FREE PRE-WEEK NOTES
TAXATION LAW
Specially prepared for the LEGAL EDUCATION
BOARD for the use of Candidates for the January 23,
2022 Bar Examinations, specially those affected by
Typhoon Odette. The assistance of Central Book
Store in printing and releasing these materials is
greatly appreciated.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
Based on the SYLLABUS FOR
THE 2020/21 BAR EXAMINATIONS
Per Bar Bulletin No. 31, s. 2022 issued January 4,
2022
Suggested answers are based on selected canonical
jurisprudential doctrines up to March 31, 2021;
laws, rules and regulations until June 30, 2019
by
ABELARDO T. DOMONDON
AB, BSC, MA, JD, LLM, DCL (C.A.U.), PhD (CAND.)
Lawyer-CPA-Customs Broker
Commissioner, Legal Education Board
2022 SPECIAL EDITION
For VENNY VALDEZ my one and only whose
inspiration and support brought me to where I am.
For my late parents, JOSE CONCEPCION
DOMONDON and INES JIMENEZ TORRES, who
shall always be honored and remembered.
ii
2022 Special Edition
Copyright 2022 by Abelardo T. Domondon
I am not registering this work with the Philippine
Intellectual Property Office but I own the materials
from the moment I created them.
All persons are allowed free use of these
materials which may be reproduced in any form or
any means, electronic or mechanical, including
photocopying or xeroxing without written permission
from the author so long as the authorship is
recognized.
Please dessiminate and distribute to those in
need of the materials.
ABELARDO T. DOMONDON
iii
BAR CANDIDATE’S PRAYER*
Lord God, the creator of all, and fount of all
knowledge and wisdom, I implore you to guide me in
my undertaking to become a lawyer.
Open my mind to absorb, remember and live the
principles of law and justice distilled in my readings
and in the lectures I attend.
I beseech you to illumine the thoughts of the bar
reviewers so they could be your instruments in guiding
me.
Fill me with your grace, so I would have a clear
mind in identifying the issues raised in the bar
questions. Give light for me to discover the correct,
just and ethical answers to the bar questions so I
could pass the Bar.
Finally, grant me the serenity to accept whatever
is thy will and show me the correct path to take for
your greater glory.
AMEN
___________
* A non-sectarian prayer written by Prof. Abelardo T. Domondon.
iv
FOREWORD
Typhoon Odette has caused unspeakable
devastation in the Visayan region. With barely a
month before the Bar Examinations, a lot of the bar
reviewees therein have lost their homes, their books
and their momentum.
The Legal Education Board and its stakeholders,
the Integrated Bar of the Philippines (IBP), the
Philippine Association of Law Schools (PALS) and the
Association of Law Students of the Philippines (ALSP)
have quickly joined their efforts to assist the
reviewees in their dire predicament. Soon, not a few
legal education institutions have made their pre-week
reviewers available online to those seriously hit by
Odette.
On the other hand, with no time to waste, the
reviewer is determined to read only what he must
know, can process and might remember during
crunch time.
v
“Pre-Week Notes on Taxation”, written by
seasoned bar reviewer and Commissioner of the LEB,
Hon. Abelardo T. Doondon, delivers just that.
A subject in which amendments and repeals are
commonplace, the book walks the reader through the
remaining, as well as the new tax laws, so methodically,
as only an author who is a lawyer, certified public
accountant, statistician, foreign service officer and most
importantly, an educator – all rolled into one – can. Shorn
of any condition for its publication and released without the
author expecting or desiring earnings therefrom, it is
intended for this book, foremost, to revive the bar
candidates’ optimism and take away from them any
feeling of bar disaster. Given its unhindered availability,
through the generosity of Mr. Paolo Sibal and Central
Book Supply, anyone who wishes to expand his or her
knowledge of Tax Law, affected or not by Typhoon
Odette, will benefit exceedingly from this material.
While the intellectual gain is invaluable, there is
more to this work than the academic light it brings. In
the midst of the uncertainty, panic and grief that
Odette has inflicted upon the properties in the Visayas
and the spirit of its people, and as the pandemic
continues to have a grip on all nations, this book, a
product of pure altruism, is a reminder of all that is still
right and good in us, in others and in this world.
ANNA MARIE MELANIE B. TRINIDAD
Chairperson, Legal Education Board
vi
PUBLISHER’S MESSAGE
We are deeply saddened by the widespread devastation
caused by the typhoon “Odette”. We hope that in the midst of
all these difficulties, you will find comfort in the fact that
many people including us in Central Books, are in solidarity
with you.
Despite the devastation surrounding you, focus on your
goals. Trust that everything you studied is deeply embedded
in your subconscious and that you will be able to access every
detail at the right time. View this episode in your life as a
challenge and
a life-changing event, a process that will
contribute to who you are in becoming as a person.
We at Central Books are one with you in your journey of
becoming a lawyer and we hope that this Free Pre-week
Notes Taxation Law will help you achieve your destiny.
JOSE PAOLO M. SIBAL
President
Central Book Supply Inc.
PREFACE TO THE 2022 SPECIAL
EDITION
Bar Bulletin No. 31, S. 2022 is a game-changer
because it sought to “(a) reduce the coverage; and (b)
shorten the duration of the 2020/21 Bar Examinations to
only two days: January 23, 2022, Sunday; and January 25,
2022, Tuesday.” All pre-week materials have to be
adjusted to meet the reduced coverage as well the
attendant limitation of the number of questions. From the
former 18 to 20 questions with subdivisions, there are now
only three (3) questions. The Bar Candidate is advised to
concentrate on the basic objective questions as well as
canonical doctrines from 2015 up to 2022, specially the
case of La Sallian Educational Innovators (etc.), Inc. v.
Commissioner of Internal Revenue, G.R. No. 202792,
February 27, 2019.
This Book was written as a labor of love for those
who are going to take the January 23, 2022 Bar
Examination in Taxation Law serving as a memory jogger
so the reader should note the following marks:
*** must know.
** should know.
* nice to know.
Without any star, just browse.
Master the concepts not the questions. This PreWeek Notes is a summary of the concepts that would
probably be asked in the January 23, 2022 Bar
Examination in Taxation Law. The questions merely
illustrate how the concepts are applied to a set of facts.
vii
All the best for the 2022 Bar Candidates especially
for the victims of Typhoon “Odette.” My prayers are always
with you.
Ad Majorem Dei Gloriam.
267 Carandang Avenue
Bigain 1st, San Jose, Batangas
January 7, 2022
THE AUTHOR
viii
i. BASIC PRINCIPLES OF TAXATION IN
THE CONSTITUTION
***1. The exercise of the power of taxation is
considered as plenary and unlimited because the very
existence of the government is dependent for its
existence upon the revenues collected from taxation.
Are there any limitations imposed upon the power
of taxation ? Why ? If there are, what in general are the
limitations ?
SUGGESTED ANSWER: Yes. The limitations exist in
order to prevent an abuse of this otherwise unlimited
power. The limitations on the power of taxation are the
following:
a.
Inherent limitations. These are part and
parcel of the power of taxation and originate from the very
nature of taxation.
b.
Constitutional limitations. These are the
restrictions imposed by the constitution.
The limitations on power to tax, not assumed.
[Kasamahan Realty Development Corporation (now known
as Stag Trading Corporation) v. Commissioner of Internal
Revenue, CTA Case No. 6204, February 16, 2005)
The failure of a tax measure to achieve its objectives
is not a ground for its nullification. (Soriano v. Secretary of
Finance, G.R.
No. 184450, and companion cases,
January 24, 2017)Ch
***2. Taxation as an attribute of sovereignty is
peculiarly and essentially legislative. As a power, it
had been described as broad, unlimited, supreme and
plenary, subject only to constitutional restrictions and
its inherent limitations. Discuss said inherent
limitations.
1
FREE PRE-WEEK NOTES
TAXATION LAW
2
SUGGESTED ANSWER: The inherent limitations on
the power of taxation which are also known as the
elements, tenets or characteristics of taxation are:
a.
The tax imposed should be for a public
purpose.
b.
There should be no improper delegation of
the taxing power.
c.
The power to tax is limited to the territorial
jurisdiction of the taxing government.
d.
Exemption of
recognized.
e.
Observance of international comity such that
property of foreign sovereigns, are not
subject to taxation.
government
entities
is
Some authorities include double taxation. While this
may be so, it is submitted that double taxation is properly
a constitutional limitation.
***3. The European Union General System of
Preferences (EU GSP+) is a special incentive arrangement
for sustainable development and good governance in the
form of zero duties. It is a unilateral trade arrangement,
which offers zero tariffs on 6,274 products or 66% of all
EU tariff lines. It is a part of the broader Generalized
System of Preferences (GSP) of the EU and, as a
developmental tool it seeks to encourage export
diversification in developing countries. Among the
industries that enjoy the privilege is the pineapple
industry. In order to continually enjoy protection under
EU GSP+ the Philippines should ensure that the EU
Monitoring Team must not identify a serious failure to its
effective implementation of any of numerous conventions
which include International Drug Control Conventions,
UN Human Rights Conventions International Covenant
on Civil and Political Rights (ICCPR), etc. Unfortunately,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
3
the EU GSP+ Momitoring Team, in its last visit, expressed
grave concerns on the Philippines’ performance on
human rights, the war on drugs, etc.. It now appears that
the Philippines might lose the privilege of enjoying the
benefits under the EU GSP+.
To provide means for the rehabilitation and
stabilization of the preserved pineapple industry so as to
prepare it for the eventuality of the loss of the EU GPS+
privilege, Congress passes a law increasing the existing
tax on the processing of preserved pineapple on a
graduated basis. All collections made under the law are to
accrue to a special fund to be spent only for the purposes
enumerated therein, among which are to place the
preserved pineapple industry in a position to maintain
and ultimately to insure its continued existence despite
the loss of the EU GSP+ privilege, and to afford laborers
employed in the industry a living wage and to improve
their working conditions. Mr. Omar Reyes, a pineapple
planter, files a suit questioning the constitutionality of the
law alleging that the tax is not for a public purpose as the
same is being levied exclusively for the aid and support of
the preserved pineapply industry. Decide the same.
SUGGESTED ANSWER: The tax is valid because it
is for a public purpose.
It is an exercise of police power which is for the
general welfare of the entire country because the
preserved pineapple industry is one of the pillars of the
Philippine economy which affects the welfare of the State.
(Republic v. Bacolod-Murcia Co., G.R. No. L-19824, July 9,
1966)
It is a pillar of the Philippine economy providing
employment for thousands of workers, providing much
needed foreign exchange, and otherwise contributes to
economic development and progress.
4
FREE PRE-WEEK NOTES
TAXATION LAW
Public purpose is the heart of a tax law. [Planters
Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 (2008)]
***4. Explain the general rule on non-delegation
of the legislative authority to tax as well as its
constitutional basis.
SUGGESTED ANSWER: There should be no improper
delegation of legislative authority to tax. The power to tax is
inherent in the State, such power being inherently legislative,
based on the principle that taxes are a grant of the people
who are taxed, and the grant must be made by the
immediate representatives of the people; and where the
people have laid the power, there it must remain and be
exercised. (Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)
The constitutional principle of separation of powers
ordains that each of the three great branches of government
has exclusive cognizance of and is supreme in matters falling
within its own constitutionally allocated sphere. [Abakada
Guro Party List (Formerly AASJS), etc. v. Ermita, G.R.
No.168056, September 1, 2005]
A logical corollary to the doctrine of separation of powers
is the principle of non-delegation of powers, as expressed in
the Latin maxim: potestas delegata non delegari potest which
means that what has been delegated, cannot be further
delegated. (Abakada, supra citations omitted)
This doctrine is based on the ethical principle that
such delegated power constitutes not only a right but a
duty to be performed by the delegate through the
instrumentality of his own judgment and not through the
intervening mind of another. (Abakada, supra)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
5
***5. What is the extent of the legislative power
that may not be delegated ?
SUGGESTED ANSWER: The legislative power that
may not be delegated is the discretion to ascertain the
following:
a. basis, amount, or rate of tax;
b. person or property that is subject to tax;
c. exemptions and exclusions from tax; and
d. manner of collecting the tax - may not be delegated
away by Congress. (La Suerte Cigar & Cigarette Factory v.
Court of Appeals, G.R. No. 125346, November 11, 2014,
and companion cases, paraphrasing and arrangement
supplied)
***6. What are the exceptions to the rule against
delegation of the taxing power ?
SUGGESTED ANSWER: The following are some of
the instances where there may be exceptions to the rule
against delegation of the taxing power:
a. When the constitution itself authorizes the
delegation such as in the flexible tariff clause where the
constitution has authorized Congress to delegalte to the
President certain aspects of taxation;
b. Where there is a valid delegation to administrative
bodies provided there is compliance with the requirements
of completeness and existence of sufficiently determinate
standards to guide the delegate.
Where the law leaves the hands of the lawmaker
complete in all aspects there could be delegated to
administrative authorities the power of subordinate legislation,
i.e. the issuance of implementing rules and regulations.
If the law is not complete, there may still be a valid
delegation to administrative authorities provided that there
FREE PRE-WEEK NOTES
TAXATION LAW
6
exists sufficiently determinate standards that provide
adequate guidelines or limitations in the law that map out
the boundaries of the delegate’s authority and canalize the
delegation. (Soriano v. Secretary of Finance, G.R. No.
184450, and companion cases, January 24, 2017)
This would prevent a total transference of the
legislative authority to tax to the administrative authority
who is not allowed to step into the shoes of the legislature
and exercise a power essentially legislative. [Abakada
Guro Party List (Formerly AASJS), etc. v. Ermita, G.R. No.
168056, September 1, 2005]
***7. What are the constitutional limitations or
restrictions upon the taxing power ?
SUGGESTED ANSWER:
constitutional limitations.
There are two kinds of
a. Provisions directly affecting taxation. Direct or
specific limitations. Provisions in the constitution that
contain the words tax, taxation or others, of similar import.
Some examples of the provisions directly affecting
taxation are:
1) Prohibition against imprisonment for nonpayment of poll tax. (CONST., art. III, sec. 20)
2) Majority vote of Congress for grant of tax
exemptions. [Ibid., art. VI, sec. 28 (4)]
3) President’s veto power on appropriation,
revenue, tariff bills. [Ibid., art. VI, sec. 27 (2)]
b. Provisions indirectly affecting taxation. Indirect or
general limitations. Provisions in the constitution that do
NOT contain the words tax, taxation or others of similar
import.
Some examples of constitutional provisions indirectly
affecting taxation:
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
7
1) Due process. (CONST., art. III, sec. 1)
2) Equal protection. (Ibid.)
3) Religious freedom. (Ibid., sec. 5)
4) Non-impairment of obligations of contract.
(Ibid., sec. 10)
***8. Taxation as an attribute of sovereignty is
peculiarly and essentially legislative. As a power, it had
been described as broad, unlimited, supreme and
plenary, subject only to constitutional restrictions and its
inherent limitations. The constitutional restrictions are
the specific or direct limitations and the general or
indirect limitations.
What are the specific or direct constitutional
limitations on the power of taxation?
SUGGESTED ANSWER:
The specific or direct
constitutional limitations on the power of taxation or those
where there is mention of the word “tax”, “taxation” or any
of their variations such as the following
a. Prohibition against imprisonment for non-payment
of poll tax. (CONST., art. III, sec. 20)
b. Uniformity and equality of taxation. (Ibid., art. VI,
sec. 28)
c. Grant by Congress of authority to the president to
impose tariff rates. (Ibid., art. VI, sec. 28, 2nd par.)
d. Prohibition against taxation of religious, charitable
entities, and educational entities. [Ibid., art. VI, sec. 28 (3)]
e. Prohibition against taxation of non-stock, non-profit
institutions. (Ibid., art. XIV, sec. 4)
f. Majority vote of Congress for grant of tax
exemptions. [Ibid., art. VI, sec. 28 (4)]
8
FREE PRE-WEEK NOTES
TAXATION LAW
g. Prohibition on use of tax levied for special purpose.
[Ibid., art. VI, sec. 29 (3)]
h. President’s veto power on appropriation, revenue,
tariff bills. [Ibid., art. VI, sec. 27 (2)]
i. Non-impairment of jurisdiction of the Supreme
Court. (Ibid., art. VIII, sec. 5)
j. Grant of power to the local government units to
create its (their) own sources of revenue. (Ibid., art. X,
sec. 5)
k. Flexible tariff clause. [Ibid., art. VI, sec. 28 (2)]
l. Exemption from real property taxes. [Ibid., art. VI,
sec. 28 (3)]
m.
No appropriation or use of public money for
religious purposes. [[bid., art. VI, sec. 29 (2)]
n. Mandate for Congress to evolve a progressive
system of taxation. [Ibid, art. VI, Sec. 28 (1), 2nd sentence]
o. Origination of appropriation, revenue or tariff bills.
(Ibid., art. VI, sec. 24)
p. Automatic release of LGU’s just share in national
taxes. (Ibid., art. X, sec. 6)
q. Tax exemption of grants, endowments, donations
or contributions. [Ibid., art. XIV, sec. 4 (4)]
NOTE NOT PART OF THE ANSWER: The reader
should note that the specific or direct constitutional
provisions include words like tax, taxation, revenue or tariff
bills, use of public money, or words of similar import
WHILE the general or indirect constitutional limitations do
not include such words.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
9
***9. Under the 1987 Constitution, may the government
tax income of non-profit educational institution operated by
religious orders? What policy considerations are to be
taken into account?
SUGGESTED ANSWER: No. The revenue of non-stock,
non-profit educational institutions which are actually, directly
and exclusively used for educational purposes, irrespective of
whether or not they are operated by religious orders under the
1987 Constitution. are exempt from income taxation. (La
Sallian Educational Innovators (etc.), Inc. v. Commissioner of
Internal Revenue, G.R. No. 202792, February 27, 2019 citing
1987 Constitution, Article XIV)
The policy consideration is to encourage the
establishment of educational institutions which are not profit
motivated. The tax exemption would translate to lower tuition
fees providing access to education for all
***9. What does constitutional equality in taxation
mean?
SUGGESTED ANSWER: Equality of taxation means
that all persons who are similarly situated should be treated
alike both in privileges conferred and burdens imposed.
Constitutional equality in taxation means the application
of the concept of equal protection of the laws which prohibits
discrimination other than these instances where there is valid
classification.
Thus, persons who are similarly situated, or who
belong to the same class, should be given by law the same
protection and privileges as well as imposed the same
burdens and obligations.
“The constitutional guarantee of equal protection is not
violated by an executive issuance which was issued to simply
reinforce existing taxes applicable to both the private and
public sector.” [Confederation for Unity, Recognition and
Advancement of Government Employees (Courage) v.
FREE PRE-WEEK NOTES
TAXATION LAW
10
Commissioner, etc., G.R. No. 213446, and companion cases
July 03, 2018, paraphrasing supplied]
***10. What
classification ?
are
the requisites
for
a
valid
SUGGESTED ANSWER: All that is required of a valid
classification is that it be reasonable, which means that
a.
the classification should be based on substantial
distinctions which make for real differences, that
b.
it must be germane to the purpose of the law;
that
c.
it must not be limited to existing conditions only;
and that
d.
it must apply equally to each member of the
class. This Court has held that the standard is
satisfied if the classification or distinction is
based on a reasonable foundation or rational
basis and is not palpably arbitrary.
The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. (Drugstores
Association of the Philippines, Inc., et al. v. National Council on
Disability Affairs, G.R. No. 194561, September 14, 2016)
ALTERNATIVE STATEMENT: The United States
Supreme Court has established different tests to determine
the validity of a classification and compliance with the
equal protection clause. The recognized tests are:
a. strict scrutiny (or compelling interest test) for laws
dealing with freedom of the mind or restricting the political
process. Applying strict scrutiny, the focus is on the presence
of compelling, rather than substantial, governmental interest
and on the absence of less restrictive means for achieving that
interest. (White Light Corporation v. City of Manila, etc., G.R.
No. 122846, January 20, 2009)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
11
b. The rational basis standard of review for economic
legislation. (Ibid.) Under this test, laws or ordinances are
upheld if they rationally further a legitimate governmental
interest. (Ibid.)
The standard is met if the classification or distinction
is based on a reasonable foundation or rational basis and
is not palpably arbitrary. [ABAKADA Guro Party List, etc.
v. Purisima, etc., G.R. No. 166715, August 14, 2008]
c. A third standard, denominated as heightened or
intermediate level of scrutiny (in While Light this was called
immediate scrutiny), Intentional discriminations against
members of a quasi-suspect class violate equal protection
unless they are substantially related to important
government objectives. (White Light, supra)
***11. Executive Order No. 97-A specified the secured
areas that shall be completely tax and duty-free in the
Subic Special Economic Zone (SSEZ) consisting of the
presently fenced-in former Subic Naval Base without
granting the same to those outside the SSEZ. Is there a
violation of the equal protection clause ?
SUGGESTED ANSWER: No. Equal protection allows
for a reasonable classification.
a. Significant distinctions exist between the two
groups. Those outside of the SSEZ maintain their business
within Philippine customs territory while those within the
SSEZ operate within the so-called “separate customs
territory.” To grant the same privileges would clearly defeat
the statute’s intent to carve a territory out of the military
reservations in Subic Bay where free flow of goods and
capital is maintained.
b. The classification is germane to the purpose of Rep.
Act No. 7227. As held in Tiu, the real concern of the law is to
convert the lands formerly occupied by the US military bases
into economic or industrial areas. In furtherance of such
objective, Congress deemed it necessary to extend
FREE PRE-WEEK NOTES
TAXATION LAW
12
economic incentives, in terms of a complete package of tax
incentives and other benefits, to the establishments within the
zone to attract and encourage foreign and local investors.
c. The classification is not limited to the existing
conditions when the law was promulgated but to future
conditions as well, inasmuch as the law envisioned the
former military reservation to ultimately develop into a selfsustaining investment center.
d. The classification applies equally to all retailers found
within the “secured area.” As ruled in Tiu, the individuals and
businesses within the “secured area,” being in like
circumstances or contributing directly to the achievement of
the end purposes of the law, are not categorized further. They
are all similarly treated, both in privileges granted and in
obligations required. (Coconut Oil Refiners Association, Inc. v.
Torres, etc., G.R. No. 132527, July 29, 2005)
***12. Quezon City Ordinance No. SP-2235, S-2013
was enacted on December 16, 2013 and took effect ten
days after when it was approved by City Mayor. The
proceeds collected from the garbage fees on residential
properties shall be deposited solely and exclusively in an
earmarked special account under the general fund to be
utilized for garbage collections.
1. The Ordinance set forth the schedule
and manner for the collection of garbage fees
as follows:
On all domestic households in Quezon City;
LAND AREA
IMPOSABLE
FEE
Less than 200 sq. m.
Php 100.00
201 sq. m. – 500 sq. m.
Php 200.00
501 sq. m. – 1,000 sq. m.
Php 300.00
1,001 sq. m. – 1,500 sq. m.
Php 400.00
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
13
1,501 sq. m. – 2,000 sq. m. or more Php 500.00
On all condominium unit and socialized
housing projects/units in Quezon City;
FLOOR AREA
IMPOSABLE
Less than 40 sq. m.
Php 25.00
41 sq. m. – 60 sq. m.
Php 50.00
61 sq. m. – 100 sq. m.
Php 75.00
101 sq. m. – 150 sq. m.
Php100.00
151 sq. m. – 200 sq. [m.] or more
Php200.00
FEE
On high-rise Condominium Units
a) High-rise Condominium – The Homeowners
Association of highrise condominiums shall pay the
annual garbage fee on the total size of the entire
condominium and socialized Housing Unit and an
additional garbage fee shall be collected based on
area occupied for every unit already sold or being
amortized.
b) High-rise apartment units – Owners of
high-rise apartment units shall pay the annual
garbage fee on the total lot size of the entire
apartment and an additional garbage fee based
on the schedule prescribed herein for every unit
occupied.
SECTION 3. of the ordinance contains a penalty
clause which reads: “A penalty of 25% of the garbage
fee due plus an interest of 2% per month or a fraction
thereof (interest) shall be charged against a household
owner who refuses to pay the garbage fee herein
imposed.”
Rule on the validity of the ordinance.
14
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: The ordinance is null and void.
It violates the equal protection clause of the Constitution
and the provisions of the LGC that an ordinance must be
equitable and based as far as practicable on the taxpayer’s
ability to pay, and not unjust, excessive, oppressive,
confiscatory. (Ferrer, Jr. v. City Mayor Bautista, G.R. No.
210551, June 30, 2015 citing LGC, Secs. 130 and 186)
In the subject ordinance, the rates of the imposable
fee depend on land or floor area and whether the payee is
an occupant of a lot, condominium, social housing project
or apartment.
The rates being charged by the ordinance are unjust
and inequitable: a resident of a 200 sq. m. unit in a
condominium or socialized housing project has to pay
twice the amount than a resident of a lot similar in size;
unlike unit occupants, all occupants of a lot with an area of
200 sq. m. and less have to pay a fixed rate of Php100.00;
and the same amount of garbage fee is imposed
regardless of whether the resident is from a condominium
or from a socialized housing project.
Indeed, the classifications under Ordinance No. S2235 are not germane to its declared purpose of
“promoting shared responsibility with the residents to
attack their common mindless attitude in over-consuming
the present resources and in generating waste.”
Instead of simplistically categorizing the payee into
land or floor occupant of a lot or unit of a condominium,
socialized housing project or apartment, the City Council
should have considered factors that could truly measure
the amount of wastes generated and the appropriate fee
for its collection. Factors include, among others, household
age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and
actual occupancy of the property.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
15
On top of an unreasonable classification, the penalty
clause lacks the limitation required by Section 168 of the
LGC, which provides that, in no case shall the total interest
on the unpaid amount or portion thereof exceed thirty-six
(36) months.” (Ibid.)
***13. What is the scope of the tax exemption of all
schools, whether non-stock, non-profit or proprietary (for
profit) including those that are cooperatively owned ?
SUGGESTED ANSWER:
a. All donations, grants, endowments or contributions
used actually, directly and exclusively for educational
purposes
1) shall be exempt from tax
2) subject to conditions prescribed by law.
(CONST., art. XIV, sec. 4)
b. All lands, buildings, and improvements
1) actually, directly and exclusively used
2) for educational purposes. [CONST., art. VI,
sec. 28 (3),
14. What is the basic rationale for the constitutionally
granted tax exemptions for private (non-government)
schools?
SUGGESTED ANSWER: The relief given to private
(non-government) schools by the constitution is expected to be
passed on to the students in the form of lower tuition fees.
(Southeast Asian Regional Center for Graduate Study and
Research in Agriculture [SEARCA] v. Commissioner of Internal
Revenue, CTA Case No. 4982, October 6, 1995)
In this manner the schools would be assisting the
State provide education for all without using government
resources because it would the private school that would
take the economic burden of providing education.
FREE PRE-WEEK NOTES
TAXATION LAW
16
***15. There are areas of common constitutional
tax exemptions granted to both non-stock, non-profit
and proprietary (for profit) educational institutions.
a. Are there any instances of constitutional tax
exemptions that are granted only to non-stock, nonprofit but not to proprietary (for profit) educational
institutions ?
SUGGESTED ANSWER: Yes.
“All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and
duties.” [CONST., art. XIV, sec. 4 (3), 1st par., 1st sentence]
b. In what manner may proprietary educational
institutions avail of the same tax exemption privileges ?
SUGGESTED ANSWER: “Proprietary educational
institutions, including those cooperatively owned, may
likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends
and provisions for reinvestment.” [CONST., art. XIV, sec. 4
(3), 2nd par.]
***16. The Constitution provides – “That rule of
taxation shall be uniform and equitable. Congress shall
evolve a progressive system of taxation. (Art VI, Sec. 28
(L). What do you understand by “a progressive system of
taxation”?
Discuss briefly the rationale for its inclusion in
the 1987 Constitution.
SUGGESTED ANSWER: Taxation is progressive when
its rate goes up depending on the resources of the person
affected. [Abakada Guro Party List (Formerly AASJS) etc. v.
Ermita, G.R. No. 168056, September 1, 2005]
It should be noted that the foregoing definition is clearly
deficient. It is not the mere increase in the rate alone in
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
17
relation to income (the tax base) but the increase in the tax
rate must be at faster rate than the increase in the tax base.
If the tax rate increases in the same proportion as the
increase on the tax base, the tax is a proportional tax not a
progressive tax.
The progressive system of taxation is exemplified by
the income tax rate which increases as the net taxable
increases.
It is based on the ability to pay and in implementation
of the social justice principle that the more affluent should
contribute more to the community’s benefit.
The progressive system of taxation is constitutionally
imposed to achieve social justice through redistribution of income.
Progressive income taxes alleviate the margin between rich and
poor. (Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, G.R. No. 158540,
August 3, 2005)
Among the general rationale for the progressive
system of taxation are the following:
a. It represents a procedurally legitimate outcome of a
political process based on sound democratic principles.
b. It furthers (not guarantees) the end of achieving a
modest redistribution of wealth.
c. It limits the wealth and power of the extremely
wealthy.
d. It compensates for regressive national taxes such
as the value-added tax, etc. (Adapted from Dodge,
Joseph M. The Logic of Tax, West Publishing Company,
St. Paul, Minn, USA, 1989)
***17. E.O. 313 intended to create a trust fund out of
the coco-levy funds to provide economic assistance to
the coconut farmers and, assisting other agriculturally-
FREE PRE-WEEK NOTES
TAXATION LAW
18
related programs which would ultimately, benefit the
coconut farmers.
Is E.O. 313 violative of the constitution ?
SUGGESTED ANSWER: Yes. “Clearly, E.O. 313 above
runs counter to the constitutional provision which directs that
all money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such
purpose only. Assisting other agriculturally-related programs is
way off the coco-fund’s objective of promoting the general
interests of the coconut industry and its farmers.”
(Pambansang Koalisyon ng mga Samahang Magsasaka at
Manggagawa sa Niyugan (PKSMMN), et al. v. Executive
Secretary, G.R. Nos. 147036-37, April 10, 2012, and
companion cases)
***18. State the provisions of our constitution that
indirectly affects taxation.
SUGGESTED ANSWER: The general or indirect
constitutional limitations on the power of taxation are the
provisions on:
a. Due process. (CONST., Art. III, Sec. 1)
b. Equal protection. (Ibid.)
c. Religious freedom. (Ibid., Sec. 5)
d. Non-impairment of obligations of contract. (Ibid.,
Sec. 10)
e. Freedom of the press. (Ibid., Sec. 4)
f. No taking of private
compensation. (Ibid., Sec. 9)
property
without
just
g. Law-making process:
1) Bill should embrace only one subject
expressed in the title thereof. [Ibid., Art VI, Sec. 26
(1)]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
19
2) Three readings on three separate days.
[Ibid., Sec. 26(2)]
3) Printed copies in final form distributed three
(3) days before passage. (Ibid.)
h. Presidential
power
to
grant
reprieves,
commutations and pardons and remit fines and forfeitures
after conviction by final judgment. (Ibid., Art. VII, Sec. 19)
i. Preference to Filipinos. (Ibid., Art. XII; Sec. 12)
j. Policy on cooperatives. (Ibid., Art. XII, Sec. 1, last
par., last sentence)
k. Reducing Commission on Audit’s audit function
over tax revenues is unconstitutional.
19. What is the meaning of “deprivation? to fall
within the ambit of the due process protection?
SUGGESTED ANSWER: A “deprivation” of liberty or
property, as a result of the exercise of the power of taxation,
which requires compliance with due process, requires
something more than mere negligent conduct by government
officials, even though such conduct causes injury. It may
occur as a result of a legislative act enacting a tax statute or
that of administrative authorities implementing a tax statute.
Since the due process clause is to protect the people
from the arbitrary acts of government the “deprivation” must be
that of the government or its agents, and not that of
private entities or persons. Thus, the failure of a government
entity or its agents to protect an individual against being
harmed by others is not covered by the due process clause.
(De Shaney v. Winnebago County Department of Social
Services, 489 U.S. 189)
**19. What are the requisites for the observance
of due process in taxation ?
SUGGESTED ANSWER:
requires:
Due process in taxation
FREE PRE-WEEK NOTES
TAXATION LAW
20
a. The tax must be for public purpose
b. imposed within its territorial jurisdiction.
c.
There should be no arbitrariness or
oppression in its
1)
assessment and
2) collection. (Pepsi-Cola Co. of the Phil.
v. Municipality of Tanauan, Leyte, 69 SCRA 460,
arrangement and numbering supplied)
Due process in taxation does not require:
a. Determination through judicial inquiry of
1)
property subject to tax, and
2)
amount of tax to be imposed.
b. Notice and hearing as to:
1)
amount of the tax, and
2) manner of apportionment. Reason: Lifeblood
theory. (Ibid.)
***20. What are the requisites of administrative due
process or what is known as the “Ang Tibay” doctrine ?
SUGGESTED ANSWER: The requisites are:
a.
The right to notice, be it actual or constructive,
of the filing of the proceedings that may affect
a person’s legal rights.
b.
The right to a hearing which includes the right
to present one’s case and submit evidence in
support thereof. This is the right of a person to
a reasonable opportunity to defend himself,
introduce witnesses and relevant evidence.
c.
A tribunal so constituted as to give the person
reasonable assurance of honesty and impartiality,
and which must be of competent jurisdiction.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
21
d.
The tribunal must consider the evidence
present.
e.
The decision must have something to support
itself.
f.
The evidence must be substantial.
g.
The decision must be rendered on the
evidence presented at the hearing, or at least
contained in the record and disclosed to the
parties affected.
h.
The tribunal or any of its judges, must act on
its or his own independent consideration of the
law and facts of the controversy. and
i.
The tribunal should, in all controversial
questions render its decision in such a manner
that the parties to the proceeding may know
the various issues involved, and the reasons
for the decision rendered. (Ang Tibay v.
C.I.R., 69 Phil. 635)
***21. Give exceptions or instances where notice is
dispensed with before the issuance of an assessment.
SUGGESTED ANSWER: The following are the
instances where notice for informal conference may be
dispensed with before issuance of a preliminary
assessment notice and where a pre-assessment notice is
not required before issuing an assessment notice:
a.
When the finding for any deficiency tax is the
result of mathematical error in the computation of
the tax as appearing on the face of the return
filed by the taxpayer;
b.
When a discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding agent; or
FREE PRE-WEEK NOTES
TAXATION LAW
22
c.
When a taxpayer who has opted to claim a refund or
tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year;
or
d.
When the excise tax due on excisable articles
has not been paid; or
e.
When an article locally purchased or imported by
an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred
to non-exempt persons. (NIRC of 1997, Sec.
228; Rev. Regs. No. 12-99, Sec. 3.1.3)
***22. Explain briefly the meaning of “Impairment”
and its rationale as used in the Constitution.
SUGGESTED ANSWER: There is “impairment” when a
law substantially invalidates, releases, or extinguishes the
obligations of a contract, or that derogates substantial
contractual rights. (Home Building & Loan Association v.
Blaisdell, 290 U.S. 398)
The rationale for the non-impairment clause. When
the state grants an exemption on the basis of a contract,
consideration is presumed to be paid to the state, and the
public is supposed to receive the whole equivalent
therefore. Thus, the exemption from taxation will be
binding upon succeeding legislation and a tax could not be
imposed without infringing on the impairment clause.
***23. What circumstances are considered as
impairment of the obligations of contract?
SUGGESTED ANSWER: The circumstances are:
a. When a person is deprived of the benefits of his
contract; or
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
23
b. When the law takes from the party his whole contract
and all the rights which it has intended to confer; or
c. When the terms of a statute is altered by imposing
new conditions, or dispensing with conditions, or which adds
new duties, or releases or lessens any part of the contract,
obligation or substantially defeats its end (Oshkosh
Waterworks Co. v. Oshkosh, 187 U.S. 437), thereby
1) diminishing the value of the contract;
2) changing the intention of the parties;
3) changing the mode of payment; and
4) changing the remedy to enforce the contract
without leaving any substantial remedy.
***24. What are the requisites for permissible
“impairments”?
SUGGESTED ANSWER: While it is true that the nonimpairment clause protects against the state’s destruction of
the rights arising under or enforcement of existing contracts,
there may be instances of legislation modifying contractual
obligations. To be valid the impairing legislation:
a.
must serve an important and legitimate public
interest; and
b.
is a reasonable and narrowly tailored means of
promoting that interest.
The Court should consider, among other things,
a.
the severity of the impairment,
b.
the reasonable reliance and expectations of the
contracting parties,
c.
the strength and breadth of the socio-economic
problems involved,
d.
whether the law serves the general public
welfare or benefits only special interests,
FREE PRE-WEEK NOTES
TAXATION LAW
24
e.
whether the law operates in an area already
regulated by the state, and
f.
whether the impact of the law is permanent
(rather than temporary) or immediate (as
opposed to gradual). (Energy Reserves Group,
Inc. v. Kansas Power & Light Co., 459 U.S. 400)
***25. What are regulatory taxes? Illustrate.
SUGGESTED ANSWER: Regulatory taxes are those
imposed in the joint exercise of the power of taxation and
police power. Taxes raise revenues and at the same time
promote general welfare or protect the health, safety or
morals of the general populace.
An illustration of regulatory taxes are the coco-levy
funds that were raised with the use of the police and taxing
powers of the State for the benefit of the coconut industry
and its farmers in general. [Pambansang Koalisyon ng
mga Samahang Magsasaka at Manggagawa sa Niyugan
(PKSMMN) v. Executive Secretary, G.R. Nos. 147036-37,
April 10, 2012, and companion cases]
***26. How may the power to tax be utilized to carry
out the social justice program of our government ?
SUGGESTED ANSWER: The power to tax carries out
the social justice program of our government through
redistribution of income using the progressive system of
taxation. The compensatory purpose of taxation is to
implement the social justice provisions of the constitution
through the progressive system of taxation, which would
result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between
the rich and poor. (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, G.R.
No. 158540, August 3, 2005)
In recent years, the increasing social challenges of
the times expanded the scope of the state activity, and
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
25
taxation has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and
similar objectives. (Batangas Power Corporation v.
Batangas City, G.R. No. 152675, and companion case,
April 28, 2004)
***27. What is the nature of the state’s power to tax?
Why is it so?
SUGGESTED ANSWER: The nature of the state’s
power to tax is two-fold. It is both an inherent power and a
legislative power.
a. Taxation is inherent in nature being an attribute of
sovereignty [Chamber of Real Estate and Builders’
Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] and
consequently it exists with or without a constitutional provision
to the effect. (Cooley, Constitutional Limitations, p. 787)
This is so, because without tax revenues the state’s
very existence would be imperiled for lack of funds to
perform the essential obligations of the state.
b. Taxation is a legislative power because it involves
the promulgation of rules. Taxation is a set of rules, why
should the tax be paid, who pays the tax, how much is the
tax to be paid, to whom it should be paid, and when the tax
should be paid.
The power to tax is inherent in the State, such power
being inherently legislative, based on the principle that
taxes are a grant of the people who are taxed, and the
grant must be made by the immediate representatives of
the people, and where the people have laid the power,
there it must remain and be exercised. [Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, 559
SCRA 160 (2008)]
FREE PRE-WEEK NOTES
TAXATION LAW
26
***28. What is the scope of the inherent legislative
power to tax?
SUGGESTED ANSWER: The legislature wields the
power
a. to define what tax shall be imposed,
b. why it should be imposed,
c. how much tax shall be imposed,
d. against whom (or what) it shall be imposed
e. and where it shall be imposed. [Chamber of Real
Estate and Builders’ Associations, Inc. v. Romulo, 614
SCRA 606 (2010)]
ALTERNATIVE ANSWER: The legislature is given the
discretion to determine the
a. nature (kind),
b. object (purpose),
c. extent (rate),
d. coverage (subjects), and
e. where the situs (place) of taxation primarily lies.
(Tan v. Del Rosario Jr.; Carag v. Del Rosario Jr. 237
SCRA 324, arrangement and numbering supplied)
It is clear from the above that the legislative power to
tax does not include collection of the tax which is none
other than the execution of the tax laws that the legislative
department has promulgated.
By constitutional allocation collection of taxes is part
of the functions of the executive department.
***28. 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.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
27
SUGGESTED ANSWER: The state’s power to tax is
two-fold. It is both an inherent power and a legislative power.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a
grant of the people who are taxed, and the grant must be
made by the immediate representatives of the people. Where
the people have laid the power, there it must remain and be
exercised. [Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, 559 SCRA 160 (2008)]
A legislative body may enact laws to raise revenues
despite the absence of a constitutional provision granting that
body the power to tax. Taxation is inherent in nature being an
attribute of sovereignty [Chamber of Real Estate and Builders’
Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] and
consequently it exists with or without a constitutional provision
to the effect. (Cooley, Constitutional Limitations, p.787)
This is so, because without taxes the state’s very
existence would be imperiled for lack of funds to perform
the essential obligations of the state.
Taxation is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules, who pays
the tax, how much is the tax to be paid, to whom it should
be paid, and when the tax should be paid.
**29. Distinguish taxation from police power.
SUGGESTED ANSWER:
following:
The distinctions are the
a. Purpose: Taxation is for revenue while police
power is for general welfare.
Police power is the power of the State to enact legislation
that may interfere with personal liberty or property in order to
promote the general welfare, while the power of taxation is the
power to levy taxes to be used for public purpose. [Planters
Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 (2008)]
28
FREE PRE-WEEK NOTES
TAXATION LAW
In distinguishing tax regulation as form of police power,
the determining factor is the purpose of the implemented
measure – if the purpose is primarily to raise revenue, then it
will be deemed a tax even though the measure results in some
form of regulation. On the other hand, if the purpose is
primarily to regulate, then it is deemed a regulation and an
exercise of the police power of the state, even though
incidentally, revenue is generated. [Chevron Philippines, Inc. v.
Bases Conversion Development Authority, 630 SCRA 519
(2010)]
b. Amount: In taxation, the amount of tax collected is
practically unlimited while under police power, the license
fee should not exceed cost of regulation.
c. Compensation: In taxation, the enjoyment of public
services while in police power, the feeling of having done
something good for society in general.
d. Property taken: In taxation, generally money while
under police power, any property, other than money, which
is the source of the danger health, safety or morals.
e. What is done with the property taken: Taxation is
constructive because the money collected is spent for
building infrastructure or providing public services while
police power is destructive. The property taken is usually
destroyed.
f. Relation to the non-impairment clause: Taxation is
inferior to the non-impairment clause and could not
override the same while police power is superior to the
non-impairment clause.
g. Scope. Taxation interferes with property rights only
while police power regulates both liberty and property.
h. Surrender. Taxation may be bargained away through
a contract such that if the government issues a tax-exempt
bond, it could not withdraw the exemption because it would
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
29
violate the non-impairment clause while police power cannot
be bargained away.
**30. How has the growing importance of local
taxation been underscored by the 1987 Constitution?
SUGGESTED ANSWER: The importance of local
taxation has been underscored by the 1987 Constitution
when it delegated to each local government unit the power to
create its own sources of revenue and to levy taxes, fees and
charges so long as the proceeds accrue exclusively to the
local government unit imposing and levying the same.
However, this power of local government units is subject
to such guidelines and limitations as the Congress may
provide.
***31. The 1987 Constitution, Art. X Sec. 5 grants to
local government units the power to create their own
sources of revenue and to levy taxes, fees and charges.
Discuss further whether or not local government units
may levy taxes without an act passed by Congress on the
theory that they now enjoy the sovereign power of
taxation unlike in the past when they possessed only
delegated power to do so.
SUGGESTED ANSWER: Local government units could
not levy taxes without an act passed by Congress. This is so,
because the provision of the Constitution delegating the power
of taxation to local government units is not self-executing. The
exercise of the power is subject to such guidelines and
limitations as Congress may provide.
Presently, those guidelines and limitations are found
in the Local Government Code.
32. Petitioner Smart Communications, Inc. (Smart) is
a domestic corporation engaged in the business of
providing telecommunications services to the general
public. In the course of its business, Smart constructed a
telecommunications
tower
within
the
territorial
FREE PRE-WEEK NOTES
TAXATION LAW
30
jurisdiction of the Municipality of Malvar, Batangas, The
construction of the tower was for the purpose of receiving
and transmitting cellular communications within the
covered area.
On 30 July 2003, the Municipality passed Ordinance
No. 18, series of 2003, entitled “An Ordinance Regulating the
Establishment of Special Projects.” On 24 August 2004,
Smart received from the Permit and Licensing Division of
the Office of the Mayor of the Municipality an assessment
letter with a schedule of payment for the total amount of
₱389,950.00 for Smart’s telecommunications tower.
Is the imposition a tax?
SUGGESTED ANSWER: No. The imposition of fees
on “cell sites” is under police power.
The main purpose of Ordinance No. 18 is to regulate
certain construction activities of the identified special projects,
which includes “cell sites” or telecommunications towers.
Thus, the fees imposed in Ordinance No. 18 are primarily
regulatory in nature, and not primarily revenue-raising. They
are not taxes. While the fees may contribute to the revenues
of the Municipality, this effect is merely incidental. (Smart
Communications, Inc. v. Municipality of Malvar, Batangas,
G.R. No. 204429, February 18, 2014)
33. Quezon City passed Ordinance No. SP-2095 that
imposes a Socialized Housing Tax (SHT) equivalent to
0.5% on the assessed value of land in excess of
Php100,000.00. The special assessment shall accrue to
the General Fund under a special account to be
established for the purpose.
Effective for five (5) years, the Socialized Housing
Tax (SHT) shall be utilized by the Quezon City
Government for the following projects: (a) land
purchase/land
banking;
(b)
improvement
of
current/existing socialized housing facilities; (c) land
development; (d) construction of core houses, sanitary
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
31
cores, medium-rise buildings and other similar structures;
and (e) financing of public-private partnership agreement
of the Quezon City Government and National Housing
Authority (NHA) with the private sector.
Under certain conditions, a tax credit shall be
enjoyed by taxpayers regularly paying the special
assessment: The tax credit to be granted shall be
equivalent to the total amount of the special assessment
paid by the property owner.
Is the imposition valid ?
SUGGESTED ANSWER: Yes. The ordinance imposing
the Socialized Housing Tax of Quezon City, (SHT) is valid.
The tax is not a pure exercise of taxing power or merely
to raise revenue; it is levied with a regulatory purpose. The
levy is primarily in the exercise of the police power for the
general welfare of the entire city. It is greatly imbued with
public interest.
Removing slum areas in Quezon City is not only
beneficial to the underprivileged and homeless constituents
but advantageous to the real property owners as well. The
situation will improve the value of their property investments,
fully enjoying the same in view of an orderly, secure, and safe
community, and will enhance the quality of life of the poor,
making them law-abiding constituents and better consumers of
business products. (Ferrer, Jr. v. City Mayor Bautista, G.R.
No. 210551, June 30, 2015)
34. The city of Makati, in order to solve the traffic
problem in its business districts, decided to impose a tax,
to be paid by the driver, on all private cars entering the
city during peak hours from 8:00 a.m. to 9:00 a.m. from
Mondays to Fridays, but exempts those cars carrying
more than two occupants, excluding the driver. Is the
ordinance valid?
32
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: Yes. It is an imposition under
the police power because it seeks to promote the general
welfare, for the protection of the health, safety and
convenience of the public who would be affected by the traffic
problem.
***35. Uptown University is a non-stock, non-profit
educational institution. It owns a piece of land in
Batangas City on which its three 2-storey 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.
Can the City Treasurer of Batangas City collect real
property taxes on the land and building of Uptown
University? Explain your answer.
SUGGESTED ANSWER: No. It appears that the land
and buildings of Uptown University are acutally, directly and
exclusively used for educational purposes.
They are constitutionally exempt from taxation because
all lands, buildings and improvements actually, directly and
exclusively used for educational purposes shall be exempt
from taxation. [CONST., art. VI, sec. 28 (3), paraphrasing
supplied]
**36. What are the five (5) circumstances that must be
present in order to qualify “taking” as an exercise of
eminent domain which requires just compensation?
SUGGESTED ANSWER: The circumstances are:
“First, the expropriator must enter a private property.
Second, the entrance into private property must be for
more than a momentary period.
Third, the entry into the property should be under
warrant or color of legal authority.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
33
Fourth, the property must be devoted to a public use
or otherwise informally appropriated or injuriously affected.
Fifth, the utilization of the property for public use must
be in such a way as to oust the owner and deprive him of
all beneficial enjoyment of the property. (Southern Luzon
Drug Corporation v. The Department of Social Welfare and
Development, G.R. No. 199669, April 25, 2017,
arrangement supplied)
**37. What is the concept of “taking” which requires
just compensation ?
SUGGESTED ANSWER: There are two different types
of taking that can be identified.
a. A “possessory” taking occurs when the government
confiscates or physically occupies property.
b. A “regulatory” taking occurs when the government’s
regulation leaves no reasonable economically viable use of the
property.
