unit per month of his
apartment units (which ranges from P8,000 to
P10,000) does not exceed the threshold provided
for in the VAT law in the amount of P10,000, his rental
income is exempt from VAT under Section 109(Q) of
the 1997 Tax Code. In view, thereof, it does not
matter whether or not he has exceeded the
general threshold for the preceding twelve months
of P1,500,00 prescribed in Section 109(V) of the Tax
Code. Thus, my advice is for him not to register as a
VAT person. He will be exempt from VAT under
Section 109(Q) and for the 3% percentage tax
under Section 116 of the Tax Code.
Q:Mr. Abraham Eugenio, a pawnshop operator,
after having been requested by the Revenue District
Officer to pay value added tax pursuant to a
Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the
Regional Trial Court an action questioning the
validity of the RMO. If you were the judge, will you
dismiss the case?
A:Yes. An RMO is in reality a ruling or an opinion
issued by the Commissioner in implementing the
provisions of the Tax Code dealing with the
taxability of pawnshops. The power to review rulings
issued by the Commissioner is lodged with the CTA
and not with the RTC. A ruling falls within the purview
of “other matters arising under the Tax Code,”
appealable only to the CTA (CIR v. Leal, 392 SCRA
9 [2002]).
Q: In 2010, pursuant to a Letter of Authority (LA)
issued by the Regional Director, Mr. Abcede was
assessed deficiency income taxes by the BIR for the
year 2009. He paid the deficiency. In 2011, Mr.
Abcede received another LA for the same year
2009, this time from the National Investigation
Division, on the ground that Mr. Abcede;s 2009
return was fraudulent. Mr. Abcede contested the LA
on the ground that he can only be investigated
once in a taxable year. Decide.
A: The contention of Mr. Abcede is not tenable.
While the general rule is to the effect that for
income tax purposes, a taxpayer must be subject
to examination and inspection by the internal
revenue officers only once in a taxable year, this will
not apply if there is a fraud, irregularity, or mistakes
as determined by the Commissioner. In the instant
case, what triggered the second examination is the
57
findings by the BIR that Mr. Abcede’s 2009 return
was fraudulent. Accordingly, Mr. Abcede the
examination is legally justified. (Sec. 235, NIRC)
Q: “A” Co., a Philippine corporation, is a big
manufacturer of consumer good and has several
suppliers of raw materials. The BIR suspects that
some of the suppliers are not properly reporting
their income on the sales to “A” Co. The CIR
therefore: (a) Issued an access letter to “A” Co. to
furnish the BIR information on sales and payment to
its suppliers. (b) Issued an access letter to a bank
(“X” Bank) to furnish the BIR on deposits of some
suppliers of “A” Co. on the alleged ground that the
suppliers are committing tax evasion. “A” Co., “X”
Bank and the suppliers have not been issued by the
BIR letter of authority to examine. “A” Co. and “X”
Bank believe that the BIR is on a “fishing expedition”
and come to you for counsel. What is your advice?
A: I will advice “A” Co. and “X” Bank that the BIR is
justified only in getting information from the former
but not from the latter. The BIR is authorized to
obtain information from the other persons than
those whose internal revenue tax liability is subject
to audit or investigation. However, this power shall
not be constructed as granting the Commissioner
the authority to inquire into bank deposits (Sec. 5,
NIRC)
Q: Can the Commissioner of Internal Revenue
inquire into the bank deposits of a taxpayer? If so
does this power of the Commissioner conflict with
R.A. 1405, Secrecy of Bank Deposits Law?
A: The Commissioner of Internal Revenue is
authorized to inquire into the bank deposit of: (1) A
decedent to determine his gross estate. (2) Any
taxpayer who has filed an application for
compromise of his tax liability by means of financial
incapacity to pay his tax liability (Sec. 6[F], NIRC).
The limited power of the Commissioner does not
conflict with R.A. No. 1405 because of the provisions
of the Tax Code granting this power is an exception
to Secrecy of Bank Deposits Law as embodied in a
later legislation. Furthermore, in case a taxpayer
applies for an application to compromise the
payment of his tax liabilities on his claim that his
financial position demonstrates a clear inability to
pay the tax assessed, his application shall not be
considered unless and until he waives in writings his
privilege under R.A. 1405, and such waiver shall
constitute the authority of the Commissioner to
inquire into the bank deposits of the taxpayer.
Q:X dies in year 2000 leaving a bank deposit of P
2,000,000.00 under joint account with his associates
in a law firm. Learning of X’s death from the
newspapers, the Commissioner wrote to every
bank in the country asking them to disclose to him
the amount of deposits that might be outstanding in
his name or jointly with others at the date of his
death. May the bank holding the deposit refuse to
comply on the ground of the Secrecy of Bank
Deposit Law? Explain.
A: No. The commissioner has the authority to inquire
into bank deposit accounts of a decedent to
determine his gross estate notwithstanding the
provisions of the Bank Secrecy Law. Hence, the
banks holding the deposits in question may not
refuse to disclose the amount of deposits on the
ground of secretary of bank deposits (Sec. 6 [F],
NRC). The fact that the deposit is a joint account will
not preclude the Commissioner from inquiring
thereon because the law mandates that if a bank
has knowledge of the death of a person, who
maintained a bank deposit account alone or jointly
with another, it shall not allow any withdrawal from
the said deposit account, unless the Commissioner
has certified that the taxes imposed thereon have
been paid (Sec. 97, NIRC0. Hence, to be able to
gibe the required certification, the inclusion of the
deposit is imperative.

Q: 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?
A: No, as this would be violative of R.A. 1405, the
Bank Deposits Secrecy Law. The Commissioner or
his duty authorized representative may be allowed
to inquire or look into the bank deposits of a
taxpayer in the following cases: For the purpose of
determining the gross estate of a decedent; Where
the taxpayer has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay such tax liability (Sec. 6[F], NIRC);
Where the taxpayer has signed a waiver authorizing
the Commissioner or his duly authorized
representatives to inquire into the bank deposits.

58
 CHAPTER XX: RATES OF VAT
Q:Royal Mining is a VAT-registered domestic
mining entity. One of its products is silver being gold
to the Bangko Sentral ng Pilipinas. It filed a claim
with the BIR for tax refund on the ground that under
Section 106 of the Tax Code, sales of precious
metals to the Bangko Sentral are considered export
sales subject to zerorated VAT. Is Royal Mining’s
claim meritorious? Explain.
A:No, Royal Mining’s claim is not meritorious
because it is the sale of gold (and not silver) to the
BSP that is considered as export sale subject to zero-
rated VAT.
CHAPTER XXI: EXEMPT TRANSACTIONS
Q:Emiliano Paupahan is engaged in the business of
leasing out several residential apartment units he
owns. The monthly rental for each unit ranges from
P8,000 to P10,000. His gross rental income for one
year is P1,650,000. He consults you on whether it is
necessary for him to register as a VAT taxpayer.
What legal advice will you give him, and why?
A:Since the rental income per unit per month of his
apartment units (which ranges from P8,000 to
P10,000) does not exceed the threshold provided
for in the VAT law in the amount of P10,000, his rental
income is exempt from VAT under Section 109(Q) of
the 1997 Tax Code. In view, thereof, it does not
matter whether or not he has exceeded the
general threshold for the preceding twelve months
of P1,500,00 prescribed in Section 109(V) of the Tax
Code. Thus, my advice is for him not to register as a
VAT person. He will be exempt from VAT under
Section 109(Q) and for the 3% percentage tax
under Section 116 of the Tax Code.
Q:Mr. Abraham Eugenio, a pawnshop operator,
after having been requested by the Revenue District
Officer to pay value added tax pursuant to a
Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the
Regional Trial Court an action questioning the
validity of the RMO. If you were the judge, will you
dismiss the case?
A:Yes. An RMO is in reality a ruling or an opinion
issued by the Commissioner in implementing the
provisions of the Tax Code dealing with the
taxability of pawnshops. The power to review rulings
issued by the Commissioner is lodged with the CTA
and not with the RTC. A ruling falls within the purview
of “other matters arising under the Tax Code,”
appealable only to the CTA (CIR v. Leal, 392 SCRA
9 [2002]).
59
CHAPTER XXIV: INTRODUCTION – TAX REMEDIES
Q: In 2010, pursuant to a Letter of Authority (LA)
issued by the Regional Director, Mr. Abcede was
assessed deficiency income taxes by the BIR for the
year 2009. He paid the deficiency. In 2011, Mr.
Abcede received another LA for the same year
2009, this time from the National Investigation
Division, on the ground that Mr. Abcede;s 2009
return was fraudulent. Mr. Abcede contested the LA
on the ground that he can only be investigated
once in a taxable year. Decide.
A: The contention of Mr. Abcede is not tenable.
While the general rule is to the effect that for
income tax purposes, a taxpayer must be subject
to examination and inspection by the internal
revenue officers only once in a taxable year, this will
not apply if there is a fraud, irregularity, or mistakes
as determined by the Commissioner. In the instant
case, what triggered the second examination is the
findings by the BIR that Mr. Abcede’s 2009 return
was fraudulent. Accordingly, Mr. Abcede the
examination is legally justified. (Sec. 235, NIRC)
Q: “A” Co., a Philippine corporation, is a big
manufacturer of consumer good and has several
suppliers of raw materials. The BIR suspects that
some of the suppliers are not properly reporting
their income on the sales to “A” Co. The CIR
therefore: (a) Issued an access letter to “A” Co. to
furnish the BIR information on sales and payment to
its suppliers. (b) Issued an access letter to a bank
(“X” Bank) to furnish the BIR on deposits of some
suppliers of “A” Co. on the alleged ground that the
suppliers are committing tax evasion. “A” Co., “X”
Bank and the suppliers have not been issued by the
BIR letter of authority to examine. “A” Co. and “X”
Bank believe that the BIR is on a “fishing expedition”
and come to you for counsel. What is your advice?
A: I will advice “A” Co. and “X” Bank that the BIR is
justified only in getting information from the former
but not from the latter. The BIR is authorized to
obtain information from the other persons than
those whose internal revenue tax liability is subject
to audit or investigation. However, this power shall
not be constructed as granting the Commissioner
the authority to inquire into bank deposits (Sec. 5,
NIRC)
Q: Can the Commissioner of Internal Revenue
inquire into the bank deposits of a taxpayer? If so
does this power of the Commissioner conflict with
R.A. 1405, Secrecy of Bank Deposits Law?
A: The Commissioner of Internal Revenue is
authorized to inquire into the bank deposit of:
(1) A decedent to determine his gross estate. (2)
Any taxpayer who has filed an application for
compromise of his tax liability by means of financial
incapacity to pay his tax liability (Sec. 6[F], NIRC).
The limited power of the Commissioner does not
conflict with R.A. No. 1405 because of the provisions
of the Tax Code granting this power is an exception
to Secrecy of Bank Deposits Law as embodied in a
later legislation. Furthermore, in case a taxpayer
applies for an application to compromise the
payment of his tax liabilities on his claim that his
financial position demonstrates a clear inability to
pay the tax assessed, his application shall not be
considered unless and until he waives in writings his
privilege under R.A. 1405, and such waiver shall
constitute the authority of the Commissioner to
inquire into the bank deposits of the taxpayer.
Q:X dies in year 2000 leaving a bank deposit of P
2,000,000.00 under joint account with his associates
in a law firm. Learning of X’s death from the
newspapers, the Commissioner wrote to every
bank in the country asking them to disclose to him
the amount of deposits that might be outstanding in
his name or jointly with others at the date of his
death. May the bank holding the deposit refuse to
comply on the ground of the Secrecy of Bank
Deposit Law? Explain.
A:No. The commissioner has the authority to inquire
into bank deposit accounts of a decedent to
determine his gross estate notwithstanding the
provisions of the Bank Secrecy Law. Hence, the
banks holding the deposits in question may not
refuse to disclose the amount of deposits on the
ground of secretary of bank deposits (Sec. 6 [F],
NRC). The fact that the deposit is a joint account will
not preclude the Commissioner from inquiring
thereon because the law mandates that if a bank
has knowledge of the death of a person, who
maintained a bank deposit account alone or jointly
with another, it shall not allow any withdrawal from
the said deposit account, unless the Commissioner
has certified that the taxes imposed thereon have
been paid (Sec. 97, NIRC0. Hence, to be able to
gibe the required certification, the inclusion of the
deposit is imperative.
