University of Santo Tomas
Faculty of Civil Law
TAXATION LAW
Questions Asked More Than Once
QuAMTO 2021
QuAMTO is a compilation of past bar questions with answers as suggested by the UPLC and other distinct
luminaries in the academe, and updated by the UST Academics Committee to fit for the 2021 Bar Exams.
Bar questions are arranged per topic in accordance with the bar syllabus released by the Supreme Court
and were selected based on their occurrence on past bar examinations from 1987 to 2019.
ACADEMICS COMMITTEE
MARIA FRANCES FAYE R. GUTIERREZ
JOHN EDWARD F. FRONDA
ANGEL ISAH M. ROMERO
KIRBY ANNE C. RENIA
KAREN ABBIE C. ASPIRAS
JOSE CHRISTIAN ANTHONY I. PINZON
NATHAN RAPHAEL D.L. AGUSTIN
MARIA FRANCES FAYE R. GUTIERREZ
SECRETARY GENERAL
EXECUTIVE COMMITTEE
LAYOUT AND DESIGN
QuAMTO COMMITTEE MEMBERS
MA. SELYNA V. ROÑO
MARFE B. GADDI
MERVIN ANGELO V. MANALO
ATTY. CLARICE ANGELINE V. QUESTIN
ATTY. AL CONRAD B. ESPALDON
ADVISERS
OUR DEEPEST APPRECIATION TO
OUR MENTORS AND INSPIRATION
JUSTICE JAPAR B. DIMAAMPAO
ATTY. ABELARDO T. DOMONDON
ATTY. BENEDICTA DU-BALADAD
ATTY. KENNETH GLENN L. MANUEL
ATTY. LEAN JEFF M. MAGSOMBOL
ATTY. NOEL M. ORTEGA
ATTY. PRUDENCE ANGELITA A. KASALA
ATTY. RIZALINA V. LUMBRERA
ATTY. VIRGINIA JEANNIE P. LIM
ATTY. CLARICE ANGELINE V. QUESTIN
For being our guideposts in understanding
the intricate sphere of Legal and Judicial Ethics.
-Academics Committee 2021
QuAMTO (1987-2019)
the government (Chamber of Real Estate and
Builders’ Associations, Inc. v. Romulo, 614 SCRA
605, 2010) and their prompt and certain
availability is imperious need. (Bull v. United
States, 295 US 247) For without taxes, the
government can neither exist nor endure.
(National Power Corporation v. City of Cabanatuan,
G.R. No. 149110, April 9, 2003, citing various cases)
TAXATION QUAMTO
GENERAL PRINCIPLES OF TAXATION
NATURE AND CHARACTERISTICS
OF TAXATION
(1989, 1991, 1996, 2003, 2005, 2016)
PRINCIPLES OF A SOUND TAX SYSTEM
(2009, 2015)
Q: Describe the power of taxation. May a
legislative body enact laws to raise revenues in
the absence of a constitutional provision
granting said body the power to tax? Explain.
(2005 BAR)
Q: Explain the principles of a sound tax system.
(2015 BAR)
A: The principles of a sound tax system and their
respective explanations, are as follows:
A: The power of taxation is inherent in the State
being an attribute of sovereignty. As an incident of
sovereignty, the power to tax has been described
as unlimited in its range, acknowledging in its
very nature no limits, so that security against its
abuse is to be found only in the responsibility of
the legislature which imposes the tax on the
constituents who are to pay it. (Mactan Cebu
International Airport Authority v. Marcos, 261
SCRA 667)
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 Government, but instead
merely constitute limitations upon a power which
would otherwise be practically without limit.
(Cooley, Constitutional Limitations, 1927 8th Ed., p.
787)
Fiscal adequacy which means that the
sources of revenue should be sufficient to
meet the demands of public expenditures
(Chavez v. Ongpin, G.R. No. 76778, June 6,
1990);
2.
Equality or theoretical justice which means
that the tax burden should be proportionate
to the taxpayer’s ability to pay (Section [Sec.]
28(1), Art. VI, 1987 Constitution); and
3.
Administrative feasibility which means that
the tax law should be capable of convenient,
just and effective administration, as well as
easy compliance by taxpayer.
Q: TRUE or FALSE.
(a) A law that allows taxes to be paid either in
cash or in kind is valid. xxx (2009 BAR)
Power of Taxation as distinguished from Police
Power and Eminent Domain (1989, 1991,
2003)
A: True. There is no law which requires the
payment of taxes in cash only. However, a law
allowing payment of taxes in kind, although valid,
may pose problems of valuation, hence, will
violate the principle of administrative feasibility.
Q: The City of Manila passed an ordinance
imposing an annual tax of P 5,000.00 to be
paid by an operator of a massage clinic and an
annual fee of P 50.00 to be paid by every
attendant or helper in the said clinic. Is the
imposition a tax or a license fee? (1989 BAR)
INHERENT LIMITATIONS
(1989, 1991, 2009)
Q: Enumerate the four (4) inherent
limitations on taxation. Explain each item
briefly. (2009 BAR)
A: The imposition on the operator of the massage
clinic is both a tax and a license fee. The amount of
P 5,000.00 exceeds the cost of regulation,
administration and control but it is likewise
imposed to regulate a non-useful business in
order to protect the health, safety and morals of
the citizenry in general. The P 50.00 impositions
on the helpers or attendants are license fees
sufficient only for regulation, administration and
control.
A: The inherent limitations on the power to tax
are:
Theory and Basis of Taxation (1991, 2016
BAR)
Q: Briefly explain the following doctrines:
lifeblood doctrine xxx (2016 BAR)
A: Lifeblood doctrine. Taxes are the lifeblood of
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
1.
1
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 promote the welfare of the
community.
2.
Taxation is inherently legislative – Only the
legislature has full discretion as to the
persons, property, occupation or business
to be taxed provided these are all within
the State’s territorial jurisdiction. It can
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Taxation Law
also finally determine the amount or rate
of tax, the kind of tax to be imposed and
the method of collection. (1 Cooley 176184)
3.
Taxation is territorial– Taxation may be
exercised only within 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 limitation which is founded on
reciprocity designed to maintain a
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
principles 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.
condonation of all penalties on fines resulting
from the late payment.
Arguing that the ordinance rewards
delinquent taxpayers and discriminates
against prompt ones, RC demands that he be
refunded an amount equivalent to one- half 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 reimbursement. RC files suit
to declare the ordinance void on the ground
that it is a class legislation. Will his suit
prosper? Explain your answer briefly. (2004
BAR)
A: 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 taxpayers
belonging to one class were not treated alike.
(Juan Luna Subdivision, Inc., v. Sarmiento, 91 Phil
371, 1952)
Non-Impairment of Obligations of Contracts
(1997, 2004 BAR)
Public Purpose (1989, 1991 BAR)
Q: A law was passed granting tax exemption to
certain industries and investments for a
period of five years. But three years later, the
law was repealed. With the repeal, the
exemptions were considered revoked by the
BIR, which assessed the investing companies
for unpaid taxes effective on the date of the
repeal of the law.
Q: An ordinance of Quezon City on the
operation of market stalls and the collection
of market stall fees created a market
committee “to formulate, recommend and
adopt subject to the ratification of the
Sangguniang Panglungsod regulations in the
operations of the market stalls.” It also
entrusted the collection of the market stall
fees to a private corporation. Does the
entrusting of the collection of the market
stall fees destroy the “public purpose” of the
ordinance? (1989 BAR)
NPC and KTR companies questioned the
assessments on the ground that, having made
their investments in full reliance with the
period of exemption granted by the law, its
repeal violated their constitutional right
against the impairment of the obligations and
contracts. Is the contention of the companies
tenable or not? Reason briefly. (2004 BAR)
A: YES, because a portion of the fees collected
would be diverted as fees to private corporation.
Entrusting of the collection of the market stall
fees violates the limitation that local government
units shall in no case let to any private person the
collection of local taxes, fees, charges and other
impositions. (Sec. 130(c), Republic Act [R.A.] No.
7160, The Local Government Code [LGC]) As a
result of this prohibition, public funds are
therefore utilized for a private purpose, which is
to pay the private corporation for its services.
A: The contention is not tenable. The exemption
granted is in the nature of a unilateral tax
exemption. Since the exemption given is
spontaneous on the part of the legislature and no
service or duty or other remunerative conditions
have been imposed on the taxpayers receiving the
exemption, it may be revoked at will by the
legislature. (Manila Railroad Company v. Insular
Collector of Customs, 12 Phil 146, 1915)
CONSTITUTIONAL LIMITATIONS
(1988, 1997, 2000, 2003, 2004, 2017)
Tax Exemption Granted to Non-Stock, NonProfit Educational Institutions (2004, 2017
BAR)
Equality and Uniformity (1988, 2000, 2003,
2004 BAR)
Q: RC is a law-abiding citizen who pays his
real estate taxes promptly. 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
Q: 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
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QuAMTO (1987-2019)
(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
actually, directly, and exclusively for educational
purposes as provided under Article XIV, Sec. 4(3)
of the 1987 Constitution. The requisites for
availing the tax exemption under Article XIV,
Section 4(3) are as follows: (1) the taxpayer falls
under the classification 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 v. De
La Salle University, Inc., G.R. Nos. 196596, 198841,
198941, November 9, 2016)
Which of these above cited income and
donation would not be exempt from taxation?
Explain briefly. (2004 BAR)
A: The following are not exempt from taxation,
viz:
(c) xxx. Rental income is considered as unrelated
to the school operations; hence, taxable. (DOF
Order No. 137-87, Dec. 16, 1987)
KINDS OF TAXES
(1994, 2000, 2001, 2006 BAR)
Direct and Indirect Taxes (1994, 2000, 2001,
2006 BAR)
(d) xxx. The interest on the placement is taxable.
(Ibid)
Q: Distinguish “direct taxes” from “indirect
taxes." Give examples. (2006 BAR)
If, however, the said rental income and/or
interest are used actually, directly and exclusively
for educational purposes as proven by substantial
evidence, the same will be exempt from taxation.
(CIR v. CA, 298 SCRA 83, 1998)
A: Direct taxes are demanded from the very
person who, as intended, should pay the tax which
he cannot shift to another; while an indirect tax is
demanded in the first instance from one person
with the expectation that he can shift the burden
to someone else, not 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.
The other items of income which were all derived
from school-related activities will be exempt from
taxation in the hands of the recipient if used
actually, directly and exclusively for educational
purposes. (Sec. 4 par. 3, Art. 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.
(Sec. 4, par. 4, Art XIV, 1987 Constitution, in
relation to Section 101(A)(3), National Internal
Revenue Code [NIRC])
CONSTRUCTION AND INTERPRETATION
OF TAX LAWS
(1996, 2005, 2007)
Tax Exemption and Exclusion (1996, 2005,
2007 BAR)
Q: Why are tax exemptions strictly construed
against the taxpayer? (1996 BAR)
Q: San Juan University is a non-stock, nonprofit educational institution. It owns a piece
of land in Caloocan City on which its three 2storey school buildings stood. Two of the
buildings are devoted to classrooms,
laboratories, a canteen, a bookstore, and
administrative offices. The third building is
reserved as dormitory for student athletes
who are granted scholarships for a given
academic year.
A: Tax exemptions are strictly construed against
the taxpayer because such provisions are highly
disfavored and may almost be said to be odious to
the law. (Manila Electric Company v. Vera, 67 SCRA
351) The exception contained in the tax statutes
must be strictly construed against the one
claiming the exemption because the law does not
look with favor on tax exemptions, they, being
contrary to the life-blood theory which is the
underlying basis for taxes.
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.
(b) Is the income earned by San Juan
University for the year 2017 subject to income
tax? Explain your answer. (2017 BAR)
Q: An alien employee of the Asian
Development Bank (ADB) who is retiring soon
has offered to sell his car to you which he
imported tax-free for his personal use. The
privilege of exemption from tax is granted to
qualified personal use under the ADB Charter
which is recognized by the tax authorities. If
you decide to purchase the car, is the sale
subject to tax? Explain. (2005 BAR)
A: NO, provided that the revenues are used
A: YES. The sale is subject to tax. Section 107(B) of
xxx
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
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the NIRC provides that: "In the case of tax-free
importation of goods into the Philippines by
persons, entities or agencies exempt from tax
where such goods are subsequently sold,
transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers,
transferees or recipients shall be considered the
importer thereof, who shall be liable for any
internal revenue tax on such importation”. Tax
exemptions are to be construed strictly and are
not considered transferable in character.
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 had been already subjected
to withholding tax.
Is Alfredo's contention correct? Explain your
answer. (2017 BAR)
A: 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 Investment Phils., G.R. Nos. 139786,
140857, 2006) The 20% final tax is imposed on
the interest income, while the tax earlier
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.
DOUBLE TAXATION
(1996, 1997, 2004, 2015, 2017, 2018, 2019)
Q: Differentiate between double taxation in the
strict sense and in a broad sense and give an
example of each. (2015 BAR)
A: Double taxation in the strict sense pertains to
the direct double taxation. This means that the
taxpayer is taxed twice by the same taxing
authority, within the same taxing 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 income tax returns.
Q: KM Corporation, doing business in the City
of Kalookan, has been a distributor and
retailer of clothing and household materials. It
has been paying the City of Kalookan local
taxes based on Sections 15 (Tax on
Wholesalers, Distributors or Dealers) and 17
(Tax on Retailers) of the Revenue Code of
Kalookan City (Code). Subsequently, the
Sangguniang
Panlungsod
enacted
an
ordinance amending the Code by inserting
Section 21 which imposes a tax on "Businesses
Subject to Excise, Value-Added and Percentage
Taxes under the National Internal Revenue
Code (NIRC)," at the rate of 50% of 1 % per
annum on the gross sales and receipts on
persons "who sell goods and services in the
course of trade or business." KM Corporation
paid the taxes due under Section 21 under
protest, claiming that (a) xxx and (b) this
would amount to double taxation, since its
business was already taxed under Sections 15
and 17 of the Code.
On the other hand, double taxation in the broad
sense pertains to indirect double taxation. This
extends to all cases in which there is a burden 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)
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
withholding 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.
Q: X, a lessor of a property, pays real estate tax
on the premises, a real estate dealer’s tax
based on rental receipts and income tax on the
rentals. X claims that this is double taxation.
(1996 BAR)
Does this amount to double taxation? (2018
BAR)
A: There is no double taxation. Double taxation
means taxing for the same tax period the same
thing or activity twice, when it should be taxed
but once, by the same taxing authority for the
same purpose and with the same kind or
character of tax. The real estate tax is a tax on
property; the real estate dealer’s tax is a tax on
the privilege to engage in business; while the
income tax is a tax on the privilege to earn an
income. These taxes are imposed by different
taxing authorities and are essentially of different
kind and character. (Villanueva v. City of Iloilo, 26
SCRA 578)
A: YES. The three taxes are all in the nature of
local business taxes on wholesalers, retailers and
service providers which are imposed by the same
taxing authority on the same subject matter for
the same tax period; hence, the elements of double
taxation are present. (Nursery Care Corporation v.
Anthony Acebedo, G.R. No. 180651, July 30, 2014)
ALTERNATIVE ANSWER:
YES. Double taxation means taxing the same
property twice when it should be taxed only once;
that is, “taxing the same person twice by the same
jurisdiction for the same thing”. It is obnoxious
when the taxpayer is taxed twice when it should
be only once. In double taxation, which is
otherwise described as “direct duplicate taxation”,
the two taxes must be imposed on the same
Q: 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%
4
QuAMTO (1987-2019)
subject matter, for the same purpose, by the same
taxing authority, within the same jurisdiction,
during the same taxing period, and the taxes must
be of the same kind or character.
must be imposed on 1) the same subject matter;
2) for the same purpose; 3) by the same taxing
authority; 4) within the same jurisdiction; 5)
during the same taxing period; and 6) the taxes
must be of the same kind or character.
It is obnoxious when the taxpayer is taxed twice
when it should be only once. In double taxation,
which is otherwise described as “direct duplicate
taxation”, the two taxes must be imposed on the
same subject matter, for the same purpose, by the
same taxing authority, within the same
jurisdiction, during the same taxing period, and
the taxes must be of the same kind or character.
ESCAPE FROM TAXATION
(TAX AVOIDANCE v. TAX EVASION)
(1989, 1996, 2000, 2005, 2008, 2014, 2016
BAR)
Tax avoidance and Tax Evasion (1989, 1996,
2000, 2005, 2008, 2014, 2016 BAR)
Using the afore-mentioned test, there is indeed,
double taxation since KM Corporation is subjected
to the taxes under both Sections 15 (Tax on
Wholesalers, Distributors or Dealers), 17 (Tax on
Retailers) and 21 (Tax on Businesses Subject to
Excise, Value-Added and Percentage Taxes under
the NIRC) of the Revenue Code of Kalookan City.
These taxes are being imposed: (1) on the same
subject matter — the privilege of doing business
in Kalookan City; (2) for the same purpose — to
make persons conducting business within
Kalookan City contribute to city revenues: (3) by
the same taxing authority — Kalookan City; (4)
within the same taxing jurisdiction — within the
territorial jurisdiction of Kalookan City: (5) for the
same taxing periods — per calendar year; and (6)
of the same kind or character — a local business
tax imposed on gross sales or receipts of the
business. (City of Manila v. Coca-Cola Bottlers
Philippines, Inc., GR. No. 181845, August 4, 2009,
595 SCRA 299 and GR. No, 167283, February 19,
2010, reiterated in Swedish Match Philippines, Inc.
v. The Treasurer of the City of Manila, GR. No.
181277, July 3, 2013, 700 SCRA 428, 439-442 bota
cited in Nursery Care Corporation v. Acevedo, GR.
No. 180651, July 30, 2014)
Q: Distinguish tax evasion from tax avoidance.
(1996 BAR)
A: Tax evasion is a scheme used outside of those
lawful means to escape tax liability and, when
availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities.
Tax avoidance, on the other hand, is a tax saving
device within the means sanctioned by law, hence
legal.
Q: 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, a domestic corporation engaged
in manufacturing paper products, owned 99%
by Maria Suerte. In October 2007, EIP
Corporation, a real estate developer,
expressed its desire to buy the Makati
property at its fair market value of P300
million, payable as follows: (a) P60 million
down payment; and (b) balance, payable
equally in twenty-four (24) monthly
consecutive installments. Upon the advice of a
tax lawyer, Maria Suerte exchanged her
Makati property for shares of stock of MAS
Corporation. A BIR ruling, confirming the taxfree exchange of property for shares of stock,
was secured from the BIR National Office and
a Certificate Authorizing Registration was
issued by the Revenue District Officer (RDO)
where
the
property
was
located.
Subsequently,
she
sold
her
entire
stockholdings in MAS Corporation to EIP
Corporation for P300 million. In view of the
tax advice, Maria Suerte paid only the capital
gains tax 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 property). After
evaluating the capital gains tax payment, the
RDO wrote a letter to Maria Suerte, stating
that she committed tax evasion.
Q: In 2018, City X amended its Revenue Code to
include a new provision imposing a tax on
every sale of merchandise by a wholesaler
based on the total selling price of the goods,
inclusive of value-added taxes (VAT). ABC
Corp., a wholesaler operating within City X,
challenged the new provision based on the
following contentions: (1) the new provision is
a form of prohibited double taxation because it
essentially amounts to City X imposing VAT
which was already being levied by the national
government xxx
Rule on each of ABC Corp.'s contentions. (2019
BAR)
A: ABC’s first contention is without merit.
Considering that the taxing authorities are
different and that the local tax is imposed on the
total selling price, inclusive of VAT, and VAT is
imposed on gross sales/receipts, the present
situation could not be considered as double
taxation. There is no double taxation since in
order to constitute prohibited double taxation, it
must constitute taxing the same property twice
when it should be taxed only once. The two taxes
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
Is the contention of the RDO tenable? Or was it
tax avoidance that Maria Suerte had resorted
to? Explain. (2008 BAR)
A: The contention of the RDO is not tenable. Maria
Suerte resorted to tax avoidance and not tax
evasion. Tax avoidance is the use of legal means
to reduce tax liability and it is the legal right of a
taxpayer to decrease the amount of what
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Taxation Law
otherwise would be his taxes by means which the
law permits. (Heng Tong Textiles Co., Inc. v.
Commissioner) There is nothing illegal about
transferring first the property to a corporation in
a tax-free exchange and later selling the shares
obtained in the exchange at a lower tax than what
could have been imposed if the property was sold
directly.
executive agreement in respect of a loan
facility to the Philippines from Japan whereby
it was stipulated that interest on loans granted
by private Japanese financial institutions to
private
financial
Institutions
in
the
Philippines shall not be subject to Philippine
income taxes. (1992 BAR)
Is this tax exemption valid? Explain.
Q: Lucky V Corporation (Lucky) owns a 10storey 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 return and declared its gain
from the sale of the lot and building in the
amount of P750,000.00.
A: YES. The tax exemption is valid because an
executive agreement has the force and effect of a
treaty under the provision of the Revenue Code.
Taxation is subject to International Comity.
ALTERNATIVE ANSWER:
The act of tax exemption is an act of taxation
which is inherently legislative. Therefore, a mere
executive agreement cannot provide for a tax
exemption.
An investigation conducted by the BIR
revealed that two months prior to the sale of
the properties to Rainier, Lucky received P40
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 BIR concluded that there is
tax evasion since the real buyer of the
properties 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 the 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. (2016 BAR)
COMPENSATION AND SET-OFF
(1990, 1992, 1996, 2001, 2005 BAR)
Q: May taxes be the subject of set-off or
compensation? Explain. (2005 BAR)
A: NO. Taxes cannot be the subject of set-off or
compensation for the following reasons: (1) taxes
are of distinct kind, essence and nature, and these
impositions cannot be classed in merely the same
category as ordinary obligations; (2) the
applicable laws and principles governing each are
peculiar, not necessarily common, to each; and (3)
public policy is better subserved if the integrity
and independence of taxes are maintained.
(Republic v. Mambulao Lumber Company, 4 SCRA
622, 1962)
A: YES. The BIR is correct in assessing the taxes
on Lucky.
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)
There was no tax avoidance, instead there was tax
evasion on the part of Lucky because of the
simulated sale to Rainier which had its apparent
purpose to reduce the income tax to be paid by
Lucky on the sale to HSC.
The sale to Rainier was simulated as evidenced by
the fact that two months prior to the sale of the
properties to Rainier, Lucky received P40 million
from HSC and not from Rainier.
Q: Can an assessment for a local tax be the
subject of set-off or compensation against a
final judgment for a sum of money obtained by
the taxpayer against the local government that
made the assessment? Explain. (2005 BAR)
The intermediary transaction (the simulated sale
to Rainier) was prompted more on the mitigation
of tax liabilities than for legitimate business
purpose constitutes one of tax evasion.
A: NO. Taxes and debts are of different nature and
character; hence, no set-off or compensation
between these two different classes of obligations
is allowed. The taxes assessed are the obligations
of the taxpayer arising from law, while the money
judgment against the government is an obligation
arising from contract, whether express or implied.
Inasmuch that taxes are not debts, it follows that
the two obligations are not susceptible to set-off
or legal compensation. (Francia v. Intermediate
Appellate Court, 162 SCRA 753, 1988)
EXEMPTION FROM TAXATION
(1989, 1992 BAR)
Constitutional Limitation to the power of
Congress in granting tax exemptions (1989,
1992 BAR)
Q: The President of the Philippines and the
Prime Minister of Japan entered into an
It is only when the local tax assessment and the
6
QuAMTO (1987-2019)
final judgment are both overdue, demandable, as
well fully liquidated may set-off or compensation
be allowed. (Domingo v. Garlitos, 8 SCRA 443,
1963)
TAXPAYER’S SUIT
(1990, 1996 BAR)
Q: When may a taxpayer’s suit be allowed?