What is crucial in judicial consideration of regulatory
takings is that government regulation is a taking if it leaves
no reasonable economically viable use of property in a
manner that interferes with reasonable expectations for
use. A regulation that permanently denies all economically
beneficial or productive use of land is, from the owner’s
point of view, equivalent to a “taking” unless principles of
nuisance or property law that existed when the owner
acquired the land make the use prohibitable. When the
owner of real property has been called upon to sacrifice all
economically beneficial uses in the name of the common
good, that is, to leave his property economically idle, he
has suffered a taking. (Southern Luzon Drug Corporation
v. The Department of Social Welfare and Development,
G.R. No. 199669, April 25, 2017)
FREE PRE-WEEK NOTES
TAXATION LAW
34
The circumstances that must be present for eminent
domain are absent in the senior citizens and PWDs
discount. (Ibid.)
Theory and basis of taxation
**1. What is the underlying theory of taxation ?
SUGGESTED ANSWER: The underlying theory of
taxation is the lifeblood doctrine.
Under this doctrine, taxes constitute the blood that runs
through the veins of the government for without taxes, the
government can neither exist nor endure. (National Power
Corporation v. City of Cabanatuan, G.R. No. 149110, April 9,
2003)
Without revenue raised from taxation, the government
will not survive, resulting in detriment to society. Without
taxes, the government would be paralyzed for lack of motive
power to activate and operate it. (Commissioner of Internal
Revenue v. Algue, Inc., 158 SCRA 8, 16-17)
*2. Briefly explain the necessity theory.
SUGGESTED ANSWER: The theory behind the
exercise of the power to tax emanates from necessity, for
without taxes, government cannot fulfill its mandate of
promoting the general welfare and well being of the people.
[Republic v. Caguioa, 536 SCRA 193 (2007)]
**3. Discuss the basis of taxation.
SUGGESTED ANSWER: The basis of taxation is the
symbiotic relationship which is the reciprocal relation of
protection and support between the state and the
taxpayers. The state gives protection and for it to continue
giving protection it must be supported by the taxpayers in
the form of taxes.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
35
a. Taxes are what we pay for a civilized society.
Without taxes, the government would be paralyzed for lack
of motive power to activate and operate it.
b. Despite the natural reluctance to surrender part of
one’s hard-earned income to the taxing authorities, every
person who is able must contribute his share in running the
government.
c. The government, for its part, is expected to respond
in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral
and material values.
This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
(Commissioner of Internal Revenue v. Algue, Inc., 158
SCRA 8, 16-17)
**4. Briefly explain the symbiotic relation principle.
SUGGESTED ANSWER: The symbiotic relation
principle is the reciprocal relation of protection and support
between the state and the taxpayers. The state gives
protection and for it to continue giving protection it must be
supported by the taxpayers in the form of taxes.
5. Explain briefly the concept of jurisdiction in
relation to taxation.
SUGGESTED ANSWER: Jurisdiction in taxation is
basically territorial in character. Unless the state could
exercise jurisdiction over persons and property, then it could
not enforce and implement tax measures.
This is so because as a general rule the taxing authority
could give protection only to subjects and objects within its
territorial boundaries hence, those given protection should
contribute to the expenses necessary to provide protection.
36
FREE PRE-WEEK NOTES
TAXATION LAW
**6. Explain the principles of a sound tax system.
SUGGESTED ANSWER: The basic principles
(sometimes referred to as the tenets, elements, characteristics)
of a sound tax system are:
a. Fiscal adequacy which means that the revenues
generated by taxation should be sufficient to meet the needs of
government.
b. Equality or theoretical justice which means that the tax
should be collected only from those that have the ability to pay.
c. Administrative feasibility which means that tax laws
should be easily implemented in order to assure the smooth
flow into the treasury of the fiscally adequate amounts.
The principles or canons serve as standards in order to
determine whether a tax system is able to meet the purposes or
objectives of taxation.
7. Evaluate the Philippine tax system from the
viewpoint of a sound tax system.
SUGGESTED ANSWER: The Philippine tax system
is not a sound tax system because it does not meet the
principles of a sound tax system.
It is not fiscally adequate because the revenues
generated are sufficient to finance the operations needs of
the government. This is exemplified by the billions of
pesos that the government has to borrow domestically and
internationally in order to fund government expenditures.
There is also no theoretical justice because the
burden falls upon the poor. This is illustrated by the fact
that most tax revenues are generated by indirect taxes.
The tax system is likewise complex that it violates the
principle of administrative feasibility. Some taxpayers still
find difficulty in applying the VAT. So also, the two
methods of taxing corporations results to confusion.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
37
*8. Explain and illustrate fiscal adequacy as a
principle of a sound tax system.
SUGGESTED ANSWER: This means that the tax
system must be able to provide sufficient revenues in order to
meet the legitimate objects of government. Stated otherwise,
the taxes collected must be able to finance government
expenditures and their variations. (Chavez v. Ongpin, G.R.
No. 76778, June 6, 1990, 186 SCRA 331, 338)
As an illustration, to continue collecting real property
taxes based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound
tax system. Fiscal adequacy requires that the sources of
revenues must be adequate to meet government expenditures.
(Ibid.)
9. What is meant by theoretical justice as a canon
of a sound tax system ?
SUGGESTED ANSWER: The tax should be collected
on the basis of ability to pay through a progressive system
of taxation. Thus, the incidence or burden of taxation
should fall more on those who could afford.
10. Explain administrative feasibility as a principle
of a sound tax system.
SUGGESTED ANSWER: The tax measures should
be easily implemented in order to assure the smooth flow
into the treasury of the fiscally adequate amounts.
11. Are tax laws imprescriptible ?
SUGGESTED ANSWER: As a general rule, the right
of the government to collect taxes is imprescriptible because
the very existence of the state depends upon the exercise of
this power.
Where the government has not by express statutory
provision, provided a limitation upon its right to assess
FREE PRE-WEEK NOTES
TAXATION LAW
38
unpaid taxes, such right is imprescriptible. [Kasamahan
Realty Development Corporation (now known as Stag
Trading Corporation) v. Commissioner of Internal
Revenue, CTA Case No. 6204, February 16, 2005]
Statutes may, however, provide for prescriptive periods
for the collection of particular kinds of taxes in order to
respect the due process rights of taxpayers.
SITUS OF TAXATION
**1. What is meant by situs of taxation ? Illustrate.
SUGGESTED ANSWER: The situs of taxation is the
place or authority that has the right to impose and collect
taxes. (Commissioner of Internal Revenue v. Marubeni
Corporation, G.R. No. 137377, December 18, 2001)
Illustration of situs of taxation. The situs of the services
for the “design and engineering, supply and delivery,
construction, erection and installation, supervision, direction
and control of testing and commissioning, coordination” of
contractual projects are in two countries.
The acts occurred in two countries – Japan and the
Philippines. While the construction and installation work
were completed within the Philippines, it is clear that some
pieces of equipment and supplies were completely
designed and engineered in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to contractor’s tax.
(Commissioner of Internal Revenue v. Marubeni
Corporation, G.R. No. 137377, December 18, 2001)
**2. What are the exceptions to the territoriality rule?
SUGGESTED ANSWER:
a. Instances where tax laws operate outside territorial
jurisdiction.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
1) Taxation of resident
incomes derived from abroad.
39
citizens
on
their
b. Where tax laws do not operate within the territorial
jurisdiction of the state.
1) When exempted by treaty obligations.
2) When exempted by international comity.
**3. What determines situs of taxation ?
SUGGESTED ANSWER: In general, situs of taxation
is determined by the place that gives protection which has
the right to levy and collect taxes. Specifically, the
determinants are the following:
a. The
“benefits-protection
theory”
(symbiotic
relationship). The reciprocal relation of protection and support
between the taxpayer and the state. The state gives
protection and in order to continue giving protection, it must be
supported in the form of taxes.
b. Jurisdiction, state or political unit that gives
protection has the right to demand support.
Technically tax laws are jurisdictional, or operate only
within the territorial jurisdiction of a state because that is
where it could give protection. This is subject to the
concept of mobilia sequuntur personam.
NOTE NOT PART OF THE ANSWER: There is a
distinction between a question asking for situs of taxation,
in general (such as the question above) and one which
asks for the situs of various kinds of taxes (such as the
situs of income taxation, the situs of estate taxes, the situs
of property taxes, etc.).
**4. Situs of taxation means the place of taxation,
the state which has jurisdiction to impose a particular
tax on persons, property or transaction. Bearing in
mind the general rule on situs of taxation and the
provisions of the National Internal Revenue Code,
FREE PRE-WEEK NOTES
TAXATION LAW
40
what is the situs of taxation of the following stating the
basis for your answer:
a. Transfer of property by death.
SUGGESTED ANSWER: For resident decedents,
whether Filipino citizens or not, the situs would be
irrespective of where the property real or personal, tangible
or intangible, is located and in the case of a nonresident
decedents who are not Filipino citizens, the situs would
only be those property situated in the Philippines. (NIRC
of 1997, Sec. 85, paraphrasing supplied)
The places of situs are the places that give protection.
b. Transfer of property by gift.
SUGGESTED ANSWER: The Philippines is the situs
of taxation of the donation or transfers of property by gift.
1) Donations made in the Philippines
irrespective of the nationality of rhe donor, as well as
the location of the property. The basis is the
protection made of the activity which is the act of
donation.
2) Donations made outside of the Philippines
where the donor is a Philippine citizen, irrespective of
his residency or location of the property donated.
The basis is the protection given to the donor who is
a Filipino citizen.
3) Donations made outside of the Philippines
where the property donated is located in the
Philippines irrespective of the nationality or residency
of the donor. The Philipines gives protection to the
property that is donated that is why it is the situs of
taxation.
NOTES NOT PART OF THE ANSWER: It is to be
noted that the residence and nationality of the donee are
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
41
not taken into consideration for determining whether the
donation is subject to Philippine donor’s taxation or not.
c. Business and occupation.
SUGGESTED ANSWER: The situs of business and
occupation is the place where the business and occupation
are being conducted. The reason being that this is the
place which gives protection to the business or occupation.
d. Situs of taxes on real propery.
SUGGESTED ANSWER: The place where the real
property is located under the principle of Lex rei sitae or lex
situs because of the following reasons:
1) The taxing authority has control because of
the stationary and fixed character of the property.
2) The place where the real property is
situated gives protection to the real property, hence
the property or its owner should support the
government of that place.
e. Situs of taxation of personal property.
SUGGESTED ANSWER: The basis of taxation is
determined by the nature of the property whether it is
tangible, intangible or mixed.
For tangible personal property the basis is mobilia
sequuntur personam (movables follow the person). The
situs of taxation is the place where the owner is found. This
is generally, where the owner resides.
The domicile of the owner is the place that provides
protection to the property because the intangible follows
the owner.
For intangible personal property or mixed the basis is
the place where the property has acquired a business situs.
For example, taxes imposed on the sales of Philippine
stocks (stocks in domestic corporations) are taxable in the
FREE PRE-WEEK NOTES
TAXATION LAW
42
Philippines no matter where they may be found, or where
the owner’s domicile is located.
f. Situs of excise taxes.
SUGGESTED ANSWER: The situs of taxation of
excise tax would depend whether the article is
1) a domestic product or mineral;
2) an imported article.
Situs of taxation of the excise tax on a domestic
product or mineral. The situs is the place of production or
where mined or extracted. [NIRC of 1997, Sec. 130 (A)
(2), paraphrasing supplied]
Situs of taxation of imported articles. Place where the
customshouse from where released is located. In case of
tax exempt articles where the possessor is not entitled to
the exemption, then the place where the possessor is
found. [Ibid., Sec. 130 (A) (1), paraphrasing supplied]
Situs of franchise tax which is an excise tax. It should
be stressed that what the City of Iriga seeks to collect from
CASURECO III is “a franchise tax, which as defined, is a
tax on the exercise of a privilege.” [City of Iriga v.
Camarines Sur III Electric Cooperative, Inc. (CASURECO
III), G.R. No. 19245, September 5, 2012]
The “franchise tax shall be based on gross receipts
precisely because it is a tax on business, rather than on
persons or property. Since it partakes of the nature of an
excise tax the situs of taxation is the place where the
privilege is exercised, in this case in the City of Iriga, where
CASURECO III has its principal office and from where it
operates, regardless of the place where its services or
products are delivered. Hence, franchise tax covers all
gross receipts from Iriga City and the Rinconada area.”
(Ibid.)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
43
g. Situs of sales of property.
SUGGESTED ANSWER: The situs of taxation
depends upon whether the property is real or personal.
Gains, profits, and income from sale of real
property located in the Philippines are treated as gross
income from sources within the Philippines. [NIRC of
1997, Sec. 42 (A) (5)]
Thus, the situs is where the real property is located.
Tax treatment of gains, profits, and income derived
from the sale of personal property. Gains, profits and
income derived:
1) From the purchase of personal property
within and its sale without the Philippines, or
2) From the purchase of personal property
without and its sale within the Philippines,
a) shall be treated as derived entirely from
sources within the country in which sold:
b)
Provided, however, That gains from
the sales of shares of stock in a domestic
corporation
1) shall be treated as derived entirely
from sources within the Philippines
2) regardless of where the said shares
are sold. [Ibid., Sec. 42 (E), 2nd par.,
arrangement, and numbering supplied]
Illustration of situs of sale of personal property. Sales
of encyclopedias were considered as perfected and
consummated in the U.S. because of showing that when
the Philippine distributors placed and/or sent their specific
orders to P.F. Collier, U.S., they already knew the price of
the books. Such orders were shipped by the vendor in the
U.S. direct to the different buyers in the Philippines. [P.F.
44
FREE PRE-WEEK NOTES
TAXATION LAW
Collier, Inc. (Philippine Branch) v. Commissioner of
Internal Revenue, CTA Case No. 4355, November 9, 1995]
DOUBLE TAXATION
***1. Is “double taxation” allowed or prohibited in
the Philippines? Illustrate.
SUGGESTED ANSWER: There is no specific
provision in the Constitution prohibiting double taxation.
Unlike the United States Constitution, double taxation is
not specially prohibited in the Philippine Constitution.
(Manufacturers Life v. Meer, 89 Phil. 210)
However, where there is direct duplicate taxation,
then there may be violation of the constitutional precepts
of equal protection and uniformity in taxation.
If only the 1st element of direct duplicate taxation is
present (taxing the same subject or object twice, by the
same taxing authority, etc.), there is no violation of the equal
protection clause because all subjects and objects that are
similarly situated are subject to the same burdens and
granted the same privileges without any discrimination
whatsoever,
The presence of the 2nd element, taxing all of the
subjects and objects within the territory for the first time,
without taxing all for the second time, results to
discrimination among subjects and objects that are similarly
situated, hence violative of the equal protection clause.
At all events, there is no constitutional prohibition
against double taxation in the Philippines. (La Suerte Cigar
& Cigarette Factory v. Court of Appeals, G.R. No. 125346,
November 11, 2014, and companion cases]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
45
***2. What are the usual methods of avoiding the
occurrence of double taxation ?
SUGGESTED ANSWER: The following are the
methods for easing the economic burden of double
taxation:
a. Tax treaties which exempts foreign nationals from
local taxation and local nationals from foreign taxation
under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as
deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross
income.
d. Reduction of Philippine income tax rates.
EXPLANATION NOT PART OF THE ANSWER: The
double taxation referred to in the question is indirect
duplicate taxation which is not a basis for invalidating a tax
measure. Thus, the taxpayer is subject to tax twice unlike
in the case of direct duplicate taxation where one of the tax
measures may be invalidated because it violates the equal
protection clause.
***3. Is double taxation a valid defense against the
legality of a tax measure ?
SUGGESTED ANSWER: Yes. If the double taxation
is in its strict sense also known as direct duplicate taxation
because it would be a valid defense against a tax
measure. The tax measure would be nullified for being
unconstitutional because it violates the equal protection
clause.
***4. Poro Point Corporation, doing business in the
City of San Fernando in La Union has been a distributor
and retailer of car parts and accessories. It has been
paying the City of San Fernando local taxes based on
Sections 15 (Tax on Wholesalers, Distributors or
46
FREE PRE-WEEK NOTES
TAXATION LAW
Dealers) and 17 (Tax on Retailers) of the Revenue Code
of the City of San Fernando (Code). Subsequently, the
Sangguniang Panlungsod enacted an ordinance
amending the Code by inserting Section 21 which
imposes a tax on “Businesses Subject to Excise, ValueAdded 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.” Poro Point 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.
Does this amount to double taxation ?
SUGGESTED 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 but once. 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.
Using the aforementioned test, there is indeed double
taxation since Poro Point 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 the City of San Fernando.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
47
These taxes are being imposed:
a. on the same subject matter - the privilege of
doing business in the City of San Fernando;
b. for the same purpose - to make persons
conducting business within the City of San Fernando
contribute to city revenues;
c. by the same taxing authority Fernando;
City of San
d. within the same taxing jurisdiction - within
the territorial jurisdiction of the City of San Fernando;
e. for the same taxing periods - per calendar
year; and
f. of the same kind or character - a local
business tax imposed on gross sales or receipts of
the business.
(Nursery Care Corporation v.
Acevedo, etc., G.R. No. 180651, July 30, 2014)
***5. A 20% final withholding tax (FWT) on interest
income and a 5% gross receipts tax (GRT) are both
imposed upon banks. Is there double taxation ?
SUGGESTED ANSWER:
following reasons:
No because of the
a. The taxes are imposed on two different subject
matters. The subject matter of the FWT is the passive income
generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the
privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than
on the property, hence it is an excise rather than a property
tax. It is not an income tax, unlike the FWT. One can be
taxed for engaging in business and further taxed differently
for the income derived therefrom. These two taxes are
entirely distinct and are assessed under different provisions.
48
FREE PRE-WEEK NOTES
TAXATION LAW
(Commissioner of Internal Revenue v. Solidbank Corporation,
G.R. No. 148191, November 25, 2003)
b. Although both taxes are national in scope because
they are imposed by the same taxing authority – the national
government under the Tax Code – and operate within the
same Philippine jurisdiction for the purpose of raising
revenues, the taxing periods they affect are different.
The FWT is deducted and withheld as soon the
income is earned, and is paid every calendar quarter in
which it is earned. On the other hand, the GRT is neither
deducted nor withheld, but is paid only after every taxable
quarter in which it is earned.
c. These two taxes are of different kinds or character.
The FWT is an income tax subject to withholding, while the
GRT is a percentage tax not subject to withholding.
(Commissioner of Internal Revenue v. Bank of Commerce,
G.R. No. 149636, June 8, 2005)
***6. Is there a case of double taxation when an
item of income is taxed in the Philippines and the
same income is taxed in another country?
SUGGESTED ANSWER: In its general sense yes,
because the same subject is taxed twice although by
different taxing authorities
However, this type of double taxation is not prohibited by
the Constitution because it is not direct duplicate taxation
which is violative of equal protection and uniformity in taxation.
The reason is that the taxes are imposed for different purposes
and by different taxing authorities.
***7. Differentiate double taxation in the strict
sense (direct duplicate taxation) and in a broad sense
(indirect duplicate taxation). Give an example of each.
SUGGESTED ANSWER: The differences between
double taxation in the strict sense and in a broad sense
are the following:
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
49
a. The following elements are all present in double
taxation, in its strict sense or direct duplicate taxation: The
same object or property is taxed twice by the same taxing
authority, for the same taxing purpose, during the same tax
period, and taxing all the objects or property within the
same territory for the first time without taxing all of them for
the second time while the absence of one of the foregoing
elements results to double taxation in a broad sense or
indirect duplicate taxation.
b. Double taxation, in its strict sense or direct
duplicate taxation, is a defense against the imposition of
taxes while double taxation, in a broad sense, is not a
defense against the imposition of taxes.
c. Double taxation, in its strict sense, violates the
equal protection, as well as the uniformity and equality of
protection clauses of the 1987 Philippine Constitution
resulting to nullification of one of the tax laws while double
taxation, in a broad sense, is not violative of the 1987
Philippine Constitution.
d. In double taxation, in its strict sense, there could only
be one tax collected and the burden falls only once while
double taxation, in a broad sense, allows for the collection of
the tax twice, thus the economic burden falls twice.
An example of double taxation in its strict sense:
Section 21 of the Revenue Code of Manila imposed the tax
on a person who sold goods and services in the course of
trade or business based on a certain percentage of his gross
sales or receipts in the preceding calendar year, while
Section 15 and Section 17 likewise imposed the tax on a
person who sold goods and services in the course of trade or
business but only identified such person with particularity,
namely, the wholesaler, distributor or dealer (Section 15), and
the retailer (Section 17), all the taxes – being imposed on the
privilege of doing business in the City of Manila in order to
make the taxpayers contribute to the city’s revenues – were
imposed on the same subject matter and for the same
50
FREE PRE-WEEK NOTES
TAXATION LAW
purpose. (Nursery Care Corporation v. Acevedo, etc.,
No. 180651, July 30, 2014)
G.R.
An example of double taxation in a broad sense is where
a 20% final withholding tax (FWT) on interest income and a
5% gross receipts tax (GRT) are both imposed upon banks.
(Commissioner of Internal Revenue v. Solidbank Corporation,
G.R. No. 148191, November 25, 2003)
***8. Your neighbor owns a row of apartments,
one unit of which he occupies as his residence and the
rest, he leases to tenants. He complains to you that he
has to pay the following taxes:
a. real estate taxes on the properties;
b. real estate dealer’s tax based on his rental
receipts;
c. income tax for said rental receipts;
d. community tax based on the assessed value of
the same properties.
He asks you whether or not the various impositions
constitute double taxation and therefore violative of the
Constitution. What will your answer be? Explain.
SUGGESTED ANSWER: The various impositions
constitute double taxation because my neighbor is taxed
twice.
However, this type of double taxation is not prohibited
by the Constitution because it is not direct duplicate
taxation that is violative of equal protection and uniformity
in taxation. The reason is that the taxes are imposed for
different purposes and by different taxing authorities.
NOTE NOT PART OF THE ANSWER: The answer
may be expanded by explaining the concept of direct
duplicate taxation.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
51
***9. In 2020, Batangas City amended its Revenue
Code to include a new provision imposing a tax on every
sale of merchandize by a wholesaler based on the total
selling price of the goods, inclusive of value-added taxes
(VAT). Kulambo’t Kumot Corp., a wholesaler operating
within Batangas City, challenged the new provision based
in the following contentions: 1. The new provision is a
form of prohibited double taxation because it essentially
amounts to Batangas City imposing VAT which was
already being levied by the national government; and 2.
Since the tax being imposed is akin to VAT, it is beyond
the power of Batangas City , to levy the same.
Rule on
contentions.
each
of
Kulambo’t
Kumot
Corp.’s
SUGGESTED ANSWER: Kulambo’t Kumot Corp.’s
contention no. 1 is lacking in merit.
The same taxing authority that imposed the first tax
should also be the one that imposes the second tax is
among the elements of prohibited double taxation, which is
also known as direct duplicate taxation.
There is absent the element above described
because there are different taxing authorities. VAT is
imposed by the national government while the second tax
is imposed by a local government unit, Batangas City.
Kulambo’t Kumot Corp.’s contention no. 2 is likewise
bereft of merit.
Local government units such as Batangas City, may
impose a tax on any business that are “not otherwise specified
in the preceding paragraphs” of Sec. 143 (h) of the Local
Government Code but already subject to tax under the NIRC
such as excise, value-added tax or percentage provided the
rate of tax does not exceed two percent (2%) of gross sales or
receipts of the preceding calendar year. [LGC, Sec. 133 (h);
Nursery Care Corporation v. Acevedo, etc., G.R. No. 180651,
July 30, 2014)]
52
FREE PRE-WEEK NOTES
TAXATION LAW
***10. In 2020, Eufronio a resident Filipino citizen,
received dividend income from a U.S.–based corporation
which owns a chain of motels in the East Coast, U.S.A.
The dividend remitted to Eufronio is subject to U.S.
withholding tax with respect of a non-resident alien like
Eufronio.
A. What will be your advice to Eufronio in order to
lessen the impact of possible double taxation on the
same income ?
SUGGESTED ANSWER: I would advise Eufronio that
he could choose whether to avail of a tax credit deducting the
withheld amount from his tax due in the Philippines or
deducting the withheld amount from his gross income in the
Philippines. [NIRC, Sec. 34 (1) (b)]
ALTERNATIVE ANSWER: I could advise Eufronio to
become a non-resident alien. In this maner he would not
be subject to Philippine income taxation on his dividend
income from a US based corporation.
This is so because a non-resident alien is to be taxed
only on his income derived from sources within the Philippines.
The dividend is considered as income from without.
11. What are the methods resorted to by a tax
treaty in order to eliminate double taxation ?
SUGGESTED ANSWER: The methods are the:
First Method: The tax treaty sets out the respective rights
to tax by the state of source or situs and by the state of
residence with regard to certain classes of income or capital.
In some cases, an exclusive right to tax is conferred on one of
the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is
limited.
Second Method: The state of source is given a full or
limited right to tax together with the state of residence. In this
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
53
case, the treaty makes it incumbent upon the state of
residence to allow relief in order to avoid double taxation.
Two methods of relief are used under the second method:
a. Tax exemption method (using the deduction method).
The income or capital which is taxable in the state of source or
situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate
of tax applicable to the taxpayer’s remaining income or capital.
(This may be done using the tax deduction method which
allows foreign income taxes to be deducted from gross
income, in effect exempting the payment from being further
taxed.) (Commissioner of Internal Revenue v. S.C. Johnson
and Son, Inc., G.R. No. 127105, June 25, 1999)
Tax deduction method is a subtraction from income
for tax purposes, or an amount that is allowed by law to
reduce income prior to the application of the tax rate to
compute the amount of tax which is due.
A tax deduction reduces the income that is subject to
tax in order to arrive at taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G.R.
No. 159647, April 15, 2005)
b. The credit method. Although the income or capital
which is taxed in the state of source is still taxable in the state
of residence, the tax paid in the former is credited (deducted)
against the tax levied in the latter. (Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105,
June 25, 1999)
Tax credit generally refers to an amount that is subtracted
directly from one’s total tax liability, an allowance against the
tax itself, or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever
applicable – the income tax that is determined after applying
the corresponding tax rates to taxable income. (Commissioner
of Internal Revenue v. Central Luzon Drug Corporation, G.R.
No. 159647, April 15, 2005)
54
FREE PRE-WEEK NOTES
TAXATION LAW
Author’s comments. The reader should note that the
“double taxation” referred to is the valid type which is double
taxation in its general sense or indirect duplicate taxation.
Under this type, the two laws could validly be enforced
because there is no constitutional infirmity (as a result of the
absence for example of the same taxing authority that imposes
the tax) hence, there is collection of the two taxes imposing a
dual economic burden upon the taxpayer. Thus, the methods
described are for the purpose of eliminating if not easing the
economic burden of “double taxation.”
ESCAPE FROM TAXATION
***1. What is meant by shifting of the tax burden ?
What are the ways of shifting the burden of double
taxation ?
SUGGESTED ANSWER: Shifting the burden of
taxation means transferring the economic burden from the
one who pays the tax to another.
a. One way of shifting the economic burden of
the tax is to include the tax as part of the selling
price. The tax is not billed separately but included in
the selling price.
b. Another way is the method of listing the
price separately and defining taxable gross receipts
as the amount received less the amount of the tax
added. The tax is then billed separately. This
method merely avoids payment by the seller of a tax
on the amount of the tax. It is still the seller who is
subject to the tax and not the buyer. The additional
amount paid by the buyer is not payment for the tax
but payment for the purchase of the electric cables,
etc. (Phil. Acetylene v. Commissioner of Internal
Revenue, G.R. No. L-19707, August 17, 1967)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
55
***2. What are the taxes that may be shifted ?
SUGGESTED ANSWER: Indirect Taxes may be shifted.
Most business taxes are indirect taxes. Among such business
taxes are the following:
a.
franchise tax,
b.
contractor’s tax,
c.
value-added tax,
d.
documentary stamp taxes,
e.
excise taxes, and
f.
the percentage taxes.
***3. Upon whom does the impact of a tax fall ?
For purposes of refund why is it important to know
upon whom the impact of a tax lies ?
SUGGESTED ANSWER: The impact of a tax refers
to the statutory taxpayer. The person or entity stated in the
law who is liable for the tax.
Importance of knowing upon whom the impact of a tax
lies for refund purposes. The proper party to question or
seek a refund of, an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and who
paid the same even if he shifts the burden thereof to
another because once shifted, it is no longer in the nature
of a tax, but part of the purchase price or the cost of the
goods or services sold. [Silkair (Singapore) Pte, Ltd. v.
Commissioner of Internal Revenue, G.R. No. 166482,
January 25, 2012]
***4. What is meant by incidence of the tax ?
SUGGESTED ANSWER: The incidence of the tax
refers to the person or entity to whom the burden of the
indirect tax is shifted. The one who ultimately bears the
burden of the tax.
56
FREE PRE-WEEK NOTES
TAXATION LAW
A seller who is directly and legally liable for payment
of an indirect tax, such as the VAT on goods and services
is not necessarily the person who ultimately bears the
burden of the same tax. It is the final purchaser or
consumer of such goods or services who although not
directly and legally liable for the payment thereof,
ultimately bears the burden of the tax.
[Context
Corporation v. Commissioner of Internal Revenue, 433
SCRA 376 (2004)]
***5. “A” sold electric cables, etc. to the NEA, a
government corporation granted an exemption from all
taxes under its charter. Is the sale taxable? Suppose
the sales tax is shown in the invoices as billed or
chargeable to the said buyer, would your conclusion
be the same ? Explain.
SUGGESTED ANSWER: Yes, the sale is taxable. The
sales tax is a tax on the seller and not on NEA, the buyer,
hence the buyer’s exemption does not flow to the seller.
Yes. My conclusion would still be the same although the
sales tax is billed to NEA in the invoice. Sales taxes are
indirect taxes, the economic burden of which may be shifted
to the buyer is of no moment. The method of listing the price
separately and defining taxable gross receipts as the amount
received less the amount of the tax added merely avoids
payment by the seller of a tax on the amount of the tax. It is
still the seller who is subject to the tax and not the buyer. The
additional amount paid by the buyer NEA is not payment for
the tax but payment for the purchase of the electric cables,
etc. (Phil. Acetylene v. Commissioner of Internal Revenue,
G.R. No. L-19707, August 17, 1967)
***6. GASOLINA Corporation is a domestic
corporation engaged in the business of importing,
refining and selling petroleum products. During the
period from September 1, 2020 to December 31,
2020, GASOLINA Corporation imported 225 million
liters of Jet A-1 aviation fuel and paid the excise taxes
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
57
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, 2020, to
December 31, 2020. GASOLINA Corporation did not
pass on to the international carriers the excise taxes it
paid on the importation of petroleum products.
On June 25, 2021, GASOLINA 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 lnternal Revenue,
will you grant GASOLINA Corporation’s administrative
claim for refund or issuance of tax credit certificate.
Explain your answer.
SUGGESTED ANSWER: Yes. GASOLINA Corporation
as the statutory taxpayer is entitled to refund but only up to the
extent of the 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.
The excise tax on petroleum products is a tax on
property; hence, the exemption from the excise tax expressly
granted under Section 135 of the NIRC, in favor of
international carriers, must be construed in favor of the
petroleum products on which the excise tax was initially
imposed.
Accordingly, the excise taxes that Wreck paid on its
importation of petroleum products subsequently sold to
international carriers and foreign registries for their use or
consumption outside the Philippines were illegal and
erroneous, and should be credited or refunded to
GASOLINA in accordance with Section 204 of the NIRC.
FREE PRE-WEEK NOTES
TAXATION LAW
58
(Chevron Philippines, Inc. v. Commissioner of Internal
Revenue, G.R. No. 210836, September 1, 2015)
***7. Define tax avoidance.
SUGGESTED ANSWER: Tax avoidance is the
exploitation by the taxpayer of legally permissible alternative
rates or methods of assessing taxable property or income in
order to reduce or entirely avoid tax liability. Example:
Availing of all deductions allowed by law or refraining from
engaging in activities subject to tax.
***8. What is meant by tax evasion?
SUGGESTED ANSWER: A scheme used outside of
lawful means and when availed of, usually subjects the
taxpayer to further or additional administrative, civil or
criminal liabilities. (Commissioner of Internal Revenue v.
The Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188,
September 14, 2004)
A term that connotes fraud through the use of
pretenses and forbidden devices to lessen or defeat taxes.
(Yutivo Sons Hardware Company v. Court of Tax Appeals,
1 SCRA 160)
***9. What are the factors integrated in tax evasion?
SUGGESTED ANSWER: The factors are:
a. The end to be achieved, i.e. the payment of less
than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
b. An accompanying state of mind which is described
as being “evil,” in “bad faith,” “willfull,” or “deliberate and
not accidental”; and
c. A course of action or failure of action which is
unlawful. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188,
September 14, 2004)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
59
10. As forms of escape from taxation, we hear of
“tax evasion” and “tax avoidance.” Differentiate between
them and give an instance of each.
SUGGESTED ANSWER: The following are the
distinctions between tax avoidance and tax evasion:
a. Means and methods used. Tax avoidance uses
means allowed under the law while tax evasion uses
means outside the law.
b. Legality. Tax avoidance is legal while tax evasion
is illegal.
c. Validity. Tax avoidance is valid while tax evasion
is invalid.
d. Effect. Tax avoidance is minimization of taxes
while tax evasion almost always results in absence of tax
payments.
e. Penalties. Tax avoidance does not result to any
penalties while tax evasion warrants the imposition of civil,
administrative and criminal penalties.
An example of tax evasion is indicating in the contract
of sale of real property the zonal valuation which is lower
than the actual selling price and the reporting the said zonal
value in the capial gains tax returns for purposes of taxation.
An example of tax avoidance is spreading a
P500,000.00 donation over a period of two calendar years
in order to avail of the tax exemption of the first and second
P250,000.00 donation.
***11. Does resort to tax-saving devices constitute
fraud under our tax law? Explain your answer.
SUGGESTED ANSWER: No. There is fraud when there
is a deliberate intention, employing means outside the law, to
deprive the government of its right to collect taxes.
FREE PRE-WEEK NOTES
TAXATION LAW
60
Resort to tax-saving devices does not constitute fraud
so long as legally permissible means and the method used by
the taxpayer is in good faith and at arms length.
(Commissioner of Internal Revenue v. The Estate of Benigno
P. Toda, Jr., etc., G.R. No. 147188, September 14, 2004)
This is so because a taxpayer has the legal right by
means permitted by law to:
a.
decrease the amount of what could be his taxes,
or
b.
altogether avoid them. (Delpher Trades Corp. v.
Intermediate Appellate Court, 157 SCRA 349,
arrangement and numbering supplied)
***12. Lucky V Corporation (Lucky) owns a 10-storey
building on a 2,000 square meter lot in the City of Makati.
It sold the lot and building to Rainier for P80 million. One
month after, Rainier sold the lot and building to Healthy
Smoke Company (HSC) for P200 million, Lucky filed its
annual return and declared its gain from the sale of the
lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that
two months prior to the sale of the properties to Rainier,
Lucky received P40 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 Luckyc? Explain.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
61
SUGGESTED ANSWER: Yes. The BIR is correct in
assessing the taxes on Lucky.
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.
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. (Commissioner of Internal Revenue v.
The Estate of Benigno P. Toda, Jr., etc., G.R. No. 147188,
September 14, 2004, 438 SCRA 290)
EXEMPTION FROM TAXATION
**1. What is meant by exemptions from taxation ?
SUGGESTED ANSWER: Exemption from taxation is
the act of the State in divesting itself of its prerogative to
collect taxes upon certain subjects and objects of taxation.
**2. Can a tax exemption be revoked? Why?
SUGGESTED ANSWER: Yes. A tax exemption may
be revoked because it is an act of liberality which could be
taken back by the Government.
Since taxation is the rule and exemption therefrom the
exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. (Mactan Cebu International
Airport Authority v. Marcos, 261 SCRA 667)
62
FREE PRE-WEEK NOTES
TAXATION LAW
There is no vested right in a tax exemption, more so
when the latest expression of legislative intent renders its
continuance doubtful.
Flowing from the basic precept of constitutional law that
no law is irrepealable, Congress in the legitimate exercise of
its lawmaking powers, can enact a law withdrawing a tax
exemption just as efficaciously as it may grant the same.
[Republic v. Caguioa, 536 SCRA 193 (2007)]
3. Are there any restrictions on the power to
revoke tax exemptions ? If so, what are they?
SUGGESTED ANSWER: Yes. The following are the
restrictions:
a. Non-impairment clause. Where the exemption was
granted to private parties based on material consideration of
a mutual nature, which then becomes contractual and is
covered by the non-impairment clause of the Constitution.
(Mactan Cebu International Airport Authority v. Marcos, 261
SCRA 667)
“A municipal franchise once granted as a contract
cannot be altered or amended except by actual consent of
the parties concerned.” (Darmouth College v. Woodward,
4 Wheat, 578)
b. Adherence to form. If the exemption is granted by
the Constitution, its revocation may be effected through
constitutional amendment only.
Where the tax exemption grant is in the form of a
special law and not by a general law even if the terms of
the general act are broad enough to include the codes in
the general law unless there is manifest intent to repeal or
alter the special law. (Commissioner of Internal Revenue v.
Court of Appeals, 207 SCRA 487)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
63
EQUITABLE RECOUPMENT
**What is the doctrine of equitable recoupment? Is
it applicable in our jurisdiction?
SUGGESTED ANSWER: The doctrine of equitable
recoupment holds that where the refund of a tax illegally or
erroneously collected or overpaid by a taxpayer is barred
by prescription, a tax presently being assessed against a
taxpayer may be recouped or set-off against the tax whose
refund is now barred by prescription. (U.S.T. v. Collector,
104 Phil. 1062)
The doctrine is not applicable in the Philippines
because of the lifeblood theory. Taxpayers would become
lazy in paying taxes because they could offset the alleged
illegally or erroneously collected or overpaid taxes. The
same could also be said of tax collectors relative to their
duty to collect taxes because they know that the taxpayers
would not pay anyway because of the offset with previous
illegally or erroneously collected or overpaid taxes. (Ibid.)
PROHIBITION ON COMPENSATION
AND SET-OFF
***1. May taxes be the subject of set-off or
compensation ? Explain.
SUGGESTED ANSWER: No. Taxes are not contractual
obligation but arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which the
personal consent of the individual taxpayer is not required.
(Republic v. Mambulao Lumber Co., 4 SCRA 622)
The government and the taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is
no such a debt, demand, contract or judgment as is allowed
64
to be set-off. (Caltex Philippines, Inc. v.
Audit, 208 SCRA 726, 756)
FREE PRE-WEEK NOTES
TAXATION LAW
Commission on
NOTE NOT PART OF THE ANSWER: The foregoing
doctrine finds application only to national taxes because of
the lifeblood doctrine. Absence or insufficiency of revenues
from national taxes might lead to the demise of the
national government.
The doctrine does not find application to local
government taxation because the death of a local
government unit does not result to the demise of the
national government.
***2. Hansel obtained a judgment for a sum of money
against the municipality of Mabini. The judgment has
become final although execution has not issued. Upon
receiving an assessment for municipal sales taxes from
the Municipal Treasurer, Hansel executed a partial
assignment of his judgment sufficient to cover the
assessment in favor of the Municipality. May the
Municipal Treasurer validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The Municipal Treasurer
validly accept the assignment.
The parties in this case are mutually debtors and
creditors of each other, and since both of the claims became
overdue, demandable and fully liquidated, compensation takes
place by operation of law. (Domingo v. Garlitos, 8 SCRA 443)
NOTE NOT PART OF THE ANSWER: The doctrine
finds application only to local government taxation because
the death of a local government unit does not result to the
demise of the national government.
The doctrine does not apply to national taxes because
of the lifeblood doctrine. Absence or insufficiency of
revenues from national taxes might lead to the demise of
the national government.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
65
COMPROMISE
*1. What is a compromise?
SUGGESTED ANSWER: A compromise is a contract
whereby the parties, through mutual agreement, make
reciprocal concessions, in order to avoid a litigation or put
an end to one already commenced. (CCP, Art. 2028)
*2. Distinguish compromise from abatement of taxes.
SUGGESTED ANSWER: The distinctions between
compromise and abatement of taxes are the following:
a. Grounds: The grounds for compromise are either
doubt as to the validity of the assessment or financial
incapacity to pay while the grounds for abatement are the
tax be unjustly or excessively assessed, or the
administration and collection costs do not justify the
amount due;
b. Effect: In compromise the tax is merely reduced
while in abatement the tax is cancelled.
TAX AMNESTY
**1. What is tax amnesty? Discuss briefly its
nature and purpose.
SUGGESTED ANSWER: A tax amnesty is an
absolute waiver by the government of its right to collect
what is due it. (ING Bank N.V., etc. v. Commissioner of
Internal Revenue, G.R. No. 167679, July 22, 2015) It refers
to the articulation of the absolute waiver by a sovereign of
its right to collect taxes and power to impose penalties on
persons or entities guilty of violating a tax law. (CS
Garment, Inc. v. Commissioner of Internal Revenue, G.R.
No. 182399, March 12, 2014)
It is in the nature of a tax amnesty that it partakes of
an absolute forgiveness or waiver of the Government of its
FREE PRE-WEEK NOTES
TAXATION LAW
66
rights to collect what otherwise would be due it, and in this
sense, prejudicial thereto. [Philippine Banking Corporation
(now Global Business Bank, Inc.) v. Commissioner of
Internal Revenue, 577 SCRA 366 (2009)]
Among the purposes of tax amnesty are the following:
a. To give tax evaders who wish to relent and are
willing to reform a chance to do so and thereby start with a
clean tax slate. (Ibid.)
Tax amnesty aims to grant a general reprieve to tax
evaders who wish to come clean by giving them an
opportunity to straighten out their records. (Ibid.)
b. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go
through the tedious process of a tax case. To avail of a tax
amnesty granted by the government, and to be immune
from suit on its delinquencies, the taxpayer must have
voluntarily disclosed his previously untaxed income and
must have paid the corresponding tax on such previously
untaxed income. (Bañas, Jr. v. Court of Appeals, G.R. No.
102967, February 10, 2000)
2. May a withholding tax agent avail of tax
amnesty? Why?
SUGGESTED ANSWER: No.
The claim of a taxpayer under a tax amnesty shall be
allowed when the liability involves the deficiency in
payment of income tax.
However, it must be disallowed when the taxpayer is
assessed on his capacity as a withholding tax agent
because the person who earned the taxable income was a
person other than the withholding agent. (LG Electronics
Philippines, Inc., G.R. No. 165451, December 03, 2014)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
67
**3. Distinguish a tax amnesty from a tax exemption.
SUGGESTED ANSWER: The distinctions between a
tax amnesty and tax exemption are as follows:
a. Tax amnesty is an immunity from all criminal, civil
and administrative liabilities arising from nonpayment of
taxes (People v. Castañeda, G.R. No. L-46881, September
15, 1988) while a tax exemption is an immunity from civil
liability only. It is an immunity or privilege, a freedom from
a charge or burden to which others are subjected. (Florer
v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods,
hence of retroactive application (Castañeda, supra) while a
tax exemption has prospective application.
CONSTRUCTION AND INTERPRETATION
OF TAX LAWS, RULES, AND
REGULATIONS
***1. How are grants of tax exemption construed
in our jurisdiction? What is the rationale behind the
principle? Explain.
SUGGESTED ANSWER: Statutes granting tax
exemptions are construed in stricissimi juris against the
taxpayer and liberally in favor of the taxing authority. A
claim of tax exemption must be clearly shown and based
on language in law too plain to be mistaken. Otherwise
stated, taxation is the rule, exemption is the exception.
(Quezon City v. ABS-CBN Broadcasting Corporation, G.R.
No. 166408, October 6, 2008)
The rationale behind the principle of stricissimi juris or
strict interpretation of statutory provisions granting tax
exemptions or deductions against the claimant are:
68
FREE PRE-WEEK NOTES
TAXATION LAW
a. To minimize differential treatment and foster
impartiality, fairness and equality of treatment among
taxpayers. (Ibid.)
b. Lifeblood theory. Taxes are what we pay for civilized
society. (Mactan Cebu International Airport Authority v.
Marcos, 261 SCRA 667) Without the revenues generated from
taxation the very existence of the government may be
imperiled because thre is no wherewithal to perform the
fuctions for which it was created. Hence, reduction in the form
of exemptions are strictly construed.
c. Taxation is a high prerogative of sovereignty whose
relinquishment is never presumed. (Luzon Stevedoring
Corporation v. Court of Appeals, 163 SCRA 647)
The State cannot be deprived of this most essential
power and attribute of sovereignty by vague implications of
law and he who claims an exemption must be able to
justify his claim by the clearest grant of statute. [Jaka
Investments Corporation v. Commissioner of Internal
Revenue, 626 SCRA 16 (2010)]
2. Give an illustration where there is no construction
in favor of the government.
SUGGESTED ANSWER: Where grant of exemption
is clear and unambiguous, such as the exemption granted
under the EPZA Law, there is no construction in favor of
the government.
There is neither logic nor need to cast a speck of
uncertainty on a doubt-free situation to resolve the resulting
forced question in favor of the government. The disposition
arises not out of blind solicitude towards the concerns of
business, but from the duty to affirm and enforce a crystalclear legislative policy and initiative intent.
Indeed, the revenue collectors of the government should
be cautious before attempting to gut away at concessions the
State itself has deemed worthy of award to deserving
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
69
investors. It is unsound practice and uncouth behavior to
invite guests to dinner at home, then charge them for the
use of the silverware before allowing them to dine.
(Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G.R. No. 144440, September 1, 2004)
***3. The rule that tax exemptions are to be strictly
construed against the taxpayer has certain exceptions.
What are they?
SUGGESTED ANSWER: The exceptions or instances
where tax exemptions are to be liberally construed in favor
of the taxpayer and strictly against the taxing authority are
the following:
a. When the statute granting exemption provides for
liberal construction thereof.
b. In case of special taxes relating to special cases
and affecting only special classes of persons.
c. If exemptions refer to the public property.
d. In cases of exemptions granted to charitable and
educational institutions or their property. (Cooley)
e. In cases of exemptions in favor of a government
political subdivision or instrumentality. (Maceda v.
Macaraig, Jr., 197 SCRA 771)
f. A tax refund based on solutio indebeti.
***4. State the rule on the construction or
interpretation of laws imposing taxes. What is the
rationale behind it?
SUGGESTED ANSWER: In case of doubt, tax laws must
be construed strictly against the State and liberally in favor of
the taxpayer. (Commissioner of Internal Revenue v. The
Philippine American Accident Insurance Company, Inc.,
G.R. No. 141658, March 18, 2005)
70
FREE PRE-WEEK NOTES
TAXATION LAW
This is so because taxes, as burdens which must be
endured by the taxpayer, should not be unduly exacted or
presumed to go beyond what the law expressly and clearly
declares. (Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)
***5. Why is prescription in civil cases, involving
the collection of internal revenue taxes, construed
strictly against the government and liberally in favor of
the taxpayer ?
SUGGESTED ANSWER: Our tax law provides a statute
of limitations in the collection of taxes for the purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment.
Thus, the law on prescription, being a remedial measure,
should be liberally construed in favor of the taxpayer in order to
afford such protection. (Commissioner of Internal Revenue v.
BF Goodrich, Phils. Inc., G.R. No. 104171, February 24, 1999)
“
As a corollary, the exceptions to the law on prescription should
perforce be strictly construed.” (Ibid.)
“A waiver of the statute of limitations under the NIRC, to a
certain extent, is a derogation of the taxpayers’ right to security
against prolonged and unscrupulous investigations and must
therefore be carefully and strictly construed.” (Philippine
Journalists, Inc. v. Commissioner of Internal Revenue, G.R.
No. 162852, December 16, 2004)
***6. Why are periods of prescription in criminal
cases, involving tax offenses punishable under the
National Internal Revenue Code (NIRC) as amended,
construed strictly in favor of the government?
SUGGESTED ANSWER: Statutes of limitations in
criminal cases constitute a surrender by the sovereign of its
right to prosecute. Hence, they receive a strict construction in
favor of the Government. (Lim v. Court of Appeals, G.R. No.
48134-37, October 18, 1990)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
71
***7. A law was passed condoning unpaid real
property taxes. Will this law benefit the taxpayers who
have been prompt in paying their taxes? Explain.
SUGGESTED ANSWER: No. The condonation is in
the nature of tax exemptions which must be strictly
construed against the claimant.
Since there is no showing in the problem of any
provision of the law on condonation expressly extending
the benefit of condonation to those who have been prompt
in paying their taxes, then they could not benefit from it.
***8. Does exemption granted by law from payment
of all taxes carry with it automatically exemption from
payment of customs duties and license fees?
SUGGESTED ANSWER: Yes but only with regard to
the payment of customs duties. There is no exemption
from the payment of license fees. When the law is clear
and unequivocal there is no need for the application of the
principle of stict interpretation against the taxpayer.
