The Sigma Rho Fraternity
Bar Operations 2018
Bar Questions and Answers
Taxation Law Bar
Questions and An-
swers (1999-2017)
Table of Contents
TAX 1 ...................................................................... 1
General Principles ...............................................1
Income Taxation ..................................................9
TAX 2 .................................................................... 30
Estate Tax .........................................................30
Donor’s Tax .......................................................35
Value-Added Tax ...............................................37
Tax Remedies ................................................... 43
Local Government Tax ......................................54
Real Property Tax ..............................................58
Tariff and Customs Law.....................................61
Judicial Remedies .............................................64
Others (Not Part of Bar Coverage)....................68
TAX 1
General Principles
Upon his retirement, Alfredo transferred his savings derived from
his salary as a marketing assistant to a time deposit with AAB
Bank. The bank regularly deducted 20% final withholding tax on
the interest income from the time deposit.
Alfredo contends that the 20% final tax on the interest income
constituted double taxation because his salary bad been already
subjected to withholding tax.
Is Alfredo's contention correct? Explain your answer. (3%) ’17—
Q9
No. Double taxation means taxing for the same tax period the same
thing or activity twice, when it should be taxed but once, for the same
purpose and with the same kind of character of tax (CIR v. Citytrust
lnvestmtnt Phils., G.R, Nos. 139786, 140857, September 27, 2006).
The 20% final tax is imposed on the interest income while the tax earli-
er withheld is on the salary or compensation income. Thus, though
both pertain to income tax, they do not pertain to the same thing or
activity and consequently, no double taxation exists.
San Juan University is a non-stock, non-profit educational institu-
tion. It owns a piece of land in Caloocan City on which its three 2-
storey school buildings stood. Two of the buildings are devoted
!1
to classrooms, laboratories, a canteen, a bookstore, and adminis-
trative offices. The third building is reserved as dormitory for
student athletes who are granted scholarships for a given acade-
mic year.
In 2017, San Juan University earned income from tuition fees and
from leasing a portion of its premises to various concessionaires
of food, books, and school supplies.
(a) Can the City Treasurer of Caloocan City collect real property
taxes on the land and building of San Juan University? Explain
your answer. (5%)
(b) Is the income earned by San Juan University for the year 2017
subject to income tax? Explain your answer. (5%) ’17—Q17
(a) Yes, but only on the leased portion. Article XIV, Section 4(3) of the I
987 Constitution provides that the assets of a non-stock, nonprofit
educational institution shall be exempt from taxes and duties only if the
same are used actually, directly, and exclusively for educational pur-
poses. The test of exemption from taxation is the use of tile property for
purposes mentioned in the Constitution. The leased portion of the
building may be subject to real property tax since such lease is for
commercial purposes, thereby, it removes the asset from the property
tax exemption granted under the Constitution (CIR v. De La Salle Uni-
versity, lnc., G.R. Nos. 196596, 198841, 1198941,November 9, 2016).
(b) No, provided that the revenues are used actually, directly, and ex-
clusively for educational purposes as provided under Article XIV, Sec-
tion 4(3) of the 1987 Constitution. The requisites for availing the tax
exemption under Article XIV, Section 4 (3) are as follows: (1) the tax-
payer falls under the classification of non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly and exclusively for educational purposes; thus,
so long as the requisites are met, the revenues may be exempt from
tax (CIR vs. De La Salle University, Inc., G.R. Nos. 196596, 198841,
198941, November 9, 2016).
Briefly explain the following doctrines: lifeblood doctrine; neces-
sity theory; benefits received principle; and, doctrine of symbiotic
relationship. (5%) ’16 – Q1
The following doctrines, explained:
• Lifeblood doctrine - Without revenue raised from taxation, the
government will not survive, resulting in detriment to society'.
Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it (CIR v. Algae, Inc. 158
SCRA 9 (1988)).
• Necessity theory - The exercise of the power to tax emanates
from necessity, because without taxes, government cannot fulfill
its mandate of promoting the general welfare and well-being of
the people (CIR v. Bank of Philippine Islands, 521 SCRA 373
(2007)).
• Benefits received principle - Taxpayers receive benefits from tax-
es through the protection the State affords to them. For the pro-
tection, they get arises their obligation to support the government
through payment of taxes (CIR v. Algae, Inc. 158 SCRA 9 (1988)).
• Doctrine of symbiotic relationship - Taxation arises because of the
reciprocal relation of protection and support between the state
and taxpayers. The state gives protection and for it to continue
giving protection, it must be supported by the taxpayers in the
form of taxes (CIR v. Algae, Inc. 158 SCRA 9 (1988)).
Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000
square meter lot in the City of Makati. It sold the lot and building
to Rainier for P80 million. One month after, Rainier sold the lot
and building to Healthy Smoke Company (HSC) for P200 million.
Lucky filed its annual tax return and declared its gain from the
sale of the lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that two months
prior to the sale of the properties to Rainier, Lucky received P40
 The Sigma Rho Fraternity
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million from HSC and not from Rainier. Said amount of P40 million
was debited by HSC and reflected in its trial balance as "other inv.
- Lucky Bldg." The month after, another P40million was reflected
in HSC's trial balance as "other inv. - Lucky Bldg." The BIR con-
cluded that there is tax evasion since the real buyer of the proper-
ties of Lucky is HSC and not Rainier. It issued an assessment for
deficiency income tax in the amount of P79 million against Lucky.
Lucky argues that it resorted to tax avoidance or a tax saving
device, which is allowed by the NIRC and BIR rules since it paid
the correct taxes based on its sale to Rainier. On the other hand,
Rainier and HSC also paid the prescribed taxes arising from the
sale by Rainier to HSC. Is the BIR correct in assessing taxes on
Lucky? Explain. (5%) ’16 – Q14
Yes. The sale of the property by Lucky V Corporation (Lucky) to Rainer
and consequently the sale by Rainer to HSC being prompted more on
the mitigation of tax liabilities than for legitimate business purposes,
therefore, constitutes tax evasion. The real buyer from Lucky is BBC as
evidenced by the direct receipt of payments by the former from the
latter where the latter recorded “other investments - Lucky Building”.
The scheme of resorting to a two-step transaction in selling the proper-
ty to the ultimate buyer in order to escape paying higher taxes is con-
sidered as outside of those lawful means allowed in mitigating tax lia-
bilities which makes Lucky criminally and civilly liable. Hence, the BIR
is correct in assessing taxes on Lucky (CIR v. Estate of Benigno P.
Toda, Jr., 438 SCRA 290 [2004]).
Jennifer is the only daughter of Janina who was a resident in Los
Angeles, California, U.S.A. Janina died in the U.S. leaving to Jen-
nifer one million shares of Sun Life (Philippines), Inc., a corpora-
tion organized and existing under the laws of the Republic of the
Philippines. Said shares were held in trust for Janina by the Cor-
porate Secretary of Sun Life and the latter can vote the shares
and receive dividends for Janina. The Internal Revenue Service
(IRS) of the U.S. taxed the shares on the ground that Janina was
domiciled in the U.S. at the time of her death.
[a] Can the CIR of the Philippines also tax the same shares? Ex-
plain. (2.5%)
[b] Explain the concept of double taxation. (2.5%) ’16 – Q19
Yes. The property being a property located in the Philippines, it is sub-
ject to the Philippine estate tax irrespective of the citizenship or resi-
dence of the decedent (Sec, 85, NIRC). However, if Janina is a nonres-
ident alien at the time of her death, the transmission of the shares of
stock can only be taxed applying the principle of reciprocity (Sec, 104,
NIRC).
Double taxation occurs when the same subject or object of taxation is
taxed twice when it should be taxed but once. Double taxation is pro-
hibited when it is an imposition of taxes on the same subject matter, for
the same purpose, by the same taxing authority, within the same juris-
diction, during the same taxing period, with the same kind or character
of a tax (84 C.J.S. 131-132). It is permissible if taxes are of different
nature or character, or the two taxes are imposed by different taxing
authorities (Villanueva v. City of Iloilo, 26 SCRA 578 [1968]).
Explain the principles of a sound tax system. (3%) ‘15 - Q1
The principles of a sound tax system and their respective explanations,
are as follows:
a) Fiscal adequacy which means that the sources of revenue
should be sufficient to meet the demands of public expendi-
tures (Chaves v. Ongpin, G.R. No. 76778, June 6, 1990);
!2
b) Equality or theoretical justice which means that the tax bur-
den should be proportionate to the taxpayer’s ability to pay
(Sec. 28(1), Art. VI, 1987 Constitution); and
c) Administrative feasibility which means that the tax law
should be capable of convenient, just and effective adminis-
tration, as well as, easy compliance by taxpayer.
Differentiate between double taxation in the strict sense and in a
broad sense and give an example of each. (4%) ‘15 - Q6
Double taxation in the strict sense pertains to the direct double taxa-
tion. This means that the taxpayer is taxed twice by the same taxing
authority, within the same jurisdiction, for the same property and same
purpose. Example: Imposition of final withholding tax on cash dividend
and requiring the taxpayer to declare this tax-paid income in his in-
come tax returns.
On the other hand, double taxation in the broad sense pertains to indi-
rect double taxation. This extends to all cases in which there is a bur-
den of two or more impositions. It is the double taxation other than
those covered by direct double taxation (CIR v. Solidbank Corp, 436
SCRA 416 [2003]). Example: Subjecting the interest income of banks
on their deposits with other banks to the 5% gross receipts tax (GRT)
despite of the same income having been subjected to 20% final with-
holding tax (FWT), is only a case of indirect double taxation. The GRT
is a tax on the privilege of engaging in business while the FWT is a tax
on the privilege of earning income (CIR v. Bank of Commerce, 459
SCRA 638 [2005]).
On August 31, 2014, Haelton Corporation (HC) thru its authorized
representative Ms. Pares, sold a 16-storey commercial building
known as Haeltown Building to Mr. Belly for P100 million. Mr. Bel-
ly, in turn, sold the same property on the same day to Bell Gates,
Inc. (BGI) for P200 million. These two (2) transactions were evi-
denced by two separate Deeds of Absolute Sale notarized on the
same day by the same notary public. Investigations by the Bureau
of Internal Revenue (BIR) showed that:
(1) The Deed of Absolute Sale between Mr. Belly and BGI
was notarized ahead of the sale between HC and Mr.
Belly
(2) as early as May 17, 2014. HC received P40 million from
BGI, and not from Mr. Belly;
(3) the said payment of P40 million was recorded by BGI in
its books as of June 30, 2014 as investment in Haeltown
Building; and,
(4) the substantial portion of P40 million was withdrawn by
Ms. Pares through the declaration of cash dividends to
all its stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a
Notice of
Assessment for deficiency income tax arising from an alleged
simulated sale of the aforesaid commercial building to escape the
higher corporate income tax rate of thirty percent (30%).
What is the liability of Haeltown Corporation, if any? - ‘14 Q21
Haeltown Corporation is liable for the deficiency income tax as a result
of tax evasion. The purpose of selling first the property to Mr. Belly is to
create a tax shelter. He never controlled the property and did not enjoy
the normal benefits and burdens of ownership. The sale to him was
merely a tax ploy, a sham, and without business purpose and econom-
ic substance. The intermediary transaction, which was prompted more
on the mitigation of tax liabilities than for legitimate business purpose
 The Sigma Rho Fraternity
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constitutes one of tax evasion. However, being a corporation, Haeltown
can only be liable for civil fraud which is a civil liability rather than a
criminal fraud which can only be committed by natural persons (CIR v.
Benigno Toda, Jr., G.R. No. 147188, September 14, 2004, 438 SCRA
290).
Choose the correct answer. Double Taxation (1%) - ‘14 - Q22
(A) Is one of the direct duplicate taxations wherein two (2)
taxes must be imposed on the same subject matter, by
the same taxing authority, within the same jurisdiction,
during the same period, with the same kind or character
of tax, even if the purposes of imposing the same are
different.
(B) Is forbidden by law; and therefore, it is a valid defense
against the validity of a tax measure.
(C) Means taxing the same property twice when it should be
taxed only once; it is tantamount to taxing the same
person twice by the same jurisdiction for the same
thing.
(D) Exists when a corporation is assessed with local busi-
ness tax as a manufacturer, and at the same time, value-
added tax as a person selling goods in the course of
trade or business.
(C) Means taxing the same property twice when it should be taxed only
once; it is tantamount to taxing the same person twice by the same
jurisdiction for the same thing. (Victorias Milling Co. v. Municipality of
Victorias, Negros Occidental, G.R. No. L-21183, September 27, 1968).
Choose the correct answer. Tax Avoidance (1%) - ‘14 - Q23
(A) Is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to fur-
ther or additional civil or criminal liabilities.
(B) Is a tax saving device within the means sanctioned by
law.
(C) Is employed by a corporation, the organization of which
is prompted more on the mitigation of tax liabilities than
for legitimate business purpose.
(D) Is any form of tax deduction scheme, regardless if the
same is legal or not.
(B) Is a tax saving device within the means sanctioned by law. (Philip
Manufacturing Corp. v. CIR, G.R. No. L-19737, August 26, 1968).
Choose the correct answer. Tax law – (1%) - ‘14 - Q28
(A) May be enacted for the promotion of private enterprise
or business for as long as it gives incidental advantage
to the public or the State
(B) Are inherently legislative; therefore, may not be delegat-
ed
(C) Are territorial in nature; hence, they do not recognize
the generally-accepted tenets of international law
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(D) Adhere to uniformity and equality when all taxable arti-
cles or kinds of property of the same class are taxable at
the same rate
(D) Adhere to uniformity and equality when all taxable articles or kinds
of property of the same class are taxable at the same rate (City of
Baguio v. de Leon, G.T. No. L-24756, October 31, 1968, 25 SCRA
938).
Construction of prescription in civil and criminal cases involving
collection of internal revenue taxes. ’10 – Q1a and Q1b
In civil cases involving the collection of internal revenue taxes,
prescription is construed strictly against the government and liberally in
favor of the taxpayer (CIR v. B.F. Goodrich Phils., Inc., 303 SCRA 546
[1999]; Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004].)
In criminal cases, statutes of limitations are acts of grace, a sur-
rendering by the sovereign of its right to prosecute. They receive a
strict construction in favor of the Government and limitations in such
cases will not be presumed in the absence of clear legislation (Lim, Sr.
v. Court of Appeals, 190 SCRA 616 [1990].)
“Rational basis” test; when applicable. ’10 – Q2c
The “rational basis test” is applied to gauge the constitutionality of
an assailed law in the face of an equal protection challenge. It has
been held that “in areas of social and economic policy, a statutory clas-
sification that neither proceeds along suspect lines nor infringes consti-
tutional rights must be upheld against equal protection challenge if
there is any reasonably conceivable state of facts that could provide a
rational basis of the classification.” Under the rational basis test, it is
sufficient that the legislative classification is rationally related to achiev-
ing some legitimate State interest (British American Tobacco v. Cama-
cho, 585 SCRA 36 [2009].)
A law that allows taxes to be paid either in cash or kind is valid.
’09 – Q1a
TRUE. There is no law which requires the payment of taxes in
cash only. However, a law allowing payment taxes in kind, although
valid, may pose problems of valuation, hence, will violate the principle
of administrative feasibility.
The statement that “a law imposing a tax on income of religious
institutions derived from the sale of religious articles is valid” is
FALSE. ’09 – Q1d
Congress can pass a law taxing income of religious institutions
from its property or activities used for profit but not on their income
from exercise of religious activities. The imposition of a tax on income
of a religious institution from sale of religious articles is an infringement
of religious freedom which is not allowed under the fundamental law
(American Bible Society v. City of Manila, 101 Phil. 386 [1957].)
Enumerate the four (4) inherent limitations on taxation. ’09 – Q2
The inherent limitations on the power to tax are:
1. Taxation is for a public purpose. – The proceeds of the tax
must be used (a) for the support of the State or (b) for some
recognized objective of the government or to directly pro-
mote the welfare of the community.
2. Taxation is inherently legislative. – Only the legislature has
full discretion as to persons, property, occupation or busi-
ness to be taxed provided these are all within the State’s
territorial jurisdiction. It can also finally determine the amount
or rate of tax, the kind of tax to be imposed and the method
of collection (1 Cooley 176-184.)
3. Taxation is territorial. – Taxation may be exercised only with-
in the territorial jurisdiction of the taxing authority (61 Am.
Jur. 88.) Within the territorial jurisdiction, the taxing authority
may determine the “place of taxation” or “tax situs.”
4. Taxation is subject to international comity. – This is a limita-
tion which is founded on reciprocity designed to maintain a
 The Sigma Rho Fraternity
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harmonious and productive relationships among the various
states. Under international comity, a state must recognize
the generally-accepted tenets of international law, among
which are the principle of sovereign equality among states
and of their freedom from suit without their consent, that limit
the authority of a government to effectively impose taxes on
a sovereign state and its instrumentalities, as well as on its
property held, and activities undertaken in that capacity.
Maria Suerte, a Filipino citizen, purchased a lot in Makati City in
1980 at a price of P1 million. Said property has been leased to
MAS Corporation (MASC), a domestic corporation engaged in
manufacturing paper products, owned 99% by Maria. In October
2007, EIP Corporation (EIPC), a real estate developer, expressed
its desire to buy the Makati property at its FMV of P300 million,
payable as follows: (a) P60 million downpayment; and (b) balance
payable equally in 24-monthly installments. Upon the advice of a
tax lawyer, Maria exchanged her Makati property for shares of
stock of MASC. A BIR Ruling, confirming the tax-free exchange of
property of stock, was secured from the BIR National Office and a
Certificate Authorizing Registration was issued by the RDO where
the property was located. Subsequently, she sold her entire
stockholdings in MASC to EIPC for P300 million. In view of the tax
advice, Maria paid only the CGT of P29,895,000 (P100,000 x 5%
plus P298,900,000 x 10%), instead of the corporate income tax of
P104,650,000 (35% on (P299 million gain from sale of real proper-
ty.) After evaluating the CGT payment, the RDO wrote a letter to
Maria, stating that she committed tax evasion.
Is the contention of the RDO tenable? Or was it tax evasion that
Maria had resorted to? ’08 – Q5
No. The exchange of the real estate property for the shares of
stock is considered as a legitimate tax avoidance scheme (Section
40(C)(2)(b), NIRC.) The sale of the shares of stock of domestic corpo-
ration, which is a capital asset, is subject to a final tax of 5% on the first
P100,000 and 10% on the amount in excess of P100,000 (Section
24(C), NIRC.)
Another Alternative Answer:
Yes, the RDO’s contention, that Maria Suerte committed tax eva-
sion and not tax avoidance, is tenable. Suerte’s sale of her property to
MAS Corporation was an intermediary transaction aimed more at re-
ducing Suerte’s tax liabilities than for MAS Corporation’s legitimate
business purposes (CIR v. Norton Harrison Co., 120 Phil. 684, 691
[1964].) Said sale was merely a tax ploy, a sham and without business
purpose and economic substance (Commissioner of Internal Revenue
v. Toda, 438 SCRA 290 [2004].)
What kind of taxes, fees and charges are considered as National
Internal Revenue Taxes under the National Internal Revenue
Code? ’07 – Q3
The following taxes, fees and charges are considered to be Na-
tional Internal Revenue Taxes under the National Internal Revenue
Code:
1. Income tax;
2. Estate and donor’s taxes;
3. Value-added tax;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue (Section 21,
NIRC.)
XYZ Corp., an export-oriented company was able to secure a BIR
Ruling in July 2005 that exempts from tax the importation of some
of its raw materials. The ruling is of first impression, which means
the interpretation made by the CIR is one without established
precedents. Subsequently, however, the BIR issued another ruling
which in effect would subject to tax such kind of importation. XYZ
is concerned that said ruling may have a retroactive effect, which
means that all their importations before the issuance of the sec-
ond ruling could be subject to tax.
!4
1. What are BIR rulings?
BIR rulings are administrative opinions issued by the Commis-
sioner of Internal Revenue interpretative of a provision of a tax law.
Alternative Answer:
They are the best guess of the moment and incidentally often
contain such well-considered and sound law, but the courts have held
they do not prevent an entire change of front at any time and are mere-
ly advisory – sort of an information service to the taxpayer (Aban, Law
of Basic Taxation in the Philippines, p. 149 citing Quiazon and Lukban.)
2. What is required to make a BIR ruling of first impression
a valid one?
A BIR of first impression to be valid must not be against the law
and it must be issued only by the Commissioner of Internal Revenue
(Philippine Bank of Communications v. CIR, 302 SCRA 241 [1999];
Section 7, NIRC.)
3. Does a BIR ruling have a retroactive effect, considering
the principle that tax exemptions should be interpreted
strictly against the taxpayer? ’07 – Q4
NO. A BIR Ruling cannot be given retroactive effect if its retroac-
tive application is prejudicial to the taxpayer (Section 246, NIRC; CIR v.
Court of Appeals, 267 SCRA 557 [1997].)
Alternative Answer:
The general rule is that a BIR ruling does not have a retroactive
effect if giving its retroactive application is prejudicial to the taxpayer.
However, if the first ruling is tainted with either of the following: (1)
misstatement or omission of material facts, (2) the facts gathered by
the BIR are materially different from the facts upon which the ruling is
based, or (3) the taxpayer acted in bad faith, a subsequent ruling can
have a retroactive application (ABS-CBN Broadcasting Co. v. CTA &
CIR, 80 SCRA 142 [1981]; Section 246, NIRC.)
Enumerate the three (3) stages or aspects of taxation. ’06 – Q1(1)
The three stages or aspects of taxation are:
1. Levy – This refers to the enactment of a law by Congress
authorizing the imposition of a tax.
2. Assessment and Collection – This is the act of administration
and implementation of the tax law by the executive through
its administrative agencies.
3. Payment – This is the act of compliance by the taxpayer,
including such options, schemes or remedies as may be
legally available to him.
Distinguish “direct taxes” from “indirect taxes.” Give examples.
’06 – Q1(2)
Direct taxes are demanded from the very person who, as intend-
ed, should pay the tax which he cannot shift to another. While an indi-
rect tax is demanded in the first instance from one person with the
expectation that he can shift the burden to someone else, not as a tax,
but as part of the purchase price (Maceda v. Macaraig, Jr., 223 SCRA
217 [1993].)
Examples of direct taxes are income tax, estate tax and donor’s
tax. Examples of indirect taxes are value-added tax, percentage tax
and excise tax on excisable articles.
What is tax pyramiding? What is its basis in law? ’06 – Q2
Tax pyramiding refers to the imposition of tax upon a tax. This
occurs when the tax is added as part of the tax base. It has no basis in
law (People v. Sandiganbayan, 467 SCRA 137 [2005]; CIR v. American
Rubber Co., 18 SCRA 842 [1966].)
Another Suggested Answer:
 The Sigma Rho Fraternity
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Tax pyramiding refers to a situation where some or all of the
stages of distribution of goods or services are taxed, with the accumu-
lation borne by the final consumer. There is tax pyramiding when sales
taxes are applied to both inputs and outputs, thus shifting the tax bur-
den to the ultimate consumer. It has no basis in law because it violates
the principle of neutrality in taxation (R.G. Holcombe, Taxing Services,
30 Fla. St. U.L. Rev. 467 [1996].)
The Constitution provides “charitable institutions, churches, par-
sonages or convents appurtenant thereto, mosques, and non-
profit cemeteries and all lands, buildings, and improvements ac-
tually, directly and exclusively used in religious, charitable or
educational purposes shall be exempt from taxation.” This provi-
sion exempts charitable institutions and religious institutions
from what kind taxes?
a. From all kinds of taxes, i.e., income, VAT, customs du-
ties, local taxes and real property tax
b. From income tax only
c. From value-added tax only
d. From real property tax only
e. From capital gains tax only.
Choose the best answer. ’06 – Q5(2)
I choose (d), exempt from real property tax only. This is the con-
notation of the phrase “and all lands, buildings and improvements”
thereby limiting the exemption to real property taxes only (CIR v. Court
of Appeals, 298 SCRA 83 [1998]; Lladoc v. CIR, 14 SCRA 292 [1965];
Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965].)
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? '05 – Q1a
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 range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the re-
sponsibility of the legislature which imposes the tax on the constituen-
cy who are to pay it (Mactan Cebu International Airport Authority v.
Marcos, 261 SCRA 667 [1996].)
Being an inherent power, the legislature can enact laws to raise
revenues even without the grant of said power in the Constitution. It
must be noted that Constitutional provisions relating to the power of
taxation do not operate as grants of the power of taxation to the Gov-
ernment, but instead merely constitutes limitations upon a power which
would otherwise be practically without limit (Cooley, Constitutional
Limitations, 1927 8th Ed., p. 787.)
May taxes be the subject of set-off or compensation? ’05 – Q1b
NO. Taxes cannot be the subject of set-off or compensation for
the following reasons: (1) taxes are of distinct kind, essence and na-
ture, and these impositions cannot be classified 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 Co., 4 SCRA 622
[1962].)
However, if the obligation to pay taxes and the taxpayer’s claim
against the government are both overdue, demandable, as well as fully
liquidated, compensation takes place by operation of law and both
obligations are extinguished to their concurrent amounts (Domingo v.
Garlitos, 8 SCRA 443 [1963].)
Can an assessment for a local tax be the subject of set-off or
compensation against a final judgment for a sum of money ob-
tained by the taxpayer against the local government that made the
assessment? ’05 – Q1c
NO. Taxes and debts are of different nature and character; hence,
no set-off or compensation between two different classes of obligations
is allowed. The taxes assessed are the obligations of the taxpayer
arising from law, while the money judgment against the government is
an obligation arising from contract, whether express or implied. Inas-
much that taxes are not debts, it follows that the two obligations are not
!5
susceptible to set-off or legal compensation (Francia v. Intermediate
Appellate Court, 162 SCRA 753 [1988].)
It is only when the local tax assessment and the final judgment
are both overdue, demandable, as well as liquidated may set-off or
compensation be allowed (Domingo v. Garlitos, 8 SCRA 443 [1963].)
Taxes are assessed for the purpose of generating revenue to be
used for public needs. Taxation itself is the power by which the
State raises revenue to defray the expenses of government. A
jurist said that a tax is what we pay for civilization.
In our jurisdiction, which of the following statements may be er-
roneous?
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property within the
territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of the govern-
ment.
5. Taxes are assessed according to a reasonable rule of
apportionment.
Justify your answer or choice briefly. ’04 – Q1a
4. 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, 186 SCRA 198 [1990.)
Which of the following propositions may now be untenable?
1. The court should construe a law granting tax exemption
strictly against the taxpayer.
2. The court should construe a law granting a municipal
corporation the power to tax most strictly.
3. The CTA has jurisdiction over decisions of the Customs
Commissioner in cases involving liability for customs
duties.
4. The CA has jurisdiction to review decisions of the CTA.
5. The SC has jurisdiction to review decisions of the CA.
Justify your answer or choice briefly. ’04 – Q1b
2. The court should construe a law granting a municipal corpora-
tion the power to tax most strictly.
This proposition is now untenable. The basic rationale for the
grant of tax power to local government units is to safeguard their viabil-
ity and self-sufficiency by directly granting them general and broad tax
powers (Manila Electric Company v. Province of Laguna, 306 SCRA
750 [1999].) Considering that inasmuch as the power to tax may be
exercised by local legislative bodies, no longer by valid congressional
delegation but by direct authority conferred by the Constitution, in in-
terpreting statutory provisions on municipal fiscal powers, doubts will,
therefore, have to be resolved in favor of municipal corporations (City
Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 [1999].)
This means that the court must adopt a liberal construction of a law
granting a municipal corporation the power to tax.
[Note: If the examinee chose proposition no. 4 as his answer, it
should be given full credit considering that the present CTA Act (R.A.
No. 9282) has made the CTA a co-equal judicial body of the Court of
Appeals. The question "Which of the following propositions may now
be untenable" may lead the examinee to choose a proposition which is
untenable on the basis of the new law despite the cut-off date adopted
by the Bar Examination Committee. R.A. No. 9282 was passed on
March 30, 2004.]
RC is a law-abiding citizen who pays his real estate taxes prompt-
ly. Due to a series of typhoons and adverse economic conditions,
an ordinance is passed by MM City granting a 50% discount for
payment of unpaid real estate taxes for the preceding year and
the condonation of all penalties on fines resulting from the late
payment. Arguing that the ordinance rewards delinquent taxpay-
ers and discriminates against prompt ones, RC demands that he
be refunded an amount equivalent to ½ of the real taxes he paid.
The municipal attorney rendered an opinion that RC cannot be
reimbursed because the ordinance did not provide for such reim-
bursement. RC files suit to declare the ordinance void on the
 The Sigma Rho Fraternity
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Bar Questions and Answers
ground that it is a class legislation. Will his suit prosper? '04 –
Q2a
The suit will not prosper. The remission or condonation of taxes
due and payable to the exclusion of taxes already collected does not
constitute unfair discrimination. Each set of taxes is a class by itself
and the law would be open to attack as class legislation only if all tax-
payers belonging to one class were not treated alike (Juan Luna Sub-
division, Inc., v. Sarmiento, 91 Phil. 371 [1952].)
A law was passed granting exemption to certain industries and
investments for a period of 5 years. But 3 years later, the law was
repealed. With the repeal, the exemptions were considered re-
voked by the BIR, which assessed the investing companies for
unpaid taxes effective on the date of the repeal of the law. NPC
and KTR companies questioned the assessments on the ground
that, having made their investments in full reliance with the period
of exemption granted by the law, its repeal violated their constitu-
tional right against the impairment of the obligations and con-
tracts. Is the contention of the companies tenable or not? '04 –
Q2b
The contention is not tenable. The exemption granted is in the
nature of a unilateral tax exemption. Since the exemption given is
spontaneous on the part of the legislature and no service or duty or
other remunerative conditions have been imposed on the taxpayers
receiving the exemption, it may be revoked at will by legislature (Christ
Church v. Philadelphia, 24 How. 300 [1860].) What constitutes an im-
pairment of the obligation of contracts is the revocation of an exemp-
tion which is founded on a valuable consideration because it takes the
form and essence of a contract (Casanovas v. Hord, 8 Phil. 125 [1907];
Manila Railroad Company v. Insular Collector of Customs, 12 Phil. 146
[1915].)
XYZ Colleges is a non-stock, non-profit educational institution
run by the Archdiocese of BP City. It collected and received the
following:
a) Tuition fees
b) Dormitory fees
c) Rentals from canteen concessionaires
d) Interest from money-market placements of the tuition
fees
e) Donation of a lot and building by school alumni.
1. Which of these above cited income and donation would
not be exempt from taxation?
All of the income derived by the non-stock, non-profit educational
institution will be exempt from taxation provided they are used actually,
directly and exclusively for educational purposes. The Constitution
provides that all revenues and assets of non-stock, non-profit educa-
tional institution which are actually, directly and exclusively used for
educational purposes are exempt from taxation (Section 4 par. 3, Arti-
cle XIV, 1987 Constitution).
The donation is, likewise, exempt from the donor's tax if actually,
directly and exclusively used for educational purposes, provided not
more than 30% of the donation is used by the donee for administration
purposes. The donee, being a non-stock, non-profit educational institu-
tion, is a qualified entity to receive an exempt donation subject to con-
ditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution,
in relation to Section 101(A)(3), NIRC.)
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.
Alternative Answer:
The following receipts by the non-stock, non-profit educational
institution are not exempt from taxation, viz:
c) Rentals from canteen concessionaires. Rental income is
considered as unrelated to the school operations; hence,
taxable (DOF Order No. 137-87, Dec. 16, 1987)
d) Interest from money-market placements of the tuition fees.
The interest on the placement is taxable (DOF Order No.
137-87). If however, the said interest is used actually, directly
and exclusively for educational purposes as proven by sub-
!6
stantial evidence, the same will be exempt from taxation
(CIR v. Court of Appeals, 298 SCRA 83 [1998].)
The other items of income which were all derived from school-
related activities will be exempt from taxation in the hands of the recip-
ient if used actually, directly and exclusively for educational purposes
(Section 4, par. 3, Article XIV, 1987 Constitution.)
The donation to a non-stock, non-profit educational institution will
be exempt from the donor's tax if used actually, directly and exclusively
for educational purposes and provided, that, not more than 30% of the
donation is used for administration purposes (Section 4, par. 4, Art.
XIV, 1987 Constitution, in relation to Section 101(A)(3), NIRC.)
2. Suppose that XYZ Colleges is a proprietary educational
institution owned by the Archbishop’s family, rather than the
Archdiocese, which of the above-cited income and donation
would be exempt from taxation? ’04 – Q3
If XYZ Colleges is a proprietary education institution, all of its
income from school related activities will be subject to the income tax
based on its aggregate net income derived from both activities (Section
27(B), NIRC.) Accordingly, all of the income enumerated in the problem
will be taxable.
The donation of the lot and building will likewise be subject to
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 divi-
dends. Since the donee is a proprietary education institution, the dona-
tion is taxable (Section 101(A)(3), NIRC.)
Citing Section 10, Article VIII of the 1987 Constitution which pro-
vides 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 RTC 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? '04 – Q4a
NO. The contention is incorrect. The salaries of judges are not
tax-exempt and their taxability is not contrary to the provisions of Sec-
tion 10, Article VIII of the Constitution on the non-diminution of the
salaries of members of the judiciary during their continuance in office.
The clear intent of the Constitutional Commission that framed the Con-
stitution is to subject their salaries to tax as in the case of all taxpayers.
Hence, the deduction of withholding taxes, being a manner of collect-
ing the income tax on their salary, is not a diminution contemplated by
the fundamental law (Nitafan v. CIR, 152 SCRA 284 [1987].)
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. Subsequently, the mu-
nicipal board proposed an ordinance imposing a sales tax equiva-
lent to 5% of the amount paid for the purchase or consumption of
liquor in stores, restaurants and other establishments. The mu-
nicipal mayor, CC, refused to sign the ordinance on the ground
that it would constitute double taxation. Is the refusal of the may-
or justified? '04 – Q4b
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 im-
posed 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 Tabacos de Filipinas v. City of Manila, 8 SCRA
367 [1963].)
Due to an uncertainty whether or not 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 com-
panies 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 cov-
ers printing companies. Could the BIR now assess DEF Printers
for back taxes corresponding to the years before the new ruling?
'04 – Q5a
 The Sigma Rho Fraternity
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Bar Questions and Answers
NO. Reversal of a ruling shall not be given a retroactive applica-
tion if said reversal will be prejudicial to the taxpayer. Therefore, the
BIR cannot assess DEF printers for back taxes because it would be
violative of the principle of non-retroactivity of rulings and doing so
would result in grave injustice to the taxpayer who relied on the first
ruling in good faith (Section 246, NIRC; CIR v. Burroughs Ltd., 142
SCRA 324 [1986].)
A law was passed exempting doctors and lawyers from the opera-
tion of the VAT. Other professionals complained and filed a suit
questioning the law for being discriminatory and violative of the
equal protection clause of the Constitution since complainants
were not given the same exemption. Is the suit meritorious or
not? ’04 – Q10b
YES, the suit is meritorious.
The VAT is designed for economic efficiency; hence, should be
neutral to those who belong to the same class. Professionals are a
class of taxpayers by themselves who, in compliance with the rule of
equality of taxation, must be treated alike for tax purposes. Exempting
lawyers and doctors from a burden to which other professionals are
subjected will make the law discriminatory and violative of the equal
protection clause of the Constitution.
While singling out a class for taxation purposes will not infringe
upon this constitutional limitation (Shell v. Vaño, 94 Phil. 389 [1954]),
singling out a taxpayer from a class will no doubt transgress the consti-
tutional limitation (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City,
22 SCRA 603 [1968].) Treating doctors and lawyers as a different class
of professionals will not comply with the requirements of a reasonable,
hence valid classification, because the classification is not based upon
substantial distinction which makes real differences. The classification
does not comply with the requirement that it should be germane to the
purpose of the law either (Pepsi-Cola Bottling Co., Inc. v. City of Butu-
an, 24 SCRA 789 [1968].)
Another Answer:
No. The suit is not meritorious. The equal protection clause of the
Constitution merely requires that all persons subjected to legislation
shall be treated alike, under like circumstances and conditions, both in
the privileges conferred and in the liabilities imposed. The equality in
taxation rule is not violated if classifications or distinctions are made as
long as the same are based on reasonable and substantial differences
(Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968].)
In the instant case, the professions of doctors and lawyers are not
principally aimed at earning money but for the service of the people.
The exemption granted to doctors and lawyers from the operation of
the VAT is justified, as it is not discriminatory against the other profes-
sionals because they have reasonable and substantial differences in
the conduct of their professions.
Why is the power to tax considered inherent in a sovereign State?
'03 – Q1
It is considered inherent in a sovereign State because it is a nec-
essary attribute of sovereignty. Without this power no sovereign State
can exist or endure. The power to tax proceeds upon the theory that
the existence of a government is a necessity and this power is an es-
sential and inherent attribute of sovereignty, belonging as a matter of
right to every independent state or government. No sovereign state
can continue to exist without the means to pay its expenses; and that
for those means, it has the right to compel all citizens and property
within its limits to contribute, hence, the emergence of the power to tax
(51 Am. Jur., Taxation 40.)
May Congress under the 1987 Constitution, abolish the power to
tax of local governments? '03 – Q2
NO. Congress cannot abolish what is expressly granted by the
fundamental law. The only authority conferred to Congress is to pro-
vide the guidelines and limitations on the local government's exercise
of the power to tax (Section 5, Article X, 1987 Constitution.)
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 dri-
!7
ver, on all private cars entering the city during peak hours from 8
AM to 9 AM from Mondays to Fridays; but exempts those cars
carrying more than two occupants, excluding the driver. Is the
ordinance valid? '03 – Q12
The ordinance is in violation of the Rule of Uniformity and Equali-
ty, which requires that all subjects or objects of taxation, similarly situ-
ated must be treated alike in equal footing and must not classify the
subjects in an arbitrary manner. In the case at bar, the ordinance ex-
empts cars carrying more than two occupants from coverage of the
said ordinance. Furthermore, the ordinance only imposes the tax on
private cars and exempts public vehicles from the imposition of the tax,
although both contribute to the traffic problem. There exists no sub-
stantial standard used in the classification 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 of the same. The tax does
not only violate the requirement of uniformity, but the same is also
unjust because it places the burden on someone who has no control
over the route of the vehicle.
The ordinance is, therefore, invalid for violating the rule of unifor-
mity and equality as well as for being unjust.
XYZ Foundation is a non-stock, non-profit association duly orga-
nized for religious, charitable and social welfare purposes. Last
January 3, 2000 it sold a portion of its lot used for religious pur-
poses 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 300square me-
ter 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 para-
graph of said Sec. 30 of the 1997 Tax Code which states
that “Income of whatever kind and character of the fore-
going 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 in-
come shall be subject to tax imposed under this Code.”
The exemption contemplated in the Constitution covers real es-
tate tax on real properties actually, directly and exclusively used for
religious, charitable or social welfare purposes. It does not cover ex-
emption from the imposition of the income tax which is within the con-
text of Section 30 of the Tax Code. As a rule, non-stock non-profit cor-
porations 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 (Section 30, NIRC; CIR v. CA and
YMCA, 298 SCRA 83 [1998].)
2. Is the income derived by XYZ Foundation from 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? '02 – Q6
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 incomes from the operation of the canteen
and gift shop are income from its activities conducted for profit which
are subject to tax. The income tax attaches irrespective of the disposi-
tion of these incomes (Section 30, NIRC; CIR v. CA and YMCA, 298
SCRA 83 [1998].)
May a taxpayer who has pending claims for VAT input credit or
refund, set-off said claims against his other tax liabilities? ’01 –
Q1
 The Sigma Rho Fraternity
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Bar Questions and Answers
NO. Set-off is available only if both obligations are liquidated and
demandable. Liquidated debts are those where the exact amounts
have already been determined. In the instant case, the claim of the
taxpayer for VAT refund is still pending and the amount has still to be
determined. A fortiori, the liquidated obligation of the taxpayer to the
government cannot, therefore, be set-off against the unliquidated claim
which the taxpayer conceived to exist in his favor (Philex Mining v. CIR,
294 SCRA 687 [1998].)
Alternative Answer:
No. Taxes and claims for refund cannot be the subject of set-off
for the simple reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material distinction
between a tax and a claim for refund. Claims for refunds just like debts
are due from the government in its corporate capacity, while taxes are
due to the government in its sovereign capacity (Philex Mining v. CIR,
294 SCRA 687 [1998].)
Distinguish a tax amnesty from a tax exemption. '01 – Q2a
Tax amnesty is an immunity from all criminal, civil and administra-
tive liabilities arising from non-payment of taxes. It is a general pardon
given to all taxpayers. It applies only to past tax periods, hence of
retroactive application (People v. Castañeda, G.R. No. L-46881, 1988.)
Tax exemption is an immunity from the civil liability only. It is an
immunity or privilege, a freedom from a charge or burden to which
others are subjected (Florer v. Sheridan, 137 Ind. 28, 36 NE 365.) It is
generally prospective in application.
Distinguish direct taxes from indirect taxes, and give an example
for each one. '01 – Q2b
DIRECT TAXES are taxes wherein both the incidence (or liability
for the payment of the tax) as well as the impact or burden of the tax
falls on the same person. An example of this tax is income tax where
the person subject to tax cannot shift the burden of the tax to another
person.
INDIRECT TAXES, on the other hand, are taxes wherein the inci-
dence of or the liability for the payment of the tax falls on one person
but the burden thereof can be shifted or passed on to another person.
Example of this tax is the value-added tax (Aban, Law of Basic Taxa-
tion, p. 20.)
Alternative Answer:
A direct tax is a tax which is demanded from the person who also
shoulders the burden of the tax. Example: corporate and individual
income tax.
An indirect tax is a tax which is demanded from one person in the
expectation and intention that he shall indemnify himself at the ex-
pense of another, and the burden finally resting on the ultimate pur-
chaser or consumer. Example: value added tax.
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. '00 – Q1
The power 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 pow-
ers of government because in the absence of limitations, it is consid-
ered as unlimited, plenary, comprehensive and supreme. The two limi-
tations 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.
Mr. Pascual's income from leasing his property reaches the max-
imum rate of tax under the law. He donated one-half of his said
property to a non-stock, non-profit educational institution whose
!8
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
30(h) 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? '00 – Q2a
There is tax avoidance. Mr. Pascual has exploited a fully permis-
sive alternative method to reduce his income tax by 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.
An Executive Order was issued pursuant to law, granting tax and
duty incentives only to businesses and residents within the “se-
cured area” of the Subic Economic Special Zone, and denying
said incentives to those who live within the Zone but outside such
"“secured area.” Is the constitutional right to equal protection of
the law violated by the E.O.? '00 – Q2b
NO. Equal protection of the law clause is subject to reasonable
classification. Classification, to be valid, must (1) rest on substantial
distinctions, (2) be germane to the purpose of the law, (3) not be limit-
ed to existing conditions only, (4) apply equally to all members of the
same class.
There are substantial differences between big investors being
enticed to the “secured area” and the business operators outside that
are in accord with the equal protection clause that does not require
territorial uniformity of laws. The classification applies equally to all the
resident individuals and businesses within the “secured area”. The
residents, being in like circumstances to contributing directly to the
achievement of the end purpose of the law, are not categorized further.
Instead, they are similarly treated, both in privileges granted and oblig-
ations required (Tiu v. Court of Appeals, 301 SCRA 278 [1999].)
Article VI, Section 28(3) of the 1987 Philippine Constitution pro-
vides that charitable institutions, churches and personages or
covenants 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.
1. To what kind of tax does this exemption apply?
This 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 edu-
cational purposes (CIR v. CA and YMCA, 298 SCRA 83 [1998].)
2. Is proof of actual use necessary for tax exemption pur-
poses under the Constitution? ’00 – Q3
YES, because tax exemptions are strictly construed against the
taxpayer. There must be evidence to show that the taxpayer has com-
plied with the requirements for exemption. Furthermore, real property
taxation is based on use and not on ownership. Hence, the same rule
must also be applied for real property tax exemptions.
Among the taxes imposed by the BIR are income tax, estate 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. ’00 – Q4
Income tax, estate and donor's tax are considered as direct taxes.
On the other hand, value-added tax, excise tax, other percentage tax-
es, and documentary stamp tax are indirect taxes.
DIRECT TAXES are demanded from the very person who, as intended,
should pay the tax which he cannot shift to another; while an INDI-
RECT TAX is demanded in the first instance from one person with the
expectation that he can shift the burden to someone else, not as a tax
but as a part of the purchase price.
 The Sigma Rho Fraternity
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Bar Questions and Answers
Income Taxation
Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-
file) of Sta. Portia Realty Corporation (SPRC). He invited the Re-
gional Director of the Housing and Land Use Regulatory Board
(HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the
approval of SPRC's application for a development permit in con-
nection with its subdivision development project in Pasig City. At
breakfast the following day, Calvin met a prospective client inter-
ested to enter into a joint venture with SPRC for the construction
of a residential condominium unit in Cainta, Rizal.
Calvin incurred expenses for the lunch and breakfast meetings he
had with the Regional Director of HLURB and the prospective
client, respectively. The expenses were duly supported by official
receipts issued in his name. At month's end, he requested the
reimbursement of his expenses, and SPRC
granted his request.
(a) Can SPRC claim an allowable deduction for the expenses in-
curred by Calvin? Explain your answer. (2.5%)
(b) Is the reimbursement received by Calvin from SPRC subject to
tax? Explain your answer. (2.5%) ’17--Q7
(a) SPRC cannot claim as a deduction, the amount spent for lunch in
the meeting with the Regional Director of HLURB. While the expense
is business connected, the same is not allowed as deduction because
it was incurred as an indirect payment to a government official which,
not only amounts to a violation of the Anti Graft and Corrupt Practices
Act, but also constitutes bribes, kickbacks and similar payments (See
Sec. 34 (a) (c) NIRC).
With respect, however, to the amount spent for breakfast with a
prospective client, the same is deductible from gross income of SPRC.
The expense complies with the requirements for deductibility, namely:
(a) the expense must be ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it must have been paid or
incurred in carrying on the trade or business of the taxpayer, and (d) it
must be supported by receipts, records or other pertinent papers (CIR
v. General Foods (Phils.), Inc., G.R. No. 143672, April4, 2003, 401
SCRA 545, 553). Section 34 (A)(1)(b) of the 1997 NIRC, as amended,
does not require that the substantiation be in the form of official re-
ceipts or invoices issued in the name of the taxpayer claiming the ex-
pense. It must only be proven that there is a "direct connection or rela-
tion of the expense being deducted to the development, management,
operation and/or conduct of the trade, business or profession of the
taxpayer”.
(b) No. Any amount paid as reimbursements for representation in-
curred by the employee in the performance of his duties is not com-
pensation subject to withholding, if the following conditions are satis-
fied: (i) It is for ordinary and necessary representation expense paid or
incurred by the employee in the pursuit of the trade, business or pro-
fession, and (ii) The employee is required to account/liquidate for the
such expense in accordance with the specific requirements of substan-
tiation pursuant to Sec. 34 of the 1997 NIRC as amended. The
amounts are actually spent by the employee for the benefit of his em-
ployer, so no income is considered to have flowed to the employee.
On April 30, 2015, Daryl resigned us the production manager of 52nd
Avenue, a television studio owned by SSS Entertuinment Corporation.
52nd Avenue issued to her a Certificate of Withholding Tax on Com-
pensation (BIR Form No. 2316), which showed thot the tax withheld
from her compensation was equal to her income tax due for the period
from January 2015 to April 30, 2015.
A month after her resignation, Daryl put up her own studio and started
producing short films. She was able to earn a meager income from her
short films but did not keep record of her production expenses.
Is Daryl qualified for substituted filing for taxable year 2015? Explain
your answer. (3%) ’17--Q8
!9
No. Following the relevant revenue Issuance, only an Individual receiv-
ing purely compensation income, regardless or amount, from only one
employer in the Philippines for the calendar year, the income tax or
which has been withheld correctly by the said employer, shall qualify
for substituted filing of income tax return (Revenue Regulations No.
3-2002). Daryl, within the same calendar year, derived income from
producing short films; thus, she did not receive purely compensation
income for calendar year 2015. Accordingly, the amount withheld from
her compensation income is not equal to the income tax due on his
aggregate taxable income during the taxable year.
Mapagbigay Corporation grants all its employees (rank and file,
supervisors, and managers) 5% discount of the purchase price of
its products. During an audit investigation, the BIR assessed the
company the corresponding tax on the amount equivalent to the
courtesy discount received by all the employees, contending that
the courtesy discount is considered as additional compensation
for the rank and file employees and additional fringe benefit for
the supervisors and managers. In its defense, the company ar-
gues that the discount given to the rank and file employees is a
de minimis benefit and not subject to tax. As to its managerial
employees, it contends that the discount is nothing more than a
privilege and its availment is restricted. Is the BIR assessment
correct? Explain. (5%)
Is the BIR assessment correct? Explain. (5%) ’16 – Q6
No. The courtesy discounts given to rank and file employees are con-
sidered “de minimis benefits91 falling under the category of other facili-
ties and privileges furnished or offered by an employer to his employ-
ees which are of relatively small value intended to promote the health,
goodwill, contentment or efficiency of the employee. These benefits are
not considered as compensation subject to income tax and conse-
quently to the withholding tax (Sec.2.78,1 of RR No. 10-2008). If these
“de minimis benefits” are furnished to supervisors and managers, the
same are also exempt from the fringe benefits tax (RR No. 3-98; Sec.
33, NIRC).
ALTERNATIVE ANSWER:
Yes, the BIR assessment is correct. De minimis benefits are benefits of
relatively small values provided by the employers to the employee on
top of the basic compensation intended for the general welfare of the
employees. It is considered exempt from income tax on compensation
as well as from fringe benefit tax, provided it does not exceed PI0,000
per employee per taxable year.
Pursuant to RR No. 1-2015, which amended RR No. 2-98, 3-98,
52008, 5-2011 and 8-2012, the following are considered de minimis
benefits:
1. Monetized unused vacation leave credits of private employ-
ees not exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid to
government officials and employees
3. Medical cash allowance to dependents of employees, not
exceeding Php750 per employee per semester or Phpl25
per month.
4. Rice subsidy of Php1,500
5. Uniform and clothing allowance not exceeding Php5,000 per
annum
6. Actual medical assistance not exceeding Php10,000 per
annum
7. Laundry allowance not exceeding Php300 per month
8. Employees’ achievement awards, e.g. for length of service or
safety achievement, which must be in the form of tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding Php10,000 received
 The Sigma Rho Fraternity
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by the employee under an established written plan which
does not discriminate in favor of highly paid employees.
9. Gifts made during Christmas and major anniversary celebra-
tions not exceeding Php5,000 per employee per annum
10. Daily meal allowance for overtime work and night/graveyard
shift not exceeding twenty-five percent (25%) of the basic
minimum wage on a per region basis
11. Benefits received by an employee by virtue of a collective
bargaining agreement and productivity incentive schemes
provided that the total monetary value received from both
CBA and productive incentive schemes combined do not
exceed Php10,000 per employee per taxable year
This list is exclusive and anything that is given which is not on the list,
shall not be considered de minimis. The 5% discount of purchase price
of its products, not being in this enumeration, is subject to tax as well
as to withholding tax on compensation.
Sure Arrival Airways (SAA) is a foreign corporation, organized
under the laws of the Republic of Nigeria. Its commercial air-
planes do not operate within Philippine territory, or service pas-
sengers embarking from Philippine airports. The firm is repre-
sented in the Philippines by its general agent, Narotel.
SAA sells airplane tickets through Narotel, and these tickets are
serviced by SAA airplanes outside the Philippines. The total sales
of airplane tickets transacted by Narotel for SAA in 2012 amount-
ed to P10,000,000.00. The Commissioner of Internal Revenue
(CIR) assessed SAA deficiency income taxes at the rate of 30% on
its taxable income, finding that SAA's airline ticket sales consti-
tuted income derived from sources within the Philippines.
SAA filed a protest on the ground that the alleged deficiency in-
come taxes should be considered as income derived exclusively
from sources outside the Philippines since SAA only serviced
passengers outside Philippine territory. It, thus, asserted that the
imposition of such income taxes violated the principle of territori-
ality in taxation.
Is the theory of SAA tenable? Explain. (5%) ’16 – Q5
No. The activity which gives rise to the income is the sale of ticket in
the Philippines, hence, the income from sale of tickets is an income
derived from Philippine sources which is subject to the Philippine in-
come tax. Accordingly, there is no violation of the principle of territoriali-
ty in taxation (Air Canada v. CIR, 778 SCRA 131, [2016]).
[Note: As the case which is the basis of the answer was decided before
the cut-off date for the 2016 Bar Examinations, it is recommended that
this question be considered a bonus question, with any answer to be
given full credit].
Rakham operates the lending company that made a loan to Alfon-
so in the amount of P120,000.00 subject of a promissory note
Which is due within one (1) year from the note's issuance. Three
years after the loan became due and upon information that Alfon-
so is nowhere to be found, Rakham asks you for advice on how to
treat the obligation as "bad debt." Discuss the requisites for de-
ductibility of a "bad debt?" (5%) ’16 – Q3
I will advise Rakham that the obligation of Alfonso may now be consid-
ered as bad debts for having met the yardstick of a debt which had
become worthless. In order to be considered worthless, the taxpayer
should establish that during the year from which a deduction is sought,
a situation developed as a result of which it became evident in the
exercise of sound, objective business judgment that there remained no
practical, but only vaguely theoretical, prospect that the debt would
!10
ever be paid (Collector of Internal Revenue v. Goodrich International
Rubber Co., 21 SCRA 1336 [1961]). A bad debt is deductible if it com-
plies with the following requisites:
a. There must be a valid and subsisting debt.
b. The obligation is connected with the taxpayer’s trade or
business and is not between related parties.
c. There is an actual ascertainment that the debt is worthless.
d. The debt is charged-off during the taxable year. A partial
write-off is not allowed (PRC v. CA, 256 SCRA 667 [1996]).
Peter is the Vice-President for Sales of Golden Dragon Realty
Conglomerate, Inc. (Golden Dragon). A group of five (5) foreign
investors visited the country for possible investment in the con-
dominium units and subdivision lots of Golden Dragon. After a
tour of the properties for sale, the investors were wined and dined
by Peter at the posh Conrad's Hotel at the cost of P150,000.00.
Afterward, the investors were brought to a party in a videoke club
which cost the company P200,000.00 for food and drinks, and the
amount of P80,00.00 as tips for business promotion officers. Ex-
penses at Conrad's Hotel and the videoke club were receipted and
submitted to support the deduction for representation and enter-
tainment expenses. Decide if all the representation and enter-
tainment expenses claimed by Golden Dragon are deductible.
Explain. (5%) ’16 – Q15
Reasonable allowance for entertainment, amusement, and recreation
expenses during the taxable year that are directly connected or related
to the operation or conduct of the trade, business or profession, or that
are directly related to or in furtherance of the conduct of his/its trade,
business, or exercise of a profession not to exceed such ceilings pre-
scribed by rules and regulations, are allowed as deduction from gross
income.
In this case, the expenses incurred were to entertain the investors of
Golden Dragon; thus, the amount deductible for entertainment,
amusement and recreation expenses is limited to the actual amount
paid or incurred but in no case shall the deduction exceed 0.50% of net
sales for taxpayers engaged in the sale of goods or properties (Sec.
34(A)(1)(a)(iv), NIRC as implemented by RR No. 10-2002).
[Note: Reasonableness and liberality are recommended in considering
an examinee’s answer to this question].
Henry, a U.S. naturalized citizen, went home to the Philippines to
reacquire Philippine citizenship under RA 9225. His mother left
him a lot and building in Makati City and he wants to make se of it
in his trading business. Considering that he needs money for the
business, he wants to sell his lot and building and make use of
the consideration. However, the lot has sentimental value and he
wants to reacquire it in the future. A friend of Henry told him of
the "sale- leaseback transaction" commonly used in the U.S.,
which is also used for tax reduction. Under said transaction, the
lot owner sells his property to a buyer on the condition that he
leases it back from the buyer. At the same time, the property own-
er is granted an option to repurchase the lot on or before an
agreed date. Henry approaches you as a tax lawyer for advice.
Explain what tax benefits, if any, can be obtained by Henry and
the buyer from the sale-leaseback transaction? (5%) ’16 – Q18
Henry will be entitled to claim rental expense as a deduction from his
gross income in the trading business. His lease payments plus interest
would be substantially higher than the depreciation expense he may
claim in computing his taxable income; hence, the lease would result in
the additional benefit of increasing his additional tax deductions. The
buyer will be deriving rental income from the property and be able to
claim business deductions such as real property taxes, repairs and
 The Sigma Rho Fraternity
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maintenance, depreciation and other expenses necessary for the rent-
ing out of the property.
Patrick is a successful businessman in the United States and he
is a sole proprietor of a supermarket which has gross sales of $10
million and an annual income of $3million. He went to the Philip-
pines on a visit and, in a party, he saw Atty. Agaton who boasts of
being a tax expert. Patrick asks Atty. Agaton: if he (Patrick) de-
cides to reacquire his Philippine citizenship under RA 9225, es-
tablish residence in this country, and open a supermarket in
Makati City, will the BIR tax him on the income he earns from his
U.S. business? If you were Atty. Agaton, what advice will you give
Patrick? (5%) ’16 – Q20
I will advise Patrick that once he re-acquires his Philippine citizenship
and establishes his residence in this country, his income tax classifica-
tion would then be a ‘resident citizen’. A resident citizen is taxable on
all his income, whether derived within or without the Philippines; ac-
cordingly, the income he earns from his business abroad will now be
subject to the Philippine income tax (Sec. 23, NIRC).
ALTERNATIVE ANSWER:
If Patrick becomes a dual citizen under RA 9225 in our country, he
shall be allowed to acquire real properties and engage himself in busi-
ness here just like an ordinary Filipino without renouncing his foreign
citizenship. In addition, his income abroad will not be taxed here.
These are among the incentives we have extended to former Filipinos
under the Dual Citizenship Law so that they will be encouraged to
come home and invest their money in our country.
Mr. A, a citizen and resident of the Philippines, is a professional
boxer. In a professional boxing match held in 2013, he won prize
money in United States (US) dollars equivalent to P300,000,000.
a) Is the prize money paid to and received by Mr. A in the
US taxable in the Philippines? Why? (2%) ‘15 - Q2a
Yes. Under the Tax Code, the income within and without of a resident
citizen is taxable. Since Mr. A is a resident Filipino citizen, his income
worldwide is taxable in the Philippines (Sec. 23 A, NIRC).
b) May Mr. A’s prize money qualify as an exclusion from his
gross income? Why? (2%) ‘15 - Q2b
No. Under the law, all prizes and awards granted to athletes in local
and international sports competitions and tournaments whether held in
the Philippines or abroad and sanctioned by their national sports asso-
ciations are excluded from gross income. The exclusion find applica-
tion only to amateur athletes where the prize was given in an event
sanctioned by the appropriate national sports association affiliated with
the Philippine Olympic Committee and not to professional athletes like
Mr. A. Therefore, the prize money would not qualify as an exclusion
from Mr. A’s gross income (Sec. 32 B [7] [d], NIRC).
c) The US already imposed and withheld income taxes
from Mr. A’s prize money. How may Mr. A use or apply
the income taxes he paid on his prize money to the US
when he computes his income tax liability in the Philip-
pines for 2013? (4%) ‘15 - Q2c
The income taxes withheld and paid to the U.S. government maybe
claimed by Mr. A, either as a deduction from his gross income or as a
tax credit from the income tax due, when he computes his Philippine
income tax liability for taxable year 2013 (Sec. 34(C)(1)(b), NIRC).
!11
Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B,
a non-resident citizen.
Note: The problem does not indicate where the sale took place.
The suggested answers in a and b above assume that the sale
took place in the Philippines. A non-resident alien is to be taxed
by the Philippine government only on her income derived from an
activity conducted in the Philippines such as the sale of goods
irrespective where produced.
a) If the goods were produced from Ms. B’s factory in the
Philippines, is Ms. B’s income from the sale to Ms. C
taxable in the Philippines? Explain. (2%) ‘15 - Q3a
Yes, the income of Ms. B from the sale of ready-to-wear goods to Ms.
C is taxable. A nonresident citizen is taxable only on income derived
from sources within the Philippines (Sec. 23(B), NIRC). In line with the
source rule of income taxation, since the goods are produced and sold
within the Philippines, Ms. B’s Philippine sourced income is taxable in
the Philippines.
b) If Ms. B is an alien individual and the goods were pro-
duced in her factory in China, is Ms. B’s income from the
sale of the goods to Ms. C taxable in the Philippines?
Explain. (2%) ‘15 - Q3b
Yes, but only a proportionate part of the income. Gains, profits, and
income from the sale of personal property produced by the taxpayer
without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philip-
pines (Sec. 42E, NIRC).
Mr. E and Ms. F are both employees of AAA Corp. They got mar-
ried on February 14, 2011. On December 29, 2011, the couple gave
birth to triplets. On June, 2013, they had twins. What were the
personal exemptions/deductions which Mr. E and Ms. F could
claim in the following taxable years:
a) For 2010 (2%) ‘15 - Q4a
For 2010, Mr. E and Ms. F are each entitled to personal exemptions of
P50,000.00 (Sec. 35A, NIRC).
b) For 2011 (3%) ‘15 - Q4b
For 2011, Mr. E and Ms. F are each entitled to basic personal exemp-
tion of P50,000.00. In addition to his basic personal exemption, Mr. E
could claim additional personal exemptions for three (3) qualified de-
pendent children in the amount of P25,000.00 for each child (Sec 35B,
NIRC).
c) For 2013 (2%) ‘15 - Q4c
For 2013, Mr. E and Ms. F are each entitled basic personal exemptions
of P50,000.00. Mr. E could claim additional personal exemptions for
four (4) qualified dependent children in the amount of P25,000.00 for
each child (Sec. 35B, NIRC).
BBB, Inc., a domestic corporation, enjoyed a particularly prof-
itable year in 2014. In June 2015, its Board of Directors approved
the distribution of cash dividends to its stockholders. BBB, Inc.
has individual and corporate stockholders. What is the tax treat-
ment of the cash dividends received from BBB, Inc. by the follow-
ing stockholders:
 The Sigma Rho Fraternity
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Bar Questions and Answers
a) A resident citizen (1%) ‘15 - Q5a
A final withholding tax for ten percent (10%) shall be imposed upon the
cash dividends actually or constructively received by a resident citizen
from BBB, Inc. (Sec. 24 (b)(2), NIRC).
b) Non-resident alien engaged in trade or business (1%) ‘15
- Q5b
A final withholding tax of twenty percent (20%) shall be imposed upon
the cash dividends actually or constructively received by a non-resi-
dent alien engaged in trade or business from BBB, Inc. (Sec. 25(a)(2),
NIRC).
c) Non-resident alien not engaged in trade or business
(1%) ‘15 - Q5c
A final withholding tax equal to twenty-five percent (25%) of the entire
income received from all sources within the Philippines, including the
cash dividends received from BBB, Inc. (Sec. 25(b), NIRC).
d) Domestic corporation (1%) ‘15 - Q5d
Dividends received by a domestic corporation from another domestic
corporation, such as BBB, Inc., shall not be subject to tax (Sec. 27(d)
(4), NIRC).
e) Non-resident foreign corporation (1%) ‘15 - Q5e
Dividends received by a non-resident foreign corporation from a do-
mestic corporation are generally subject to an income tax of 30% to be
withheld at source (Sec. 28(b)(1), NIRC). However, a final withholding
tax of fifteen percent (15%) is imposed on the amount of cash divi-
dends received from a domestic corporation like BBB, Inc. if the tax
sparing rule applies (Sec. 28(B) (5)(b), NIRC): Pursuant to this rule, the
lower rate of tax would apply if the country in which the non-resident
foreign corporation is domiciled would allow as tax credit against the
tax due from it, taxes deemed paid in the Philippines of 15% represent-
ing the difference between the regular income tax rate and the prefer-
ential rate.
Indicate whether each of the following individuals is required or
not required to file an income tax return:
a) Filipino citizen residing outside the Philippines on his
income from sources outside the Philippines. (1%) ‘15 -
Q10a
Not required. The income of a non-resident Filipino citizen are taxable
only on income sourced within the' Philippines.Accordingly, his income
from sources outside the Philippines is exempt from income tax (Sec.
51A (I)(b), NIRC).
b) Resident alien on income derived from sources within
the Philippines. (1%) ‘15 - Q10b
Required. A resident alien is taxable only for income derived from
sources within the Philippines (Sec. 51A (l)(c), NIRC).
c) Resident citizen earning purely compensation income
from two employers within the Philippines, whose in-
come taxes have been correctly withheld. (1%) ‘15 -
Q10c
!12
Required. A resident citizen who is earning purely compensation in-
come from two employers should file income tax return. If the compen-
sation income is received concurrently from two employers during the
taxable year, the employee is not qualified for substituted filing (Sec.
51A (2)(b), NIRC).
d) Resident citizen who falls under the classification of
minimum wage earners. (1%) ‘15 - Q10d
Not required. Under the law', all minimum wage earners in the private
and public sector shall be exempt from payment of income tax. (Sec.
51A (2)(d), NIRC in relation to Republic Act No. 9504).
e) An individual whose sole income has been subjected to
final withholding fax. (1%) ‘15 - Q10e
Not required. Under the law, an individual whose sole income has been
subjected of final withholding tax pursuant to Sec. 57(A), N1RC, need
not file a return. What he received is a tax paid income (Sec. 51A (2)(c)
NIRC).
What are de minimis benefits and how are these taxed? Give
three (3) examples of de minimis benefits. (4%) ‘15 - Q11
De minimis benefits are facilities and privileges furnished or offered by
an employer to his employees, which are not considered as compen-
sation subject to income tax and consequently to withholding tax, if
such facilities or privileges are of relatively small value and are offered
or furnished by the employer merely as means of promoting the health,
goodwill, contentment, or efficiency of his employees. If received by
rank-and-file employees they are exempt from income tax on wages; if
received by supervisory or managerial employees, they are exempt
from the fringe benefits tax (RR No. 2-98, as amended by RR No.
8-2000).
The following shall be considered as de minimis benefits:
(Note: The examinee may choose any three)
1. Monetized unused vacation leave credits of private employ-
ees not exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid to
government officials and employees;
3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per
month;
4. Rice subsidy of P1,500 or 1 sack of 50 kg rice per month
amounting to not more than P1,500;
5. Uniform and clothing allowance not exceeding P5,000 per
annum;
6. Actual medical assistance not exceeding P10,000 per an-
num;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards, e.g., for length of service
or safety achievement, which must be in the form of a tangi-
ble personal property other than cash or gift certificate, with
an annual monetary value not exceeding P10,000 received
by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
9. Gifts given during Christmas and major anniversary celebra-
tions not exceeding P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night/graveyard
shift not exceeding 25% of the basic minimum wage on a per
region basis;
11. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive
 The Sigma Rho Fraternity
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Bar Questions and Answers
schemes provided that the total annual monetary value re-
ceived from both CBA and productivity incentive schemes
combined do not exceed P10,000 per employee per taxable
year (Rev. Regs. 2-98, as amended).
Mr. H decided to sell the house and lot wherein he and his family
have lived for the past 10 years, hoping to buy and move to a new
house and lot closer to his children’s school. Concerned about
the capital gains tax that will be due on the sale of their house, Mr.
H approaches you as a friend for advice if it is possible for the
sale of their house to be exempted from capital gains tax and the
conditions they must comply with to avail themselves of said
exemption. How will you respond? (4%) ‘15 - Q12
I would advise Mr. H that he may be exempted from the payment of
the capital gains tax on the sale or disposition of the house and lot
where his family lives because the sale of principal residence by a
natural person is exempt provided the following conditions are com-
plied with, viz:
1. The proceeds of the sale is fully utilized in acquiring or con-
structing new principal residence within 18 calendar months
from the date of sale or disposition;
2. The historical cost or adjusted basis of the real property sold
or disposed will be carried over to the new principal resi-
dence built or acquired;
3. The Commissioner has been duly notified, through a pre-
scribed return, within 30 days from the date of sale or dispo-
sition of the person’s intention to avail of the tax exemption;
and,
4. The exemption was availed only once every 10 years (Sec.
24(d)(2), NIRC).
KKK Corp. secured its Certificate of Incorporation from the Secu-
rities and Exchange Commission on June 3, 2013. It commenced
business operations on August 12, 2013. IN April 2014, Ms. J, an
employee of KKK Corp. in charge of preparing the annual income
tax return of the corporation for 2013, got confused on whether
she should prepare payment for the regular corporate income tax
or the minimum corporate income tax.
a) As Ms. J’s supervisor, what will be your advice? (2%) ‘15
- Q14a
As Ms. J’s supervisor, I will advise that KKK Corp. should prepare
payment for the regular corporate income tax and not the minimum
corporate income tax. Under the Tax Code, minimum corporate income
tax is only applicable beginning on the fourth taxable year following the
commencement of business operation (Sec. 27(e)(1), NIRC).
b) What are the distinctions between regular corporate
income tax and minimum corporate income tax? (3%)
‘15 - Q14b
The distinctions between regular corporate income tax and the mini-
mum corporate income tax are the following:
1. As to taxpayer: Regular corporate income tax applies to all
corporate taxpayers; while minimum corporate income tax
applies to domestic corporations and resident foreign corpo-
rations.
2. As to tax rate: Regular corporate income tax is 30%; while
minimum corporate income tax is 2%.
3. As to tax base: Regular corporate income tax is based on
the net taxable income; while minimum corporate income tax
is based on gross income.
!13
4. As to period of applicability: Regular corporate income tax is
applicable once the corporation commenced its business
operation, while minimum corporate income tax is applicable
beginning on the fourth taxable year following the com-
mencement of business operation.
5. As to imposition: The minimum corporate income tax is im-
posed whenever it is greater than the regular corporate in-
come tax of the corporation (Sec. 27(A) and (E), NIRC; RR
No. 9-98).
In 2012, Dr. K decided to return to his hometown to start his own
practice. At the end of 2012, Dr. K found that he earned gross
professional income in the amount P1,000,000.00. While he in-
curred expenses amounting to P560,000.00 constituting mostly of
his office space rent, utilities, and miscellaneous expenses relat-
ed to his medical practice. However, to Dr. K’s dismay, only
P320.000.00 of his expenses were duly covered by receipts. What
are the options available for Dr. K so he could maximize the de-
ductions from his gross income? (3%) ‘15 - Q15
In order to maximize his deductions, Dr. K may avail of the optional
standard deduction (OSD) which is an amount not exceeding forty
percent (40%) of his gross sales or gross receipts. The OSD can be
claimed without being required to present proof or evidence of expens-
es paid or incurred by him (Sec. 34(L), NIRC; Rev. Regs. 16-08, as
amended).
Dr. Taimtim is an alumnus of the College of Medicine of Universal
University (UU), a privately-owned center for learning which
grants yearly dividends to its stockholders. UU has a famous
chapel located within the campus where the old folks used to say
that anyone who wanted to pass the medical board examinations
should offer a dozen roses on all the Sundays of October. This
was what Dr. Taimtim did when he was still reviewing for the
board examinations. In his case, the folk saying proved to be true
because he is now a successful cardiologist. Wanting to give
back to the chapel and help defray the costs of its maintenance,
Dr. Taimtim donated P50,000.00 to the caretakers of the chapel
which was evidenced by an acknowledgement receipt.
In computing his net taxable income, can Dr. Taimtim use his do-
nation to the chapel as an allowable deduction from his gross
income under the National Internal Revenue Code (NIRC)? (4%) -
‘14 - Q3
No, the donation is not deductible. The chapel is owned by privately-
owned university hence the donation for the maintenance of the chapel
is a donation for the university. The donation to be deductible must
comply with the requirement that the net income of the donee must not
inure to the benefit of any private stockholder or individual. In the in-
stant case, the university is granting yearly dividends to its stockhold-
ers which is a clear violation of the law appertaining to the so-called
“private inurement doctrine” thereby making the donation non-de-
ductible (Section 34(H)(i), NIRC).
Mr. Gipit borrowed from MR. Maunawain P100,000.00, payable in
five (5) equal monthly installments. Before the first installment
became due, Mr. Gipit rendered general cleaning services in the
entire office building of Mr. Maunawain, and as compensation
thereof, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up
to the amount of P75,000.00. Mr. Gipit claims that the cancellation
of his indebtedness cannot be considered as gain on his part
which must be subject to income tax, because according to him,
he did not actually receive payment from Mr. Maunawain for the
general cleaning services.
 The Sigma Rho Fraternity
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Bar Questions and Answers
Is Mr. Gipit correct? Explain. (4%) - ‘14 - Q9
No. the cancellation of the indebtedness of up to P75,000.00 is intend-
ed as a compensation for the general cleaning services rendered by
Mr. Gipit. Compensation for services in whatever form paid is part of
gross income (Section 32(A), NIRC).
Which of the following is an exclusion from gross income? (1%) -
‘14 - Q10
(A) Salaries and wages
(B) Cash dividends
(C) Liquidating dividends after dissolution of a corporation
(D) De minimis benefits
(E) Embezzled money
(D) de minimis benefits (Section 33(C)(4); RR No. 3-98).
Triple Star, a domestic corporation, entered into a Management
Service Contract with Single Star, a non-resident foreign corpora-
tion with no property in the Philippines. Under the contract, Sin-
gle Star shall provide managerial services for Triple Star’s
Hongkong branch. All said services shall be performed in Hong
Kong.
Is the compensation for the services of Single Star taxable as
income from sources within the Philippines? Explain (4%) - ‘14 -
Q11
No. the compensation for services rendered by Single Star is an in-
come derived from sources without the Philippines To be considered as
income from within, the labor or service must be performed within the
Philippines (section 42(A)(3) and Section 42(C)(3), NIRC). Since all the
services required to be performed by Single Star, a non-resident for-
eign corporation is to be performed in Hongkong, the entire income is
from sources without.
Which of the following should not be claimed as deductions from
gross income? (1%) - ‘14 - Q11
(A) Discounts given to senior citizens on certain goods and
services
(B) Advertising expense to maintain some form of goodwill
for the taxpayer’s business
(C) Salaries and bonuses paid to employees
(D) Interest payment on loans for the purchase of machin-
ery and equipment used in business
(B) Advertising expense to maintain some form of goodwill for the tax-
payer’s business (General Foods Corporation v. CIR, G.R. No.
143672, April 24, 2003)
Hopeful Corporation obtained a loan from Generous Bank and
executed a mortgage on its real property to secure the loan. When
Hopeful Corporation failed to pay the loan, Generous Bank extra-
judicially foreclosed the mortgage on the property and acquired
the same as the highest bidder. A month after the foreclosure,
Hopeful Corporation exercised its right of redemption ad was able
to redeem the property.
Is Generous Bank liable to pay capital gains tax as a result of the
foreclosure sale? Explain. (4%) - ‘14 - Q13
No. in a foreclosure of a real estate mortgage, the capital gains tax
accrues only after the lapse of the redemption period because it is only
!14
that there exists a transfer of property. This, if the right to redeem the
foreclosed property was exercised by the mortgagor before expiration
of the redemption period,, as in this case, the foreclosure is not a tax-
able event (See RR No. 4-99; Supreme Transliner, Inc. v. BPI Family
Savings Bank, Inc., G.R. No. 165617, February 25, 2011).
A, B, and C, all lawyers, formed a partnership called ABC Law
Firm so that they can practice their profession as lawyers. For the
year 2012, ABC LAw Firm received earnings and paid expenses,
among which are as follows: (6%)
Earnings:
(1) professional/legal fees from various clients
(2) Cash prize received from a religious society in recogni-
tion of the exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and lap-
tops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with
clients
a) What are the items in the abovementioned earnings
which should be included in the computation of ABC
Law Firm’s gross income? Explain. - ‘14 - Q24a
The three (3) items of earnings should be included in the computation
of ABC Law Firm’s gross income. The professional/legal fees from
various clients is included as part of gross income being in the nature
of compensation for services (Section 32(A)(1), NIRC). The cash prize
from a religious society in recognition of its exemplary services is also
included there being no law providing for its exclusion. This is not a
prize in recognition of any of the achievements enumerated under the
law hence, should form part of gross income (Section 32(B)(7)(c),
NIRC). The gains from sale of excess computers and laptops should
also be included as part of the firm’s gross income because the term
gross income specifically includes gains derived from dealings in prop-
erty (Section 32(A)(3), NIRC).
b) What are the items in the abovementioned payments
which may be considered as deductions from the gross
income of ABC Law Firm? Explain. - ‘14 - Q24b
The law firm being formed as a general professional partnership is
entitled to the same deductions as allowed to corporations (Sections
26, NIRC). Hence, the three (3) items of deductions mentioned in the
problem are all deductible, they being in the nature of ordinary and
necessary expenses incurred in the practice of profession (Section
34(A), NIRC).
ALTERNATIVE ANSWER:
The law firm being formed as a general professional partnership is
entitled to the same deductions as allowed to corporations (Section 26,
NIRC). Hence, the three (3) items of deductions mentioned in the prob-
lem are all deductible, they being in the nature of ordinary and neces-
sary expenses incurred in the practice of profession (Section 34(A),
NIRC). However, the amount deductible for representation expenses
incurred by a taxpayer engaged in sale of services, including a law
firm, is subject to a ceiling of 1% of net revenue (RR No. 10-2002).
c) If ABC Law Firm earns net income in 2012, what, if any,
is the tax consequence on the part of ABC Law Firm
 The Sigma Rho Fraternity
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insofar as the payment of income tax is concerned?
What, if any, is the tax consequence on the part of A, B,
and C as individual partners, insofar as the payment of
income tax is concerned? - ‘14 - Q24c
The net income having been earned by the law firm, which is formed
and qualifies as a general professional partnership, is not subject to
income tax because the earner is devoid of any income tax personality.
Each partner shall report as gross income his distributive share, actual-
ly or constructively received, in the net income of the partnership. The
partnership is merely treated for income tax purposes as a pass-
through entity so that its net income is not taxable at the level of the
partnership but said net income should be attributed to the partners,
whether or not distributed to them, and they are liable to pay the in-
come tax based on their respective taxable income as individual tax-
payers (Section 26, NIRC).
Freezy Corporation, a domestic corporation engaged in the manu-
facture and sale of ice cream, made payments to an officer of
Frosty Corporation, a competitor in the ice cream business, in
exchange for said officer’s revelation of Frosty Corporation’s
trade secrets.
May Freezy Corporation claim the payment to the Officer as de-
duction from its gross income? Explain. (4%) - ‘14 - Q26
No. The payments made in exchange for the revelation of a competi-
tor’s trade secrets is considered as an expense which is against law,
morals, and good customs or public policy, which is not deductible (3M
Philippines, Inc. v. CIR, G.R. No. 82833, September 26, 1988). Also,
the law will not allow the deduction of bribes, kickbacks and other simi-
lar payments. Applying the principle of ejusdem generis,payment made
by Freezy Corporation would fall under “other similar payments” which
are not allowed as deduction from gross income [Section 34 (A)(1)(c),
NIRC].
In January 2013, your friend got his first job as an office clerk. He
is upon him for financial support. His parents have long retired
from their work, and his two (2) siblings are still minors and
studying in grade school. In February 2014, he consulted you as
he wanted to comply with all rules pertaining to the preparation
and filing of his income tax return. He now asks you the follow-
ing:
a) Is he entitled to personal exemption? If so, how much?
(1%) - ‘14 - Q27a
Yes. The law allows a basic personal exemption of P50,000 for each
individual taxpayer (Section 35 (A), NIRC)
b) Is he entitled to additional exemptions? If so, how
much? (1%) - 14 - Q27b
No. While his parents and minor siblings are living with and dependent
upon him for financial support, they are not qualified dependents for
purposes of additional exemptions. The term, “dependent” for purposes
of the additional personal exemption would include only legitimate,
illegitimate or legally adopted child (Section 35 (B), NIRC).
c) What is the effect of the taxes withheld from his salaries
on his taxable income? (2%) - 14 - Q27c
The taxes withheld from his salaries will not affect his taxable income
because they are not allowed as tax deductions but as tax credits. Tax
deductions reduce the taxable income while tax credits reduce the tax
!15
liability (CIR v. Central Luzon Drug Corporation, G.R. No. 199647, April
15, 2005).
Dona Evelina, a rich widow engaged in the business of currency
exchange, was assessed a considerable amount of local business
taxes by the City Government of Bagnet by virtue of Tax Ordi-
nance No. 24. Despite her objections thereto, Dona Evelina paid
the taxes. Nevertheless, unsatisfied with said Tax Ordinance,
Dona Evelina, through her counsel Atty. ELP, filed a written claim
for recovery of said local business taxes and contested with the
assessment. Her claim was denied, and so Atty. ELP elevated her
case to the Regional Trial Court (RTC).

