Tax Rednotes

8/12/2019 Tax Rednotes

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T a x a t i o n L a w 2005 CentralizedBarOperations

M O S T FR EQ U EN T L Y A S KED TO P IC SS o ur c e: U P L a w C e nt e r

G e ne r al P r in c ip l es

1. Why is the pow er to tax considered inherent in a sovereign S tate? [2003 Bar Exams]

I t i s c o ns i de re d i n he r en t i n a s o ve re i gn S t at e b e ca u se i t i s a n ec e ss ar y a t tr ib u te o f s o ve re i gn t y.

Without this power no sover eign State can exist or endur e. The power to tax pr oceeds upon the theor y

that the existence of a gover nment is a necessity and this power is an essential and inher ent attr ibute of

sover eignty, belonging as a matter of r ight to ever y independent state or gover nment. No sover eign State

c a n c o n t i n u e t o e x i s t w i t h o u t m e a n s t o p a y i t s e x p e n s e s ; a n d t h a t f o r t h o s e m e a n s , i t h a s t h e r i g h t t o

c o m p e l a l l c i t i z e n s a n d p r o p e r t y w i t h i n i t s l i m i t s t o c o n t r i b u t e , h e n c e , t h e e m e r g e n c e o f t h e p o w e r t o

tax. (51 Am. Jur ., Taxation 40)

2 . T h e C i t y o f M a n i la , i n or d e r t o s o l v e t h e t r a f f ic pr o b l e m i n i t s b u s i n es s d i s t r ic t s , d e c i de d to im p o s e a ta x ,

t o b e p a i d b y t h e d r i v e r , o n a l l p r i v a t e c a r s e n t e r i n g t h e c i t y d u r i n g p e a k h o u r s f r o m 8 : 0 0 a . m . t o 9 : 0 0 a . m .

f r o m M o n d ay s t o F r i d a y s , b u t e x e m p t s t h o s e c a r s c a r r y in g m o r e t h a n t w o o c c u p a n t s, e x c l u d i n g t h e d r i v e r . I s

the ordinance valid? [2003 Bar Exams]

T h e o r d i n a n c e i s i n v i o l a t i o n o f t h e R u l e o f U n i f o r m i t y a n d E q u a l i t y , w h i c h r e q u i r e s t h a t a l l s u b j e c t s

o r o b j e c t s o f t a x a t i o n , s i m i l a r l y s i t u a t e d m u s t b e t r e a t e d a l i k e i n e q u a l f o o t i n g a n d m u s t n o t c l a s s i f y t h e

subjects in an ar bitr ar y manner . In the case at bar , the or dinance exempts car s car rying mor e than two

o c cu p an t s f r om c o ve r ag e o f t h e s a i d o r di n an c e. F u rt h er m or e , t h e o r di n an c e o n ly i m po s es t h e t ax o n

pr ivate car s, and exempts public vehicles fr om the imposition of the tax, although both contr ibute to the

tr affic pr oblem. Ther e exists no substantial standar d used in the classification by the City of Manila.

Another issue is the fact that the tax is imposed on the dr iver of the vehicle and not on the r egister ed

o w n er o f t h e s a m e. T h e t a x d o e s n o t o n l y v i o l a te t h e r e q u i r em e n t o f u n i f o r mi t y , b u t t h e s a m e i s a l s o

unjust because it places the bur den on someone who has no contr ol over the r oute of the vehicle .

3 . C on gr e ss , a ft er m u c h p ub li c h e ar in g a n d c on su lt at io ns w i th v a r io us s e c to rs o f s o ci et y, c a me t o t h ec on cl us io n t ha t i t w il l b e g oo d f or t he c ou nt ry t o h av e o nl y o ne s ys te m o f t ax at io n b y c en tr al iz in g t he

imposition and collection of taxes in the national government. Accordingly, it is thinking of passing a law that

w ould abolish the taxing pow er of all local government units. In your opinion, w ould such a law be valid under

the present Constitution? Explain your answer. [2001 Bar Exams]

No. The law centralizing the imposition and collection of all taxes in the national gover nment would

contr avene the Constitution which mandates that: .Each local gover nment unit shall have the power

to cr eate their own sour ces of r evenue and to levy taxes, fees and char ges subject to such guidelines and

l i m i ta t i o ns a s C o n gr e s s m a y p r o v i de c o n s i s t en t w i t h t h e b a s ic p o l i cy o f l o c al a u t o no m y . I t i s c l e ar t h a t


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C o ng r es s c a n o n l y g i ve t h e g u id e li n es a n d l i mi t at i on s o n t h e e x er c is e b y t h e l o ca l g o ve r nm e nt s o f t h e

power to tax but what was gr anted by the fundamental law cannot be withdr awn by the Congr ess.

4. Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donors tax, value

a d d e d t a x , e x c i se t a x , o t h e r p e r c e nt a g e t a x e s , a n d d o c u m en t a r y s t a m p t a x . C l a s si f y t h e s e t a x e s i n t o d i r e c t

and indirect taxes, and differentiate direct from indirect taxes. [2000 Bar Exams]

I n co m e t a x , e s t at e t ax a n d d o n or s t a x a re c o ns i de r ed a s d i r e ct t a xe s . O n t h e o t h er h a nd , v a lu e

added tax, excise tax, other per centage taxes, and documentar y stamp tax ar e indir ect taxes.

D ir ec t t ax es a re d em an de d f ro m t he v er y p er so n w ho , a s i nt en de d, s ho ul d p ay t he t ax w hi ch h e

cannot shift to another ; while an indir ect tax is demanded in the fir st instance fr om one per son with the

e x pe c ta t io n t h a t h e c a n s h if t t h e b u rd e n t o s o me o ne e l se , n o t a s a t a x b u t a s a p a rt o f t h e p u r ch a se

pr ice.

5.An Executive Order w as issued pursuant to law , granting tax and duty incentives only to businesses and residents

w i t h i n t h e s e c u r e d a r e a o f t h e S u b i c E c o n o m i c S p e c i a l Z o n e , a n d d e n y i n g s a i d i n c e n t i v e s t o t h o s e w h o l i v e

w i t h in t h e Z o n e b u t o u t s id e s u c h s e c u r e d a r e a . I s t h e c o n s t i t u ti o n a l r i g h t t o e q u a l p r o t e ct i o n o f t h e l a w

violated by the Executive Order? Explain. [2000 Bar Exams]

N o . E q u al p r o t e c ti o n o f t h e l a w c l a u s e i s s u b j ec t t o r e a s o n ab l e c l a s s if i c at i o n. C l a ss i f ic a t io n s , t o b e

v al id , m us t ( 1) r es t o n s ub st an ti al d is ti nc ti on s, ( 2) b e g er ma ne t o t he p ur po se o f t he l aw , ( 3) n ot b e

limited to existing conditions only, (4) eq ually to all member s of the same class.

Ther e ar e substantial differ ences between big investor s being enticed to the secur ed ar ea and the

b u si n es s o p er a to r s o u ts i de t h at a re i n a c co rd w it h t h e e qu a l p r ot e ct i on c l au s e t h at d o es n o t r e qu i re

ter r itor ial unifor mity of laws. The classification applies eq ually to all r esident individuals and businesses

w i th i n t h e s ec u re d a re a . T he r e si d en t s, b e in g i n l i ke c i rc u ms t an c es t o c o nt r ib u ti n g d i re c tl y t o t h e

a c hi e ve m en t o f t h e e n d p u rp o se o f t h e l a w , a re n o t c a t e go ri z ed f u rt h er . I n st e ad , t h ey a r e s i m il a rl y

t r e a t e d , b o t h i n p r i v i l e g e s a n d o b l i g a t i o n s r e q u i r e d . ( T iu , e t a l . v s . C o u rt o f A p pe a ls . G R N o . 1 2 7 4 10 .

January 20, 1999)

6 . X i s th e ow ne r of a r es id e nt ia l lo t si tu at ed a t Qu ri no A ve nu e, P as ay C it y. T he l ot h as a n ar ea o f 30 0

s qu ar e m et er s. O n J un e 1, 1 99 4, 1 00 sq uar e m et er s o f sa id l ot own er b y X wa s e xp ro pr iat ed b y t he

government to be used in the w idening of Quirino Avenue, for Php300,000 representing the estimated assessed

value of said portion. Form 1991 to 1995, X, w ho is a businessman, has not been paying his income taxes. X is

n o w b e i n g a s s es s e d f o r t h e u n p a i d i n c o me t a x e s i n t h e t o t a l a m o u n t o f P h p 1 5 0 ,0 0 0 . X c l a i m s t h e i n c o m e t a x

liability has already been compensated by the amount of Php300,000 w hich the government ow es him for the

expropriation of his property. Decide. [1996 Bar Exams]

T h e i n c o m e t a x l i a b i l i t y o f X c a n n o t b e c o m p e n s a t e d w i t h t h e a m o u n t o w e d b y t h e G o v e r n m e n t a s

compensation for his pr oper ty expr opriated. Taxes ar e of distinct kind, essence and natur e than or dinar y

obligations. Taxes and debts cannot be the subject of compensation because the Gover nment and X ar e

not mutually cr editor s and debtor s of each other and a claim for taxes is not a debt, demand, contr act, or

judgment as is allowable to be set-off. ( F r a n ci a v s . I A C . G R N o . 7 6 7 4 9 . Ju n e 2 8 , 1 9 8 8 )

7. X, a lessor of a property, pays real estate taxes on the premises, a real estate dealers tax based on rental

receipts and income tax on the rentals. X claims that this is double taxation. Decide. [1996 Bar Exams]

