Domondon's2007 Pre-Week Taxation Review

8/2/2019 Domondon's2007 Pre-Week Taxation Review

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DOMONDON’s LATEBREAKERS

TAXATION1

Ver. 2007

This Handout is specially prepared to meet the needs of Pre-Week Reviewees in Taxation and is intended tosupplement the author’s lectures on the subject. It tries to“second-guess” probable questions that may be asked in the2007 Bar Exams in Taxation considering selected Supreme

Decisions up to July 2007. If the recent decisions are merereiterations of prior doctrines then the author has decided tostick to the older cases.

GOOD LUCK TO EVERYBODY AND SEE YOUALL IN COURT AS WORTHY OPPOSING COUNSELS.

GENERAL PRINCIPLES OF TAXATION

1. What is the power to tax ? What is its

nature ? ANSWER: The power to tax is an inherent power of the

state exercised through the legislature imposing burdens uponsubjects and objects within its jurisdiction to raise revenues inorder to meet the legitimate objects of government.

It’s nature is that it is both an inherent power of governmentand an exercise of legislative power.

1 Prepared by Prof. Abelardo T. Domondon, AB (Econ), BSC

(Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-CustomsBroker, Management Consultant, Professor of Law and Pre-Bar

Reviewer.

It is inherent in character because it could be exercisedeven in the absence of a constitutional grant. It is an exerciselegislative power because it is that department that promulgaterules and taxation is the promulgation of rules, such as howmuch tax is to be paid, who pays the tax, to whom should it bepaid and when it should be paid.

2. When does the power to tax involve the power to destroy ?

ANSWER: The power to tax involves the power todestroy, where the tax law is valid because a taxpayer couldnot seek the nullification of a valid tax law solely upon thepremise that the collection of the tax will impoverish him.

3. When is the exercise of the power to tax not destructive of a taxpayer’s property?

ANSWER: The exercise of the power to tax is notdestructive of a taxpayer’s property where the source is aninvalid tax law, which violates the inherent or constitutionallimitation because there is a sympathetic court that shall cometo the succor of the taxpayer and declare such tax law as nulland void. It would not thus be the source of the power todestroy.

4. What is the presumption with respect to thevalidity of tax statutes ? Why?

SUGGESTED ANSWER: Tax statutes are presumedvalid. While the courts may invalidate tax measures that runcounter to the Constitution, “it bears emphasis that deeply

ingrained in our jurisprudence is the time-honored principle thata statute is presumed to be valid.” (Coconut Oil Refiners

Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527,July 29, 2005 citing Basco v. Phil. Amusements and Gaming Corporation, G. R. No. 91649, May 14, 1991, 197 SCRA 52)

5. Why are tax laws construed strictly against theState and liberally in favor of the State ?

ANSWER: In case of doubt, tax laws must be construedstrictly against the State and liberally in favor of the taxpayer because taxes, as burdens which must be endured by thetaxpayer, should not be presumed to go beyond what the law



expressly and clearly declares. (Lincoln Philippine Life InsuranceCompany, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

6. Tax exemptions are strictly construed againstthe taxpayer and liberally in favor of the State and must beclearly shown and based on language in the law too plain to bemistaken (Davao Gulf Lumber Corporation v. Commissioner of

Internal Revenue, et al., 293 SCRA 76, 88 ), because taxes arenecessary for the continued existence of the State.

8. In 1996 Rosemarie, a nonresident citizen, wascollected Philippine income taxes on her incomes derived from sources without the Philippines. Upon the enactment of the NIRC of 1997 which took effect on January 1, 1998,she filed a claim for refund of the taxes she paid praying for the retroactive application of the provision that subjectsnonresident citizens to tax only on their incomes fromwithin. Should the refund be granted ?

SUGGESTED ANSWER: No. Tax laws, unlike remediallaws, are not to be applied retroactively. Revenue laws aresubstantive laws and their application must not be equated withremedial laws.

Revenue laws are not intended to be liberally construed,and exemptions are not given retroactive application,considering that taxes are the lifeblood of the government and inHolmes’ memorable metaphor, the price we pay for civilization,tax laws must be faithfully and strictly implemented.(Commissioner of Internal Revenue v.Acosta, etc.,G. R. No. 154068,

August 3, 2007)

7. A reversal of a BIR ruling favorable to a

taxpayer would not necessarily create a perpetualexemption in his favor , for after all the government is never estopped from collecting taxes because of mistakes or errors onthe part of its agents. (Lincoln Philippine Life Insurance Company,Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

8. As a general rule, the right of the government tocollect taxes is imprescriptible because the very existence of the state depends upon the exercise of this power.

However, statutes may provide for prescriptive periods for the collection of particular kinds of taxes.

9. It is said that taxes are the lifeblood of the

government and any delay in its collection would impair the rendition of government services. May the collection of taxes be restrained by a court ?

ANSWER: As a general rule, “No court shall have theauthority to grant an injunction to restrain the collection of anynational internal revenue tax, fee or charge.” (Sec. 218, NIRC)

However, the Court of Tax Appeals is empowered toenjoin the collection of taxes through administrative remedieswhen collection could jeopardize the interest of the governmentor taxpayer. (Sec. 11, Rep. Act No. 1125)

10. Procedure for suspension of collection of taxes.Where the collection of the amount of the taxpayer’s liability,sought by means of a demand for payment, by levy, distraint or

sale of property of the taxpayer, or by whatever means, asprovided under existing laws, may jeopardize the interest of thegovernment or the taxpayer, an interested party may file amotion for the suspension of the collection of the tax liability(Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Courtof Tax Appeals.

The motion for suspension of the collection of the tax maybe filed together with the petition for review or with the answer,or in a separate motion filed by the interested party at any stageof the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15,2005)

11. Taxation “is not only practical, it is vital.” Theobligation of good faith and fair dealing in carrying out itsprovisions is reciprocal and, as the government should never beover-reaching or tyrannical, neither should a taxpayer bepermitted to escape payment by the concealment of materialfacts.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc.G.R. No. 136975, March 31, 2005 citing Harbin v. Commissioner of Internal Revenue, 40 TC 373 (1963)]

12. The three purposes for the exercise of the taxingpower are:

a. the revenue purpose;

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b. the sumptuary purpose; andc. the compensatory purpose.

13. One of the purposes of taxation is to raiserevenues to meet the recognized objects of purposes of government. Thus, is based the lifeblood theory which positsthat the revenues collected constitute the lifeblood that animates

the existence of governments, without which governmentscannot perform the functions for which they were established.

14. The sumptuary purpose of taxation is to

promote the general welfare and to protect the health,safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxesare collected.

Taxation may be made the implement of the state’s policepower. The motivation behind many taxation measures is theimplementation of police power goals. [Southern Cross Cement

Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil.148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean,302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4Wheaton 316] The reader should note that the August 3, 2005Southern Cross case is the decision on the motion for reconsiderationof the July 8, 2004 Southern Cross decision.

The so-called “sin taxes” on alcohol and tobaccomanufacturers help dissuade the consumers from excessiveintake of these potentially harmful products. (Southern CrossCement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005)

15. Regulatory taxes should not be onerous. As anelementary principle of law, license taxation must not be “soonerous to show a purpose to prohibit a business which is notinjurious to health or morals.” [Terminal Facilities and ServicesCorporation v. Philippine Ports Authority, 378 SCRA 82 (2002)]

16. The compensatory purpose of taxation is toimplement the social justice provisions of the constitutionthrough the progressive system of taxation, which would resultto equal distribution of wealth, etc.

Progressive income taxes alleviate the margin betweenrich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540,

August 3, 2005)

17. What are the distinctions between a tax

and a license fee ?

SUGGESTED ANSWER: The following are thedistinctions between a tax and a license fee:

a. PURPOSE: A tax is imposed for revenue purposesWHILE a license fee is imposed for regulatory purposes. (Unlessit is a joint exercise of both the police power and the power of taxation)

b. BASIS: A tax is imposed under the power of taxationWHILE a license fee is imposed under police power.

c. AMOUNT: There is no limit as to the amount of a taxWHILE the amount of license fee that could be collected islimited to the cost of the license and the expenses of police

surveillance and regulation.d. TIME OF PAYMENT: Taxes are normally paid after

the start of a business WHILE a license fee before thecommencement of business.

e. EFFECT OF NON-PAYMENT: Failure to pay a taxdoes not make the business illegal WHILE failure to pay alicense fee makes the business illegal.

f. SURRENDER: Taxes being the lifeblood of thestate, cannot be surrendered except for lawful considerationWHILE a license fee may be surrendered with or withoutconsideration.

18. Taxation is distinguishable from police power

as to the means employed to implement these public goals.Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects(Southern Cross Cement Corporation v. Cement Manufacturers

Association of the Philippines, et al., G. R. No. 158540, August 3, 2005citing U. S. Chief Marshall who once said, the power to tax involvesthe power to destroy, McCulloch v. Maryland, 4 Wheaton 316, cited in

Sison v. Ancheta, G. R. No. L – 59431, July 25, 130 SCRA 654) andthe belief that taxes are lifeblood of the state. (Southern CrossCement Corporation v. Cement Manufacturers Association of the

Philippines, et al., G. R. No. 158540, August 3, 2005 citing “[T]axes

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being the lifeblood of the government, their prompt and certainavailability is of the essence.” Sison v. Ancheta, id., citing Vera v.Fernandez, G. R. No. L-31364, March 30, 1979, 89 SCRA 199]

These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (SouthernCross Cement Corporation, supra)

If the question asks for an enumeration of the distinctions

between the power of taxation and police power, the candidateshould reformulate no. 17 above.

19. The Sugar Adjustment Act which increasedexisting taxes on sugar was enacted to stabilize the sugar industry to prepare it for the loss of its quota in the U.S. marketwas levied for a regulatory purpose to protect and promotethe sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148)

The Philsugin fund, an imposition on sugar, to raise fundsto conduct research for the improvement of the sugar industry,is for the purpose of stabilizing the sugar industry which one of the pillars of the Philippine economy which affects the welfare of the State. The levy is not so much an exercise of the power of taxation, nor the imposition of a special levy, but the exercise of police power which is for the general welfare of the entirecountry, therefore for a public purpose. (Republic v. Bacolod-Murcia Co., et al ., G.R. No. L-19824, July 9, 1966)

20. Motor vehicle registration fees are nowconsidered revenue or tax measures. Consequently, entitiesenjoying tax exemptions are also exempt from paying motor vehicle registration fees. (PAL v. Edu, G.R. No. L-41383, August 15,

1988)

21. The tax imposed on videogram establishments isnot only regulatory but a revenue measure because theearnings of such establishments have not been subject to taxdepriving the government of an additional source of income.The is no over regulation as a result of the imposition of the taxbecause of the need for regulating a new industry. (Tio v.Videogram Regulatory Board, 151 SCRA 208)

22. The OPSF designed to reimburse gasoline

companies for increases in the price of crude oil resulting from

world price movements and exchange fluctuations are taxescollected in the exercise of the police power in order to stabilizeprices of gasoline and other petroleum products. (Osmena v.Orbos, G.R. No. 99886, March 31, 1993 )

23. Power of taxation can also be used to implementpower of eminent domain. Tax measures are but ”enforced

contributions exacted on pain of penal sanctions” and “clearlyimposed for public purpose.” In most recent years, the power totax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.(Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G.R. No. 159647, April 16, 2005)

24. The inherent and constitutional limitations to thepower of taxation are safeguards which would prevent abusein the exercise of this otherwise unlimited and plenary power.

25. The inherent limitations area. Public purpose. The revenues collected from

taxation should be devoted to a public purpose.b. No improper delegation of legislative authority to

tax. Only the legislature can exercise the power of taxes unlessthe same is delegated to some other governmental body by theconstitution or through a law which does not violate anyprovision of the constitution.

c. Territoriality. The taxing power should be exercisedonly within territorial boundaries of the taxing authority.

d. Recognition of government exemptions; ande. Observance of the principle of comity. Comity is the

respect accorded by nations to each other because they areequals. On the other hand taxation is an act of sovereign. Thus,the power should be imposed upon equals out of respect.

Some authorities include no double taxation.26. The tax revenues are for a public purpose if

utilized for the benefit of the community in general. Analternative meaning is that tax proceeds should be utilized onlyto attain the objectives of government.

27. Public use is no longer confined to the traditionalnotion of use by the public but held synonymous with public

interest, public benefit, public welfare, and public convenience.

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(Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G.R. No. 159647, April 16, 2005)

28. Taxpayers’ suit is a case where the actcomplained of directly involves the illegal disbursement of public funds derived from taxation. (Justice Melo, dissenting inKilosbayan, Inc. v. Guingona, Jr ., 232 SCRA 110)

29. What is locus standi ? ANSWER: Locus standi is “a right of appearance in a

court of justice on a given question. ( Abaya v. Ebdane, G. R. No.167919, February 14, 2007)

It is a party’s personal and substantial interest in the case,such that the party has sustained or will sustain (Ibid.)directinjury as a result of the government act being challenged. It callsfor more than just a generalized grievance.

A party need not be a party to the contract to challenge itsvalidity. (Ibid.)

NOTE: The term “interest” means a material interest, aninterest in issue affected by the decree, as distinguished from mereinterest in the question involved, or a mere incidental interest. ( Abayav. Ebdane, G. R. No. 167919, February 14, 2007)

30. What is the rationale for locus standi ? ANSWER: The rationale for requiring a party who

challenges the constitutionality of a statute to allege such apersonal stake in the outcome of the controversy is “to ensurethat a concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illuminationof different constitutional questions.” ( Abaya v. Ebdane, G. R. No.

167919, February 14, 2007)

31. Alternative statement of doctrine of

brushing aside locus standi. In cases of paramountimportance where serious constitutional questions are involved,the standing requirements may be relaxed and a suit may beallowed to prosper even where there is no direct injury to theparty claiming the right of judicial review. [Coconut Oil Refiners

Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No. 132527,July 29, 2005 citing Bayan (Bagong Alyansang Makabayan) v.Zamora, G. R. No. 138570, October 10, 2000, 342 SCRA 449, in turnciting Kilosbayan, Inc. v. Guingona, Jr ., G. R. No. 113375, May 5,1994, 232 SCRA 110]

23. What are the requirements that must be

met before taxpayers, concerned citizens and legislatorsmay be accorded standing to sue ?

SUGGESTED ANSWER:a. The case should involve constitutional issues;b. For taxpayers, there must be a claim of illegal

disbursement of public funds or that the tax measure isunconstitutional.

c. For voters, there must be a showing of obviousinterest in the validity of the election law in question.

d. For concerned citizens, there must be a showingthat the issues raised are of transcendental importance whichmust be settled early.

e. For legislators, there must be a claim that theofficial action complained of infringes upon their prerogativesas legislators. (David, et al., v. President Gloria Macapagal-Arroyo,etc., et al., G. R. No. 171396, May 3, 2006)

NOTES AND COMMENTS:a. Improper to implead incumbent President.

Impleading the President as respondent during her tenure andincumbency in office degrades the dignity of the office, harass her and detracts her from the performance of her functions. While thismay be so, she is subject to impeachment. (En banc, Sandoval-Gutierrez, J. David, et al., v. President Gloria Macapagal-Arroyo, etc.,et al., G. R. No. 171396, May 3, 2006)

a. Requisites for challenging constitutionality of law.The party bringing suit must snow “not only that the law or act isinvalid, but also that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its

enforcement and not merely that he suffers thereby in someindefinite way.” (Soriano III v. Lista, et al., G. R. No. 153881, March24, 2003)

32. Locus standi being merely a matter of procedure, have been waived in certain instances where a party who is not personally injured may be allowed to bring suit. Give some examples.

ANSWER: The following are examples of instanceswhere suits have been brought by parties who have not havebeen personally injured by the operation of a law or any other

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government act but by concerned citizens, taxpayers or voterswho actually sue in the public interest:

a. Taxpayer’s suits to question contracts entered intoby the national government or government-owned or controlledcorporations allegedly in contravention of the law.

b. A taxpayer is allowed to sue where there is a claimthat public funds are illegally disbursed, or that public money is

being deflected to any improper purpose, or that there is awastage of public funds through the enforcement of an invalid or unconstitutional law. ( Abaya v. Ebdane, G. R. No. 167919, February14, 2007)

33. The power of taxation is exercised by the legislaturewhose members are the mere delegates of the people hencethe power could not therefore be delegated by the legislature toother departments of government, like the executive.

34. Delegata potestas non potest delegari. A delegated

power cannot be further delegated.

35. The petitioners impugn the validity of the

establishment of tax and duty-free shops within the Subic Special Economic Zone (SSEZ) and the removal of consumer goods and items from the zones without payment of corresponding duties and taxes for the reasonthat this constitute executive legislation in violation of therule on separation of powers, that only “raw material,capital and equipment” should be allowed the privilege.Rule on the objections and reason out your answer briefly.

ANSWER: The objections should not be given credence.It is legal to setup duly authorized duty-free shops in the SSEZto sell tax and duty-free consumer items in the Secured Area.This is in line with the policy enunciated in the law that “theSubic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investmentcenter to generate employment opportunities in and around thezone and to attract and promote productive foreigninvestments.”

While it is true that Section 12 (b) of Rep. Act No. 7227mentions only raw materials, capital and equipment, this doesnot necessarily mean that the tax and duty free buying privilege

is limited to these types of articles to the exclusion of consumer goods.

It must be remembered that in construing statutes, theproper course is to start out and follow the true intent of theLegislature and to adopt that sense which harmonizes best withthe context and promotes to the fullest manner the policy andobjects of the Legislature.

The concept of inclusio unius est exclusio alterius doesnot find application because the phrase “tax and duty-freeimportations of raw materials, capital and equipment” wasmerely cited as an example of incentives that the SSEZ isauthorized to grant, in line with its being a free port zone. Thus,the legislative intent is that consumer goods entering the SSEZwhich satisfy the needs of the zone and are consumed there arenot subject to duties and taxes in accordance with Philippinelaw. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc.,et al., G. R. No. 132527, July 29, 2005)

` Would your answer be the same if a PresidentialProclamation allowed for the limited withdrawal from theClark Special Economic Zone or the John Hay EconomicZone of consumer goods tax and duty-free ?

ANSWER: The answer would not be the same. This timethe Presidential Proclamation would be invalid as the statutorytax exempt privilege was granted only to the Subic SpecialEconomic Zone and not to John Hay or Clark. This is sobecause the Constitution mandates that no law granting taxexemption shall be passed without the concurrence of a majorityof all the members of Congress. (Coconut Oil Refiners Association,Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005

citing John Hay People’s Alternative Coalition, et al., v. Lim, etc., et al.,G.R. No. 119775, October 24, 2003, 414 SCRA 356)

Furthermore, the law is very clear that the “exportation or removal of goods from the territory of the Subic SpecialEconomic Zone to other parts of the Philippine territory shall besubject to customs duties and taxes under the Customs andTariff Code and other relevant tax laws of the Philippines.” (Ibid.)

36. The VAT law provides that, the President,

upon the recommendation of the Secretary of Finance,shall, effective January 1, 2006, raise the rate of value-

added tax to twelve percent (12%) after any of the following

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conditions have been satisfied. “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).”

Was there an invalid delegation of legislative power ?

ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible.

Congress does not abdicate its functions or undulydelegate power when it describes what job must be done, whomust do it, and what is the scope of his authority. In the abovecase the Secretary of Finance becomes merely the agent of thelegislative department, to determine and declare the even uponwhich its expressed will takes place. The President cannot setaside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. .

[ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,September 1, 2005 and companion cases citing various cases]]

37. The power to tax should be exercised onlywithin the territorial boundaries of the taxing authority. Intheory, it is only within a state’s territorial boundaries that a statecould give protection, hence it is only within that territory that itcould demand support in the form of taxes.

38. In par parem, non habet imperium. As betweenequals there is no sovereign, hence foreign sovereigns are notto be subject to the sovereign power of taxation.

39. Comity is the respect accorded to other sovereign nations. Thus, properties of other sovereign nationswithin the territory of the taxing authority should not be subject totaxation as a measure of respect to a co-equal.

40. Government exemption should be recognized inorder to reduce the amount of money the government ishandling. There is verity in the maxim, “For the government,exemption is the rule and taxation is the exception.”

41. Situs of taxation is the place or the authority thathas the power to collect taxes. It is premised upon thesymbiotic relation between the taxpayer and the State.

42. The place that gives protection is the place thathas the right to demand that it be supported in the form of taxes so it could continually give protection.

43. The situs of real property taxes is the placewhere the property is located because it is that place thatgives protection. The applicable concept is lex situs or lex rei sitae.

44. The situs of taxation of tangible personalproperty is the place where the owner is located because itis that place that gives protection to the owner which protectionextends to the tangible personal property. The applicableconcept is mobilia sequuntur personam.

45. Intangible personal property may have obtaineda business situs in a particular place even if locatedelsewhere. Thus, the dividends earned from domesticcorporations are considered as income from within, irrespectivewhere the shares of stock of such domestic corporation islocated.

46. The situs of income taxation is determined bythe nationality, residence of the taxpayer and source of income. Please refer to general principles of income taxationunder income taxation.

47. The situs of excise taxes is the place where theprivilege is exercised because it is that place that givesprotection.

48. The situs of transfer taxes, such as estate anddonor’s taxes, is determined by the nationality andresidence of the taxpayer and the place where the propertyis located. Please refer to estate and donor’s taxes.

49. The situs of taxation of a contract for a projectwhich included the construction and installation in the

Philippines of equipment designed, fabricated and

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manufactured in Japan is the Philippines for the constructionand installation work and for the pieces of equipment and Japanfor supplies which were completely designed and engineered inJapan. (Commissioner of Internal Revenue v. Marubeni Corporation,G.R. No. 137377, December 18, 2001)

50. Juliane a non-resident alien appointed as

a commission agent by a domestic corporation with a salescommission of 10% all sales actually concluded and collected through her efforts. The local company withheld the amount of P107,000 from her sales commission and remitted the same to the BIR.

She filed a claim for refund alleging that her salescommission is not taxable because the same was acompensation for her services rendered in Germany and therefore considered as income from sources outside thePhilippines.

Is her contention correct ?

ANSWER: Yes. The important factor which determinesthe source of income of personal services is not the residence of the payor, or the place where the contract for service is enteredinto, or the place of payment, but the place where the serviceswere actually performed.

Since the activity of securing the sales were in Germany,then the income did not originate from sources from within thePhilippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R.No. 153793, August 29, 2006)

NOTE: In the above case, the Supreme Court reiterated therule that “source of income” relates to the property, activity or servicethat produced the income. With respect to rendition of labor or personal service, it is the place where the labor or service wasperformed that determines the source of the income.

The above Baier-Nickel case discussed the import of thelandmark cases (Howden and BOAC) involving sources of income for tax purposes both of which may be dangerous for Bar purposes:

51. A domestic insurance company decided to

reinsure with a foreign reinsurer the risks it has undertakenwith its local clients. The foreign reinsurer does not havean office, neither does it do business in the Philippines. Are the reinsurance premiums subject to Philippine income

taxation ?

ANSWER: Yes because the undertaking of the foreigninsurance company to indemnify the local insurance company isthe activity that produced the income.

The reinsurance premiums remitted to the foreignreinsurer had for their source the undertaking to indemnify thelocal insurer against liability. Said undertaking is the activity thatproduced there insurance premiums, and the same took place in

the Philippines. The reinsured, the liabilities insured and the riskoriginally undertaken by the local insurance company, uponwhich the reinsurance premiums and indemnity were based,were all situated in the Philippines. ( Alexander Howden & Co., Ltd.v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965)

cited in Baier-Nickel)

52. BOAC, a foreign airline company which

does not maintain any flight to and from the Philippinessold air tickets in the Philippines, through a general salesagent, relating to the carriage of passengers and cargo

between two points, both outside the Philippines.Is BOAC subject to income taxes on the sale of the

tickets ? ANSWER: Yes. The source of income which is taxable is

that “activity” which produced the income. The ”sale of tickets”in the Philippines is the activity that determines whether suchincome is taxable in the Philippines.

The tickets exchanged hands here and payments for fareswere also made here in Philippine currency. The situs of thesource of payments is the Philippines. The flow of wealthproceeded from and occurred, within the Philippine territory,

enjoying the protection accorded by the Philippine Government.In consideration of such protection, the flow of wealth shouldshare the burden of supporting the government. (Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),149 SCRA 395 cited in Bauer-Nickel)

53. What are the constitutional limitations on the power of taxation ?

ANSWER: The general or indirect constitutionallimitations as well as the specific or direct constitutionallimitations.

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54. What are the general or indirect

constitutional limitations on the power of taxation ? ANSWER: The general or indirect constitutional

limitations are the following:a. Due process clause;b. Equal protection clause;c. Freedom of the press;

d. Religious freedom;e. No taking of private property without just

compensation;f. Non-impairment clause;g. Law-making process:

1) Bill should embrace only one subject expressedin the title

thereof;2) Three (3) readings on three separate days;3) Printed copies in final form distributed three (3)

days before

passage.h. Presidential power to grant reprieves, commutations

and pardons and remittal of fines and forfeiture after convictionby final judgment.

55. The specific or direct constitutional limitations

are the following:a. No imprisonment for non-payment of a poll tax;b. Taxation shall be uniform and equitable;c. Congress shall evolve a progressive system of

taxation;

d. All appropriation, revenue or tariff bills shall originateexclusively in the House of Representatives, but the Senate maypropose and concur with amendments;

e. The President shall have the power to veto anyparticular item or items in an appropriation, revenue, or tariff bill,but the veto shall not affect the item or items to which he doesnot object;

f. Delegated power of the President to impose tariff rates,import and export quotas, tonnage and wharfage dues:

1) Delegation by Congress2) Through a law

3) Subject to Congressional limits and restrictions

4) Within the framework of national developmentprogram.

g. Tax exemption of charitable institutions, churches,parsonages and convents appurtenant thereto, mosques, and alllands, buildings and improvements of all kinds actually, directlyand exclusively used for religious, charitable or educationalpurposes;

h. No tax exemption without the concurrence of majorityvote of all members of Congress;

i. No use of public money or property for religiouspurposes except if priest is assigned to the armed forces, penalinstitutions, government orphanage or leprosarium;

j. Money collected on tax levied for a special purpose tobe used only for such purpose, balance if any, to general funds;

k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of anytax, impose, assessment or toll or the legality of any penaltyimposed in relation to the above;

l. Authority of local government units to create their ownsources of revenue, to levy taxes, fees and other chargessubject to guidelines and limitations imposed by Congressconsistent with the basic policy of local autonomy;

m. Automatic release of local government's just share innational taxes;

n. Tax exemption of all revenues and assets of non-stock,non-profit educational institutions used actually, directly andexclusively for educational purposes;

o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to

limitations provided by law including restrictions on dividendsand provisions for reinvestment of profits;

p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes subject to conditions prescribed by law.

56. Equal protection of the law clause is subject to

reasonable classification. If the groupings are characterizedby substantial distinctions that make real differences, one classmay be treated and regulated differently from another. Theclassification must also be germane to the purpose of the law

9



and must apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

58. Classification, to be valid, must (a) rest onsubstantial distinctions, (b) be germane to the purpose of thelaw, (c) not be limited to existing conditions only, and (d) applyequally to all members of the same class. (Tiu, et al., v. Court of

Appeals, et al., G.R. No. 127410, January 20, 1999)

59. The law grant of tax and duty-free status

under Rep. Act No. 7227, to retailers inside the SSEZ without granting the same to those outside the SSEZ. Isthere a violation of the equal protection clause ?

ANSWER: There is no violation of equal protectionbecause there exists a valid classification as shown below:

a. Significant distinctions exist between the twogroups. Those outside of the SSEZ maintain their businesswithin Philippine customs territory while those within the SSEZoperate within the so-called “separate customs territory.” To

grant the same privileges would clearly defeat the statue’s intentto carve a territory out of the military reservations in Subic Baywhere 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 toconvert the lands formerly occupied by the US military basesinto economic or industrial areas. In furtherance of suchobjective, Congress deemed it necessary to extend economicincentives, in terms of a complete package of tax incentives andother benefits, to the establishments within the zone to attractand encourage foreign and local investors.

c. The classification is not limited to the existingconditions when the law was promulgated but to futureconditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaininginvestment center.

d. The classification applies equally to all retailersfound within the “secured area.” As ruled in Tiu, the individualsand businesses within the “secured area,” being in likecircumstances or contributing directly to the achievement of theend purposes of the law, are not categorized further. They areall similarly treated, both in privileges granted and in obligationsrequired. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres,

etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999, 301 SCRA 278)

60. Is the statutory grant of tax and duty-freeimportation into the Subic Special Economic Zone violativethe “preferential use” concept of the Constitution ?

ANSWER: No. The mere fact that the law authorizes the

importation and trade of foreign goods does not suffice todeclare it unconstitutional on this ground.

While the Constitution does not encourage the unlimitedentry of foreign goods, services and investments into thecountry, it does not prohibit them either. In fact, it allows anexchange on the basis of equality and reciprocity, frowning onlyin foreign competition that is unfair. (Coconut Oil Refiners

Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527,July 29, 2005 citing Tanada v. Angara, G. R. No. 118295, May 2, 1997,272 SCRA 18)

61. A legislative rule which is in the nature of

subordinate legislation, designed to implement a primarylegislation by providing the details thereof. In the same waythat laws must have the benefit of public hearing, it is generallyrequired that before a legislative rule is adopted there must be ahearing and publication as required under the AdministrativeCode. (Commissioner of Internal Revenue v. Court of Appeals, et al .,261 SCRA 236 )

62. In case of an interpretative rule no hearing or publication is required since an interpretative rule isdesigned merely to provide guidelines of the law which the

administrative agency is in charge of enforcing.( Commissioner of Internal Revenue v. Court of Appeals, et al., 261SCRA 236 )

63. Equality and uniformity of taxation may mean the

same as equal protection. In such a case, the terms wouldmean that all subjects and objects of taxation which are similarlysituated shall be subject to the same burdens and granted thesame privileges without any discrimination whatsoever.

64. Uniformity may have a restrictive meaningdifferent from equality and equal protection. It would mean

10



then that the same rate shall be imposed for the same subjectsand objects within the territorial boundaries of a taxing authority.

65. A trial court is not the proper forum for theventilation of the issues where it is the legislature to whichrelief must be sought, because with the legislature primarilylies the discretion to determine (a) the nature (kind), (b) object

(purpose), (c) extent (rate), (d) coverage (subjects) and (e)situs (place) of taxation. (Commissioner of Internal Revenue, et al.,v. Santos, et al., 277 SCRA 617)

66. It is inherent in the power to tax that the State befree to select the subjects of taxation, and it has beenrepeatedly held that, "inequalities which result from a singlingout of one particular class of taxation, or exemption, infringe noconstitutional limitation." (Commissioner of Internal Revenue, et al.,v. Santos, et al., 277 SCRA 617)

67. A fixed annual license fee on those engaged inthe business of general enterprise was also imposed on thesale of bibles by a religious sect. Is this valid or violative of the constitutionally guaranteed freedom of religion ?

ANSWER: It is not valid because it violates theconstitutionally guaranteed freedom of religion. As a license feeis fixed in amount and unrelated to the receipts of the taxpayer,such a license fee, when applied to a religious sect is actuallyimposed as a condition for the free exercise of religion. Alicense fee “restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise.”

68. Article XII, Sec. 11 of the Constitution providesthat the grant of a franchise for the operation of a publicutility is subject to amendment. alteration or repeal byCongress when the common good requires.

69. A lawful tax on a new subject, or an increased taxon an old one, does not interfere with a contract or impairsits obligation, within the meaning of the constitution. Eventhough such taxation may affect particular contracts, as it mayincrease the debt of one person and lessen the security of

another, or may impose additional burdens upon one class and

release the burdens of another, still the tax must be paid unlessprohibited by the constitution, nor can it be said that it impairsthe obligations of any existing contract in its true and legalsense. (Tolentino v. Secretary of Finance, et al., and companioncases, 235 SCRA 630) 70. While the Supreme Court has, not too

infrequently, referred to tax exemptions contained in specialfranchises as being in the nature of contracts and a part of the inducement for carrying out the franchise, theseexemptions, nevertheless are far from being strictlycontractual in nature.

Constitutional tax exemptions, in the real sense of theterm and where the non-impairment clause of the Constitutioncan rightly be invoked, are those agreed to by the taxingauthority in contracts, such as those contained in governmentbonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private

capacity sheds its cloak of authority and waives its governmentimmunity. (Manila Electric Company v. Province of Laguna, et al., G.R.No. 131359, May 5, 1999)

71. The tax exemption, investments incentives

and the like granted by Congress under Section 12 of R.A.No. 7227, refer only to the Subic SEZ. There is no expressextension of the aforesaid benefits to other SEZs still to becreated at the time via presidential proclamation.

Thus, Proclamation No. 420 which also makes available tothe John Hay SEZ benefits existing in other laws such as the

privilege of export processing zone-based businesses of importing capital equipment and raw materials free from taxes,duties and other restrictions; tax and duty exemptions, taxholiday, tax credit, and other incentives under the OmnibusInvestments Code of 1987 and the applicability to the John HaySEZ of rules governing foreign investments in the Philippinesfinds no support under R.A. No. 7227. It is illegal.

Proclamation No. 420 would circumvent the Constitution’simposition that a law granting any tax exemption must have theconcurrence of a majority of all the members of Congress. Inthe same vein, the other kinds of privileges extended to the JohnHay SEZ are by tradition and usage for Congress to legislate

11



upon. (John Hay People’s Alternative Coalition, et al., v. Lim, etc., et al., G. R. No. 119775, October 24, 2003)

72. Under the now prevailing Constitution, where

there is neither a grant nor prohibition by statute, the taxingpower of local governments must be deemed to existalthough Congress may provide statutory limitations and

guidelines in order to safeguard the viability and self-sufficiencyof local government units by directly granting them general andbroad tax powers. (City Government of San Pablo, Laguna, et al., v.Reyes, et al., G.R. No. 127708, March 25, 1999)

73. The Local Government Code explicitly authorizesprovinces and cities, notwithstanding “any exemptiongranted by any law or other special law” to impose a tax onbusinesses enjoying a franchise. Indicative of the legislativeintent to carry out the constitutional mandate of vesting broadtax powers to local government units, the Local Government

Code has withdrawn tax exemptions or incentives theretoforeenjoyed by certain entities. (City Government of San Pablo, Laguna,et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

74. Philippine Long Distance Telephone Company,

Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,2001, upheld the authority of the City of Davao, a localgovernment unit, to impose and collect a local franchise taxbecause the Local Government has withdrawn all taxexemptions previously enjoyed by all persons and authorizedlocal government units to impose a tax on business enjoying afranchise tax notwithstanding the grant of tax exemption tothem.

75. “Paradigm shift” from exclusive

Congressional power to direct grant of taxing power tolocal legislative bodies. The power to tax is no longer vestedexclusively on Congress; local legislative bodies are now givendirect authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companioncase, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

Power to tax of LGUs not direct grant not merelydelegated power.

WARNING: The following doctrine is already abandoned.Power of local governments to tax is only a delegated power. Localgovernments do not have the inherent power to tax except to theextent that such power might be delegated to them either by the basiclaw or statute. Presently, under Article X of the 1987 Constitution ageneral delegation of that power has been given in favor of localgovernment units. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

76. The fundamental law did not intend the directgrant to local government units to be absolute andunconditional, the constitutional objective obviously is toensure that, while local government units are beingstrengthened and made more autonomous, the legislature muststill see to it that:

a. the taxpayer will not be over-burdened or saddled withmultiple and unreasonable impositions;

b. each local government unit will have its fair share of available resources;

c. the resources of the national government will be undulydisturbed; and

d. local taxation will be fair, uniform and just. (ManilaElectric Company v. Province of Laguna, et al., G.R. No. 131359, May

5, 1999 referred to power as merely a delegated power hencethe limitations. The author however holds that whether thepower is direct grant or merely a delegated power, the abovelimitations find application, as the power is subject to suchguidelines and limitations as Congress may provide. )

77. The withdrawal of a tax exemption should not beconstrued as prohibiting future grants of exemption from alltaxes. Indeed, the grant of taxing powers to local governmentunits under the Local Government Code does not affect thepower of Congress to grant exemptions to certain persons,pursuant to a declared national policy. The legal effect of theconstitutional grant to local governments simply means that ininterpreting statutory provisions on municipal taxing powers,doubts must be resolved in favor of municipal corporations.(Philippine Long Distance Telephone Company, Inc., v. City of Davao,et al., etc., G. R. No. 143867, August 22, 2001)

12



78. When Congress approved a provision that, “Anyadvantage, favor, privilege, exemption, or immunity grantedunder existing franchises, or may hereafter be granted, shallipso facto become part of previously grantedtelecommunications franchises and shall be accordedimmediately and unconditionally to the grantees of suchfranchises: Provided, however, That the foregoing shall neither

apply to nor affect provisions of telecommunications franchisesconcerning territory covered by the franchise, the life span of thefranchise, or the type of service authorized by the franchise.”(Underscoring supplied) there was no intention for it tooperate as a blanket tax exemption to alltelecommunications entities. Applying the rule of strictconstruction of laws granting tax exemptions and the rule thatdoubts should be resolved in favor of municipal corporations ininterpreting statutory provisions on municipal taxation, it washeld that said provisions cannot be considered as extending itsapplication to franchises such as that of PLDT. (Philippine Long

Distance Telephone Company, Inc., v. City of Davao, et al., etc ., G. R.No. 143867, August 22, 2001 )

79. Double taxation in its generic sense, this

means taxing the same subject or object twice during thesame taxable period.