The RTC declared Tax Ordinance No. 24 null and void without
legal effect for having been enacted in violation of the publication
requirement of tax ordinances and revenue measures under the
Local Government Code (LGC) and on the ground of double taxa-
tion. On appeal, the Court of Tax Appeals (CTA) affirmed the deci-
sion of the RTC. No motion for reconsideration was filed and the
decision became final and executory. (4%)
b) If Dona Evelina eventually recovers the local business
taxes, must the same be considered as income taxable
by the national government? - ‘14 - Q29b
Yes, subject to the tax benefit rule. The local business tax paid is a
business connected tax hence, deductible from gross income. If at the
time of its deduction it resulted to a tax benefit to Dona Evelina, then
the recovery will form part of a gross income to the extent of the tax
benefit on the previous deduction (Section 34(C)(1), NIRC).
A group of philanthropists organized a non-stock, non-profit hos-
pital 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?
(6%) ‘13 - Q2
Yes. Although a non-stock, non-profit hospital organized for charitable
purposes, is generally exempt from income tax, it 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 said income.
The hospital is subject to income tax of 10% of its net income derived
from the paying patients considering that the income earned appears
to be derived solely from hospital-related activities (CIR v. St. Luke’s
Medical Center, Inc., G.R.Nos. 195909 & 195960, September 26,
2012).
ALTERNATIVE ANSWER:
No. The hospital is organized exclusively for charitable purposes and
since no part of its income inures to the benefit of any private individ-
ual, it should not lose its exempt character by simply admitting paying
patients.The revenues derived from paying patients are necessary to
maintain “its head above the waters” and allow it to sustain its charita-
ble activities (CIR v. CA, CTA & YMCA, G.R No. 124043, 298 SCRA
83, October 14, 1998).
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
 The Sigma Rho Fraternity
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partners, including Atty. Gambino, in accordance with its articles
of partnership.
In filing his own income tax return, Atty. Gambino claimed deduc-
tions that the partnership did not claim, such as purchase of law
books, entertainment expenses, car insurance and car deprecia-
tion. The BIR disallowed the deductions.
Was the BIR correct? (6%) ‘13 - Q4
No. The BIR is wrong in disallowing the deductions claimed by Atty.
Gambino. It appears that the general professional partnership (GPP)
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 GPP 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 pro-
fession and were not claimed by the partnership in computing its net
income (Section 26, NIRC; RR No. 16-2008; RR No. 2-2010).
ALTERNATIVE ANSWER:
The BIR is wrong is disallowing the deductions because if the partner-
ship claims itemized deductions, the partner can further claim deduc-
tions from his share in the net income of the partnership provided
these are ordinary, necessary, reasonable, duly substantiated and not
yet claimed by the partnership in computing its distributable net in-
come. Consonant with these requirements of deductibility, the pur-
chase of law books can be considered as a capital outlay, hence not
deductible outright but subject to depreciation. Insofar as entertainment
expenses are concerned, only an amount not exceeding 1% of gross
income shall be allowed. For the car insurance and car depreciation,
they are allowed as deductions but only to the extent that the car is
used in the practice of profession (Section 26, NIRC; RR No. 16-2008;
RR No. 2-2010; Sec. 34 (A) as implemented by RR. No. 10-2002).
XYZ Law Offices, a law partnership in the Philippines and a VAT-
registered taxpayer, received a query by e-mail from Gainsburg
Corporation, a corporation organized under the laws of Delaware,
but the e-mail came from California where Gainsburg has an of-
fice. Gainsburg has no office in the Philippines and does no busi-
ness in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed
Gainsburg US$1000 for the opinion. Gainsburg remitted its pay-
ment through Citibank which converted the remitted US$1,000 to
pesos and deposited the converted amount in the XYZ Law Of-
fices account.
What are the tax implications of the payment to XYZ Law Offices
in terms of VAT and income taxes? (7%) ‘13 - Q7
The payment to XYZ Law Offices by Gainsburg Corporation is subject
to VAT and income tax 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 de-
rived within and without the Philippines, it has to compute its net in-
come in the same manner as a corporation. The net income of the
partnership whether distributed or not will be declared by the partners
as part of their gross income who are to pay the income tax thereon in
their individual capacity (Section 26, NIRC).
In 2000, Mr. Belen bought a residential house and lot for P
1,000,000. He used the property as his and his family’s principal
!16
residence. It is now year 2013 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 com-
puting the income tax? Please explain the legal relevance of each
of these considerations. (7%) ‘13 - Q11
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 of the property to be sold. The cur-
rent 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 between
the gross selling price and the current fair market value of
the property.
The income tax is computed as 6% of the tax base which is in the na-
ture of a final capital gains tax )Section 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 proceeds of sale in acquiring a new prin-
cipal 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 complies with
the utilization requirement he will be entitled to get back his
deposit; otherwise, the deposit will be applied against the
capital gains tax due (Section 24(D)(2), NIRC).
Anchor 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 for-
eign corporation and is taxed only on income from sources within
the Philippines, and since the loan and other business transac-
tions 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 cor-
porate income tax for 2010? Explain your answer. (5%)
‘12 - Q1a
No. A Domestic Corporation is taxable on all income derived from
sources within and without the Philippines (Section 23, NIRC). The
income of the foreign branch and that of the Home Office will be
summed up for income tax purposes following the “single entity” con-
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cept and will all be included in the gross income of the domestic corpo-
ration in the annual Philippine income tax return.
b) Should the Shanghai Branch of Anchor Bank remit profit
to its Head Office in the Philippines in 2011, is the
branch liable to the 15% branch profit remittance tax
imposed under Section 28 (A)(5) of the 1997 Tax Code?
Explain your answer. (5%) ‘12 - Q1b
NO. the branch profit remittance tax is imposed only on the remit-
tances by branches of Foreign Corporation in the Philippines to their
Home Office abroad. It is the outbound branch profits that is subject to
the tax, not the inbound profits (Section 28(A)(5), NIRC).
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 device
for GOC’s refinery in the Philippines. Provided that the installation
part of the project may be sub-contracted to a local construction
company. Pursuant to the contract, the design and supply con-
tracts were done in Singapore by FC, while the installation works
were sub-contracted by FC with Philippine Construction Corpora-
tion (PCC), a domestic corporation. The project with a total cost
of P100 Million was completed in 2011 at the following cost com-
ponents: (design - P20 Million; machinery and equipment - P50
Million; and installation - P30 Million). 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 project. GOC pad FC as follows: P60 Million in 2010 and P40
Million in 2011 and FC paid PCC in foreign currency through a
Philippine bank as follows: P10 Million in 2010 and P20 Million 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. (5%) ‘12 - Q2a
No. FC is not liable to Philippine income tax. The revenues from the
design and supply contracts having been all done in Singapore are
income from sources without the Philippines, hence, not taxable to a
foreign corporation in the Philippines (Section 42, NIRC; CIR v.
Marubeni Corporation, G.R. No. 137377, December 18, 2001). Also,
with respect to the installation of the project which are services per-
formed within, the same is sub-contracted to PCC, a domestic corpora-
tion. Since FC has no branch or permanent establishment in the
Philippines, business profits earned by its pursuant to our treaty with
Singapore are exempt from income tax.
Note: If the examinee answered that the offshore portion of the con-
tract (design and supply) is not taxable in the Philippines while the
onshore portion (installation) is taxable invoking the source rules, it
should be given full credit. The question might be too technical for
students and expected new entrants to tax practice to discern.
Mr. Jose Castillo is a resident Filipino citizen. He purchased a
parcel of land in Makati City in 1970 at a consideration of P1 Mil-
lion. In 2011, the land, which remained undeveloped and idle, had
a fair market value of P20 Million. Mr. Antonio Ayala, another FIl-
ipino citizen, is very much interested in the property and he of-
fered to buy the same for P20 Million. The Assessor of Makati City
re-assessed in 2011 the property at P10 Million.
!17
b) Is Mr. Castillo liable for income tax in 2011 based on the
offer to buy by Mr. Ayala? Explain your answer. (3%); ‘12
- Q3b
No. Mr. Castillo 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 again realized resulting from a closed and complete
transaction (Madrigal v, Rafferty, G.R. No. L-12287, August 7, 1918)(c).
He shall be liable to pay the 6% capital gains tax (CGT) based in the
Gross Selling Price of the Property which is P20 Million plus the CHT
assumed by the buyer. He should file the return within 30 days from
date of the sale (date of notarization) and shall pay the tax as he files
the return (Section 24(D), NIRC).
ALTERNATIVE ANSWER:
The income tax due on the transaction is P1,276595.74 which is com-
puted as 6%of the Gross Selling Price (GSP). The tax base of the 6%
capital gains tax (CGT) is the higher between the GSP and the fair
market value (FMV). The GSP is P20 Million plus the CGT to be as-
sumed by the buyer, following the doctrine of constructive receipt of
income or a total of P21,276,595.74, which amount is higher than the
FMV of P20 Million.
c) Should Mr. Castillo agree to sell the land to Mr. Ayala in
2012 for P20 Million, 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 the tax be paid by the taxpayer? Explain your an-
swer. (5%) ‘12 - Q3c
[NOTE: THE BRI OMITTED TO INCLUDE THE SUGGESTED AN-
SWER FOR THIS SUB-ITEM.]
Mr. Pedro Aguirre, a resident citizen is working for a large real
estate development company in the country and in 2010, he was
promoted to Vice-President of the company. With more responsi-
bilities 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 P800,000.00, 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 P700,000.00 was donated
by him and registered in the name of his son. The corresponding
donor’s tax thereon was duly paid by the father.
b) What is the nature of the old car- capital asset or ordi-
nary asset? Explain your answer (3%); ‘12 - Q4b
The old car is a capital asset. It is property held by the taxpayer
(whether or not connected with his trade or business), but is not stock
in trade of the taxpayer or other property of a kind which would proper-
ly 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 the taxpayer (Section 39, NIRC)
c) Is Mr. Aguirre liable to pay income tax on the gain from
the sale of his old car? Explain your answer. (5%) ‘12 -
Q4c
Yes. Capital gain is P100,000. The amount of the taxable gain is sub-
ject to the holding period of the asset (Section 39, NIRC).
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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 P100,000.00. Mr. Pablo Gonzales is the Presi-
dent of PG Corporation and he receives P50,000.00 salary per
month. The spouses have only one (1) 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, 201. With
no liabilities, the estate of the late Pablo Gonzales was settled
extra-judicially in early 2011.
a) Is Mr. Pablo 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? Explain your answer. (5%); ‘12 - Q5a
Yes. Income to be declared: P600,000 (Rental Income P300,000 &
Salary P300,000); Personal and Additional Exemption P75,000 (Basic
of P50,000 & P25,000 for one minor child.)
b) Is Mrs. Teresita Gonzales required to file income tax
return for 2010? If no, how much income must she de-
clare for the year? How much personal exemption is she
entitled to? Explain your answer. (5%); ‘12 - Q5b
Yes. Rental Income of P600,000 (P300,000 share for January to June
2010 & P300,000 representing his interest in the income from the
properties comprising the estate for the period July to December). The
share of the minor child in the rental income (P300,000) earned after
death is not included in the return of the parent pursuant to Section
51(E) of the Tax Code.
c) 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? How much personal exemp-
tion is it entitled to? Explain your answer. (5%). ‘12 - Q5c
No. It has acquired no tax personality because the estate is not under
judicial settlement. The income of the properties is taxable to the heirs
in their individual capacity in accordance with their respective interest
in the inheritance.
On April 16, 2012, the corporation filed its annual corporate in-
come 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 corporation sought advice from you
and said that it contemplates to file an amended return for 2011,
which shows that instead of carry over 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 amended 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? Explain your answer. (5%); ‘12 - Q9a
Once the option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered IR-
REVOCABLE for the taxable year period and no application for tax
!18
refund or issuance of tax credit certificate shall be allowed therefor
(Section 76, NIRC).
b) Should the petition for review filed with the CTA on the
basis of the amended tax return be denied by the BIR
and the CTA, could the corporation still carry over such
excess payment of income tax in the succeeding years,
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? Explain your answer.
(5%). ‘12 - Q9b
Yes. The carry-over of excess income tax payments is no longer limit-
ed to the succeeding taxable year. Unutilized excess income tax pay-
ments 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 COrp. v. CIR, G.R> No.
181298, January 10, 2011).
“All events test”; When applicable. ’10 – Q2a
The “all events test” is a test applied in the realization of income
and expense by an accrual-basis tax payer. The test requires (1) the
fixing of a right to the income or liability to pay; and (2) the availability
of reasonably accurate determination of such income or liability, to
warrant the inclusion of the income or expense in the gross income or
deductions during the taxable year (CIR v. Isabela Cultural Corp., 515
SCRA 556 [2007].)
“Immediacy test”; When applicable. ’10 – Q2b
The “immediacy test” is applied to determine whether the accu-
mulation of after tax profits by a domestic or resident foreign corpora-
tion is really for the reasonable needs of the business. Under this test,
the reasonable needs of the business are construed to mean the im-
mediate needs of the business, including reasonably anticipated
needs. The corporation should be able to prove an immediate need for
the accumulation of earnings and profits, of the direct correlation of
anticipated needs to such accumulation of profits to justify the said
accumulation (Sec. 3, Rev. Reg. No. 2-2001; Mertens, Law of Federal
Income Taxation, Vol. 7, Chapter 39, p. 103, cited in Manila Wine Mer-
chants, Inc. v. CIR, 127 SCRA 483 [1984].)
True of False Items. ’10 – Q10a – Q10g
Gains realized by the investor upon redemption of shares of stock
in a mutual company are exempt from income tax [Sec. 32(B)(7)
(h), NIRC].
An individual subject to tax under Section 24, other than a non-
resident alien, may elect a standard deduction in an amount not
exceeding ten percent (10%) of his gross income. [Sec. 34(L),
NIRC, as amended by R.A. No. 9504.]
The amount of premiums not to exceed Two thousand four hun-
dred pesos (P2,400) per family or Two hundred pesos (P200) a
month paid during the taxable year for health and/or hospitaliza-
tion insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income:
Provided, That said family has a gross income of not more than
Two hundred fifty thousand pesos (P250,000) for the taxable year
[Sec. 34(M), NIRC.)
The Tax Code allows an individual taxpayer to pay in two equal
instalments, the first instalment to be paid at the time the return is
filed, and the second on or before July 15 of the same year, if his
tax exceeds P2,000 [Sec. 56(A)(2), NIRC.)
An individual taxpayer cannot adopt either the calendar or fiscal
year for purposes of filing his income tax return. If the taxpayer is
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Bar Questions and Answers
an individual, the taxable income shall be computed on the basis
of the calendar year. [Sec. 43, NIRC.]
The capitalization rules may be resorted to by the BIR in order to
compel corporate taxpayers to declare dividends to their stock-
holders regularly [Sec. 244, NIRC; Rev. Reg. No. 2-2001 implement-
ing Sec. 29, NIRC.]
Informer’s reward is subject to final withholding tax of 10% [Sec.
282, NIRC.]
A non-resident alien individual engaged in trade, business or in
the exercise of a profession in the Philippines shall be entitled to a
personal exemption in the amount equal to the exemptions allowed in
the income tax law in the country of which he is a subject - or citizen, to
citizens of the Philippines not residing in such country, not to exceed
the amount fixed in Section 34. A non-resident alien individual who
shall come to the Philippines and stay therein for an aggregate period
of more than one hundred eighty (180) days during any calendar year
shall be deemed a non-resident alien doing business in the Philippines.
[Sec. 25(A)(1) in relation to Sec. 35.]
Compensation income earner not entitled to claim for casualty
loss. ’10 - Q16
A is not entitled to claim a casualty loss because all his income
partake the nature of compensation income. Taxpayers earning com-
pensation income arising from personal services under an employer-
employee relationship are not allowed to claim deduction except al-
lowed under Section 34(M) referring only to P2,400 health and/or hos-
pitalization insurance premium. Perforce, the claim of casualty loss has
no legal basis (Sec. 34, NIRC.)
In 2009, Caruso, a resident Filipino citizen, received dividend in-
come from a U.S.-based corporation. The dividend remitted to
Caruso is subject to U.S. withholding tax with respect to a non-
resident alien like Caruso.
1. Advice to Caruso in order to lessen the impact of possi-
ble double taxation on the same income.
Caruso has the option either to claim the amount of income tax
withheld in the U.S. as a deduction from his gross income in the Philip-
pines, or to claim it as a tax credit [Sec. 34(C)(1)(b), NIRC.]
2. What if Caruso became a U.S. immigrant in 2008 and
had become a non-resident Filipino citizen, would your
answer be the same? ’10 - Q17
No. The income from abroad of a non-resident citizen is
exempt from the Philippine income tax; hence, there is no international
double taxation on said income (Sec. 23, NIRC.)
ABC, a domestic corporation, entered into a software license
agreement with XYZ, a non-resident foreign corporation based in
the U.S. Under the agreement which the parties forged in the U.S.,
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 rev-
enue it receives from customers who will use and apply the pro-
gram in the Philippines.
Tax Implication of the Transaction. ’10 – Q18
The amount payable under the agreement is in the nature of a
royalty. The term royalty is broad enough to include compensation for
the use of an intellectual property and supply of technical know-how as
a means of enabling the application or enjoyment of any such property
or right [Sec. 42(4), NIRC.] The royalties paid to the non-resident U.S.
corporation, equivalent to 5% of the revenues derived by ABC for the
use of the program in the Philippines, is subject to a thirty percent
(30%) final withholding tax, unless a lower tax rate is prescribed under
an existing tax treaty [Sec. 28(B)(1), NIRC.]
Melissa inherited from her father a 300 square-meter 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 cost of the
!19
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 the sale was P3,000 per square-meter.
1. Is Melissa liable to pay capital gains tax on the transac-
tion? If so, how much?
YES. The capital gains tax is 6% of the higher value between the
selling price (P600,000.00) and fair market value of the real property
(P900,000.00) or a tax in the amount of P54,000.00. The capital gains
tax is due on the sale of a real property classified as a capital asset
(Section 24(D)(1), NIRC.)
2. Is Melissa liable to pay VAT on the sale of the property?
If so, how much? ’09 – Q3
NO. The real property sold, being in the nature of a capital asset,
is not subject to VAT. The sale is subject to VAT only if the real property
is held primarily for sale to customers or held for lease in the ordinary
course of trade or business. A real property classified as a capital asset
does not include a real property held for sale or for lease, hence, it sale
is not subject to VAT (Sections 39 and 106, NIRC.)
Kenya International Airlines (KIA) is a foreign corporation, orga-
nized under the laws of Kenya. It is not licensed to do business in
the Philippines. Its commercial airplanes do not operate within
Philippine territory, or service passengers embarking from Philip-
pine airports. The firm is represented in the Philippines by its
general agent, PAL, a Philippine corporation. KIA sells airplane
tickets through PAL, and these tickets are serviced by KIA air-
planes outside the Philippines. The total sales of airline tickets
transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The
Commissioner of Internal Revenue assessed KIA deficiency in-
come taxes at the rate of 35% on its taxable income, finding that
KIA’s airline ticket sales constituted income derived from sources
within the Philippines. KIA filed a protest on the ground that the
P2,968,156.00 should be considered as income derived exclusive-
ly from sources outside the Philippines since KIA only serviced
passengers outside the Philippine territory. Is the position of KIA
tenable? ’09 – Q7
KIA’s position is not tenable. The revenue it derived in 1997 from
sales of airplane tickets in the Philippines, through its agent PAL, is
considered as income from within the Philippines, subject to 35% tax
based on its taxable income pursuant to Section 25(a)(1) of the Tax
Code of 1977. The transacting of business in the Philippines through
its local sales agent, makes KIA a resident foreign corporation despite
the absence of landing rights, thus, it is taxable on income derived
from within. The source of income is the property, activity or service
that produced the income. In the instant case, it is the sale of tickets in
the Philippine which is the activity that produced the income. KIA’s
income being derived from within, is subject to Philippine income tax
(CIR v. British Airways Overseas Corp., 149 SCRA 395 [1987].)
[Note: the taxable year involved in the problem is 1997, hence,
the suggested answer above follows the applicable provision of the old
Tax Code (National Internal Revenue Code of 1977] then in effect and
the prevailing jurisprudence on the matter. However, with the adoption
of the National Internal Revenue Code of 1997 (R.A. No. 8424) which
took effect on January 1, 1998, it is expected that the bar candidates
have lost track of the change in the tax law which transpired more than
a decade ago. For this reason, it is respectfully requested that an an-
swer based on the provisions of the New Tax Code shall be given full
credit. Accordingly, an answer framed in this wise should also be con-
sidered as a correct answer, viz:}
Alternative Answer:
YES. KIA is a non-resident foreign corporation which is taxable
only on income from within. The income of KIA as an international air
carrier is derived from sale of transportation services. Compensation
for services is an income from within if the services are performed in
the Philippines (Section 42(A)(3), NIRC.) The origination of the flight is
determinative of the source of income of the international air carrier. If
the flight originates in the Philippines to a foreign destination, the in-
 The Sigma Rho Fraternity
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come is an income from within; if it originates in a foreign country to
any destination, the income is from without.
In the case at bar, no flight will originate from the Philippines be-
cause KIA is not licensed to do business here. Hence, income is not
taxable in the Philippines (Section 28(A)(3)(a), NIRC.)
ABCD Corp. is a domestic corporation with individual and corpo-
rate shareholders who are residents of the US. For the 2nd quarter
of 1983, these US-based individuals and corporate stockholders
received cash dividends from the corporation. The corresponding
withholding tax on dividend income – 30% for individual and 35%
for corporate non-resident 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 withheld at source as tax on dividends
earned 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 Commis-
sioner denied the request. On January 17, 1985, ABCD filed a peti-
tion with the CTA reiterating its demand for refund.
1. Does ABDC Corp. have the legal personality to file the
refund on behalf of its non-resident stockholders?
YES. A withholding agent is not only an agent of the Government
but is also an agent of the taxpayer/income earner. Hence, ABCD is
also an agent of the beneficial owner of the dividends with respect to
the actual payment of the tax to the Government, such authority may
reasonably be held to include the authority to file a claim for refund and
to bring an action for recovery of such claim (Commissioner of Internal
Revenue v. Procter and Gamble Philippine Manufacturing Corp., 204
SCRA 377 [1991].)
2. Is the contention of ABCD Corp. correct? ’09 – Q10
YES. The provision of treaty must take precedence over and
above the provisions of the local taxing statute consonant with the
principle of international comity. Tax treaties are accepted limitations to
the power of taxation. Thus, the CTA should apply the treaty provision
so that the claim for refund representing the difference between the
amount actually withheld and paid to the BIR and the amount due and
payable under the treaty should be granted (Hawaiian-Philippine Com-
pany v. CIR, CTA Case No. 3887, May 31, 1988.)
Raffy and Wena, husband and wife, are both employed by XXX
Corp. After office hours, they jointly manage a coffee shop at the
ground floor of their house. The coffee shop is registered in the
name of both spouses. What is the correct way to prepare their
income tax return? ’09 – Q11
Raffy will declare his own compensation income and Wena will
declare hers. The income from the coffee shop shall be equally divided
between them. Each spouse shall be taxed separately on their corre-
sponding taxable income to be covered by one consolidated return for
the spouses.
YYY Corp. engaged the services of a law firm in 2006 to defend
the corporation’s title over a property used in the business. For
the legal services rendered in 2007, the law firm billed the corpo-
ration only in 2008. The corporation duly paid. YYY claimed this
expense as a deduction from gross income in its 2008 return,
because the exact amount of the expense was determined only in
2008. Is YYY’s claim of deduction proper? ’09 – Q12
NO. The expense is deductible in the year it complies with the all-
events test. The test is considered met if the liability is fixed, and the
amount of such liability is determined with reasonable accuracy. The
liability to pay is already fixed in 2007 when the services were ren-
dered, and the amount of such liability is determinable with reasonable
accuracy in the same year. Hence, the deduction should have been
claimed in 2007 and not in 2008 (CIR v. Isabela Cultural Corp., 515
SCRA 556 [2007].)
Ernesto, a Filipino citizen and a practicing lawyer, filed his income
tax return for 2007 claiming optional standard deductions. Realiz-
ing that he has enough documents to substantiate his profession-
!20
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 previous-
ly filed. Will Ernesto be allowed to amend his return? ’09 – Q16
NO. Since Ernesto has elected to claim the optional standard
deduction, said election is irrevocable for the taxable year for which the
return is made (Section 34(L), NIRC.)
Johnny transferred a valuable 10-door commercial apartment to a
designated trustee, Miriam, naming in the trust instrument Santi-
no, 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 apart-
ment.
1. What advice will you give the trustee?
I will advise the trustee that she has nothing to pay in annual
income taxes because the trust’s taxable income is zero. This is so
because the amount of income to be distributed annually to the benefi-
ciary is a deduction from the gross income of the trust but must be
reported as income of the beneficiary (Section 61(A), NIRC.)
2. 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?
’09 – Q19
NO. The trustee has to pay the income tax on the trust’s net in-
come determined annually if the income is required to be accumulated.
Once a taxable trust is established, its net income is either taxable to
the trust, represented by the trustee, or to the beneficiary depending
on the provision for distribution of income following the one-layer taxa-
tion scheme (Section 61(A), NIRC.)
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 the advertising
expense as deduction from gross income, claiming it as an ordi-
nary business expense. Is MFC correct? ’09 – Q20
NO. The protection of taxpayer’s brand franchise is analogous to
the maintenance of goodwill or title to one’s property which is in the
nature of a capital expenditure. An advertising expense, of such nature
does not qualify as an ordinary business expense, because the benefit
to be enjoyed by the taxpayer goes beyond one taxable year (Com-
missioner of Internal Revenue v. General Foods (Phils.) Inc., 401
SCRA 545 [2003].)
In January 1970, Juan Gonzales bought one hectare on agricul-
tural land in Laguna for P100,000. This property has a current
FMV of P10 million in view of the construction a concrete road
traversing the property. Juan agreed to exchange his agricultural
land in Laguna for a ½ hectare residential property located in
Batangas, with a FMV of P10 million, owned by Alpha Corp., a
domestic corporation engaged in the purchase and sale of real
property. Alpha acquired the property in 2007 for P9 million.
1. What is the nature of the real properties exchanged for
tax purposes – capital asset or ordinary asset?
With regard to the Laguna property, it is a capital asset because it
is agricultural land. The Batangas property, in contrast, is an ordinary
asset because it is either: (1) held for sale to customers in the ordinary
course of business or (2) real property used in the trade of business of
a realtor like Alpha Corp. (Sections 24(D)(1), 39(A)(1)(2), NIRC; and
Rev. Reg. 7-2003.)
2. Is Juan subject to income tax on the exchange of prop-
erty? If so, what is the tax base and rate?
YES. Juan must pay final income tax of 6% of the gross selling
price or the fair market value, whichever is higher (Section 24(D)(1),
NIRC; and Rev. Reg. 13-99.)
 The Sigma Rho Fraternity
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3. Is Alpha Corp. subject to income tax on the exchange of
property? If so, what is the tax base and rate? ’08 – Q1
YES. Alpha must pay corporate income tax at the rate of 35% of
the residential property’s fair market value of P10 million (Section
27(A), NIRC.)
John McDonald, a US citizen residing in Makati City, bought
shares of stock of a domestic corporation whose shares are listed
and traded in the PSE at the price of P2 million. Yesterday, he sold
the shares of stock through his Makati stockbroker at a gain of
P200,000.
1. Is John subject to Philippine income tax on the sale of
his shares through his stockbroker?
NO. R.A. No. 7717, now incorporated in Section 127 of the NIRC,
provides that the sale of shares of stock traded in the local stock ex-
change is subject to a percentage tax on the sales of shares, in lieu of
any kind of income tax.
2. If John directly sold the shares to his best friend, who is
another US citizen residing in Makati, at a gain of
P200,000, is he liable for Philippine income tax? If so,
what is the tax base and rate? ’08 – Q10
YES. He is liable for a final income tax of 5% on the first
P100,000 net capital gain, and 10% for any amount in excess of
P100,000 net capital gain (Section 24(C), NIRC.)
Pedro, a Filipino citizen residing in Makati City, owns a vacation
house and lot in SF, California, USA, which he acquired in 2000
for P15 million. On January 10, 2006, he sold said real property to
Juan, another Filipino citizen residing in QC, for P20 million. On
February 9, 2006, Pedro filed the CGT return and paid P1.2 million
representing 6% CGT. Since Pedro did not derive any ordinary
income, no ITR was filed by him for 2006. After the tax audit con-
ducted in 2007, the BIR officer assessed Pedro for deficiency
income tax computed as follows: P5 million (P20 million less P15
million x 35% = P1.75 million, without the CGT being allowed as
tax credit. Pedro consulted a real estate broker who said that the
P1.2 million CGT should be credited from the P1.75 million defi-
ciency income tax.
1. Is the BIR officer’s tax assessment correct?
The BIR officer correctly disallowed the credit of the final tax of
P1.2 million against the net income tax, which is subject to deductions.
However, the assessment of 35% is incorrectly imposed. The correct
rate is based on 5-32% tax scale which is applicable to individuals
(Section 24(D)(1) and Section 42(A)(5), NIRC.)
2. If you were hired by Pedro as his tax consultant, what
advice would you give him to protect his interest? ’08 –
Q11
I would advise him to demand the application of the 5-32% tax
scale instead of the fixed rate of 35% which applies only to domestic
corporations (Section 24(D)(1), NIRC.)
In 2007, spouses Renato and Judy Garcia opened peso and dollar
deposits at the Philippine branch of the Hong Kong Bank in Mani-
la. Renato is an overseas worker in HK while Judy lives and
works in Manila. During the year, the bank paid interest income of
P10,000 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 the BIR.
1. Are the interest incomes on the bank deposits of spous-
es Renato and Judy Garcia subject to income tax?
The interest income of Renato, who is a non-resident, is exempt
from income tax under Section 27(D)(3)(2), NIRC. Any bank interest of
non-residents from an expanded foreign currency deposit system is
exempt from income tax (Section 24(B)(1), NIRC.) An expanded for-
eign currency deposit refers to any bank authorized by the Central
Bank to transact business in local and acceptable foreign currencies.
!21
Judy Garcia, who is a resident of the Philippines, is liable for 7.5%
final income tax on interest income (Section 24(B)(1), NIRC.)
2. Is the bank correct in withholding the 20% final tax on
the entire interest income? ’08 – Q15
NO. The bank should withhold only 7.5% on the final interest
income of the wife. The husband is exempt.
ABC Corp. sold a real property to XYZ Corp. The property has
been classified as residential and with a zonal valuation of P1,000
per square-meter. The CGT was paid based on zonal value. The
Revenue District Officer (RDO), however, refused to issue the
Certificate Authorizing Registration for the reason that based on
his ocular inspection, the property should have a higher zonal
value as determined by the CIR because the area is already a
commercial area. Accordingly, the RDO wanted to make a recom-
putation of the taxes due by using the FMV appearing in a nearby
bank’s valuation list.
1. Does the RDO have the authority or discretion to unilat-
erally use the FMV as the basis for determining the CGT
and not the zonal value as determined by the CIR?
NO. The RDO has no authority to use a fair market value other
than that prescribed in the Tax Code. The fair market value prescribed
for the computation of any internal revenue tax shall be, whichever is
the higher of: (1) the fair market value as determined by the Commis-
sioner (referred to as zonal value); or (2) the fair market value as
shown in the schedule of values of the provincial and city assessors
(FMV per tax declaration) (Section 6(E), NIRC.) The use of the fair
market value appearing in a nearby bank’s valuation list, therefore, is
not allowed for purposes of computing internal revenue taxes.
2. Should the difference in the supposed taxable value be
legally subject to donor’s tax? ’07 – Q5
NO. The difference in the supposed taxable value cannot be
legally subject to donor’s tax, because the use of a fair market value
other than that prescribed by the Tax Code is not allowed for comput-
ing any internal revenue tax (Section 6(E), NIRC.)
Alternative Answer:
The difference in value is not subject to donor’s tax, because the
sale is not for insufficient consideration. A deemed gift subject to tax
arises only if a tax is avoided as a result of selling the property at a
price lower than its fair market value. In a sale subject to the 6% capital
gains tax, the tax is always based on the gross selling price or fair
market value, whichever is higher, and therefore, the seller cannot
avoid any tax by selling his property below its fair market value. This
means that the deemed gift provision provided for under the Tax Code
will not apply to a sale of real property subject to the 6% capital gains
tax (Section 100, NIRC.)
Z is a Filipino immigrant living in the US for more than 10 years.
He is retired and he came back to the Philippines as a balikbayan.
Every time he comes home to the Philippines, he stays here for
about a month. He regularly receives a pension from his former
employer in the US, amounting to US$1,000 a month. While in the
Philippines, with his pension pay from his former employer, he
purchased 3 condominium units in Makati which he is renting out
for P15,000 a month each.
1. Does the US$1,000 pension become taxable because he
is now residing in the Philippines?
The pension is not taxable. The law provides that pensions re-
ceived by resident or non-resident citizens of the Philippines from for-
eign government agencies and other institutions, private or public, are
excluded from gross income (Section 32(B)(6)(c), NIRC.)
Alternative Answer:
Z is still considered as a non-resident Filipino citizen who is sub-
ject to tax only on income derived from Philippine sources (Section 23,
NIRC.) His pension from the US is an income from without being in the
 The Sigma Rho Fraternity
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Bar Questions and Answers
nature of compensation for past services rendered outside the Philip-
pines (Section 42, NIRC.) Accordingly, the pension is not subject to
Philippine income tax.
2. Is his purchase of the 3 condominium units subject to
any tax?
YES. The purchase will be subject to the capital gains tax im-
posed on the sale of real property and the documentary stamp tax on
conveyance of real property, if these units are acquired from individual
unit owners or domestic corporations who hold them as capital assets
(Sections 24(D), 27(D)(5) and 196, NIRC.)
If these properties, however, were acquired from dealers and/or
lessors of real property, the purchase will give rise to the imposition of
the regular income tax, value-added tax and documentary stamp tax
(Sections 24-28 and 196, NIRC.)
Alternative Answer:
Yes, the purchase of the three condominium units is subject to the
following taxes:
1. Capital gains tax, if held as capital assets by the seller (Sec-
tions 24(D), 27(D)(5), NIRC), otherwise, the regular income
tax (Sections 24-28 and 196, NIRC);
2. Documentary stamp tax (Section 196, NIRC);
3. Local transfer tax (Section 135, LGC); and
4. Value-added tax if acquired from real estate developers or
lessors of real property.
Alternative Answer:
The purchase is only subject to the documentary stamp tax, a tax
that is imposed indifferently on the parties to a transaction (Sections
173 and 196, NIRC.) Other taxes that may be due on the transaction,
other than the documentary stamp tax, are the legal liabilities of the
seller which cannot be considered as a tax on the purchase but a tax
on the sale. To the purchaser, these taxes are not taxes but merely part
of the purchase price if, by the nature of the tax, the economic inci-
dence can be shifted to him.
3. Will Z be liable to pay income tax on the P45,000 month-
ly income? ’07 – Q6
YES. The rental income from property located in the Philippines is
considered as income derived from within. Z, a non-resident citizen, is
taxable on income derived from sources within the Philippines (Section
42 in relation to Section 23, NIRC.)
NCC gives all its employees (rank-and-file, supervisors and man-
agers) one sack of rice every month valued at P800 per sack. Dur-
ing an audit investigation made by the BIR, the BIR assessed the
company for failure to withhold the corresponding withholding
taxes on the amount equivalent to one sack of rice received by all
the employees, contending that the sack of rice is considered an
additional compensation for the rank-and-file employees and ad-
ditional fringe benefit for the supervisors and managers. There-
fore, the value of the one sack of rice every month should be con-
sidered as part of the compensation of the rank-and-file subject to
tax. For the supervisors and managers, the employer should be
the one assessed pursuant to Section 33(a) of the NIRC. Is there
legal basis for the assessment made by the BIR? ’07 – Q8
There is no legal basis for the assessment. The one sack of rice
given to the supervisors and managers are considered de minimis
fringe benefits considering that the value per sack does not exceed
P1,000, hence, exempted from the fringe benefits tax (Section 33,
NIRC as implemented by Rev. Reg. No. 10-2000.)
The one sack of rice per month given to the rank and file employ-
ees is likewise not subject to tax as part of compensation income. This
is a benefit of relatively small value intended to promote the health,
goodwill, contentment and efficiency of the employee which will not
constitute taxable income of the recipient (Section 2.781(A)(3) of Rev.
Reg. No. 2-98.)
!22
[Note that rice subsidy of P1,500 or one (1) sack of 50-kg rice per
month amounting to not more than P1,500 shall be considered as a
“de mininis benefit” not subject to income tax, hence, not subject to
withholding tax on compensation income of both managerial and rank-
and-file employees.]
Weber Realty Co. which owns a 3-hectare land in Antipolo entered
into a Joint Venture Agreement (JVA) with Prime Development Co.
for the development of said parcel of land. Weber Realty as owner
of the land contributed the land to the JV and Prime Development
agreed to develop the same into a residential subdivision and
construct residential houses thereon. They agreed that they
would divide the lots between them.
1. Does the JVA entered into by and between Weber and
Prime create a separate taxable entity?
The JVA entered into between Weber and Prime does not create
a separate taxable entity. The joint venture is formed for the purpose of
undertaking construction projects; hence, is not considered as a corpo-
ration for income tax purposes (Section 22(B), NIRC.)
2. Are the allocation and distribution of the saleable lots to
Weber and Prime subject to income tax and to expanded
withholding tax?
NO. The allocation and distribution of the saleable lots to Weber
and Prime is a mere return of their capital contribution. The income tax
and the expanded withholding tax is not due on a capital transaction
because no income is realized from it (BIR Ruling No. DA-192-2001,
October 17, 2001.)
3. Is the sale by Weber or Prime of their respective shares
in the saleable lots to third parties subject to income tax
and to expanded withholding tax? ’07 – Q9
YES. The sale by Weber and Prime of their respective shares to
third parties is a closed a completed transaction resulting in the realiza-
tion of income, subject to income tax and to the expanded withholding
tax (BIR Ruling DA-228-2006.)
Noel is a very bright computer science graduate. He was hired by
Hewlett Packard. To entice him to accept the offer of employment,
he was offered the arrangement that part of his compensation
would be an insurance policy with a face value of P20 million. The
parents of Noel are made the beneficiaries of the insurance policy.
1. Will the proceeds of the insurance form part of the in-
come of the parents of Noel and subject to income tax?
NO. The proceeds of the life insurance policies paid to the heirs
or beneficiaries upon the death of the insured are not included as part
of the gross income of the recipient (Section 32(B)(1), NIRC.) There is
no income realized because nothing flows to Noel’s parents other than
a mere return of capital, the capital being the life of the insured.
2. Can the company deduct from its gross income the
amount of the premium? ’07 – Q10
YES. The premiums paid are ordinary and necessary expenses of
the company. They are allowed as a deduction from gross income so
long as the employer is not a direct or indirect beneficiary under the
policy of insurance (Section 36(A)(4), NIRC.) Since the parents of the
employee were made the beneficiaries, the prohibition for their deduc-
tion does not exist.
Congress enacts a law imposing a 5% tax on gross receipts of
common carriers. The law does not define the term “gross re-
ceipts.” Express Transport, Inc., a bus company plying the Mani-
la-Baguio route, has time deposits with ABC Bank. In 2005, Ex-
press Transport earned P1 Million interest, after deducting the
20% final withholding tax from its time deposits with the bank.
The BIR wants to collect a 5% gross receipts tax on the interest
income of Express Transport without deducting the 20% final
withholding tax. Is the BIR correct? ’06 – Q7
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YES. The term “gross receipts” is broad enough to include income
not physically received but constructively received by the taxpayer.
After all, the amount withheld is paid to the government on its behalf, in
satisfaction of its withholding taxes. The fact that it did not actually
receive the amount does not alter the fact that it is remitted for its ben-
efit in satisfaction of its tax obligations. Since the income withheld is an
income owned by Express Transport, the same forms part of its gross
receipts (CIR v. Bank of Commerce, 459 SCRA 639 [2005]; CIR v.
Solidbank Corp., 416 SCRA 436 [2003]; CIR v. China Bank, 403 SCRA
634 [2003].)
Charlie, a widower, has two sons by his previous marriage. Char-
lie lives with Jane who is legally married to Mario. They have a
child named Jill. The children are all minors and not gainfully
employed.
1. How much personal exemption can Charlie claim?
Charlie can claim the personal exemption of P50,000. According
to R.A. No. 9504 (effective July 6, 2008) basic personal exemption is
Fifty thousand pesos (P50,000) for each individual taxpayer, regard-
less of status, i.e., whether single, married or head of the family.
2. How much additional exemption can Charlie claim? ’06 –
Q11
Each legitimate child from his previous marriage and his illegiti-
mate child with Jane entitles him to an additional personal exemption
of P25,000 for each dependent, if apart from being not more than 21
years old and not gainfully employed, they are unmarried, living with
and dependent upon Charlie for their chief support (Section 35(B),
NIRC.)
Gold and Silver Corp. gave extra 14th month bonus to all its offi-
cials and employees in the total amount of P75 Million. When it
filed its corporate ITR the following year, the corporation declared
a net operating loss. When the ITR of the corporation was re-
viewed by the BIR the following year, it disallowed as item of de-
duction the P75 Million bonus the corporation gave its officials
and employees on the ground of unreasonableness. The corpora-
tion claimed that the bonus is an ordinary and necessary expense
that should be allowed. If you were the BIR Commissioner, how
will you resolve the issue? ’06 – Q14
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 reasonable-
ness of a bonus as an additional compensation. This depends upon
many facts 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; its 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 operat-
ing losses is not a payment in good faith and is not normal to the busi-
ness, hence, unreasonable and would not qualify as ordinary and
business expense.
Explain briefly whether the following items are taxable or non-
taxable.
1. Income from jueteng;
It is taxable. The law imposes a tax on “all income derived from
whatever source” which means that it includes income whether legal or
illegal (Section 32(A), NIRC.)
2. Gains arising from expropriation of property;
Taxable. There is a material gain, not excluded by law, realized
out of a close and completed transaction. Gains from dealings in prop-
erty are part of gross income (Section 32(A)(3), NIRC.)
3. Taxes paid and subsequently refunded;
!23
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 (Section 34(C)(1),
NIRC.) It 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.
4. Recovery of bad debts previously charged off;
Recovery of bad debts previously charged off is taxable to the
extent of income tax benefit of said deduction (Section 34(E)(1),
NIRC.)
5. Gain on the sale of a car used for personal purposes. ’05
– Q2(1)
Gain on the sale of a car used for personal purposes is taxable.
This is a gain derived from dealings in property which is part of the
taxpayer’s gross income (Section 32(A)(3), NIRC.) There is a material
gain, not excluded by law, realized out of a closed and completed
transaction.
State with reasons the tax treatment of the following in the prepa-
ration of annual income tax returns:
1. Proceeds of life insurance received by a child as ir-
revocable beneficiary;
The proceeds of life insurance received by a child as irrevocable
beneficiary are not to be reported in the annual income tax returns,
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 return of
capital (Section 32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 973 [1922].)
2. 13th month pay and de minimis benefits;
13th month pay is excluded from the gross income for income tax
purposes to the extent of P30,000.00. Any excess will be included in
the gross income per income tax return as part of gross compensation
income (Section 32(B)(7)(e), NIRC.)
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
(Section 33(C), NIRC.)
3. Dividends received by a domestic corporation from (a)
another domestic corporation; and (b) a foreign corpora-
tion;
Dividends received by a domestic corporation from another do-
mestic corporation are not subject to income tax, hence, should not be
declared in the income tax return (Section 27(D)(4), NIRC.)
Dividends received by a domestic corporation from a foreign cor-
poration are subject to income tax and shall form part of the gross
income. There is no law exempting this type of dividend income from
income tax (Section 32(7), NIRC.)
4. Interest on deposits with (a) BPI Family Bank; and (b) a
local offshore banking unit of a foreign bank;
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% (Section 24(B)(1), NIRC.)
Both interest incomes are not to be declared as part of gross
income in the income tax return.
5. Income realized from (a) capital assets; and (b) ordinary
assets. ’05 – Q4(1)
Generally, income realized from the sale of capital assets are not
to be reported in the income tax returns as they are already subject to
final taxes (capital gains tax on real property and shares of stocks.)
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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 or shares of stocks in domestic corporations which are not
subject to final taxes.
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 constitutes either income derived from the conduct of trade or
business or a gain derived from dealings in property (Section 32(A)(2)
and (3), NIRC.)
An international airline with no landing rights in the Philippines
sold tickets in the Philippines 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? '05 – Q7
NO. While the tickets are sold here by the international airline, this
is 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 derived 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 pay-
ment of the ticket or passage document (Section 28(A)(3)(a), NIRC.)
Accordingly, the income mentioned is not derived from Philippine
sources.
JR was a passenger of an airline that crashed. He survived the
accident but sustained serious physical injuries which required
hospitalization for 3 months. Following negotiations with the air-
line and its insurer, an agreement was reached under the terms of
which JR was paid the following amounts: P500,000.00 for his
hospitalization; P250,000.00 as moral damages; and P300,000.00
for loss of income during the period of his treatment and recuper-
ation. In addition, JR received from his employer the amount of
P200,000.00 representing the cash equivalent of his earned vaca-
tion and sick leaves. Which, if any, of the amounts he received are
subject to income tax? ’05 – Q8
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 vaca-
tion allowances or sick leave credits which are paid to an employee
constitutes compensation (Section 2.78(A)(7) Rev. Reg. No. 2-98, as
amended by R.R. No. 10-2000.)
The amounts that JR received from the airline are excluded from
gross income and not subject to income tax because they are com-
pensation for personal injuries suffered from an accident as well as
damages received as a result of an agreement (negotiation) on ac-
count of such injuries (Section 32(B)(4), NIRC.)
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 a minimum of ½ 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. '05 –
Q9
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 (Section 32(B)(6)(b), NIRC.) The entire benefits, thus, are
not taxable and not subject to withholding tax under the Tax Code.
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 Mil-
lion. Upon the advice of a tax consultant, the parties agreed to
execute 2 deeds of sale, one indicating the zonal value of P2.0
Million as the selling price and the other showing the true selling
price of P2.5 Million. The tax consultant filed the CGT return using
the deed of sale showing the zonal value of P2.0 Million as the
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selling price. Discuss the tax implications and consequences of
the action taken by the parties. ’05 – Q13
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 (Section 24(D)(1), NIRC). The documentary stamp tax on the
conveyance of the property shall likewise be based on the higher value
(Section 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 eva-
sion. Here, it is clear that the three (3) requisite factors 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) and accompanying state of mind,
which is evil, in bad faith; and (3) a course of action which is unlawful
(Commissioner of Internal Revenue v. Estate of Benigno Toda, Jr., 438
SCRA 290 [2004].)
PQR Corp. claimed as a deduction in its tax returns the amount of
P1 million as bad debts. The corporation was assessed by the CIR
for deficiency taxes on the ground that the debts cannot be con-
sidered as “worthless,” hence they do not qualify as bad debts.
The company asks for your advice on “What factors will held in
determining whether or not the debts are bad debts?” ‘04 – Q5b
In order that debts be considered as bad debts because they
have become worthless, the taxpayer should establish that during the
year for which the deduction is sought, a situation developed as a re-
sult of which it became evident in the exercise of sound, objective
business judgment that there remained no practical, but only vaguely
theoretical, 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 follow-
ing:
1. The debtor has no property nor visible income;
2. The debtor has been adjudged bankrupt or insolvent;
3. Collateral shares have become worthless; and
4. There are numerous debtors with small amounts of debts
and further action on the accounts would entail expenses
exceeding the amounts sought to be collected.
Alternative Answer:
The following are the factors to be considered in determining
whether or not the debts are bad debts:
1. The debt must be valid and subsisting;
2. The debt is connected with the taxpayer's trade or business,
and is not between related parties;
3. There is an actual ascertainment that the debt is worthless;
and
4. The debt is charged-off within the taxable year (Philippine
Refining Co. v. Court of Appeals, 256 SCRA 667 [1996]; Rev.
Regs. No. 5-99.)
RAM married 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 ITR for the year 2003,
what should RAM indicate in the ITR as his civil status: (a) single;
(b) married; (c) Head of the family; (d) widower; (e) none of the
above? Why? ’04 – Q8a
He could indicate any of the first four choices.
According to R.A. No. 9504 (effective July 6, 2008) basic personal
exemption is Fifty thousand pesos (P50,000) for each individual tax-
payer, regardless of status, i.e., whether single, married or head of the
family.
But note Section 35(A) of NIRC - In the case of married individu-
als where only one of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
OXY is the President and CEO of ADD Computers, Inc. When OXY
was asked to join the government service as director of a bureau
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under the DTI, 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 his life. On ethical grounds, OXY objected to the
insurance purchase but ADD purchased the policy anyway. Its
annual premium amounted to P100,000. Is said premium de-
ductible by ADD? ’04 – Q8b
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 U.S. 488 [1940].) Paying
premiums 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 employ-
ee. 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 (Section 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 deduc-
tion from gross income (Section 36(A)(4), NIRC.)
A “fringe benefit” is defined as being any good, service or other
benefit furnished or granted in cash or in kind by an employer to
an individual employee. Would it be the employer or the employee
who is legally required to pay an income tax on it? '03 – Q3
It is the employer who is legally required to pay an income tax on
the fringe benefit. The fringe benefit tax is imposed as a FINAL WITH-
HOLDING TAX placing the legal obligation to remit the tax on the em-
ployer, 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 employ-
ee as a fringe benefit is considered tax paid hence, net of the income
tax due thereon. The person who is legally required to pay (same as
statutory incidence as distinguished from economic incidence) is that
person who, in case of non-payment, can be legally demanded to pay
the tax.
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 to his doctor
and P100,000 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 (for his doctor
and hospitalization bills), P100,000 by way of moral damages, and
P50,000 for what he had to pay his attorney for bringing his case
to court. Which, if any, of the foregoing awards are taxable in-
come to X and which are not? '03 – Q5
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 are 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 (Section 32(B) (4), NIRC.)
Distinguish a “capital asset” from an “ordinary asset.” ’03 – Q6a
The term “capital asset” regards all properties not specifically
excluded in the statutory definition of capital assets, the profits or loss
on the sale or the exchange of which are treated as capital gains or
capital losses. Conversely, all those properties specifically excluded
are considered as ordinary assets and the profits or losses realized
must have to be treated as ordinary gains or ordinary losses. Accord-
ingly, “capital assets” includes property held by the taxpayer whether or
not connected with his trade or business, but the term does not include
any of the following, which are consequently considered “ordinary as-
sets”:
1. 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;
!25
2. Property held by the taxpayer primarily for sale to customers
in the ordinary course of trade or business;
3. Property used in the trade or business of a character which
is subject to the allowance for depreciation provided in Sec-
tion 34 (F) of the Tax Code; or
4. Real property used in trade or business of the taxpayer.
The statutory definition of “capital assets” practically excludes
from its scope, it will be noted, all property held by the taxpayer if used
in connection with his trade or business.
What is the rationale for the rule prohibiting the deduction of capi-
tal losses from ordinary gains? '03 – Q6b
It is to insure that only costs or expenses incurred in earning the
income shall be deductible for income tax purposes consonant with the
requirement of the law that only necessary expenses are allowed as
deductions from gross income. The term “NECESSARY EXPENSES”
presupposes that in order to be allowed as deduction, the expense
must be business connected, which is not the case insofar as capital
losses are concerned. This is also the reason why all non-business
connected expenses like personal, living and family expenses, are not
allowed as deduction from gross income (Section 36(A)(1) of the 1997
Tax Code.)
Alternative Answer:
The prohibition of deduction of capital losses from ordinary gains
is designed to forestall the shifting of deductions from an area subject
to lower taxes to an area subject to higher taxes, thereby unnecessari-
ly resulting in leakage of tax revenues. Capital gains are generally
taxed at a lower rate to prevent, among others, the bunching of income
in one taxable year which is a liberality in the law begotten from mo-
tives of public policy (Rule on Holding Period). It stands to reason
therefore, that if the transaction results in loss, the same should be
allowed only from and to the extent of capital gains and not to be de-
ducted from ordinary gains which are subject to a higher rate of income
tax (Chirelstein, Federal Income Taxation, 1977 Ed.)
On 3 January 1998, X, a Filipino citizen residing in the Philippines,
purchased 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
100% stock dividend on all stockholders of record as of 31 De-
cember 1999 as a result of which X holding in Y Corporation be-
came 200 shares. Are the stock dividends received by X subject
to income tax? '03 – Q7
NO. Stock dividends are not realized income. Accordingly, the
different provisions of the Tax Code imposing a tax on dividend income
only includes, within its purview, cash and property dividends making
stock dividends exempt from income tax. However, if the distribution of
stock dividends is the equivalent of cash or property, as when the dis-
tribution results in a change of ownership interest of the shareholders,
the stock dividends will be subject to income tax (Section 24(B)(2);
Section 25(A)&(B); Section 28(B)(5)(b), NIRC.)
What is meant by the “tax benefit rule”? Give an illustration of the
tax benefit rule. ’03 – Q8
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 a deduction from
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 the taxpayer enjoyed
when such taxes were previously claimed as deduction from income.
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 years later, Y voluntarily paid his obligation pre-
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viously 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 years earlier.
The MKB-Phils. is a BOI-registered domestic corporation licensed
by the MKB-UK to distribute, support and use in the Philippines
its computer software systems, including basic and related mate-
rials for banks. The MKB-Phils. provides consultancy and techni-
cal services incidental thereto by entering into licensing agree-
ments 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 net income of MKB-
Phils. under the licensing agreement with banks considered roy-
alty subject to 20% final withholding tax? Why? If not, what kind
of tax will its income be subject to? '02 – Q3
YES. The income of MKB-Phils. under the licensing agreement
with banks shall be considered as royalty subject to the 20% final with-
holding tax. The term royalty is broad enough to include technical ad-
vice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commer-
cial undertaking, venture, project or scheme (Section 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.
How often does a domestic corporation file income tax returns for
income earned during a single taxable year? Explain the process.
What is the reason for such procedure? ’01 – Q4
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. (Section 75, NIRC.) Then, a final
adjustment return is required to be filed covering the total taxable in-
come for the entire year, calendar or fiscal (Section 76, NIRC.)
The reason for this procedure is to ensure the timeliness of collec-
tion to meet 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.
Alternative Answer:
The reason for the quarterly filing of tax returns is to allow partial
collection of the tax before the end of the taxable year and also to im-
prove the liquidity of government.
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? ’01 – Q5
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 per annum (Section 34(M).) This deduction is allowed if the
aggregate family income do not exceed P250.000 and by the spouse,
in case of married individual, who claims additional personal exemption
for dependents.
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. ’01 – Q6a
Income subject to 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 recipient is no longer required to include the item of in-
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come subjected to “final tax” as part of his gross income in his income
tax returns. Examples of income subject to final tax are dividend in-
come, interest from bank deposits, royalties, etc.
Distinguish “Exclusion from Gross Income” from “Deductions
From Gross Income.” Give an example of each. ’01 – Q6a
EXCLUSIONS 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;
and (3) It does not come within the definition of income (Section 61,
Rev. Reg. 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
deductions 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 some-
thing 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 exceed-
ing P30,000 which is an income not recognized for tax purposes. Ex-
ample of a deduction is business rental.
What do you think is the reason why cash dividends, when re-
ceived 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? ’01 – Q7
The reason for imposing final withholding tax rather than the pro-
gressive tax schedule on cash dividends received by a resident citizen
or alien from a domestic corporation is to ensure the collection of in-
come tax on said income. If we subject the dividend to the progressive
tax rate, which can only be done through the filing of income tax re-
turns, 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 compli-
ance 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 with-
holding 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 chance to offset such loss
against dividend income thereby depriving the government of the tax
on said dividend income.
"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 Php. 1 mil-
lion. 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
Php. 800,000 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 cor-
rect? Why? ’01 – Q8
NO. The 6% capital gains tax on sale of a real property held as
capital asset is imposed on the income presumed to have been real-
ized from the sale which is the fair market value or selling price thereof,
whichever is higher (Section 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.
What is the rationale of the law in imposing what is known as the
Minimum Corporate Income tax on Domestic Corporations? '01 –
Q9a
The imposition of the Minimum Corporate Income Tax (MCIT) is
designed to forestall the prevailing practice of corporations of over
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claiming deductions in order to reduce their income tax payments. The
filing of income tax returns showing a tax loss every year goes against
the business motive which impelled the stockholders to form the corpo-
ration. This is the reason why domestic corporations (and resident
foreign corporations) after the recovery period of four years from the
time they commence business operations, they become liable to the
MCIT whenever this tax imposed at 2% of gross income exceeds the
normal corporate income tax imposed on net income (Sponsorship
Speech, Chairman of Senate Ways and Means Committee.)
Is a corporation which is exempted from the minimum corporate
income tax automatically exempted from the regular corporate
income tax? ’01 – Q9b
NO. The minimum corporate income tax is a proxy for the normal
corporate income tax, not the regular corporate income tax paid by a
corporation. For instance, a proprietary educational institution may be
subject to a regular corporate income tax of 10% (depending on its
dominant income), but it is exempt from the imposition of MCIT be-
cause the latter is not intended to substitute special tax rates. So is
with PEZA enterprises, CDA enterprises etc.
[Note: If what is meant by regular income tax is the 30% tax rate
imposed on taxable income of corporations, the answer would be in
the affirmative, because domestic corporations and resident foreign
corporations are either liable for the 2% of gross income (MCIT) or
30% of net income (the normal corporate income tax) whichever is
higher.]
Alternative Answer:
No. A corporation which is exempted from the minimum corporate
income tax is not automatically exempted from the regular corporate
income tax. The reason for this is that MCIT is imposed only beginning
on the fourth taxable year immediately following the year in which such
corporation commenced its business operations. Thus, a corporation
may be exempt from MCIT because it is only on its third year of opera-
tions following its commencement of business operations.
Distinguish Allowable Deductions from Personal Exemptions.
Give an example of an allowable deduction and another example
for personal exemption. '01 – Q10
The distinction between allowable deductions and personal ex-
emptions 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 arbi-
trary 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 tax-
payer 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 exemp-
tions can be claimed only by individual taxpayers.
X was hired to watch over Y’s fishponds with a salary of Php.
10,000. To enable him to perform his duties well, he was also pro-
vided a small hut, which he could use as his residence in the
middle of the fishponds. Is the fair market value of the use of the
small hut by X a "fringe benefit" that is subject to the 32% tax
imposed by Section 33 of the NIRC? ’01 – Q11
NO. X is neither a managerial nor a supervisory employee. Only
managerial or supervisory employees are entitled to a fringe benefit
subject to the fringe benefits tax. Even assuming that he is a manager-
ial or supervisory employee, the small hut is provided for the conve-
nience of the employer, hence does not constitute a taxable fringe
benefit (Section 33, NIRC.)
!27
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 Php. 100,000 as a bribe to the approving offi-
cial. Is the Php. 100,000 deductible from the gross income of Cor-
poration A? On the other hand, is the Php. 100,000 taxable income
of the approving official? '01 – Q12
Since the amount of Php. 100,000 constitutes a bribe, it is not
allowed as a deduction from gross income of Corporation A (Section
34(A)(1)(c), NIRC.) However, to the recipient government official, the
same constitutes a taxable income. All income from legal or illegal
sources are taxable absent any clear provision of law exempting the
same. This is the reason why gross income had been defined to in-
clude income from whatever source derived (Section 32(A), NIRC.)
Illegally acquired income constitutes realized income under the claim
of right doctrine (Rutkin v. U.S., 343 U.S. 130.)
In the year 2000, X worked part time as a waitress in a restaurant
in Mega Mall from 8 AM to 4 PM 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 employers does not exceed her total per-
sonal and additional exemptions for the year 2000. Was she re-
quired to file an income tax return last April? ’01 – Q13
YES. An individual deriving compensation concurrently from two
or more employers at any time during the taxable year shall file an
income tax return (Section 51(A)(2)(b), NIRC.)
Alternative Answer:
It depends. An individual with pure compensation income is not
required to file an income tax returns when she meets the following
conditions; (1) the total gross compensation income does not exceed
Php60,000.00 and (2) the income tax has been correctly withheld,
meaning the tax withheld is equal to the tax due (Section 51(A)(2)(b),
NIRC.)
There is no mention in the problem of the amount of personal and
additional personal exemption to quantify how much is that compensa-
tion income that did not exceed the personal and additional personal
exemptions. There is no, mention, either, of whether or not the em-
ployers withheld taxes and that the amount withheld is equal to the tax
due. Whether or not she will be required to file an income tax return
last April 15 on the 2000 income will depend on her compliance with
the requirements of the law.
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? ’01 – Q14
NO. The income tax on all income derived from Philippine
sources by a non-resident alien who is not engaged in trade or busi-
ness in the Philippines is withheld by the lessee as a Final Withholding
Tax (Section 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 (Section 51, NIRC.)
To start a business of his own, Mario opted for an early retirement
from a private company after 10 years of service. Pursuant to the
company's qualified and approved private retirement benefit plan,
he was paid his retirement benefit which was subjected to with-
holding tax.
1. Is the employer correct in withholding the tax?
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 retir-
ing employee must have been in service of the same employer for at
least ten (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 Sigma Rho Fraternity
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2. Under what conditions are retirement benefits received
by officials and employees of private firms excluded
from gross income and exempt from taxation? '00 – Q6
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:
1. Under R.A. No. 4917 (those received under a reasonable
private benefit plan);
a. The retiring official or employee must have been in
service of the same employer for at least ten (10) years;
b. That he is not less than fifty (50) years at the time of
retirement; and
c. That the benefit is availed only once.
2. Under R.A. No. 7641 (those received from employers with-
out any retirement plan);
a. The received under existing collective bargaining
agreement and other agreements are exempt; and
b. In the absence of retirement plan or agreement provid-
ing for retirement benefits, the benefits are excluded
from gross income and exempt from income tax if:
i. Retiring employee must have served at least five
(5) years; and
ii. That he is not less than sixty (60) years of age but
not more than sixty-five (65).
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? '00 – Q7
Mr. Javier is exempt from income tax on his monthly GSIS pen-
sion (Section 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 (Section 51 (A)(2)(c), NIRC.)
Mr. Cortez is a non-resident alien based in HK. During the calen-
dar 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? '00 – Q8
Mr. Cortez being a non-resident alien individual who has stayed
for an aggregated period of more than 180 days during the calendar
year 1999, shall 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 (Section 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 reci-
procity on the personal exemptions (Section 34 (A) to (J) and (M) in
relation to Section 25(A)(1), NIRC, Section 35(D), NIRC.)
Under Article XIV, Section 4(3) of the 1987 Philippine Constitution,
all revenues and assets of non-stock, non-profit educational insti-
tutions, 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? '00 – Q9
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 infor-
mation 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;
!28
2. Certification of actual, direct and exclusive utilization of said
income for educational purposes;
3. Board resolution on proposed project to be funded out of the
money deposited in banks or placed in money market
placements (Finance Department Order No. 149-95 issued
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 re-
quirement for evidence to show actual, direct and exclusive use for
educational purposes. It is to be noted that the 1987 Philippine Consti-
tution does not distinguish with respect to the source or origin of the
income. The distinction is with respect to the use which should be ac-
tual, 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 dis-
tinguish with respect to source or origin, the Tax Code should not make
distinctions.
What is meant by taxable income? ’00 – Q10a
Taxable income means the pertinent items of gross income speci-
fied in the Tax Code, less the deductions and/or personal and addition-
al exemptions, if any, authorized for such types of income by the Tax
Code or other special laws (Section 31, NIRC.)
Jose, a young artist and designer, received a prize of P100,000 for
winning in the on-the-spot peace poster contest sponsored by a
local Lions Club. Shall the reward be included in the gross in-
come of the recipient for tax purposes? '00 – Q10b
NO. It is not includable in the gross income of the recipient be-
cause the same is subject to a final tax of 20%, the amount thereof
being in excess of P10,000 (Section 24(B)(1), NIRC.) The prize consti-
tutes 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 (Section 32(B)(7)(c), NIRC.) Since it is an on-the-spot con-
test, it is evident that he must have joined the contest in order to earn
the prize or award.
Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal
residence situated in Tandang Sora, QC for Ten Million Pesos
(P10,000,000) 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 sub-
ject to capital gains tax? ’00 – Q13
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
or eighteen (18) months from July 12, 2000.
2. The historical cost or adjusted basis of the real property sold
or disposed shall be carried over to the new principal resi-
dence 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 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.
5. If there is no full utilization of the proceeds of sale or disposi-
tion, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains
tax (Section 24(D)(2), NIRC.)
HK Co. is a Hong Kong corporation not doing business in the
Philippines. It holds 40% of the shares of A Co., a Philippine com-
pany, while the 60% is owned by P Co., a Filipino-owned Philip-
pine corporation. HK Co. also owns 100% of the shares of B Co.,
an Indonesian company which has a duly licensed Philippine
 The Sigma Rho Fraternity
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branch. Due to worldwide restructuring of the HK Co. group, HK
Co. decided to sell all its shares in A and B Cos. 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 pur-
chase price will be paid to HK Co's bank account in the US and
that title to A and B Cos. Shares will pass from HK Co. to P Co. in
HK where the stock certificates will be delivered. P Co. seeks your
advice as to whether or not it will subject the payments of pur-
chase price to Withholding Tax. '99 – Q7
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, there-
fore, 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 a 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 there from is considered as a foreign-sourced income.
Alternative Answer:
Yes, but only on the shares of stocks of A Co. and only on the
portion of the purchase price, which constitutes capital gains. Under
the Tax Code of 1997, the capital gains tax imposed under Section
28(B)(5)(c) is collectible via the withholding of tax at source pursuant to
Section 57 of the same Code.
[Note: The bar candidate might have relied on the provision of the
Tax Code of 1997 which provides that the capital gains tax is imposed
as withholding taxes (Section 57, NIRC.) This procedure is impractical
and, therefore, not followed in practice because the buyer/ withholding
agent will not be in a position to determine how much income is real-
ized by the seller from the sale. For this reason, any of the foregoing
suggested answers should be given full credit).]
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 stock 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 stock-
holders. Before remitting the dividends to HK Co., A Co. seeks
your advice as to whether it will subject the remittance to WT. No
need to discuss WT rates, if applicable. Focus your discussion on
what is the issue. '99 – Q9
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, how-
ever, the corporation transacts business in the Philippines directly and
independently of its branch, the taxpayer would be the foreign corpora-
tion itself and subject to the dividend tax similarly imposed on non-
resident foreign corporation. The dividends attributable to the Home
Office would not qualify as dividends earned by a resident foreign cor-
poration, which is exempt from tax (Marubeni Corp. v. CIR, 177 SCRA
500 [1989].)
A Co., a Philippine has two divisions — manufacturing and con-
struction. Due to the economic situation, it had to close its con-
struction division and layoff the employees in that division. A Co.
has a retirement plan approved by the BIR, which requires a min-
imum of 50 years of age and 10 years of service in the same em-
ployer 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 10
years of service at the time of termination employment.
b) Employees who do not meet either the age or length of ser-
vice A Co. plans to give the following:
i. For category (A) employees - the benefits under the BIR
approved plan plus an ex gratia payment of one month
of every year of service.
ii. For category (B) employees - one month for every year
of service.
!29
iii. For both categories, the cash equivalent of unused va-
cation and sick leave credits.
A Co. seeks your advice as to whether or not it will subject any of
these payments to WT. '99 – Q10
For category A employees, all the benefits received on account of
their separation are not subject to income tax, hence no withholding
tax shall be imposed. The benefits received under the BIR-approved
plan upon meeting the service requirement and age requirement are
explicitly excluded from gross income. The ex gratia payment also
qualifies as an exclusion from gross income being in the nature of
benefit received on account of separation due to causes beyond the
employees' control (Section 32(B), NIRC.) The cash equivalent of un-
used vacation and sick leave credits qualifies as part of separation
benefits excluded from gross income (CIR v. CA and Castañeda, 203
SCRA 72 [1991].)
For category B employees, all the benefits received by them will
also be exempt from income tax, hence not subject to withholding tax.
These are benefits received on account of separation due to causes
beyond the employees' control, which are specifically excluded from
gross income (Section 32(B), NIRC.)
Alternative Answer:
All of the payments are not subject to income tax and should not
also be subject to withholding tax. The employees were laid off, hence
separated for a cause beyond their control. Consequently, the amounts
to be paid by reason of such involuntary separation are excluded from
gross income, irrespective of whether the employee at the time of sep-
aration has rendered less than ten years of service and/or is below fifty
years of age (Section 32(B), NIRC.)
A Co., a Philippine corporation, has an executive (P) who is a Fil-
ipino 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 resi-
dence in the Philippines. The salary of P will be shouldered 50%
by A Co. while the other 50% plus housing, cost of living and edu-
cational 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 Philip-
pine residence.
Are these salaries, allowances and rentals subject to the Philip-
pine income tax? '99 – Q11
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 (Section
22(E), NIRC.) A non-resident citizen is taxable only on income derived
from Philippine sources (Section 23, NIRC.) The salaries and al-
lowances received from being employed abroad are incomes from
without because these are compensation for services rendered outside
of the Philippines (Section 42, NIRC.)
However, P is taxable on rental income for the lease of his Philip-
pine residence because this is an income derived from within, the
leased property being located in the Philippines (Section 42, NIRC.)
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 to acquire capital equipment or ma-
chinery.
Interest on loans used to acquire capital equipment or machinery
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 (Section 34(B)(3), NIRC.)
2. Depreciation of goodwill. ’99 – Q12
Depreciation for goodwill is not allowed as deduction from gross
income. While intangibles maybe allowed to be depreciated or amor-
 The Sigma Rho Fraternity
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Bar Questions and Answers
tized, it is only allowed to those intangibles whose use in the business
or trade is definitely limited in duration (Basilan Estates, Inc. v. CIR, 21
SCRA 17 [1967].) Such is not the case with goodwill.
Alternative Answer:
Depreciation of goodwill is allowed as a deduction from gross
income if the goodwill is acquired through capital outlay and is known
from experience to be of value to the business for only a limited period
(Section 107, Revenue Regulations No. 2.) In such case, the goodwill
is allowed to be amortized over its useful life to allow the deduction of
the current portion of the expense from gross income, thereby paving
the way for a proper matching of costs against revenues which is an
essential feature of the income tax system.
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.
RESERVE 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 (Section 34(E), NIRC.)
2. Worthless securities. ’99 – Q13
WORTHLESS SECURITIES, which are ordinary assets, are not
allowed as deduction from gross income because the loss is not real-
ized. However, if these worthless securities are 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
(Section 34(D)(4), NIRC.) This deduction, however, is not allowed to a
bank or trust company (Section 34(E)(2), NIRC.)
A Co., a Philippine corporation, issued preferred shares of stock
with the following features:
1. Non-voting;
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 pre-
ferred stock shall be paid in full or ratably as the assets
of the issuer may permit before any distribution shall be
made to common shareholders; 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 interests deductible from its gross Income for in-
come 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 interests. Decide. '99 –
Q14
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 paid thereon are not
considered “interest” which are allowed to be deducted from the gross
income of the corporation (Revenue Memorandum Circular No. 17-71,
July 12, 1971.)
TAX 2
Estate Tax
Globesman Services, Inc. received a final assessment notice with
formal letter of demand from the BIR for deficiency income tax,
value-added tax and withholding tax for the taxable year 2016
amounting to P48 million. Globesman Services, Inc., filed a
protest against the assessment, but the Commissioner of Internal
!30
Revenue denied the protest. Hence, Globes mart Services, Inc.
filed a petition for review in the CTA with an urgent motion to
suspend the collection of tax.
After hearing, the CTA Division issued a resolution granting the
motion to suspend but required Globesmart Services, Inc., to post
a surety bond equivalent to the deficiency assessment within 15
days from notice of the resolution. Giobesmart Services, Inc.
moved for the partial reconsideration ofthe resolution and for the
reduction of the bond to an amount it could obtain.
The CTA division issued another resolution reducing the amount
of the surety bond to P24 million. The latter amount was still more
than the net worth of Globesmart Services, Inc., as reported in its
audited financial statements.
(a.) May the collection of taxes be suspended? Explain your an-
swer. (3%)
(b) Is the CTA Division justified in requiring Globesmart ServIces,
Inc., to post a surety bond as a condition for the suspension of
the deficiency tax collection? Explain your answer. (3%)’17—Q14
(a) Yes. As provided by RA No. 1125, as amended by RA No. 9282,
that when in the opinion of the Court the collection by the aforemen-
tioned government agencies may jeopardize the interest of the Gov-
ernment and/or the taxpayer, the Court at any stage of the proceeding
may suspend the collection and require the taxpayer either to deposit
the amount claimed or to file a surety bond for not more than double
the amount with the Court.
(b) No. The Supreme Court in the Tridharma Case cited the case of
Pacquiao v. Court of Tax Appeals (G.R. No. 213394, April 6, 2016)
where it ruled that the CTA should first conduct a preliminary hearing
for the proper determination of the necessity of a surety bond or the
reduction thereof. In the conduct of its preliminary hearing, the CTA
must balance the scale between the inherent power of the State to tax
and its right to prosecute perceived transgressors of the law, on one
side, and the constitutional rights of petitioners to due process of law
and the equal protection of the laws, on the other. In this case, the CTA
failed to consider that the amount of the surety bond that it is asking
Globesmart Services, Inc. to pay is more than its net worth. It is, thus,
necessary for the CTA to first conduct a preliminary hearing to give the
taxpayer an opportunity to prove its inability to come up with such
amount.
State the conditions for allowing the following as deductions from
the gross estate of a citizen or resident alien for the purpose of
imposing estate tax:
a. Claims against the estate (2%) ‘15 - Q22a
In order that claims against the estate may be allowed as deductions
from the gross estate of a citizen or resident alien for purposes of im-
posing the estate tax, the law requires that at the time the indebted-
ness was incurred, the debt instrument was duly notarized. In addition,
if the loan was contracted within three (3) years before the death of the
decedent, the executor or administrator shall submit a statement show-
ing the disposition of the proceeds of the loan (Sec. 86(a)(1)(c), NIRC).
b. Medical expenses (2%) ‘15 - Q22b
The conditions for the allowance of medical expenses as deductions
from the gross estate of a citizen or resident alien are: (1) The medical
expenses must have been incurred within one (1) year before the
death of the decedent; (2) That the medical expenses are duly sub-
stantiated with receipts; and (3) The total amount thereof, whether paid
or unpaid, does not exceed P500,000.00 (Sec. 86A(6), NIRC).
 The Sigma Rho Fraternity
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Bar Questions and Answers
Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, Don Sebastian, single but head of the family, Filipino and resident
2013 after undergoing a major heart surgery. He left behind to his of Pasig, died intestate on November 15, 2009. He left the follow-
wife and two (2) kids several properties, to wit: (4%) ing properties:
(1) Family home in Makati City;
(2) Condominium unit in Las Pinas City; House and lot (family P 800,000
(3) Proceeds of health insurance from Take Care, a health home) in Pasig
maintenance organization in the Philippines; and
Vacation house and lot in 1,500,000
(4) Land in Alabama, U.S.A.
U.S.