Ther e is no double taxation. Double taxation means taxing for the same tax per iod the same thing or

activity twice, when it should be taxed but once, by the same taxing author ity for the same pur pose and

with the same kind and char acter of tax. The r eal estate tax is a tax on pr oper ty; the r eal estate dealer s

t a x i s a t a x o n t h e p r i v i l e g e t o e n g a g e i n b u s i n e s s ; w h i l e t h e i n c o m e t a x i s a t a x o n t h e p r i v i l e g e t o e a r n

a n i n c o m e . T h e t a x e s a r e i m p o s ed b y d i f f e r e nt t a x i ng a u t h or i t ie s a n d a r e e s s e nt i a l ly o f d i f f e r e nt k i n d

and character. ( V i l la n u e va v s . C i t y of I l o i lo . 2 6 SC R A 5 7 8 )


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Income Taxation

8. X, w hile driving home from his office, w as seriously injured w hen his automobile w as bumped from behind

b y a b u s d r i v e n b y a r e c k l es s d r i v e r . A s , a r e s u l t , h e h a d t o p a y P 2 0 0 , 0 0 0 t o h i s d o c t or a n d P 1 0 0 , 0 0 0 t o t h e

hospital w here he w as confined for treatment. He filed a suit against the bus driver and the bus company and

w a s a w a r d e d a n d p a i d a c t u a l d a m a g e s o f P 3 0 0 , 0 0 0 b y w a y o f m o r a l d a m a g e s a n d P 5 0 , 0 0 0 f o r w h a t h e h a d t o

pay his attorney for bringing his case to court.

W h ic h , i f a n y , o f t h e f o r eg o in g a w a r ds a r e t a x ab l e i n c om e t o X a n d w h ic h a r e n o t? E x pl a in . [ 2 0 0 3 B a r

Exams]

Nothing is taxable. Under the Tax Code, any amount r eceived as compensation for per sonal injur ies

or sickness, plus the amounts for any damages r eceived whether by suit or agr eement, on account of such

injur ies or sickness shall be excluded fr om gr oss income. Since the entir e amount of P450,000 r eceived

ar e awar ds of damages of the injur ies sustained, all shall be excluded fr om his gr oss income. Obviously,

these damages ar e consider ed by law as mer e r etur n of capital (Sec.32 (B)(4), 1997 Tax Code).

9. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in

t h e c a p i ta l s t o c k o f Y C o r p o r a t io n , a d o m e s t i c c om p a n y. O n 0 3 J a n u a r y 2 0 0 0 , Y C o r p . d e c l a r ed , o u t o f t h e

p ro fi ts o f t he c om pa ny e ar ne d a ft er 0 1 J an ua ry 1 99 8, a h un dr ed p er ce nt ( 10 0% ) s to ck d iv id en ds o n a ll

s t o c k h o l d e r s o f r e c o r d a s o f 3 1 D e c e m b e r 1 9 9 9 a s a r e s u l t o f w h i c h X h o l d i n g i n Y C o r p . b e c a m e t w o h u n d r e d

(200) shares. Are the stock dividends received by X subject to income tax? Explain. [2003 Bar Exams]

N O . S t o c k d i v i d en d s a r e n o t r e al i z e d i n c o me . A c c or d i ng l y , t h e d i f f e r e nt p r o v is i o ns o f t h e T a x C o d e

i m p o s i n g a t a x o n d i v i d e n d i n c o m e o n l y i n c l u d e s w i t h i n i t s p u r v i e w c a s h a n d p r o p e r t y d i v i d e n d s m a k i n g

s to ck d iv id en ds e xe mp t f ro m i nc om e t ax . H ow ev er , i f t he d is tr ib ut io n o f s to ck d iv id en ds i s t he

eq uivalent of cash or pr oper ty, as when the distr ibution r esults in a change of owner ship inter est of the

s h a r e h o l d e r s , t h e s t o c k d i v i d e n d s w i l l b e s u b j e c t t o i n c o m e t a x . [ S e c t i o n 2 4 ( B ) ( 2 ) ; S e c t i o n 2 5 ( A ) & ( B ) ;

Section 28 (B)(5)(b), 1997 Tax Code]

1 0 . X Y Z Fo u n d a ti o n is a n on - s t oc k , no n - p r of i t as s o ci a t i on d u l y a c c r ed i t e d f o r r e li g i o us , c ha r i t ab l e a n d s o c ia l

w e l f a r e p u r p o s e s . L a s t J a n u a r y 3 , 2 0 0 0 i t s o l d a p o r t i o n o f i t s l o t u s e d f o r r e l i g i o u s p u r p o s e s a n d u t i l i z e d t h e

e n t i r e p r o c e e d s f o r t h e c o n s t r u c t i o n o f a b u i l d i n g t o h o u s e i t s f r e e D a y a n d N i g h t C a r e C e n t e r f o r c h i l d r e n o f

s i n g le p a r e n t s . I n o r d e r t o s u b s i d i ze t h e e x p e n se s o f t h e C e n t e r a n d t o s u p p o r t i t s r e l i g i ou s , c h a r i t ab l e a n d

social w elfare projects, the Foundation leased the 300-square meter area of the second and third floors of the

b u il d in g f o r u s e a s a b o ar d in g h o u s e. T h e F o u nd a ti o n a l s o o p e ra t es a c a nt e en a n d a g i ft s h op w it h in t h e

p r e m i s e s , a l l t h e i n c o m e f r o m w h i c h i s u s e d a c t u a l l y , d i r e c t l y , a n d e x c l u s i v e l y f o r t h e p u r p o s e s f o r w h i c h t h e

Foundation w as organized.

a. C o ns i de r in g t h e C o ns t it u ti o na l p r ov i si o n g r an t in g t a x e x em p ti o n t o n o n- s to c k c o rp o ra t io n s s u ch a s

those formed exclusively for religious, charitable and social w elfare purposes, explain the meaning of

t h e l a s t p a r a g r a p h o f s a i d S e c . 3 0 o f t h e 1 9 9 7 T a x C o d e w h i c h s t a t e s t h a t i n c o m e o f w h a t e v e r k i n d


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a n d c h a r a c t e r o f t h e f o r e g o i n g o r g a n i z a t i o n s f r o m a n y o f t h e i r p r o p e r t i e s , r e a l o r p e r s o n a l , o r f r o m

a n y o f t h e i r a c t i v i t i e s c o n d u c t e d f o r p r o f i t r e g a r d l e s s o f t h e d i s p o s i t i o n m a d e o f s u c h i n c o m e s h a l l b e

subject to tax under this Code. [2003 Bar Exams]

T h e e x e m p t i on c o n te m p l at e d i n t h e C o n st i t u ti o n c o v er s r e al e s t at e t a x o n r e al p r o p er t i es a c t ua l l y ,

d i re c tl y a n d e x cl u si v el y u s ed f o r r e li g io u s, c h ar i ta b le a n d s o ci a l w el f ar e p u rp o se s . I t d o es n o t c o ve r

exemption fr om the imposition of the income tax, which is within the context of Sec.30 of the Tax Code.

As a r ule, non-stock, non-pr ofit cor por ations or ganized for r eligious, char itable or social welfar e pur poses

a re e x em p t f r o m i n c o me t a x o n t h ei r i n c o me r ec e iv e b y t h em a s s u c h. H o we v er , i f t h es e r e l i gi o us ,

char itable and social welfar e cor por ations der ived income fr om their pr oper ties or any of their activities

c on du ct ed f or p ro fi t, t he i nc om e t ax s ha ll b e i mp os ed o n s ai d i te ms o f i nc om e i rr es pe ct iv e o f t he ir

disposition. (Sec.30, NIRC; CIR vs. YMCA. G.R. No. 124043. [1998])

b. Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding

house and the operation of its canteen and the gift shop subject to tax? Explain.

Y e s . T h e i n c o me d e r i v e d f r o m t h e s a l e o f l o t a n d r e n t al s f r o m i t s b o a rd i n g h o u s e a r e c o n s id e r ed a s

i nc om e f ro m p ro pe rt ie s w hi ch a re s ub je ct t o t ax . L ik ew is e t he i nc om e f ro m t he o pe ra ti on s o f t he

canteen and the gift shop ar e income fr om its activities conducted for pr ofit that ar e subject to tax. The

income attaches ir r espective of the disposition of these incomes. ( S e c . 3 0 , N I R C ; C I R v s . Y M C A . G . R . N o .

124043. [1998])

11. A fringe benefit is defined as being any good, service or other benefit furnished or granted in cash or in

k i nd b y a n e m pl o ye r t o a n i n d i vi d ua l e m p l oy e e. W o ul d i t b e t h e e m pl o ye r o r t h e e m p l oy e e w h o i s l e ga l ly

required to pay an income tax on it? [2003 Bar Exams]

I t i s t h e e m p lo y er w h o i s l e ga l ly r eq u ir e d t o p a y a n i n co m e t a x o n t h e f r i ng e b e n e fi t . T h e f r i ng e

b en ef it t ax i s i mp os ed a s a f in al w it hh ol di ng t ax p la ci ng t he l eg al o bl ig at io n t o r em it t he t ax o n t he

e m p l o y e r , s u c h t h a t , i f t h e t a x i s n o t p a i d t h e l e g a l r e c o u r s e o f t h e B I R i s t o g o t o a f t e r t h e e m p l o y e r .