(1996 BAR)
A: A taxpayer's suit may only be allowed when an
act complained of, which may include a legislative
enactment,
directly
involves
the
illegal
disbursement of public funds derived from
taxation. (Pascual v. Secretary of Public Works, 110
Phil. 331)
Any taxpayer upon his written consent;
2.
A decedent to determine his gross estate;
3.
Any taxpayer who has filed an application
for compromise of his tax liability by means
of financial incapacity to pay his tax liability;
4.
A specific taxpayer or taxpayers subject of a
request for the supply of tax information
from a foreign tax authority pursuant to an
international convention or agreement on
tax matters to which the Philippines is a
signatory. (Sec. 6(F), NIRC)
The limited power of the Commissioner does not
conflict with R.A. No. 1405 because the provisions
of the Tax Code granting this power is an
exception to the Secrecy of Bank Deposits Law as
embodied in a later legislation.
Q: A law imposes a tax of 1/5 of 1% of the
export price of prawns produced in the
Philippines. The law provides that the
proceeds of the tax shall be turned over to the
Philippine Prawn Growers Association, Inc.
(PPGA), a non-profit private corporation
registered with the Securities and Exchange
Commission to be used by PPGA exclusively to
undertake activities that promote the growth
of the Philippine prawns industry, such as
undertaking research on how to improve the
productivity of prawn farms in the Philippines,
undertaking marketing activities that will
directly further the growth of the industry.
Furthermore, in case a taxpayer applies for an
application to compromise the payment of his tax
liabilities on his claim that his financial position
demonstrates a clear inability to pay the tax
assessed, his application shall not be considered
unless and until he waives in writing his privilege
under R.A. No. 1405, and such waiver shall
constitute the authority of the Commissioner to
inquire into the bank deposits of the taxpayer.
NATIONAL TAXATION
The members of PPGA constitute 90% of all
the Prawn growers in the country
representing 100% of the country’s prawn
exports. JN, a practicing lawyer and taxpayer,
filed a suit with the Supreme Court
questioning the constitutionality of the law on
the ground that the funds raised through
taxation will be used for a private purpose.
Will said suit prosper? Explain. (1990 BAR)
REALIZATION AND RECOGNITION OF INCOME
(1989, 1993, 2009, 2010, 2012 BAR)
Q: What is the “all event test”? Explain Briefly.
(2010 BAR)
A: The “all events test” is a test applied in the
realization of income and expense by an accrualbasic taxpayer. The test requires (1) the fixing to
the 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
the gross income or deductions during the taxable
year. (CIR v. Isabela Cultural Corporation, GR No.
172231, Feb 12, 2007)
A: No because Atty. JN is not prejudiced by the
law. It is not his tax money that is being used. In
short, he has no locus standi. Furthermore,
assistance to the prawn industry is for a public
purpose because the industry is one of the pillars
of the economy contribution to employment and
foreign exchange. (Domondon, Remedies, p. 815)
POWERS AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
(1998, 1999, 2000, 2003, 2012 BAR)
Q: Mr. Jose Castillo is a resident Filipino
Citizen. He purchased a parcel of land in
Makati City in 1970 at a consideration of P1
million. In 2011, the land, which remained
undeveloped and idle, had a fair market value
of P20 million. Mr. Antonio Ayala, another
Filipino citizen, is very much interested in the
property and he offered to buy the same for
P20 million. The Assessor of Makati City reassessed in 2011 the property at P10 million.
Is Mr. Castillo liable for income tax in 2011
based on the offer to buy by Mr. Ayala? Explain
your answer. (2012 BAR)
Power to inquire into bank deposits (1998,
1999, 2000, 2003, 2012 BAR)
Q: Can the Commissioner of Internal Revenue
inquire into the bank deposits of a taxpayer? If
so, does this power of the Commissioner
conflict with R.A.1405 (Secrecy of Bank
Deposits Law). (1998 BAR)
A: The Commissioner of Internal Revenue is
authorized to inquire into the bank deposits of:
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
1.
A: NO. Mr. Castillo is not liable for income tax in
2011 because no income is realized by him during
7
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BAR OPERATIONS
Taxation Law
that year. Tax liability for income tax attaches
only if there is a gain realized resulting from a
closed and complete transaction. (Madrigal v.
Rafferty, G.R. No. L- 12287, August 7, 1918)
stipend of ₱50,000.00 for the first vacation
leave that any employee takes during a given
calendar year. In addition, the senior
engineers were also given housing inside the
factory compound for the purpose of ensuring
that there are available engineers within the
premises every time there is a breakdown in
the factory machineries and equipment.
CLASSIFICATION OF INCOME
SUBJECT TO TAX
(1991, 1993, 1995, 2001, 2003, 2016, 2019
BAR)
(a) Is the special stipend part of the taxable
income of the employees receiving the
same? If so, what tax is applicable and
what is the tax rate? Explain.
Taxable Income Fringe Benefits (1991, 1993,
1995, 2001, 2003, 2016, 2019 BAR)
Q: A “fringe benefit” is defined as being any
good, service or other benefit furnished or
granted in cash or in kind by an employer to
an individual employee. Would it be the
employer or the employee who is legally
required to pay an income tax on it? Explain.
(2003 BAR)
A: The special stipend is a taxable income of
an employee. If the individual is a rank-andfile employee, the same forms part of his
compensation income and it is subject to
income tax (or withholding tax on
compensation) at a schedular rate. However,
if the stipend allowance, if lumped-up with
13th month pay and other benefits, the
aggregate amount do not exceed the
exclusion threshold of P90,000.00, the same
shall be excluded from gross income and not
subject to income tax.
A: It is the employer who is legally required to
pay an income tax on the fringe benefit. The fringe
benefit tax is imposed as a final withholding tax
placing the legal obligation to remit the tax on the
employer, such that, if the tax is not paid the legal
recourse of the BIR is to go after the employer.
Any amount or value received by the employee as
a fringe benefit is considered tax paid hence, net
of 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 nonpayment, can be legally demanded to pay the tax.
If the employee is not a rank-and-file
employee (but a managerial or supervisory),
the same is subject to fringe benefits tax or
final tax at 35% based on the grossed-up
monetary value of the special stipend. (Sec.
33, NIRC, as amended)
(b) Is the cash equivalent value of the
housing facilities received by the senior
engineers subject to fringe benefits tax?
Explain. (2019 BAR)
Q: In 2011, Solar Computer Corporation
(Solar) purchased a proprietary membership
share covered by Membership certificate No. 8
from the Mabuhay Golf Club, Inc. for P500,
000.00. On December 27, 2012, it transferred
the same to David, its American consultant, to
enable him to avail of the facilities of the Club.
David executed a Deed of Declaration of Trust
and Assignment of Shares wherein he
acknowledged the absolute ownership of Solar
over the share; that the assignment was
without any consideration; and that the share
was placed in his name because the Club
required it to be done. In 2013, the value of
the share increased to P800,000.00.
A: NO, the cash equivalent value of the
housing facilities inside the factory granted
to the senior engineers are not considered as
fringe benefits subject to tax. The housing
facility is furnished by the employer for his
convenience or advantage because it is
furnished to ensure that the senior engineers
are always available to attend to possible
breakdown of machineries and equipment.
Benefits which are granted for the
convenience or advantage of the employer
are exempt from the fringe benefits tax. (Sec.
2.33(A), RR No. 03-98 implementing Sec. 33,
NIRC)
Is the said assignment a “gift” and, therefore,
subject to gift tax? Explain. (2016 BAR)
A: NO. The assignments are not gratuitous, and
there is no intent to transfer ownership hence not
subject to gift tax.
INCOME FROM DEALINGS IN PROPERTY (1987,
1988, 1989, 1991, 1992, 1993, 1994, 1997,
1998, 2001, 2003, 2005, 2007, 2008, 2009,
2012, 2014, 2015, 2017, 2019)
The value of the right to avail of the privileges
attendant to Mabuhay Golf Club, Inc. Membership
Certificate is due to David’s merits or services as a
computer consultant. It is a fringe benefit taxable
to the employer. (Sec. 33(B)(6), NIRC)
Q: Distinguish a “capital asset" from an
“ordinary asset". (2003 BAR)
A: 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
Q: As a way to augment the income of the
employees of DEF, Inc., a private corporation,
the management decided to grant a special
8
QuAMTO (1987-2019)
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. Accordingly, “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 assets:”
1.
P1,000,000.00 in a subdivision with the
intention of building his residence on it. In
1994, he abandoned his plan to build his
residence on it because the surrounding area
became a depressed area and land values in
the subdivision went down; instead, he sold it
for P800,000.00. At the time of the sale, the
zonal value was P500,000.00.
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;
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 Section 34(F) of
the Tax Code; or
Real property used in trade or business of
the taxpayer.
1.
A: The land is a capital asset because it is
neither for sale in the ordinary course of
business nor a property used in the trade or
business of the taxpayer. (Sec. 33, NIRC)
2.
4.
Is there any income tax due on the sale?
Explain. (1994 Bar)
A: Yes. Mr. Naval is liable to the 6% capital
gains tax imposed under the Tax Code based
on the gross selling price of P 800,000.00
which is an amount higher than the zonal
value.
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.
Q: In January 1970, Juan Gonzales bought one
hectare of agricultural land in Laguna for P
100, 000. This property has a current fair
market value of P 10 million in view of the
construction of a concrete road traversing the
property. Juan Gonzales agreed to exchange
his agricultural lot in Laguna for a one-half
hectare residential property located in
Batangas, with a fair market value of P 10
million, owned by Alpha Corporation, a
domestic corporation engaged in the purchase
and sale of real property. Alpha Corporation
acquired the property in 2007 for P 9 million.
Q: What is the rationale for the rule
prohibiting the deduction of capital losses
from ordinary gains? Explain. (2003 BAR)
A: It is to ensure 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 nonbusiness connected expenses
like personal, living and family expenses, are not
allowed as deduction from gross income. (Sec.
36(A)(1), NIRC of 1997)
1. What is the nature of the real properties
exchanged for tax purposes - capital asset
or ordinary asset? Explain.
A: The one-hectare agricultural land owned
by Juan Gonzales is a capital asset because it
is not a real property used in trade or
business. The one-half hectare residential
property owned by Alpha Corporation is an
ordinary asset because the owner is engaged
in the purchase and sale of real property.
(Sec. 39, NIRC, RR No. 07-03)
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
unnecessarily 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 motives 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 deducted from ordinary gains
which are subject to a higher rate of income tax.
2. Is Juan Gonzales subject to income tax on
the exchange of property? If so, what is
the tax base and rate? Explain.
A: YES. The tax base in a taxable disposition
of a real property classified as a capital asset
is the higher between two values: the fair
market value of the property received in
exchange and the fair market value of the
property exchanged. Since the fair market
value of two properties are the same, the
said fair market value should be taken as the
tax base which is P 10 million. The income
tax rate is 6%. (Sec. 24(D)(1), NIRC)
Q: In 1990, Mr. Naval bought a lot for
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
Is the land a capital asset or an ordinary
asset? Explain.
9
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BAR OPERATIONS
Taxation Law
3. Is Alpha Corporation subject to income tax
on the exchange of property? If so, what is
the tax base and rate? Explain. (2008 BAR)
Exemptions from capital gains tax (1991, 2015
BAR)
Q: 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. (2015 BAR)
A: YES. The gain from the exchange
constitutes an item of gross income, and
being a business income, it must be reported
in the annual income tax return of Alpha
Corporation. From the pertinent items of
gross income, deductions allowed by law
from gross income can be claimed to arrive at
the net income which is the tax base for the
corporate income tax rate of 35%. (Secs.
27(A) & 31, NIRC)
NOTE: That from January 1, 2009 to June 30,
2020 the tax rate is 30%. (R.A. No. 9337; R.A.
No. 11534 – CREATE Act) Starting July 1,
2020, the tax rate for Domestic Corporations
in general is 25%, and the tax rate for
Domestic Corporations classified as Micro,
Small and Medium Enterprise, is 20%. (Sec.
27(A), NIRC as amended by R.A. No. 11534 –
CREATE Act) For a corporation to be
classified as Micro, Small and Medium
Enterprise, during the taxable year for which
the tax is imposed, the net taxable income
does not exceed P 5,000,000 and the total
assets does not exceed P 100,000,000,
excluding land on which the particular
business entity’s office, plant, and equipment
are situated. (CREATE Act is not covered by
2020 bar syllabus)
A: 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 complied with:
Q: GHI, Inc. is a corporation authorized to
engage in the business of manufacturing ultrahigh density microprocessor unit packages.
After its registration on July 5, 2005, GHI, Inc.
constructed
buildings
and
purchased
machineries and equipment. As of December
31, 2005, the total cost of the machineries and
equipment amounted to ₱ 250,000,000.00.
However, GHI, Inc. failed to commence
operations. Its factory was temporarily closed
effective September 15, 2010. On October 1,
2010, it sold its machineries and equipment to
JKL Integrated for ₱ 300,000,000.00.
Thereafter, GHI, Inc. was dissolved on
November 30, 2010.
1.
The proceeds of the sale is fully utilized in
acquiring or construction new principal
residence within 18 calendar months from
the date of the 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 residence built or
acquired;
3.
The Commissioner has been duly notified,
through a prescribed return, within 30 days
from the date of sale or disposition 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)
Q: Cebu Development Inc. (CDI) has an
authorized capital stock of P 5,000,000.00
divided into 50,000 shares with a par value of
One Hundred Pesos (P 100.00) per share. Of
the authorized capital stock, twenty-five
thousand (25,000) shares have been
subscribed. Mr. Juan Legaspi is a stockholder
of CDI where he has subscription amounting to
13,000 shares. To fully pay his unpaid
subscription in the amount of P 950,000.00,
Mr. Legaspi transferred to the corporation a
parcel of land that he owns by virtue of a Deed
of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said
property for only P 500,000.00. Is Mr. Legaspi
liable for any taxable gain? (1991 BAR)
(a) Is the sale of the machineries and
equipment to JKL Integrated subject to normal
corporate income tax or capital gains tax?
Explain. xxx (2019 BAR)
A: The sale of machineries and equipment is
subject to normal corporate income tax and not to
the capital gains tax. As explained by the Supreme
Court in one case, the capital gains tax of 6%
imposed under Section 27(D)(5) of the NIRC, as
amended, is on the presumed gain from the sale
of a land and/or building only. (SMI-ED
Philippines Technology, Inc. v. CIR, G.R. No. 175410,
November 12, 2014)
A: The transfer by Mr. Legaspi to the corporation
of the parcel of land in payment of his unpaid
subscription did not increase his stockholdings in
the corporation. It cannot be said that he acquired
control of the corporation by virtue of the transfer
of the land. His percentage of stockholdings in the
capital stock of the corporation remains the same
after the transfer as before. Therefore, Mr.
Legaspi derived taxable gain for his economic
10
QuAMTO (1987-2019)
gain which was realized by virtue of the exchange
of the land for the liability for the subscription.
A: Dividends received by a non-resident
foreign corporation from a domestic
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 dividends
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%
representing the difference between the
regular income tax rate and the preferential
rate.
ALTERNATIVE ANSWER:
Mr. Legaspi is not liable for any taxable gain. The
transaction amounted to an exchange of shares of
property for shares of stock as a result of which
the property transferor acquired control of the
corporation. The 13,000 shares of stock acquired
in exchange of property was more than fifty
percent (50%) of the total subscribed capital
stock of Cebu Development, Inc. (CDI) that
qualified the transaction as a tax-exempt under
the provisions of Sec. 40(C)(2) of the NIRC, as
amended by R.A. No. 8424 (the Tax Reform Act of
1997).
PASSIVE INVESTMENT INCOME
(1994, 1995, 1997, 2000, 2003, 2005, 2015,
2018 BAR)
Q: BBB, Inc., a domestic corporation, enjoyed a
particularly profitable year in 2014. In June
2015, its Board of Directors approved the
distribution of cash dividend to its
stockholders. BBB, Inc. has individual and
corporate stockholders. What is the tax
treatment of the cash dividends received from
BBB, Inc. by the following stockholders:
1. A resident citizen
A: 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)
2. Non-resident alien engaged in trade or
business
A: A final withholding tax of twenty percent
(20%) shall be imposed upon the cash
dividends actually or constructively received
by a non-resident alien engaged in trade or
business from BBB, Inc. (Sec. 25(A)(2), NIRC)
3. Non-resident alien not engaged in trade
or business
A: A final withholding tax equal to twentyfive 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)
4. Domestic corporation
A: 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)
5. Non-resident foreign corporation (2015
BAR)
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
NOTE: Starting July 1, 2020, the income tax
rate for non-resident foreign corporations is
25%. (Sec. 28(B)(1), as amended by R.A. No.
11534 – CREATE Act) (CREATE Act is not
covered by 2020 bar syllabus)
Q: Mr. Javier is a non-resident senior citizen.
He receives a monthly pension from the GSIS
which he deposits with the PNB-Makati
Branch. Is he exempt from income tax and
therefore not required to file an income tax
return? (2000 BAR)
A: Mr. Javier is exempt from income tax on his
monthly GSIS pension (Sec. 32(B)(6)(f), NIRC) but
not on the interest income that might accrue on
the pensions deposited with PNB which are
subject to final withholding tax.
Consequently, since Mr. Javier’s sole taxable
income would have been subjected to a final
withholding tax, he is not required anymore to file
an income tax return. (Sec. 51(A)(2)(c), NIRC)
Q: What are disguised dividends in income
taxation? Give an example. (1994 BAR)
A: Disguised dividends are those income
payments made by a domestic corporation, which
is a subsidiary of a non-resident foreign
corporation, to the latter ostensibly for services
rendered by the latter to the former, but which
payments are disproportionately larger than the
actual value of the services rendered. In such case,
the amount over and above the true value of the
service rendered shall be treated as a dividend
and shall be subjected to the corresponding tax on
Philippine sourced gross income, or such other
preferential rate as may be provided under a
corresponding Tax Treaty.
Example:
Royalty
payments
corresponding licensing agreement.
under
a
Q: Spouses Konstantino and Karina are
Filipino
citizens
and
are
principal
shareholders of a restaurant chain, Karina's,
Inc. The restaurant's principal office is in
11
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Taxation Law
Makati City, Philippines.
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 P 20
million. The parents of Noel are made the
beneficiaries of the insurance policy.
Korina's became so popular as a Filipino
restaurant that the owners decided to expand
its operations overseas. During the period
2010-2015 alone, it opened ten (10) stores
throughout North America and five (5) stores
in various parts of Europe where there were
large Filipino communities. Each store abroad
was in the name of a corporation organized
under the laws of the state or country in which
the store was located. All stores had identical
capital structures: 60% of the outstanding
capital stock was owned by Karina's, Inc.,
while the remaining 40% was owned directly
by the spouses Konstantino and Korina.
Will the proceeds of the insurance form part
of the income of the parents of Noel and be
subject to income tax? Reason briefly. (2007
BAR)
A: NO. The proceeds of 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. (Sec. 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.
Beginning 2017, in light of the immigration
policy enunciated by US President Donald
Trump, many Filipinos have since returned to
the Philippines and the number of Filipino
immigrants in the US dropped significantly. On
account of these developments, Konstantino
and Karina decided to sell their shares of
stock in the five (5) US corporations that were
doing poorly in gross sales. The spouses'
lawyer-friend advised them that they will be
taxed 5% on the first PhP100,000 net capital
gain, and 10% on the net capital gain in excess
of P 100,000.
Q: Born of a poor family on 14 February 1944.
Mario worked his way through college. After
working for more than 2 years in X
Manufacturing Corporation, Mario decided to
retire and avail of the benefits under the very
reasonable retirement plan maintained by his
employer. He planned to invest whatever
retirement benefits he would receive in a
business that will provide his employer with
the needed raw materials. On the day of his
retirement on 30 April 1985, he received P
400,000.00 as retirement benefit. In addition,
his endowment insurance policy, for which he
was paying an annual premium of P 1,520.00
since 1965 also matured. He was then paid the
face value of his insurance policy in the
amount of P 50,000.00. Is his P 50, 000.00
insurance proceeds exempt from income
taxation? (1991 BAR)
Is the lawyer correct? If not, how should the
spouses Konstantino and Karina be taxed on
the sale of their shares? (2018 BAR)
A: The lawyer’s advice is wrong. The capital gains
tax of 5% for the first P 100,000 net capital gain,
and 10% on the net capital gain in excess of
P100,000 applies only to the net capital gains
realized from the sale, barter, exchange or other
disposition of shares of stock in a domestic
corporation. (Sec. 24(C), NIRC) Since the shares of
stock sold are shares of foreign corporations held
as capital assets, the recognized portion of the
capital gain realized from the sale must be
reported as part of their gross income in their
income tax returns where the taxable income will
be subject to the graduated income tax rates for
individuals. (Sec. 24(A)(1)(a) in relation to Sec. 39,
NIRC)
A: The P 50, 000.00 insurance proceeds is not
totally exempt from income tax. The excluded
amount is only that portion which corresponds to
the premiums that he had paid since 1965. At the
rate of P 1,520.00 per year multiplied by twenty
(20) years which was the period of the policy, he
must have paid a total of P 30,400.00.
Accordingly, he will be subject to report as
taxable income the amount of P 19,600.00.
PRZES AND AWARDS
(1993, 1996, 2000, 2015, 2019 BAR)
[NOTE: Starting January 1, 2018, a final tax rate of
15% is imposed upon the net capital gains
realized during the taxable year from the sale,
barter, exchange, or other disposition of shares of
stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange.
(Sec. 24(C), NIRC as amended by R.A. No. 10963 –
TRAIN Law)]
Q: 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 P 300, 000.00.
a.
ANNUITIES, PROCEEDS FROM
LIFE INSURANCE OR
OTHER TYPES OF INSURANCE
(1988, 1991, 2003, 2005, 2007 BAR)
Is the prize money paid to and received
by Mr. A in the US taxable in the
Philippines? Why?
A: 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
Q: Noel Santos is a very bright computer
science graduate. He was hired by Hewlett
12
QuAMTO (1987-2019)
the Philippines. (Sec. 23(A)(1), NIRC)
b. May Mr. A’s prize money qualify as an
exclusion from his gross income? Why?
A: 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
associations are excluded from gross
income. The exclusion find application 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 Philippines for 2013?
(2015 BAR)
A: The income taxes withheld and paid to
the US government maybe claimed by Mr.
A, either as a deduction from his gross
income (Sec. 34(C)(1)(b), NIRC) or as a tax
credit (Sec. 34(C)(3)(a), NIRC) from the
income tax due when he computes his
Philippine income tax liability for taxable
year 2013.
Q: Mr. D, a Filipino amateur boxer, joined an
Olympic qualifying tournament held in Las
Vegas, USA, where he won the gold medal.
Pleased with Mr. D's accomplishment, the
Philippine
Government,
through
the
Philippine Olympic Committee, awarded him a
cash prize amounting to ₱ 1,000,000.00. Upon
receipt of the funds, he went to a casino in
Pasay City and won the ₱ 30,000,000.00
jackpot in the slot machine. The next day, he
went to a nearby Lotto outlet and bought a
Lotto ticket which won him a cash prize of ₱
5,000.00.
Which of the above sums of money is/are
subject to income tax? Explain. (2019 BAR)
A: Only the amount of P 30,000,000.00,
constituting the winnings from casino, is subject
to income tax, specifically to a final tax at the rate
of 20%. (Sec. 24(B)(1), NIRC, as amended)
The cash prize of P 1,000,000 is exempt from
taxation under Section 32(B)(7)(d) of the NIRC, as
amended, considering that it is in the nature of a
prize granted to Mr. D as an athlete after winning
an international sports competition, i.e., an
Olympic qualifying tournament, sanctioned by his
national sports association.
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
Meanwhile, under Section 24(B)(1) of the NIRC,
the winnings amounting to P 10,000 or less from
Lotto shall be exempt from tax, therefore the Lotto
prize of P 5,000 is not subject to income tax.