The following expenses were paid: Agricultural land in Cavite 2,000,000

(1) Funeral expenses;
(2) Medical expenses; and Ca which is used by his 500,000
(3) Judicial expenses in the testate proceedings. brother in Cavite

a) What are the items that must be considered as part of Proceeds of life insurance 1,000,000
where he named his estate
the gross estate income of Mr. X? - ‘14 - Q14a
as irrevocable beneficiary

All the items of properties enumerated in the problem shall form part of Household furniture and 1,000,000
the gross estate of Mr. X. the composition of the gross estate of a appliances
decedent who is a Filipino citizen shall include all of his properties, real
or personal, tangible or intangible, wherever situated (Section 85, Claims against a cousin 100,000
NIRC). who has assets of P10,000
and liabilities of P100,000
Note: It is suggested that if the examinee answered NONE, the same Shares of stock in ABC 1000,000
should be given full credit because there is no gross state INCOME in Corp., a domestic
the problem. Likewise it is suggested that any answer should be given enterprise
full credit because of the question is worded in a confusing manner.

b) What are the items that may be considered as deduc-

tions from the gross estates. - ‘14 - Q14b The expenses and charges on the estate are as follows:

All the items of expenses in the problem are deductible from his gross
Funeral Expenses P 250,000
estate. However, the allowable amount of funeral expenses shall be
5% of the gross estate or actual, whichever is lower, but in no case Legal fees for the 500,000
shall the amount deductible go beyond P200,000. Likewise, the de- settlement of the estate
ductible medical expenses must be limited to those incurred within one
year prior his death but not to exceed P500,000. In addition to the Medical expenses of last 600,000
items of expenses mentioned in the problem, the standard deduction illness
amounting to P1 million is also allowed as a deduction from the gross
Claims against the estate 300,000
estate (Section 86, NIRC).

During his lifetime, Mr. Sakitin obtained a loan amounting to ten

million pesos from Bangko Uno for the purchase of a parcel of
land located in Makati City, using such property as collateral for
the loan. The loan was evidenced by a duly notarized promissory
note. Subsequently, Mr. Sakitin died. At the time of his death, the
unpaid balance of the loan amounted to P2 million. The heirs of
Mr. Sakitin deducted the amount of P2 million from the gross es-
tate, as part of the “Claims against the Estate.” Such deduction
was disallowed by the Bureau of Internal Revenue (BIR) Examiner,
claiming that the mortgaged property was not included in the
computation of the gross estate. Do you agree with the BIR? Ex-
plain. (4%) - ‘14 - Q20
Yes. Unpaid mortgages upon, or any indebtedness with respect to
property are deductible from the gross estate only if the value of the
decedent’s interest in said property, undiminished by such mortgage or
indebtedness is included in the gross estate (Section 86(A)(1)(e)). In
the instant case, the interest of the decedent in the property purchased
from the loan where the said property was used as the collateral, was
not included in the gross estate. Accordingly, the unpaid balance of the
loan at the time of Mr. Sakitin’s death is not deductible as “Claims
against the Estate”.
1. Properties and interests that should be included in the
computation in the gross estate of the decedent.
All the properties and interests earned in the problem should be
included in the gross estate of the decedent. The composition of the
gross estate of the decedent who is a citizen of the Philippines in-
cludes all properties, real or personal, tangible or intangible, wherever
situated and to the extent of the interest that he has thereon at the time
of his death [Sec. 85, NIRC.]
2. Net taxable estate of the decedent.
The net taxable estate of the decedent is P3,700,000.00. From
the gross estate of P7 million, the following deductions are allowed: (1)
funeral expenses of P200,000 which is the maximum allowed by law;
(2) legal fees amounting to P500,000; (3) medical expenses not to
exceed P500,000; (4) Claims against the estate of P300,000; (5) Fami-
ly Home equivalent to its fair market value (not to exceed P1 million) of
P800,000; and (6) standard deduction of P1 million, or a total allowable
deduction of P3,300,000 [Sec. 86, NIRC.]
The claim against the cousin amounting to P100,000, although
includable in the gross estate, cannot be claimed as a deduction be-
cause a debtor is not yet declared insolvent. Likewise, the inherited
property cannot give rise to a vanishing deduction for want of sufficient
factual basis.