Q: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
60
Commissioner or his duly authorized representative
be allowed to inquire or look into the bank deposits
of a taxpayer?
A:No, as this would be violative of R.A. 1405, the
Bank Deposits Secrecy Law.
The Commissioner or his duty authorized
representative may be allowed to inquire or look
into the bank deposits of a taxpayer in the following
cases:
a) For the purpose 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. 6[F], NIRC);
c) Where the taxpayer has signed a
waiver authorizing the
Commissioner or his duly authorized
representatives to inquire into the
bank deposits.
CHAPTER XXV: ADMINISTRATIVE REMEDIES OF
GOVERNMENT
Q: For failure of Oceanic Company, Inc.(OCEANIC)
to pay deficiency taxes of Php20 Million, the
Commissioner of Internal Revenue issued warrants
of distraint on OCEANIC's personal properties and
levy on its real properties. Meanwhile, the
Department of Labor through the Labor Arbiter
rendered a decision ordering OCEANIC to pay
unpaid wages and other benefits to its employees.
Four barges belonging to OCEANIC were levied
upon by the sheriff and later sold at public auction.
The Commissioner of Internal Revenue filed a
motion with the Labor Arbiter to annul the sale and
enjoin the sheriff from disposing the proceeds
thereof. The employees of OCEANIC opposed the
motion contending that Article 110 of the Labor
Code gives first preference to claims for unpaid
wages. Resolve the motion. Explain.
A: The motion filed by the Commissioner should be
granted because the claim of the government for
unpaid taxes is generally preferred over the claims
of laborers for unpaid wages. The provision of Article
110 of the Labor Code, which gives laborers' claims
for preference, applies only in case of bankruptcy
or liquidation of the employer's business. In the
instant case, OCEANIC is not under bankruptcy or
liquidation at the time the warrants of distraint and
levy were issued; hence, the lien of the employees
is unwarranted (CIR v.NLRC,G.R.
No.74965,November 9,1994).

Q: Is the BIR authorized to collect estate tax
deficiencies by the summary remedy of levy upon
and sale of real properties of the decedent without
first securing the authority of the court sitting in
probate court over the supposed will of the
decedent?
A: Yes. The BIR is authorized to collect estate tax
deficiency through the summary remedy of levying
upon and sale of real 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
non-claims, and this is justified by the necessity of
government funding, immortalized in the maxim
that taxes are the lifeblood of the government
(Marcos II v.CA and CIR,273 SCRA 47).
Q: Is the BIR authorized to issue a warrant of
garnishment against the bank account of a
taxpayer despite the pendency of his protest
against the assessment with the BIR or appeal with
the Court of Tax Appeals?
A: The BIR is authorized is issue a warrant of
garnishment against the bank account of a
taxpayer despite the pendency of protest (Yabes
v.Flojo,15 SCRA 278).Nowhere in the Code is the
Commissioner required to rule first on the protest
before he can institute collection proceedings on
the tax assessed. The legislative policy is to give the
Commissioner much latitude in the speedy and
prompt collection of taxes because it is in taxation
that the Government depends to obtain the means
to carry on its operations (Republic v.Lim Tian Teng
Sons,16 SCRA 584).
Q: State and discuss briefly whether the following
cases may be compromised or may not be
compromised: a. Delinquent accounts;
b. Cases under administrative protest, after issuance
of the final assessment notice to the taxpayer, which
are still pending; c. Criminal tax fraud cases;
d. Criminal violations already filed court;
e. Cases where final reports of reinvestigation or
reconsideration have been issued resulting in the
reduction of the original assessment agreed to
by the taxpayer when he signed the required
agreement form.
A: a. Delinquent accounts may be compromised, if
either of the two conditions is present:(1) the
assessment is of doubtful validity, or (2) the financial
position of the taxpayer demonstrates a clear
inability to pay the tax
(Sec.204[A],NIRC;Sec.2,Rev.Regs.No.30-2002);
61
b. These may not be compromised, provided
that it is premised upon doubtful validity of the
assessment or financial incapacity to pay;
c. These may not be compromised, so that the
taxpayer may not profit from his fraud, thereby
discouraging its commission;
d. These may not be compromised in order
that the taxpayer will not profit from his criminal
acts;
e. Cases where final reports of reinvestigation
or reconsideration have been issued resulting in the
reduction of the original assessment agreed to by
the taxpayer when he signed the required
agreement form, cannot be compromised. By
giving his conformity to the revised assessment, the
taxpayer admits the validity of the assessment and
his capacity to pay the same
(Sec.2,Rev.Regs.No.30-2002).
Q: After the tax assessment had become final and
unappealable, the Commissioner of Internal
Revenue initiated the filing of a civil action to collect
the tax due from NX. After several years, a decision
was tendered by the court ordering NX to pay the
tax due plus penalties and surcharges. The
judgment became final and executory, but
attempts to execute the judgment award were
futile. Subsequently, NX offered the
Commissioner a compromise settlement of 50% of
the judgment award, representing that this amount
is all he could really afford. Does the Commissioner
have the power to accept the compromise offer? Is
it legal and ethical? Explain briefly.
A: Yes. The Commissioner has the power to accept
the offer of compromise, if the financial position of
the taxpayer clearly demonstrates a clear inability
to pay the tax (Sec.204, NIRC).
As represented by NX in his offer, only 50% of
the judgment award is all he could really afford. This
is an offer for compromise based on financial
incapacity which the Commissioner shall not
accept, unless accompanied by a waiver of the
secrecy of bank deposits (Sec.6[F],NIRC).The waiver
will enable the Commissioner to ascertain the
financial position of the taxpayer, although the
inquiry need not be limited only to the bank deposits
of the taxpayer but also as to his financial position
as reflected in his financial statements or other
records upon which his property holdings can be
ascertained.
If indeed the financial position of NX as
determined by the Commissioner demonstrates a
clear inability to pay the tax, the acceptance of the
offer is legal and ethical because the ground upon
which the compromise was anchored is within the
context of the law and the rate of compromise is
well within and far exceeds the minimum prescribed
by law, which is only 10% of the basic tax assessed.
A: Yes. The commissioner has the power to accept
the offer of compromise, if the financial position of
the taxpayer clearly demonstrates a clear inability
to pay the tax (Sec. 204, NIRC).
As represented by NX in his offer, only 50% of the
judgment award is all he could really afford. This is
an offer for compromise based on financial
incapacity which the Commissioner shall not
accept, unless accompanied by a waiver of the
secrecy of bank deposits (Sec. 6[F], NIRC). The
waiver will enable the Commissioner to ascertain
the financial position of the taxpayer, although the
inquiry need not be limited only to bank deposits of
the taxpayer but also as to his financial position as
reflected in his financial statements or other records
upon which his property holdings can be
ascertained.
If indeed he financial position of NX as determined
by the Commissioner demonstrates a clear inability
to pay the tax, the acceptance of the offer is legal
and ethical because the ground upon which the
compromise was anchored is within the context of
the law and the rate of compromise is well within
and far exceeds the minimum prescribed by law,
which is only 10% of the basic tax assessed.
Q: Under what conditions may the Commissioner of
Internal Revenue be authorized to:
a. Compromise the payment of any internal
revenue tax?
A:The Commissioner of Internal Revenue maybe
authorized to compromise the payment of any
internal revenue tax where:
1) A reasonable doubt as to the validity of the
claim against the taxpayer exists;or 2) The
financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax.
3) Abate or cancel a tax liability?
A: The Commissioner of Internal Revenue may
abate or cancel a tax liability when:
1) The tax or any portion thereof appears to be
unjustly or excessively assessed;or 2) The
administration and collection costs involved do not
justify the collection of the amount due (Sec.204[B],
NIRC).
Q: An Information was filed in court for willful non-
payment of income tax, the assessment of which
has become final. The accused, through counsel,
presented a motion that be allowed to compromise
his tax liability subject of the information. The
62
prosecutor indicated his conformity to the motion. Is
this procedure correct?
A: No. Criminal violations, if already filed in court,
may not be compromised (Sec.204[B], NIRC).
Furthermore, the payment of the tax due after
apprehension shall not constitute a valid defense in
any prosecution for violation of any provisions of the
Tax Code (Sec.247[a], NIRC). Finally, there is no
showing that the prosecutor in the problem is a
legal officer of the Bureau of Internal Revenue to
whom the conduct of criminal actions is lodged by
the Tax Code.
Q: May the Commissioner of the Internal Revenue
compromise the payment of withholding tax (tax
deducted and withheld at source) where the
financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax?
A: No. A taxpayer who is constituted as withholding
agent who has deducted and withheld at source
the tax on the income payment made by him holds
the taxes as trust funds for the government
(Sec.58[D],NIRC) and is obligated to remit them to
the BIR. The subsequent inability of the withholding
agent to pay/remit the tax withheld is not a ground
for compromise; because the withholding tax is not
a tax upon the withholding agent but it is only a
procedure for the collection of a tax.
Q: Minolta Philippines, Inc. (Minolta) is an EPZA-
registered enterprise enjoying preferential tax
treatment under a special law. After investigation of
its withholding tax returns for the taxable year
1997,the BIR issued a deficiency withholding tax
assessment in the amount of Php150,000.00.On May
15,1999,because of financial difficulty, the
deficiency tax remained unpaid, as a result of
which the assessment became final and executory.
The BIR also found that, in violation of the provisions
of the NIRC, Minolta did not file its final corporate
income tax return for the taxable year 1998,
because it allegedly incurred net loss from its
operations. On May 17, 2002 the BIR filed with the
RTC an action for collection of the deficiency
withholding tax for 1997.
A. Will the BIR's action for collection prosper?
As counsel of Minolta, what action will you
take? Explain.
B. May criminal violations of the Tax Code be
compromised?
If Minolta makes voluntary offer to
compromise the criminal violations for non-filing
and non-payment of taxes for the year 1998, may
the Commissioner accept the offer? Explain.
A:
A. Yes. BIR’s action for collection will prosper
because the assessment is already final and
 executor. It can already be enforced
through judicial action.
As counsel of Minolta, I will introduce
evidence that the income payment was
reported by the payee and the income tax
was paid thereon in 1997 so that my client
may be allowed to pay only the civil
penalties for non-withholding pursuant to
Revenue memorandum Order No. 38-83.
B. All criminal violations of the Tax code may
be compromised except those already filed
in court or those involving fraud (Sec. 204,
NIRC).
Accordingly, if Minolta makes a voluntary
offer to compromise the criminal violations
for non-filing and non-payment of taxes for
the year 1998, the Commissioner may
accept the offer which is allowed by law.
However, if it can be established that a tax
has not been paid as a consequence of
non-filing of the return, the civil liability for
taxes may be dealt with independently of
the criminal violations. The compromise
settlement of the criminal violations will not
relieve the taxpayer from its civil liability. But
the civil liability for taxes may also be
compromised if the financial position of the
taxpayer demonstrates a clear inability to
pay the tax.
Q: A domestic corporation failed to withhold and
remit the tax on income received from Philippine
sources by a non-resident foreign corporation. In
addition to the civil penalties provided for under the
Tax Code, a compromise penalty was imposed for
violation of the withholding tax provisions. May the
Commissioner of Internal Revenue legally enforce
the collection of compromise penalty?
A: No. There is no showing that the compromise
penalty was imposed by the Commissioner of
Internal Revenue with the agreement and
conformity of the taxpayer (Wonder Mechanical
Engineering Corporation v.Court of Tax Appeals, et
al.,64 SCRA 555).
CHAPTER XXVI: JUDICIAL REMEDIES OF
GOVERNMENT
Q: When is an internal revenue tax considered
delinquent?
A: An internal revenue tax is considered delinquent
when it is unpaid after the lapse of the last day
prescribed by law for its payment. Likewise, it could
also be considered as delinquent where an
assessment for deficiency tax has become final and
63
the taxpayer has not paid it within the period given
in the notice of assessment.
Q: Antonio Cruz was appointed by the Regional Trial
Court as administrator in the testate proceedings for
the settlement of the estate of his deceased father.