(NIRC, Sec. 24(B)(1), amended by R.A.10963 –
TRAIN Law)
PENSIONS, RETIREMENT BENEFIT
OR SEPARATION PAY
(1988, 1991, 1994, 1995, 1996, 1999, 2000,
2005, 2007 BAR)
Q: Z is a Filipino immigrant living in the United
States for more than 10 years. He is retired
and he came back to the Philippines as a
balikbayan. Every time he comes to the
Philippines, he stays here for about a month.
He regularly receives a pension from his
former employer in the United States,
amounting to US$1,000 a month. While in the
Philippines, with his pension pay from his
former employer, he purchased three
condominium units in Makati which he is
renting out for P15, 000 a month each.
(a) Does the US$ 1,000 pension become
taxable because he is now residing in the
Philippines? Reason briefly. xxx (2007 BAR)
A: NO. The provisions of any existing law to the
contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar
benefits received by a resident citizen of the
Philippines, such as Z, from a foreign private
institution, is excluded from income taxation. (Sec.
32(B)(6)(c), NIRC)
Q: X, an employee of ABC Corporation died.
ABC Corporation gave X’s widow an amount
equivalent to X’s salary for one year. Is the
amount considered taxable income to the
widow? Why? (1996 BAR)
A: NO. The amount received by the widow from
the decedent’s employer may either be a gift or a
separation benefit on account of death. Both are
exclusions from gross income pursuant to
provisions of Section 32(B)(6)(b) of the NIRC, as
amended by R.A. No. 8424 (the Tax Reform Act of
1997).
ALTERNATIVE ANSWER:
NO. Since the amount was given to the widow and
not to the estate, it becomes obvious that the
amount is more of a gift. In one U.S. tax case
(Estate of Hellstrom v. Commissioner, 24 T.C. 916),
it was held that payments to the widow of the
president of a corporation of the amount the
president would have received in salary if he lived
out the year constituted a gift and not an income.
The controlling facts which would lead to the
conclusion that the amount received by the
widow is not an income are as follows:
a.
13
The gift was made to the widow rather than
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BAR OPERATIONS
Taxation Law
b.
c.
d.
e.
the estate;
There was no obligation for the corporation
to make further payments to the deceased;
The widow had never worked for the
corporation;
The corporation received no economic
benefit; and
The deceased had been fully compensated
for his services. (Estate of Sydney Carter us.
Commissioner, 453 F. 2d 61, 2d Cir. 1971)
TAXABLE INCOME
(2012, 2013, 2014, 2015 BAR)
Gross Income (2012, 2013, 2014, 2015 BAR)
Q: Mr. Gipit borrowed from Mr. Maunawain P
100,000.00, 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
therefor, Mr. Maunawain cancelled the
indebtedness of Mr. Gipit up to the amount of
P 75,000.00. 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 or the general cleaning
services. Is Mr. Gipit correct? Explain. (2014
BAR)
Q: A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of
65 years. Upon compulsory retirement, A
received the money value of his accumulated
leave credits in the amount of P500,000.00. Is
said amount subject to tax? Explain. (1996
BAR)
A: NO. The commutation of leave credits, more
commonly known as terminal leave pay, i.e., the
cash equivalent of accumulated vacation and sick
leave credits given to an officer or employee who
retires or separated from the service through no
fault of his own, is exempt from income tax. (BIR
Ruling 238-91 dated November 8, 1991;
Commissioner v. CA and Efren Castaneda, GR No.
96016, October 17, 1991)
A: NO. Sec. 50 of RR No. 02-40, otherwise known
as Income Tax Regulations, provides that if a
debtor performs services for a creditor who
cancels the debt in consideration for such
services, the debtor realizes income to that
amount as compensation for his services. In the
given problem, the cancellation of Mr. Gipit’s
indebtedness up to the amount of P 75,000.00
gave rise to compensation income subject to
income tax since Mr. Maunawain condoned such
amount as consideration for the general cleaning
services rendered by Mr. Gipit.
Q: Under what conditions are retirement
benefits received by officials and employees of
private firms excluded from gross income and
exempt from taxation? (2000 BAR)
A: Retirement benefits received under R.A. No.
7641 and those received by officials and
employees of private firms, whether, individual or
corporate, in accordance with the employer’s
reasonable private benefit plan approved by the
BIR, are excluded from gross income and exempt
from income taxation if the retiring official or
employee was:
1.
2.
3.
4.
Q: In 2010, Mr. Platon sent his sister Helen $
1, 000 via a telegraphic transfer through the
Bank of PI. The bank's remittance clerk made a
mistake and credited Helen with $ 1,000,000
which she promptly withdrew. The bank
demanded the return of the mistakenly
credited excess, but Helen refused. The BIR
entered the picture and investigated Helen.
Would the BIR be correct if it determines that
Helen earned taxable income under these
facts? (2013 BAR)
In service of same employer for at least 10
years;
Not less than fifty years of age at time of
retirement;
Availed of the benefit of exclusion only once;
(Sec. 32(B)(6)(a), NIRC)
The retiring official or employee should not
have previously availed of the privilege
under the retirement plan of the same or
another employer. (Sec. 2.78(B)(1), 1st par.
RR No. 02-98)
(A) No, she had no income because she had
no right to the mistakenly credited
funds.
(B) Yes, income is income regardless of the
source.
(C) No, it was not her fault that the funds in
excess of $ 1,000 were credited to her.
(D) No, the funds in excess of $ 1,000 were in
effect donated to her.
INCOME FROM ANY SOURCE WHATSOEVER
(1989, 1995, 2001, 2005 BAR)
A: (B) YES, income is income regardless of the
source.
Q: Explain briefly whether the following items
are taxable or non- taxable:
Section 32 of the NIRC defines gross income as all
income derived from whatever source.
Consequently, the flow of wealth, without any
distinction as to the lawfulness of its source, is
subject to income tax. In other words, the phrase
“income from whatever source” discloses a
legislative policy to include all income not
(a) Income from jueteng (2005 BAR)
A: It is taxable. The law imposes a tax on income
from any source whatever which means that it
includes income whether legal or illegal. (Sec.
32(A), NIRC)
14
QuAMTO (1987-2019)
expressly exempted within the class of taxable
income under the law.
EXCLUSIONS FROM GROSS INCOME
(1988, 1991, 1993, 1994, 1995, 1996, 1997,
1999, 2000, 2003, 2005, 2007, 2008, 2015,
2018, 2019 BAR)
EXCLUSIONS UNDER THE TAX CODE
Proceeds of life insurance policy (1988, 1991,
2003, 2005, 2007 BAR)
Q: State with reasons the tax treatment of the
following in the preparation of annual income
tax returns:
a.
Proceeds of life insurance received by a
child as irrevocable beneficiary;
b. xxx (2005 BAR)
A: 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 – “Many wealth which flows
into the taxpayer other than a mere return of
capital.” Since insurance is compensatory in
nature, the receipt is merely considered as a
return of capital. (Sec. 32(B)(1), NIRC; Fisher v.
Trinidad, 43 Phil. 73, 1922)
Gifts, bequests and devises (1988, 1995, 1996,
1997, 2008 BAR)
Q: Mr. Rodrigo, an 80-year-old retired
businessman, fell in love with 20-year-old
Tetchie Sonora, a night club hospitality girl.
Although she refused to marry him, she
agreed to be his “live-in" partner.
In gratitude Mr. Rodrigo transferred to her a
condominium unit, where they both live,
under a deed of sale for P10 million. Mr.
Rodrigo paid the capital gains tax of 5% of
P10 million.
The Commissioner of Internal Revenue found
that the property was transferred to Tetchie
Sonora by Mr. Rodrigo because of the
companionship she was providing him.
Accordingly, the Commissioner made a
determination that Sonora had compensation
income of P10 million in the year the
condominium unit was transferred to her and
issued a deficiency income tax assessment.
Tetchie Sonora protests the assessment and
claims that the transfer of the condominium
unit was a gift and therefore excluded from
income.
How will you rule on the protest of Tetchie
Sonora? Explain. (1995 BAR)
A: I will grant the protest and cancel the
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
assessment. The transfer of the property by Mr.
Rodrigo to Ms. Sonora was gratuitous. The deed
of sale indicating a P 10 million consideration
was simulated because Mr. Rodrigo did not
receive anything from the sale. The problem
categorically states that the transfer was made in
gratitude to Ms. Sonora’s companionship. The
transfer being gratuitous is subject to donor’s tax.
Mr. Rodrigo should be assessed deficiency
donor’s tax and a 50% surcharge imposed for
fraudulently simulating a contract of sale to
evade donor’s tax. (Sec. 98(B), NIRC, as amended
by R.A. No. 8424 – the Tax Reform Act of 1997)
Awards and agreements for damages paid on
account of or resulting from injuries or
sickness (1995, 2003, 2005, 2007 BAR)
Q: Mr. Infante was hit by a wayward bus while
on his way to work. He survived but had to pay
P 400,000.00 for his hospitalization. He was
unable to work for six months which meant
that he did not receive his usual salary of P
10,000.00 a month or a total of P 60, 000.00.
He sued the bus company and was able to
obtain a final judgment awarding him P
400,000.00 as reimbursement for his
hospitalization, P 60,000 for the salaries he
failed to receive while hospitalized, P
200,000.00 as moral damages for his pain and
suffering, and P 100,000.00 as exemplary
damages. He was able to collect in full from
the judgment.
How much income did he realize when he
collected on the judgment? Explain. (1995
BAR)
A: P 60,000.00 for salaries he failed to receive. As
a general rule, compensatory damages, actual
damages (P 400,000.00), moral damages (P
200,000.00), exemplary damages (P 100,000.00),
attorney’s fees, and the cost of the suit, are
excluded from gross income of the awarded party.
(Sec. 32(B)(4) NIRC, as amended by R.A. No. 8424 –
the Tax Reform Act of 1997, Sec. 63 of RR No. 0240)
However,
consequential
damages
representing the loss of the victim’s earning
capacity are not excluded from gross income.
Such damages are merely replacement of income
which would have been subject to tax if earned.
(BIR Ruling No. 26-2018)
Q: 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 airline and its
insurer, an agreement was reached under the
terms of which JR was paid the following
amounts: P 500,000.00 for his hospitalization;
P 250,000.00 as moral damages; P 300,000.00
for loss of income during the period of his
treatment and recuperation. In addition, JR
received from his employer the amount of P
200,000.00 representing the cash equivalent
of his earned vacation and sick leaves. Which,
15
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BAR OPERATIONS
Taxation Law
if any, of the amounts he received are subject
to income tax? Explain. (2005 BAR)
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. (Sec. 32(B)(6), NIRC) The cash
equivalent of unused vacation and sick leave
credits qualifies as part of separation benefits
excluded from gross income. (CIR v. Court of
Appeals, GR No. 96016, October 17, 1991)
A: The amount of P 200,000.00 that JR received
from his employer is subject to income tax except
the money equivalent of ten (10) days unutilized
vacation leave credits, which is not taxable.
Amounts of vacation allowances or sick leave
credits which are paid to an employee constitutes
compensation. (Sec. 2.78(A)(7), RR No. 02-98, as
amended by RR No. 10-2000)
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. (Sec.
32(B)(6), NIRC)
The amounts that JR received from the airline are
excluded from gross income and not subject to
income tax because they are compensation for
personal injuries suffered from an accident as well
as damages received as a result of an agreement
(negotiation) on account of such injuries. (Sec.
32(B)(4), NIRC)
ALTERNATIVE ANSWER:
Retirement benefits, gratuities, pensions etc.
(1988, 1991, 1994, 1995, 1996, 1999, 2000,
2005, 2007 BAR)
All of the payments are not subject to income tax
and should not also be subject to WT. The
employees were laid off, hence separated for a
cause beyond their control. Consequently, the
amounts to be paid by reason of such involuntary
separation are excluded from gross income,
irrespective of whether the employee at the time
of separation has rendered less than ten years of
service and/or is below fifty years of age. (Sec.
32(B), NIRC)
Q: A Co., a Philippine corporation, has two
divisions — manufacturing and construction.
Due to the economic situation, it had to close
its construction division and lay-off the
employees in that division. A Co. has a
retirement plan approved by the BIR, which
requires a minimum of 50 years of age and 10
years of service in the same employer at the
time of retirement.
Prizes and awards (1993, 1996, 2000, 2015
BAR)
There are 2 groups of employees to be laid off:
Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup
Boxing Council, a sports association duly
accredited by the Philippine Boxing
Association. Onyoc received the amount of P
500,000 as his prize which was donated by
Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by
Onyoc and donor’s tax from Ayala Land
Corporation, which taxes, Onyoc and Ayala
Land Corporation refuse to pay. Decide. (1996
BAR)
1. Employees who are at least 50 years of
age and has at 10 years of service at the
time of termination of employment.
2. Employees who do not meet either the
age or length of service, A Co. plans to give
the following:
a.
For category (A) employees – the
benefits under the BIR approved
plan plus an ex-gratia payment of
one month of every year of service.
A: The prize will not constitute a taxable income
to Onyoc, hence the BIR is not correct in imposing
the income tax. R.A. No. 7549 explicitly provides
that “All prizes and awards granted to athletes in
local and International sports tournaments and
competitions held in the Philippines or abroad
and sanctioned by their respective national sports
associations shall be exempt from income tax".
b. For category (B) employees – one
month for every year of service.
For both categories, the cash
equivalent of unused vacation and
sick leave credits.
A Co. seeks your advice as to whether or not it
will subject any of these payments to
Withholding Tax (WT). Explain your advice.
(1999 BAR)
Neither is the BIR correct in collecting the donor’s
tax from Ayala Land Corporation. The law is clear
when it categorically stated “That the donor’s of
said prizes and awards shall be exempt from the
payment of the donor’s tax."
A: For category A employees, all the benefits
received on account of their separation are not
subject to income tax, hence no withholding tax
shall be imposed. The benefits received under the
BIR-approved plan upon meeting the service
requirement and age requirement are explicitly
Tax-free exchanges (2018, 2019 BAR)
Q: B transferred his ownership over a 1,000square meter commercial land and three-door
apartment to ABC Corp., a family corporation
16
QuAMTO (1987-2019)
of which B is a stockholder. The transfer was
in exchange of 10,000 shares of stock of ABC
Corp. As a result, B acquired 51% ownership
of ABC Corp., with all the shares of stock
having the right to vote. B paid no tax on the
exchange, maintaining that it is a tax
avoidance scheme allowed under the law. The
Bureau of Internal Revenue, on the other
hand, insisted that B's alleged scheme
amounted to tax evasion.
Should B pay taxes on the exchange? Explain.
(2019 BAR)
A: NO, B shall not pay taxes on the exchange.
Section 40(C)(2) of the Tax Code provides that no
gain or loss shall be recognized if property is
transferred to a corporation by a person in
exchange for stocks in such corporation wherein
as a result of such exchange, such person, alone or
together with others, not exceeding four, gains
control of the corporation. When B transferred
the properties for shares in ABC Corporation, he
acquired control (51% of voting shares) over the
corporation, thus, the transaction shall not be
subject to income tax, capital gains tax, and value
added tax.
DEDUCTIONS FROM GROSS INCOME
(1988, 1989, 1990, 1993, 1996, 1998, 1999,
2004, 2006, 2009, 2010, 2015, 2016, 2017,
2018, 2019 BAR)
Q: Differentiate tax exclusions from tax
deductions. (2019 BAR)
A: Tax exclusions refer to income received or
earned but is not taxable as such since it is
exempted by law or by treaty, thus, the same is
not included in the computation of gross income.
Meanwhile, tax deductions are those which are
subtracted from gross income to arrive at the
taxable income.
ALTERNATIVE ANSWER:
The distinction between tax exclusions and tax
deductions are as follows:
1.
Tax exclusions 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:
a.
It is exempted by the fundamental law;
b.
c.
It is exempted by statute; and
It does not come within the definition of
income (Sec. 61, RR No. 2);
while tax deductions are the amounts which
the law allows to be subtracted from gross
income in order to arrive at net income.
2.
Tax exclusions pertain to the computation of
gross income, while deductions pertain to
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
the computation of net income.
3.
Tax exclusions are something received or
earned by the taxpayer which do not form
part of gross income, while deductions are
something spent or paid in earning gross
income.
ITEMIZED DEDUCTIONS
Ordinary and necessary trade, business or
professional expenses (1988, 1989, 1990,
1993, 2006, 2009, 2016, 2017 BAR)
Q: Peter is the Vice-President for Sales of
Golden Dragon Realty Conglomerate, Inc.
(Golden Dragon). A group of five (5) foreign
investors visited the country for possible
investment in the condominium units and
subdivision lots of Golden Dragon. After a tour
of the properties for sale, the investors were
wined and dined by Peter at the posh Conrad's
Hotel at the cost of P150,000.00. Afterward,
the investors were brought to a party in a
videoke club which cost the company
P200,000.00 for food and drinks, and the
amount of P80,000.00 as tips for business
promotion officers. Expenses at Conrad's
Hotel and the videoke club were receipted and
submitted to support the deduction for
representation and entertainment expenses.
Decide if all the representation and
entertainment expenses claimed by Golden
Dragon are deductible. Explain. (2016 BAR)
A: Not all of the representation and entertainment
expenses claimed by Golden Dragon are
deductible. Only those that are reasonable in
amount and nature should be deductible. It
should be noted that the total expenses are PhP
430,000.00 for the five (5) investors or PhP
86,000.00 each.
I would allow only a deduction in such amounts
as are reasonable under the circumstances but in
no case shall all deductions for representation
and entertainment expenses, including those
above enumerated, exceed 0.50% of net sales.
(Sec. 34(A)(1)(iv), NIRC of 1997; RR 10-2002;
Domondon)
Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
protect its brand franchise for one of its line
products. In its income tax return, MFC
included the advertising expense as deduction
from gross income, claiming it as an ordinary
business expense. Is MFC correct? Explain.
(2009 BAR)
A: 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
17
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Taxation Law
taxable year. (CIR v. General Foods Inc., 401 SCRA
545, 2003)
representation incurred by the employee in the
performance of his duties is not compensation
subject to withholding, if the following conditions
are satisfied: (i) It is for ordinary and necessary
representation expense paid or incurred by the
employee in the pursuit of the trade, business or
profession, and (ii) The employee is required to
account/liquidate for the such expense in
accordance with the specific requirements of
substantiation pursuant to Sec. 34 of the NIRC, as
amended. The amounts are actually spent by the
employee for the benefit of his employer, so no
income is considered to have flowed to the
employee.
Q: Calvin Dela Pisa was a Permits and
Licensing Officer (rank-and-file) of Sta. Portia
Realty Corporation (SPRC). He invited the
Regional 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
connection
with
its
subdivision
development project in Pasig City. At breakfast
the following day, Calvin met a prospective
client interested to enter into a joint venture
with SPRC for the construction of a residential
condominium unit in Cainta, Rizal.
Losses (1993, 1998, 1999, 2010 BAR)
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.
Q: Give the requisites for deductibility of a loss.
(1998 BAR)
A:
1.
(a) Can SPRC claim an allowable deduction
for the expenses incurred by Calvin?
Explain your answer.
A: NO. 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. (Sec 34(A)(1)(c),
NIRC)
2.
They must have been losses that are actually
sustained during the taxable year.
3.
Must not have been compensated for by
insurance or other forms of indemnity.
4.
If they are casualty losses, they are of
property connected with trade, business, or
profession and the lose arises from fires,
storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement.
5.
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, 2003) Section 34(A)(1)(b) of
the NIRC, as amended, does not require that the
substantiation be in the form of official receipts
or invoices issued in the name of the taxpayer
claiming the expense. It must only be proven that
there is a “direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer”.
They must be ordinary losses that are
incurred by a taxable entity as a result of its
day-to-day operations conducted for profit
or otherwise, or casualty losses.
Must not have been claimed as a deduction
for estate tax purposes in the estate tax
return.
Q: A is a travelling salesman working full time
for Nu Skin Products. He receives a monthly
salary plus 3% commission on his sales in a
Southern province where he is based. He
regularly uses his own car to maximize his
visits even to far flung areas. One fine day a
group of militants seized his car. He was
notified the following day by the police that
the marines and the militants had a bloody
encounter and his car was completely
destroyed after a grenade hit it. A wants to file
a claim for casualty loss. Explain the legal basis
of your tax advice. (2010 BAR)
A: A is not entitled to claim a casualty loss
because all of his income partake the nature of
compensation income. Taxpayers earning
compensation income arising from personal
services
under
an
employer-employee
relationship are not allowed to claim deduction
except that allowed under Section 34(M)
referring only to the PhP 2,400 health and/or
hospitalization insurance premium; perforce, the
claim of casualty loss has no legal basis. (Sec.
34(M), NIRC)
(b) Is the reimbursement received by Calvin
from SPRC subject to tax? Explain your
answer. (2017 BAR)
A: NO Any amount paid as reimbursements for
18
QuAMTO (1987-2019)
Bad Debts (1999, 2004, 2016 BAR)
Q: Rakham operates the lending company that
made a loan to Alfonso 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
Alfonso is nowhere to be found, Rakham asks
you for advice on how to treat the obligation
as “bad debt.” Discuss the requisites for
deductibility of a “bad debt.” (2016 BAR)
A: I shall advise Rakham to treat the obligation as
“bad debt” by deducting the same from his
income tax return and proving compliance with
the following requisites for the deductibility of a
“bad debt.”
The requisites for the deductibility of a “bad debt”
are:
a.
There must be an existing indebtedness due
to the taxpayer which must be valid and
legally demandable.
b.
The same must be connected with the
taxpayer’s trade, business or practice of
profession.
c.
The same must not be sustained in a
transaction entered into between related
parties.
d.
The same must be actually charged off the
books of accounts of the taxpayer as of the
end of the taxable year.
e.
The debt must be actually ascertained to be
worthless and uncollectible during the
taxable year.
f.
The debts are uncollectible despite diligent
effort exerted by the taxpayer. (Sec. 34(E)(1),
NIRC, arrangement and numbering supplied;
Sec. 3, RR No. 05-99, reiterated in RR No. 252002; Philippine Refining Corporation v. Court
of Appeals, et al., 256 SCRA 667)
g.
Must have been reported as receivables in
the income tax return of the current or prior
years. (RR No. 2, Sec. 103)
Depreciation (1989, 1998, 1999 BAR)
Q: Explain if the following items are
deductible from gross income for income tax
purposes. Disregard who is the person
claiming the expense.
(b) Depreciation of goodwill. (1999 BAR)
A: Depreciation for goodwill is not allowed as
deduction from gross income. While intangibles
maybe allowed to be depreciated or amortized, it
is only allowed to those intangibles whose use in
the business or trade is definitely limited in
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17)
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. (Sec. 107, RR No. 02-40)
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.
Charitable and other contributions (1993,
1996, 1998, 2018 BAR)
Q: The Filipinas Hospital for Crippled
Children is a charitable organization. X
visited the hospital, on his birthday, as was
his custom. He gave P100,000.00 to the
hospital and P5,000.00 to a crippled girl
whom he particularly pitied. A crippled son
of X is in the hospital as one of its patients. X
wants to exclude both the P100,000.00 and
the P5,000.00 from his gross income. Discuss.
(1993 BAR)
A: Under the National Internal Revenue Code,
charitable contributions to be deductible must
be:
a.
Actually paid or made to domestic
corporations or associations organized and
operated
exclusively
for
religious,
charitable, scientific, youth and sports
development, cultural or educational
purposes or for rehabilitation of veterans
or to social welfare institutions no part of
which inures to the benefit of any private
individual;
b.
Made within the taxable year;
c.
Not more than 10% (for individuals) of 5%
(for corporations) of the taxpayer’s taxable
income to be computed without including
the contribution.
Applying the above provisions of law to the case
at bar, it is clear therefore that only the P
100,000.00 contribution of X to Filipinas Hospital
for Crippled Children qualified as a deductible
contribution.