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3. Due date and payment of the applicable tax return and
tax; Whether or not these dates can be extended.
The filing of the return and payment of the tax is within six (6)
months from date of death following the pay-as-you-file concept. The
period to file the return is extendible for a maximum of thirty (30) days
under meritorious cases as may be determined by the Commissioner.
The payment of the estate tax may also be extended when the Com-
missioner finds that the payment of the tax on the due date would im-
pose undue hardship upon the estate or any of the heirs. The period of
extension to pay shall not exceed five (5) years if the estate is settled
through courts, or shall not exceed two (2) years if settled extrajudicial-
ly. The Commissioner may require that the executor, or administrator,
or the beneficiary to furnish a bond as an amount more than double the
amount of the estate tax [Sec. 91, NIRC.]
4. If X, one of the compulsory heirs, renounces his share in
the inheritance in favor of the other co-heirs, is there
any tax implication of X’s renunciation? What about the
co-heirs? ’10 – Q15
If the renunciation is a general renunciation such that the share of
the heir who waives his right to the inheritance does to the other co-
heirs in accordance with their respective interest in the inheritance, the
law on accretion applies and the property waived is considered to pass
through the other co-heirs by inheritance; hence, it has no tax implica-
tion. Undoubtedly, when the compulsory heir renounced his share in
the inheritance, he did not donate the property which had never be-
come his. Such being the case, the renunciation is not subject to
donor’s tax.
If it is not a general renunciation in favor of the other co-heirs, the
heir renouncing his right is considered to have made a donation and
the renunciation is subject to donor’s tax. In both cases, however, the
renunciation has no tax implication to the other co-heirs (BIR Ruling
No. DA-(DT-039) 396-09, dated July 23, 2009.)
In 1999, Xavier purchased from his friend, Yuri, a painting for
P500,000. The FMV of the painting at the time of the purchase was
P1 million. Yuri paid all the corresponding taxes on the transac-
tion. 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 Zan-
dro’s death. Zandro died in 2007, and Wilma succeeded to the
property.
1. Should the painting be included in the gross estate of
Xavier in 2001 and thus, be subject to estate tax?
YES. The transmission of the property from Xavier to Zandro is
subject to the estate tax because this is a property within Xavier’s con-
trol to dispose upon his death. The composition of the gross estate
pertains to properties owned and existing as of the time of death and to
be transferred by the owner by death (Section 85, NIRC.)
2. Should the painting be included in the gross estate of
Zandro in 2007 and thus, be subject to estate tax?
NO. The transmission from the first heir, legatee or donee in favor
of another beneficiary, in accordance with the desire of the predeces-
sor is an exempt transfer (Section 87, NIRC.) Zandro has no control
over the disposition of the property at the time of his death; hence, the
estate tax which imposed the privilege of transmitting properties upon
his death will not apply.
Alternative Answer:
No. The property passes from Zandro to Wilma by virtue of the
special power of appointment granted by Xavier. The law includes as
part of the gross estate of the decedent a property passing under gen-
eral (not special) power of appointment. The grantee of the power to
appoint, Zandro, has no control over the disposition of the property
because it is the desire of the grantor of the power that the property will
go to a specific person. This being so, the painting should not be in-
cluded in the gross estate of Zandro, hence, it is not subject to estate
tax (Section 85(D), NIRC.)
!32
3. May a vanishing deduction be allowed in either or both
of the estates? ’09 – Q13
Vanishing deduction shall be allowed to the estate of Xavier but
only to the extent of ½ of the property which is the portion acquired by
gift (Section 100, NIRC.)
The donation took place within 5 years (1999 to 2001) from death
of Xavier; hence, there is a vanishing deduction. However, Zandro’s
estate will not be entitled to claim vanishing deduction because, first
and foremost, the property previously taxed is not includable in his
gross estate and second, even if includable, the present decedent died
more than 5 years from the death of the previous decedent, and that a
vanishing deduction is already claimed by the previous estate involving
the same property.
Jose, a Filipino citizen, married to Maria, died in vehicular acci-
dent on July 10, 2007. The spouses owned, among others, a 100-
hectare agricultural land in Sta. Rosa, Laguna with current FMV of
P20 million, which was the subject matter of Joint Venture
Agreement about to be implemented with Star Land Corp. (SLC), a
well-known real estate development company. He bought the said
real property for P2 million 50 years ago. On January 5, 2008, 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 com-
mercial centers. As a result, the prices of real properties in the
locality have doubled. The Administrator of the Estate of Jose
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.
1. Is the BIR correct in valuing the real property at P40
million?
NO, the BIR is not correct. The property valuation should be fixed
at P20 million, which was the value at the time of the death of Jose
Cernan (Section 88(A), NIRC.)
2. If you disagree, what is the correct value to use for es-
tate tax purposes? ’08 – Q2
For purposes of computing the estate tax, the value should have
been P20 million because that was the value of the property at the time
of death (Section 88(A), NIRC.)
While driving to Baguio 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, As-
sunta also died in the hospital. The spouses and their son had the
following assets and liabilities at the time of death:
Assunta Conjugal Jaime
Exclusive Exclusive
Cash 10,000,000 1,200,000
Cars 2,000,000 500,000
Land 5,000,000 2,000,000
4,000,000
Residential
House
Mortgage 2,500,000
Payable
F u n e r a l 300,000
Expenses
1. Is the Estate of Jaime Asuncion liable for estate tax?
 The Sigma Rho Fraternity
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NO. By availing of the standard deduction of P1 million (Section
86(A)(5), NIRC); funeral expenses not exceeding P200,000 and in no
case, to exceed 5% of the gross estate (Section 86(A)(1)(a), NIRC);
and medical expenses not more than P500,000 (Section86(A)(6),
NIRC), the result is a negative estate. Therefore, there is no estate tax
liability.
2. Is vanishing deduction applicable to the Estate of As-
sunta Asuncion? ’08 – Q6
No. In order to claim a vanishing deduction, Section 86(A)(2),
NIRC requires that the estate tax of the property from Jaime to Assunta
has already been paid. However, in this case, it is unlikely that the
estate tax has been paid because the difference of only one day be-
tween the respective times of death.
Another Alternative Answer:
Yes, provided that the estate tax of the property of Jamie was
paid before Assunta died, as provided for in Section 86(A)(2), NIRC.
Vanishing deduction equal to 100% is applicable to Assunta’s estate as
regards ½ cash she inherited from her son Jaime. Assunta died within
one (1) year after receiving her share of Jaime’s estate.
Antonia Santos, 30 years old, gainfully employed, is the sister of
Edgardo Santos. She died in an airplane crash. Edgardo is a
lawyer and he negotiated with the airline company and insurance
company and they were able to agree to a total settlement of P10
million. This is what Antonia would have earned as somebody
who was gainfully employed. Edgardo was her only heir.
1. Is the P10 million subject to estate tax?
NO. The estate tax is a tax on the privilege enjoyed by an individ-
ual in controlling the disposition of her properties to take effect upon
her death. The P10M is not a property existing as of the time of dece-
dent’s death; hence, it cannot be said that she exercised control over
its disposition. Since the privilege to transmit the property is not exer-
cised by the decedent, the estate cannot be imposed thereon (Defini-
tion of Estate Tax, p. 184, Vitug, Compendium of Tax Law and Ju-
risprudence, Third Revised Edition.)
2. Should Edgardo report to P10 million as his income
being Antonia’s only heir? ’07 – Q7
The P10M should not be reported by Edgardo as his income. The
amount received in a settlement agreement with the airline company
and insurance company is an amount received from the accident in-
surance covering the passengers of the airline company and is in the
nature of compensation for personal injuries and for damages sus-
tained on account of such injuries, which is excluded from the gross
income of the recipient (Section 32(B)(4), NIRC.)
Alternative Answer:
NO. The P10M having been received for the loss of life, is com-
pensatory in nature, hence, is not considered as an income but a mere
return of capital. Income is any wealth which flows to the taxpayer
other than a mere return of capital (Madrigal v. Rafferty, 38 Phil 414
[1918].)
Remedios, a resident citizen, died on November 10, 2006. She
died leaving 3 condominium units in QC valued at P5 million
each. Rodolfo was her only heir. He reported the death on De-
cember 5, 2006 and filed the estate tax return on March 30, 2007.
Because he needed to sell one unit of the condominium to pay for
the estate tax, he asked the CIR to give him one year to pay the
estate tax due. The Commissioner approved the request for ex-
tension of time provided that the estate tax be computed on the
basis of the value of the property at the time of payment of the
tax.
1. Does the Commissioner of Internal Revenue have the
power to extend the payment of estate tax? If so, what
are the requirements to allow such extension?
!33
YES. The Commissioner may allow an extension of time to pay
the estate tax if the payment on the due date would impose undue
hardship upon the estate or any of the heirs. The extension, in any
case, will not exceed two (2) years if the estate is not under judicial
settlement or five (5) years if it is under judicial settlement. The Com-
missioner may also require the posting of a bond to secure the pay-
ment of the tax (Section 91(B), NIRC.)
Alternative Answer:
Yes. The requirements to be complied with so that an extension
may be allowed are: (1) a request for extension may be filed before the
expiration of the original period to pay which is within 6 months from
death; (2) there must be a finding that the payment on the due date of
the estate tax would impose undue hardship upon the estate or any of
the heirs; (3) the extension must be for a period not exceeding 5 years
if the estate is settled judicially or 2 years if settled extra-judicially; and
(4) the Commissioner may require the posting of a bond in an amount
not exceeding double the amount of tax to secure the payment thereof
(Section 91(B), NIRC.)
2. Does the condition that the basis of the estate tax will be
the value at the time of the payment have legal basis?
’07 – Q12
NO. The valuation of properties comprising the estate is the fair
market value as of the time of death. No other valuation date is allowed
by law (Section 88, NIRC.)
Vanishing deduction is availed of by taxpayers to:
a. Correct his accounting 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. ’06 – Q5(1)
I choose (d), reduce his gross estate. Vanishing deduction or
property previously taxed is one of the items of deduction allowed in
computing the net estate of a decedent (Sections 86(A)(2) and 86(B)
(2), NIRC.)
Is the approval of the court, sitting as probate or estate settlement
court, required in the enforcement and collection of estate tax?
’05 – Q1e
NO. The approval of the court, sitting in probate, is not a manda-
tory requirement in the collection of estate tax. On the contrary, under
Section 94 of the NIRC, it is the probate or settlement court which is
forbidden to authorize the executor or judicial administrator of the
decedent’s estate, to deliver any distributive share to any party inter-
ested in the estate, unless a certification from the Commissioner of
Internal Revenue that the estate tax has been paid is shown (Marcos II
v. Court of Appeals, 273 SCRA 47 [1997].)
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 de-
cided 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 resthouse 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. corpora-
tion. Which of the foregoing assets shall be included in the tax-
able gross estate in the Philippines? ’05 – Q12
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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 per-
sonal, tangible or intangible, wherever situated at the time of his death
(Section 85, NIRC.) Thus, the following shall be included in his taxable
gross estate in the Philippines:
1. Bank deposits with Citibank Makati and Citibank Orland,
Florida;
2. A resthouse in Orlando, Florida;
3. A condominium unit in Makati;
4. Shares of stock in the Philippine subsidiary of the U.S. com-
pany where he worked;
5. Shares in San Miguel Corp. and PLDT;
6. Shares of stock in Disney World in Florida; and
7. U.S. treasury bonds.
The proceeds from a life insurance policy issued by a U.S. Corpo-
ration 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, the
executor or administrator. If the designated is other than the estate,
executor or administrator and the designation is irrevocable, the pro-
ceeds shall not form part of his gross estate (Section 85(E), NIRC.)
VCC is the administrator of the estate of his father NGC, in the
estate proceedings pending before the MM RTC. Last year, he
received from the CIR a deficiency tax assessment for the estate
in the amount of P1,000,000. But he ignored the notice. Last
month, the BIR effected a levy on the real properties of the estate
to pay the delinquent tax. VCC filed a motion with the probate
court to stop the enforcement and collection of the tax on the
ground that the BIR should have secured first the approval of the
probate court, which had jurisdiction over the estate, before levy-
ing on its real properties. Is VCC's contention correct? ’04 – Q9a
NO. VCC's contention is not correct. The approval of the probate
court is not necessary. Payment of estate taxes is a condition prece-
dent for the distribution of the properties of the decedent and the col-
lection of estate taxes is executive in nature for which the court is de-
void of any jurisdiction. Hence, the approval of the court, sitting in pro-
bate, or as a settlement tribunal is not a mandatory requirement in the
collection of estate taxes (Marcos II v. Court of Appeals, 273 SCRA 47
[1997]).
On June 30, 2000, X took out a life insurance policy on his own
life in the amount of P2,000,000. He designated his wife, Y, as
irrevocable beneficiary to P1,000,000 and his son, Z, to the bal-
ance of P1,000,000 but, in the 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.
1. Are the proceeds of the insurance subject to income tax
on the part of Y and Z for their respective shares?
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 the death of the insured con-
stitute a compensation for the loss of life, hence a return of capital,
which is beyond the scope of income taxation (Section 32(B)(1),
NIRC.)
2. Are the proceeds of the insurance to form part of the
gross estate of X? '03 – Q4
Only the proceeds 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 the 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 while the insured/decedent
reserved the right to substitute Z as beneficiary for another 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-
tion 85(E), NIRC.)
!34
X dies in year 2000 leaving a bank deposit of P2 million under
joint account with his associates in a law office. Learning of X’s
death from the newspapers, the CIR 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
time of his death. May the bank holding the deposit refuse to
comply on the ground of the Secrecy of Banks Deposit Law? ’03 –
Q9
NO. The Commissioner of Internal Revenue 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 secrecy of bank de-
posits (Section 6(F), NIRC.) 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 (Section 97, NIRC.) Hence, to be able to give the required
certification, the inclusion of the deposit is imperative, which may be
made possibly only through the inquiry made by the Commissioner.
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? ’01 – Q15
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 been made in contemplation of death (Roces v. Posadas, 58
Phil. 108 [1933].) 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 gross estate.
On the 1st anniversary of the death of Y, his heirs hosted a sump-
tuous dinner for his doctors, nurses, and others who attended to
Y during his last illness. The cost of the dinner amounted to Php
50,000. Compared to his gross estate, the Php 50,000 did not ex-
ceed 5% of the estate. Is the said cost of the dinner to commemo-
rate his one year death anniversary deductible from his gross
estate? ’01 – Q16
NO. This expense will not fall under any of the allowable deduc-
tions from gross estate. Whether viewed in the context of either funeral
expenses or medical expenses, the same will not qualify as a deduc-
tion. Funeral expenses may include medical expenses of the last ill-
ness but not expenses incurred after burial nor expenses incurred to
commemorate the death anniversary (De Guzman V. De Guzman, 83
SCRA 256 [1978].) Medical expenses, on the other hand, are allowed
only if incurred by the decedent within one year prior to his death (Sec-
tion 86(A)(6), NIRC.)
Discuss the rule on situs of taxation with respect to the imposi-
tion of the estate tax on property left behind by a non-resident
decedent. '00 – Q15a
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, tangi-
ble or intangible, wherever situated to the extent of the interest therein
of the decedent at the time of his death (Section 85 (A), NIRC of 1997.)
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 es-
 The Sigma Rho Fraternity
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tate. Provided, that, with respect to intangible personal property, we
apply the rule of reciprocity (Section 85 (A), NIRC of 1997.)
Felix, 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 NY, USA, leaving behind real properties situated in NY,
USA; his family home in Valle Verde, Pasig City; an office condo-
minium in Makati City; shares of stocks in San Miguel Corp.; cash
in bank; and personal belongings. The decedent is heavily in-
sured 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? '00 – Q15b
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 the
interest he had at the time of his death because he is a Filipino citizen
(Section 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 revoca-
tion, or to the extent of the amount receivable by any beneficiary des-
ignated in the policy of insurance, except when it is expressly stipulat-
ed that the designation of the beneficiary is irrevocable (Section 85 (E),
NIRC.)
The DEDUCTIONS that may be claimed by the estate are:
1. The actual funeral expenses or in an amount 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) (Section 86 (A)(1)(a), NIRC.)
2. The judicial expenses in the testate or intestate proceedings
(Sec. 86(A)(1), NIRC.)
3. 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 certifica-
tion of the barangay captain of the locality that the same
have been the decedent's family home (Section 86 (A) (4),
NIRC.)
4. The standard deduction of P1,000,000 (Section 86(A)(5),
NIRC.)
5. Medical expenses incurred within one year from death in an
amount not exceeding P500,000 (Section 86(A)(6), NIRC.)
The ESTATE TAX RETURN shall be filed within six (6) months
from the decedent's death (Section 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 (Section 90 (C), NIRC.)
Except in cases where the Commissioner of Internal Revenue
otherwise permits, the estate tax return shall be filed with an autho-
rized 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 (Section 90(D),
NIRC.)
A died, survived by his wife and 3 children. The estate tax was
properly paid and the estate settled and divided and distributed
among the 4 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? '99 – Q4a
YES, the BIR is correct. In a case where the estate has been dis-
tributed 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 inheri-
tance 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 pur-
suing the second remedy although this will give rise to the right of the
!35
heir who pays to seek reimbursement from the other heirs (CIR v.
Pineda, 21 SCRA 105 [1965].) In no case, however, can the BIR en-
force the tax liability in excess of the share of the widow in the inheri-
tance.
Donor’s Tax
CMI School, Inc., a non-stock, non-profit corporation, donated its
three parcels of idle land situated in the Municipality of Cuyapo,
Nueva Ecija to SLC University, another non-stock, non-profit cor-
poration, in recognition of the latter's contribution to and partici-
pation in the spiritual and educational development of the former.
(a) Is CMI School, lnc., liable for the payment of donor 's tax? Ex-
plain your answer. (2.5%)
(b) If SLC University later sells the three parcels of idle land to
Puregold Supermarket, Inc., a stock corporation, will SLC Univer-
sity be liable for capital gains tax? Explain your answer. (3%)
(c) If SLC University donates the three parcels of idle land in favor
of the Municipality of Cuyapo, Nueva Ecija, will SLC University be
liable for donor's tax? Explain your answer. (2.5%) ’17—Q19
(a) No. Gifts made by a resident in favor of an educational corporation
or institution shall be exempt from donor's tax (Section 101(A)(3), 1997
NIRC, as amended). Considering that SLC University is a non-stock,
non-profit corporation, and the property donated was made by a resi-
dent, then, such exemption under the law applies to the present case.
(b) Yes. The gain presumed to have been realized on the sale, ex-
change or disposition of lands and/or buildings which are not actually,
used in the business of a corporation and are treated as capital assets
small be subject to capital gains tax (Section 27(D)(5), 1997 NJRC, as
amended). Likewise, Section 30 of the NLRC subjects to income tax
(capital gains tax) all income from properties, real or personal, or from
any activity conducted for profit, irrespective of the disposition of the
income, by all tax exempt corporations.
(c) No. Gifts made by a resident to any political subdivision of the Na-
tional Government shall be exempt from donor’s tax (Section 101 (A)
(2), 1997 NIRC, as amended).
In 2011, Solar Computer Corporation (Solar) purchased a propri-
etary membership share covered by Membership Certificate No. 8
from the Mabuhay Golf Club, Inc. for PS00,000.00. On December
27, 2012, it transferred the same to David, its American consul-
tant, to enable him to avail of the facilities of the Club. David exe-
cuted a Deed of Declaration of Trust and Assignment of Shares
wherein he acknowledged the absolute ownership of Solar over
the share; that the assignment was without any consideration;
and that the share was placed in his name because the Club re-
quired it to be done. In 2013, the value of the share increased to
P800,000.00.
Is the said assignment a "gift" and, therefore, subject to gift tax?
Explain. (5%) ’16 – Q8
No. The transfer is not a taxable donation because there is no divest-
ment of ownership by the transferor. The purpose of the transfer is
simply to allow David to avail of the facilities of the Club. The execution
of a “Deed of Declaration of Trust and Assignment of Shares” where
the absolute ownership by Solar of the share is acknowledged would
show that there is no relinquishment of ownership by Solar. The trans-
fer being merely a transfer in form but not in substance, the same is
not subject to gift tax.
ALTERNATIVE ANSWER:
The assignment is a “gift” subject to gift tax. The absence of donative
intent does not exempt the sales of stock transaction from donor’s tax
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since Sec. 100 of the NIRC categorically states that the amount by
which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift. Thus, even if there is no actual
donation, the difference in price is considered a donation by fiction of
law (Philam Life and General Insurance Co. v. Sec. of Finance and
CIR, 741 SCRA 579 [2014]).
Mr. L owned several parcels of land and he donated a parcel each
to his two children. Mr. L acquired both parcels of land in 1975 for
P200,000.00. At the time of donation, the lair market value of the
two parcels of land, as determined by the CIR, was P2,300,000.00;
while the fair market value of the same properties as shown in the
schedule of values prepared by the City Assessors was
P2,500,000.00. What is the proper valuation of Mr. L’s gifts to his
children for the purpose of computing donor’s tax? (3%) ‘15 - Q17
The valuation of Mr. L’s gift to his children is the fair market value
(FMV) of the property at the time of donation. The FMV is the higher of
the FMV as determined by the Commissioner or the FMV as shown in
the schedule of values fixed by the provincial and city assessors. In
this case, for the purpose of computing donor’s tax, the proper valua-
tion is the value prepared by the City Assessors amounting to
P2,500,000.00 because it is higher than the FMV determined by the
CIR (Sec. 102 in relation to Sec. 88(B), NIRC).
Mr. De Sarapen is a candidate in the upcoming Senatorial elec-
tions. Mr. De Almacen, believing in the sincerity and ability of Mr.
De Sarapen to introduce much needed reforms in the country,
contributed P500,000.00 in cash to the campaign chest of Mr. De
Sarapen. In addition, Mr. De Almacen purchased tarpaulins, t-
shirts, umbrellas, caps and other campaign materials that he also
donated to Mr. De Sarapen for use in his campaign.
Is the contribution of cash and campaign materials subject to
donor’s tax? (4%) - ‘14 - Q2
The Tax Code provides that any contribution in cash or in kind to any
candidate, political party or coalition of parties for campaign purposes
shall be governed by the Election Code (Section 99(C), NIRC). On the
other hand, the Omnibus Election provide, that any provision of the law
to the contrary notwithstanding any contribution in cash or in kind to
any candidate or political party or coalition of parties for campaign
purposes, duly reported to the Commission shall not be subject to any
payment of gift tax (Section 13, R.A. 7166). Hence, the contributions
will be exempt from donor’s tax if they are duly reported to the Com-
mission. Otherwise, the contributions will be subject to donor’s tax.
In the settlement of the estate of Mr. Barbera who died intestate,
his wife renounced her inheritance and her share of the conjugal
property in favor of their children. The BIR determined that there
was a taxable gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (7%) ‘13 - Q9
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 con-
cerned. This is a transfer of property without any consideration which
takes effect during the lifetime of the transferor/wife and thus qualifies
as a taxable gift (RR No. 2-2003).
But the renunciation of the wife’s share in the inheritance during the
settlement of the estate is not a taxable gift considering that the prop-
erty is automatically transferred to the other heirs by operation of law
due to her repudiation of her inheritance (BIR Ruling DA No. 333-07).
!36
Mr. Pedro Aguirre, a resident citizen is working for a large real
estate development company in the country and in 2010, he was
promoted to Vice-President of the company. With more responsi-
bilities 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 P800,000.00, 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 P700,000.00 was donated
by him and registered in the name of his son. The corresponding
donor’s tax thereon was duly paid by the father.
a) How much is the cost basis of the old car to Mr.
Aguirre? Explain your answer. (2%); ‘12 - Q4a
P700,000. The basis of the property in the hands of the donee is the
carry-over basis (Section 40(B)(3), NIRC).
Miguel, a citizen and resident of Mexico, donated US$1,000 worth
of stocks in Barack Motors Corp., a Mexican company, to his legit-
imate son, Miguelito, who is residing in the Philippines and about
to get married to a Filipino girlfriend. Mexico does not impose any
transfer tax of whatever nature on all gratuitous transfers of
property.
1. Is Miguel entitled to a dowry exclusion?
Miguel, a non-resident alien, is not allowed any dowry exclusion.
The dowry applies only to a donor who is either a citizen or resident of
the Philippines (Section 101(A)(1), NIRC.)
2. Is Miguel entitled to the rule of reciprocity in order to be
exempted from the Philippine donor’s tax? ’09 – Q15
NO. The donation is not subject to the Philippine donor’s tax be-
cause the donor is a non-resident alien and the property donated is a
property not situated in the Philippines. The rule of reciprocity applies
only if the property transferred by a non-resident alien is an intangible
personal property situated in the Philippines. This is designed to recip-
rocate the exemption from donor’s tax granted by a foreign country to
Filipinos who are not residing thereat (Section 104, NIRC.)
Spouses Jose San Pedro and Clara San Pedro, both Filipino citi-
zens, are the owners of a residential house and lot in QC. After
the recent wedding of their son, Mario to Maria, the spouses do-
nated said real property to them. At the time of the donation, the
real property has a FMV of P2 million.
1. Are Mario and Maria subject to income tax for the value
of the real property donated to them?
NO. The law classifies the donated property as an exclusion from
income tax, and therefore exempt from income tax (Section 32(B)(3),
NIRC.)
2. 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? ’08 – Q14
YES, because the value of the gift exceeds P10,000 (Section
101(A)(1), NIRC.) However, they are entitled to a deduction of
P100,000 for the net value of the gift (Section 99(B), NIRC.) Each
spouse shall be liable for a taxable gift worth P890,000 each at the
progressive rate of 2-15%, since the donee is a relative.
The Congregation of the Mary Immaculate donated a land a dor-
mitory building in favor of the Sisters of the Holy Cross, a group
of nuns operating a free clinic and high school teaching basic
spiritual values. Is the donation subject to donor’s tax? ’07 – Q11
NO. Gifts in favor of an educational and/or charitable, religious,
social welfare corporation, or cultural institution, accredited non-gov-
ernment organization, trust or philanthropic organization or research
institution or organization are exempt from the donor’s tax, provided,
that, not more than 30% of the gifts are used for administration pur-
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poses. The donation being in the nature of a real property complies
with the utilization requirement (Section 101(A)(3), NIRC.)
X is a friend of Y, the chairman of Political Party Z, who wants to
run for President in the 2004 elections. Knowing that Y needs
funds for posters and streamers, X is thinking of donating to Y
P150,000 for his campaign. He asks you whether his intended
donation to Y will be subject to the donor's tax. What would your
answer be? Will your answer be the same if he were to donate to
Political Party Z instead of to Y directly? '03 – Q10
The donation to Y, once he becomes a candidate for an elective
post, is not subject to donor's tax provided that he complies with the
requirement of filing returns of contributions with the Commission on
Elections as required under the Omnibus Election Code.
The answer would be the same if X had donated the amount to
Political Party Z instead of to Y directly because the law places in equal
footing any contribution to any candidate, political party or coalition of
parties for campaign purposes (Section 99(C), NIRC.)
On December 6, 2001, LVN Corp. 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.
1. May the donor claim in full as deduction from its gross
income for the taxable year 2001 the amount of the do-
nated lot equivalent to its fair market value/zonal value
at the time of the donation?
NO. Donations and/or contributions made to qualified donee insti-
tutions 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 (Section
34(H), NIRC.)
2. In order that donations to non-stock, non-profit educa-
tional institution may be exempt from the donor's gift
tax, what conditions must be met by the donee? ’02 – Q8
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 (Section 101(A)(3), NIRC.)
Value-Added Tax
SMZ, Inc., is a VAT-registered enterprise engaged in the general
construction business. HI' International contracts the services of
SMZ, Inc. to construct HI' International's factory building located
in the Laguna Techno Park, a special economic zone. HI' In-
ternational is registered with the Philippine Economic Zone Au-
thority (PEZA) as an ecozone export enterprise, and, as such,
enjoys income tax holiday pursuant to the Special Economic
Zone Act of 1995.
SMZ, Inc., files an application with the Bureau of Internal Revenue
(BIR) for the VAT zero-rating of its sale of services to HP In-
ternational. However, the BIR denies SMZ, Inc.'s application on
the ground that HP International already enjoys income tax holi-
day. Is the BIR correct in denying SMZ, Inc.'s application? Explain
your answer. (6%) ’17—Q1
SUGGESTED ANSWER
No. All sales of goods, properties, and services made by a VAT-regis-
tered supplier from the Customs Territory to an ecozone enterprise
shall be subject to VAT, at zero percent (0%) rate, regardless of the
latter's type or class of PEZA registration (Coral Bay Nickel Corporation
v. CIR, G.R. No. 190506, June 13,2016, citing Commissioner of Inter-
nal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R. No.
150154, August 9, 2005).
!37
Moreover, under Section 108 (8)(3), of the 1997 NIRC as amended,
services rendered to persons or entities whose exemption under spe-
cial laws effectively subjects the supply of such services to zero per-
cent (0%) rate are considered zero-rated. Considering the law does not
provide for any additional qualification or disqualification, the BIR can-
not deny the application on the ground that HP International already
enjoys income tax holiday.
An administrative agency may not enlarge, alter or restrict a provision
of law. It cannot add to the requirement provided by law. To do so con-
stitutes lawmaking, which is generally reserved for Congress (Soriano
v. Secretary of Finance, et al., G.R. Nos. 184450, 184508, 184538,
185234, January 24, 2017).
ALTERNATIVE ANSWER
The BIR is wrong. Under Sec. 108(B)(3) of the NIRC, the sale is effec-
tively zero-rated and there is no need to file an application for zero-
rating with the BIR. The BIR in pointing out that the HP International
enjoys income tax holiday is of no moment, because a sale of services
to an ecozone enterprise by a supplier from the customs territory is
considered as an effectively zero-rated sale of service in view of the
exemption enjoyed by the Peza enterprise from indirect taxes.
The Board of Directors of Sumo Corporation, a company primarily
engaged in the business of marketing and distributing pest con-
trol products, approved the partial cessation of its commercial
operations, resulting in the separation of 32 regular employees.
Only half of the affected employees were notifieded of the board
resolution.
Rule on the taxability of the separation pay and indemnity that will
be received by the affected employees as the result of their sepa-
ration from service. Explain your answer. (3%) ’17—Q11
It shall be tax-exempt. Section 30(B)(6)(b) of the 1997 NIRC, as
amended, provides that any amount received by an official or employ-
ee or by his heirs from the employer as a consequence of separation
of such official or employee from the service of the employer because
of death, sickness or other physical disability or for any cause beyond
the control of the said official or employees shall be exempt from taxa-
tion.
Pursuant to Sec. 11 of the "Host Agreement" between the United
Nations and the Philippine government, it was provided that the
World Health Organization (WHO), "its assets, income and other
properties shall be: a) exempt from all direct and indirect taxes."
Precision Construction Corporation (PCC) was hired to construct
the WHO Medical Center in Manila. Upon completion of the build-
ing, the BIR assessed a 12% VAT on the gross receipts of PCC
derived from the construction of the WHO building. The BIR con-
tends that the 12% VAT is not a direct nor an indirect tax on the
WHO but a tax that is primarily due from the contractor and is
therefore not covered by the Host Agreement. The WHO argues
that the VAT is deemed an indirect tax as PCC can shift the tax
burden to it. Is the BIR correct? Explain. (5%) ’16 – Q13
No. Since World Health Organization (WHO), the contractee, is exempt
from direct and indirect taxes pursuant to an international agreement
where the Philippines is a signatory, the exemption from indirect taxes
should mean that the entity or person exempt is the contactor itself
because the manifest intention of the agreement is to exempt the con-
tractor so that no tax may be shifted to the contractee (CIR v. John
Gotamco & Sons, lnc., 148 SCRA 36 (1987)). The immunity of WHO
from indirect taxes extends to the contractor by treating the sale of
service as effectively zero-rated when the law provided that - “services
rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effec-
tively subjects the supply of such service to zero percent (0%)
 The Sigma Rho Fraternity
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rate” (Section 108(B)3, NIRC). Accordingly, the BIR is wrong in assess-
ing the 12% VAT from the contractor, Precision Construction Corpora-
tion.
[a] Explain the procedure for claiming refunds or tax credits of
input Value Added Tax (VAT) for zero-rated or effectively zero-rat-
ed sales under Sec. 112 of the National Internal Revenue Code
(NIRC) from the filing of an application with the OR up to the CTA.
(2.5%)
[b] Explain the procedure for claiming refunds of tax erroneously
or illegally collected under Sec. 229 of the NIRC from the filing of
the claim for refunds with the C1R up to the CTA. (2.5%) ’16 – Q9
[a] In order to be entitled to a refund/tax credit of excess input VAT
attributable to zero-rated or effectively zero-rated sales, the following
requisites must be complied with:
1. The claim for refund must be filed with the Commissioner
within 2 years counted from the last day of the quarter when
the zero-rated sale was made (Sec, 112, NIRC);
2. The claim for refund must be accompanied by a statement
under oath that all documents to support the claim has been
submitted at the time of filing of the claim for refund (RMC
54-14);
3. The Commissioner must decide on the claim within 120 days
from date of filing and the adverse decision is appealable to
the CTA within 30 days from receipt (Sec. 112, NIRC; CIR v.
Aichi Forging of Asia, Inc., 632 SCRA 422 [2010]).
4. If no decision is made within the 120-day period, there is a
deemed denial or adverse decision which is appealable to
the CTA within 30 days from the lapse of the 120-day period
(Sec. 112, NIRC; Sec. 7(a)(1), RA 1125 as amended by RA
9282);
[b] The procedure for claiming refunds of tax erroneously or illegally
collected are the following;
1. A written claim for refund must be filed with the Commis-
sioner within two years from date of payment of the tax
(Sec. 204, NIRC);
2. A decision of the Commissioner denying the claim, is ap-
pealable to the CTA within 30 days from receipt thereof or
within two years from date of payment, whichever comes
first (Sec. 229, NIRC; Sec. 7(a)(1), RA 1125 as amended by
RA 9282);
3. If no decision is made by the Commissioner, the aggrieved
taxpayer must consider the inaction as a denial and appeal
to the CTA must be filed before the lapse of two years count-
ed from date of payment (Sec. 229, NIRC).
Congress issued a law allowing a 20% discount on the purchases
of senior citizens from, among others, recreation centers. This
20% discount can then be used by the sellers as a "tax credit." At
the initiative of BIR, however, Republic Act No. (RA) 9257 was
enacted amending the treatment of the 20% discount as a "tax
deduction." Equity Cinema filed a petition with the RTC claiming
that RA 9257 is unconstitutional as it forcibly deprives sellers a
part of the price without just compensation.
[a] What is the effect of converting the 20% discount from a "tax
credit" to a "tax deduction"? (2.5%)
[b] If you are the judge, how will you decide the case? Briefly ex-
plain your answer. (2.5%) ’16 – Q10
[a] The effect of converting the 20% discount from a “tax credit” to a
“tax deduction” is that the tax benefit enjoyed by sellers of goods and
services to senior citizens is effectively reduced. A tax credit reduces
the tax liability while a tax deduction merely reduces the tax base.
!38
Under the tax credit scheme, the establishments are paid back 100%
of the discount they give to senior citizens while under the tax deduc-
tion scheme, they are only paid back about 32% of the 20% discount
granted to senior citizens.
[b] I will decide in favor of the Constitutionality of the law. The 20%
discount as well as the tax deduction scheme is a valid exercise of the
police power of the State (Manila Memorial Park Inc. v. Department of
Social Welfare and Development, 711 SCRA 302 [2013]).
In June 2013, DDD Corp., a domestic corporation engaged in the
business of leasing real properties in the Philippines, entered into
a lease agreement of a residential house and lot with EEE, Inc., a
non-resident foreign corporation. The residential house and lot
will be used by officials of EEE, Inc. during the visit to the Philip-
pines. The lease agreement was signed by representatives from
DDD Corp. and EEE, Inc. in Singapore. DDD Corp. did not subject
the said lease to VAT believing it was not a domestic service con-
tract. Was DDD Corp. correct? Explain (3%) ‘15 - Q8
DDD Corp. is not correct. Lease of properties shall be subject to VAT
irrespective of the place where the contract of lease was executed if
the property is leased or used in the Philippines (Sec. 108 (A), NIRC).
For calendar year 2011, FFF, Inc., a VAT-registered corporation,
reported unutilized excess input VAT in the amount of
P1,000,000.00 attributable to its zero-rated sales. Hoping to im-
press his boss, Mr. G, the accountant of FFF, Inc., filed with the
Bureau of Internal Revenue (BIR) on January 31, 2013 a claim for
tax refund/credit of the P1,000,000.00 unutilized excess input VAT
of FFF, Inc. for 2011. Not having received any communication
from the BIR, Mr. G filed a Petition for Review with the CTA on
March 15, 2013, praying for the tax refund/credit of the
P1,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011.
a) Did the CTA acquire jurisdiction over the Petition of FFF,
Inc.? (2%) ‘15 - Q9a
The CTA has not acquired jurisdiction over the Petition of FFF, Inc.
because the judicial claim has been prematurely filed on March 15,
2013. The Supreme Court ruled that the 30-day period after the expira-
tion of the 120-day period fixed by law for the Commissioner of Internal
Revenue to act on the claim for refund is jurisdictional and failure to
comply would bar the appeal and deprive the Court of Tax Appeals of
its jurisdiction to entertain the appeal (CIR v. Aichi Forging Company of
Asia, Inc. 632 SCRA 422 | 2014). In this case, Mr. G filed the
administrative claim on January 31, 2013. The petition for relief should
have been filed on June 30, 2013. Filing the judicial claim on March 15,
2013 is premature, thus the CTA did not acquire jurisdiction.
b) Discuss the proper procedure and applicable time peri-
ods for administrative and judicial claims for refund/
credit of unutilized excess input VAT. (4%) ‘15 - Q9b
The administrative claim must be filed the Commissioner of Internal
Revenue (CIR) within the two years from the close of the taxable quar-
ter when the zero-rated sales were made. The CIR has 120 days from
the date of submission of complete documents in support of the claim
to decide. If the CIR decides within the 120-day period or the 120-day
period expires without the CIR rendering a decision, the taxpayer has
30 days to file a petition for review with the CTA reckoned from the
receipt of adverse decision or from the lapse of the 120-day period.
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As a general rule, the 30-day period to appeal is both mandatory and
jurisdictional. As an exception to the general rule, premature filing is
allowed only if filed between December 10, 2003 and October 5, 2010,
when the BIR Ruling No. DA-489-03 was still in force prior to the re-
versal of the aforesaid ruling by the CTA in the Aichi case on October
6, 2010 (CIRv. Mindanao II Geothermal Partnership, 713 SCRA 645
{2014})
MMM, Inc., a domestic telecommunications company, handles
incoming telecommunications services for non-resident foreign
companies by relaying international calls within the Philippines.
To broaden the coverage of its telecommunications services
throughout the country, MMM, Inc. entered into various intercon-
nection agreements with local carriers. The non-resident foreign
corporations pay MMM, Inc. in US dollars inwardly remitted
through Philippine hanks, in accordance with the rules and regu-
lations of the Bangko Sentral ng Pilipinas.
MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently,
MMM, Inc. timely filed with the BIR an administrative claim for the
refund of the amount of P6,321,486.50, representing excess input
VAT attributable to its effectively zero-rated sales in 2000. The BIR
ruled to deny the claim for refund of MMM, Inc. because the VAT
official receipts submitted by MMM, Inc. to substantiate said claim
did not bear the words “zero-rated'” as required under Section
4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA
division and the CTA en banc affirmed the BIR ruling.
MMM, Inc. appealed to the Supreme Court arguing that the NIRC
itself did not provide for such a requirement. RR No. 7-95 should
not prevail over a taxpayer’s substantive right to claim tax refund
or credit.
a. Rule on the appeal of MMM. Inc. (3%) ‘15 - Q21a
The appeal of MMM, Inc. must be denied. MMM, Inc.’s position that the
requirements under RR No. 7-95 should not prevail over a taxpayer’s
substantive right to claim tax refund or credit is unmeritorious. The
Secretary of Finance has the authority to promulgate the necessary
rules and regulations for the effective enforcement of the provisions of
the NIRC. Such rules and regulations are given weight and respect by
the courts in view of the rule-making authority given to those who for-
mulate them and their specific expertise in their respective fields.
 b)
An applicant for a claim for tax refund or tax credit must not only prove
entitlement to the claim, but also compliance with all the documentary
and evidentiary requirements. Consequently, the CTA and the CTA en
banc correctly ruled that the failure to indicate the words “zero-rated”
on the invoices and receipts issued by a taxpayer would result in the
denial of the claim for refund or tax credit (Eastern v. Telecommunica-
tions Philippines, Inc. p. CIR, 2015).
b. Will your answer in (a) be any different if MMM, Inc. was
claiming refund of excess input VAT attributable to its
effectively zero-rated sales in 2012? (2%) ‘15 - Q21b
No, my answer will not be different if the claim for refund is for effec-
tively zero-rated sales in 2012. The requirement to print the word “zero-
rated” is no longer by mere regulations but is now clearly provided by
law as follows — “If the sale is subject to zero percent (0%) value-
added tax, the terra “zero-rated sale” shall be written or printed promi-
nently on the invoice or receipt. Failure to comply with this invoicing
requirement is fatal to a claim for refund of input taxes attributable to
the zero-rated sale (Sec. 113(B)(2)(c), NIRC). Moreover, as recently
ruled by the Supreme Court, the subsequent incorporation of Sec.
!39
4.108-1 of RR 7-95 in Sec. 113 of the N1RC as introduced in R.A.
9337, actually confirmed the validity of the imprinting requirement on
VAT invoices or official receipts—a case falling under the principle of
legislative approval of administrative interpretation by re-enactment
(Northern Mindanao Power Corp. v. CIR, 2015).
Gangwam Corporation (GC) filed its quarterly tax returns for the
calendar year 2012 as follows:
First quarter - April 25,2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
On December 22, 2013, GC filed with the Bureau of Internal Rev-
enue (BIR) an administrative claim for refund of its unutilized in-
put Value-Added Tax (VAT) for the calendar year 2012. After sev-
eral months of inaction by the BIR on its claim for refund, GC
decided to elevate its claim directly to the Court of Tax Appeals
(CTA) on April 22, 2014. In due time, the CTA denied the tax refund
relative to the input VAT of GC for the first quarter of 2012, rea-
soning that the claim was filed beyond the two-year period pre-
scribed under Section 112(A) of the National Internal Revenue
Code (NIRC).
a) Is the CTA correct? (3%) - ‘14 - Q4a
No. CTA is not correct. The two-year period to file a claim for refund
refers to the administrative claim and does not refer to period within
which to elevate the claim to the CTA. The filing of the administrative
claim for refund was timely done because it is made within two years
from the end of the quarter when the zero-rated transaction took place
(Section 112(A), NIRC). When GC decided to elevate its claim to the
CTA on April 22, 2014, it was after the lapse of 120 days from the filing
of the claim for refund with the BIR, hence the appeal is seasonably
filed. The rule on VAT refunds is two years to file the claim with the
BIR, plus 120 days for the Commissioner to act and inaction after 120
days is a deemed adverse decision on the claim, appealable to the
CTA within 30 days from the laps of the 120-day period (CIR v. Aichi
Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010; CIR
v. San Roque, G.R. No. 187485, February 12, 2013).
Assuming that GC filed its claim before the CTA on Feb-
ruary 22,2014, would your answer be the same? - ‘14 -
Q4b