A n y a m o u n t o r v a l u e r e c e i v e d b y t h e e m p l o y e e a s a f r i n g e b e n e f i t i s c o n s i d e r e d t a x p a i d h e n c e , n e t o f

t h e i n c o m e t a x d u e t h e r eo n . T h e p e r s on w h o i s l e g a l l y r e q ui r e d t o p a y ( s a m e a s s t a tu t o r y i n c id e n ce a s

d is ti ng ui sh ed f ro m e co no mi c i nc id en ce ) i s t ha t p er so n w ho , i n c as e o f n on -p ay me nt , c an b e l eg al ly

demanded to pay the tax.

12. a ) Ho w of t en d o es a d om e st i c c o rp o ra t io n f il e in c om e ta x r et u rn f or i n co m e ea r ne d d u ri n g a s i ng l e

taxable year? Explain the process. [2001 Bar Exams]

A d o me st i c c o rp o ra t io n i s r eq u ir e d t o f i le a n i n co m e t a x r et u rn s f o ur ( 4 ) t i m e s f o r i n co m e e a r ne d

dur ing a single taxable year . Quar ter ly r etur ns ar e r eq uir ed to be filed for the fir st thr ee q uar ter s wher e

the cor por ation shall declar e its q uar ter ly summar y of gr oss income and deductions on a cumulative basis.

(Sec. 75, NIRC). Then a final adjustment r etur n is r eq uir ed to be filed cover ing the total taxable income

for the entir e year , calendar or fiscal. (Sec. 76, NIRC)

b) What is the reason for such procedure?

The r eason for such pr ocedur e is to ensur e the timeliness of collection to meet the budgetar y needs

o f t h e g o v e r n me n t . L i k ew i s e, i t i s d e s i g ne d t o e a s e t h e b u r d e n o n t h e t a x p a y er b y p r o v i d i ng i t w i t h a n

installment payment scheme, r ather than r eq uir ing the payment of the tax on a lump-sum basis after the

end of the year . It is also to impr ove the liq uidity of the gover nment.

13. A, doctor by profession, sold in the year 2000 a parcel of land w hich he bought as a form of investment in

1 9 9 0 f o r P h p 1 m i l l i on . T h e l a n d w a s s o l d t o B , h i s c o l le a g u e , a t a t i m e w h e n t h e r e al e s t a t e p r i c e s h a d g o ne

dow n and so the land w as sold only for Php800,000 which w as then the fair market value of the land. He used

t h e p r o ce e ds t o f i na n ce h i s t r ip t o t h e U n it e d S t a te s . H e c l a im s t h a t h e s h o u ld n o t b e m a d e t o p a y t h e 6 %

f in al t ax b ec au se h e d id n ot h av e a ny a ct ua l g ai n o n t he s al e. I s h i s c on te nt io n c or re ct ? W hy ? [ 20 01 B ar


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Exams]

No. The 6% capital gains tax on sale of a r eal pr oper ty held as capital asset is imposed on the income

p r es u me d t o h a ve b e en r e al i ze d f r om t h e s a le w h ic h i s t h e f a i r m a rk e t v al u e o r s el l in g p r ic e t h er eo f ,

whichever is higher . (Section 24D, NIRC) Actual gain is not req uir ed for the imposition of the tax but it is

the gain by fiction of law which is taxable.

1 4 . D i s t in g u i s h A l l o wa b l e D e d u ct i o n s f r o m P e r s on a l E x e m pt i o n s. G i v e a n e x a m pl e of an al l o w ab l e d e d u ct i o nand another example for personal exemption. [2001 Bar Exams]

The distinctions ar e as follows:

a) A s t o a m ou n t A l lo wa b le d e du c ti o ns g e ne ra l ly r ef e r t o a ct u al e x pe n se s i n cu r re d i n t h e p u rs u it o f

tr ade, business or pr actice of pr ofession while per sonal; exemptions ar e ar bitr ar y amounts allowed by

law.

b) A s t o n a t u r e A l l o w a b l e d e d u c t i o n s c o n s t i t u t e b u s i n e s s e x p e n s e s w h i l e p e r s o n a l e x e m p t i o n s p e r t a i n

to per sonal expenses.

c) A s t o p u r p o s e D e d u c t i o n s a r e a l l o w e d t o e n a b l e t h e t a x p a y e r t o r e c o u p h i s c o s t o f d o i n g b u s i n e s s

while per sonal exemptions ar e allowed to cover per sonal, family and living expenses.

d) As to claimants Allowable deductions can be claimed by all taxpayer s, cor por ate or other wise, while

per sonal exemptions can be claimed only by individual taxpayer s.

15. In order to facilitate the processing of its application for a license from a government office, Corporation

A f o u n d i t n e c e s s a r y t o p a y t h e a m o u n t o f P h p 1 0 0 , 0 0 0 a s a b r i b e t o t h e a p p r o v in g o f f i c i al . I s t h e P h p 1 0 0 , 0 00

d e d u c t i b l e f o r m t h e g r o s s i n c o m e o f C o r p o r a t i o n A ? O n t h e o t h e r h a n d , i s t h e P h p 1 0 0 , 0 0 0 t a x a b l e i n c o m e o f

the approving official? Explain your answers. [2001 Bar Exams]

S in ce t he a mo un t o f P hp 10 0, 00 0 c on st it ut es a b ri be , i t i s n ot a ll ow ed a s a d ed uc ti on f or m g ro ss

income of Cor por ation A. (Section 34(A)(1)(c), NIRC). However , to the r ecipient gover nment official, the

same constitutes a taxable income. All income fr om legal or illegal sour ces ar e taxable absent any clear

p r o v is i o n o f l a w e x e m p t i ng t h e s a m e. T h i s i s t h e r e a s o n w h y g r o ss i n c o m e h a d b e e n d e f i n e d t o i n c l u d e

i n co m e f r om w h at e ve r s o ur c e d e ri v ed . ( S ec t io n 3 2 (A ) , N I RC ) . I l l e ga l l y a c q ui r e d i n c o me c o n s t i t ut e s

r ealized income under the claim of r ight doctr ine . ( Ru tk in v s. U S. 3 4 3 U S 1 30 )

16. I s a n on -r es id en t a li en w ho i s n ot e ng ag ed i n t ra de o r b us in es s o r i n t he e xe rc is e o f p ro fe ss io n i n t he

P h i l i p p i n e s b u t w h o d e r i v e d r e n t a l i n c o m e f r o m t h e P h i l i p p i n e s r e q u i r e d t o f i l e a n i n c o m e t a x r e t u r n o n A p r i l

of the year following his receipt of said income? If not, w hy not? Explain your answ er. [2001 Bar Exams]

No. The income tax on all income der ived fr om Philippine sour ces by a non-r esident alien who is not

e ng ag ed i n t ra de o r b us in es s i n t he P hi li pp in es i s w it hh el d b y t he l es se e a s a F in al W it hh ol di ng T ax .

( S e c t i o n 5 7 ( A ) , N I R C ) . T h e g o v e rn m e nt c a n n o t r e q u i r e p e r so n s o u t s i d e o f i t s t e r ri t o ri a l j u r i s di c t i on t o


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f i l e a r e t u r n ; f o r t h i s r e a s o n , t h e i n c o m e t a x o n i n c o m e d e r i v e d f r o m w i t h i n m u s t b e c o l l e c t e d t h r o u g h

t h e w i t h ho l di n g t a x s ys t em a nd t h us , r e li e ve t h e r e c ip i en t o f t h e i n c o me t h e d u t y t o f i le i n co m e t a x

r etur ns. (Section 51, NIRC)

17. M r. J a v ie r i s a n on -r es id en t s e ni or c i ti ze n. H e r e ce iv es a m on th ly p e n si on f or m t h e G S IS , w hi ch h e

d e po s it s w i t h t h e P N B- M ak a ti B r an c h. I s h e e x em p t f r o m i n c om e t a x a n d t h e r ef o re n o t r e q u ir e d t o f i le a n

income tax return? [2000 Bar Exams]

M r . J a v i e r i s e x e m p t f r o m i n c o m e t a x o n h i s m o n t h l y G S I S p e n s i o n (Sec. 32(B)(6)(f), NIRC) b u t n o t o n

t h e i n te re s t i n co m e t h at m i gh t a cc r ue o n t h e p e ns i on s d e po s it e d w it h P NB w hi c h a r e s u bj e ct t o f i na l

withholding tax.

C on se que nt ly , si nc e Mr. Ja vi er s so le ta xab le i nc om e w ou ld hav e b ee n su bje ct ed t o a f in al

withholding tax, he is not r eq uir ed anymor e to file an income tax r etur n. ( S e c . 51 ( A ) (2 ) ( c ), N I R C )

18. A C o ., a P h i l ip p i n e c o r p or a t i on , h as a n e x e c u ti v e (P ) wh o is a Fi l i p in o c it i z e n . A C o . h a s a s u b s id i a r y i n

H o ng K o n g ( H K C o . ) a n d w i l l a s s ig n P f o r a n i n d e f in i te p e ri o d t o w o r k f u l l t i m e f o r H K C o . P w il l b r i n g h i s

f a m i ly t o r e s i d e i n H K a n d w i l l l e a s e o u t h i s r e s i d en c e i n t h e P h i l i p p i n e s. T h e s a l a r y o f P w i l l b e s h o u l de r e d

5 0 % b y A C o . w h i l e t h e o t h e r 5 0 % p l u s h o u s i n g , c o s t o f l i v i n g a n d e d u c a t i o n a l a l l o w a n c e s o f P s d e p e n d e n t s

w ill be shouldered by HK Co. A Co. w ill credit the 50% of Ps salary to Ps Philippine bank account. P w ill also

be receiving rental income for the lease of his Philippine residence.