The NIRC expressly provides that the same must
be actually paid to a charitable organization to be
deductible. Note that the law accorded no
privilege to similar contributions extended to
private individuals. Hence, the PhP 5,000.00
contribution to the crippled girl cannot be
claimed as a deduction.
ALTERNATIVE ANSWER:
19
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BAR OPERATIONS
Taxation Law
a.
b.
c.
income shall be the acquisition cost of said
property by the donor which is P 6.5 million. (Sec.
34(H)(3), NIRC)
The P 100,000.00 donation may properly be
deducted from X’s gross income, but not the
P 5, 000.00 donated to the crippled girl, as
charitable and other contributions that may
be deducted from taxable income do not
contemplate those given to individuals.
While it may be that X’s son is a patient in
the hospital, it cannot be said that part of its
net income inures to the benefit of X as to be
disallowed as a deduction from taxable
income.
ALTERNATIVE ANSWER:
Katrina may claim a deduction from her gross
income an amount not in excess of ten percent
(10%) of her taxable income derived from trade,
business or profession as computed price to the
deduction of the value of the donation made to
Klaret School, and other charitable contributions
that may have been made by Katrina during the
taxable year, after compliance with the
substantiation requirements. (Sec. 34(H), NIRC)
Assuming X is a self-employed individual, he
may not deduct the donations made because
under Section 29 of the NIRC as amended by
R.A. No. 7496 better known as SelfEmployed and Professionals Engaged in the
Practice of their Profession (SNITS), only
contribution to the government or to an
accredited relief organization for the
rehabilitation of calamity-stricken areas
declared by the President may be deducted
for income tax purposes. Clearly, the donees
do not qualify as relief organizations.
OPTIONAL STANDARD DEDUCTION
(2009, 2015 BAR)
Q: 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 of
P1,000,000.00. While he incurred expenses
amounting to P 560,000.00 constituting
mostly of his office space rent, utilities, and
miscellaneous expenses related 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
deductions from his gross income? (2015
BAR)
Assuming
X
is
receiving
purely
compensation income, he can only deduct
from gross compensation income premium
on Health and/or Hospitalization Insurance.
(Sec. 34(M), NIRC)
Personal exemption, additional personal
exemption, and special additional personal
exemption have been repealed by Sec. 12 of
R.A. No. 10963 – TRAIN Law.
A: 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 expenses paid or
incurred by him. (Sec. 34(L), NIRC; RR No. 16-08,
as amended)
Q: Years ago, Krisanto bought a parcel of land
in Muntinlupa for only PhP65,000. He donated
the land to his son, Kornelio, in 1980 when the
property had a fair market value of
PhP75,000, and paid the corresponding
donor's tax.
PERSONAL AND ADDITIONAL EXEMPTIONS
(1993, 1998, 2004, 2006, 2012, 2014, 2015
BAR)
Kornelio, in turn, sold the property in 2000 to
Katrina for P 6.5 million and paid the capital
gains tax, documentary stamp tax, local
transfer tax, and other fees and charges.
Katrina, in turn, donated the land to Klaret
School last August 30, 2017 to be used as the
site for additional classrooms. No donor's tax
was paid, because Katrina claimed that the
donation was exempt from taxation. At the
time of the donation to Klaret School, the land
had a fair market value of P 65 million.
Q: Mr. E and Ms. F are both employees of AAA
Corp. They got married on February 14, 2011.
On December 29, 2011, the couple gave birth
to triplets. On June 25, 2013, they had twins.
What
were
the
personal
exemptions/deductions which Mr. E and Ms. F
could claim in the following taxable years?
(2015 BAR)
(b) How much in deduction from gross income
may Katrina claim on account of the said
donation? (2018 BAR)
(a) For 2010
A: For 2010, Mr. E and Ms. F are each
entitled to personal exemptions of PhP
50,000.00. (Sec. 35(A), NIRC)
A: If Klaret School is an accredited ‘nongovernment
organization,
having
been
established as a non-profit domestic corporation,
organized and operated exclusively for
educational purposes, the donation to it as a
qualified donee-institution is deductible in full.
(Sec. 34(H)(2)(c), NIRC) The deduction from gross
(b) For 2011
A: For 2011, Mr. E and Ms. F are each
entitled to basic personal exemption of PhP
50,000.00. In addition to his basic personal
20
QuAMTO (1987-2019)
exemption, Mr. E could claim additional
personal exemptions for three qualified
dependent children in the amount of PhP
25, 000.00 for each child. (Sec. 35(B), NIRC)
(c) For 2013
A: 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 qualified
dependent children in the amount of
P25,000.00 for each child. (Sec 35(B), NIRC)
NOTE: Allowance for personal exemption for
individual taxpayer was repealed by Sec. 12 of
R.A. No. 10963 – TRAIN Law.
ITEMS NOT DEDUCTIBLE
(1989, 1993, 1998, 2004, 2007, 2014 BAR)
Premiums paid on life insurance policy (1989,
2004, 2007 BAR)
Q: OXY is the president and chief executive
officer of ADD Computers Inc. When OXY was
asked to join the government service as
director of a bureau under the Department of
Trade and Industry, he took a leave of absence
from ADD. Believing that its business outlook,
goodwill and opportunities improved with
OXY in the government, ADD proposed to
obtain a policy of insurance on 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 deductible by
ADD Computers, Inc.? Reason. (2004 BAR)
A: NO. The premium is not deductible because it
is not an ordinary business expense. The term
"ordinary” is used in the income tax law in its
common significance and it has the connotation of
being normal, usual or customary. (Deputy v. Du
Pont, 308 US 48) 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 employee.
This is so because if the insured, his estate or
heirs were made as the beneficiary (because of
the requirement of insurable interest), the
payment of premium will constitute bribes which
are not allowed as deduction from gross income.
(Sec. 34(A)(1)(c), NIRC)
On the other hand, if the company was made the
beneficiary, whether directly or indirectly, the
premium is not allowed as a deduction from gross
income. (Sec. 36(A)(4), NIRC)
Q: Noel Santos 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
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
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.
xxx
(b) Can the company deduct from its gross
income the amount of the premium?
Reason briefly. (2007 BAR)
A: YES. The premiums paid are ordinary and
necessary business 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.
(Sec. 36(A)(4), NIRC) Since the parents of the
employee were made the beneficiaries, the
prohibition for their deduction does not exist.
Bribes (1993, 1998, 2014 BAR)
Q: Freezy Corporation, a domestic corporation
engaged in the manufacture 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 deduction from its gross income?
Explain. (2014 BAR)
A: NO. The payments made in exchange for the
revelation of a competitor’s trade secrets is
considered as an expense which is against law,
morals, good customs or public policy, which is
not deductible. (3M Philippines, Inc. v. CIR, GR No.
82833, 1988) Also, the law will not allow the
deduction of bribes, kickbacks and other similar
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.
(Sec. 34(A)(1)(c). NIRC)
INCOME TAX ON INDIVIDUALS
(1997, 1999, 2000, 2001, 2002, 2007, 2015,
2016, 2017, 2018, 2019 BAR)
Income tax on Resident Citizens, Non- resident
Citizens and Resident Aliens (1997, 1999,
2000, 2001, 2002, 2007, 2015, 2016, 2017,
2018, 2019 BAR)
Q: Patrick is a successful businessman in the
United States and he is a sole proprietor of a
supermarket which has a gross sales of $10
million and an annual income of $3 million. He
went to the Philippines 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) decides to reacquire his Philippine
citizenship under R.A. NO.9225, establish
residence in this country, and open a
supermarket in Makati City, will the BIR tax
21
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BAR OPERATIONS
Taxation Law
him on the income he earns from his U.S.
business? If you were Atty. Agaton, what
advice will you give Patrick? (2016 BAR)
Determine whether the compensation they
received from KKI in 2017 is taxable under
Philippine laws and whether they are
required to file tax returns with the Bureau of
Internal Revenue (BIR).
A: I will advise Patrick that if he reacquires his
Philippine citizenship and establish residence in
the Philippines, he shall be considered as a
resident citizen subject to tax on incomes derived
from sources within or without the Philippines.
(Sec. 23(A), NIRC)
(a) Kris Konejero, a Filipino accountant in
KKl's Tax Department in the Makati
office, and married to a Filipino engineer
also working in KKI;
Consequently, the BIR could now tax him on his
income derived from sources without the
Philippines which is the income he earns from his
U.S. business. (Domondon)
A: Taxable. (Sec. 23 & 24(A), NIRC) Kris must
file tax returns with the BIR, unless she
qualifies for substituted filing of income tax
returns because the tax was correctly
withheld by the employer. (Sec. 51(A)(2)(b),
NIRC)
Q: Mr. Sebastian is a Filipino seaman employed
by a Norwegian company which is engaged
exclusively in international shipping. He and
his wife, who manages their business, filed a
joint income tax return for 1997 on March
15,1998. After an audit of the return, the BIR
issued on April 20, 2001 a deficiency income
tax assessment for the sum of P250,000.00,
inclusive of interest and penalty. For failure of
Mr. and Mrs. Sebastian to pay the tax within
the period stated in the notice of assessment,
the BIR issued on August 19, 2001 warrants of
distraint and levy to enforce collection of the
tax.
(b) Klaus Kloner, a German national who
heads KKl's Design Department in its
Makati office;
A: Taxable being an income earned by a
resident alien from Philippine sources. (Sec.
23 & 24(A), NIRC) Klaus is required to file a
tax return unless the compensation income
from KKJ is his only returnable income and
the withholding tax thereon was correctly
withheld by his employer. (Sec. 51(A)(2)(b),
NIRC)
What is the rule of income taxation with
respect to Mr. Sebastian's income in 1997 as a
seaman on board the Norwegian vessel
engaged in international shipping? Explain
your answer. (2002 BAR)
(c) Krisanto Konde, a Filipino engineer in
KKl's Design Department who was hired
to work at the principal office last
January 2017. In April 2017, he was
assigned and detailed in the company's
project in Jakarta, Indonesia, which
project is expected to be completed in
April 2019;
A: Mr. Sebastian’s income as seaman on board the
Norwegian vessel engaged in international
shipping shall not be subjected to income tax. An
individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on
income derived from sources within the
Philippines: provided, that a seaman who is a
citizen of the Philippines and who receives
compensation for services rendered abroad as a
member of the complement of a vessel engaged
exclusively in international trade shall be treated
as an overseas contract worker. (Sec. 23(C), NIRC)
Mr. Sebastian shall be considered as an overseas
contract worker. His income as seaman, which is
an income from without the Philippines, shall not
be liable for income tax in the Philippines.
A: His compensation from January 1 up to
the time he left the Philippines is taxable and
he must file tax returns, unless the
compensation income is his only returnable
income, and the withholding tax thereon
was correctly withheld by KKI. (Sec.
51(A)(2)(b), NIRC) The compensation for his
services abroad from the date of bis actual
assignment thereat up to the time of the
completion of the project is not taxable
being an income from a source without the
Philippines earned by a non-resident citizen.
(Secs. 23 & 42, NIRC) He is not required to
file a return for this income derived from
without, because said income is not subject
to income tax in the Philippines. (Sec. 23,
NIRC)
Q: Kronge Konsult, Inc. (KKI) is a Philippine
corporation engaged in architectural design,
engineering, and construction work. Its
principal office is located in Makati City, but it
has various infrastructure projects in the
country and abroad. Thus, KKI employs both
local and foreign workers. The company has
adopted a policy that the employees' salaries
are paid in the currency of the country where
they are assigned or detailed.
(d) Kamilo Konde, Krisanto's brother, also an
engineer assigned to KKl's project in
Taipei, Taiwan. Since KKI provides for
housing and other basic needs, Kamila
requested that all his salaries, paid in
Taiwanese dollars, be paid to his wife in
Manila in its Philippine Peso equivalent;
and
Below are some of the employees of KKI.
22
QuAMTO (1987-2019)
A: Not taxable and no need to file tax
returns. Kamilo is a non-resident citizen who
is taxable only on income from sources
within the Philippines. Compensation for
services rendered outside of the Philippines
is an income from a source without the
Philippines which is not subject to the
Philippine income tax. (Secs. 23 & 42, NIRC)
(e) Karen Karenina, a Filipino architect in
KKl's Design Department who reported
back to KKl's Makati office in June 2017
after KKl's project in Kuala Lumpur,
Malaysia was completed. (2018 BAR)
A: Compensation from January 1 up to the
time of her return in June 2017 is an income
from a source without the Philippines which
is not taxable if received by a nonresident
citizen. (Secs. 23 & 42, NIRC) Compensation
from June 2017 to December 31, 2017 is an
income from a source within the Philippines
and taxable to Karen, who is taxable on
worldwide income from the time she
regained the status of a resident citizen and
accordingly, must file returns to pay for the
tax, unless she is purely compensation
income earner for which the withholding tax
on wages was correctly withheld by KKI.
(Sec. 51(A)(2)(b), NIRC)
Q: Mr. C is employed as a Chief Executive
Officer of MNO Company, receiving an annual
compensation of ₱ 10,000,000.00, while Mr. S
is a security guard in the same company
earning an annual compensation of ₱
200,000.00. Both of them source their income
only from their employment with MNO
Company. (2019 BAR)
(a) At the end of the year, is Mr. C personally
required to file an annual income tax
return? Explain.
Based on the amount of annual
compensation income Mr. S received, he is
considered a minimum wage earner. Being a
minimum wage earner, he is not required to
file an income tax return. (Sec. 51(A)(2)(d),
NIRC)
EXCLUSIONS
(1991, 1994, 1996, 2005, 2015, 2016 BAR)
De minimis benefits (1994, 2005, 2015, 2016
BAR)
Q: 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 argues 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. (2016
BAR)
A: NO. The 5% discount of the purchase price of
its products, so-called “courtesy discounts” on
purchases, granted by Mapagbigay Corporation to
all its employees (rank and file, supervisors, and
managers) otherwise known as “de minimis
benefits,” furnished or offered by an employer to
his employees merely as a means of promoting
the health, goodwill, contentment, or efficiency of
his employees, are not considered as
compensation subject to income tax and
consequently to withholding tax. (RR No. 02-98,
Sec. 2.78.1(A)(3), as amended by RR No. 08-2000,
RR No. 05-2008, RR No. 10-2008, RR No. 05-2011,
and RR No. 08-2012)
A: NO, Mr. C is not required, as he is
qualified for substituted filing of income tax
return under Section 51(A) of the NIRC,
since he is receiving purely compensation
income from one employer (MNO Company)
in the Philippines for a given calendar year;
provided the employer has correctly
withheld the tax on the said compensation
income.
As such, de minimis benefits, if given to
supervisors and managerial employees, they are
also exempt from the fringe benefits tax.
(b) How about Mr. S? Is he personally
required to file an annual income tax
return? Explain.
Q: What are de minimis benefits and how are
these taxed? Give three (3) examples of de
minimis benefits. (2015 BAR)
A: NO, Mr. S is also not required. Since the
only income earned (P 200,000) during the
taxable year did not exceed the exemption
threshold of P 250,000 provided in the NIRC,
the employee need not file the income tax
return. (Sec. 51(A)(2)(a), NIRC, as amended
by R.A. No. 10963 – TRAIN Law)
A: De minimis benefits are facilities and privileges
furnished or offered by an employer to his
employees, which are not considered as
compensation 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
ALTERNATIVE ANSWER:
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
23
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BAR OPERATIONS
Taxation Law
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. 0298, as amended by RR No. 08-2000)
leave credits in the amount of P 500,000.00. Is
said amount subject to tax? Explain. (1996
BAR)
A: NO. The accumulated leave credits in the
amount of P 500,000.00 is not subject to tax. The
monetized value of leave credits paid to
government officials and employees shall not be
subject to income tax and consequently to
withholding tax. (RR No. 03-98, Sec. 2.78.1(A)(7),
3rd sentence, as amended by RR No. 10- 2000)
The following shall be considered as de minimis
benefits:
1.
Monetized unused vacation leave credits of
private employees 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 P 1,500 per
employee per semester or P 250 per month;
4.
Rice subsidy pf P 2,000 or 1 sack of 50 kg.
rice per month amounting to not more than
P 2,000;
5.
Uniform and clothing allowance
exceeding P 6,000 per annum;
6.
Actual medical assistance not exceeding P
10,000 per annum;
7.
Laundry allowance not exceeding P 300 per
month
8.
Employees achievement awards, e.g., for
length of service or safety achievement,
which must be in the form of a tangible
personal property other than cash or gift
certificate, with an annual monetary value
not exceeding P 10,000 received by the
employee under an established written plan
which does not discriminate in favor of
highly paid employees;
9.
INCOME TAX ON CORPORATIONS
(1987, 1988, 1989, 1990, 1991, 1994, 1997,
2001, 2005, 2009, 2013, 2014, 2015 BAR)
Minimum Corporate Income Tax (2001, 2015
BAR)
Q: KKK Corp. secured its Certificate of
Incorporation from the Securities 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.
not
a.
As Ms. J’s supervisor, what will be your
advice?
A: 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? (2015
BAR)
Gifts given during Christmas and major
anniversary celebrations not exceeding P
5,000 per employee per annum
A: As to taxpayer: Regular
income tax applies to all
taxpayers, while minimum
income
tax
applies
to
corporations
and
resident
corporations.
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
schemes
combined do not exceed P 10,000 per
employee per taxable year. (RR No. 02-98, as
amended by RR No. 05-11, RR No, 01-15, & RR
No. 11-18)
corporate
corporate
corporate
domestic
foreign
As to tax rate: Regular corporate income
tax is 30%; while minimum corporate
income tax is 2%.
Leave Credits (1991, 1996 BAR)
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.
Q: A, an employee of the Court of Appeals,
retired upon reaching the compulsory age of
65 years. Upon compulsory retirement, A
received the money value of his accumulated
As to period of applicability: Regular
corporate income tax is applicable
beginning on the fourth taxable year
following the commencement of business
24
QuAMTO (1987-2019)
operation, while minimum corporate
income tax is applicable beginning on the
fourth taxable year following the
commencement of business operation.
As to imposition: The minimum corporate
income tax is imposed whenever it is
greater than the regular corporate income
tax of the corporation. (Sec. 27(A) & (E),
NIRC; RR No. 09-98)
Off-line International carriers (1987, 1990,
1994, 2005, 2009 BAR)
Q: Kenya International Airlines (KIA) is a
foreign corporation, organized under the laws
of Kenya. It is not licensed to do business in
the Philippines. Its commercial airplanes do
not operate within Philippine territory, or
service passengers embarking from Philippine
airports. The firm is represented in the
Philippines by its general agent, Philippine
Airlines (PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and
these tickets are serviced by KIA airplanes
outside the Philippines. The total sales of
airline tickets transacted by PAL for KIA in
1997 amounted to P2,968,156.00. The
Commissioner of Internal Revenue assessed
KIA deficiency income taxes at the rate of 35%
on its taxable income, finding that KIA’s
airline ticket sales constituted income derived
from sources within the Philippines.
KIA filed a protest on the ground that the
P2,968,156.00 should be considered as
income derived exclusively from sources
outside the Philippines since KIA only
serviced passengers outside Philippine
territory.
Is the position of KIA tenable? Reasons. (2009
BAR)
A: KIA’s position is not tenable. The revenue it
derived in 1997 from sales of airplane tickets in
the Philippines, through its agent PAL, is
considered as income from within the Philippines,
subject to the 35% tax based on its taxable
income pursuant to the Tax Code. The transacting
of business in the Philippines through its local
sales agent, makes KIA a resident foreign
corporation despite the absence of landing rights,
thus, it is taxable on income derived from within.
The source of an income is the property, activity
or service that produced the income. In the
instant case, it is the sale of tickets in the
Philippines which is the activity that produced the
income. KIA’s income being derived from within,
is subject to Philippine income tax. (CIR v. British
Overseas Airways Corporation, 149 SCRA 395,
1987)
NOTE: That from January 1, 2009 to June 30,
2020 the tax rate is 30%. (R.A. No. 9337; R.A. No.
11534 – CREATE Act) Starting July 1, 2020, the tax
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
rate for Resident Foreign Corporations is 25%.
(CREATE Act is not covered by 2020 bar syllabus)
Tax on Co-ownerships (1990, 1991, 1994,
1997 BAR)
Q: Mr. Santos died Intestate in 1989 leaving
his spouse and five children as the only heirs.
The estate consisted of a family home and a
four-door apartment which was being rented
to tenants. Within the year, an extrajudicial
settlement of the estate was executed from the
heirs, each of them receiving his/her due
share. The surviving spouse assumed
administration of the property. Each year, the
net income from the rental property was
distributed to all, proportionately, on which
they paid respectively, the corresponding
income tax.
In 1994, the income tax returns of the heirs
were examined and deficiency income tax
assessments were issued against each of them
for the years 1989 to 1993, inclusive, as
having entered into an unregistered
partnership. Were the assessments justified?
(1997 BAR)
A: YES. The assessments were justified because
for income tax purposes, the co-ownership of
inherited property is automatically converted into
an unregistered partnership from the moment the
said properties are used as a common fund with
intent to produce profits for the heirs in
proportion to their shares in the inheritance.
From the moment of such partition, the heirs are
entitled already to their respective definite shares
of the estate and the income thereof, for each of
them to manage and dispose of as exclusively his
own without the intervention of the other heirs,
and, accordingly, he becomes liable individually
for all taxes in connection therewith. If after such
partition, he allows his shares to be held in
common with his co-heir under a single
management to be used with the intent of making
profit thereby in proportion to his share, there
can be no doubt that, even if no document or
instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is
formed. (Lorenzo Ona, et al v. CIR, 45 SCRA 74)
ALTERNATIVE ANSWER:
NO, the assessments are not justified. The mere
sharing of income does not of itself establish a
partnership absent any clear intention of the coowners who are only awaiting liquidation of the
estate.
Tax on General Professional Partnerships
(1988, 1989, 1990, 2013, 2014 BAR)
Q: 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
25
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BAR OPERATIONS
Taxation Law
earnings and paid expenses, among which are
as follows:
(c) If ABC Law Firm earns net income in
2012, what, if any, is the tax consequence
on the part of ABC Law Firm 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? (2014 BAR)
Earnings:
1. Professional/legal
clients;
fees
from
various
2. Cash prize received from a religious
society in recognition of the exemplary
service of ABC Law Firm;
3. Gains derived from sale
computers and laptops.
of
A: 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
shares,
actuality
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 income
tax based on their respective taxable
income as individual taxpayers. (Sec. 26,
NIRC)
excess
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 above
mentioned earnings which should be
included in the computation of ABC Law
Firm’s gross income? Explain.
ESTATE TAX
A: 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 are included as part
of gross income being in the nature of
compensation for services. (Sec. 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. (Sec. 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
property. (Sec. 32(A)(3), NIRC)
TIME AND TRANSFER OF PROPERTIES
(DATE OF DEATH VALUATION RULE)
(1994, 2007, 2008 BAR)
Q: Jose Cernan, Filipino citizen, married to
Maria Ceman, died in a vehicular accident in
NLEX on July 10, 2007. The spouses owned,
among others, a 100-hectare agricultural land
in Sta. Rosa, Laguna with current fair market
value of P 20 million, which was the subject
matter of a Joint Venture Agreement about to
be implemented with Star Land Corporation
(SLC), a well-known real estate development
company. He bought the said real property for
P 2 million fifty 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 commercial centers. As a result, the prices
of real properties in the locality have doubled.
(b) What are the items in the abovementioned payments which may be
considered as deductions from the gross
income of ABC Law Firm? Explain.
The Administrator of the Estate of Jose Cernan
filed the estate tax return on January 9,2008,
by including in the gross estate the real
property at P 2 million. After 9 months, the
BIR issued deficiency estate tax assessment,
by valuing the real property at P40 million.
A: The law firm being formed as general
professional partnership is entitled to the
same deductions allowed to corporation.
(Sec. 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. (Sec. 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. 10-02)
(a) Is the BIR correct in valuing the real
property at P 40 million? Explain.