In its particular sense, it may mean direct duplicatetaxation, which is prohibited under the constitution because itviolates the concept of equal protection, uniformity andequitableness of taxation. Indirect duplicate taxation is notanathematized by the above constitutional limitations.

80. The elements of direct duplicate taxation are:a. Same

1) Subject or object is taxed twice2) Taxing authority3) Taxing purpose4) Taxing period

b. Taxing all of the subjects or objects for the first timewithout taxing all of them for the second time.

If any of the elements are absent then there is indirectduplicate taxation which is not prohibited by the constitution.

81. Double taxation a valid defense against the

legality of a tax measure if the double taxation is directduplicate taxation, because it would violate the equalprotection clause of the constitution.

82. When an item of income is taxed in thePhilippines and the same income is taxed in another

country, this would be known as international juridicaldouble taxation which is the imposition of comparable taxes intwo or more states on the same taxpayer in respect of the samesubject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June25, 1999)

83. Double taxation usually takes place when aperson is a resident of a contracting state and derivesincome from or owns capital in, the other contracting stateand both states impose tax on that income or capital.(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

84. What are the methods for avoiding double

taxation (indirect duplicate taxation) ? SUGGESTED ANSWER: The following are the methods

of avoiding double taxation:a. Tax treaties which exempts foreign nationals from local

taxation and local nationals from foreign taxation under theprinciple of reciprocity.

b. Tax credits where foreign taxes are allowed asdeductions from local taxes that are due to be paid.

c. Allowing foreign taxes as a deduction from grossincome.

85. Tax credit generally refers to an amount that issubtracted directly from one’s total tax liability, an allowanceagainst 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 thecorresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.159647, April 15, 2005)

13



86. A tax deduction is defined as a subtraction froincome for tax purposes, or an amount that is allowed by law toreduce income prior to the application of the tax rate to computethe amount of tax which is due.

A tax deduction reduces the income that is subject to taxin order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April

15, 2005)

87. Purpose of tax treaties. To reconcile the nationalfiscal legislation of the contracting parties in order to help thetaxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are draftedwith a view towards the elimination of international juridicaldouble taxation. (Commissioner of Internal Revenue v. S.C. Johnsonand Son, Inc., et al ., G.R. No. 127105, June 25, 1999)

88. Rationale for avoiding international juridicaldouble taxation. To encourage the free flow of goods andservices and the movement of capital, technology and personsbetween countries, conditions deemed vital in creating robustand dynamic economies. Foreign investments will only thrive ina fairly predictable and reasonable international investmentclimate and the protection against double taxation is crucial increating such a climate. (Commissioner of Internal Revenue v. S.C.Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999) 89. The petitioners allege that the R-VAT law is constitutional because the Bicameral ConferenceCommitted has exceeded its authority in including

provisions which were never included in the versions of both the House and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to12%; deleting entirely the no pass-on provisions found inboth the House and Senate Bills; inserting the provisionimposing a 70% limit on the amount of input tax to becredited against the output tax; and including theamendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value- added tax. Thus, there was a violation of the constitutional mandate that revenue bills shall originate exclusively from

the House of Representatives.

Are the contentions of such weight as to constitutegrave abuse of discretion which may invalidate the law ? Explain briefly.

SUGGESTED ANSWER: No. There was no grave abuseof discretion because all the changes and modifications madeby the Bicameral Conference Committee were germane tosubjects of the provisions referred to it for reconciliation.

The Bicameral Conference Committee merely exercisedthe judicially recognized long-standing legislative practice of giving said conference committee ample latitude for compromising differences between the Senate and the House.[ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,September 1, 2005 and companion cases citing Philippine Judges

Association v. Pardo, G. R. No. 105371, November 11, 1993, 227SCRA 703; Tolentino v. Secretary of Finance, et al., G. R. No. 115455,

August 25, 1994, 235SCRA 630]

NOTES AND COMMENTS:a. It is within the power of a conference committee

to include in its report an entirely new provision that is notfound either in the House bill or Senate bill. If the committeecan propose an amending consisting of one or two provisions, there isno reason why it cannot propose several provisions, collectivelyconsidered as an “amendment in the nature of a substitute,” so longas such amendment is germane to the subject of the bills before thecommittee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislativedepartment. The charge that in this case the Conference Committeeacted as a third legislative chamber is thus without any basis.[ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235SCRA 630]

b. The Constitution requires that all revenue billsshall originate exclusively from the House of Representatives. The Constitution simply means that the initiativefor filing revenue, tariff or tax bills must come from the House of Representatives on the theory that, elected as they are from thedistricts, the Members of the House can be expected to be moresensitive to the local needs and problems. (Tolentino v. Secretary of Finance and companion cases, 249 SCRA 628)

c. It is not the law - but the revenue bill - which isrequired by the Constitution to “originate exclusively” in theHouse of Representatives because a bill originating in the Housemay undergo such extensive changes in the Senate that the result

14



may be a rewriting of the whole, and a distinct bill may be produced.(Tolentino v. Secretary of Finance and companion cases, 235 SCRA630)

d. To insist that a revenue statute - not only the billwhich initiated the legislative process culminating in theenactment of the law - must substantially be the same asthe House bill would be to deny the Senate’s power not only

to “concur with amendments” but also to “proposeamendments.” It would be to violate the coequality of legislativepower of the two houses of Congress and in fact make the Housesuperior to the Senate.

Given the power of the Senate to propose amendments, it canpropose its own version even with respect to bills which are requiredby the Constitution to originate in the House. [ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005and companion cases citing Tolentino v. Secretary of Finance, et al.,G. R. No. 115455, August 25, 1994, 235SCRA 630]

e. Rationale for the “origination rule.” Elected fromthe districts the members of the House can be expected to be more

sensitive to the local needs and problems. On the other hand, thesenators, who are elected at large, are expected to approach the sameproblems from the national perspective. Both views are thereby madeto bear on the enactment of such laws. . [ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 andcompanion cases citing Tolentino v. Secretary of Finance, et al., G. R.No. 115455, August 25, 1994, 235SCRA 630]

It is the main purpose of the bills emanating from the House of Representatives to bring in sizeable revenues for the government tosupplement our country’s serious financial problems, and improve taxadministration and control of the leakages in revenue from incometaxes and value-added taxes. As these house bills were transmitted tothe Senate, the latter, approaching the measure from the point of national perspective, can introduce amendments within the purposesof these bills, It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e. by distributing the burdenacross all sectors instead of putting it entirely on the shoulders of theconsumers. [ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.No. 168056, September 1, 2005 and companion cases]

f. Nor does the Constitution prohibit the filing inthe Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a bodyis withheld pending receipt of the House bill. (Obiter in Tolentino v.Secretary of Finance and companion cases, 235 SCRA 630)

95. It is contended that where the Bicameral

Conference Committee was allowed to add or delete provisions in the House Bill and Senate Bill after these had passed three readings constitutes a circumvention of the“no amendment rule” of Article VI. Sec. 26 (2) of theConstitution which provides that, “Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote

thereon shall be taken immediately thereafter, and the yeasand nays entered in the Journal.” Is such a contentiontenable ? Reason out briefly your answer>

SUGGESTED ANSWER: The contention is not tenablebecause the “no amendment rule” refers only to bills introducedfor the first time in either house of Congress, not to theconference committee report.

To prohibit changes after one house has voted on it wouldmean that the other house of Congress would be deprived of itsconstitutional power to amend or introduce changes to said bill.[ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,

September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235SCRA 630]

96. The VAT is assailed as being regressive and therefore violative of the mandate to evolve a progressivesystem of taxation. Do you agree ? Explain your answer.

SUGGESTED ANSWER: No. The VAT does not violatethe progressive system of taxation. The mandate to Congressis not to prescribe but to evolve a progressive system of taxation. Otherwise, sales taxes which perhaps are the oldestform of indirect taxes, would have been prohibited with the

proclamation of the constitutional provision. Sales taxes arealso regressive. . [ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citingTolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25,1994, 235 SCRA 630]

NOTES AND COMMENTS: a. The Constitution does not really prohibit

the imposition of indirect taxes which, like the VAT, areregressive. The constitutional provision means simply that indirecttaxes should be minimized.

Resort to indirect taxes should be minimized but not avoidedentirely because it is difficult, if not impossible, to avoid imposing such

taxes according to the taxpayer’s ability to pay. . [ Abakada Guro Party

15



List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005and companion cases citing Tolentino v. Secretary of Finance, et al.,G. R. No. 115455, August 25, 1994, 235 SCRA 630]

b. In the case of VAT, the law minimizes theregressive effects of this imposition by providing for zerorating of certain transactions while granting exemptions toother transactions. The transactions which are subject to VAT are

those which involve goods and services which are used or availed of mainly by higher income groups. Likewise the VAT rate of 0% or 10%(or 12%) does not apply to sale of goods or services with gross annualsales or receipts not exceedingP1,500,000.00. Also basic marine andagricultural products in their original state are still not subject to tax,thus ensuring that process at the grass roots level will remainaccessible. [ Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.No. 168056, September 1, 2005 and companion cases citingKapatiran ng Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v.Tan, No.L-81311, June 30, 1988, 163 SCRA 371, 383)]

99. “The President shall have the power to veto anyparticular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items towhich he does not object.”

100. An “item” in a revenue bill does not refer to an entiresection imposing a particular kind of tax, but rather to the subjectof the tax and the tax rate. In the portion of a revenue bill whichactually imposes a tax, a section identifies the tax andenumerates the persons liable therefore with the correspondingtax rate.

To construe the word “item” as referring to the wholesection would tie the President’s hand in choosing either to

approve the whole section at the expense of also approving aprovision therein which he deems unacceptable or veto theentire section at the expense of foregoing the collection of thekind of tax altogether.

101. Charitable institutions, churches and

parsonages or convents appurtenant thereto, mosques,non-profit cemeteries, and all lands, buildings andimprovements that are actually, directly and exclusivelyused for religious, charitable or educational purposes areexempt from taxation. [Sec.28 (3) Article VI, 1987 Constitution]

102. The constitutional tax exemptions refer

only to real property that are actually, directly and exclusivelyused for religious, charitable or educational purposes, and thatthe only constitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educationalinstitutions which are actually, directly and exclusively used for educational purposes. (Commissioner of Internal Revenue v. Court

of Appeals, et al., 298 SCRA 83)The constitutional tax exemption covers property taxes

only. What is exempted is not the institution itself, thoseexempted from real estate taxes are lands, buildings andimprovements actually, directly and exclusively used for religious, charitable or educational purposes. (Lung Center of thePhilippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004citing Justice Davide)

103. The 1935 Constitution stated that the

lands, buildings, and improvements are “used exclusively”

but the present Constitution requires that the lands,buildings and improvements are “actually, directly andexclusively used.” The change should not be ignored.Reliance on past decisions would have sufficed were the words“actually” as well as :directly” are not added. There must beproof therefore of the actual and direct use to be exempt fromtaxation. (Lung Center of the Philippines v. Quezon City, et al., etc.,G. R. No. 144104, June 29, 2004 citing Province of Abra v. Hernando,107 SCRA 105)

104. What is meant by “actual, direct and

exclusive use” of the property for charitable purposes is thedirect and immediate and actual application of the propertyitself to the purposes for which the charitable institution isorganized. It is not the use of the income from the real propertythat is determinative of whether the property is used for tax-exempt purposes.

If real property is used for one or more commercialpurposes, it is not exclusively used for the exempted purposebut is subject to taxation,. The words “dominant use” or “principal use” cannot be substituted for the words “usedexclusively” without doing violence to the Constitution and thelaw. Solely is synonymous with exclusively. (Lung Center of the

16



Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29,2004)

105. Portions of the land of a charitable

institution, such as a hospital, leased to private entities aswell as those parts of the hospital leased to privateindividuals are not exempt from real property taxes. On the

other hand, the portion of the land occupied by the hospital andportions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29,2004)

106. As a general principle, a charitable institutiondoes not lose its character as such and its exemption fromtaxes simply because it derives income from payingpatients, whether out-patient, or confined in the hospital, or receives subsidies from the government. So long as themoney received is devoted or used altogether to the charitableobject which it is intended to achieve; and no money inures tothe private benefit of the persons managing or operating theinstitution. (Lung Center of the Philippines v. Quezon City, et al., etc.,G. R. No. 144104, June 29, 2004)

107. All revenues and assets of non-stock, non-

profit educational institutions that are actually, directly andexclusively used for educational purposes shall be exemptfrom taxation.

108. Revenues and assets of proprietary educational

institutions, including those which are cooperatively owned,may be entitled to exemptions subject to limitationsprovided by law including restrictions on dividends andprovisions for reinvestments. There is no law at the presentwhich grants exemptions, other the exemptions granted tocooperatives.

109. The NIRC recognizes the exemption from tax of the incomes of civic leagues or organizations not organizedfor profit but operated exclusively for the promotion of socialwelfare, as well as clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes where

no part of the net income inures to the benefit of any privatestockholder or member.

110. The tax exemption so recognized does not flow toincome of whatever kind and character of the foregoingorganizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the

disposition made of such income, which shall be subject toincome taxes. (Commissioner of Internal Revenue v. Court of

Appeals, et al., 298 SCRA 83)

112. What is a tax amnesty ? SUGGESTED ANSWER: A tax amnesty is a general

pardon or intentional overlooking by the State of its authority toimpose penalties on persons otherwise guilty of evasion or violation of a revenue or a tax law. (Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18,2001)

NOTES AND COMMENTS:a. The purpose of tax amnesty is to (a) give tax

evaders who wish to relent a chance to start a clean slate, and to (b)give the government a chance to collect uncollected tax from taxevaders without having to go through the tedious process of a taxcase. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February10, 2000 )

111. Distinguish tax amnesty from tax exemption.

SUGGESTED ANSWER:a. Tax amnesty is an immunity from all criminal, civil andadministrative liabilities arising from nonpayment of taxes(People v. Castaneda, G.R. No. L-46881, September 15, 1988 )WHILE a tax exemption is an immunity from civil liability only. Itis an immunity or privilege, a freedom from a charge or burdento 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 (Castaneda, supra) WHILE tax exemptionhas prospective application.

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114. Define tax avoidance and tax evasion.

SUGGESTED ANSWER: Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion isthe use of illegal means to escape the payment of taxes.

NOTES AND COMMENTS: a. Tax avoidance connotes the integration of

three factors:

1) the end to be achieved, i.e., the payment of lessthan that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due;

2) an accompanying state of mind which is describedas being “evil” on “bad faith,” “willful,” or ”deliberate and notaccidental”; and

3) a course of action or failure of action which isunlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14,2004)

115. Distinguish between the tax avoidance and

tax evasion.SUGGESTED ANSWER:a. Tax avoidance is legal while tax evasion is illegal.b. The objective of tax avoidance in most instances is

merely to reduce the tax that is due while tax evasion the objectis to entirely escape the payment of taxes.

117. What are the reasons why national taxes

cannot be the subject of compensation and set-off withdebts ?

SUGGESTED ANSWER:

a. The lifeblood theory;b. Taxes are not contractual obligations but arise out

of a duty to, and are the positive acts of government, to themaking and enforcing of which the personal consent of theindividual taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA 622)

c. The government and the taxpayer are not mutuallycreditors and debtors of each other and a claim for taxes is nosuch debt, demand, contract or judgment as is allowed to be set-off. (Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA 726,756)

118. Compensation takes place by operation of law,

where the local government and the taxpayer are in their ownright reciprocally debtors and creditors of each other, and thatthe debts are both due and demandable, in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8SCRA 443)

119. In case of a tax overpayment, where theBIR’s obligation to refund or set-off arises from the momentthe tax was paid under the principle of solutio indebeti .(Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172SRCA 364)

120. But note Nestle Phil. v. Court of Appeals, et

al., G.R. No. 134114, July 6, 2001 which held that in order for the rule on solutio indebeti to apply it is an essential conditionthat the petitioner must first show that its payment of thecustoms duties was in excess of what was required by the law

at the time the subject 16 importations of milk and milk productswere made. Unless shown otherwise, the disputablepresumption of regularity of performance of duty lies in favor of the Collector of Customs.

121. A direct tax is a tax for which a taxpayer is

directly liable on the transaction or business it engages in,without transferring the burden to someone else. Examplesare individual and corporate income taxes, transfer taxes, andresidence taxes. ( Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases, citingMaceda v. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA217)

122. The main difference between direct taxes

and indirect taxes is that the burden of direct taxes could notbe shifted by the taxpayer to another while the burden of indirecttaxes could be shifted to another person, such the burden value-added taxes being shifted or transferred by the taxpayer, theseller, to the buyer.

123. Acesite is the owner and operator of

restaurant which caters to the patrons of a casino operated

by PAGCOR within its premises. It billed PAGCOR for the

18



cost of the food and beverages consumed by thePAGCOR’s patrons as well as the lease of the premises plus the VAT on these items. PAGCOR paid Acesite minusthe VAT claiming exemption while Acesite, in order toavoid legal implications, paid the P30 million tax and applied for a refund on the ground of solutio indebeti.

Acesite cites the tax exemption grant in PAGCOR’s

franchise as follows: “The exemptions herein granted for earnings derived from the operations conducted under thefranchise specifically from the payment of any tax, income, or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),association (s), agency (cies), or individual(s) with whomthe Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and tothose receiving compensation or other remuneration from theCorporation or operator as a result of essential facilities

furnished and/or technical services rendered to the Corporationor operator.” (emphasis supplied)

The BIR denied the claim on the ground that PAGCOR is exempt only from direct taxes and not fromindirect taxes so Acesite may not avail of the exemption. Isthis correct ?

ANSWER: No. As the law is worded the exemption flowsto Acesite. The law is clear that the exemption extends theexemption to entities or individuals dealing with PAGCOR.(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February 16, 2007)

NOTE: The above holding should be differentiated fromPhilippine Acetylene Co. v. Commissioner of Internal Revenue, 20 SCRA 1056, where the tax exemption did not flow to private entities.( Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

NATIONAL INTERNAL REVENUE CODE

THE BUREAU OF INTERNAL REVENUE

1. Warrantless search authority of internal revenueofficers. Any internal revenue officer in the discharge of his

official duties may enter any house, building or place where

articles subject to excise taxes are produced or kept, or arebelieved by him upon reasonable grounds to be produced or kept so far as may be necessary to examine, discover or seizethe same. (1st par., Sec. 171, NIRC of 1997)

2. Internal revenue officers shall have authority tomake arrests and seizures for violation of any penal law or

regulation administered by the Bureau of Internal Revenue. Anyperson so arrested shall forthwith be brought before a court,there to be dealt with according to law. (Sec. 13, NIRC of 1997)

3. The basis for warrantless search and arrest is thedoctrine of primary jurisdiction which posits that in technicalmatters where the administrative bodies have obtainedexpertise, the courts will defer. This is likewise premised on thelifeblood theory which mandates the immediate collection of taxes to ensure the continued existence of the State.

4. There are two kinds of rulings the BIR may issue -interpretative rulings and legislative rulings.

5. Interpretative rules are designed to provideguidelines to the law which the administrative agency is incharge of enforcing. No notice, hearing or publication isrequired, as they are issued merely for the guidance of administrative officers. Illustration: Revenue MemorandumCircular No. 47-91 classifying copra as an agricultural non-fooditem declaring it exempt from VAT only if the sale is made by theprimary producer. (Misamis Oriental Association of Coco Traders,Inc. v. Department of Finance Secretary, et al., 238 SCRA 63 [1994]

6. Legislative rules are in the nature of subordinatelegislation, designed to implement a primary legislation byproviding the details thereof. They are issued under the quasi-legislative authority of the BIR Commissioner. There is arequirement for notice, hearing and publication. Illustration:Revenue Memorandum Circular No. 37-93 which placed HopeLuxury, Premium More and Champion cigarettes within thescope of the amendatory law R.A. No. 7654 and subjected themto the increased tax rate requires notice, hearing andpublication. (Commissioner of Internal Revenue v. Court of Appeals,

et al., 261 SCRA 236)

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7. The rulings and circulars promulgated by theCommissioner do not have retroactive application if therevocation, modification, or reversal would be prejudicial to thetaxpayers. (Sec. 246, NIRC of 1997; Commissioner of Internal Revenue v. Court of Appeals, et al., 267 SCRA 557)

8. Instances when revenue rulings and regulationshave retroactive effect even if prejudicial to the taxpayer:a. Where the taxpayer deliberately misstates or omits

material facts from his return or in any document required of himby the BIR;

b. Where the facts subsequently gathered by the BIRare materially different from the facts on which the ruling isbased, or

c. Where the taxpayer acted in bad faith. (Sec. 246,NIRC of 1997)

9. The Commissioner or his authorized representative

is empowered to suspend the business operations andtemporarily close the business establishment of any person for any of the following violations:

a. In case of a VAT-registered person:1) Failure to issue receipts or invoices;2) Failure to file a VAT return as required under

the Tax Code;3) Understatement of taxable sales or receipts

by 30% or more of his correct taxable sales or receipts for the taxable quarter.b. Failure to register under the VAT provisions of the

Tax Code.The temporary closure of the establishment shall for the

duration of not less than five (5) days and shall be lifted onlyupon compliance with whatever requirements prescribed by theCommissioner in the closure order. (Atlas Consolidated Mining &Development Corporation v. Commissioner of Internal Revenue, G.R.No. 134467, November 17, 1999)

10. The Commissioner of Internal Revenue is

authorized under the Tax Code to delegate the powers vestedin him under the pertinent provisions of the Tax Code to any

subordinate official with the rank equivalent to a division chief or higher.

11. The following are some of the powers that theCommissioner of Internal Revenue could not delegate:

a. The power to recommend the rules and regulations bythe Secretary of Finance;

b. The power to issue rulings of first impression or toreverse, revoke, or modify any existing ruling of the Bureau;

c. The power to compromise or abate, any tax deficiency,Provided, however, that assessments issued by the RegionalOffices involving basic deficiency taxes of P500,000.00 or less,and minor criminal violations as may be determined by rules andregulations to be promulgated by the Secretary of Finance, uponthe recommendation of the Commissioner, discovered byregional and district officials, may be compromised by a regionalevaluation board which shall be composed of the RegionalDirector as Chairman, the Assistant Regional Director, heads of

the Legal, Assessment and Collection Divisions and theRevenue District Officer having jurisdiction over the taxpayer, asmembers; and

d. The power to assign or reassign internal revenueofficers to establishments where articles subject to excise taxare produced or kept. (Sec. 7, NIRC of 1997 cited in Republic of thePhilippines, etc. v. Hizon, G.R. No. 130430, December 13, 1999)

12. The Commissioner of Internal Revenue has the

power to obtain on a regular basis from any person other thanthe person whose internal revenue tax liability is subject to audit

or investigation, an information such as, but not limited to, costsand volume of production, receipts or sales and gross incometaxpayers, among others. [Sec. 5 (B), NIRC of 1997]

13. Rep. Act No. 1405, the Bank Deposits Secrecy

Law prohibits inquiry into bank deposits. As exceptions to Rep. Act No. 1405, the Commissioner of Internal Revenue is onlyauthorized to inquire into the bank deposits of:

a. a decedent to determine his gross estate; andb. any taxpayer who has filed an application for

compromise of his tax liability by reason of financial incapacity to

pay his tax liability. [Sec. 5 (F), NIRC of 1997]

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c. A taxpayer who authorizes the Commissioner toinquire into his bank deposits.

INCOME TAXATION

1. The Tax Code has included under the term

“corporation” partnerships, no matter how created or organized,

joint-stock companies, joint accounts (cuentas en participacion),associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]

2. In Evangelista v. Collector, 102 Phil. 140, the SupremeCourt held citing Mertens that the term partnership includes asyndicate, group, pool, joint venture or other unincorporatedorganization, through or by means of which any business,financial operation, or venture is carried on.

3. Certain business organizations do not fall under the

category of “corporations” under the Tax Code, and thereforenot subject to tax as corporations, include:a. General professional partnerships;b. Joint venture or consortium formed for the purpose of

undertaking construction projects engaging in petroleum, coal,geothermal, and other energy operations, pursuant to anoperation or consortium agreement under a service contractwith the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]

4. Co-heirs who own inherited properties whichproduce income should not automatically be considered as

partners of an unregistered corporation subject to income tax for the following reasons:a. the sharing of gross returns does not of itself

establish a partnership, whether or not the persons sharingthem have a joint or common right or interest in any propertyfrom which the returns are derived. There must be anunmistakable intention to form a partnership or joint venture .(Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)

b. There is no contribution or investment of additionalcapital to increase or expand the inherited properties, merelycontinuing the dedication of the property to the use to which ithad been put by their forebears. (Ibid.)

c. Persons who contribute property or funds to acommon enterprise and agree to share the gross returns of thatenterprise in proportion to their contribution, but who severallyretain the title to their respective contribution, are not therebyrendered partners. They have no common stock capital, and nocommunity of interest as principal proprietors in the businessitself from which the proceeds were derived. (Elements of the

Law of Partnership by Floyd R. Mechem, 2nd

Ed., Sec. 83, p. 74cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 )

5. In order to constitute a partnership inter sese theremust be:

a. an intent to form the same;b. generally participating in both profits and losses;c. and such a community of interest, as far as third

persons are concerned as enables each party to make acontract, manage the business, and dispose of the wholeproperty. (Municipality Paving Co. v. Herring, 150 O. 1067, 50 Ill. 470 ,cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 )

6. The common ownership of property does not itself create a partnership between the owners, though they may useit for purpose of making gains, and they may, without becomingpartners, are among themselves as to the management and useof such property and the application of the proceeds therefrom..(Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560 )

7. The income from the rental of the house, bought

from the earnings of co-owned properties, shall be treated as

the income of an unregistered partnership to be taxable as acorporation because of the clear intention of the brothers to jointogether in a venture for making money out of rentals.

8. Where the plaintiff, his brother and, and another

agreed to become owners of a single tract of realty holding astenants in common, and to divide the profits of disposing of it,the brother and the other not being entitled to share in plaintiff’scommissions, no partnership existed as between the threeparties, whatever their relation may have been as to thirdparties. (Magee v. Magee, 123 N.E. 673, 233 Mass. 341 cited in

Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)

21



9. Income is an amount of money coming to a person

within a specified time, whether payment for services, interest,or profit from investment.” It means cash or its equivalent.

10. Income is gain derived and severed from capital, fromlabor or from both combined. For example, to tax a stock

dividend would be to tax a capital increase rather than theincome. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)

11. Distinctions between wealth and income.a. Capital is wealth or fund, WHILE income is profit or

gain from the flow of wealth. (Commissioner of Internal Revenuev. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)

b. Capital is a fund of property existing at an instant of time WHILE income is that flow of services rendered by thatcapital by the payment of money from it or any other benefit

rendered by a fund of capital in relation to such fund through aperiod of time.c. Capital is wealth WHILE income is the service of

wealth; andd. Capital is the tree WHILE income is the fruit. (Madrigal

v. Rafferty, 38 Phil. 414)

12. Realization is determinative of earning processresulting to income. Without realization, there is no income.

13. The determining factor for the imposition of incometax is whether any gain or profit was derived from the

transaction. In the metaphor of Eisner v. Macomber, 252 U.S.426 , income is not deemed “realized” until the fruit has beenplucked from the tree.

14. The term taxable income means the pertinent

items of gross income specified in the Tax Code, less thedeductions and/or personal and additional exemptions, if any,authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)

15. The cancellation and forgiveness of

indebtedness may amount to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances.16. If an individual performs services for a creditor

who, in consideration thereof, cancels the debt, it is income tothe extent of the amount realized by the debtor as compensationfor his services.

17. An insolvent debtor does not realize taxable

income from the cancellation or forgiveness. (Commissioner v.Simmons Gin Co., 43 Fd 327 CCA 10 th )

18. The insolvent debtor realizes income resulting

from the cancellation or forgiveness of indebtedness when hebecomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA(F) 289)

19. If a creditor merely desires to benefit a debtor and

without any consideration therefor cancels the amount of thedebt it is a gift from the creditor to the debtor and need not beincluded in the latter’s income.

20. If a corporation to which a stockholder is indebtedforgives the debt, the transaction has the effect of payment of adividend. (Sec. 50, Rev. Regs. No. 2)

21. The Global system of income taxation is a

system employed where the tax system views indifferently thetax base and generally treats in common all categories of

taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

22. The Schedular system of income taxation is a

system employed where the income tax treatment varies and ismade to depend on the kind or category of taxable income of thetaxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

23. Under the National Internal Revenue Code the globalsystem is applicable to taxable corporations and the schedular to individuals.

22



24. The general principles of income taxation in the

Philippines OR the situs of income taxation in the Philippines ORthe source rule of income taxation as applied in the Philippines.

a. A citizen of the Philippines residing therein is taxableon all income derived from sources within and without thePhilippines.

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 from abroad as an overseas contractworker is taxable only on income from sources within thePhilippines: Provided, That a seaman who is a citizen of thePhilippines and who receives compensation for servicesrendered abroad as a member of the complement of a vesselengaged exclusively in international trade shall be treated as anoverseas contract worker.

d. An alien individual, whether resident or not of thePhilippines, 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.f. A foreign corporation, whether engaged or not in trade

or business in the Philippines, is taxable only on income derivedfrom sources within the Philippines. (Sec. 23, NIRC of 1997)

25. Compensation income is considered as having

been earned in the place where the service was rendered andnot considered as sourced from the place of origin of the money.

26. Payment for services, other than compensationincome, is considered as having been earned at the placewhere the activity or service was performed.

27. A non-resident alien, who has stayed in thePhilippines for an aggregate period of more than 180 daysduring the calendar year 2001, shall be considered as a non-resident alien doing business in the Philippines. Consequently,he shall be subject to income tax on his income derived fromsources from within the Philippines. [Sec. 25 (A) (1), NIRC]

He is allowed to avail of the itemized deductions includingthe personal and additional exemptions subject to the rule onreciprocity.

28. Improperly accumulated earnings are the earnings

or profits of a corporation which are permitted to accumulateinstead of being divided by a corporation to its shareholders for

the purpose of avoiding the income tax on dividends withrespect to its shareholders or the shareholders of another corporation. If the income were divided and distributed, theywould have been taxed as dividends.

29. In addition to other income taxes, there is imposedfor each taxable year on the improperly accumulated taxableincome of each corporation, an improperly accumulatedearnings tax equal to 10% of the improperly accumulatedtaxable income. [Sec. 29 (A), NIRC of 1997]

30. Every corporation formed or availed for the purposeof avoiding income tax with respect to its shareholders or theshareholders of another corporation, by permitting earnings andprofits to accumulate instead of being divided or distributed.[Sec. 29 (B) (1), NIRC of 1997]

31. Corporations exempt from the improperlyaccumulated earnings tax:

a. Publicly-held corporations;b. Banks and other nonbank financial intermediaries; andc. Insurance companies. [Sec. 29 (B) (2), NIRC of 1997]

32. The fact that the earnings or profits of a corporationare permitted to accumulated beyond the reasonable needs of the business shall be determinative of the purpose to avoid thetax upon its shareholders or members unless the corporation, byclear preponderance of evidence, shall prove the contrary. [Sec.29 (C) (2), NIRC of 1997]

33. Reasonable needs of business includes thereasonably anticipated needs of the business. [Sec. 29 (E),NIRC of 1997]

In order to determine whether profits are accumulated for

the reasonable needs of the business to avoid the surtax upon

23



shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, notintentions declared subsequently, which are mere afterthoughts.Furthermore, the accumulated profits must be used within areasonable time after the close of the taxable year . (Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No. 108067, January20, 2000)

34. The tests to determine justified accumulation of earnings, and not subject to tax are (a) the immediacy test; (b)the “2 to 1” ratio; and the (c) the Bardahl formula.

35. Under the “immediacy test,” “reasonable needs of thebusiness” means the immediate needs of the business, and itwas generally held that if the corporation did not prove animmediate need for the accumulation of the earnings and profits,the accumulation was not for the reasonable needs of thebusiness and the penalty tax would apply . (Cyanamid Philippines,Inc. v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn citing Mertens)

36. Under the “2 to 1” rule, the ratio of current assets tocurrent liabilities is used to determine the sufficiency of workingcapital. Ideally, the working capital should equal the currentliabilities and there must be 2 units of current assets for everyunit of current liability, hence the so-called “2 to 1” Rule.(Cyanamid Philippines, Inc. v. Court of Appeals, et al., G.R. No.108067, January 20, 2000 citing Manila Wine Merchants, Inc. v.Commissioner of Internal Revenue in turn citing Mertens)

37. The “Bardahl” formula allows retention as workingcapital reserve, sufficient amounts of liquid assets to carry thecompany through one operating cycle. The formula requires anexamination of whether the taxpayer has sufficient liquid assetsto pay all its current liabilities and any extraordinary expensesreasonably anticipated, plus enough to operate the businessduring one operating cycle. (Cyanamid Philippines, Inc. v. Court of

Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila WineMerchants, Inc. v. Commissioner of Internal Revenue in turn citingMertens)

38. Although the “Bardahl” formula is well-establishedand routinely applied by the courts, it is not a precise rule. It isused only for administrative convenience. (Cyanamid Philippines,Inc. v. Court of Appeals, et al., G.R. No. 108067, January 20, 2000 citing Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue in turn citing Mertens)

39. The operating cycle is the period of time it takes toconvert cash into raw materials, raw materials into inventory,and inventory into sales, including the time it takes to collectpayment for the sales. There are variations in the application of the “Bardahl” formula, such as average operating cycle or peakoperating cycle. In times when there is no recurrence of abusiness cycle, the working capital needs cannot be predictedwith accuracy. (Cyanamid Philippines, Inc. v. Court of Appeals,et al., G.R. No. 108067, January 20, 2000 citing Manila WineMerchants, Inc. v. Commissioner of Internal Revenue in turn citingMertens)

40. The two (2) principal accounting methods for recognition of income are the (a) accrual method; and the (b)cash method.

41. Under the accrual method of accounting, incomeis reportable when all the events have occurred that fix thetaxpayer’s right to receive the income, and the amount can bedetermined with reasonable accuracy. Thus it is the right toreceive income, and not the actual receipt, that determineswhen to include the amount in gross income. (Filipinas Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377,

October 12, 1999)

42. The requisites of the accrual method of incomerecognition:

a. That the right to receive the income must be valid,unconditional and enforceable, i.e. not contingent upon futuretime;

b. The amount must be reasonably susceptible of accurate estimate; and

c. There must be a reasonable expectation that theamount will be paid in due course. (Filipinas Fiber Corporation v.

24



Court of Appeals, et al., G.R. Nos. 118498 & 124377, October 12,1999)

43. Under the cash method income is to be construedas income for tax purposes only upon actual receipt of the cashpayment. It is also referred to as the “cash receipts anddisbursements method” because both the receipt and

disbursements are considered. Thus, income is recognized onlyupon actual receipt of the cash payment but no deductions areallowed from the cash income unless actually disbursed throughan actual payment in cash.

44. The other methods of accounting are (a) thecompletion of contract basis (not recognized under the NIRC of 1997); (b) the percentage of completion method; and (c) theinstallment method.