Are these salaries, allow ances and rentals subject to the Philippine income tax? [1999 Bar Exams]

T h e s a l a ri e s a n d a l l o wa n c es r e c e i ve d b y P a r e n o t s u b j e c t t o P h i l i p p in e i n c o m e t a x . P q u a l i f ie s a s a

n o n- r es i de n t c i ti z en b e ca u se h e l e av e s t h e P h il i pp i ne s f o r e m pl o ym e nt r eq u ir in g h i m t o b e p h ys i ca l ly

pr esent abr oad most of the time dur ing the taxable year . (Section 22(E), NIRC). A non-r esident citizen is

taxable only on income der ived fr om Philippine sour ces. (Section 23, NIRC). The salar ies and allowances

r ec e iv e d f r om b e in g e m pl o ye d a b ro a d a re i n co m e f r om w it h ou t b e ca u se t h es e a r e c o mp e ns a ti o n f o r

ser vices r ender ed outside of the Philippines. (Section 42, NIRC)

H o w e v e r , P i s t a x a b l e o n r e n t a l i n c o m e f o r t h e l e a s e o f h i s P h i l i p p i n e r e s i d e n c e b e c a u s e t h i s i s a n

income der ived fr om within, the leased pr oper ty being located in the Philippines. (Section 42, NIRC)

19. Arnold, w ho is single, cohabits with Vilma, w ho is legally married to Zachary. Arnold and Vilma have six minor

c hi ld r en w ho l iv e a nd d ep en d u po n A rn ol d f or t he ir c hi ef s up po rt . T he c hi ld re n a re n ot m ar r ie d a nd n ot

gainfully employed. [1998 Bar Exams]

a) For income tax purposes, may Arnold be considered as head of a family?

Yes. An unmar r ied man who has illegitimate minor childr en who live with him and depend upon him

f o r t h e i r c h i e f s u p p o r t i s c o n s i d e r e d a s h e a d o f t h e f a m i l y . ( R R N o . 2 9 8 i m p l e m e n t i n g S e c t i o n 3 5 ,

NIRC)

b) Is Arnold entitled to deduct from his gross income, an additional exemption for each of his illegitimate

child?

N o . A r no l d i s o n ly e nt i tl e d t o d e du c t a d d it i on a l p e r so n al e x em p ti o n f o r f o ur ( 4) o u t o f t h e s i x ( 6 )

i ll eg it im at e c hi ld re n. T he m ax im um n um be r o f d ep en de nt s f or p ur po se s o f t he a dd it io na l p er so na l

exemption is four . (Section 35, NIRC)

20. (a) Discuss the meaning of the Global and S chedular systems of taxation. [1997 Bar Exams]

A g l ob a l s y s te m o f t a xa t io n i s o n e w h e re t h e t a x pa ye r i s r e qu i re d t o l u mp u p a l l i t e m s o f i n co m e

ear ned dur ing a taxable per iod and pay under a single set of income tax r ules on these differ ent items of

income.

A schedular system of taxation pr ovides for a differ ent tax tr eatment of differ ent types of income so

t h a t a s e p a r a t e t a x r e t u r n i s r e q u i r e d t o b e f i l e d f o r e a c h t y p e o f i n c o m e a n d t h e t a x i s c o m p u t e d o n a

per r etur n or per schedule basis.


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-

(b)T o w h i c h s y s t e m w o u l d y o u s a y t h a t t h e m e t h o d o f t a x a t i o n u n d e r t h e N a t i o n a l I n t e r n a l R e v e n u e C o d e

belongs? [1997 Bar Exams]

T h e m e t h o d o f t a x a t i o n u n d e r t h e N I R C i s a c o m b i n a t i o n o f b o t h s y s t e m s , t h u s p a r t l y s c h e d u l a r a n d

par tly global.

21. M r . S a n t o s d i e d i n t e st a t e i n 1 9 8 9 l e a v i n g h i s s p o u s e a n d f i v e c h i l d r e n a s t h e o n l y h e i r s . T h e e s t a t e c o n s is t e do f a f am il y h om e a nd a f ou r- do or a pa rt me nt w hi ch w as b ei ng r en te d t o t en an ts . W it hi n t he y ea r, a n

e x t r a j u d i c i a l s e t t l e m e n t o f t h e e s t a t e w a s e x e c u t e d b y t h e h e i r s , e a c h o f t h e m r e c e i v i n g h i s / h e r d u e s h a r e .

T h e s u r v iv i ng s p ou s e a s s u me d a d mi n is t ra t io n o f t h e p r o p er t y. E a ch y e ar , t h e n e t i n co m e f r o m t h e r e n t al

p r o p e r t y w a s d i s t r i b u t e d t o a l l , p r o p o r t i o n a t e l y , o n w h i c h t h e y p a i d r e s p e c t i v e l y , t h e c o r r e s p o n d i n g i n c o m e

tax.

I n 1 9 9 4 , t h e i n c o m e t a x r e t u r n s o f t h e h e i r s w e r e e x a m i n e d a n d d e f i c i e n c y i n c o m e t a x a s s e s s m e n t s w e r e

i s su e d a g a i ns t e a ch o f t h em f o r t h e y e ar s 1 9 89 t o 1 9 93 , i n cl u si v e, a s h a vi n g e n t e r ed i n to a n u n r eg i st e re d

partnership. Were the assessments justified? [1997 Bar Exams]

Yes, the assessments wer e justified because for income tax pur poses, the co-owner ship of inher ited

p ro pe rt y i s a ut om at ic al ly c on ve rt ed i nt o a n u nr eg is te re d p ar tn er sh ip f ro m t he m om en t t he s ai d

p r o p e r t i e s a r e u s e d a s c o m m o n f u n d w i t h i n t e n t t o p r o d u c e p r o f i t s f o r t h e h e i r s i n p r o p o r t i o n t o t h e i rshares in the inheritance.

Fr om the moment of such par tition, the heir s ar e entitled alr eady to their r espective definite shar es

o f t h e e s t a t e a n d t h e i n c o m e t h e r e o f , f o r e a c h o f t h e m t o m a n a g e a n d d i s p o s e o f a s e x c l u s i v e l y h i s o w n

without the inter vention of the other heir s, and, accor dingly, he becomes liable individually for all taxes

i n c o n n ec t io n t h e r ew i th . I f a f t e r s u c h p a r ti t io n , h e a l lo w s h i s s h a re s t o b e h el d i n c o m m on w i th h i s

c o - h e i r u n d e r a s i n g l e m a n a g e m e n t t o b e u s e d w i t h t h e i n t e n t o f m a k i n g p r o f i t t h e r e b y i n p r o p o r t i o n t o

his shar e, ther e can be no doubt that, even if no document or instr ument wer e executed for the pur pose,

for tax pur poses, at least an unr egister ed par tner ship is for med. ( O a vs . C I R, 4 5 SC R A 7 4 )

22. Disguised dividends in income taxation? Give an example. [1994 Bar Exams]

Disguised dividends ar e those income payments made by a domestic cor por ation, which is a subsidiar yo f a n o n - r e s i d e n t f o r e i g n c o r p o r a t i o n , t o t h e l a t t e r o s t e n s i b l y f o r s e r v i c e s r e n d e r e d b y t h e l a t t e r t o t h e

for mer , but which payments ar e dispr opor tionately lar ger than the actual value of the ser vices r ender ed.

I n s u c h c a s e , t h e a m o u n t o v e r a n d a b o v e t h e t r u e v a l u e o f t h e s e r v i c e r e n d e r e d s h a l l b e t r e a t e d a s a

d i vi d en d a n d s h a l l b e s u bj e ct e d t o t h e c o r r es p on d in g t a x o f 3 2 % o n P h il i pp i ne s o ur ce g r os s i n co m e o r

such other pr efer ential r ate as may be pr ovided under a cor r esponding Tax Tr eaty.

Note: Dividends received by a domestic corporation form another domestic corporation shall not be

subject to tax. [Sec. 27 (D) (4), NIRC]


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E s t at e T a x an d D o n o r s T a x

23. O n t h e f i r s t a n n i v e r s a r y o f t h e d e a t h o f Y , h i s h e i r s h o s t e d a s u m p t u o u s d i n n e r f o r h i s d o c t o r s , n u r s e s a n d

others w ho attended to Y during his last illness. The cost of the dinner amounted to Php50,000. Compared to

h i s g r o ss e s t a te , t h e P h p 50 , 00 0 d i d n o t e x ce e d f i v e p e r ce n t o f t h e e s t at e . I s t h e s a id c o st o f t h e d i nn e r t o

commemorate his one year death anniversary deductible from his gross estate? Explain your answ er. [2001 Bar

Exams]

N o . T h i s e x p e ns e w i ll n o t f a ll u n d er a n y o f th e a l l ow a b le d e d u ct i o n s fr o m g ro s s e st a t e. W h e th e r

v i ew ed i n t h e c o n t ex t o f e it h er f u ne r al e x pe n se s o r m e di c al e x pe n se s , t h e s a me w i ll n o t q u a l if y a s a

deduction. Expenses incur red after the inter nment, such as pr ayer s, masses, enter tainment, or the like

a r e n o t d e d u c ti b l e . A n y p o r t i on o f t h e f u n e ra l a n d b u r i a l e x p e n se s b o r n e o r d e f r a y ed b y r e l at i v es a n d

f r ie n ds o f t h e d e ce as e d a re n o t d e du c ti b le . [ 4th p ar ., S ec . 6 ( A) ( 1) R ev . R eg s. N o. 2 -2 00 3] . M ed ic al

e x p e n s e s , o n t h e o t h e r h a n d , a r e a l l o w e d o n l y i f i n c u r r e d b y t h e d e c e d e n t w i t h i n o n e y e a r p r i o r t o h i s

death. [Section 86 (A)(6), NIRC]

N o t e : H o w e ve r , p u rs u a n t t o R ev . R e g s. N o . 2 - 2 0 03 , m e d ic a l e x p en s e s a s o f t he l a s t i l l ne s s w il l n o t

form part of funeral expenses but should be claimed as medical expenses incurred w ithin one (1) year

b e f o re t h e d e a t h o f t h e d e c ed e n t .