A: NO. The value of the property for estate tax
purposes shall be the fair market value thereof at
the time of death. (Sec. 88(B), NIRC)
26
QuAMTO (1987-2019)
(b) If you disagree, what is the correct value
to use for estate tax purposes? Explain.
(2008 BAR)
A: The correct value to use for estate tax
purposes is P 20 million which is the current fair
market value of the property at the time of the
decedent's death. (Sec. 88(B), NIRC)
CLASSIFICATION OF DECEDENT FOR PURPOSES
OF DETERMINING
COMPOSITION OF GROSS ESTATE
(1987, 1990, 1994, 2010 BAR)
Q: Cliff Robertson, an American citizen, was a
permanent resident of the Philippines. He died
in Miami, Florida. He left 10, 000 shares of
Meralco, a condominium unit at the Twin
Towers Building at Pasig. Metro Manila and a
house and lot in Los Angeles, California.
What assets shall be included in the Estate Tax
Return to be filed with the BIR? (1994 BAR)
A: All of Mr. Robertson’s assets consisting of 10,
000 shares in the Meralco, a condominium unit in
Pasig, and his house and lot in Los Angeles,
California are taxable. The properties of a resident
alien decedent like Mr. Robertson are taxable
wherever situated. (Sec. 85, NIRC as amended by
R.A. No. 8424 – the Tax Reform Act of 1997)
ITEMS TO BE INCLUDED AS PART OF
GROSS ESTATE (2001, 2003, 2005, 2007, 2013,
2018, 2019 BAR)
Q: Karissa is the registered owner of a
beachfront property in Kawayan, Quezon
which she acquired in 2015. Unknown to
many, Karissa was only holding the property
in trust for a rich politician who happened to
be her lover. It was the politician who paid for
the full purchase price of the Kawayan
property. No deed of trust or any other
document showing that Karissa was only
holding the property in trust for the politician
was executed between him and Karissa.
Karissa died single on May 1, 2017 due to a
freak surfing accident. She left behind a
number of personal properties as well as real
properties, including the Kawayan property.
Karissa's sister, Karen, took charge of
registering Karissa's estate as a taxpayer and
reporting, for income tax and VAT purposes,
the rental income received by the estate from
real properties. However, it was only on
October 1, 2017 when Karen managed to file
an estate tax return for her sister's estate. The
following were claimed as deductions in the
estate tax return:
1. Funeral expenses
250,000;
amounting
to
P
2. Medical expenses amounting to P
100,000, incurred when Karissa was
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
hospitalized for pneumonia a month
before her death; and
3. Loss valued at PhP6 million arising from
the
destruction
of
Karissa's
condominium unit due to fire which
occurred on September 15, 2017.
(a) Should the beachfront property be
included in Karissa's gross estate? xxx (2018
BAR)
A: YES. The property is registered in the name of
the decedent, so it’s a property owned by her as of
the time of death which must properly be
included as part of her gross estate. The extent of
her interest in the property, which is full
ownership, must form part of her gross estate.
(Sec. 85(A), NIRC)
Transfers in Contemplation of Death (2001,
2013 BAR)
Q: A, aged 90 years and suffering from
incurable cancer, on August 1, 2001 wrote a
will and, on the same day, made several intervivos gifts to his children. Ten days later, he
died. In your opinion, are the inter-vivos gifts
considered transfers in contemplation of
death for purposes of determining properties
to be included in his gross estate? Explain
your answer. (2001 BAR)
A: YES. When the donor makes his will within a
short time of, or simultaneously with, the making
of gifts, the gifts are considered as having been
made in contemplation of death. (Roces v. Posadas,
58 Phil. 108) Obviously, the intention of the donor
in making the inter-vivos gifts is to avoid the
imposition of the estate tax and since the donees
are likewise his forced heirs who are called upon
to inherit, it will create a presumption juris
tantum that said donations were made mortis
causa, hence, the properties donated shall be
included as part of A's gross estate.
Proceeds of Life Insurance Policy (2003, 2005,
2007 BAR)
Q: Antonia Santos, 30 years old, gainfully
employed, is the sister of Eduardo 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.
Is the P 10 million subject to estate tax?
Reason briefly. (2007 BAR)
A: NO. The estate tax is a tax on the privilege
enjoyed by an individual in controlling the
disposition of her properties to take effect upon
her death. The P 10M is not a property existing as
of the time of decedent’s death; hence, it cannot
27
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BAR OPERATIONS
Taxation Law
be said that she exercised control over its
disposition. Since the privilege to transmit the
property is not exercised by the decedent, the
estate tax cannot be imposed thereon. (Definition
of Estate Tax, Compendium of Tax Law and
Jurisprudence, Third Revised Edition, Vitug, p. 184)
Funeral
Expenses
(a) Is the Estate of Jaime Asuncion liable for
estate tax? Explain. (2008 BAR)
A: NO. The estate comprised of properties of only
P 1.2 million is not liable to any estate tax. The
estate is entitled to a standard deduction of P 5
million deductible from the gross estate without
the benefit of substantiation, thereby placing the
net estate at a negative. Since there is no net
taxable estate, no estate tax is due. (Secs. 86(A)(1)
& 84, NIRC, as amended by R.A. No. 10963 – TRAIN
Law)
DEDUCTIONS FROM GROSS ESTATE
(2000, 2008, 2009, 2010, 2015, 2017, 2018,
2019 BAR)
Vanishing Deduction (2008, 2009 BAR)
Q: In 1999, Xavier purchased from his friend,
Yuri, a painting for P 500,000.00. The fair
market value (FMV) of the painting at the time
of the purchase was P 1 million. Yuri paid all
the corresponding taxes on the transaction. In
2001, Xavier died. In his last will and
testament, Xavier bequeathed the painting,
already worth P 1.5 million, to his only son,
Zandro. The will also granted Zandro the
power to appoint his wife, Wilma, as successor
to the painting in the event of Zandro’s death.
Zandro died in 2007, and Wilma succeeded to
the property.
Medical Expenses (2010, 2015, 2018 BAR)
Q: 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 ------- Medical Expenses
(2015 BAR)
A: The conditions for the allowance of medical
expenses as deductions from the gross estate of a
citizen or resident alien are:
May a vanishing deduction be allowed in
either or both of the estates? Explain. (2009
BAR)
A: Vanishing deduction shall be allowed to the
estate of Xavier but only to the extent of the
property which is the portion acquired by gift.
(Sec. 100, NIRC) The donation took place within 5
years (1999 to 2001) from the death of Xavier;
hence, there is a vanishing deduction. However,
Zandro’s estate will not be entitled to claim
vanishing deduction because, first and foremost,
the property previously taxed is not includable in
his gross estate and second, even if it is
includable, the present decedent died more than 5
years from the death of the previous decedent,
and that a vanishing deduction is already claimed
by the previous estate involving the same
property.
Cash
P 10,000,000
Cars
P 2,000,000
500,000
Land 5,000,000
2,000,000
Residential
4,000,000
House
Mortgage
2,500,000
Payable
The medical expenses must have been
incurred within one (1) year before the
death of the decedent;
2.
That the medical expenses
substantiated with receipts; and
3.
The total amount thereof, whether paid or
unpaid, does not exceed P 500, 000.00. (Sec.
86(A)(6), NIRC)
are
duly
Claims against the Estate (2010, 2015, 2017
BAR)
Q: 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 ------ Claims against the
estate. (2015 BAR)
Q: While driving his car 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, Assunta also died in the
hospital. The spouses and their son had the
following assets and liabilities at the time of
death:
Conjugal
1.
NOTE: Specific deductions for actual funeral
expenses, judicial expenses of the testamentary of
intestate proceedings and medical expenses were
removed by Sec. 23 of R.A. No. 10963 – TRAIN
Law.
Standard Deduction (2000, 2008, 2019 BAR)
Assunta
Exclusive
300,000
A: 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 imposing
the estate tax, the law requires at the time the
indebtedness 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 showing the disposition
of the proceeds of the loan. (Sec. 86(A)(2), NIRC, as
amended by R.A. No. 10963 – TRAIN Law)
Jaime
Exclusive
P 1,200,000
28
QuAMTO (1987-2019)
Funeral Expenses (2018, 2019 BAR)
Q: A, a resident Filipino citizen, died in
December 2018. A's only assets consist of a
house and lot in Alabang, where his heirs
currently reside, as well as a house in Los
Angeles, California, USA. In computing A's
taxable net estate, his heirs only deducted: 1.
₱ 10,000,000.00 constituting the value of their
house in Alabang as their family home; and 2.
₱ 200,000.00 in funeral expenses because no
other expenses could be substantiated.
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 Commissioner of Internal Revenue
to give him one year to pay the estate tax due.
The Commissioner approved the request for
extension 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.
Are both deductions claimed by A's heirs
correct? Explain. xxx (2019 BAR)
(a) 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? xxx
(2007 BAR)
A: NO. The claim of both deductions by the heirs
is incorrect. Only the claim for the deduction of
the family home worth P 10,000,000.00 is
correct, if the property is the decedent’s family
home as of the time of his death. (Sec. 86(A)(7),
NIRC) As for the funeral expense, upon the
amendment introduced by R.A. No. 10963 –
TRAIN Law, funeral expense was not specified as
a separate deductible item, hence, not allowed as
a deduction from the gross estate of the decedent.
A: 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 years if
the estate is under extrajudicial settlement or five
years if it is under judicial settlement. The
Commissioner may also require the posting of a
bond to secure the payment of the tax. (Sec. 91(B),
NIRC)
PERIOD FOR FILING OF ESTATE TAX RETURN,
PAYMENT AND EXTENSION
(2000, 2007, 2010, 2017 BAR)
Q: Mr. Felix de la Cruz, a bachelor resident
citizen suffered from a heart attack while on a
business trip to the USA. He died intestate on
June 15, 2013 in New York City, xxx xxx where
shall the return be filed and estate tax be
paid? (2000 BAR)
A: The estate tax return shall be filed within six
(6) months from the decedent’s death (Sec. 90(B),
NIRC, as amended by R.A. No. 8424 – the Tax
Reform Act of 1997), provided that the
Commissioner of Internal Revenue shall have
authority to grant in meritorious cases, a
reasonable extension not exceeding thirty (30)
days for filing the return. (Sec. 90(C), Ibid)
ALTERNATIVE ANSWER:
YES The requirements to be complied with so that
an extension may be allowed are: (1) a request for
extension must be filed before the expiration of
the original period to pay; (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 of not exceeding 5 years if the
estate is settled judicially or 2 years if settled
extrajudicially; 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. (Sec. 91(B), NIRC)
COLLECTION OF ESTATE TAXES PENDING
PROBATE PROCEEDING
(1998, 2004, 2005 BAR)
NOTE: R.A. No. 10963 – TRAIN Law amended the
deadline for filing the estate tax return, from
within six months from the decedent’s death to
within one year from the decedent’s death.
Q: Is the approval of the court, sitting as
probate or estate settlement court, required
in the enforcement and collection of estate
tax? Explain. (2005 BAR)
Except in cases where the Commissioner of
Internal Revenue otherwise permits, the estate
tax return shall be filed with an authorized agent
bank, or Revenue District Officer, Collection
Officer, or duly authorized Treasurer of Pasig City,
the City in which the decedent Mr. de la Cruz was
domiciled at the time of his death. (Sec. 90(D),
NIRC, as amended by R.A. No. 8424 – the Tax
Reform Act of 1997)
A: NO. The approval of the court, sitting in
probate, is not a mandatory 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 interested 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)
Q: Remedios, a resident citizen, died on
November 10, 2006. She died leaving three
condominium units in Quezon City valued at
P5 Million each. Rodolfo was her only heir. He
reported her death on December 5, 2006 and
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
29
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POWER OF THE
COMMISSIONER OF INTERNAL REVENUE
TO INQUIRE INTO BANK ACCOUNTS
FOR PURPOSES OF DETERMINING THE
GROSS ESTATE OF A DECEDENT
(1992, 2003 BAR)
strike and volunteered to picket the company
premises from 8:00 A.M. to 12:00 P.M.,
Monday to Friday. Six months into the strike, X
ran out of money and asked financial aid from
the union since he has no other source of
income and needed financial assistance in
order to live. The union gave him P1, 000.00 a
month to take care of his food requirements
plus P500.00 to take care of his monthly rent.
When X filed his return, he excluded these
benefits from his gross income. The exclusion
was denied by the BIR Decide. (1993 BAR)
Q: X dies in year 2000 leaving a bank deposit
of P 2, 000,000.00 under joint account with his
associates in a law office. Learning of X’s death
from the newspapers, the Commissioner of
Internal Revenue wrote to every bank in the
country asking them to disclose to him the
amount of deposits that might be outstanding
in his name or jointly with others at the date
of his death. May the bank holding the deposit
refuse to comply on the ground of the Secrecy
of Bank Deposit Law? Explain. (2003 BAR)
A: The P 1,500.00 is not compensation income.
Compensation income, in general, means all
renumeration for services performed by an
employee for his employer under an employeremployee relationship, unless specifically
excluded by the Code. The P 1,500.00 is a gift
from the labor union. According to Section
32(B)(3) of the NIRC as amended by R.A. No. 8424
(the Tax Reform Act of 1997), gifts are to be
excluded from gross income. Thus, the BIR's
denial is not valid.
A: 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 deposits. (Sec. 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. (Sec. 97, NIRC) Hence, to be able to give
the required certification, the inclusion of the
deposit is imperative, which may be made
possible only through the inquiry made by the
Commissioner.
ALTERNATIVE ANSWER:
Under the law, gross income consists of all gains,
profits, and income of the taxpayer during a
taxable year of whatever kind and in whatever
form derived from any source, whether legal or
illegal, except items of gross income subject to
final income tax and income exempt from taxation
under Section 32(B) of the NIRC, as amended by
R.A. No. 8424 (the Tax Reform Act of 1997).
Moreover, in the case of Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, 31 August 1965,
it was held that the phrase income from whatever
source derived covers all other forms of income. It
discloses a legislative policy to include all income
not expressly exempted, as within the class of
taxable income under our laws, irrespective of the
voluntary or involuntary action of the taxpayer in
producing the gain.
NOTE: R.A. 10963 – TRAIN Law amended Sec. 97
of the NIRC as follows: “If a bank has knowledge
of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it
shall allow any withdrawal from the said deposit
account, subject to a final withholding tax of six
percent (6%). For this purpose, all withdrawal
slips shall contain a statement to the effect that
all of the joint depositors are still living at the
time of withdrawal by any one of the joint
depositors and such statement shall be under
oath by the said depositors.”
Therefore, based on the foregoing considerations,
the benefits subject in the case at bar, not
expressly exempted by law, are considered as
income.
Q: A, an individual, sold to B, his brother-inlaw, 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.
DONOR’S TAX
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.
TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
(1989, 1991, 1993, 1995, 1996, 1999 BAR)
Sale/exchange/transfer of property for
insufficient consideration (1989, 1991, 1993,
1995, 1996, 1999 BAR)
Q: The employees of Travellers, Inc. staged a
strike. X, a non-union member joined the
30
QuAMTO (1987-2019)
Explain if the above transactions are subject
to donor's tax. (1999 BAR)
Renunciation of share of surviving spouse
(2010, 2013 BAR)
A: The first transaction where a lot was sold by A
to his brother-in-law for a price below its fair
market value will not be subject to donor's tax if
the lot qualifies as a capital asset. The transfer for
less than adequate and full consideration, which
gives rise to a deemed gift, does not apply to a
sale of property subject to capital gains tax. (Sec.
100, NIRC) However, if the lot sold is an ordinary
asset, the excess of the fair market value over the
consideration received shall be considered as a
gift subject to the donor's tax.
Q: In the settlement of the estate of Mr.
Barbera who died intestate, his wife
renounced her inheritance and her share of
the conjugal property in favor of their
children. The BIR determined that there was a
taxable gift and thus assessed Mrs. Barbera as
a donor. Was the BIR correct? (2013 BAR)
The sale of shares of stock below the fair market
value thereof is subject to the donor's tax
pursuant to the provisions of the Tax Code. The
excess of the fair market value over the selling
price is a deemed gift.
ALTERNATIVE ANSWER:
The sale of shares of stock below the fair market
value will not give rise to the imposition of the
donor's tax. In determining the gain from the
transfer, the selling price of the shares of stocks
shall be the fair market value of the shares of
stocks transferred. (Sec. 6, RR No. 02- 82) In
which case, the reason for the imposition of the
donor's tax on sales for inadequate consideration
does not exist.
CLASSIFICATION OF DONORS
(1992, 1996, 2009 BAR)
Situs of Donor’s Tax (1992, 1996, 2009 BAR)
Q: Mr. Bill Morgan, a Canadian citizen and a
resident of Scarborough, Ontario, sends a gift
check of $ 20,000.00to his future Filipino
daughter-in-law who is to be married to his
only son in the Philippines.
Is the donation by Mr. Morgan subject to tax?
Explain. (1992 BAR)
A: The BIR is correct that there was a taxable gift
but only insofar as the renunciation of the share
of the wife in the conjugal property is concerned.
This is a transfer of property without 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 property is
automatically transferred to the other heirs by
operation of law due to her repudiation of her
inheritance. (BIR Ruling DA No. 333-07)
EXEMPTION OF GIFTS FROM
DONOR’S TAXES
(1992, 1994, 1995, 2000, 2001, 2002, 2007,
2008, 2014, 2017, 2018, 2019 BAR)
Q: Due to rising liquidity problems and
pressure from its concerned suppliers, P Corp.
instituted a flash auction sale of its shares of
stock. P Corp. was then able to sell its treasury
shares to Z, Inc., an unrelated corporation, for
P l,000,000.00, which was only a little below
the valuation of P Corp. 's shares based on its
latest audited financial statements. In
connection therewith, P Corp. sought a Bureau
of Internal Revenue ruling to confirm that,
notwithstanding the price difference between
the selling price of the shares and their book
value, the said transaction falls under one of
the recognized exemptions to donor's tax
under the Tax Code.
A: YES. While the gift has been made on account
of marriage, to qualify for exemption to the extent
of the first P 10, 000.00 of the value thereof, such
gift should have been given to a legitimate,
recognized natural or adopted child of the donor.
(Sec. 101(A)(1), NIRC, as amended by R.A. No. 8424
– the Tax Reform Act of 1997)
(a) Cite the instances under the Tax Code
where gifts made are exempt from
donor's tax.
A: Under the Tax Code, the following gifts are
exempt from the donor’s tax:
NOTE: R.A. No. 10963 (TRAIN Law) removed the
provision on dowries or gifts made on account of
marriage.
ALTERNATIVE ANSWER:
It is not subject to tax because the gift was made
outside the Philippines.
DETERMINATION OF GROSS GIFT
(2010, 2013 BAR)
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
31
1.
Total net gifts not in excess of Two hundred
fifty thousand pesos (P 250,000.00) made
during the calendar year. (Sec. 99(A), NIRC,
as amended by R.A. No. 10963 – TRAIN Law)
2.
Sale or exchange for insufficient
consideration where said sale, exchange, or
other transfer of property is made in the
ordinary course of trade or business, a
transaction which is bona fide, at arm’s
length, and free from any donative intent.
(Sec. 100, NIRC, as amended by R.A. No.
10963 – TRAIN Law)
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BAR OPERATIONS
Taxation Law
3.
4.
Gifts made to or for the use of the National
Government or any entity created by any of
its agencies which is not conducted for
profit, or to any political subdivision of the
said Government. (Sec. 101, NIRC)
cumulative donations, the aggregation of all
donations made by a donor is allowed only over
one calendar year.
NOTE: Under Sec. 99(A) of the NIRC, as amended
by R.A. No. 10963 (TRAIN Law), total net gifts not
in excess of Two hundred fifty thousand pesos (P
250,000.00) made during the calendar year are
exempt from donor’s tax.
Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution, accredited
non-government organization, trust or
philanthropic organization or research
institution or organization: Provided,
however, that not more than thirty percent
(30%) of said gifts shall be used by such
donee for administration purposes. (Sec.
101, NIRC)
Donations in favor of the government,
educational,
charitable,
religious
etc.
institutions (1992, 1994, 2000, 2002, 2007,
2014, 2017, 2018 BAR)
Q: On December 06, 2001, LVN Corporation
donated a piece of vacant lot situated in
Mandaluyong City to an accredited and duty
registered non-stock, non-profit educational
institution to be used by the latter in building
a sports complex for students.
(b) Does the above transaction fall under any
of the exemptions? Explain. (2019 BAR)
A: YES. The transaction is not subject to
donor’s tax. Generally, the sale of property,
other than real property held as capital
assets, for less than its fair market value is
subject to donor’s tax on the amount by
which the fair market value exceeds the
consideration received. However, if the sale
of property is made in the ordinary course of
business (i.e., (i) a transaction which is bona
fide, (ii) at arm’s length, and (iii) free from
any donative intent), the sale will be
considered made for an adequate and full
consideration in money or money’s worth
and will not be subject to donor’s tax. (Sec.
100, NIRC, as amended by R.A. No. 10963 –
TRAIN Law)
(a) May the donor claim in full as deduction
from its gross income for the taxable year
2001 the amount of the donated lot
equivalent to its fair market value/zonal
value at the time of the donation? Explain
your answer.
A: NO. Donations and/or contributions made to
qualified donee institutions consisting of
property other than money shall be based on the
acquisition cost of the property. The donor is not
entitled to claim as full deduction the fair market
value/zonal value of the lot donated. (Sec.
34(H)(3), NIRC)
In this case, the transfer was made in the
ordinary course of business since it was done
for a valid business purpose, which is to
address liquidity problems and relieve
pressure from the Company’s suppliers.
(b) In order that donations to non-stock, nonprofit educational institution may be
exempt from the donor’s gift tax, what
conditions must be met by the donee?
(2002 BAR)
Gift Splitting (1995, 2001, 2008 BAR)
A: In order that donations to non-stock, nonprofit educational institution may be exempt
from the donor’s gift tax, it is required that not
more than 30% of the said gifts shall be used by
the
donee-institution
for
administration
purposes. (Sec. 101(A), NIRC)
Q: Your bachelor client, a Filipino residing in
Quezon City, wants to give his sister a gift of P
200,000.00. 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 P 200,000.00 on
Christmas 2001 or to give P 100, 000.00 on
Christmas 2001 and the other Php100,000.00
on January 1, 2002. Please explain your
advice. (2001 BAR)
VALUE ADDED TAX
CONCEPT, NATURE AND
CHARACTERISTICS OF VAT
(1988, 1996, 2015, 2019 BAR)
A: I would advise him to split the donation. Giving
the P 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 P 100, 000 given on two different
years will totally relieve the donor from the
donor’s tax because the first P 100,000 donation
in the graduated brackets is exempt. (Sec. 99,
NIRC) While the donor’s tax is computed on the
Q: What are the characteristics of the ValueAdded Tax? (1996 BAR)
A: The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee, or lessee of the goods,
properties or services.
ALTERNATIVE ANSWER:
32
QuAMTO (1987-2019)
The value-added
characteristics:
a.
b.
c.
d.
e.
tax
has
the
following
It is an indirect tax where tax shifting is
always presumed;
It is consumption-based;
It is imposed on the value-added in each
stage of distribution;
It is a credit-invoice method value-added
tax; and
It is not a cascading tax.
Q: For purposes of value-added tax, define,
explain or distinguish the following terms:
(a) Input tax and output tax
A: Input tax means the VAT due on or paid by a
VAT-registered person on importation of goods
or local purchases of goods, properties, or
services, including lease or use of properties. It
includes presumptive input tax and transitional
input tax.
Output tax refers to the VAT billed by a VATregistered or VAT-registrable seller on his sale
of goods, properties and services.