45. The installment basis is a method consideredwhen collections extend over relatively long periods of time andthere is a strong possibility that full collection will not be made. As customers make installment payments, the seller recognizesthe gross profit on sale in proportion to the cash collected.(Chapter II, Accounting Methods, Handbook on Audit Procedures andTechniques – Volume I, Revision 2000, pp. 3-4)

46. The fringe benefits tax is a final withholding taximposed on the grossed-up monetary value of fringe benefitsfurnished, granted or paid by the employer to the employee,except rank and file employees. [1st par., Sec. 2.33 (A), Rev. Regs.No. 3-98]

47. For purposes of taxation, fringe benefit meansany good, service, or other benefit furnished or granted incash or in kind by an employer to an individual employee(except rank and file employees), such as but not limited to:

a. Housing;b. Expense account;c. Vehicle of any kind;d. Household personnel, such as maid, driver and others;e. Interest on loan at less than market rate to the extent

of the difference between the market rate and actual rate

granted;

f. Membership fees, dues and other expenses borne bythe employer for the employee in social and athletic clubs or other similar organizations;

g. Expenses for foreign travel;h. Holiday and vacation expenses;i. Educational assistance to the employee or his

dependents; and

j. Life or health insurance and other non-life insurancepremiums or similar amounts in excess of what the law allows.[Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

48. Fringe benefits that are not subject to the fringebenefits tax:

a. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer;or

b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of 1997; 1st par., Sec.2.33 (A), Rev. Regs. No. 3-98]

c. Fringe benefits which are authorized and exemptedfrom income tax under the Tax Code or under any special law;

d. Contributions of the employer for the benefit of theemployee to retirement, insurance and hospitalization benefitplans;

e. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and

f. De minimis benefits as defined in the rules andregulations to be promulgated by the Secretary of Finance uponrecommendation of the Commissioner of Internal Revenue. [1st

par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]

49. De minimis benefits are facilities and privileges(such as entertainment, medical services, or so-called “courtesydiscounts” on purchases), furnished or offered by an employer tohis employees. They are not considered as compensationsubject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merelyas a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 asamended by Rev. Regs. No. 8-2000]

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50. The following shall be considered as de minimisbenefits not subject to withholding tax on compensationincome of both managerial and rank and file employees:

a. Monetized unused vacation leave credits of employeesnot exceeding ten (10) days during the year;

b. Medical cash allowance to dependents of employeesnot exceeding P750.00 per employee per semester or P125 per

month;c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice

per month amounting to not more than P1,000.00;d. Uniforms and clothing allowance not exceeding

P3,000.00 per annum;e. Actual yearly medical benefits not exceeding

P10,000.00 per annum;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 atangible persona property other than cash or gift certificate, with

an annual monetary value not exceeding P10,000.00 receivedby an employee under an established written plan which doesnot discriminate in favor of highly paid employees;

h. Gifts given during Christmas and major anniversarycelebrations not exceeding P5,000 per employee per annum;

i. Flowers, fruits, books, or similar items given toemployees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and

j. Daily meal allowance for overtime work not exceedingtwenty five percent (25%) of the basic minimum wage.

The amount of de minimis benefits conforming to the

ceiling herein prescribed shall not be considered in determiningthe P30,000 ceiling of “other benefits” provided under Section 32(B)(7)(e) of the Code. However, if the employer pays more thanthe ceiling prescribed by these regulations, the excess shall betaxable to the employee receiving the benefits only if suchexcess is beyond the P30,000.00 ceiling, provided, further, thatany amount given by the employer as benefits to its employees,whether classified as de minimis benefits or fringe benefits, shallconstitute as deductible expense upon such employer . [Sec.2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

51. Income subject to “final tax” refers to an incomecollected through the withholding tax system.

The payor of the income withholds the tax and remits it tothe government as a final settlement of the income tax as a finalsettlement of the income tax due on said income. The recipientis no longer required to include the income subjected to a finaltax as part of his gross income in his income tax return.

52. Two examples of income subject to final tax areinterest from bank deposits and royalties.

53. Stock dividends are unrealized gains and cannot besubject to income tax until the gains have been realized. Beforerealization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not yetsubject to income tax. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)

54. Distinguish exclusions from deductions.SUGGESTED ANSWER:a. Exclusions from gross income refer to a flow of

wealth to the taxpayer which are not treated as part of grossincome for purposes of computing the taxpayer’s taxableincome, due to the following reasons: (1) It is exempted by thefundamental law; (2) It is exempted by statute; and (3) It doesnot come within the definition of income (Sec. 61, Rev. Regs. No.

2) WHILE deductions are the amounts which the law allows tobe subtracted from gross income in order to arrive at netincome.

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 WHILEdeductions are something spent or paid in earning grossincome.

An example of an exclusion from gross income are lifeinsurance proceeds, and an example of a deduction are losses.

55. What are excluded from gross income ?

SUGGESTED ANSWER:

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a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a singlesum or otherwise.

b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of theterm mentioned in the contract, or upon surrender of the

contract.c. Value of property acquired by gift, bequest, devise, or

descent.d. Amounts received, through accident or health

insurance or Workmen’s Compensation Acts as compensationfor personal injuries or sickness, plus the amounts of anydamages received on whether by suit or agreement on accountof such injuries or sickness.

e. Income of any kind to the extent required by any treatyobligation binding upon the Government of the Philippines.

f. Retirement benefits received under Republic Act No.

7641. Retirement received from reasonable private benefit planafter compliance with certain conditions. Amounts received for beyond control separation. Foreign social security, retirementgratuities, pensions, etc. USVA benefits, SSS benefits andGSIS benefits.

56. What are the conditions for excluding

retirement benefits from gross income, hence tax-exempt ? SUGGESTED ANSWER:a. Retirement benefits received under Republic Act No.

7641 and those received by officials and employees of private

firms, whether individual or corporate, in accordance with theemployer’s reasonable private benefit plan approved by the BIR.b. Retiring official or employee

1) In the service of the same employer for at leastten (10) years;

2) Not less than fifty (50) years of age at time of retirement;

3) Availed of the benefit of exclusion only once.[Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of theprivilege under the retirement plan of the same or another employer . [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]

57. Separation (retirement) pay excluded from

gross income, hence tax-exempt:a. Any amount received by an official, employee or by his

heirs,b. From the employer c. As a consequence of separation of such official or

employee from the service of the employer because of 1) Death, sickness or other physical disability; or

2) For any cause beyond the control of saidofficial or employee [Sec. 32 (B) (6) (b), NIRC of 1997], suchas retrenchment, redundancy and cessation of business.[1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]

58. Prizes that are excluded from gross income,

hence not taxable:a. Prizes and awards made primarily in recognition of

religious, charitable, scientific, educational, artistic, literary, or

civic achievement but only if 1) The recipient was selected without any actionon his part to enter the contest or proceeding; and

2) The recipient is not required to render substantial future services as a condition to receiving theprize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]

b. All prizes and awards1) Granted to athletes2) In local and international sports tournaments and

competitions3) Whether held in the Philippines or abroad, and4) Sanctioned by their national sports associations

[Sec. 32(B) {7} {d}, NIRC of 1997], which per BIR ruling isaccreditation with the Philippine Olympic Committee.Note that the exemption refers only to amateur sports.For professional boxing, a special law grants theexemption not the NIRC.

59. Only resident citizens and resident alien individualsare allowed to deduct the optional standard deduction on their gross income other than passive or compensation income.

Nonresident individuals, estates, trusts or corporations arenot allowed to avail of this deduction.

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60. Itemized deductions from gross income and

who may avail:a. Ordinary and necessary trade, business or

professional expenses.b. The amount of interest paid or incurred within a

taxable year on indebtedness in connection with the taxpayer’s

profession, trade or business.Resident citizens, resident alien individuals and

nonresident alien individuals who are engaged in trade andbusiness, on their gross incomes other from compensationincome are allowed to deduct these expenses. Domesticcorporations, estates and trusts may also deduct this expense.Nonresident citizens and foreign corporations on their grossincomes from within may also deduct this expense.

Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct thisexpense.

c. Taxes paid or incurred within the taxable year inconnection with the taxpayer’s profession.Resident citizens, resident alien individuals and


Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this

expense.d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.

Resident citizens, resident alien individuals andnonresident alien individuals who are engaged in trade andbusiness, on their gross incomes other from compensationincome are allowed to deduct these expenses. Domesticcorporations, estates and trusts may also deduct this expense.Nonresident citizens and foreign corporations on their grossincomes from within may also deduct this expense.


e. Bad debts due to the taxpayer, actually ascertainedto be worthless and charged off within the taxable year,connected with profession, trade or business, not sustainedbetween related parties.



f. Depreciation or a reasonable allowance for the

exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business.Resident citizens, resident alien individuals and



expense.g. Depletion or deduction arising from the exhaustion of a non-replaceable asset, usually a natural resource.


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h. Charitable and other contributions. Residentcitizens, resident alien individuals and nonresident alienindividuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to

deduct these expenses. Domestic corporations, estates andtrusts may also deduct this expense. Nonresident citizens andforeign corporations on their gross incomes from within mayalso deduct this expense.


i. Research and development expenditures treated asdeferred expenses paid or incurred by the taxpayer inconnection with his trade, business or profession, not deductedas expenses and chargeable to capital account but not

chargeable to property of a character which is subject todepreciation or depletion.Resident citizens, resident alien individuals and



expense. j. Contributions to pension trusts. Resident citizens,resident alien individuals and nonresident alien individuals whoare engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct theseexpenses. Domestic corporations, estates and trusts may alsodeduct this expense. Nonresident citizens and foreigncorporations on their gross incomes from within may also deductthis expense.


k. Insurance premiums for health and hospitalization.Resident citizens, resident alien individuals and nonresidentalien individuals who are engaged in trade and business, ontheir gross incomes other from compensation income areallowed to deduct these expenses. Nonresident citizens andnonresident alien individual engaged in trade or business in thePhilippine on their gross incomes from within may also deduct

these premiums.Nonresident alien individuals not engaged in trade or

business in the Philippines are not allowed to deduct thesepremiums.

l. Personal and additional exemptions. Residentcitizens, and resident alien on their gross incomes and fromcompensation income are allowed to deduct these premiums.Nonresident citizens on their gross incomes from within mayalso deduct this expense. Nonresident alien individualsengaged in trade or business in the Philippines are allowed todeduct these exemptions under reciprocity.


61. Extraordinary deductionsa. Those allowed to insurance companiesb. Deductions allowed to estates and trusts availing of

itemized deductions of income currently distributed tobeneficiaries.

c. Losses from wash sales of stocks or securities.d. Certain capital losses but only from capital gains.

62. Ordinary expenses distinguished from

capital expenditures. Ordinary expenses are those which arecommon to incur in the trade or business of the taxpayer WHILEcapital expenditures are those incurred to improve assets andbenefits for more than one taxable year. Ordinary expenses areusually incurred during a taxable year and benefits such taxableyear. Necessary expenses are those which are appropriate or helpful to the business.

63. What are the requisites for the

deductibility of business expenses ?

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SUGGESTED ANSWER: The following are the requisitesfor deductibility of business expenses:

a. Compliance with the business test:1) Must be ordinary and necessary;2) Must be paid or incurred within the taxable year;3) Must be paid or incurred in carrying on a trade or

business.

4) Must not be bribes, kickbacks or other illegalexpenditures

b. Compliance with the substantiation test. Proof byevidence or records of the deductions allowed by law includingcompliance with the business test.

64. What are the requisites for the

deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services ?

SUGGESTED ANSWER:

a. the expense must be ordinary and necessary;b. it must have been paid or incurred during thetaxable year dependent upon the method of accounting upon thebasis of which the net income is computed.

c. it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal Revenue v, Isabelacultural Corporation, G. R. No. 172231, February 12, 2007)

65. TMG Corporation issuing the accrual

method of accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Sincethe bills for legal and auditing services were received only in 2006 and paid in the same year, TMG deducted the samefrom its 2006 gross income. The BIR disallowed thededuction ?

Who is correct, TMG or BIR ? Explain. ANSWER: The BIR. TMG should have deducted the

professional and legal fees in the year they were incurred in2005 and not in 2006 because at the time the services wererendered in 2005, there was already an obligation to pay them.(Commissioner of Internal Revenue v, Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007)

NOTES:

a. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions.(Commissioner of Internal Revenue v, Isabela cultural Corporation, G.R. No. 172231, February 12, 2007)

b. Recognition of income and expenses under theaccrual method of accounting. Amounts of income accrue wherethe right to receive them becomes fixed, where there is created anenforceable liability. Liabilities, are incurred when fixed and

determinable in nature without regard to indeterminacy merely of timeof payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)

The accrual of income and expense is permitted when the all-events test has been met. (Ibid.)

c. All-events test. This test requires:1) fixing of a right to income or liability to pay; and2) the avai labi li ty of the reasonable accurate

determination of such income or liability.The test does not demand that the amount of such income or

liability be known absolutely, only that a taxpayer has at his disposalthe information necessary to compute the amount with reasonable

accuracy.The all-events test is satisfied where computation remainsuncertain; if its basis is unchangeable, the test is satisfied where acomputation may be unknown, but is not as much as unknowable,within the taxable year. The amount of liability does not have to bedetermined exactly,; it must be determined with “reasonable accuracy”implies something less than an exact or completely accurate amount.

The propriety of an accrual must be judged by the fact that ataxpayer knew, or could reasonably be expected to have known, at theclosing of its books for the taxable year. Accrual method of accountingpresents largely a question of fact; such that the taxpayer bears theburden of proof of establishing the accrual of an item of income or deduction. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)

66. Advertising expenses not designed to stimulate thefuture sale of merchandise are not deductible These areexpenditures in order to create or maintain some form of goodwill. These expenditures are to be spread over areasonable period of time because they are considered that acapital asset which has a determinable life has been acquired.(General Foods [Phils.], Inc. v. Commissioner of Internal Revenue, CTACase No. 4386, February 8, 1994)

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67. Expenses incurred to create a favorable image

for the corporation to generate sales of its shares of stockconstitute capital investment because the particular advertisingexpense was incurred in relation to the capital asset or equity of the company (Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 102 SCRA 246 ),

and are to be capitalized or spread over a reasonable period.

68. Requisites of deductibility of “Entertainment,

Amusement and Recreation Expenses:a. It must be a reasonable allowance for entertainment,

amusement and recreation expenses [Sec. 34 (A) (1) (iv), NIRC of 1997];

b. It must be paid or incurred during the taxable year;c. It must be

1) directly connected to the development,management and operation of the trade, business or profession of the taxpayer, or

2) directly related to or in furtherance of the conductof its trade, business or exercise of a profession;d. It must not be contrary to law, morals, good customs,

public policy or public order;e. It must not have been paid, directly or indirectly, to an

official or employee of the national government, or any localgovernment unit, or of any government-owned or controlledcorporation (GOCC), or of a foreign government, or to a privateindividual, or corporation, or general professional partnership(GPP), or a similar entity, if it constitutes a bribe, kickback or other similar payment;

f. It must be duly substantiated by adequate proof. Theofficial receipts, or invoices, or bills or statements of accountsshould be in the name of the taxpayer claiming the deduction;and

g. The appropriate amount of withholding tax, if applicable, should have withheld therefrom and paid to theBureau of Internal Revenue. (Sec. 4, Rev. Regs. No. 10-2002)

i. It must conform to the following ceilings:1) in an amount equivalent to the actual

entertainment, amusement and recreation expense paidor incurred within the taxable year by the taxpayer,

2) but in no case shall such deduction exceed0.50 percent (.5%) of net sales (i.e. gross sales lesssales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or

3) 1.00 percent (1%) of net revenue (i.e.,gross revenue less discounts) for taxpayers engaged insale of services, including exercise of profession and use

or lease of properties.4) However, if the taxpayer is deriving incomefrom both sale of goods/properties and services, theallowable entertainment, amusement and recreationexpense shall in all cases be determined based on anapportionment formula taking into consideration thepercentage of the net sales/net revenue to the total netsales/net revenue, but which in no case shall exceed themaximum percentage ceiling. (Sec. 5, Ibid.)

69. Who are allowed to deduct entertainment,

amusement and recreation expenses:a. Individuals engaged in trade or business, includingtaxable estates and trusts;

b. Individuals engaged in the practice of profession;c. Domestic corporations;d. Resident foreign corporations;e. General professional partnerships.

70. Entertainment, Amusement and RecreationExpenses, include “representation expenses and/or depreciationor rental expense relating to entertainment facilities.” (1st par.,Sec. 2, Rev. Regs. 110-2002)

71. Representation expenses, shall “refer to expensesincurred by a taxpayer in connection with the conduct of histrade, business or exercise of profession, in entertaining,providing amusement and recreation to, or meeting with a guestor guests at a dining place, place of amusement, country club,theater, concert, play, sporting event, and similar events or places.” (2nd par., Sec. 2, Rev. Regs. 10-2002)

Representation expenses “shall not refer to fixedrepresentation allowances that are subject to withholding tax onwages pursuant to appropriate revenue regulations.” (Ibid.)

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72. Club dues, when fringe benefits and whenrepresentation expenses. “In the case particularly of a country,golf, sports club, or any other similar club where the employeeor officer of the taxpayer is the registered member and theexpenses incurred in relation thereto are paid for by thetaxpayer, there shall be a presumption that such expenses arefringe benefits subject to fringe benefits tax unless the taxpayer

can prove that these are actually representation expenses. For purpose of proving that the said expense is a representationexpense and not fringe benefits, the taxpayer should maintainreceipts and adequate records that indicate

a) the amount of expenseb) date and place of expensec) purpose of expensed) professional or business relationship of expensed) professional or business relationship of expensee) name of person and company entertained with con-tact

details.” (2nd par., Sec. 2, Rev. Regs. 10-2002)

73. Dues paid by company officers to any one clubdeductible by employer as business expense but not asrepresentation or entertainment:

a. Dues paid to any one social, athletic, or sporting club or organization per officer may be deductible as a businessexpense. However, purchase of proprietary shares and playingrights and expenses in the said club or organization may bedeductible only if said expense complies with the rules onsubstantiation. Dues on company membership constitutedeductible expense. (No. 3.4.2, RAMO No. 1-87)

b. Dues or fees paid to professional or businessorganizations and civic clubs such as Lions, Rotary, Kiwanisshall be deductible to the employer to the extent of one club. (No.3.4.3, RAMO No. 1-87)

The above provisions of RAMO No. 1-87 are to be read inrelation to the provisions of Rev. Regs. No. 10-2002. If considered as a fringe benefit subject to the fringe benefits taxunder Sec. 33, NIRC of 1997, may be deductible from theemployer's gross income.

74. Entertainment facilities shall “refer to (1) a yacht,vacation home or condominium; and 2) any similar item of real

or personal property used by the taxpayer primarily for the

entertainment, amusement, or recreation of guests or employees. To be considered an entertainment facility, suchyacht, vacation home or condominium, or item of real or personal property must be owned or form part of the taxpayer’strade, business or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or rental expense. Ayacht shall be considered an entertainment facility if its use is in

fact not restricted to specified officers or employees or positionsin such a manner as to make the same a fringe benefit for purposes of imposing the fringe benefits tax.” (4th par., Sec. 2,Rev. Regs. 10-2002)

75. Guests shall mean “persons or entities with which thetaxpayer has direct business relations, such as but not limitedto, clients/customers or prospective clients/customers. Theterm shall not include employees, officers, partners, directors,stockholders, or trustees of the taxpayer.” (last par., Sec. 2, Rev.Regs. No. 10-2002)

77. Expenses not considered as entertainment,amusement and recreational expenses:

a. Expenses which are treated as compensation or fringebenefits for services rendered under an employer-employeerelationship;

b. Expenses for charitable or fund raising events;c. Expenses for bona fide business meeting of stock-

holders, partners or directors;d. Expenses for attending or sponsoring an employee to a

business league or professional organizational meeting;e. Expenses organized for promotion, marketing and

advertising including concerts, conferences, seminars,workshops, conventions, and other similar events;

f. Other expenses of similar nature.Notwithstanding the foregoing such items of exclusions

may, nonetheless qualify as items of deduction under Section 34of the Tax Code of 1997, subject to conditions for deductibilitystated therein. (Sec. 3, Rev. Regs. No. 10-2002)

78. Reimbursements for expenses relating toentertainment shall be deductible by the employer if

a. Used primarily for the furtherance of employer’s trade

or business

32



b. Only to the extent allowable, the same is directlyrelated to the active conduct of the employer’s trade or businessand

c. Subject to the rule of substantiation.. (No. 3.4.1, RAMONo. 1-87)

If considered as a fringe benefit subject to the fringebenefits tax under Sec. 33, NIRC of 1997, may be deductible

from the employer's gross income. Refer to previous discussionfor limitations.

79. Representation expenses fall under the category of business expenses which are allowable deductions, if they areordinary and necessary; paid or incurred in carrying on a tradeor business; and they are reasonable. (Zamora v. Col. of Int.Revenue, 8 SCRA 163 cited in Paramount Insurance Corporation v.Commissioner of Internal Revenue, CTA Case No. 4844,. June 7,1996)

If treated as a fringe benefit, subject to the fringe benefitstax under Sec. 33, NIRC of 1997, it may be allowed as a

deduction from the employer's gross income.

80. Representation expenses not supported by officialreceipts should be disallowed. Mere receipts when signed bythe company officers themselves are not sufficient, for while theymay show that they received the amount from the company,they do not prove payment of the alleged representationexpenses to the entity in which the same were incurred.Furthermore, the absence of invoices receipts or vouchers,particularly lack of proof of the items constituting the expense isfatal to the allowance of the deduction. (Paramount Insurance

Corporation v. Commissioner of Internal Revenue, CTA Case No.4844, June 7, 1996 citing Collector of Internal Revenue v. Goodrich Int.Rubber Co., 21 SCRA 1336 and Gancayco v. Collector of Internal Revenue, 1 SCRA 980)

81. Preferred shares are considered capital

regardless of the conditions under which such shares areissued and dividends or “interests” paid thereon are notallowed as deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71)

82. In addition to the expenses allowable as deductions aprivate educational institution, may at its option elect either:

a. To deduct expenditures otherwise considered ascapital outlays of depreciable assets incurred during the taxableyear for the expansion of school facilities, or

b. To deduct allowance for depreciation thereof . [Sec. 34(A) (2), NIRC of 1997]

83. Financial statements audited by in dependent externalauditors constitute the normal method of proof of the profit andloss performance of a company. A comparative statement of revenue and expenses for two years, by itself, is not conclusiveproof of serious business losses. (Bogo-Medellin SugarcanePlanters Association, Inc. v. NLRC, et al., 296 SCRA 108, 121)

84. Bad debts are those which result from the

worthlessness or uncollectibility, in whole or in part, of amountsdue the taxpayer by others, arising from money lent or fromuncollectible amounts of income from goods sold or servicesrendered. (Sec. 2.a, Rev. Regs. 5-99)

85. The following are related parties:

a. Members of the same family. The family of anindividual shall include only his brothers and sisters (whether bythe whole or half-blood), spouse, ancestors, and linealdescendants;

b. An individual and a corporation more than fifty percent(50%) in value of the outstanding stock of which is owned,directly or indirectly, by or for such individual;

c. Two corporations more than fifty percent (50%) in value

of the outstanding stock of which is owned, directly or indirectly,by or for the same individual;

d. A grantor and a fiduciary of any trust; or e. The fiduciary of a trust and the fiduciary of another trust

if the same person is a grantor with respect to each trust; or f. A fiduciary of a trust and a beneficiary of such. [Sec. 36

(B), NIRC of 1997]

86. Requisites for valid deduction of bad debts

from gross income:

33



a. There must be an existing indebtedness due to thetaxpayer which must be valid and legally demandable;

b. The same must be connected with the taxpayer’strade, business or practice of profession;

c. The same must not be sustained in a transactionentered into between related parties;

d. The same must be actually charged off the books of

accounts of the taxpayer as of the end of the taxable year; ande. The debt must be actually ascertained to beworthless and uncollectible during the taxable year;

f. The debts are uncollectible despite diligent effortexerted by the taxpayer . [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev.Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; PhilippineRefining Corporation v. Court of Appeals, et al., 256 SCRA 667 ]

g. Must have been reported as receivables in the incometax return of the current or prior years. (Sec. 103, Rev. Regs. No.2):

87. Reserve for bad debts are not deductible from gross

income because the debts have not yet been ascertained to bebad debts.

88. The value of worthless securities are not allowed tobe deductible from gross income because they are consideredas capital losses and may be deducted only from capital gains.

89. The “tax benefit rule” posits that the recovery of baddebts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income inthe year of such recovery to the extent of the income tax benefit

of said deduction.

90. If in the year the taxpayer claimed deduction of baddebts written-off, he realized a reduction of the income tax duefrom him on account of the said deduction, his subsequentrecovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

91. If the said taxpayer did not benefit from the deductionof the said bad debt written-off because it did not result to anyreduction of his income tax in the year of such deduction (i.e.

where the result of his business operation was a net loss even

without deduction of the bad debts written-off), then hissubsequent recovery thereof shall be treated as a mererecovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

92. Depreciation is the gradual diminution in the usefulvalue of tangible property resulting from ordinary wear and tear

and from normal obsolescence. The term is also applied toamortization of the value of intangible assets the use of which inthe trade or business is definitely limited in duration.

93. The methods of depreciation are the

following:a. Straight line method;b. Declining balance method;c. Sum of years digits method; andd. Any other method prescribed by the Secretary of

Finance upon the recommendation of the Commissioner of

Internal Revenue:1) Apportionment to units of production;2) Hours of productive use;3) Revaluation method; and4) sinking fund method.

93. What are personal and additional exemptions ? SUGGESTED ANSWER: These are the theoretical

persona, living and family expenses of an individual allowed tobe deducted from the gross or net income of an individualtaxpayer.

These are arbitrary amounts which have been calculatedby our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status andadditional qualified dependents of the taxpayer. They are fixedamounts in the sense that the amounts have beenpredetermined by our lawmakers and until our lawmakers makenew adjustments on these personal exemptions, the amountsallowed to be deducted by a taxpayer are fixed aspredetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citingMadrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418(1918)]

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94. The shares of the corporation are considered as

capital assets where the holder is not a dealer in securities.Where the shares are not listed and traded in the stockexchange the holder shall be subject to the capital gains tax, of ½ of 1% of the gross selling price, which is an income tax.

95. Capital assets shall refer to all real properties

held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real propertiesconsidered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)

96. The term “capital assets” means property held

by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE:

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 whichis subject to the allowance for depreciation; or real propertyused in the trade or business of the taxpayer . [Sec. 39 (A) (1),NIRC of 1997, capitalized words, numbering and arrangementsupplied; Sec. 2.a, Rev. Regs. No. 7-2003]

97. The statutory definition of capital assets is negativein nature. If the asset is not among the exceptions, it is a capitalasset; conversely, assets falling within the exceptions areordinary assets. And necessarily, any gain resulting from thesale or exchange of an asset is a capital gain or an ordinary gaindepending on the kind of asset involved in the transaction.(Calasanz v. Commissioner of Internal Revenue, et al; 144 SCRA 664,669-670)

98. Examples of capital assets:

a. Stock and securities held by taxpayers other thandealers in securities;

b. Jewelry not used for trade and business;

c. Residential houses and lands owned and used assuch;

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)

g. “Real property used by an exempt corporation in itsexempt operations, such as a corporation included in theenumeration of Section 30 of the Code, shall not be consideredused for business purposes, and therefore considered as capitalasset.” (last sentence, 3rd par., Sec. 3.b, Rev. Regs. No. 7-2003)

h. “Real property, whether single detached, townhouse,or condominium unit, not used in trade or business as evidencedby a certification from the Barangay Chairman or from the headof administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available recordsof the Bureau of Internal Revenue, owned by an individualengaged in business, shall be treated as capital asset.” (lastpar., Sec. 3.b., Rev. Regs. No. 7-2003)

99. Ordinary assets shall refer to all real properties

specifically excluded from the definition of capital assets,namely:

a. Stock in trade of a taxpayer or other real property of akind which would properly be included in the inventory of ataxpayer if on hand at the close of the taxable year; or

b. Real property held by the taxpayer primarily for sale

to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e. buildings

and/or improvements), of a character which is subject to theallowance for depreciation; or

d. Real property used in trade or business of thetaxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)

100. Real properties acquired by banks throughforeclosure sales are considered their ordinary assets.However, banks shall not be considered as habitually engagedin the real estate business for purposes of determining the

35



applicable rate of withholding tax. (Sec. 2. b, Rev. Regs. No. 7-2003)

“A property purchased for future use in the business, eventhough this purpose is later thwarted by circumstances beyondthe taxpayer’s control, does not lose its character as an ordinaryasset. Nor does a mere discontinuance of the active use of theproperty change its character previously established as a

business property.” (last sentence, Sec. 3.a.4, Rev. Regs. No. 7-2003)

101. Examples of ordinary assets hence not capitalassets:

a. The machinery and equipment of a manufacturingconcern subject to depreciation;

b. The tractors, trailers and trucks of a hauling company;c. The condominium building owned by a realty

company the units of which are for rent or for sale;d. The wood, paint, varnish, nails, glue, etc. which are

the raw materials of a furniture factory;

e. Inherited parcels of land of substantial areas locatedin the heart of Metro Manila, which were subdivided into smaller lots then sold on installment basis after introducingcomparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable ;the employment of an attorney-in-fact for the purpose of developing, managing, administering and selling the lots; salesmade with frequency and continuity; annual sales income fromthe sales was considerable; and the heir was not a stranger tothe real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)

f. Inherited agricultural property improved by

introduction of good roads, concrete gutters, drainage andlighting systems converts the property to an ordinary asset. Theproperty forms part of the stock in trade of the owner, hence anordinary asset. This is so, as the owner is now engaged in thebusiness of subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)

102. Tax treatment of real properties that have been

transferred. Real properties classified as capital or ordinaryasset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The

classification of such property in the hands of the

buyer/transferee shall be determined in accordance with thefollowing rules:

a. Real property transferred through succession or donation to the heir or donee who is not engaged in the realestate business with respect to the real property inherited or donated, and who does not subsequently use such property intrade or business, shall be considered as a capital asset in the

hands of the heir or donee.b. Real property received as dividend by stockholderswho are not engaged in the real estate business and who notsubsequently use such real property in trade or business shallbe treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend isengaged in real estate business.

c. The real property received in an exchange shall betreated as ordinary asset in the hands of the transferee in thecase of a tax-free exchange by taxpayer not engaged in realestate business to a taxpayer who is engaged in real estate

business, or to a taxpayer who, even if not engaged in realestate business, will use in business the property received in theexchange. (Sec. 3.f., Rev. Regs. No. 7-2003)

103. Factors considered as helpful guides in

determining whether asset is ordinary or capital:a. The purpose for which the property was initially

acquired;b. The purpose for which the property was subsequently

held;c. The extent to which the improvements, if any, were

made by the taxpayer;d. The frequency, number and continuity of sales;e. The extent and nature of the transactions involved;f. The ordinary business of the taxpayer;g. The extent of advertising, promotion, or other

activities used in soliciting buyers for the sale of the property;h. The listing of property, with brokers; andi. The purpose for which the property was held at the

time of sale. [Elumba, et al. v. The Honorable Commissioner of Internal Revenue, CTA Case No. 5103, August 16, 1996; Klarkowski,TCM 1965-328, affirmed 385 F. 2d (CA-7, 1967 )]

36



j. “Real properties acquired by banks through foreclosuresales are considered as their ordinary assets. However, banksshall not be considered as habitually engaged in the real estatebusiness for purposes of determining the application rate of withholding tax imposed” under Revenue Regulations. (last par.,Sec. 2.b, Rev. Regs. No. 7-2003)

104. “Monetary consideration or the presence or absence of profit in the operation of the property is notsignificant in the characterization of the property. So long as theproperty is or has been used for business purposes, whether for the benefit of the owner or nay of its members or stockholders, itshall be considered as an ordinary asset.” (1st and 2nd sentences,3rd par., Sec. 3.b., Rev. Regs. No. 7-2003)

105. Taxpayers engaged in the real estate businessshall refer collectively to real estate dealers, real estatedevelopers, and/or real estate lessors. (Sec. 2.g, Rev. Regs. No. 7-2003)

106. The term taxpayers not engaged in the real estatebusiness shall refer to persons other than real estate dealers,real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is toengage in the real estate business shall be deemed to beenengaged in the real estate business. (Sec. 2.g, Rev. Regs. No. 7-2003) 107. The tax is “imposed upon capital gains

presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines,classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997]Revenue Regulations No. 7-2003 has defined real property ashaving “the same meaning attributed to that term under Article415 of Republic Act No. 386, otherwise known as the ‘Civil Codeof the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003)

108. Property must be located in the Philippines for purposes of capital gains taxation. . [Sec. 24 (D) (1), NIRC of 1997]

109. Tax treatment where property is not located in thePhilippines. Gains realized from the sale, exchange, or other disposition of real property, not located in the Philippines,regardless of classification by resident citizens or domesticcorporations shall be subject to ordinary income taxation. [1st

sentence, Sec. 4.f., Rev. Regs. No. 7-2003; Sec. 24 (A) (1), or Sec. 27(A) or (E), all of the NIRC of 1997]

Such income may be exempt in the case of non-residentcitizens, alien individuals and foreign corporations. [1st sentence,Sec. 4.f., Rev. Regs. No. 7-2003; Sec. 23 (B), (D) and (F) of the NIRC of 1997]

110. Transactions covered by the presumed

capital gains tax on real property: a. sale,

b. exchange,c. or other disposition, including pacto de retro sales and

other forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997,numbering and arrangement supplied]

111. “Sale, exchange, or other disposition” includestaking by the government through condemnation proceedings.(Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v.Court of Tax Appeals, et al., 121 Phil. 861)

112. Transfers that may change the character of theclassification of real properties into ordinary or capital:

a. succession or donation;b. a dividend declaration; andc. exchange.

113. “Real property transferred through succession or donation to the heir or donor who is not engaged in the realestate business with respect to the real property inherited or donated, and who does not subsequently use such property intrade or business, shall be considered as a capital asset in thehands of the heir or donee.” (Sec. 3.f.1, Rev. Regs. No. 7-2003)

114. “Real property received as dividends by stockholderswho are not engaged in the real estate business and who do notsubsequently use such real property in trade or business shallbe treated as capital assets in the hands of the recipients even if

37



the corporation which declared the real property dividend isengaged in real estate business.” (Sec. 3.f.2, Rev. Regs. No. 7-2003, paraphrasing supplied)

115. “The real property received in an exchange

shall be treated as ordinary asset in the hands of thetransferee in the case of a tax-free exchange by taxpayer not

engaged in real estate business to a taxpayer who is engaged inreal estate business, or to a taxpayer who, even if not engagedin real estate business, will use in business the propertyreceived in the exchange.” (Sec. 3.f.3, Rev. Regs. No. 7-2003,paraphrasing supplied)

116. In the case of involuntary transfers of real properties,including expropriation or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such realproperty in the hands of the involuntary seller, either as capitalasset or ordinary asset as the case may be. (Sec. 3.g, Rev. Regs.No. 7-2003)

117. In case the mortgagor exercises his right of

redemption within one (1) year from the issuance of thecertificate of sale, in a foreclosure of mortgage sale of realproperty, no capital gains tax shall be imposed because nocapital gains has been derived by the mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]

118. In case of non-redemption of the property soldupon a foreclosure of mortgage sale, the presumed capital gains

tax shall be imposed, based on the bid price of the highestbidder but only upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No. 3135, asamended by Act No. 4118, and shall be paid within thirty (30)days from the expiration of the said one-year redemption period.[Sec. 3 (2), Rev. Regs. No. 4-99]

119. Real properties acquired by banks throughforeclosure sales are considered as their ordinary assets.However, banks shall not be considered as habitually engagedin the real estate business for purposes of determining the

application rate of withholding tax imposed” under RevenueRegulations. (last par., Sec. 2.b, Rev. Regs. No. 7-2003)

120. The basis for the final presumed capital gains tax

of six percent (6%) is whichever is the higher of the a. gross selling price, or

b. the current fair market value as determined below:

1) the fair market value or real properties locatedin each zone or area as determined by theCommissioner of Internal Revenue after consultationwith competent appraisers both from the private andpublic sectors; or

2) the fair market value as shown in theschedule of values of the Provincial and City Assessors.[Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. It is thetransaction that is taxed not the gain.

121. Holding period not applied to the taxation of thepresumed capital gains derived from the sale of real propertyconsidered as capital assets.