The exemption applies to “all taxes,” hence there is
no need for interpretation as “customs duties” are taxes.
Ubi lex non distinguit nec nos distinguire debemos (Where
the law does not distinguish, we should not distinguish). It
is clear in the problem that there is no distinction made as
to what kind of taxes the exemption refers to.
However, there should be no exemption from the
payment of license fees because they are not taxes. They
are imposed under police power not under the power of
taxation.
9. What is rule on the construction of revenue
regulations?
SUGGESTED ANSWER: Revenue regulations are
construed in the same manner as laws because they
partake of the nature of a law.
FREE PRE-WEEK NOTES
TAXATION LAW
72
In general, rules and regulations issued by administrative
or executive officers pursuant to the procedure or authority
conferred by law upon the administrative agency have the
force and effect or partake of the nature, of a statute.
Reason: Statutes express the policies, purposes,
objective, remedies and sanctions intended by the legislature
in general terms. The details and manner of carrying them out
are oftentimes left to the administrative agency entrusted with
their enforcement.
In the case of revenue regulations, it is the Secretary of
Finance who promulgates the same, upon recommendation of
the BIR commissioner. These regulations are the consequences
of a delegated power to issue legal provisions that have the
effect of law. (Commissioner of Internal Revenue v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003)
*What is the nature of our internal revenue law ?
Explain briefly.
SUGGESTED ANSWER: Our internal revenue law is
a. not political in character;
b. civil in nature, not subject to ex post fact law
prohibition;
c. not penal in character; and
d. not retroactive in its application.
JURISDICTION, POWER, AND FUNCTIONS
OF THE COMMISSIONER OF INTERNAL
REVENUE
**1. What are the purposes of the grant of power to
Commissioner of Internal Revenue to obtain information,
and to summon, examine and take testimony of persons?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
73
SUGGESTED ANSWER: The purposes for the grant
of the power are:
a. To ascertain correctness of any return.
b. To make a return where none has been made.
c. To determine the liability of any person for any
internal revenue tax.
d. To collect from any person liability for any internal
revenue tax.
e. To evaluate tax compliance. (NIRC of 1997, Sec.
5, 1st par., arrangement and numbering supplied)
**2. What is the extent of the authority of the
Commissioner of Internal Revenue to make or amend a
return?
SUGGESTED ANSWER: In case a person
a. fails to file a required return or other document at
the time prescribed by law, or
b. willfully or otherwise files a false or fraudulent
return or other document,
1)
the Commissioner shall make or
amend the return
a)
from his own knowledge
b)
and from such information as he can
obtain through testimony or otherwise, which
shall be prima facie correct and sufficient for all
legal purposes. [NIRC of 1997, Sec. 6 (B), 2nd
par., arrangement and numbering supplied]
**3. Relleve Corp. is a big manufacturer of industrial
products. It has several suppliers of raw materials. The
BIR suspects that some of the suppliers are not properly
reporting their income on their sales to Relleve Corp. The
74
FREE PRE-WEEK NOTES
TAXATION LAW
CIR therefore: a. Issued an access letter to Relleve Corp.,
to furnish the BIR information on sales and payments to
its suppliers on the alleged ground that the suppliers are
committing tax evasion. Relleve Corp. and the suppliers
have not been issued by the BIR letters of authority to
examine. Relleve Corp. believes that the BIR is on a
“fishing expedition” and comes to you for counsel. What
is your advice ?
SUGGESTED ANSWER: I would advise Relleve
Corp., to supply the BIR with the information desired.
The BIR is authorized under the NIRC of 1997 to
secure information even from persons who are not under
tax investigation.
The BIR Commissioner is allowed to investigate any
circumstance which led him to believe that the taxpayer had
taxable income larger than that reported. Necessarily, this
inquiry would have to be outside of the books because they
supported the return as filed. He may take the sworn
testimony of the taxpayer; he may take the testimony of third
parties; he may examine and subpoena; if necessary, traders’
and brokers’ accounts and books and the taxpayer’s books of
accounts. The Commissioner is not bound to follow any set of
patterns. The existence of unreported income may be shown
by any particular proof that is available in the circumstances of
the particular situation. (Commissioner of Internal Revenue v.
Hantex Trading Co., Inc., G.R. No. 136975, March 31, 2005)
It was once held that where the records of the taxpayer
are
manifestly
inaccurate
and
incomplete,
the
Commissioner may look to other sources of information to
establish income made by the taxpayer during the years in
question. (Ibid) .
*4. Rovick, Inc., sold a real property in Polangui,
Albay to Cathy Cat Corporation. The property has been
classified as residential and with a zonal valuation of
P1,000 per square meter. The capital gains tax was paid
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
75
based on the zonal value. The Revenue District Officer
(RDO), however, refused to issue the Certificate
Authorizing Registration for the reason that based on his
ocular inspection, the property should have a higher
zonal valuation determined by the Commissioner of
Internal Revenue because the area is already a commercial
area. Accordingly, the RDO wanted to make a recomputation
of the taxes due by using the fair market value appearing
in a nearby bank’s valuation list which is practically
double the existing zonal value. The RDO also wanted to
assess a donor’s tax on the difference between the selling
price based on the zonal value and the fair market value
appearing in a nearby bank’s valuation list.
a. Does the RDO have the authority or discretion
to unilaterally use the fair market value as the basis for
determining the capital gains tax and not the zonal
value as determined by the Commissioner of Internal
Revenue? Reason Briefly.
SUGGESTED ANSWER: No. The RDO has no authority
to use a fair market value other than that prescribed in the Tax
Code. The power to prescribe the fair market value (zonal
valuation) is lodged with the Commissioner of Internal Revenue.
The fair market value prescribed for the computation of
any internal revenue tax shall be, whichever is higher of: (1)
the fair market value as determined by the Commissioner
(referred to as zonal value); or (2) the fair market value as
shown in the schedule of values of the provincial and city
assessors (FMV per tax declaration). [NIRC, Sec. 6(E)] The
use of the fair market value appearing in a nearby bank’s
valuation list, therefor, is not allowed for purposes of computing
internal revenue taxes.
b. Should the difference in the supposed taxable
value be legally subject to donor’s tax? Reason briefly.
SUGGESTED ANSWER: No. The difference in the
supposed taxable value cannot be legally subject to the
76
FREE PRE-WEEK NOTES
TAXATION LAW
donor’s tax, because the use of a fair market value other
than that prescribed by the Tax Code is not allowed for
computing any internal revenue tax. [NIRC, Section 6(E)]
***5. 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. No. 1405 (Secrecy of Bank Deposits Law)?
SUGGESTED ANSWER: Yes. The Commissioner of
Internal Revenue has the power to inquire into the bank
deposits of a taxpayer in the following instances:
a. Where the taxpayer has
Commissioner to make an inquiry;
authorized
the
b. Where the inquiry is made in decedent’s bank
account to determine his gross estate.
c. Where the inquiry is made in the deposit account of
any taxpayer who has filed an application for compromise
of his tax liability by reason of financial incapacity to pay
his tax liability. [NIRC of 1997, Sec. 6 (F), 1st par., as
amended by Rep. Act No. 10021, paraphrasing supplied]
d. Where the inquiry is made in the deposit account of
a specific taxpayer or taxpayers subject of a request for the
supply of tax information from a foreign tax authority.
[Ibid., Sec. 6 (F), 3rd par., as amended by Rep. Act No.
10021, paraphrasing supplied]
The power of the Commissioner in the instances
stated above does not conflict with R.A. 1405 because the
Commissioner’s power to inquire into bank deposits
authorized under the NIRC of 1997 constitutes exceptions
to R.A. 1405.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
77
RULE-MAKING AUTHORITY OF THE
SECRETARY OF FINANCE
***1. What is the extent of the rule making power
of administrative taxing authorities ?
SUGGESTED ANSWER:
a. The Secretary of Finance, upon recommendation of
the Commissioner of Internal Revenue, shall promulgate
all useful rules and regulations for the effective
enforcement of the provisions of the NIRC. (NIRC of 1997,
sec. 244) The Bureau of Internal Revenue is also
empowered to issue rules and opinions without need of
Secretary of Finance approval.
The issuance of revenue regulations is authorized by
statute and as such has the force and effect of law.
(Arches v. Belosillo, 20 SCRA 32) In case of conflict
between a law and an administrative regulation, the law
prevails (Wise & Co., Inc. v. Meer, etc., 78 Phil. 655); and
b. The Secretary of Finance shall, upon the
recommendation of the Commissioner of Customs, promulgate
the necessary rules and regulations for the effective
implementation of the Customs Modernization and Tariff Act.
(CMTA, Sec. 1800)
*2. Discuss the power of the Commissioner of
Internal Revenue (CIR) to interpret tax laws and to
decide tax cases.
SUGGESTED ANSWER: The power to interpret the
provisions of the National Internal Revenue Code of 1997,
as amended, and other tax laws shall be under the
exclusive and original jurisdiction of the CIR, subject to
review by the Secretary of Finance.
“The power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the
FREE PRE-WEEK NOTES
TAXATION LAW
78
Tax Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals.” [Confederation for Unity, Recognition and
Advancement of Government Employees (COURAGE) v.
Commissioner, etc., G.R. No. 213446, and companion cases,
July 03, 2018]
“The CIR’s exercise of its power to interpret tax laws
comes in the form of revenue issuances, which include
RMOs that provide ‘directives or instructions; prescribe
guidelines; and outline processes, operations, activities,
workflows, methods and procedures necessary in the
implementation of stated policies, goals, objectives, plans
and programs of the Bureau in all areas of operations, except
auditing.” (Ibid.) “These revenue issuances are subject to the
review of the Secretary of Finance.
3. What are the two kinds of rules that may be
adopted by administrative taxing authorities? Illustrate
each.
SUGGESTED ANSWER:
a. Legislative rule. A legislative rule is in the nature of
the subordinate legislation, designed to implement a
primary legislation by providing the details thereof.
(Commissioner of Internal Revenue v. Court of Appeals,
261 SCRA 236, 246)
This is also known as a quasi-legislative rule.
1) Revenue Regulations (RRs) are legislative
rules. Revenue Regulations (RRs) are likewise issued
by the Commissioner of Internal Revenue but always
subject to the approval of the Secretary of Finance.
They are legislative rulings which necessitate hearing
and publication.
RRs are issuances signed by the Secretary of
Finance, upon recommendation of the Commissioner of
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
79
Internal Revenue, that specify, prescribe or define rules
and regulations for the effective enforcement of the
provisions of the National Internal Revenue Code (NIRC)
and related statutes. (www.bir.gov.ph); and
b. Interpretative rules. Interpretative rules are designed
to provide guidelines to the law which the administrative
agency is in charge of enforcing. (Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance
Secretary, et al., 238 SCRA 63, 69)
**4. What are the kinds of BIR interpretative rulings?
SUGGESTED ANSWER:
a. Rulings of first impression. These refers to the
rulings, opinions and interpretations of the Commissioner
of Internal Revenue with respect to the provisions of the
NIRC and other tax laws without established precedents.
Provided, however, that the term shall include reversal,
modification or revocation of any existing ruling. [RAO No.
1-99, [Sec. 3 (a)]
b. Rulings reiterating established precedents as
delegated by the Commissioner of Internal Revenue. These
shall refer to mere reiteration of previous rulings, opinions and
interpretations of the Commissioner, as delegated to duly
authorized internal revenue officers. [Ibid.,, Sec. 3 (b)]
***5. XYZ Corporation, an export-oriented company,
was able to secure a Bureau of Internal Revenue (BIR)
ruling in June 2020 that exempts from Tax the importation
of some of its raw materials. The ruling is of first
impression, which means the interpretations made by the
Commissioner of Internal Revenue is one without
established precedents. Subsequently, however, the BIR
issued another ruling which in effect would subject to tax
such kind of importation. XYZ Corporation is concerned
that said ruling may have a retroactive effect, which
means that all their importations done before the
issuance of the second ruling could be subject to tax.
FREE PRE-WEEK NOTES
TAXATION LAW
80
a. What are BIR rulings?
SUGGESTED ANSWER: BIR rulings are official
positions of the Bureau on inquiries of taxpayers, who
request clarification on certain provisions of the National
Internal Revenue Code (NIRC), other tax laws, or their
implementing regulations, usually for the purpose of
seeking tax exemptions. Rulings are based on particular
facts and circumstances presented and are interpretations
of the law at a specific point in time.
The Bureau also issues rulings to answer written
questions of individuals and juridical entities regarding their
status as taxpayers and the effects of their transactions for
taxation purposes. (RMO No. 9-2014, Sec. 1)
b. What is required to make a BIR ruling of first
impression valid ?
SUGGESTED ANSWER:
A BIR ruling of first
impression to be valid must not be against the law and it
must be issued only by the Commissioner of Internal
revenue. (Philippine Bank of Communications v. CIR, 302
SCRA 241)
Rulings of first impression shall be submitted together
with their dockets to the Secretary of Finance and shall not
be valid unless reviewed and approved by the Secretary of
Finance. [RAO No. 1-99, Sec. 4 (a)]
***6. The Commissioner of Internal Revenue
issued a BIR ruling to the effect that the transaction is
liable to income tax and value added tax. Upon receipt
of the ruling, a taxpayer does not agree thereto. What
is his proper remedy ?
SUGGESTED ANSWER: File an appeal to the
Secretary of Finance within thirty (30) days from receipt
thereof.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
81
7. In what instances do Revenue Rulings and
Regulations have retroactive effect even if prejudicial
to the taxpayer ?
SUGGESTED ANSWER: The following are the
instances when Revenue Rulings and Regulations would
have retroactive effect even if prejudicial to the interest of
the taxpayer:
“a. Where the taxpayer deliberately misstates or omits
material facts from his return or on any document required
of him by the Bureau of Internal Revenue.
b. Where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from
the facts on which the ruling is based; or
c. Where the taxpayer acted in bad faith.”
1997, Sec. 246)
(NIRC of
**8. Due to uncertainty whether or not a new tax law
is applicable to printing companies, DEF Printers
submitted a legal query to the Bureau of Internal
Revenue on that issue. The BIR issued a ruling that
printing companies are not covered by the new law.
Relying on this ruling, DEF Printers did not pay said tax.
Subsequently, however, the BIR reversed the ruling and
issued a new one stating that the tax covers printing
companies. Could the BIR now assess DEF Printers for
back taxes corresponding to the years before the new
ruling?
SUGGESTED ANSWER: No. The reversal would
prejudice the taxpayer who acted in good faith upon the
previous BIR ruling.
Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult
question of law. Absent fraud, bad faith or misrepresentation,
the reversal of a specific BIR, should apply prospectively.
FREE PRE-WEEK NOTES
TAXATION LAW
82
(Banco de Oro v. Republic of the Philippines, G.R. No.
198756, August 16, 2016, paraphrasing supplied)
ALTERNATIVE ANSWER: Yes. “The general rule is
that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents.” [The City of Davao, etc. v.
The intestate estate of Amado S. Dalisay, etc., G.R. No.
207791, July 15, 2015) The foregoing doctrine finds
application specially in the case of taxation where the
revenues collected is the lifeblood upon which the
government depends for its continued existence.
The Commissioner of Internal Revenue is not bound
by the ruling of his predecessors. He could reverse the
same. To the contrary, the overruling of decisions is
inherent in the interpretation of laws. (Misamis Oriental
Association of Coco Traders, Inc. v. Secretary of Finance,
238 SCRA 63, 69)
NOTE NOT PART OF THE ANSWER: Where the
alternative answer finds application, the taxpayer should
not be subject to the payment of interests, fines,
surcharges, and other penalties for the late payment of the
deficiency taxes. After all, the taxpayers should not be
penalized for their reliance in good faith upon the previous
interpretation.
ii. INCOME TAX
DEFINITION AND NATURE
1. What is an income tax? Give an example.
SUGGESTED ANSWER: It is a national tax on the net or
the gross income realized in a taxable year arising from
property, professions, trades and offices. (Fisher v. Trinidad,
43 Phil. 981) It is subject to withholding. (Commissioner of
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
83
Internal Revenue v. City-Trust Investment Phils., Inc., G.R. No.
138786, September 27, 2006 and companion case)
Example of an income tax. The tax imposed upon the
pertinent items of gross income derived by a resident
citizen from conduct of trade or business or the exercise of
a profession. [NIRC of 1997, Sec. 24 (A) (1) (a) in relation
to Sec. 31, as amended by TRAIN and Sec. 32 (A) (2)]
2. What is the nature of income tax?
SUGGESTED ANSWER: It is an excise tax and not a
tax on property. It is an excise tax because it is a tax on
the privilege to earn income.
The theory that a tax on income is legally or
economically a tax on its source is no longer tenable.
(Graves v. New York, 306 U.S. 466)
NOTE NOT PART OF THE ANSWER: The reader
should not confuse the nature of income tax with the
nature of income tax laws or nature of income taxation.
They are different concepts altogether.
***3. Discuss the meaning of the schedular
system of taxation.
SUGGESTED ANSWER: A system employed where
the income tax treatment varies and is made to depend on
the kind or category of taxable income of the taxpayer.
(Tan v. Del Rosario, Jr., 237 SCRA 324, 331)
It is a system which itemizes the different incomes
and provides for varied percentages of taxes, to be applied
thereto.
Sec. 24 (A) (2) (a), NIRC of 1997, as amended by the
TRAIN, provides for the application of the schedular
system of income taxation to individuals. There is adoption,
effective January 1, 2018 until December 31, 2022, of a
progressive rate which taxes at 20% taxable incomes
which goes beyond P250,000.00, progressively increasing
84
FREE PRE-WEEK NOTES
TAXATION LAW
up to a high of 35% for taxable incomes exceeding
P8,000,000.00.
***4. To which system would you say the method
of taxation under the National Internal Revenue Code
belongs ?
SUGGESTED ANSWER: The National Internal Revenue
Code has adopted the global system for corporations and the
schedular system of taxation for individuals.
Thus, it is sometimes referred to as the semischedular and semi-global tax system.
ALTERNATIVE ANSWER: The system of taxation to
which the National Internal Revenue Code belongs is
known as the semi-schedular and the semi-global system.
The apparent intent of current amendatory laws to the
income tax law is to maintain, by and large, the global
treatment on taxable corporations and to increasingly shift
the income tax system toward the schedular approach in
the income taxation of individual taxpayers. (Tan v. Del
Rosario, Jr. 237 SCRA 324, 331)
GENERAL PRINCIPLES
**1. What are the general principles of income
taxation ?
SUGGESTED ANSWER: The general principles are:
a. A citizen of the Philippines residing therein is
taxable on all income derived from sources within and
without the Philippines;
b. A nonresident citizen is taxable only on income
derived from sources within the Philippines;
c. An individual citizen of the Philippines who is working
and deriving income abroad as an overseas contract worker
is taxable only on income from sources within the Philippines:
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
85
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;
d. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
e. A domestic corporation is taxable on all income
derived from sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines. (NIRC
of 1997, Sec. 23, arrangement and numbering supplied)
**2. Currently we hear of the system of income
taxation by basing the tax on the gross rather than on
the net income. What do you understand by “gross
income taxation”?
SUGGESTED ANSWER: The gross income taxation
in its general sense is the taxation of all income received
without any deduction. The tax base, in gross income
taxation in its broad sense, is the total gross income of
an individual or corporation during the taxable year without
any deductions allowed.
The system of gross compensation income is
considered valid because taxpayers may be classified into
different categories. It is enough that the classification
must rest upon substantial distinctions that make for real
differences.
Taxpayers who are recipients of compensation
income are apart as a class because they are not entitled
to make deductions as they practically have no overhead
expense. On the other hand, in the case of professionals
in the practice of their calling and businessmen, there is no
86
FREE PRE-WEEK NOTES
TAXATION LAW
uniformity in the costs or expenses necessary to produce
their income. It would not be just to disregard the
disparities by giving all of them zero deductions and
indiscriminately impose an all alike the same tax rates on
the basis of gross income. (Sison, Jr. v. Ancheta, 130
SCRA 654, 665-5)
**3. In general, on what does the taxability of income
depend as regards individuals and corporations? Explain
your answer, citing the incomes taxable under our Income
Tax Law.
SUGGESTED ANSWER: In general, the taxability of
income, as regards individuals and corporations, depends
upon the:
a. Domiciliary theory. The location where the income
earner resides is the situs of taxation for the reason that it
is there where he is given protection; hence, he must
support it.
b. Nationality theory. The country where the income
earner is a citizen is the situs of taxation because a citizen
is given protection by his country no matter where he is
found or no matter where he earns his income. He is
therefore obligated to support that country, in exchange for
the protection he receives.
The principle of mobilia sequuntur personam may
likewise apply as income taxation laws of his country follow
the citizen no matter where he is found. This applies to
resident citizens on their incomes derived from sources
without the Philippines.
c. Source. The country which is the source of the
income is where the activity that produced the income took
place. This is the situs of taxation and not the place where
the money originated. The money may come from one
place but if that is not where the activity that produced the
income, then it is not the source of the income for tax
purposes.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
87
The important factor which determines the source of
income of personal services is not the residence of the
payor, or the place where the contract for service is entered
into, or the place of payment, but the place where the
services were actually performed.
Prescinding from the above, the basis for taxability of
income depends on the following:
a. As regards individuals, the taxability of income
depends upon:
1) citizenship; or
2) residence of the recipient; or
3) the place where such income is derived.
b. With respect to corporations, the taxability of
income depends upon;
1) whether the corporation is a domestic or a
foreign corporation;
2) whether the foreign corporation is a resident
or nonresident.
Author’s observation. The question based on an
actual Bar question is unfair. It should be noted that the
answer is rather lengthy and could not be written within the
time limitation for answering Bar questions. It is suggested
that the reader should be able to come up with a short
summarization.
***4. Atty. Mary created an irrevocable trust in favor
of her two minor children. The trust stipulates that 50% of
the net income should be distributed yearly to the
children, share and share alike, the balance to accumulate
for eventual distribution to the children at age 25. The
income for 2020 was P1 million.
a) How will the income of the trust be taxable?
88
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: The trust created by Atty.
Mary is irrevocable in character, but only 50% of the income is
distributable. In this case the amount that is not distributed is
not allowed to be deductible from the gross income of the trust
in order to arrive at income subject to tax.
The amount that is not distributed, is taxed in the
same manner as individual citizens and resident alien
individuals. It shall be subject to the same exclusions,
itemized deductions and tax rates with the following
qualifications:
1) allowed to use standard optional deduction,
[NIRC of 1997, Sec. 34 (L)]
2) in addition to the itemized deductions the
trust may deduct
(a) the amount of income for the taxable
year distributed currently by the fiduciary to the
beneficiaries [Ibid., Sec. 61 (A)];
(b) the amount of the income collected
by the guardian of an infant which is to be held
or distributed as the court may direct (Ibid.);
(c) the amount of income properly
credited to the beneficiaries. [Ibid., Sec. 61 (B)]
b) Will your answer remain the same if the trust
established by Atty. Mary is revocable ?
SUGGESTED ANSWER: No. The income which is
part of a revocable trust shall be included in computing the
net income of Atty. Mary, the grantor. (NIRC of 1997, Sec.
63)
c) When is a trust considered revocable ?
SUGGESTED ANSWER: A trust is considered as
revocable where at any time the power to revest in the
grantor title to any part of the corpus of the trust is vested
(1) in the grantor either alone or in conjunction with any
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
89
person not having a substantial adverse interest in the
disposition of such part of the corpus or the income
therefrom, or (2) in any person not having a substantial
adverse interest in the disposition of such part of the
corpus or the income therefrom. (NIRC of 1997, Sec. 63)
**5. Who are the taxpayers who are allowed to use
only the calendar year and not the fiscal year ? Which
among the following taxpayers is required to use only
the calendar year for tax purposes?
SUGGESTED ANSWER: Taxpayers other than
corporations, such as natural persons, estates, trusts, general
professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement
under a service contract with the Government. [NIRC of 1997,
Sec. 22 (B), 1st sentence]
**6. What kinds of taxpayers have the option to
use either the calendar or fiscal years ?
SUGGESTED ANSWER: Only corporations as
defined under the NIRC of 1997 have the option use either
the calendar or the fiscal years.
Corporations, as defined under the NIRC of 1997, include
not only corporations as defined and organized under the
provisions of the Corporation Code, but also “partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional
partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service
contract with the Government.” [NIRC of 1997, Sec. 22 (B), 1st
sentence]
90
FREE PRE-WEEK NOTES
TAXATION LAW
**7. May an individual taxpayer change his/her
accounting period? Why?
SUGGESTED ANSWER: No. Only a corporation may
change its accounting periods but always subject to the
approval of the Commissioner of Internal Revenue and
compliance with the requirements for filing returns for short
period resulting from change of accounting period. (NIRC
of 1997, Sec. 46, paraphrasing supplied)
An individual taxpayer cannot change his/her
accounting period because he/she is allowed only one, the
calendar year.
**8. Define income for tax purposes.
SUGGESTED ANSWER: Income may be defined as
“an amount of money coming to a person or corporation
within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also
be thought of as a flow of the fruits of one’s labor.”
[Association of NonProfit Clubs, Inc. (ANPC), etc. v.
Bureau of Internal Revenue (BIR), etc., G.R. No. 228539,
26 June 2019]
**9. The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues
and membership fees collected by condominium
corporations from its member condominium-unit owners.
The RMC’s validity is challenged before the Supreme
Court (SC) by the condominium corporations. The
Solicitor general, counsel for BIR, claims that association
dues, membership fees, and other assessment/charges
collected by a condominium corporation are subject to
VAT since they constitute income payments or
compensation for the beneficial services it provides to its
members and tenants.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
91
On the other hand, the lawyer of the condominium
corporations argues that such fees are merely held in
trust by the condominium corporations exclusively for
their members and used solely for administrative
expenses in implementing the condominium corporations’
purposes. Accordingly, the condominium corporations
do not actually render services for a fee subject to VAT.
Whose argument is correct? Decide.
SUGGESTED ANSWER The argument
condominium corporation’s lawyer is correct.
of
the
The condominium is not engaged in business which is
a “trade or commercial activity regularly engaged in as a
means of livelihood or with a view to profit.” (Yamane , etc.
v. BA Lepanto Condominium Corporation, G.R. No.
154993, October 25, 2005)
Thus, the association dues, membership fees, and
other assessments/charges are not income payments
which constitutes “yearly profits arising from property,
professions, trades or offices, or as a tax on a person’s
income, emoluments, profits and the like.” (Ibid.)
**10. Are membership fees, assessment dues, and
other fees of similar nature in recreational non-profit
clubs considered as income for tax purposes?
SUGGESTED ANSWER: No. They only constitute
contributions to and/or replenishment of the funds for the
maintenance and operations of the facilities offered by
recreational clubs to their exclusive members.
“They represent funds “held in trust” by these clubs to
defray their operating and general costs and hence,
only constitute infusion of capital.
Case law provides that in order to constitute ‘income,’
there must be realized ‘gain.’ Clearly, because of the
nature of membership fees and assessment dues as funds
inherently dedicated for the maintenance, preservation,
92
FREE PRE-WEEK NOTES
TAXATION LAW
and upkeep of the clubs’ general operations and facilities,
nothing is to be gained from their collection.
This stands in contrast to the fees received by recreational
clubs coming from their income-generating facilities, such as
bars, restaurants, and food concessionaires, or from incomegenerating activities, like the renting out of sports equipment,
services, and other accommodations. In these latter examples,
regardless of the purpose of the fees’ eventual use, gain is
already realized from the moment they are collected because
capital maintenance, preservation, or upkeep is not their predetermined purpose. As such, recreational clubs are generally
free to use these fees for whatever purpose they desire and
thus, considered as unencumbered ‘fruits’ coming from a
business transaction.
“In fine, for as Iong as these membership fees,
assessment dues, and the like are treated as collections by
recreational clubs from their members as an inherent
consequence of their membership, and are, by nature, intended
for the maintenance, preservation, and upkeep of the clubs’
general operations and facilities, then these fees cannot be
classified as ‘the income of recreational clubs from whatever
source’ that are ‘subject to income tax.’ Instead, they only form
part of capital from which no income tax may be collected or
imposed.” [Association of NonProfit Clubs, Inc. (ANPC), etc. v.
Bureau of Internal Revenue (BIR), etc., G.R. No. 228539, 26
June 2019, reierated in Commissioner of Internal Revenue v.
Federation of Golf Clubs of the Philippines, Inc. (FEDGOLF),
G.R. No. 226449, July 28, 2020]
“It is a well-enshrined principle in our jurisdiction that
the State cannot impose a tax on capital as it constitutes
an unconstitutional confiscation of property.” (Ibid.)
**11. Mr. Matola bought his residential house and
lot in 2004 for P1 Million. In 2021, curious as to how much
his property is then valued, he asked a real estate broker to
reappraise the same. The real estate broker reported that
the value of his property has increased to P3 Million.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
93
Should Mr. Matola report the P2 Million increase in his
income tax return for the year 2021 ? Reasons.
SUGGESTED ANSWER: No. The P2 Million increase
in the value of the residential house and lot is not
considered as income reportable as income of Mr. Cruz
because such increase has not yet been received by Mr.
Cruz, either physically or constructively.
Besides, capital gains of individuals on dispositions of
real property are subject to a final tax, the presumed
capital gains tax. Consequently, increases in valuation
are not reported in the income tax return. Increases in
valuation of real property are not subject to income tax,
hence not reportable in the income tax return.
NOTE NOT PART OF THE ANSWER:
The
appropriate return to be filed is the capital gains tax return,
once the real property considered as capital asset is
disposed, whether the seller made a profit or not.
**12. In 2010, Corporation “X” had a capital stock of
1,000 shares without par value. At the time of its
incorporation, the value of each no-par value share was
P10. In 2020, due to its profitable operations, the
corporation earned a surplus of P200,000.00. The
corporation’s board of directors increased the stated
value of each share by P190 making each share worth
P200. The Bureau of Internal Revenue, for income tax
purposes, assessed each stockholder for the P190
increase. Is the Bureau correct? Explain. (1989, dates
and amounts supplied)
SUGGESTED ANSWER: No. The stockholders have not
physically or constructively received any income subject to tax.
There was no change in the proportion of their ownership in
the corporation considering that the shares of stock are without
par value. Furthermore, there was no realization of the income
through the change in stated value. When the stockholder
94
FREE PRE-WEEK NOTES
TAXATION LAW
disposes of the shares, then the same would be subject to
capital gains taxes.
**13. What is the “all events test”? Explain briefly.
SUGGESTED ANSWER: The “all events test” is a
test to determine when income or liability is to be accrued.
An item that is reasonably ascertained as to amount and
acknowledged to be due has “accrued”; actual payment is not
essential to constitute “expense.” [Commissioner of Internal
Revenue v. Isabela Cultural Commission, 544 Phil. 488
(2007)]
Stated otherwise, an expense is accrued and
deducted for tax purposes when
a. the obligation to pay is already fixed;
b. the amount can be determined with reasonable
accuracy; and
c. it is already knowable or the taxpayer can
reasonably be expected to have known at the closing of its
books for the taxable year. (Ibid.)
**14. CHED Corporation engaged the services of the
ABOGADO Law Firm in 2019 to defend the corporation’s
title over a property used in the business. For the legal
services rendered in 2020, the law firm billed the
corporation only in 2021. The corporation duly paid.
CHED Corporation claimed this expense as a
deduction from gross income in its 2021 return, because
the exact amount of the expense was determined only in
2021. Is YYY’s claim of deduction proper ? Reasons.
SUGGESTED ANSWER: No. Since CHED is a
corporation, it should be using the accrual method. As
such, it should have recognized the expense in 2019 when
the amount of legal services was agreed upon.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
95
It was in 2019 that the liability to pay the attorney’s
fees was fixed as well as the availability of the reasonable
accurate determination of such liability. (Commissioner of
Internal Revenue v. Isabela Cultural Commission, G.R. No.
172231, February 12 2007)
***15. TOBAGO Engineering Co., Inc. (TECI) is a
Philippine corporation engaged in architectural design,
engineering, and construction work. Its principal office is
located in Bonifacio Global City (BGC), but it has various
infrastructure projects in the country and abroad. Thus,
TECI 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.
Below are some of the employees of TECI.
Determine whether the compensation they received
from TECI in 2021 is taxable under Philippine laws and
whether they are required to file tax returns with the
Bureau of Internal Revenue (BIR).
(a) Rodrigo Gumal, a Filipino accountant in TECI’s
Tax Department in the BGC office, and married to a
Filipino engineer also working in TECI.
SUGGESTED ANSWER: Rodrigo is required to file an
income tax return on his income because he is a Filipino
citizen residing in the Philippines if TECI has failed to withhold
the correct income taxes or that his pure compensation
income derived from sources within the Philippines exceeds
P60,000.00. [NIRC of 1997, Sec. 51 (A) (1)]
ALTERNATIVE ANSWER: Rodrigo’s compensation
he received as an accountant in TECI’s Tax Department in
the BGC Office is taxable under Philippine law. This is so,
because he is a citizen of the Philippines residing therein
hence he is taxable on all income derived from sources
within the Philippines. The situs of income taxation is the
96
FREE PRE-WEEK NOTES
TAXATION LAW
place where the service was rendered, which in this case,
is the Philippines [NIRC of 1997, Sec. 23 (A)]
If Rodrigo received purely compensation income from
TECI who is his single employer and the latter, has
withheld correctly the income tax due from Rodrigo (tax
due equals tax withheld) from his income for the calendar
year Rodrigo shall not be required to file an annual income
tax return. The certificate of withholding filed by TECI, duly
stamped ‘received’ by the BIR, shall be tantamount to the
substituted filing of income tax returns by Rdorigo. (NIRC
of 1997, Sec. 51-A, as inserted by the TRAIN)
However, if TECI, Rodrigo’s single employer has failed
to withhold the correct income tax due from Rodrigo, he
being a Filipino citizen would then be required to file an
income tax return regardless of the amount of his gross
income because he is engaged in the practice of his
profession as an accountant. (Ibid., SEc. 51 (A) (2) (a) as
amended by the TRAIN)
(b) Adolf Dietrich, a German national who heads
TECl’s Design Department in its BGC office.
SUGGESTED ANSWER: Dietrich’s compensation he
received as the head of TECI’s Design Department in the
BGC Office is taxable under Philippine law because he is
an alien individual resident of the Philippines and is taxable
on income derived from sources within the Philippines.
[NIRC of 1997, Sec. 23 (D)] The situs of income taxation is
the place where the service was performed, in this case,
the Philippines.
If Dietrich received purely compensation income from
TECI who is his single employer and the latter, has
withheld correctly the income tax due from Dietrich (tax
due equals tax withheld) from his income for the calendar
year he shall not be required to file an annual income tax
return. The certificate of withholding filed by TECI, duly
stamped ‘received’ by the BIR, shall be tantamount to the
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
97
substituted filing of income tax returns by Dietrich. (NIRC
of 1997, Sec. 51-A, as inserted by the TRAIN)
However, if TECI, Dietrich’s single employer has
failed to withhold the correct income tax due from Dietrich,
he being a resident alien, would then be required to file an
income tax return because he earns income from within
the Philippines. [Ibid., Sec. 51 (A) (4) (c)]
ALTERNATIVE ANSWER: However, if TECI,
Dietrich’s single employer, has failed to withhold the
correct income tax due from Dietrich, he being a resident
alien, would then be required to file an income tax return
because he earns income from within the Philippines.
[Ibid., Sec. 51 (A) (4) (c)]
(c) Gabby Francisco, a Filipino engineer in TECI’s
Design Department who was hired to work at the
principal office last January 2021. In April 2021, he was
assigned and detailed in the company’s project in
Riyadh, Saudi Arabia, which project is expected to be
completed in April 2023.
SUGGESTED ANSWER: Gabby’s compensation for
the whole taxable year 2021 is not subject to tax under
Philippine law because he is an individual citizen of the
Philippines who is working and deriving income from
abroad in Riyadh, Saudi Arabia as an ”overseas contract
worker” which employment thereat requires him to be
physically present abroad most of the time during the
taxable year from April 2021 up to end December 2021.
[NIRC of 1997, Sec. 23 (C)] Since the basis for income
taxation is the calendar year, it is as if he earned all of his
income from without the Philippines.
A non-resident citizen like Gabby is required to file an
income tax return only on income derived from sources
within the Philippines. [NIRC, Sec. 51A (4)(b)] Since his
income, including his pay prior to his assignment and detail
abroad, is considered income derived from sources outside
98
FREE PRE-WEEK NOTES
TAXATION LAW
the Philippines, he is not required to file an income tax
return on such income. There is likewise no showing that
he earned income from Philippine sources.
(d) Aaron Antonis is also an engineer assigned to
TECI’s project in Taipei, Taiwan. Since TECI provides
for housing and other basic needs, Aaron requested
that all his salaries, paid in Taiwanese dollars, be paid
to his wife in Manila in its Philippine Peso equivalent.
SUGGESTED ANSWER: Aaron’s compensation is
not taxable under Philippine laws since he is an individual
citizen of the Philippines who is working and deriving
income from abroad in Taipei, Taiwan as an overseas
contract worker hence he is taxable only on income
derived from sources within the Philippines. [NIRC of 1997,
Sec. 23 (C)] The fact that his compensation is paid to his
wife does not matter because the situs of income taxation
is where the service that earned him the income was
performed.
A non-resident citizen like Aaron is required to file an
income tax return only on income derived from sources
within the Philippines. [NIRC, Sec. 51A (4)(b)] Since his
income was derived from sources outside the Philippines,
he is not required to file an income tax return on such
income.
(e) Fil-Am de Castro, is a Filipino architect in
TECl’s Design Department who reported back to
TECl’s BGC office in August 2021 after TECI’s project
in Belfast, Ireland was completed.
SUGGESTED ANSWER: Fil-Am’s compensation
earned for the period 2021 is not subject to tax under
Philippine Law because she is an individual citizen of the
Philippines who is working and deriving income from
abroad in Belfast, Ireland as an overseas contract worker
which employment thereat requires her to be physically
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
99
present abroad most of the time during the taxable year
2021. [NIRC of 1997, Sec. 23 (C)]
Since the basis for income taxation is the calendar
year, it is as if he earned all of her income from without the
Philippines.
A non-resident citizen like Fil-Am is required to file an
income tax return only on income derived from sources
within the Philippines. [NIRC, Sec. 51A (4)(b)] Since her
income, including her pay prior to her return from abroad,
is considered income derived from sources outside the
Philippines, she is not required to file an income tax return
on such income.
**16. ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non-resident
foreign corporation based in the U.S. Under the
agreement which the parties forged in the U.S., XYZ
granted ABC the right to use a computer system
program and to avail of technical know-how relative to
such program. In consideration for such rights, ABC
agreed to pay 5% of the revenues it receives from
customers who will use and apply the program in the
Philippines.
Discuss the tax implications of the transaction.
SUGGESTED ANSWER: The 5% payment is
considered royalty income of XYZ, a non-resident foreign
corporation, derived from sources within the Philippines
subject to Philippine income taxation.
ABC should
therefore withhold the appropriate taxes before remitting
the same to XYZ.
The 5% payment is considered as a royalty because it
is paid for the use of or the right or privilege to use in the
Philippines XYZ’s computer system program which is
presumably covered by a copyright or patent as well as the
supply of technical know-how that is ancillary and
100
FREE PRE-WEEK NOTES
TAXATION LAW
subsidiary to, and is furnished as a means of enabling the
application or enjoyment of the computer system program.
Since the service is rendered within the Philippines, it
is considered as income derived from the Philippines of a
non-resident foreign corporation. [NIRC of 1997, Sec. 42
(A) (4)]
Consequently, the royalty income is subject to a final
tax of 20% based on the amount to be remitted to XYZ.
[Ibid., Sec. 28 (B) (1), as amended by the TRAIN]
**17. TEXECANA Co. is a U.S.A. corporation not
doing business in the Philippines. It holds 40% of the
shares of ABRA Co., a Philippine company while the
60% is owned by PALAWAN Co., a Filipino-owned
Philippine corporation. TEXECANA Co. also owns
100% of the shares of BALI Co., an Indonesian
company which has a duly licensed Philippine branch.
Due to worldwide restructuring of the TEXECANA Co.
group, resulting from the COVID Pandemic, it decided
to sell all its shares in ABRA and BALI Cos. The
negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines.
The Agreement provides that the purchase price will
be paid to TEXECANA Co.’s bank account in the U.S.
and that title to ABRA and BALI Cos. shares will pass
from TEXECANA Co. to PALAWAN Co. in U.S.A. where
stock certificates will be delivered. PALAWAN Co.
seeks your advice as to whether or not it will subject
the payments of the purchase price to withholding tax.
Explain your advice.
SUGGESTED ANSWER: Yes. The payments of the
purchase price will be subject to withholding tax.
TEXECANA Co., being a foreign corporation is to be taxed
on its income derived from sources within the Philippines.
Considering that all the activities (including the
consummation of the sales) occurred within the Philippines,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
101
the income is considered as income from within, subject to
Philippine income taxation
Furthermore, The gains derived from the sale of
shares in ABRA Co., a domestic corporation, anywhere in
the world, is considered as income from within because the
shares are considered as having a business situs in the
Philippines. Since domestic corporations are organized
and existing by virtue of Philippine law, they are given
protection by the Philippine government. Thus, their
shares of stock have obtained a business situs in the
Philippines. [NIRC of 1997, Sec. 42 (E), 4th pars., in
relation to Sec. 42 (A) (6)]
FRINGE BENEFITS TAX AND
DE MINIMIS BENEFITS
**1. As a way to augment the income of the
employees of DEF, Inc., a private corporation, the
management decided to grant a special stipend of
P50,000.00 for the first vacation leave that any
employee takes during a calendar year.
(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.
SUGGESTED ANSWER: It depends on the nature
and character of the employee.
If the employee is not a managerial employee, but a
rank and file employee, then the special stipend would be
part of his taxable income subject to the schedular rate.
If the employee is a managerial employee, and not a
rank and file employee, then the special stipend is not part
of his taxable income but subject to the fringe benefit tax
which is a final tax of 35% based on the grossed-up
monetary value. (NIRC of 1997, sec. 33)
102
FREE PRE-WEEK NOTES
TAXATION LAW
(b) Is the cash equivalent value of the housing
facilities received by the senior engineers subject to
fringe benefits tax ? Explain.
SUGGESTED ANSWER: No. Since the purpose of
housing is to make available engineers every time there is
breakdown which is for the convenience of the employer
then it is not a fringe benefit subject to the payment of the
fringe benefits tax.
**2. What are de minimis benefits and how are
they taxed? Give examples of de minimis benefits.
SUGGESTED ANSWER: De minimis benefits are
ordinarily facilities and privileges (such as entertainment,
medical services, or so-called “courtesy discounts” on
purchases) of small amounts, furnished or offered by an
employer to his employees.
They “are not considered as compensation subject to
income tax and consequently to withholding tax, if such
facilities are offered or furnished by the employer merely
as a means of promoting the health, goodwill,
contentment, or efficiency of his employees.” [Rev. Reg.
No. 2-98, Sec. 2.78,1 (A) (3), as amended by Rev. Reg.
No. 8-2000]
De minimis benefits are NOT subject to tax on
compensation income as well as withholding tax on
compensation income of both managerial and rank and file
employees. The amount of de minimis benefits conforming to
the ceiling herein prescribed shall not be considered in
determining the P90,000 ceiling of “other benefits” excluded
from gross income under Section 32 (B) (7) (e) of the Code,
as amended by the TRAIN, Provided that, the excess of the de
minimis benefits over their respective ceilings prescribed by
these regulations shall be considered as part of ‘other benefits’
and employee receiving it will be subject to tax only on the
excess over P90,000.00 ceiling, provided, further, that MWEs
receiving ‘other benefits’ exceeding the P90,000.00 limit shall
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
103
be taxable on the excess benefits, as well as on his salaries,
wages and allowances, just like an employee receiving
compensation income beyond the SMW.
The term ‘de minimis’ benefits which are exempt from
the fringe benefits tax shall include the following:
“(a) Monetized unused vacation leave credits of
private employees not exceeding ten (10) days
during the year and the monetized value of leave
credits paid to government officials and employees;
(b) Medical cash allowance to dependents of
employees not exceeding P750.00 per employee per
semester or P125 per month;
(c) Rice subsidy of P1,500.00 or one (1) sack
of 50-kg. rice per month amounting to not more than
P1,500.00;
(d) Uniforms and clothing
exceeding P5,000.00 per annum;
allowance
not
(e) Actual yearly medical
exceeding P10,000.00 per annum;
benefits
not
(f) Laundry allowance not exceeding P300 per
month;
(g) 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 P10,000.00 received by an
employee under an established written plan which
does not discriminate in favor of highly paid
employees;
(h) Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per
employee per annum;
104
FREE PRE-WEEK NOTES
TAXATION LAW
(i) Flowers, fruits, books, or similar items given
to employees under special circumstances, e.g. on
account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not
exceeding twenty five percent (25%) of the basic
minimum wage.” [Rev. Reg. 3-98, Sec. 2.33 (C), last
par., as amended by Rev. Reg. No. 10-2000, Rev.
Reg. No. 5-2008; Rev. Reg. No. 5-2011; and Rev.
Reg. No. 8-2012)
Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and productivity
incentive schemes, provided that the total annual monetary
value received from both CBA and productivity incentive
schemes combined do not exceed P10,000 per employee
per taxable year. (Rev. Reg. 2-98, Sec. 2.78.1 (A) (3), as
amended by Rev. Reg. No. 8-2000, Rev. Reg. No. 5-2008,
Rev. Reg. No. 10-2008, Rev. Reg. No. 5-2011, and Rev.
Reg. No. 8-2012, amount adjusted by the author to
conform with the increase provided for in the TRAIN]
*13. 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.
SUGGESTED ANSWER: The employer should pay
the tax. It is a final tax subject to withholding. As such, the
obligation devolves upon the withholding agent, in this
case the employer to collect the tax from itself.
**14. Mr. Psalmir is an executive of Baldago
Corporation. Aside from his salary, his employer
provides him with the following benefits: the free use
of a residential house in an exclusive subdivision, free
use of limousine and membership in a country club
where he can entertain customers of the corporation.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
105
Which of these benefits, if any, must Mr. Psalmir
report as income ? Explain.
SUGGESTED ANSWER: None. All are subject to the
fringe benefits tax, except the value of the use of the
country club which is not taxable as it is for the
convenience of the corporation.
The fringe benefits tax is a final tax, hence the items
that are subject to it are not reportable anymore as income
in the annual income tax return.
15. What is the tax treatment of the 13th month pay
and de minimis benefits ?
SUGGESTED ANSWER: The 13th month pay that does
not exceed P90,000.00 is excluded from gross income, hence
not to be included in the annual income tax return. Any
amounts exceeding P90,000.00 should be included in the
preparation of the annual income tax returns as part of gross
compensation income, subject to tax. [NIRC of 1997, Sec. 32
(B) (7) (e), as amended by Rep. Act No. 10653, and the
TRAIN paraphrasing supplied]
De minimis benefits are not to be included in the
preparation of annual income tax returns because they are
not subject to income taxation.
INCOME FROM WITHIN AND INCOME
FROM WITHOUT THE PHILIPPINES
***1. A Co., a Philippine corporation, has an executive
(P) who is a Filipino citizen. A Co. has a subsidiary in
Hong Kong (HK Co.) and will assign P for an indefinite
period to work full time for HK Co. P will bring his family
to reside in HK and will lease out his residence in the
Philippines. The salary of P will be shouldered 50% by A
Co. while the other 50% plus housing, cost of living and
educational allowances of P’s dependents will be
106
FREE PRE-WEEK NOTES
TAXATION LAW
shouldered by HK Co. A Co. will credit the 50% of P’s
salary to P’s Philippine bank account. P will sign the
contract of employment in the Philippines. P will also be
receiving rental income for the lease of his Philippine
residence.
Are these salaries, allowances and rentals subject
to Philippine income tax?
SUGGESTED ANSWER: The salaries and allowances of
P, being derived from labor or personal services rendered
outside of the Philippines is considered as income from
without. Since P is an OCW, then he is to be taxed only on his
income derived from within the Philippines such as the rentals
on his Philippine residence, and not on his income from
without.
***2. Ms. C, a resident citizen bought ready-towear goods from Ms. B, a non-resident citizen.
a) If the goods were produced from Ms. B’s
factory in the Philippines, is Ms. B’s income from
the sale to Ms. C taxable in the Philippines ? Explain.
SUGGESTED ANSWER: Yes. The income of Ms. B
from the sale of ready-to-wear goods to Ms. C is taxable in
the Philippines.