(b) Zero-rated and effectively zero-rated
transactions
A: Zero-rated transactions are transactions that
are immune from the imposition of the VAT and
the term includes export sales and effectively
zero-rated sales. (Sec. 106(A)(2), NIRC)
A zero-rated sale of goods or properties
(whether export sale or effectively zero-rated
sale) is a taxable transaction for VAT purposes,
although the VAT rate applied is 0%. A sale by a
VAT-registered taxpayer of goods and/or
services taxed at 0% shall not result in any
output tax, while the input tax on its purchase of
goods or services related to such zero-rated sale
shall be available as tax credit or refund. (Atlas
Consolidated v. CIR, June 8, 2007)
An effectively zero-rated transaction is limited
in its context because it does not cover export
sales. More specifically, effectively zero-rated
transactions refer to the local sale of goods or
supply of services by a VAT-registered person to
persons or entities who were granted tax
exemption under special laws or international
agreement to which the Philippines is a
signatory. (CIR v. Seagate Technology Phils., Inc.
G.R. No. 153866, Feb. 11, 2005)
(c) Destination principle (2019 BAR)
A: The destination principle provides that “no
VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the
territorial border of the taxing authority”.
Hence, exports are zero-rated while imports are
subject to the 12% VAT. (Coral Bay Nickel
Corporation v. CIR, June 13, 2016)
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
Q: In June 2013, DDD Corp., a domestic
corporation engaged in the business of leasing
real properties in the Philippines, entered into
a lease agreement of a residential house and
lot with EEE, Inc., a non-resident foreign
corporation. The residential house and lot will
be used by officials of EEE, Inc. during their
visit to the Philippines. The lease agreement
was signed by representatives from DDD Corp.
and EEE, Inc. in Singapore. DDD Corp. did not
subject the said lease to VAT believing that it
was not a domestic service contract. Was DDD
Corp. correct? Explain. (2015 BAR)
A: DDD Corp. is not correct. Lease of properties
shall be subject to VAT irrespective of the place
where the contract of lease was executed if the
property is leased or used in the Philippines. (Sec.
108(A), NIRC)
VAT ON SALE OF PROPERTIES
(1988, 1998, 2014 BAR)
Q: MasarapKumain, Inc. (MKI) is a ValueAdded 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 capital 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 corporation
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? (2014 BAR)
A: 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 entered into in the course
of trade or business. (Sec. 105, NIRC) A sale of a
fully depreciated vehicle that has been used in
business is subject to VAT as an incidental
transaction, although such sale may be considered
isolated. (Mindanao II Geothermal Partnership v.
CIR)
VAT ON SERVICES
(1998, 2010, 2013, 2015, 2016, 2019 BAR)
Q: All the homeowners belonging to ABC
Village Homeowners' Association elected a
new set of members of the Board of Trustees
for the Association effective January 2019. The
first thing that the Board looked into is the
need to increase the prevailing association
dues. Mr. X, one of the trustees, proposed an
increase of 100% to account for the payment
of the 12% value-added tax (VAT) on the
association dues which were being collected
for services allegedly rendered "in the course
of trade or business" by ABC Village
Homeowners' Association.
33
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BAR OPERATIONS
Taxation Law
What constitutes transactions done "in the
course of trade or business" for purposes of
applying VAT? xxx (2019 BAR)
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 P 6,321,486.50,
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 CT A en banc affirmed the BIR
ruling.
A: “In the course of trade or business” means the
regular conduct of pursuit of a commercial or an
economic
activity,
including
transactions
incidental thereto, by any person regardless of
whether or not the person engaged therein is a
nonstock,
nonprofit
private
organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to members
or their guests), or government entity. (Sec. 105,
NIRC)
Zero-rated Sale of Services (1998, 2010, 2013,
2015, 2016 BAR)
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.
Q: Pursuant to Sec. 11 of the "Host Agreement"
between the United Nations and the Philippine
government, it was provided that the World
Health Organization (WHO), "its assets,
income and other properties shall be: a)
exempt from all direct and indirect taxes."
Precision Construction Corporation (PCC) was
hired to construct the WHO Medical Center in
Manila. Upon completion of the building, the
BIR assessed a 12% VAT on the gross receipts
of PCC derived from the construction of the
WHO building. The BIR contends that the 12%
VAT is not a direct nor an indirect tax on the
WHO but a tax that is primarily due from the
contractor and is therefore not covered by the
Host Agreement. The WHO argues that the
VAT is deemed an indirect tax as PCC can shift
the tax burden to it. Is the BIR correct?
Explain. (2016 BAR)
(a) Rule on the appeal of MMM, Inc.
A: The appeal of MMM, Inc. must be denied.
MMM, Inc.’s position that the requirements
under RR No. 07-95 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 formulate them and
their specific expertise in their respective fields.
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 Court of Tax Appeal (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 Telecommunications
Philippines, Inc. v. CIR, G.R. No. 183531, March 25,
2015)
A: NO. The BIR is not correct.
While it is true that the VAT is an indirect tax, it is
clear from the agreement that WHO is “exempt
from all direct and indirect taxes.” Since the 12%
VAT is an indirect tax whose burden was shifted
by PCC to WHO then it is evident that the BIR is
not correct. (CIR v. John Gotamco & Sons, Inc., G.R.
No. L-31092, Feb. 27, 1987, 148 SCRA 36, 1987)
To allow the shifting of the burden to WHO would
negate its exemption and in violation of the
international agreement entered into by the
Philippines. (Domondon)
(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? (2015 BAR)
Q: 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 interconnection agreements with
local carriers. The non-resident foreign
corporations pay MMM, Inc. in US dollars
inwardly remitted through Philippine banks,
in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas.
A: NO, my answer will not be different if the
claim for refund is for effectively 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%) valueadded tax, the term “zero-rated sale” shall be
written or printed prominently 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)
34
QuAMTO (1987-2019)
Moreover, as recently ruled by the Supreme
Court, the subsequent incorporation of Sec.
4.108-1 of RR No. 07-95 in Sec. 113 of the NIRC
as introduced in R.A. No. 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
reenactment. (Northern Mindanao Power Corp. v.
CIR, G.R. No. 185115, February 18, 2015)
Q: State whether the following transactions
are: a) VAT exempt; b) subject to VAT at 12%;
or c) subject to VAT at 0%:
Services rendered by Jake’s Construction
Company, a contractor to the World Health
Organization in the renovation of its offices in
Manila. (1998 BAR)
A: VAT at 0%. Since Jake's Construction Company
has rendered services to the World Health
Organization, which is an entity exempted from
taxation under international agreements to which
the Philippines is a signatory, the supply of
services is subject to zero percent (0%) rate. (Sec.
108(B)(3), NIRC, as amended by R.A. No. 10963 –
TRAIN Law)
VAT EXEMPT TRANSACTIONS
(1996, 1998, 2008, 2009, 2010, 2019 BAR)
Sale or importation of agricultural and marine
food products in their original state and
certain kinds of livestock, poultry, breeding
stock and genetic materials (1998, 2010 BAR)
Q: State whether the following transactions
are: a) VAT Exempt; b) subject to VAT at 10%;
or c) subject to VAT at 0%:
Sale of fresh vegetables by Aling Ining at the
Pamilihang Bayan ng Trece Martirez. xxx
(1998 BAR)
A: VAT exempt. Sale of agricultural products, such
as fresh vegetables, in their original state, of a
kind generally used as, or producing foods for
human consumption is exempt from VAT. (Sec.
109(1)(A), NIRC, as amended by R.A. No. 10963 –
TRAIN Law)
Sale of certain Real Estate (1996, 2009 BAR)
Q: Melissa inherited from her father a 300square-meter lot. At the time of her father’s
death on March 14, 1995, the property was
valued at P720,000.00. On February 28, 1996,
to defray the cost of the medical expenses of
her sick son, she sold the lot for P600,000.00,
on cash basis. The prevailing market value of
the property at the time of the sale was P3,
000.00 per square meter.
A: 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 sold 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, its sale is not subject to VAT. (Secs.
39 & 106, NIRC)
Q: Give at least three (3) real estate
transactions which are not subject to the
Value-Added Tax. (1996 BAR)
A: Real estate transactions which are exempt
from the value-added tax are:
1.
2.
3.
Lease of residential unit and Association Dues
(1998, 2008, 2009, 2019 BAR)
Q: Emiliano Paupahan is engaged in the
business of leasing out several residential
apartment units he owns. The monthly rental
for each unit ranges from P 8,000.00 to P
10,000.00. His gross rental income for one
year is P 1,650,000.00. He consults you on
whether it is necessary for him to register as a
VAT taxpayer. What legal advice will you give
him, and why? (2009 BAR)
A: I will advise Emiliano that he is not required to
register as a VAT taxpayer. His transactions of
leasing residential units for an amount not
exceeding P 12,800.00 per unit per month are
exempt from VAT irrespective of the aggregate
amount of rentals received annually.
Q: Greenhills Condominium Corporation
incorporated in 2001 is a non-stock, nonprofit 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
corporation agreed to lease part of the ground
floor of the condominium building to DEF
Savings Bank for P 120,000 a month or P 1.44
million for the year, starting January 2007.
(a) Is the non-stock, non-profit association
liable for value added tax in 2007? If your
answer is in the negative, is it liable for
another kind of business tax?
A: NO. Since the association’s annual gross
receipts do not exceed P 1,500,000, it is exempt
from the VAT. It is, however, liable to the 3%
percentage tax which is imposed on persons
Is Melissa liable to pay Value Added Tax (VAT)
on the sale of the property? If so, how much
and why? If not, why not? (2009 BAR)
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
Sale of real property not primarily held for
sale or lease in the ordinary course of trade
or business;
Sale of real property utilized for socialized
housing as defined by R.A. No. 7279;
Sale of real property utilized under the lowcost housing as defined by R.A. No. 7279.
(Sec. 109(1)(P), NIRC, as amended by R.A. No.
10963 – TRAIN Law)
35
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BAR OPERATIONS
Taxation Law
exempt from value-added tax on account of
failure to reach the PhP 1,500,000 threshold.
1998. For the CIR, the 120-day period is
mandatory and jurisdictional so that any suit
filed before its expiration is premature and,
therefore, dismissible.
NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN
Law), the VAT threshold was amended to three
million pesos (PhP 3,000,000).
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.
(b) Will the association be liable for value
added tax in 2008 if it increases the rental
to P 150,000 a month beginning January
2008? Explain. (2008 BAR)
A: YES. When it increased the rentals to P
150,000 per month, its gross annual receipts will
now exceed P 1,500,000. It is liable to the VAT
beginning January 2008.
NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN
Law), the VAT threshold was amended to three
million pesos (P 3,000,000).
Will API's Petition for Review prosper? Decide
with reasons. (2016 BAR)
Q: All the homeowners belonging to ABC
Village Homeowners' Association elected a
new set of members of the Board of Trustees
for the Association effective January 2019. The
first thing that the Board looked into is the
need to increase the prevailing association
dues. Mr. X, one of the trustees, proposed an
increase of 100% to account for the payment
of the 12% value-added tax (VAT) on the
association dues which were being collected
for services allegedly rendered "in the course
of trade or business" by ABC Village
Homeowners' Association.
A: YES. API’s petition for review will prosper.
Since API’s petition for review was filed on
September 15, 2010, it is an exception to the
general rule. The premature filing is allowed
because it was filed between 10 December 2003
and 5 October 2010, when BIR Ruling No. DA489-03 was still in force. (Mindanao II Geothermal
Partnership v. Commissioner of Internal Revenue,
G.R. No. 193301, March 11, 2013 and companion
case)
Q: For calendar year 2011, FFF, Inc., a VATregistered corporation, reported unutilized
excess input VAT in the amount of P
l,000,000.00 attributable to its zero-rated
sales. Hoping to impress 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 P
l,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
Pl,000,000.00 unutilized excess input VAT of
FFF, Inc. for 2011.
Is Mr. X correct in stating that the association
dues are subject to VAT? Explain. (2019 BAR)
A: NO, association dues are not subject to VAT.
Under Section 109(Y) of the NIRC, association
dues, membership fees, and other assessments
and charges collected by homeowners
associations and condominium corporations are
VAT-exempt.
REFUND OR TAX CREDIT OF
EXCESS INPUT TAX
(2014, 2015, 2016, 2017 BAR)
Q: 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 P 500,000,000.00
on August 3, 2008. Hence, it filed with the BIR
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.
(a) Did the CTA acquire jurisdiction over the
Petition of FFF, Inc.?
A: 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 expiration 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
Forgin Company of Asia, Inc., G.R. No. 183421,
October 22, 2014, 632 SCRA 422)
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,
In this case, Mr. G filed the administrative claim
on January 31, 2013. The petition for relief
36
QuAMTO (1987-2019)
should have been filed on June 30, 2013. Filing
the judicial claim on March 15, 2013 is
premature, this the CTA did not acquire
jurisdiction.
he must within fifteen (15) days from
receipt explain why no additional taxes
should be assessed against him.
NOTE: The Commissioner shall grant a refund
for creditable input taxes within ninety (90)
days from the date submission of the official
receipts or invoices and other documents in
support of the application filed, as amended by
Sec. 36 of R.A. No. 10963 (TRAIN Law).
(b) Discuss the proper procedure and
applicable
time
periods
for
administrative and judicial claims for
refund/credit of unutilized excess input
VAT. (2015 BAR)
A: The administrative claim must be filed with
the Commissioner of Internal Revenue (CIR)
within two years from the close of the taxable
quarter when the zero-rated sales were made.
The CIR has 120 days from the date of
submission of the 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 120day period.
TAX REMEDIES
REMEDIES AVAILABLE TO TAXPAYERS UNDER
THE NIRC, IN GENERAL
(1992, 2000 BAR)
Q: Describe separately the procedures on the
legal remedies under the Tax Code available
to an aggrieved taxpayer both at the
administrative and judicial levels. (2000 BAR)
A: The legal remedies of an aggrieved taxpayer
under the Tax Code, both at the administrative
and judicial levels, may be classified into those for
assessment, collection and refund.
The procedures for the administrative remedies
for assessment are as follows:
1.
After receipt of the Pre-Assessment Notice,
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
If the Commissioner of Internal Revenue
issues an assessment notice, the taxpayer
must administratively protest or dispute the
assessment by filing a motion for
reconsideration or reinvestigation within
thirty (30) days from receipt of the notice of
assessment. (4th par., Sec. 228, NIRC)
3.
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:
NOTE: Under R.A. No. 10963 (TRAIN Law), the
CIR is given a 90-day period to decide.
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 BIR Ruling No. DA489-03 was still in force prior to the reversal of
the aforesaid ruling by the CTA in the Aichi case
on October 6, 2010. (Mindanao II Geothermal
Partnership v. CIR, G.R. No. 204745, December 8,
2014, 713 SCRA 645)
2.
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 Appeals for the issuance of an
injunctive writ to enjoin the Bureau of Internal
Revenue from collecting the disputed tax during
the pendency of the proceedings.
The adverse decision of the Court of Tax Appeals
is appealable to the Court of Appeals by means of
a petition for certiorari within a period of fifteen
(15) days from receipt of the adverse decision,
extendible for another period of fifteen (15) days
for compelling reasons, but the extension is not
to exceed a total of thirty (30) days in all.
The adverse decision of the Court of Appeals is
appealable to the Supreme Court by means of a
petition for review on certiorari within a period of
fifteen (15) days from receipt of the adverse
decision of the Court of Appeals.
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 Commissioner whose decision is appealable
to the Court of Tax Appeals under other matter
arising under the provisions of the National
Internal Revenue Code. The judicial appeals start
with the Court of Tax Appeals and continues in
the same manner as shown above.
Should the Bureau of Internal Revenue decide to
37
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Taxation Law
utilize Its judicial tax remedies for collecting the
taxes by means of an ordinary suit filed with the
regular courts for the collection of a sum of
money, the taxpayer could oppose the same by
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 Appeals,
thence to the Supreme Court.
Juliana Diezvda. De Gabriel v. CIR, 421 SCRA
266, 2004)
(b) As tax lawyer of EDS Corporation, what
legal defense(s) would you raise against
the assessment? Explain. (2008 BAR)
A: I will question the validity of the assessment
because of the failure to send the demand letter
which contains a statement of the law and the
facts upon which the assessment is based. If an
assessment notice is sent without informing the
taxpayer in writing about the law and facts on
which the assessment is made, the assessment is
void. (Sec. 228, NIRC; Azucena T. Reyes v. CIR, 480
SCRA 382, 2006)
The remedies 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.
ASSESSMENT
(1989, 1996, 1997, 1998, 1999, 2000,
2002, 2006, 2008, 2009, 2013, 2014,
2017, 2018, 2019 BAR)
Q: On October 5, 2016, the Bureau of Internal
Revenue (BIR) sent KLM Corp. a Final
Assessment Notice (FAN), stating that after its
audit pursuant to a Letter of Authority duly
issued therefor, KLM Corp. had deficiency
value-added
and
withholding
taxes.
Subsequently, a warrant of distraint and/or
levy was issued against KLM Corp. KLM Corp.
opposed the actions of the BIR on the ground
that it was not accorded due process because
it did not even receive a Preliminary
Assessment Notice (PAN) after the BIR' s
investigation, which the BIR admitted:
Requisites of a valid assessment (2008, 2013,
2019 BAR)
Q: After examining the books and records of
EDS Corporation, the 2004 final assessment
notice, showing basic tax of P 1,000,000,
deficiency interest of P 400,000, and due date
for payment of April 30, 2007 but without the
demand letter, was mailed and released by the
BIR on April 15, 2007. The registered letter,
containing the tax assessment, was received by
the EDS Corporation on April 25, 2007.
Are the deficiency tax assessment and warrant
of distraint and/or levy issued against KLM
Corp. valid? Explain. (2019 BAR)
(a) What is an assessment notice? What are
the requisites of a valid assessment?
Explain.
A: NO. Both the deficiency tax assessment and the
warrant issued are invalid. The deficiency tax
assessment issued against KLM Corp. is invalid
due to the absence of a preliminary assessment
notice (PAN), which is required by law for the
validity of the assessment. (Sec. 228, NIRC)
Sending a PAN to the taxpayer to inform him of
the assessment made is but a part of the “due
process requirement in the issuance of a
deficiency tax assessment,” the absence of which
renders nugatory any assessment made by the tax
authorities. (CIR v. Metro Star Superama, Inc. G.R.
o. 185371, Dec. 8, 2010)
A: An assessment notice is a formal notice to the
taxpayer stating that the amount thereon is due
as a tax and containing a demand for the
payment thereof. (Alhambra Cigar and Cigarette
Mfg. Co. v. Collector, 105 PR 1337, 1959; CIR v.
Pascor Realty and Development Corp., 309 SCRA
402, 1999) To be valid, the taxpayer must be
informed in writing of the law and the facts on
which the assessment is made. (Sec. 228, NIRC)
ALTERNATIVE ANSWER:
An assessment is a written notice and demand
made by the Bureau on the taxpayer for the
settlement of a tax liability that is due, definitely
set and fixed therein. The requisites of a valid
assessment are:
1.
It must be made within the prescriptive
period to assess; (Sec. 203, NIRC)
2.
There must be a preliminary assessment
previously issued, except in those instances
allowed by law; (Sec. 228, NIRC)
3.
The taxpayer must be informed in writing
about the law and facts on which the
assessment is based; (Sec. 228, NIRC) and
4.
It must be served upon the taxpayer or any
of his authorized representatives. (Estate of
The warrant of distraint and/or levy cannot be
issued to enforce an invalid assessment. An
assessment is a preliminary step for the collection
of taxes. If the preliminary step in the collection
process is invalid, the entire collection process is
also invalid which includes the warrant issued.
Prescriptive Period for Assessment General
Rule (1989, 1997, 1999, 2000, 2002, 2006,
2017, 2019 BAR)
Q: Mr. Sebastian is a Filipino seaman
employed by a Norwegian company which is
engaged exclusively in international shipping.
He and his wife, who manages their business,
filed a joint income tax return for 1997 on
March 15, 1998. After an audit of the return,
the BIR issued on April 20, 2001 a deficiency
38
QuAMTO (1987-2019)
income tax assessment for the sum of
P250,000.00, inclusive of interest and penalty.
For failure of Mr. and Mrs. Sebastian to pay the
tax within the period stated in the notice of
assessment, the BIR issued on August 19, 2001
warrants of distraint and levy to enforce
collection of the tax.
If you are the lawyer of Mr. and Mrs. Sebastian,
what possible defense or defenses will you
raise in behalf of your clients against the
action of the BIR in enforcing collection of the
tax by the summary remedies of warrants of
distraints and levy? Explain your answer.
(2002 BAR)
A: I will raise the defense of prescription. The
right of the BIR to assess prescribes after three
years counted from the last day prescribed by law
for the filing of the income tax returns when the
said return is filed on time. (Sec. 203, NIRC) The
last day for filing the 1997 income tax return is
April 15,1998. Since the assessment was issued
only on April 20, 2001, the BIR’s right to assess
has already prescribed.
Q: After a Bureau of Internal Revenue (BIR)
audit, T Corp., a domestic corporation engaged
in buying and selling of scrap metals, was
found to have deficiency income tax of
₱25,000,000.00, including interests and
penalties, for the year 2012. For 2012, T Corp.
filed its income tax return (ITR) on April 15,
2013 because it used the calendar year for its
accounting. The BIR sent the Preliminary
Assessment Notice (PAN) on December 23,
2015, and eventually, the Final Assessment
Notice (FAN) on April 11, 2016, which were
received by T Corp. on the same dates that they
were sent. Upon receipt of the FAN, T Corp.
filed its protest letter on June 25, 2016.
Thereafter, and without action from the
Commissioner of Internal Revenue (CIR), T
Corp. filed a petition for review before the
Court of Tax Appeals, alleging that the
assessment has prescribed.
For its part, the CIR moved to dismiss the case,
pointing out that the assessment had already
become final because the protest was filed
beyond the allowable period.
(a) Is T Corp.'s contention regarding the
prescription
of
the
assessment
meritorious? Explain.
A: NO. The three-year prescriptive period for the
assessment of tax shall start to run from the last
day prescribed by law for the filing of the return,
or the day the return was filed, whichever comes
later. (Sec. 203, NIRC) In the present case, since T.
Corp. filed its annual income tax return on April
15, 2013, which is also the last day to file the said
return, the last day to assess shall fall on April
15, 2016. By issuing the FAN on April 11, 2016,
the right to assess deficiency income tax for year
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
2012 has not yet prescribed.
(b) Should the CIR's motion to dismiss be
granted? Explain. (2019 BAR)
A: YES. Since the taxpayer failed to file a protest
against the FAN within 30 days from date of
receipt, the assessment had become final,
executory and demandable. (Sec. 228, NIRC, RR
No. 18-13)
False or fraudulent returns and non-filing of
returns (1989, 1996, 1998, 2002, 2009, 2018
BAR)
Q: Distinguish a false return from a fraudulent
return. (1996 BAR)
A: The distinction between a false return and a
fraudulent return is that the first merely implies a
deviation from the truth or fact whether
intentional or not, whereas the second is
intentional and deceitful with the sole aim of
evading the correct tax due. (Aznar v.
Commissioner, L-20569. August 23, 1974)
ALTERNATIVE ANSWER:
A false return contains deviations from the truth
which may be due to mistakes, carelessness or
ignorance of the person preparing the return. A
fraudulent return contains an intentional
wrongdoing with the sole object of avoiding the
tax and it may consist in the intentional under
declaration of income, intentional over
declaration of deductions or the recurrence of
both. A false return is not necessarily tainted with
fraud because the fraud contemplated by law is
actual and not constructive. Any deviation from
the truth on the other hand, whether intentional
or not, constitutes falsity. (Aznar v. Commissioner,
L-20569, August 23, 1974)
Q: Mr. Castro inherited from his father, who
died on June 10, 1994, several pieces of real
property in Metro Manila. The estate tax
return was filed and the estate tax due in the
amount of P250,000.00 was paid on December
6, 1994. The Tax Fraud Division of the BIR
investigated the case on the basis of
confidential information given by Mr. Santos
on January 6, 1998 that the return filed by Mr.