122. The tax liability, of individual taxpayers (not

corporate), if any, on gains from sales or other dispositions of real property, classified as capital assets, to the government or any of its political subdivisions or agencies or to governmentowned or controlled corporations shall be determined, at theoption of the taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions, then to the schedular tax[Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997 ]or the final presumed capital gains tax of six percent (6%). [Sec.24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

123. The interest at the legal rate on the value of expropriated land should be taxed as ordinary income, and notas capital gains. (Gonzales v. Court of Tax Appeals, et al., 121 Phil.861)

38



124. The seller of the real property, classified as a

capital asset, pays the presumed capital gains tax whether:a. an individual [Sec. 24 (D) (1), NIRC of 1997];

1) Citizen, whether resident or not [Ibid.];

2) Resident alien [Ibid.];3) Nonresident alien engaged in trade or business

in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1),

both of the NIRC of 1997];4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24(D) (1), both of the NIRC of 1997];

b. an estate or trust (Ibid.);c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]

125. The proceeds of sale of real property, classified ascapital assets, by foreign corporations shall be subject toordinary income taxation of whichever is higher between thereduced rate of 32% and the minimum corporate income tax[Sec. 28 (A) (1) (2) in relation to Sec. 27 (E), both of the NIRC of 1997]

126. In the instances where non-resident aliens arequalified to own real property in the Philippines (likecondominium units, or buildings, or other immovables as definedunder Art. 415 of Rep. Act No. 386, the Civil Code of thePhilippines), and these are considered as capital in character,they are to be subject to tax in the same manner as citizensand resident aliens. [Sec. 25 (A) (3) and Sec. 25 (B) in relation toSec. 24 (D), all of the NIRC of 1997]

127. Excepted from the payment of the presumed

capital gains tax are those presumed to have been realizedfrom the disposition by natural persons of their principalplace of residence

a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence;

b. within eighteen (18) calendar months from the dateof sale or disposition

c. the BIR Commissioner shall have been duly notifiedby the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and

d. the said tax exemption can only be availed of onceevery ten (10) years. [Sec. 24 (D) (2), NIRC of 1997]

128. Net loss carry-over means the deduction fromnet capital gains of a succeeding year the net capital losssuffered during the prior year. Net operating loss carry-over is the deduction from gross income for the next three (3)

consecutive taxable years following the year of such loss, theexcess of allowable deduction over the gross income. (Sec. 39[D], NIRC of 1997)

129. Distinctions between net loss carry-over and netoperating loss carry-over.

a. Source: The source of net loss carry-over arecapital losses only WHILE the source of net operating losscarry-over are from the ordinary trade and business of thetaxpayer.

b. Who may enjoy the carry-over: Only taxpayersother than corporations may enjoy net loss carry-over WHILE

only corporations may enjoy the net operating loss carry-over.(Sec. 39 [D], NIRC of 1997)

130. Concept of net loss carry-over. Any taxpayer,other than a corporation (individuals including trusts andestates), who sustains in any taxable year a net capital loss fromcapital transactions involving capital assets (other than realproperty or shares of stock not listed or traded in the stockexchange), is allowed to treat during the succeeding year suchnet capital loss as a loss from the sale or exchange of a capitalasset (other than real property or shares of stock not listed and

traded in the stock exchange), held for more than twelvemonths. (Sec. 39 [D], NIRC of 1997)

131. The equity investment by a bank in another corporation is capital in character, the loss of which could bedeductible only from capital gains, and not from any other income of the taxpayer . (China Banking Corporation v. Court of

Appeals, et al., G.R. No. 12508, July 19, 2000)

132. A capital gain or a capital loss normally requiresthe concurrence of two conditions for it to result:

a. There is a sale or exchange; and

39



b. The thing sold or exchanged is a capital asset.When securities become worthless there is strictly no sale

or exchange but the law deems the loss anyway to be “a lossfrom the sale or exchange of capital assets. (China Banking Corporation v. Court of Appeals, et al ., G.R. No. 12508, July 19, 2000)

133. Securities, defined for deductibility of bad debts areshares of stock in a corporation and rights to subscribe for or toreceive such shares. The term includes bonds, debentures,notes or certificates, or other evidence of indebtedness, issuedby any corporation, including those issued by a government or political subdivision thereof, with interest coupons or inregistered form. (Sec. 2.b, Rev. Regs. No. 5-99)

134. General rule: If securities, held as capital asset, areascertained to be worthless and charged off within the taxableyear, the loss resulting therefrom shall be considered as a lossfrom the sale or exchange of capital asset made on the last dayof such taxable year. The taxpayer, however, has to prove

through clear and convincing evidence that the securities are infact worthless. (Sec. 5, Rev. Regs. No. 5-99)

133. The above rule, however, is not true in the case of banks or trust companies incorporated under the laws of thePhilippines, a substantial part of whose business is the receipt of deposits. (Sec. 5, Rev. Regs. No. 5-99)

134. Is a mutual life insurance company which isconsidered as a cooperative required to register with theCooperatives Development Authority (CDA) before it could

avail of the exemptions from the payment of percentagetaxes under Sec. 121 and documentary stamps on policiesof insurance or annuities under Sec. 199 both of the NIRC ?

ANSWER: No. The Tax Code does not require a mutuallife insurance company to register with the CDA in order to enjoythe exemption. Only cooperatives to be formed or organizedunder the Cooperative Code require registration with the CDAand a mutual life insurance company is not one of them.Finally, not even the Insurance Code requires registration withthe CDA. (Republic , etc. v. Sunlife Assurance Company of Canada,G. R. No. 158085, October 14, 2005)

136. A final withholding tax (FWT) of 20% on passiveincome is collected from the interest income of banks. It likewise has to pay a 5% gross receipts tax (GRT) on grossreceipts which includes their passive income. XYZ Bank now claims that the GRT should be computed after deducting the 20% passive income tax on the ground that the monies or receipts that do not redound to the benefit of

the taxpayer are not part of its gross receipts. To imposethe GRT without deducting the 20% would be doubletaxation. It also contends that since the 20% was withheld at source and is paid directly to the government, then thebank has not received the same. Thus, it should not beincluded in the gross receipts subject to tax.

Resolve the issue of whether the 20% FWT on thebank’s passive income form part of the taxable grossreceipts for the purpose of computing the 5% GRT.

SUGGESTED ANSWER: No. The word “gross” must beused in its plain and ordinary meaning. It is defined as “whole,entire, total, without deduction.” Thus, the 20% should not bededucted for purposes of computing the 5% gross receipts tax.

Receipt may either be actual or constructive. There isprior to the withholding a constructive receipt of the interest,otherwise there would be no interest from where the 20% taxmay be withheld from.

There is no double taxation because there are two kindsof taxes, the 20% FWT which is an income tax and the 5% GRTwhich is a percentage tax. (Commissioner of Internal Revenue v.Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006and companion case)

NOTES AND COMMENTS:

a. Interest income, defined. Interest from bankdeposits and yield or any other monetary benefit from depositsubstitutes and from trust funds and similar arrangements androyalties. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companioncase)

b. Gross receipts, defined. The Tax Code has notprovided any definition for “gross receipts.” The word “gross” must beused in its plain and ordinary meaning. It is defined as “whole, entire,total, without deduction.” A common definition is “:without deduction,””Gross” is also defined as “taking in the whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or

40



specific parts.” Gross is the antithesis of net. (Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786,September 27, 2006 and companion case)

“Highly refined and technical tax concepts have been developedby the accountant and the legal technician primarily because of theimpact of federal income tax legislation. However, this in no wayshould affect or control the normal usage of words in the constructionof our statutes; and we see nothing that would require us not to

include the proceeds here in question in the gross receipts allocationunless statutorily such include is prohibited. Under the ordinary basicmethods of handling accounts, the term gross receipts, in the absenceof any statutory definition of the term, must be taken to include thewhole total gross receipts without any deductions. x x x”(Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc.,G. R. No. 139786, September 27, 2006 and companion case citingCommissioner of Internal Revenue v. Bank of Philippine Islands, G. R.No. 147375, June 26, 2006, 492 SCRA 551, in turn citing ChinaBanking Corporation v. Court of Appeals, G. R. No. 146749, June 10,2003, 403 SCRA 634, which cited the Supreme Court of Pennsylvaniain Commonwealth of Pennsylvania v. Koppers Company, Inc.)

c. Actual receipt of interest income, defined. Actualreceipt may either be physical receipt or constructive receipt.(Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc.,G. R. No. 139786, September 27, 2006 and companion case)

Actual receipt of interest income is not limited to physicalreceipt. When the depositary bank withholds the final tax to pay thetax liability of the lending bank, there is prior to the withholding aconstructive receipt by the lending bank of the amount withheld. Fromthe amount constructively received by the lending bank, the depositarybank deducts the final withholding tax and remits it to the governmentfor the account of the lending bank. Thus, the interest income actuallyreceived by the lending bank, both physically and constructively, is thenet interest plus the amount withheld as final tax.

The concept of withholding tax on income obviously andnecessarily implies that the amount of the tax withheld comes from theincome earned by the taxpayer. Since the amount of the tax withheldconstitute income earned by the taxpayer, then that amount manifestlyforms part of the taxpayer’s gross receipts. Because the amountwithheld belongs to the taxpayer, he can transfer its ownership to thegovernment in payment of his tax liability. The amount withheldindubitably comes from the income of the taxpayer, and thus formspart of his gross income. (Commissioner of Internal Revenue v.Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006and companion case citing Commissioner of Internal Revenue v. Bank of Commerce, G. R. No. 1`49636, June 8, 2005, 459 SCRA 638)

d. Commissioner of Internal Revenue v. ManilaJockey Club, 108 Phil. 821 (1960) is different from Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case. Manila Jockey Club paid amusement taxes on itscommission in the total amount of bets called wager funds and did notinclude the 5½% of the fund which went to the Board on Races and tothe owners of horses and jockeys. The Supreme Court rules that thegross receipts of Manila Jockey Club should not include the 5½%because although delivered to the Club, such money has beenespecially earmarked by law or regulation for other persons.

Manila Jockey does not apply because what happened therewas earmarking and not withholding. Earmarking is not the same aswithholding. Amounts earmarked do not form part of gross receiptsbecause these are by law or regulation reserved for some personother than the taxpayer, although delivered or received. On thecontrary, amounts withheld form part of gross receipts because thereare in constructive possession and not subject to any reservation, thewithholding agent being merely a conduit in the collection process.(Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc.,

G. R. No. 139786, September 27, 2006 and companion case)e. There are distinctions between the 20% FWT on

interest income and the 5% GRT on banks. Since the twoare different there is no double taxation.

1) FWT is an income tax under Title II of the Code(Tax on Income) while GRT is a percentage tax under Title V of the Tax Code.

2) Percentage tax is a national tax measured by acertain percentage of the gross selling price or gross value inmoney of goods sold, bartered or imported; or of the grossreceipts or earnings derived by any person engaged in the saleof services while an income tax is a national tax imposed on the

net or gross income realized in a taxable year.3) Income tax is subject to withholding while

percentage is not. (Commissioner of Internal Revenue v.Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case)

122. MBC was incorporated in 1961 and engaged incommercial banking operations since 1987. On May 22,1987, it ceased operations that year by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. On June

41



23, 1999, the BSP authorized MBC to operate as a thrift bank.

In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with theminimum corporate income tax (MCIT). It sought the BIR’sruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999.

BIR then ruled that cessation of business activities as aresult of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT.

As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIR’s inaction, MBC filed a petition for review with the CTA.

The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a volte facie theBIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not close its businessoperations in 1987 but merely suspended the same. Even if placed under receivership, the corporate existence wasnever affected. Thus, it falls under the category of anexisting corporation recommencing its banking operations.

Should the refund be granted ? SUGGESTED ANSWER: Yes. The MCIT shall be

imposed beginning in the fourth taxable year immediatelyfollowing the year in which the corporation commenced itsbusiness operations. [Sec. 27 (E) (1), NIRC of 1997]

The date of commencement of operations of a thrift bankis the date it was registered with the SEC or the date when theCertificate of Authority to Operate was issued to it by theMonetary Board, whichever comes later. (Sec. 6, Rev. Regs. No.4-95)

Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by the BSP tooperate as a thrift bank before the MCIT should be applied to it.(Manila Banking Corporation v. Commissioner of Internal Revenue, G.R. No. 168118, August 26, 2006)

NOTES AND COMMENTS:a. The MCIT and when should be imposed and the

four (4) year grace period. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year,

as defined herein, is hereby imposed on a corporation taxable under

this Title, beginning on the fourth taxable year immediately followingthe year in which such corporation commenced its businessoperations, when the minimum corporate income tax is greater thanthe tax computed under Subsection (A) of this section for the taxableyear.” [Sec. 27 (E) (1), NIRC of 1997]

b. Period when a corporation becomes subject tothe MCIT. “(5) Specific rules for determining the period when acorporation becomes subject to the MCIT (minimum corporate income

tax) -For purposes of the MCIT, the taxable year in which business

operations commenced shall be the year in which the domesticcorporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier yearsshall be covered by the MCIT beginning January 1, 1998. x x x” (Rev.Regs. No. 9-98)

Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev. Regs.No. 9-98 because Rev. Regs. No. 4-95 specifically refers to thriftbanks.)

c. Purpose of the four (4) year grace period. The

intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations.Corporations still starting their business operations have to stabilizetheir venture in order to obtain a stronghold in the industry. It does notcome as a surprise then when many companies reported losses intheir initial years of operations.

Thus, in order to allow new corporations to grow and develop atthe initial stages of their operations, the lawmaking body saw the needto provide a grace period of four years from their registration beforethey pay their minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,

August 26, 2006)

TRANSFER TAXES

1. The gross estate for purposes of estate taxation

of Filipino citizens, whether residents or nonresidents andresident alien includes the value at the time of his death of all hisreal property, wherever situated, personal property, whether tangible, intangible or mixed, wherever situated, to the extent of the interest existing therein of the decedent at the time of hisdeath.

42



2. The gross estate for purposes of estate

taxation of non-resident aliens includes the value at the time of his death of all the real property situated in the Philippines,personal property whether tangible, intangible or mixed, situatedin the Philippines, to the extent of the interest therein of thedecedent at the time of his death.

3. Items deductible from the gross estate of aresident or nonresident Filipino decedent or resident aliendecedent:

a. Expenses, losses, claims, indebtedness and taxes;b. Property previously taxed;c. Transfers for public use;d. The Family Home up to a value not exceeding P1

million;e. Standard deduction of P1 million;f. Medical expenses not exceeding P500,000.00;

g. Amount of exempt retirement received by the heirs

under Rep. Act Mo. 4917;h. Net share of the surviving spouse in the conjugalpartnership.4. The notarial fee paid for the extrajudicial settlement is

clearly a deductible expense since such settlement effected adistribution of the estate to his lawful heirs, Similarly, theattorney’s fees for a guardian of the property during thedecedent’s lifetime should also be considered as a deductibleadministration expense. The guardian gives a detailedaccounting of decedent’s property and gives advice as to theproper settlement of the estate, acts which contributed towards

the collection of decedent’s assets and the subsequentsettlement of the case. (Commissioner of Internal Revenue v.Court of Appeals, et al., G.R. No. 123206, March 22, 2000)

5. Judicial expenses are expenses of administration. Administration expenses, as an allowable deduction from grossestate of the decedent for purposes of arriving at the value of thenet estate, have been construed to include all expenses“essential to the collection of the assets, payment of debts or thedistribution of the property to the persons entitled to it.” In other words, the expenses must be essential to the proper settlementof the estate.

6. Not deductible are expenditures incurred for theindividual benefit of the heirs, devisees or legatees. Thus, inLorenzo v. Posadas, the Court construed the phrase “judicialexpenses of the testamentary or intestate proceedings” as notincluding the compensation paid to a trustee of the decedent’sestate when it appeared that such trustee was appointed for thepurpose of managing the decedent’s real property for the benefitof the testamentary heir. In another case, the Court disallowedthe premiums paid on the bond filed by the administrator as anexpense of administration since the giving of a bond is in thenature of a qualification for the office, and not necessary in thesettlement of the estate. Neither may attorney’s fees incident tolitigation incurred by the heirs in asserting their respective rightsbe claimed as a deduction from the gross estate. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 123206,March 22, 2000)

7. Not every inter-vivos transfer in anticipation of

death is considered “transfer in contemplation of death” for purposes of determining the property to be included in the grossestate of a decedent.

8. To be considered a “transfer in contemplation of

death” “the decedent has at any time made a transfer, by trustor otherwise, in contemplation of or intended to take effect inpossession or enjoyment at or after death” [Sec. 85 (B), NIRC of

1997]. It is clear that the properties are not transferred incontemplation of or intended to take effect in possession or enjoyment at or after death.

9. There is no transfer in contemplation of death if thereis no showing the transferor “retained for his life or for anyperiod which does not in fact end before his death: (1) thepossession or enjoyment of, or the right to the income from theproperty, or (2) the right, either alone or in conjunction with anyperson, to designate the person who shall possess or enjoy theproperty or the income therefrom.” [Sec. 85 (B), NIRC of 1997]

10. The approval of the court sitting in probate, or as

a settlement tribunal over the estate of the deceased is not a

43



mandatory requirement for the collection of the estate. Theprobate court is determining issues which are not against theproperty of the decedent, or a claim against the estate as such,but is against the interest or property right which the heir,legatee, devisee, etc. has in the property formerly held by thedecedent.

The notices of levy were regularly issued within the

prescriptive period.The tax assessment having become final, executory andenforceable, the same can no longer be contested by means of a disguised protest. (Marcos, II v. Court of Appeals, et al., 273SCRA 47)

11, When the donee or beneficiary is a stranger, the

tax payable by the donor shall be 30% of the net gifts.

12. For purposes of the donor’s tax, a stranger is

person who is not a:“(1) Brother, sister (whether by whole or half-blood),

spouse, ancestor and lineal descendant; or (2) Relative by consanguinity in the collateral line within

the fourth degree of relationship.” [Sec. 99 (B), NIRC of 1997]

13. The amount of P100,000.00 donated during a

calendar year is exempt from donor’s tax. [Sec. 99 (A), NIRC of 1997]

14. The donation of a prize to an athlete in aninternational sports tournament held abroad and sanctioned bythe national sports association is exempt from donor’s tax.

(Sec. 1, Rep. Act No. 7549)

15. A non-resident citizen or alien is exempt only from thepayment of donor’s taxes if his gifts are made to or for the useof the National Government or any entity created by any of itsagencies which is not conducted for profit, or to any politicalsubdivision of the said Government.

16. A non-resident citizen or alien is subject to donor’s taxwhere the gift is not made in favor of an educational and/or charitable, religious, cultural or social welfare corporation,

institution, foundation, trust or philanthropic organization or

research institution or corporation which does not use more than30% of the donation for administration purposes.

RETURNS AND WITHHOLDING

1. Income tax returns being public documents, untilcontroverted by competent evidence, are competent evidence,

are prima facie correct with respect to the entries therein.(Ropali Trading v. NLRC, et al., 296 SCRA 309, 317)

2. “Married individuals, whether citizens,resident or non-resident aliens, who do not derive incomepurely from compensation shall file a return for the taxableyear to include the income of both spouses, but where it isimpracticable for the spouses to file one return, each spousemay file a separate return of income but the returns so filed shallbe consolidated by the Bureau for purposes of verification.”[Section 51 (D) of the NIRC of 1997]

3. Individuals required to file an income tax return.a. Every Filipino citizen residing in the Philippines;b. Every Filipino citizen residing outside the Philippines

on his income from sources within the Philippines;c. Every alien residing in the Philippines on income

derived from sources within the Philippines; andd. Every nonresident alien engaged in trade or

business or in the exercise of profession in the Philippines. [Sec.51 (A) (1), NIRC of 1997]

4. Individuals who are not required to file an

income tax return.a. An individual whose gross income does not exceed

his total personal and additional exemptions for dependents,Provided, That a citizen of the Philippines and any alienindividual engaged in business or practice of profession withinthe Philippines shall file an income tax return regardless of theamount of gross income;

b. An individual with respect to pure compensationincome for services in whatever form paid, including, but notlimited to fees, salaries, wages, commissions, and similar items,derived from sources within the Philippines, the income tax on

which has been correctly withheld, Provided, That an individual

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deriving compensation concurrently from two or more employersat any time during the taxable year shall file an income taxreturn: Provided, further, That an individual whose purecompensation income derived from sources within thePhilippines exceeds Sixty thousand pesos (P60,000.00), shallalso file an income tax return;

c. An individual whose sole income has been subject

to final withholding tax;d. An individual who is exempt from income taxpursuant to the provisions of the NIRC of 1997, and other laws,general or special. [Sec. 51 (A) (2), NIRC of 1997]

5. An individual who is not required to file anincome tax return may nevertheless be required to file aninformation return. [Sec. 51 (A) (3), NIRC of 1997]

6. A corporation files its income tax return andpays its income tax four (4) times during a single taxableyear. Quarterly returns are required to be filed for the first three

quarters, then a final adjustment return is filed covering the totaltaxable income for the whole taxable year, be it calendar or fiscal.

7. An individual earning from the practice of hisprofession or who engages in trade or business files hisincome tax return and pays his income tax four (4) timesduring a single taxable year. Quarterly returns are required tobe filed for the first three quarters, then an annual income taxreturn is filed covering the total taxable income for the whole of the previous calendar year.

8. The purpose of the above four (4) times a

year requirement is to make available sufficient funds tomeet the budgetary requirements, on a quarterly basisthereby increasing government liquidity. It also eases hardshipson the part of individuals who are required to make this four timereturn. Thus, the taxpayer does not have to raise large sums of money in order to pay the tax.

9. An individual earning purely compensationincome files only one annual income tax return covering the

total taxable compensation income for the whole of the previouscalendar year.

10. Under the withholding tax system, taxes

imposed or prescribed by the NIRC of 1997 are to bededucted and withheld by the payors from payments madeto payees for the former to pay directly to the Bureau of

Internal Revenue. It is also known as collection of the tax atsource.

11. A withholding agent is explicitly madepersonally liable under the Tax Code for the payment of thetax required to be withheld, in order to compel the withholdingagent to withhold the tax under any and all circumstances. Ineffect, the responsibility for the collection of the tax as well asthe payment thereof is concentrated upon the person over whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377,

October 12, 1999) The system facilitates tax collection.

12. The two (2) types of withholding at source are the 1)final withholding tax; and 2) creditable withholding tax.

13. Under the final withholding tax system the

amount of income tax withheld by the withholding agent isconstituted as a full and final payment of the income duefrom the payee on the said income. [1st sentence, 1st par., Sec.2.57 (A), Rev. Regs. No. 2-98]

The liability for payment of the tax rests primarily on thepayor or the withholding agent.. Thus, in case of his failure to

withhold the tax or in case of under withholding, the deficiencytax shall be collected from the payor withholding agent. Thepayee is not required to file an income tax return for theparticular income.

14. Under the creditable withholding tax system,taxes withheld on certain income payments are intended toequal or at least approximate the tax due from the payeeon the said income. The income recipient is still required to filean income tax return and/or pay the difference between the taxwithheld and the tax due on the income. [1st and 2nd sentences,

Sec. 257(B), Rev. Regs. No. 2-98]

45



15. The two kinds of creditable withholding taxesare (a) taxes withheld on income payments covered by theexpanded withholding tax; and (b) taxes withheld oncompensation income.

NOTES AND COMMENTS:16. Payments to the following are exempt from the

requirement of withholding or when no withholding taxesrequired:

a. National Government and its instrumentalitiesincluding provincial, city, or municipal governments;

b. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

1) Sales of real property by a corporation which isregistered with and certified by the HLURB or HUDCC asengaged in socialized housing project where the sellingprice of the house and lot or only the lot does not exceedP180,000.00 in Metro Manila and other highly urbanizedareas and P150,000.00 in other areas or such adjustedamount of selling price for socialized housing as may later be determined and adopted by the HLURB;

2) Corporations registered with the Board of Investments and enjoying exemptions from income under the Omnibus Investment Code of 1997;

3) Corporations exempt from income tax under Sec. 30, of the Tax Code, like the SSS, GSIS, the PCSO,etc. However, income payments arising from any activitywhich is conducted for profit or income derived from realor personal property shall be subject to a withholding tax.

(Sec. 57.5, Rev. Regs. No. 2-98)

17. “A’ erroneously withheld the amount of 15%

from the selling price of books authored by “W” when thecorrect rate should have been 10% only. Since “W” is out of the country, “A” applied for a refund of the excesswithholding of 5%. May “A” properly apply for the refund ? Explain.

SUGGESTED ANSWER: Yes. In applications for refund,the withholding agent is a taxpayer because if he does not paythe tax shall be collected from him. (Commissioner of Internal

Revenue v. Procter & Gamble Philippine Manufacturing Corporation,

204 SCRA 377, 383-386),NOTES AND COMMENTS:a. For tax amnesty purposes, the withholding

agent is not a taxpayer because he is made to pay the tax wherehe fails to withhold as a penalty and not that the tax is due from him.(Commissioner of Internal Revenue v. Court of Appeals, et al ., G.R. No.108576, January 20, 1999, the Anscor case)

PENALTIES, INTERESTS AND SURCHARGES

1. What are surtaxes or surcharges ? SUGGESTED ANSWER: Surtaxes or surcharges, also

known as the civil penalties, are the amounts imposed inaddition to the tax required.

They are in the nature of penalties and shall be collectedat the same time, in the same manner, and as part of the tax.[Sec.248 (A), NIRC of 1997]

2. What are the two (2) kinds of civil penalties ? SUGGESTED ANSWER:a. the 25% surcharge for late filing or late payment

[Sec. 248 (A), NIRC of 1997] (also known as the delinquencysurcharge), and

b. the 50% willful neglect or fraud surcharge. [Sec. 248(B), Ibid.]

3. Define deficiency income tax.SUGGESTED ANSWER: Deficiency income tax is the

amount by which the tax imposed under the NIRC of 1997exceeds the amount shown as the tax due by the taxpayer uponhis return. [Sec. 56 (B) (1), NIRC of 1997]

4. Deficiency interest, defined. The interestassessed and collected on any unpaid amount of tax at the rateof 20% per annum or such higher rate as may be prescribed byregulations, from the date prescribed for payment until theamount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]

5. Delinquency interest, defined. The interestassessed and collected on the unpaid amount until fully paidwhere there is failure on the part of the taxpayer to pay the

46



amount die on any return required to be filed; or the amount of the tax due for which no return is required; or a deficiency tax, or any surcharge or interest thereon, on the date appearing in thenotice and demand by the Commissioner of Internal Revenue.[Sec.249 (c), NIRC of 1997]

6. After resolving the issues the BIR

Commissioner reduced the assessment. Was it proper toimpose delinquency interest despite the reduction of theassessment ? Why ?

ANSWER: Yes. The intention of the law is to discouragedelay in the payment of taxes due to the State and in this sensethe surcharge and interest charged are not penal butcompensatory in nature – they are compensation to the State for the delay in payment, or for the concomitant use of the funds bythe taxpayer beyond the date he is supposed to have paid themto the State. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)

7. Compromise penalty, defined. The amountagreed upon between the taxpayer and the Government to bepaid as a penalty in cases of a compromise.

8. As a result of divergent rulings on whether it issubject to tax or not, the taxpayer was not able to pay histaxes on time. Imposed surcharges and interests for suchdelay, the taxpayer not invokes good faith with the BIR countering by saying that good faith is not a valid defensefor violation of a special law. Furthermore, the BIR further raises the defense that the government is not bound by the

errors of its agents. Who is correct ? ANSWER: The taxpayer is correct. The settled rule is that

good faith and honest belief that one is not subject to tax on thebasis of previous interpretation of government agencies taskedto implement the tax, are sufficient justification to delete theimposition of surcharges. (Michel J. Lhuillier Pawnshop, Inc. v.Commissioner of Internal Revenue, G. R. No. 166786, September 11,2006)

TARIFF AND CUSTOMS CODE

1. When does importation begin, and why is it

important to know whether importation has already begunor not ?

SUGGESTED ANSWER: Importation begins when theconveying vessel or aircraft enters the jurisdiction of thePhilippines with intention to unlade therein. (Sec. 1202, TCCP)

The jurisdiction of the Bureau of Customs to enforce the

provisions of the TCCP including seizure and forfeiture alsobegins from the beginning of importation. Thus, the Bureau of Customs obtains jurisdiction over imported articles only after importation has begun.

2. When is importation deemed terminated

and why is it important to know whether importation hasalready ended?

SUGGESTED ANSWER: Importation is deemedterminated upon payment of the duties, taxes and other charges due upon the agencies, or secured to be paid, at

the port of entry and the legal permit for withdrawal shallhave been granted. In case the articles are free of duties, taxes and other

charges, until they have legally left the jurisdiction of thecustoms. (Sec. 1202, TCCP) The Bureau of Customs loses jurisdiction to enforce the TCCP and to make seizures andforfeitures after importation is deemed terminated.

3. The flexible tariff clause is a provision in the

Tariff and Customs Code, which implements the constitutionallydelegated power to the President of the Philippines, in the

interest of national economy, general welfare and/or nationalsecurity upon recommendation of the NEDA (a) to increase,reduce or remove existing protective rates of import duty,provided that, the increase should not be higher than 100% advalorem; (b) to establish import quota or to ban imports of anycommodity, and (c) to impose additional duty on all imports notexceeding 10% ad valorem, among others.

4. Customs duties defined. Customs duties is thename given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise

47



imported from, or exported to, a foreign country. (Nestle Phils. v.Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

5. Special customs duties are additional import

duties imposed on specific kinds of imported articles under certain conditions. The special customs duties under the Tariff and Customs Code (TCCP) are the anti-dumping duty, thecountervailing duty, the discriminatory duty, and the markingduty, and under the Safeguard Measures Act (SMA) additionaltariffs as safeguard measures.

6. The special customs duties are imposed for

the protection of consumers and manufacturers, as well asPhilippine products.

7. Dumping duty is an additional special duty

amounting to the difference between the export price andthe normal value of such product, commodity or article(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-

Dumping Act of 1999.”) imposed on the importation of a product,commodity or article of commerce into the Philippines at lessthan its normal value when destined for domestic consumptionin the exporting country which is causing or is threatening tocause material injury to a domestic industry, or materiallyretarding the establishment of a domestic industry producing thelike product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No.8752, “Anti-Dumping Act of 1999”]

8. The anti-dumping duty is imposed

a. Where a product, commodity or article of commerce is

exported into the Philippines at a price less than its normal valuewhen destined for domestic consumption in the exportingcountry,

b. and such exportation is causing or is threatening tocause material injury to a domestic industry, or materiallyretards the establishment of a domestic industry producing thelike product. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,“Anti-Dumping Act of 1999”]

9. Normal value for purposes of imposing the anti-

dumping duty is the comparable price at the date of sale of like

product, commodity, or article in the ordinary course of trade

when destined for consumption in the country of export. [Sec.301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping

Act of 1999”]

10. A dumped imported product is any product,commodity or article of commerce introduced into thePhilippines at an export price less than its normal value inthe ordinary course of trade, for the like product,

commodity or article destined for consumption in theexporting country, which is causing or is threatening tocause material injury to a domestic industry, or materiallyretarding the establishment of a domestic industryproducing the like product. [Sec. 301 (s) (5), TCC, as amendedby Rep. Act No. 8752, “Anti-Dumping Act of 1999”]

11. The imposing authority for the anti-dumping

duty is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or theSecretary of Agriculture, in the case of agricultural product,

commodity or article, after formal investigation and affirmativefinding of the Tariff Commission. [Sec. 301 (a), TCC, as amended byRep. Act No. 8752, “Anti-Dumping Act of 1999”]

12. Even when all the requirements for the

imposition have been fulfilled, the decision on whether or not to impose a definitive anti-dumping duty remains theprerogative of the Tariff Commission. [Sec. 301 (a), TCC, as

amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”] Thus,the cabinet secretaries could not contravene therecommendation of the Tariff Commission. They could not

impose the anti-dumping duty or any special customs dutywithout the favorable recommendation of the Tariff Commission.

13. In the determination of whether to impose the anti-dumping duty, the Tariff Commission, may consider amongothers, the effect of imposing an anti-dumping duty on thewelfare of the consumers and/or the general public, andother related local industries. (Sec. 301 (a), TCC, as amended byRep. Act No. 8752, “Anti-Dumping Act of 1999”)

14. The amount of anti-dumping duty that may be

imposed is the difference between the export price and the

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normal value of such product, commodity or article. (Sec.301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping

Act of 1999”)

The anti-dumping duty shall be equal to the margin of dumping on such product, commodity or article thereafter imported to the Philippines under similar circumstances, inaddition to ordinary duties, taxes and charges imposed by lawon the imported product, commodity or article.

15. Countervailing duties are additional customs

duties imposed on any product, commodity or article of commerce which is granted directly or indirectly by thegovernment in the country of origin or exportation, any kind or form of specific subsidy upon the production, manufacture or exportation of such product commodity or article, and theimportation of such subsidized product, commodity, or articlehas caused or threatens to cause material injury to a domesticindustry or has materially retarded the growth or prevents theestablishment of a domestic industry. (Sec. 302, TCCP as

amended by Section 1, R.A. No. 8751)

16. The imposing authority for the countervailing

duties is the Secretary of Trade and Industry in the case of non-agricultural product, commodity, or article or theSecretary of Agriculture, in the case of agricultural product,commodity or article, after formal investigation and affirmativefinding of the Tariff Commission.

Even when all the requirements for the imposition havebeen fulfilled, the decision on whether or not to impose adefinitive anti-dumping duty remains the prerogative of the Tariff

Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,“Anti-Dumping Act of 1999”)

17. The countervailing duty is equivalent to the

value of the specific subsidy.

18. Marking duties are the additional customs

duties imposed on foreign articles (or its containers if the articleitself cannot be marked), not marked in any official language inthe Philippines, in a conspicuous place as legibly, indelibly andpermanently in such manner as to indicate to an ultimate

purchaser in the Philippines the name of the country of origin.

19. The Commissioner of Customs imposes the

marking duty.

20. The marking duty is equivalent to five percent

(5%) ad valorem.

21. A discriminatory duty is a new and additionalcustoms duty imposed upon articles wholly or in part the growth

or product of, or imported in a vessel, of any foreign countrywhich imposes, directly or indirectly, upon the disposition or transportation in transit through or reexportation from suchcountry of any article wholly or in part the growth or product of the Philippines, any unreasonable charge, exaction, regulationor limitation which is not equally enforced upon like articles of every foreign country, or discriminates against the commerce of the Philippines, directly or indirectly, by law or administrativeregulation or practice, by or in respect to any customs, tonnage,or port duty, fee, charge, exaction, classification, regulation,condition, restriction or prohibition, in such manner as to placethe commerce of the Philippines at a disadvantage comparedwith the commerce of any foreign country.

22. The President of the Philippines imposes the

discriminatory duties.

23. Safeguard measures are emergency

measures, including tariffs, to protect domestic industries andproducers from increased imports which inflict or could inflictserious injury on them.

The CTA is vested with jurisdiction to review decisions of the Secretary of Trade and Industry imposing safeguardmeasures as provided under Rep. Act No. 8800 the SafeguardMeasures Act (SMA). (Southern Cross Cement Corporation v. ThePhilippine Cement Manufacturers Corp., et al., G. R. No. 158540, July8, 2004)

The DTI Secretary cannot impose the safeguardmeasures if the Tariff Commission does not favorablyrecommend its imposition.

49



24. Imposing authority for safeguard measures. Theimposing authority for the countervailing duties is theSecretary of Trade and Industry in the case of non-agricultural product, commodity, or article or the Secretaryof Agriculture, in the case of agricultural product,commodity or article, after formal investigation and affirmativefinding of the Tariff Commission.

25. Safeguards measures that may be imposed. Additional tariffs, import quotas or banning of imports.

26. Payment under protest required where

additional duties, taxes, fees or other charges are imposedby the Collector otherwise taxpayer could not obtain refund.When a ruling or decision of the collector is made wherebyliability for duties, taxes, fees, or other charges are determined,except the fixing of fines in seizure cases, the party adverselyaffected may protest such ruling or decision

a. by presenting to the Collector at the time whenpayment is made, or within fifteen (15) days thereafter,

b. a written protest setting forth his objection to theruling or decision in question, together with his reasons therefor.No protest shall be considered unless payment of the amountdue after final liquidation has first been made and thecorresponding docket fee. (Sec. 2308, TCC numbering andarrangement supplied)

27. Protest Exclusive Remedy in Protestable Cases.In all cases subject to protest, the interested party who desires

to have the action of the collector reviewed, shall make aprotest, otherwise the action of the collector shall be final andconclusive against him. (Sec. 2309, TCC)

28. The basis of dutiable value of merchandise

that is subject to ad valorem customs duties the transactionvalue, which shall be the price actually paid or payable for thegoods when sold for export to the Philippines, adjusted byadding certain cost elements to the extent that they are incurredby the buyer but are not included in the price actually paid or payable for the imported goods, and may include the following:

a. Cost of containers and packing,b. Insurance, andc. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep.