B, being a non-resident citizen, is taxable only on
income derived from sources within the Philippines. [NIRC
of 1997, Sec. 23 (B)] Since, the goods are produced and
sold within the Philippines, the income earned therefrom is
considered as income from within,
Consequently, B’s income is subject to tax within the
Philippines.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
107
ORDINARY ASSETS AND CAPITAL
ASSETS AND THEIR GAINS AND LOSSES
**1. Distinguish an ordinary asset from a capital
asset.
SUGGESTED ANSWER: The following are the
distinctions between an ordinary asset and a capital asset:
a. Nature. An ordinary asset is used in trade, business
or exercise of a profession while a capital asset is not used
in trade, business or exercise of a profession.
b. Diminution in value. The diminution in value of an
ordinary asset may be allowed as a deduction from gross
income in the form of depreciation or otherwise while the
diminution in value of a capital asset, in the form of
depreciation, or otherwise is not allowed as a deduction
from gross income because it is not used in trade,
business or exercise of a profession.
c. Taxability of income. The incomes derived from
ordinary assets are subject to inclusion in the income tax
return of the earner while In general, the incomes derived
from the disposition of a capital asset, is subject to a final
tax, hence not to be included anymore in the income tax
return.
d. Deductibility of losses. Ordinary losses arising from
the use of ordinary assets, in trade, business or exercise of
a profession may be deducted from capital gains while
capital losses arising from disposition of a capital asset
may only be deductible from a capital gain.
e. Carry-over of losses. The concept of net operating
loss carry-over finds application in the taxation of losses
incurred from the transactions involving ordinary assets
while it is the concept of the net loss carry-over that applies
to losses incurred as a result of transactions involving
capital assets.
108
FREE PRE-WEEK NOTES
TAXATION LAW
f. Period for carry-over of losses. The loss incurred
from transactions involving ordinary assets may be carried
over for a period of three (3) or five (5) years while the
carry-over of losses suffered from the disposition of capital
assets is only one (1) year.
g. Holding period. The holding period never find
application to the taxability of ordinary assets while the
taxability of certain kinds of capital assets may be subject
to the holding period.
**2. Klaus, Inc., a domestic, VAT-registered
corporation engaged in the land transportation
business, owns a house and lot along Katipunan St.,
Quezon City. This property is being used by Klaus,
lnc.’s president and single largest shareholder, Atty.
Krimson, as his residence. No business activity
transpires there except for the company’s Christmas
party which is held there every December. Atty.
Krimson recently grew tired of the long commute from
Katipunan to his office in Makati City and caused the
company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in
real property.
Is the sale subject to 6% capital gains tax or
regular corporate income tax of 30%?
SUGGESTED ANSWER: The sale is not subject to
the 6% capital gains tax but the gain derived from the sale
is subject to the regular corporate income tax of 30%
because the house and lot is an ordinary asset used in the
trade of business of Klaus, Inc.
The house and lot is an ordinary asset. It is real
property used in the trade and business of Klaus,
Inc.because it is being used by its President as his
residence. [NIRC of 1997, Sec. 39 (A) (1);
It should be noted that while the house and lot is an
ordinary asset used in the trade and business of Klaus,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
109
Inc., it is not part of the “Goods or properties” the sale,
barter or exchange of which may be subject to VAT which
include real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or
business. [NIRC of 1997, Sec. 106 (A) (1)], 1st par.; Rev.
Regs. No. 16-2005, Sec. 4.106-2]
**3. GHI, Inc. is a corporation authorized to engage in
the business of manufacturing ultra-high 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 P250,000,000.00. 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
P300,000,000.00. Thereafter, GHI, Inc. was dissolved on
November 30, 2010.
(a) Is the sale of the machineries and equipment
to JKL Integrated subject to normal corporate income
tax or capital gains tax ? Explain.
SUGGESTED ANSWER: The sale of the machineries
and equipment, which are considered as ordinary assets
because they were intended to be used in the trade and
business of GHI, Inc., is the subject to the normal income
tax rate.
This despite the fact they were not actually used
because GHI, Inc. failed to commence operations.
*4. What is capital asset? Illustrate with an
example.
SUGGESTED ANSWER: The term “capital assets”
means property held by the taxpayer (whether or not
connected with his trade or business), BUT DOES NOT
INCLUDE:
FREE PRE-WEEK NOTES
TAXATION LAW
110
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the
close of the taxable year, or
c. Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character
which is subject to the allowance for depreciation; or real
property used in the trade or business of the taxpayer. [NIRC
of 1997, Sec. 39 (A) (1); Rev. Reg. No. 6-2008, Sec. 2 (u)]
arrangement and numbering supplied]
The following are examples of capital assets:
a. Stock and securities held by taxpayers other
than dealers in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used
as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects
of arts which are not used in trade or business;
f.
Inherited large tracts of agricultural land which
were subdivided pursuant to the government
mandate under land reform, then sold to
tenants. (Roxas v. Court of Tax Appeals, etc.
L-25043, April 26, 1968) Improvements made
on the property converts it to an ordinary asset.
g. “Real property used by an exempt corporation
in its exempt operations, such as a corporation
included in the enumeration of Section 30 of the
Code, shall not be considered used for
business purposes, and therefore considered
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
111
as capital asset.” (Rev. Reg. No. 7-2003, Sec.
3.b, 3rd par., last sentence)
h. “Real property, whether single detached,
townhouse, or condominium unit, not used in
trade or business as validated from the existing
available records of the Bureau of Internal
Revenue, owned by an individual engaged in
business, shall be treated as capital asset.
(Rev. Reg. No. 7-2003, Sec. 3.b., last par., as
adjusted by the TRAIN)
**5. Mr. Pedro Aguirre, a resident citizen, is
working for a large real estate development company
in the country and in 2019, he was promoted to VicePresident of the company. With more responsibilities
comes higher pay. In 2020, he decided to buy a new
car worth P2 Million and he traded in his old car with a
market value of P800,000.00, and paid the difference of
P1.2 Million to the car company. The old car, which
was bought three (3) years ago by the father of Mr.
Pedro Aguirre at a price of P700,000.00, was donated
by him and registered in the name of his son. The
corresponding donor’s tax thereon was duly paid by
the father.
a. What is the nature of the old car – capital asset
or ordinary asset? Explain your answer. (2012, dates
supplied)
SUGGESTED ANSWER: The old car is in the nature
of a capital asset because it is not used in trade of
business of Mr. Aguirre.
b. How much is the cost basis of the old car to Mr.
Aguirre? Explain your answer.
SUGGESTED ANSWER: The cost basis of the old
car to Mr. Aguirre is the value paid for by his father at the
time the donation was made. In this case, it is the value of
P700,000.00 the price which the father paid for the car.
FREE PRE-WEEK NOTES
TAXATION LAW
112
*6. What does the term “ordinary income” include?
SUGGESTED ANSWER: The term ordinary gain
includes any gain from the sale or exchange of property
which is not a capital asset or property. [NIRC of 1997,
Sec. 22 (Z)]
An example would be the gain derived from the sale
of items held for sale in the ordinary course of business,
such as the gains from the sale of automobiles by a car
dealer.
*7. What differentiates capital gains from ordinary
gains?
SUGGESTED ANSWER:
distinctions:
The following are the
a. The source of capital gain is property not used in
trade or business while the source of ordinary gain is
property used in trade or business.
b. Some types of capital gains are adjusted by the
holding period, while the holding period does not find
application to ordinary gains.
c. From certain types of capital gains may be
deducted ordinary losses, while only ordinary losses may
be deducted from ordinary gains.
d. The concept of net loss carryover applies to capital
gains taxation, while the concept of net operating loss
carryover applies to ordinary gains taxation.
e. Generally no deductions are allowed from capital
gains while deductions are usually allowed for ordinary
gains.
f. Generally capital gains are subject to final taxes,
while this is not so with regard to ordinary gains;
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
113
g. The income from capital gains are not generally to
be included in the annual income tax return, while ordinary
income is to be included in the annual income tax return.
NOTE NOT PART OF THE ANSWER: The capital
gains derived from the sale, exchange or other disposition
of capital assets which are not real property, nor shares of
stock are “lumped” with ordinary income reportable in the
income tax return. To this combined income would be
deducted the optional standard or itemized deductions, if
any, to arrive at income subject to tax.
TAX-FREE EXCHANGES
***1. As of March 2012, Lucio, Susan, Ferdinand, and
Pamela, the COs collectively, were the majority
shareholders of Kareila Management Corporation
(KAREILA), a domestic corporation engaged as
managers, managing agents, consignor, concessionaire,
or supplier of business engaged in the operation of
hotels, supermarkets, groceries and the like. KAREILA
had an authorized capital stock of P500,000,000.00,
wherein 1,703,125 shares were subscribed and fully paid.
The COs owned 99.9999% of the total subscribed shares
while SY owned the remaining 0.0001%.
The COs were also shareholders of Puregold Price
Club, Inc. (PUREGOLD), a corporation organized under
the Philippine laws and primarily engaged in the
wholesale and retail of general merchandise. From
PUREGOLD’s
authorized
capital
stock
of
P3,000,000,000.00,
2,000,000,000.00
shares
were
subscribed and fully paid. The COs owned 66.55% of
PUREGOLD’s total subscribed shares.]
On March 27, 2012, PUREGOLD’s Board of
Directors approved the issuance of 766,406,250
PUREGOLD common shares to the COs and SY in
FREE PRE-WEEK NOTES
TAXATION LAW
114
exchange for the transfer to PUREGOLD of KAREILA’s
1,703,125.
On May 8, 2012, during PUREGOLD’s annual
stockholders meeting, this exchange was approved by
the
stockholders
representing
two-thirds
of
PUREGOLD’s outstanding capital stock.
On May 11, 2012, the COs and SY entered into a
Deed of Exchange with PUREGOLD wherein they
agreed to transfer all their KAREILA shares to
PUREGOLD in exchange for its shares.
Under the Deed of Exchange, the COs and SY
each would receive four hundred fifty (450)
PUREGOLD shares for every one (1) KAREILA share
that they would transfer to PUREGOLD. Accordingly,
PUREGOLD issued to the COSs and SY a total of
766,406,250 PUREGOLD shares from the unissued
portion of its authorized capital stock in exchange for
the 1,703,125 KAREILA shares:
As a result of the share swap under the Deed of
Exchange:
1. PUREGOLD acquired majority ownership of
KAREILA; and,
2. The COs who, prior to the share swap, already
collectively owned 66.5720% of the outstanding capital
stock of PUREGOLD consequently increased their
stockholdings to 75.8329% after the swap:
Is the exchange subject to tax ?
SUGGESTED ANSWER: No. The “requisites for the
non-recognition of gain or loss are as follows: (a) the
transferee is a corporation; (b) the transferee exchanges
its shares of stock for property/ies of the transferor; (c) the
transfer is made by a person, acting alone or together with
others, not exceeding four persons; and, (d) as a result of
the exchange the transferor, alone or together with others,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
115
not exceeding four, gains control of the transferee.”
(Commissioner of Internal Revenue v. Co, G.R. No.
241424, February 26, 2020)
It is not necessary that, after the exchange, each of the
transferors individually gains control of the transferee
corporation. Also not prohibited are instances when the
transferor gains further control of the transferee corporation.
The element of control is satisfied even if one of the
transferors is already owning at least 51% of the shares of
the transferee corporation, as long as after the exchange, the
transferors, not more than five, collectively increase their
equity in the transferee corporation by 51% or more.” (Ibid.)
The share swap transaction between the COs and
PUREGOLD is covered the rules on tax-free exchange
because after the exchange, the COs collectively
increased their control over PUREGOLD from 66.57% to
75.83%. Accordingly, the COs cannot be held liable for
income taxes on the supposed gain which may have
resulted from such transfer. (Ibid.)
***2. B transferred his ownership over a 1,000square meter commercial land and three-door
apartment to ABC Corp., a family corporation 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.
SUGGESTED ANSWER: No. B is not liable for any
taxable gain on the exchange.
116
FREE PRE-WEEK NOTES
TAXATION LAW
The transaction is an exchange solely in kind
exchanging property (land and the apartment) for
property(the shares of stock). Thus, no gain is recognized
as the property transferred to ABC Corp. by B in exchange
for the shares of stocks resulting to B’s gaining control of
ABC Corp. because he acquired ownership of 10,000 or
more than 50% ownership of ABC Corp.
ALTERNATIVE ANSWER: No. There is no taxable
gain arising from the exchange solely in kind exchanging
land and an apartment for shares of stock.
No gain or loss shall
be recognized when B
transferred the 1,000-square meter parcel of land and
apartment building to ABC Corp. by a person in exchange
for stock in such a corporation of which as a result of such
exchange said B, alone
gained
control of said
corporation. [NIRC of 1997, Sec. 40 (C), paraphrasing
supplied)
PASSIVE INVESTMENT INCOME
***1. What is the manner of taxation of any peso
currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds
and similar arrangements derived from sources within
the Philippines ?
SUGGESTED ANSWER: A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount
of interest from any peso currency bank deposit and yield
or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements derived from
sources within the Philippines. [NIRC of 1997, Sec. 24 (B)
(1)]
**2. What is the tax treatment of interest income of
a domestic commercial bank derived from a peso loan
to a domestic corporation in 2021?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
117
SUGGESTED ANSWER: It shall be subject to 30%
corporate income tax rate bcause the interest income is
derived from the regulat business of a domestic commercial
bank.
**3. State with reasons the tax treatment of the
following in the preparation of annual income tax
returns:
a. interest earned from the peso deposits with
BDO Bank, a domestic commercial bank.
SUGGESTED ANSWER: The interests earned on peso
deposits with BDO Bank should not be reported in the income
tax returns because they are subject to a final tax.
b. Interest on deposits with a local offshore
banking unit of a foreign bank.
SUGGESTED ANSWER: The interests on deposits
with a local offshore banking unit of a foreign bank is not
to be reported in the tax returns.
If the interest was paid to a resident Filipino citizen or
alien, it is not to be reported because a final tax is
collected upon such interest.
Upon the other hand, if the interest was paid to a nonresident, whether individuals or corporations, no report in
the income tax return shall be made because it is exempt
from income tax. [NIRC of 1997, Sec. 28 (A) (4), last
sentence]
**4. What is the tax treatment of dividends on life
insurance received during a taxable year? Explain
your answer briefly.
SUGGESTED ANSWER: The dividends on life
insurance do not fall under taxable income.
Such dividends are not dividends, in the accepted and
ordinary sense of the word, but represent an excess
premium or surcharge paid by the policy holder, and then
FREE PRE-WEEK NOTES
TAXATION LAW
118
returned to him, without interest, less the costs attendant
on collection and administration and various other
deductions. (Commissioner of Internal Revenue v. The
Insular Life Assurance Company, Ltd., CA-G.R. SP No.
46516, September 29, 1998)
Such dividends are strictly speaking, not profits as in
the case of an ordinary corporation, but really constitute a
return to the policy holder of the amount he has been
overcharged for his insurance. (Ibid.)
**5. MIGGY Corp. secured an income tax holiday
for 5 years as a pioneer industry. On the fourth year of
the tax holiday, MIGGY Corp. declared and paid cash
dividends to its stockholders, all of whom are
individuals. Are the dividends taxable?
SUGGESTED ANSWER: Yes. The dividends are
taxable because the tax exemption of MIGGY Corp. does
not extend to its stockholders. (Sunio v. NLRC, G.R. No.
L-57767, January 31, 1984)
***6. BARAKO, Inc. a domestic corporation
enjoyed a particularly profitable year in 2020. In June
2021, its Board of Directors approved the distribution
of cash dividends to its stockholders. BARAKO, Inc.
has individual and corporate stockholders. What is
the tax treatment of the cash dividends received from
BARAKO, Inc. by the following stockholders.
a) American citizen.
SUGGESTED ANSWER: A final withholding tax for
ten percent (10%) shall be imposed upon the cash
dividends actually or constructively received from
BARAKO, Inc. a domestic corporation if the American
citizen is a resident alien. [NIRC of 1997, Sec. 24 (B)(2),
as retained by the TRAIN]
b) Resident Filipino citizen.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
119
SUGGESTED ANSWER: They are subject to a final
tax of ten percent (10%) on the gross amount of the
dividends. [Ibid,]
c) Non-resident
business.
alien
engaged
in
trade
or
SUGGESTED ANSWER: A final withholding tax of
twenty percent (20%) shall be imposed upon the cash
dividends actually or constructively received by a nonresident alien engaged in trade or business from BARAKO,
Inc., a domestic corporation. [NIRC of 1997, Sec. 25
(A)(2)]
d) Non-resident alien not engaged in trade or
business.
SUGGESTED ANSWER: A final withholding tax
equal to twenty-five percent (25%) of the entire income
received from all sources within the Philippines, including
the cash dividends received from BARAKO, Inc. [NIRC of
1997, Sec. 25 (B)]
e) Domestic corporation.
SUGGESTED ANSWER: Dividends received by a
domestic corporation from another domestic corporation,
such as BARAKO, Inc. shall not be subject to tax. [NIRC
of 1997, Sec. 27 (D)(4)]
f) Non-resident foreign corporation.
SUGGESTED ANSWER: 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. [NIRC of 1997, Sec. 28 (B)(1), as
amended by Rep. Act No. 9337]
However, a final withholding tax of fifteen percent
(15%) is imposed on the amount of cash dividends
received from a domestic corporation like BARAKO, Inc. If
the country in which the non-resident foreign corporation is
120
FREE PRE-WEEK NOTES
TAXATION LAW
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 30% regular
income tax rate and the 15% preferential rate. [NIRC of
1997, Sec. 28 (B)(5)(b),as amended by Rep. Act No. 9337]
NOTE NOT PART OF THE ANSWER: In all of the
above instances the cash dividends are not reportable in
the income tax return because they are either exempt or
subjected to a final tax.
*7. On 03 January 2020, Randy, a Filipino citizen
residing in the Philippines, purchased one hundred
(10) shares in the capital stock of ABC Corporation, a
domestic corporation. On 03 January 2022, ABC
Corporation declared, out of the profits of the
company earned after 01 January 2020, a hundred
percent (100%) stock dividends on all stockholders of
record as of 31 December 2021 as a result of which
Randy’s holding in ABC Corporation became two
hundred (200) shares.
Are the stock dividends received by Randy
subject to income tax ? Explain.
SUGGESTED ANSWER: The stock dividend declared
under the circumstances obtaining in the problem may or
may not be the subject of income taxation.
As a general rule, stock dividend representing the
transfer of surplus to capital account shall not be subject to
tax. [NIRC of 1997, Sec. 73 (B), 1st sentence]
Where stock dividends are given as returns on
investment, the dividends are subject to tax when the
distribution results in changes in the in the proportionate
interest of the stockholder. (Rev. Regs. No. 2, Sec. 252)
It appears in the problem that the stock dividends
were given only to stockholders of record as of 31
December 2020. If all the stockholders are stockholders
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
121
as of said date, then there would be no proportionate
change in ownership, hence not taxable. If not all are
stockholders of record as of 31 December 2020, then the
declaration of the stock dividends would result in
disproportionate change in ownership. In such a case, the
stock dividend declaration would be taxable.
*8. XYZ Corp. was dissolved and liquidating
dividends were declared and paid to the stockholders.
What tax consequence follows ?
SUGGESTED ANSWER: The stockholders should
declare their gain from their investment and pay income
tax at the ordinary rates.
EXCLUSIONS FROM GROSS INCOME
*1. What are excluded from gross income under
the National Internal Revenue Code of 1997 (NIRC of
1997)?
SUGGESTED ANSWER:
a. Life Insurance proceeds.
b. Amount received by insured as return of
premium.
c. Gifts, bequest and devises.
d. Compensation for injuries or sickness.
e. Income exempt under treaty.
f.
Retirement benefits, pensions; gratuities, etc.
g. Miscellaneous Items:
1)
Income
government.
derived
by
foreign
2)
Income derived by the government
or its political subdivisions.
FREE PRE-WEEK NOTES
TAXATION LAW
122
3)
Prizes and awards.
4)
Prizes
competitions.
5)
and
awards
in
sports
13th month pay and other benefits.
6)
GSIS, SSS, Medicare and other
contributions.
7)
Gains from the sale of bonds,
debentures or other certificate of indebtedness.
8)
Gains from redemption of shares in
mutual fund. [NIRC of 1997, Sec. 32 (B)]
The above are the recognized substantive
exclusions from gross income. Provisions of
special laws may recognize other exclusions
from gross income.
**2. Differentiate “Exclusion from Gross Income”
from “Deductions from Gross Income”.
Give an
example of each.
SUGGESTED ANSWER: “Exclusions from Gross
Income” are distinguished from “Deductions from Gross
Income” in the following manner:
a. Exclusions from gross income refer to a flow of
wealth to the taxpayer which are not treated as part of
gross income for purposes of computing the taxpayer’s
taxable income, due to the following reasons:
(1) It is exempted by the fundamental law;
(2) It is exempted by statute; and
(3) It does not come within the definition of
income (RR No. 2, Sec. 61), while deductions are
the amounts which the law allows to be subtracted
from gross income in order to arrive at net income.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
123
b. Exclusions pertain to the computation of gross
income, while deductions pertain to the computation of net
income.
c. Exclusions are something received or earned by
the taxpayer which do not form part of gross income, while
deductions are something spent or paid in earning gross
income.
Example of an exclusion from gross income: Life
insurance proceeds.
Example of a deduction: Ordinary and necessary
expenses.
*3. Salvador took out a life insurance policy for
P1,000,000.00 naming his wife as beneficiary. Under
the terms of the policy, the insurer will pay Salvador
the amount of P1,000,000.00 after the 20th year of the
policy, and his beneficiaries, should he die before that
date. Salvador outlived the policy and received
P1,000,000.00. The premiums paid on the policy was
P250,000.00.
Is the P1,000,000.00 received by
Salvador subject to tax? Explain your answer.
SUGGESTED ANSWER: No. Not all of the
P1,000,000.00 is subject to tax. The amount of P250,000.00 is
not subject to tax because it is the amount received by A, as a
return of the premiums paid by him under a life insurance
contract at the maturity of the term mentioned in the contract.
[NIRC of 1997, Sec. 32 (B) (2)] The premiums returned are
not income but return of capital. They represent earnings
which were previously taxed.
On the other hand, the amount of P750,000.00 is
subject to tax because it represents income being interest
or earnings of the premium and not return of capital. (Ibid.)
**4. Policarpio, while relaxing in his living room
watching the Lotto draw on TV, saw and heard that he
just won P100 million in the 6/55 draw. With full
124
FREE PRE-WEEK NOTES
TAXATION LAW
expectancy of receiving the P100 million, he went to the
PCSO to get his prize. He got the surprise of his life
when he was told that he shall get only about P80
million. He asked why, and he was told that taxes were
deducted from his prize winnings. Feeling bad about the
whole thing, he called you up through his cellphone to
seek your advice What would you tell him?
SUGGESTED ANSWER: I would tell him to get the
P80 million because Lotto winnings are now taxable under
the TRAIN law. [NIRC of 1997, Sec. 24 (B) (1), as
amended by the TRAIN]
**5. Mr. X received income and you were asked to
prepare his income tax return. Is he required to include
as part of gross income proceeds from his winnings from
the gambling casino? Give your reasons.
SUGGESTED ANSWER:
No.
If the winnings
exceeded P10,000.00 and was subject to the final tax of
20%. [NIRC of 1997, Sec. 24 (B) (1), as amended by the
TRAIN]
ALTERNATIVE ANSWER: Yes. If the winnings was
less than P10,000.00. (Ibid.)
***6. Vynette, a Filipino national, worked with the
LEB Group of Companies, Inc. (LEB), and was
seconded to various LEB-affiliated corporations:
a. from 2003 to 2008 as Vice President of
LEB Land Holdings, Inc.,
b. from 2008 to 2011 as Vice President of
LEB Bank;
c. from 2011 to 2015 as COO of LEB
Airlines Inc.;
d. from 2015 to 2021 as CEO of LEB Energy
Corporation, where Vynette served as CEO for
seven years until her retirement last December
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
12, 2021 upon reaching
retirement age of 60 years.
125
the
compulsory
All the corporations mentioned are majority-owned in
common by the de la Cruz family and covered by a BIRqualified multiemployer-employee retirement plan (MEE
RP), under which the employees may be moved around
within the controlled group (i.e., from one LEB subsidiary
or affiliate to another) without loss of seniority rights or
break in the tenure. Vynette was well-loved by her
employer and colleagues, so upon retirement, and on her
last day in office, LEB gave her a Land Rover SUV worth
PhP8 million as a surprise, with a streamer that reads:
“You’ll be missed. Good luck, Ma-am Vynette.”
(a) Are the retirement benefits paid to Vynette
pursuant to the MEE RP taxable ?
SUGGESTED ANSWER: No. The retirement benefits
paid to Vynette pursuant to the MEERP are not taxable
because they are excluded from gross income for
purposes of determining income subject to tax.
This is so, because the retirement benefits were
received by Vynette, an official of LEB a corporate private
firm, in accordance with the MEERP which is a reasonable
private benefit plan maintained by his employer.
Furthermore, Vynette the retiring official or employee is
considered as been in the service of same employer for at
least ten (10) years because of the MEERP provision that
service with one affiliate is considered part of service with
LEB. So also, Vynette is not less than fifty (50) years of
age at time of retirement because she was already 60, and
there is no showing that she previously enjoyed tax-free
retirement benefits. [NIRC of 1997, Sec. 32 (B) (6) (a)]
The Land Rover SUV is not part of Ms. Vynette’s
retirement package but should be considered as a
donation made by LEB as an act of pure liberality. Since
126
FREE PRE-WEEK NOTES
TAXATION LAW
this is a donation, it is not income on the part of Ms.
Vynette but subject to the payment of donor’s tax by LEB.
***7. Are moral damages awarded a litigant
for mental anguish an account of a libelous article
written about him taxable as income or not? Why?
SUGGESTED ANSWER: Yes. Moral damages arising
from libel or slander, breach of contracts are not excluded
from gross income and are part of taxable income.
Such kinds of damages are separate and different
from the moral damages received on account of sickness
and personal injuries. The express provision of law
requires that the damages must be received “on account of
such injuries or sickness” referring to personal physical
injuries or sickness, and from no other. [NIRC of 1997,
Sec. 32 (B) (4)]
ALTERNATIVE ANSWER: Yes. The moral damages
that are awarded a litigant for mental anguish an account
of a libelous article written about him are taxable as
income. Mental anguish is not physical injuries, therefore
moral damages awarded due to moral anguish are not
excluded from income.
Amounts received as compensation for personal
injuries plus the amounts of any damages received on
account of such injuries are excluded from taxable income
if the personal injuries are physical in character.
Exclusions from taxable income are considered as
exemptions from taxation, hence to be interpreted in
strictissimi juris against the taxpayer. The words “personal
injuries” should be given a restrictive meaning to refer only to
physical injuries. This interpretation finds its basis in the
provision of law which refers to “Accident or Health Insurance
or under Workmen’s Compensation Acts,” both of which refers
to “personal injuries or sickness.” [NIRC of 1997, Sec. 32 (B)
(4)] This could only mean, physical injuries.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
127
***8. 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: P500,000.00 for his
hospitalization; P250,000.00 as moral damages; and
P300,000.00 for loss of income during the period of his
treatment and recuperation. In addition, JR received from
his employer the amount of P200,000.00 representing the
cash equivalent of his earned vacation and sick leaves.
Which, if any, of the amounts he received are
subject to income tax ? Explain.
SUGGESTED ANSWER: The only amount received
by JR that may be subject to income tax is the portion of
the P200,000.00 which exceeds the monetized equivalent
of ten (10) days unutilized vacation and sick leave credits.
[Rev. Regs. No. 3-98, Sec. 2.78.1 (A), 2nd sentence as
amended by Rev. Regs. No. 10-2000]
The portion
equivalent of the monetized equivalent that does not
exceed ten (10) days unutilized vacation and sick leave
credits are non-taxable de minimis benefits.
The other amounts represent amounts of damages
received as compensation for JR’s injuries as a result of an
accident, the plane crash. The express provision of law
requires that, to be excluded from gross income, the damages
must be received on account of personal injuries [NIRC of
1997, Sec. 32 (B) (4)], referring to physical injuries
Consequently, such amounts are excluded from gross
income and not be subject to income taxation. (Ibid.)
**9. Mr. Manny, a citizen and resident of the
Philippines, is a professional boxer. In a professional
boxing match held in 2021, he won prize money in
United States in the amount of (US) dollars, 5 million.
128
FREE PRE-WEEK NOTES
TAXATION LAW
The US already imposed and withheld income
taxes from Mr. Manny’s prize money. May his prize
money qualify as an exclusion from his gross income?
Why?
SUGGESTED ANSWER: No. The prize money is not
excluded from gross income.
This is so because Mr. A is a professional athelete
and the law excluding from gross income all prizes and
awards granted to athletes in local and international sports
competitions, whether held in the Philippines or abroad
requires sanctions by national sports associations for
boxing. [NIRC of 1997, Sec. 32 (B) (7) (d)]
The sports association that sanctions professional
boxing fights in the U.S. is not the Philippine national
sports association for boxing but the different state
commissions for boxing.
Finally, the Philippine national sports association for
boxing only governs amateur athletes.The exclusion finds
application only to amateur athletes in order to promote
excellence in sports activities.
“INCOME FROM WHATEVER
SOURCE DERIVED”
**1. What is meant by “Income from whatever
source derived” as a component of gross income for
purposes of income taxation?
SUGGESTED ANSWER: “Income from whatever
source derived” refers to all income not expressly excluded
or exempted from the class of taxable income, irrespective
of the voluntary or involuntary action of the taxpayer in
producing the income. (Gutierrez v. Collector of Internal
Revenue, CTA Case No. 65, August 31, 1965)
The source of the income may be legal or illegal.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
129
They include the following:
a. Condonation or forgiveness of indebtedness in
certain instances.
b. Recovery of written-off debts, or refund of tax
payments. Under the so-called “tax benefit” rule where
there is recovery of written-off debts, or refund of tax
payments.
c. Taxable illegal income.
*2. What is meant by the “tax benefit rule”?
SUGGESTED ANSWER: The “tax benefit rule” or “the
equitable tax benefit rule,” posits that the “recovery of bad
debts previously allowed as deduction in the preceding year or
years shall be included as part of the taxpayer’s gross income
in the year of such recovery to the extent of the income tax
benefit of said deduction.” [NIRC of 1997, Sec. 34 (E) (1);
Rev. Regs. 5-99, Sec. 4, 1st sentence)
a. Illustrate the application of the tax benefit rule.
SUGGESTED ANSWER: Bad debts that were deducted
in a prior year, if paid during the current year are “recaptured”
and reported as part of the current year’s income.
**3. In 2019, your client was assessed by the BIR
P750,000.00 in deficiency business taxes which it paid
despite its belief that the assessment was erroneous.
Upon payment, it applied for a refund. So also, it
deducted the amount of P750,000.00 as taxes paid in
its ITR filed for 2019. This resulted to lower income
taxes paid for 2019.
In 2021, the BIR realized its mistake in issuing the
P750,000.00 assessment and granted your client’s
application for refund.
a. Your client now consults you and asks how you
are going to treat the P750,000.00 refund it received in
its 2021 ITR. Explain your answer.
130
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: The P750,000.00 refund is
subject to tax. I would advise my client to report the
P750,000.00 refund as miscellaneous income which is a
part of its gross income for the 2021.
My advice is based on the application of the concept
of the tax benefit rule. In 2019 when my client claimed
deduction of the P750,000.00 taxes paid, it realized a tax
benefit in the form of the reduction of the income tax due
from it on account of the said deduction.
It’s subsequent recovery thereof from a refund of the
P750,000.00 from the government in 2021 shall be treated
as a receipt of realized taxable income for the year 2021.
a. Supposing under the same above set of facts
except that in 2019 your client was not able to deduct
the amount of P750,000.00 because it already suffered
a net operating loss even without such deduction.
Would your advice of treating the P750,000.00
refund it received as a receipt of realized taxable
income for the year 2021 being taxable still hold water
? Explain your answer.
SUGGESTED ANSWER: No more. My answer is not
the same because this time the P750,000.00 that is
received is not subject to income taxation.
My client did not benefit from P750,000.00 tax paid
because the result of his business operation was a net loss
even without deduction of the taxes paid. The P750,000.00
tax paid did not help in reducing my client’s income tax
liability for 2019.
Its subsequent recovery in 2021 of the P750,000.00
shall be treated as a mere recovery or a return of capital,
hence, not treated as receipt of realized taxable income.
There is no need for my client to report it in the ITR.
NOTE NOT PART OF THE ANSWER: The above
discussion on the “tax benefit” rule finds application
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
131
whether the tax is a national or local tax so as it is allowed
as a deduction from gross income.
**4. Explain whether income from illegal gambling,
such as jueteng, masiao, etc., or from the commission
of crimes such malversation, estafa, theft, robbery,
etc., is taxable or non-taxable ?
SUGGESTED ANSWER: Such income are taxable.
Income from illegal gambling, such as jueteng, masiao, etc.,
or from the commission of a crimes such malversation,
estafa, theft, robbery, etc., is taxable. This so because these
income fall within the classification of “income from whatever
source derived” [NIRC of 1997, Sec. 32 (A)], hence taxable.
All receipts whether legal or illegal fall under the broad
category of “income from whatever source derived.”
The phrase “income from whatever source derived,” is
so broad that it includes all income not expressly excluded
or exempted from the class of taxable income, irrespective
of the voluntary or involuntary action of the taxpayer in
producing the income. (Gutierrez v. Collector of Internal
Revenue, CTA Case No. 65, August 31, 1965)
NOTE NOT PART OF THE ANSWER: The author
submits that the above also finds application in the case of
erroneous receipts of payments. (Javier v. Commissioner,
G.R. 78953, July 31, 1991, 199 SCRA 824)
DEDUCTIONS FROM GROSS INCOME
1. In general, what are the deductions from gross
income allowed under the National Internal Revenue
Code?
SUGGESTED ANSWER: The allowable deductions
are the
a) Optional standard deduction.
Sec. 34 (L), as amended by the TRAIN]
[NIRC of 1997,
FREE PRE-WEEK NOTES
TAXATION LAW
132
b) Itemized deductions. [Ibid., Sec. 34 (A) to (K), as
amended by the TRAIN]
1) Ordinary and necessary expenses
2) Interest
3) Taxes
4) Losses
5) Bad Debts
6) Depreciation
7) Depletion of Oil and Gas Wells and Mines
8) Charitable and Other Contributions
9) Research and Development
10) Pension Trusts
c) Extraordinary deductions.
1) Those allowed to insurance companies.
(Ibid., Sec. 37)
2) Deductions allowed to estates and trusts
availing of itemized deductions of income currently
distributed to beneficiaries. (Ibid., Sec. 61)
3) Losses from wash sales of stocks or
securities. (Ibid., Sec. 38)
4) Certain capital losses but only from capital
gains. (Ibid., Sec. 39)
5) Deductions allowed to private educational
institutions. [Ibid., Sec. 34 (A) (2)]
NOTE NOT PART OF THE ANSWER: No more personal
and additional exemptions for individuals. Starting January 1,
2018, the TRAIN has expressly repealed NIRC Sec. 35
entitled, Allowance of Personal Exemption for Individual
Taxpayer.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
133
No more exemptions for estates and trusts. The
TRAIN has also expressly repealed NIRC Sec. 62 entitled,
Exemption Allowed to Estates and Trusts.
Rationale for the repeal of NIRC Secs. 35 and 62,
The TRAIN has adopted a minimum income tax base of
P250,000.00 for individuals, estates and trusts.
Furthermore, the tax rates were also reduced.
Not deductible are personal, living or family expenses.
[NIRC of 1997, Sec. 36 (A) (1)]
**2. State the essential conditions which must be
satisfied in order that an expense may be validly
considered deductible for income tax purposes?
SUGGESTED ANSWER: The conditions that must
be complied with in order that an expense must be
considered deductible for income tax purposes:
a. There must be a specific provision of law allowing
the deductions, since deductions do not exist by
implication. (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, L26911, January 27, 1981)
b. The requirements for deductibility of the expense
must be met.
1) It must be
taxable year.
2) The
necessary.
paid
expense
or
must
incurred within the
be
ordinary
and
3) It must meet the business test rule and be
paid or incurred in carrying on a trade or business.
4) The substantiation rule must be complied
through substantially proving by evidence or records
the deductions claimed under the law. Otherwise,
the same will be disallowed. The mere allegation of
the taxpayer that an item of expense is ordinary and
134
FREE PRE-WEEK NOTES
TAXATION LAW
necessary does not justify its deduction. (Esso
Standard Eastern, Inc. v. Commissioner of Internal
Revenue, 175 SCRA 149)
5) The business expense must not be
an illegal expenditure, such as bribes, kickbacks,
for immoral purposes, etc.
c. There must be proof of entitlement to the
deductions. (Paper Industries Corporation of the
Philippines v. Court of Appeals, et al., 250 SCRA 434)
d. The deductions must not have been waived. (Rev.
Regs. No. 2, Sec. 76)
e. The withholding and payment of the tax required
must be shown. [NIRC of 1997, Sec. 34 (K), Secs. 58 and
81]
**3. Atty. Jerome, a practicing lawyer, owns a car
which he uses exclusively in his law practice. He also
spends for the driver’s salary, gasoline, oil, and
maintenance. In the taxable year in question, he had
the upholstery done and the body repainted which
would last for 3 years. He also pays a monthly rental
on his office space that he uses as his law office.
While on his way to court to attend a hearing, his
attache case, with some cash were stolen from his car.
His bad luck continued when his wallet was stolen
while he was unwinding in a disco bar.
He deducted all these expenses, supported by
receipts, in his annual income tax return.
Enumerate which of these expenses are allowable
as deductions and which are not. Explain.
SUGGESTED ANSWER: Atty. Jerome is allowed to
deduct all of the expenses except the value of the loss of
his wallet and the cost of the upholstery and the body
repaint which maybe included in the cost of his car to be
depreciated.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
135
The office rent is fully deductible because it is
payment for the continued use or possession of property
for the exercise of the Atty. Jerome’s profession. There is
no showing that he is paying the office rent with the end in
view of taking title to the office.
The value of the loss of the wallet is not allowed to be
deducted because it is a loss that is not connected with
Atty. Jerome’s exercise of his profession. The cost of the
upholstery and the body repaint are not allowed to be
deducted in full because they are capital expenditures
which prolong the life of an asset (the car). [NIRC of 1997,
Sec. 36 (A) (3)]
**4. 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 vidoke 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.
SUGGESTED ANSWER: 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 is P430,000.00 for the five (5) investors
or P86,000.00 each.
I would allow only a deduction in such amounts as are
reasonable under the circmstances but in no case shall all
136
FREE PRE-WEEK NOTES
TAXATION LAW
deductions for representation and entertainment expenses,
including those above enumerated, exceed 0.50% of net
sales. [NIRC of 1997, Sec. 34 (A) (1) (iv); Rev. Regs. 10-2002]
*5. Pursuant to the National Internal Revenue Code
for interest to be deductible, what are the requirements to
be met ? Explain.
SUGGESTED ANSWER:
In general, subject to
certain limitations, the following are the requisites for the
deductibility of interest expense from gross income:
a. There must be an indebtedness.
b. There should be an interest expense paid or
incurred upon such indebtedness.
c. The indebtedness must be that of the
taxpayer.
d. The indebtedness must be connected with
the taxpayer’s trade, business or exercise of
profession.
e. The interest expense must have been paid
or incurred during the taxable year.
f. The interest must have been stipulated in
writing.
g. The interest must be legally due.
h. The interest payment arrangement must not
be between related taxpayers.
i. The interest must not be incurred to finance
petroleum operations.
j. In case of interest incurred to acquire
property used in trade, business or exercise of
profession, the same was not treated as a capital
expenditure. (Rev. Regs. 13-2000, Sec. 3,
paraphrasing, arrangement and numbering supplied)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
137
k. The amount deducted must be within the
limits provided by law.
**6. Give the requisites for the deductibility of a loss.
SUGGESTED ANSWER: A loss may be deductible if
the general and specific requisites for its deductibility are
met.
a. There must be compliance with the general
requisites for deductibility as applied to losses:
1) There must be a specific provision of
law allowing the deductions, since deductions
do not exist by implication. (Atlas Consolidated
Mining and Development Corporation v.
Commissioner of Internal Revenue, L-26911,
January 27, 1981)
2)
There must be proof of entitlement
to
the
deductions.
(Paper
Industries
Corporation of the Philippines v. Court of
Appeals, 250 SCRA 434)
3)
The deductions must not have been
waived. (Rev. Regs. No. 2, Sec. 76)
b. The specific requirements for deductibility of
losses must be met:
1)
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.
2)
They must have been losses that
are actually sustained during the taxable year.
3)
They
must
not
have
been
compensated for by insurance or other forms
of indemnity.
138
FREE PRE-WEEK NOTES
TAXATION LAW
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)
They must not have been claimed as
a deduction for estate tax purposes in the
estate tax return. [NIRC of 1997, Sec. 34 (D)
(1), (a), 1st par., paraphrasing supplied]
*7. 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 militants had a bloody encounter and his
car was completely destroyed after a grenade hit it.
A wants for file a claim for casualty loss. Explain
the legal basis for your tax advice.
SUGGESTED ANSWER: I would advise A not to
claim for casualty loss because it would be disallowed.
A earns from gross compensation only.
allowed to deduct any items including losses.
He is not
*8. What is meant by “depreciation” as used in the
Tax Code ?
SUGGESTED ANSWER: Depreciation as used in the
Tax Code is the reasonable allowance for the exhaustion,
wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or business.
[NIRC of 1997, Sec. 34 (F) (1)]
The term is also applied to amortization of the value
of intangible assets, the use of which in the trade or
business is definitely limited in duration. (Basilan Estates,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
139
Inc. v. Commissioner of Internal Revenue, 21 SCRA 17)
Example: Incorporation expenses.
**9. On the part of the contributor, are contributions to
a candidate in an election allowed as a deduction from
gross income ?
SUGGESTED ANSWER: No. The political contributions
are not considered as ordinary expenses which would help
earn the income, nor are they considered charitable and other
contributions.
One of the requirements for deductibility is a specific
provision of law which recognizes such deduction. While it
is true that such a donation is exempt from the donor’s tax,
it does not necessarily follow that there is authority to
deduct the same from gross income for income tax
purposes.
**10. Years ago, Gabriel bought a parcel of land in
Mataas na Kahoy, Batangas for only PhP65,000. He
donated the land to his son, Thomas, in 1983 when the
property had a fair market value of PhP75,000, and
paid the corresponding donor’s tax.
Thomas, in turn, sold the property in 2004 to
Eleanne for PhP 6.5 million and paid the capital gains
tax, documentary stamp tax, local transfer tax, and
other fees and charges. Eleanne, in turn, donated the
land to Calabarzon School last August 30, 2021 to be
used as the site for additional classrooms. No donor’s
tax was paid, because Eleanne claimed that the
donation was exempt from taxation. At the time of the
donation to Calabarzon School, the land had a fair
market value of PhP 65 million.
How much in deduction from gross income may
Eleanne claim on account of the said donation?
SUGGESTED ANSWER: Eleanne may claim a
deduction from her gross income an amount not in excess of
140
FREE PRE-WEEK NOTES
TAXATION LAW
ten percent (10%) of her taxable income derived from trade,
business or profession as computed prior to the deduction of
the value of the donation made to Calabarzon School, if
Calabarzon School is a non-profit non-stock educational
institution and other charitable contributions that may have
been made by Eleanne [NIRC of 1997, Sec. 34 (H)] after
compliance with the substantiation requirements.
*11. Hidilyn, an amateur swimmer, won in a
swimming competition sponsored by the Kalayaan
Swimmers, a sports association duly accredited by the
Philippine Swimming Association. Hidilyn received the
amount of P500,000.00 as her prize which was donated by
Robinson Land Corporation. Could Robinson Land
Corporation deduct the P500,000.00 from its gross
income ? Decide. .
SUGGESTED ANSWER: Yes. The amount is fully
deductible if the Philipppine Swimming Association is duly
accredited with the Philippine Olympic Committee. [Rep.
Act No. 7549, Sec. 1]
**12. Harold, a Filipino citizen and a professional
golfer, filed his income tax return for 2020 claiming
optional standard deductions (OSD). Realizing that he
has enough documents to substantiate his professionconnected expenses, he now plans to file an amended
tax return for 2020, in order to claim itemized
deductions, since no audit has been commenced by
the BIR on the return he previously filed. Will Harold
be allowed to amend his return ? Why or why not ?
SUGGESTED ANSWER: No more. Once the election
to avail of OSD is signified in the return, it shall be
irrevocable for the taxable year for which the return is
made. This means that a taxpayer who initially filed a
return availing OSD is precluded from amending said
return in order to shift to the itemized deductions.” (Rev.
Regs. No. 16-2008, Sec. 7, 1st and 2nd sentences, 1st par.)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
141
*13. In 2021, the Commissioner of Internal Revenue
assessed against a manufacturing corporation the
amount of P1,000,000 as deficiency income tax. The
deficiency was brought about by the disallowance of
items claimed by the corporation as deductible business
expenses for the taxable year. These were a) expenses
paid to an advertising firm in order to create a favorable
image for the corporation; and b) litigation expenses
incurred in defense of a title to corporate property.
The corporation argued that they were ordinary
and necessary business expenses incurred during the
taxable year in carrying out its business and were,
therefore, deductible. The Commissioner of Internal
Revenue contended otherwise.
Resolve the controversy, giving reasons.
SUGGESTED ANSWER: Public relations fees for
enhancing the image of the corporation are in the nature of
capital expenditures (Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal
Revenue, L-26911, January 27, 1981), hence not
deductible as business expenses. This is so because the
enhanced image of the corporation benefits numerous
taxable periods.
The litigation expenses incurred in defense of a title to
corporate property are not properly deductible as ordinary
and necessary expenses because they constitute part of
the cost of the property. (Rev. Regs. No. 2, Sec. 120;
Atlas Consolidated Mining and Development Corporation
v. Commissioner of Internal Revenue, supra)
*14. Jayjay is a very bright computer science
graduate. He was hired by Hewlett Packard. To entice
him to accept the offer for employment, he was offered
the arrangement that part of is compensation would be
an insurance policy with a face value of P20 Million.
FREE PRE-WEEK NOTES
TAXATION LAW
142
Ebeng, Jayjay’s mother, made the beneficiary of the
insurance policy.
Can the company deduct from its gross income
the amount of the premium ? Reason briefly.
SUGGESTED ANSWER: Yes. It is deductible being
a legitimate business expense and Hewlett Packard, the
employer is not the beneficiary under the policy. [NIRC of
1997, Sec. 36 (A) (4)] It is a deductible legitimate business
expense because the taking of the insurance policy is part
of Jayjay’s compensation package.
*15. ABC Co., a Philippine corporation, issued
preferred shares of stock with the following features:
a. Non-voting.
b. Preferred and cumulative dividends at the rate
of 10% per annum, whether or not in any period the
amount is covered by earnings or projects.
c. In the event of dissolution of the issuer, holders
of preferred stock shall be paid in full or ratably as the
assets of the issuer may permit before any distribution
shall be made to common stockholders.
d. The issuer has the option to redeem the
preferred stock.
ABC Co. declared dividends on the preferred stock
and claimed the dividends as interests deductible from its
gross income for income tax purposes.
The BIR
disallowed the deduction. ABC Co. maintains that the
preferred shares with their features are really debt and
therefore the dividends are really interests. Decide.
SUGGESTED ANSWER: The dividends are not
interests considered as deductible expense.
Preferred shares are not loans but considered capital
regardless of the conditions under which such shares are
issued and dividends or “interests” paid thereon are not
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
143
allowed as deductions from the gross income of
Corporations. (Rev. Regs. No. 2, Sec. 78, par.3; Rev.
Memo. Circ. No. 17-71)
Stated otherwise, the preferred shares are not
considered as indebtedness because they do not help
earn the income from which they are deductible.
**20. Roberto was the Customs Broker of
Logistics Co., Inc. (LOGINC). He invited the Head of
the Electronics Section of the Port of Manila, Bureau of
Customs to lunch at the Manila Hotel to discuss the
early release of electronic imports of LOGINC’s clients.
At breakfast the following day, Roberto met a
prospective capitalist interested to enter into a joint
venture with LOGINC for the construction of a
Container Yard/Container Freight Stations (CY/CFS) in
Batangas City.
Roberto incurred expenses for the lunch and
breakfast meetings he had with the Bureau of Customs
official and the prospective capitalist, 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 LOGINC granted
his request.
Can LOGINC claim an allowable deduction for the
expenses incurred by Roberto? Explain your answer.
SUGGESTED ANSWER: The expenses incurred for
treating to lunch the Bureau of Customs official for the
purpose of discussing the release of LOGINC’s clients
electronic imports may be considered as a bribe and not
deductible as an expense. It is highly irregular to discuss
the subject over lunch instead at the office of the Bureau of
Customs official. Thus, such expense is not deductible.