Castro was fraudulent and that he failed to
declare all properties left by his father with
intent to evade payment of the correct tax. As a
result, a deficiency estate tax assessment for
P1,250,000.00, inclusive of 50% surcharge for
fraud, interest and penalty, was issued against
him on January 10, 2001. Mr. Castro protested
the assessment on the ground of prescription.
Decide Mr. Castro’s protest. (2002 BAR)
A: 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. (Sec.
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BAR OPERATIONS
Taxation Law
222, NIRC) Accordingly, the assessment was
issued within the prescriptive period to make an
assessment based on a fraudulent return.
Prescriptive Periods (1994, 1997, 2001, 2002,
2009 BAR)
Q: A final assessment notice was issued by the
BIR on June 13, 2000 and received by the
taxpayer on June 15, 2000. The taxpayer
protested the assessment on July 31, 2000.
The protest was initially given due course but
was eventually denied by the Commissioner of
Internal Revenue in a decision dated June 15,
2005. The taxpayer then filed a petition for
review with the Court of Tax Appeals (CTA),
but the CTA dismissed the same.
Q: The BIR Commissioner, in his relentless
enforcement of the Run After Tax Evaders
(RATE) program, filed with the Department of
Justice (DOJ) charges against a movie and
television celebrity. The Commissioner
alleged that the celebrity earned around PhP
50 million in fees from product endorsements
in 2016 which she failed to report in her
income tax and VAT returns for said year. The
celebrity questioned the proceeding before
the DOJ on the ground that she was denied due
process since the BIR never issued any
Preliminary Assessment Notice (PAN) or a
Final Assessment Notice (FAN), both of which
are required under Section 228 of the NIRC
whenever the Commissioner finds that proper
taxes should be assessed.
Assume that the CTA’s decision dismissing the
petition for review has become final. May the
Commissioner legally enforce collection of the
delinquent tax? Explain. (2009 BAR)
A: NO. The protest was filed out of time and,
therefore, did not suspend 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., February 14, 2000)
Is the celebrity's contention tenable? (2018
BAR)
A: NO. In cases where a fraudulent return is filed
with the intent to evade a tax, a proceeding in
court for the collection of such tax maybe filed
without assessment. (Sec. 222(a), NIRC)
Assessment is not necessary before the filing of a
criminal complaint for tax evasion. (CIR v. Pascor
Realty and Development Corp., G.R. No. 128315,
June 29, 1999)
TAXPAYERS REMEDIES
PROTESTING AN ASSESSMENT
(1987, 1992, 1997, 1999, 2005, 2009, 2012,
2014 BAR)
Issuance of Preliminary Assessment Notice
(2002, 2014 BAR)
Forms of Administrative Protest (1992, 2012
BAR)
Q: Mr. Tiaga has been a law-abiding citizen
diligently paying his income taxes. On May 5,
2014, he was surprised to receive an
assessment notice from the Bureau of Internal
Revenue (BIR) informing him of a deficiency
tax assessment as a result of a mathematical
error in the computation of his income tax, as
appearing on the face of his income tax return
for 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.
Q: What are the differences between a request
for reconsideration and a request for
reinvestigation? (2012 BAR)
A:
1.
Based on the assessment received by Mr.
Tiaga, may he already file a protest thereon?
(2014 BAR)
A: YES. Mr. Tiaga may consider the assessment
notice as a final assessment 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.
COLLECTION
(1994, 1997, 2001, 2002, 2009 BAR)
40
A request for reinvestigation suspends the
running of the prescriptive period for
collection of taxes while a motion for
reconsideration does not.
2.
A request for reinvestigation requires the
presentation of newly discovered or
additional evidence while a motion for
reconsideration does not.
3.
The period of 60 days for submission of the
relevant supporting documents finds
application only to a request for
reinvestigation and not to a request for
reconsideration.
4.
The failure of the Commissioner of Internal
Revenue to act on the request for
reconsideration after a period of 180 days
from filing thereof authorizes the taxpayer
to file a petition for review with the CTA
within a period of 30 days from the
expiration of such 180-day period while for
a request for reinvestigation the period is
the expiration of the 180-day period from
QuAMTO (1987-2019)
the submission of the complete supporting
documents.
Effect of failure to file protest (1997, 2009
BAR)
Q: A final assessment notice was issued by the
BIR on June 13, 2000 and received by the
taxpayer on June 15, 2000. The taxpayer
protested the assessment on July 31, 2000.
The protest was initially given due course but
was eventually denied by the Commissioner of
Internal Revenue in a decision dated June 15,
2005. The taxpayer then filed a petition for
review with the Court of Tax Appeals (CTA),
but the CTA dismissed the same.
Is the CTA correct in dismissing the petition
for review? Explain your answer. xxx (2009
BAR)
A: YES. The protest was filed out of time, hence
the CTA does not acquire jurisdiction over the
matter. (CIR v. Atlas Mining and Development
Corp., 2000)
Q:
(a) A taxpayer received, on 15 January 1996,
an assessment for an internal revenue
tax deficiency. On 10 February 1996, the
taxpayer forthwith filed a petition for
review with the Court of Tax Appeals.
Could the Tax Court entertain the
petition?
A: NO. Before taxpayer can avail of judicial
remedy, he must first exhaust administrative
remedies by filing a protest within 30 days from
receipt of the assessment. It is the
Commissioner's decision on the protest that give
the Tax Court jurisdiction over the case provided
that the appeal is filed within 30 days from
receipt of the Commissioner’s decision. An
assessment by the BIR is not the Commissioner's
decision from which a petition for review may be
filed with the Court of Tax Appeals. Rather, it is
the action taken by the Commissioner in
response to the taxpayer's protest on the
assessment that would constitute the appealable
decision.
(b) Under the above factual setting, the
taxpayer, instead of questioning the
assessment he received on 15 January
1996, paid on 01 March 1996 the
"deficiency tax" assessed. The taxpayer
requested
a
refund
from
the
Commissioner by submitting a written
claim on 01 March 1997. It was denied.
The taxpayer, on 15 March 1997, filed a
petition for review with the Court of
Appeals. Could the petition still be
entertained? (1997 BAR)
A: NO, the petition for review cannot be
entertained by the Court of Appeals, since
decisions of the Commissioner on cases
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
involving claim for tax refunds are within the
exclusive and primary jurisdiction of the Court of
Tax Appeals.
Decision/Inaction of the Commissioner on the
protest filed (1987, 1999, 2005, 2009, 2012,
2014 BAR)
Q: In the examination conducted by the
revenue officials against the corporate
taxpayer in 2010, the BIR issued a final
assessment notice and demand letter which
states: “It is requested that the above
deficiency tax be paid immediately upon
receipt hereof, inclusive of penalties incident
to delinquency. This is our final decision
based on investigation. If you disagree, you
may appeal this final decision within 30 days
from receipt hereof, otherwise said deficiency
tax assessment shall become final, executory
and demandable.” The assessment was
immediately appealed by the taxpayer to the
Court of Tax Appeals, without filing its protest
against the assessment and without a denial
thereof by the BIR. If you were the judge,
would you deny the petition for review filed
by the taxpayer and consider the case as
prematurely filed? Explain you answer. (2012
BAR)
A: NO, the Petition for Review should not be
denied. The case is an exception to the rule on
exhaustion of administrative remedies. The BIR is
estopped from claiming that the filing of the
Petition for Review is premature because the
taxpayer failed to exhaust all administrative
remedies. The statement of the BIR in its Final
Assessment Notice and Demand Letter led the
taxpayer to conclude that only a final judicial
ruling in his favor would be accepted by the BIR.
The taxpayer cannot be blamed for not filing a
protest against the Formal Letter of Demand with
Assessment Notices since the language used and
the tenor of the demand letter indicate that it is
the final decision of the respondent on the matter.
The CIR should indicate, in a clear and
unequivocal language, whether his action on a
disputed assessment constitutes his final
determination thereon in order for the taxpayer
concerned to determine when his or her right to
appeal to the tax court accrues. Although there
was no direct reference for the taxpayer to bring
the matter directly to the CTA, it cannot be denied
that the word “appeal” under prevailing tax laws
refers to the filing of a Petition for Review with
the CTA. (Allied Bank vs CIR, GR No 175097,
February 5, 2010)
Q: 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.
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Taxation Law
However, on May 19, 2013, that is after more
than a year from the 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 reasoned
that its failure to decide the case within 180
days from filing of the letter protest should
have prompted BWI to seek recourse before
the CTA by filing a petition for review within
30 days after the expiration of the 180-day
period as mandated by the provisions of the
last paragraph of Section 228 of the NIRC.
Accordingly, BWI’s failure to file a petition for
review before the CTA rendered the
assessment final, executory and demandable.
(b) Cases under administrative protest, after
issuance of the final assessment notice to
the taxpayer, which are still pending;
A: These may be compromised, provided that it
is premised upon doubtful validity of the
assessment or financial incapacity to pay. (Ibid)
(c) Criminal tax fraud cases;
A: These may not be compromised, so that the
taxpayer may not profit from his fraud, thereby
discouraging its commission. (Ibid)
(d) Criminal violations already filed in court;
A: These may not be compromised in order that
the taxpayer will not profit from his criminal
acts. (Ibid)
Is the contention of the BIR correct? Explain.
(2014 BAR)
A: 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. (Sec 228, NIRC; Lacsona Land Co., Inc.
v. CIR, GR No. 171251, March 5, 2012)
(e) Cases
where
final
reports
of
reinvestigation or reconsideration have
been issued resulting in the reduction of
the original assessment agreed to by the
taxpayer when he signed the required
agreement form. (2005 BAR)
A: Cases where final reports of reinvestigation or
reconsideration have been issued resulting in the
reduction of the original assessment agreed to by
the taxpayer when he signed the required
agreement form, cannot be compromised. By
giving his conformity to the revised assessment,
the taxpayer admits the validity of the
assessment and his capacity to pay the same.
(Sec. 2, RR No. 30-02)
COMPROMISE OF TAXES
(1989, 1996, 1998, 2000, 2002, 2005, 2009
BAR)
Authority, Grounds and Conditions to
Compromise taxes (1989, 1996, 2000, 2009
BAR)
Q: Under what conditions may the
Commissioner of Internal Revenue be
authorized to compromise the payment of any
internal revenue tax? xxx (2000 BAR)
ABATEMENT OF TAXES
(1989, 1996, 2000 BAR)
Authority and Conditions to abate taxes (1989,
1996, 2000 BAR)
A: The Commissioner of Internal Revenue may be
authorized to compromise the payment of any
internal revenue tax where:
1.
2.
Q: Under what conditions may the
Commissioner of Internal Revenue be
authorized to abate or cancel a tax liability
(2000 BAR)
A reasonable doubt as to the validity of the
claim against the taxpayer exists; or
The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax.
A: The Commissioner of Internal Revenue may
abate or cancel a tax liability when:
Tax cases which may be subject of compromise
(1998, 2002, 2005 BAR)
1.
2.
Q: State and discuss briefly whether the
following cases may be compromised or may
not be compromised:
The tax or any portion thereof appears to be
unjustly or excessively assessed; or
The administration and collection costs
involved do not justify the collection of the
amount due. (Sec. 204(B). NIRC)
RECOVERY OF TAX ERROUNEOUSLY OR
ILLEGALY COLLECTED
(2002, 2005, 2017 BAR)
(a) Delinquent accounts;
A: Delinquent accounts may be compromised if
either of the two conditions is present: (1) the
assessment is of doubtful validity, or (2) the
financial position of the taxpayer demonstrates a
clear inability to pay the tax. (Sec. 204(A), NIRC;
Sec. 2, RR No. 30-02)
Q: Wreck Corporation is a domestic
corporation engaged in the business of
importing, refining and selling petroleum
products. During the period from September 1,
2014 to December 31, 2014, Wreck
Corporation imported 225 million liters of Jet
42
QuAMTO (1987-2019)
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 of 225
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.
(2017 BAR)
A: 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
international carriers. Wreck Corporation, as the
statutory taxpayer who is directly liable to pay the
excise tax on its petroleum products, is entitled to
a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers,
the latter having been granted exemption from the
payment of said excise tax under Sec. 135(a) of the
NIRC. (CIR v. Pilipinas Shell Petroleum Corporation,
G.R. No. 188497, 2014)
Conditions for the grant of a refund or credit
(2002, 2005 BAR)
taxable year, ABC Corp. had excess tax credits
arising from its overwithholding of income
payments. It opted to carry over the excess 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? (2013 BAR)
A: NO. The claim for refund will not prosper.
While the law gives the taxpayer 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. (Sec. 76, NIRC; CIR v. PL Management
International Phils, Inc., GR No. 160949, April 4,
2011)
Q: Vanderful, lnc.'s income tax return for
taxable year 2015 showed an overpayment
due to excess creditable withholding taxes in
the amount of ₱ 750,000.00. 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 ₱ 1,100,000.00, which included
the carry-over from year 2015 in the amount
of ₱ 750,000.00 because its operations
resulted in a net loss; hence, there was no
application for any tax liability. This time, the
company opted and marked the box “To be
refunded” in respect of the total amount of ₱
1,100,000.00.
Q: State the conditions required by the Tax
Code before the Commissioner of Internal
Revenue could authorize the refund or credit
of taxes erroneously or illegally received.
(2005 BAR)
Vanderful, Inc. now files in the BIR a claim for
refund of unutilized overpayments of ₱
1,100,00.00.
A: The conditions are:
A: NO, but only to the extent of the amount of P
750,000.00 which was carried over from year
2015. Section 76 of the NIRC 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 succeeding 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 certificate 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
taxable years. Section 76 further states that no
application for cash refund or issuance of a tax
credit certificate shall be allowed, referring to that
taxable period comprising the succeeding taxable
years. (Asiaworld Properties Philippine Corporation
v. CIR, G.R. No. 171766, 2010)
1.
2.
3.
A written claim for refund is filed by the
taxpayer with the Commissioner of Internal
Revenue (NIRC);
The claim for refund must be a categorical
demand for reimbursement (Bermejo v.
Collector of Internal Revenue, 87 Phil. 96,
1950);
The claim for refund or tax credit must be
filed with the Commissioner, or the suit or
proceeding therefore must be commenced in
court within 2 years from date of payment of
the tax or penalty regardless of any
supervening cause. (NIRC)
OPTION TO CARRY OVER EXCESS QUARTERLY
INCOME TAX PAID (1992, 1994, 1997, 2008,
2012, 2013, 2017 BAR)
Is the claim meritorious? (2017 BAR)
Q: In its final adjustment return for the 2010
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
43
UST
BAR OPERATIONS
Taxation Law
Period for filing claim for refund or credit
(1992, 1994, 1997, 2008 BAR)
xxx (2009 BAR)
A: YES, withholding agents 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
for refund and to bring an action for recovery of
such claim (CIR v. Procter & Gamble, 204 SCRA
377, 1991)
Q: DEF Corporation is a wholly owned
subsidiary of DEF, Inc., California, USA.
Starting December 15, 2004. DEF Corporation
paid annual royalties to DEF, Inc., for the use
of the latter's software, for which the former,
as withholding agent of the government,
withheld and remitted to the BIR the 15%
final tax based on the gross royalty payments.
The withholding tax return was filed and the
tax remitted to the BIR on January 10 of the
following year. On April 10, 2007, DEF
Corporation filed a written claim for tax credit
with the BIR, arising from erroneously paid
income taxes covering the years 2004 and
2005. The following day, DEF Corporation
filed a petition for review with the Court of
Tax Appeals involving the tax credit claim for
2004 and 2005.
GOVERNMENT REMEDIES
NON-AVAILABILITY OF INJUNCTION TO
RESTRAIN COLLECTION OF TAX
(1996, 1998, 2001 BAR)
Q: May the courts enjoin the collection of
revenue taxes? Explain your answer. (2001
BAR)
As a BIR lawyer handling the case, would you
raise the defense of prescription in your
answer to the claim for tax credit? Explain. xxx
(2008 BAR)
A: As a general rule, the courts have no authority
to enjoin the collection of revenue taxes. (Sec. 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. (R.A. No. 1125)
A: YES. The claim for refund for the 2004
erroneously paid income tax was filed out of time
because the claim was only filed after more than
two years had elapsed from the payment thereof.
(Sec. 204(C) & 229, NIRC)
WITHHOLDING AGENT AS A PROPER PARTY
TO FILE A CLAIM FOR REFUND OR CREDIT
(1992, 1999, 2005, 2008, 2009 BAR)
JUDICIAL REMEDIES
JURISDICTION OF THE
COURT OF TAX APPEALS
(1989, 1997, 1998, 2004, 2006, 2014, 2015,
2016, 2017, 2018 BAR)
Q: ABCD Corporation (ABCD) is a domestic
corporation with individual and corporate
shareholders who are residents of the United
States. For the 2nd quarter of 1983, these U.S.based individual 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.
Q: State At least five (5) cases under the
exclusive appellate jurisdiction of the Court of
Tax Appeals (CTA) (2016 BAR)
A: Exclusive original or appellate jurisdiction to
review by appeal the following:
On May 15, 1984, ABCD filed with the
Commissioner of Internal Revenue a formal
claim for refund, alleging that under the RPUS 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 U.S. the Commissioner
denied the claim.
On January 17, 1985, ABCD filed a petition
with the Court of Tax Appeals (CTA)
reiterating its demand for refund.
(a) Does ABCD Corporation have the legal
personality to file the refund on behalf of its
non-resident stockholders? Why or why not?
44
1.
Decisions of the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other matters arising
under the National Internal Revenue Code or
other laws administered by the Bureau of
Internal Revenue;
2.
Inaction by the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other matters arising
under the National Internal Revenue Code or
other laws administered by the Bureau of
Internal Revenue where the National
Internal Revenue Code or other applicable
law provides a specific period for action:
QuAMTO (1987-2019)
Provided, that in case of disputed
assessments,
the
inaction
of
the
Commissioner of Internal Revenue within
the one hundred eighty day-period under
Section 228 of the National Internal Revenue
Code shall be deemed a denial for purposes
of allowing the taxpayer to appeal his case to
the Court and does not necessarily
constitute a formal decision of the
Commissioner of Internal Revenue on the
tax case; Provided, further, that should the
taxpayer opt to await the final decision of
the Commissioner of Internal Revenue on
the disputed assessments beyond the one
hundred
eighty
(180)-day
period
abovementioned, the taxpayer may appeal
such final decision to the Court under
Section 3(a), Rule 8 of these Rules; and
Provided, still further, that in the case of
claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a
petition for review with the Court prior to
the expiration of the two-year period under
Section 229 of the National Internal Revenue
Code.
3.
4.
5.
6.
Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their original jurisdiction;
Decisions of the Commissioner of Customs in
cases involving liability for customs duties,
fees or other money charges, seizure,
detention or release of property affected,
fines, forfeitures or other penalties in
relation thereto or other matters arising
under the Customs Law or other laws
administered by the Bureau of Customs;
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. 2325 of the Tariff
and Customs Code; and
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 Secs. 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 to impose said duties.” (Rule 4, Sec. 3(a),
RRCTA)
The Court en banc shall exercise exclusive
appellate jurisdiction to review by appeal the
following:
1.
Decisions or resolutions on motion for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
a.
Cases arising from administrative
agencies – Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;
b.
Local tax cases decided by the Regional
Trial Courts in the exercise of their
original jurisdiction; and
c.
Tax collection cases decided by the
Regional Trial Court in the exercise of
their original jurisdiction involving
final and executory assessments for
taxes, fees, charges and penalties,
where the principal amount of taxes
and penalties claimed is less than one
million pesos;
2.
Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their appellate jurisdiction;
3.
Decisions, resolutions or orders of the
Regional Trial Courts in tax collection cases
decided or resolved by them in the exercise
of their appellate jurisdiction;
4.
Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in division in the exercise of its exclusive
original jurisdiction over tax collection
cases;
5.
Decisions of the Central Board of
Assessment Appeals (CBAA) 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, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
criminal offenses arising from violations of
the National Internal Revenue Code or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;
7.
Decisions, resolutions or orders on motion
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
mentioned in the preceding subparagraph;
and
8.
Decisions, resolutions or orders of the
Regional Trial Courts in the exercise of their
appellate jurisdiction over criminal offenses
mentioned in subparagraph (f).” (Rule 4, Sec.
2, RRCTA)
Q: On May 15, 2013, CCC, Inc. received the Final
45
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BAR OPERATIONS
Taxation Law
Decision on Disputed Assessment issued by
the Commissioner of Internal Revenue (CIR)
dismissing the protest of CCC, Inc. and
affirming the assessment against said
corporation. On June 10, 2013, 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 CT A division dismissing its
Petition. CCC, Inc. immediately filed a Petition
for Review with the CT A 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? (2015 BAR)
NIRC or other 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 Revenue, pertains
to the Court of Tax Appeals in the exercise of its
appellate jurisdiction. (Philamlife v. The Sec. of
Finance and CIR, G.R. No. 210987, November 24,
2014)
Q: Mr. Abraham Eugenio, a pawnshop
operator, after having been required by the
Revenue District Officer to pay value-added
tax pursuant to a Revenue Memorandum
Order (RMO) of the Commissioner of Internal
Revenue, filed with the Regional Trial Court an
action questioning the validity of the RMO.
A: 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 concerned CTA Division.
(Commissioner of Customs v. Marina Sale, G.R. No.
183868, November 22, 2010, 635 SCRA 606; Rule 8,
Sec. 1 of the Revised Rules of Court of Tax Appeals)
If you were the judge, will you dismiss the
case? (2006 BAR)
A: YES. A RMO is in reality a ruling, or an opinion
issued by the Commissioner in implementing the
provisions of the Tax Code dealing with the
taxability of pawnshops. The power to review
rulings issued by the Commissioner is lodged
with the Court of Tax Appeals (CTA) 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)
Q: 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
HHH 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 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 Ruling 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
difference 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 affirmed 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 recourse
from the adverse ruling of the Secretary of
Finance in the exercise of the latter's power of
review? (2014 BAR)
Q: Krisp Kleen, Inc. (KKI) is a corporation
engaged in the manufacturing and processing
of steel and its by-products. It is both
registered with the Board of Investments with
a pioneer status, and with the BIR as a VAT
entity. On October 10, 2010, it filed a claim for
refund/credit of input VAT for the period
January 1 to March 31, 2009 before the
Commissioner of Internal Revenue (CIR). On
February 1, 2011, as the CIR had not yet made
any ruling on its claim for refund/credit, KKI,
fearful that its period to appeal to the courts
might prescribe, filed an appeal with the Court
of Tax Appeals (CTA).
(a) Can the CTA act on KKl's appeal?
A: NO. Pursuant to the pronouncement made the
Supreme Court in the case of Commissioner of
Internal Revenue v. Aichi Forging Company of
Asia, Inc. (G.R. No. 184823, February 12, 2013),
the observance of the “120+30-day” period is
jurisdictional. Now, counting 120 days from
October 10, 2010, the last day for the CIR to act
on the claim for refund/credit fell on February 7,
2011, thus musing the February 1, 2011 filing
premature.
A: 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 the
Secretary of Finance under Sec. 4 of the NIRC is
appealable. However, R.A. No. 1125, as amended,
addresses the seeming gap in the law as it vests
upon the CTA, albeit impliedly, with jurisdiction
over the case as “other matters” arising under the
NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN
Law), the VAT threshold was amended to three
million pesos (P 3,000,000).
(b) Will your answer be the same if KKI filed
its appeal on March 20, 2011 and CIR had
not yet acted on its claim? (2018 BAR)
46
QuAMTO (1987-2019)
A: YES. The filing of March 20, 2011 is still not
compliant with the “120+30-day” rule. As
mentioned, the CIR has until February 7. 2011 to
decide on the claim for refund/credit of input
VAT. After the lapse of the 120-day period, the
taxpayer-claimant has 30 days to file an appeal
before the CTA. In the present ease. KKI had until
March 9, 2011 to file the appeal based on a
deemed adverse decision on the claim fer
refund/credit; hence, the filing on March 26, 2011
was belatedly done, and the CTA has no
jurisdiction over such claim for refund/credit.