Act No. 9135)

29. The above transaction value is the primary

method of determining dutiable value. If the transactionvalue of the imported article could not be determined usingthe above, the following alternative methods should beused one after the other:

a. Transaction value of identical goodsb. Transaction value of similar goodsc. Deductive methodd. Computed methode. Fallback method

30. There is a mistaken belief that claims for refundare governed by the rule on quasi-contract of solutioindebeti which prescribes in six (6) years under Article 1145

of the Civil Code.In order for the rule on solutio indebeti to apply it is an

essential condition that the petitioner must first show that itspayment of the customs duties was in excess of what wasrequired by the law at the time the subject 16 importations of milk and milk products were made. Unless shown otherwise,the disputable presumption of regularity of performance of dutylies in favor of the Collector of Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001)

31. There is no automatic grant of refund. In

determining whether Nestle is entitled to refund of allegedoverpayment of custom duties, it is necessary to determineexactly how much the Government is entitled to collect ascustoms duties. Until there is such a determination by theCollector and affirmed or rejected by the Commissioner, then theCourt of Tax Appeals does not have jurisdiction. The CTA’s jurisdiction under the Tariff and Customs Code is not concurrentwith that of the Commissioner of Customs due to the absence of any certification from the Collector of Customs of Manila thatsuch import duties should be refunded. Consequently, thefinding by the CTA in another case of overpayment of internal

50



revenue taxes is not necessarily a finding that there wasoverpayment of customs duties. (Nestle Phil. v. Court of Appeals,et al., G.R. No. 134114, July 6, 2001)

32. How and to whom should claims for refund of customs duties be made ?

SUGGESTED ANSWER: All claims for refund of dutiesshall be made in writing and forwarded to the Collector of

Customs to whom such duties are paid, who upon receipt of such claim, shall verify the same by the records of his Office,and if found to be correct and in accordance with law, shallcertify the same to the Commissioner of Customs with hisrecommendation together with all necessary papers anddocuments. Upon receipt by the Commissioner of such certifiedclaim he shall cause the same to be paid if found correct. (Sec.1708, TCC)

32-B. What do mean by the term “entry” in CustomsLaw ?

SUGGESTED ANSWER: It has a triple meaning.a. the documents filed at the Customs house;b. the submission and acceptance of the documents;

andc. Customs declaration forms or customs entry forms

required to be accomplished by passengers of incomingvessels or passenger planes as envisaged under Sec. 2505 of the TCCP (Failure to declare baggage). (Jardeleza v. People,G.R. No. 165265, February 6, 2006)

32-A. A flight stewardess arrived from Singapore.

Upon her arrival she was asked whether she has anything to declare. She answered none, and she submitted her “Customs Baggage Declaration Form” which sheaccomplished and signed with nothing or written on thespace for items to be declared. When her hanger bag wasexamined some pieces of jewelry were found concealed within the lining of said bag.

She was then convicted of violating of Sec. 3601 of the Tariff and Customs Code for unlawful importationwhich penalizes any person who shall fraudulently import or bring into the Philippines any article contrary to law.

She now appeals claiming that lower court erred nconvicting her under Sec. 3601 when the facts alleged bothin the information and those shown by the prosecutionconstitute the offense under Sec. 2505 “Failure to DeclareBaggage,” of which she was acquitted. Is she correct ? SUGGESTED ANSWER: No. Sec. 3601 does not definea crime. It merely provides, inter alia, the administrativeremedies which can be resorted to by the Bureau of Customswhen seizing dutiable articles found the baggage of any personarriving in the Philippines which is not included in theaccomplished baggage declaration submitted to the customsauthorities, and the administrative penalties that such personmust pay for the release of such goods if not imported contraryto law.

Such administrative penalties are independent of thecriminal liability for smuggling that may be imposed under Sec.3601, and other provisions of the TCC which can only bedetermined after the appropriate criminal proceedings,prescinding from the outcome in any administrative case thatmay have been filed and disposed of by the customs authorities.

Indeed the second paragraph of Sec. 2505 provides thatnothing shall prevent the bringing of a criminal action against theoffender for smuggling under Section 3601. (Jardeleza v. People,G. R. No. 165265, February 6, 2006)

NOTES AND COMMENTS:a. Duty of person arriving in the Philippines. A

person arriving in the Philippines with baggage containing dutiablearticles is bound to declare the same in all respects. In order to meetthe convenience of the travelers, a simple and more expeditiousmethod of customs clearance is provided for baggages occupying the

passage therein for goods imported in the regular manner. Officialentry forms and forms of baggage declaration are supplied to thepassengers to be filled before the customs officer.

The traveler has the burden of carrying forward items that haveto be declared before examination of the cargo has begun. Adequatereporting of dutiable merchandise being brought into the country isabsolutely necessary to the enforcement of customs laws, and failureto comply with those requisites is as condemnable as failure to paycustoms duties. (Jardeleza v. People, G. R. No. 165265, February 6,2006 citing various cases)

b. Smuggling, defined. The act of importing or exporting any article contrary to law. Legally, it is defined as unlawfulimportation or exportation. “Unlawful Importation. – Any person who

51



shall fraudulently import or bring into the Philippines, or assist in sodoing, any article, contrary to law, or shall receive, conceal, buy, sell,or in any manner facilitate the transportation, concealment, or sale of such article after importation, knowing the same to have beenimported contrary to law, shall be guilty of smuggling.” (1st par., Sec.3601, TCC)

Sec. 3601 is a penal provision. It defines the crime of smuggling and provides compound penalties of graduated fine and

imprisonment based on the appraised values of the imported articlesto be determined in the manner provided in the TCC.Sec. 3601 was designed to supplement the existing provisions

of the TCC against the means leading up to smuggling which mightrender it beneficial by a substantive and criminal statement separatelyproviding for the punishment of smuggling. (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

c. Purpose of Sec. 3601. The law was not intended tomerge into one and the same offense all the many acts which areclassified and punished by different penalties, penal or administrative,but to legislate against the overt act of smuggling itself. This ismanifested by the use of the words “fraudulently” and ”contrary to law”in the law. . (Jardeleza v. People, G. R. No. 165265, February 6,2006)

c. Payment is not a defense in smuggling. “Whenupon trial for violation of this section, the defendant is shown to havepossession of the article in question, possession shall be deemedsufficient evidence to authorize conviction, unless the defendant shallexplain the possession to the satisfaction of the court: Provided,however, That payment of the tax due after apprehension shall notconstitute a valid defense in any prosecution under this section.” (lastpar., Sec. 3601, TCC)

33. How is smuggling committed ? SUGGESTED ANSWER: Smuggling is committed by

any person who:a. fraudulently imports or brings into the country any

article contrary to law;b. assists in so doing any article contrary to law; or c. receives, conceals, buys, sells or in any manner

facilitates the transportation, concealment or sale of suchgoods after importation, knowing the same to have beenimported contrary to law. (Jardeleza v. People, G.R. No. 165265,February 6, 2006 citing Rodriguez v. Court of Appeals, G. R. No.115218, September 18, 1995, 248 SCRA 288, 296)

NOTES AND COMMENTS:

a. Importation consists of bringing an article into thecountry from the outside. Importation begins when the conveyingvessel or aircraft enters the jurisdiction of the Philippines withintention to unload therein.

b. When unlawful importation is complete. In theabsence of a bona fide intent to make entry and pay duties when theprohibited article enters the Philippine territory. Importation iscomplete when the taxable, dutiable commodity is brought within the

limits of the port of entry. Entry through a custom house is not theessence of the act. (Jardeleza v. People, G.R. No. 165265, February6, 2006)

35. The Collector of Customs sitting in seizure

and forfeiture proceedings has exclusive jurisdiction tohear and determine all questions touching on the seizureand forfeiture of dutiable goods. RTCs are precluded fromassuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. (TheBureau of Customs, et al., v. Ogario, et al., G.R. No. 138081, March20, 2000)

What is the rationale for this doctrine ? SUGGESTED ANSWER:a. Regional Trial Courts have no jurisdiction to replevin a

property which is subject to seizure and forfeiture proceedingsfor violation of the Tariff and Customs Code otherwise, actionsfor forfeiture of property for violation of the Customs laws couldeasily be undermined by the simple device of replevin. (De laFuente v. De Veyra, et al., 120 SCRA 455)

b. The doctrine of exclusive customs jurisdiction over customs cases to the exclusion of the RTCs is anchored uponthe policy of placing no unnecessary hindrance on the

government’s drive, not only to prevent smuggling and other frauds upon Customs,

c. but more importantly, to render effective andefficient the collection of import and export duties due the State,which enables the government to carry out the functions it hasbeen instituted to perform. (Jao, et al., v. Court of Appeals, et al.,and companion case, 249 SCRA 35, 43)

d. The issuance by regular courts of writs of preliminary injunction in seizure and forfeiture proceedingsbefore the Bureau of Customs may arouse suspicion that theissuance or grant was for consideration other than the strict

merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003])

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e. Under the doctrine of primary jurisdiction, the Bureau of Customs has exclusive administrative jurisdiction to conductsearches, seizures and forfeitures of contraband withoutinterference from the courts. It could conduct searches andseizures without need of a judicial warrant except if the search isto be conducted in a dwelling place.

Where an administrative office has obtained a technicalexpertise in a specific subject, even the courts must defer to thisexpertise.

38. “A” claiming to be the owner of a vessel whichis the subject of customs warrant of seizure and detentionsought the intercession of the RTC to restrain the Bureau of Customs from interfering with his property rights over the vessel. Would the suit prosper?

SUGGESTED ANSWER: No. His remedy was not withthe RTC but with the CTA, as issues of ownership of goods inthe custody of customs officials are within the power of theCTA to determine.

The Collector of Customs has exclusive jurisdiction over seizure and forfeiture proceedings and trial courts areprecluded from assuming cognizance over such matters eventhrough petitions for certiorari, prohibition or mandamus.(Commissioner of Customs v. Court of Appeals, et al., G. R. Nos.111202-05, January 31, 2006)

37. The customs authorities do not have to prove tothe satisfaction of the court that the articles on board avessel were imported from abroad or are intended to beshipped abroad before they may exercise the power to

effect customs searches, seizures, or arrests provided bylaw and continue with the administrative hearings. (TheBureau of Customs, et al., v. Ogario, et al ., G.R. No. 138081, March 20,2000)

38. The Tariff and Customs Code allows the Bureau

of Customs to resort to the administrative remedy of seizure,such as by enforcing the tax lien on the imported articlewhen the imported articles could be found and be subject toseizure and forfeiture.

39. The Tariff and Customs Code allows the

Bureau of Customs to resort to the judicial remedy of filing anaction in court when the imported articles could notanymore be found.

40. Instances where there is no right of redemptionof seized and forfeited articles:

a. There is fraud;b. The importation is absolutely prohibited, or c. The release of the property would be contrary to law.

(Transglobe International, Inc. v. Court of Appeals, et al., G.R. No.126634, January 25, 1999)

41. In Aznar v. Court of Tax Appeals, 58 SCRA 519,reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298 , the Supreme Court clarified that the fraudcontemplated by law must be actual and not constructive. Itmust be intentional, consisting of deception, willfully anddeliberately done or resorted to in order to induce another to

give up some right.

42. Fraud must be proved to justify forfeiture. Itmust be actual, amounting to intentional wrong-doing with theclear purpose of avoiding the tax. Forfeiture is not favored inlaw nor in equity. Mere negligence is not equivalent to the fraudcontemplated by law. An honest mistake, will not deprive thegovernment of its right to collect the proper tax. (Republic, etc., v.The Court of Appeals, et al ., G.R. No. 139050, October 2, 2001)

43. Requisites for forfeiture of imported goods:

a. Wrongful making by the owner, importer, exporter or consignee of any declaration or affidavit, or the wrongful makingor delivery by the same person of any invoice, letter or paper –all touching on the importation or exportation of merchandise.

b. the falsity of such declaration, affidavit, invoice, letter or paper; and

c. an intention on the part of the importer/consignee toevade the payment of the duties due. (Republic, etc., v. The Court of Appeals, et al ., G.R. No. 139050, October 2, 2001)

44. On January 7, 1989, the vessel M/V ”Star Ace,”coming from Singapore laden with cargo, entered the Port

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of San Fernando, La Union for needed repairs. When theBureau of Customs later became suspicious that thevessel’s real purpose in docking was to smuggle cargo intothe country, seizure proceedings were instituted and subsequently two Warrants of Seizure and Detention wereissued for the vessel and its cargo.

Cesar does not own the vessel or any of its cargo but claimed a preferred maritime lien. Cesar then brought several cases in the RTC to enforce his lien. Would thesesuits prosper ?

SUGGESTED ANSWER: No. The Bureau of Customshaving first obtained possession of the vessel and its goods hasobtained jurisdiction to the exclusion of the trial courts.

When Cesar has impleaded the vessel as a defendant toenforce his alleged maritime lien, in the RTC, he brought anaction in rem under the Code of Commerce under which thevessel may be attached and sold.

However, the basic operative fact is the actual or constructive possession of the res by the tribunal empowered by

law to conduct the proceedings. This means that to acquire jurisdiction over the vessel, as a defendant, the trial court musthave obtained either actual or constructive possession over it.Neither was accomplished by the RTC as the vessel wasalready in the possession of the Bureau of Customs.(Commissioner of Customs v. Court of Appeals, et al., G. R. Nos.111202-05, January 31, 2006)

NOTES AND COMMENTS:a. Forfeiture of seized goods in the Bureau of

Customs is in the nature of a proceeding in rem, i.e. directedagainst the res or imported goods and entails a determination of the

legality of their importation. In this proceeding, it is in legalcontemplation the property itself which commits the violation and istreated as the offender, without reference whatsoever to the character or conduct of the owner.

The issue is limited to whether the imported goods should beforfeited and disposed of in accordance with law for violation of theTariff and Customs Code. .(Transglobe International, Inc. v. Court of

Appeals, et al ., G.R. No. 126634, January 25, 1999)Forfeiture of seized goods in the Bureau of Customs is a

proceeding against the goods and not against the owner. ( AsianTerminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October 27,2006 citing Transglobe)

45. The one-year prescriptive period for forfeitureproceedings applies only in the absence of fraud.(Commissioner of Customs v. Court of Tax Appeals, et al., G.R. No.132929, March 27, 2000)

46. The posting of customs guards at the importer’swarehouse where the imported steel billets were transferredunder guard from the customs zone is an indication that the

goods were not yet released by the Bureau of Customs tothe importer and that importation has not yet beenterminated.

However, when the Bureau of Customs allowed theprocessing of the import entry, accepted the payment andissued an order of release such order is sufficient legal permitfor withdrawal and importation is then deemed terminated. Thegoods could not anymore be seized and forfeited becauseimportation has been validly terminated. (Sandoval-Gutierrez J.Commissioner of Customs v. Milwaukee Industrial Corporation, G. R.No. 135253, December 9, 2004)

47. The Collector of Customs upon probable

cause that the articles are imported or exported, or areattempted to be imported or exported, in violation of thetariff and customs laws shall issue a warrant of seizure.(Sec. 6, Title III, CAO No. 9-93)

If the search and seizure is to be conducted in a dwellingplace, then a search warrant should be issued by the regular courts not the Bureau of Customs.

There may be instances where no warrants issued by theBureau of Customs or the regular courts is required, as in

search and seizures of motor vehicles and vessels.

48. Smuggled goods seized by virtue of a courtwarrant should be surrendered to the court that issued thewarrant and not to the Bureau of Customs because thegoods are in custodia legis.

REPUBLIC ACT NO. 1125, CREATING THECOURT OF TAX APPEALS INCLUDING

JURISDICTION OF THE CTA, AS AMENDED

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1. The Court of Tax Appeals is the special tax courtcreated under Republic Act No. 1125, as amended by R. A.No. 9282, and is composed of a Presiding Justice and five Associate Justices, organized into two divisions.

2. Why was the Court of Tax Appeals created ?

a. To prevent delay in the disposition of tax cases bythe then Courts of First Instance (now RTCs), in view of thebacklog of civil, criminal, and cadastral cases accumulating inthe dockets of such courts; and

b. To have a body with special knowledge whichordinary Judges of the then Courts of First Instance (nowRTCs), are not likely to possess, thus providing for an adequateremedy for a speedy determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209; Lacsamana, et al., etc., v. CTA, et al., 102 Phil. 931)

NOTE: By the very nature of its functions, the CTA is a highlyspecialized court specifically created for the purpose of reviewing taxand customs cases. it is dedicated exclusively to the study and

consideration of revenue-related problems and has necessarilydeveloped an expertise on the subject. (J. Panganiban in SouthernCross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005, citing variouscases in his separate opinion to the decision on the motion for reconsideration)

Court of Tax Appeals is not governed strictly bytechnical rules of evidence. (Sec. 8, Rep. Act No. 1125) Whilethis may be so rules of procedure are not ends in themselvesbut are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or invoicesis not mere procedural technicality which may be disregarded

considering that it is the only means by which the CTA mayascertain and verify the truth of the taxpayer’s claims.(Commissioner of Internal v. Manila Mining Corporation, G. R. No.153204, August 31, 2005)

3. The factual determination of the Court of TaxAppeals, when supported by substantial evidence, will notbe reversed on appeal unless it is clear that said court hascommitted gross error in the process. (Republic of thePhilippines represented by the Commissioner of Customs v. The Court

of Tax Appeals, et al., G. R. No. 139050, October 2, 2001) REASON:

The Court of Tax Appeals is a highly specialized body

specifically created for the purpose of reviewing tax cases[Commissioner of Internal Revenue v. General Foods (Phils.), Inc.,401

SCRA 545 (2003)] which by the very nature of its functions, isdedicated exclusively to the study and consideration of taxcases and has necessarily developed an expertise on thesubject. (Commissioner of Internal Revenue v. American ExpressInternational, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005citing various cases)

4. The legal remedies under the NIRC of 1997 andother laws available to an aggrieved taxpayer may be classifiedinto the tax remedies with respect to:

a. assessment;b. collection, andc. refund of internal revenue taxes.

The remedies may also be classified into theadministrative or the judicial remedies.

5. The legal remedies under the NIRC of 1997

available to an aggrieved taxpayer at the administrativelevel with respect to assessment of internal revenue taxes arethe following:

a. Upon receipt of a pre-assessment notice, thetaxpayer shall respond to the same within fifteen (15) days fromreceipt which is the period provided for by implementing rulesand regulations. [3rd par., Sec. 228 (e), NIRC of 1997]

b. Upon the issuance of an assessment notice, thetaxpayer shall protest administratively by filing a request for reconsideration or reinvestigation within thirty (30) days fromreceipt of the assessment in such form and manner as may be

prescribed by implementing rules and regulations.c. Within sixty (60) days from the filing of the protest, all

relevant supporting documents shall be submitted; otherwise theassessment shall become final. (4th par., Ibid.)

6. The legal remedies under the NIRC of 1997

available to an aggrieved taxpayer at the judicial level withrespect to assessment of internal revenue taxes:

a. If the protest is denied in whole or in part, or b. is not acted upon within one hundred eighty (180)

days from submission of documents,

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c. the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty(30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) – day period; otherwise, thedecision shall become final, executory and demandable. [lastpar., Sec. 228 (e), NIRC of 1997]

d. On appeal, the taxpayer should apply for the issuanceof a writ of preliminary injunction to enjoin the BIR from collecting

the tax subject of the appeal.e. A decision of a division of the Court of Tax Appeals

adverse to the taxpayer or the government may be the subjectof a motion for reconsideration or new trial, a denial of which isappealable to the Court of Tax Appeals en banc by means of apetition for review. .

f. A decision of the Court of Tax Appeals en banc adverse to the taxpayer or the government may be appealed tothe Supreme Court through a petition for review on certiorarifiled with fifteen (15) days from notice, and extendible for justifiable reasons for thirty (30) days only.

7. The legal remedy under the NIRC of 1997

available to an aggrieved taxpayer at the administrativelevel with respect to refund or recovery of tax erroneously or illegally collected, is to file a claim for refund or credit with theCommissioner of Internal Revenue. (1st par., Sec. 229, NIRC of 1997)

8. What is the legal remedy under the NIRC of

1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected ?

SUGGESTED ANSWER. The legal remedy under theNIRC of 1997 at the judicial level with respect to refund or recovery of tax erroneously or illegally collected, is the filing of asuit or proceeding with the Court of Tax Appeals

a. before the expiration of two (2) years from the date of payment of the tax regardless of any supervening cause thatmay arise after payment (2nd par., Sec. 229, NIRC of 1997), or

b. within thirty (30) days from receipt of the denial by theCommissioner of the application for refund or credit. (Sec. 11,R.A. No. 1125)

9. The two (2) year period and the thirty (30) day

period should be applied on a whichever comes first basis.Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year period is about to lapse but there is no decision yet bythe Commissioner which would trigger the 30-day period, thetaxpayer should file an appeal, despite the absence of adecision. (Commissioners, etc. v. Court of Tax Appeals, et al., G. R.No. 82618, March 16, 1989, unrep.)

10. Where the taxpayer is a corporation the two

year prescriptive period from “date of payment” for refund of income taxes should be the date when the corporation filed itsfinal adjustment return not on the date when the taxes were paidon a quarterly basis. (Philippine Bank of Communications v.Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

11. Generally speaking it is the Final AdjustmentReturn, in which amounts of the gross receipts and deductions

have been audited and adjusted, which is reflective of the resultsof the operations of a business enterprise. It is only when thereturn, covering the whole year, is filed that the taxpayer will beable to ascertain whether a tax is still due or refund can beclaimed based on the adjusted and audited figures. (Bank of thePhilippine Islands v. Commissioner of Internal Revenue, G.R. No.144653, August 28, 2001)

12. Outline of tax remedies of a taxpayer and the

government relative to ASSESSMENT of internal revenuetaxes.

a. The taxpayer files his tax return.b. A Letter of Authority is issued authorizing BIRexaminer to audit or examine the tax return and determineswhether the full and complete taxes have been paid.

c. If the examiner is satisfied that the tax return is trulyreflective of the taxable transaction and all taxes have beenpaid, the process ends. However, if the examiner is not satisfiedthat the tax return is truly reflective of the taxable transactionand that the taxes have not been fully paid, a Notice of InformalConference is issued inviting the taxpayer to explain why heshould not be subject to additional taxes.

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d. If the taxpayer attends the informal conference andthe examiner is satisfied with the explanation of the taxpayer,the process is again ended.

If the taxpayer ignores the invitation to the informalconference, or if the examiner is not satisfied with taxpayer’sexplanation,, and he believes that proper taxes should beassessed, the Commissioner of Internal Revenue or his dulyauthorized representative shall then notify the taxpayer of thefindings in the form of a pre-assessment notice. The pre-assessment notice requires the taxpayer to explain within fifteen(15) days from receipt why no notice of assessment and letter of demand for additional taxes should be directed to him.

e. If the Commissioner is satisfied with the explanationof the taxpayer, then the process is again ended.

If the taxpayer ignores the pre-assessment notice by notresponding or his explanations are not accepted by theCommissioner, then a notice of assessment and a letter of demand is issued.

The notice of assessment must be issued by the

Commissioner to the taxpayer within a period of three (3) yearsfrom the time the tax return was filed or should have been filedwhichever is the later of the two events. Where the taxpayer didnot file a tax return or where the tax return filed is false or fraudulent, then the Commissioner has a period of ten (10) yearsfrom discovery of the failure to file a tax return or from discoveryof the fraud within which to issue an assessment notice. Therunning of the above prescriptive periods may however besuspended under certain instances.

The notice of assessment must be issued within theprescriptive period and must contain the facts, law and

jurisprudence relied upon by the Commissioner. Otherwise itwould not be valid.

f. The taxpayer should then file an administrative protestby filing a request for reconsideration or reinvestigation withinthirty (30) days from receipt of the assessment notice.

The taxpayer could not immediately interpose an appealto the Court of Tax Appeals because there is no decision yet of the Commissioner that could be the subject of a review.

To be valid the administrative protest must be filed withinthe prescriptive period, must show the error of the Bureau of Internal Revenue and the correct computations supported by a

statement of facts, and the law and jurisprudence relied upon bythe taxpayer. There is no need to pay under protest. If theprotest was not seasonably filed the assessment becomes finaland collectible and the Bureau of Internal Revenue could use itsadministrative and judicial remedies in collecting the tax.

g. Within sixty (60) days from filing of the protest, allrelevant supporting documents shall be submitted, otherwise theassessment shall become final and collectible and the BIR coulduse its administrative and judicial remedies to collect the tax.

Once an assessment has become final and collectible,not even the BIR Commissioner could change the same. Thus,the taxpayer could not pay the tax, then apply for a refund, and if denied appeal the same to the Court of Tax Appeals.

h. If the protest is denied in whole or in part, or is notacted upon within one hundred eighty (180) days from thesubmission of documents, the taxpayer adversely affected bythe decision or inaction may appeal to the Court of Tax Appealswithin thirty (30) days from receipt of the adverse decision, or from the lapse of the one hundred eighty (180-) day period, with

an application for the issuance of a writ of preliminary injunctionto enjoin the BIR from collecting the tax subject of the appeal.

If the taxpayer fails to so appeal, the denial of theCommissioner or the inaction of the Commissioner would resultto the notice of assessment becoming final and collectible andthe BIR could then utilize its administrative and judicial remediesto collect the tax.

i. A decision of a division of the Court of Tax Appealsadverse to the taxpayer or the government may be the subjectof a motion for reconsideration or new trial, a denial of which isappealable to the Court of Tax Appeals en banc by means of a

petition for review. .The Court of Tax Appeals, has a period of twelve (12)

months from submission of the case for decision within which todecide.

j. If the decision of the Court of Tax Appeals en banc affirms the denial of the protest by the Commissioner or theassessment in case of failure by the Commissioner to decide thetaxpayer must file a petition for review on certiorari with theSupreme Court within fifteen (15) days from notice of the judgment on questions of law. An extension of thirty (30) daysmay for justifiable reasons be granted. If the taxpayer does not

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so appeal, the decision of the Court of Tax Appeals wouldbecome final and this has the effect of making the assessmentalso final and collectible. The BIR could then use itsadministrative and judicial remedies to collect the tax.

12. What is the burden of taxpayers seeking tax refunds or credits ?

SUGGESTED ANSWER: It has always been the rule that

those seeking tax refunds or credits bear the burden of provingthe factual basis of their claims and of showing, by words tooplain to be mistaken, that the legislature intended to entitle themto such claims. ( Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G. R. No. 145526,March 16, 2007, See Commissioner of Internal Revenue v. SeagateTechnology (Philippines) G. R. No. 153866, 11 February 2005, 451SCRA 132)

12. What is the nature of proceedings before theCourt of Tax Appeals ?

SUGGESTED ANSWER:First, a judicial claim for refund or tax credit in the CTA isby no means an original action, but rather an appeal by way of petition for review of a previous, unsuccessful administrativeclaim.

Therefore, as in every appeal or petition for review, apetitioner has to convince the appellate court that the quasi- judicial agency a quo did not have any reason to deny its claims.

Second, cases filed in the CTA are litigated de novo.Thus, a petitioner should prove every minute aspect of its caseby presenting, formally offering and submitting its evidence to

the CTA.Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim shouldhave been granted in the first place, part of the evidence to besubmitted to the CTA must necessarily include whatever isrequired for the successful prosecution of an administrativeclaim. ( Atlas Consolidated Mining and Development Corporation v.Commissioner of Internal Revenue, G. R. No. 145526, March 116,2007)

13. What is the jurisdiction of the Court of

Tax Appeals ?

ANSWER:“a. Exclusive appellate jurisdiction to review by

appeal, as herein provided:1. Decisions of the Commissioner of Internal

Revenue in cases involving disputed assessments, refundsof internal revenue taxes, fees or other charges, penalties,in relation thereto, or other matters arising under theNational Internal Revenue Code or other laws administeredby the Bureau of Internal Revenue’; (DIVISION)

2. Inaction by the Commissioner of InternalRevenue in cases involving disputed assessments, refundsor internal revenue taxes, fees or other charges, penaltiesin relation thereto, or other matter arising under the NationalInternal Revenue Code or other laws administered by theBureau of Internal Revenue, where the National InternalRevenue Code provides a specific period of action, in whichcase the inaction shall be deemed a denial; (The inactionon refunds in two years from the time tax was paid. Thus,if the prescriptive period of two years is about to expire, the

taxpayer should interpose a petition for review with the CTA – DIVISION)

3. Decisions, orders or resolutions of theRegional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; (If original DIVISION; if appellate EN BANC )

4. Decisions of the Commissioner of Customs incases involving liability for customs duties, fees or other money charges, seizure, detention or release of propertyaffected, fines, forfeitures or other penalties in relation

thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs;(DIVISION)

5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of realproperty originally decided by the provincial or city board of assessment appeals; (EN BANC )

6. Decisions of the Secretary of Finance oncustoms cases elevated to him automatically for reviewfrom decisions of the Commissioner of Customs which are

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adverse to the Government under Section 2315 of the Tariff and Customs Code; (This has reference to forfeiture caseswhere the decision is to release the seized articles –DIVISION)

7. Decisions of the Secretary of Trade andIndustry, in case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumpingand countervailing duties under Section 301 and 302,respectively, of the Tariff and Customs Code, and safeguardmeasures under Republic Act No. 8800, where either partymay appeal the decision to impose or not to impose saidduties. (DIVISION)b. Jurisdiction over cases involving criminal

offenses as herein provided:1. Exclusive original jurisdiction over all

criminal cases arising from violations of the NationalInternal Revenue Code or Tariff and Customs Code andother laws administered by the Bureau of Internal Revenue

or the Bureau of Customs: Provided, however, Thatoffenses or felonies mentioned in this paragraph where theprincipal amount of taxes and fees, exclusive of chargesand penalties claimed, is less than One million pesos(P1,000,000.00) or where there is no specified amountclaimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding,the criminal action and the corresponding civil action for therecovery of civil liability for taxes and penalties shall at alltimes be simultaneously instituted with, and jointly

determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with itthe filing of the civil action, and no right to reserve the filingof such civil action separately from the civil action will berecognized.

2. Exclusive appellate jurisdiction in criminaloffenses:

a) Over appeals from the judgments,resolutions or orders of the Regional Trial Courts intax cases originally decided by them, in their respective territorial jurisdiction.

b) Over petitions for review of the judgments, resolutions or orders of the RegionalTrial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by theMetropolitan Trial Courts, Municipal Trial Courts andMunicipal Circuit Trial Courts in their respective jurisdiction.

c. Jurisdiction over tax collection cases:1. Exclusive original jurisdiction in tax collection

cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however,That collection cases where the principal amount of taxesand fees, exclusive of charges and penalties, claimed isless than One million pesos (P1,000,000) shall be tried bythe proper Municipal Trial Court, Metropolitan Trial Courtand Regional Trial Court.

2. Exclusive appellate jurisdict ion in taxcollection cases:

a. Over appeals from judgments,

resolutions, or orders of the Regional Trial Courts intax collection cases originally decided by them, intheir respective territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the RegionalTrial Courts in the exercise of their appellate jurisdiction over tax collection cases originallydecided by the Metropolitan Trial Courts, MunicipalTrial Courts and Municipal Circuit Trial Courts, intheir respective jurisdiction.” (Sec. 7, R. A. No.1125, as amended by R. A. No. 9282, emphasis and

words in parentheses supplied)

14. Applicability of Proton Pilipinas

Corporation vs. Republic, etc., G. R. No. 165027, October 16, 2006.

The case was decided on factual antecedents beforeR.A.No. 9282 which grants criminal jurisdiction to the Court of Tax Appeals if the value of the tax is P1 million or more.

Interpreting the provisions of Republic Act No. 8249,which provides that the civil action for recovery of civil liabilityshould be jointly determined in the criminal proceeding by the

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Sandiganbayan or appropriate courts, the prohibition of reservation of the criminal aspect, the Supreme Court said thattax collection cases may be tried separately, and not before theSandiganbayan in Rep. Act No. 3019 cases. This is sobecause, Rep. Act No. 3019 is silent on the definition of civilliability and the application of Art. 104 of the Revised Penal Codedoes not cover taxes. Consequently, the Supreme Court ruledthat on the tax collection case the RTC would have jurisdiction.

Interpretation by the author in the light of Rep. Act.9282. If it is a criminal case cognizable by the Sandiganbayan,then this court retains jurisdiction, with the civil jurisdiction beingcognizable by the CTA or the lower courts depending on theamount.

If the issue is a purely tax case, even if it involves casescognizable by the Sandiganbayan, then jurisdiction vests uponthe CTA or the lower courts depending on the amount of the tax.

13. What is the characteristic of a BIR denial of a protest such as would enable the taxpayer to appeal the

same to the Court of Tax Appeals ? SUGGESTED ANSWER: The Commissioner of Internal

Revenue should always indicate to the taxpayer in clear andunequivocal language whenever his action on an assessmentquestioned by a taxpayer constitutes his final determination onthe disputed assessment.

On the basis of his statement indubitably showing that theCommissioner’s communicated action is his final decision on thecontested assessment, the aggrieved taxpayer would then beable to take recourse to the tax court at the opportune time.Without needless difficulty, the taxpayer would be able to

determine when his right to appeal to the tax court accrues.(Commissioner of Internal Revenue v. Bank of the Philippines Islands,G. R. No. 134062, April 17, 2007 citing Oceanic Wireless Network, Inc.v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523)

NOTES AND COMMENTS:a. Reasons for the rule requiring CIR’s unequivocal

language on his action on the protest.1) It would obviate all desire and opportunity on the

part of the taxpayer to continually delay the finality of theassessment – and, consequently, the collection of the amount

demanded as taxes – by repeated requests for recomputationand reconsideration.

2) On the part of the Commissioner of InternalRevenue, this would encourage his office to conduct a carefuland thorough study of every questioned assessment and render a correct and define decision thereon in the first instance.

3) This would also deter the Commissioner of Internal Revenue from unfairly making the taxpayer grope in thedark and speculate as to which action constitutes the decisionappealable to the tax court.

4) Of greater import, this rule of conduct would meeta pressing need for fair play, regularity, and orderliness in

administrative action. . (Commissioner of Internal Revenue v.Bank of the Philippines Islands, G. R. No. 134062, April 17, 2007citing Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue, G. R. No. 148380, 9 December 2005, 477SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-254289, 28 June 1974, 57 SCRA 523)

14. Cite acts of BIR Commissioner that may

be considered as denial of a protest which serve as basisfor appeal to the Court of Tax Appeals.SUGGESTED ANSWER:a. Filing by the BIR of a civil suit for collection of the

deficiency tax is considered a denial of the request for reconsideration. (Commissioner of Internal Revenue v. UnionShipping Corporation, 185 SCRA 547)

b. An indication to the taxpayer by the Commissioner “in clear and unequivocal language” of his final denial not theissuance of the warrant of distraint and levy. What is the subjectof the appeal is the final decision not the warrant of distraint.(Commissioner of Internal Revenue v. Union Shipping Corporation, 185

SCRA 547 )c. A BIR demand letter sent to the taxpayer after his

protest of the assessment notice is considered as the finaldecision of the Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)

d. A letter of the BIR Commissioner reiterating to ataxpayer his previous demand to pay an assessment isconsidered a denial of the request for reconsideration or protestand is appealable to the Court of Tax Appeals. (Commissioner v.

Ayala Securities Corporation, 70 SCRA 204)

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e. Final notice before seizure considered ascommissioner’s decision of taxpayer’s request for reconsideration who received no other response. Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210,

July 11, 2001 held that not only is the Notice the only responsereceived: its content and tenor supports the theory that it wasthe 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. The letter itself clearly stated that thetaxpayer was being given “this LAST OPPORTUNITY” to pay;otherwise, its properties would be subjected to distraint and levy.

15. The taxpayer seasonably protested the

assessment issued by the Commissioner of Internal Revenue. During the pendency of the protest the CIR issued a warrant of distraint and levy to collect the taxessubject of the protest.

As counsel what advice shall you give the taxpayer.Explain briefly your answer.

ANSWER: The taxpayer should appeal, by way of apetition for review, to the Court of Tax Appeals not on theground of the denial of the protest but on other matter arisingunder the provisions of the National Internal Revenue Code.The actual issuance of a warrant of distraint and levy in certaincases cannot be considered a final decision on a disputedassessment.

To be a valid decision on a disputed assessment, thedecision of the Commissioner or his duly authorizedrepresentative shall (a) state the facts, the applicable law, rulesand regulations, or jurisprudence on which such decision is

based, otherwise, the decision shall be void, in which case thesame shall not be considered a decision on the disputedassessment; and (b) that the same is his final decision. (Sec.

3.1.6, Rev. Regs. 12-99) These conditions are not complied withby the mere issuance of a warrant of distraint and levy.(Commissioner of Internal Revenue v. Union Shipping Corp., 185SCRA 547 )

Furthermore, a motion for the suspension of the collectionof the tax may be filed together with the petition for review (Sec.

3, Rule 10, RRCTA effective December 15, 2005) because thecollection of the tax may jeopardize the interest of the taxpayer.

16. As a general rule, there must always be a

decision of the Commissioner of Internal Revenue or Commissioner of Customs before the Court of Tax Appeals,would have jurisdiction. If there is no such decision, it wouldbe dismissed for lack of jurisdiction unless the case falls under any of the following exceptions.

17. Instances where the Court of Tax Appeals

would have jurisdiction even if there is no decision yet bythe Commissioner of Internal Revenue:

a. Where the Commissioner has not acted on thedisputed assessment after a period of 180 days from submissionof complete supporting documents, the taxpayer has a period of 30 days from the expiration of the 180 day period within which toappeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)

b. Where the Commissioner has not acted on anapplication for refund or credit and the two year period from the

time of payment is about to expire, the taxpayer has to file hisappeal with the Court of Tax Appeals before the expiration of two years from the time the tax was paid.