2 4 . W h a t c o n d it i o n s m u s t o c c u r i n o r de r t h at a l l g r a n t s, d o n at i o n s a n d co n t r ib u t i o ns t o n o n - st o c k , n o n - pr o f i t

private educational institutions may be exempt from the donors tax under S ec. 101 (a) of the Tax Code? [2000

Bar Exams]

The following ar e the conditions:

1) Not mor e than thir ty (30%) of said gifts shall be used by such donee for administr ation pur poses;

2) T h e e d u c a t i o n a l i n s t i t u t i o n s i s i n c o r p o r a t e d a s a n o n - s t o c k e n t i t y , p a y i n g n o d i v i d e n d s , g o v e r n e d b y

t r u s t e e s w h o r e c e i v e n o c o m p e n s a t i o n , a n d d e v o t i n g a l l i t s i n c o m e , w h e t h e r s t u d e n t s f e e s o r g i f t s ,

d on at io ns , s ub si di es o r o th er f or ms o f p hi la nt hr op y, t o t he a cc om pl is hm en t a nd p ro mo ti on o f

pur poses enumer ated in its Ar ticles of Incor por ation. ( S ec . 1 01 ( A ) ( 3 ) NI R C of 1 9 97 )

25. Discuss the rule on situs of taxation w ith respect to the imposition of the estate tax on property left behind by

a non-resident decedent. [2000 Bar Exams]

T h e v a l u e o f t h e g r o s s e s t a t e o f a n o n - r e s i d e n t d e c e d e n t w h o i s a F i l i p i n o c i t i z e n a t t h e t i m e o f h i s

death shall be deter mined by including the value at the time of his death of all pr oper ty, r eal or per sonal,

tangible or intangible, wher ever situated to the extent of the inter est ther ein of the decedent at the time

of his death [sec. 85 (A), NIRC of 1997]. These pr oper ties shall have a situs of taxation in the Philippines

hence subject to Philippine estate taxes.

O n t h e o t h e r h a n d , i n t h e c a s e o f a n o n - r e s i d e n t d e c e d e n t w h o a t t h e t i m e o f h i s d e a t h w a s n o t a

c i t i z e n o f t h e P h i l i p p i n e s , o n l y t h a t p a r t o f t h e e n t i r e g r o s s e s t a t e w h i c h i s s i t u a t e d i n t h e P h i l i p p i n e s t o

the extent of the inter est ther ein of the decedent at the time of his death shall be included in his taxablee s ta te . P r ov i de d , t h at , w i th r es p ec t t o i n ta n gi b le p e rs o na l p r op e rt y , w e a p pl y t h e r u le o f r ec i pr o ci t y.

(Ibid)

26. A , a n i nd iv id ua l, s ol d t o B , h is b rot he r-i n- law, h is l ot wit h a ma rk et v al ue o f Ph p On e mi ll ion f or

Php600,000. As cost in the lot is Php100,000. B is financially capable of buying the lot.

A also ow ns X Co., w hich has a fast grow ing business. A sold some of his shares of stock in X Co. to his key

e x ec u ti v es i n X C o . T h es e e x e cu t iv e s a r e n o t r e l at e d t o A . T h e s e l li n g p r ic e i s P h p 3 m i l l io n , w h ic h i s t h e

b o ok v a l u e o f t h e s h ar e s s o l d b u t w i th a m a rk e t v a l ue o f P h p 5 m i ll i on . A s c o st i n t h e s h a re s s o l d i s P h p 1

m i l l io n . T h e p u r p o se o f A i n s e l l i n g t h e s h ar e s i s t o e n a b l e h i s k e y e x e c u ti v e s t o a c q u ir e a p r o p r ie t y o f A i n

s e l l i n g t h e s h a r e s i s t o e n a b l e h i s k e y e x e c u t i v e s t o a c q u i r e a p r o p r i e t y i n t e r e s t i n t h e b u s i n e s s a n d h a v e a

personal stake in its business.


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Explain if the above transactions are subject to donors tax. [1999 Bar Exams]

T h e f i r s t t r a n s a c t i o n w h e r e a l o t w a s s o l d b y A t o h i s b r o t h e r - i n - l a w f o r a p r i c e b e l o w i t s f a i r m a r k e t

value will not be subject to donors tax if the lot q ualifies as a capital asset. The tr ansfer for less than an

a d e q u a t e a n d f u l l c o n s i d e r a t i o n , w h i c h g i v e s r i s e t o a d e e m e d g i f t , d o e s n o t a p p l y t o a s a l e o f p r o p e r t y

subject to capital gains tax. (Section 100, NIRC). However , if the lot sold is an or dinar y asset, the excess

o f t he f ai r m ar ke t v al ue o ve r t he c on si de ra ti on r ec ei ve d s ha ll b e c on si de re d a s a g if t s ub je ct t o t he

donor s tax.The sale of shar es of stock below the fair mar ket value ther eof is subject to the donor s tax pur suant

t o t h e p r o v i s io n s o f S e c t i o n 1 0 0 o f t h e T a x C o d e . T h e e x c es s o f t h e f a i r m a r ke t v a l u e o v e r t h e s e l l i ng

pr ice is a deemed gift.

27. A d i ed , su r v i v e d b y h is w if e a nd t h r ee c h il d r e n . T h e e st a t e t a x wa s p ro p e r l y p a i d a n d th e e s ta t e se t t l e d

and divided and distributed among the four heirs. Later, the BIR found out that the estate failed to report the

income received by the estate during administration. The BIR issued a deficiency income tax assessment plus

interest, surcharges and penalties. S ince the three children are residing abroad, the BIR sought to collect the

full tax deficiency only against the widow . Is the BIR correct? [1999 Bar Exams]

Y es , t he B IR i s c or re ct . I n a c as e w he re t he e st at e t ax h as b ee n d is tr ib ut ed t o t he h ei rs , t he

collection r emedies available to the BIR in collecting tax liabilities of an estate may either (1) sue all theheir s and collect fr om each of them the amount of tax pr opor tionate to the inher itance r eceived or (2) by

vir tue of the lien cr eated under Section 219, sue only one heir and subject the pr oper ty he r eceived fr om

the estate to the payment of the estate tax. The BIR, ther efore, is cor r ect in pur suing the second r emedy

although this will give r ise to the r ight of the heir who pays to seek r eimbur sement fr om the other heir s.

( C I R v s . P i n e d a . 2 1 S C R A 1 0 5 ) . In no case, however , can the BIR enfor ce the tax liability in excess of the

shar e of the widow in the inher itance.

28. I s t h e B I R a u t h o r i z e d t o c o l l e c t e s t a t e t a x d e f i c i e n c i e s b y t h e s u m m a r y r e m e d y o f l e v y u p o n a n d s a l e o f r e a l

p ro pe rt ie s o f t he d ec ed en t w it ho ut f ir st s ec ur in g t he a ut ho ri ty o f t he c ou rt s it ti ng i n p ro ba te o ve r t he

supposed w ill of the decedent? [1998 Bar Exams]

Y e s . T h e B I R i s a u t h o r iz e d t o c o l l e c t e s t a te t a x d e f ic i e nc y t h r o u g h t h e s u m m ar y r e m e d y o f l e v y i ngupon and sale of r eal pr oper ties of a decedent, without the cognition and author ity of the cour t sitting in

p r o ba t e o v e r t h e s u p p os e d w i l l o f t h e d e c e a s ed . A s s u c h t h e e s t a t e t a x i s e x e mp t , i t i s e x e mp t e d f r o m

the application of the statute of non-claims, and this is justified by the necessity of gover nment funding,

i m mo r ta l iz e d i n t h e m a x i m t h a t t a xe s a r e t h e l i fe b lo o d o f t h e g o v e rn m en t . ( Ma rc os v s. C IR . G R N o.

120880. June 5, 1997)

29. Are contributions to a candidate in an election subject to donors tax? On the part of the contributor, is it

allow able as a deduction from gross income? [1998 Bar Exams]


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a) N o , p r o v i d e d t h e r e c i p i e n t c a n d i d a t e h a d c o m p l i e d w i t h t h e r e q u i r e m e n t f o r f i l i n g o f r e t u r n s o f

contr ibutions with the Commission on Elections as r eq uir ed under the Omnibus Election Code.

b) T he c on tr ib ut or i s n ot a ll ow ed t o d ed uc t t he c on tr ib ut io ns b ec au se t he s ai d e xp en se i s n ot

dir ectly attr ibutable to, the development, management, oper ation and/or conduct of a tr ade, business or

pr ofession (Section 34(A)(1)(a), NIRC). Fur ther mor e, if the candidate is an incumbent government official

or employee, it may even be considered as a bribe or kickback. (Section 34(A)(1)(a), NIRC)

N o te : I n t h e r e ce n t c a s e o f A b el l o v s . C I R , G R . N o . 1 2 0 7 1, F e br u ar y 2 3 , 2 0 05 , t h e S u pr e me C o ur t

held that political/electoral contributions duly reported to the Commission on Elections made after the

passag e of RA No. 7166, as provided in Section 13 thereof, are not subject to the payment of any g ift

tax. As such political contributions made before RA No. 7166, are subject to the payment of g ift taxes,

and RA No. 7166 provides no retroactive effect on this point.