On 12 February 1987 the Commissioner of Internal
Revenue issued a deficiency estate tax assessment
for the estate. The notice of deficiency assessment
was received by the latter's office two (2) days later,
the Administrator requested for a reconsideration of
the assessment on the ground that the same is
contrary to law and is not supported by sufficient
evidence. He also requested for a period of fifteen
(15) days within which to submit the estate's position
paper.
On 4 August 1988,not having received the
promised position paper, the Commissioner filed
with the Court a motion for allowance of claim and
for an order of payment of estate taxes, praying
therein that the administrator be required to pay the
BIR the aforementioned deficiency tax. The
administrator opposed the motion alleging that by
reason of the pendency of his request for
reconsideration the deficiency assessment has not
become final and executory and, therefore, the
absence of a decision on the disputed assessment
is a bar against collection of taxes. He further
argued that it is the Court of Tax Appeals, and not
the Regional Trial Court, which has exclusive
jurisdiction over the claim.
Resolve the motion and issues raised.
A: Evidently, the request for reconsideration referred
to did not express or specify the grounds therefor. A
request for reconsideration in the tenor stated in the
problem is insufficient, not being substantiated,to
stop the running of the 30-day period within which
the assessment may be disputed (Dayrit v. Cruz,G.R.
No.39919,September 26,1988).The failure of the
taxpayer to submit the promised position paper
within the said 30-day period had the effect of
rendering the assessment final and executory.In
addition,the pendency of a decision on a disputed
assessment does not bar the collection of the
taxes,and no injunction may be issued by any court
(except by the Court of Tax Appeals as an incident
to a timely petition for review).In the absence of a
petition for review with the Court of Tax Appeals
which may be brought by a taxpayer within 30 days
from the receipts of the final decision of the
Commissioner, the Court of Tax Appeals has no
jurisdiction to take cognizance thereof (See
Sec.11,R.A. 1125).Premises considered, the action
taken by the Commissioner with the Regional Trial
Court was appropriate and in accordance with
law. The taxpayer's failure to dispute the
assessment effectively by complying with the
conditions laid down by the BIR, such as specifying
under oath the grounds of his protest, paying one-
half of the amount assessed and putting up a bond
for the balance, provided a legal basis for the
government to collect the taxpayer's liability by
ordinary civil action (Republic v. Ledesma, G.R.
No.L-18759,February 28,1967).
CHAPTER XXVII: CIVIL PENALTIES
Q: Danilo, who is engaged in the trading business,
entrusted to his accountant the preparation of his
income tax return and the payment of the tax due.
The accountant filed a falsified tax return by under-
declaring the sales and overstating the expense
deductions of Danilo. Is Danilo liable for the
deficiency tax and the penalties thereon? What is
the liability, if any, of the accountant? Discuss.
A: Yes, Danilo is liable for the deficiency tax as well
as for the deficiency interest. However, he is not
liable for the fraud penalty because the
accountant acted beyond the limits of his authority.
A tax return which does not correctly reflect taxable
income may only be false but not necessarily
fraudulent, where it appears that the return was not
prepared by the taxpayer himself but by his
accountant. Accordingly, the 50% surcharge for
fraud could not be imposed (Azanr v. CTA, 58 SCRA
719 [1974]).
Q: Businessman Stephen Yang filed an income tax
return for 1993 showing business net income of
350,000.00 Pesos on which he paid an income tax
of 61,000.00 Pesos. After filing the return, he realised
that he forgot to include an item of business income
in 1993 for 50,000.00 Pesos. Being an honest
taxpayer, he included this income in his return for
1994 and paid the corresponding income tax
thereon.
In the examination of his 1993 rerun, the BIR
examiner found that Stephen Yang failed to report
this item of 50,000.00 Pesos and assessed him a
deficiency income tax on this item, plus 50% fraud
surcharge.
1. Is the examiner correct?
2. If you were the lawyer of Stephen yang, what
would you have advised your client before he
included in his 1994 return the amount of
50,000.00 Pesos as 1993 income to avoid the
fraud surcharge?
3. Considering that Stephen yang had already
been assessed a deficiency income tax for 1993
for his failure to report the 50,000.00 Pesos
income, what would you advise him to do to
avoid the penalties for tax delinquency?
64
4. What would you advise Stephen to do with
regard to the income tax he paid for the
50,000.00 Pesos in his 1994 return? In case your
remedy falls, what is your other recourse?
A:
1. The examiner is correct in assessing a deficiency
income tax for table year 1993 but not in
imposing the 50% fraud surcharge. The amount
of all items of gross income must be included in
gross income during the year in which received
or realised (Sec. 38, NIRC). The 50% fraud
surcharge attaches only if a false or fraudulent
return is wilfully made by Mr. Yang (Sec. 248,
NIRC). The fact that Mr. Yang included the
income in his 1994 return belies any claim of
wilfulness but is rather indicative of an honest
mistake which was sought to be rectified by a
subsequent act, that is the filing of the 1994
return.
2. Mr. Yang should have amended his 1993
income tax return to allow for the inclusion of
the 50,000.00 income during the taxable period
it was realised.
3. Mr. Yang should file a protest questioning the
50% surcharge and ask for abatement thereof
4. Mr. Yang should file a written claim for refund
with the Commissioner of Internal revenue of
the taxes paid on the 50,000.00 income
included in 1994 within two years from payment
pursuant to Section 204(3) of the Tax Code.
Should this remedy fail in administrative level, a
judicial claim for refund can be instituted before
the expiration of the two-year period.
Q: What is a deficiency interest” for the purposes of
the income tax? illustrate
1. What is a “delinquency interest” for purposes of
the income tax? illustrate
A: 1. Deficiency interest for purposes of the income
tax is the interest due on any amount of tax due or
instalment thereof which is not paid on or before the
date prescribed for its payment computed at the
rate of 20% per annum or the Manila reference rate,
which is higher, from the date prescribed for its
payment until it is fully paid. If for example after the
audit of the books of XYZ Corp. for taxable year 1993
there was found to be due a deficiency income tax
of 125,000.00 Pesos inclusive of the 25% surcharge
imposed under Section 248 of the Tax Code, the
interest will be computed on the 125,000.00 from
April 15, 1994 up to its date of payment.
2. Delinquency interest is the interest of 20% or
the Manila reference rate, whichever is higher,
required to be paid in case of failure to pay:
a. the amount of the tax due on any return
required to be filed; or
 b. the amount of tax due for which return is
required; or
c. the deficiency tax or any surcharge or
interest thereon, on the due date
appearing in the notice and demand of
the Commissioner of Internal Revenue.
If in the above illustration the assessment notice was
real eased on December 31, 1994 and the amount
of deficiency tax, incisive of surcharge and
deficiency interest, was computed up to January
30, 1995 which is the due date for payment per
assessment notice, failure to pay on this latter date
will render the tax delinquent and will require the
payment of delinquency interest.
The imposition of 1% monthly [now 20% annual]
interest is but a just compensation to the state for
the delay in paying the tax for the concomitant use
by the taxpayer of funds that rightfully should be in
the government’s hands (U.S. v. Goldstein, 189 F[2d]
752). The fact that the interest charged is made
proportionate to the period of delay constitutes the
best evidence that such interest is not penal but
compensatory (Aguinaldo Industries Corporation v.
Commissioner and CTA, L-29790, February 25,1982).
CHAPTER XXVIII: REMEDIES OF TAXPAYERS
Q: Compare the taxpayers remedies under the
national Internal Revenue Code and the Tariff and
Customs Code.
A: The taxpayers remedies under the National
Internal Revenue Code may be categorised into
remedies before payment and remedies after
payment. The remedy before payment consists of
administrative remedy which is the filing of protest
within 30 days from receipt of assessment , and
judicial remedy which is the appeal of the adverse
decision of the Commissioner on the protest with the
Court of Tax Appeals, thereafter to the Court of
appeals and finally with the Supreme Court.
The remedy after payment is availed of by
paying the assessed tax within 30 days from receipt
of assessment and the filing of a claim for refund or
tax credit of these taxes on the ground that they are
erroneously paid within two years from date of
payment.if there is a denial of the claim, appeals of
the CTA shall be made within 30 days from receipt
of denial but within two years from date of
payment. if the Commissioner fails to act on the
claim for refund or tax credit and the two years
period is about to expire, the taxpayer should
consider the continuous inaction of the
Commissioner as a denial and elevate the case to
65
the CTA before the expiration of the two year
period.
Under the Tariff and Customs Code, taxpayer’s
remedies arise only after payment of duties. The
administrative remedies consist of filing a claim for
refund which may take the form of abatement or
drawback. The taxpayer can also file a protest
within 15 days from payment if he disagrees with the
ruling or decision of the Collector of Customs
regarding the legality or correctness of the
assessment of customs duties.if the decision of the
Collector is adverse to the taxpayer, he can notify
the Collector within 15 days from receipt of said
decision of his desire to have his case reviewed by
the Commissioner Government, is automatically
elevated of the Commissioner, the same shall be
automatically elevated to and finally reviewed by
the secretary of Finance.
Resort to judicial relief can be had by the
taxpayer by appealing the decision of the
Commissioner or of the Secretary of Finance (for
cases subject to automatic review) within 30 days
from the promulgation of the adverse decision to
the CTA.
Q: On March 10, 2010, Continental, Inc. received a
preliminary assessment notice (PAN) dated March
1, 2010 issue by the Commissioner of Internal
Revenue (CIR) for deficiency income tax for 2008.It
failed to protest the PAN. The CIR thereupon issued
final assessment notice (FAN) with letter of demand
on April 30, 2010. The FAN was received by the
corporation on May 10, 2010, following which or on
May 25 2010,it filed its protest against it. The CIR
denied the protest on the ground that the
assessment had already become final and
executory, the corporation having failed to protest
the PAN. Is the CIR correct? Explain.
A: No. Failure to file a Reply of PAN makes the
taxpayer in default and authorises the revenue
official to issue the FAN. However, no liability for
additional or deficiency tax arises from such failure.
Indeed, Revenue Regulation No. 12-99 makes the
filing of such Reply to PAN merely directory, i.e the
taxpayer may or may not reply to the PAN is for the
CIR to issue a FAN, since the corporation timely filed
the protest against the FAN, it cannot be said that
the final assessment notice had already become
final and executory.
CHAPTER XXIX: ASSESMENT AND PROTEST
Q: Describe separately the procedures on the legal
remedies under the Tax Code available to an
aggrieved taxpayer both at the administrative and
judicial levels. A: 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.
a. After receipt of the Pre- Assessment Notice
(PAN), he must within 15 days from receipt
explain why no additional taxes should be
assessed against him.
b. if the Commission of Internal revenue 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
par, Sec. 228, NIRC).
Q: After examining the book and records of EDS
Corporation, the 2004 final assessment notice,
showing basic tax of 1,000,000 Pesos, deficiency
interest of 400,000 Pesos, and due for payment of
April 20, 2007, but without the demand letter, was
mailed and released by the BIR on April 15, 2007.
The registered letter containing the tax assessment,
was received by the EDS Corporation on April 25,
2007.
a. What is an assessment notice? What are the
requisites of a valid assessment? Explain.
b. As tax lawyer of EDS Corporation, what legal
defense(s) would you raise against the
assessment? Explain.
A: a. The assessment notice, without the demand
letter, is void. Section 228 of the Tax Code expressly
provides that “the taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall
be void.” Since the assessment notice merely
contains the basic tax, interest and due date for
payment, it does not comply with the requirements
of the law that it must state the factual and legal
bases; hence, it is void.
b. The demand letter is important not only
because in such letter does the BIR makes a
demand for the payment of the deficiency tax but
more importantly, because of the findings of the
facts and computations of the deficiency taxes by
the revenue officers as we'll as the legal basis for
such assessment are adequately explained therein.
Q: What are the requisites before a taxpayer’s
request for reinvestigation may be granted by the
BIR? Discuss briefly.
A: A request for reinvestigation refers to a plea for
re-evaluation of an assessment on the basis of newly
discovered evidence or additional evidence the
taxpayer intends to present in the re-investigation.