Also not deductible are the expenses for treating the
prospective capitalist to breakfast because they were not
144
FREE PRE-WEEK NOTES
TAXATION LAW
incurred for the purpose of earning income but for the
purpose of raising capital.
INCOME TAX ON INDIVIDUALS
**1. 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 P1,000,000.00. Upon
receipt of the funds, he went to a casino in Pasay City
and won the P30,000,000.00 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 P5,000.00.
Which of the above sums of money is/are subject
to income tax ? Explain.
SUGGESTED ANSWER: Only the amount of
P30,000,000.00 won in the slot machine is subject to
income taxes because it is considered “income from
whatever source derived” [NIRC of 1997, Sec. 32 (A)],
hence taxable.
The phrase “income from whatever source derived,”
is so broad that it includes all income not expressly
excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the
taxpayer in producing the income. (Gutierrez v. Collector
of Internal Revenue, CTA Case No. 65, August 31, 1965)
This includes winnings from gambling such as those
derived from the slot machine.
Upon the other hand, the amount of P1,000,000.00
given by the Philippine Government is not subject to
income taxation because it is excluded from gross income.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
145
It is a gift or donation which is not considered as income
subject to tax because it is excluded from gross income.
Finally, the Lotto prize of P5,000.00 is not subject to
income tax because it is below P10,000.00. [NIRC of 1997,
Sec. 24 (B) (1), as amended by the TRAIN]
The above conclusion finds application whether Mr. D
is a resident or non-resident Filipino citizen.
NOTES NOT PART OF THE ANSWER:
a. It is error on the part of some quarters to claim that
the P30,000,000.00 is not subject to income tax because
the final tax was already withheld, Withheld taxes are
nothing more than the advance payment of tax at source,
in this case the income tax due on the earnings.
b. Others likewise erroneously submit that the
P1,000,000.00 given by the Philippine Government,
through the Philippine Olympic Committee, is taxable
income because there is no specific provision of law that
exempts it from income taxation. The author insists on his
interpretation that this is a gift or donation that is excluded
from income taxation.
*2. X, a multinational corporation doing business
in the Philippines donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the
Philippines.
Assuming the shares of stocks were given to Mr.
Y in consideration of his services to the corporation,
what are the tax implications? Explain. (1996)
SUGGESTED ANSWER: The value of the shares
shall be taxable as compensation income because it was
paid as a result of employer-employee relationship.
It is apparent that the intention of X is to compensate,
Mr. Y its employee, for services rendered because the
FREE PRE-WEEK NOTES
TAXATION LAW
146
shares of stock would not have been given if Mr. Y was not
an employee.
*3. Mr. Barrios is a non-resident alien based in
California, U.S.A. During the calendar year 2021, he
came to the Philippines several times and stayed in the
country for an aggregated period of more than 180
days. How will Mr. Barrios be taxed on his income
derived from sources within the Philippines and from
abroad ?
SUGGESTED ANSWER: Mr. Barrios having stayed in
the Philippines for more than 180 days is considered as a
non-resident alien engaged in trade or business in the
Philippines. As such, he should be subject to taxation in the
same manner as an individual citizen or resident alien on his
taxable income received from all sources within the
Philippines. [NIRC of 1997, Sec. 25 (A) (1)]
INCOME TAXATION OF CORPORATIONS
*1. Define or explain the meaning of corporation
for income tax purposes.
SUGGESTED ANSWER: The term corporation shall
a. include:
1)
partnerships, no matter how created
organized,
2) joint stock companies,
3) joint accounts (cuentas en participacion),
4) associations or insurance companies.
b. but does not include:
1) general professional partnerships and
2) a joint venture or consortium formed
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
147
a) for purpose of undertaking construction
projects or
b) engaging in
(1) petroleum,
(2) coal,
(3) geothermal, and
(4)
other
pursuant to
energy
operations,
(a) an operation or consortium
agreement
(b) under a service contract
with the Government.” [NIRC of
1997, Sec. 22 (B), 1st sentence,
arrangement and numbering supplied]
**2. What is the rationale of the law in imposing
what is known as the Minimum Corporate income tax
on Domestic and Resident Foreign Corporations ?
SUGGESTED ANSWER: “The imposition of the
Minimum Corporate Income Tax (MCIT) is designed to
forestall the prevailing practice of corporations of over
claiming deductions in order to reduce their income tax
payments. The filing of income tax returns showing a tax
loss every year goes against the business motive which
impelled the stockholders to form the corporation. This is
the reason why domestic corporations (and resident
foreign corporations) after the recovery period of four years
from the time they commence business operations, they
become liable to the MCIT whenever this tax imposed at
2% of gross income exceeds the normal corporate income
tax imposed on net income.” (Sponsorship Speech,
Chairman of Senate Ways and Means Committee)
148
FREE PRE-WEEK NOTES
TAXATION LAW
**3. Is a corporation which is exempted from the
minimum corporate income tax automatically
exempted from the regular corporate income tax ?
Explain and illustrate your answer.
SUGGESTED ANSWER: No. A corporation exempted
from the minimum corporate income tax is not automatically
exempted from the regular corporate income tax.
The minimum corporate income tax merely
substitutes for the regular corporate income tax. This is
evident from the fact that the 2% minimum corporate
income tax is imposed whenever such tax is greater than
the regular corporate income tax of 30% based on the
income subject to tax.
Thus, an exemption from the minimum corporate
income tax does not mean automatic exemption from the
regular income tax.
For example, the corporation’s income tax labillity as
computed using the minimum corporate income tax
method is lower than its income tax liability using the
regular or normal rate the corporation is exempted from the
payment of the minimum corporate income tax but it must
pay the regular or normal income tax.
**4. Distinguish regular corporate or normal
income tax from the minimum corporate income tax.
SUGGESTED ANSWER: The distinctions between
regular corporate or normal income tax and the minimum
corporate income tax are the following:
a. As to taxpayer: The regular corporate or normal
income tax applies to all corporate taxpayers while the
minimum corporate income tax applies only to domestic
corporations and resident foreign corporations.
b. As to tax rate: The regular corporate or normal
income tax is 30% while the minimum corporate income
tax is 2%.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
149
c. As to tax base: The regular corporate income tax is
based on the net taxable income while the minimum
corporate income tax is based on gross income.
d. As to period of applicability: The regular corporate
income tax is applicable once the corporation commenced
its business operation while the minimum corporate
income tax is applicable beginning on the fourth taxable
year following the commencement of business operation.
e. As to imposition: The minimum corporate income
tax is imposed whenever it is greater than the regular
corporate income tax of the corporation. (NIRC of 1997,
Sec. 27(A) and (E); Rev. Regs. No. 9-98)
**5. KKK Corp. secured its Certificate of
Incorporation from the Securities and Exchange
Commission on June 3, 2020. It commenced business
operation on August 12, 2020. In April 2021, Ms. J, an
employee of KKK Corp. in charge of preparing the
annual income tax return of the corporation for 2020,
got confused on whether she should prepare payent
for the regular corporate income tax or the minimum
corporate income tax.
As Ms. J’s supervisor, what will be your advice ?
(2015, paraphrasing and dates supplied supplied)
SUGGESTED ANSWER: 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. [NIRC of 1997, Sec 27 (E) (1)]
Since KKK Corp. only commenced business
operation on August 12, 2020, or less than one (1) year
following the commencement of its business operation, the
minimum corporate income tax is not applicable.
FREE PRE-WEEK NOTES
TAXATION LAW
150
**6. RAMITECH, a corporation not engaged in the
realty business, bought a piece of land in 2020 which it
sold to another corporation one year later. It realized a
net profit of P1,000,000.00. What income tax rate
would it be subject to and why ? (1988, date supplied)
SUGGESTED ANSWER: Assuming that RAMITECH
is a domestic corporation, it shall be subject to the 6%
presumed capital gains tax. There is no showing in the
problem that the piece of land is used in its trade or
business, hence it is classified as a capital asset.
The tax is a final tax.
NOTE NOT PART OF THE ANSWER: The author
further opines that disposition by domestic corporations of
real property other than “land and/or buildings” are not
subject to the 6% presumed capital gains tax. This is in
according with the doctrine of inclusio unius est exclusio
alterius (the inclusion of one is the excousion of the
others). The inclusion of the phrase ““land and/or
buildings” excludes all other kinds of real property. NIRC
of 1997, Sec. 27 (D) (5) This is unlike the case of citizens
and resident aliens where the 6% presumed capital gains
tax is applicable to dispostion of “real property.” [NIRC of
1997, Sec. 24 (D)]
Furthermore, foreign corporations, whether residents
or non-residents, are no subject to this kind of tax.
***7. What is the “immediacy test”? Explain
briefly.
SUGGESTED ANSWER: This is a test that has been
developed under Amercian jurisprudence in order to
determine the
“reasonable needs” of the business in
order to justify an accumulation of earnings and not subject
the accumulation to the improperly accumulated earnings
tax of ten percent (10%) of the improperly accumulated
taxable income. [NIRC, Sec. 29 (A), Rev. Regs. No. 22001, Sec. 3, 1st par.)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
151
The term “reasonable needs of the business” meanS
the immediate needs of the business, including reasonably
anticipated needs. (Rev. Regs. No. 2-2001, Sec. 3, 1st
par.)
ALTERNATIVE ANSWER: It is a test to determine
whether the accumulated earnings are to be subject to the
improperl accumulated earnings tax of ten percent (10%)
of the improperly accumulated taxable income. [NIRC,
Sec. 29 (A), Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
“An accumulation of earnings, profits or profits
(including undistributed earnings or profits of prior years) is
unreasonable if it is not necessary for the purpose of the
business, considering all the circumstances of the case.
To determine the ‘reasonable needs of the business’ in
order to justify an accumulation of earnings, these
Regulations hereby adhere to the so-called “Immediacy
Test” under American jurisprudence as adopted in this
jurisdiction. Accordingly, the term ‘reasonable needs of the
business’ are hereby construed to mean the immediate
needs of the business, including reasonably anticipated
needs. In either case, the corporation should be able to
prove an immediate need for the accumulation of the
earnings and profits, or the direct correlation of anticipated
needs to such accumulation of profits. Otherwise, such
accumulation would be deemed to be not for the
reasonable needs of the business, and the penalty tax
shall apply.”
The tax is ten percent (10%) of the improperly
accumulated taxable income. [NIRC of 1997, Sec. 29 (A),
Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
***8. In 2019, AMORSECO, Inc.’s net profit before
tax was P35 million while its operating expenses was
P31 million. In 2020, its net profit before tax was P40
million and its operating expenses was P38 million. It
did not declare dividends for 2019 and 2020. And it has
no proposed capital expenditures for 2020 and the
FREE PRE-WEEK NOTES
TAXATION LAW
152
immediate future. It has a paid-up capital of P20 million
each for years ended 2019 and 2020.
May AMORSECO be subject to the improperly
accumulated tax on its retained profits for 2019 and
2020 ?
SUGGESTED ANSWER: Yes, since the accumulation
is not reasonably necessary for the immediate needs of the
business.
AMORSECO’s paid-up capital is only P20 million but
it has an accumulation of earnings or profits (including
undistributed earnings or profits of prior years) of more
than 100% of such paid-up capital.
It is evident that the accumulation is unreasonable
because it is not necessary for the purpose of the
business, considering the immediate needs of the
business, including reasonably anticipated needs. The
facts of the problem do not show a direct correlation of
anticipated needs to such accumulation of profits. Thus the
accumulation made by AMORSECO is deemed not for the
reasonable needs of the business.
AMORSECO is subject to the ten percent (10%) tax
on the improperly accumulated earnings tax for the years
2019 and 2020. (Rev. Regs. No. 2-2001, Sec. 3, 1st par.)
9. To what domestic corporations is the concept
of Improperly Accumulated Income Tax (IAET) not
applicable ?
SUGGESTED ANSWER: The IAET shall not apply to
the following corporations:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations [NIRC of 1997, Sec. 29
(B), (2) arrangement and numbering supplied];
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
153
d. Taxable partnerships;
e. General professional partnerships;
f. Non- taxable joint ventures; and
g. Enterprises duly registered with the Philippine
Economic Zone Authority (PEZA) under R.A. 7916, and
enterprises registered pursuant to the Bases Conversion
and Development Act of 1992 under R.A. 7227, as well as
other enterprises duly registered under special economic
zones declared by law which enjoy payment of special tax
rate on their registered operations or activities in lieu of
other taxes, national or local. (Rev. Regs. No. 2-2001,,
Sec. 4, 1st par.)
* 10. Kria, Inc., a Korean corporation engaged in
the business of manufacturing electric vehicles,
established a branch office in the Philippines in 2014.
The Philippine branch constructed a manufacturing
plant in Kabuyao, Laguna, and the construction lasted
three (3) years. Commercial operations in the Laguna
plant began in 2018.
In just two (2) years of operation, the Philippine
branch had remittable profits in an amount exceeding
175% of its capital. However, the head office in Korea
instructed the branch not to remit the profits to the
Korean head office until instructed otherwise. The
branch chief finance officer is concerned that the BIR
might hold the Philippine branch liable for the 10%
improperly accumulated earnings tax (IAET) for
permitting its profits to accumulate beyond reasonable
business needs.
Is it subject to 15% branch profit remittance tax
(BPRT)? (2018, dates supplied)
SUGGESTED ANSWER: No. The branch profits
remittance tax of fifteen (15%) which is imposed on any
profit remitted by a branch to its head office “which shall
154
FREE PRE-WEEK NOTES
TAXATION LAW
be based on the total profits applied or earmarked for
remittance without any deduction for the tax component”.
[NIRC of 1997, Sec. 28 (A) (5), 1st sentence]
No tax is due until actual remittance is made. No
such remittance took place because of the instructions
from the head office.
The phrase “which shall be based on the total profits
applied or earmarked for remittance without any deduction
for the tax component” [NIRC of 1997, Sec. 28 (A) (5), 1st
sentence] provides the basis for computing the amount of
the tax to be paid when the actual remittance is to be
made and does not determine whether or not Kria, Inc. is
subject to the tax.
***11. Sometime in 1976 the Phillippines entered
into a Convention with Canada for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income.
On April 24, 2000, Air Canada a "foreign
corporation organized and existing under the laws of
Canada” was granted an authority to operate as an
offline carrier by the Civil Aeronautics Board, subject
to certain conditions, which authority would expire on
April 24, 2005. As an off-line carrier, Air Canada does
not have flights originating from or coming to the
Philippines and does not operate any airplane [in] the
Philippines.
On July 1, 1999, Air Canada engaged the services
of Aerotel Ltd., Corp. (Aerotel) as its general sales
agent in the Philippines. Aerotel sells Air Canada’s
passage documents in the Philippines.
For the period ranging from the third quarter of
2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax
returns and paid the income tax on Gross Philippine
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
155
Billings in the total amount of ₱5,185,676.77, detailed
as follows:
1âwphi1
Applicable
Quarter[/]Year
Date
Filed/Paid
3rd Qtr 2000
Amount of Tax
November 29,
P 395,165.00
2000 April 16,
381,893.59
May 30, 2001
522,465.39
August
1,033,423.34
2000
Annual ITR
2001
1st Qtr 2001
2nd Qtr 2001
29,
2001
3rd Qtr 2001
November 29,
765,021.28
April 15, 2002
328,193.93
May 30, 2002
594,850.13
August
1,164,664.11
2001
Annual
ITR
2001
1st Qtr 2002
2nd Qtr 2002
29,
2002
TOTAL
P 5,185,676.77
On November 28, 2002, Air Canada filed a written
claim for refund of alleged erroneously paid income
taxes amounting to ₱5,185,676.77 before the Bureau of
Internal Revenue. It found basis from the revised
definition of Gross Philippine Billings under the 1997
National Internal Revenue Code
a.How shall Air Canada be subject to income
taxation ?
1
156
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: Air Canada is subject to
the regular income tax rate of 32% (now 30%) tax on its
taxable income because it is a resident foreign corporation
for income tax purposes. Air Canada was engaged in
business in the Philippines through a local agent that sells
airline tickets on its behalf.
It is a resident foreign corporation doing business in
the Philippines imposed 32% (now 30% under Rep. Act
No. 9337) on income subject to tax subject to any
applicable tax treaty to which the Philippines is a signatory.
Pursuant to Article 8 of the Republic of the PhilippinesCanada Tax Treaty, Air Canada may only be imposed a
maximum tax of 1 1/2% of its gross revenues earned from
the sale of its tickets in the Philippines. (Air Canada v.
Commissioner of Internal Revenue, G.R. No. 169507,
January 11, 2016, words in parentheses supplied)
The correct interpretation of provisions which imposes
the 2 ½% Gross Philippine Billings and that which imposes
the 32% (now 30%) tax rate is that: international air
carriers maintaining] flights to and from the Philippines
shall be taxed at the rate of 2 1/2% of its Gross Philippine
Billings while international air carriers that do not have
flights to and from the Philippines but nonetheless earn
income from other activities in the country like sale of
airline tickets will be taxed at the rate of 32% (now 30%) of
such taxable income. (Ibid.)
While Air Canada is taxable as a resident foreign
corporation subject to 32% (now 30%) on its taxable
income from sale of airline tickets in the Philippines, it
could only be taxed at a maximum of 1 1/2% of gross
revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to Canada as
a “foreign corporation organized and existing under the
laws of Canada.” (Ibid.)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
157
b. Rule on the application for refund.
SUGGESTED ANSWER: Refund denied.
The P5,185,676.77 Gross Philippine Billings tax paid
by Air Canada was computed at the rate of 1 ½% of its
gross revenues amounting to P345,711,806.08 from the
third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section
28(A)(l) of the 1997 National Internal Revenue Code [32%
of taxable income, that is, gross income less deductions,
now 30%] will exceed the maximum ceiling of 1 ½% of
gross revenues as decreed in Article VIII of the Republic of
the Philippines-Canada Tax Treaty. Hence, no refund is
forthcoming. (Air Canada v. Commissioner of Internal
Revenue, G.R. No. 169507, January 11, 2016)
TAXATION OF EDUCATIONAL
INSTITUTIONS, HOSPITALS AND NONSTOCK NON-PROFIT RELIGIOUS
CHARITABLE AND OTHER SIMILAR
INSTITUTIONS
**1. University of Bigain is a proprietary
educational institution. In 2020, despite the pandemic
it was able to declare dividends to its stockholders.
It’s earnings were delived solely from the tuition fees it
collected from its students. It collected and received
the following:
(1) Tuition fees
(2) Dormitory
fees
from
maintained outside its campus
dormitories
(3) Rentals from canteen concessionaires
(4) Interest from money-market placements
of the tuition fees
FREE PRE-WEEK NOTES
TAXATION LAW
158
(5) Interests from its deposits of the peso
tuition fees
(6) Capital gains from the sale of McJolli
shares of stock of not traded in the stock
exchange
(7) Interest derived from its US Dolllar
deposit under the Expanded Foreign Currency
Deposit System
(8) Capital gains from the sale of a parcel of
landit bought for investment purposes.
(9) Fees to answer
laboratory equipment
(10)
newspaper.
for
breakage
of
Fees collected for the school
a. Which among the following
exempted from income taxation ?
receipts
are
SUGGESTED ANSWER: None. All of the above
cited income shall be subject to income taxation because
University of Bigain is a proprietary educational institution.
It is exempt from taxation on its income only in accordance
with law, and up to the present, there is no law that grants
income tax exemption.
b. If your answer to the first question is in the
negative, how are the above receipts subject to
taxation ?
SUGGESTED ANSWER: University of Bigain is a
proprietary educational institution because it is a private school
maintained and administered by private individuals or groups
with an issued permit to operate from the Commission on
Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA) in accordance with
existing laws and regulations.” [NIRC of 1997, Sec. 27 (B), 3rd
sentence]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
159
As such it shall pay a tax of ten percent (10%) on its
taxable income except on its passive income [items no.
(4) up to (8))], provided that if the gross income from
unrelated trade, business or other activity (such as items
no. (2) and (3)] exceeds fifty percent (50%) of the total
gross income derived by University of Bigain from all
sources, the regular or normal income tax of thirty percent
(30%) shall be imposed on the entire taxable income.
[NIRC of 1997, Sec. 27 (B), 3rd sentence, in relation to
Sec. 27 (A) and (D)]
*2. A group of philantrophists organized a nonstock, non-profit hospital for charitable purposes to
provide medical services to the poor. The hospital
also accepted paying patients although none of its
income accrued to any private individual; all income
were plowed back for the hospital’s use and not more
than 30% of its funds were used for administrative
purposes.
Is the hospital subject to tax on its income? If it
is, at what rate? (2013)
SUGGESTED ANSWER: Yes. The hospital is subject to
tax at the rate of ten percent (10%) on its taxable income
except those on certain passive income provided that if the
gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived
by such hospital from all sources the regular or normal
income tax of thirty percent (30%) shall be imposed on its
entire taxable income. [NIRC of 1997, Sec. 27 (B), 3rd
sentence, in relation to Sec. 27 (A) and (D)]
Thus, the income derived by the hospital from its paying
patients, even if not distributed to its members, is considered
as taxable income. (CIR v. St Luke’s Medical Center, Inc., G.R.
Nos. 195909 & 195960, September 26, 2012)
160
FREE PRE-WEEK NOTES
TAXATION LAW
***3. La Sallian Educational Innovators Foundation,
Inc. (De La Salle-St. Benilde) is a non-stock, non-profit
domestic corporation duly organized and existing under
the laws of the Philippines. On June 17, 2005, The
Commissioner of Internal Revenue (CIR) issued two (2)
Assessment Notices with demand letters against De La
Salle-St. Benilde for deficiency income tax in the amount of
P122,414,521.70, inclusive of interest
To contest the deficiency taxes assessed, De La
Salle-St. Benilde filed a Protest or Request for
Reconsideration to the CIR on July 20, 2005. Despite the
submission of all documents in support of the protest the
CIR did not act on it. De La Salle-St. Benilde then filed a
Petition for Review before the Special First Division of the
CTA Division through registered mail on April 17, 2006,
the last day of filing the appeal. However, it was only able
to pay the docket and other legal fees nine days after or
on April 26, 2006.
The CIR alleged that the De La Salle-St. Benilde has
already lost its tax-exempt status, making it liable to
deficiency income tax. It may be a non-stock entity but it
is definitely a profit-oriented organization wherein
majority of its revenue-operating activities are generating
huge amount of profit amounting to P643 million that it
earned from expensive tuition fees collected from its
students. Furthermore, the taxpayer's Ruling for
exemption from the BIR was obtained in 1988, hence, all
Rulings issued before the implementations or RA No.
8424 or CTRP was repealed, thereby, requiring the
taxpayer to apply for a new Revenue Ruling for exemption
taking consideration of its income earning activities.
a. Has De La Salle-St. Benilde lost its tax-exempt
status under the 1987 Constitution ?
SUGGESTED ANSWER: No because the 1987
Constitution expressly exempts all revenues and assets of
non-stock, non-profit educational institutions from taxes
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
161
provided that they are actually, directly and exclusively
used for educational purposes. (La Sallian Educational
Innovators (etc.), Inc. v. Commissioner of Internal
Revenue, G.R. No. 202792, February 27, 2019 citing
1987 Constitution, Article XIV)
“(T)he constitutionally mandated tax privilege granted to
non-stock non-profit educational institutions plays an important
role in promoting quality and affordable education in the
country.” (Ibid.) “The tax exemption was seen as beneficial to
students who may otherwise be charged unreasonable tuition
fees if not for the tax exemption extended to all revenues and
assets of non-stock, non-profit educational institutions.” (Ibid.)
Where a previous BIR Ruling was issued declaring a
Foundation as a non-stock, non-profit educational institution
exempt from taxes there is no need to secure a new BIR
Ruling to claim its exemption after amendment of the Tax
Code considering that the BIR Ruling was never revoked, and
the primary purpose of petitioner Foundation remained the
same.” (Ibid.) “The tax exemption expressly granted by the
1987 Constitution, the supreme law of the land, cannot be set
aside by any statute, especially by a mere technicality in
procedure.” (Ibid.)
Finally, earning profits does not change the character of
non-profit institution. “The Constitution does not require that the
revenues and income must have also been earned from
educational activities or activities related to the purposes of an
educational institution. The phrase ‘all revenues’ is unqualified by
any reference to the source of revenues.” (Ibid.) “Every
responsible organization must be so run as to, at least insure its
existence, by operating within the limits of its own resources,
especially its regular income. In other words, it should always
strive, whenever possible, to have a surplus.” (Ibid.)
b. Is the belated payment of the docketing fee
sufficient ground to dismiss De La Salle-St. Benilde’s
petition? Why?
FREE PRE-WEEK NOTES
TAXATION LAW
162
SUGGESTED ANSWER: No.
The general rule is that a petition for review is
perfected by timely filing it and paying the requisite docket
fees and other lawful fees. However, there are exceptions
to the stringent requirement as to call for a relaxation of the
application of the rules, such as:
(1) most persuasive and weighty reasons;
(2) to relieve a litigant from an injustice not commensurate
with his failure to comply with the prescribed procedure;
(3) good faith of the defaulting party by immediately
paying within a reasonable time from the time of the default;
(4) the existence of special or compelling circumstances;
(5) the merits of the case;
(6) a cause not entirely attributable to the fault or
negligence of the party favored by the suspension of the rules;
(7) a lack of any showing that the review sought is
merely frivolous and dilatory;
(8) the other party will not be unjustly prejudiced
thereby;
(9) fraud, accident, mistake or excusable negligence
without appellant's fault;
(10) peculiar legal and equitable circumstances
attendant to each case;
(11) in the name of substantial justice and fair play;
(12) importance of the issues involved; and
(13) exercise of sound discretion by the judge guided
by all the attendant circumstances. Concomitant to a liberal
interpretation of the rules of procedure should be an effort
on the part of the party invoking liberality to adequately
explain his failure to abide by the rules.” (La Sallian
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
163
Educational Innovators (etc.), Inc. v. Commissioner of
Internal Revenue, G.R. No. 202792, February 27, 2019)
In other words, while procedural rules are important in
the administration of justice, they may be excused for the
most persuasive and meritorious reasons in order to
relieve a litigant of an injustice that is not commensurate
with the degree of his thoughtlessness in not complying
with the procedure prescribed. (Ibid.)
To reiterate, De La Salle-St. Benilde was able to
establish that it is a tax exempt entity under the 1987
Constitution. It has timely filed its Protest to the tax
deficiency assessment. It was also able to actually pay the
full amount of the required docket and legal fees in the
amount of P861,178.34, but it was nine (9) days late.
Evidently, it immediately paid the docket and legal fees
upon the CTA's assessment of the proper amount which
showed petitioner's good faith. (Ibid.)
Moreover, the issue involved in this case is no less
than the tax assessment over a non-stock, non-profit
educational institution, which the 1987 Constitution
mandated to be tax exempt. Otherwise stated, what is at
stake is the opportunity for the proper and just
determination of De La Salle-St. Benilde's status as a taxexempt entity under the 1987 Constitution, and a
deprivation of a substantial amount of property. (Ibid.)
Taking into account the importance of the issues
raised in the petition filed before the CTA Division, what De
La Salle-St. Benilde stands to lose, and considering the
merits of said petition, it should not be dismissed solely
based on the technicality of belated payment of the
docketing fee to better sercve the ends of justice. (Ibid.)
***4. Under Article XIV, Section 4 (3) of the 1987
Philippine Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually,
directly and exclusively for educational purposes, are
164
FREE PRE-WEEK NOTES
TAXATION LAW
exempt from taxes and duties. Are income derived from
dormitories, canteens and bookstores, as well as interest
income on bank deposits and yields from deposit
substitutes automatically exempt from taxation ? Explain.
SUGGESTED ANSWER: Yes. “The Constitution does
not require that the revenues and income must have also
been earned from educational activities or activities related
to the purposes of an educational institution. The phrase
‘all revenues’ is unqualified by any reference to the source
of revenues.” (La Sallian Educational Innovators (etc.), Inc.
v. Commissioner of Internal Revenue, G.R. No. 202792,
February 27, 2019 citing 1987 Constitution, Article XIV)
So long as the revenues and income are actually,
directly and exclusively used for educational purposes they
are exempt irrespective of the source.
ALTERNATIVE ANSWER: No. because there are
conditions that are required to be complied with.
a. Conditions for tax exemption of income generated
by a school operated canteen/book-store.
1) Owner-operator must be a non-stock, nonprofit private educational institution.
2)
Such canteen/bookstore must be
located within the school premises. (There are some
who dispute this condition in the light of the
provisions of the 1987 Constitution that does not
make a distinction with regard to the origin of the
funds, so long as they are actually, directly and
exclusively used for educational purposes. Refer to
La Sallian Educational Innovators (etc.), Inc. v.
Commissioner of Internal Revenue, G.R. No. 202792,
February 27, 2019 citing 1987 Constitution, Article
XIV)
3) Owned and operated by the private
educational institution as an ancillary activity.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
165
(Finance Dept. Order No. 137-87, as amended, Sec.
2.2)
4) The income must be actually, directly and
exclusively used for educational purposes.
b. Conditions for tax exemption of passive income
earned by educational institutions.
1) The educational, institution must be nonstock, non-profit.
2) Inclusion in their annual information return
and duly audited financial statements.
3) Certification from depository banks as to the
amount of interest income earned from passive
investments not subject to the 20% final withholding
tax.
4) Certification of actual utilization of said
income.
5) Board resolution on proposed project to be
funded out of the money deposited in banks or
placed in money market placements. (Finance
Department Order No. 149-95, November 24, 1995)
***5. CMI School, Inc., a non-stock, non-profit
corporation, donated its three parcels of idle land
situated in the Municipality of Cuyapo, Nueva Ecija to
SLC University, another non-stock, non-profit
corporation, in recognition of the latter’s contribution
to and participation in the spiritual and educational
development of the former.
If SLC University later sells the three parcels of
idle land to Puregold Supermarket, Inc., a stock
corporation, will SLC University be liable for capital
gains tax? Explain your answer. (2017, paraphrasing
supplied)
166
FREE PRE-WEEK NOTES
TAXATION LAW
SUGGESTED ANSWER: No. “The Constitution does
not require that the revenues and income must have also
been earned from educational activities or activities related
to the purposes of an educational institution. The phrase
‘all revenues’ is unqualified by any reference to the source
of revenues.” (La Sallian Educational Innovators (etc.), Inc.
v. Commissioner of Internal Revenue, G.R. No. 202792,
February 27, 2019 citing 1987 Constitution, Article XIV)
The sale by SLC University to Puregold
Supermarket, Inc. is not subject to capital gains tax if the
proceeds are actually, directly and exclusively used for
educational purposes.
***6. Disciples of Jesus, Inc. (DOJI) is a non-stock,
non-profit religious organization which owns a large
parcel of land in a mountainous area in Cuenca,
Batangas.
DOJI 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 DOJI Council of Elders (the counterpart of a
Board of Trustees) decided to lease the remaining 1/2
portion to a real estate developer which constructed a
forest sanctuary/resort over the property.
Since the rental income from the lease of the
property was substantial, the DOJI decided to use the
amount to finance (1) the medical expenses of the
charity patients in the DOJI Hospital and (2) the
purchase of books and other educational materials for
the students of the DOJI School.
Is DOJI’s income from the rental fees subject to
income tax?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
167
SUGGESTED ANSWER: Yes. Notwithstanding that
DOJI is a non-stock, non-profit religious organization, is
generally not to be taxed in respect to income received by
it as such, its of income of whatever kind and character
from its activities conducted for profit regardless of the
disposition of such income shall be subject to income tax.
[NIRC of 1997, Sec. 30, last par., in relation to Sec. 30,
par. (E)]
NOTE NOT PART OF THE ANSWER: Take note of
the difference between non-profit, non-stock educational
instutions and other corporations under Sec. 30. The
exemption from income taxation of non-profit, non-stock
educational institutions is constitutionally granted and does
not emanate from the NIRC, Sc. 30, so they are not
subject to the limitations under the last par.of Sec. 30.
TAXATION OF GENERAL PARTNERSHIPS
*“E” died in December 2018 leaving to his three
(3) sons “A”, “B” and “C” an apartment building. They
decided not to partition the property and just divided
the rentals among themselves for the year 2018.
In 2020, “A”, “B” and “C” did not divide the
income from the apartment building; instead they
invested the same in the purchase of a house to be
rented out. What is the status of their enterprise for
income tax purposes for the year 2020? Explain your
answer. (1972, dates and paraphrasing supplied)
SUGGESTED ANSWER: A business partnership,
taxable as a corporation, was formed as a result of the
purchase of a house, to be rented out.
There was an umistakable intention to form a
partnership through contribution of the rental incomes from
their common properties for the purpose of earning a profit
to be deivided among themselves. There is continuity of
168
FREE PRE-WEEK NOTES
TAXATION LAW
the income stream through the regular rentals to be
received from the house that was purchased. (Ona v.
Commissioner, 45 SCRA 74)
TAXATION OF GENERAL PROFESSIONAL
PARTNERSHIPS (GPPS), IN GENERAL
**1. What is a general professional partnership
(GPP)? Are the incomes of a GPP subject to tax?
Why?
SUGGESTED ANSWER: A general professional
partnership, is one formed by persons for the sole purpose
of exercising their common profession no part of the
income of which is derived from engaging in any trade or
business. [NIRC of 1997, Sec. 22 (B), 2nd sentence]
A general professional partnership as such shall not
be subject to income taxes. (Ibid., Sec. 26, 1st sentence)
This is regardless of whether they are registered as such
general professional partnerships with the Securities and
Exchange Commission (SEC).
A general professional partnership is deemed to be
no more than a mechanism or flow-through entity in the
generation of income by, and the ultimate distribution of
income to, respectively, each of the individual partners.
(Tan v. Del Rosario, Jr. and Companion case, 237 SCRA
324, 335)
NOTE NOT PART OF THE ANSWER: While a
general professional partnership as such is not a taxable
entity and therefore not subject to income taxes, the
member professionals are to be subject to income taxes on
their share in the distributive net income of such general
professional partnership.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
169
**2. XYZ Law Offices, a law partnership in the
Philippines and a VAT-registered taxpayer, received a
query by e-mail from Gainsburg Corporation, a
corporation organized under the laws of Delaware, but
the e-mail came from California where Gainsburg has
an office. Gainsburg has no office in the Philippines
and does no business in the Philippines.
XYZ Law Offices rendered its opinion on the
query and billed Gainsburg US$1,000 for the opinion.
Gainsburg remitted its payment through Citibank
which converted the remitted US$1,000 to pesos and
deposited the converted amount in the XYZ Law
Offices account. What are the tax implications of the
payment to XYZ Law Offices in terms of xxx
xxx
Income Tax? (2013)
SUGGESTED ANSWER: The payment to XYZ Law
Offices by Gainsburg Corporation is not subject to income
tax in the Philippines as income of a general professional
partnership.
While the above statement is correct, the payment
received by XYZ Law Offices for services rendered to
Gainsburg, is considered as income derived from sources
without the Philippines, which is taxable as the income of
the partners of XYZ Law Offices.
For income tax purposes, payment of Gainsburg is
going to be included as part of XYZ Law Offices’ gross
income. From its total gross income derived within and
without the Philippines, it has to compute its net income in
the same manner as a corporation. The net income of the
partnership whether distributed or not will be declared by
the partners as part of their gross income who are to pay
the income tax thereon in their individual capacity. (NIRC,
Sec. 26)
FREE PRE-WEEK NOTES
TAXATION LAW
170
**3. A, B, and C, all lawyers, formed a partnership
called ABC Law Firm so they can practice their
profession as lawyers. For the year 2020, ABC Law
Firm received earnings and paid expenses among
which are as follows:
Earnings:
(1) Professional legal fees
from various clients
(2) Cash prize received
from a religious society in
recognition
of
exemplary
service of ABC Law Firm
(3) Gains derived from
sale of excess computers and
laptops
Payments:
(1) Salaries of office staff
(2) Rentals
space
for
office
(3) Representation
expenses incurred in meeting
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. (2014,
dates and paraphrasing supplied)
SUGGESTED ANSWER: The items in the above
mentioned earnings that should be included in the
computation of ABC Law Firm’s gross income are all those
shown under the heading “Earnings,” which include the
following:
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
171
(1) Professional legal fees from various clients.
(2) Cash prize received from a religious society in
recognition of exemplary service of ABC Law Firm.
The foregoing items (1) and (2) should be included as
part of ABC Law Firm’s gross income because they are
considered as compensation derived from rendering legal
services. [NIRC of 1997, Sec. 22 (A) (1).
(3) Gains derived from sale of excess computers and
laptops are also included because the excess computers
and laptaps are used in the rendition by ABC Law of Firm
of legal services. The gains derived sale being incidental
to the rendition of legal services, although isolated in
character, must be included as part of the gross income of
ABC Law Firm. (Applying by analogy RMC No. 15-2011,
and Mindanao II Geothermal Partnership v. Commissioner
of Internal Revenue, G.R. Nos. 193301 and 194637,
March 11, 2013) The gains should be included in gross
income because they may be considered as gains derived
from dealings in property. [NIRC of 1997, Sec. 32 (A), (3)]
(B) What are the items in the above-mentioned
payments which may be considered as deductions
from the gross income of ABC Law Firm ? Explain.
(2014, dates and paraphrasing supplied)
SUGGESTED ANSWER: The items in the above
mentioned payments which may be considered as
deductions from the gross income of ABC Law Firm are all
those shown under the heading “Payments:”, which
include the following:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meeting with
clients
172
FREE PRE-WEEK NOTES
TAXATION LAW
This is so, because ABC Law Firm is a general
professional partnership whose net income shall be
computed in the same manner as a corporation. (NIRC of
1997, Sec. 26, 2nd par.)
The net income of a corporation is determined by
deducting from its gross income all ordinary and necessary
expenses that are incurred or paid in earining the income.
The items of payment described in the problem are
considered as ordinary and necessary expenses.
While this may be so, there is need to comply with
requisites of deductibility such as the limitation on the
deductibility of the representation expenses to the extent of
1.00 percent (1%) of net revenue (i.e., gross revenue less
discounts). [Rev. Regs. No. 10-2002, Sec. 5 which
implements NIRC of 1997, Sec. 34 (A) (1) (a) (iv)]
(C) If ABC Law Firm earns net income in 2020,
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,
dates and paraphrasing supplied)
SUGGESTED ANSWER: ABC Law Firm is not
subject to pay income tax as it is a general professional
partnership formed by A, B, and C “for the sole purpose of
exercising their common profession, no part of the income
of which is derived from engaging in any trade or business”
[NIRC of 1997, Sec. 22 (B), last sentence in relation to
Sec. 26, 1st sentence]
ABC Law Firm is not subject to income tax because it
is deemed to be no more than a mechanism or flowthrough entity in the generation of income by, and the
ultimate distribution of income to, respectively, each of the
individual partners. (Tan v. Del Rosario, Jr. et al., and
Companion case, 237 SCRA 324, 335)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
173
“Clearly, a general professional partnership shall not
be subject to income tax xxx.” (RMC No. 2-2012,3rd par.,
1st sentence, paraphrasing supplied)
A, B, and C, as partners of ABC Law Firm, shall each
“report as gross income his distributive share, actually or
constructively received, in the net income of the
partnership” (NIRC of 1997, Sec. 26, last par.,
paraphrasing supplied), and they shall then “be subject to
income tax in their separate and individual capacities.”
(RMC No. 2-2012, 3rd par., 1st sentence, paraphrasing
supplied)
TAXATION OF CO-OWNERSHIPS
**1. Rosa Arroyo died in 2020. Her heirs executed
a project of partition of her estate which was approved
by the Court. However, Rosa’s estate was not actually
distributed among the heirs but remained under the
management of their father (widower-spouse) who
used the properties in business and so their value
increased yearly. The profits were credited on the
books of account of the common fund to the heirs in
proportion to their respective hereditary shares. The
heirs allowed their father to continue using their
shares for his ventures, although they paid income
taxes on their respective shares of the profits of their
common business. Is there a partnership here subject
to corporate income tax under the Tax Code ? Why ?
(1975, date supplied)
SUGGESTED ANSWER: No. There was no
partnership formed subject to the corporate income tax ,
when her widower-spouse and her heirs did not partition
the estate they inherited from Rosa. However, when the
heirs allowed their father (the widower spouse) to continue
using their shares for his ventures, resulting in a common
business, there was formed a partnership.
174
FREE PRE-WEEK NOTES
TAXATION LAW
Co-heirs who own properties which produce income
should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview
of the income tax law. To hold otherwise, would subject the
income of all co-ownership of inherited properties to the tax on
corporations resulting in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy.
This eventuality should be obviated.
Article 1769 (3) of the Civil Code provides that “the
sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the
returns are derived.” There must be an unmistakable intention
to form a partnership or joint venture. (Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 440) Such is
not present in the instant case.
For tax purposes when the heirs allowed their father
(the widower-spouse) to continue using their shares for his
ventures, resulting in a common business there was in
fact, a contribution of the incomes of the heirs to a
common fund for the purpose of dividing the rentals
earned among themselves. Thus, a partnership was
formed subjecting them to corporate income tax rates.
(Ona v. Commissioner, 45 SCRA 74)
**2. Noel Langit and his brother, Jovy, bought
a parcel of land which they registered in their names
as pro indiviso owners (Parcel A). Subsequently, they
formed a partnership, duly registered with the
Securities and Exchange Commission, which bought
another parcel of land (Parcel B). Both parcels of land
were sold, realizing a net profit of P1,000,000.00 for
Parcel A and P500,000.00 for Parcel B.
a. The BIR claims that the sale of Parcel A should
be taxed as a sale by an unregistered partnership.
Is the BIR correct ? (1994)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
175
SUGGESTED ANSWER: No. The brothers have not
formed a partnership subject to corporate tax rates. Mere
sharing of gross returns does not of itself establish a
partnership. [CCP, Art. 1769 (3)]
There must be an unmistakable intention to form a
partnership or joint venture. (Obillos, Jr. v. Commissioner
of Internal Revenue, 139 SCRA 440) There is no showing
that the joint purchase was for the purpose of earning
profits to be divided among them.
b. The BIR also claims that the sale of Parcel B
should be taxed as a sale by a corporation. Is the BIR
correct ? (1994)
SUGGESTED ANSWER: Yes, because Parcel B was
bought after the brothers have formed a taxable
partnership. Registration of the partnership with the SEC
is a manifest showing of the bother’s intention to engage in
business together and divide the profits.
TAXATION OF JOINT VENTURES AND
CONSORTIA
*Weber Realty Company which owns a three hectare
land in Antipolo entered into a Joint Venture Agreement
(JVA) with Prime Development Company for the
development of said parcel of land. Weber Realty as
owner of the land contributed the land to the Joint
Venture and Prime Development agreed to develop the
same into a residential subdivision and construct
residential houses thereon. They agreed that they would
divide the lots between them. Does the JVA entered into
by and between Weber and Prime create a separate
taxable entity? Explain briefly. (2007)
SUGGESTED ANSWER: Yes. In order that a JVA
should not be taxable as a corporation and considered as a
separate taxable entity and it must involve the pooling of
176
FREE PRE-WEEK NOTES
TAXATION LAW
resources between licensed local contractors; that is, licensed
as general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and
Industry (DTI). (Rev. Reg. No. 10-2012, Section 3)
In the problem, Weber Realty is not a contractor but
the owner of the land which contributed land to the Joint
Venture. While it is implied that Prime Development is
engaged in the construction business, there is no showing
that it is a licensed general contractor by the PCAB/DTI.
Thus, Weber Realty and Prime Development should
be taxable as if the JVA between them is a corporation
with a separate taxable personality.
WITHHOLDING TAX
*1. Explain the concept of the withholding tax
system or “taxation at source”. What is the rationale
behind it?
SUGGESTED ANSWER: The concept of
withholding system or “taxation at source” refers to
deduction made by a payor, as an agent of
government, from paymentrs of income to a payee of
estimated taxes to be paid by the payee.
the
the
the
the
The basic rationale is to facilate the collection of taxes
and to prevent tax evasion.
ALTERNATIVE ANSWER: The concept of “taxation
at source,” refers to the requirement that taxes imposed or
prescribed by the National Internal Revenue Code (NIRC)
are to be deducted and withheld by the payor-corporations
and/or persons from payments made to payeescorporations and/or persons for the former to pay the same
directly to the Bureau of Internal Revenue (BIR). Thus, the
taxes are collected practically at the time the transaction is
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
177
made or when the taxable act occurs. It is also known as
the “withholding tax system.”
The following are considered as the rationale behind
the concept of “taxation at source”:
a. To provide the taxpayer a convenient
manner to meet his probable income tax liability.
b. To ensure the collection of the income tax
which could otherwise be lost or substantially
reduced through failure to file the corresponding
returns.
c. To improve the government’s cash flow
[Confederation for Unity, Recognition and Advancement
of Government Employees (COURAGE),
v.
Commissioner, etc., G.R. No. 213446, and companion
cases, July 03, 2018] to enable it to meet its obligations
as they fall due.
d. To minimize tax evasion, thus resulting in a
more efficient tax collection system.
“This results in administrative savings, prompt and
efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes
through more complicated means and remedies.”
**2. Argus Corp. is listed as a top 1,000 Philippine
corporation by the Bureau of Internal Revenue. It
secured a loan from Minotaur Bank with a 6% per
annum interest. All interest payments made by Argus
Corp. to Minotaur Bank is subject to a 2% creditable
withholding tax. At the same time, Argus Corp. has a
trust deposit with Minotaur Bank in the amount of
P100,000,000.00, which earns 2% interest per annum,
but is subject to a 20% final withholding tax on the
interest income received by Argus Corp.
(a) Who are the withholding agents in the case of:
FREE PRE-WEEK NOTES
TAXATION LAW
178
1) The 20% final withholding tax. Explain.
SUGGESTED ANSWER: The withholding agent
for the 20% final withholding tax is Minotaur Bank for
the reason that the withholding agent is the person
that has control of the funds.
2) The 2% creditable withholding tax ?
Explain.
SUGGESTED ANSWER:
The withholding
agent for the 2% creditable withholding tax is Argus
Corp, because it is the payor of the fund.
3. What are the kinds of withholding taxes ?
SUGGESTED ANSWER:
taxes are:
The kinds of withholding
a. Final withholding tax at source. [NIRC, Sec. 57 (A)]
b.
Creditable withholding tax at source. [Ibid.,
Sec. 57 (B)]
1) Expanded withholding tax
c. Withholding tax on compensation
**4. Is the prize of one million pesos awarded by
the Readers’ Digest subject to withholding of final tax?
Who is responsible for withholding the tax? What are
the liabilities for failure to withhold such tax?
SUGGESTED ANSWER: Yes. Prizes and other
winnings are subject to withholding of final taxes.
The payor is responsible for withholding the tax.
Any payor required to withhold taxes and who willfully
fails to withhold shall be subject to the criminal penalties of
fine and imprisonment and upon conviction to a penalty
equal to the total amount of the tax not withheld. (NIRC of
1997, Sec. 251 and 254)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
179
*5. What are the liabilities for failure to withhold a
tax?
SUGGESTED ANSWER: The liabilities for failure to
withhold a tax include the administrative penalty and
criminal penalty in the form of both deprivation of liberty
(imprisonment) and pecuniary in the form of a fine.
The liablities that may be imposed for failure to
withhold a tax is dependent upon whether the withholding
tax agent is
a. a natural person or individual,
b. a corporation, or
c. the government.
a. Liabilities of a person (natural or juridical)
for failure as withholding agent to withhold the
required tax. Any person required to withhold any
tax required to be withheld by the NIRC of 1997,
1)
shall in addition to the criminal
penalties of fine and imprisonment provided for
under Sec. 255 of the NIRC of 1997,
2)
be liable upon conviction to a
penalty equal to the total amount of the tax not
withheld, or not accounted for and remitted.
(NIRC of 1997, Sec. 251, paraphrasing
supplied)
Any person required under the NIRC of 1997 to
withhold shall upon conviction be punished by a
penalty equal to the total amount of the tax not
withheld (NIRC of 1997, Sec. 251) and a fine of not
less than Php10,000.00 and suffer imprisonment of
not less than one (1) year but not more than ten (10)
years. (Ibid., Sec. 255, 1st par.)
b. Penal liability of corporations to fines. Any
corporation, association or general co-partnership
FREE PRE-WEEK NOTES
TAXATION LAW
180
liable for any of the acts or omissions penalized
under the NIRC of 1997, in addition to the penalties
imposed herein upon the responsible corporate
officers, partners, or employees shall, upon
conviction for each act or omission, be punished by a
fine of not less P50,000) but not more than
P100,000. (NIRC of 1997, Sec. 256, paraphrasing
supplied)
c. Personal liability of government employee if
the withholding agent is the Government. If the
withholding agent is the Government or any of its
agencies, political subdivisions or instrumentalities,
or a government-owned or -controlled corporation,
the employee thereof responsible for the withholding
and remittance of the tax shall be personally liable
for the deficiency taxes. [NIRC of 1997, Sec. 247
(b)]
INDIVIDUAL INCOME TAX RETURNS
AND PAYMENT
***1. Who should file individual income tax returns
in the Philippines ?