It is disheartening enough to a taxpayer to be keptwaiting for an indefinite period for the ruling, It would makematters more exasperating for the taxpayer if the doors of justice would be closed for such a relief until after theCommissioner, would have, at his personal convenience, givenhis go signal. (Commissioner of Customs, et al, v. Court of Tax

Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)

18. Instances where the Court of Tax Appealswould have jurisdiction even if there is no decision of theCommissioner of Customs:

a. Decisions of the Secretary of Trade and Industry or theSecretary of Agriculture in anti-dumping and countervailing dutycases are appealable to the Court of Tax Appeals within thirty(30) days from receipt of such decisions.

b. In case of automatic review by the Secretary of Finance in seizure or forfeiture cases where the value of theimportation exceeds P5 million or where the decision of the

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Collector of Customs which fully or partially releases theshipment seized is affirmed by the Commissioner of Customs.

c. In case of automatic review by the Secretary of Finance of a decision of a Collector of Customs acting favorablyupon a customs protest.

19. As a general rule, “No court shall have the

authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge.” (Sec. 218,NIRC)

“No appeal taken to the CTA from the decision of theCommissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipaltreasurer or the Secretary of Finance, the Secretary of Tradeand Industry and Secretary of Agriculture, as the case may beshall suspend the payment, levy, distraint, and/or sale of anyproperty of the taxpayer for the satisfaction of his tax liability asprovided by existing law: Provided, however, That when in theopinion of the Court the collection by the aforementioned

government agencies may jeopardize the interest of theGovernment and/or the taxpayer the Court at any stage of theproceeding may suspend the said collection and require thetaxpayer either to deposit the amount claimed or to file a suretybond for not more than double the amount with the Court.” (Sec.11, Rep. Act No. 1125, as amended by Sec.9, Rep. Act No. 9282 )

The Supreme Court may enjoin the collection of taxesunder its general judicial power but it should be apparent thatthe source of the power is not statutory but constitutional.

The Supreme Court did not grant the provisional remedyprayed for in Southern Cross Cement Corporation v. The

Philippine Cement Manufacturers Corp., et al., G. R. No.158540, July 8, 2004 for it would be tantamount to enjoining thecollection of taxes, a peremptory judicial act which is traditionallyfrowned upon unless there is a clear statutory basis for it.Evident is the clear legislative intent that the imposition of safeguard measures, despite the availability of judicial review,should not be enjoined notwithstanding any timely appeal of theimposition. This so because the Safeguard Measures Act statesthat the filing of a petition for review before the CTA does notstop, suspend, or otherwise toll the imposition or collection of the

appropriate tariff duties or the adoption of other appropriatesafeguard measures.

20. “The taxable income shall be computed upon thebasis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with themethod of accounting regularly employed in keeping the booksof such taxpayer; but if no such method of accounting has beenso employed, or if the method employed does not clearly reflectthe income, the computation shall be in accordance with suchmethod as in the opinion of the Commissioner clearly reflectsthe income.” (Sec. 43, NIRC of 1997)

21. “When a report required by law as a basis for theassessment of any national internal revenue tax shall not beforthcoming within the time fixed by laws or rules andregulations or when there is reason to believe that any suchreport is false, incomplete or erroneous, the Commissioner shallassess the proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwisefiles a false or fraudulent return or other document, theCommissioner shall make or amend the return from his ownknowledge and from such information as he can obtain throughtestimony or otherwise, which shall be prima facie correct andsufficient for all legal purposes.” [Sec. 6 (B), NIRC of 1997]

22. General rule: “The rule is that in the absence of accounting records of a taxpayer, his tax liability may bedetermined by estimation. The petitioner (Commissioner of

Internal Revenue) is not required to compute such tax liabilitieswith mathematical exactness. Approximation in the calculationof taxes due is justified. To hold otherwise would be tantamountto holding that skillful concealment is an invincible barrier toproof.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing United Statesv. Johnson, 319 U.S. 1233 (1943)] “However, the rule does notapply where the estimation is arrived at arbitrarily andcapriciously.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc., citing United States v. Rindskopf, 105 U.S.418(1881)]

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23. Meaning of "best evidence obtainable" under Sec. 6(B), NIRC of 1997. This means that the original documentsmust be produced. If it could not be produced, secondaryevidence must be adduced. (Hantex Trading Co., Inc. v.Commissioner of Internal Revenue, CA - G.R. SP No. 47172,September 30, 1998)

NOTE: The secondary evidence referred to are those that may

be adduced using the general methods for reconstructing a taxpayer’sincome or the indirect approach to tax investigation.

The “best evidence” envisaged in Section 16 of the 1977 NIRC[now Sec. 6 (B),NIRC of 1997] “includes the corporate and accountingrecords of the taxpayer who is the subject of the assessment process,the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales.”(Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R.No. 136975, March 31, 2005 citing De Leon, The National Internal Revenue Code Annotated, p. 37)

“Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other

taxpayers who had personal transactions or from whom the subjecttaxpayer received any income; and record, data, document andinformation secured from government offices or agencies, such as theSEC, the Central Bank of the Philippines, the Bureau of Customs, andthe “Tariff and Customs Commission.” (sic, Commissioner v. Hantex

Trading Co., Inc., supra) “The law allows the BIRaccess to all relevant or material records or data in the person of thetaxpayer. It places no limit or condition on the type or form of themedium by which the record subject of the order of the BIR is kept.”(Ibid.) Purpose of the “best evidence obtainable”rule under Sec, 6 (B), NIRC of 1997. “The purpose of the law is toenable the BIR to get at the taxpayer’s records in whatever form they

may be kept.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975,March 31, 2005)

24. “Best evidence” may include computerizedrecords. Such records include computer tapes of the taxpayersrecords prepared by the taxpayer in the course of business.[Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R.No. 136975,March 31, 2005 citing z United States v. Davey, 543 F.2d996 (1976)])

“In this era of developing information-storage technology,there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The

standard is not the form of the record but where it might shed

light on the accuracy of the taxpayer’s return.” (Commissioner of

Internal Revenue v. Hantex Trading Co., Inc., supra) “Best evidence”may include records of third parties.

“Best evidence obtainable” may consist of testimonialhearsay. The “best evidence obtainable may consist of hearsayevidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as thetaxpayer subject of the investigation, hence, inadmissible in a

regular proceeding in the regular courts.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975,March31, 2005 citing Llorente v. Commissioner of Internal Revenue, 74 TC260 (1980); Weimerskirch v. Commissioner of Internal Revenue, 67 TC672 (1977); Rosano v. Commissioner of Internal Revenue, 46 TC 681

(1966)] “Moreover, the general rule is that administrative agencies

such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted ina judicial proceeding where the Rules of Court are strictlyobserved. It can choose to give weight or disregard such

evidence, depending on its trustworthiness.” (Commissioner of Internal Revenue, v. Hantex Trading Co., Inc., supra)

“Best evidence obtainable” “does not include merephotocopies of records/documents.” [Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. No. 136975,March 31, 2005citing Llorente v. Commissioner of Internal Revenue, 74 TC 260(1980); Weimerskirch v. Commissioner of Internal Revenue, 67 TC 672(1977); Rosano v. Commissioner of Internal Revenue, 46 TC 681(1966)]

Mere photocopies have “no probative weight if offered asproof of the contents thereof. The reason for this is that suchcopies are mere scraps of paper and are of no probative value

as basis for any deficiency income or business taxes against ataxpayer.” (Ibid.) The U. S. Court of Appeals (2nd Circuit) onceruled that “where the accuracy of a taxpayer’s return is beingchecked, the government is entitled to use the original recordsrather than be forced to accept purported copies which presentthe risk of error or tampering.” [Ibid., citing United States v. Davey,543 F.2d 996 (1976)]

25. Sec. 6 (B) of the NIRC of 1997 allows the BIR tomake or amend a tax return from his own knowledge or obtained through testimony or otherwise. Thus, the

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Commissioner of Internal Revenue investigates ”anycircumstance which led him to believe that the taxpayer hadtaxable income larger than that reported. Necessarily, thisinquiry would have to be outside of the books because theysupported the return as filed. He may take the sworn testimonyof the taxpayer, he may take the testimony of third parties; hemay 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. Theexistence 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. citing Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)]

Citing its ruling in a previous case, a “U.S. appellate courtdeclared that where the records of the taxpayer are manifestlyinaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. (Ibid., in turn citing Kenney v.Commissioner, 111 F.2d 374)

26. The following are the general methods developed bythe Bureau of Internal Revenue for reconstructing ataxpayer’s income where the records do not show the trueincome or where no return was filed or what was filed was afalse and fraudulent return

(a) Percentage method;(b) Net worth method.;(c) Bank deposit method;(d) Cash expenditure method;(e) Unit and value method;

(f) Third party information or access to records method;(g) Surveillance and assessment method. (Chapter XIII.Indirect Approach to Investigation, Handbook on Audit Procedures andTechniques – Volume I, pp. 68-74)

27. Under the percentage method, the computed amountof revenues based on the percentage computation is comparedto the amount of revenues reflected on the return. Thepercentages used may be obtained from the taxpayer, industrypublication, prior year’s audit results, or third parties. Thecomparison will provide an indication on the possibility of revenue being understated.

Among the significant ratios and trends to be analyzedare the percentage mark-up, gross profits ratio or gross marginpercentage, profit margin, total assets turnover, and inventoryturnover. (Chapter XIII. Indirect Approach to Investigation, Handbookon Audit Procedures and Techniques – Volume I, pp. 68-74)

28. The net worth method is a method of reconstructingincome which is based on the theory that if the taxpayer’s net

worth has increased in a given year in an amount larger than hisreported income, he has understated his income for that year.The net worth on a fixed starting date is compared with the networth on a fixed ending date. Any increase in net worth ispresumed to be income not declared for tax purposes. (Chapter XIII. Indirect Approach to Investigation, Handbook on Audit Proceduresand Techniques – Volume I, pp. 68-74)

29. The difficulty of establishing the opening net worth of a tax payer has led to the “Cohan Rule” which is the use of estimates or approximations of the amount of cash and other

asserts where the taxpayer lacks adequate records. (Chapter XIII.Indirect Approach to Investigation, Handbook on Audit Procedures andTechniques – Volume I, pp. 68-74)

30. Under the bank deposit method, the bank records of the taxpayer are analyzed and the BIR estimates income on thebasis of the total bank deposits after eliminating non-incomeitems. This method stands on the premise that depositsrepresent taxable income unless otherwise explained as beingnon-taxable items. This method may be used only where theBIR has been legally allowed access to the taxpayer’s bankrecords. (Chapter XIII. Indirect Approach to Investigation, Handbook

on Audit Procedures and Techniques – Volume I, pp. 68-74)

31. The cash expenditure method assumes that theexcess of a taxpayer’s expenditures during the tax period over his reported income for that period is taxable to the extent notdisproved otherwise. (Chapter XIII. Indirect Approach toInvestigation, Handbook on Audit Procedures and Techniques –Volume I, pp. 68-74)

32. Under the unit and value method, the determination or verification of gross receipts may be computed by applying price

65



and profit figures to the known ascertainable quality of businessof the taxpayer. (Chapter XIII. Indirect Approach to Investigation,Handbook on Audit Procedures and Techniques – Volume I, pp. 68-74)

For example, in order to determine the gross receipts of apizza parlor, multiply the pounds of flour used by the number of pizzas per pound which in turn would then be multiplied by theaverage price per pizza.

33. Third party information or access to records method.The BIR may require third parties, public or private to supplyinformation to the BIR, and thus, “obtain on a regular basis fromany person other than the person whose internal revenue taxliability is subject to audit or investigation, or from any office or officer of the national and local governments, governmentagencies and instrumentalities including the Bangko Sentral ngPilipinas and government-owned or –controlled corporations,any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers,

and the names , addresses, and financial statements of corporations, mutual fund companies, insurance companies,regional operating headquarters or multinational companies, joint accounts, associations, joint ventures or consortia andregistered partnerships, and their members; xxx” [Sec. 5 (B),NIRC of 1997)

34. A pre-assessment notice is a letter sent by theBureau of Internal Revenue to a taxpayer asking him to explainwithin a period of fifteen (15) days from receipt why he shouldnot be the subject of an assessment notice. It is part of the due

process rights of a taxpayer. As a general rule, the BIR could not issue an assessmentnotice without first issuing a pre-assessment notice because it ispart of the due process rights of a taxpayer to be given notice inthe form of a pre-assessment notice, and for him to explain whyhe should not be the subject of an assessment notice.

35. Instances where a pre-assessment notice is not

required before a notice of assessment is sent to the taxpayer.a. When the finding for any deficiency tax is the result of

mathematical error in the computation of the tax as appearingon the face of the return; or

b. When a discrepancy has been determined between thetax withheld and the amount actually remitted by the withholdingagent; or

c. When a taxpayer opted to claim a refund or tax creditof excess creditable withholding tax for a taxable period wasdetermined to have carried over and automatically applied thesame amount claimed against the estimated tax liabilities for thetaxable quarter or quarters of the succeeding table year; or

d. When the excess tax due on excisable articles has notbeen paid; or

e. When an article locally purchased or imported by anexempt person, such as, but not limited to vehicles, capitalequipment, machineries and spare parts, has been sold, trade or transferred to non-exempt persons. (Sec. 228, NIRC of 1997)

36. The word assessment when used in connection withtaxation, may have more than one meaning. More commonlythe word “assessment” means the official valuation of ataxpayer’s property for purpose of taxation. The above

definition of assessment finds application under tariff andcustoms taxation as well as local government taxation.

For real property taxation, there may be a specialmeaning to the burdens that are imposed upon realproperties that have been benefited by a public worksexpenditure of a local government. It is sometimes called aspecial assessment or a special levy. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R.No. 128315, June 29, 1999)

For internal revenue taxation assessment as laying atax. The ultimate purpose of an assessment to such a

connection is to ascertain the amount that each taxpayer is topay. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

37. An assessment is a notice duly sent to the

taxpayer which is deemed made only when the BIRreleases, mails or sends such notice to the taxpayer.(Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

38. An affidavit-report of the examiners used tosupport a criminal complaint for tax evasion does not

66



constitute an assessment that may be the subject of amotion for reconsideration/reinvestigation. The affidavit-report merely contains a computation of the liabilities. It does notstate a demand or a period for payment. It is not addressed tothe taxpayers but to the Department of Justice. Clearly, it wasnot meant to be a notice of the tax due and a demand for thepayment thereof. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June

29, 1999)

39. Tirso submitted to the BIR a sworn statement informing that PNB failed to withhold the final tax oninterest earnings and/or yields from the money market placements of PNOC. Subsequently, PNOC and PNBentered into a compromise with the BIR. It paid only 30%of the tax, with Tirso receiving his informer’s reward through four installments. Not satisfied with the amount hereceived Tirso demanded his supposed entitlement, and upon refusal of the BIR Commissioner instituted a petition

for review with the CTA on the ground that BIR Commissioner acted with grave abuse of discretion and/or whimsical exercise of jurisdiction that resulted in a grossand unconscionable diminution of his informer’s reward.

During the pendency of the CTA case a new BIR Commissioner was appointed who sent a letter of demand to PNB for the balance of the 70% unpaid withholding taxes.

The CTA declared the compromise agreement without force and effect, ordered the enforcement of theassessment against PNB, and upon collection the payment

to Tirso of the informer’s reward amounting to about P44million.a. Did the CTA have jurisdiction on the

controversy involving the BIR and the PNB (bothgovernment instrumentalities) regarding the new assessment (the new letter of demand by the new BIR Commissioner) in the light of the provisions of P.D. No. 242 that mandates that in all cases involving questions of law between or among departments, bureaus, offices, agenciesand instrumentalities of the National Government including government-owned or controlled corporations shall be

administratively settled or adjudicated by the Secretary of Justice ?

b. Did the CTA act within the ambit of the law when it declared the compromise agreement without forceand effect ?

SUGGESTED ANSWER:a. The CTA has jurisdiction. The dispute is not

between the government agencies (BIR- the tax-collector,

PNOC-the taxpayer, and PNB-the withholding agent) but itlikewise involves a private party, Tirso – the tax informer henceit is beyond the purview of the Secretary of Justice.

Furthermore, the action of the new BIR Commissioner todemand form PNOC the balance of the tax is not a newassessment but merely part of the continuing effort of the BIR tocollect the tax. Surely the CTA has jurisdiction because it is adecision of the BIR Commissioner on other matter arising under the NIRC.

b. Yes. The CTA may set aside a compromiseagreement that is contrary to law and public policy. It was

contrary to law because the agreement violated thecommissioner’s authority under the NIRC to enter into acompromise agreement. Furthermore, the compromise isagainst public policy because it will result to huge tax revenuelosses. Comprises involving taxes shall be subject to strictscrutiny of the courts. After all the state is not estopped by themistakes of its agents. (Philippine National Oil Company v. Court of

Appeals, et al., G. R. No. 109976, April 26, 2005 and companion case. Although the case interpreted the provisions of the NIRC of 1977, thedoctrines enunciated are still good doctrines because the provisionsare retained under the provisions of the NIRC of 1997)

40. What is a self-assessed tax ?

SUGGESTED ANSWER: A tax that the taxpayer himself assesses or computes and pays to the taxing authority. It is atax that self-assessed by the taxpayer without the intervention of an assessment by the tax authority to create the tax liability.

The Tax Code follows the pay-as-you-file system of taxation under which the taxpayer computes his own tax liability,prepares the return, and pays the tax as he files the return. Thepay-as-you-file system is a self-assessing tax return.

Internal revenue taxes are self-assessing. [Dissent of J.Carpio in Philippine National Oil Company v. Court of Appeals, et al., G.

R N 109976 A il 26 2005 d i iti T i t f th t O t b 28 198867



R. No. 109976, April 26, 2005 and companion case citing Tupaz v.Ulep, 316 SCRA 118 (1999) in turn citing Vitug and Acosta, Tax Law and Jurisprudence, 1st edition, 1997, p. 267]

A clear example of a self-assessed tax is the annualincome tax, which the taxpayer himself computes and payswithout the intervention of any assessment by the BIR. Theannual income tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or may not

investigate or audit the annual income tax return filed by thetaxpayer. The taxpayer’s liability for the income tax does notdepend on whether or not the BIR conducts such subsequentinvestigation or audit.

However, if the taxing authority is first required toinvestigate, and after such investigation to issue the taxassessment that creates the tax liability, then the tax is nolonger self-assessed. (Dissent of J. Carpio in Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April 26, 2005and companion case)

43. On October 28, 1988 taxpayer bank received anotice of assessment from the BIR informing it that deficiency taxes are due from the said taxpayer bank without any findings of law or fact but supported only witha computation. On December 10, 1988, the taxpayer bank counsel filed a letter that “as soon as this is explained and clarified in a proper notice of assessment, we shall informyou of the taxpayer’s decision on whether to pay or protest the assessment.” The taxpayer bank insists that theassessment was not valid. Of course, BIR took theopposite view contending further that there was noseasonable protest, hence the tax is sue and collectible.Who is correct ?

SUGGESTED ANSWER: The BIR is correct. Under theold law Sec. 270, it is enough merely that the BIR Commissioner shall “notify the taxpayer of his findings.” The statement, “Thetaxpayer shall be informed in writing of the law and the facts onwhich the assessment is made; otherwise the assessment shallbe void” is an amendment to Sec. 270 (now renumbered to Sec.228) which took effect only sometime in 1998 upon the effectivityof the Tax Reform Act of 1997.

The taxpayer bank counsel’s December 10, 1988 is not aseasonable protest because it was filed thirty (30) days after

receipt of the assessment on October 28, 1988. (Commissioner of Internal Revenue v. Bank of Philippine Islands, G. R. No. 134062,

April 17, 2007)

41. What are the prescriptive periods for

making assessments of internal revenue taxes ? SUGGESTED ANSWER:

a. Three (3) years from the last day within which to file

a return or when the return was actually filed, whichever is later (Sec. 203, NIRC of 1997);

b. ten years from discovery of the failure to file the taxreturn or discovery of falsity or fraud in the return [Sec. 222 (a),

NIRC of 1997 ; or c. within the period agreed upon between the

government and the taxpayer where there is a waiver of theprescriptive period for assessment (Sec. 222 (b), NIRC of 1997).

42. For the purpose of safeguarding taxpayers from anyunreasonable examination, investigation or assessment, our tax

law provides a statute of limitations in the collection of taxes.[Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171,February 24, 1999.303 SCRA 546; Philippine Journalists, Inc. v.Commissioner of Internal Revenue, G. R. No. 162852, December 16,

2004;], as well as their assessments.

43. Unreasonable investigation contemplates cases wherethe period for assessment extends indefinitely because thisdeprives the taxpayer of the assurance that it will no longer besubjected to further investigation for taxes after the expiration of a reasonable period of time. (Philippine Journalists, Inc. v.

Commissioner of Internal Revenue, G. R. No. 162852, December 16,2004 with note to see Republic v. Ablaza, 108 Phil. 1105. 1108)

Laws on prescription should be liberally construed in favor of the taxpayer. Reason: for the purpose of safeguardingtaxpayers from an unreasonable examination, investigation or assessment, our tax laws provide a statute of limitation on thecollection of taxes. Thus, the law on prescription, being aremedial measure, should be liberally construed in order toafford such protection, As a corollary, the exceptions to the lawon prescription should perforce be strictly construed . [PhilippineJournalists, Inc. v. Commissioner of Internal Revenue, G. R. No.162852, December 16, 2004 citing Commissioner of Internal Revenue

B F G d i h Phil I ( Si D b I t ti l Ti C J li ’ h i O N b 22 2005 th BIR fil d ith th68



v. B.F. Goodrich Phils, Inc (now Sime Darby International Tire Co.,Inc.),., et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546]

The prescriptive period was precisely intended to givethe taxpayers peace of mind. (Commissioner of Internal Revenue v.B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February 24, 1999)

NOTE: “In computing a period, the first day shall be excluded,and the last day included.” (last sentence, Art. 13, Civil Code)

44. A “jeopardy assessment” is a delinquency taxassessment which was assessed without the benefit of completeor partial audit by an authorized revenue officer, who has reasonto believe that the assessment and collection of a deficiency taxwill be jeopardized by delay because of the taxpayer’s failure tocomply with the audit and investigation requirements to presenthis books of accounts and/or pertinent records, or tosubstantiate all or any of the deductions, exemptions, or creditsclaimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)

45. Jeopardy assessment is an indication of the doubtfulvalidity of the assessment, hence it may be subject to acompromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]

46. During Juliana’s lifetime, her business affairs

were managed by the Philippine Trust Company (Philtrust).She died on April 3, 2001.Two days after her death,Philtrust, through its Trust Officer, filed her Income Tax Return for 2000, without indicating that Juliana died.

On May 22, 2001, Philtrust filed a verified petition withthe RTC for appointment as Special Administrator. Thiswas denied by the court who appointed one of the heirs asSpecial Administrator. Philtrust’s motion for reconsideration was denied.

After an investigation by the BIR of the decedent’sincome tax liability, it sent, on November 18, 2003, ademand letter and a Notice of Assessment to Juliana c/oPhiltrust at the latter’s address which was stated in the1998 Income Tax Return. No response was made neither was the BIR advised that Juliana already died.

On June 18, 2005, the BIR Commissioner issued warrants of distraint and levy to enforce collection of thedeficiency income tax liability which was served on

Juliana’s heir. On November 22, 2005, the BIR filed with theestate court a motion for allowance of claim. The heir claimed that there was no proper service of the notice of assessment and that the filing of the motion was time- barred. On the other hand the BIR made the submissionthat both the issuance of the assessment notice and themotion were all properly made on Philtrust. Furthermorethe lapse of the 30-day period within which to protest made

the assessment final, executory and uncontestable and not time barred.

Rule on the conflicting claims of the parties. ANSWER: I would rule in favor of the heir.There was no proper service of the notice of assessment

because the death of Juliana automatically severed the legalrelationship of principal and agent between her and Philtrust.The severed relationship could not be revived on the mere factthat Philtrust filed her Tax Return two days after her death.

Philtrust’s failure to file a notice of death subjects it topenal sanctions which do not include the indefinite tolling of the

prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments.(Estate of the late Juliana Diez Vda. de Gabriel v. Commissioner of Internal Revenue, G.R. No. 155541, January 27, 2004)

47. What are the requirements for the validity of a

formal letter of demand and assessment notice ? a. There must have been previously issued a pre-

assessment notice until excepted;b. It must have been issued prior to the prescriptive

period; and

c. The letter of demand calling for payment of thetaxpayer’s deficiency tax or taxes shall state the facts, the law,rules and regulations, or jurisprudence on which the assessmentis based, otherwise, the formal letter of demand and assessmentnotice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)

48. What is the presumption that flows from ataxpayer’s failure to protest an assessment ?

SUGGESTED ANSWER: “Tax assessments by taxexaminers are presumed correct and made in good faith. Thetaxpayer has the duty to prove otherwise. In the absence of

proof of any irregularities in the performance of duties, an

t d l d b B f I t l R 51 Wh t i th d t f t l ti t69



assessment duly made by a Bureau of Internal Revenueexaminer and approved by his superior officers will not bedisturbed. All presumptions are in favor of the correctness of taxassessments.” (Commissioner of Internal Revenue v. Bank of Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v.Court of Appeals, G. R. No. L-81446, 18 August 1988, 164 SCRA 524,530, citations omitted)

49. What are the reasons for presumption of correctness of assessments ?

SUGGESTED ANSWER: a. Lifeblood theoryb. Presumption of regularity (Commissioner of Internal

Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31,

2005) in the performance of public functions. (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA 397)

c. The likelihood that the taxpayer will have access tothe relevant information [Commissioner of Internal Revenue, supraciting United States v. Rexach, 482 F.2d 10 (1973). The certiorari wasdenied by the United States Supreme Court on November 19, 1973)

d. The desirability of bolstering the record-keepingrequirements of the NIRC. (Ibid.)

50. Give instances where prima facie correctness of atax assessment does not apply.

SUGGESTED ANSWER: The “ prima facie correctness of a tax assessment does not apply upon proof that an assessmentis utterly without foundation, meaning it is arbitrary andcapricious. Where the BIR has come out with a “nakedassessment” i.e., without any foundation character, thedetermination of the tax due is without rational basis.”

[Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R.No. 136975, March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d

1046 (1976); 428 US 433 (1976)] In such a situation, “thedetermination of the Commissioner contained in a deficiencynotice disappears.” [Commissioner of Internal Revenue, supra citinga U.S. Court of Appeals ruling, in Clark and Clark v. Commissioner of

Internal Revenue, 266 F. 2d 698 (1959)] “Hence, the determinationby the CTA must rest on all the evidence introduced and itsultimate determination must find support in credible evidence.”[Commissioner of Internal Revenue, supra]

51. What is the duty of a taxpayer relative to presumption of correctness of assessments ?

SUGGESTED ANSWER: “The burden of proof is on thetaxpayer contesting the validity or correctness of an assessmentto prove not only that the Commissioner of Internal Revenue iswrong but the taxpayer is right” (Commissioner of Internal Revenuev. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing

Tan Guan v. CTA, 19 SCRA 903), “otherwise the presumption in

favor of correctness of tax assessment stands.” (Commissioner,supra citing Sy Po v. Court of Tax Appeals, et al., 164 SCRA 524)

“If a taxpayer files a petition for review in the CTA andassails the assessment, the prima facie presumption is that theassessment made by the BIR is correct, and that in preparingthe same, the BIR personnel regularly performed their duties.”(Callejo, Sr., J. Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005)

52. What are the instances that suspends the

running of the prescriptive periods (Statute of Limitations)

within which to make an assessment and the beginning of distraint or levy or of a proceeding in court for thecollection, in respect of any tax deficiencies?

SUGGESTED ANSWER:a. When the Commissioner is prohibited from making the

assessment, or beginning distraint, or levy or proceeding incourt and for sixty (60) days thereafter;

b. When the taxpayer requests for and is granted areinvestigation by the commissioner;

c. When the taxpayer could not be located in the addressgiven by him in the return filed upon which the tax is being

assessed or collected;d. When the warrant of distraint and levy is duly servedupon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property couldbe located; and

e. When the taxpayer is out of the Philippines.NOTES AND COMMENTS:The holding in Commissioner of Internal Revenue v. Court

of Appeals, et al., G.R. No. 115712, February 25, 1999(Carnation case) that the waiver of the period for assessmentmust be in writing and have the written consent of the BIRCommissioner is still doctrinal because of the provisions of Sec.

223 NIRC of 1997 which provides for the suspension of the A In the National Office70



223, NIRC of 1997 which provides for the suspension of theprescriptive period:

53. The signatures of both the Commissioner and

the taxpayer, are required for a waiver of the prescriptiveperiod, thus a unilateral waiver on the part of the taxpayer doesnot suspend the prescriptive period. [Commissioner of Internal

Revenue v. Court of Appeals, et al., G.R. No. 115712, February 25,1999 (Carnation case)]

54. A waiver of the statute of limitations under the NIRC,to a certain extent, is a derogation of the taxpayers’ right tosecurity against prolonged and unscrupulous investigations andmust therefore be carefully and strictly construed. Thewaiver of the statute of limitations is not a waiver of the right toinvoke the defense of prescription. [Ynares-Santiago, J. PhilippineJournalists, Inc. v. Commissioner of Internal Revenue, G. R. No.162852, December 16, 2004 citing Ouano v. Court of Appeals, G. R.

No. 129279, 4 March 2003, 398 SCRA 525 citing People v. Donato,G.R. No. 79269, 5 June 1991, 198 SCRA 130)

55. Revenue Memorandum Order (RMO) 20-90implements the provisions of the NIRC relating to the period of prescription for assessment and collection of taxes, which RMOmust be strictly followed:

“In the execution of said waiver, the following proceduresshould be followed:

1. The waiver must be in the form identified hereof.This form may be reproduced by the Office concerned but thereshould be no deviation from such form. The phrase “but not

after __________ 19___” should be filled up.2. … …Soon after the waiver is signed by the taxpayer, the

Commissioner of Internal Revenue or the revenue officialauthorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to thewaiver. The date of such acceptance by the Bureau should beindicated.

3. The following revenue officials are authorized to signthe waiver:

A. In the National Office….3. Commissioner For tax cases

involving more than P 1M

B. In the Regional Office1. The Revenue District Officer with respect to tax cases

still pending investigation and the period to assess is about to

prescribe regardless of amount.…….5. The foregoing procedures shall be strictly followed.

Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall beadministratively dealt with.” (Philippine Journalists, Inc. v.Commissioner of Internal Revenue, G. R. No. 162852, December 16,2004 citing R.M.O. No. 20-90)

56. A waiver of the statute of limitations under the NationalInternal Revenue Code to a certain extent is a derogation of the

taxpayer’s right to security against prolonged and unscrupulousinvestigation and must therefore be strictly construed. (PhilippineJournalists, Inc. v. Commissioner of Internal Revenue, G. R. No.162852, December 16, 2004 with a note to see Ouano v. Court of

Appeals, G. R. No. 129279, 04 March 2003, 398 SCRA 525 citingPeople v. Donato, G. R. No. 72969, 05 June 1991, 198 SCRA 130)

57, a. The waiver is defective if it does not specify adefinite agreed date between the Bureau of Internal Revenueand the taxpayer within which to formally assess and collect.(Ynares-Santiago J. Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004)

b. Waiver is defective if signed only by the RevenueDistrict Officer and not the Commissioner of Internal Revenue.(Ibid.)

c. Waiver is not complete if copies were not furnishedto the taxpayer. This is so because the waiver must be signedby Commissioner of Internal Revenue. It is not correct to statethat since it was the taxpayer who proposed the waiver that healready knows the same because the waiver is not a unilateralact of the taxpayer, it must have the concurrence of theCommissioner. (Ibid.)

58 Philippine Journalists Inc (PJI) filed its Annual Waiver of the Statute of Limitations was validly effected This is71



58. Philippine Journalists, Inc. (PJI) filed its Annual Income Tax Return for the calendar year ended December 31, 1994 which showed a net income of P30 million and thetax due as P10 million. An examination of PJI’s books of account and other accounting records for the period January 1, 1994 to December 31, 1994 showed deficiency VAT, Income Tax and Withholding Tax in the total amount of P1.27 million. During the September 22, 1997 informal

conference with the Revenue District Officer, PJI’sComptroller executed a waiver of statute of limitations provided for under sections 223 and 224 of the NIRC. OnOctober 5, 1998, the BIR issued a Pre-Assessment Noticewhich was followed by Assessment/Demand No.33-1- 000757-94 stating a total deficiency taxes in the amount of P1.11 million for income tax, VAT and expanded withholding taxes, inclusive of interest and compromise penalty.

On March 16, 1999, the BIR sent to PJI a Preliminary Collection Letter to pay the assessment within 10 days

from receipt. On November 10,1999, a Final Notice BeforeSeizure was issued giving PJI 10 days from receipt withinwhich to pay. PJI received the final notice on November 24,1999 and on November 26, 1999 PJI asked that it beclarified on how the tax liability of P111 million was arrived at and requested for an extension of 30 days from receipt of the clarification within which to reply. PJI, through afollow-up letter, asserted it never received Assessment/Demand No. 33-1-000757-94. On March 28,2000 PJI received a Warrant of Distraint and/or Levy. PJI then appealed to the CTA.

The following issues are for resolution in the appeal:a. Does the CTA have jurisdiction over the

appeal ? b. Was the Waiver of the Statute of Limitations

valid ? c. Were the Assessment/Demand and the Warrant

of Distraint and/or Levy valid ? Will the appeal prosper? Explain briefly your answer.ANSWER: Yes, it will prosper.a. The CTA has jurisdiction to determine if the warrant

of distraint and levy issued by the BIR is valid and to rule if the

Waiver of the Statute of Limitations was validly effected. This isso because the CTA has exclusive appellate jurisdiction toreview by appeal decisions of the Commissioner of InternalRevenue in cases involving “other matters arising under theNational Internal Revenue Code or other laws administered bythe Bureau of Internal Revenue.” [Sec. 7 (a) (1). R. A. No. 1125, as

amended by R. A. No. 9282) Thus it was previously ruled that theCTA had jurisdiction to act on a petition to invalidate and annul

the distraint orders of the Commissioner. [Ynares-Santiago, J.Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G. R.No. 162852, December 16, 2004 citing Panrtoja v. David, 111 Phil.

197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Courtwas the decision of the CTA declaring several waivers executedby the taxpayer as null and void, thus invalidating theassessments issued by the BIR. (Ibid., citing Commissioner of Internal Revenue v. Court of Appeals, G. R. No. 115712, 25 February1999, 303 SCRA 614)

b. The Waiver of the Statute of Limitations is not validbecause it did not specify a definite agreed date between the

BIR and PJI, within which the former may assess and collectrevenue taxes. Furthermore, the waiver is also defective fromthe government side because it was signed only by a revenuedistrict officer, and not the Commissioner, as so required.Finally, PJI was not furnished a copy of the waiver.

c. The waiver document is incomplete and defectiveand thus the three-year prescriptive period within which toassess was not tolled or extended and continued to run until April 17, 1998. Consequently, Assessment/Demand No. 33-1-000757-94 issued on December 9, 1998 was invalid because itwas issued beyond the three (3) year period. In the same

manner, the Warrant of Distraint and/or Levy which PJI receivedon March 28, 2000 is also null and void for having been issuedpursuant to an invalid assessment. (Philippine Journalists, Inc. v.Commissioner of Internal Revenue, G. R. No. 162852, December 16,2004)

9. What is the procedure for suspension of

collection of taxes ? SUGGESTED ANSWER: Where the collection of the

amount of the taxpayer’s liability, sought by means of ademand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under

existing laws may jeopardize the interest of the government or Internal Revenue supra citing Republic v Lopez 117 Phil 575 578; 772



existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for thesuspension of the collection of the tax liability (Sec. 1, Rule 10,

RRCTA effective December 15, 2005) with the Court of Tax Appeals.

The motion for suspension of the collection of the taxmay be filed together with the petition for review or with theanswer, or in a separate motion filed by the interested party at

any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effectiveDecember 15, 2005)

32. What are the two ways of protesting anassessment notice for an internal revenue tax ? Alternatively, what are the two types of protests ? Explainbriefly.

SUGGESTED ANSWER:a. Request for reconsideration which refers to a plea

for re-evaluation of an assessment on the basis of existingrecords without need of additional evidence. It may involve both

a question of fact or of law or both.b. Request for reinvestigation which refers to a plea for

re-evaluation of an assessment on the basis of newly-discoveredevidence or additional evidence that a taxpayer intends topresent in the investigation. It may also involve a question of fact or law or both. (Commissioner of Internal Revenue v. PhilippineGlobal Communication, Inc., G. R. No. 167146, October 31, 2006 citingRev. Regs. No. 12-85)

33. What is that type of protest that suspends therunning of the statute of limitations for the beginning of distraint or levy or a proceeding in court for collection ? Why ?