66
Q: The BIR issued in 2010 a final assessment notice
and demand letter against X Corporation covering
deficiency income tax deficiency for the year 2008
in the amount of PHP10 Million. X Corporation earlier
requested the advice of a lawyer on whether or not
it should file a request for reconsideration or a
request for reinvestigation. The lawyer said it does
not matter whether the protest filed against the
assessment is a request for reconsideration or a
request for reinvestigation, because it has the same
consequences or implications. (a) What are the
differences between a request for reconsideration
and a request for reinvestigation? (b) Do you agree
with the advice of the lawyer?
A: a. Request for reconsideration is a plea for
evaluation of the assessment on the basis of existing
records without the need of presentation of
additional evidence (Rev. Regs. No. 1299). It does
not suspend the period to collect the deficiency tax
(Sec. 223, NIRC). The 180day period within which the
BIR shall act on the protest starts from the filing of the
request for reconsideration (Sec. 228, NIRC). On the
other hand, a request for reinvestigation is a plea for
re-evaluation of the assessment on the basis of
additional or newly discovered evidence which are
to be introduced for examination for the first time. It
suspends the running of the prescriptive period to
collect. The 180-year period within which the BIR
shall act on the protest starts only from the date of
submission of the additional or newly discovered
evidence (Sec. 228, NIRC; RCBC v. CIR, cited in
Royal Bank of Scotland [Phil.] v. CIR, CTA EB Case
No. 446, October 23, 2009)
b. No, in view of the aforesaid differences between
the request for reconsideration and the request for
reinvestigation.
Q: A final assessment notice was issued by the BIR
on June 13, 2000, and received by the taxpayer on
June 15, 2000. The taxpayer protested on July 31,
2000. The protest was initially given due course, but
was eventually denied by the CIR in a decision
dated June 15, 2005. The taxpayer then filed a
petition for review with the CTA, but the CTA
dismissed the same. (a) is the CTA correct in
dismissing the petition for review (b) Assume that the
CTA’s decision dismissing the petition for review has
become final. May the CIR legally enforce
collection of the delinquent tax?
A: a. Yes. The CTA is correct in dismissing the petition
for review because the assessment had already
become final and executory by the time the protest
was filed on July 31, 2000. The fact that the petition
for review was filed by the taxpayer before the CTA
within 30 days from the date of receipt of the CIR’s
final decision in the disputed assessment, this is not,
however, relevant in this case because the
taxpayer filed its protest against the assessment
after the 30-day period mandated by law.
b. Since the assessment had already become final
and executory for failure of the taxpayer to file a
timely protest against the assessment, particularly
where the decision of the CTA also becomes final
executory, the CIR can legally enforce the
collection of the delinquent tax by administrative
remedies through the issuance of warrants of
distraints/garnishments and levy and/or by judicial
remedies through the filing of civil actions or criminal
actions within the time prescribed by law.
Q: In the examination conducted by the revenue
officials against the corporation taxpayer in 2010,
the BIR issued a final assessment notice and
demand letter which states: “It is requested that the
above deficiency tax be paid immediately upon
receipt hereof, inclusive of penalties incident to
delinquency. This is our final decision based on
investigation. If you disagree, you may appeal this
decision within 30 days from receipt hereof,
otherwise said deficiency tax assessment shall
become final, executory and demandable.” The
assessment was immediately appealed by the
taxpayer to the court of Tax appeals, without filing
its protest against the assessment and without a
denial thereof by the BIR. If you were the judge,
would you deny the petition for review filed by the
taxpayer and consider the case as prematurely
filed?
A: No, the petition for review should not be denied.
The case is an exception to the rule on exhaustion
of administrative remedies. The BIR is estopped from
claiming that the filing of the petition for review is
premature because the taxpayer failed to exhaust
all administrative remedies. The statement of the BIR
in its final assessment notice and demand letter led
the taxpayer to conclude that only a final judgment
ruling in his favor would be accepted by the BIR. The
taxpayer cannot be blamed for not filing a protest
against the assessment since the language used
and the tenor of the demand letter indicate that it
is the final decision of the BIR on the matter. The CIR
should indicate, in a clear and unequivocal
language, whether his action on a disputed
assessment constitutes his final determination
thereon in order for the taxpayer concerned to
determine when his or her right to appeal to the tax
court accrues. Although there was no direct
reference for the taxpayer to bring the matter
directly to the CTA, it cannot be denied that the
word “appeal” under prevailing tax laws refers to
the filing of a petition for review with the CTA (Allied
Bank Corporation v. CIR, G.R. No. 175097, February
5, 2010).
67
Q: On June 1, 2003, Global Bank received a final
notice of assessment from the BIR for deficiency
documentary stamp tax in the amount of 55 million.
On June 20, 2003, Global Bank filed a request for
reconsideration with the Commissioner of Internal
Revenue. The Commissioner denied the request for
reconsideration only on May 30, 2006, at the same
time serving on Global Bank a warrant of distraint to
collect the deficiency tax. If you were the counsel,
what will be your advice to the bank? Explain.
A: The denial of the request for reconsideration is a
final decision of the Commissioner of Internal
Revenue. I would advise Global Bank to appeal the
Commissioner’s denial to the Court of Tax Appeals
(CTA) within 30 days from receipt, if the remedy of
appeal is still available, I will further advise the bank
to file a motion for injunction with the CTA to enjoin
the Commissioner from enforcing the assessment
pending resolution of the appeal. While n appeal to
the CTA will not suspend the payment, levy, distraint
and/or sale of any property of the taxpayer for the
satisfaction of its tax liability, the CTA is authorized
to give injunctive relief if the enforcement would
jeopardize the interest of the taxpayer, as in this
case where the assessment has not become final.
Q: A taxpayer received a tax deficiency
assessment of 51.2 million from the BIR demanding
payment within 180 days; otherwise, it would collect
through summary remedies. The taxpayer
requested for a reconsideration stating the grounds
therefor. Instead of resolving the request for
reconsideration, the BIR sent a Final Notice Before
Seizure to the taxpayer. May this action of the
Commissioner of Internal Revenue be deemed a
denial of the request for reconsideration of the
taxpayer to entitle him to appeal to the CTA?
Decide with reasons.
A: Yes. The action of the CIR is deemed a denial of
the request for reconsideration of the taxpayer, thus
entitling him to appeal to the CTA. The Notice was
the only response received by the taxpayer and its
content and tenor supports the theory that it was
the BIR final act regarding the request for
reconsideration. The very title of the Notice
indicated that it was a “Final Notice Before Seizure”
which means that the taxpayer’s properties will be
subjected to seizure to enforce the deficiency
assessment. Thus, in one decided case, the
Supreme Court ruled that the Final Notice Before
Seizure is a final decision of the Commissioner on the
disputed assessment (CIR v Isabela Cultural Corp.,
361 SCRA 71 [2001]).
Q: RR disputed a deficiency tax assessment and
upon receipt of an adverse decision by the
Commissioner of Internal revenue, filed an appeal
with the Court of Tax Appeals. While the appeal is
pending, the BIR served a warrant of levy on the real
properties of RR to enforce the collection of the
disputed tax. Granting arguendo that the BIR can
legally levy on the properties, what could RR do to
stop the process? Explain briefly.
A: RR should file a motion for injunction with the CTA
to stop the administrative collection process. An
appeal to the CTA shall not suspend the
enforcement of the tax liability, unless a motion to
that effect shall have been presented in court and
granted by it on the basis that such collection will
jeopardize the interest of the taxpayer or the
Government (Pirovano v. CIR, 14 SCRA 832 [1965]).
The CTA is empowered to suspend the collection of
internal revenue taxes and customs duties in cases
pending appeal only when: (1) in the opinion of the
court the collection by the BIR will jeopardize the
interest of the government and/or the taxpayer;
and (2) the taxpayer is willing to deposit the amount
being collected or to file a surety bond for not more
than double the amount of the tax to be fixed by
the court (Sec. 11, R.A. 1125).
Q: On March 15, 2000, the BIR issued a deficiency
income tax assessment for the taxable year 1997
against the Valera Group of Companies (Valera) in
the amount of P10 million. Counsel for Valera
protested the assessment and requested a
reinvestigation of the case. During the investigation,
it was shown that Valera had been transferring its
properties to other persons. As no additional
evidence to dispute the assessment had been
presented, the BIR issued on June 16, 2000 warrants
of distraint and levy on the properties and ordered
the filing of an action in the RTC for the collection of
the tax, Counsel for Valera filed an injunctive suit in
the RTC to compel the BIR to hold the collection of
the tax in abeyance until the decision on the protest
was rendered.
A. Can the BIR file the civil action for collection,
pending decision on the administrative
protest? Explain.
B. As counsel for Valera, what action would
you take in order to protect the interest of
your client? Explain your answer.
A:
A. Yes, because there is no prohibition for this
procedure considering that the filing of the
civil action for collection during the
pendency of an administrative protest
constitutes the final decision of the
Commissioner on the protest (CIR v. Union
Shipping Corp., 85 SCRA 548 [1990]).
B. I will wait for the filing of the civil action for
collection and consider the same as an
appealable decision. I will not file an
68
injunctive suit because it is not an available
remedy. I would then appeal the case to
the Court of Appeals and move for the
dismissal of the collection case with the RTC.
Once the appeal to the CTA is filed on time
the CTA has exclusive jurisdiction over the
case. Hence, the collection case in the RTC
should be dismissed (Yabes v. Flojo, 115
SCRA 278 [1982]).
Q: CFB Corporation, a domestic corporation
engaged in food processing and other allied
activities, received a letter from the BIR assessing it
delinquency income taxes. CFB filed a letter of
protest. One month after, a warrant of distraint and
levy was served on CFB Corporation.
If you were the lawyer engaged by CFB
Corporation to contest the assessment made by
the BIR, what steps will you take for your client?
A: I shall immediately file a motion for
reconsideration of the issuance of the warrant of
distraint and levy and seek from the BIR
Commissioner a denial of the protest “in clear and
unequivocal language.” This is so because the
issuance of a warrant of distraint and levy is not
considered as a denial by the BIR of the protest filed
by CFB Corporation (CIR v Union Shipping Corp., 185
SCRA 547).
Within 30 days from receipt of such denial
“in clear and unequivocal language,” I shall then
file a petition for review with the CTA.
Q: Spanflex Intl, Inc. received a notice of
assessment from the BIR. It seasonably filed a
protest with all the necessary supporting
documents, but the BIR failed to act on the protest.
Thirty days from the lapse of 180 days from filing the
protest, Spanflex still has not elevated the matter to
the CTA. What remedy, if any, can Spanflex take?
A: Spanflex may wait for the final decision on the
disputed assessment of the BIR and appeal it to the
CTA within 30 days from receipt of such decision.
 CHAPTER XXX: PRESCRIPTION
Q: Mia, a compensation income earner, filed her
income tax return for the year 2007 on March 30,
2008. On May 20, 2011, Mia received an assessment
notice and letter of demand covering the year 2007,
but the postmark on the envelope shows April 10,
2011. Her return is not a false or fraudulent return.
Can she raise the defense of prescription?
A: No. the 3-year prescriptive period started to run
only on April 15, 2008 (and not on March 30, 2008).
Internal revenue taxes shall be assessed within three
(3) years after the last day prescribed by law for the
filing of the return (Sec. 203, NIRC). Accordingly, the
period to assess the deficiency tax for 2007 has not
yet expired on April 10, 2011.
Q: DEF Corporation is a wholly owned subsidiary of
DEF, Inc., California, USA. Every December 15 of the
year, DEF Corporation paid annual royalties to DEF,
Inc. for the use of the latter’s software, for which the
former, as withholding agent of the government,
withheld and remitted to the BIR the 15% final tax
based on the gross royalty payments. The
withholding tax return is filed and the tax remitted to
the BIR on January 10 of the following year. On April
10, 2007, DEF Corporation filed a written claim for tax
credit with the BIR, arising from erroneously paid
income taxes covering the years 2004 and 2005. The
following day, DEF Corporation filed a petition for
review with the CTA involving the tax credit claim for
2004 and 2005.
a. As a BIR lawyer handling the case, would
you raise the defense of prescription in your
Answer to the claim for tax credit? Explain.
b. Can the BIR lawyer raise the defense that DEF
Corporation is not the proper party to file
such claim for tax credit? Explain.
A:
a. No credit or refund of taxes shall be
allowed, unless the taxpayer files in
writing with the Commissioner a claim for
credit or refund within two (2) years after
the payment of the tax. (Sec. 204, NIRC).