SUGGESTED ANSWER:
a. A citizen of the Philippines and any alien individual
engaged in business or practice of profession within the
Philippine shall file an income tax return, regardless of the
amount of gross income. [NIRC of 1997, Sec. 51 (A) (2)
(a), as amended by the TRAIN]
b. An individual deriving compensation concurrently
from two or more employers at any time during the taxable
year shall file an income tax return. [Ibid., Sec. 51 (A) (2) (b)]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
181
***2. Omar Hassan is a Malaysian who first arrived
in the Philippines in 2017 as a member of the
Malaysian sports contingent that participated in the
Southeast Asian Games (SEAG). After his stint, he
returned to Malaysia, but shuttles between here and
the Malaysia regularly up to the present. He does not
stay longer than thirty (30) days in the Philippines in
any given year. He is presently employed as
consultant with an European company situated at the
Bonifacio Global City (BGC). For the year 2020, he
earned US$10,650.00 in consultation fees. Sometime
in 2021, the District Revenue Office of the Bureau of
Internal Revenue served him a notice informing him
that he did not file his income tax return for the year
2020 and directing him to file said return in 10 days.
He refused to file any return claiming that he is not a
resident alien and is therefore not required to file any
income tax return. Is Hassan’s claim correct ?
SUGGESTED ANSWER: No. Hassan’s claim is not
correct. He is an alien individual engaged in business or
practice of profession within the Philippines who is required
to file an income tax return, regardless of the amount of
gross income. [NIRC of 1997, Sec. 51 (A) (2) (a), as
amended by the TRAIN]
***3. In 2021, Camille worked part time as a
waitress in a restaurant in Maginhawa Street from 8:00
a.m. to 4:00 p.m. and then as a cashier in a 24-hour
convenience store in her neighborhood. The total
income of Camille from the two employers does not
exceed P250,000.00. Was she required to file an
income tax return next April? Explain your answer.
SUGGESTED ANSWER: Yes. An individual deriving
compensation income concurrently from two or more
employers at any time during the taxable year is required
to file an income tax return. [NIRC of 1997, Sec. 51 (A)
182
FREE PRE-WEEK NOTES
TAXATION LAW
(2)] This is irrespective of the amount of income earned
from the two employers.
***4. Is a resident alien required to file an income
tax return in the Philippines ?
SUGGESTED ANSWER: Yes. A resident alien is
required to file an income tax return only on income
derived from from sources within the Philippines [NIRC of
1997, Sec. 51 (A) (4) (c)] which exceeds P250,000.00.
5. Bian a resident Filipino is a government employee
and also as a self-employed wedding photographer. What
should she file with the Bureau of Internal Revenue?
SUGGESTED ANSWER: Bian being a resident
Filipino individual subject to income tax who is receiving
self-employment income, whether it constitutes the sole
source of his income or in combination with salaries,
wages and other fixed or determinable income, shall make
and file a declaration of his estimated income for the
current taxable year on or before May 15 of the same
taxable year.” [NIRC of 1997, Sec. 74 (A), 1st sentence, as
amended by the TRAIN]
Would your answer be the same if Bian is a nonresident Filipino or a non-resident alien ? Explain your
answer.
SUGGESTED ANSWER: No more. “Non-resident
Filipino citizens, with respect to income from without the
Philippines, and non-resident aliens not engaged in trade
or business in the Philippines, are not required to render a
declaration of estimated income tax.” [NIRC of 1997, Sec.
74 (A) 3rd sentence, paraphrasing supplied]
6. The Philippine internal revenue service has
adopted the “pay as you go” system of paying internal
revenue taxes. This means that as a general rule,
taxes are paid at the time the appropriate tax returns
are filed. There are however certain instances when
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
183
the law specifically allows the payment of taxes in
installments.
When may taxes be paid in installments when
there are no specific provisions of law allowing for the
payment by installments ?
SUGGESTED ANSWER: As a general rule, “When a
tax due is in excess of Two thousand pesos (P2,000), the
taxpayer other than a corporation, may elect to pay the tax
in two (2) equal installments, in which case, the first
installment shall be paid at the time the return is filed and
the second installment on or before October 15 following
the close of the calendar year, if any installment is not paid
on or before the date fixed for its payment, the whole
amount of the tax unpaid becomes due and payable
together with the delinquency penalties.” [NIRC of 1997,
Sec. 56 (A) (2), as amended by the TRAIN]
*7. H, husband, and W, wife; Filipinos with four (4)
minor children, are both employed in the Philippines.
Due to their desire to save on income tax, should they
file separate returns? Explain your answer.
SUGGESTED ANSWER: Yes. They should file
separate returns. Combining the compensation income of
H and W would bring them to a high tax bracket. Filing
separate returns would place them within a lower tax
bracket which results to lower taxes.
**8. Who are the individuals that are NOT required
to file an income tax return ?
SUGGESTED ANSWER: The following individuals
are not required to file an income tax return:
a. “An individual whose taxable income does not
exceed Two hundred fifty thousand pesos (₱250,000)
under Section 24(A)(2)(a): Provided, That a citizen of the
Philippines and any alien individual engaged in business or
practice of profession within the Philippines shall file an
184
FREE PRE-WEEK NOTES
TAXATION LAW
income tax return, regardless of the amount of gross
income.” [NIRC of 1997, sec. 51 (2) (a), as amended by
theTRAIN)
Sec. 24 (A) (2) (a) refers to the Tax Schedule
Effective January 1, 2018 until December 31, 2022 on the
Taxable Income of Individuals.
b. “An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived from
sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of Section
79 of this Code: Provided, That an individual deriving
compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax
return.” [NIRC of 1997, sec. 51 (2) (b), as amended by the
TRAIN]
Sec. 32 (A) (1) states, “Compensation for services in
whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items.”
c. An individual whose sole income has been
subjected to final withholding tax pursuant to Section 57(A)
of this Code; and [Ibid., Sec. 51 (2) (c)]
d. An individual who is exempt from income tax
pursuant to the provisions of this Code and other laws,
general or special.” [Ibid., sec. 51 (2)[Ibid, (d)]
“The foregoing notwithstanding, any individual not
required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.” [Ibid., sec. 51 (3)]
e. In case of substituted filing. “Individual taxpayers
receiving purely compensation income, regardless of
amount, from only one employer in the Philippines for the
calendar year, the income tax of which has been withheld
correctly by the said employer (tax due equals tax
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
185
withheld) shall not be required to file an annual income tax
return. The certificate of withholding filed by the respective
employers, duly stamped ‘received’ by the BIR, shall be
tantamount to the substituted filing of income tax returns by
said employees.” (NIRC of 1997, Sec. 51-A, as inserted by
the TRAIN)
***9. Policarpio, who is married with four (4) minor
dependent children, works as a driver in a government
office which pays him P16,000.00 monthly. He asks
you whether he is still required to file an income tax
return What will your answer be? Why?
SUGGESTED ANSWER: A is not required anymore
to file an income tax return because his taxable income
does not exceed Two hundred fifty thousand pesos
(P250,000). [NIRC of 1997, Sec. 51 (A) (2) (a), as
amended by the TRAIN]
***10. Who are NOT required to file Income Tax
Returns (ITRs) because they are allowed to avail of the
system of Substituted Filing of Income Tax Returns ?
SUGGESTED ANSWER:
“Individual taxpayers
receiving purely compensation income, regardless of
amount, from only one employer in the Philippines for the
calendar year, the income tax of which has been withheld
correctly by the said employer (tax due equals tax
withheld) shall not be required to file an annual income tax
return.
The certificate of withholding filed by the respective
employers, duly stamped ‘received’ by the BIR, shall be
tantamount to the substituted filing of income tax returns by
said employees.” [NIRC of 1997, Sec. 51-A, as inserted by
the TRAIN. This is a new provision]
In Lieu of BIR Form No. 1700, the Annual Information
Return of Income Taxes Withheld on Compensation and
Final Withholding Taxes (BIR Form No. 1604-CF) (hard
copy) filed by their respective employers, duly stamped
186
FREE PRE-WEEK NOTES
TAXATION LAW
“received” by the BIR, shall be tantamount to the
substituted filing of income tax returns by said employees.”
(Rev. Regs. Nos. 2-98 as amended by Rev. Regs. No. 32002, Sec. 2.83.4, 1st par.)
***11. Who are the employees that are NOT
qualified for substituted filing and still required to file
an Income Tax Return (BIR Form No. 1700) ?
SUGGESTED ANSWER: The following individuals,
however are not qualified for substituted filing and
therefore, still required to file BIR Form No. 1700 in
accordance with existing regulations:
a. Individuals deriving compensation from two or more
employees concurrently or successively at anytime during
the taxable year.
b. Employees
deriving
compensation
income,
regardless of the amount, whether from a single or several
employers during the calendar year, the income tax of
which has not been withheld correctly (i.e. tax due is not
equal to the tax withheld) resulting to collectible or
refundable return.
c. Employees whose monthly gross compensation
income does not exceed Five Thousand Pesos
(P5,000.00) or the statutory minimum wage, whichever is
higher, and opted for non-withholding of tax on said
income.
d. Individuals deriving other non-business, nonprofession-related income in addition to compensation
income not otherwise subject to a final tax.
e. Individuals receiving purely compensation income
from a single employer, although the income tax of which
has been correctly withheld, but whose spouse falls under
Section 2.83.4 (A), (B), (C) and (D) of these regulations.
f. Non-resident aliens engaged in trade or business in
the Philippines deriving purely compensation income or
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
187
compensation, or compensation income and other nonbusiness, non-profession-related income.
In case of married individuals who are still required to
file returns under existing provisions of the law, i.e. in those
instances not covered by the substituted filing of returns,
only one return for the taxable year shall be filed by either
spouse to cover the income of the spouses, which return
shall be signed by the husband and the wife unless it is
physically impossible to do so, in which case signature of
one of the spouses would suffice. (Rev. Regs. No 2-98, as
amended by Rev. Regs. No. 3-2002, Sec. 2.83.4, 2nd and
3rd pars.)
***12. On April 30, 2021, Psalmir was among those
retrenched as a production manager of ABS-CBN
which issued to him a Certificate of Withholding Tax
on Compensation (BIR Form No. 2316), which showed
that the tax withheld from his compensation was equal
to his income tax due for the period from January 2021
to April 30, 2021.
A month after his retrenchment, Psalmir put up
his own studio and started producing film
commercials for advertising companies. He was able
to earn a meager income from his films commercials
but did not keep record of his production expenses.
Is Psalmir qualified for substituted filing for
taxable year 2021? Explain your answer.
SUGGESTED ANSWER: No. Psalmir is not entitled
to substituted filing because he did not receive purely
compensation income, regardless of amount, from only
one employer in the Philippines for the calendar year, the
income tax of which has been withheld correctly by the
said employer (tax due equals tax withheld).
Specifically, Psalmir is not qualified for substituted
filing and still required to file an Income Tax Return (BIR
Form No. 1700) because he is an individual who derived
188
FREE PRE-WEEK NOTES
TAXATION LAW
other non-profession-related income in addition to
compensation income not otherwise subject to a final tax.
(Rev. Regs. No 2-98, as amended by Rev. Regs. No. 32002, Sec. 2.83.4, 2nd and 3rd pars.)
***13. Atty. Aaron Barrios is employed as the Chief
Operating Officer of ABC Company receiving an annual
compensation of P10,000,000.00, while Mr. Elmer Lusung is
a security guard in the same company earning an annual
compensation of P20,000.00. Both of them source their
income only from their employment with ABC Company.
(a) At the end of the year, is Atty. Barrios
personally required to file an annual income tax return
? Explain.
SUGGESTED ANSWER: No. Since Atty. Barrios is
receiving compensation income only from a single
employer, ABC Company, during the taxable period, he is
qualified for substituted filing provided the employer has
withheld the correct income taxes on income paid to and
received by Atty. Barrios.
(b) How about Mr. Lusung? Is he personally
required to file an annual income tax return ? Explain.
SUGGESTED ANSWER: No. Mr. Lusung is not
personally required to file an annual income tax return for
the reason that his total annual compensation income is
P240,000.00 which is below the threshold of taxable
annual income of P250,000.00. Thus, Mr. Lusung is not
required to file an income tax return. [NIRC of 1997, sec.
51 (A) (2) (a)]
*14. Give the due dates for the filing of the annual
income tax returns (ITRs) of individuals and where
should the ITRs be filed ?
SUGGESTED ANSWER: The return of any individual
shall be filed on or before the fifteenth (15th) day of April of
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
189
each year covering income for the preceding taxable year.
[NIRC of 1997, Sec. 51 (C), renumbered]
The BIR Commissioner may, in meritorious cases,
grant a reasonable extension of time for filing returns of
income. (NIRC of 1997, Sec. 53, paraphrasing supplied)
Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized agent
bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which
such person has his legal residence or principal place of
business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the
Office of the Commissioner. [NIRC of 1997, Sec. 51 (B)]
*15. Spouses Rizaldy and Gabrielle Salvador, both
resident citizens, acquired during their marriage a
residential house and lot located in Baguio City, which
is being leased to a tenant for a monthly rental of
P100,000.00. Mr. Rizaldy Salvador is the President of
RS Corporation and he receives P50,000.00 salary per
month. The spouses have only one (1) minor child. In
late June 2021, he was immediately brought to the
hospital because of a heart attack and he was
pronounced dead on June 30, 2021. With no liabilities,
the estate of the late Pablo Gonzales was settled
extrajudicially in late 2021.
a) Is Mr. Rizaldy Salvador required to file income
tax return for 2021 ? If so, how much income must he
declare for the year ?
SUGGESTED ANSWER: Yes. Mr. Rizaldy Salvador
is required to file an income tax return for the period
January 1 to June 30, 2021.
This would be one-half of the six months rentals as
his share in the conjugal partnership or P300,000.00 and
his six (6) months salary or an equivalent of P300,000.00
or a total of P600,000.00.
190
FREE PRE-WEEK NOTES
TAXATION LAW
b) Is Mrs. Gabrielle Salvador required to file
income tax return for 2021? If so, how much income
must she declare for the year ? Explain your answer.
SUGGESTED ANSWER: Yes, because she had
income in 2021. The income that she should declare
should be her share in the rentals which is P600,000.00 for
the year corresponding to her share in the conjugal
partnership gains.
c) Is the Estate of the late Rizaldy Salvador
required to file income tax return for 2021? If so, how
much income must it declare for the year ? .Explain
your answer.
SUGGESTED ANSWER: Yes. Since the estate
was settled in 2021, then the estate had income in 2021
for the period July 1, 2021 up to December 31, 2021. This
income is represented by the income that Mr. Salvador
would have earned as his conjugal share in the rentals
which is P300,000.00.
CORPORATE INCOME TAX RETURNS
*1. How often does a domestic corporation file
income tax return for income earned during a single
taxable year.
SUGGESTED ANSWER: Four (4) times a year. A
quarterly summary declaration is filed for each of the first
three (3) quarters followed by a final adjustment return, for
the whole year including the last quarter.
What is the reason for such procedure?
SUGGESTED ANSWER: This is in order to provide
the government with sufficient cash flow to meet its
obligations as they fall due.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
191
**2. When is the deadline for the filing of a
corporation’s final adjustment return for a calendar
year? How about for a fiscal year?
SUGGESTED ANSWER: A calendar year corporate
tax return is filed not later than April 15 of the year
following the year when the income was earned while a
fiscal year corporate tax return is filed on or before the 15th
day of the fourth (4th) month from the close of the fiscal
year.
iii. VALUE-ADDED TAX
NATURE AND CHARACTERISTICS OF
VALUE-ADDED TAX
1. Why is the tax called value-added ?
SUGGESTED ANSWER: The tax is a tax on valueadded because it is imposed only on the increase in the
worth, merit or importance of goods, properties or services,
and not on the total value of the goods or services being
sold or rendered.
*2.Discuss the meaning and scope of value-added
tax (VAT).
SUGGESTED ANSWER: The value-added tax is a
uniform tax ranging, at present, from 0 percent to 12
percent [now under the Reformed Value-Added Tax
(RVAT)] levied on every importation of goods, whether or
not in the course of trade or business, or imposed on each
sale, barter, exchange or lease of goods or properties on
each rendition of services in the course of trade or
business as they pass along the production and
distribution chain, the tax being limited only to the value
added to such goods, properties or services by the seller,
transferor or lessor. [Commissioner of Internal Revenue v.
FREE PRE-WEEK NOTES
TAXATION LAW
192
Seagate Technology (Philippines), 451 SCRA 132 citing
various cases, percentages supplied]
*3. What are the characteristics of the ValueAdded Tax ?
SUGGESTED ANSWER: The characteristics of the
Value-Added Tax are the following:
a. It is an indirect tax.
b. It is a tax on consumption.
c. It is a percentage tax.
d. It is a regressive tax.
The above characteristics of the Value-Added Tax are
sometimes referred to as the nature of the Value-Added
Tax.
*4. What is tax pyramiding? What is its basis in
law?
SUGGESTED ANSWER: Tax pyramiding is the
practice of imposing a tax upon another tax. It is a situation
where some or all of the stages of distribution of goods or
services are taxed, with the accumulation borne by the
final consumer.
There is tax pyramiding when sales taxes are applied
to both inputs and outputs, thus shifting the tax burden to
the ultimate consumer. [R. G. Holcombe, Taxing Services,
30 Fla. St. U.L. Review Rev. 467 (1996)]
It has no basis in law because It has been rejected,
since 1922, by the Supreme Court, the legislature and our
tax authorities. It is prohibited as a taxpayer cannot be
compelled to pay a tax on the tax itself. (People of the
Philippines v. Sandiganbayan, etc., G. R. No. 152532,
August 16, 2005)
Thus, it violates the principle of uniformity and
neutrality in taxation. (R.G. Holcombe, supra)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
193
5. What is the nature or characteristic of VAT as a
consumption tax ?
SUGGESTED ANSWER: VAT is ultimately a tax on
consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.
It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom
is passed on to the end users by the providers of these
goods or services who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they receive
from the final consumer (or output VAT). The final
purchase by the end consumer represents the final link in a
production chain that itself involves several transactions
and several acts of consumption.
The VAT system assures fiscal adequacy through the
collection of taxes one very level of consumption, yet
assuages the manufacturers or providers of goods and
services by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally the end
consumer shoulders the entire tax liability. (Commissioner
of Internal Revenue v. Magsaysay Lines, Inc., G. R. No.
146984, July 28, 2006)
*6. Masarap Kumain, Inc. (MKI) is a Value-Added Tax
(VAT)-registered company which has been engaged in the
catering business for the past 10 years. It has invested a
substantial portion of its 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)
SUGGESTED ANSWER: Yes. The sale of the
delivery van by MKI to MGSC is subject to VAT.
194
FREE PRE-WEEK NOTES
TAXATION LAW
MKI is a VAT-registered company engaged in ‘in the
course of trade or business’ catering which means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto (NIRC of
1997, Sec. 105, 3rd par.;(Rev. Regs. No. 16-2005, Sec.
4.105-3, 1st par.) which are subject to VAT.
The delivery van being used in MKI’s trade or business
of catering is part of its assets.
The sale of a fully
depreciated asset (the delivery van) that has been used in
business is subject to VAT as an incidental transaction,
although such sale may be considered isolated.
(Mindanao 11 Geothermal Partnership v. CIR, G.R. Nos.
193301, 194637, March 11, 2013)
*7. Is the sale of tractors and other agricultural
implements by AgriMasin, Inc. to local farmers subject
to VAT ? If so, at what rate ? Why ?
SUGGESTED ANSWER: Yes. It is subject to VAT at 12%.
VAT is imposed and collected on every sale, barter or
exchange, or transactions “deemed sale” of taxable goods or
properties at the rate of 12% of the gross selling price or gross
value in money of the goods or properties sold, bartered, or
exchanged, or deemed sold in the Philippines. (Rev. Regs.
No. 16-2005, Sec. 4.106-1, in relation to RMC No. 7-2006)
EFFECTIVELY ZERO-RATED SALE OF
GOODS AND PROPERTIES
*1. What is meant by the term “effectively zerorated sale of goods and properties”?
SUGGESTED ANSWER: The term “effectively zerorated sale of goods and properties” shall refer to the local
sale of goods and properties by a VAT-registered person
to a person or entity who was granted indirect tax
exemption under special laws or international agreement.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
195
Transactions which, although not involving actual
export, are considered as “constructive export” shall be
entitled to the benefit of zero-rating, such as
a. local sales of goods and properties to persons or
entities covered such as
1) sales to export-oriented enterprises,
2) sale of goods supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations,
3) Foreign Currency Denominated Sale, and
4) Sales to Tax-Exempt Persons or Entities.
(Rev. Regs. No. 16-2005, Sec. 4.106-6, 1st par.,
paraphrasing supplied)
**2. Team Energy is principally engaged in the
business of power generation and the subsequent sale
thereof to the National Power Corporation (NPC) under a
Build, Operate, Transfer Scheme. It is also registered with
the BIR as a VAT taxpayer. BIR granted it an Effective
Zero-Rate for the supply of electricity to the NPC for the
period January 1, 2005 to December 31, 2005.
It then filed with the BIR its Quarterly VAT Returns
for the first three quarters of 2005 on April 25, 2005,
July 26, 2005, and October 25, 2005, respectively. It
also filed its Monthly VAT Declaration for the month of
October 2005 on November 21, 2005, which was
subsequently amended on May 24, 2006.
On December 20, 2006, Team Energy filed an
administrative claim for cash refund or issuance of tax
credit certificate corresponding to the input VAT
reported in its Quarterly VAT Returns for the first three
quarters of 2005 and Monthly VAT Declaration for
October 2005 in the amount of P80 million plus.
196
FREE PRE-WEEK NOTES
TAXATION LAW
Due to the BIR’s inaction on its claim, Team
Energy filed a Petition for Review before the CTA in
Division which in its July 13, 2010 Decision ordered
the BIR to refund or, in the alternative, issue a tax
credit certificate in the amount of P79 million plus.
Subsequently,the CTA Division reversed itself upon a
motion for reconsideration filed by the BIR. The En
Banc then reinstated the Division’s July 13. 2010.
Rule on the Commissioner of Internal Revenue’s
(CIR’s) contention that the CTA en banc erred in not
requring Team Energy to secure a Certificate of
Compliance (COC) from the Energy Regulatory
Commission (ERC) because of the requirement under
Section 13 of the NPC Charter which the Team Energy
to qualify as a "generation company" under the EPIRA
before its sale of services to NPC may be subject to
VAT zero-rating.
SUGGESTED ANSWER: The CIR’s contention is
bereft of merit.
The Supreme Court “rejected the contention of the
CIR that Team Energy is not entitled to tax refund or tax
credit because it cannot qualify for VAT zero-rating for its
failure to submit its ERC Registration and COC required
under the EPIRA considering that Team Energy's refund
claim is premised on Section 108(B)(3) of the 1997 NIRC,
in relation to NPC's charter, the requirements under the
EPIRA are inapplicable.
To qualify its electricity sale to NPC as zero-rated,
Team Energy needs only to show that it is a VATregistered entity and that it has complied with the invoicing
requirements under the 1997 NIRC, in conjunction with
Revenue Regulations. (Commissioner of Internal Revenue
v. Team Energy, etc., G.R. No. 230412, March 27, 2019)
Effective zero-rating is not intended as a benefit to the
person legally liable to pay the tax, such as Team Energy
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
197
but to relieve certain exempt entities, such as the NPC,
from the burden of indirect tax so as to encourage the
development of particular industries. Effective zero-rating
was intended to relieve the exempt entity from being
burdened with the indirect tax which is or which will be
shifted to it had there been no exemption. In this case,
Team Energy is being exempted from paying VAT on its
purchases to relieve NPC of the burden of additional costs
that Team Energy may shift to NPC by adding to the cost
of the electricity sold to the latter. (Ibid.)
3. Illustrate the concept that zero-rating is not for
the benefit of the person legally liable for the tax but
for the benefit of the person to whom the indirect tax is
to be passed on.
SUGGESTED ANSWER: The Supreme Court
emphasized that effective zero-rating is not intended as a
benefit to the person legally liable to pay the tax, such as San
Roque Power Corporation, but to relieve certain exempt
entities, such as the NPC, from the burden of indirect tax so as
to encourage the development of particular industries. Before,
as well as after, the adoption of the VAT, certain special laws
were enacted for the benefit of various entities and
international agreements were entered into by the Philippines
with foreign governments and institutions exempting sale of
goods or supply of services from indirect taxes at the level of
their suppliers.
Effective zero-rating was intended to relieve the
exempt entity from being burdened with the indirect tax
which is or which will be shifted to it had there been no
exemption. In this case, San Roque Power Corporation is
being exempted from paying VAT on its purchases to
relieve NPC of the burden of additional costs that petitioner
may shift to NPC by adding to the cost of the electricity
sold to the latter. (San Roque Power Corporation v.
Commissioner of Internal Revenue, G.R. No. 180345,
November 25, 2009)
198
FREE PRE-WEEK NOTES
TAXATION LAW
WHO ARE SUBJECT TO VAT
***1. The National Power Corporation (NPC)
bought manufactured products from SIMPLEX Corp.
(SC) for which SC passed on the VAT to NPC. NPC
claims it should not pay the VAT because it is exempt
from the payment of all taxes under its Charter. How
would you decide this case ?
SUGGESTED ANSWER: The contention of NPC is
without merit. The tax is due from SC, who is not exempt,
because it is a sales tax. NPC’s tax exemption does not
flow to SC who must show a specific provision of law under
which it is exempt.
Furthermore, an exemption from “all taxes” excludes
indirect taxes, unless the exempting statute, like NPC’s
charter, is so couched as to include indirect tax from the
exemption. Statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority, and if an exemption
is found to exist, it must not be enlarged by construction.
(Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal
Revenue, G.R. No. 173594, February 6, 2008)
ALTERNATIVE ANSWER:
NPC is correct in
contending that it should not pay the tax. The Latin
maxim, Ubi lex non distinguit nec nos distinguere debemos
(Where the law does not distinguish we should not
distinguish) finds application.
It is apparent that NPC’s exemption is from payment
“of all taxes.” An exemption from “all taxes” excludes
indirect taxes. Hence, NPC’s exemption covers both direct
and indirect taxes. (Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
199
***2. As an incentive for investors, a law was
passed giving newly established companies in certain
economic zones exemption from all taxes, duties, fees,
imposts and other charges for a period of three years.
ABC Corp. was organized and was granted such
incentive. In the course of business, ABC Corp.
purchased mechanical equipment from XYZ Inc.
Normally, the sale is subject to VAT.
XYZ, Inc. claims, however, that since it sold the
equipment to ABC Corp. which is tax exempt, XYZ
should not be liable to pay the VAT. Is this claim
tenable?
SUGGESTED ANSWER: No. Tax exemptions are to
be strictly construed against the taxpayer. Since XYZ, Inc..
has not shown a specific law under which it could claim
exemption, then such claim of exemption should be
denied.
ALTERNATIVE ANSWER: VAT is a tax on the seller
and not on the buyer, hence the buyer’s exemption does
not flow to the seller.
The rule that VATs are indirect taxes, the economic
burden of which may be shifted to the buyer is of no
moment. It is still the seller who is subject to the tax and
not the buyer. (Phil. Acetylene v. Commissioner of Internal
Revenue, G.R. No. L-19707, August 17, 1967)
Assuming arguendo that XYZ had to and did pay
the VAT. ABC Corp. later found out, however, that XYZ
merely shifted or passed on to ABC the amount of the
VAT by increasing the purchase price. ABC Corp. now
claims for a refund from the Bureau of Internal
Revenue in an amount corresponding to the tax
passed on to it since it is tax exempt. Is the claim of
ABC Corp. meritorious?
SUGGESTED ANSWER: No. ABC has nothing to
claim because it was not the one that paid the tax but XYZ.
200
FREE PRE-WEEK NOTES
TAXATION LAW
Shifting of the economic burden of the tax by the seller
XYZ to the buyer ABC is of no moment.
It is still the seller who paid the tax and not the buyer.
(Phil. Acetylene v. Commissioner of Internal Revenue,
G.R. No. L-19707, August 17, 1967)
***3. The World Health Organization’s (WHO’s)
“assets, income and other properties shall be: a)
exempt from all direct and indirect taxes.” (“Host
Agreement” between the United Nations and the
Philippine Government, Sec. 11) Astro Construction,
Inc. (ACI) was hired to construct the WHO Center in
Manila. Upon completion of the building, the BIR
assessed a 12% VAT on the gross receipts of ACI
derived from the construction of the WHO building.
WHO contends that the 12% VAT is not a direct tax nor
an indirect tax on it but a tax that is primarily due from
the contractor and is therefore covered by the Host
Agreement. The BIR argues that the VAT is deemed an
indirect tax as ACI can shift the tax burden to it. Is the
BIR correct ? Explain.
SUGGESTED ANSWER: 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., 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.
***4. Thomas’ primary source of income is his
employment managing a poultry farm. He earns extra
from the land he inherited from his parents, and which
land he has been leasing to a private, non-stock, nonprofit school since 2017.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
201
Last January, the school offered to buy the land
from Thomas for an amount equivalent to its zonal
value plus 15% of such zonal value. Thomas agreed
but required the school to pay, in addition to the
purchase price, the 12% VAT. The school refused
Thomas’ proposal to pass on the VAT contending that
it was an entity exempt from such tax. Moreover, it
said that Thomas was not regularly engaged in the real
estate business and, therefore, was not subject to
VAT. Consequently, Thomas should not charge any
VAT to the school.
a. Is the school’s contention correct ?
SUGGESTED ANSWER: The contention of the
school is partially correct.
Of possible merit is the contention that Tjomas was
not regularly engaged in the real estate business and thus
is not subject to VAT. While continuity of the lease
agreement from 2006 to the present could characterize
Thomas as a lessor of property regularly engaged in the
real estate business (NIRC of 1997, Sec. 108 (A) , 2nd par)
there is no showing that the gross annual rentals received
by Thomas exceeds P3 million [Ibid., Sec. 109 (BB)] which
would make him subject to VAT.
Finally, Thomas does not appear to be a VATregistered person. Hence, there is no VAT to be paid by
Thomas that could be passed on to the school.
As a result of the foregoing there is no need to
discuss whether or not the school is exempt from the VAT.
Finally, granting arguendo that Thomas is a VATregistered person and he has paid the VAT and passed
on the same to the school it’s contention that Thomas
could not pass on to it the because it is exempt from VAT
is without merit. The school is not exempt from VAT but its
transactions. [NIRC of 1997, Sec. 109 (H) as reiterated by
the TRAIN]
202
FREE PRE-WEEK NOTES
TAXATION LAW
An exempt transaction differs from a VAT exempt
party.
“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.”
(NIRC OF 1997, Sec. 105, 2nd par.) Thus, Thomas may
pass on the VAT, if any, to the school.
b. Will your answer be the same if Thomas signed
up as VAT-registered person only in 2021 ?
SUGGESTED ANSWER: Yes but only partially.
Thomas shall be then be subject to VAT after his
registration as such a person. He could pass on to the
school the VAT that he paid.
*5. KONSTRUCT, Inc., is a VAT-registered enterprise
engaged in the general construction business. PACKARD
Co. Ltd. contracts the services of KONSTRUCT, Inc. to
construct PACKARD Co. Ltd.’s factory building located in
the Camelray Techno Park, a special economic zone.
PACKARD Co. Ltd. is registered with the the Philippine
Economic Zone Authority (PEZA) as an ecozone export
enterprise, and, as such, enjoys income tax holiday
pursuant to the Special Economic Zone Act of 1995.
KONSTRUCT, Inc., files an application with the
Bureau of lnternal Revenue (BIR) for the VAT zero-rating
of its sale of services to PACKARD Co. Ltd. However, the
BIR denies KONSTRUCT, lnc.’s application on the ground
that PACKARD Co. Ltd. already enjoys income tax
holiday.
Is the BIR correct in denying KONSTRUCT, lnc.’s
application? Explain your answer.
SUGGESTED ANSWER: No. The fact that
PACKARD Co. Ltd. already enjoys income tax holiday is
not a valid ground for denying KONSTRUCT, Inc.’s
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
203
application for VAT zero-rating of its sale of services to
PACKARD Co. Ltd..
Services rendered to persons or entitities whose
exemption under special laws subjects the supply of such
services to zero percent (0%) rate. [NIRC of 1997, Sec.
108 (B) (3)]
“PEZA shall manage and operate the ECOZONES as
a separate customs territory; thus, creating the fiction that
the ECOZONE is a foreign territory. As a result, sales
made by a supplier in the Customs Territory to a purchaser
in the ECOZONE shall be treated as an exportation from
the Customs Territory.” (Coral Bay Nickel Corporation v.
Commissioner of Internal Revenue, G.R. No. 190506, June
13, 2016)
All sales of goods, properties, and services made by a
VAT-registered supplier from the Customs Territory, such
as KONSTRUCT, Inc. to an ECOZONE enterprise like
PACKARD Co. Ltd, shall be subject to VAT, at zero
percent (0%) rate, regardless of the tatter's type or class of
PEZA registration; and, thus, affirming the nature of a
PEZA-registered or an ECOZONE enterprise as a VATexempt entity. (Ibid.)
*6. The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65-2012
imposing Value-Added Tax (VAT) on association dues
and membership fees collected by condominium
corporations from its member condominium-unit owners.
The RMC’s validity is challenged before the Supreme
Court (SC) by the condominium corporations. The
Solicitor General, counsel for BIR, claims that association
dues, membership fees, and other assessment/charges
collected by a condominium corporations are subject to
VAT since they constitute income payments or
compensation for the beneficial services it provides to its
members and tenants.
204
FREE PRE-WEEK NOTES
TAXATION LAW
On the other hand, the lawyer of the condominium
corporations argues that such dues and fees are
merely held in trust by the condominium corporations
exclusively for their members and used solely for
administrative expenses in implementing the
condominium corporations’ purposes. Accordingly,
the condominium corporations do not actually render
services for a fee subject to VAT.
Whose argument is correct? Decide.
SUGGESTED ANSWER: The argument of the
condominium corporations’ lawyer is correct.
The provisions of the NIRC are clear in describing the
characteristics of a person who is subject to VAT, as any
person who, in the course of his trade or business, renders
services. (NIRC of 1997, Sec. 105, 1st par., paraphrasing
supplied)
To be “in the course of trade or business” means
”trade or commercial activity regularly engaged in as a
means of livelihood or with a view to profit.” (Yamane , etc.
v. BA Lepanto Condominium Corporation, G. R. No.
154993, October 25, 2005) By its very nature a
condominium corporation is not engaged in business, and
any profit that it derives is merely incidental. (Ibid.)
The money paid by the unit owners are pooled
together to be spent exclusively for the purpose of
maintaining and preserving the condominium building and
the common areas which they themselves own and
possess.
VAT ON REAL ESTATE TRANSACTIONS
***1. What real estate transactions are not subject
to the Value-Added Tax (VAT)?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
205
SUGGESTED ANSWER: The following sales of real
properties are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade
or business,
b. real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise
known as the Urban Development and Housing Act of
1992, and other related laws,
c. residential lot valued at One million five hundred
thousand pesos (P 1,500,000) and below,
d. house and lot, and other residential dwellings
valued at Two million five hundred thousand pesos
(P2,500,000) and below:
Provided, That beginnning January 1, 2021, the VAT
exemption shall only apply to sale of real properties not
primarily held for sale to customers or held for lease in the
ordinary course of trade or business, sale of real property
utilized for socialized housing as defined by Republic Act
No. 7279, sale of house and lot, and other residential
dwellings with selling price of not more than Two million
pesos (P2,000,000): Provided, further, That every three (3)
years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price
Index, as published by the Philippine Statistics Authority
(PSA).” [NIRC of 1997, Sec. 109 (P) as amended by the
TRAIN, paraphrasing supplied ]
**2. Romina Quinajon is engaged in the business of
leasing out several residential apartment units she owns.
The monthly rental for each unit ranges from P10,000.00
to P12,000.00. Her gross rental income for one year is
P4,000,000.00. She consults you on whether it is
necessary for her to register as a VAT taxpayer. What
legal advice will you give her, and why?
206
SUGGESTED ANSWER:
register as a VAT taxpayer.
FREE PRE-WEEK NOTES
TAXATION LAW
She is not required to
Her transactions of leasing residential units for an
amount not exceeding P15,000.00 per unit per month is
exempt from the VAT.
The total gross rental income of P4,000,000.00, which
exceeds the P3,000,000.00 threshold does not matter
because such threshold applies only non-exempt sale or
lease of goods or properties or the performance of
services. [NIRC of 1997, Sec. 109 (BB) as added by the
TRAIN]
***3. On September 17, 2021, Data Realty, Inc., a
real-estate corporation duly organized and existing
under Philippine law, sold to Jenny Vera a
condominium unit at Freedom Residences in Malabon
City with an area of 32.31 square meters for a contract
price of P4,213,000. The condominium unit had a zonal
value amounting to P2,877,000 and fair market value
amounting to P550,000.
a. Is the transaction subject to value-added tax
and documentary stamp tax? Explain your answer.
(2017, date supplied)
SUGGESTED ANSWER: Yes. The sale is subject to
both the value-added tax and documentary stamp tax.
Data Realty is a real estate dealer which includes any
person engaged in the business of buying, developing,
selling, exchanging real properties as principal and holding
itself out as a full or part-time dealer in real estate. (Rev.
Regs. No. 16-2005, Section 4.106-3, 12th par.) It sold the
condominium unit which is primarily held for sale to
customers hence subject to VAT.
The contract price of P4,213,000.00, which is the
highest value compared with the zonal value, and the fair
market value, is the amount used for internal revenue
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
207
purposes. Since, it is above the threshold value of P3
million, then the sale is subject to VAT.
Since, Data Realty, Inc. is the seller, it is liable for the
documentary stamp tax which is a tax on the sales
transaction.
The above however, does not include the sale of
parking lots which may or may not be included in the sale
of condominium units. The sale of parking lots in a
condominium is a separate and distinct transaction and is
not covered by the rules on threshold amount not being a
residential lot, house and lot or a residential dwelling, thus,
should be subject to VAT regardless of amount of selling
price. (Rev. Regs. No. 16-2005, Sec. 4.106.3, last par.,
as added by Rev. Regs. No. 13-2012)
b. Would your answer be the same if the property
was sold by a bank in a foreclosure sale? Explain your
answer.
SUGGESTED ANSWER: Yes. The sale of foreclosed
real property is not considered as part of the services
rendered by a bank to its client-borrowers because it sells
the foreclosed property for purposes of collecting. The
sale benefits the bank and therefore subject to VAT.
The foreclosure sale is not part of the service
rendered by the bank to its borrower-clients which is not
subject to VAT but to percentage tax. [NIRC of 1997, Sec.
109 (U), as amended by Rep. Act No. 9337, and
renumbered by the TRAIN as Sec. 109 (V)]
***4. Klaus, Inc., a domestic, VAT-registered
corporation engaged in the land transportation
business, owns a house and lot along Katipunan St.,
Quezon City. This property is being used by Klaus,
lnc.'s president and single largest shareholder, Atty.
Krimson, as his residence. No business activity
transpires there except for the company's Christmas
party which is held there every December. Atty.
208
FREE PRE-WEEK NOTES
TAXATION LAW
Krimson recently grew tired of the long commute from
Katipunan to his office in Makati City and caused the
company to sell the house and lot. The sale was
recorded in the books of Klaus, Inc. as investment in
real property.
a. Is the sale of the said property subject to VAT ?
(2018)
SUGGESTED ANSWER: No. Klaus, Inc., is engaged
in the transportation business and the house and lot is not
part of “Goods or properties” the sale, barter or exchange
of which may be subject to VAT which include real
properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business. [NIRC of
1997, Sec. 106 (A) (1)], 1st par.; Rev. Regs. No. 16-2005,
Sec. 4.106-2]
Klaus, Inc., is not holding the house and lot primarily
for sale to customers or held for lease in the ordinary
course of trade or business because it is being used by its
President as his residence.
ALTERNATIVE ANSWER: Yes. The sale of
residential properties such as the property of Klaus, Inc.,
being used by Atty. Krimson as his residence is subject to
VAT if the gross selling price exceeded P3,199,200.00 and
the sale notarization was after January 1, 2012.
The sale of residential lot with gross selling price
exceeding P1,919,500.00, residential house and lot or
other residential dwellings with gross selling price
exceeding P3,199,200.00, where the instrument of sale
(whether the instrument is nominated as a deed of
absolute sale, deed of conditional sale or otherwise) is
executed and notarized on or after January 1, 2012 and
shall be subject to twelve percent (12%) output VAT.
(Rev. Regs. No. 16-2005, Section 4.106-3, 3rd par., as
amended by Rev. Regs.
No. 16-2011, and further
amended by Rev. Regs. No. 3-2012)
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
209
NOTE NOT PART OF THE ANSWER: The author
suggests that for purposes of answering a Bar examination
question with similar statement of facts as the foregoing
question, that the examinee should discuss both the
SUGGESTED and ALTERNATIVE ANSWERS. While this
may be so there must be an indication that the
SUGGESTED ANSWER is the primary choice for the
answer. Without this indication the examinee has no
answer.
*5. In June 2016, DDD Corp., a domestic
corporation engaged in the business of leasing real
properties in the Philippines, entered into a lease
agreement of a residential house and lot with EEE,
Inc., a non-resident foreign corporation.
The
residential house and lot will be used by officials of
EEE, Inc. during the visit to the 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)
SUGGESTED ANSWER:
correct.
No. DDD Corp. is not
The 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. [NIRC of 1997, Sec. 108 (A) 4th par.]
Since, the leased residential house and lot is located
and used in the Philippines it is subject to VAT despite the
fact that the lease agreement was signed in Singapore.
FREE PRE-WEEK NOTES
TAXATION LAW
210
EXEMPT FROM VAT
**1. What transactions in agricultural and marine
products are VAT exempt ?
SUGGESTED ANSWER: Sale or importation of
a. agricultural and marine food products in their
original state,
b. livestock and poultry of
1) a kind generally used as, or yielding or
producing foods for human consumption;
2) and breeding stock and genetic materials
therefor. [NIRC of 1997, Sec. 109 (1) (A), 1st par.as
amended by Rep. Act No. 9337, reiterated by the
TRAIN, arrangement and numbering supplied]
**2. Is the sale of fresh vegetables and fish by
Aling Toneng at her pwesto in the Pamilihang Bayan
ng San Jose, Batangas subject to VAT ?
SUGGESTED ANSWER: No. The sale of agricultural
and marine products are VAT exempt. [NIRC of 1997, Sec.
109 (1) (A), 1st par.as amended by Rep. Act No. 9337,
reiterated by the TRAIN]
**3. Is the sale of orchids by a flower shop in
Dangwa, Sampaloc, Manila which raises its flowers in
Benguet subject to VAT ?
SUGGESTED ANSWER: Yes. It is subject to the
12% VAT because flowers are non-food agricultural items.
Only agricultural food items are exempted from VAT.
[NIRC of 1997, Sec. 109 (1) (A), as amended by Rep. Act
No. 9337, reiterated by the TRAIN)
**4. On August 3, 2012, the Bureau of Internal
Revenue (BIR) issued RMC No. 35-2012, entitled
"Clarifying the Taxability of Clubs Organized and
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
211
Operated Exclusively for Pleasure, Recreation, and
Other Non-Profit Purposes," which was addressed to
all revenue officials, employees, and others concerned
for their guidance regarding among others the Valued
Added Tax (VAT) liability of the said recreational clubs.
RMC No. 35-2012 provides that "the gross
receipts of recreational clubs including but not limited
to membership fees, assessment dues, rental income,
and service fees are subject to VAT." As basis, the BIR
relied on Section 105, Chapter I, Title IV of the 1997
NIRC, which states that even a nonstock, nonprofit
private organization or government entity is liable to
pay VAT on the sale of goods or services.
Is the imposition of VAT under RMC No. 35-2012
valid ?
SUGGESTED ANSWER: No. The Supreme Court
declared invalid “the BIR's interpretation in RMC No. 352012 that membership fees, assessment dues, and the like
are part of ‘the gross receipts of recreational clubs’ that are
‘subject to VAT.” [Association of NonProfit Clubs, Inc.
(ANPC), etc., v. Bureau of Internal Revenue (BIR), etc.,
G.R. No. 228539, 26 June 2019]
“It is a basic principle that before a transaction is
imposed VAT, a sale, barter or exchange of goods or
properties, or sale of a service is required.” (Ibid.) “This is
true even if such sale is on a cost-reimbursement basis.”
(Ibid.) ,
Membership fees, assessment dues, and the like are
not subject to VAT because in collecting such fees, the
club is not selling its service to the members. Conversely,
the members are not buying services from the club when
dues are paid; hence, there is no economic or commercial
activity to speak of as these dues are devoted for the
operations/maintenance of the facilities of the
organization. As such, there could be no “sale, barter or
FREE PRE-WEEK NOTES
TAXATION LAW
212
exchange of goods or properties, or sale of a service" to
speak of, which would then be subject to VAT under the
1997 NIRC. (Ibid.)
**5. In lieu of VAT what tax is due upon persons
exempt from VAT ?
SUGGESTED ANSWER:
a. Any person,
b. whose sales or receipts are exempt under the
NIRC of 1997 from the payment of value-added tax
1) and who is not a VAT-registered person
c. shall pay a tax equivalent to three percent (3%) of
his gross monthly sales or receipt:
d. Provided, that cooperatives shall be exempt from
the three percent (3%) gross receipts tax herein imposed.
[NIRC of 1997, Sec. 116, as amended by the TRAIN,
arrangement and numbering supplied]
If VAT-registered the percentage tax is not paid and
VAT shall be collected.
REFUND OR TAX CREDITS FOR VAT
***1. Explain the procedure for claiming refunds
or tax credits of input Value Added Tax (VAT) for zerorated or effectively zero-rated sales under Sec. 112 of
the National Internal Revenue Code (NIRC) from the
filing of an application with the Commissioner of
Internal Revenue (CIR) up to the Supreme Court.
SUGGESTED ANSWER:
a. An administrative claim for refund of or issuance of
tax credit for unutilized excess input VAT must be filed with
the CIR within two (2) years counted from the last day of
the quarter when the relevant zero-rated sale was made
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
213
[NIRC of 1997, Sec. 112 (A)] pertaining to the input Value
Added Tax (VAT) regardless of whether said tax was paid
or not. (Commissioner of Internal Revenue v. Mirant
Pagbilao Corporation, 565 SCRA 154)
b. The claim for refund must be accompanied with a
statement under oath that all documents to support the
claim has been submitted at the time of filing of the claim
for refund. (RMC 54-14)
c. The CIR shall within ninety (90) days from the date
of submission of complete documents to support the
application filed VAT-registered person on his zero-rated or
effectively zero rated sale to decide the matter. [Ibid., Sec.
112 (C), 1st par., as amended by the TRAIN, in relation to
Sec. 112 (A), to reduce the period from 120 days to 90
days.]
d. In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the CIR to
act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the
expiration of the ninety (90) day period, appeal the
decision or the unacted claim with the Court of Tax
Appeals (CTA) division [Ibid., Sec. 112 (C), 2nd par., as
amended by the TRAIN]
As a general rule, the case would be dismissed, for
premature filing, if recourse was made to the CTA division
without waiting for the expiration of the 90-day period
within which the CIR should render his decision. The 90day period took effect only on January 1, 2018. Before
that date the period was 120 days.
e. The adverse decision of the CTA division may be
the subject of a motion for reconsideration or new trial
within fifteen (15) days from receipt of the adverse
decision, filed with the same division that rendered the
decision
FREE PRE-WEEK NOTES
TAXATION LAW
214
f. The adverse decision of the CTA division on the
motion for reconsideration or new trial, shall the the subject
of a petition for review filed within fifteen (15) days from
receipt of the decision filed with the CTA en banc.
g. The adverse decision of the CTA en banc shall,
within fifteen (15) days from receipt be the subject of a
petition for review on certiorari filed with the Supreme
Court. The period may be extended to thirty (30) days
upon payment of the requisite docketing fee.
***2. Tiktok Inc. (TI) filed its quarterly tax returns
for the calendar year 2019 as follows:
First quarter – April 25, 2019
Second quarter – July 23, 2019
Third quarter – October 25, 2019
Fourth quarter – January 27, 2020
On December 22, 2020, TI filed with the Bureau of
Internal Revenue (BIR) an administrative claim for
refund of its unutilized input Value-Added Tax (VAT)
for the calendar year 2019. After several months of
inaction by the Commissioner of Internal Revenue
(CIR) on its claim for refund, Tiktok, Inc, decided to
elevate its claim directly to the Court of Tax Appeals
(CTA) on April 22, 2021. In due time, the CTA denied
the tax refund relative to the input VAT of TI for the
first quarter of 2019, reasoning that the claim was filed
beyond the two-year period prescribed under Section
112 (A) of the National Internal Revenue Code (NIRC).