SUGGESTED ANSWER: It is that type of protest “whenthe taxpayer requests for a reinvestigation which is granted bythe Commissioner” (Sec. 223, NIRC of 1997), that suspends therunning of the statute of limitations for collection of the tax.(Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31, 2006 citing Sec.

271, now Sec. 223, NIRC of 1997) When a taxpayer demands areinvestigation, the time employed in reinvestigation should bededucted from the total period of limitation. [Commissioner of

Internal Revenue, supra citing Republic v. Lopez, 117 Phil. 575, 578; 7SCRA 566, 568-569 (1963)]

Undoubtedly, a reinvestigation, which entails the receptionand evaluation of additional evidence, will take more time than areconsideration of a tax assessment which will be limited to theevidence already at hand; this justifies why the former cansuspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. (Commissioner of

Internal Revenue v. Philippine Global Communication, Inc., G. R. No.167146, October 31, 2006 citing Bank of Philippine Islands v.Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)

60. What are the requirements for the validity

of a taxpayer’s protest ? SUGGESTED ANSWER:a. It must be filed within the reglementary period of

thirty (30) days from receipt of the notice of assessment.b. The taxpayer must not only show the errors of the

Bureau of Internal Revenue but also the correct computationthrough1) A statement of the facts, the applicable law,

rules and regulations, or jurisprudence on which thetaxpayer’s protest is based,

2) If there are several issues involved in thedisputed assessment and the taxpayer fails to state thefacts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of theseveral issues on which the assessment is based, thesame shall be considered undisputed issue or issues, inwhich case, the taxpayer shall be required to pay thecorresponding deficiency tax or taxes attributable thereto.(Sec. 3.1.5, Rev. Regs. 12-99)c. Within sixty (60) days from filing of the protest, the

taxpayer shall submit all relevant supporting documents. [4th

par., Sec. 228 (e), NIRC of 1997]

62. Assessment and refund cases could not be

consolidated. Reason: Lifeblood doctrine. If there a pendingassessment, refund should not be granted.

63 Fraud is “deemed to comprise anything calculated 1999 and Ungab v Cusi 97 SCRA 877 are different from one73



63. Fraud is deemed to comprise anything calculated

to deceive, including all acts, omissions, and concealmentinvolving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by whichan undue and unconscionable advantage is taken of another”(Commissioner of Internal Revenue v. Estate of Benigno P. Toda, Jr.,etc. G. R. No. 147188, September 14, 2004 citing Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33; 257 SCRA 200,

225 (1996), including the government for taxes.

64. Assessment is not necessary before a taxpayer

may be prosecuted for willfully attempting in any manner toevade or defeat any tax imposed by the Internal Revenue Code.

The above doctrine may not be applicable anymorebecause of the prohibition under Rep. Act No. 9282 which doesnot allow the reservation of the tax due whenever there arecriminal cases filed. The better interpretation should be that if the government does not desire to collect but only to imprison,there is no need for an assessment. However if the government

wants both to collect and imprison then assessment isnecessary.

65. A criminal charge for tax evasion is different from

a tax 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, apre-assessment notice sent to the taxpayer WHILE such is notso with a criminal charge. The charge is filed directly with the

Department of Justice.c. A criminal complaint is instituted not to demand

payment, but to penalize the taxpayer for violation of the TaxCode WHILE the purpose of the issuance of an assessment is tocollect the tax. (Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, 1999)

66. The doctrines in Commissioner of Internal

Revenue v. Court of Appeals, et al., G.R. No. 119322, June 4,1996 , Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29,

1999 and Ungab v. Cusi , 97 SCRA 877, are different from oneanother.67. In Ungab, there was a prima facie attempt to

evade taxes because of the taxpayer’s failure to declare in hisincome tax return “his income derived from banana saplings”hence the case was filed despite the absence of a notice of assessment.

68. In the Fortune Tobacco case no criminal casewas filed, because the registered wholesale price of the goods,approved by the BIR is presumed to be the actual wholesaleprice, therefore, not fraudulent and unless and until the BIR hasmade a final determination of what is supposed to be the correcttaxes, the taxpayer should not be placed in the crucible of criminal prosecution.

69. While it is true as stated on Commissioner v.

Pascor Realty and Development Corporation, that a criminalcomplaint is instituted not to demand payment, but to penalize

the taxpayer for violation of the Tax Code, “The judgment in thecriminal case shall not only impose the penalty but shall alsoorder payment of the taxes subject of the criminal case as finallydecided by the Commissioner .” [3rd par., Sec. 205 (b), NIRC of 1997]

70. A compromise is a contract whereby the parties, bymaking reciprocal concessions, avoid a litigation or put an end toone already commenced. (Art. 2028, Civil Code)

71. A compromise penalty could not be imposed by

the BIR, if the taxpayer did not agree. A compromise being, byits nature, mutual in essence requires agreement. The paymentmade under protest could only signify that there was noagreement that had effectively been reached between theparties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001)

72. What tax cases may be the subject of a

compromise ?

SUGGESTED ANSWER: The following cases may 74 The Commissioner may compromise the

74



SUGGESTED ANSWER: The following cases may,upon taxpayer’s compliance with the basis for compromise, bethe subject matter of compromise settlement:

a. Delinquent accounts;b. Cases under administrative protest after issuance of

the Final Assessment Notice to the taxpayer which are stillpending in the Regional Offices, Revenue District Offices, LegalService, Large Taxpayer Service (LTS), Collection Service,

Enforcement Service and other offices in the National Office;c. Civil tax cases being disputed before the courts;d. Collection cases filed in courts;e. Criminal violations, other than those already filed in

court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs.No. 30-2002)

73. What tax cases could not be the subject

of compromise ? SUGGESTED ANSWER:a. Withholding tax cases unless the applicant-taxpayer

invokes provisions of law that cast doubt on the taxpayer’sobligation to withhold.;

b. Criminal tax fraud cases, confirmed as such by theCommissioner of Internal Revenue or his duly authorizedrepresentative;

c. Criminal violations already filed in court;d. Delinquent accounts with duly approved schedule of

installment payments;e. Cases where final reports of reinvestigation or

reconsideration have been issued resulting to reduction in theoriginal assessment and the taxpayer is agreeable to such

decision by signing the required agreement form for thepurpose. On the other hand, other protested cases shall behandled by the Regional Evaluation Board (REB) or the NationalEvaluation Board (NEB) on a case to case basis;

f. Cases which become final and executory after final judgment of a court where compromise is requested on theground of doubtful validity of the assessment; and

g. Estate tax cases where compromise is requested onthe ground of financial incapacity of the taxpayer . (Sec. 2, Rev.Regs. No. 30-2002)

74. The Commissioner may compromise the

payment of any internal revenue tax when:a. A reasonable doubt as to the validity of the claim

against the taxpayer exists provided that the minimumcompromise entered into is equivalent to forty percent (40%) of the basic tax; or

b. The financial position of the taxpayer demonstrates aclear inability to pay the assessed tax provided that the

minimum compromise entered into is equivalent to ten percent(10%) of the basic assessed tax

In the above instances the Commissioner is allowed toenter into a compromise only if the basic tax involved does notexceed One million pesos (P1,000,000.00), and the settlementoffered is not less than the prescribed percentages. [Sec. 204(A), NIRC of 1997]

In instances where the Commissioner is not authorized,the compromise shall be subject to the approval of theEvaluation Board composed of the Commissioner and the four (4) Deputy Commissioners.

75. The Commissioner of Internal Revenue is

authorized to abate or cancel a tax liability, when:a. The tax or any portion thereof appears to be unjustly

or excessively assessed; or b. The administration and collection costs involved do

not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997]

76. The offer to compromise a delinquent account or disputed assessment on the ground of reasonable doubt as to

the validity of the assessment may be accepted when it isshown that:a. The delinquent account or disputed assessment is one

resulting from a jeopardy assessment. or b. The assessment seems to be arbitrary in nature,

appearing to be based on presumptions and there is reason tobelieve that it is lacking in legal and/or factual basis; or

c. The taxpayer failed to file an administrative protest onaccount of the alleged failure to receive notice of assessmentand there is reason to believe that the assessment is lacking inlegal and/or factual basis; or

d The taxpayer failed to file a request for c The taxpayer is suffering from a networth deficit (total75



d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that theassessment is lacking in legal and/or factual basis; or

e. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or hisauthorized representative, in some cases, within 30 days fromreceipt thereof and there is reason to believe that the

assessment is lacking in legal and/or factual basis; or f. The assessments were issued on or after January 1,

1998, where the demand notice allegedly failed to comply withthe formalities under Sec. 228 of the National Internal RevenueCode of 1997; or

g. Assessments made based on the “Best EvidenceObtainable Rule” and there is reason to believe that the samecan be disputed by sufficient and competent evidence; or

h. The assessment was issued within the prescriptiveperiod for assessment as extended by the taxpayer’s executionof Waiver of the Statute of Limitations the validity or authenticity

of which is being questioned or at issue and there is strongreason to believe and evidence to prove that it is not authentic.(Sec. 3, 1, Rev. Regs. No. 30-2002)

77. The offer to compromise based on financial incapacitymay be accepted upon showing that:

a. The corporation ceased operation or is alreadydissolved Provided, that tax liabilities corresponding to theSubscription Receivable or Assets distributed/distributable to thestockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be

considered for compromise; or b. The taxpayer, as reflected in its latest Balance Sheetsupposed to be filed with the Bureau of Internal Revenue, issuffering from surplus or earnings deficit resulting to impairmentin the original capital by at least 50%, provided that amountspayable to due to stockholders other than business-relatedtransactions which are properly ineludible in the regular “accounts payable” are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or

c. The taxpayer is suffering from a networth deficit (totalliabilities exceed total assets) computed by deducting totalliabilities (net of deferred credits and amounts payable tostockholders/owners reflected as liabilities, except business-related transactions) from total assets (net of prepaid expenses,deferred charges, pre-operating expenses, as well as appraisalincreases in fixed assets) taken from the latest audited financialstatements, provided that in the case of an individual taxpayer,

he has no other leviable properties under the law other than hisfamily home; or

d. The taxpayer is a compensation income earner with noother source of income and the family’s gross monthlycompensation income does not exceed, if single, P10,500 or less, or if married, whose salary together with his spouse isP21,000 per month, or less, and it appears that the taxpayer possesses no other leviable/distrainable assets other than hisfamily home; or

e. The taxpayer has been declared by any competenttribunal/authority/body/government agency as bankrupt or

insolvent. (Sec. 3. 2, Rev. in relation to Sec.4.1.1 both of Regs. No.30-2002)

27. What is the prescriptive period for collecting internal revenue taxes ?

SUGGESTED ANSWER: There are three (3) prescriptiveperiods for the collection of an internal revenue tax:

a. Collection upon a false or fraudulent return or noreturn without assessment. In case of a false or fraudulentreturn with the intent to evade tax or of failure to file a return, “aproceeding in court for the collection of such tax may be filed

without assessment, at any time within ten (10) years after thediscovery of the falsity, fraud or omission.” [Sec. 222 (a), NIRC of 1997)

b. Collection upon a false or fraudulent return or noreturn with assessment. Any internal revenue tax which hasbeen assessed (because the return is false or fraudulent withintent to evade tax or of failure to fail a return), within a period of ten (10) years from discovery of the falsity, fraud or omission“may be collected by distraint or levy or by a proceeding incourt within five (5) years following the assessment of thetax.” [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasissupplied)

c. Collection upon an extended assessment. Where a referred to in the former Sec. 269 which provided for a prescriptive

76



c. Collection upon an extended assessment. Where atax has been assessed with the period agreed upon betweenthe Commissioner and the taxpayer in writing (which shouldinitially be within three (3) years from the time the return wasfiled or should have been filed), or any extensions before theexpiration of the period agreed upon, the tax “may be collectedby distraint or levy or by a proceeding in court within theperiod agreed upon in writing before the expiration of the

five (5) year period. The period so agreed upon may beextended by subsequent written agreements made before theexpiration of the period previously agreed upon.” [Sec. 222 (d), inrelation to Secs. 222 (b) and 203, NIRC of 1997, emphasis supplied)

d. Collection upon a return that is not false or fraudulent, or where the assessment is not an extendedassessment. “Except as provided in Section 222, internalrevenue taxes shall be assessed within three (3) years after thelast day prescribed by law for the filing of the return, and noproceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such

period; Provided, That in case where a return is filed beyond theperiod prescribed by law, the three (3) year period shall becomputed from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by lawfor the filing thereof shall be considered filed on such last day.”(Sec. 203, NIRC of 1997, emphasis supplied)

NOTES AND COMMENTS:a. Both the former Sec. 269, NIRC of 1977 and Sec.222

of NIRC of 1997 do not refer to a “regular return.” It is clear that inenacting Sec. 222, entitled “Exceptions as to the period of limitation of assessment and collection of taxes,” the NIRC of 1997 has eliminatedsub-paragraph c of the former Sec. 269 of the NIRC, also entitled

“Exceptions as to the period of limitation of assessment and collectionof taxes.” Said Sec. 269 (c), reads “Any internal revenue tax whichhas been assessed within the period of limitation above-prescribedmay be collected by distraint or levy or by a proceeding in court withinthree years following the assessment of the tax.”

A perusal of Sec. 222 of the NIRC is clear that it covers onlythree scenarios only. 1) No assessment was made upon a false or fraudulent return or omission to file a return; 2) an assessment wasmade upon a false or fraudulent return or omission to file a return; and3) an extended assessment issued within a period agreed upon by theCommissioner and the taxpayer. The same scenarios are those

p p pperiod for collection of three (3) years.

It is clear therefore that neither Sec. 222 nor the former Sec.269 provide for an instance where the assessment was made upon a“regular return” or one that is not false or fraudulent, or that there wasan agreement to extend the period for assessment.

Resort should therefore be made to the three (3) year periodreferred to in Sec. 203 of the NIRC of 1997 which reads, “Except asprovided in Section 222, internal revenue taxes shall be assessed

within three (3) years after the last day prescribed by law for the filingof the return, and no proceeding in court without assessment for the collection of such taxes x x x “ (paraphrasing and emphasissupplied)

78. What is solutio indebeti as applied to tax

cases ? ANSWER: This is erroneous payment of taxes and

occurs when the taxpayer pays under a mistake of fact, as for the instance in a case where he is not aware of an existingexemption in his favor at the time the payment was made. Such

payment is held to be not voluntary and therefore, can berecovered or refunded. (Commissioner of Internal Revenue v.

Acesite (Philippines) Hotel Corporation, G. R. No. 147295, February16, 2007)

78. What are the reasons for requiring the

filing of an administrative application for refund or credit with the Bureau of Internal Revenue before a case may befiled with the Court of Tax Appeals ?

ANSWER: The filing of an administrative claim for refund with the BIR, before filing a case with the Court of Tax Appeals, is necessary for the following reasons:

a. To afford the Commissioner an opportunity to correcthis errors or that of subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA 79)

b. To notify the Government that such taxes have beenquestioned and the notice should be borne in mind in estimatingthe revenue available for expenditures. (Bermejo v. Collector, G.R.No. L-3028, July 28, 1950)

79. As a general rule the filing of an application

for refund or credit with the Bureau of Internal Revenue is

an administrative precondition before a suit may be filed 77



a ad st at e p eco d t o be o e a su t ay be edwith the Court of Tax Appeals. Is there any exception ?

ANSWER: Yes. The failure to first file a written claim for refund or credit is not fatal to a petition for review involving adisputed assessment where an assessment was disputed butthe protest was denied by the Bureau of Internal Revenue.

To hold that the taxpayer has now lost the right to appealfrom the ruling on the disputed assessment and require him to

file a claim for a refund of the taxes paid as a conditionprecedent to his right to appeal, would in effect require of him togo through a useless and needless ceremony that would onlydelay the disposition of the case, for the Commissioner wouldcertainly disallow the claim for refund in the same way as hedisallowed the protest against the assessment. The law, shouldnot be interpreted as to result in absurdities. (vda. de San

Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. 138485,September 10, 2001 citing Roman Catholic Archbishop of Cebu v.

Collector of Internal Revenue, 4 SCRA 279 )NOTE: Reconciliation between above two numbers. An

application for refund or credit under Sec. 229 of the NIRC of 1997 isrequired where the case filed before the CTA is a refund case, which isnot premised upon a disputed assessment. There is no need for aprior application for refund or credit, if the refund is merely aconsequence of the resolution of the BIR’s denial of a protestedassessment.

81. What is the nature of the taxpayer’s remedy

of either to ask for a refund of excess tax payments or toapply the same in payment of succeeding taxable periods’ taxes ?

ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76 of

the NIRC of 1997) provides that any excess of the total quarterlypayments over the actual income tax computed in theadjustment or final corporate income tax return, shall either (a)be refunded to the corporation, or (b) may be credited againstthe estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. To ease the administration of taxcollection, these remedies are in the alternative and the choiceof one precludes the other. Since the Bank has chosen the taxcredit approach it cannot anymore avail of the tax refund.(Philippine Bank of Communications v. Commissioner of Internal Revenue, et al., G.R. No. 112024, January 28, 1999)

82. The choice, is given to the taxpayer, whether toclaim for refund under Sec. 76 or have its excess taxesapplied as tax credit for the succeeding taxable year, suchelection is not final. Prior verification and approval by theCommissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute and mandatory. It doesnot confer an absolute right on the part of the taxpayer to avail of

the tax credit scheme if it so chooses. Neither does it impose aduty on the part of the government to sit back and allow animportant facet of tax collection to be at the sole control anddiscretion of the taxpayer. (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13,2004)

83. Discuss the difference between tax refund

and tax credit . ANSWER: It may be that there is no essential difference

between a tax refund and a tax credit since both are moves of

recovering taxes erroneously or illegally paid to the government.Yet, there are unmistakable formal and practical

differences between the two modes. Formally, a tax refundrequires a physical return of the sum erroneously paid by thetaxpayer, while a tax credit involves the application of thereimbursable amount against any sum that may be due andcollectible from the taxpayer.

On the practical side, the taxpayer to whom the tax isrefunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if thetaxpayer chooses instead to receive a tax credit. (Commissioner

of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. No.144440, September 1, 2004)

84. What is the effect of a timely service of a warrant of distraint or levy on the period to collect taxes ? Explainbriefly.

ANSWER: The timely service of a warrant of distraint or levy suspends the running of the period to collect the taxdeficiency in the sense that the disposition of the attachedproperties might well take time to accomplish, extending evenafter the lapse of the statutory period for collections. (Advertising

Associates, Inc., v. Court of Appeals, 133 SCRA 765; Palanca v. 1999 and May 14, 1999 XYZ requested for the issuance of a78



ppCommissioner of Internal Revenue, 114 Phil. 203)

85. The enforcement of tax collection throughsummary proceedings may be carried out beyond thestatutory period. (Republic of the Philippines, etc. v. Hizon, G.R. No.

1304, December 13, 1999) The statutory period for collectionapplies only where a court suit is availed of for collection.

86. Civil and criminal actions and proceedings institutedin behalf of the Government under the authority of the NIRC of 1997 or other law enforced by the Bureau of Internal Revenueshall be brought in the name of the Government of thePhilippines and shall be conducted by legal officers of theBureau of Internal Revenue but no civil or criminal action for therecovery of taxes or the enforcement of any fine, penalty or forfeiture under the NIRC of 1997 shall be filed in court withoutthe approval of the Commissioner of Internal Revenue. (Sec.220, NIRC of 1997)

87. The two year period applies only to recovery of taxes or penalties NOT to tax credits availment . Absent aspecific provision in the Tax Code or special laws, the periodwould be 10 years. (Justice Vitug, concurring in Commissioner of Internal Revenue v. The Philippine Life Insurance Co., et al . G.R. No.105208, May 29, 1995 reiterating the TMX case)

88. The two-year period is not jurisdictional. Even if the two (2) year prescriptive period, if applicable, had alreadylapsed, the same is not jurisdictional [Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 161997, October 25,

2005 citing Oral & Dental College v. Court of Appeals,102 Phil. 912(1958). And may be suspended for reasons of equity and other special circumstances. [Commissioner of Internal Revenue v.Philippine National Bank, supra, citing Panay Electric Co. v. Collector,103 Phil. 819 (1958)]

89. In early April 1999 XYZ Bank advanced theamount of P180 million to the BIR its income tax payment for the bank’s 1999 operations in response for thegovernment’s call to generate more revenues for national development. In separate letters dated April 19 and 29,

y , qTax Credit Certificate (TCC) to be utilized against future tax obligations of the bank.

By the end of 1999, a credit balance in the amount of P73 million remain which was carried over for the years2000 to 2004 but was not availed of because XYZ incurred losses during the period. On July 28, 2005 PNB reiterated its request for the issuance of a TCC for the P73 million

balance. The BIR rejected the request on the ground of among others prescription having been applied for beyond the two-year reglementary period for filing claims for refund as set forth in Sec. 229 of the NIRC of 1997.

Has the claim prescribed ? Explain briefly your answer.

AMSWER: The claim has not prescribed. Sec. 229 of theTax Code, as couched, particularly its statute of limitationscomponent, is in context intended to apply to suits for anynational internal revenue tax “alleged to have been erroneouslyor illegally assessed or collected, or of any penalty claimed to

have been collected without authority, or of any sum alleged tohave excessively or in any manner wrongfully collected.”

Analyzing the underlying reason behind the advancepayment (to help the government) made by XYZ it would beimproper to treat the same as erroneous, wrongful or illegalpayment of tax within the meaning of Sec. 229 of the NIRC of 1997.

An availment of tax credit due for reasons other than theerroneous or wrongful collection of taxes may have a differentprescriptive period. (Commissioner of Internal Revenue v. PhilippineNational Bank, G.R. No. 161997, October 25, 2005 citing

Commissioner of Internal Revenue v. The Philippine Life InsuranceCo., et al . G.R. No. 105208, May 29, 1995) Absent any specificprovision in the Tax Code or special laws, that period would beten (10) years under Article 1144 of the Civil Code.(Commissioner of Internal Revenue v. Philippine National Bank, supra)

89. ABC Bank filed with the BIR an application for atax credit/refund for alleged excess payments of its grossreceipts tax (GRT) for the 3rd and 4th quarters of 2003 and the entire 2004 amounting to P14 million. Since no actionwas taken by the Commissioner on its claim, ABC filed acase with the CTA on October 18, 2005 to comply with the

two-year reglementary period and avoid the prescription of b. The doctrine that delay of the Commissioner in79



y g y p p pits action. Only July 30, 2007, the CTA rendered a decisiondenying the claim for ABC’s failure to file its formal offer of evidence in the CTA.

ABC Bank now seeks refuge in Onate v. Court of Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where theSupreme Court allowed evidence, not formally offered, tobe considered on condition that: (1) evidence must have

been identified by testimony duly recorded and (2) it must have been incorporated in the records of the case.

Is ABC correct ? SUGGESTED ANSWER: No. A tax refund s in the nature

of a tax exemption which must be construed strictissimi jurisagainst the taxpayer. The taxpayer must present convincingevidence to substantiate a claim for refund. Without anydocumentary evidenced on record, ABC failed to discharge theburden of proving its right to a tax credit/tax refund. (Far East Bank & Trust Company v. Commissioner of Internal Revenue, G. R.No. 149589, September 15, 2006)

90. Where a corporation is dissolved It becomes

necessary for the bank to file its income tax return within 30days after approval by the SEC of its plan or resolution of dissolution. Indeed, it would be absurd for the bank to wait untilthe fifteenth day of April, after it ceased its operations, beforefiling its income tax return.

Thus, the two-year prescriptive period should be countedfrom 30 days after the approval by the SEC of its plan for dissolution. There is no need to file a Final Adjustment Return

because there is nothing to adjust or to audit. After thecorporation ceased operation its taxable year would beshortened. (Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)

91. A simultaneous filing of the application with

the BIR for refund/credit and the institution of the court suitwith the CTA is allowed. There is no need to wait for a BIRdenial. REASONS:

a. The positive requirement of Section 230 NIRC (nowSec. 229, NIRC of 1997);

yrendering decision does not extend the peremptory period fixedby the statute;

c. The law fixed the same period two years for filing aclaim for refund with the Commissioner under Sec. 204, par. 3,NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit incourt under Sec. 230, NIRC (now Sec. 229, NIRC of 1997),unlike in protests of assessments under Sec. 229 (now Sec.

228, NIRC of 1997), which fixed the period (thirty days fromreceipt of decision) for appealing to the court, thus clearlyimplying that the prior decision of the Commissioner isnecessary to take cognizance of the case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal Revenue,et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151)

92. The rule is that no interest on refund of tax can beawarded unless authorized by law or the collection of the taxwas attended by arbitrariness. An action is not arbitrary when

exercised honestly and upon due consideration where there isroom for two opinions, however much it may be believed that anerroneous conclusion was reached. Arbitrariness presupposesinexcusable or obstinate disregard of legal provisions. (Philex Mining Corporation v. Commissioner of Internal Revenue, et al., G.R.No. 120324, April 21, 1999)

93. The grant of a refund is founded on the

assumption that the tax return is valid, i.e. that the factsstated therein are true and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21, 1994,234 SCRA 348) Without the tax return it would be virtually impossible

to determine whether the proper taxes have been assessed and paid. After all, it is axiomatic that a claimant has the burden of proof toestablish the factual basis of his or her claim for tax credit or refund.

Tax refunds, like tax exemptions, are construed strictly against the

taxpayer . (Paseo Realty & Development Corporation v. Court of Appeals, et al., G. R. No. 119286, October 13, 2004)

However, in BPI-Family Savings Bank v. Court of Appeals, 386

Phil. 719; 326 SCRA 641 (2000), refund was granted, despite thefailure to present the tax return, because other evidence was

presented to prove that the overpaid taxes were not applied.(Ibid.)

Tax refunds partake of the nature of tax exemptions and80



12. What are the three (3) conditions for the grant of a claim for refund of creditable withholding tax ?

SUGGESTED ANSWER:a. The claim is filed with the Commissioner of Internal

Revenue within the two-year period from the date of thepayment of the tax.

b. It is shown on the return of the recipient that the

income payment received was declared as part of the grossincome; and

c. The fact of withholding is established by a copy of astatement duly issued by the payee showing the amount paidand the amount of tax withheld therefrom. (Banco Filipino Savingsand Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682,March 27, 2007)

NOTES AND COMMENTS:a. Proof of fact of withholding. “Sec. 10. Claim for

tax credit or refund. – (a) Claims for Tax Credit or Refund of Income tax deducted and withheld on income payments shall be

given due course only when it is shown on the return that theincome payment received has been declared as part of thegross income and the fact of withholding is established by acopy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of the taxwithheld therefrom xxx” (Rev. Regs. No. 6-85, as amended)

The document which may be accepted as evidence of thethird condition, that is, the fact of withholding, must emanatefrom the payor itself, and not merely from the payee, and mustindicate the name of the payor, the income payment basis of thetax withheld, the amount of the tax withheld and the nature of the tax paid. . (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007)

12. What should be established by a taxpayer for the grant of a tax refund ? Why ?

SUGGESTED ANSWER: A taxpayer needs to establishnot only that the refund is justified under the law, but also thecorrect amount that should be refunded.

If the latter requisite cannot be ascertained withparticularity, there is cause to deny the refund, or allow it only tothe extent of the sum that is actually proven as due.

are thus construed strictissimi juris against the person claimingthe exemption. The burden in proving the claim for refundnecessarily falls on the taxpayer. (Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No.138919, May 2, 2006)

11. What are the requisites for the refund of illegally

deducted taxes from the income of an employees’ trust fund ?

SUGGESTED ANSWER: What has to be established, asa matter of evidence, is that the amount sought to be refundedto the bank-trustee corresponds to the tax withheld on theinterest income earned from the exempt employees’ trust. Theneed to be determinate is important, specially if the bank trustee,in the ordinary course of its banking business, earns interestincome not only from its investments of employees’ trusts, buton a whole range of accounts which do not enjoy the samebroad exemption as employees’ trusts. (Far East Bank Trust and

Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No.138919, May 2, 2006)

NOTES AND COMMENTS:a. Employees’ trust fund, defined. An employees’

trust fund is a trust established by an employer to provide retirement,pension, or other benefits to employees - it is a separate taxable entityestablished for the exclusive benefit of the employees. (Development Bank of the Philippines v. Commission on Audit, 422 SCRA 459)

b. Income of employees’ trust is tax exempt. “Anyprovision of law to the contrary notwithstanding, the retirementbenefits received by official and employees of private firms, whether individual or corporate, in accordance with a reasonable private

benefit plan maintained by the employer shall be exempt from all taxesand shall not be liable to amendment, levy or seizure by or under anylegal or equitable process whatsoever except to pay a debt of theofficial or employee concerned to the private benefit plan or thatarising from liability imposed in a criminal action’ x x x “ (Sec. 1, Rep.

Act 4917) A tax-exempt employees’ trust fund is referred to under the

NIRC of 1997 as a “reasonable private retirement plan, which means“a pension, gratuity, stock bonus or profit-sharing plan maintained byan employer for the benefit of some or all of his officials or employees,wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials andemployees the earnings and principal of the fund thus accumulated,

and wherein it is provided in said plan that at no time shall any part of th i f th f d b d f b di t d t

employee’s trust has not been shown as they have been81



the corpus or income of the fund be used for, or be diverted to, anypurpose other than for the exclusive benefit of the said officials or employees.” [Sec. 32 (B) (6 ) (a), NIRC of 1997]

c. Extent of exemption. The tax exemption enjoyed byemployees’ trust is absolute irrespective of the nature of the tax. Itdoes not apply only to the tax on interest income from money marketplacements, bank deposits, other deposit substitute instruments andgovernment security, because the source of the interest income does

not have any effect on the exemption enjoyed by employee’s trusts.(Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue, et al., G. R. No. 138919, May 2, 2006)

62. A bank-trustee of employee trusts filed anapplication for the refund of taxes withheld on the interest incomes of the investments made of the funds of theemployees’ trusts. Instead of presenting separateaccounts for interest incomes made of these investments,the bank-trustee instead presented witness to establishthat it would next to impossible to single out the specific

transactions involving the employees’ trust funds fromthe totality of all interest income from its total investments. On the above basis will the application for refund prosper ?

SUGGESTED ANSWER: No. The application for refundwill not prosper.

The bank-trustee needs to establish not only that therefund is justified under the law (which is so because incomesof employees’ trusts are tax exempt), but also the correctamount that should be refunded.

Tax refunds partake of the nature of tax exemptions and

are thus construed strictissimi juris against the person or entityclaiming the exemption. The burden in proving the amount tobe refunded necessarily falls on the bank-trustee, and there isan apparent failure to do so.

A necessary consequence of the special exemptionenjoyed alone by employees’ trusts would be a necessarysegregation in the accounting of such income, interest or otherwise, earned from those trusts from that earned by theother clients of the bank-trustee. (Far East Bank and Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May 2,

2006) The amounts that are the exempt earnings of the

commingled with the interest income of the other clients of thebank-trustee.

LOCAL GOVERNMENT CODE ON TAXATION

LOCAL TAXATION

1. The fundamental principles of local taxationare:

a. Uniformity;b. Taxes, fees, charges and other impositions shall be

equitable and based on ability to pay, for public purposes, notunjust, excessive, oppressive or confiscatory, not contrary tolaw, public policy, national economic policy or in restraint of

trade;c. The levy and collection shall not be let to any private

person;d. Inures solely to the local government unit levying the

tax;e. The progressivity principle must be observed.

2. A law which deprives local government unitsof their power to tax would be unconstitutional. Theconstitution has delegated to local governments the power tolevy taxes, fees and other charges. This constitutional

delegation may only be removed by a constitutional amendment.

3. The authority under the Local Government Code tocollect taxes on quarry resources applies only to thoseextracted from public lands. (Sec. 134 in relation to Sec. 138,Local Government Code)

4. The Local Government Code prohibits localgovernment units from collecting excise taxes on articlesenumerated under the NIRC, and taxes, fees or charges onpetroleum products. (Sec. 133 [h], Local Government Code in

relation to the Tax Code). While the Tax Code levies a tax on all

quarry resources, regardless of origin, whether extracted from Philippines. It is thus, an instrumentality of the National 82



public or private lands, the Local Government Code authorizesthe local government unit to impose such taxes on those takenfrom public lands. Thus, quarry resources extracted fromprivate lands are taxable under the NIRC and not by localgovernment units. (The Province of Bulacan, et al., v. The Court of

Appeals, etc., et al., 299 SCRA 442)

5. Professional basketball games should pay theamusement taxes collected by the BIR and not theamusement taxes collected by the local governments. Theamusement tax which provinces and cities are allowed to collectunder Sec. 140 of the Local Government Code, refers to “anamusement tax to be collected from proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxingstadia, and other places of amusement.” The authority to taxprofessional basketball games is not included therein because itis a national tax provided for under Sec. 125 of the 1997 TaxCode which provides that, “There shall be collected from the

proprietor, lessee or operator of cockpits, cabarets, night or dayclubs, boxing exhibitions, professional basketball games, Jai-Alaiand racetracks, a tax equivalent to: xxxx (d) Fifteen percent(15%) in the case of professional basketball games envisionedin Presidential Decree No. 971: Provided, however, That the taxherein shall be in lieu of all other percentage taxes of whatever nature and description; xxx” (Philippine Basketball Association v.Court of Appeals, et al ., G.R. No. 119122, August 8, 2000)

6. The primary reason for the withdrawal of taxexemption privileges granted to government owned andcontrolled corporations and all other units of government wasthat such privilege resulted to serious tax base erosion anddistortions in the tax treatment of similarly situated enterprises,hence resulting in the need for these entities to share in therequirements of development, fiscal or otherwise, by paying thetaxes and other charges due them. (Philippine Ports Authority v.City of Iloilo, G. R. No. 109791, July 14, 2003)

8. National Power Corporation (NPC) is of theinsistence that it is not subject to the payment of franchises taxes imposed by the Province of Isabelabecause all of its shares are owned by the Republic of the

Government which is exempt from local taxation. As such it is not a private corporation engaged in “business enjoying franchise”

Is such contention meritorious ? SUGGESTED ANSWER: No.

7. Philippine Long Distance Telephone Company,Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a localgovernment unit, to impose and collect a local franchise taxbecause the Local Government Code has withdrawn all taxexemptions previously enjoyed by all persons and authorizedlocal government units to impose a tax on business enjoying afranchise tax notwithstanding the grant of tax exemption tothem.

8. Professional tax may be imposed by a

province or city but not by a municipality or barangay.a. Transaction taxed: Exercise or practice of profession requiring government licensure examination.

b. Tax rate: Not to exceed P300.00.c. Tax base: Reasonable classification by the

sanggunian.d. Exception: Payment to one province or city no

longer subject to any other national or local tax, license or fee for the practice of such profession in any part of the Philippineprofessionals exclusively employed in the government.

e. Date of payment: or on before January 31 or

engaging in the profession.f. Place of payment: Province or city where theprofessional practices his profession or where he maintains hisprincipal office in case he practices his profession in severalplaces.

9. Requirements: Any individual or corporation

employing a person subject to professional tax shall requirepayment by that person of the tax on his profession beforeemployment and annually thereafter.

Any person subject to the professional tax shall write ind d i i i b k f l

On the other hand, to constitute practice of law, the individualt t il h bit ll h ld hi lf t t th bli

83



deeds, receipts, prescriptions, reports, books of account, plansand designs, surveys and maps, as the case may be, thenumber of the official receipt issued to him.

f. Exemption: Professionals exclusively employed in thegovernment shall be exempt from payment. (Sec. 139, LGC)

NOTE: For the purpose of collecting the tax, the provincial or citytreasurer or his duly authorized representative shall require from such

professionals their current annual registration cards issued bycompetent authority before accepting payment of their professional taxfor the current year. The PRC shall likewise require the professionalspresentation of proof of payment before registration of professionals or renewal of their licenses. (last par., Art. 228, Rules and RegulationsImplementing the Local Government Code of 1991)

10. Who are the professionals who, if they are

in practice of their profession, are subject to professional tax ?

SUGGESTED ANSWER: The professionals subject to theprofessional tax are only those who have passed the bar

examinations, or any board or other examinations conducted bythe Professional Regulation Commission (PRC). for example, alawyer who is also a Certified Public Accountant (CPA) must paythe professional tax imposed on lawyers and that fixed for CPAs,if he is to practice both professions. [Sec. 238 (f), Rule XXX, Rulesand Regulations Implementing the Local Government Code of 1991]

NOTE: The annual professional tax is levied on “each personengaged in the exercise or practice” of a profession but neither the lawor the implementing rules define what is practice of a profession. It isthe various professional regulatory laws or jurisprudence thatdetermine whether a person is engaged in the practice of a professionor not.