No suit or proceeding shall be
maintained in any court for the recovery
of any tax hereafter alleged to have
been erroneously or illegally assessed or
collected, until a claim for refund or
credit has been duly filed with the
Commissioner. In any case, no such suit
or proceeding shall be filed after the
expiration of two (2) years from the date
of payment of the tax, regardless of any
supervening cause that may arise after
the payment (Sec. 229, NIRC). Based on
the foregoing, the BIR lawyer can raise
69
the defense of prescription for the year
2004, but not for 2005. Since the
withholding tax return for 2004 was filed
on January 10, 2005, and considering
that the claim for refund or credit was
filed only on April 10, 2007, more than
two years have elapsed between the
date of payment and the date of filing
the written claim for refund or credit.
b. The proper person to claim refund or tax
credit is the person on whom the tax is
imposed by the statute. In one case, the
Supreme Court ruled that the BIR should
not be allowed to defeat an otherwise
valid claim for refund by raising the
question of the withholding agent’s
alleged incapacity to file the claim for
refund for the first time on appeal. The
Government must follow the same rules
of procedure which bind private parties
(Commissioner v Proctor & Gamble
PMC, 204 SCRA 377).
Q: 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.
A: The rules that have been adopted on
prescription are as follows:
(a) National Internal Revenue Code—The
Statute of Limitation for assessment of tax if
a return is filed within three (3) years from the
last day prescribed by law for the filing of the
return, or if filed after the last day, within
three years from the date of the actual filing.
If no return is filed or the return filed is false or
fraudulent, the period to assess is within ten
years from 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
discovery without need of assessment.
(b) Tariff and Customs Code—It does not
express any general Statute of Limitation. It
provided, however, that “when articles
have entered and passed free of duty or
final adjustment 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 became due.
In case of fraud or intent to evade the
payment of taxes, fees or charges, the same
may be assessed within ten years from
discovery of the fraud or intent to evade
payment. They shall also be collected either
by administrative or judicial action within
five (5) years from date of assessment (Sec.
194, LGC).
Q: the Commissioner of Internal Revenue issued an
assessment for deficiency income tax for taxable
year 2000 last July 31, 2006 in the amount of P10
million, inclusive of surcharge and interests. If the
delinquent taxpayer is your client, what steps will
you take? What is your defense?
A: Since my client has already lost the right to
protest (the assessment having been issued on July
31, 2006, and that he is already categorized as a
delinquent taxpayer), I will advise him to wait for a
collection action to be instituted by the
Commissioner. Once collection is pursued, I will file
a petition for review with the CTA to question the
validity of the Commissioner’s action. My defense
would be prescription. Since the assessment was
issued beyond the prescriptive period to assess, the
assessment is invalid and any action to collect an
invalid assessment is not warrant (Phil. Journalists,
Inc. v. CIR, 447 SCRA 214 [2004]).
Q: Mr. Sebastian is a Filipino seaman employed by
a Norwegian company which is engaged
exclusively in international shipping. He and his
wife, who manage their business, filed a joint
income tax return for 1997 on March 15, 1998. After
an audit of the return, the BIR issued on April 20, 2001
a deficiency income tax assessment for the sum of
P250,000 inclusive of interest and penalty. For failure
of Mr. and Mrs. Sebastian to pay the tax within the
period stated in the notice of assessment, the BIR
issued on August 19, 2001 warrants of distraint and
levy to enforce collection of the tax. If you are the
lawyer of Mr. and Mrs. Sebastian, what possible
defense or defenses will you raise in behalf of your
clients against the action of the BIR in enforcing
collection of the tax by the summary remedies of
warrants of distraint and levy? Explain your answer.
A: I will raise the defense of prescription. The right of
the BIR to assess prescribes after three years
counted from the last day prescribed by law for the
filing of the income tax returns when the said return
is filed on time (Sec. 203, NIRC). The last day for filing
the 1997 income tax return is April 15, 1998. Since the
70
assessment was issued only on April 20, 2001, the
BIR’s right to assess has already prescribed.
Q: Mr. Castro inherited from his father, who died on
June 10, 1994, several pieces of real property in
Metro Manila. The estate tax return was filed and the
estate tax due in the amount of P250,000.00 was
paid on December 6, 1994. The Tax Fraud Division of
the BIR investigated the case on the basis of
confidential information given by Mr. Santos on
January 6, 1998 that the return filed by Mr. Castro
was fraudulent and that he failed to declare all
properties left by his father with intent to evade
payment of the correct tax. As a result, a deficiency
estate tax assessment for P1,250,000.00, inclusive of
50% surcharge for fraud, interest and penalty, was
issued against him on January 10, 2001. Mr. Castro
protested the assessment, on the ground of
prescription. Decide Mr. Castro’s protest.
A: The protest should be resolved against Mr.
Castro. What was filed is a fraudulent return
making the prescriptive period for assessment 10
years from discovery of the fraud (Sec. 222, NIRC).
Accordingly, the assessment was issued within the
prescriptive period to make an assessment based
on a fraudulent return.
Q: On September 19, 1973, the BIR sent a notice of
assessment to X to pay P300,000.00 as forest
charges for the years 1970-1973. X made a partial
payment of P100,000.00 on September 28, 1973. X
died in November 1977. On July 29, 1979, the BIR
filed in the Testate Estate Proceedings of X a claim
for P200,000.00, the unpaid forest charges left by X.
The administrator of the estate opposed the claim
on the ground of prescription. Decide.
A: Where the assessment was made, the tax may
be collected within five (5) years (now three [3]
years) from the date of assessment (Collector v.
Pineda, 2 SCRA 401).
In the case at bar, X, on the basis of the notice of
assessment, voluntarily made partial payment to
the BiR in the amount of P100,000.00. However, it
took the BIR almost more than five (5) years to take
the necessary legal action to collect the remaining
amount of taxes due. This is clearly beyond the five
(5) (now three [3] year) period for the collection of
taxes. Hence, the claim filed by the BIR against the
Estate of X for the payment of P200,000.00 has
prescribed.
(NOTE: Under R.A. 8424 [1998], the period to
collect an assessed tax is five years from the date of
the assessment.)
Q: A Co., a Philippine Corporation, filed its 1995
income Tax Return (ITR) on April 15, 1996 showing a
net loss. On Nov. 10, 1996, it amended its 1995 ITR to
show more losses. After a tax investigation, the BIR
disallowed certain deductions claimed by A Co.,
putting A co. in a net income position. As a result,
on august 5, 1999, the BIR issued a deficiency
income assessment against A Co. A Co. protested
the assessment on the ground that it has prescribed.
Decide.
A: The right of the BIR to assess the tax has not
prescribed. The rule is that internal revenue taxes
shall be assessed within three years after the last day
prescribed by law for the filing of the return (Sec.
203, NIRC). However, if the return originally filed is
amended substantially, the counting of the three-
year period starts from the date the amended
return was filed (CIR v Phoenix Assurance Co., 14
SCRA 52). There is a substantial amendment in this
case because a new return was filed declaring
more losses, which can only be done either (1) in
reducing gross income, or (2) in increasing the items
of deductions claimed.
Q: (1)Distinguish a false return from a fraudulent
return.
(2)Explain the extent of the authority of the
Commissioner of internal Revenue to compromise
and abate taxes. A:
(1) The distinction between a false return and a
fraudulent return is that the first merely
implies a deviation from the truth or fact
whether intentional or not, whereas the
second is intentional and deceitful with the
sole aim of evading the payment of the
correct tax due.
(2) The authority of the Commissioner to
compromise encompasses both civil and
criminal liabilities of the taxpayer. The civil
compromise is allowed only in cases (a)
where the tax assessment is of doubtful
validity, or (b) when the financial position of
the taxpayer demonstrates a clear inability
to pay the tax. The compromise of the tax
liability is possible at any stage of litigation
and the amount of compromise is left to the
discretion of the Commissioner, except with
respect to final assessments issued against
large taxpayers wherein the Commissioner
cannot compromise for less than 50%. Any
compromise involving large taxpayers lower
than 50% shall be subject to the approval of
the Secretary of Finance. [NOTE: this
requirement had been deleted in R.A. 8424.]
All criminal violations except those involving
fraud, can be compromised by the
Commissioner but only prior to the filing of
the information with the Court.
71
Q: What constitutes prima facie evidence of a false
or fraudulent return to justify the imposition of a 50%
surcharge on the deficiency tax due from a
taxpayer? Explain.
A:There is a prima facie evidence of false or
fraudulent return when the taxpayer substantially
under-declared his taxable sales, receipts or
income, or substantially overstated his deductions.
The taxpayer’s failure to report sales, receipts or
income in an amount exceeding 30% of that
declared per return, and a claim of deduction in an
amount exceeding 30% of actual deduction shall
render the taxpayer liable for substantial
underdeclaration and over-declaration,
respectively, and will justify the imposition of the 50%
surcharge on the deficiency tax due from the
taxpayer (Sec. 248, NIRC).
Q: What constitutes prima facie evidence of a false
or fraudulent return?
A: There is prima facie evidence of a false or
fraudulent return when the taxpayer has willfully
and knowingly filed it with the intent to evade a part
or all of the tax legally due from him (Ungab v. Cusi,
97 SCRA 877). There must appear a design to
mislead or deceive on the part of the taxpayer, or
at least culpable negligence. A mistake, which is
not culpable in respect of its value, would not
constitute a false return (Words and Phrases, Vol. 16,
page 173).
Q: On August 5, 1997, Adamson co., Inc. (Adamson)
filed a request for reconsideration of the deficiency
withholding tax assessment on July 10, 1997,
covering the taxable year 1994. After administrative
hearings, the original assessment of P150,000.00 was
reduced to P75,000.oo and a modified assessment
was thereafter issued on August 5, 1999. Despite
repeated demands, Adamson failed and refused to
pay the modified assessment. Consequently, the BIR
brought an action for collection in the RTC on
September 15, 2000. Adamson moved to dismiss the
action on the ground that the government’s right to
collect the tax by judicial action has prescribed.
Decide the case.
A: The right of the Government to collect by judicial
action has not prescribed. The filing of the request
for reconsideration suspended the running of the
prescriptive period and commenced to run again
when a decision on the protest was made on
August 5, 1999. It must be noted that in all cases
covered by an assessment, the period to collect
shall be five (5) years from the date of the
assessment but this period is suspended the filing of
a request for reconsideration which was acted
upon by the Commissioner (Commissioner v. Wyeth
Suaco Laboratories, 202 SCRA 125 [1991]).

Q: Mr. Reyes, a Filipino citizen engaged in the real
estate business, filed his 1994 income tax return on
March 20, 1995. On December 15, 1995, he left the
Philippines as an immigrant to join his family in
Canada. After the investigation of said return, the
BIR issued a notice of deficiency of income tax
assessment on April 15, 1998. Mr. Reyes returned to
the Philippines as a balikbayan on December 8,
1998. Finding his name to be in the list of delinquent
taxpayers, he filed a protest against the assessment
on the ground that he did not receive the notice of
assessment and that the assessment had
prescribed. Will the protest prosper/ Explain.
A: No. Prescription has not set in because the period
of limitations for the BIR to issue an assessment was
suspended during the time that Mr. Reyes was out
of the Philippines or from the period December 15,
1995 up to December 8, 1998 (Sec. 223 in relation to
Sec. 203, NIRC).
CHAPTER XXXI: TAX CREDIT OR REFUND
Q:Congress enacts a law granting grade school
and high school students a 10%discount on all
school-prescribed textbooks purchased from any
bookstore.
The law allows bookstores to claim in full the
discount as a tax credit.
1. If in taxable year a bookstore has no tax
due on which to enjoy the tax credit,
can the bookstore claim from the BIR a
tax refund in lieu of tax credit? Explain
2. Can the BIR require the bookstore to
deduct the amount of the discount from
their gross income? Explain.
3. If a bookstore closes its business due to
losses without being able to recoup the
discount, can it claim reimbursement of
the discount from the government on
the ground that without such
reimbursement, the law constitutes
taking of private property for public use
without just compensation? Explain. A:
1. No, the law is clear that bookstores can only
claim the discount as a tax credit. The term
“tax credit” connotes that the amount,
when claimed, shall only be treated as a
reduction from any tax liability, plain and
simple. There is nothing in the law that grants
a refund when the bookstore has no tax
liability against which the tax credit can be
used. (CIR v Central Luzon Drug Corp., 456
SCRA 414 [2005]).