(A) Is the CTA correct ?
SUGGESTED ANSWER: No. The CTA is not correct.
The phrase “within two (2) years” prescribed under
Section 112 (A) of the NIRC refers to applications for
administrative refund/credit filed with the CIR and not to
appeals made to the CTA.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
215
Applying the two-year period to judicial claims would
render nugatory Section 112 (C) of the NIRC of 1997, as
amended by the TRAIN which already provides for a
specific 90-day period within which a taxpayer should
appeal to the CTA the decision or inaction of the CIR.
The 90 period within which the CIR must decide is
counted from December 22, 2020 and ends on March 29,
2021. The BIR’s inaction after 90 days or on March 29,
2021 is a deemed an adverse decision on the claim,
appealable to the CTA within 30 days from the lapse of the
90-day period or not later than April 28, 2021.
TI has 30 days from March 29, 2021 or until April 28,
2021 within which to appeal to the CTA. The April 22, 2021
claim with the CTA was seasonably filed.
(B) Assuming that TI filed its claim before the CTA
on February 22, 2021, would your answer be the same
?
SUGGESTED ANSWER: No. This time the CTA was
correct in denying the claim for refund.
The claim made before the CTA on February 22,
2021 is premature. The 90 period within which the CIR
must decide is counted from December 22, 2020 and ends
on March 29, 2021.
As of February 22, 2021 there is as yet no decision
subject to appeal because the 90-day period for the CIR
to act on the claim for refund has not yet lapsed.
iv. DONOR’s TAX
**1. What transfers of property are considered
subject to the donor’s tax?
SUGGESTED ANSWER: The following are transfers
of property subject to donors tax:
FREE PRE-WEEK NOTES
TAXATION LAW
216
a.
Act of liberality on the part of the donor;
b. inter vivos in its effect;
c.
gratuitous disposal of property; or for less than
adequate consideration
d. in favor of another
e. who accepts it
f. without any legal compulsion to give. (CCP, Art.
725, arrangement and numbering supplied)
Stated otherwise, there is no legal obligation to
give.
The above are also known as the requisites of a
valid donation subject to donor’s tax.
***2. What transfers of property are considered
subject to the donor’s tax ?
SUGGESTED ANSWER: Where property, other than
real property, other than real property that has been subjected
to the final capital gains tax, is transferred for less than an
adequate and full consideration in money or money’s worth,
then the amount by which the fair market value of the property
exceeded the value of the consideration shall, for the purpose
of imposing the donor’s tax , be deemed a gift, and shall be
included in computing the amount of gifts made during the
calendar year.
A sale, exchange, or other transfer of property made in
the ordinary course of business (a transaction which is a bona
fide, at arm’s length, and free from any donative intent), will be
considered as made for an adequate and full consideration in
money or money’s worth [NIRC of 1997, Sec. 100, as
amended by the TRAIN] and not subject to donor’s tax.
***3. Enumerate gifts which are not subject to
donor’s taxes.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
217
SUGGESTED ANSWER: The following gifts are not
subject to donor’s taxes:
a. Total gifts NOT in excess of Two hundred fifty
thousand pesos (P250,000) exempt gift made during the
calendar year. [NIRC of 1997, Sec. 99 (A), as amended by
the TRAIN]
b. Any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign purposes
shall be exempted under the Election Code, as amended.
[Ibid., Sec. 99 (B), as amended by the TRAIN]
c. 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. [Ibid., Sec. 101 (A) (1),
as amended by the TRAIN, and Sec. 101 (B) (1)]
d. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
accredited nongovernment 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.
[Ibid,, Sec. 101 (A) (2), as amended by the TRAIN, and Sec.
101 (B) (2), paraphrasing supplied]
e. Donations of intangibles subject to reciprocity.
f. Donations for athlete’s prizes and awards.
g. Donations under special laws.
h. Donations under international agreements.
Author’s observation. The reader should distinguish
between those donations that are not covered under the
NIRC of 1997 and those that are exempt under the
provisions of the said law. Donations that are not covered
under the NIRC of 1997 are not subject to donor’s taxes.
These were discussed under Situs of Taxation, supra.
218
FREE PRE-WEEK NOTES
TAXATION LAW
**4. Can you name one kind of gift that is exempt
from donor’s tax which is extendible to both residents
and non-residents or non-citizens of the Philippines?
Include qualifications, if any.
SUGGESTED ANSWER: A gift made in favor of an
educational and/or charitable, religious, cultural or social
welfare organization or research institution or organization.
[NIRC of 1997, Sec.. 101 (A) (3) and (B) (2)]
The qualification for said gift to be exempt from
donor’s tax is that not more than thirty per centum (30%) of
said gifts shall be used by the donee for administration
purposes. (Ibid.)
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
subdivisions of the said Government [NIRC of 1997, Sec.
101 (A), (2), and (B) (1)] are exempted from donor’s tax
whether made by residents and non-residents or noncitizens of the Philippines.
**5. Monforte, Inc. holds a proprietary share
of Boracay Timeshares, Inc. It assigned without any
consideration this share to Bian, one of its foreign
consultants, to enable her to use its facilities for the
duration of her stay in the Philippines. Bian signed a
Declaration of Trust where she acknowledged that the
share is owned by Monforte, Inc. and where she
promised to transfer the same to whoever will succeed
her as consultant. When Bian’s contract with Monforte,
Inc. expired, she left the Philippines and assigned for
free the share to Camille, her successor in office.
What tax, if any can be imposed by the BIR on the
transaction ?
SUGGESTED ANSWER: The tax to be imposed on
the value of the “right to use the facilities” is the fringe tax
to be imposed on the employer.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
219
The assignments are not gratuitous, hence not
subject to donor’s taxes. The value of the right to avail of
the privileges attendant to the Boracay Time Shares, Inc.,
proprietary share which is due to Bian’s merits or services
as a computer consultant is a fringe benefit taxable to the
employer. [NIRC of 1997, Sec. 33 (B) (6)]
The same holds true with respect to the transfer of the
shares to Camille.
**6. The spouses Jun and Romina Sampaga
purchased a piece of land for P5,000,000 and included
their two (2) minor children as co-purchasers in the
Deed of Absolute Sale. The Commissioner of Internal
Revenue (CIR) ruled that there was an implied
donation and assessed donor’s taxes against the
spouses. Rule on the CIR’s action.
SUGGESTED ANSWER: The CIR is correct. There
was animus donandi (intent to donate) since the children
had no financial capacity to be co-purchasers. (Spouses
Evono v. Department of Finance, CTA EB Case No. 705,
June 4, 2012)
NOTE NOT PART OF THE ANSWER: The above
answer should be distinguished from a sale for insufficient
consideration. There was full consideration paid for the
property but it is considered a donation to the children
because the complete absence of consideration makes the
giving a pure act of liberality. This is a characteristic of a
donation.
***7. Raniel sold to Omar, his brother-in-law, his
lot with a market value of P1,000,000 for P600,000.00.
Raniel’s cost in the lot is P100,000.00. B is financially
capable of buying the lot.
Raniel also owns Bedaneo Co., which has a fast
growing business. Raniel sold some of his shares of
stock in Bedaneo Co., to his key executives in
Bedaneo Co. These executives are not related to
220
FREE PRE-WEEK NOTES
TAXATION LAW
Raniel. The selling price is P3,000,000, market value of
P5,000,000.
Raniel’s cost in the shares sold is
P1,000,000. Raniel’s purpose in selling the shares is
to enable his key executives to acquire a proprietary
interest in the business and have a personal stake in
the business.
Explain if the above transactions are subject to
donor’s tax.
SUGGESTED ANSWER: Yes. All the transactions
are subject to donor’s tax except the lot if the 6% capital
gains tax was fully paid. [NIRC of 1997, Sec. 100, as
amended by the TRAIN
The transfers were all made for less than an
adequate and full consideration in money’s worth hence,
the excess of the fair market value of the property over the
actual value of the consideration shall be subject to
donor’s tax.
**8. Don Pancrasio, Filipino, married, and resident
of Pasig City, died intestate on November 15, 2021. He
was survived by his wife, Amelia and three children:
Psalmir, Darylle and Aexandra.
a. If Psalmir, one of the compulsory heirs,
renounces his share in the inheritance in favor of the
other co-heirs, is there any tax implication of Psalmir’s
renunciation ? What about the other coheirs ?
SUGGESTED ANSWER: There is no tax implication
with regard to X’s renunciation. There is a general
renunciation because there is no specific identification in
favor of a specified person. General renunciation by the
compulsory heir of his share in the hereditary estate left by
the decedent is not subject to donor’s tax, unless
specifically and categorically done in favor of identified
heir/s to the exclusion or disadvantage of the other coheirs in the hereditary estate. [Rev. Regs. No. 2-2003,
Sec. 11, 4th par.]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
221
There is no tax implication with regard to the other
coheirs because they are not the ones required to pay the
estate taxes but the administrator of the estate of Don
Pancrasio. There would a tax implication for the other coheirs if there is no administrator because their share in the
estate taxes would increase in the proportion of the
increase in their shares resulting from the renunciation.
b. Amelia 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 Amelia as a donor.
Was the BIR correct ?
SUGGESTED ANSWER: No. The BIR is only partially
correct.
The renunciation by Amelia, the surviving spouse, of
her share in the conjugal partnership after the dissolution
of the marriage, resulting from the death of Don Pancrasio,
in favor of her children who are the heirs of the deceased
spouse is subject to donor’s tax. [Rev. Regs. No. 2-2003,
Sec. 11, 4th par.]
This is so, because the transfer that resulted from the
renunciation of her share in the conjugal property was
without consideration.
The BIR is wrong with regard to Amelia’s renunciation
of her share in the inheritance left by the late Don
Pancrasio. There was a general renunciation by Amelia,
the surviving spouse, of her share in the hereditary estate
left by the decedent which is is not subject to donor’s tax,
because it was not specifically and categorically done in
favor of identified heir/s to the exclusion or disadvantage of
the other co-heirs in the hereditary estate. (Rev. Regs.
No. 2-2003, Sec. 11, 4th par.)
222
FREE PRE-WEEK NOTES
TAXATION LAW
**9. San Pascual Medical School, Inc. (SPMSI), a
non-stock, non-profit corporation, donated its three
parcels of idle land situated in the Municipality of San
Jose, Batangas to San Jose University (SJU), another
non-stock, non-profit corporation, duly accredited with
the Commission on Higher Education (CHED), in
recognition of the latter’s contribution to and
participation in the spiritual and educational
development of the former.
a. Is San Pascual Medical School, Inc. (SPMSI),
liable for the payment of donor’s tax ?
SUGGESTED ANSWER: No. Exempt from donor’s
tax are gifts in favor of an educational institution, such as
SJU. There is no showing in the problem that not more than
thirty percent (30%) of said gifts shall be used by SJU for
administration purposes.
SPMSI is exempt from the payment of the donor’s tax
because SJU is a non-stock, non-profit educational
university, incorporated as a non-stock entity, paying no
dividends, governed by trustees who receive no
compensation, and devoting all its income, whether
students’ fees or gifts, donation, subsidies or other forms of
philanthropy, to the accomplishment and promotion of the
purposes enumerated in its Articles of Incorporation. [NIRC
of 1997, Sec. 101 (A) (2) as amended by the TRAIN]
b. If San Jose University (SJU) donates the three
parcels of idle land in favor of the Municipality of San
Jose, Batangas, will SJU be liable for donor’s tax
? Explain your answer.
SUGGESTED ANSWER: No. Exempt from donor’s
tax are gifts made to or for the use of any political
subdivisions of the said National Government such as the
Muncipality of San Jose, Batangas. [NIRC of 1997, Sec.
101 (A), (1), and (B) (1), as amended by the TRAIN]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
223
**10. Spouses Jerome and Lily de la Cruz, both
Filipino citizens are the owners of a small residential
house and lot in Lipa City. After the recent wedding of
their son, Mark, to Annie, the spouses donated said
real property to them. At the time of donation, the real
property has a fair market value of P1 million.
a. Are Mark and Annie subject to income tax for
the value of the real property donated to them ?
Explain.
SUGGESTED ANSWER: No. The giving was a pure
act of liberality that is considered as a gift and excluded
from gross income hence not subject to income tax.
b. Are Jerome and Lily subject to donor’s tax ? If
so, how much is the taxable gift of each spouse and
what rate shall be applied to the gift ? Explain.
SUGGESTED ANSWER: Yes. The total value of the
donation is P1million which if divided between the spouses
Jerome and Lily, would result to a donation worth
P500,000.00 for each of them.
If they would donate the P500,000.00 equally between
Mark and Lily, both Jerome and Lily would have an gift of
P250,000.00 each for their donation to Mark because the
first P250,000.00 net donation is exempt from donor’s tax.
After deducting the first P250,000.00 the balance of
P250,000.00 shall be subject to the 6% donor’s tax.
Assuming that the donation given to Mark and Annie
were given during the same calendar year, then the total
donation of P500,000.00 made to Annie (P250,000.00
each from Jerome and Lily) would not anymore be subject
to the first P250,000.00 exemption because the spouses
already availed of the same when they made the donation
of Mark.
224
FREE PRE-WEEK NOTES
TAXATION LAW
Consequently, the Jerome and Lily shall pay the 6%
donor’s tax on their donation of P250,000.00 each they
made to Annie.
***10. Atty. Aaron is a candidate in the upcoming
2022 Senatorial elections. Mr. Rodrigo, believing in the
sincerity and ability of Atty. Aaron to introduce much
needed reforms in the country, contributed in December
2021, P500,000.00 in cash to the campaign chest of Atty.
Aaron. In addition during the same period, Mr. Rodrigo
purchased tarpaulins, t-shirts, umbrellas, caps and other
campaign materials that he also donated to Atty. Aaron
for use in his campaign.
a. Is the contribution of cash and campaign
materials subject to donor’s tax ?
SUGGESTED ANSWER: No. The contribution of
cash and campaign materials is considered a donation
that is not subject to donor’s tax.
“Any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign purposes
shall be governed by the Election Code, as amended.”
[NIRC of 1997, Sec. 99 (B), as amended by the TRAIN]
The exemption applies only if reported to the
COMELEC. “Any provision of law to the contrary
notwithstanding, any contribution in cash or in kind to any
candidate or political party or coalition of parties for
campaign purposes, duly reported to the Commission (on
Elections), shall not be subject to the payment of any gift
tax.” [Rep. Act No. 7166, Sec. 13, last par., words in
parentheses supplied]
b. Would you answer be the same if in addition to
Mr. Rodrigo donation of P500,000.00, he also donated
P750,000.00 to Atty. Aaron’s political party ?
SUGGESTED ANSWER: Yes, for reasons please
refer to the answer to question no. a.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
225
c. Are the amounts of the donations made by Mr.
Rodrigo to Atty. Aaron and his political party allowed
as deductions from Mr. Rodrigo’s 2021 gross income
derived from his business in order to arrive at his
income subject to tax? Explain.
SUGGESTED ANSWER: No. Exempt donations for
campaign purposes are not deductible from gross income
for income tax purposes because such amounts did not
help earn the income. Furthermore, they are not among
those which are considered as charitable and other
contributions, which are allowable deductions.
d. Would your answers still be the same, if instead
of Mr. Rodrigo it was his corporation that made the
donation ?
SUGGESTED ANSWER: No more for my answers to
questions to a and b, but still the same for the answer to
question c.
Corporations are not allowed to make donations for
partisan political activities including for political campaign
purposes. The tax exemption provided for by the Election
Code should be construed strictly against the taxpayers.
Corporations are prohibited from making political
contributions.
No corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for
purposes of partisan political activity. [Corp. Code, Title IV,
Sec. 36.9]
**11. Hidylin, 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. Hidylin received the
amount of P500,000.00 as her prize donated by
Robinson Land Corporation. The BIR tried to collect
donor’s tax from Robinson Corporation, which tax
Robinson Land Corporation refuses to pay.
FREE PRE-WEEK NOTES
TAXATION LAW
226
Decide.
SUGGESTED
ANSWER:
Robinson
Land
Corporation is exempt from the payment of donor’s taxes.
It is apparent that the competition was sanctioned by the
appropriate national sports association. [Rep. Act No.
7549, Sec. 1]
***12. On December 25, 2021, Alexandra Baldago
wanted to give to her “ajijada”, the daughter of her
best friend Annie Buenaobra a gift of P500,000.00 for
Christmas. She consulted Atty. Mica Reyes on the
taxes she would have to pay on the P500,000.00 gift.
You are Atty. Reyes, what advice should you give ?
SUGGESTED ANSWER: I would advise Alexandra
to split the gift by giving P250,000.00 on December 25,
2021 (Christmas Day) and the other P250,000.00 on
January 6, 2022 (Three Kings).
In this manner Alexandra does not have to pay any
donor’s tax, because the donations, made during each of
the calendar years, 2021 and 2022, not exceeding Two
hundred fifty thousand pesos (P250,000) are exempt gifts
[NIRC of 1997, Sec. 99, as amended by the TRAIN]
Would Atty. Reyes’ answer be the same despite
the fact that Alexandra Baldago’s “ajijada” is not even
related to her whether by affinity or consanguinity ?
SUGGESTED ANSWER: Yes. The special rate of
30% for donations to strangers was eliminated by the
TRAIN. The rate is now 6% in excess of the first
P250,000.00 for donations made during the calendar year.
**13. Mr. Harold Marciano, an Australian citizen
and a resident of Geelong, Victoria, Australia, sends a
gift check of $20,000 to his future Filipino daughter-inlaw who is to be married to his only son in the
Philippines.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
227
a. Is the donation by Mr. Marciano subject to tax?
Explain.
SUGGESTED ANSWER: No, because the giving of
the gift took place outside of the Philippines. This is
evident from the fact that the gift check was sent to, and
not given personally in, the Philippines. It is of no moment
that Mr. Marciano’s donation does not fall within the gifts
made by a non-resident exempt from donor’s tax.
b. What is the tax consequence, if any, to the
donee (the future Filipino daughter-in-law of Mr.
Marciano) ?
SUGGESTED ANSWER: None. The donee (the
future Filipino daughter-in-law of Mr. Marciano) is not
required to report the $20,000.00 as income because the
gifts are excluded from gross income and exempt from
income taxes.
The income from such gift shall, however, be included
by the donee in her gross income. [NIRC of 1997, Sec. 32
(B) (3)]
v. REMEDIES (JURISDICTION OF
COURTS, PRESCRIPTION, REMEDIES
AGAINST ASSESSMENT NOTICES)
METROPOLITAN TRIAL COURTS, MUNICIPAL TRIAL
COURTS, MUNICIPAL CIRCUIT TRIAL COURTS
What criminal cases fall within the exclusive
original jurisdiction of the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial
Courts?
SUGGESTED ANSWER: Jurisdiction over violations
of criminal offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code (now
228
FREE PRE-WEEK NOTES
TAXATION LAW
Customs Modernization and Tariff Act) and other laws
administered by the Bureau of Internal Revenue or the
Bureau of Customs where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is
less than One million pesos (P1,000,000.00) or where
there is no specified amount claimed and the imposable
penalty is not exceeding six (6) years imprisonment shall
be tried by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts. [Rep. Act No.
1125, Sec. 7.b (1), as amended by Rep. Act No. 9282, in
relation to B.P. Blg. 129, Sec. 32 (2), as amended by Rep.
Act No. 7691]
REGIONAL TRIAL COURT
1. What criminal cases fall within the exclusive
original jurisdiction of the Regional Trial Courts ?
SUGGESTED ANSWER: Jurisdiction over violations
of criminal offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code (now
Customs Modernization and Tariff Act) and other laws
administered by the Bureau of Internal Revenue or the
Bureau of Customs where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is
less than One million pesos (P1,000,000.00) or where
there is no specified amount claimed and the imposable
penalty is more than six (6) years imprisonment shall be
tried by the Regional Courts. [Rep. Act No. 1125, Sec. 7.b
(1), as amended by Rep. Act No. 9282, in relation to B.P.
Blg. 129, Sec. 20, and Sec. 32 (2), as amended by Rep.
Act No. 7691]
2. What tax collection cases fall within the exclusive
original jurisdiction of Regional Trial Courts?
SUGGESTED ANSWER: Civil actions for tax
collection where the principal amount of taxes and fees,
exclusive of charges and penalties claimed exceeds Three
hundred thousand pesos (P300,000.00), or in Metro
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
229
Manila where the amount of the demand exceeds Four
hundred thousand pesos (P400,000.00), provided that the
amount claimed is less than One million pesos
(P1,000,000.00). (B.P .Blg. 129, Sec. 19, as amended by
R.A. No. 7691 in relation to R.A. No. 7691, Sec. 5, and
R.A. No. 1125, Sec. 7, as amended by R.A. No. 9282)
Author’s observation. Tax collection cases that are
below the threshold amounts of P300,000.00 and
P400,000.00 fall within the jurisdiction of the Municipal
Trial Courts, the Municipal Trial Courts in Cities, the
Municipal Circuit Trial Courts, or the Metropolitan Trial
Courts. Where the amount is P1 million or more, exclusive
original jurisdiction is vested with the Court of Tax Appeals
division.
COURT OF TAX APPEALS, IN DIVISIONS
**1. What comprises the exclusive or appellate
jurisdiction of the Court of Tax Appeals (CTA) in divisions ?
SUGGESTED ANSWER:
shall exercise:
“The Court in Divisions
(a) Exclusive original or appellate jurisdiction to
review by appeal the following:
(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
230
FREE PRE-WEEK NOTES
TAXATION LAW
Internal Revenue, where the National Internal
Revenue Code or other applicable law provides a
specific period for action: 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 day period above
mentioned, 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) 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;
(4) Decisions of the Commissioner of Customs
in cases involving liability for customs duties, fees or
other money charges, seizure, detention or release
of property affected, fines, forfeitures of other
penalties in relation thereto, or other matters arising
under the Customs Law or other laws administered
by the Bureau of Customs;
(5) Decisions of the Secretary of Finance on
customs cases elevated to him automatically for
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
231
review from decisions of the Commissioner of
Customs adverse to the Government under Section
2315 of the Tariff and Customs Code (now Secs.
1127 & 1128, Customs Modernization and Tariff
Act); and
(6) 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 Section 301 and 302,
respectively, of the Tariff and Customs Code (now
Secs. 711 & 713, Customs Modernization and Tariff
Act), and safeguard measures under Republic Act
No. 8800, where either party may appeal the
decision to impose or not to impose said duties;”
(RRCTA, Rule 4, Sec. 3, words in parenthesis
supplied)
**2. What is the exclusive original jurisdiction of
Court of Tax Appeals, in divisions, over collection of
taxes ?
SUGGESTED ANSWER: The Court in Divisions shall
exercise “Original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees,
charges and penalties, where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is
one million pesos or more” [A.M. No. 05-11-07-CTA,
November 22, 2005, RRCTA, Rule 4, Sec. 3 (c) (1)]
*3. A taxpayer received on 15 January 2021, an
assessment for an internal revenue tax deficiency. On
10 February 2021, the taxpayer forthwith filed a
petition for review with the Court of Tax Appeals.
Could the Tax Court entertain the petition?
SUGGESTED ANSWER: No. The Court of Tax
Appeals has jurisdiction only over decisions of the
FREE PRE-WEEK NOTES
TAXATION LAW
232
Commissioner of Internal Revenue, or in certain cases his
inaction, involving disputed assessments.
There is no decision yet that could be the subject of
review by the Court of Tax Appeals.
**4. Quezon City issued a notice of assessment
against Mondejar, Inc. for deficiency real property taxes
for the taxable years 2017 to 2020 in the amount of PhP 20
million. Mondejar paid the taxes under protest and
instituted a complaint entitled “Recovery of Illegally
and/or Erroneously-Collected Local Business Tax,
Prohibition with Prayer to Issue TRO and Writ of
Preliminary Injunction” with the RTC of Quezon City.
The RTC denied the application for TRO. Its
motion for reconsideration having been denied as well,
Mondejar filed a petition for certiorari with the Court of
Appeals (CA) assailing the denial of the TRO.
Will the petition prosper?
SUGGESTED ANSWER: No because the Court of
Appeals has no jurisdiction. The petition should have been
filed with the Court of Tax Appeals (CTA).
It was once held that the CTA has certiorari powers
over the issue of grave abuse of discretion on the part of
the RTC in issuing an interlocutory order in cases falling
within the exclusive jurisdiction of the tax court, as this is
inherent to its exercise of appellate jurisdiction. (City of
Manila v. Hon. Grecia-Cuerdo, G.R. No. 175723, Feb. 4,
2014)
**5. Does the Court of Tax Appeals (CTA) have
jurisdiction over tax cases that raise constitutional
issues? Explain.
SUGGESTED ANSWER: Yes, the CTA has exclusive
jurisdiction over tax cases that raise constitutional issues.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
233
“The Court of Tax Appeals has undoubted jurisdiction
to pass upon the constitutionality or validity of a tax law or
regulation when raised by the taxpayer as a defense in
disputing or contesting an assessment or claiming a
refund. It is only in the lawful exercise of its power to pass
upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.
The CTA may likewise take cognizance of cases
directly challenging the constitutionality or validity of a tax
law or regulation or administrative issuance (revenue
orders, revenue memorandum circulars, rulings. (Banco de
Oro, etc. v. Republic of the Philippines, G.R. No. 198756,
August 16, 2016)
**6. What procedural remedy is available in order
to raise constitutional issues before the Court of Tax
Appeals (CTA) ? Explain.
SUGGESTED ANSWER: Prohibition may be filed to
question the constitutionality of a law.
“Generally, the office of prohibition is to prevent the
unlawful and oppressive exercise of authority and is directed
against proceedings that are done without or in excess of
jurisdiction, or with grave abuse of discretion, there being no
appeal or other plain, speedy, and adequate remedy in the
ordinary course of law. It is the remedy to prevent inferior
courts, corporations, boards, or persons from usurping or
exercising a jurisdiction or power with which they have not
been vested by law.” (Southern Luzon Drug Corporation v.
The Department of Social Welfare and Development, G.R. No.
199669, April 25, 2017)
“This is, however, not the lone office of an action for
prohibition.” There was an instance where “prohibition was
also recognized as a proper remedy to prohibit or nullify
acts of executive officials that amount to usurpation of
legislative authority.” (Ibid.)
234
FREE PRE-WEEK NOTES
TAXATION LAW
7. Explain and illustrate the meaning of the Court
of Tax Appeals’ (CTA’s) jurisdiction over “other
matters.”
SUGGESTED ANSWER: The jurisdiction of the CTA
is not limited only to cases which involve decisions or
inactions of the CIR on matters relating to assessments or
refunds but also includes other cases arising from the
NIRC or related laws administered by the BIR.
(Commissioner of Internal Revenue v. Lancaster
Philippines, Inc., G.R. No. 183408, July 12, 2017)
It was once held that the question of whether or not
to impose a deficiency tax assessment comes within the
purview of the phrase “other matters arising under the
National Internal Revenue Code.” (Ibid.)
8. When may a decision on interpleader be
appealed to the Court of Tax ppeals (CTA) ?
SUGGSTED ANSWER: “That the case filed before
the RTC was in the mode of a special civil action for
interpleader does not detract from its nature as a local tax
case, involving as it does the application of the rules on
situs on the payment of local business taxes.
There is no need to distinguish it from other local tax
cases ‘considering that the law expressly confers on the
CTA, the tribunal with the specialized competence over tax
and tariff matters, the role of judicial review over local tax
cases without mention of any other court that may exercise
such power.’” (The City of Makati v. The Municipality of
Bakun, G.R. No. 225226, July 07, 2020)
**9. First E-Bank filed with the Regional Trial Court
(RTC), a petition for declaratory relief seeking to declare
as invalid Revenue Memorandum Circular No. 65-2012
(RMC No. 65-2012) entitled “Clarifying the Taxability of
Association Dues, Membership Fees and Other
Assessments/Charges Collected by Condominium
Corporations. The RTC took cognizance and declared as
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
235
invalid RMC No. 65-2012 for it purportedly expanded the
law, created an additional tax burden on condominium
corporations, and was issued without the requisite notice
and hearing,
a. Was the trial court correct when it resolved the
petition for declaratory relief ?
SUGGESTED ANSWER: No. A petition for declaratory
relief is not the proper remedy to seek the invalidation of a
Revenue Memorandum Circular. (In the Matter of declaratory
relief on the invalidity of BIR Revenue Memorandum Circular
No. 65-2-12. “ClarIfying the taxability of association dues,
membership fees and other assessments/charges collected by
condominium corporations”, G.R. No. 215801, January 15,
2020) Certiorari or prohibition, not declaratory relief, is the
proper remedy to assail the validity or constitutionality of
executive issuances. (Ibid.)
One of the requisites for declaratory relief is that it
must be filed before any breach or violation of an
obligation. Thus, there is no actual case involved in a
Petition for Declaratory Relief. It cannot, therefore, be the
proper vehicle to invoke the judicial review powers to
declare a statute unconstitutional.
It is elementary that before the Supreme Court can
rule on a constitutional issue, there must first be a
justiciable controversy. A justiciable controversy refers to
an existing case or controversy that is appropriate or ripe
for judicial determination, not one that is conjectural or
merely anticipatory. (Ibid.)
b. If the trial court was not correct when it
resolved the petition for declaratory relief, should it
dismiss the petition ?
SUGGESTED ANSWER: No. The case “has farreaching implications and raises questions that need to be
resolved for the public good; or if the assailed act or acts of
executive officials are alleged to have usurped legislative
236
FREE PRE-WEEK NOTES
TAXATION LAW
authority.” (In the Matter of declaratory relief on the
invalidity of BIR Revenue Memorandum Circular No. 65-212. “ClarIfying the taxability of association dues,
membership fees and other assessments/charges
collected by condominium corporations”, G.R. No. 215801,
January 15, 2020)
**10. Since a petition for declaratory relief is not the
proper procedural remedy to raise constitutional issues
are there any instances when petition for declaratory relief
may be treated as one for prohibition? If so give
examples.
SUGGESTED ANSWER: Yes, if the case has farreaching implications and raises questions that need to be
resolved for the public good; or if the assailed act or acts of
executive officials are alleged to have usurped legislative
authority.” (In the Matter of declaratory relief on the invalidity of
BIR Revenue Memorandum Circular No. 65-2-12. “ClarIfying
the taxability of association dues, membership fees and other
assessments/charges collected by condominium corporations”,
G.R. No. 215801, January 15, 2020)
a. A petition for declaratory relief on the subject of
VAT was treated as one for prohibition. This is so because
“the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the
more than half a million motorists who use the tollways
everyday, but more so on the government’s effort to raise
revenue for funding various projects and for reducing
budgetary deficits.” (Ibid.)
b. A petition for declaratory relief seeking to declare as
invalid Revenue Memorandum Circular No. 65-2012 (RMC
No. 65-2012) entitled ”Clarifying the Taxability of Association
Dues, Membership Fees and Other Assessments/Charges
Collected by Condominium Corporations was treated as one
for prohibition. This is so because “RMC No. 65-2012 has farreaching ramifications among condominium corporations
which have proliferated throughout the country. For numerous
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
237
Filipino families, professionals, and students have, for quite
sometime now, opted for condominium living as their new way
of life. The matter of whether indeed the contributions of unit
owners solely intended for maintenance and upkeep of the
common areas of the condominium building are taxable is
imbued with public interest. Suffice it to state that taxes, being
the lifeblood of the government, occupy a high place in the
hierarchy of State priorities, hence, all questions pertaining to
their validity must be promptly addressed with the least
procedural obstruction.” (Ibid.)
**11. Harold, a taxpayer, received a tax deficiency
assessment of P1.2 Million from the BIR demanding
payment within 10 days, otherwise, it would collect
through summary remedies. The taxpayer requested
for a reconsideration stating the grounds therefor.
Instead of resolving the request for reconsideration,
the BIR sent a Final Notice Before Seizure to Harold.
May this action of the Commissioner of Internal
Revenue (CIR) be deemed a denial of Harold’s request
for reconsideration to entitle him to appeal to the
Court of Tax Appeals (CTA) ? Decide with reasons.
SUGGESTED ANSWER: Yes. Not only is the Notice
the only response received: its content and tenor supports
the theory that it was the CIR’s final act regarding the
request for reconsideration. The very title expressly
indicated that it was a final notice prior to seizure of
property. (Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11, 2001)
12. 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)
FREE PRE-WEEK NOTES
TAXATION LAW
238
SUGGESTED ANSWER:
proper.
The manifestation is not
No right to reserve the filing of such civil action
separately from the criminal action shall be recognized.
[Republic Act No. 9282, Sec. 7(b)(1); RRCTA, Rule 9,
Sec. 11, last sentence; Judy Anne Santos v. People, G.R.
No. 173176, August 26, 2008, 563 SCRA 341]
In cases within the jurisdiction of the Court of Tax
Appeals, the criminal action and the corresponding civil
action for the recovery of the civil liability for taxes and
penalties shall be deemed jointly instituted in the same
proceeding.
The filing of the criminal action shall
necessarily carry with it the filing of the civil action.
(RRCTA, Rule 9, Sec. 11, 1st two sentences)
COURT OF TAX APPEALS, en banc
**1. What constitutes the jurisdiction of the CTA
en banc ?
SUGGESTED ANSWER: “The Court en banc shall
exercise exclusive appellate jurisdiction to review by
appeal the following:
(a) Decisions or resolutions on motions for
reconsideration or new trial of the Court in Divisions in the
exercise of its exclusive appellate jurisdiction over:
(1) Cases arising from administrative agencies
- Bureau of Internal Revenue, Bureau of Customs,
Department of Finance, Department of Trade and
Industry, Department of Agriculture;
(2) Local tax cases decided by the Regional
Trial Courts in the exercise of their original
jurisdiction; and
(3) Tax collection cases decided by the
Regional Trial Courts in the exercise of their original
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
239
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;
(b) 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;
(c) 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;
(d) 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;
(e) 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;
(f) 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 (now Customs Modernization and Tariff Act), and
other laws administered by the Bureau of Internal Revenue
or Bureau of Customs. [Rep. Act No. 1125, Sec. 7 (a), as
amended by Rep. Act No. 9282; A.M. No. 05-11-07-CTA,
November 22, 2005, RRCTA, Rule 4, Sec. 2, arrangement,
numbering and words in parenthesis supplied]
NOTE NOT PART OF THE ANSWER: The CTA en
banc’s jurisdiction is limited only to an appellated review
2. How are appeals to the Court of Tax Appeals en
banc taken ?
FREE PRE-WEEK NOTES
TAXATION LAW
240
SUGGESTED ANSWER:
a. “An appeal to the Court en banc in criminal cases
decided by the Court in Division shall be taken by filing a
petition for review as provided in Rule 43 of the Rules of
Court within fifteen days from receipt of a copy of the
decision or resolution appealed from. The Court may, for
good cause, extend the time for filing of the petition for
review for an additional period not exceeding fifteen days.”
[RRCTA, Rule 9, Sec. 9 (b)]
b. “An appeal to the Court in criminal cases decided
by the Regional Trial Courts in the exercise of their
appellate jurisdiction shall be taken by filing a petition for
review as provided in Rule 43 of the Rules of Court within
fifteen days from receipt of a copy of the decision or final
order appealed from. The Court en banc shall act on the
appeal.” [RRCTA, Rule 9, Sec. 9 (c)]
c. An appeal from a decision or resolution of the Court
of Tax Appeals in Division on a motion for reconsideration
or new trial shall be taken to the Court of Tax Appeals en
banc by filing before it a petition for review as provided in
Rule 43 of the Rules of Court.” [RRCTA, Rule 8, Sec. 4 (b)]
To standardize the appeal periods provided in the
Rules and to afford litigants fair opportunity to appeal their
cases, it is deemed practical to allow a fresh period of 15
days within which to file the notice of appeal in the
Regional Trial Court, counted from receipt of the order
dismissing a motion for a new trial or motion for
reconsideration.” [Domingo Neypes v. Court of Appeals, et
al., 469 SCRA 633 (2005)]
SUPREME COURT
1. What is the exclusive review jurisdiction of the
Supreme Court over decisions of the Court of Tax
Appeals (en banc) in tax collection cases?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
241
SUGGESTED ANSWER: “A party adversely affected
by a decision or ruling of the CTA en banc may file with the
Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure.”
(R.A. No. 1125, Sec. 19, as amended by R.A. No. 9282)
PRESCRIPTION
**1. Taxes are generally imprescriptible; statutes,
however, may provide otherwise. State the rules that
have been adopted on this score by The National
Internal Revenue Code (NIRC).
SUGGESTED ANSWER: There are three rules on
prescription under the NIRC: one for assessment, the other
for collection, and finally on refund.
The prescriptive period for assessment is three (3)
years computed from the time the tax return was filed or
should be filed whichever is the later. However, where
there is no return filed or what was filed was a false and
fraudulent return, then the prescriptive period is ten (10)
years computed from the discovery of the falsity or of the
fraud, or of the failure to file the tax return. The taxpayer
and the BIR may also agree on a date when the
assessment may be made, with the taxpayer waiving the
prescriptive period of three years referred to above.
The prescriptive period for collecting internal revenue
taxes is three (3) years from the issuance of an
assessment notice. Where the return is false or fraudulent,
or no return was filed, the deficiency taxes may be
collected even without an assessment within ten (10) years
from discovery of the falsity, fraud or failure to file the tax
return. If there is an assessment made upon a false or
fraudulent return, or no return was filed, then the
prescriptive period is five (5) from issuance of an
assessment notice. This is the same period for the
242
FREE PRE-WEEK NOTES
TAXATION LAW
payment of an assessment issued within the period agreed
upon between the BIR and the taxpayer.
Lastly, the prescriptive period for a refund is within
two (2) years from payment of the tax sought to be
refunded.
**2. State the instances where the general three
(3) year period for assessment does not apply.
SUGGESTED ANSWER:
The following are the
instances where an assessment could be made despite
the lapse of three (3) years from the time the return was
filed or should have been filed whichever is the later:
a. In case of a false or fraudulent return to evade the
payment of a tax. At anytime within ten (10) years after the
discovery of the falsity or fraud. [NIRC of 1997, Sec. 222
(a)]
b. In case of failure to file a return. At anytime within
ten (10) years after the discovery of the omission to file a
return. (Ibid.)
c. If before the expiration of the three (3) year period
for the assessment of the tax, there is an agreement in
writing between the taxpayer and the BIR Commissioner.
The period agreed upon which may be extended by
subsequent written agreements made before the period
previously agreed upon.
[Ibid., Sec. 222 (b)] The
assessment issued in this instance is known as an
“extended assessment”.
NOTE NOT PART OF THE ANSWER: Do not
confuse the above instances with the instances where the
prescriptive periods are suspended or do not run.
The provisions of the Civil Code on prescription does
not apply to tax cases because the NIRC of 1997 being a
special law takes precedence over a general law, the Civil
Code. Furthermore, the provisions of the Tax Code, were
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
243
crafted to ensure expeditious collection of tax money to
ensure the continuous delivery of government services.
**3. What events suspend the running of statute of
limitations for assessment and collection of internal
revenue taxes under the provisions of the National
Internal Revenue Code (NIRC of 1997)?
SUGGESTED ANSWER: The running of the Statute
of Limitations provided in the NIRC of 1997 on the making
of assessment and the beginning of distraint or levy a
proceeding in court for collection, in respect of any
deficiency, shall be suspended
a. for the period during which the Commissioner is
prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty (60)
days thereafter;
b. when the taxpayer requests for a reinvestigation
which is granted by the Commissioner;
c. when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being
assessed or collected.
Where the summons to the taxpayer-defendant was
not served because the defendant could not be located.
The period within which the defendant’s whereabouts are
not known suspends the running of the prescriptive period.
(Republic v. Philips, CA-G.R. No. 66236, November 20,
1983)
d. when the warrant of distraint or levy is duly served
upon the taxpayer, his authorized representative, or a
member of his household with sufficient discretion, and no
property could be located;
e. and when the taxpayer is out of the Philippines.
(NIRC of 1997, Sec. 223, arrangement, numbering, and
paraphrasing supplied)
244
FREE PRE-WEEK NOTES
TAXATION LAW
NOTE NOT PART OF THE ANSWER: In all of the
above instances, the BIR is effectively given extended
periods within which to assess or collect the intetrnal
revenue taxes. These instances are favorable to the BIR.
What about the instances when the running of the
prescriptive period are not suspended ?
a. If the taxpayer informs the Commissioner of any
change in address, the running of the Statute of Limitations
will not be suspended. (NIRC of 1997, Sec. 223)
b. Where an information return indicated therein the
taxpayer’s new address as its “present address”, the same
falls short of the legal requirement for the suspension of
the prescriptive period. The law clearly states that the
prescriptive period will not be suspended only “if the
taxpayer informs the Commissioner of any change in
address.”
(Afisco Insurance Corporation v. Court of
Appeals, et al., G.R. No. 112675, January 25, 1999)
c. If the defendants whereabouts are known, the
prescriptive period is not suspended.
NOTE NOT PART OF THE ANSWER: The above
events are favorable to the taxpayer because the
prescriptive periods continue to run and are not extended.
So the BIR could not anymore assess or collect.
**4. What constitutes a valid waiver of the statute
of limitations for the assessment and collection of
taxes? Explain your answer.
SUGGESTED ANSWER: The following constitutes a
valid waiver of the statute of limitations for the assessment
and collection of taxes:
a. The agreement to waive must have been entered
before the expiration of the three (3) year period for the
assessment of the tax. [NIRC of 1997, Sec. 222 (b);
Cordero v. Gonda, 18 SCRA 331]
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
245
b. The waiver must be in the proper form prescribed
by RMO 20- 90. The phrase "but not after __________ 20
__", which indicates the expiry date of the period agreed
upon to assess/collect the tax after the regular three-year
period of prescription, should be filled up. (Commissioner
of Internal Revenue v. Systems Technology Institute, Inc.,
G.R. No. 220835, July 26, 2017)
c. The waiver must be for a definite period beyond the
ordinary prescriptive periods for assessment and
collection. The period agreed upon can still be extended
by a subsequent written agreement, provided that it is
executed prior to the expiration of the first period agreed
upon. (Bank of Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 139736, October 17, 2005)
d. The waiver must be signed by the taxpayer himself
or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by
the taxpayer to a representative, such delegation should
be in writing and duly notarized. (Commissioner of Internal
Revenue v. Systems Technology Institute, Inc., G.R. No.
220835, July 26, 2017)
e. The Commissioner of Internal Revenue (CIR) or
the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the
waiver. The date of such acceptance by the BIR should be
indicated. However, before signing the waiver, the CIR or
the revenue official authorized by him must make sure that
the waiver is in the prescribed form, duly notarized, and
executed by the taxpayer or his duly authorized
representative. (Ibid.)
Thus, neither implied consent can be presumed nor
can it be contended that the waiver required under the
Tax Code is one which is unilateral nor can it be said that
concurrence to such an agreement is a mere formality
because it is the very signatures of both the CIR and the
246
FREE PRE-WEEK NOTES
TAXATION LAW
taxpayer which give birth to such a valid agreement.
(Commissioner of Internal Revenue v. Court of Appeals,
G.R. No. 115712, February 25, 1999)
f. Both the date of execution by the taxpayer and date
of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse
of the period agreed upon in case a subsequent
agreement is executed. (Commissioner of Internal
Revenue v. Systems Technology Institute, Inc., G.R. No.
220835, July 26, 2017)
g. The waiver must be executed in three copies,
original copy to be attached to the docket of the case,
second copy for the taxpayer and the third copy for
Office accepting the waiver. The fact of receipt by
taxpayer of his/her file copy must be indicated in
original copy to show that the taxpayer was notified of
acceptance of the BIR and the perfection of
agreement. (Ibid.)
the
the
the
the
the
the
the
*5. What should the BIR do when the prescriptive
period for the assessment of a tax deficiency is about
to prescribe but the taxpayer has not yet complied
with the BIR requirements for the production of books
of accounts and other records to substantiate the
claimed deductions, exemptions or credits?
SUGGESTED ANSWER: The BIR should issue a
jeopardy assessment coupled with a letter of demand.
When as in this case the BIR has reason to believe
that the assessment and collection of a deficiency tax will
be jeopardized by delay because of the taxpayer’s failure
to comply with the audit and investigation requirements to
present his books of accounts and/or pertinent records, or
to substantiate all or any of the deductions, exemptions, or
credits claimed in his return.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
247
**6. “X” Corporation filed its income tax returns in
January, 2016 for its income for the year 2015. In
October, 2018, March, 2019 and May, 2019, “X”
through its authorized representative signed three (3)
separate waivers of the “Statute of Limitations under
the NIRC.” The waivers were not signed by the BIR
Commissioner or his agents.
In 2021, the BIR issued letters of demand,
accompanied by assessment notices asking the
corporation to pay the deficiency internal revenue taxes
for its income for the year 2015. “X” disputed the
assessment and requested a reinvestigation. The BIR
Commissioner denied the protest. “X” appealed to the
Court of Tax Appeals on the ground of prescription.
Has the BIR’s right to assess already prescribed ?
SUGGESTED ANSWER: Yes. The BIR’s right to assess
has already prescribed. The waivers being unilateral in
character are not valid waivers. (Commissioner of Internal
Revenue v. Court of Appeals, G.R. No. 115712, February 25,
1999)
The waivers are invalid because they were not signed
by the BIR Commissioner or his agents. Furthermore,
there is no showing in the problem that the waivers (1)
were executed with the notarized written authority of the
taxpayer's representative to sign the waiver on its behalf;
(2) indication of the date of acceptance; and (3) the fact of
receipt by the taxpayer of its file copy was indicated in the
original copies of the waivers.” (Commissioner of Internal
Revenue v. Systems Technology Institute, Inc., G.R. No.
220835, July 26, 2017)
Clearly, the defects in the waivers resulted to the nonextension of the period to assess or collect taxes, and
made the assessments issued by the BIR beyond the
three-year prescriptive period void. [Commissioner of
FREE PRE-WEEK NOTES
TAXATION LAW
248
Internal Revenue v. Kudos Metal Corporation 634 Phil. 314
(2010)]
*7. “X”, a taxpayer, received his notice of assessment
from the BIR on May 5, 2013 requiring him to pay a
deficiency tax of P50,000.00 within thirty 30 days from
notice. On May 28, 2014 “X” ask for and was granted a
reinvestigation. The reinvestigation was terminated on
June 18, 2020, with the Commissioner of Internal Revenue
maintaining the original assessment of P10,000.00.
Having defaulted in payment “X” was sued, today April
26, 2021 in the Court (RTC) of Pangasinan for the
collection of the deficiency tax. “X” pleads prescription.
Will the government suit prosper? Reasons. (1976,
amount and dates supplied)
SUGGESTED ANSWER: No. The RTC of Pangasinan
has no jurisdiction to entertain the case considering that the
amount of the tax is only P50,000.00. Since the RTC is
outside Metro Manila, it would have jurisdiction only if the basic
tax is P300,000.00 or over but does not reach P1 million.
***8. Mr. Dimagiba inherited from his father, who
died on June 10, 2014, several pieces of real property in
Batangas province. The estate tax return was filed and
the estate tax due in the amount of P250,000.00 was paid
on December 06, 2014. The Tax Fraud Division of the BIR
investigated the case on the basis of confidential
information given by Mr. Dimaano on January 06, 2018
that the return filed by Mr. Dimagiba 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, 2021. Mr. Dimagiba protested the assessment on the
ground of prescription.
Decide Mr. Dimagiba’s protest.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
249
SUGGESTED ANSWER: Denied. The return filed on
December 6, 2014 was a false and fraudulent return. This
is evident from the fact as shown in the problem that a
fraud surcharge was imposed. Since the fraud was
discovered only on January 06, 2018, the BIR has a period
of ten (10) years from said discovery or until January 07,
2029 within which to assess. Thus, the assessment notice
that was issued on January 10, 2021 was issued within the
prescriptive period.
NOTE NOT PART OF THE ANSWER: If confronted
with a similar problem, check if there is imposed a fraud
penalty. If there is none, then the appropriate prescriptive
period is three (3) years from the time the return was filed or
should have been filed whichever is later. This is so because
the BIR itself recognized that the return is not false or
fraudulent, when it did not impose the fraud surcharge
***9. On April 14, 2018, Mr. Castor de Castro filed
his income tax returns for 2017 and paid the income tax
due per return. After investigation, the Regional Revenue
Director having jurisdiction of the case, issued a letter of
assessment on April 5, 2018, which was released, mailed
and received by Mr. de Castro on the same day. On
March 31, 2021, a Warrant of Distraint and Levy to enforce
collection of the assessment was served on Mr. de Castro
who protested such action of the revenue official, alleging
that the assessment is not valid because more than 3
years had elapsed from April 5, 2018, the date when he
received the assessment in question and therefore, the
right of the government to assess the deficiency income
tax of P30,000.00 had already prescribed, pursuant to
Section 203 of the Revenue Code. Is the contention of Mr.
de Castro tenable?