Tax Administration

30. M r. P a sc ua l s i nc om e f r om l e a si ng h i s p r op er ty r e a ch es t h e m a xi mu m r a te o f t a x u n de r t h e l aw . H e

d o na t ed o n e- h al f o f h i s s a id p r op e rt y t o a n o n- s to c k, n o n- p ro f it e d u ca t io n al i n st i tu t io n w h os e i n co m e a n d

a s se t s a r e a ct u al l y , d i re c tl y a n d e x cl u si v el y u s ed f o r e d u ca t io n al p u r po s es , a n d t h er e fo r e q u al i fi e d f o r t a xexemption under Article XIV, S ection 4(3) of the Constitution and S ection 30(H) of the Tax Code. Having thus

t r an s fe r r ed a p o rt i on o f h i s s a i d a s s e t, M r . P a s c ua l s u cc e ed e d i n p a yi n g a l e ss e r t a x o n t h e r e n t a l i n c o me

derived from his property. Is there tax avoidance or tax evasion? Explain. [2000 Bar Exams]

Ther e is tax avoidance. Mr . Pascual has exploited a legally per missive alter native method to r educe

h i s i n c o me t ax b y t r an s fe rr i ng p a rt o f h i s r e n t al i n co m e t o a t a x- e xe m pt e n ti t y t h r o ug h a d o na t io n o f

one-half of the income pr oducing pr oper ty. The donation is likewise exempt fr om the donor s tax. The

donation is the legal means employed to tr ansfer the incidence of income tax on the r ental income.

31. A t a xp a ye r i s su s pe c te d n ot t o h a ve d e cl a re d h i s co r re c t gr o ss i n co m e in h i s r et u rn f i l ed f o r 1 99 7 . T h e

e x a m i n e r r e q u e s t e d t h e C o m m i s s i o n e r t o a u t h o r i z e h i m t o i n q u i r e i n t o t h e b a n k d e p o s i t s o f t h e t a x p a y e r s o

t h a t h e c o u l d p r o c ee d w i t h t h e n e t w o r t h m e t h o d o f i n v e s t ig a t i on t o e s t a b l i s h f r a u d. M a y t h e e x a m i ne r b eallow ed to look into the taxpayers bank deposits? In w hat cases may the Commissioner or his duly authorized

representative be allow ed to inquire or look into the bank deposits of a taxpayer? [2000 Bar Exams]

No, as this would be violative of Republic Act No. 1405, the Banks Deposits Secr ecy Law.

T he C om mi ss io ne r o f I nt er na l R ev en ue o r h is d ul y a ut ho ri ze d r ep re se nt at iv e m ay b e a ll ow ed t o

inq uir e or look into the bank deposits of a taxpayer in the following cases:

a) For the pur pose of deter mining the gr oss estate of a decedent;

b) W he re t he t ax pa ye r h as f il ed a n a pp li ca ti on f or c om pr om is e o f h is t ax l ia bi li ty b y r ea so n o f

financial incapacity to pay such tax liability. (Section 6(f), NIRC)

c) W h er e t h e t a xp ay e r h a s s i gn e d a w ai v er a ut h or iz i ng t h e C o mm i ss i on e r o r h i s d u ly a ut h or iz e d

r epr esentatives to inq uir e into the bank deposits.

32. A C o . , a P h i li p p i ne c o r p or a t i on , i s a b i g m an u f a c tu r e r o f co n s u me r g o o ds a n d h as s e v e ra l s u p pl i e r s of r a w

m a t e r i a l s . T h e B I R s u s p e c t s t h a t s o m e o f t h e s u p p l i e r s a r e n o t p r o p e r l y r e p o r t i n g t h e i r i n c o m e o n t h e i r s a l e s

to A Co. The CIR therefore:

a. Issued an access letter to A Co. to furnish the BIR information on sales and payment to its suppliers.

b . I s s u ed a n a c c e s s l e tt e r t o a b a n k ( X B a n k) t o f u r n i s h t he B I R o n d e p o s it s o f s o m e s u p p li e r s o f A C o . o n

the alleged ground that the suppliers are committing tax evasion.

A C o . , X B a n k a n d t h e s u p p l i e r s h a v e n o t b e e n i s s u e d b y t h e B I R l e t t e r o f a u t h o r i t y t o e x a m i n e . A C o . a n d

X B a n k b e l i e v e t h a t t h e B I R i s o n a f i s h i n g e x p e d i t i o n a n d c o m e t o y o u f o r c o u n s e l . W h a t i s y o u r a d v i c e .

[1999 Bar Exams]

I will advise A Co. and X Bank that the BIR is justified only in getting infor mation fr om the for mer but


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n o t f r om t h e l a t t er . T h e B I R i s a ut h or iz e d t o o b ta i n i n f o rm a ti o n f r om o t he r p e rs o ns o t he r t h an t h os e

w h o s e i n t e r n a l r e v e n u e t a x l i a b i l i t y i s s u b j e c t t o a u d i t o r i n v e s t i g a t i o n . H o w e v e r t h i s p o w e r s h a l l n o t b e

constr ued as gr anting the Commissioner the author ity to inq uir e into bank deposits.

33. M ay t he C om mi ss io ne r o f t he I nt er n al R ev en ue c om pr om is e t h e p ay me n t o f t he w it hh ol di ng t ax ( ta x

d e d u c t e d a n d w i t h h e l d a t s o u r c e ) w h e r e t h e f i n a n c i a l p o s i t i o n o f t h e t a x p a y e r d e m o n s t r a t e s a c l e a r i n a b i l i t y

to pay the assessed tax? [1998 Bar Exams]

No. A taxpayer who is constituted as withholding agent who has deducted and withheld at sour ce the

t ax o n t he i nc om e p ay me nt m ad e b y h im h ol ds t he t ax es a s t ru st f un ds f or t he g ov er nm en t (Section

58(D), NIRC) and is obligated to r emit them to the BIR. The subseq uent inability of the withholding agent

t o p a y / r e m i t t h e t a x w i t h h e l d i s n o t a g r o u n d f o r c o m p r o m i s e b e c a u s e t h e w i t h h o l d i n g t a x i s n o t a t a x

upon the withholding agent but it is only a pr ocedur e for the collection of a tax.

34. T he S ec re ta ry o f F i n an ce , u p o n r e c om me n da ti on o f t h e C om mi ss io ne r o f I n t er na l R ev en u e, i ss ue d a

Revenue Regulation using gross income as the tax base for corporations doing business in the Philippines.

Is the Revenue Regulation valid? [1994 Bar Exams]

T he r eg ul at io n e st ab li sh in g g ro ss i nc om e a s t he t ax b as e f or c or po ra ti on s d oi ng b us in es s i n t he

Philippines (domestic as well as r esident for eign) is not valid. This is no longer implementation of the lawbut actually it constitutes legislation because among the power s that ar e exclusively within the legislative

a u t h o r i t y t o t a x i s t h e p o w e r t o d e t e r m i n e t h e a m o u n t o f t h e t a x . ( s e e 1 C o o l e y 1 7 6 - 1 8 4 ) . C e r t a i n l y , i f

t h e t a x i s l i m i t e d t o g r o s s i n c o m e w i t h o u t d e d u c t i o n s o f t h e s e c o r p o r a t i o n s , t h i s i s c h a n g i n g t h e a m o u n t

of the tax as said amount ultimately depends on the taxable base.

N ot e: T he P re si den t, h owe ve r, u po n t he r ec omm en dat io n o f t he Se cr et ar y o f F in an ce , ma y

effective January 1, 2000, allow corporations the option to be taxed at (15% of g ross income, after the

follow ing conditions have been satisfied:

1. A tax effort ration of tw enty percent (20%) of Gross National Product (GNP);

2. A ration of forty percent (40%) of income tax collection to total tax revenues;

3. A VAT tax effort of four percent (4%) GNP; and

4. A 0.9 percent (0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

Ta x R em ed ie s u nde r th e N IR C

35. I n t he i nv e st ig at io n of t he w it hh ol di ng t ax r e tu r ns o f AZ Medina S ecurity Agency (AZ Medina) f or t he

t a x a b l e y e a r s 1 9 9 7 a n d 1 9 9 8 , a d i s c r e p a n c y b e t w e e n t h e t a x e s w i t h h e l d f r o m i t s e m p l o y e e s a n d t h e a m o u n t s


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actually remitted to the government w as found. Accordingly, before the period of prescription commenced to

r u n , t h e B I R i s s u e d a n a s s e s s m e n t a n d a d e m a n d l e t t e r c a l l i n g f o r t h e i m m e d i a t e p a y m e n t o f t h e d e f i c i e n c y

w i t h h o l d i n g t a x e s i n t h e t o t a l a m o u n t o f P 2 5 0 , 0 0 0 . 0 0 . C o u n s e l f o r AZ Medina p r o t e s t e d t h e a s s e s s m e n t f o r

b e i n g n u l l a n d v o i d o n t h e g r o u n d t h a t n o p r e - a s s e s s m e n t n o t i c e h a d b e e n i s s u e d . H o w e v e r , t h e p r o t e s t w a s

denied. Counsel then filed a petition for prohibition w ith the Court of Tax Appeals to restrain the collection of

the tax. [2002 Bar Exams]

A. Is the contention of the counsel tenable? Explain.

N o , t h e c o n t e n t i o n o f t h e c o u n s e l i s u n t e n a b l e . S e c t i o n 2 2 8 o f t h e T a x C o d e e x p r e s s l y p r o v i d e s t h a t

no pr e-assessment notice is r eq uir ed when a discr epancy has been deter mined between the tax withheld

a nd t he a mo un t a ct ua ll y r em it te d b y t he w it hh ol d in g a ge nt . S in ce t he a mo un t a ss es se d r el at es t o

d e f i c i e n c y w i t h h o l d i n g t a x e s , t h e B I R i s c o r r e c t i n i s s u i n g t h e a s s e s s m e n t a n d d e m a n d l e t t e r c a l l i n g f o r

the immediate payment of the deficiency withholding taxes. (Sec. 228, NIRC)

B. W i ll t h e s p ec i al c i vi l a c ti o n f o r p r oh i bi t io n b r ou g ht b e fo r e t h e C T A u n d e r S e c. 1 1 o f R . A. N o . 1 1 25

prosper? Discuss your answ er.