2. No, tax credit which reduces the tax liability,
is different from a tax deduction, which
72
merely reduces the income to arrive at the
tax base. Since the law allowed the
bookstores to claim in the full discount as a
tax credit, the BIR is not allowed to expand
or contract the legislative mandate (CIR v
Central Luzon Drug Corp., ibid.).
3. No, the bookstore cannot claim
reimbursement The tax credit privilege
given to it is the compensation for the
subsidy taken by the government for the
benefit of a class of taxpayers to which the
students belong. However, the privilege
granted is limited only to the reduction of a
present or future tax liability, because by its
nature, it is the existence of a lack of a tax
liability that determines whether the
discount can be used as a tax credit.
Accordingly, if the business continues to
operate at a loss and no other taxes are
due, compelling the business to close shop,
the credit can never be applied and will be
lost altogether. (CIR v Central Luzon Drug
Corp., ibid.).
Q:On April 6, 2012, the corporation filed its annual
corporate income tax return for 2011, showing an
overpayment of income tax of P1 million, which is
to be carried over to the succeeding year(s). On
May 15, 2012, the corporate sought advice from
you and said that it contemplates to files an
amendment return for 2011, which shows that
instead of carryover of the excess income tax
payment, the same shall be considered as a claim
for tax refund and the small box shown as “refund”
in the return will be filled up. Within the year, the
corporation will file the formal request for refund for
the excess payment. (a) Will you recommend to the
corporation such a course of action and justify that
the amendment return is the latest official act of the
corporation as to how it may treat such
overpayment of tax or should you consider the
option granted to taxpayers as irrevocable, once
previously exercised by it? (b) Should the petition
for review filed with the CTA on the basis of the
amended tax return be denied by the BIR and CTA,
could the corporation still carry over such excess
payment of income tax in the succeeding years,
considering that there is no prescriptive period
provided for in the income tax law with respect to
carry over of excess income tax payments?
A:
a. No. Once the option to carry over and
apply the excess quarterly income tax
against the income tax due for the taxable
quarters of the succeeding taxable years
has been made, such options shall be
considered irrevocable for the taxable year
 and no application for tax refund or
issuance of tax credit certificate shall be
allowed therefor (Sec. 76, NIRC).
b. Yes. The carryover of excess income tax
payments is no longer limited to the
succeeding taxable year. Unutilized excess
income tax payments may now be carried
over to the succeeding taxable years until
fully utilized. In addition, the option to carry
over excess income tax payments is now
irrevocable. Hence, unutilized excess
income tax payments may no longer be
refunded. (Belle Corporation v CIR, G.R. No.
181298, January 10, 2011; CIR v P.L.
Management Int’l Phils, Inc., G.R. No.
160949. April 4, 2011).
Q: State the conditions required by the Tax Code
before the Commissioner of Internal Revenue could
authorize the refund or credit of taxes erroneously
or illegally received.
a. Does a withholding agent have the right
to file an application for tax refund?
Explain. A:
a. The conditions are: (1) a written claim for
refund is filed by the taxpayer with the
Commissioner of Internal Revenue (Sec. 24,
NIRC); (2) the claim for refund must be a
categorical demand for reimbursement
(Bermejo v Collector of Internal Revenue, 87
Phil 96 [1950]) ; (3) the claim for refund or tax
credit must be filed with the Commissioner,
or the suit or proceeding therefor must be
commenced in court within two years from
date of payment of the tax or penalty,
regardless of any supervening cause, (Sec.
29, NIRC).
b. Yes. A withholding agent should be allowed
to claim for tax refund, because under the
law, said agent is the one who is held liable
for any violation of the withholding tax law
should such violation occur (Commissioner v
Wander Philippines, 160 SCRA 570 [1988]).
Furthermore, since the withholding agent is
made personally liable to deduct and
withhold any tax under Section 53(c) of the
Tax Code, it is imperative that he be
considered the taxpayer for all legal intents
and purposes. Thus, by any reasonable
standard, such person should be regarded
as a party-in-interest to bring suit for refund
of taxes (Commissioner v Procter & Gamble
PMC and CTA, 204 SCRA 377 [1991]).
Q:On March 12, 2001, REN paid his taxes. Ten
months later, he realized that he had overpaid and
so he immediately filed a claim for refund with the
73
Commissioner of Internal Revenue. On February 27,
2003, he received the decision of the
Commissioner, denying REN’s claim for refund. On
March 24, 2003, REN filed an appeal with the CTA.
Was his appeal on time or not? Reason.
A:The appeal was not filed on time. The two-year
period of limitation for filing a claim for refund is not
only a limitation for pursuing the claim at the
administrative level but also a limitation for
appealing the case to the CTA. The law provides
that “no suit or proceeding shall be filed after the
expiration of two years from the date of payment
of the tax or penalty, regardless of any supervening
cause that may arise after payment” (Sec. 29,
NIRC). Since the appeal was only made on March
24, 2003, more than two years had already elapsed
from the time taxes were paid on March 12, 2003.
Accordingly, REN had lost his judicial remedy
because of prescription.
Q:Apple Computer Corp. (ACC) is a foreign
corporation doing business in the Philippines
through a local branch located at Makati, Metro
Manila. In 1985, the local branch applied with the
Central Bank for authority to remit to ACC branch
profits amounting to P8,000.00. After paying the 15%
branch remittance tax of P1,200,000.00, the branch
office remitted to ACC the balance of
P6,800,000.00. In January 1986, the branch office
was advised by its legal counsel that it overpaid the
branch remittance tax since the basis of the
computation thereof should be the amount actually
remitted and not the amount applied for.
Accordingly, the branch office applied for a refund
in the amount of P180,000.00. If you were
the Commissioner of Internal Revenue, would you
grant the claim for refund?
A:If I were the Commissioner of Internal Revenue, I
would allow the claim for refund. The remittance
tax should be computed on the amount actually
remitted (Marubeni Corporation v Commissioner,
G.R. No. 76573, September 14, 1989). In the refund
of taxes, the claim therefor can be filed within two
years from the time of the payment so long as the
tax payment was made before an assessment by
the Commissioner has become final (Sec. 230,
NIRC).
Q: XCEL Corporation filed its quarterly income tax
return for the first quarter of 1985 and paid an
income tax of P500,000.00 on May 15, 1985. In the
subsequent quarters, SCEL suffered losses so that on
April 15, 1986, it declared a net loss of P1,000,000.00
in its annual income tax return. After failing to get
refund, XCEL filed on March 1, 1988 a case with the
Court of Tax Appeal store cover the P500, 000.oo in
taxes paid on May 15, 1985. Is the action to recover
the taxes filed timely?
A:The action for refund was filed in the Court of Tax
Appeals on time. In the case of Commissioner v TMX
Sales, Inc., 205 SCRA 184, which is similar to this case,
the Supreme Court ruled that in the case of
overpaid quarterly corporate income tax, the two
year period for filing claims for refund in the BIR as
well as in the institution of an action for refund in the
CTA, the two year prescriptive period for tax refunds
(Sec 230, NRIC) is counted from the filing of the final,
adjustment return under section 67 of the Tax Code,
and not from the filing of the quarterly return and
payment of the quarterly tax. The CTA action on
March 1, 1988 was clearly within the reglementary
two year period from the filing of the final
adjustment return of the corporation on April 15,
1986.
Q: A corporation files its income tax return on a
calendar year basis.
For the first quarter of 1993, it paid on 30 May
1993 its quarterly income tax in the amount of P3.0
million. On 20 August 1993, it paid the second
quarterly income tax of P0.5 million. The third
quarter resulted in a net loss, and no tax was paid.
For the fourth and final return for 1993, the company
reported a net loss for the year, and the taxpayer
indicated in the income tax return that it opted to
claim a refund of the quarterly income tax
payments. On 10 January 1994, the corporation
filed with the Bureau of Internal Revenue a written
claim for the refund of P3.5 million. BIR failed to act
on the claim for refund; hence, on 2 March 1996, the
corporation filed a petition for review with the Court
of Tax Appeals on its claim for refund of the
overpayment of its 1993 quarterly income tax. BIR,
in its answer to the petition, alleged that the claim
for refund was filed beyond the reglementary
period.
Did the claim for refund prescribe?
A:The claim for refund has prescribed. The counting
of the two year prescriptive period for filing a claim
for refund is counted not from the date when the
quarterly income taxes were paid but on the date
when the final adjustment return or annual income
tax return was filed (CIR v TMX Sales, G.R. No. 83736,
January 15, 1992; CIR v Philam Life Insurance Co.,
Inc., G.R. No. 105208, May 29,1995). It is obvious that
the annual income tax return was filed before
January 10, 1994 because the written claim for
refund was filed with the BIR on January 10, 1994.
Since the two-year prescriptive period is not only a
limitation of action for bringing the case to the
judicial stage, the petition for review filed with the
CTA on March 2, 1996 is beyond the reglementary
period.
74
Q: A.What must a taxpayer do in order to claim
refund of, or tax credit of, taxes and penalties which
he alleged to have been erroneously, illegally or
excessively assessed or collected?
A. Can the Commissioner grant a refund or
tax credit even without a written claim for
it?
A: A. The taxpayer must comply with the following
procedures in claiming a refund of, or tax credit for,
taxes and penalties which he alleges to have been
erroneously, illegally or excessively assessed or
collected:
1. He should file a written claim for
refund with the Commissioner within
two years after the date of payment
of the tax or penalty (Sec. 204,
NIRC);
2. The claim filed must state a
categorical demand for
reimbursement (Mermejo v
Collector, 87 Phil. 96 [1950]);
3. The suit or proceeding for recovery
must be commenced in court within
two years from date of payment of
the tax or penalty regardless of any
supervening event that will arise
after payment (Sec. 229, NIRC).
[NOTE: If the answer given is only
number 1, it is suggested that the
same shall be given full credit,
considering that this is the only
requirement for the Commissioner to
acquire jurisdiction over the claim.]
B. Yes. When the taxpayer files a return
which on its face shows an overpayment
of the tax and the option to refund/claim
a tax credit was chosen by the taxpayer,
the Commissioner shall grant the refund or
tax credit without the need for a written
claim. This is so, because a return filed
showing an overpayment shall be
considered as a written claim for credit or
refund (Secs. 76 and 204, NIRC).
Moreover, the law provides that the
Commissioner may, even without a
written claim therefore, refund or credit
any tax where on the face of the return
upon which payment was made, such
payment appears clearly to have been
erroneously paid (Sec. 229, NIRC).
Q: On June 16, 1997, the Bureau of Internal Revenue
(BIR) issued against the estate of Jose de la Cruz a
notice of deficiency estate tax assessment,
inclusive of surcharge, interest and compromise
penalty. The Executor of the estate of Jose de la
Cruz (Executor) filed a timely protest against the
assessment and requested for waiver of the
surcharge, interest and penalty. The protest was
denied by the Commissioner of Internal Revenue
(Commissioner) with the finality on September 13,
1997. Consequently, the Executor was made to pay
the deficiency assessment on October 10, 1997. The
following day, the Executor filed a petition with the
Court of Tax Appeals (CTA) praying for the refund of
the surcharge, interest and compromise penalty.
The CTA took cognizance of the case and ordered
the Commissioner to make a refund. The
Commissioner filed a petition for review with the
Court of Tax Appeals assailing the jurisdiction of the
CTA and the Order to make refund to the Estate on
the ground that no claim for refund was filed with
the BIR.
a) Is the stand of the
Commissioner correct? Reason.
A: A.Yes. There was no claim for refund or credit that
has been duly filed with the
Commissioner of Internal Revenue which is required
before a suit or proceeding can be filed in any
court (Sec. 229, NIRC). The denial of the claim by
the Commissioner is the one which will vest the
Court of Tax Appeals jurisdiction over the refund
case should the taxpayer decide to appeal on
time.
b) Why is the filing of an
administrative claim with the BIR
necessary? B:
The filing of an administrative claim for refund with
the BIR is necessary in order:
1) To afford the Commissioner an
opportunity to consider the claim and to
have a chance to correct the errors of
subordinate officers (Gonzales v CTA, et
al., 14 SCRA 79); and
2) To notify the Government that such
taxes have been questioned and the
notice should be borne in mind in
estimating the revenue available for
expenditures (Bermejo v Collector;
G.R.No. L-3028, July 29, 1950)
Q:Is a protest at the time of payment of taxes/duties
a requirement to preserve the taxpayer’s right to
claim a refund? Explain.