SUGGESTED ANSWER: No. The reckoning point for
the tolling of the prescriptive period of three (3) years for the
assessment of the tax is the date of filing the income tax return
250
FREE PRE-WEEK NOTES
TAXATION LAW
or the date when the return should have been filed whichever is
the later of the two.
Since the return for 2017 was filed on April 14, 2018,
then the government has three (3) years from April 15,
2018 or until April 16, 2021 within which to make an
assessment.
The assessment issued on April 5, 2021
was
seasonably made because it was within the aforesaid
three (3) year period.
***10. Mangyan Co., a Philippine corporation filed its
2017 Income Tax Return (ITR) on April 15, 2018 showing a
net loss. Since there was no tax investigation being
conducted by the BIR, on November 10, 2018, Mangyan
Co., amended its 2019 ITR to show more losses. After a
tax investigation, the BIR disallowed certain deductions
claimed by Mangyan Co., putting it, in a net income
position. As a result, on August 5, 2021, the BIR issued a
deficiency income assessment against Mangyan Co. It
protested the assessment on the ground of prescription.
Decide.
SUGGESTED ANSWER: Mangyan Co.’s protest
should be denied.
The right of the BIR to issue an assessment has not
yet prescribed. Since the return was amended, the three
year prescriptive period started to run on November 10,
2018, the date when the amended return was filed. This is
so because there is no showing in the problem that A Co.
is subject to tax investigation, so it could still amend its tax
return. The BIR has up to November 11, 2021 within
which to issue the assessment notice. Thus, the issuance
of the assessment on August 5, 2021 was within the three
(3) year prescriptive period.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
251
***11. DOMINIC Corporation filed its quarterly
income tax return for the first quarter of 2019 and paid
an income tax of P500,000.00 on May 15, 2019. In the
subsequent quarters, DOMINIC suffered losses so that
on April 15, 2020 it declared a net loss of P1,000,000.00
in its annual income tax return. After failing to get a
refund, DOMINIC filed on June 1, 2021 a case with the
Court of Tax Appeals to recover the P500,000.00 in
taxes paid on May 15, 2019.
Is the action to recover the taxes filed timely ?
SUGGESTED ANSWER: Yes. DOMINIC
Corporation is deemed to have paid the P500,000.00 as
of April 15, 2020 and not as of May 15, 2019, the actual
payment.
This is so, because a corporation is considered
to be paying its tax as of the end of the taxable year
inasmuch as the quarterly payments are considered only
as installments.
Consequently , the prescriptive period of two years
from the payment of the tax should start to run on April 15,
2020. Since the Court of Tax Appeals case was filed on
June 1, 2021, it was filed within the prescriptive period.
***12. XYZ Corporation files its income tax return
on a calendar year basis.
For the first quarter of 2019, It paid on 30 May
2019 its quarterly income tax in the amount of P3.0
million. On 20 August 2019, it paid the second
quarterly income tax in the amount of P5.0 million.
The third quarter resulted in a net loss, and no tax was
paid. For the fourth and final return for 2019 the
company reported a net loss for the year, and the
taxpayer indicated in the income tax return that it
opted to claim a refund of the quarterly income tax
payments.
252
FREE PRE-WEEK NOTES
TAXATION LAW
On 10 January 2020, the corporation filed with the
Bureau of internal Revenue a written claim for the
refund of P3.5 million.
BIR failed to act on the claim for refund; hence, on
02 March 2021, the corporation filed a petition for
review with the Court of Tax Appeals on its claim for
refund of the overpayment of its 2019 quarterly income
tax. BIR, in its answer to the petition, alleged that the
claim for refund was filed beyond the reglementary
period.
Did the claim for refund prescribe?
SUGGESTED ANSWER: No. The tax is considered
as having been paid on 10 January 2020, the date when
the income tax return was filed. The income tax return was
deemed filed on 10 January 2020, the date when the
written claim for refund was made because the written
claim for refund is made by ticking the appropriate box in
the income tax return.
Thus, it has a period of two years from that date or
until 11 January 2022 within which to file its petition with
the Court of Tax Appeals. The petition filed on 02 March
2021 was seasonably filed.
***13. WEBGAMES Corporation is a wholly owned
subsidiary of WEBGAMES, Inc., California USA.
Starting December 15, 2018, WEBGAMES Corporation
paid annual royalties to WEBGAMES, 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, 2021,
WEBGAMES Corporation filed a written claim for tax
credit with the BIR, arising from erroneously paid
income taxes covering the years 2018 and 2019. The
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
253
following day, WEBGAMES Corporation filed a petition
for review with the Court of Tax Appeals involving the
tax credit claim for 2018 and 2019.
As a lawyer handling the case, would you raise
the defense of prescription in your answer to the claim
for tax credit ? Explain.
SUGGESTED ANSWER: Yes.
A claim for the refund of withholding taxes should be
filed within two years computed from the 25th day after the
close of each calendar quarter. Since the 2018 royalties
were withheld and remitted on January 10, 2019, the two
prescriptive period should be counted from the 25th day of
the close of the quarter or 25 days from March 31, 2019 or
until April 1, 2021.
Since the claim for tax credit was filed only on April
10, 2021 and the petition for review only on April 11, 2021,
then prescription has set in for the tax withheld and
remitted on January 10, 2019.
***14. May the collection of taxes be barred by
prescription ? Explain your answer.
SUGGESTED ANSWER: Yes. The collection of taxes
may be barred by prescription.
The prescriptive period for collecting internal revenue
taxes is three (3) years from the issuance of an
assessment notice.
Where the return is false or fraudulent, or no return
was filed, the deficiency taxes may be collected even
without an assessment within ten (10) years from
discovery of the falsity, fraud or failure to file the tax return.
If there is an assessment made upon a false or
fraudulent return, or no return was filed, then the
prescriptive period is five (5) years from issuance of an
assessment notice. This is the same period for the
254
FREE PRE-WEEK NOTES
TAXATION LAW
payment of an assessment issued within the period agreed
upon between the BIR and the taxpayer.
Collection of taxes undertaken by the BIR beyond the
periods above stated would be barred by prescription.
***15. In connection with the income tax return for
2014 filed by Darylle , an assessment was made in
January 2020. Darylle asked for a reinvestigation,
which was granted. After reinvestigation, another
assessment was made by the Commissioner of
Internal Revenue on June 1, 2020. Has the period of
collection of the income tax due from Darylle for the
year 2014 expired ? Explain your answer.
SUGGESTED ANSWER:
Yes. The period of
collection of the income due from Darylle for the year 2014
has expired.
The Bureau of Internal Revenue has a period of three
(3) years from the filing of the income tax return, or when it
should have been filed to make an assessment.
The income tax return was for the 2014 income so it
should have been filed not later than April 15, 2015.
Since, there is no showing that the return filed by Darylle
was made beyond April 15, 2015 and that there exists
fraud, then the BIR has only up to April 16, 2018 within
which to make the assessment. The assessment made in
January 2020 was therefore made out of time. Taxes
could not be collected on a prescribed assessment.
NOTE NOT PART OF THE ANSWER: The examinee
should be careful in answering problems similar to the
above problem which lack factual basis. There was no
showing when the return was filed, neither was there a
showing whether the return was fraudulent. Finally, the
question refers to collection, not assessment. Assumptions
should be made upon which your answer should be based.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
255
**16. In January 2017, additional taxes as due and
payable in the sum of P50,000.00 and P25,000.00 were
assessed Annie and Bian, respectively. In March 2019,
Annie requested that he be furnished a copy of the
detailed computation of his alleged tax liability, while
Bian moved for a reinvestigation which was granted by
the Commissioner. The reinvestigation of Bian was
terminated in January 2020, reiterating the assessment
of P25,000.00 of which Bian was duly informed. In
January 2020, Annie was finally furnished with the
details requested for. In 2021, the government levied
on the properties of Annie and Bian to answer for their
tax liabilities mentioned above. Was the levy on the
properties of Annie and Bian valid and proper?
Discuss.
SUGGESTED ANSWER: No. The levy on the
properties of Annie and Bian was not proper because the
right of the government to collect was already lost through
prescription.
In March 2019 when Annie requested for a copy of
the detailed computation and Bian moved for a
reinvestigation, the January 2017 assessment was already
final and collectible. This is so, because Annie and Bian
did not seasonably dispute the assessment within 30 days
from receipt. Even if there is no showing of the date when
Annie and Bian received the assessments in January
2017, it could be presumed as having been furnished by
the BIR to them within a reasonable period of time from
January 2017.
In view of the foregoing, the government has a
period of only three (3) years from the time the assessment
notice was issued in January, 2017. This is so because
there is no showing that the return filed was false or
fraudulent, or that there is a waiver of the prescriptive
period by either Annie or Bian. Presupposing that the
assessment became final in February 2017 for failure on
256
FREE PRE-WEEK NOTES
TAXATION LAW
the part of Annie and Bian to seasonably dispute the
same, then the government had only three (3) years from
in January, 2017 up to February, 2020 within which to
collect.
Since the government was collecting through levy in
2021, then it has lost its right to do so because of
prescription. The levy was therefore not valid and is
improper.
NOTE NOT PART OF THE ANSWER: This is
another vague question. The answer was dependent on a
lot of assumptions because there was no showing when
Annie and Bian actually received the assessment notice.
17. What is the prescriptive period for violations of
the penal provisions of the Tax Code ?
SUGGESTED ANSWER:
All violations of any
provision of Tax Code shall prescribe after five (5) years.
(NIRC of 1997, Sec. 281, 1st par.)
a. When does the prescriptive period start to run?
SUGGESTED ANSWER: Prescription shall begin to
run from the day of the commission of the violation of the
law, and if the same be not known at the time, from the
discovery thereof and the institution of judicial proceedings
for its investigation and punishment. (NIRC of 1997, Sec.
281, 2nd par.)
b. When is an offense considered as discovered ?
SUGGESTED ANSWER: An offense under the Tax Code
is considered discovered only after the manner of
commission and the nature and extent of fraud has been
definitely ascertained. (RMC No. 101-90)
This occurs when the BIR renders its final decision
and requires the taxpayer to pay the deficiency tax.
c. When is the prescriptive period interrupted ?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
257
SUGGESTED ANSWER: The prescription shall be
interrupted when proceedings are instituted against the
guilty persons and shall begin to run again if the
proceedings are dismissed for reasons not constituting
jeopardy. (NIRC of 1997, Sec. 281, 3rd par.)
“The institution of the criminal action shall interrupt the
running of the period of prescription.” (RRCTA, Rule 9,
Sec. 2, 2nd par.)
d. When does prescription not run ?
SUGGESTED ANSWER: The term of prescription
shall not run when the offender is absent from the
Philippines. (NIRC of 1997, Sec. 281, 3rd par.)
REMEDIES AGAINST ASSESSMENT NOTICES
***Outline of the Taxpayer’s and Government’s
Administrative and Judicial Remedies Relative to
Assessments of Internal Revenue Taxes.
SUGGESTED ANSWER: Procedural due process in
tax assessment is met if the following outline is observed:
DISPUTED ASSESSMENT
1. Revenue District Officer (RDO) or a
higher BIR authorized officer. Issues a Letter of
Authority (LA) authorizing the examiner to inspect
the taxpayer’s books of accounts, other accounting
records, and documents that may be pertinent in
determining whether the taxpayer has paid the
correct taxes and has complied with all the
requirements for recording financial transactions,
keeping books of accounting, and others
promulgated by the Bureau of Internal Revenue to
ensure determination of the correct taxes due from
the taxpayer.
FREE PRE-WEEK NOTES
TAXATION LAW
258
The examination should be made within the
reglementary period for the issuance of an
assessment notice.
2. Revenue Officer
a) Audits or examines the taxpayer’s
records.
b) Issues a Notice of informal Conference
to the taxpayer in order to discuss the
Examiner’s findings.
c) States in his report whether or not
there are violations of the compliance
requirements,
whether
there
are
tax
deficiencies, the deficiency taxes, fines and
penalties due from the taxpayer. The report
shall also state whether the taxpayer agrees
with his findings that the taxpayer is liable for
deficiency taxes, fines and penalties.
1) If the taxpayer agrees, he pays
the tax.
2)If the taxpayer does not agree
with the Revenue Officer’s submitted
report of investigation, he does not pay.
3. Assessment Division (Revenue Regional
Office) or Commissioner of Internal Revenue or
his duly authorized representative.
a) Reviews and evaluates the finding of
the Revenue Officer.
1) If he finds no sufficient basis, the
case is dismissed.
2) Determines that there exists
sufficient basis to assess the taxpayer for
any deficiency tax, fines and penalties,
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
259
3) Issues to the taxpayer, at least by
registered mail, a Preliminary Assessment
Notice
(PAN)
for
the
proposed
assessment (NIRC of 1997, Sec. 228;
Rev. Regs. 12-99, Sec. 3.1.2) unless the
case within the exceptions where there is
no need to issue a PAN in which case
there is immediately issued a formal letter
of demand (FLD) and a final assessment
notice (FAN).
4) Taxpayer responds within fifteen
(15) days from receipt of the PAN why no
taxes, fines and penalties should be
assessed against him.
5) If the taxpayer fails to respond
within fifteen (15) days from date of receipt
of the PAN, he shall be considered in
default. (Rev. Regs. 12-99, Sec. 3.1.2)
b) If the Commissioner accepts the
taxpayer's explanations to the PAN, then the
proceedings are ended, and the case is closed.
c) If the taxpayer’s response is not
acceptable or he is in default because of failure
to respond to the PAN, or there is no need to
issue a PAN, then a formal letter of demand
(FLD) and a final assessment notice (FAN)
shall cause to be issued by the Commissioner or
his duly authorized representative calling for
payment of the taxpayer’s deficiency tax liability,
inclusive of the applicable penalties. (Rev.
Regs. 12-99, Secs. 3.1.2, 3.1.4)
4. Taxpayer
a) Does not do anything within thirty (30) days
from receipt of the FLD/FAN
260
FREE PRE-WEEK NOTES
TAXATION LAW
1) the assessment becomes final,
executory, demandable and not appealable to
the Court of Tax Appeals (Rev. Regs. 12-99,
Sec. 3.1.5, 4th par.); and
2) the BIR could avail of its administrative
or judicial remedies to collect the tax.
b) Administratively protests or disputes the
assessment by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of
the notice of assessment. (NIRC of 1997, Sec. 228,
4th par.; Rev. Regs. 12-99, Sec. 3.1.5, 1st par.)
1)
Within sixty (60) from filing of the
protest (request for reinvestigation), all relevant
supporting documents shall be submitted.
(Ibid.)
2)
If the documents are not seasonably
submitted, the assessment shall become final,
executory, demandable, not appealable to the
Court of Tax Appeals (Ibid.), and the BIR could
avail of its administrative or judicial remedies to
collect the tax.
5. Commissioner acts on the administrative protest
(request for reinvestigation) within one hundred eighty
(180) days from receipt of the relevant supporting
documents. If the protest is a request for reconsideration,
the Commissioner acts on the same within one hundred
eighty (180) days from filing of the request for
reconsideration.
a) The BIR Commissioner grants the protest
(request for reinvestigation or request for
reconsideration), the case is dismissed.
b) The BIR Commissioner denies the
administrative protest (request for reinvestigation or
request for reconsideration) or dispute, or
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
261
c) The BIR Commissioner does not act on the
administrative protest (request for reinvestigation
within 180 days from submission of the complete
supporting documents or if it’s a request for
reconsideration within 180 days from filing of the
protest) or dispute.
6. Taxpayer
a) Receives the BIR Commissioner's denial
of his administrative protest (whether request for
reinvestigation or reconsideration) or dispute
1)
within thirty (30) days from receipt of
the denial, appeals the decision of the BIR
Commissioner to the Court of Tax Appeals in
division by means of a petition for review
coupled with a motion for the issuance of an
order suspending the collection of the tax
pending resolution of the petition.
2)
If the taxpayer does not seasonably
interpose an appeal, the decision of the BIR
Commissioner denying his administrative
protest (whether request for reinvestigation or
request for reconsideration), or dispute, the
assessment
becomes
final,
executory,
demandable (Rev. Regs. 12-99, Sec. 3.1.5, 5th
par.), and not anymore appealable to the Court
of Tax Appeals. The BIR could then avail of its
administrative or judicial remedies to collect
the tax.
3)
A denial by the Commissioner’s
duly authorized representative may be
elevated to the Commissioner within thirty (30)
days from receipt of the final decision by the
representative.
b) Learns
of
the
inaction by the BIR
Commissioner or his duly authorized representative
262
FREE PRE-WEEK NOTES
TAXATION LAW
on his administrative protest or dispute within 180
days from submission of the required documents to
support the dispute (if a request for reinvestigation)
of within 180 days from filing of the request for
reconsideration;
1)
Within thirty (30) days from the lapse
of 180 days from the taxpayer's submission of
all the relevant supporting documents (if a
request for reinvestigation) or from the lapse of
180 days from filing of the request for
reconsideration,
(a)
must interpose an appeal to
the Court of Tax Appeals division by
means of a petition for review coupled
with a motion for the issuance of an order
suspending the collection of the pending
the resolution of the petition. Otherwise,
the assessment shall become final,
executory, and demandable (Rev. Regs.
12-99, Sec. 3.1.5, 7th par; Rep. Act
No.1125, Sec. 7, as amended by Rep.
Act No.9282), and not appealable to the
Court of Tax Appeals. The BIR could
then avail of its administrative or judicial
remedies to collect the tax.
(b)
If the Commssioner does not
act within the 180 period described
above, the taxpayer may decide to wait
for a denial by the BIR and when the
denial is received, the taxpayer would
have thirty (30) days from receipt of the
denial within which to appeal to the Court
of Tax Appeals division. Failing to so
appeal, the denial would attain a state of
finality and the BIR could then avail of its
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
263
administrative or judicial remedies to
collect the tax.
7. The Court of Tax Appeals
a) The Court of Tax Appeals division has a period of
twelve (12) months from the time the case is
submitted for decision within which to decide.
(Rep. Act No. 1125, Sec. 13, as amended by Rep.
Act. No. 9282)
b) The CTA division grants the petition or reverses
the decision of the BIR Commissioner in which
case the Commissioner may, within fifteen (15)
days from receipt,
files a motion for
reconsideration or new trial with the same division.
If the BIR does not do anything, the grant of the
petition results to dismissal of the case against
the taxpayer.
c) The CTA division dismisses the petition or affirms
the decision of the BIR Commissioner in which
case the taxpayer may, within fifteen (15) days
from receipt, files a motion for reconsideration or
new trial with the same division. If the taxpayer
does not do anything, the dismissal of the petition
results to a case against the taxpayer attaining a
state of finality and BIR could now resort to its
administrative or judicial remedies to collect the
tax.
d) The party adversely affected by the decision of a
Division of the Court of Tax Appeals may file one
motion for reconsideration or new trial with the
same division.
A denial of the motion for
reconsideration or new trial may be the subject of
a petition for review filed with the Court of Tax
Appeals, en banc.
If the decision of the CTA division is not
seasonably questioned by the party adversely
FREE PRE-WEEK NOTES
TAXATION LAW
264
affected by the decision of the Court of Tax
Appeals, the decision lapses into finality. The
assessment then becomes final, executory and
demandable or of no force and effect depending
upon the nature of Court of Tax Appeals division’s
decision.
e) The Court of Tax Appeals division may grant or
deny the motion for reconsideration or new trial.
f) The party adversely affected by the decision of
the Court of Tax Appeals division on the motion
for reconsideration or new trial has a period of
fifteen (15) days from receipt within which to
interpose a petition for review with Court of Tax
Appeals en banc.
The party adversely affected by the decision of
the Court of Tax Appeals en banc, may then file a
verified petition for review on certiorari with the
Supreme Court.
The petition shall be filed and served,
with full payment of the docket and other lawful
fees and the deposit for costs within fifteen (15)
days from receipt of the adverse judgment. Before
the expiration of the reglementary period, the
Supreme Court may for justifiable reasons grant an
extension of thirty (30) days only within which to
file the petition. (ROC, Rule 45, Sec. 2)
8. The Supreme Court
a) Grants the petition and reverses the decision of
the Court of Tax Appeals, or
b) Dismisses the petition or affirms the decision of
the Court of Tax Appeals.
c) A motion for reconsideration may be posed
after which the Supreme Court decision becomes
final.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
265
UNDISPUTED ASSESSMENT
1. The Commissioner of Internal Revenue files an
ordinary action for the collection of the tax before a regular
trial court or the CTA), depending upon the jurisdictional
amount.
2. Court that has jurisdiction.
a) Municipal or Metropolitan Trial Court. If the
basic amount of the tax to be collected (except
interests, and surcharges) is P300,000.00 or less,
then the case should be filed before the proper
Municipal or Metropolitan Trial Court outside of
Metropolitan Manila or if the court is in
Metropolitan Manila area, then the jurisdictional
amount is P400,000.00 or less. (The Rule on
Summary Procedure may find application)
1) The decision of the Municipal or
Metropolitan Trial Court shall be the
subject of a notice of appeal directed to
the Regional Trial Court.
2) The decision of the Regional Trial
Court in aid of its appellate jurisdiction
shall be the subject of a petition for
review directed to the Court of Tax
Appeals, en banc.
3) The decision of the CTA en banc is
the
subject
of
a
motion
for
reconsideration or new trial after which
the matter is elevated to the Supreme
Court on a pure question of law on a
petition for review on certiorari under
Rule 45.
b) Regional Trial Court. If the basic amount of
the tax to be collected (except interests, and
surcharges) is more than P300,000.00 but less
266
FREE PRE-WEEK NOTES
TAXATION LAW
than P1,000,000.00, the case should be filed
before the proper Regional Trial Court outside of
Metropolitan Manila or if the court is in
Metropolitan Manila area, then the jurisdictional
amount is P400,000.00 or more but less than
P1,000,000.00.
1) The decision of the Regional Trial
Court shall be the subject of one motion
for reconsideration or new trial, thence
of a petition for review directed to a
Court of Tax Appeals division.
2) The decision of the Court of Tax
Appeals division shall be the subject of a
motion for reconsideration or motion for
new trial directed to the same Court of
Tax Appeals division that rendered the
decision.
3) The resolution of the CTA division
on the subject of a motion for
reconsideration or new trial is the subject
of a petition for review directed to the
Court of Tax Appeals en banc after
which the matter is elevated to the
Supreme Court on a pure question of law
on a petition for review on certiorari
under Rule 45.
Author’s Observation. The above process should
be mastered because it is a rich source of Bar problems.
***1. What remedies are available to a taxpayer
who considers himself aggrieved in connection with the
assessment and collection of internal revenue taxes?
SUGGESTED ANSWER: When the taxpayer receives a
preliminary assessment notice he must, within fifteen (15) days
from receipt of the same reply to the Bureau of Internal
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
267
Revenue explaining why he should not be the subject of a final
letter of demand and a final assessment notice.
If the reply is not accepted by the Bureau of Internal
Revenue, the taxpayer receives a final letter of demand
and a final assessment notice for deficiency taxes, he must
protest the same, either through a motion for
reconsideration or reinvestigation, within a period of thirty
(30) days from receipt of such notice.
If the taxpayer files a motion for reconsideration, there
is no need for him to submit supporting documents.
However, if he files a motion for reinvestigation, he must
within a period of sixty (60) days from filing of the protest,
submit the complete supporting documents. If he does not
comply with this requirement, the taxpayer would be
considered as not having filed the protest and the BIR
could then collect the tax using its administrative or judicial
remedies.
If the taxpayer fails to file a protest the assessment
becomes final, executory and collectible. It could not be
the subject of an appeal and the BIR could then collect the
tax using its administrative or judicial remedies.
If the BIR denies the taxpayer’s protest, or if the
BIR does not resolve the protest within a period of 180
days from submission of the motion for reconsideration or
in the case of a motion for reinvestigation, within a period
of 180 days from submission of the complete supporting
documents, then the taxpayer has a period of thirty (30)
days from receipt of the denial, or expiration of the 180
day period, within which to appeal to the Court of Tax
Appeals division by filing a petition for review under Rule
42 of the Rules of Court, with an application for the
issuance of an order suspending the collection of the tax.
If the Commissioner has not acted upon the protest
despite the expiration of the 180 day period the taxpayer
has the option to wait for the decision of the Commissioner
268
FREE PRE-WEEK NOTES
TAXATION LAW
after which the taxpayer has a period of thirty (30) days from
receipt of the decision within which to appeal to the Court of
Tax Appeals division by filing a petition for review under Rule
42 of the Rules of Court, with an application for the issuance of
an order suspending the collection of the tax.
If the taxpayer fails to file a petition for review under
Rule 42 of the Rules of Court with the Court of Tax
Appeals division within thirty (30) days from receipt of the
denial of the protest (dispute) of the final letter of demand
(FLD) and the final assessment notice (FAN), the same
shall become final, executory and demandable. (Rev.
Regs. No. 12-99, Sec. 3.1.4, 9th par., as amended by Rev.
Regs. No. 18-2013)
The Bureau of Internal Revenue could then utilize its
administrative or judicial remedies for collecting the tax.
If the Division’s decision is unfavorable to the
taxpayer, he could then file a motion for reconsideration or
new trial with the Division within 15 days from notice. The
Division’s unfavorable action on the motion for new trial or
reconsideration may be the subject of a petition for review
under Rule 43 of the Rules of Court filed within fifteen (15)
days with the Court of Tax Appeals en banc. The adverse
decision or ruling of the Court of Tax Appeals en banc is
appealable to the Supreme Court through a verified
petition for review on certiorari under Rule 45 of the Rules
of Court within a period of 15 days from receipt of the
Court of Tax Appeals’ adverse decision, which period is
extendible for 30 days.
If the assessment notice has become final, executory
and collectible and the BIR files a collection suit in court,
the taxpayer may use affirmative defenses such as
prescription, res judicata, payment, etc. but not the
negative defenses which are deemed waived for failure to
raise the same in the administrative proceedings. Estoppel
could not be raised as a defense because the government
is not estopped by the acts of its agents.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
269
Whether the BIR intends to collect the taxes judicially
or administratively, the taxpayer may try to enter into a
compromise in order to obtain a reduction of the taxes
being demanded.
*2. The BIR issued in 2021 a final assessment notice
and demand letter against Lebmo Corporation covering
deficiency income tax for the year 2020 in the amount of P10
Million. Lebmo Corporation earlier requested the advice of a
lawyer on whether or not it should file a request for
reconsideration or a request for reinvestigation. The lawyer
said it does not matter whether the protest filed against the
assessment is a request for reconsideration or a request for
reinvestigation, because it has the same consequences or
implications.
a. What are the differences between a request for
reconsideration and a request for reinvestigation ?
SUGGESTED ANSWER: The differences between a
request for reconsideration as a mode of protest and a
request for reinvestigation also as a mode of protest are
the following:
1) A request for reconsideration does not suspend
the running of the prescriptive period for collection of taxes
while a request for reinvestigation suspends the running of
the prescriptive period.
2) A request for reconsideration does not require the
presentation of newly discovered or additional evidence
while a request for reinvestigation requires it.
3) The period of 60 days for submission of the
relevant supporting documents does not find application to
a request for reconsideration while such period is applied
to a request for reinvestigation.
4) The failure of the Commissioner of Internal
Revenue to act on the request for reconsideration after a
period of 180 days from the filing thereof authorizes the
270
FREE PRE-WEEK NOTES
TAXATION LAW
taxpayer to file a petition for review with the Court of Tax
Appeals within a period of thirty (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 the submission of the complete supporting
documents.
b. Do you agree with the advice of the lawyer?
Explain your answer.
SUGGESTED ANSWER: No, in view of the foregoing
differences between a request for reconsideration and a
request for reinvestigation.
**3. On July 31, 2021, Esperanza received a
preliminary assessment notice (PAN) from the BIR
demanding that she pays P180,000.00 deficiency
income taxes on her 2019 income. How many days
from July 31, 2021 should Esperanza respond to the
notice?
SUGGESTED ANSWER: 15 days from receipt of the
PAN or July 31, 2021 or until August 15, 2021.
What is the effect of the failure to respond ?
SUGGESTED ANSWER: If Esperanza fails to
respond within fifteen (15) days from date of receipt of the
PAN, she shall be considered in default, in which case, a
Final Assessment Notice (FAN) coupled with a Formal
Letter of Demand (FLD) shall be issued calling for payment
of her deficiency tax liability, inclusive of the applicable
penalties. (Rev. Regs. No. 12-99, Sec. 3.1.1 2nd par., as
amended by Rev. Regs. No. 18-2013)
**4. A taxpayer received on 15 January 2021, an
assessment for an internal revenue tax deficiency. the
taxpayer instead of questioning the assessment he
received on 15 January 2021, paid on 01 March 2021,
the “deficiency tax” assessed. The taxpayer requested
a refund from the Commissioner by submitting a
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
271
written claim on 01 March 2021. It was denied. The
taxpayer, on 15 March 2021, filed a petition for review
with the Court of Tax Appeals. Could the petition still
be entertained ?
SUGGESTED ANSWER: No. The petition could not
be entertained anymore.
When the taxpayer paid the tax assessed on 01
March 2021, the assessment he received on 15 January
2021 has already attained a state of finality for failure to
seasonably protest the same within a period of thirty (30)
days from receipt of the assessment notice.
An assessment that has already become final,
executory and demandable for failure to appeal the same
within the reglementary period of thirty (30) days from
receipt of the assessment notice, could not be paid, apply
for a refund and then if denied appeal the denial to the Tax
Court. The Tax Court can no longer amend, modify, much
less set aside such final assessment. (Adez Realty v. Inc.
v. Court of Appeals, 212 SCRA 623)
The taxpayer would be doing indirectly, what he could
not do directly, that is open an assessment that has
become final.
This would be disadvantageous to the government
and be violative of the life blood doctrine because the
reopening might result to lower taxes or at the very least,
results to delay in collection of taxes upon which the
government depends for the continued performance of its
functions.
On the other hand, a reopening that would result to
increasing the tax would violate the taxpayer’s right to due
process.
***5. Mr. Roderick Relleve, a taxpayer, received an
assessment notice from the BIR on February 9, 2021. The
following day, he filed a protest, in the form of a request
272
FREE PRE-WEEK NOTES
TAXATION LAW
for reinvestigation, against the assessment and submitted
all relevant documents in support of the protest. On
September 11, 2021, Mr. Relleve, apprehensive because
he had not yet received notice of a decision by the
Commissioner on his protest, sought your advice.
What remedy or remedies are available to the
taxpayer?
SUGGESTED ANSWER: The remaining remedy
available to Mr. Relleve is to wait for the decision of the
Commissioner on the protest he filed. If his protest is
denied, he would have a period of thirty (30) days from
receipt of the denial within which to interpose a petition for
review with the Court of Tax Appeals Division.
The Commissioner has a period of 180 days from the
submission of the relevant documents on February 10,
2021 or until August 11, 2021, after which Mr. Relleve has
the option of either filing a petition for review with the Court
of Tax Appeals within a period of 30 days from the
expiration of the 180 day period or until September 9, 2021
or he could choose to wait for the decision on the protest.
In case of a denial of Mr. Relleve’s protest, he may file the
petition for review with the Court of Tax Appeals within a
period of thirty (30) days from receipt of the decision. (Rev.
Regs. No. 12-99, Sec. 3.1.4, 8th par. as amended by Rev.
Regs. No. 18-2013)
The 180-day period lapsed on August 11, 2021, thus
Mr. Relleve has only 30 days from August 11, 2021, or
until September 9, 2018 within which to file a petition for
review with the Court of Tax Appeals in divisions. Since, it
is already September 11, 2021, then Mr. Relleve could not
anymore avail of the remedy of appeal.
He has to await the decision of the Commissioner on
his protest before he could appeal to the Court of Tax
Appeals, in divisions.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
273
*5. In February 2021, pursuant to a Letter of Authority
(LOA) issued by the Regional Director, Mr. “A” was
assessed deficiency income taxes by the BIR for the year
2020. He paid the deficiency. In the August 2021, Mr.
Abcede received another LOA for the same year 2020, this
time from the National Investigation Division, on the
ground that Mr. “A”’s 2020 return was fraudulent.
Mr. “A” contested the LA on the ground that he
can only be investigated once in a taxable year.
Decide.
SUGGESTED ANSWER: Mr. “A” is not correct.
For income tax purposes, the examination and
inspection of Mr. “A’s tax records shall be made only once
in a taxable year, except in case of fraud as determined by
the Commissioner. (NIRC of 1997, Sec. 235, 1st par.)
Mr. “A”’s 2020 return was fraudulent hence, it could
be the subject of another investigation.
a. Aside from fraud, are there any other instances
when the books of accounts and accounting records
shall be subject to examination and inspection for
income tax purposes may be made by internal revenue
officers more thanonce in a taxable year ? Discuss.
SUGGESTED ANSWER: Yes, in the following
instances:
1) The taxpayer requests for reinvestigation.
2) Verification of compliance with withholding tax laws
and regulations.
3) Verification of capital gains tax liabilities. and
4) In the exercise of the Commissioner's power to obtain
information from other persons in which case, another or
separate examination and inspection may be made. (NIRC of
1997, Sec. 235, 1st par., arrangement, paraphrasing, and
numbering supplied)
274
FREE PRE-WEEK NOTES
TAXATION LAW
*6. What methods may be utilized by the
Commissioner of Internal Revenue to determine the
correct taxable income of the taxpayer if the latter’s
record or methods of accounting are not reflective of
his true income?
SUGGESTED ANSWER: Where the records or methods
of accounting of the taxpayer does not reflect his correct
taxable income, the Commissioner of Internal Revenue is
allowed to use reasonable methods in determining the income.
The reasonable methods are referred to as the “Constructive
Methods of Income Determination” (also known as the
“Indirect Methods of Income Determination”), or the “Best
Evidence Obtainable Rules”.
Some of the specific methods under the “Constructive
Methods of Income Determination” (also known as the
“Indirect Methods of Income Determination”), or the “Best
Evidence Obtainable Rules” may include the following:
a. Net worth method. The net worth method of
determining income is a method of reconstructing income
which is based on the theory that if the taxpayer’s net worth
has increased in a given year in an amount larger than his
reported income, he has understated his income for the year.
The net worth on a fixed starting date is compared with the net
worth on a fixed ending date. Any increase in net worth is
presumed to be income not declared for tax purposes.
b. Cash expenditure method. Where during a taxable
year, a taxpayer incurs expenditures, the source of which
could not be explained (such as from gifts, donations, income
subject to final taxes, disposal of previously paid, excluded or
tax exempt income), the amount of expenditures is presumed
to be income for the taxable year subject to income tax.
(Collector v. Jamir, 4 SCRA 718)
This is a method which assumes that the excess of a
taxpayer’s expenditures during the taxable period over his
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
275
reported income for that period is taxable to the extent not
disproved otherwise.
c. Percentage method.
d. Bank deposit method.
e. Unit and value method.
f. Third party information or access to records
method.
g. Inventory method.
h. Surveillance and assessment method.
The above methods are not exclusive in character
because there may be such methods used in the opinion
of the BIR Commissioner which clearly reflects the
income.
***7. When are the instances where a final
assessment notice (FAN) coupled with a formal letter of
demand (FLD) and may be issued even without
preliminary assessment notice (PAN)? Othrwise stated,
when shall a PAN not a requirement before issuance of a
FAN/FLD ?
SUGGESTED ANSWER: The following are the
instances:
a. When the finding for any deficiency tax is the
result of mathematical error in the computation of
the tax as appearing on the face of the return filed
by the taxpayer; or
b. When a discrepancy has been determined between
the tax withheld and the amount actually remitted by
the withholding agent; or
c. When a taxpayer who has opted to claim a refund
or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount claimed
276
FREE PRE-WEEK NOTES
TAXATION LAW
against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
d. When the excise tax due on excisable articles has
not been paid; or
e. When an article locally purchased or imported by
an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred
to non-exempt persons. (NIRC of 1997; Sec. 228)
In the above-cited instances, a FLD/FAN shall be
issued outright. (Rev. Regs. No. 12-99, Sec. 3.1.2, last
sentence as amended by Rev. Regs. No. 18-2013)
*8. Federico Matibag, a Filipino citizen residing in
San Jose, Batangas, owns a vacation house and lot in
San Francisco, California, U.S.A., which he acquired in
2010 for P15 million. On January 10, 2020, he sold
said real property to Efren Limbo, another Filipino
citizen residing in Mandaluyong City, for P20 million.
On February 9, 2020, Matibag filed the capital gains tax
return and paid P1.2 million representing 6% capital
gains tax. Since Matibag did not derive any ordinary
income, no income tax return was filed by him for
2020. After the tax audit conducted in 2021, the BIR
officer assessed Matibag for deficiency income tax
computed as follows: P5 million (P20 million less P15
million) x 35% = P1.75 million, without the capital gains
being allowed as tax credit. Matibag consulted a real
estate broker who said that the P1.2 million capital
gains tax should be credited from the P1.75 million
deficiency income tax.
If you were hired by Matibag as his tax consultant,
what advice would you give him to protect his
interest? Explain.
SUGGESTED ANSWER: I would advise him to
protest the assessment within a period of thirty (30) days
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
277
from receipt on the ground that the assessment is invalid
for the following reasons:
a. His right to due process was violated because no
pre-assessment notice was made before the issuance of
the assessment.
b. The assessment is erroneous and he should show
what is the correct computation. The income tax rate for
individuals is not is a progressive rate with a top rate of
35% on amounts of income subject to tax exceeding P8
Million.
Since it is apparent that the gain should be subject to
ordinary income taxation, I would likewise advise him to file
an application for refund of the capital gains taxes he paid.
He should file a suit for recovery of the tax within two years
from the payment of the tax if his application for refund is
not acted upon or if it is denied.
**9. Car Manufacturing Corporation manufactures
motor vehicles and is almost at the point of
insolvency. It had no more cash and all it has are
unsold automobiles. It received an assessment from
the BIR for deficiency income taxes. It wants to pay
but due to lack of cash, it seeks permission to pay in
kind with automobiles.
Should the BIR grant the requested permission ?
SUGGESTED ANSWER: No. The BIR should not grant
permission to pay in kind because such act goes against the
very concept of taxes of being pecuniary burdens.
Giving permission would violate a principle of a sound
tax system which is administrative feasibility. There may be
difficulties in collecting the tax because of issues of
valuation of the property to be paid as taxes may arise.
Instead, the BIR should issue the proper assessment
notice with a demand to pay. In case of failue by the
taxpayer to pay, it should then exercise its lien over the
278
FREE PRE-WEEK NOTES
TAXATION LAW
automobiles or subject the same to distraint, and sell them
at a public auction and apply the proceeds to the tax
delinquency. If the proceeds are not sufficient, then, further
distraint or levy should be exercised.
ALTERNATIVE ANSWER: Yes. The BIR should
grant permission to pay in kind because there is no law,
rule nor principle in taxation that requires that deficiency
taxes should only be paid in cash. Furthermore, the
lifeblood doctrine mandates the collection of taxes in the
most expeditious manner possible whether in cash or in
kind.
*10. Is an assessment necessary before a
taxpayer may be prosecuted for willfully attempting in
any manner to evade or defeat any tax imposed by the
Internal Revenue Code?
SUGGESTED ANSWER: No, because of the
following reasons which distinguish a criminal charge from
an assessment:
a. Criminal charge need only be supported by a prima
facie showing of failure to file a required return while the
fact of failure to file a return need not be proven by an
assessment.
b. Before an assessment is issued, there is, by
practice a pre-assessment notice sent to the taxpayer
while such is not so with a criminal charge.
c. A criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for violation of the
Tax Code while the purpose of the issuance of an
assessment is to collect the tax. (Commissioner of Internal
Revenue, v. Pascor Realty and Development Corporation,
G. R. No. 128315, June 29, 1999)
*11. Is initiation by the BIR of criminal prosecution
an assessment notice? Why?
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
279
SUGGESTED ANSWER: No. The initiation by the
BIR of criminal prosecution is not an assessment notice
because of the following reasons:
a. To consider the initiation of criminal prosecution as
a disputed assessment would render nugatory the
requirement set by the Supreme Court regarding final
decisions of the Commissioner of Internal Revenue.
(Cargo Lane Realty Development Corporation, v. VinzonsChato, etc., CA-G.R. SP No. 47950, March 19, 1999)
b. An affidavit-report of BIR examiner showing
computation of tax liabilities, and recommending the issuance
of a notice of assessment, is not an assessment itself which is
the subject of a motion for reconsideration/investigation or
protest by the taxpayer. This is so, because it was not sent to
the taxpayer, and does not demand payment of the tax within
a certain period of time. An assessment is deemed made only
when the BIR releases, mails or sends such notice to the
taxpayer. (Commissioner of Internal Revenue v. Pascor
Realty and Development Corporation, G.R. No. 128315, June
29, 1999)
**12. What are the requisites of a valid assessment ?
Explain.
SUGGESTED ANSWER:
a. The investigation that resulted to the assessment
must have been authorized by a Letter of Authority.
b. It must have been preceded by a Notice of Informal
Conference, which actually took place, issued by a
properly authorized revenue officer.
c. It must have been issued within the prescriptive
period for the issuance of assessment notices.
d. As a general rule, it may be issued only after a preassessment notice has been served upon the taxpayer.
280
FREE PRE-WEEK NOTES
TAXATION LAW
The constitutional requirement for due process also
finds application in the field of taxation, especially in the
matter of issuance of a deficiency tax assessment.
The requirement of due process for the validity of a
formal letter of demand (FLD) or a final assessment notice
(FAN) is complied with by furnishing a pre-assessment
notice to the taxpayer advising him that proper taxes are
being assessed. (Rev. Regs. No. 12-99, Sec. 3.1.1, 1st
par., as amended by Rev. Regs. No. 18-2013)
e. It shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is
based, otherwise, the assessment shall be void. (Rev.
Regs. No. 12-99, Sec. 3.1.3, 2nd sentence, as amended by
Rev. Regs. No. 18-2013)
f. The taxpayer must have personally received the
assessment notice [Estate of the late Juliana Diez vda. De
Gabriel v. Commissioner of Internal Revenue, 421 SCRA
266 (2004)] or a tax agent/practitioner, who is appointed by
the taxpayer. (Rev. Regs. No. 12-99, Sec. 3.1.6, last par.,
as amended by Rev. Regs. No. 18-2013)
**13. Distinguish a false return from a fraudulent
return.
SUGGESTED ANSWER: The distinctions between a
false return and a fraudulent return are the following:
a. A false return is merely a deviation from the truth
whether intentional or not due to mistake, carelessness or
ignorance while a fraudulent return implies intentional or
deceitful entry with intent to evade the taxes due.
(Commissioner of Internal Revenue v. Philippine Daily
Inquirer, G.R. No. 213943, March 22, 2017)
b. A false return is not subject to the 50% fraud
penalty while a fraudulent return is subject to the 50%
fraud penalty.
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
281
c. A false return does not subject the taxpayer to
criminal penalties while a fraudulent return may subject the
taxpayer to criminal penalties.
In short, a false return is not the same as a fraudulent
return.
NOTE NOT PART OF THE ANSWER: The similarity
in the three different cases of (1) false return, (2) fraudulent
return with intent to evade tax, (3) failure to file a return, is
that the tax may be assessed, or a proceeding in court for
the collection of such tax may be begun without
assessmeμt, at any time within ten years after the
discovery of the (1) falsity, (2) fraud, (3) omission.
(Commissioner of Internal Revenue v. Philippine Daily
Inquirer, G.R. No. 213943, March 22, 2017)
***14. What constitutes prima facie evidence of a
fraudulent return to justify the imposition of a 50%
surcharge on the deficiency tax due from a taxpayer ?
Explain.
SUGGESTED ANSWER: The following constitutes
prima facie evidence of a fraudulent return.
a. A substantial underdeclaration of taxable sales,
receipts, or income, or a substantial overstatement of
deductions, as determined by the Commissioner of Internal
Revenue pursuant to rules and regulations to be
promulgated by the Secretary of Finance.
b. Failure to report sales, receipts, or income in an
amount exceeding thirty percent (30%) of that declared per
tax return constitutes substantial underdeclaration of sales,
receipts, or income.
c. A claim of deductions in an amount exceeding thirty
percent (30%) of actual deductions constitutes overstatement of
deductions. [NIRC of 1997, Sec. 248 (B); Rev. Regs. No. 1299, Sec. 4.2.1, arrangement and numbering supplied]
282
FREE PRE-WEEK NOTES
TAXATION LAW
d. There is prima facie evidence of a fraudulent return
when the taxpayer has willfully and knowingly filed it with
the intent to evade a part or all of the tax legally due from
him. (Ungab v. Cusi, 97 SCRA 877)
e. There appears a design to mislead or deceive on
the part of the taxpayer, or at least culpable negligence. A
mistake, not culpable in respect of its value would not
constitute a false return. (Words and Phrases, Vol. 16,
page 173)
NOTE NOT PART OF THE ANSWER: As a
general rulel a false return is not subject to the 50%
penalty surcharge UNLESS the falsity is willfully made.
[NIRC of 1997, Sec. 248 (B)]
***15. Businessman Jorell Francisco filed an
income tax return for 2020 showing business net
income of P350,000.00 on which he paid an income tax
of P61,000.00. After filing the return, he realized that
he forgot to include an item of business income in
2019 for P50,000.00. Being an honest taxpayer he
included this income in his return for 2020 and paid
the corresponding income tax thereon.
In the examination of his 2020 return the BIR
examiner found that Jorell Francisco failed to report
this item of P50,000.00 and assessed him a deficiency
income tax on this item, plus a 50% fraud surcharge.
a. Is the examiner correct? Explain.
SUGGESTED ANSWER: The examiner is partially
correct.
The examiner is correct with respect to the
deficiency income tax. This is so, because the amount
due under the Tax Code exceeds the tax reported by the
taxpayer in his return. [NIRC of 1997, Sec. 56 (B) (1)]
However, the examiner erred in imposing the 50%
fraud surcharge as it is evident that the taxpayer
HYPOTHETICAL BAR REVIEW
QUESTIONS & ANSWERS
283
committed a mistake. Mere mistake cannot be considered
fraudulent intent. There is no showing of intentional fraud
(Aznar v. CTA, 103 Phil. 1167) because the taxpayer
“rectified” the mistake during the next taxable year.
b. If you were the lawyer of Jorell Francisco,
what would you have advised your client before he
included in his 2020 return the amount of P50,000.00
as 2020 income to avoid the fraud surcharge ?
Explain.
SUGGESTED ANSWER: I would have advised him
to show that there was no intent to induce the government
to give up its right to collect the tax, and the failure to
include the P50,000.00 was not tainted with deception
willfully or and deliberately done. (Aznar, supra)
c. Considering that Jorell Francisco had already
been assessed a deficiency income tax for 2014 for his
failure to report the P50,000.00 income, what would
you advise him to do to avoid the penalties for tax
delinquency ? Explain.
SUGGESTED ANSWER: He should immediately pay
in order not to be subject to the penalties for delinquency.
d. What would you advise Jorell Francisco to do
with regard to the income tax he paid for the
P50,000.00 in his 2020 return? In case your remedy
fails, what is your other recourse ? Explain.
SUGGESTED ANSWER: I would advise him to
request that the same be credited to the 2020 income, or
be refunded on the ground that there was a mistake in
reporting it under the 2020 income. If this fails, I would
advise him to appeal to the Court of Tax Appeals division.
If the decision of the division is adverse, I would advise him
to file a motion for reconsideration or new trial and if still
unavailing to the CTA en banc and ultimately to the
Supreme Court.
FREE PRE-WEEK NOTES
TAXATION LAW
284
**16. Aaron was preparing his income tax return
and had some doubt on whether a commission he
earned should be declared for the current year or for
the succeeding year. He sought the opinion of his
lawyer who advised him to report the commission in
the succeeding year. He heeded his lawyer’s advice
and reported the commission in the succeeding year.
The lawyer’s advice turned out to be wrong; in Mr.
Aaron’s petition against the BIR assessment, the court
ruled against Mr. Aaron.
Is Mr. Aaron guilty of fraud ?
SUGGESTED ANSWER: No. A is not guilty of fraud
as he simply followed the advice of his lawyer.
Fraud in relation to filing income tax return is actual
not constructive. It must amount to intentional wrong doing
with the sole object of which is to avoid the tax. A mere
mistake cannot be considered as fraudulent intent.
There was mere mistake as Mr. Aaron did not
deliberately escape the payment of the tax. This is evident
as he merely postponed the payment of the tax from one
period to another. There was at the most what is referred
to as a false return, not a fraudulent return.
END OF THE PRE-WEEK NOTES
The Best of Luck for the Bar. Advance
Congratulations and see you at the Oath
Taking.