T he S pe ci al C iv il a ct io n f or p ro hi bi ti on w il l n ot p ro sp er , b ec au se t he C TA h as n o j ur is di ct io n t o

enter tain the same. The power to issue wr it of injunction pr ovided for under Sec. 11 of R.A. 1125 is only

ancillar y to its appellate jur isdiction to issue wr its of pr ohibition or injunction independently of and apar t

fr om an appealed case. The r emedy is to appeal the decision of the BIR. ( Collector v. Yuseco. 3 SCRA 313

[1961])

3 6 . M r . C as t r o i n h e r it e d f r o m h i s f a t h e r , w h o d i e d o n J u n e 1 0 , 1 9 9 4 , s e v e r al p i e ce s o f r e a l

p r o p e r t y i n M e t r o M a n i l a . T h e e s t a t e t a x r e t u r n w a s f i l e d a n d t h e e s t a t e t a x d u e i n t h e a m o u n t

o f P 2 5 0 , 0 0 0 . 0 0 w a s p a i d o n D e c e m b e r 6 , 1 9 9 4 . T h e T a x F r a u d D i v i s i o n o f t h e B I R i n v e s t i g a t e d

t h e c a s e o n t h e b a s i s o f c o n f i d e n t i a l i n f o r m a t i o n g i v e n b y M r . S a n t o s o n J a n u a r y 6 , 1 9 9 8 t h a t t h e

r e t u r n f i l e d b y Mr. Castro was f r a u d u l e n t a n d t h a t h e f a i l e d t o d e c l a r e a l l p r o p e r t i e s l e f t b y h i s

f a t h e r w i t h i n t e nt t o e v ad e p a y m en t o f t h e c o r r ec t t a x. A s a r e su l t, a d e fi c i e n c y e s t a t e t a x

a s s e s s me n t f o r P 1 , 25 0 , 0 0 0 . 0 0 , i n c l u s i v e o f 5 0 % s u r ch a r g e f o r f r a u d , i n t e r e s t a n d p e n al t y , was

issued a g a i n s t h i m o n J a n u a r y 1 0 , 2 0 0 1 . M r . C a s t r o p r o t e s t e d t h e a s s e s sm e n t , o n t h e g r o u n d o f

p r e s c r i p t i o n . [ 2 0 0 2 B a r E x a m s ]

a) D e c i d e M r . C a s t r o ' s p r o t e s t .

T h e p r o t e s t s h o u l d b e r e s o l v e d a g a i n s t M r . C a s t r o . W h a t w a s f i l e d i s a f r a u d u l e n t r e t u r n m a k i n g t h e

p re sc ri pt iv e p er io d f or a ss es sm en t t en y ea rs ( 10 ) f ro m d is co ve ry o f t he f ra ud ( Se ct io n 2 22 , N IR C).

A c c o r d i n g l y , t h e a s s e s s m e n t w a s i s s u e d w i t h i n t h e p r e s c r i p t i v e p e r i o d t o m a k e a n a s s e s s m e n t

b a s e d o n a f r a u d u l e n t r e t u r n .

b) W h a t l e g a l r e q u i r e m e n t s m u s t M r . S a n t o s c o m p l y w i t h s o t h a t h e c a n c l a i m h i s r e w a r d ?

E x p l a i n .

T h e l e g a l r e q u i r e m e n t s t h a t m u s t b e c o m p l i e d b y M r . S a n t o s t o e n t i t l e h i m t o r e w a r d a r e

a s f o l l o w s :

1. H e s h o u l d v o l u n t a r i l y f i l e a c o n f i d e n t i a l i n f o r m a t i o n u n d e r o a t h w i t h t h e L a w D i v i s i o n o f t h e B u r e a u

of Inter nal Revenue alleging ther ein the specific violations constituting fr aud;

2. T h e i n f o r m a t i o n m u s t n o t y e t b e i n t h e p o s s e s s i o n o f t h e B u r e a u o f I n t e r n a l R e v e n u e , o r r e f e r t o a

case alr eady pending or pr eviously investigated by the Bur eau of Inter nal Revenue;

3. M r . S a n t o s s h o u l d n o t b e a g o v e r n m e n t e m p l o y e e o r a r e l a t i v e o f a g o v e r n m e n t e m p l o y e e w i t h i n t h e

sixth degr ee of consanguinity; and

4. The infor mation must r esult to collections of r evenues and/or fines and penalties ( S e c . 2 8 2 , N I R C ) .

N o te : T h e t h i rt y p e r c en t ( 3 0 % ) r u l e u n d er S e c. 2 4 8 ( B ) o f t h e N I R C, t h at i s , t h e f a i l ur e t o r e po r t


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sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a

c l a i m o f d e d u c t i o n s i n a n a m o u n t e x c e e d i n g t h i r t y p e r c e n t ( 3 0 % ) o f a c t u a l d e d u c t i o n s , s h a l l r e n d e r t h e

t a x p a y e r l i a b l e f o r s u b s t a n t i a l u n d e r d e c l a r a t i o n o f s a l e s , r e c e i p t s o r i n c o m e o r f o r o v e r s t a t e m e n t o f

d e d u c t i o n s , a p p l i e s o n l y f o r p u r p o s e s o f i m p o s i n g t h e s u r c h a r g e , i . e . t w e n t y f i v e p e r c e n t ( 2 5 % ) v e r s u s

fifty percent (50%).

For purposes of prescription, i.e., the three (3) year prescriptive period (Sec. 203, NIRC) versus the

ten (10) year period in case of false or fraudulent return (Sec. 222, NIRC), the 30 % rule does not apply;

intent to defraud must still be established.

37. Under w hat conditions may the Commissioner of Internal Revenue be authorized to:

a.) Compromise the payment of any internal revenue tax? [2000 Bar Exams]

The Commissioner of Inter nal Revenue may be author ized to compr omise the payment of any inter nal

revenue tax where:

1. A r easonable doubt as to the validity of the claim against the taxpayer exist; or

2. T h e f i na nc i al p o si t io n o f t h e t a xp a ye r d e mo n st r at e s a c l ea r i na b il i ty t o p a y t h e a s se s se d t a x.

(Revenue Reg ulation No. 30-02)

b.) Abate or cancel a tax liability?

The Commissioner of Inter nal Revenue may abate or cancel a tax liability when:

1. The tax or any por tion ther eof appear s to be unjustly or excessively assessed; or

2. T h e a d m i n i s t r a t i o n a n d c o l l e c t i o n c o s t s i n v o l v e d d o n o t j u s t i f y t h e c o l l e c t i o n o f t h e a m o u n t d u e .

[ S e c . 2 0 4 ( B ), N I R C of 1 9 9 7 ]

38. Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20,

1 9 9 5 . O n D e c e mb e r 1 5 , 1 9 9 5, h e l e f t t h e P h i l i p pi n e s a s a n i m m i gr a n t t o j o i n h i s f a m il y i n C a n a d a . A f t e r t h e

i n v e s t i g a t i o n o f s a i d r e t u r n , t h e B I R i s s u e d a n o t i c e o f d e f i c i e n c y i n c o m e t a x a s s e s s m e n t o n A p r i l 1 5 , 1 9 9 8 .

Mr. Reyes returned to the Philippines as a balikbayan on December 8, 1998. Finding his name to be in the list

o f d e l i n q u e n t t a x p a y e r s , h e f i l e d a p r o t e s t a g a i n s t t h e a s s e s s m e n t o n t h e g r o u n d t h a t h e d i d n o t r e c e i v e t h e

n o t i ce o f a s se s s m e nt a n d t h at t h e a s s es s m e nt h a d p r e s cr i b e d . W i l l t he p r o t e st p r o s p er ? E x p l ai n . [ 2 0 00 B a r

Exams]

No. Pr escr iption has not set in because the per iod of limitations for the Bureau of Inter nal r evenue to

issue an assessment was suspended dur ing the time that Mr . Reyes was out of the Philippines or fr om the

period December 15, 1995 up to December 8, 1998. (Section 223 in relation to Section 203, NIRC)

39. A C o . , a P h i l i p p i n e C o r p o r a t i o n , f i l e d i t s 1 9 9 5 I n c o m e T a x R e t u r n ( I T R ) o n A p r i l 1 5 , 1 9 9 6 s h o w i n g a n e t l o s s .