A:For taxes imposed under the NIRC, protest at the
time of payment is not required to preserve the
taxpayers’ right to claim refund. This is clear under
Section 230 of NIRC which provides that a suit or
proceeding may be maintained for the recovery of
national internal revenue tax or penalty alleged to
have been erroneously assessed or collected,
whether such tax or penalty has been paid under
protest or not.
75
For duties imposed under the Tariff and
Customs Code, a protest at the time of payment is
required to preserve the taxpayers’ claim for
refund. The procedure under the TCC is to the
effect that when a ruling or decision of the
Collector of Customs is made whereby liability for
duties is determined, the party adversely affected
may protest such ruling or decision by presenting to
the Collector, at the time when payment is made,
or within fifteen days thereafter, a written protest
setting forth his objections to the ruling or decision
in question (Sec. 2308, TCC).
Q:ABCD Corporation is a domestic corporation with
individual and corporate shareholders who are
residents of the US. For the 2nd quarter of 1983, these
USbased individual and corporate shareholders
received cash dividends from the corporation. The
corresponding withholding tax on dividend income
– 30% for individual, and 35% for corporate
nonresident stockholders – was deducted at source
and remitted to the BIR. On May 15, 1984, ABCD filed
with the CIR a formal claim for refund, alleging that
under the RP-US Tax Treaty, the deduction of
withholding tax on dividends was fixed at 25% of
said income. Thus, ABCD asserted that it overpaid
the withholding tax due on the cash dividends
given to its non-resident stockholders in the US. The
Commissioner denied the claim. On January
17, 1985, ABCD filed a petition with the CTA,
reiterating its demand for refund. (a) Does ABCD
Corporation have the legal personality to file the
refund on behalf of its non-resident stockholders?
(b) Is the contention of ABCD Corporation correct?
A: a. In Procter & Gamble PMC, supra, involving the
refund of alleged over-withheld final withholding
tax on dividends paid out to a non-resident foreign
corporation, the defense of the Government
against the claim to the effect that a mere
withholding agent is not the proper party that
should claim such refund, was not interposed by the
Government in the lower court but was raised only
for the first time on appeal. The Supreme Court
sustained the Government’s position and ruled that
estoppel does not preclude the Government from
its right to bring up such defense even for the first
time on appeal. However, the Supreme Court, in a
subsequent resolution, ruled that the BIR should not
be allowed to defeat an otherwise valid claim for
refund by raising the question of the withholding
agent’s alleged incapacity to file the claim for
refund for the first time on appeal. The Government
must follow the same rules of procedure which bind
private parties. (Commissioner v Procter & Gamble,
PMC, 204 SCRA 377).
a. Yes, ABCD is correct. The applicable final
withholding income tax rate on the cash
 dividends paid it to non-resident
shareholders is only 25% of the gross
dividend, pursuant to the RP-US Tax
Treaty. Considering that the final
withholding taxes deducted and
remitted to BIR are 30% (for individuals)
and 35% (for corporations), there was
overpayment of income tax.
Q: Lily’s Fashion Inc. is a garment manufacturer
located and registered as a Subic Bay Freeport
Enterprise under Republic Act No. 7227 and a non-
VAT taxpayer. As such, it is exempt from payment
of all local and national internal revenue taxes.
During its operations, it purchased various supplies
and materials necessary in the conduct of its
manufacturing business. The suppliers of these
goods shifted to Lily’s Fashion, Inc. the 10% VAT on
the purchased items amounting to
P500,000.00. Lily’s Fashion, Inc. filed with the BIR a
claim for refund for the input tax shifted to it by the
suppliers. If you were the Commissioner of Internal
Revenue, will you allow the refund?
A: No. The exemption of Lily’s Fashion, Inc. is only for
taxes for which it is directly liable; hence, it cannot
claim exemption for a tax shifted to it, which is not
at all considered a tax to the buyer but a part of the
purchase price. Lily’s Fashion, Inc. is not the
taxpayer insofar as the passed-on tax is concerned
and therefore, it cannot claim a refund of a tax
merely shifted to it. Only taxpayers are allowed to
file a claim for refund (Phil. Acetylene Co. v CIR, 20
SCRA 1056 [1987]).
Q: A Co. is the wholly owned subsidiary of B Co., a
non-resident German company. A Co. has a
trademark licensing agreement with B Co. On
February 10, 1995, A Co. remitted to B Co. royalties
of P10,000,000.00, which A Co. subjected to a WT of
25% or P2,500,000.00 with the BIR. Upon advice of
counsel, A Co. realized that the proper WT rate is
10%. On March 20, 1996, A Co. filed a claim for
refund of
P2,500,000.00 with the BIR. The BIR denied the claim
on November 15, 1996. On November 28, 1996 A
Co. filed a petition for review with the CTA. The BIR
attacked the capacity of A Co., as agent, to bring
the refund case. Decide the issue. A: A Co., the
withholding agent of the non-resident foreign
corporation, is entitled to claim the refund of excess
withholding tax paid on the income of said
corporation in the Philippines. Being a withholding
agent, it is the one held liable for any violation of
the withholding tax law should such a violation
occur. In the same vein, it should be allowed to
claim a refund in case of over-withholding. (CIR v
Wander Phils., Inc., GR No. 68378, April 15, 1988, 160
76
SCRA 573; CIR v Procter & Gamble PMC, 204 SCRA
377).
CHAPTER XXXII LOCAL BUSINESS TAXES
Q:Congress, after much public hearing and
consultations with various sectors of society, came
to the conclusion that it will be good for the country
to have only one system of taxation by centralizing
the imposition and collection of all taxes in the
national government. Accordingly, it is thinking of
passing a law that would abolish the taxing power
of all local government units. In your opinion, would
such a law be valid under the present Constitution?
Explain your answer. A: No. The law centralizing the
imposition and collection of all taxes in the national
government would contravene the Constitution
which mandates that: “Each local government unit
shall have the power to create their own sources of
revenue and to levy taxes, fees, and charges
subject to such guidelines and limitations as
Congress may provide consistent with the basic
policy of local autonomy.” It is clear that Congress
can only give the guidelines and limitations on the
exercise by the local governments of the power to
tax but what was granted by the fundamental law
cannot be withdrawn by Congress.
Q: In order to raise revenue for the repair and
maintenance of the newly constructed City Hall of
Makati, the City Mayor ordered the collection of
P1.00, called “elevator tax”, every time a person
rides any of the high-tech elevators in the city hall
during the hours of 8:00am to 10:00 am and 4:00pm
to 6:00 pm. Is the “elevator tax” a valid imposition?
Explain.
A: No. The imposition of a tax, fee or charge or the
generation of revenue under the Local
Government Code shall be exercised by the
Sanggunian of the local government unit
concerned through an approporiate ordinance
(Sec. 132, LGC). The city mayor alone could not
order the collection of the tax. As such, the
“elevator tax” is an invalid imposition.
Q:The City of Manila enacted an ordinance,
imposing 5% tax on gross receipts on rentals of
space in privately-owned public markets. BAT
Corporation questioned the validity of the
ordinance, stating that the tax is an income tax,
which cannot be imposed by the city government.
Do you agree with the position of BAT Corporation?
Explain.
A: Bo, I do not agree with the position of BAT
Corporation. The 5% tax on gross receipts of rentals
of space in privately-owned public markets
imposed under the ordinance of City of Manila is
not an income tax, which may not be imposed by
the city government, but a valid license tax or fee
for the regulation of business. (Progressive
Development Corporation v Quezon City, GR No.
36081, April 24, 1989).
Q: XYZ Shipping Corporation is a branch of an
international shipping line with voyages between
Manila and West Coast of the U.S. The company’s
vessels load and unload cargoes at the Port of
Manila, albeit it does not have a branch or sales
office in Manila. All the bills of lading and invoices
are issued by the branch in Makati which is also the
company’s principal office. The City of Manila
enacted an ordinance levying a 2% tax on gross
receipts of shipping lines using the Port of Manila.
Can the city government of Manila legally impose
said levy on the corporation?
A: The situs is the place or incident of an event or
location of property, and the situs of a tax is,
therefore, the place where the tax has to be paid.
Section 150 of the LGC provides for the situs of the
tax imposed on taxpayers enumerated therein. The
recording of sales of goods and services subject to
the local business taxes shall be made in the branch
or sales outlet making the sale or transaction, and
the tax thereon shall accrue and shall be paid to
the municipality or city where such branch or sales
outlet is located. In cases where there is no such
branch or sales outlet in the city or municipality
where the sale or transaction is made, the sale shall
be duly recorded in the principal office and the
taxes due shall accrue and shall be paid to such
city or municipality (Sec. 150[a], LGC). In this case,
the principal office in Makati City which issued the
bills of landing and the invoices to the customers
has no branch in the City of Manila, where the
business transactions take place. In view thereof,
the sales allocation shall be made as follows: 30% to
the sales recorded in the principal office in Makati
City shall be taxable by the city where the principal
office is located, and 70% of the total sales
recorded in Makati City shall be taxable by the City
of Manila, where transaction is had (Sec. 150[b],
LGC).
Q: What is the basis for the computation of business
tax on contractors under the Local Government
Code?
A: “Gross sales or receipts” include the total amount
of money or its equivalent representing the
contract price, compensation or service fee,
including the amount charged or the materials
supplied with the services and deposits or advance
payments actually or constructively received
during the taxable quarter for the services
77
performed or to be performed for another person,
excluding discounts if determinable at the time of
sales, sales return, excise tax, and value added tax
(Sec.131 [n], LGC).
Q: ABC Corporation is registered as a holding
company and has an office in the City of Makati. It
has no actual business operations. It invested in
another company and its earnings are limited to
dividends from this investment, interests on its bank
deposits, and foreign exchange gains from its
foreign currency account. The City of Makati
assessed ABC Corporation as a contractor or one
that sells services for a fee. Is the City of Makati
correct?
A: No. The corporation cannot be considered as a
contractor because it does not render services for
a fee. A contractor is one whose activity consists
essentially in the sale of all kinds of services for a fee,
regardless of whether or not the performance of the
service calls for the exercise or use of the physical
or mental faculties of such contractor or its
employees. To be considered as a contractor, the
corporation must derive income from doing active
business of selling services and not from deriving
purely passive income. Only income arising from
the performance of services to its customers is
subject to local business tax. Accordingly, a mere
holding company cannot be assessed by the City
of Makati as a contractor (Sec. 131 [h], LGC;
Orlyete Company [Phil. Branch]) v City of Makati,
CTA, November 14, 2012).
Q: Mr. Fermin, a resident of Quezon City, is a
Certified Public Accountant-Lawyer engaged in the
practice of his two professions. He has his main
office in Makati City and maintains a branch office
in Pasig City. Mr. Fermin pays his professional tax as
a CPA in Makati City and his professional tax as a
lawyer in Pasig City.
a. May Makati City, where he has his main
office, require him to pay his professional
tax as a lawyer? Explain.
b. May Quezon City, where he has his
residence and where he also practices his
two professions, go after him for the
payment of his professional tax as a CPA
and a lawyer? Explain.
A: a. No. Mr. Fermin is given the option to pay either
in the city where he practices his profession or
where he maintains his principal office in case he
practices his profession in several places. The
professional tax paid as a lawyer in Pasig City, a
place where he practices his profession, will entitle
him to practice his profession in any part of the
Philippines without being subjected to any other
national or local tax, license, or fee for the practice
of such profession (Sec. 139, in relation to Sec. 151,
LGC).
b. No. The professional tax shall be paid only
once for every taxable year and the
payment shall be made either in the city
where he practices his profession or
where he maintains his principal office.
The city of residence cannot require him
to pay his professional taxes (Sec. 139, in
relation to Sec. 151, LGC).
Q: MNO Corporation was organized on July 1, 2006
to engage in trading of school supplies, with
principal place of business in Cubao, Quezon City.