Yes. the two-year prescriptive period to file a claim for refund refers to
the administrative claim with the BIR and not to the period to elevate
the claim to the CTA. Hence, the CTA cannot deny the refund for rea-
sons that the first quarter claim was filed beyond the two-year period
prescribed by law. However, when the claim is made before the CTA on
February 24, there is definitely no appealable decision as yet because
the 120-day period for the Commissioner to act on the claim for refund
has not yet lapsed. Hence, the act of the taxpayer in elevating the
claim to the CTA is premature and the CTA has no jurisdiction to rule
thereon (CIR v. Aichi Forging Company of Asia, Inc., G.R. No. 184823,
October 6, 2010; CIR v. San Roque, G.R. No. 187485, February 12,
2013).
Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered
company which has been engaged in the catering business for
the past 10 years. It has invested a substantial portion of its capi-
tal on flat wares, table linens, plates, chairs, catering equipment,
and delivery vans. MKI sold its first delivery van already 10 years
old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a cor-
 The Sigma Rho Fraternity
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Bar Questions and Answers
poration engaged in the business of buying and selling gravel
and sand. The selling price of the delivery van was way below its
acquisition cost.
Is the sale of the delivery van by MKI to MGSC subject to VAT?
(4%) - ‘14 - Q8
Yes, the sale of the delivery van is subject to VAT being a transaction
incidental to the catering business which is a VAT-registered activity of
MKI. Transactions that are undertaken incidental to the pursuit of a
commercial or economic activity are considered as entered into in the
course of trade or business (Section 105, NIRC). A sale of a fully de-
preciated vehicle that has been used in business is subject to VAT as
an incidental transaction, although such sale may be considered iso-
lated (Mindanao II Geothermal Partnership v. CIR, G.R. Nos. 193301,
194637, March 11, 2013).
The Bureau of Internal Revenue (BIR) issued Revenue Memoran-
dum Circular (RMC) No. 65-2012 imposing Value-Added Tax (VAT)
on association dues and membership fees collected by condo-
minium corporations from its member condominium unit owners.
The RMC’s validity is challenged before the Supreme Court (SC)
by the condominium corporations. The Solicitor General, counsel
for BIR, claims that association dues, membership fees, and other
assessment/charges collected by a condominium corporation are
subject to VAT since they constitute income payments or com-
pensation for the beneficial services it provides to its members
and tenants.
On the other hand, the lawyer of the condominium corporations
argues that such dues and fees are merely held in trust by the
condominium corporations’ purposes. Accordingly, the condo-
minium corporations do not actually render services for a fee
subject to VAT.
Whose argument is correct? Decide. (5%) - ‘14 - Q19
The lawyer of the condominium corporations is correct. The associa-
tion dues, membership fees, and other assessments/charges do not
constitute income payments because they were collected for the bene-
fit of the unit owners and the condominium corporation is not created
as a business entity. The collection is the money of the unit owners
pooled together and will be spent exclusively for the purpose of main-
taining and preserving the building and its premises which they them-
selves own and possess (First e-Bank Tower Condominium Corp., v.
BIR, Special Civil Action No. 12-1236, RTC Br. 146, Makati City).
ALTERNATIVE ANSWER:
In the case of Office Metro Philippines, Inc. (formerly Regus Centres,
Inc.) v. Commissioner of Internal Revenue, CTA Case No. 8382, the
Court only dealt with the EWT issue as the VAT Section 105 shows that
transaction in the course of a trade or business (sells, barters, ex-
changes, leases goods or properties, renders services, imports goods)
are those subject to VAT. In the case of a condominium corporation,
the function of the entity is merely for administrative purposes and not
a trade or business. Thus, payments in the form of association dues
should not be subjected to VAT.
Which of the following transactions is subject to Value-Added Tax
(VAT)? (1%) - ‘14 - Q25
(A) Sale of shares of stock-listed and traded through the
local stock
!40
(B) Importation of personal and household effects belong-
ing to residents of the Philippines returning from abroad
subject to custom duties under the Tariff and Customs
Code
(C) Services rendered by individuals pursuant to an em-
ployer-employee relationship
(D) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Coopera-
tive Development Authority
(B) importation of personal and household effects belonging to resi-
dents of the Philippines returning from abroad subject to custom duties
under the Tariff and Customs Code (exempt from VAT only if exempt
from customs duties, Section 109(1)(C), NIRC).
XYZ Law Offices, a law partnership in the Philippines and a VAT-
registered taxpayer, received a query by e-mail from Gainsburg
Corporation, a corporation organized under the laws of Delaware,
but the e-mail came from California where Gainsburg has an of-
fice. Gainsburg has no office in the Philippines and does no busi-
ness in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed
Gainsburg US$1000 for the opinion. Gainsburg remitted its pay-
ment through Citibank which converted the remitted US$1,000 to
pesos and deposited the converted amount in the XYZ Law Of-
fices account.
What are the tax implications of the payment to XYZ Law Offices
in terms of VAT and income taxes? (7%) ‘13 - Q7
The payment to XYZ Law Offices by Gainsburg Corporation is subject
to VAT and income tax in the Philippines.
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. The services were rendered to a nonresident person, en-
gaged 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-rate (Section
108(B)(2), NIRC).
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 device
for GOC’s refinery in the Philippines. Provided that the installation
part of the project may be sub-contracted to a local construction
company. Pursuant to the contract, the design and supply con-
tracts were done in Singapore by FC, while the installation works
were sub-contracted by FC with Philippine Construction Corpora-
tion (PCC), a domestic corporation. The project with a total cost
of P100 Million was completed in 2011 at the following cost com-
ponents: (design - P20 Million; machinery and equipment - P50
Million; and installation - P30 Million). 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 project. GOC pad FC as follows: P60 Million in 2010 and P40
Million in 2011 and FC paid PCC in foreign currency through a
Philippine bank as follows: P10 Million in 2010 and P20 Million in
2011.
 The Sigma Rho Fraternity
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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 an-
swer. (5%) ‘12 - Q2b
Yes. PCC is liable to the VAT as seller of services for a fee. However,
the sale of services to FC is subject to VAT at zero percent rate. Ser-
vices rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed paid in foreign
currency inwardly remitted through the banking system are zero-rated
sales of services (Section 108(B)(2), NIRC).
Whether or not the construction of XYZ Corp. of concrete barriers
for the Asian Development in Ortigas Center is subject to VAT. ’10
– Q11a
The transaction is subject to VAT at the rate of zero (0%). ADB is
exempt from direct and indirect taxes under a special law, thereby
making the sale of services to it by a VAT-registered construction com-
pany effectively zero-rated [Sec. 108(B)(3), NIRC.]
Whether or not the services of a Call Center operated by a domes-
tic enterprise that handles exclusively calls of hotel chain all lo-
cated in North America which are paid in US$ and duly accounted
for with the BSP is subject to VAT. ’10 – Q11b
The sale of services is subject to VAT at zero (0%). Zero-rated
services include services rendered to a person engaged in the busi-
ness outside the Philippines and the consideration is paid in accept-
able foreign currency duly accounted for by the Bangko Sentral ng
Pilipinas [Sec. 108(B)(2), NIRC.]
Whether or not the sale of orchids by a flower shop which raises
its flowers in Tagaytay is subject to VAT. ’10 – Q11c
The sale of orchids is subject to VAT at 12%. This is a sale of
agricultural non-food product in its original state which is no longer one
of the exempt transactions [Sec. 109, NIRC, as amended by R.A. No.
9337.]
Emiliano is engaged in the business of leasing out several resi-
dential apartment units he owns. The monthly rentals 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 neces-
sary for him to register as a VAT taxpayer. What legal advice will
you give him? ’09 – Q14
I will advice Emiliano that he is not required to register as a VAT
taxpayer. His transactions of leasing residential units for an amount not
exceeding P10,000 per unit per month are exempt from VAT irrespec-
tive of the aggregate amount of rentals received annually (Section
109(1)(Q), NIRC.)
[Note: The gross receipts from lease of residential units are subject to
the following rules:
1. If the monthly rental does not exceed P12,800 per month per
unit, regardless of the aggregate amount of rentals, the lessor
shall be exempt from VAT and other percentage taxes (OPT).
2. If the monthly rental exceeds P12,800 per month per unit but
the aggregate annual rentals do not exceed P1,919,500, the
lessor is exempt from VAT. The lessor, however, is subject to 3%
OPT.
3. If the monthly rental exceeds P12,800 per month per unit
and the aggregate annual rentals exceed P1,919,500, the lessor
is subject to 12% VAT (BIR Ruling No. 144-2006; Rev. Regs.
16-2011, as amended).]
Greenhills Condominium Corp., incorporated in 2001, is a non-
stock, non-profit association of unit owners in Greenhills Tower,
San Juan City. To be able to reduce the association dues being
collected from the unit owners, the Board of Directors of the cor-
poration agreed to lease part of the ground floor of the condo-
!41
minium building to DEF Savings Bank for P120,000 a month or
P1.44 million for the year, starting January 2007.
1. Is the non-stock, non-profit association liable for VAT in
2007? If your answer is in the negative, is it liable for
another kind of business tax?
NO. Under R.R. No. 16-2005, liability for VAT arises only if the
annual gross receipts exceed P1.5 million. Secondly, under Section
106(A)(1)(a), NIRC, the lease must be pursuant to the ordinary course
of trade or business of the taxpayer. The lease of the ground floor is a
casual transaction.
The Association is liable for the business tax of 3% of the gross
receipts of the taxpayer do not exceed P1.5 million per annum (Section
116, NIRC.)
2. Will the association be liable for VAT in 2008 if it in-
creases the rental to P150,000 for a month beginning
January 2008? ’08 – Q12
YES, because the gross receipts will exceed P1.5 million (R.R.
No. 16-2005.)
[Note: In general, gross receipts from lease of commercial units are
subject to 12% VAT, except when the lessor is non-VAT and his total
receipts do not exceed P1,919,500 per year (Section 105, NIRC’ R.A.
No. 9337; Rev. Reg. 16-2011, as amended.)
Royal Mining is a VAT-registered domestic mining entity. One of
its products is silver being sold to the BSP. 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 BSP are considered export
sales subject to zero-rated VAT. Is Royal Mining's claim meritori-
ous? ’06 – Q4
NO. Royal Mining’s claim is not meritorious because it is the sale
to Bangko Sentral ng Pilipinas of gold and not silver which is consid-
ered as export sale subject to zero-rated VAT (Section 106(2)(a)(4),
NIRC.)
Congress enacts a law granting grade school and high school
students a 10% discount on all school-prescribed textbooks pur-
chased from any bookstore. The law allows bookstores to claim
in full the discount as a tax credit.
1. If in a taxable year a bookstore has no tax due on which
to apply the tax credits, can the bookstore claim from
the BIR a tax refund in lieu of tax credit?
NO. The law is clear that bookstores can only claim the discount
as a tax credit. The term tax credit connotes that the amount 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 book-
store has no tax liability against which the tax credit can be used (CIR
v. Central Luzon Drug Corp., 456 SCRA 414 [2005].)
2. Can the BIR require the bookstores to deduct the
amount of the discount from their gross income?
NO. Tax credit which reduces the tax liability is different from tax
deduction which merely reduces the income to arrive at the tax base.
Since the law allowed bookstores to claim in full discount as a tax cred-
it, the BIR is not allowed to expand or contract the legislative mandate
(CIR v. Central Luzon Drug Corp., Id.).
3. If a bookstore closes its business due to losses without
being able to recoup the discount, can it claim reim-
bursement of the discount from the government on the
ground that without such reimbursement, the law con-
stitutes taking of private property for public use without
just compensation? '06 – Q6
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 stu-
dents belong. However, the privilege granted is limited only to the re-
duction of a present or future tax liability because by its nature, it is the
 The Sigma Rho Fraternity
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existence or 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 altogeth-
er (CIR v. Central Luzon Drug Corp., Id.).
Lily's Fashion, Inc. is a garment manufacturer located and regis-
tered as a Subic Bay Freeport Enterprise under R.A. 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 con-
duct of its manufacturing business. The suppliers of these goods
shifted to Lily's Fashion the 10% VAT on the purchased items
amounting to P 500,000. Lily's Fashion filed with the BIR a claim
for refund for the input tax shifted to it by the suppliers. If you
were the CIR, will you allow the refund? ’06 – Q15
NO. The exemption of Lily’s Fashion is only for taxes 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 part of the pur-
chase price. Lily’s Fashion’s Inc. is not a taxpayer in so far as the
passed-on tax is concerned and therefore, it cannot claim for a refund
of a tax merely shifted to it. Only taxpayers are allowed to file a claim
for refund (Phil. Acetylene Co., Inc. v. CIR, 20 SCRA 1056 [1967].)
An alien employee of the 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 sub-
ject to tax? ’05 – Q11
YES. The sale is subject to tax. Section 107(B) of the NIRC pro-
vides that: “In the case of tax-free importation of goods into the Philip-
pines by persons, entities or agencies exempt from tax where such
goods are subsequently sold, transferred or exchanged in the Philip-
pines 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.”
As an incentive for investors, a law was passed giving newly es-
tablished 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 in-
centive. In the course of business, ABC purchased mechanical
equipment from XYZ Inc. Normally, the sale is subject to a sales
tax.
1. XYZ claims, however, that since it sold the equipment to
ABC, which is tax-exempt, XYZ should not be liable to
pay the sales tax. Is this claim tenable?
NO. Exemption from taxes is personal in nature and covers only
taxes for which the taxpayer-grantee is directly liable. The sales tax is
a tax on the seller who is not exempt from taxes. Since XYZ Inc. is
directly liable for the sales tax and no tax exemption privilege is ever
given to him, therefore, its claim that the sale is tax exempt is not ten-
able. A tax exemption is construed in strictissimi juris and it cannot be
permitted to exist upon vague implications (Asiatic Petroleum Co., Ltd.
v. Llanes, 49 Phil. 466 [1926].)
2. Assume arguendo that XYZ had to and did pay the sales
tax. ABC later found out, however, that XYZ merely
shifted or passed on to ABC the amount of the sales tax
by increasing the purchase price. ABC 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 meritorious? ’04 – Q6
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. Hence, since ABC Corp. is not a tax-
payer, it has no capacity to file a claim for refund. The taxpayer who
can file a claim for refund is the person statutorily liable for the pay-
ment of the tax.
!42
Your bachelor client, a Filipino residing in QC, wants to give his
sister a gift of Php 200,000. 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 Php 200,000 on Christmas
2001 or to give Php 100,000 on Christmas 2001 and the other Php
100,000 on January 1, 2002. Please explain your advice. '01 – Q17
I would advise him to split the donation. Giving the Php 200,000
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 Php 100,000 given on two different years will
totally relieve the donor from the donor’s tax because the first Php
100,000 donation in the graduated brackets is exempt (Section 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.
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? ’00 – Q12a
A STRANGER is a person who is not a:
1. Brother, sister (whether by whole or half-blood), spouse,
ancestor and lineal descendant;
2. Relative by consanguinity in the collateral line within the
fourth degree of relationship (Section 98(B), NIRC.)
What conditions must occur 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? '00 – Q12b
The following are the conditions:
1. Not more than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes;
2. The educational institution is incorporated as a non-stock
entity, paying no dividends, governed by trustees who re-
ceive 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 (Section
101(A)(3), NIRC.)
A, an individual, sold to B, his brother-in-law, his lot with a market
value of P1,000,000 for P600,000. A's cost in the lot is P100,000. B
is financially capable of buying the lot.
A also owns X Co., which has a fast growing business. A sold
some of his shares of stock in X Co. to his key executives in X Co.
These executives are not related to A. The selling price is
P3,000,000, which is the book value of the shares sold but with a
market value of P5,000,000. A's cost in the shares sold is
P1,000,000. The purpose of A in selling the shares is to enable his
key executives to acquire a propriety interest in the business and
have a personal stake in its business.
Explain if the above transactions are subject to donor's tax. '99 –
Q3
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 ade-
quate and full consideration, which gives rise to a deemed gift, does
not apply to a sale of property subject to capital gains tax (Section 100,
NIRC). However, if the lot sold is an ordinary asset, the excess of the
fair market value over the consideration received shall be considered
as a gift subject to the donor's tax.
The sale of shares of stock below the fair market value thereof is sub-
ject 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.
 The Sigma Rho Fraternity
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Bar Questions and Answers
Tax Remedies
Wreck Corporation is a domestic corporation engaged in the
business of importing, refining arid selling petroleum products.
During the period from September I, 2014 to December 31, 2014,
Wreck Corporation imported 225 million liters of Jet A-1 aviation
fuel and paid the excise taxes thereon. Seventy-five percent (75%)
of the total volume of aviation fuel imported were actually sold to
international carriers of Philippine and foreign registries for their
use or consumption outside of the Philippines in the period from
November 1, 2014, to December 31, 2014. Wreck Corporation did
not pass on to the international carriers the excise taxes it paid
on the importation of petroleum products.
On June 25, 2015, Wreck Corporation filed an administrative claim
for refund or issuance of tax credit certificate amounting to the
excise taxes it had paid on the importation of225 million liters of
Jet A-1 aviation fuel.
If you were the Commissioner of Internal Revenue, will you grant
Wreck Corporation’s administrative claim for refund or issuance
of tax credit certificate? Explain your answer. (6%) ’17—Q2
Yes, but only the excise tax which corresponds to the 75% of the total
volume of aviation fuel imported that were actually sold to the in-
ternational carriers. Wreck Corporation, as the statutory taxpayer who
is directly liable to pay the excise tax on its petroleum products, is enti-
tled to a refund or credit of the excise taxes it paid for petroleum prod-
ucts sold to international carriers, the latter having been granted ex-
emption from the payment of said excise tax under Sec. 13,5 (a) of the
NIRC (CIR v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497,
February 19, 2014).
Vanderful, Inc.'s income tax return for taxable year 2015 showed
an overpayment due to excess creditable withholding taxes in the
amount of P750,000. The company opted to carry over the excess
income tax credits as tax credit against its quarterly income tax
liabilities for the next succeeding years. For taxable year 2016, the
company's income tax return showed an overpayment due to
excess creditable withholding taxes in the amount of P1,000,000,
which included the carry-over from year 2015 in the amount of
P750,000 because its operations resulted in a net loss hence,
there was no application for any tax liability. This time, the com-
pany opted and marked the box "To be refunded" in respect of the
total amount of P1,100,000.
Vanderful, Inc. now files in the BIR a claim for refund of unutilized
overpayments of P1,100,000. Is the claim meritorious? (4%) ’17—
Q3
No, but only to the extent of the amount ofP750,000.00 which was
carried over from year 2015. Section 76oft he NIRC of 1997 clearly
states: Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the suc-
ceeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit urtificate shall be allowed therefor. Section 76
expressly states that the option shall be considered irrevocable for that
taxable period referring to the period comprising the succeeding tax-
able years. Section 76 further states that no application for cash refund
or issuance of a tax credit certificate shall be allowed therefore refer-
ring to that taxable period comprising the succeeding taxable years
(Asiaworld Properties Philippine Corporalion v. CIR, G.R. No. 171766,
July 29, 2010).
Distinguish compromise from abatement of taxes. (3%) ’17—
Q18(b)
!43
A compromise of tax is a remedy which Is available when there is a
reasonable doubt as to the validity of the claim against the taxpayer
exists, or when the financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax.
Abatement of tax, on the other hand, Is available as a remedy when
the tax or any portion thereof appears to be unjustly or excessively
assessed, or when the administration and collection costs Involved do
not justify the collection of the amount due (Section 204, NIRC).
Soaring Eagle paid its excise tax liabilities with Tax Credit Certifi-
cates (TCCs) which it purchased through the One Stop Shop In-
ter-Agency Tax Credit Center (Center) of the Department of Fi-
nance. The Center is a composite body of the DOF, BIR, BOC and
the BOI. The TCCs were accepted by the BIR as payments. A year
after, the BIR demanded the payment of alleged deficiency excise
taxes on the ground that Soaring Eagle is not a qualified transfer-
ee of the TCCs it purchased from other BOI-registered compa-
nies. The BIR argued that the TCCs are subject to post-audit as a
suspensive condition. On the other hand, Soaring Eagle coun-
tered that it is a buyer in good faith and for value who merely re-
lied on the Center's representation of the genuineness and validi-
ty of the TCCs. If it is ordered to pay the deficiency, Soaring Eagle
claims the same is confiscatory and a violation of due process. Is
the assessment against Soaring Eagle valid? Explain. (5%) ’16 –
Q11
No. The assessment is invalid because the TCC’s used by Soaring
Eagle are valid and effective. A TCC is an undertaking by the govern-
ment through the BIR or DOF, acknowledging that a taxpayer is enti-
tled to a certain amount of tax credit from either an overpayment of
income taxes, a direct benefit granted by law or other sources and
instances granted by law such as on specific unused input taxes and
excise taxes on certain goods. As such, tax credit is transferable in
accordance with pertinent laws, rules, and regulations (Pilipinas Shell
Petroleum Corp. v. Commissioner of Internal Revenuef 541 SCRA 316
[2007]).
The requisites for a valid waiver of the three-year (3-year) pre-
scriptive period for the BIR to assess taxes due in the taxable
year are prescribed by Revenue Memorandum Order (RMO) No.
20-90:
1. The waiver must be in the proper form prescribed by
RMO 20-90.
2. The waiver must be signed by the taxpayer himself or
his duly authorized representative.
3. In the case of a corporation, the waiver must be signed
by any of its responsible officials. In case the authority
is delegated by the taxpayer to a representative, such
delegation should be in writing and duly notarized.
4. The waiver should be duly notarized.
5. The CIR or the revenue official authorized by him must
sign the waiver indicating that the B1R has accepted
and agreed to the waiver. The date of such acceptance
by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by
him must make sure that the waiver is in the prescribed
form, duly notarized, and executed by the taxpayer or
his duly authorized representative.
6. Both the date of execution by the taxpayer and date of
acceptance by the Bureau should be before the expira-
tion of the period of prescription or before the lapse of
the period agreed upon in case a subsequent agreement
is executed.
7. The waiver must be executed in three copies, the origi-
nal copy to be attached to the docket of the case, the
second copy for the taxpayer and the third copy for the
Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the
original copy to show that the taxpayer was notified of
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the acceptance of the BIR and the perfection of the
agreement.
After being assessed by the BIR with alleged deficiency income
taxes, VVV Corporation (VVV) through Enrique, its President, exe-
cuted a waiver of the prescriptive period. The waiver was signed
by Revenue District Officer (RJDO) Alfredo. However, the waiver
did not state the date of execution by the taxpayer and date of
acceptance by the BIR. Enrique was also not furnished a copy of
the waiver by the BIR.
VVV claims that the waiver is void due to non-compliance with
RMO 20-90. Hence, the period for assessment had already pre-
scribed. Moreover, since the assessment involves P2million, the
waiver should have been signed by the CIR and instead of a mere
RDO. On the other hand, the BIR contends that the requirements
of RMO No. 20-90 are merely directory; that the execution of the
waiver by VVV was an enunciation of its right to invoke prescrip-
tion and that the government cannot be estopped by the mistakes
committed by its revenue officers. Is VVV liable? Explain. (5%) ’16
– Q17
No. The waiver was executed after VVV Corporation (VVV) was as-
sessed for deficiency income taxes obviously to justify the assessment
made after prescription had set in. This is the reason why VVV is in-
voking prescription due to the alleged invalidity of the waiver for failure
to comply with the requisites set forth under RMO 20-90. A waiver
executed beyond the prescriptive period is ineffective (CIR v. The Stan-
ley Works Sales (Phils), Inc. 743 SCRA 642 [2014]).
On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a
notice of assessment against Blue Water Industries Inc. (BWI), a
domestic corporation, informing the latter of its alleged deficiency
corporate income tax for the year 2009. On April 20, 2012, BWI
filed a letter protest before the BIR contesting said assessment
and demanding that the same be cancelled or set aside.
However, on May 19, 2013, that is, after more than a year from
filing of the letter protest, the BIR informed BWI that the latter’s
letter protest was denied on the ground that the assessment had
already become final, executory and demandable. The BIR rea-
soned that its failure to decide the case within 180 days from fil-
ing of the letter protest should have prompted BWI to seek re-
course before the Court of Tax Appeals (CTA) by filing a petition
for review within thirty (30) days after the expiration of the 180-
day period as mandated by the provisions of the last paragraph of
Section 228 of the National Internal Revenue Code (NIRC). Ac-
cordingly, BWI’s failure to file a petition for review before the CTA
rendered the assessment final, executory and demandable.
Is the contention of the BIR correct? Explain. (5%) - ‘14 - Q1
No, the contention of BIR is not correct. The right of BWI to consider
the inaction of the Commissioner on the protest within 180 days as an
appealable decision is only optional and will not make the assessment
final, executory and demandable (Section 228, NIRC; Lasaona Land
Co., Inc. v. CIR, G.R. No. 171251, March 5, 2012, 667 SCRA 455).
When is a pre-assessment notice required under the following
cases? (1%) -’14 - Q15
(A) When the finding for any deficiency tax is the
result of mathematical error in the computation
of the tax as appearing on the face of the re-
turn
!44
(B) When a discrepancy has been determined be-
tween the tax withheld and the amount actually
remitted by the withholding agent
(C) When the excise tax due on excisable articles
has been paid
(D) When an article locally purchased or imported
by an exempt person, such as, but not limited
to vehicles, capital equipment, machineries
and spare parts, has been sold, traded or
transferred to non-exempt persons
(C) When the excise tax due on excisable articles has been paid (Sec-
tion 228, NIRC)
Mr. Tiaga has been a law-abiding citizen diligently paying his in-
come taxes. On May 5, 2014, he was surprised to receive an as-
sessment notice from the Bureau of Internal Revenue (BIR) in-
forming him of a deficiency tax assessment as a result of a math-
ematical error in the computation of his income tax, as appearing
on the face of his income tax return (or the year 2011, which he
filed on April 15, 2012. Mr. Tiaga believes that there was no such
error in the computation of his income tax for the year 2011.
Based on the assessment received by Mr. Tiaga, may he already
file a protest thereon? (4%) - ‘14 - Q16
Yes. Mr. Tiaga may consider the assessment notice as a final assess-
ment notice and his right to protest within 30 days from receipt may
now be exercised by him. When the finding of a deficiency tax is the
result of mathematical error in the computation of the tax appearing on
the face of the return, a pre-assessment notice shall not be required
hence, the assessment notice is a final assessment notice (Section
228, NIRC; RR. No. 18-2013).
In its final adjustment return for the 2010 taxable year, ABC Corp.
had excess tax credits arising from its over-withholding of in-
come payments. It opted to carry over the access tax credits to
the following year. Subsequently, ABC Corp. changed its mind
and applied for a refund of the excess tax credits.
Will the claim for refund prosper (6%) ‘13 - Q1
No. The claim for refund will not prosper. While the law gives the tax-
payer an option whether to carry-over or claim as refund the excess
tax credits shown on its final adjustment return, once the option to
carry-over has been made, such option shall be considered irrevocable
for that taxable period and no application for cash refund or issuance
of a tax credit certificate shall be allowed (Section 76, NIRC; CIR v. PL
Management International Phils., Inc., G.R. No. 160949, April 4, 2011,
647 SCRA 721).
In 2010, pursuant to a Letter of Authority (LA) issued by the Re-
gional Director, Mr. Abcede was assessed for 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. (7%) ‘13 - Q10
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 internal revenue officers only once in
a taxable year, this will not apply if there is fraud, irregularity or mis-
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takes 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, the examination is
legally justified (Section 235, NIRC).
You are the retained tax counsel of ABC Corp. Your client in-
formed you that they have been directly approached with a pro-
posal by a BIR insider (i.e., a middle rank BIR official) on the tax
matter they have referred to you for handling. The BIR insider’s
proposal is to settle the matter by significantly reducing the as-
sessment, but he will get 50% of the savings arising from the re-
duced assessment.
What tax, criminal and ethical considerations will you take into
account in giving your advice? Explain the relevance of each of
these considerations. (9%) ‘13 - Q12
I will advise my client not to accept the settlement proposal but instead
pay the entire amount of tax that is legally due to the government.
On the tax aspect, I will tell my client that a proposed assessment cov-
ering deficiency taxes which are legally due must be fully paid to exon-
erate the taxpayer from further tax liabilities. The unwarranted reduc-
tion of the proposed assessment into half and the payment thereof will
not close the case but can be re-opened anytime within ten years from
discovery so as to collect the correct amount of taxes from ABC Corp.
The act of deliberately paying an amount of tax that is less than what is
known by my client to be legally due through a cause of action that is
unlawful is considered as tax evasion. I will advise my client that con-
niving with a BIR insider to reduce the proposed assessment for a fee
is unlawful which can expose the officers of the corporation to criminal
liability. Likewise, the payment to be made to the BIR official of 50% of
the savings constitutes direct bribery punishable under the Revised
Penal Code. Insofar as the BIR officer is concerned he will also be a
principal to direct bribery and to the criminal violations penalized under
Section 269 of the Tax Code.
On ethical grounds, agreeing to the settlement scheme being proposed
by the BIR insider is agreeing to the perpetration of a dishonest act.
Since taxation is symbiotic relationship, fair dealing on both sides is of
paramount importance. I will remind my client that taxpayers owe hon-
esty to government just as government owes fairness to taxpayers
(CIR v. Tokyo Shipping Co., Ltd., G.R. No. 68252, May 26, 1995).
The BIR issued in 2010 a final assessment notice and demand
letter against X Corporation covering deficiency income tax for
the year 2008 in the amount of P10 Million. X Corporation earlier
requested the advice of a lawyer on whether or not it should file a
request for reinvestigation, because it has the same conse-
quences or implications.
a) What are the differences between a request for recon-
sideration and a request for reinvestigations? (5%); ‘12 -
Q6a
1. Request for Reconsideration- plea for evaluation of assess-
ment on the basis of existing records without need of pre-
sentation of additional evidence. It does not suspend the
period to collect the deficiency tax.
2. Request for Reinvestigation - plea for reevaluation on the
basis of newly discovered evidence which are to be intro-
duced for examination for the first time. It suspend the pre-
scriptive period to collect.
!45
b) Do you agree with the advice of the lawyer? Explain
your answer. (5%). ‘12 - Q6b
No, in view of the aforesaid difference between Request for Reconsid-
eration & Request for Reinvestigation.
a) May the bank deposits - peso and foreign currency 0 of
an individual taxpayer be disclosed by a commercial
bank to the Commissioner of Internal Revenue, in con-
nection with a tax investigation being conducted by
revenue officials, without violating the relevant bank
secrecy laws? Explain your answer. (5%); ‘12 - Q7a
No. as a general rule, bank deposits of an individual taxpayer may not
be disclosed by a commercial bank to the Commissioner. As excep-
tions, the Commissioner is authorized to inquire into the bank deposits
of: (1) A decedent to determine his gross estate; and (2) any taxpayer
who has filed an application for compromise of his tax liability by rea-
son of financial incapacity to pay for his tax liability
In case a taxpayer files 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 con-
sidered unless and until he waives in writing his privilege under Re-
public Act No. 1405 (Bank Secrecy Law) or under other general or
special laws and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer (Sec-
tion 6, NIRC).
b) In 2011 the Commissioner of the U.S. INternal Rev-
enue Service (IRS) requested in writing the Commis-
sioner of Internal Revenue to get the information from a
bank in the Philippines, regarding the deposits of a U.S.
Citizen residing in the Philippines, who is under exami-
nation by the officials of the US IRS, pursuant to the US-
Philippine Tax Treaty and other existing laws. Should the
BIR Commissioner agree to obtain such information
from the bank and provide the same to the IRS? Explain
your answer. (5%); ‘12 - Q7b
Yes. The Commissioner should agree to the request pursuant to the
principle of international comity. The Commissioner of Internal Rev-
enue has the authority to inquire into bank deposit accounts and relat-
ed information held by financial institutions of a specific taxpayer sub-
ject of a request for the supply of tax information from a foreign tax
authority pursuant to an international convention or agreement to
which the Philippines is a signatory or party of (Section 3, RA 10021).
c) Is the bank secrecy law in the Philippines violated
when the BIR issues a Warrant of Garnishment directed
against a domestic bank, requiring it not to allow any
withdrawal from any existing bank deposit of the delin-
quent taxpayer mentioned in the Warrant and to freeze
the same until the tax delinquency of said taxpayer is
settled with the BIR? Explain your answer. (5%). ‘12 -
Q7c
No. Garnishment is an administrative remedy allowed by law to en-
force a tax liability. Bank account shall be garnished by serving a war-
rant of garnishment , the bank shall turn over to the Commissioner so
much of the bank accounts as may be sufficient to satisfy the claim of
the Government (Section 208, NIRC).
Explain the following statements:
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a) The acquittal of the taxpayer in a criminal action under
the Tax Code does not necessarily result in exoneration
of said taxpayer from his civil liability to pay taxes. (3%);
‘12 - Q10a
In taxation, the taxpayer becomes criminally liable because of a civil
liability. While he may be acquitted on the criminal case, his acquittal
could not operate to discharge him from the duty to pay tax, since that
duty is imposed by statute prior to and independent of any attempt on
the taxpayer to evade payment. The obligation to pay the tax is not a
mere consequence of the felonious acts charged in the information,
nor is a mere civil liability derived from crime that would be wiped out
by the judicial declaration that the criminal acts charged did not exist
(Castro v. Collector of Internal Revenue, L-12174, April 26,1962).
b) Should the accused be found guilty beyond reasonable
doubt for violation of Section 255 of the Tax Code (for
failure to to file tax return or to supply correct informa-
tion), the imposition of the civil liability by the CTA
should be automatic and no assessment notice from the
BIR is necessary. (2%) ‘12 - Q10b
Yes. if the failure to file tax return or supply correct information resulted
to unpaid taxes the amount of which is proven during trial, the CTA
shall not only impose the criminal penalty but must likewise order the
payment of the civil liability (Section 205(b), NIRC). As a matter of fact,
it is well-recognized that in the case of failure to file a return, a pro-
ceeding in court for the collection of the tax may be filed without the
need of an assessment, which recognizes that the civil liability of a
taxpayer maybe established without the need of an assessment (Sec-
tion 222(a), NIRC).
Effect of the execution by a taxpayer of a “waiver of the statute of
limitations” on his defense of prescription. ’10 – Q2d
The waiver of the statute of limitations executed by a taxpayer is
not a waiver of the right to invoke the defense of prescription. The
waiver of the statute of limitation is merely an agreement in writing
between the taxpayer and the BIR that the period to assess and collect
taxes is extended to a date certain. If prescription has already set in at
the time of the execution of the waiver or if the said waiver is invalid,
the taxpayer can still raise prescription as a defense (Phil. Journalists,
Inc. v. CIR, 447 SCRA 214 [2004].)
Mirador, Inc., a domestic corporation, filed its annual Income Tax
Return for its taxable year 2008 on 2009. In the Return, it reflected
an income tax overpayment of P1 million and indicated its choice
to carry-over the overpayment as an automatic tax credit against
its income tax liabilities in subsequent years. On 2010, it filed its
Annual Income Tax Return for its taxable year 2009 reflecting a
taxable loss and an income tax overpayment for the current year
2009 in the amount of P500,000 and its income tax overpayment
for the prior year 2008 of P1 million. In its 2009 Return, the corpo-
ration indicated its option to claim for refund the total income tax
overpayment of P1,500,000. What can the corporation do? ’10 –
Q3
The corporation may claim as refund the amount of P500,000
representing the income tax overpayment for its taxable year 2009.
Since the taxpayer has opted to carry-over the P1 million overpaid
income tax for taxable year 2008, said option is considered irrevocable
and no application for cash refund shall be allowed for it (Sec. 76,
NIRC; CIR v. Bank of Philippine Islands, 592 SCRA 219 [2009].)
Failure to protest the Preliminary Assessment Notice (PAN) does
not render the assessment final and executory. What can be
protested is the Final Assessment Notice. ’10 - Q4
The issuance of preliminary assessment notice (PAN) does not
give rise to the right of the taxpayer to protest. What can be protested
!46
is the final assessment notice (FAN) of that assessment issued follow-
ing the PAN. Since the FAN was timely protested (within 30 days from
receipt thereof), the assessment did not became final and executory
(Sec. 228, NIRC; Rev. Reg. No. 12-99.)
Failure to file income tax return; A prior formal deficiency tax as-
sessment is not necessary before an Information for violation of
Section 255 of the NIRC could be filed in Regional Trial Court. ’10 -
Q6
In cases of failure to file a return, a proceeding in court may be
filed without an assessment (Sec. 222(a), NIRC.) The tax can be col-
lected by filing a criminal action with the RTC because a criminal action
is a mode of collecting the tax liability (Sec. 205, NIRC.) Besides, the
Commissioner is empowered to prepare a return on the basis of his
own knowledge, and upon such information as he can obtain from
testimony or otherwise, which shall be prima facie correct and sufficient
for legal purposes (Sec. 6(B), NIRC.) The issuance of a formal defi-
ciency tax assessment, therefore, is not required.
When the financial position of the taxpayer demonstrates a clear
inability to pay, the Commissioner of Internal Revenue may validly
compromise the tax liability. ’09 – Q1b
TRUE. Financial incapacity is a ground allowed by law in order
that the Commissioner of Internal Revenue may compromise a tax
liability (Section 204, NIRC.)
The doctrine of equitable recoupment allows a taxpayer whose
claim for refund has prescribed to offset tax liabilities with his
claim for overpayment. ’09 – Q1c
TRUE. The doctrine arose from common law allowing offsetting of
a prescribed claim for refund against a tax liability arising from the
same transaction on which an overpayment is made and underpay-
ment is due. The doctrine finds no application to cases where the taxes
are totally unrelated, and although it seems equitable, it is not allowed
in our jurisdiction (CIR v. UST, 104 Phil. 1062 [1958].)
The statement that “a false return and a fraudulent return are one
and the same” is FALSE. ’09 – Q1e
There is a difference between a false return a fraudulent return.
The first merely implies a deviation from the truth or fact whether inten-
tional or not, whereas the second is intentional and deceitful with the
aim of evading the correct tax due (Aznar v. Commissioner, 58 SCRA
519 [1974].)
ITI filed a claim for refund for unutilized input VAT with the CTA. In
the course of the trial, ITI engaged the services of an independent
CPA who examined the voluminous invoices and receipts of ITI.
ITI offered in evidence only the summary prepared by the CPA,
without the invoices and the receipts, and then submitted the
case for decisions.
Can the CTA grant ITI’s claim for refund based only on the CPA’s
summary? ’09 – Q4
NO. The summary prepared by the CPA does not prove anything
unless the documents which were the basis of the summary are sub-
mitted to the CTA and adduced in evidence. The invoices and receipts
must be presented because they are the only and direct evidence that
would enable the Court to determine with particular certainty the basis
of the refund (CIR v. Rio Tuba Nickel Mining Corp., 207 SCRA 549
[1992].)
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 the assessment on July 31, 2000. The protest was ini-
tially 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.
1. Is the CTA correct in dismissing the petition for review?
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YES. The protest was filed out of time, hence the CTA does not
acquire jurisdiction over the matter (CIR v. Atlas Mining and Develop-
ment Corp. [2000].)
2. Assume that the CTA’s decision dismissing the petition
for review has become final. Nay the Commissioner
legally enforce collection of the delinquent tax? ’09 –
Q17
NO. The protest was filed out of time and, therefore, did not sus-
pend the running of the prescriptive period for the collection of the tax.
Once the right to collect has prescribed, the Commissioner can no
longer enforce collection of the tax liability against the taxpayer (CIR v.
Atlas Mining and Development Corp. [2000].)
A taxpayer received an assessment notice from the BIR on Feb-
ruary 3, 2009. The following day, he filed a protest, in the form of a
request of reinvestigation, against the assessment and submitted
all relevant documents in support of the protest. On September
11, 2009, the taxpayer, apprehensive because he had not yet re-
ceived notice of a decision by the Commissioner on his protest,
sought your advice. What remedy or remedies are available to the
taxpayer? ’09 – Q18
The remedy of a taxpayer is to avail of either of two options:
1. File a petition for review with the CTA within 30 days after the
expiration of the 180-day period from submission of all rele-
vant documents; or
2. Await the final decision of the Commissioner on the disputed
assessment and appeal such final decision to the CTA within
30 days after receipt of a copy of such decision.
These options are mutually exclusive such that resort to one bars
the application of the other (Rizal Commercial Banking Corp. v. Com-
missioner of Internal Revenue, 522 SCRA 144 [2007].)
DEF Corp (DEFC). is a wholly-owned subsidiary of DEF, Inc.
(DEFI), California, U.S.A. Starting December 15, 2004, DEFC paid
annual royalties to DEFI for the use of the latter’s software, for
which the former, as withholding agent of the government, with-
held and remitted to the BIR the 15% final tax based on the gross
royalty payments. The withholding tax return was filed and the tax
remitted to the BIR on January 10 of the following year. On April
10, 2007, DEFC 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, DEFC filed a petition for review
with the CTA involving the tax credit claim for 2004 and 2005.
1. As a BIR lawyer handling the case, would you raise the
defense of prescription in your answer to the claim for
tax credit?
YES, the defense of prescription is available against the 2004 tax
credit. Under Section 229, NIRC, the prescriptive period is 2 years
reckoned from the filing of the annual return (CIR v. TMX Sales, G.R.
No. 83736, January 15, 1992; CIR v. PhilAm Life, G.R. No. 105208,
May 29, 1995; CIR v. CTA, G.R. No. 117254, January 21, 1999.)
However, the 2005 claim has not yet prescribed since its prescrip-
tive period ends on January 11, 2008, while the claim was filed on April
10, 2007. The filing of the Petition for Review with the Court of Tax
Appeals on 2005 Claim is premature (Section 57(A), NIRC.)
2. Can the BIR lawyer raise the defense that DEF Corp. is
not the proper party to file such claims for tax credit?
’08 – Q3
NO, the BIR cannot raise the defense that DEF Corporation is not
the proper party. In Commissioner of Internal Revenue v. Procter and
Gamble Philippine Manufacturing Corp., 204 SCRA 377 [1991], the
Court ruled that a final withholding agent is a proper party “with suffi-
cient legal interest” because it will be liable in the event that the final
income tax cannot be paid by the taxpayer (See also Philippine Guar-
anty Co. v. CIR and CTA, G.R. No. L-22074, April 30, 1965.)
After examining the books and records of EDS Corp. (EDSC), the
2004 final assessment notice, showing basic tax of P1,000,000,
deficiency interest of P400,000, and due date for payment of April
!47
30, 2007, but without demand letter, was mailed and released by
the BIR on April 15, 2007. The registered letter, containing the tax
assessment, was received by EDSC on April 25, 2007.
1. What is an assessment notice? What are the requisites
of a valid assessment?
An assessment notice is a computation prepared by the BIR of
the alleged unpaid taxes, plus interests, penalties or surcharges, if any.
However, an assessment notice must be accompanied by a demand
letter from the BIR in order to result in valid assessment (Rev. Reg. 12-
99.)
2. As tax lawyer of EDS Corp., what legal defense(s) would
you raise against the assessment? ’08 – Q7
I would raise the defense that there is no valid assessment be-
cause EDS Corporation did not receive a demand letter from the BIR.
ABC Corp. won a tax refund case for P50 million. Upon execution
of the judgment and when trying to get the Tax Credit Certificates
(TCC) representing the refund, the BIR refused to issue the TCC
on the basis of the fact that the corporation is under audit by the