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.
NOTE: Under R.A. No. 10963 (TRAIN Law), the
CIR is given a 90-day period to decide.
Q: Globesmart 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. Globesmart Services, Inc. filed a
protest against the assessment, but the
Commissioner of Internal Revenue denied the
protest. Hence, Globesmart 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. Globesmart Services, Inc. moved
for the partial reconsideration of the
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.
CRIMINAL ACTIONS
(1998, 2005, 2015 BAR)
Q: After filing an Information for violation of
Section 254 of the National 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. (2015 BAR)
A: The manifestation is not proper. The criminal
action and the corresponding 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 Court of Tax Appeals
(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 separately from the criminal action
shall be recognized. (Sec. 7(b)(1) of R.A. No. 9282;
Judy Ann Santos v. People, G.R. No. 173176, August
26, 2008, 563 SCRA 341)
(a) May the collection of taxes be suspended?
Explain your answer.
Necessity of an assessment
prosecution (1998, 2005 BAR)
A: YES. As provided by R.A. No. 1125, as
amended by R.A. No. 9282, that when in the
opinion of the Court the collection by the
aforementioned government agencies may
jeopardize the interest of the Government 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.
Q: In 1995, the BIR filed before the
Department of Justice (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 examiners 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 assessment of its
tax liability; hence, the criminal complaint was
premature. The DOJ denied the motion on the
ground that an assessment 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 assessment of the tax
liability of the corporation.
(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. (2017 BAR)
A: NO. The Supreme Court in the Tridharma Case
cited the case of Pacquiao v. Court of Tax Appeals
(G.R. No. 213394, 2016) where it ruled that the
CTA should first conduct a preliminary hearing
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
in
criminal
Is the ruling of the DOJ correct? Explain. (2005
47
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BAR OPERATIONS
Taxation Law
BAR)
A: NO. Congress cannot abolish what is expressly
granted by the fundamental law. The only
authority conferred to Congress is to provide the
guidelines and limitations on the local
government’s exercise of the power to tax. (Sec. 5,
Art X, 1987 Constitution)
A: YES. The ruling of 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
has 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
NIRC.
Q: KM Corporation, doing business in the City
of Kalookan, has been a distributor and
retailer of clothing and household materials. It
has been paying the City of Kalookan local
taxes based on Sections 15 (Tax on
Wholesalers, Distributors or Dealers) and 17
(Tax on Retailers) of the Revenue Code of
Kalookan City (Code). Subsequently, the
Sangguniang
Panlungsod
enacted
an
ordinance amending the Code by inserting
Section 21 which imposes a tax on "Businesses
Subject to Excise, Value-Added and Percentage
Taxes under the National Internal Revenue
Code (NIRC)," at the rate of 50% of 1 % per
annum on the gross sales and receipts on
persons "who sell goods and services in the
course of trade or business." KM Corporation
paid the taxes due under Section 21 under
protest, claiming that (a) local government
units could not impose a tax on businesses
already taxed under the NIRC and (b) this
would amount to double taxation, since its
business was already taxed under Sections 15
and 17 of the Code.
However, the contention that the joint affidavit of
the BIR examiners showing the computation of
tax liabilities maybe considered an assessment is
erroneous. It is not an assessment which may
entitle the taxpayer to protest. (CIR v. Pascor
Realty 81 Development Corp., 309 SCRA 402, 1999)
An assessment is a formal notice to the taxpayer
stating 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)
LOCAL GOVERNMENT CODE OF 1991
NATURE AND SOURCE OF
TAXING POWER
(1987, 1998, 2001, 2003, 2007, 2018 BAR)
May local government units impose a tax on
businesses already subjected to tax under the
NIRC? xxx (2018 BAR)
Grant of Local Taxing power under the Local
Government Code (1987, 1998, 2001, 2003,
2007, 2018 BAR)
A: YES. Sec. 143 in relation to Section 151 of the
Local Government Code (LGC) provides for the
power of cities to impose a local business tax, and
one of those which may be subjected to such tax
are those businesses that are subject to “excise
tax, value-added tax or percentage tax” under the
NIRC, other than those specifically enumerated by
the same provision. The tax to be imposed by the
city shall not exceed 2% of gross sales or gross
receipts of the preceding calendar year. (Sec.
143(h), in relation to Sec. 151, LGC)
Q: What is the nature of the taxing power of
the provinces, municipalities and cities? How
will the local government units be able to
exercise their taxing powers? (2007 BAR)
A: 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)
CHALLENGING LOCAL TAX ORDINANCES
(1991, 2003, 2015 BAR)
Q: What is the proper procedural remedy and
applicable time periods for challenging a tax
ordinance? (2015 BAR)
The local government units exercise the power to
tax by levying taxes, fees and charges consistent
with the basic policy of local autonomy, and to
assess and collect all these taxes, fees and charges
which will exclusively accrue to them. The local
government units are authorized to pass tax
ordinances (levy) and to pursue actions for the
assessment and collection of the taxes imposed in
said ordinances. (Secs. 129 & 132, LGC)
A: 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, LGC)
Q: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
(2003 BAR)
48
QuAMTO (1987-2019)
TAXING POWER OF PROVINCES
(1991, 2016 BAR)
several places. The professional tax paid as a
lawyer in Pasig City, a place where he practices
his profession, will entitle him to practice his
profession in any part of the Philippines without
being subjected to any other national or local tax,
license, or fee for the practice of such profession.
(Sec. 139 in relation to Sec. 151, LGC)
Tax on transfer of real property ownership
(1991, 2016 BAR)
Q: The City of Maharlika passed an ordinance
imposing a tax on any sale or transfer of real
property located within the city at a rate of
fifty percent (50%) of one percent (1%) of the
total consideration of the transaction. Jose
sold a parcel of land in the city, which he
inherited from his deceased parents, and
refused to pay the aforesaid tax. He instead
filed a case asking that the ordinance be
declared null and void since the tax it imposed
can only be collected by the national
government, as in fact he has paid the Bureau
of Internal Revenue (BIR) the required capital
gains tax. If you were the City Legal Officer of
Maharlika, what defenses would you raise to
sustain the validity of the ordinance? (2016
BAR)
A: The defenses I would raise are the following:
1.
2.
3.
4.
Cities like the City of Maharlika have the
power to pass an ordinance imposing a tax
on the sale, donation, barter, or on any other
mode of transferring ownership of title to
real property located within its territorial
boundaries; (Sec. 135, in relation to Secs. 142
& 151, LGC)
The required capital gains tax collected by
the national government is different from
the tax that is imposable by the local
government units such as the City of
Maharlika;
The transfer tax imposed and collected by
cities are not among those included in the
common limitations on the power of
taxation which are reserved solely for the
exercise by the national government;
There is no direct duplicate taxation because
there are two different taxing authorities,
the national government and a local
government unit. (Domondon)
PROFESSIONAL TAX
(1991, 2005 BAR)
Q: Mr. Fermin, a resident of Quezon City, is a
Certified Public Accountant-Lawyer engaged
in the Practice of his two professions. He has
his main office in Makati City and maintains a
branch office in Pasig City. Mr. Fermin pays his
professional tax as a CPA in Makati City and
his professional tax as a lawyer in Pasig City.
(a) May Makati City, where he has his main
office, require him to pay his professional
tax as a lawyer? Explain.
A: NO. Mr. Fermin is given the option to pay
either in the city where he practices his
profession or where he maintains his principal
office in case he practices his profession in
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
(b) May Quezon City, where he has his
residence and where he also practices his
two professions, go after him for the
payment of his professional tax as a CPA
and a lawyer? Explain. (2005 BAR)
A: NO. The professional tax shall be paid only
once for every taxable year and the payment
shall be made either in the city where he
practices his profession or where he maintains
his principal office. The city of residence cannot
require him to pay his professional taxes. (Sec.
139 in relation to Sec. 151, LGC)
TAXING POWERS OF MUNICIPALITIES
(2008, 2009 BAR)
Fees and charges for regulation and licensing
(2008, 2009 BAR)
Q: The Sangguniang Bayan of the Municipality
of Sampaloc, Quezon, passed an ordinance
imposing a storage fee of ten centavos (P 0.10)
for every 100 kilos of copra deposited in any
bodega within the Municipality’s jurisdiction.
The Metropolitan Manufacturing Corporation
(MMC), with principal office in Makati, is
engaged 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 Sampaloc and nearby towns
before the same is shipped to Makati. MMC
goes to court to challenge the validity of the
ordinance, demanding the refund of the
storage fees it paid under protest.
Is the ordinance valid? Explain your answer.
(2009 BAR)
A: YES. The municipality is authorized to impose
reasonable fees and charges as a regulatory
measure in an amount commensurate with the
cost of regulation, inspection and licensing. (Sec.
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 Administrative Code or the “general
welfare clause.” A warehouse used for keeping or
storing copra is an establishment likely to
endanger the public safety or likely to give rise to
conflagration because the oil content of the 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
49
UST
BAR OPERATIONS
Taxation Law
Philippine
Manufacturing
Corporation
v.
Municipality of Jagna, Province of Bohol, 94 SCRA
894, 1979)
establishments, while the rest of the property,
in particular the northwestern side, is idle or
unoccupied.
COMMON LIMITATIONS ON THE TAXING
POWERS OF LGU’S
(1987, 2015, 2019 BAR)
May the Church claim tax exemption on the
entire land? Decide with reasons. (2005 BAR)
A: NO. The portions of the land occupied and used
by the church, convent and school run by the
church are exempt from real property taxes while
the portion of the land occupied by commercial
establishments and the portion, which is idle, are
subject to real property taxes. The “usage” of the
property and not the “ownership" is the
determining factor whether or not the property is
taxable. (Lung Center of the Philippines v. Q.C., 433
SCRA 119, 2004)
Q: In 2018, City X amended its Revenue Code
to include a new provision imposing a tax on
every sale of merchandise by a wholesaler
based on the total selling price of the goods,
inclusive of value-added taxes (VAT). ABC
Corp., a wholesaler operating within City X,
challenged the new provision based on the
following contentions: xxx 2. since the tax
being imposed is akin to VAT, it is beyond the
power of City X to levy the same
Q: In 2015, Kerwin bought a three-story house
and lot in Kidapawan, North Cotabato. The
property has a floor area of 600 sq.m. and is
located inside a gated subdivision. Kerwin
initially declared the property as residential
for real property tax purposes.
Rule on each of ABC Corp.'s contentions. (2019
BAR)
A: ABC’s second contention is meritorious. One of
the common limitations of the local government
unit’s (such as City X) taxing power under Sec.
133 of the LGC is that it may not levy VAT on
sales, barters or exchanges on goods or services.
Hence, ABC Corp. is correct in saying that the local
tax, which is imposed on every sale transaction, is
akin to VAT; and necessarily, it may not be
imposed by City X.
In 2016, Kerwin started using the property in
his business of manufacturing garments for
export. The entire ground floor is now
occupied by state-of-the-art sewing machines
and other equipment, while the second floor is
used as offices. The third floor is retained by
Kerwin as his family's residence. Kerwin's
neighbors became suspicious of the activities
going on inside the house, and they decided to
report it to the Kidapawan City Hall. Upon
inspection, the local government discovered
that the property was being utilized for
commercial use. Immediately, the Kidapawan
Assessor reclassified the property as
commercial with an assessment level of 50%
effective January 2017, and assessed Kerwin
back taxes and interest. Kerwin claims that
only 2/3 of the building was used for
commercial purposes since the third floor
remained as family residence. He argues that
the property should have been classified as
partly commercial and partly residential.
Levy upon goods carried into, leaving or
passing through and LGU’s territorial
boundaries (1987, 2015 BAR)
Q: 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.
Is there a ground for opposing said ordinance?
(2015 BAR)
A: 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), LGC)
(a) Is the Kidapawan assessor correct in
assessing back taxes and interest?
A: NO. The assessor cannot assess back taxes and
interest. Since this involves a reassessment of
real property due to a major change in its actual
use, the same cannot be given a retroactive effect.
The reassessment shall only be effective at the
beginning of the quarter next following the
reassessment. (Sec. 221, LGC)
REAL PROPERTY TAXATION
ACTUAL USE PRINCIPLE
(1988, 1990, 2000, 2001, 2003,
2005, 2009, 2018 BAR)
(b) Is Kerwin correct that only 2/3 of the
property
should
be
considered
commercial? xxx (2018 BAR)
Q: The Roman Catholic Church owns a 2hectare 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
A: YES. The property must be classified, valued
and assessed on the basis of its actual use
regardless of where located, whoever owns it,
and whoever uses it. (Sec. 217, LGC)
50
QuAMTO (1987-2019)
ALTERNATIVE ANSWER:
NO. One of the fundamental principles in the
appraisal, assessment, levy and collection of real
property tax under Section 198 of the LGC is that
the real property shall be classified for assessment
purposes on the basis of its actual use. Section 199
of the LGC defines “actual use” as referring to the
purpose for which the property is principally or
predominantly utilized by the person in
possession thereof. Hence, considering that, as
admitted by Kerwin, 2/3 of the property ‘s used
for commercial purposes, the entire property
must be classified as “commercial” for real
property tax purposes.
Real Properties for Purposes of Taxation
(2001, 2003, 2009 BAR)
Q: Under Article 415 of the Civil Code, in order
for machinery and equipment 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 underground 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 taxation under
the local Government Code? Explain. (2003
BAR)
A: YES. The properties are considered as
necessary fixtures of the gasoline station, without
which the gasoline station would be useless.
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)
Q: Republic Power Corporation (RPC) is a
government – owned and controlled
corporation engaged in the supply, generation
and transmission of electric power. In 2005, in
order to provide electricity to Southern
Tagalog provinces, RPC entered into an
agreement with Jethro Energy Corporation
(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, fittings,
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
the fuel of RPC into electricity. The contract
also stipulates that all real estate taxes and
assessments, rates and other charges, in
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
respect of the power barges, shall be for the
account of RPC.
In 2007, JEC received an assessment of real
property taxes on the power barges 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 government- owned
and controlled corporation. Furthermore,
even assuming that the power barges are
subject to real property tax, RPC should be
held liable therefore, in accordance with the
terms of the lease agreement. Is the
contention of JEC correct? Explain your
answer. (2009 BAR)
A: The contention of JEC is not correct. The owner
of the power barges is JEC which is required to
operate, manage and maintain the power barges
for the purpose the claim that RPC, a governmentowned 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)
EXEMPTION FROM
REAL PROPERTY TAX
(1987, 1988, 1990, 1996, 2000, 2002, 2005,
2006, 2009, 2015, 2016, 2017, 2018, 2019
BAR)
Constitutional Exemptions (1987, 1988, 1990,
1996, 2000, 2005, 2006, 2017, 2018 BAR)
Q: The Constitution exempts from taxation
charitable institutions, churches, parsonages
or convents appurtenant thereto, mosques
and non-profit cemeteries and lands,
buildings and improvements actually, directly
and exclusively used for religious, charitable
and educational purposes.
Mercy Hospital is a 100-bed hospital
organized for charity patients. Can said
hospital claim exemption from taxation under
the above-quoted constitutional provision?
Explain. (1996 BAR)
A: Yes. Mercy Hospital can claim exemption from
taxation under the provision of the Constitution,
but only with respect to real property taxes
provided that such real properties are used
actually, directly and exclusively for charitable
purposes.
Q: Kilusang Krus, Inc. (KKI) is a non-stock,
51
UST
BAR OPERATIONS
Taxation Law
non-profit religious organization which owns
a vast tract of land in Kalinga.
that the assets of a non-stock, non-profit
educational institution shall be exempt from taxes
and duties only if the same are used actually,
directly, and exclusively for educational purposes.
The test of exemption from taxation is the use of
the 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 University, Inc., G.R. Nos. 196596,
198841, 198941, 2016)
KKI has devoted 1 /2 of the land for various
uses: a church with a cemetery exclusive for
deceased priests and nuns, a school providing
K to 12 education, and a hospital which admits
both paying and charity patients. The
remaining 1/2 portion has remained idle.
The KKI Board of Trustees decided to lease
the remaining 1 /2 portion to a real estate
developer which constructed a community
mall over the property.
Exemptions under the LGC (1987, 1990, 2002,
2006, 2009, 2015, 2016, 2019 BAR)
Since the rental income from the lease of the
property was substantial, the KKI decided to
use the amount to finance (1) the medical
expenses of the charity patients in the KKI
Hospital and (2) the purchase of books and
other educational materials for the students of
KKI School.
Q: 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.
Is KKI liable for real property taxes on the
land? xxx (2018 BAR)
A: YES, but only on the leased portion. Article VI,
Section 28(3) of the 1987 Constitution provides
that “charitable institutions, churches and
personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or
educational purposes shall be exempt from
taxation”. The test of exemption from taxation is
the use of the property for purposes mentioned in
the Constitution. The leased portion of the land
may be subject to real property tax since such
lease is for commercial purposes, thereby,
removing the asset from the property tax
exemption granted under the Constitution. (CIR v.
De La Salle University, Inc., GR. Nos, 196596,
198841, 198941, November 9, 2016)
Invoking Section 193 of the Local Government
Code (LGC) expressly 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
Q: San Juan University is a non-stock, nonprofit educational institution. It owns a piece
of land in Caloocan City on which its three 2storey school buildings stood. Two of the
buildings are devoted to classrooms,
laboratories, a canteen, a bookstore and
administrative offices. The third building is
reserved as dormitory for student athletes
who are granted scholarships for a given
academic year.
A: YES. The Philippine National Railways (PNR)
was created as a corporation to serve as an
instrumentality of the Government of the
Philippines (R.A. No. 10638, amending Sec. 1 of R.A.
No. 4156) upon which the local governments are
not allowed to levy taxes, fees or other charges
including
real
property
taxes.
(Manila
International Airport Authority v. Court of Appeals,
et al., G. R. No. 155650, July 20, 2006; Manila
International Airport Authority v. City of Pasay, G.
R. No. 163072, April 2, 2009, 583 SCRA 234, 2009
citing Philippine Fisheries Development Authority
v. Court of Appeals, G.R. No. 150301, 2 October
2007, 534 SCRA 490)
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 Republic.
Is the PNR exempt from real property tax?
Explain your answer. (2016 BAR)
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.
PNR is not a government and controlled
corporation but an instrumentality of the
government hence it is not included in the
withdrawal of exemptions. Finally, under the
common limitations on local government units’
power of taxation, it shall not extend to the levy of
“taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities,
(a) Can the City Treasurer of Caloocan City
collect real property taxes on the land and
building of San Juan University? Explain your
answer. (2017 BAR)
A: YES but only on the leased portion. Article XIV,
Section 4(3) of the 1987 Constitution provides
52
QuAMTO (1987-2019)
and local government units.” (Sec. 133 (o), LGC,
paraphrasing supplied)
The railroad tracks, train stations, freight
customer facilities, land improvements, and
equipment within its main station in Tutuban,
Manila are properties of public dominion
intended for public use, and as such are exempt
from real property tax under Section 234(a) of
the LGC. (Manila International Airport Authority v.
City of Pasay, supra)
Q: LLL is a government instrumentality created
by Executive Order to be primarily responsible
for integrating and directing all reclamation
projects for the National Government. It was
not organized as a stock corporation, nor was
it intended to operate commercially and
compete in the private market.
By virtue of its mandate, LLL in 2008
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 titles 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 reclaimed properties of LLL
based on the assessment for delinquent
property taxes for the years 2010 to 2013.
(a) Are the reclaimed properties registered
in the name of LLL subject to real
property tax?
A: 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, LGC) 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 Philippine
Reclamation Authority v. City of Paranaque)
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, GR No. 184203,
Nov. 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? (2015 BAR)
A: NO. As a rule, properties owned by the
Republic of the Philippines are exempt from real
property tax except when the beneficial use
UNIVERSITY OF SANTO TOMAS
2021 ACADEMICSCOMMITTEE
thereof 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 properties are subject
to real property tax. (Sec. 234(a), LGC; GSIS v. City
Treasurer and City Assessor of the City of Manila)
Q: The Philippine-British Association, Inc.
(Association) is a non-stock, non-profit
organization which owns the St. Michael's
Hospital (Hospital). Sec. 216 in relation to Sec.
215 of the LGC classifies all lands, buildings
and other improvements thereon actually,
directly, and exclusively used for hospitals as
"special." A special classification prescribes a
lower assessment than a commercial
classification.
Within the premises of the Hospital, the
Association constructed the St. Michael's
Medical Arts Center (Center) which will house
medical practitioners who will lease the
spaces therein for their clinics at prescribed
rental rates. The doctors who treat the
patients confined in the Hospital are
accredited by the Association.
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. (2016 BAR)
A: NO. The City Assessor is not correct in
classifying the Center as “commercial.”
The fact alone that the separate St. Michael’s
Medical Arts Center will house medical
practitioners who shall treat the patients confined
in the Hospital and are accredited by the
Association takes away the said Medical Arts
Center from being categorized as “commercial”
since a tertiary hospital is required by law to have
a pool of physicians who comprise the required
medical departments in various medical fields.
(City Assessor of Cebu City v Association of
Benevola de Cebu, Inc., 524 SCRA 128, 2007;
Domondon)
REFUND OR CREDIT OF
REAL PROPERTY TAX
(1988, 1991, 1993, 2014, 2018 BAR)
Payment under protest (1988, 1991, 1993,
2014, 2018 BAR)
Q: Madam X owns real property in Caloocan
City. On July 1, 2014, she received a notice of
assessment from the City Assessor, informing
her of a deficiency tax on her property. She
wants to contest the assessment.
(a) What are the administrative remedies
available to Madam X in order to contest
53
UST
BAR OPERATIONS
Taxation Law
the assessment and their respective
prescriptive periods?
Assessor reclassified the property as
commercial with an assessment level of 50%
effective January 2017 and assessed Kerwin
back taxes and interest. Kerwin claims that
only 2/3 of the building was used for
commercial purposes since the third floor
remained as family residence. He argues that
the property should have been classified as
partly commercial and partly residential.
A: The administrative remedies available to
Madam X to contest the assessment and their
respective prescriptive periods are as follows:
1.
Pay the deficiency real property tax under
protest (Sec 252, LGC);
2.
File the protest with the local treasurer –
The protest in writing must be filed within
30 days from payment of the tax to the
provincial, city or municipal treasurer, in
the case of municipality within Metro
Manila Area, who shall decide the protest
within 60 days from receipt (Sec. 252, LGC);
3.
Appeal to the LBAA – If the 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 decided within 120 days
(Sec. 226 and 229);
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. (Sec. 229 (c), LGC)
If Kerwin wants to file an administrative
protest against the assessment, is he required
to pay the assessment taxes first? With whom
shall the protest be filed and within what
period? (2018 BAR)
A: YES. No protest shall be entertained unless
Kerwin first pays the tax. The words “paid under
protest” must be annotated on the tax receipts
issued by the treasurer. The protest in writing
must be filed with the treasurer within 30 days
from payment of the tax. (Sec. 252, LGC)
(b) May Madam X refuse to pay the deficiency
tax assessment during the pendency of
her appeal? (2014 BAR)
A: 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
pendency 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. (Sec. 252,
LGC)
Q: In 2015, Kerwin bought a three-story house
and lot in Kidapawan, North Cotabato. The
property has a floor area of 600 sq.m. and is
located inside a gated subdivision. Kerwin
initially declared the property as residential
for real property tax purposes.
In 2016, Kerwin started using the property in
his business of manufacturing garments for
export. The entire ground floor is now
occupied by state-of-the-art sewing machines
and other equipment, while the second floor is
used as offices. The third floor is retained by
Kerwin as his family's residence. Kerwin's
neighbors became suspicious of the activities
going on inside the house, and they decided to
report it to the Kidapawan City Hall. Upon
inspection, the local government discovered
that the property was being utilized for
commercial use. Immediately, the Kidapawan
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