Its book of accounts and income statement show
the following date:
July 1, 2006 to December 31, 2006 P5,000,000
January 1,2007 to June 30, 2007
10,000,000
July 1, 2007 to December 31, 2007
15,000,000
Since MNO Corporation adopted fiscal year
ending June 30 as its taxable year for income tax
purposes, it paid its 2%business tax for fiscal year
ended June 30,2007 based on gross sales of
P15,000,000. However, the Quezon City treasurer
assesses the corporation for deficiency business tax
for 2007 based on gross sales of P25,000,000,
alleging that local business taxes should be
computed based on calendar year.
a. Is the position of the city treasurer
tenable? Explain.
b. May the deficiency business tax be
paid on installments without surcharge and
interest? Explain. A:
a. Yes, the City Treasurer is correct in using the
gross sales for the calendar year of P25
million for purposes of computing the 2%
local business tax for the year 2007. The tax
period of local taxes, fees and charges is
the calendar year, except when otherwise
provided in the Code (Sec. 165, LGC). The
use of the fiscal year by corporations for
purposes of computing taxes is allowed only
under the National Internal Revenue Code,
but not under the Local Government Code.
b. The local levies may be paid on quarterly
installments (Sec. 165, LGC) within the first
twenty days of each quarter. The time for
payment may be extended by the
Sanggunian concerned, without surcharges
or penalties, but only for a period not
exceeding six months (Sec. 167, LGC).
78
Q: Ferremaro, Inc., a manufacturer of handcrafted
shoes, maintains its principal office in Cubao,
Quezon City. It has branches/sales offices in Cebu
and Davao. Its factory is located in Marikina City,
where most of its workers live. Its principal office in
Quezon City is also a sales office. Sales of finished
product for 2009 in the amount of P10 million were
made at the following locations: (i) Cebu – 25%; (ii)
Dacao – 15%’ and (iii) Quezon City – 60%. Where
should the applicable local taxes on the shoes be
paid?
A: The sales made in the Cebu branch (25%) and
the Davao branch (15%) shall be reported by the
respective branches in their books and the local
taxes due thereon will be paid to the city of Cebu
and Davao, respectively. However, the sales
recorded in the books of Quezon City to the extent
of 60% shall be allocated as follows: 30% of 60% shall
be paid to the Quezon City government, while the
70% of the 60% shall be allocated and paid to the
Marikina City government, where the factory is
located.
Q:The municipality of Argao, Province of Cebu
passed a tax ordinance requiring all professionals
practicing in the municipality to pay a tax
equivalent to 2% of their gross income. A certified
true copy of the ordinance was sent to the
Secretary of Finance for review on March 1, 1989
and was received by him on the same day. On 15
August 1989 even as the tax ordinance remained
unacted upon by the Secretary of Finance, the
municipality started collecting the tax to question.
The members of the Philippine Bar in the
municipality questioned the legality of the
ordinance and sought the suspension of the
collection of the tax, but the municipality argued
that since the Secretary has not taken any action
on the ordinance for more than one hundred twenty
days after his receipt thereof, the legality of the
ordinance can no longer be questioned and
insisted on the collection of the tax. Is the tax
ordinance in question legal?
A: No, the tax ordinance is not legal as the Local Tax
Code allows provinces and cities, to the exclusion
of municipalities, to impose an annual occupation
tax on all persons engaged in the exercise of
practice of their profession or calling in specified
amounts which in the case of lawyers is P75.00 per
annum (Secs 11 and 12 in relation to Sec. 23, Local
Tax Code). A person authorized to practice his
profession or calling shall pay the tax to the
province where he practices his professions or
calling or maintains his office. No local government
unit can impose a tax on income (Sec. 5. Local Tax
Code).
2) Is the Municipality correct in insisting on
collecting the tax?
B: No, the Municipality was incorrect in insisting on
the collection of the tax. Once the tax on
occupation is paid as stated in paragraph (a)
above, the lawyer is entitled to practice his
profession or calling in all parts of the Philippines
without being subject to any other national or local
tax, license or fee for the practice of such profession
or calling.
3) Will the inaction of the Secretary of Finance bar
the professionals in the Municipality from
questioning the legality of that ordinance?
C: The inaction of the Secretary of Finance does not
bar the professionals in the Municipality from
questioning the legality of the ordinance. While it is
true that the Secretary of Finance may himself
suspend the tax ordinance within a 120-day period
from receipt thereof, his failure to do so, however,
has no preclusive effect on taxpayers who may be
adversely affected by the ordinance.
4) What remedies are available to the taxpayer to
enable him to question the legality of that
ordinance?
D: The taxpayer may pursue his remedies either
administratively or judicially. He may, as the case
warrants, file a formal protest with the Secretary of
Finance or query with the Provincial Fiscal whose
opinion is appealable to the Secretary of Justice
whose decision may be contested in the proper
court. The other remedy would be to file a special
civil action for declaratory relief (if circumstances
still warrant) or to pay the tax and thereafter to file
an action for refund within six [now 2] years after
such payment.
Q: Tax lien- Local taxes, fees, charges and other
revenues constitute a lien, superior to all liens,
charges or encumbrances in favor of any person,
enforceable by appropriate administrative or
judicial action, not only upon any property or rights
therein which may be subject to the lien but also
upon property used in business, occupation,
practice of profession or calling, or exerciseo f
privilege with respect to which the lien is imposed.
The lien may be extinguished upon full payment of
the delinquent local tax fee or charge, including
related surcharges or interest (Sec. 173, LGC).
1. Distraint and levy – The civil remedies for the
collection of local taxes, fees or charges,
including the applicable surcharges and
interests, fees or charges, may either be (a)
by the administrative remedies of distraint of
personal property of whatever kind,
including securities and bank accounts,
and levy of real property and interest
therein, or (b) by judicial action. Either of
79
these remedies, or both, may be pursued
concurrently or simultaneously at the
discretion of the local government unit
concerned (Sec. 174, LGC).
2. Judicial action. – The local government may
institute an ordinary civil action with the
regular courts of proper jurisdiction for the
collection of delinquent taxes, fees,
charges or revenues (Sec. 183, LGC). The
term “civil action” would preclude a
criminal case as a proper remedy for the
collection of delinquent local taxes
(Republic v Patanao, 20 SCRA 712)
Q: How are retiring businesses taxed under the
Local Government Code?
A: Upon the termination of business subject to tax
under Section 143 of the Local Government Code,
it is required to submit a sworn statement of gross
sales or receipts for the current year. If the tax paid
during the year be less than the tax due on said
gross sales or receipts of the current year, the
difference shall be paid before the business is
considered officially retired (Sec 145, LGC).
Q: On May 15, 2009, La Manga Trading Corporation
received a deficiency business tax assessment of
P1,500,000 from Pasay City Treasurer. On June 30,
2009, the corporation contested the assessment by
filing a written protest with the City Treasurer. On
October 10, 2009, the corporation received a
collection letter from the City Treasurer, drawing it
to file on October 25, 2009 an appeal against the
assessment before the Pasay Regional Trial Court.
(a) Was the protest of the corporation filed on time?
(b) Was the appeal with the Pasay RTC filed on
time?
A: a.Yes. Since the business tax assessment was
received on May 15, 2009 and the protest thereto
was filed on June 30, 2009, or a total period of 49
days, the taxpayer thus timely filed such protest.
The law allows the taxpayer to files its protest within
60 days from the date of receipt of assessment.
b.The taxpayer shall, within 30 days from receipt
of the denial of the protest or from the lapse of the
60-day period prescribed within which to appeal
with the court of competent jurisdiction; otherwise,
the assessment becomes conclusive and
unappealable. The fifth sentence of Section 195 of
the LGC of 1991 does not provide for any
administrative appeal. Hence, the taxpayer can
only appeal to a court of competent jurisdiction. In
this case, the local treasurer is acting as a quasi-
judicial agency. Under Section 49 of the 1997 Rules
of Civil Procedure, appeals from quasi-judicial
agencies, in the exercise of judicial functions, shall
be brought to the Court of Appeals. In this case,
the appeal was brought by the corporation to the
Pasay RTC, which is not the court of competent
jurisdiction. Thus, the appeal was not filed on time.
Q: X, a taxpayer who believes that an ordinance
passed by the City Council of Pasay is
unconstitutional for being discriminatory against
him, wants to know from you, his tax lawyer whether
or not he can file an appeal. In the affirmative, he
asks you where such appeal should be made: the
Secretary of Finance, or the Secretary of Justice, or
the Court of Tax Appeals, or the regular courts. What
would you advice your client, X?
A: The appeal should be filed with the Secretary of
Justice. Any question on the constitutionality or
legality of a tax ordinance may be raised on
appeal with the Secretary of Justice within 30 days
from the effectivity thereof (Sec. 187, LGC;
Hagonoy Market Vendor Association v Mun. of
Hagonoy, GR No. 137621, February 6, 2002).
CHAPTER XXXIII: REAL PROPERTY TAX
Q: Mr. Jose Castillo is a citizen, who purchased a
parcel of land in Makati City in 1970 at a
consideration of P1 million. In 2011, the land, which
remained undeveloped and idle, had a fair market
value of P20 million. The Assessor of Makati re-
assessed in 20122 the property at P10 million. When
is Mr. Castillo liable for real property tax on the land
based on the re-assessed fair market value,
beginning 2011 or 2012?
A. Mr. Castillo shall be liable to the real property tax
based on the re-assessed fair market value of P10
million beginning 2012. All re-assessments made
after the first day of any year shall take effect on
the first of January of the succeeding year (Sec. 21,
LGC). The fair market value of P20 million as
determined by the Commissioner shall be used only
for the purposes of national internal revenue taxes.
Q: A city outside of Metro Manila plans to enact an
ordinance that will impose a special levy on idle
lands located in residential subdivisions within its
territorial jurisdiction in addition to the basic real
property tax. If the lot owners of a subdivision
located in the said city seeks your legal advice on
the matter, what would your advice be? Discuss.
A: My advice would be that the city’s plan to enact
on ordinance that will impose such special levy on
idle lands is not legally allowed, unless these lands
are specially benefited by a public works projects
or improvements funded by the city government
(Sec. 240, LGC). I will likewise advise them that
before the city council could enact an ordinance
80
imposing a special levy, it shall conduct a public
hearing thereon; notify in writing the owners of the
real property to be affected or the persons having
legal interest therein as to the date and place
thereof and afford the latter the opportunity to
express their positions or objections relative to the
proposed ordinance (Sec. 242, LGC).
Q: In view of the street widening and cementing of
roads and the improvement of drainage and
sewers in the district of Ermita, the City Council of
the City of Manila passed on an ordinance
imposing and collecting a special levy on lands in
the district. Jose Reyes a landowner and resident of
Ermita, submitted a protest again the special levy
fifteen (15) days after the last publication of the
ordinance alleging that the special levy was
exorbitant since the rate thereof was more than the
maximum rate of two percent (2%) of the assessed
value of the real properties allowed by Section 39
of Presidential Decree No. 464, as amended.
Assuming that Jose Reyes is able to prove that the
rate of the special levy is more than the aforesaid
percentage limitation of 2%, will his protest prosper?
A: The special levy under the Real Property Tax
Code on lands, specially benefited by the
proposed infrastructure, may not exceed 60% of
the cost of said improvement. All lands comprised
within the district benefited are subject to the
special levy except lands exempt from the real
property tax (Sec. 47, Real Property Tax). The protest
shall be filed not later than 30 days after the
publication of the ordinance and may be
submitted to the City Sanggunian signed by a
majority of the landowners affected by the
proposed work. If no such protest is filed in the
manner above specified, the city ordinance shall
become final and effective. The levy imposed
under the ordinance should be within the limit of
60% of the total cost of the proposed improvement.
The rate of two percent (2%) of the assessed value
under Section 39 of P.D. 464 refers to the real
property tax and not to special levies.
Q: May local governments impose an annual reality
tax in addition to the basic real property tax on idle
or vacant lots located in residential subdivisions
within their respective territorial jurisdictions?
A: 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 (5%) of the
assessed value (Sec. 236, LGC) of idle or vacant
residential lots in a subdivision, duty approved by
proper authorities regardless of area (Sec. 237,
LGC)