BIR and it has a potential tax liability. Is there a valid justification
for the BIR to withhold the issuance of the TCC? ’07 – Q13
The BIR has no valid justification to withhold the TCC. Off-setting
the amount of the TCC against a potential tax liability is not allowed,
because both obligations are not yet fully-liquidated. While the amount
of the TCC has been determined, the amount of deficiency is yet to be
determined through the completion of the audit (Philex Mining Corp. v.
CIR, 294 SCRA 687 [1998].)
Alternative Answer:
There is no valid justification to withhold the TCC. The require-
ment, that the claim for refund/TCC and liability for the deficiency taxes
must be settled under one proceeding to avoid multiplicity of suits, will
not apply since the determination of the entitlement to the refund was
removed from the BIR. To reopen the claim for refund in order to give
way to the introduction of evidence of a deficiency assessment will
lead to an endless litigation, which is not allowed (CIR v Citytrust Bank-
ing Corp., 499 SCRA 477 [2006].)
On June 1, 2003, Global Bank received a final notice of assess-
ment from the BIR for deficiency DST in the amount of P5 Million.
On June 30, 2003, Global Bank filed a request for reconsideration
with the CIR. The Commissioner denied the request for reconsid-
eration 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 its counsel, what will be your advice to the bank? ’06 – Q8
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 is still available. I will further
advise the bank to file a motion for injunction with the Court of Tax
Appeals to enjoin the Commissioner from enforcing the assessment
pending resolution of the appeal. While an 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.
Another Suggested Answer:
Since the denial of the protest was timely made on May 30, 2006,
I would assume that Global Bank has already lost its right to appeal.
The assessment having become final for failure to file a timely appeal, I
will now advise my client to file a request with the Commissioner of
Internal Revenue for compromise settlement of the tax assessed,
which has already become final by invoking doubtful validity of the
assessment (Section 204, NIRC.)
Another Suggested Answer:
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Since the assessment has already become final, I will now advise
Global Bank to pay the assessment in order to save on the 20% inter-
est which continues to run indefinitely until the entire obligation is paid
(Section 204, NIRC.) This will also save the taxpayer and its officers
from possible criminal prosecution for non-payment of taxes consider-
ing that in taxation, criminal liability arises as a result of the civil liability
to pay taxes (Republic v. Patanao, 20 SCRA 712 [1967].)
The CIR issued an assessment for deficiency income tax for tax-
able year 2000 last July 31, 2006 in the amount of P10 million in-
clusive of surcharges and interests. If the delinquent taxpayer is
your client, what steps will you take? What is your defense? ’06 –
Q9
Since my client has already lost his right to protest (the assess-
ment having been issued on July 31, 2006 and that he is already cate-
gorized as a delinquent taxpayer), I will advise him to wait for a collec-
tion action to be instituted to 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 prescrip-
tion. 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 warranted (Philippine Journalists, Inc. v. CIR, 447
SCRA 214 [2004].)
Another Suggested Answer:
I will advise my client, who is a delinquent taxpayer, to file a re-
quest with the Commissioner of Internal Revenue for the abatement of
the entire assessment on the ground that the same is unjustly as-
sessed (Section 204, NIRC.) I will invoke prescription as a defense
against the assessment. I will tell the Commissioner that the assess-
ment having been issued beyond the prescriptive period, the deficiency
income tax should appear to be unjustly assessed which would justify
the abatement or cancellation of the entire assessment.
Another Suggested Answer:
I will immediately file a protest within thirty (30) days from receipt
of the assessment by my client addressed to the Commissioner of
Internal Revenue, alleging prescription as my defense because the
assessment was issued beyond three (3) years as required by law
(Sections 338 and 203, NIRC.)
Should the Commissioner deny my protest, I will file an appeal to
the Court of Tax Appeals (CTA) within (30) days from receipt of the
decision (Section 228, NIRC.)
Should the CTA Division deny my petition for review, I will file a
Motion for Reconsideration within 15 days from receipt of the denial.
Should the Division deny my Motion for Reconsideration, I will appeal
to the CTA en banc and from the latter’s denial, I will appeal to the
Supreme Court by way of a petition for certiorari within 15 days from
receipt of the en banc decision.
The Collector of Customs issued an assessment for unpaid cus-
toms duties and taxes on the importation of your client in the
amount of P980,000. Where will you file your case to protect your
client's right? Choose the correct courts/ agencies, observing
their proper hierarchy.
1. Court of Tax Appeals
2. Collector of Customs
3. Commissioner of Customs
4. RTC
5. MTC
6. CA
7. SC. ’06 – Q10
I will file a protest with the Collector of Customs (Section 2308,
TCC.) Should the Collector promulgate a decision adverse to my client,
I will give a written notice to the Collector, copy furnished the Commis-
sioner of Customs, of my client’s desire to have the matter reviewed by
the Commissioner (Section 2313, TCC.) If the Commissioner affirms
the decision of the Collector, I will file an appeal with the Court of Tax
Appeals within 30 days from receipt of the decision (1997 Rules of Civil
Procedure, R.A. No. 9282.) If the Court of Tax Appeals issues a deci-
!48
sion adverse to my client, I will file with the Supreme Court a verified
petition for review on certiorari pursuant to Rule 45 (R.A. No. 9282.)
Another Suggested Answer:
I will file my case as follows:
1. Protest with the Collector of Customs (Section 2308, TCC.);
2. Review by the Commissioner of Customs (Section 2313,
TCC);
3. Appeal to the Court of Tax Appeals (R.A. No, 9282); and
4. Petition for Review on Certiorari with the Supreme Court
(R.A. No. 9282.)
Mr. Abraham Eugenio, a pawnshop operator, after having been
required by the RDO to pay VAT pursuant to a Revenue Memoran-
dum Order (RMO) of the CIR, filed with the RTC an action ques-
tioning the validity of the RMO. If you were the judge, will you
dismiss the case? ’06 – Q12
YES. The RMO is in reality a ruling of the Commissioner in im-
plementing the provisions of the Tax Code on the taxability of pawn-
shops. Jurisdiction to review rulings of the Commissioner is lodged
with the Court of Tax Appeals and not with the Regional Trial Court. 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].)
Gerry was being prosecuted by the BIR for failure to pay his in-
come tax liability for CY 1999 despite several demands by the BIR
in 2002. The Information was filed with the RTC only last June
2006. Gerry filed a motion to quash the information on the ground
of prescription, the information having been filed beyond the 5-
year reglementary period. If you were the judge, will you dismiss
the Information? Why? ’06 – Q13
NO. The trial court can exercise jurisdiction. Prescription of a
criminal action begins to run from the day of the commission of the
violation of the law. The criminal violation was committed when Gerry
willfully refused to pay despite demands in 2002. Since the information
was filed in June 2006, the criminal case was instituted within the five-
year period required by law (Tupaz v. Ulep, 316 SCRA 118 [1999];
Section 281, NIRC.)
Is a deficiency tax assessment a bar to a claim for refund or tax
credit? ’05 – Q1d
NO. As a general rule, a deficiency tax assessment is not a bar to
a claim for tax refund or tax credit. It is logically appropriate; however,
that if the deficiency tax assessment is already final, the Commissioner
should not grant the claim unless the taxpayer pays the deficiency.
Likewise, no tax refund or tax credit will be granted as long as there is
a pending deficiency tax assessment for the same taxable period. To
award a tax refund or tax credit despite the existence of a deficiency
assessment is an absurdity and a polarity in conceptual effects. A tax-
payer cannot be entitled to a refund and at the same time be liable for
tax deficiency assessment. In order to avoid multiplicity of suits, it is
logically necessary and legally appropriate that the issue of deficiency
tax assessment be resolved jointly with the taxpayer’s claim for tax
refund, to determine once and for all in a single proceeding the true
and correct amount of tax due and demandable (CIR v. Court of Ap-
peals, Citytrust Banking Corp. and Court of Tax Appeals, 234 SCRA
348 [1994].)
State and discuss briefly whether the following cases may be
compromised or may not be compromised”
1. Delinquent accounts;
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 demonstrated a clear inability to
pay the tax (Section 204(A), NIRC; Section 2, Rev. Reg. No. 30-2002.)
2. Cases under administrative protest, after issuance of
the final assessment notice to the taxpayer, which are
still pending;
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These may be compromised, provided it is premised upon doubt-
ful validity of the assessment or financial incapacity to pay (ibid.)
3. Criminal tax fraud cases;
These may not be compromised, so that the taxpayer may not
profit from his fraud, thereby discouraging its commission (ibid.)
4. Criminal violations already filed in court;
There may not be compromised, in order that the taxpayer will not
profit from his criminal acts (ibid.)
5. Cases where final reports of reinvestigation or recon-
sideration have been issued resulting in the reduction of
the original assessment agreed to by the taxpayer when
he signed the required agreement form. ’05 – Q2(2)
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 (Section 2, Rev. Reg. No. 30-2002.)
State the conditions required by the Tax Code before the Com-
missioner of Internal Revenue could authorize the refund or credit
of taxes erroneously or illegally received. ’05 – Q4(2)(a)
The conditions are:
1. A writer claim for refund is filed by the taxpayer with the
Commissioner of Internal Revenue (Section 204, NIRC);
2. The claim for refund must be a categorical demand for reim-
bursement (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 (2) years from date of pay-
ment of the tax or penalty regardless of any supervening
event (Section 229, NIRC.)
Does a withholding agent have the right to file an application for
tax refund? ’05 – Q4(2)(b); ’99 – Q8
YES. A withholding agent should be allowed to claim for a tax
refund, because under the law said agent is the one who is liable for
any violation of the withholding tax law should such violation occur
(Commissioner of Internal Revenue v. Wander Philippines, Inc., 160
SCRA 573 [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 of Internal Revenue v. Procter and Gamble
Philippine Manufacturing Corp., 204 SCRA 377 [1991].)
A taxpayer received a tax deficiency assessment of P1.2 Million
from the BIR demanding payment within 10 days. Otherwise, it
would collect through summary remedies. The taxpayer request-
ed 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 CIR
be deemed a denial of the request for reconsideration of the tax-
payer to entitle him to appeal to the CTA? Decide. '05 – Q5
YES. The action of the Commissioner of Internal Revenue is
deemed a denial of the request for reconsideration of the taxpayer, this
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’s 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
!49
a final decision on the disputed assessment (CIR v. Isabela Cultural
Corp., 361 SCRA 71 [2001].)
Another Suggested Answer:
No, the Final Notice Before Seizure does not constitute a denial of
the request for reconsideration. The Commissioner is mandated to
come out with a decision clearly stating the facts and the law upon
which it is based and that the same constitutes his final decision (Rev.
Reg. No. 12-99, Implementing Section 228, NIRC.) It cannot merely be
implied from the issuance of a Warrant of Distraint and Levy (CIR v.
Union Shipping Corp., 185 SCRA 547 [1990].) Since the final notice
before seizure is issued ahead of a Warrant of Distraint and Levy, with
more reason that his earlier action cannot be considered as a denial of
the protest.
Danilo, who is engaged in the trading business, entrusted to his
accountant the preparation of his income tax return and the pay-
ment of the tax due. The accountant filed a falsified tax return by
underdeclaring the sales and overstating the expense deductions
by Danilo. Is Danilo liable for the deficiency tax and the penalties
thereon? What is the liability, if any, of the accountant? '05 – Q6a
YES. Danilo is liable for the deficiency tax as well as for the defi-
ciency interest. However, he is not liable to 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 (Aznar v. Court of
Tax Appeals, 58 SCRA 519 [1974].)
On the other hand, the accountant may be held criminally liable
for violation of the Tax Code when he falsified the tax return by under-
declaring the sale and overstating the expense deductions (Section
257, NIRC.) If Danilo’s accountant is a Certified Public Accountant, his
certificate as CPA shall automatically be revoked or cancelled upon
conviction.
In 1995, the BIR filed before the DOJ a criminal complaint against
a corporation and its officers for alleged evasion of taxes. The
complaint was supported by a sworn statement of the BIR exam-
iners showing the computation of the tax liabilities of the erring
taxpayer. The corporation filed a motion to dismiss the criminal
complaint on the ground that there has been, as yet, no assess-
ment of its tax liability; hence, the criminal complaint was prema-
ture. The DOJ denied the motion on the ground that an assess-
ment of the tax deficiency of the corporation is not a precondition
to the filing of a criminal complaint and that in any event, the joint
affidavit of the BIR examiners may be considered as an assess-
ment of the tax liability of the corporation. Is the ruling of the DOJ
correct? ’05 – Q14(2)
YES. The ruling on the DOJ in denying the motion is correct. The
issuance of the deficiency assessment notice prior to prosecution is
not necessary because the facts of the case show that the crime of
evasion is complete since the violator knowingly and willfully filed a
fraudulent return with intent to evade/defeat a part or all of the tax
(Ungab v. Cusi, Jr., 97 SCRA 877 [1980].) What is involved here is not
the collection of taxes but a criminal prosecution for violation of the
National Internal Revenue Code.
However, the contention that the joint affidavit of the BIR examin-
ers showing the computation of tax liabilities may be considered an
assessment is erroneous. It is not an assessment which may entitle
the taxpayer to protest (Commissioner of Internal Revenue v. Pascor
Realty & Development Corp., 309 SCRA 402 (1999].) An assessment
is a formal notice to the taxpayer that the amount thereon is due as a
tax and containing a demand for the payment thereof (Alhambra Cigar
& Cigarette Mfg. Co. v. Collector, 105 Phil. 1337 [1959].)
For failure to comply with certain corporate requirements, the
stockholders of ABC Corp. were notified by the SEC that the cor-
poration would be subject to involuntary dissolution. The stock-
holders did not do anything to comply with the requirements, and
the corporation was dissolved. Can the stockholders be held per-
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sonally liable for the unpaid taxes of the dissolved corporation?
'04 – Q7a
NO. As a general rule, stockholders cannot be held personally
liable for the unpaid taxes of a dissolved corporation. The rule prevail-
ing under our jurisdiction is that a corporation is vested by law with a
personality that is separate and distinct from those of the persons
composing it (Sunio v. NLRC, 127 SCRA 390 [1984].)
However, stockholders may be held 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, 4 SCRA 986 [1962]).
Likewise, when stockholders have unpaid subscriptions to the capital
of the corporation they can be made liable for unpaid taxes of the cor-
poration to the extent of their unpaid subscriptions.
After the tax assessment had become final and unappealable, the
CIR initiated the filing of a civil action to collect the tax due from
NX. After several years, a decision was rendered by the court
ordering NX to pay the tax due plus penalties and surcharges.
The judgment became final and executory, but attempts to exe-
cute the judgment award were futile. Subsequently, NX offered the
CIR a compromise settlement of 50% of the judgment award, rep-
resenting 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? ’04 – Q6b
YES. The Commissioner has the power to accept the offer of
compromise if the financial position of the taxpayer clearly demon-
strates a clear inability to pay the tax (Section 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-
tion 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 fi-
nancial 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 Com-
missioner 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.
On March 12, 2001, REN paid his taxes. Ten months later, he real-
ized that he had overpaid and so he immediately filed a claim for
refund with the CIR. On February 27, 2003, he received the deci-
sion of the CIR denying REN's claim for refund. On March 24,
2003, REN filed an appeal with the CTA. Was his appeal filed on
time or not? '04 – Q10a
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 Court of Tax Appeals. The law provides that "no suit or proceeding
shall be filed after the expiration of two years from the date of the pay-
ment of the tax or penalty regardless of any supervening cause that
may arise after payment (Section 229, NIRC.) Since the appeal was
only made on March 24, 2003, more than two years had already
elapsed from the time the taxes were paid on March 12, 2003. Accord-
ingly, REN had lost his judicial remedy because of prescription.
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 assess-
ment for the sum of P250.000, inclusive of interest and penalty.
For failure of Mr. and Mrs. Sebastian to pay the tax within the pe-
riod 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
!50
against the action of the BIR in enforcing collection of the tax by
the summary remedies of warrants of distraints and levy? '02 –
Q1b
I will raise the defense of prescription. The right of the BIR to
assess prescribes after three years counted from the last day pre-
scribed by law for the filing of the income tax returns when the said
return is filed on time (Section 203, NIRC.) 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.
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
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 06, 1998 that the return filed by
Mr. Castro was fraudulent and that he failed to declare all proper-
ties 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
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.
1. Decide Mr. Castro's protest.
The protest should be resolved against Mr. Castro. What was filed
is a fraudulent return making the prescriptive period for assessment
ten (10) years from discovery of the fraud (Section 222, NIRC.) Accord-
ingly, the assessment was issued within that prescriptive period to
make an assessment based on a fraudulent return.
2. What legal requirement/s must Mr. Santos comply with
so that he can claim his reward? ’02 – Q2
The legal requirements that must be complied by Mr. Santos to
entitle him to reward are as follows:
1. He should voluntarily file a confidential information under
oath with the Law Division of the Bureau of Internal Revenue
alleging therein the specific violations constituting fraud;
2. The information must not yet be in the possession of the
Bureau of Internal Revenue, or refer to a case already pend-
ing or previously investigated by the Bureau of Internal Rev-
enue;
3. Mr. Santos should not be a government employee or a rela-
tive of a government employee within the sixth degree of
consanguinity; and
4. The information must result to collections of revenues and/or
fines and penalties (Section 282, NIRC.)
TY Corp. (TYC) filed its adjusted income tax return for 1993 on
April 12, 1994 showing a net loss from operations. After investiga-
tion, the BIR issued a pre-assessment notice on March 30, 1996. A
final notice and demand letter dated April 15, 1997 was issued,
personally delivered to and received by the company's chief ac-
countant. For willful refusal and failure of TY Corporation to pay
the tax, warrants of distraint and levy on its properties were is-
sued and served upon it. On January 10, 2002, a criminal charge
for violation of the Tax Code was instituted in the RTC with the
approval of the CIR. The company moved to dismiss the criminal
complaint on the ground that an act for violation of any provision
of the Tax Code prescribes after five (5) years and, in this case,
the period commenced to run on March 30, 1996 when the pre-
assessment was issued. How will you resolve the motion? ’02 –
Q4
The motion to dismiss should not be granted. It is only when the
assessment has become final and unappealable that the 5-year period
to file a criminal action commences to run (Tupaz v. Ulep, 316 SCRA
118 [1999].) The pre-assessment notice issued on March 30, 1996 is
not a final assessment which is enforceable by the BIR. It is the is-
suance of the final notice and demand letter dated April 15, 1997 and
the failure of the taxpayer to protest within 30 days from receipt thereof
that made the assessment final and unappealable. The earliest date
that the assessment has become final is May 16, 1997 and since the
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criminal charge was instituted on January 10, 2002, the same was
timely filed.
What must a taxpayer do in order to claim a refund of, or tax cred-
it for, taxes and penalties which he alleges to have been erro-
neously, illegally or excessively assessed or collected? '02 – Q5a
The taxpayer must comply with the following procedures in claim-
ing a refund of, or tax credit for, taxes and penalties which he alleges
to have been erroneously, illegally or excessively assessed or collect-
ed:
1. He should file a claim for refund with the Commissioner with-
in two years after the date of payment of the tax or penalty
(Section 204, NIRC);
2. The claim filed must state a categorical demand for reim-
bursement (Bermejo 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 (Section 229, NIRC.)
Can the Commissioner grant a refund or tax credit even without a
written claim for it? ’02 – Q5b
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 (Sections 76 and 204, NIRC.)
Moreover, the law provides that the Commissioner may, even
without a written claim therefor, refund or credit any tax where on the
face of the return upon which payment was made, such payment ap-
pears clearly to have been erroneously paid (Section 229, NIRC.)
What constitutes prime facie evidence of a false or fraudulent
return to justify the imposition of a 50% surcharge on the defi-
ciency tax due from a taxpayer? ’02 – Q7
There is a prima facie evidence of false or fraudulent return when
the taxpayer SUBSTANTIALLY UNDERDECLARED his taxable sales,
receipts or income, or SUBSTANTIALLY OVERSTATED his deduc-
tions, 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 ren-
der the taxpayer liable for substantial underdeclaration and overdecla-
ration, respectively, and will justify the imposition of the 50% surcharge
on the deficiency tax due from the taxpayer (Section 248, NIRC).
On March 15, 2000, the BIR issued a deficiency income tax as-
sessment 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.
1. Can the BIR file the civil action for collection, pending
decision on the administrative protest?
YES, because there is no prohibition for this procedure consider-
ing that the filing of a civil action for collection during the pendency of
an administrative protest constitutes the final decision of the Commis-
sioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548
[1990].)
2. As counsel for Valera, what action would you take in
order to protect the interest of your client? '02 – Q13
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 injunctive suit
!51
because it is not an available remedy. I would then appeal the case to
the Court of Tax 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].)
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 administra-
tive hearings, the original assessment of P150,000 was reduced to
P75.000.00 and a modified assessment was thereafter issued on
August 05, 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. ’02 – Q15
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 by the filing of a request for reconsideration which was
acted upon by the Commissioner of Internal Revenue (CIR v. Wyeth
Suaco Laboratories, Inc., 202 SCRA 125 [1991].)
[Note: In Commissioner of Internal Revenue v. Philippine Global
Communication, Inc., 506 SCRA 427 (2006), the Court ruled that “a
request for reconsideration does not toll the running of the prescription
period for the collection of an assessed tax.”]
In the investigation of the withholding tax returns of AZ Medina
Security Agency (AZ Medina) for the taxable years 1997 and 1998,
a discrepancy between the taxes withheld from its employees and
the amounts actually remitted to the government was found. Ac-
cordingly, before the period of prescription commenced to run,
the BIR issued an assessment and a demand letter calling for the
immediate payment of the deficiency withholding taxes in the
total amount of P250,000. Counsel for AZ Medina protested the
assessment for being null and void on the ground that no pre-
assessment notice had been issued. However, the protest was
denied. Counsel then filed a petition for prohibition with the CTA
to restrain the collection of the tax.
1. Is the contention of the counsel tenable?
NO, the contention of the counsel is untenable. Section 228 of the
Tax Code expressly provides that no pre-assessment notice is required
when a discrepancy has been determined between the tax withheld
and the amount actually remitted by the withholding agent. Since the
amount assessed relates to deficiency withholding taxes, the BIR is
correct in issuing the assessment and demand letter calling for the
immediate payment of the deficiency withholding taxes (Section 228,
NIRC.)
2. Will the special civil action for prohibition brought be-
fore the CTA under Sec. 11 of R.A. No. 1125 prosper? '02
– Q16
The special civil action for prohibition will not prosper, because
the CTA has no jurisdiction to entertain the same. The power to issue
writ of injunction provided for under Section 11 of R.A. No. 1125 is only
ancillary to its appellate jurisdiction. The CTA is not vested with original
jurisdiction to issue writs of prohibition or injunction independently of
and apart from an appealed case. The remedy is to appeal the deci-
sion of the BIR (Collector v. Yuseco, 3 SCRA 313 [1961].)
Minolta Philippines, Inc. (Minolta) is an EPZA-registered enter-
prise 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 P150.000. On May 15, 1999, because of financial
difficulty, the deficiency tax remained unpaid, as a result of which
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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.
1. Will the BIR's action for collection prosper? As counsel
of Minolta, what action will you take?
YES, BIR's action for collection will prosper because the assess-
ment is already final and executory, 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 only be allowed to pay the civil
penalties for non-withholding pursuant to RMO No. 38-83.
[Note: It is not clear whether this is a case of non-withholding/
underwithholding or non-remittance of tax withheld. As such, the tax
counsel may be open to other remedies against the assessment.]
2. May criminal violations of the Tax Code be compro-
mised? If Minolta makes a voluntary offer to compro-
mise the criminal violations for non-filing and non-pay-
ment of taxes for the year 1998, may the Commissioner
accept the offer? ’02 – Q17
All criminal violations of the Tax Code may be compromised ex-
cept those already filed in court or those involving fraud (Section 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.
Mr. Chan, a manufacturer of garments, was investigated for failure
to file tax returns and to pay taxes for the taxable year 1997. De-
spite the subpoena duces tecum issued to him, he refused to
present and submit his books of accounts and allied records.
Investigators, therefore, raided his factory and seized several
bundles of manufactured garments, supplies and unpaid import-
ed textile materials. After his apprehension and based on the tes-
timony of a former employee, deficiency income and business
taxes were assessed against Mr. Chan on April 15, 2000. It was
then that he paid the taxes. Criminal action was nonetheless insti-
tuted against him in the RTC for violation of the Tax Code. Mr.
Chan moved to dismiss the criminal case on the ground that he
had already paid the taxes assessed against him. He also de-
manded the return of the garments and materials seized from his
factory. How will you resolve Mr. Chan's motion? ’02 – Q18
The motion to dismiss should be denied. The satisfaction of the
civil liability is not one of the grounds for the extinction of criminal ac-
tion (People v. Ildefonso Tierra, 12 SCRA 666 [1964].) Likewise, the
payment of the tax due after apprehension shall not constitute a valid
defense in any prosecution for violation of any provision of the Tax
Code (Section 253(a), NIRC). However, the garments and materials
seized from the factory should be ordered returned because the pay-
ment of the tax had released them from any lien that the Government
has over them.
May the collection of taxes be barred by prescription? ’01 – Q3a
YES. The collection of taxes may be barred by prescription. The
prescriptive periods for collection of taxes are governed by the tax law
imposing the tax. However, if the tax law does not provide for prescrip-
tion, the right of the government to collect taxes become impre-
scriptible.
May the courts enjoin the collection of revenue taxes? ’01 – Q3b
!52
As a general rule, the courts have no authority to enjoin the col-
lection of revenue taxes (Section 218, NIRC.) However, the Court of
Tax Appeals is empowered to enjoin the collection of taxes through
administrative remedies when collection could jeopardize the interest
of the government or taxpayer (Section 11, R.A. No. 1125.)
A DC failed to withhold and remit the tax on income received from
Philippine sources by a NRFC. In addition to the civil penalties
provided for under the Tax Code, a compromise penalty was im-
posed for violation of the withholding tax provisions. May the CIR
legally enforce the collection of compromise penalty? '00 – Q5
NO. There is no showing that the compromise penalty was im-
posed by the Commissioner of Internal Revenue with the agreement
and conformity of the taxpayer (Wonder Mechanical Engineering Corp.
v. CTA, 64 SCRA 555 [1975].)
On June 16, 1997, the 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 filed a timely protest against the assessment and request-
ed for waiver of the surcharge, interest and penalty. The protest
was denied by the CIR with finality on September 13, 1997. Con-
sequently, the Executor was made to pay the deficiency assess-
ment on October 10, 1997. The following day, the Executor filed a
Petition with the CTA praying for the refund of the surcharge,
interest and compromise penalty. The CTA took cognizance of the
case and ordered the CIR to make a refund. The CIR filed a Peti-
tion for Review with the Supreme Court 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.
1. Is the stand of the Commissioner correct?
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 (Section 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.
2. Why is the filing of an administrative claim with the BIR
necessary? '00 – Q11
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 subordi-
nate officers (Gonzales v. CTA, 14 SCRA 79 [1965]); and
2. To notify the Government that such taxes have been ques-
tioned and the notice should be borne in mind in estimating
the revenue available for expenditures (Bermejo v. Collector
of Internal Revenue, 87 Phil. 96 [1950].)
Mr. Reyes, a Filipino citizen engaged in the real estate business,
filed his 1994 ITR 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 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? '00 – Q14
NO. Prescription has not set in because the period of limitations
for the Bureau of Internal Revenue to issue an assessment was SUS-
PENDED during the time that Mr. Reyes was out of the Philippines or
from the period December 15, 1995 up to December 8, 1998 (Section
223 in relation to Section 203, NIRC.)
Under what conditions the CIR may be authorized to:
1. Compromise the payment of any internal revenue tax?
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The Commissioner of Internal Revenue may be 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.
2. Abate or cancel a tax liability? ’00 – Q16
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 ex-
cessively assessed; or
2. The administration and collection costs involved do not justi-
fy the collection of the amount due (Section 204(B), NIRC.)
A taxpayer is suspected not to have declared his correct gross
income in his return filed for 1997. The examiner requested the
CIR to authorize him to inquire into the bank deposits of the tax-
payer so that he could proceed with the net worth method of in-
vestigation to establish fraud. May the examiner be allowed to
look into the taxpayer’s bank deposits? In what cases may the
CIR or his duly authorized representative be allowed to inquire or
look into the bank deposits of a taxpayer? ’00 – Q17
NO, as this would be violative of R.A. No. 1405, the Bank De-
posits Secrecy Law.
The Commissioner of Internal Revenue or his duly authorized
representatives may be allowed to inquire or look into the bank de-
posits of a taxpayer in the following cases:
1. For purposes of determining the gross estate of a decedent;
2. Where the taxpayer has filed an application for compromise
of his tax liability by reason of financial incapacity to pay
such tax liability (Section 6(F), NIRC);
3. Where the taxpayer has signed a waiver authorizing the
Commissioner or his duly authorized representatives to in-
quire into the bank deposits.
Describe separately the procedures on the legal remedies under
the Tax Code available to an aggrieved taxpayer both at the ad-
ministrative and judicial levels. '00 – Q18
The legal remedies of an aggrieved taxpayer under the Tax Code,
both at the administrative and judicial levels, may be classified into
those for assessment, collection and refund.
The procedures for the ADMINISTRATIVE REMEDIES for AS-
SESSMENT are as follows:
1. After receipt of the Pre-Assessment Notice, he must within
fifteen (15) days from receipt explain why no additional taxes
should be assessed against him.
2. If the Commissioner of Internal Revenue issues an assess-
ment notice, the taxpayer must administratively protest or
dispute the assessment by filing a motion for reconsideration
or reinvestigation within thirty (30) days from receipt of the
notice of assessment (4th par. Section 228, NIRC.)
Within sixty (60) days from filing of the protest, the taxpayer shall
submit all relevant supporting documents.
The JUDICIAL REMEDIES of an aggrieved taxpayer relative to an
ASSESSMENT NOTICE are as follows:
1. Where the Commissioner of Internal Revenue has not acted
on the taxpayer's protest within a period of one hundred
eighty (180) days from submission of all relevant documents,
then the taxpayer has a period of thirty (30) days from the
lapse of said 180 days within which to interpose a petition for
review with the Court of Tax Appeals.
2. Should the Commissioner deny the taxpayer's protest, then
he has a period of thirty (30) days from receipt of said denial
within which to interpose a petition for review with the Court
of Tax Appeals.
In both cases the taxpayer must apply with the Court of Tax Ap-
peals for the Issuance of an Injunctive writ to enjoin the Bureau of In-
ternal Revenue from collecting the disputed tax during the pendency of
the proceedings.
From an adverse decision of Division of the CTA, the taxpayer
may file a motion for reconsideration before the same Division of the
!53
CTA within fifteen (15) days from notice thereof (Section 11, R.A. 1125
as amended by RA 9282 [2004].)
Then, a party adversely affected by a resolution of a Division of
the CTA on a motion for reconsideration may file a petition for review
with the CTA en banc (Section 18, RA 1125 as amended by RA 9282
[2004].)
A party adversely affected by a decision or ruling of the CTA en
banc may file with the Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997 Rules of Court (Section 19,
RA 1125 as amended by RA 9282 [2004].)
The employment by the Bureau of Internal Revenue of any of the
Administrative Remedies for the collection of the tax like distraint, levy,
etc. may be administratively appealed by the taxpayer to the Commis-
sioner whose decision is appealable to the Court of Tax Appeals under
other matter arising under the provisions of the National Internal Code.
The judicial appeal starts with the Court of Tax Appeals, and continues
in the same manner as shown above.
Should the Bureau of Internal Revenue decide to utilize its judicial
tax remedies for collecting the taxes by means of an ordinary suit filed
with the regular courts for the collection of a sum of money, the tax-
payer could oppose the same going up the ladder of judicial processes
from the Municipal Trial Court (as the case may be) to the Regional
Trial Court, to the Court of Tax Appeals, thence to the Supreme Court.
The remedy of an aggrieved taxpayer on a claim for refund is to
appeal the adverse decision of the Commissioner to the CTA in the
same manner outlined above.
A Co., a Philippine Corporation, filed its 1995 ITR on April 15, 1996
showing a net loss. On November 10, 1996, it amended its 1995
ITR to show more losses. After a tax investigation, the BIR disal-
lowed 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. '99 – Q1
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 (Section 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., Ltd., 14 SCRA 52
[1965].) 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 deduc-
tions, claimed.
A Co., a Philippine corporation, received an income tax deficiency
assessment from the BIR on May 5, 1995. On May 31, 1995, A Co.
filed its protest with the BIR. On July 30, 1995, A Co. submitted to
the BIR all relevant supporting documents. The CIR did not for-
mally rule on the protest but on January 25, 1996, A Co. was
served a summons and a copy of the complaint for collection of
the tax deficiency filed by the BIR with the RTC. On February 20,
1996, A Co. brought a Petition for Review before the CTA. The BIR
contended that the Petition is premature since there was no for-
mal denial of the protest of A Co. and should therefore be dis-
missed.
1. Has the CTA jurisdiction over the case?
YES, the CTA has jurisdiction over the case because this qualifies
as an appeal from the Commissioner's decision on disputed assess-
ment. When the Commissioner decided to collect the tax assessed
without first deciding on the taxpayer's protest, the effect of the Com-
missioner’s action of filing a judicial action for collection is a decision of
denial of the protest, in which event the taxpayer may file an appeal
with the CTA (Republic v. Lim Tian Teng & Sons, Inc., 16 SCRA 584
[1966]; Dayrit v. Cruz, L-39910, September 26, 1988.)
2. Has the RTC jurisdiction over the collection case filed
by the BIR? '99 – Q4b
The RTC has no jurisdiction over the collection case filed by the
BIR. The filing of an appeal with the CTA has the effect of divesting the
RTC of jurisdiction over the collection case. At the moment the taxpay-
er appeals the case to the Court of Tax Appeals in view of the Com-
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missioner's filing of the collection case with the RTC which was con-
sidered as a decision of denial, it gives a justifiable basis for the tax-
payer to move for dismissal in the RTC of the Government's action to
collect the tax liability under dispute (Yabes v. Flojo, 115 SCRA 278
[1982]; San Juan v. Vasquez, 3 SCRA 92 [1961].) There is no final,
executory and demandable assessment which can be enforced by the
BIR, once a timely appeal is filed.
A Co., a Philippine corporation, received an income tax deficiency
assessment from the BIR on November 25, 1996. On December
10, 1996, A Co. filed its protest with the BIR. On May 20, 1997, the
BIR issued a warrant of distraint to enforce the assessment. This
warrant was served on A Co. on May 25, 1997. In a letter dated
June 4, 1997 and received by A Co. 5 days later, the CIR formally
denied A Co.'s protest stating that it constitutes his final decision
on the matter. On July 6, 1997, A Co. filed a Petition for Review
with the CTA. The BIR moved to dismiss the Petition on the
ground that the CTA has no jurisdiction over the case. Decide. ’99
– Q5
The CTA has jurisdiction over the case. The appealable decision
is the one which categorically stated that the Commissioner's action on
the disputed assessment is final and, therefore, the reckoning of the
30-day period to appeal was on June 9, 1999. The filing of the petition
for review with the CTA was timely made. The Supreme Court has
ruled that the CIR must categorically state that his action on a disputed
assessment is final; otherwise, the period to appeal will not commence
to run. That final action cannot be implied from the mere issuance of a
warrant of distraint and levy (CIR v. Union Shipping Corp., 185 SCRA
547 [1990].)
A Co., a Philippine corporation, is a big manufacturer of con-
sumer goods and has several suppliers of raw materials. The BIR
suspects that some of the suppliers are not properly reporting
their income on their sales to A Co. The CIR therefore: 1) Issued
an access letter to A Co. to furnish the BIR on information on
sales and payments to its suppliers.; 2) 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? '99 – Q6
I will advise A Co. and B Co. that the BIR is justified only in getting
information from the former but not from the latter. The BIR is autho-
rized to obtain information from other persons other than those whose
internal revenue tax liability is subject to audit or investigation. Howev-
er, this power shall not be construed as granting the Commissioner the
authority to inquire into bank deposits (Section 5, NIRC.)
Local Government Tax
Heeding the pronouncement of the President that the worsening
traffic condition in the metropolis was a sign of economic
progress, the Congress enacted Republic Act No. 10701, also
known as An Act Imposing a Transport Tax on the Purchase of
Private Vehicles.
Under RA 10701, buyers of private vehicles are required to pay a
transport tax equivalent to 5% of the total purchase price per ve-
hicle purchased. RA 10701 provides that the Land Transportation
Office (LTO) shall not accept for registration any new vehicles
without proof of payment of the 5% transport tax. RA I 0701 fur-
ther provide that existing owners of private vehicles shall be re-
quired to pay a tax equivalent to 5% of the current fair market
value of every vehicle registered with the LTO. However, RA 10701
exempts owners of public utility vehicles and the Government
from the coverage of the 5% transport tax.
!54
A group of private vehicle owners sue on the ground that the law
is unconstitutional for contravening the Equal Protection Clause
of the Constitution.
Rule on the constitutionality and validity of RA 10701. (5%) ’17—
Q6
RA 10701 is valid and constitutional. A levy of tax is not unconstitution-
al because it is not intrinsically equal and uniform in its operation. Thee
uniformity rule does not prohibit classification for purposes of Taxation
(British American Tobacco v. Jose Isidro N. Camacho, G.R. No.
163583, August 20, 2008, 562 SCRA 511).
Uniformity of taxation, like the kindred concept of equal protection,
merely requires that all subjects or objects of taxation, similarly situat-
ed, are to be treated alike both in privileges and liabilities. Uniformity
does not forfend classifications as long as: (1) the standards that are
use therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all
things being equal, to both present and future conditions, and (4) clas-
sification applies equally well to all those belonging to the same class
(Rufino R. Tan v. Ramos R. Del Rosario, Jr., G.R. Nos. 109289 and
109446, October 13, 1994, 237 SCRA 324, 331). All of those which are
singled out are a class in themselves, there is no violation of the “Equal
Protection Clause” of the Constitution.
On September 17,2015, Data Realty, Inc., a real-estate corporation
duly organized and existing under Philippine law, sold to Jenny Vera a
condominium unit at Freedom Residences in Malabon City with an
area of 32.31 square meters for a contract price of P4,213,000. The
condominium unit had a zonal value amounting to P2,877,000 and fair
market value amounting to P550,000.
(a) Is the transaction subject to value-added tax and documentary
stamp tax? Explain your answer. (3%)
(b) Would your answer be the same if the property was sold by a bank
in a foreclosure sale? Explain your answer. (3%) ’17— Q12
(a) Yes. As to the VAT liability, sale of real properties held pri-
marily for sale to customer or held for lease in the ordinary course of
trade or business is subject to VAT (Section 106 (A)(1)(a), 1997 N1RC,
as amended); further, the contract price, which is the highest compared
to the zonal value and the fair market value, is beyond the transaction-
al threshold amount for residential dwellings thereby making the sale
transaction VATable. As to the DST liability, all deeds of sale and con-
veyances of real property are likewise subject to DST (Section 196,
1997 NIRC, as amended).
(b) No, the sale made by the bank is exempt from VAT. Banks are ex-
empt from VAT because they are subject to percentage tax under Title
V of the NIRC (Section 109 in relation to Section 121 of 1997 NIRC, as
amended). The sale, however, will still be subject to DST because
conveyances of real property are generally subject to DST (Section
196, NIRC).
The Philippine-British Association, Inc. (Association) is a non-
stock, non-profit organization which owns the St. Michael's Hos-
pital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC classi-
fies all lands, buildings and other improvements thereon actually,
directly, and exclusively used for hospitals as "special." A special
classification prescribes a lower assessment than a commercial
classification.
Within the premises of the Hospital, the Association constructed
the St. Michael's Medical Arts Center (Center) which will house
medical practitioners who will lease the spaces therein for their
clinics at prescribed rental rates. The doctors who treat the pa-
tients confined in the Hospital are accredited by the Association.
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The City Assessor classified the Center as "commercial" instead
of "special" on the ground that the Hospital owner gets income
from the lease of its spaces to doctors who also entertain out-
patients. Is the City Assessor correct in classifying the Center as
"commercial?" Explain. (5%) ’16 – Q12
No. The Medical Arts Center is an integral part of the Hospital and
should be classified for assessment purposes as “special”. The fact
alone that the doctors holding clinics in the Center are those duly ac-
credited by the Association who owns the Hospital, and these doctors
are the ones who can treat the Hospital’s patients confined in it, takes
away the said Medical Arts Center from being categorized as “com-
mercial” since a tertiary hospital is required by law to have a pool of
physicians who comprise the required medical departments in various
medical fields (City Assessor of Cebu City v. Association of Benevolo
de Cebu, Inc., 524 SCRA 128 [2007]).
Philippine National Railways (PNR) operates the rail transport of
passengers and goods by providing train stations and freight
customer facilities from Tutuban, Manila to the Bicol Province. As
the operator of the railroad transit, PNR administers the land,
improvements and equipment within its main station in Tutuban,
Manila.
Invoking Section 193 of the Local Government Code (LGC) ex-
pressly withdrawing the tax exemption privileges of government-
owned and controlled corporations upon the effectivity of the
Code in 1992, the City Government of Manila issued Final Notices
of Real Estate Tax Deficiency in the amount of P624,000,000.00 for
the taxable years 2006 to 2010. On the other hand, PNR, seeking
refuge under the principle that the government cannot tax itself,
insisted that the PNR lands and buildings are owned by the Re-
public.
Is the PNR exempt from real property tax? Explain your answer.
(5%) ’16 – Q7
Yes. The properties of PNR are properties of public dominion owned by
the Republic of the Philippines, which are exempt from real property
tax (Sec. 234, LGC). In Manila International Airport Authority v. CA (495
SCRA 591, [2006]), the Supreme Court held that MIAA is a govern-
ment instrumentality and is not a government-owned or controlled
corporation, therefore the real properties owned by MIAA are not sub-
ject to real estate tax, except when MIAA leases its real property to
private parties. In the said case, PNR was cited as an example of such
government instrumentality which is deemed exempt.
Dona Evelina, a rich widow engaged in the business of currency
exchange, was assessed a considerable amount of local business
taxes by the City Government of Bagnet by virtue of Tax Ordi-
nance No. 24. Despite her objections thereto, Dona Evelina paid
the taxes. Nevertheless, unsatisfied with said Tax Ordinance,
Dona Evelina, through her counsel Atty. ELP, filed a written claim
for recovery of said local business taxes and contested with the
assessment. Her claim was denied, and so Atty. ELP elevated her
case to the Regional Trial Court (RTC).