For example, the practice of civil engineering, “shall embraceservices in the form of consultation, design, preparation of plans,specifications, estimates, erection, installation and supervision of theconstruction of streets, bridges, highways, railroads, airports andhangars, portworks, canals, river and shore improvements,lighthouses, and dry docks; buildings, fixed structures for irrigation,flood protection, drainage, water supply and sewerage works;demolition of permanent structures; and tunnels. The enumeration of any work in this section shall not be construed as excluding any other work requiring civil engineering knowledge and application.” [Sec. 2(a), R.A. No. 544, as amended by R.A. No. 1582, the Civil EngineeringLaw]

must customarily or habitually hold himself out to the public as alawyer and demands compensation for the following services: Givinglegal advice, or appearing in court, or preparation of pleadings andother legal documents. (People v. Villanueva, 121 Phil. 897)

11. Overview of the power of a local government unitto impose business taxes. The power of local governmentunits to impose taxes within its territorial jurisdiction derives fromthe Constitution itself, which recognizes the power of these units“to create its own sources of revenue and to levy taxes, fees andcharges subject to such guidelines and limitations as theCongress may provide consistent with the basic policy of localautonomy. (Yamane , etc. v. BA Lepanto Condominium Corporation,G. R. No. 154993, October 25, 2005 citing Sec. 5, Article X,Constitution)

These guidelines and limitations as provided by Congressare in main contained in the Local Government Code of 1991which provides for comprehensive instances when and howlocal government units may impose taxes. The significant

limitations are enumerated primarily in Section 133 of the Code,which includes among others, a prohibition on the imposition of income taxes except when levied on banks and other financialinstitutions.

The most well-known mode of local government taxationis perhaps the real property tax. The Code specificallyenumerates several types of business on which municipalitiesand cities may impose taxes. Moreover, the local sanggunian isalso authorized to impose taxes on any other businesses nototherwise specified under the Code which the sanggunianconcerned may deem proper to tax. (Ibid.)

12. X City issued a notice of assessment

against ABC Condominium Corporation for unpaid business taxes. The Condominium Corporation is a duly constituted condominium corporation in accordance withthe Condominium Act which owns and holds title to thecommon and limited common areas of the condominium.Its membership comprises the unit owners and isauthorized under its By-Laws to collect regular assessments from its members for operating expenses,capital expenditures on the common areas and other

special assessments as provided for in the Master Deed ith ?D l ti f R t i ti f th C d i i

a. thirty percent (30%) of all sales recorded in thei i l ffi h ll b t bl b th it i i lit h

84



with ?Declaration of Restrictions of the Condominium. ABC Condominium Corporation insists that the X City

Revenue Code and the Local Government Code do not contain provisions upon which the assessment could bebased. Resolve the controversy.

ANSWER: ABC is correct. Condominium corporationsare generally exempt from local business taxation under the

Local Government Code, irrespective of any local ordinance thatseeks to declare otherwise.

X City, is authorized under the Local Government Code, toimpose a tax on business, which is defined under the Code as”trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.” By its very nature acondominium corporation is not engaged in business, and anyprofit that it derives is merely incidental, hence it may not besubject to business taxes. (Yamane , etc. v. BA LepantoCondominium Corporation, G. R. No. 154993, October 25, 2005)

13. Situs of municipal taxation where there isno branch, sales office or warehouse. For purposes of collecting business taxes, manufacturers, assemblers,repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters,wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other business shall report In caseswhere there is no such branch, sales office, or warehouse in thelocality where the sale is made, the sale shall be recorded inthe principal office along with the sales made by saidprincipal office and the tax shall accrue to the city or

municipality where said principal office is located. [Sec. 150(a), LGC; Art. 243 (b) (2),Rules and Regulations Implementing theLocal Government Code of 1991]

14. Situs of municipal taxation where there is a

factory, project office, plant or plantation in pursuit of business. The following sales allocation shall apply tomanufacturers, assemblers, contractors, producers, andexporters with a factory, project office, plant or plantation inpursuit of a business,

principal office shall be taxable by the city or municipality wherethe principal office is located, and

b. seventy percent (70%) of all sales recorded in theprincipal office shall be taxable by the city or municipality wherethe factory, project office, plant or plantation is located.

LGUs where only experimental farms are located shall notbe entitled to the above sales allocation. [Sec. 150 (a), LGC; Art.

243 (b) (3),Rules and Regulations Implementing the LocalGovernment Code of 1991, numbering and arrangement supplied]

On-site sales of commercial quantity made by experimentalfarms shall be similarly imposed the corresponding tax andallocated as shown above. [2nd par., Art. 243 (a) (5), Ibid.]

15. Situs of municipal taxation where the sales are

made by route trucks, vans, or vehicles.a. For route sales made in a locality where a

manufacturer, producer, wholesaler, retailer or dealer has abranch or sales office or warehouse, the sales are recorded in

the branch, sales office or warehouse and the tax due thereon ispaid to the LGU where such branch, sales office or warehouseis located. [Art. 243 (d) (1), Rules and Regulations Implementing theLocal Government Code of 1991]

b. For route sales made in a locality where amanufacturer, producer, wholesaler, retailer or dealer has nobranch, sales office or warehouse, the sales are recorded in thebranch, sales office or warehouse from where the route truckswithdraw their products for sale, and the tax due on such sale ispaid to the LGU where such branch, sales office or warehouseis located. [Art. 243 (d) (2), Ibid.]

c. The LGUs where the route trucks, mentioned above,deliver merchandise cannot impose any tax on said trucksexcept the annual fixed tax authorized to be imposed by theprovince or city on every delivery truck or van or any motor vehicle used by manufacturers, producers, wholesalers, dealers,or retailers in the delivery and distribution of distilled spirits,fermented liquors, softdrinks, cigars and cigarettes, and other products as may be determined by the sangguniang panlalawigan, or panlungsod. [Art. 243 (d) (3), Ibid.]

d. In addition to the annual fixed tax, cities may alsocollect from the same manufacturers, producers, wholesalers,retailers, and dealers using route trucks a mayor’s permit fee

which shall be imposed in a local tax ordinance. [Art. 243 (d) (4),Ibid ]

the buyer. (Philippine Match Co., Ltd. v. City of Cebu, et al., L-30745,January 18 1978]

85



Ibid.]

16. Illustrations of situs of taxation.

a. MI is a corporation engaged in the trading of books.It holds office in Pasig City, where all transactions are madeincluding the issuance of sales invoices. However, it alsomaintains a warehouse in Mandaluyong City which serves as its

storage area and no transactions are made therein.MI should be assessed at the gross sales or receipts of

the preceding year by Pasig City. Likewise, it may also collectthe mayor’s permit and other regulatory fees.

Mandaluyong City where the warehouse is located butwhere no transactions are made, may only collect the Mayor’spermit fee and other regulatory fees provided for under itsexisting local tax ordinances. (DOF March 29, 1993 letter toMegastrat, Inc.)

b. MC is a subsidiary of SMC. It is a manufacturer witha principal office in Pasig City maintained for management and

administrative purposes. It has a factory and sales office inQuezon City, where said route trucks withdraw their products for delivery to the customers in Pasig City.

MC should pay business taxes to Quezon City and not toPasig City. However, Pasig may levy and collect the annualfixed tax for every delivery truck or van of MC delivering goodswithin Pasig. The IRR of the LGC of 1991 provides in Article243 (2), “For route sales made in a locality where amanufacturer, producer, wholesaler, retailer or dealer has nobranch, sales office or warehouse, the sales are recorded in thebranch, sales office or warehouse from where the route trucks

withdraw their products for sale, and the tax due on such salesis paid to the LGU where such branch, sales office or warehouse is located.” (DOF February 26, 1993 letter to San Miguel Corporation)

c. The place of delivery of the subject of the contract,and not the place where the contract was perfected determinesthe situs of taxation. (Shell Co., Inc. v. Municipality of Sipocot,

Camarines Sur, 105 Phil. 1263) This is the place where the salewas consummated through delivery.

d. Matches purchased by customers outside of CebuCity but booked, paid for and delivered to carriers in Cebu Cityare taxable by Cebu City. Delivery to the carrier is delivery to

January 18, 1978]

REAL PROPERTY TAXATION

1. What are the fundamental principles of

real property taxation ? ANSWER: The fundamental principles of real property

taxation are:a. Appraisal at current and fair market value;b. Classification for assessment on the basis of actual

use;c. Assessment on the basis of uniform classification;d. Appraisal, assessment, levy and collection shall not

be let to a private person;e. Appraisal and assessment shall be equitable.NOTE: Real properties shall be appraised at the current and

fair market value prevailing in the locality where the property issituated and classified for assessment purposes on the basis of its

actual use. ( Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October 11, 2005)

2. Who determines the fair market value of properties ?

ANSWER: The reasonable market value is determined bythe assessor in the form of a schedule of fair market values. Theschedule is then enacted by the local sanggunian.

3. What is the fair market value of

properties? ANSWER: Fair market value is the price at which a

property may be sold by a seller who is not compelled to selland bought by a buyer who is not compelled to buy, taking intoconsideration all uses to which the property is adopted andmight in reason be applied.

The criterion established by the statute contemplates ahypothetical sale. Hence, the buyers need not be actual andexisting purchasers. ( Allied Banking Corporation, etc., v. QuezonCity Government, et al., G. R. No. 154126, October 11, 2005 citing

Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 )NOTE: In fixing the value of real property, assessors have to

consider all the circumstances and elements of value and must

exercise prudent discretion in reaching conclusions. [ Allied Banking Corporation etc v Quezon City Government et al G R No 154126

The assessor uses any or all of these approaches inanalyzing the data gathered to arrive at the estimated fair

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Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126,October 11, 2005 citing Reyes v. Almanzor, 196 SCRA 322, 327(1991)])

Preparation of fair market values:a. The city or municipal assessor shall prepare a schedule

of fair market values for the different classes of real property situatedin their respective Local Government Units for the enactment of anordinance by the sanggunian concerned; and

b. The schedule of fair market values shall be published in anewspaper of general circulation in the province, city or municipalityconcerned or the posting in the provincial capitol or other places asrequired by law. (Lopez v. City of Manila, et al., G.R. No. 127139,February 19, 1999)

Proposed fair market values of real property in a localgovernment unit as well as the ordinance containing theschedule must be published in full for three (3) consecutive days ina newspaper of local circulation, where available, within ten (10) daysof its approval, and posted in at lease two (2) prominent places in theprovincial capitol, city, municipal or barangay hall for a minimum of three (3) consecutive weeks. (Figuerres v. Court of Appeals, et al,.

G.R. No. 119172, March 25, 1999)

4. What are the approaches in estimating the fair

market value of real property for real property tax purposes?

ANSWER:a. Sales Analysis Approach. The sales price paid in

actual market transactions is considered by taking into accountvalid sales data accumulated from among the Registrar of Deeds, notaries public, appraisers, brokers, dealers, bankofficials, and various sources stated under the Local

Government Code.b. Income Capitalization Approach. The value of anincome-producing property is no more than the return derivedfrom it. An analysis of the income produced is necessary inorder to estimate the sum which might be invested in thepurchase of the property.

c. Reproduction cost approach is a formal approachused exclusively in appraising man-made improvements such asbuildings and other structures, based on such data as materialsand labor costs to reproduce a new replica of the improvement.

analyzing the data gathered to arrive at the estimated fair market value to be included in the ordinance containing theschedule of fair market values. ( Allied Banking Corporation, etc., v.Quezon City Government, et al., G. R. No. 154126, October 11, 2005citing Local Assessment Regulations No. 1-92)

5. Quezon City passed an ordinance whereby

the “parcels of land sold, ceded, transferred and conveyed for remuneratory consideration after the effectivity of thisrevision shall be subject to real estate tax based on theactual amount reflected in the deed of conveyance or thecurrent approved zonal valuation of the Bureau of Internal Revenue prevailing at the time of sale, cession, transfer and conveyance, whichever is higher, as evidenced by thecertificate of payment of the capital gains tax issued

therefore.” Is the proviso for the basis in determining the value

for real property tax purposes valid ?

ANSWER: No. The proviso being contrary to publicpolicy and for restraining trade is not valid for the followingreasons:

a. It mandates an exclusive rule in determining the fair market value and departs from the established procedures suchas the sales analysis approach, the income capitalizationapproach and the reproduction approach provided under therules implementing the statute. It unduly interferes with theduties statutorily placed upon the local assessor by completelydispensing with his analysis and discretion which the LocalGovernment Code and the regulations require to be exercised.

An ordinance that contravenes any statute is ultra vires andvoid.b. The “consideration approach” in the ordinance is

illegal since “the appraisal, assessment, levy and collection of real property tax shall not be let to any private person”, it willalso completely destroy the fundamental principle in realproperty taxation – that real property shall be classified, valuedand assessed on the basis of its actual use regardless of wherelocated, whoever owns it, and whoever uses it. Allowing theparties to a private sale to dictate the fair market value of the

property will dispense with the distinctions of actual use stated inthe Local Government Code and in the regulations

ownership, nevertheless, they are good indicia of possession inthe concept of owner for no one in his right mind would be

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the Local Government Code and in the regulations.c. The invalidity is not cured by the prhase “whichever

is higher” because an integral part of that system still permitsvaluing real property in disregard of its “actual use.”

d. The ordinance would result to real propertyassessments more than once every three (3) years and that isnot in the congressional intent as shown in the provisions of the

Local Government Code and the regulations. Consequently, thereal property tax burden should not be interpreted to includethose beyond what the Code or the regulations expressly clearlystate.

e. The proviso would provide a chilling effect on realproperty owners or administrators to enter freely into contractsreflecting the increasing value of real properties in accordancewith prevailing market conditions.

While the Local Government Code provides that theassessment of real property shall not be increased once everythree (3) years, the questioned proviso subjects the property to

a higher assessment every time a sales transaction is made.Real property owners would therefore postpone sales until after the lapse of the three (3) year period, or if they do so within thesaid period they shall be compelled to dispose of the property ata price not exceeding the last prior conveyance in order to avoida higher tax assessment.

In the above two scenarios real property owners areeffectively prevented from obtaining the best price possible for their properties and unduly hampers the equitable distribution of wealth. ( Allied Banking Corporation, etc., v. Quezon City Government,et al., G. R. No. 154126, October 11, 2005)

6. How is the assessment level fixed ? ANSWER: The assessment level is fixed by ordinances of

the appropriate sanggunian.

7. How is the tax rate fixed ? ANSWER: The tax rate is fixed by ordinances of the

appropriate sanggunian.

8. What is the nature of a tax declaration ? SUGGESTED ANSWER: As a rule, tax declarations or

realty tax payments of property are not conclusive evidence of

the concept of owner, for no one in his right mind would bepaying taxes for a property that is not in his actual or constructive possession. They constitute at least proof that theholder has a claim of title over the property.

The voluntary declaration of a piece of property for taxation purposes manifests not only one’s sincere and honestdesire to obtain title to the property and announces his adverse

claim against the State and all other interested parties, but alsothe intention to contribute needed revenues to the government.Such an act strengthens one’s bona fide claim of acquisition of ownership. (Buenaventura, et al., v. Republic, G. R. No. 166865,March 2, 2007 citing Heirs of Simplicio Santiago v. Heirs of Mariano E.Santiago, G. R. No. 151440, 17 June 2003, 404 SCRA 193, 199 – 200)

NOTES AND COMMENTS:a. Delayed tax declaration negates claim of

possession in concept of owner. A tax declaration is a goodindication of possession in the concept of owner. However, delayeddeclaration of property for tax purposes negates a claim of continuous,exclusive, and uninterrupted possession in the concept of owner.(Heirs of Marina C. Regalado, et al., etc., v. Republic of the Philippines,G. R. No. 168155, February 15, 2007)

b. Non-declaration of a property for tax purposesdoes not necessarily negate ownership. (Sps. Azana v.Lumbo, et al., G. R. No. 157593, March 22, 2007 Cf. Republic v. Court of Appeals, G. R. No. 1163372, 18 January 2001, 349 SCRA 451, 462)

9. Give examples of personal property under

the civil law that may be considered as real property for purposes of taxes.

SUGGESTED ANSWER: Personal property under the

civil law may be considered as real property for purposes of taxes where the property is essential to the conduct of thebusiness.

a. Underground tanks are essential to the conduct of the business of a gasoline station without which it would not beoperational. (Caltex Phils., Inc. v. Central Board of Assessment

Appeals, et al., 114 SCRA 296)

b. Light Rail Transit (LRT) improvements such asbuildings, carriageways, passenger terminals stations, andsimilar structures do not form part of the public roads since theformer are constructed over the latter in such a way that the flow

of vehicular traffic would not be impaired. The carriageways andterminals serve a function different from the public roads

on an alleged property of public domain. (Philippine PortsAuthority v City of Iloilo G R No 109791 July 14 2003) This is still

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terminals serve a function different from the public roads.Furthermore, they are not open to use by the general publichence not exempt from real property taxes. Even grantingthat the national government owns the carriageways andterminal stations, the property is not exempt because their beneficial use has been granted to LRTA a taxable entity. (Light Rail Transit Authority v. Central Board of Assessment Appeals, et al.,

G. R. No. 127316, October 12, 2000)

13. Are port and other facilities owned by thePhilippine Ports Authority exempt from real property taxes ?

SUGGESTED ANSWER: No. The fact that the port andits facilities and appurtenances, owned by the Philippine Ports Authority (PPA), are accessible to the general public does notexempt it from the payment of real property taxes. These arepatrimonial properties of PPA, not for public use, and that theoperation of the port and its facilities and the administration of itsbuildings are in the nature of ordinary business. PPA is a profitearning corporation, hence its patrimonial properties are subjectto tax. [Philippine Ports Authority v. City of Iloilo, et al., G. R. No.143214, November 11, 2004 citing Light Rail Transit Authority v.Central Board of Assessment Appeals, 342 SCRA 692 (2000)]

NOTES AND COMMENTS:a. Warehouses located in ports are property subject

to real property taxes. Ports constructed by the State areproperties of the public dominion under Art. 420 of the Civil Codewhich enumerates these as properties intended for public use.

Be that as it may, a warehouse, which, although locatedwithin the port is distinct from the port itself. Thus, it is subject totax. The warehouse, in the case at bar, may not be held as partof the port, considering its separable nature as an improvementupon the port, and the fact that it is not open for use byeveryone and freely accessible to the public.In the same way that the Supreme Court once ruled, that theexemption of public property from taxation does not extend toimprovements made thereon by homesteaders or occupants attheir own expense, it likewise upheld the taxability of thewarehouse, in the case at bar, it being a mere improvement built

Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003) This is stillgood doctrine.

14. What property are exempt from the

payment of real property tax under the Local Government Code ?

SUGGESTED ANSWER:

a. Real property owned by the Republic of thePhilippines or any of its political subdivisions except when thebeneficial use thereof has been granted to a taxable person for aconsideration or otherwise;

b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religiouscemeteries, and all lands, buildings and improvements actually,directly and exclusively used for religious, charitable andeducational purposes;

c. Machineries and equipment, actually, directly andexclusively used by local water districts; and government owned

and controlled corporations engaged in the supply anddistribution of water and generation and transmission of electricpower;

d. Real property owned by duly registeredcooperatives;

e. Machinery and equipment used for pollution controland environmental protection.

11. The Manila International Airport Authority (MIAA) was subject to real property taxes by themunicipality of Paranaque on its airport lands, and buildings on the ground that the Local Government Codehas withdrawn exemptions previously enjoyed by government-owned and controlled corporations. MIAAcontends otherwise as it claims it is not a government owned or controlled corporation. Who is correct.

SUGGESTED ANSWER: MIAA is correct because it isnot a government owned or controlled corporation but aninstrumentality of the government that is exempt from taxation.

It is not a stock corporation because its capital is notdivided into shares, neither is it a non-stock corporationbecause there are no members. It is instead an instrumentality

of the government upon which the local governments are notallowed to levy taxes fees or other charges

protest, of the taxes assessed is consistent with thedoctrine that taxes are the lifeblood of the nation and as

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allowed to levy taxes, fees or other charges. An instrumentality “refers to any agency of the National

Government, not integrated within the department frameworkvested with special functions or jurisdiction by law, endowedwith some if not all corporate powers, administering specialfunds, and enjoying operational autonomy, usually through acharter. This term includes regulatory agencies chartered

institutions and government-owned or controlled corporations.”[Sec. 2 (10), Introductory Provisions, Administrative Code of 1987] Itis an instrumentality exercising not only governmental but alsocorporate powers. It exercises governmental powers of eminent domain, police power authority, and levying of feesand charges.

Finally, the airport lands and buildings are propertyowned by the government that are devoted to public use andare properties of the public domain. (Manila International Airport

Authority v. Court of Appeals, et al., G. R. No. 155650, July 20, 2006)

16. The primary reason for the withdrawal of taxexemption privileges granted to government-owned andcontrolled corporations and all other units of governmentwas that such privilege resulted to serious tax base erosion anddistortions in the tax treatment of similarly situated enterprises,hence resulting in the need for these entities to share in their requirements of development, fiscal or otherwise, by paying thetaxes and other charges due from them. (Philippine Ports

Authority v. City of Iloilo, G.R. No.109791, July 14, 2004 citing MactanCebu International Airport Authority v. Marcos, 261 SCRA 667)

17. Real property tax declarations “are good indiciaof possession in the concept of an owner , for no one in hisright mind would be paying taxes for a property that is not in hisactual or constructive possession.” [Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, et al., G.R. No. 132161,January 17, 2005 citing Heirs of Simplicio Santiago v. Heirs of MarianoE. Santiago, G. R. No. 151440, 17 June 2003, 404 SCRA at p. 191;Llarena v. Mapili, G.R. No.146341, 7 August 2003, 408 484, 491)

18. The restriction upon the power of courts to

impeach tax assessment without a prior payment, under

doctrine that taxes are the lifeblood of the nation, and assuch their collection cannot be curtailed by injunction or any likeaction; otherwise, the state or, in this case, the local governmentunit, shall be crippled in dispensing the needed services to thepeople, and its machinery gravely disabled. (Manila Electric Company v. Barlis, G.R. No. 114231, May 18, 2001)

Thus, the trial court has no jurisdiction to entertain a

petition for prohibition absent payment under protest of the taxassessed. (Ibid.)

NOTE: While the above May 18, 2001 decision was set asideby the Supreme Court when it granted the petitioner’s second motionfor reconsideration on June 29, 2004, the author submits that theabove ruling in the May 18, 2001 decision is still valid, because whatwas reversed in the second motion for reconsideration was thegarnishment of Meralco’s assets because whether or not anassessment was issued to Meralco has to be resolved by the lower court.

19. Unpaid realty taxes attach to the property

and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on thesubsequent owner which was neither the owner not thebeneficial user of the property during the designated periodswould not only be contrary to law but also unjust.

Consequently, MERALCO the former owner/user of theproperty was required to pay the tax instead of the new owner NAPOCOR. (Manila Electric Company v. Barlis, G.R. No. 114231,May 18, 2001)

NOTE: The above May 18, 2001 decision was set aside by

the Supreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the aboveruling in the May 18, 2001 decision is still valid, not on the basis of theMay 18, 2001 decision, in the light of pronouncements of the SupremeCourt in other cases. Thus, do not cite the doctrine as emanating fromthe May 18, 2001 decision.

20. Secretary of Justice can take cognizance of a

case involving the constitutionality or legality of taxordinances where there are factual issues involved.(Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25,1999)

Taxpayer files appeal to the Secretary of Justice,within 30 days from effectivity thereof In case the Secretary

Court in other cases. Thus, do not cite the doctrine as emanating fromthe May 18, 2001 decision.

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within 30 days from effectivity thereof. In case the Secretarydecides the appeal, a period also of 30 days is allowed for anaggrieved party to go to court. But if the Secretary does not actthereon, after the lapse of 60 days, a party could already seekrelief in court within 30 days from the lapse of the 60 day period.

These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a

competent court. Such statutory periods are set to preventdelays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe theseprovisions of statutes as mandatory. (Reyes, et al., v. Court of

Appeals, et al ., G.R. No. 118233, December 10, 1999)

21. Public hearings are mandatory prior to approvalof tax ordinance, but this still requires the taxpayer to adduceevidence to show that no public hearings ever took place.(Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233, December

10, 1999) Public hearings are required to be conducted prior tothe enactment of an ordinance imposing real property taxes.(Figuerres v. Court of Appeals, et al., G.R. No. 119172, March 25,1999)

22. The concurrent and simultaneous remedies affordedlocal government units in enforcing collection of real propertytaxes:

a. Distraint of personal property;b. Sale of delinquent real property, andc. Collection of real property tax through ordinary court

action.

23. The remedy of levy can be pursued by puttingup for sale the real property subject of tax, i.e., the delinquentproperty upon which the tax lien attaches, regardless of thepresent owner or possessor thereof. However this remedy isonly one of the other remedies. (Manila Electric Company v. Barlis,G.R. No. 114231, May 18, 2001)

NOTE: The above May 18, 2001 decision was set aside by theSupreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the aboveruling in the May 18, 2001 decision is still valid, not on the basis of theMay 18, 2001 decision, in the light of pronouncements of the Supreme

the May 18, 2001 decision.

24. The LGU could also avail of the remedy of distraint and levy of personal property subjecting anypersonal property of the taxpayer to execution. thus, theissuance of the warrants of garnishment over MERALCO’s bankdeposits was not improper or irregular. (Manila Electric Company

v. Barlis, et al ., G.R. No. 114231, May 18, 2001)NOTE: The above May 18, 2001 decision was set aside by theSupreme Court when it granted the petitioner’s second motion for reconsideration on June 29, 2004. The author submits that the aboveruling in the May 18, 2001 decision is still valid, not on the basis of theMay 18, 2001 decision, in the light of pronouncements of the SupremeCourt in other cases. Thus, do not cite the doctrine as emanating fromthe May 18, 2001 decision.

25. Notice and publication, as well as the legalrequirements for a tax delinquency sale, are mandatory, andthe failure to comply therewith can invalidate the sale. The

prescribed notices must be sent to comply with the requirementsof due process. (De Knecht, et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236)

26. The reason behind the notice requirement is thattax sales are administrative proceedings which are in personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314)

27. What are the steps to be followed for themandatory conduct of General Revision of Real Property Assessments ?

SUGGESTED ANSWER:a. Preparation of Schedule of Fair Market Values;b . Enactment of Ordinances:

1) Levying an annual “ad valorem” tax on realproperty and an additional tax accruing to the SpecialEducation Fund;

2) Fixing the assessment levels to be applied tothe market values of real properties;

3) Providing the necessary appropriations todefray expenses incident to general revision of realproperty assessments,; and

4) Adopting the Schedule of Fair Market Valuesprepared by the assessors (Lopez v City of Manila et al

and the accessory equipment mounted on the bargeswere subject to real property taxes

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prepared by the assessors. (Lopez v. City of Manila, et al.,G.R. No. 127139, February 19, 1999)

29. FELS Energy, Inc., had a contract to

supply NPC with the electricity generated by FELS’ power barges. The contract also stated that NPC shall beresponsible for all real estate taxes and assessments.

FELS then received an assessment of real property taxeson its power barges from the Provincial Assessor of Batangas. If filed a motion for reconsideration with theProvincial Assessor.

a. Upon denial, FELS elevated the matter to theLocal Board of Assessment Appeals (LBAA), where it raised the following issues:

1) Since NPC is tax-exempt then FEL’sshould also be tax-exempt because of its contract with NPC.

2) The power barges are not real property

subject to real property taxes.b. Upon the other hand the Local Treasurer insiststhat the assessment has attained a state of finality hencethe appeal to the LBAA should be dismissed.

Rule on the conflicting contentions.SUGGESTED ANSWER:a. All the contentions of FELS are without merit:

1) NPC is not the owner of the power barges nor the operator of the power barges. The tax exemptionprivilege granted to NPC cannot be extended to FELS.the covenant is between NPC and FELs and does not bind

a third person not privy to the contract such as theProvince of Batangas.2) The Supreme Court of New York in

Consolidated Edison Company of New York, Inc., et al., v.The City of New York, et al., 80 Misc. 2d 1065 (1975) citedin FELS Energy, Inc., v. Province of Batangas, G. R. No.168557, February 16, 2007 and companion case, heldthat barges on which were mounted gas turbine power plants designated to generate electrical power, the fuel oilbarges which supplied fuel oil to the power plant barges,

were subject to real property taxes.Moreover, Article 415(9) of the Civil Code provides

that “[d]ocks and structures which, though floating, areintended by their nature and object to remain at a fixedplace on a river, lake or coast” are considered immovableproperty by destination being intended by the owner for anindustry or work which may be carried on in a building or

on a piece of land and which tend directly to meet theneeds of said industry or work.b. The Treasurer is correct. The procedure do not

allow a motion for reconsideration to be filed with the Provincial Assessor.

To allow the procedure would indeed invite corruption inthe system of appraisal and assessment. It conveniently courtsa graft-prone situation where values of real property may beinitially set unreasonably high, and then subsequently reducedupon the request of a property owner. In the latter instance,allusions of possible cover, illicit trade-off cannot be avoided,

and in fact can conveniently take place. Such occasion for mischief must be prevented and excised from our system.(FELS Energy, Inc., v. Province of Batangas, G. R. No. 168557,February 16, 2007 and companion case, citing Callanta v. Office of theOmbudsman. G. R. Nos. 115253-74, January 30, 1998, 285 SCRA648)

NOTES AND COMMENTS;a. A notice of assessment issued by a local

assessor is not the subject of a motion for reconsiderationthat must be appealed to the LBAA. The last action of the localassessor on a particular assessment shall be the notice of assessment. It is this last action which gives the owner of the property

the right to appeal to the LBAA. The procedure does not permit theproperty owner the remedy of filing a motion for reconsideration beforethe local assessor, (FELS Energy, Inc., v. Province of Batangas, G. R.No. 168557, February 16, 2007 and companion case, citing Callantav. Office of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998,285 SCRA 648)

28. A special levy or special assessment is animposition by a province, a city, a municipality within theMetropolitan Manila Area, a municipality or a barangay upon real

property specially benefited by a public works expenditure of theLGU to recover not more than 60% of such expenditure.

e. The adverse decision of the Local Board of Assessment Appeals should be appealed within thirty (30) days

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LGU to recover not more than 60% of such expenditure.

29. The real property taxes that may be

collected by provinces, cities and municipalities within theMetro Manila area are the basic real property tax, thespecial education fund, and the ad valorem tax on idlelands.

Unlike the special levy, the levy and collection of realproperty taxes are limited only to the above local governmentunits.

30. If the ground for the protest is validity of the

real property tax ordinance and not the unreasonableness of the amount collected the tax must be paid under protest, and theissue of legality may be raised to the proper courts on certiorariwithout need of exhausting administrative remedies.

31. If the ground for the protest is

unreasonableness of the amounts collected there is need topay under protest and administrative remedies must beresorted to before recourse to the proper courts.

32. Procedure for refund of real property taxes

based on unreasonableness or excessiveness of amountscollected.

a. Payment under protest at the time of payment or within thirty (30) days thereafter, protest being lodged to theprovincial, city or in the case of a municipality within the MetroManila Area the municipal treasurer.

b. The treasurer has a period of sixty (60) days fromreceipt of the protest within to decide.

c. Within thirty (30) days from receipt of treasurer’sdecision or if the treasurer does not decide, within thirty (30)days from the expiration of the sixty (60) period for the treasurer to decide, the taxpayer should file an appeal with the LocalBoard of Assessment Appeals.

d. The Local Board of Assessment Appeals has 120days from receipt of the appeal within which to decide.

Assessment Appeals should be appealed within thirty (30) daysfrom receipt to the Central Board of Assessment Appeals.

f. The adverse decision of the Central Board of Assessment Appeals shall be appealed to the Court of Tax Appeals (En Banc ) by means of a petition for review within thirty(30) days from receipt of the adverse decision.

g. The decision of the CTA may be the subject of a

motion for reconsideration or new trial after which an appealmay be interposed by means of a petition for review on certioraridirected to the Supreme Court on pure questions of law within aperiod of fifteen (15) days from receipt extendible for a period of thirty (30) days.

33. A City Ordinance adopting a method of

assessment was nullified by the Supreme Court. Ataxpayer who has paid his real property taxes on the basisof the nullified ordinance now posits that the return of thereal property tax erroneously collected and paid is a

necessary consequence of the Supreme Court’snullification of the ordinance and there is no need to claimfor a refund. Is this correct ?

SUGGESTED ANSWER: No. The entitlement to a taxrefund does not necessarily call for the automatic payment of the sum claimed. The amount of the claim being a factualmatter, it must still be proven in the normal course and inaccordance with the administrative procedure for obtaining arefund of real property taxes, as provided under the LocalGovernment Code. ( Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, September 15, 2006)

NOTE: In the above Allied Banking case, the Supreme Courtprovided for the starting date of computing the two-year prescriptiveperiod within which to file the claim with the Treasurer, which is fromfinality of the Decision. The procedure to be followed is that shownbelow.

34. Procedure for refund of real property taxes

based on validity of the tax measure or solutio indebeti.a. Payment under protest not required, claim must be

directed to the local treasurer, within two (2) years from the datethe taxpayer is entitled to such reduction or readjustment, whomust decide within sixty (60) days from receipt.

b. The denial by the local treasurer of the protestwould fall within the Regional Trial Court’s original jurisdiction,

legislative franchise. The City defended its positionraising the following:

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ou d a t t e eg o a a Cou t s o g a ju sd ct o ,the review being the initial judicial cognizance of the matter.Despite the language of Section 195 of the Local GovernmentCode which states that the remedy of the taxpayer whoseprotest is denied by the local treasurer is “to appeal with thecourt of competent jurisdiction,” labeling the said review as anexercise of appellate jurisdiction is inappropriate since the denial

of the protest is not the judgment or order of a lower court, but of a local government official. (Yamane , etc. v. BA LepantoCondominium Corporation, G. R. No. 154993, October 25, 2005)

c. The decision of the Regional Trial Court should beappealed by means of a petition for review directed to the Courtof Tax Appeals (Division).

d. The decision of the Court of Tax Appeals (Division)may be the subject of a review by the Court of Tax Appeals (enbanc ).

e. The decision of the Court of Tax Appeals (en banc )may be the subject of a petition for review on certiorari on pure

questions of law directed to the Supreme Court.

2. A telecommunications company was

granted by Congress on July 20, 1992, after the effectivity of the Local Government Code on January 1, 1992, alegislative franchise with tax exemption privileges which partly reads, “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate,buildings and personal property, exclusive of this franchise,as other persons or corporations are now or hereafter may be required by law to pay.” This provision existed in

the company’s franchise prior to the effectivity of theLocal Government Code. A City then enacted anordinance in 1993 imposing a real property on all real properties located within the city limits, and withdrawing all tax exemptions previously granted. Among propertiescovered are those owned by the company from which theCity is now collecting P43 million. The properties of thecompany were then scheduled by the City for sale at public auction.

The company then filed a petition for the issuance of a writ of prohibition claiming exemption under its

a s g t e o o ga. There was no exhaustion of administrative

remedies because the matter should have first been filed before the Local Board of Assessment Appeals;

b. The company’s properties are exempt from tax under its franchise.

Resolve the issues raised.

SUGGESTED ANSWERS:a. There is no need to exhaust administrative

remedies as the appeal to the LBAA is not a speedy andadequate remedy within the law. This is so because theproperties are already scheduled for auction sale.

Furthermore one of the recognized exceptions to the ruleon exhaustion is that if the issue is purely legal in character which is so in this case.

b. The properties are exempt from taxation. Thegrant of taxing powers to local governments under theConstitution and the Local Government Code does not affect

the power of Congress to grant tax exemptions.The term “exclusive of this franchise” is interpreted tomean properties actually, directly and exclusively used in theradio or telecommunications business. The subsequent pieceof legislation which reiterated the phrase “exclusive of thisfranchise” found in the previous tax exemption grant to thecompany is an express and real intention on the part of Congress to once against remove from the LGC’s delegatedtaxing power, all of the company’s properties that are actually,directly and exclusively used in the pursuit of its franchise.(The City Government of Quezon City, et al., v. BayanTelecommunications, Inc., G. R. No. 162015, March 6, 2006)

NOTES AND COMMENTS:a. Note the confusion in the decision. It cited

Mactan Cebu which stated that the taxing power of local governmentunits is “no longer merely by virtue of a valid delegation as before,but pursuant to direct authority” but in the concluding portionreferred to it as “the LGC’s delegated taxing power.” Which is which,delegated or direct grant ? The author submits that the weight of

jurisprudence shows that it is a direct grant not a delegated power. If a question is asked then state it is a direct grant.

94



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