The RTC declared Tax Ordinance No. 24 null and void without
legal effect for having been enacted in violation of the publication
requirement of tax ordinances and revenue measures under the
Local Government Code (LGC) and on the ground of double taxa-
tion. On appeal, the Court of Tax Appeals (CTA) affirmed the deci-
sion of the RTC. No motion for reconsideration was filed and the
decision became final and executory. (4%)
!55
a) If you are Atty. ELP, what advice will you give Done
Evelina so that she can recover the subject local busi-
ness taxes? - ‘14 - Q29a
The remedy availed of by Dona Evelina to question the validity of the
assessment was to file a written claim for the recovery which was de-
nied by the city treasurer. It appears that after the denial, the judicial
remedies were properly pursued. Since the decision by the CTA had
already become final and executory, the counsel should advice Dona
Evelina to press for the execution of the judgement. Should the city
treasurer refuse to refund the local taxes paid, they should push for the
issuance of a writ of execution by the CTA to force the local treasurer
to make the refund.
Basis for the computation of business tax on contractors under
the Local Government Code. ‘10 – Q2e
The business tax on contractors is a graduated annual fixed tax
based on the gross receipts for the preceding calendar year. However,
when the gross receipts amount to P2 million or more, the business tax
on contractors is imposed as a percentage tax at the rate of 50% of 1%
(Sec. 143(e), LGC.)
Retiring business; how tax under the Local Government Code. ’10
– Q2f
Retiring businesses under the LGC are taxed on their gross sales
or gross receipts in the current year and not on the preceding year. If
the tax paid in the current year is less than the tax due on gross sales
or receipts of the current year, the difference shall be paid before the
business is considered officially retired (Sec. 145, LGC.)
On May 15, 2009, LMT Corp. received a deficiency business tax
assessment of P1.5 million from the Pasay City Treasurer. On
June 30, 2009, LMT contested the assessment by filing a writer
protest with the City Treasurer. On October 10, 2009, LMT re-
ceived a collection letter from the City Treasurer, drawing it to file
on October 25, 2009 an appeal against the assessment before the
Pasay RTC.
Timeliness of protest and appeal. ’10 – Q9
The protest was filed on time. The taxpayer has the right to
protest an assessment within 60 days from receipt thereof. (Sec. 195,
LGC.)
However, the appeal was not filed on time. When an assessment
is protested, the treasurer has 60 days within which to decide. The
taxpayer has 30 days from receipt of the denial of the protest or from
the lapse of 60-day period to decide, whichever comes first, otherwise
the assessment becomes conclusive and unappealable. Since no de-
cision on the protest was made, the taxpayer should have appealed to
the RTC within 30 days from the lapse of the period to decide the
protest (Sec. 195, LGC.)
F, Inc. maintains its principal office in Quezon City. It has branch-
es / sales offices in Cebu and Davao. It factory is located in Marik-
ina City. Its principal office in QC is also a sales office. Sales of
finished products for calendar year 2009 in the amount of P10
million were made at the following locations: i) Cebu branch –
25%; ii) Davao branch – 15%; and iii) QC branch – 60%.
Where should the applicable local taxes on the shoes be paid? ’10
– Q12
Twenty-five (25%) of the total sales or P2.5 million shall be taxed
in Cebu and 15% of the total sales or P1.5 million shall be taxed in
Davao. For the remaining 60%% sales amounting to P6 million which
are recorded in the principal office, 30% thereof or P1.8 million is tax-
able in Quezon City where the principal office is located and 70% of
P4.2 million is taxable in Marikina City where the factory is located.
Under the law, manufacturers maintaining a branch or sales outlet
shall records the sale in the branch or sales outlet making the sales
and pay the tax in the city or municipality where the branch or sales
outlet is located. Since F Inc. maintains one factory, the sales recorded
in the principal office shall be allocated and 30% of said sales are tax-
 The Sigma Rho Fraternity
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able in the place where the principal office is located while 70% is tax-
able where the factory is located (Sec. 150, LGC.)
XYZ Shipping Corp. is a branch of an international shipping line
with voyages between Manila and the US. 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 office in Makati which is also
the company’s principal office. The City of Manila enacted an or-
dinance levying a 2% tax on gross receipts of shipping lines us-
ing the Port of Manila. Validity of ordinance. ’10 – Q13
The City of Manila cannot legally levy the 2% Gross Receipts Tax
on the shipping line. Taxes on the gross receipts of transportation con-
tractors and persons engaged in the transportation of passengers or
freight by hire and common carriers by air, land, or water is a limitation
on the exercise of taxing powers by local government units [Sec.
133(j), LGC.]
The Sangguniang Bayan of the Municipality of Sampaloc, Quezon,
passed an ordinance imposing a storage fee of P0.10 for every
100 kilos of copra deposited in any bodega within the Municipali-
ty’s jurisdiction. The MMC, with principal office in Makati, is en-
gaged in the manufacture of soap, edible oil, margarine, and other
coconut oil-based products. It has a warehouse in Sampaloc,
Quezon used as storage space for the copra purchased in Sam-
paloc and nearby towns before the same is shipped to Makati.
MMC goes to court to challenge the validity of the ordinance, de-
manding the refund of the storage fees it paid under protest. Is
the ordinance valid? ’09 – Q6
YES. The municipality is authorized to impose reasonable fees
and charges as a regulatory measure in amount commensurate with
the cost of regulation, inspection and licensing (Section 147, LGC.)
In the case at bar, the storage of copra in any warehouse within
the municipality can be the proper subject of regulation pursuant to the
police power granted to municipalities under the Revised Administra-
tive Code or the “general welfare clause.” A warehouse used for keep-
ing or storing copra is an establishment likely to give rise to conflagra-
tion because the oil content of copra, when ignited, is difficult to put
under control by water and the use of chemicals is necessary to put
out the fire. It is, thus, reasonable that the Municipality impose storage
fees for its own surveillance and lookout (Procter & Gamble Co. v.
Municipality of Jagna, 94 SCRA 894 [1979].)
The City of Manila enacted an ordinance which imposes a munic-
ipal occupation tax on persons practicing various professions in
the city. Among those subjected to the occupation tax were
lawyers. Atty. Batas, who has a law office in Manila, pays the or-
dinance-imposed occupation tax under protest. He goes to court
to assail the validity of the ordinance for being discriminatory.
Decide. ’09 – Q8
The ordinance is valid. The tax imposed by the ordinance is in the
nature of a professional tax which is authorized by law to be imposed
by cities (Section 151 in relation to Section 139, LGC.) The ordinance
is not discriminatory because the City Council has the power to select
the subjects of taxation and impose the same tax belonging to the
same class. The authority given by law to cities is to impose a profes-
sional tax only on persons engaged in the practice of their profession
requiring government examinations and lawyers are included within
that class of professionals.
Alternative Answer:
The ordinance is valid. The ordinance is not discriminatory be-
cause it complies with the rule of equality and uniformity in taxation.
Equality and uniformity in local taxation means that all subjects or ob-
jects of taxation belonging to the same class shall be taxed at the
same rate within the territorial jurisdiction of the taxing authority or local
government unit and not necessarily in comparison with other units
although belonging to the same political subdivision. In fine, uniformity
is required only within the geographical limits of the taxing authority. It
is not for the Court to judge what particular cities or municipalities
should be empowered to impose occupation tax. In the case at bar, the
!56
imposition of the occupation tax to persons exercising various profes-
sions in the city is well within the authority of the City of Manila (Pun-
salan v. City of Manila, 95 Phil. 46 [1954].)
The City of Manila enacted an ordinance, imposing a 5% tax on
gross receipts on rentals of space in privately-owned public mar-
kets. BAT Corp. 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 Corp.? ’08 –
Q8
BAT Corporation is correct in questioning the ordinance, but not
because it is an income tax. The tax imposed is authorized by Section
143(H) of the Local Government Code. However, the maximum rate
that can be imposed by the city is only 3% (Section 151, LGC.) There-
fore, the tax imposed by the City of Manila is invalid for exceeding the
amount allowed by law.
MNO Corp. (MNOC) was organized in July 1, 2006, to engage in
trading of school supplies, with principal place of business in
Cubao, QC. It books of accounts and income statement showing
gross sales is as follows:
July 1, 2006 – December 31, 2006 P5,000,000
January 1, 2007 – June 30, 2007 P10,000,000
July 1, 2007– December 31, 2007 P15,000,000
Since MNOC adopted fiscal year ending June 30 as its taxable
year for income tax purposes, it paid its 2% business tax for fiscal
year ending June 30, 2007 based on gross sales of P15 million.
However, the QC Treasurer assessed the corporation for deficien-
cy business tax for 2007 based on gross sales of P25 million al-
leging that local business taxes shall be computed based on cal-
endar year.
1. Is the position of the city treasurer tenable?
YES. Under Section 165 of the Local Government Code, the tax-
able period for the payment of business taxes is the calendar year.
2. May the deficiency business tax be paid in installments
without surcharge and interest? ’08 – Q13
Yes, provided there is a valid tax ordinance enacted for that pur-
pose that does not impose such surcharge and/or interest on any taxes
not paid (Section 192, LGC.)
Another Alternative Answer:
No. There is no ordinance authorizing the installment payment of
business taxes and surcharges (Section 192, LGC.)
What is the nature of the taxing power of the provinces, munici-
palities and cities? How will the local government units be able to
exercise their taxing power? ’07 – Q1
The taxing power of the provinces, municipalities and cities is
directly conferred by the Constitution by giving them the authority to
create their own sources of revenue. The local government units do not
exercise the power to tax as an inherent power or by a valid delegation
of the power by Congress, but pursuant to a direct authority conferred
by the Constitution (Mactan Cebu International Airport Authority v.
Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan, 401 SCRA
259 [2003].)
The local government units exercise the power to tax by levying
taxes, fees and charges consistent with the basic policy of local auton-
omy, and to assess and collect all these taxes, fees and charges which
will exclusively accrue to them. The local government units are autho-
rized to pass tax ordinances (levy) and to pursue action for the as-
sessment and collection of the taxes imposes in said ordinances (Sec-
tions 129 and 132, Local Government Code.)
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The LGC took effect on January 1, 1992. PLDT’s legislative fran-
chise was granted sometime before 1992. Its franchise provides
that PLDT will pay only 3% franchise tax in lieu of all taxes. The
legislative franchises of Smart and Globe Telecoms were granted
in 1998. Their legislative franchises state that they will pay only
5% franchise tax in lieu of all taxes. The Province of Zamboanga
del Norte passed an ordinance in 1997 that imposes a local fran-
chise tax on all telecommunication companies operating within
the province. The tax is 50% of 1% of the gross annual receipts of
the preceding calendar year based on the incoming receipts, or
receipts realized, within its territorial jurisdiction.
Is the ordinance valid? Are PLDT, Smart and Globe liable to pay
franchise taxes? ’07 – Q2
The ordinance is valid. The Local Government Code explicitly
authorizes provincial governments, notwithstanding any law or other
special law, to impose a tax on business enjoying a franchise at the
rate of 50% of 1% based on the annual gross receipts during the pre-
ceding year within the province (Section 137, LGC.)
PLDT is liable to the franchise tax levied by the Province of Zam-
boanga del Norte. The tax exemption privileges on franchises granted
before the passage of the Local Government Code are effectively re-
pealed by the latter law (PLDT v. City of Davao, 363 SCRA 552
[2001].)
Smart and Globe, however, are not liable to the franchise tax
imposed under the provincial ordinance. The legislative franchises of
Smart and Globe were granted in 1998, long after the Local Govern-
ment Code took effect. Congress is deemed to have been aware of the
provisions of the earlier law when it granted the exemption. According-
ly, the latest will of the legislature to grant tax exemption must be re-
spected.
Mr. Fermin, a resident of QC, 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.
1. May Makati City, where he has main office, require him
to pay his professional tax as a lawyer in Pasig City?
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 profes-
sion, will entitle him to practice his profession in any part of the Philip-
pines without being subjected to any other national or local tax, license
or fee for the practice of such profession (Section 139 in relation to
Section 151, LGC.)
2. May QC, where he has his residence and where he also
practices his two professions, go after him for the pay-
ment of his professional tax as a CPA and a lawyer? '05
– Q14(1)
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 prac-
tices his profession or where he maintains his principal office. The city
of residence cannot require him to pay his professional taxes (Section
139 in relation to Section 151, LGC.)
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 AM to 10 AM and 4 PM to 6 PM. Is the “elevator tax” a
valid imposition? ’03 – Q13
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
appropriate ordinance (Section 132, LGC.) The city mayor alone could
not order the collection of the tax; as such, the “elevator tax” is an in-
valid imposition.
!57
X, a taxpayer who believes that an ordinance passed by the City
Council of Pasay is unconstitutional for being discriminatory
against him, want 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 CTA, or the regular courts. What
would your advice be to your client, X? '03 – Q14
The appeal should be made 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 (Section 187, LGC; Hagonoy Market Vendors Asso-
ciation v. Municipality of Hagonoy, Bulacan, 376 SCRA 376 [2002].)
Aside from the basic real estate tax, give three (3) other taxes
which may be imposed by provincial and city governments as
well as by municipalities in the Metro Manila area. ’02 – Q9a
The following real property taxes aside from the basic real proper-
ty tax may be imposed by provincial and city governments as well as
by municipalities in the Metro Manila area:
1. Additional levy on real property for the Special Education
Fund (Section 235, LGC);
2. Additional Ad-valorem tax on Idle lands (Section 236, LGC);
and
3. Special levy (Section 240, LGC.)
[Note: The question is susceptible to dual interpretation because it
is asking for three other taxes and not three other real property taxes.
Accordingly, an alternative answer should be considered and given full
credit.]
Alternative Answer:
The following taxes, aside from basic real estate tax, may be
imposed by:
1. Provincial Government
a) Printer's or publisher's tax
b) Franchise Tax
c) Professional tax
2. City Government - may levy taxes which the province or
municipality are authorized to levy (Section 151, LGC.)
a) Printer's or publisher's tax
b) Franchise tax
c) Professional tax
3. Municipalities in the Metro Manila Area - may levy taxes at
rates which shall not exceed by 50% the maximum rates
prescribed in the Local Government Code.
a) Annual fixed tax on manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers and compounders of
liquors, distilled spirits, and wines or manufacture of any
article of commerce of whatever kind or nature;
b) Annual fixed tax on wholesalers, distributors, or dealers in
any article of commerce of whatever kind or nature;
c) Percentage tax on retailers.
[Note: Other taxes may comprise the enumeration because many
other taxes are authorized to be imposed by LGUs.]
Congress, after much public hearing and consultations with vari-
ous sectors of society, came to the conclusion that it will be good
for the country to have only one system of taxation by centraliz-
ing the imposition and collection of all taxes in the national gov-
ernment. 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 Constitu-
tion? ’01 – Q19
NO. The law centralizing the imposition and collection of all taxes in the
national government would contravene the Constitution which man-
dates 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 Con-
 The Sigma Rho Fraternity
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gress 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.
Real Property Tax
The BIR assessed the Babuyan Water District (B WD) with defi-
ciency income taxes amounting to P8.5 million, inclusive of inter-
est and surcharge. The BWD disputed the assessment, and ar-
gued that it was a wholly-owned government entity performing
essential government functions. However, the BIR denied the
protest.
The BWD filed a petition for arbitration in the Office of the Secre-
tary of Justice pursuant to Sections 66 to 71, Chapter 14, Book IV
of the Administrative Code of 1987 to assail the denial of its
protest, and to seek the proper interpretation of Section 32(BX7)
(b) of the Tax Code that excluded from gross income the income
derived by the Government or its political subdivisions. The Sec-
retary of Justice rendered a decision declaring the BWD exempt
from the payment of income tax.
The Commissioner of Internal Revenue appealed to the CTA on
the sole ground that the Secretary of Justice had no jurisdiction
to review the assessment of the BIR. Is the appeal meritorious?
Explain your answer. (4%) ’17—Q16
SUGGESTED ANSWER
No. Section 7(a) of RA No. 1125, as amended by RA 9282 enumerates
the CTA's exclusive appellate jurisdiction to review by appeal certain
decisions or inaction but not that of a Secretary of Justice.
Moreover, despite the issues involves the CIR’s assessment, however,
Section 7(a)(1) of the same law, specifically the phrase “other matters
arising under the National Internal Revenue or other laws administered
by the Bureau of Internal Revenue” must be read together with the
words preceding it, i.e., “decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments, x x x”, following the
statutory construction principle of ejusdem generis (CIR v. CTA (Sec-
ond Division) and Petron Corporation, G.R. No., 207843, July 15,
2015).
ALTERNATIVE ANSWER
Yes. GOCCs are taxable entities and they are not exempt from BIR
assessment and collection, unless their charter or the law creating
them provides otherwise. Hence, in case of tax dispute between a
GOCC and the BIR, the controversy is cognizable and. appealable to
the CTA. The issue cannot be resolved by the DOJ.
PD 242 is a general law that deals with administrative settlement or
adjudication of disputes, claims, and controversies between or among
government offices, agencies and instrumentalities, including GOCCs;
whereas, RA 1125 (the law creating CTA) is a special law. A special law
prevails over a general law. The fact that PO 242 is the more recent
law is of no significance, CTA has jurisdiction when a GOCC is as-
sessed taxes. Disputes, claims, and controversies falling under RA
1125, even though solely among government offices, agencies, and
instrumentalities, including GOCCs, remain solely in the exclusive
jurisdiction of the CTA.
[Note: (On recent jurisprudence not covered by the 2017 Bar Syllabus)
The Supreme Court held in Commissioner of Internal Revenue v. Sec-
retary of Justice and PAGCOR (G.R. No. 177387, November 9, 20 16)
that the Secretary of Justice does not have any jurisdiction to review
any disputed assessments arising under the Tax Code. The Secretary
of Justice should have desisted from dealing with the petition and re-
ferred the matter to the Court of Tax Appeals that has jurisdiction over
appeals on the decisions of the BIR in tax assessment cases].
The City of Maharlika passed an ordinance imposing a tax on any
sale or transfer of real property located within the city at a rate of
!58
fifty percent (50%) of one percent (1%) of the total consideration
of the transaction. Jose sold a parcel of land in the city, which he
inherited from his deceased parents, and refused to pay the
aforesaid tax. He instead filed a case asking that the ordinance be
declared null and void since the tax it imposed can only be col-
lected by the national government, as in fact he has paid the Bu-
reau of Internal Revenue (BIR) the required capital gains tax. If
you were the City Legal Officer of Maharlika, what defenses would
you raise to sustain the validity of the ordinance? (5%) ’16 – Q4
I would argue that the City is allowed to levy a tax on transfer of real
property ownership (Sec. 135, LGC). The capital gains tax which is an
income tax collected by the national government is entirely different
from the tax on sale or transfer imposed by the ordinance. The tax
imposed by the ordinance not being in the nature of an income tax, the
imposition of the income tax by the national government will not pre-
empt the tax sought to be imposed by the ordinance. I would further
argue that the imposition by the national government of a tax will pre-
empt Local Government Units (LGU) only if there is no specific provi-
sion under the Local Government Code giving said power (Bulacan v.
CAf 299 SCRA 442 (1998)).
LLL is a government instrumentality created by Executive order to
be primarily responsible for integrating and directing all reclama-
tion projects for the National Government. It was not organized as
a stock or a non-stock corporation, nor was it intended to operate
commercially and compete in the private market.
By virtue of its mandate, LLL reclaimed several portions of the
foreshore and offshore areas of the Manila Bay, some of which
were within the territorial jurisdiction of Q City. Certificates of title
to the reclaimed properties in Q City were issued in the name of
LLL in 2008. In 2014, Q City issued Warrants of Levy on said re-
claimed properties of LLL based on the assessment for delin-
quent property taxes for the years 2010 to 2013.
a. Are the reclaimed properties registered in the name of
LLL subject to real property tax? (4%) ‘15 - Q16a
The reclaimed properties are not subject to real property tax because
LLL is a government instrumentality. Under the law, real property
owned by the Republic of the Philippines is exempt from real property
tax unless the beneficial use thereof has been granted to a taxable
person (Sec. 234, Local Government Code). When the title of the real
property is transferred to LLL, the Republic remains the owner of the
real property. Thus, such arrangement does not result in the loss of the
tax exemption. (Republic of the Philippines, represented by The Philip-
pine Reclamation Authority (PRA) v. City of Paranaque, 677 SCRA 246
[2012]).
ALTERNATIVE ANSWER:
No. LLL is an instrumentality of the national government which cannot
be taxed by local government units. LLL is not a government-owned or
controlled corporation taxable for real property taxes (City of Lapu-
Lapu v. PEZA, G.R. No. 184203, November 26, 2014).
b. Will your answer be the same in (a) if from 2010 to the
present time, LLL is leasing portions of the reclaimed
properties for the establishment and use of popular
fastfood restaurants J Burgers, G Pizza, and K Chicken?
(2%) ‘15 - Q16b
No. As a rule, properties owned by the Republic of the Philippines are
exempt from real property tax except when the beneficial use thereof
 The Sigma Rho Fraternity
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has been granted, for consideration or otherwise, to a taxable person.
When LLL leased out portions of the reclaimed properties to taxable
entities, such as the popular fast food restaurants, the reclaimed prop-
erties are subject to real property tax (Sec. 234(a), Local Government
Code; GSIS v. City Treasurer and City Assessor of the City of Manila,
2009).
Madam X owns real property in Caloocan City. ON July 1, 2014,
she received a notice of assessment from the City Assessor, in-
forming her of a deficiency tax on her property. She wants to con-
test the assessment. (4%)
a) What are the administrative remedies available to
Madam X in order to contest the assessment and their
respective prescriptive periods? - - ‘14 - Q18a
The administrative remedies available to Madam X to contest the as-
sessment and the respective prescriptive periods are as follows:
1. Pay the deficiency real property tax under protest (Section
252, LGC);
2. File the protest with local treasurer - The protest in writing
must be filed within thirty (30) days from payment of the tax
to the provincial, city treasurer or municipal treasurer, in the
case of a municipality within the Metropolitan Manila Area,
who shall decide the protest within sixty (60) days from re-
ceipt (Section 252, LGC);
3. Appeal to the LBAA - If protest is denied or upon the lapse of
the 60-day period for the treasurer to decide, the taxpayer
may appeal to the LBAA within 60 days and the case decid-
ed within 120 days (Section 226 & 229,LGC);
4. Appeal to the CBAA - If not satisfied with the decision of the
LBAA, appeal to the CBAA within 30 days from receipt of a
copy of the decision (Section 229)c), LGC).
b) May Madam X refuse to pay the deficiency tax assess-
ment during the pendency of her appeal? - ‘14 - Q18b
No. The payment of the deficiency tax is a condition before she can
protest the deficiency assessment. It is the decision on the protest or
inaction thereon that gives her the right to appeal. This means that she
cannot refuse to pay the deficiency tax assessment during the pen-
dency of the appeal because it is the payment itself which gives rise to
the remedy. The law provides that no protest (which is the beginning of
the disputation process) shall be entertained unless the taxpayer first
pays the tax (Section 252, LGC).
Mr. Amado leased a piece of land owned by the Municipality of
Pinagsabitan and built a warehouse on the property for his busi-
ness operations. The Municipal Assessor assessed Mr. Amado for
real property taxes on the land and the warehouse. Mr. Amado
objected to the assessment, contending that he should not be
asked to pay realty taxes on the land since it is municipal proper-
ty.
Was the assessment proper? (5%) ‘13 - Q8
Yes, the assessment is proper. The land, although owned by the Mu-
nicipality, is not exempt from real property tax because the beneficial
use has been granted to a taxable person (Section 234(a), LGC).
Mr. Jose Castillo is a resident Filipino citizen. He purchased a
parcel of land in Makati City in 1970 at a consideration of P1 Mil-
lion. In 2011, the land, which remained undeveloped and idle, had
a fair market value of P20 Million. Mr. Antonio Ayala, another FIl-
ipino citizen, is very much interested in the property and he of-
!59
fered to buy the same for P20 Million. The Assessor of Makati City
re-assessed in 2011 the property at P10 Million.
a) When is Mr. Castillo liable for real property tax on the
land beginning 2011 or beginning 2012? Explain your
answer. (2%) ‘12 - Q3a
Mr. Castillo shall be liable to the real property tax based on the re-as-
sessment beginning 2012. All re-assessments made after the first day
of any year shall take effect on the first day of January of the succeed-
ing year (Section 221, LGC)
Note: The question is misleading. Mr. Castillo is liable to the real prop-
erty tax on the property when he became the owner thereof although
his liability increases upon re-assessment of the property.
A inherited a building in Makati. A group of Tibetan monk ap-
proached A and offered to lease the building in order to use it as a
venue for their Buddhist rituals and ceremonies. A accepted the
rental of P1 million for the whole ear. The following year, the City
Assessor issued an assessment against A for non-payment of
real property taxes. Is the assessor justified in assessing A’s defi-
ciency real property taxes. ’10 - Q14
No. The property is exempt from real property tax by virtue of the
beneficial use thereof by the Tibetan monks for their religious rituals
and ceremonies. A property that is actually, directly and exclusively
used for religious purposes is exempt from the real property tax [Sec.
234, LGC; Sec. 28(3), Article VI of the Constitution.] The test of exemp-
tion from the tax is not ownership but the beneficial use of the property
(City of Baguio v. Busuego, 100 SCRA 116 [1980].)
RPC is a GOCC engaged in the supply, generation and transmis-
sion of electric power. In 2005, in order to provide electricity to
Southern Tagalog provinces, RPC entered into an agreement with
JEC, for the lease of JEC’s power barges which shall be berthed
at the port of Batangas City. The contract provides that JEC shall
own the power barges and the fixtures, machinery, and equipment
therein, all of which JEC shall supply at its own cost, and that
JEC shall operate, manage and maintain the power barges for the
purpose of converting fuel of RPC into electricity. The contract
also stipulates that all real estate taxes and assessments, rates
and other charges, in respect of the power barges, shall be for the
account of RPC. In 2007, JEC received an assessment of real
property taxes from the Assessor of Batangas City. JEC sought
reconsideration of the assessment on the ground that the power
barges are exempt from real estate taxes under Section 234(c) of
R.A. No. 7160 as they are actually, directly and exclusively used
by RPC, a GOCC. Furthermore, even assuming that the power
barges are subject to real property tax, RPC should be held liable
therefor, in accordance with the terms of the lease agreement. Is
the contention of JEC correct? ’09 – Q9
The contention of JEC is not correct. The owner of the barges is
JEC which is required to operate, manage and maintain the power
barges for the purpose of converting the fuel of RPC into electricity.
This belies the claim that RPC, a government-owned and controlled
corporation engaged in the supply, generation and transmission of
electric power, is the actual, direct and exclusive user of the barge,
hence, does not fall within the purview of the exempting provision of
Section 234(c) of R.A. No. 7160. Likewise, the argument that RPC
should be liable to the real property taxes consonant with the contract
is devoid of merit. The liability for the payment of the real estate taxes
is determined by law and not by the agreement of the parties (FELS
Energy, Inc. v. The Province of Batangas, 516 SCRA 186 [2007].)
Under the Local Government Code, what properties are exempt
from the real property tax? ’06 – Q3; ’02 – Q10
The following properties are exempt from the real property tax:
1. Real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use
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thereof has been granted for consideration or otherwise to a tax-
able person;
2. Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious, and all
lands, buildings, and improvements actually, directly and exclu-
sively used for religious, charitable or educational purposes;
3. All machineries and equipment actually, directly and exclu-
sively used by local water utilities and government-owned or con-
trolled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;
4. All real property owned by duly registered cooperatives as
provided under R.A. No. 6938; and
5. Machinery and equipment used for pollution control and
environmental protection (Section 234, LGC.)
Quezon City published on January 30, 2006 a list of delinquent
real property taxpayers in 2 newspapers of general circulation
and posted this in the main lobby of the City Hall. The notice re-
quires all owners of real properties in the list to pay the real prop-
erty tax due within 30 days from the date of publication, otherwise
the properties listed shall be sold at public auction. Joachim is
one of those named in the list. He purchased a real property in
1996 but failed to register the document of sale with the register
of Deeds and secure a new real property tax declaration in his
name. He alleged that the auction sale of his property is void for
lack of due process considering that the City Treasurer did not
send him personal notice. For his part, the City Treasurer main-
tains that the publication and posting of notice are sufficient
compliance with the requirements of the law.
1. If you were the judge, how will you resolve this issue?
I will resolve the issue in favor of the City Treasurer.
For purposes of the real property tax, the registered owner of the
property is deemed the taxpayer. Hence, only the registered owner is
entitled to a notice of tax delinquency and other proceedings relative to
a tax sale (Talusan v. Tayag and Hernandez, 356 SCRA 263 [2001].)
Not being the registered owner of the property, Joachim cannot
claim to have been deprived of such notice; in fact, he was not entitled
to it. He brought the misfortune upon himself, because he did not regis-
ter the Deed of Sale with the Register of Deeds upon its execution or
secure a tax declaration in his name. He did not take the necessary
steps to protect and legitimize his interest. The auction sale of his
property is, therefore, valid.
2. Assuming Joachim is a registered owner, will your answer be
the same? ’06 – Q16
NO, my answer will not be the same.
The law requires that a notice of the auction sale must be properly
sent to the registered owner. A mere publication of the notice of delin-
quency would not suffice, considering that the procedure in tax sales is
in personam. An auction sale, although preceded by advertisement
and publication but without an actual notice to the delinquent taxpayer,
is void (Tan v. Bantegui, 473 SCRA 663 [2005]; Estate of Mercedes
Jacob v. Court of Appeals, 283 SCRA 474 [1997].)
A city outside of Metro Manila plans to enact an ordinance that
will impose a special levy on idle lands located in residential sub-
divisions within its territorial jurisdiction in addition to the basic
real property tax. If the lot owners of a subdivision located in the
said city seek your legal advice on the matter, what would your
advice be? '05 – Q3(1)
My advice would be that the city’s plan to enact an ordinance that
will impose such special levy on idle lands is not legally allowed, un-
less these lands are specially benefited by a public works projects or
improvements funded by the city government (Section 240, LGC.)
I will likewise advise them that before the city council could enact
an ordinance 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 (Section 242, LGC.)
Another Suggested Answer:
!60
I would advise the low owners that the imposition is valid because
a city, even it is outside Metro Manila, may levy an annual tax on idle
lands at the rate not exceeding five percent (5%) of the assessed value
of the property which shall be in addition to the basic real property tax
(Section 236, LGC.)
I would likewise advise them that the levy may apply to residential
lots, regardless of land area, in subdivisions duly approved by proper
authorities, the ownership of which has been transferred to individual
owners, who shall be liable to the additional tax (last par., Section 237,
LGC.)
Finally, I would advise them to construct or place improvements
on their idle lands by making valuable additions to the property or ame-
liorations in the land’s conditions so the lands would not be considered
as idle (Section 199(m), LGC.) In this manner, their properties would
not be subject to the ad valorem on idle lands.
[Note: the special levy referred to in the problem might be inter-
preted by the examinee in two ways: (1) An additional ad valorem tax
on idle lands (Section 236, LGC); or (2) Special levy by Local Govern-
ment Units (Section 240, LGC.) This is so because both provisions fall
under Chapter V of the Local Government Code dealing with Real
Property Taxation. The caption or heading used in Chapter V upon
which both impositions fall is “Special Levies on Real Property.”]
The Roman Catholic Church owns a 2-hectare lot, in a town in
Tarlac province. The southern side and middle part are occupied
by the Church and a convent, the eastern side by a school run by
the Church itself, the southeastern side by some commercial es-
tablishments, 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. ’05 – Q10
NO. The portions of the land occupied 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 property and not the “ownership” is the determining factor whether
or not the property is taxable (Lung Center of the Philippines v. Quezon
City, 443 SCRA 119 [2004].)
Under Article 415 of the NCC, in order for machinery and equip-
ment to be considered real property, the pieces must be placed by
the owner of the land and, in addition, must tend to directly meet
the needs of the industry or works carried on by the owner. Oil
companies install underground tanks in the gasoline stations
located on land leased by the oil companies from the owners of
the land where the gasoline stations are located. Are those un-
derground tanks, which were not placed there by the owner of the
land but which were instead placed there by the lessee of the
land, considered real property for purposes of real property taxa-
tion under the LGC? '03 – Q15; ’01 – Q20
YES. The properties are considered as necessary fixtures of the
gasoline station, without which the gasoline station would be useless
and would not be operational. Machinery and equipment installed by
the lessee of leased land is not real property for purposes of execution
of a final judgment only. They are considered as real property for real
property tax purposes as “other improvements to affixed or attached
real property” under the Assessment Law and the Real Property Tax
Code (Caltex v. Central Board of Assessment Appeals, 114 SCRA 296
[1982].)
An Ordinance was passed by the Provincial Board of a Province
in the North, increasing the rate of basic real property tax from
0.006% to 1 % of the assessed value of the real property effective
January 1, 2000. Residents of the municipalities of the said prov-
ince protested the Ordinance on the ground that no public hear-
ing was conducted and, therefore, any increase in the rate of real
property tax is void. Is there merit in the protest? ’02 – Q9b
The protest is devoid of merit. No public hearing is required be-
fore the enactment of a local tax ordinance levying the basic real prop-
erty tax (Article 324, LGC Regulations.)
Alternative Answer:
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Yes, there is merit in the protest provided that sufficient proof
could be introduced for the non-observance of public hearing. By impli-
cation, the Supreme Court recognized that public hearings are required
to be conducted prior to the enactment of an ordinance imposing real
property taxes. Although it was concluded by the highest tribunal that
presumption of validity of a tax ordinance cannot be overcome by bare
assertions of procedural defects on its enactment, it would seem that if
the taxpayer had presented evidence to support the allegation that no
public hearing was conducted, the Court should have ruled that the tax
ordinance is invalid (Belen Figuerres v. Court of Appeals, 305 SCRA
206 [1999].)
The real property of Mr. and Mrs. Angeles, situated in a commer-
cial area in front of the public market, was declared in their Tax
Declaration as residential because it had been used by them as
their family residence from the time of its construction in 1990.
However, since January 1997, when the spouses left for the US to
stay there permanently with their children, the property has been
rented to a single proprietor engaged in the sale of appliances
and agri-products. The Provincial Assessor reclassified the prop-
erty as commercial for tax purposes starting January 1998. Mr.
and Mrs. Angeles appealed to the Local Board of Assessment
Appeals, contending that the Tax Declaration previously classify-
ing their property as residential is binding. How should the appeal
be decided? '02 – Q11
The appeal should be decided against Mr. and Mrs. Angeles. The
law focuses on the actual use of the property for classification, valua-
tion and assessment purposes regardless of ownership. Section 217 of
the Local Government Code provides that “real property shall be clas-
sified, valued, and assessed on the basis of its actual use regardless
of where located, whoever owns it, and whoever uses it.”
Give at least two (2) fundamental principles governing real prop-
erty taxation in the Philippines, which are limitations on the taxing
power of local governments insofar as the levying of the realty tax
is concerned. '00 – Q19a
Two (2) fundamental principles governing real property taxation
are:
1. The appraisal must be at the current and fair market value;
and
2. Classification for assessment must be on the basis of actual
use (Section 198, LGC.)
Alternative Answer:
The examinee should be given credit if he chooses the above two
(2) or any two (2) of those enumerated below:
1. Assessment must be on the basis of uniform classification;
2. Appraisal, assessment, levy and collection shall not be let to
private persons;
3. Appraisal and assessment must be equitable (Section 198,
LGC.)
May local governments impose an annual realty tax in addition to
the basic real property tax on idle or vacant lots located in resi-
dential subdivisions within their respective territorial jurisdic-
tions? ’00 – Q19b
Not all local government units may do so. Only provinces, cities,
and municipalities within the Metro Manila area (Section 232, LGC)
may impose an ad valorem tax not exceeding five percent (5%) of the
assessed value (Section 236, LGC) of idle or vacant residential lots in
a subdivision, duly approved by proper authorities regardless of area
(Section 237, LGC.)
A Co., a Philippine corporation, is the owner of machinery,
equipment and fixtures located at its plant in Muntinlupa City. The
City Assessor characterized all these properties as real properties
subject to the real property tax. A Co. appealed the matter to the
Muntinlupa Board of Assessment Appeals. The Board ruled in
favor of the City. In accordance with R.A. No. 1125 (An Act creat-
ing the Court of Tax Appeals.) A Co. brought a petition for review
!61
before the CTA to appeal the decision of the City Board of As-
sessment Appeals. Is Petition for Review proper? '99 – Q2
NO. The CTA’s devoid of jurisdiction to entertain appeals from the de-
cision of the City Board of Assessment Appeals. Said decision is in-
stead appealable to the Central Board of Assessment Appeals, which
under the Local Government Code, has appellate jurisdiction over
decisions of Local Board of Assessment Appeals (Caltex v. Central
Board of Assessment Appeals, 114 SCRA 296 [1982].)
Tariff and Customs Law
On the basis of a warrant of seizure and detention issued by the
Collector of Customs for the purpose of enforcing the Tariff and
Customs Code assorted brands of liquor and cigarettes said to
have been illegally imported into the Philippines were seized from
a store operating in a Freeport zone. The store owner moved for
the quashal of the warrant on the ground that the col· lector of
Customs had no jurisdiction to enforce it within the Freeport
zone.
Should the motion to quash be granted (3%) ’17—Q4
No. The treatment of the Freeport zone as a separate customs territory
cannot completely divest the Government of its right to intervene in the
operations and management of such Freeport, especially when patent
violations of the customs and tax laws are discovered. After all, Section
602 of the Tariff and Customs Code vests exclusive original jurisdiction
in the Bureau of Customs over seizure and forfeiture cases in the en-
forcement of the tariff and customs laws (Agriex Co., Ltd. v. Hon. Titus
B. Villanueva, et al., G.R. No. 158150, September 10, 2014).
Distinguish outright smuggling from technical smuggling. (3%)
’17—Q18(a)
In outright smuggling (or unlawful importation), goods and articles of
commerce are brought into the country without the required importation
documents, or are disposed of in the local market without having been
cleared by the BOC or other authorized government agencies, to
evade the payment of correct taxes, duties and other charges. (Bureau
of Customs v. The Honorable Agnes VST Devanudera, el al., G.R. No.
193253, September 8,2015).
Sec. 102. (fl) CMTA: Outright Smuggling refers to an act of importing
goods into the country without complete customs prescribed importa-
tion documents, or without being cleared by customs or other regulato-
ry government agencies, for the purpose of evading payment of pre-
scribed taxes, duties and other government charges.
On the other hand, in technical smuggling the goods and articles are
brought into the country through fraudulent' falsified or erroneous dec-
larations, to to substantially reduce, if not totally avoid, the payment of
correct taxes, duties and other charges. Such goods and articles pass
through the BOC, but the processing and clearing procedures are at-
tended by fraudulent acts in order to evade the payment of correct
taxes, duties, and other charges (Bureau of Customs v. The Honorable
Agnes VST Devanadera, et al., G.R. No. 193253, September 8, 2015)
Sec. 102 (pp) CMTA: Technical Smuggling refers to the act of import-
ing goods into the country by means of fraudulent, falsified or erro-
neous declaration of goods to its nature, kind, quality, quantity or
weight for the purpose of reducing or avoiding payment of prescribed
taxes, duties and other charges.
XVIII. Under the Tariff and Customs Code, as amended:
 The Sigma Rho Fraternity
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a. When does importation begin and when is it deemed
terminated? (2%) ‘15 - Q18a
Importation begins when the carrying vessel or aircraft enters the juris-
diction of the Philippines with intention to unlade therein. Importation is
deemed terminated upon payment of the duties, taxes, and other
charges due upon the articles, or secured to be paid, at a port of entry
and the legal permit for withdrawal shall have been granted, or in case
said articles are free of duties, taxes and other charges, until they have
legally left the jurisdiction of Customs (Sec. 1202 of the Tariff and Cus-
toms Code).
b. In what case/s is the decision of the Collector automati-
cally reviewed by the Commissioner of Customs? In
what instance/s is the decision of the Commissioner
automatically appealed to the Secretary of Finance?
(4%) ‘15 - Q18b
Whenever the decision of the Collector of Customs in any seizure pro-
ceedings is adverse to the government, the said decision is automati-
cally elevated to the Commissioner of Customs for review, and if such
decision is affirmed by the Commissioner of Customs, the same shall
be automatically elevated to and be finally reviewed by the Secretary
of Finance (Sec. 2315 of the Tariff and Customs Code).
Choose the correct answer. Smuggling - (1%) - ‘14 - Q6
(A) Does not extend to the entry of imported or exported
articles by means of any false or fraudulent invoice,
statement or practices the entry of goods at less than
the true weight or measure; or the filing of any false or
fraudulent entry for the payment of drawback or refund
of duties.
(B) Is limited to the import of contraband or highly dutiable
cargo beyond the reach of customs authorities.
(C) Is committed by any person who shall fraudulently im-
port or bring into the Philippines, or assist in so doing,
any article, contrary to law, or shall receive, conceal,
buy, sell or any manner facilitate the transportation,
concealment or sale of such article after importation,
knowing the same to have been imported contrary to
law.
(D) Is punishable by administrative penalty only.
(C) Is committed by any person who shall fraudulently import or bring
into the Philippines, or assist in so doing, any article, contrary to law, or
shall receive, conceal, buy, sell or any manner facilitate the transporta-
tion, concealment or sale of such article after importation, knowing the
same to have been imported contrary to law. (Section 3601, Tariff and
Customs Code).
Jessie brought into the Philippines a foreign-made luxury car, and
paid less than the actual taxes and duties due. Due to the dis-
crepancy, the Bureau of Customs instituted seizure proceedings
and issued a warrant of seizure and detention. The car, then
parked inside a pay garage, was seized and brought by govern-
ment agents to a government impounding facility. The Collector of
Customs denied Jessie’s request for the withdrawal of the war-
rant. Aggrieved, Jessie filed against the Collector a criminal com-
plaint for usurpation of judicial functions on the ground that only
a judge may issue a warrant of search and seizure.
1. Resolve Jessie’s criminal complaint.
The criminal complaint is bereft of merit.
The issuance of a warrant of seizure and detention by the Collec-
tor of Customs for goods released contrary to law, as when there is
underpayment of taxes and duties, is his primary and exclusive juris-
!62
diction and precludes that judge of regular courts from taking cog-
nizance of the subject matter. Accordingly, what was done by the Col-
lector could not be the basis of a prosecution for the usurpation of
judicial functions (Commissioner v. Navarro, 77 SCRA 264 [1977].)
2. Would your answer be the same if the luxury car was
seized while parked inside the garage of Jessie’s resi-
dence? ’09 – Q5
NO. The luxury car being in a dwelling house, cannot be seized
by the Bureau of Customs exercising police authority without a search
warrant issued by a judge of a competent court (Section 209, TCC;
Pacis v. Pamaran, 56 SCRA 16 [1974].)
JKL Corp. is a domestic corporation engaged in the importation
and sale of motor vehicles in Philippines and is duly registered
with the SBMA. In December 2007, it imported several second-
hand motor vehicles from Japan and Korea, which it stores in a
warehouse in Subic Bay. It sold these motor vehicles in April
2008, to persons residing in the customs territory.
1. Are the importations of motor vehicles from abroad sub-
ject to customs duties and value added taxes?
NO, because domestic corporation importing used vehicles that
are “stored, used or traded” within the Subic Naval Base Area enjoy an
exemption from customs duties and VAT, provided they are registered
with the SBMA (Executive Secretary v. Southwing Heavy Industries,
Inc., 482 SCRA 673 [2006].)
2. If they are taxable, when must the duties and taxes be
paid? What are the bases for and purposes of comput-
ing customs duties and VAT? To whom must the duties
and VAT be paid? ’08 – Q4
Duties and taxes must be paid upon release of the vehicle from
Custom’s duty. Custom duties for motor vehicles are based on the
value being used by the Bureau for assessing customs duties. VAT is
also based on the value being used by the Bureau for motor vehicles
(Section 107(A), NIRC.) Duties must be paid to the Bureau of Cus-
toms. VAT must be paid to the Bureau of Internal Revenue.
William imported into the Philippines a luxury car worth
US$100,000. This car was, however declared only for US$20,000
and corresponding customs duties and taxes were paid thereon.
Subsequently, the Collector of Customs discovered the under-
declaration and he initiated forfeiture proceedings of the imported
car.
1. May the Collector of Customs declare the imported car
forfeited in favor of the government?
YES. Under-declaration of value is a ground for forfeiture (Section
1206, TCC; Feeder International v. Court of Appeals, G.R. No. 94262,
May 31 1991.)
2. Are forfeiture proceedings of goods illegally imported
criminal in nature? ’08 – Q9
NO, forfeiture proceedings under tariff and customs laws is not
penal in nature, the main purpose of which is to enforce the administra-
tive fines or forfeiture incident to unlawful importation of goods or their
deliberate possession. The penalty in seizure cases is distinct and
separate from the criminal liability that might be imposed against the
indicted importer or possessor and both kinds of penalties may be
imposed (People v. CFI of Rizal, G.R. No. L-41686, November 17,
1980.)
State and explain the basis of dutiable value of an imported article
subject to an ad valorem tax under the TCC. ’05 – Q3(2)(a)
The basis of dutiable value of an imported article subject to an ad
valorem tax under the Tariff and Customs Code is its transaction value
(Section 201(A), TCC, as amended by R.A. No. 9135.) If such value
could not be determined, then the following values are to be utilized in
their sequence: Transaction value of identical goods (Section 201(B),
TCC; Section II, C.1, C.A.O. No. 4-2004); Transaction value of similar
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goods (Section 201(C), TCC; Section II, D.1, C.A.O. No. 4-2004); De-
ductive value (Section II, E.1, C.A.O. No. 4-2004); Computed value
(Section II, F.1, C.A.O. No. 4-2004); and Fallback value (Section
201(F), TCC.)
Another Suggested Answer:
The basis of dutiable value of an imported article subject to an ad
valorem tax under the Tariff and Customs Code is its transaction value
which shall be the price actually paid or payable for the goods when
sold for export to the Philippines, adjusted by adding certain cost ele-
ments to the extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the imported goods
(Section 201(A), TCC, as amended by R.A. No. 9135.) If such value
could not be determined, then the following values are to be utilized in
their sequence: Transaction value of identical goods (Section 201(B),
TCC; Section II, C.1, C.A.O. No. 4-2004); Transaction value of similar
goods (Section 201(C), TCC; Section II, D.1, C.A.O. No. 4-2004); De-
ductive value (Section II, E.1, C.A.O. No. 4-2004); Computed value
(Section II, F.1, C.A.O. No. 4-2004); and Fallback value (Section
201(F), TCC.)
Distinguish countervailing duty from dumping duty. ’05 – Q3(2)(b)
Countervailing duty is a duty imposed in an amount equal to the
ascertained or estimated amount of subsidy or bounty or subvention
granted by the foreign country on the production, manufacture, or ex-
portation into the Philippines of any article likely to injure an industry in
the Philippines or retard or considerably retard the establishment of
such industry (Section 302, TCC.)
On the other hand, Dumping Duty is a duty levied on imported
goods where it appears that a specific kind or class of foreign article is
being imported into or sold or is likely to be sold in the Philippines at a
price less than its fair value (Section 301, TCC.)
Jacob, after serving a 5-year duty of duty as military attaché in
Jakarta, returned to the Philippines bringing with him his person-
al effects including a PC and a car. Would Jacob be liable for tax-
es on these items? ’05 – Q3(3)
NO. Jacob will be exempted, provided he complies with the re-
quirements under Section 105 of the Tariff and Customs Code.
Another Suggested Answer:
NO. Jacob in entitled to the tax and duty-free importation of his
personal effects, personal computer and car, provided the following
requirements are met:
1. The car must have been ordered or purchased prior to the
receipt of the Philippine mission or consulate in Jakarta of
Jacob’s recall order;
2. The car is registered in Jacob’s name;
3. The exemption shall apply to the value of the car;
4. The exemption shall apply to the aggregate value of this
personal and household effects (including the personal com-
puter) not exceeding thirty per centum (30%) of the total
amount received by Jacob as salary and allowances during
his assignment in Jakarta, but not to exceed four (4) years;
5. Jacob must not have availed of the exemption more oftener
than once every four years (last par., Section 105, TCC.)
X and his wife Y, Filipinos living in the Philippines, went on a
three-month pleasure trip around the world during the months of
June, July and August 2002. In the course of their trip, they ac-
cumulated some personal effects which were necessary, appro-
priate and normally used in leisure trips, as well as souvenirs in
non-commercial quantities. Are they “returning residents” for
purposes of Section 105 of the Tariff and Customs Code? '03 –
Q11
NO. The term “returning residents” refers to nationals who have
stayed in a foreign country for a period of at least six (6) months (Sec-
tion 105(f), TCC.) Due to their limited duration of stay abroad X and Y
are not considered as “returning residents” but they are merely consid-
!63
ered as travelers or tourists who enjoy the benefit of conditionally free
importation.
[Note: Credit must likewise be given if the candidate answered in
the affirmative, considering that travelers or tourists are given the same
tax treatment as that of returning residents, treating their personal
effects, not in commercial quantities, as conditionally free importation.]
Wherever the decision of the Collector of Customs is adverse to
the government, it is automatically elevated to the Commissioner
for review and, if it is affirmed by him, it is automatically elevated
to the Secretary of Finance for review. What is the basis of the
automatic review procedure in the Bureau of Customs? '02 – Q12
Automatic review is intended to protect the interest of the Gov-
ernment in the collection of taxes and customs duties in seizure and
protest cases. Without such automatic review, neither the Commis-
sioner of Customs nor the Secretary of Finance would know about the
decision laid down by the Collector favoring the taxpayer. The power to
decide seizure and protest cases may be abused if no checks are
instituted. Automatic review is necessary because nobody is expected
to appeal the decision of the Collector which is favorable to the tax-
payer and adverse to the Government. This is the reason why when-
ever the decision of the Collector is adverse to the Government, the
said decision is automatically elevated to the Commissioner for review;
and if such decision is affirmed by the Commissioner, the same shall
be automatically elevated to and be finally reviewed by the Secretary
of Finance (Yaokasin v. Commissioner of Customs, 180 SCRA 591
[1989].)
The Collector of Customs of the Port of Cebu issued warrants of
seizure and detention against the importation of machineries and
equipment by LLD Import and Export Co. (LLD) for alleged non-
payment of tax and customs duties in violation of customs laws.
LLD was notified of the seizure, but, before it could be heard, the
Collector of Customs issued a notice of sale of the articles. In
order to restrain the Collector from carrying out the order to sell,
LLD filed with the CTA a petition for review with application for
the issuance of a writ of prohibition. It also filed with the CTA an
appeal for refund of overpaid taxes on its other importations of
raw materials which has been pending with the Collector of Cus-
toms. The Bureau of Customs moved to dismiss the case for lack
of jurisdiction of the CTA.
1. Does the CTA have jurisdiction over the petition for re-
view and writ of prohibition?
NO, because there is no decision as yet by the Commissioner of
Customs which can be appealed to the CTA. Neither the remedy of
prohibition would lie because the CTA has not acquired any appellate
jurisdiction over the seizure case. The writ of prohibition being merely
ancillary to the appellate jurisdiction, the CTA has no jurisdiction over it
until it has acquired jurisdiction on the petition for review. Since there is
no appealable decision, the CTA has no jurisdiction over the petition for
review and writ of prohibition (Commissioner of Customs v. Alikpala, 36
SCRA 208 [1970].)
2. Will an appeal to the CTA for refund be possible? '02 –
Q14
NO, because the Commissioner of Customs has not yet rendered
a decision on the claim for refund. The jurisdiction of the Commissioner
and the CTA are not concurrent in so far as claims for refund are con-
cerned. The only exception is when the Collector has not acted on the
protested payment for a long time, the continued inaction of the Collec-
tor or Commissioner should not be allowed to prejudice the taxpayer
(Nestle Philippines, Inc. v. Court of Appeals, 360 SCRA 575 [2001].)
What do you understand by the term “flexible tariff clause” as
used in the Tariff and Customs Code? '01 – Q18
The term “flexible tariff clause” refers to the authority given to the
President to adjust tariff rates under Section 401 of the Tariff and Cus-
toms Code, which is the enabling law that made effective the delega-
tion of the taxing power to the President under the Constitution.
[Note: (From UP Law Bar Reviewer 2013)
 The Sigma Rho Fraternity
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Bar Questions and Answers
Flexible Tariff Clause
Constitutional Basis: Sec. 28(2), Art. VI, 1987 Constitution:
The Congress may, by law, authorize the President to fix with
specified limits, and subject to such limitations and restrictions,
as it may impose, tariff rates, import and export quotas, ton-
nage and wharfage duties, and other duties or imposts within
the framework of the national development program of the
Government.
The flexible tariff clause refers to the authority given to the President,
upon the recommendation of NEDA, to adjust the tariff rates in the
interest of national economy, general welfare and/or national security
(Section 401, TCC)
The President is empowered to:
1. Increase, reduce or remove existing rates (increase in the
rate cannot exceed 100% ad valorem), including authority to
modify the form of duty
2. Establish import quota or ban import of any commodity
3. Impose an additional duty not exceeding 10% ad valorem.]
On the basis of a warrant of seizure and detention issued by the
Collector of Customs for the purpose of enforcing the Tariff and
Customs Laws, assorted brands of cigarettes said to have been
illegally imported into the Philippines were seized from a store
where they were openly offered for sale. Dissatisfied with the
decision rendered after hearing by the Collector of Customs on
the confiscation of the articles, the importer filed a petition for
review with the CTA. The Collector moved to dismiss the petition
for lack of jurisdiction.
1. Rule on the motion.
Motion granted. The Court of Tax Appeals has jurisdiction only
over decisions of the Commissioner of Customs in cases involving
seizures, detention or release of property affected (Section 7, R.A. No.
1125). There is no decision yet of the Commissioner which is subject to
review by the Court of Tax Appeals.
Alternative Answer:
Motion granted. The Court of Tax Appeals has no jurisdiction be-
cause there is no decision rendered by the Commissioner of Customs
on the seizure and forfeiture case. The taxpayer should have appealed
the decision rendered by the Collector within fifteen (15) days from
receipt of the decision to the Commissioner of Customs. The Commis-
sioner’s adverse decision would then be the subject of an appeal to the
Court of Tax Appeals.
2. Under the same facts, could the importer file an action
in the RTC for replevin on the ground that the articles
are being wrongfully detained by the Collector of Cus-
toms since the importation was not illegal and therefore
exempt from seizure? '00 – Q20
NO. The legislators intended to divest the Regional Trial Courts of
the jurisdiction to replevin a property which is a subject of seizure and
forfeiture proceedings for violation of the Tariff and Customs Code
otherwise, actions for forfeiture of property for violation of the Customs
laws could easily be undermined by the simple device of replevin (De
la Fuente v. De Veyra, 120 SCRA 455 [1983].)
There should be no unnecessary hindrance on the government's
drive to prevent smuggling and other frauds upon the Customs. Fur-
thermore, the Regional Trial Court do not have Jurisdiction in order to
render effective and efficient the collection of Import and export duties
due the State, which enables the government to carry out the functions
It has been instituted to perform (Jao, et al, Court of Appeals, et al, and
companion case, 249 SCRA 35 [1995].)
Judicial Remedies
On January 27, 2017, Ramon, the comptroller of Vantage Point,
Inc., executed a document entitled "Waiver of the Statute of Limi-
tations" in connection with the BIR's investigation of the tax liabil-
ities of the company for the year 2012. However, the Board of
!64
Directors of Vantage Point, Inc., did not adopt a board resolution
authorizing Ramon to execute the waiver.
On October 14, 2017, Vantage Point, Inc., received a preliminary
assessment notice from the BLR indicating its deficiency with-
holding taxes for 1he year 2012. Vantage Point, Inc., filed its
protest. On October 30,2017, the BIR issued a formal letter of de-
mand and final assessment notice. Vantage Point, Inc., again filed
a protest. The Commissioner of Internal Revenue denied the
protests and directed the collection of the assessed deficiency
taxes.
Accordingly, Vantage Point, Inc., filed a petition for review in the
CTA to seek the cancellation and withdrawal of the assessment
on the ground of prescription.
(a) What constitutes a valid waiver of the statute of limitations for
the assessment and collection of taxes? Explain your answer.
(3%).
(b) Has the right of the Government to assess and collect defi-
ciency taxes from Vantage Point, Inc. for the year 2012 pre-
scribed? Explain your answer. (3%) ’17—Q10
(a) Generally, a valid waiver of the statute of limitations for the as-
sessment and collection of taxes must be executed by the
taxpayer .and accepted by the BIR prior to the expiration of the period
which it seeks to extend. The same must also be executed by the tax-
payer or his duly authorized representative, or in the case of a corpora-
tion, it must be signed by any of its responsible officers (CIR v. Kudos
Metal Corporation, G.R. No. 178087, May 5, 2010, 620 SCRA 232,
243, 244). Such requirements must be met considering that a waiver of
the statute of limitations under the NIRC, to a certain extent, is a dero-
gation of the taxpayer's right to security against prolonged and un-
scrupulous investigations and must therefore be carefully and strictly
construed (Philippine Journalists, Inc. v. CIR, G.R. No. 162852, De-
cember 16, 2004).
(b) Yes, the final assessment was issued beyond the three-year pre-
scriptive period to make an assessment (Section 203, 1997 NIRC as
amended). The Waiver did not extend the three-year prescriptive peri-
od, since it was executed after the expiration of such period.
On March 30; 2016, XL Co. filed an administrative claim for refund
of unutilized input VAT for taxable year 2014, together with sup-
porting documents. XL Co. claimed that its sale of generated
power and delivery of electric capacity was VAT zero-rated. Due to
the inaction of the Commissioner of Internal Revenue (CIR), XL
Co. filed with the Court of Tax Appeals (CTA) the following judicial
claims for refund.
Period Covered
1st Quarter of2014
2nd Quarter of 2014
3rd and 4th quarter of2014
Date Filed
March 31, 2016
June 30, 2016
August 12,2016
Is XL Co.'s claim for VAT refund timely filed? Explain your answer.
(5%) ’17—Q5
As regards the claims for VAT refund which are administrative in na-
ture, all have been timely filed. The law requires that the administrative
claim should be filed within two years from the end of the quarter when
the sale was made (Sec. 112(A), NIRC); hence, the filing of the admin-
istrative claim for refund on March 30, 2016 covering the four quarters
of 2014, complies with the period prescribed by law.
The same is not true, however, as to the judicial claims. Only the judi-
cial claim filed on August 12, 2016 is timely filed. As provided by Sec-
 The Sigma Rho Fraternity
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Bar Questions and Answers
tion 112(C), 1997 NIRC, as amended, one of the conditions for a judi-
cial claim of refund or credit under the VAT System is compliance with
the 120+30 day mandatory and jurisdictional periods. Strict compliance
with the 120+ 30 day periods is, thus, necessary for such claim to
prosper (CIR v. San Roque Power Corporation, G.R. Nos. 187485,
196113 and 197156, October 8, 2013).
The Commissioner has been granted by law 120 days within which to
decide the taxpayer's claim. Then, if the Commissioner does not act on
the taxpayer's claim within the 120-day period, the taxpayer may ap-
peal to the CTA within 30 days from the expiration of the 120-day peri-
od. Applying this to the present case, the 120th day from the filing of
the administrative claim fell on July 28,2016. XL Co. may file the judi-
cial claim from July 29, 2016 to August 27, 2016; thus, only the judicial
claim filed on August 12, 2016 bas been timely filed.
BATAS Law is a general professional partnership operating in the
City of Valenzuela. It regularly pays value-added tax on its ser-
vices. All its lawyers have individually paid the required profes-
sional tax for the year 2017. However, as a condition for the re-
newal of Its business permit for the year 2017, the City Treasurer
of Valenzuela assessed BAT AS Law for the payment of percent-
age business tax on its gross receipts for the year 2016 in accor-
dance with the Revenue Tax Code of Valenzuela.
Is BATAS Law liable to pay the assessed percentage business
tax? Explain your answer. (3%) ’17—Q13
No. Section 133 (i) of the Local Government Code provides that the
exercise of the taxing powers of local government units such as the
City of Valenzuela shall not extend to the levy of "percentage or value-
added tax (VAT) on sales, barters or exchanges or similar transactions
on goods or services” except as otherwise provided in the LGC; there-
fore, BATAS Law may not be assessed with and required to pay per-
centage business tax.
Casimira died on June 19, 2017, after three weeks of confinement
due to an unsuccessful liver transplant. For her confinement, she
had incurred substantial medical expenses that she financed
through personal loans secured by mortgages on her real proper-
ties. Her heirs are still in the process of making an inventory of
her assets that can be used to pay the estate taxes, if any, which
are due on December 19, 2017.
(a) Are the medical expenses, personal loans and mortgages in-
curred by Casimira deductible from her gross estate? Explain
your answer. (5%)
(b) May the heirs of Casimira file the estate tax return and pay the
corresponding estate tax beyond December 19, 2017, without
incurring interest and surcharge? Explain your answer. (3%) ’17—
Q15
(a) Yes, subject to certain conditions set by the NIRC. As for the med-
ical expenses, they must be incurred within one year from death,
whether paid or unpaid, and the amount must not exceed P500,00. As
for the personal loans, it is required that the loan document must be
notarized and if incurred within three years from date of death, the
executor or administrator shall submit a statement showing the disposi-
tion of the. Proceeds of the loan. As to the mortgages, it is required
that the fair market value of Casimira's interest in said property, undi-
minished by such mortgage or indebtedness, is included in the value of
the gross estate. The claims for personal loans and mortgages must
have been contracted bona fide and for an adequate consideration in
money or money's worth (Section 86, 1997 NIRC, as amended)
(b) The heirs may file the estate tax return beyond December 19, 2017,
as long as they filed a request for a reasonable extension, not exceed-
ing 30 days. Once the request for extension has been granted and the
return filed within the extended period following the “pay-as-you-file”
!65
procedure, only the interest on extended payment may be but not the
surcharge. Interest and surcharge, however, may be imposed upon
failure of the heir to file and pay the estate tax within the extended
period granted by the CIR (Sections 248(A) and 249 (D), 1997 NIRC,
as amended).
Section 91, on the other hand, allows for the extension of time to pay
the estate tax due, for a period not exceeding five (5) years in case the
estate is settled through the courts, or two (2) years in case the estate
is settled extrajudicially. If an extension is granted, the interest on ex-
tended payment may be imposed. The Commissioner may require the
executor, or administrator, or beneficiary, as the case may be, to fur-
nish a bond in an amount not exceeding double the amount of the tax
and with such sureties as the Commissioner deems necessary, condi-
tioned upon the payment or the said tax in accordance with the terms
of the extension.
State at least five (5) cases under the exclusive appellate jurisdic-
tion of the Court of Tax Appeals (CTA). (5%) ‘16 - Q2
The following cases are under the exclusive appellate jurisdiction of
the Court of Tax Appeals:
a. Exclusive appellate jurisdiction to review by appeal:
1. Decision Is of the Commissioner of Internal Revenue in cas-
es involving disputed assessments, refunds of internal rev-
enue taxes, fees or other charges, penalties in relation there-
to, or other matters arising under the NIRC or other laws
administered by the BIR;
2. Inaction of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the NIRC or other laws adminis-
tered by the BIR, where the NIRC provides a specific period
of action, in which case the inaction shall be deemed a de-
nial;
3. Decisions, orders or resolutions of the RTC in local tax cases
originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases involv-
ing liability of customs duties, fees or other money charges,
seizure, detention or release of property affected, fines, for-
feitures or other penalties in relation thereto, or other matters
arising under the Customs Law or other laws administered
by the Bureau of Customs; and
5. Decisions of the Central Board of Assessment Appeals in the
exercise of its appellate jurisdiction over cases involving the
assessment and taxation of real property originally decided
by the provincial or city board of assessment appeals.
6. Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions of
the Commissioner of Customs adverse to the Government
under Sec. 2315 of the Tariff and Customs Code; and
7. Decisions of the Secretary of Trade and Industry, in the case
of nonagricultural product, commodity or article, and the
Secretary of Agriculture, in the case of agricultural product,
commodity or article, involving dumping and countervailing
duties under Sec. 301 and 302, respectively, of the Tariff and
Customs Code, and safeguard measures under R.A. No.
8800, where either party may appeal the decision to impose
or not impose said duties.
b. Exclusive appellate jurisdiction in criminal offenses:
1. Over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in tax cases originally decided by
them, in their respective territorial jurisdiction; and
2. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and Munici-
pal Circuit Trial Courts in their respective jurisdiction.
[NOTE: It is recommended that any five (5) of the above-enumerated
cases be given credit.]
 The Sigma Rho Fraternity
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Bar Questions and Answers
Amor Powers, Inc. (API) Is a domestic corporation registered with
the BIR as a value-added taxpayer. API incurred excess input VAT
in the amount of P500,000,000.00 on August 3, 2008. Hence, it
filed with the RIR an administrative claim for the refund or credit
of these input taxes on August 15, 2010. Without waiting for the
CIR to act on its claim, API filed a Petition for Review with the CTA
on September 15, 2010 before the lapse of two years after the
close of the taxable quarter concerned.
In its Comment on the Petition, the CIR argues that API's Petition
should be dismissed as it was filed before the lapse of the 120-
day period given to the CIR by Sec. 112(D) of the NIRC, which
became effective on January 1, 1998. For the CIR, the 120-day
period is mandatory and jurisdictional so that any suit filed before
its expiration is premature and, therefore, dismissibie.
API, on the other hand, invokes BIR Ruling No. DA-489-03 issued
by the CIR on December 10, 2003 in answer to a query posed by
the Department of Finance regarding the propriety of the actions
taken by Lazi Bay Resources Development, Inc., which filed an
administrative claim for refund with the CIR and, before the lapse
of the 120-day period from its filing, filed a judicial claim with the
CTA. BIR Ruling No. DA-489-03 stated that the taxpayer-claimant
need not wait for the lapse of the 120-day period before it could
seek judicial relief with the CTA.
Will API's Petition for Review prosper? Decide with reasons. (5%)
’16 – Q16
Yes. The petition for review filed by API falls within the exemption from
the mandatory 120 + 30-day requirement in pursuing a judicial remedy
for a claim of refund of input taxes attributable to zero-rated sales. All
claims for refund filed between October 6, 2003 when BIR Ruling No.
DA-489-03 was issued until the promulgation of the decision by the
Supreme Court ruling on the period by which a taxpayer may pursue a
judicial remedy for a claim for refund, must follow the period prescribed
in the BIR Ruling (CIR v. Aichi Forging of Asia, Inc., 632 SCRA 422
[2010]).
On May 15, 2013, CCC, Inc., received the Final Decision on Dis-
puted Assessment issued by the Commissioner of Internal Rev-
enue (CIR) dismissing the protest of CCC, Inc., filed a Petition for
Review with the Court of Tax Appeals (CTA) in division. On July
31, 2015, CCC, Inc. received a copy of the Decision dated July 22,
2015 of the CTA division dismissing its Petition. CCC, Inc. imme-
diately filed a Petition for Review with the CTA en banc on August
6, 2015. Is the immediate appeal by CCC, INc. to the CTA en banc
of the adverse Decision of the CTA division the proper remedy?
(3%) ‘15 - Q7
No, CCC, Inc. should first file a motion for reconsideration or motion for
new trial with the CTA Division. Before the CTA En Banc could take
cognizance of the petition for review concerning a case falling under its
exclusive appellate jurisdiction, the litigant must sufficiently show that it
sought prior reconsideration or moved for a new trial with the con-
cerned CTA division (Commissioner of Customs v. Marina Sale, 635
SCRA 606 [2010]; Rule 8, Sec. 1 of the Revised Rules of Court of Tax
Appeals).
GGG, Inc. offered to sell through competitive bidding its shares in
HHH Corp., equivalent to 40% of the total outstanding capital
stock of the latter. JJJ, Inc. acquired the said shares in 111 III
Corp. as the highest bidder. Before it could secure a certificate
authorizing registration/tax clearance for the transfer of the
shares of stock to JJJ, Inc., GGG, Inc. had to request a ruling
!66
from the BIR confirming that its sale of the said shares was at fair
market value and was thus not subject to donor’s tax. In BIR Rul-
ing No. 012-14, the CIR held that the selling price for the shares of
stock of HHH Corp. was lower than their book value, so the differ-
ence between the selling price and the book value of said shares
was a taxable donation. GGG, Inc. requested the Secretary of
Finance to review BIR Ruling No. 012-14, but the Secretary af-
firmed said ruling. GGG, Inc. filed with the Court of Appeals a
Petition for Review under Rule 43 of the Revised Rules of Court.
The Court of Appeals, however, dismissed the Petition for lack of
jurisdiction declaring that it is the CTA which has jurisdiction over
the issues raised. Before which Court should GGG, Inc. seek re-
course from the adverse ruling of the Secretary of Finance in the
exercise of the latter’s power of review? (3%) ‘15 - Q13
GGG, Inc., should seek recourse with the Court of Tax Appeals (CTA
which has jurisdiction.
There is no provision in law that expressly provides where exactly the
adverse ruling of the Secretary of Finance under Section 4 of the NIRC
is appealable. However, RA 1125, as amended, addresses the seem-
ing gap in the law as it vests upon the CTA, albeit impliedly, with juris-
diction over the case as “other matters” arising under the NIRC or oth-
er laws administered by the BIR. Furthermore, the Supreme Court held
that the jurisdiction to review the rulings of the Secretary of Finance on
the issues raised against a ruling of the Commissioner of Internal Rev-
enue, pertains to the Court of Tax Appeals in the exercise of its appel-
late jurisdiction (Philamlife v. The Sec. of Finance and CIR, G.R. No.
210988, November 24, 2014).
In 2014, M City approved an ordinance levying customs duties
and fees on goods coming into the territorial jurisdiction of the
city. Said city ordinance was duly published on February 15, 2014
with effectivity date on March 1, 2014.
a. Is there a ground for opposing said ordinance? (2%) ‘15
- Q19a
Yes, on the ground that the ordinance is ultra vires. The taxing powers
of local government units, such as M City, cannot extend to the levy of
taxes, fees and charges already imposed by the national government,
and this, includes, among others, the levy of customs duties under the
Tariff and Customs Code (Sec. 133(e), Local Government Code).
b. What is the proper procedural remedy and applicable
time periods for challenging the ordinance? (4%) ‘15 -
Q19b
Any question on the constitutionality or legality of tax ordinances may
be raised on appeal within 30 days from the effectivity to the Secretary
of Justice. The Secretary of Justice shall render a decision within 60
days from the date of receipt of the appeal. Thereafter, within 30 days
after receipt of the decision or the lapse of the sixty-day period without
the Secretary of Justice acting upon the appeal, the aggrieved party'
may file the appropriate proceedings with the Regional Trial Court
(Sec. 187, Local Government Code).
After filing an Information for violation of Section 254 of the Na-
tional Internal Revenue Code (Attempt to Evade or Defeat Tax)
with the CTA, the Public Prosecutor manifested that the People is
reserving the right to file the corresponding civil action for the
recovery of the civil liability for taxes. As counsel for the accused,
comment on the People’s manifestation. (3%) ‘15 - Q20
 The Sigma Rho Fraternity
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The manifestation is not proper. The criminal action and the corre-
sponding civil action for the recovery of the civil liability for taxes and
penalties shall at all times be simultaneously instituted with, and jointly
determined in the same proceeding before the CTA. The filing of the
criminal action is deemed to necessarily carry with it the filing of the
civil action, and no right to reserve the filing of such civil action sepa-
rately from the criminal action shall be recognized (Sec. 7(b)(1) of Re-
public Act. No. 9282; Judy Anne Santos v. People, 563 SCRA 341
[2008]).
The city of Liwliwa assessed local business taxes against Talin
Company. Claiming that there is double taxation, Talin Company
filed a Complaint for Refund or Recovery of Illegally and/or Erro-
neously-collected Local Business Tax; Prohibition with Prayer to
Issue Temporary Restraining Order and Writ of Preliminary Injunc-
tion with the Regional Trial Court (RTC). The RTC denied the ap-
plication for a Writ of Preliminary Injunction. Since its motion for
reconsideration was denied, Talin Company filed a special civil
action for certiorari with the Court of Appeals (CA). The govern-
ment lawyer representing the City of Liwliwa prayed for the dis-
missal of the petition on the ground that the same should have
been filed with the Court of Tax Appeals (CTA). Talin Company,
through its lawyer, Atty. Frank, countered that the CTA cannot
entertain a petition for certiorari since it is not one of its powers
and authorities under existing laws and rules.
Decide. (5%) - ‘14 - Q5
The government lawyer is correct that it is the Court of Tax Appeals
that is vested with proper jurisdiction to review by appeal decisions,
orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original
or appellate jurisdiction (Section 7(3), R.A. 9282),. In a recent case
decided by the Supreme Court., it was held that the CTA has certiorari
powers over the issue of grave abuse of discretion on the part of the
RTC in issuing an interlocutory order in cases falling within the exclu-
sive appellate jurisdiction of the tax court, as this is inherent to its exer-
cise of appellate jurisdiction (City of Manila v. Hon. Caridad H. Grecia-
Cuerdo, G.R. No. 175723, February 4, 2014).
In accordance with the Local Government Code (LGC), the Sang-
guniang Panglungsod (SP) of Baguio City enacted Tax Ordinance
No. 19, Series of 2014, imposing a P50.00 tax on all the tourists
and travellers going to Baguio City. In imposing the local tax, the
SP reasoned that the tax collected will be used to maintain the
cleanliness of Baguio City and for the beautification of its tourist
attractions. Claiming the tax to be unjust , Baguio Travellers As-
sociation (BTA), an association of travel agencies in Baguio City,
filed a petition for declaratory relief before the Regional Trial
Court (RTC) because BTA was apprehensive that tourists might
cancel their bookings with BTA’s member agencies. BTA also
prayed for the issuance of a Temporary Restraining Order (TRO)
to enjoin Baguio City from enforcing the local tax on their cus-
tomers and on all tourists going to Baguio City. The RTC issued a
TRO enjoining Baguio City from imposing the local tax. Aggriev-
ed, Baguio City filed a petition for certiorari before the Supreme
Court (SC) seeking to set aside the TRO issued by the RTC on the
ground that collection of taxes cannot be enjoined.
Will the petition prosper? (5%) - ‘14 - Q7
Yes. the petition for certiorari will prosper the RTC has no jurisdiction to
entertain any action concerning the validity of a Tax Ordinance and to
enjoin the imposition of taxes levied by it. Any question on the legality
of the tax ordinance can only be raised on appeal with the Secretary of
Justice and the appeal shall not have the effect suspending the effec-
!67
tivity of the ordinance and the accrual and the payment of the tax
levied therein (Section 187, LGC).
In the examination conducted by the revenue officials against the
corporate taxpayer in 2010, the BIR issued a final assessment
notice and demand letter which states: “It is requested that the
above deficiency tax be paid immediately upon receipt hereof,
inclusive of penalties incident to delinquency. This is our final
decision based on investigation. If you disagree, you may appeal
this final decision within thirty(30) days from receipt hereof, oth-
erwise said deficiency tax assessment shall become final, execu-
tory and demandable.” The assessment was immediately ap-
pealed by the taxpayer to the Court of Tax Appeals, without filing
its protest against the assessment and without a denial thereof by
the BIR. If you were the judge, would you deny the petition for
review filed by the taxpayer and consider the case as prematurely
filed? Explain your answer. (5%). ‘12 - Q8
SUGGESTED ANSWER:
No, the Petition for Review should not be denied. The case is an ex-
ception 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 let the taxpayer led the taxpayer to conclude that only a
final judicial ruling in his favor would be accepted by the BIR. The tax-
payer cannot be blamed for not filing a protest against the Formal Let-
ter of Demand with Assessment Notices since the language used and
the tenor of the demand letter indicate that it is the final decision of the
responded on the matter. The CIR should indicate, in a clear and un-
equivocal language, whether his action on a disputed assessment
constitutes his final determination thereon in order for the taxpayer
concerned to determine when his or her right to appeal to the tax court
accrues. Although there was no direct reference for the taxpayer to
bring the matter directly to the CTA, it cannot be denied that the word
“appeal” under prevailing tax laws refers to the filing of a Petition for
Review with the CTA (Allied Bank vs. CIR, G.R. No. 175097, February
5, 2010).
Proceedings before the Court of Tax Appeals. ’10 – Q1c, 1d and 1e
In criminal case where the Court of Tax Appeals (CTA) has exclu-
sive jurisdiction, there is no right to reserve the filing of a separate civil
action for the recovery of taxes (Sec. 11, Rule 9, 2005 Rules of the
Court of Tax Appeals, as amended.)
Proceedings before the CTA in the exercise of its exclusive origi-
nal jurisdiction are in the nature of trial de novo (CIR v. Manila Mining
Corp., 468 SCRA 571 [2005].)
Judgments, resolutions or orders of the Regional Trial Court in the
exercise of its original jurisdiction involving criminal offenses arising
from violations of the NIRC are appealable to the CTA, which shall
hear the cases in Division [Sec. 3(b)(2), Rule 4, 2005 Revised Rules of
the Court of Tax Appeals.]
Court of Appeals does not have the power to review compromise
agreements forged by the Commissioner of Internal Revenue and
a taxpayer. ’10 – Q5
First, in instances in which the Commissioner of Internal Revenue
is vested with authority to compromise, such authority should be exer-
cised in accordance with the Commissioner’s discretion, and courts
have no power, as a general rule, to compel him to exercise such dis-
cretion one way or another (Koppel Phils., Inc. v. CIR, 87 Phil. 351
[1950].)
Second, if the Commissioner abuses his discretion by not follow-
ing the parameters set by law, the CTA, not the Court of Appeals, may
correct such abuse if the matter is appealed to it. In case of arbitrary or
capricious exercise by the Commissioner of the power to compromise,
 The Sigma Rho Fraternity
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Bar Questions and Answers
the compromise can be attacked and reversed through judicial No. The Contract of Sale cannot be admitted in evidence. The docu-
process. It must be noted however, that a compromise is considered ment is clearly taxable because the law imposes a documentary stamp
as other maters arising under the NIRC which vests the CTA with juris- tax (DST) on Sales and Agreements to Sell, and Memoranda of Sale
diction, and since the decision of the CTA is appealable to the (Section 175, NIRC). Since the (DST) thereon is not paid the effect is
Supreme Court, the Court of Appeals is devoid of any power to review
that the instrument document or paper which is required by law to be
a compromise settlement by the Commissioner (PNOC v. Savellano,
457 SCRA 32 [2005]; R.A. No. 9282 on jurisdiction of the CTA.) stamped and which has been signed, issued, accepted and transferred
without being duly stamped shall not be recorded, nor shall it or (sic)
Conditions that must be complied before the Court of Tax Appeals used in evidence in any court until the requisite stamp or stamps shall
may suspend the collection of national internal revenue taxes. ’10 have been affixed thereto and cancelled (Section 201, NIRC). In the
– Q7 case at bar, no documentary stamp tax was paid on the Contract of
Sale, hence it cannot be used as her evidence on court.
The CTA may suspend the collection of internal revenue taxes if
the following conditions are met:
1. The case is pending with the CTA; NOTE: This must be considered as a bonus question because it is
2. In the opinion of the Court, the collection will jeopardize the outside the coverage of the bar examination.
interest of the Government and/of the taxpayer; and
3. The taxpayer is willing to deposit in Court the amount being
collected or to file a surety bond for not more than double the
amount of the tax (Sec. 11, R.A. No. 1125, as amended by
R.A. No. 8282.)

Rule on appeal from decisions of the Collector of Customs in

protest and seizure cases; When is the decision of the Collector
of Customs appealable to the CTA. ’10 – Q8

Decisions of the Collector of Customs in protest and seizure cas-

es are appealable to the Commissioner of 15 days from receipt of the
writer decision.
As a rule, decisions of the Collector of Customs are not appeal-
able to the Court of Tax Appeals. If the Collector of Customs, however,
does not decide a protest for a long period of time, the inaction may be
considered an adverse decision by the Collector of Customs and the
aggrieved taxpayer may appeal to the CTA even without the Collector’s
and Commissioner’s actual decision (Commissioner of Customs v.
Planters Products [1989].)

RR disputed a deficiency tax assessment and upon receipt of an

adverse decision by the CIR, filed an appeal with the CTA. 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? ’04 – Q9b

RR should file a motion for injunction with the Court of Tax Ap-
peals 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
(Section 11, R.A. No. 1125, as amended by R.A. No. 9282.)

Others (Not Part of Bar Coverage)

In a civil case for Annulment of Contract of Sale, plaintiff Ma.

Reklamo presented in evidence the Contract of Sale which she
sought to be annulled. No documentary stamp tax on the Contract
of Sale was paid because according to plaintiff Ma. Reklamo,
there was no need to pay the same since the sale was not regis-
tered with the Register of Deeds. Plaintiff Ma. Reklamo is now
offering the Contract of Sale as her evidence.

Is the Contract of Sale admissible? (4%) - ‘14 - Q17

!68