O n N ov em be r 1 0, 1 99 6, i t a m e nd ed i ts 1 99 5 I TR t o s ho w m o r e l os se s. A ft er a t ax i nv es ti ga ti on , t he B IR

disallow ed certain deductions claimed by A Co., putting A Co. in a net income position. As a result, on August


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5 , 1 9 9 9 , t h e B I R i s s u e d a d e f i c i e n cy i n c o m e a s s e s sm e n t a g a i n st A C o . A C o . p r o t e s t e d t h e a s s e s s me n t o n t h e

ground that it has prescribed. Decide. [1999 Bar Exams]

The r ight of the BIR to assess the tax has not pr escr ibed. The r ule is that inter nal Revenue taxes shall

b e a s s e s s e d w i t h i n t h r e e y e a r s a f t e r t h e l a s t d a y p r e s c r i b e d b y l a w f o r t h e f i l i n g o f t h e r e t u r n . (Section

2 0 3 , N I R C ) . H o w ev e r , i f t h e r e t ur n o r i g i n al l y f i l e d i s a m e nd e d s u b s t a nt i a l ly , t h e c o u nt i n g o f t h e t h r e e

year per iod star ts fr om the date the amended r etur n was filed . ( C I R v s . Ph o e n i x A ss u r a n ce C o . , 1 4 S C RA

52). Ther e is substantial amendment in this case because a new r etur n was filed declar ing mor e losses,

w h i c h c a n o n l y b e d o n e e i t h e r ( 1 ) i n r e d u c i n g g r o s s i n c o m e o r ( 2 ) i n i n c r e a s i n g t h e i t e m s o f d e d u c t i o n s ,

claimed.

40. A C o . , a P h i l i p p i n e c o r p o r a t i o n , r e c e i v e d a n i n c o m e t a x d e f i c i e n c y a s s e s s m e n t f r o m t h e B I R o n M a y 5 , 1 9 9 5 .

On May 31, 1995, A Co. filed its protest w ith the BIR. On July 30, 1995, A Co. submitted to the BIR all relevant

supporting documents. The CIR did not formally rule on the protest but on January 25, 1996, A Co. w as served

a s u m m o n s a n d a c o p y o f t h e c o m p l a i n t f o r c o l l e c t i o n o f t h e t a x d e f i c i e n c y f i l e d b y t h e B I R w i t h t h e R e g i o n a l

T ri al C ou r t ( R TC ). O n F e b ru ar y 2 0 , 1 9 9 6, A C o. b ro ug ht a P et it io n f o r r e v ie w b e f or e t h e C TA . T he B IR

c o n t e n d e d t h a t t h e P e t i t i o n i s p r e m a t u r e s i n c e t h e r e w a s n o f o r m a l d e n i a l o f t h e p r o t e s t o f A C o . a n d s h o u l d

t h e r e fo r e b e d i s m is s e d . [ 1 9 99 B a r E x a m s ]

a) Does the CTA have jurisdiction over the case?

Yes, the CTA has jur isdiction over the case because this qualifies as an appeal from the

C o mm i ss i on e r s d e ci s io n o n d i sp u te d a s se s sm e nt . W h en t h e C o mm i ss i on e r d e ci d ed t o c o ll e ct t h e t a x

assessed without fir st deciding on the taxpayer s pr otest, the effect of the Commissioner s action of filing

a judicial action for collection is a decision of denial of the pr otest, in which event the taxpayer may file

an appeal with the CTA. (Republic vs. Lim Tian Teng & Sons, Inc. 16 SCRA 584; Dayrit vs. Cruz. L-39910.

Sept. 26, 1998)

b) Does the RTC have jurisdiction over the collection case filed by the BIR? Explain.

The RTC has no jur isdiction over the collection case filed by the BIR. The filing of an appeal with the

C TA h a s t h e e f f ec t o f d i ve s ti n g t h e R T C o f j u ri s di c ti o n o v e r t h e c o l l ec t io n c a s e . A t t h e m o me n t t h e

taxpayer appeals the case to the CTA in view of the Commissioner s filing of the collection case with the

RTC which was consider ed as a decision of denial, it gives a justifiable basis for the taxpayer to move for

d i sm i ss al i n t h e R T C o f t h e G o ve rn m en t s a c ti o n t o c o ll e ct t h e t a x l i ab i li t y u n d e r d i s p ut e . ( Y a be s v s .

F l o j o . 1 5 S C R A 2 7 8 ; S a n J u a n v s . V a s q u e z . 3 S C R A 9 2 ) . T he r e i s n o f i na l , e x ec u to r y a n d d e m an d ab l e

assessment which can be enfor ced by the BIR, once a timely appeal is filed.

41. A C o . , a P h i l i p p i n e c o r p o r a t i o n r e c e i v e d a n i n c o m e t a x d e f i c i e n c y a s s e s s m e n t f r o m t h e B I R o n N o v e m b e r 2 5 ,

1996. On December 10, 1996, A Co. filed its protest w ith the BIR. On May 20, 1997, the BIR issued a warrant

o f d i s t ra i n t t o e n f or c e t h e a s s es s m e nt . T h i s w ar r a n t w a s s er v e d o n A C o . o n M a y 2 5 , 1 9 97 . I n a l e t t e r d a t ed

J u n e 4 , 1 9 9 7 a n d r e c e i v e d b y A C o . f i v e d a y s l a t e r , t h e C I R f o r m a l l y d e n i e d A C o . s p r o t e s t s t a t i n g t h a t i t

constitutes his final decision on the matter. On July 6, 1997, A Co. filed a Petition for Review w ith CTA. The

BIR moved to dismiss the Petition on the ground that the CTA has no jurisdiction over the case. Decide. [1999

Bar Exams]

The CTA has jur isdiction over the case. The appealable decision is the one which categor ically stated

t h a t t h e C o m m i s s i o n e r s a c t i o n o n t h e d i s p u t e d a s s e s s m e n t i s f i n a l a n d , t h e r e f o r e , t h e r e c k o n i n g o f t h e

3 0 d a y p e r io d t o a p pe al w as o n J u n e 9 , 1 99 7. T h e f i l in g o f t h e p e ti t io n f o r r ev i ew w i t h t h e C TA w as

t i me l y m a d e. T h e S u p re m e C o u rt h a s r u l ed t h at t h e C I R m u s t c a te g or i ca l ly s t at e t h at h i s a c t io n o n a

disputed assessment is final; other wise, the per iod to appeal will not commence to r un. That final action

c a nn o t b e i m pl i ed f r om t h e m e r e i s s u an c e o f a w ar r an t o f d i st r ai n t a n d l e vy . ( C IR v s . U n io n S h ip p i ng

Corp. 185 SCRA 547)

42. A C o. i s t he w ho ll y o wn ed s ub si di ar y o f B C o. , a n on -r es id en t G er ma n c om pa ny . A C o. h as a t ra de ma rk

licensing agreement w ith B Co. On Feb. 10, 1995, A Co. remitted to B Co. royalties of Php 10 million, w hich A


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C o . s u b j ec t e d t o a W T o f 2 5 % o r P h p 2 , 5 0 0 , 0 00 . U p o n a d v ic e o f c o u n s e l, A C o . r e a l i z e d t h a t t h e p r o p er W T

r a t e i s 1 0 %. O n M a r c h 2 0, 1 9 9 6 , A C o. f i l e d a c l a im f o r r e f u n d o f P 2, 5 0 0 , 0 0 0 w it h t h e B I R . T h e B I R d e n ie d

t he c la im o n N o v. 1 5, 1 99 6. O n N o v. 2 8, 1 99 6, A C o. f il ed a P et it io n f o r R e vi ew w i th t he C TA . T he B IR

attacked the capacity of A Co., as agent, to bring the refund case. Decide the issue. [1999 Bar Exams]

A Co., the withholding agent of the non-r esident for eign cor por ation is entitled to claim for r efund of

e x c es s w i t h h ol d i n g t a x p a i d o n t h e i n c o m e o f s a i d c o r p o r at i o n i n t h e P h i li p p i ne s . B e i ng a w i t hh o l d in g

agent, it is the one held liable for any violation of the withholding tax law should such a violation occur .I n t h e s a m e v e i n , i t s h o u l d b e a l l o w e d t o c l a i m a r e f u n d i n c a s e o f o v e r w i t h h o l d i n g . ( C IR v s . W a nd e r

Phils. 160 SCRA 573; CIR vs. Procter and Gamble PMC. 204 SCRA 377)

43. Is assessment necessary before a taxpayer may be prosecuted for w illfully attempting in any manner to evade

or defeat any tax imposed by the Internal Revenue Code? [1998 Bar Exams]

N o. A ss es sm en t i s n ot n ec es sa ry b ef or e a t ax pa ye r m ay be p ro se cu te d i f t he re i s a p ri ma f ac ie

s ho wi ng o f a w il lf ul a tt em pt t o e va de t ax es a s i n t he t ax pa ye r s f ai lu re t o d ec la re a s pe ci fi c i te m o f

t a x a b l e i n c o m e i n h i s i n c o m e t a x r e t u r n s . ( U n g a b v s . C u s i . 9 7 S C R A 8 7 7 ) . O n t h e c on t r ar y , i f t he t a x es

alleged to have been evaded is computed based on r epor ts appr oved by the BIR ther e is a pr esumption of

regularity of the previous payment of taxes, so that unless and until the BIR has made a final

d e te r mi n at i on o f w h at i s s u pp o se d t o b e t h e c o r re c t t a x es , t h e t a x p ay e r s h o ul d n o t b e p l ac e d i n t h ecr ucible of cr iminal pr osecution. ( C I R v s . F o r t u ne T o ba c c o C o r p . G R N o. 1 1 9 3 2 2 . J u n e 4 , 1 9 96 )

44. A c o r p o r at i o n f i l e s i ts i n c o m e t a x r e t ur n o n a c a l e n d a r y e a r b a s i s. F o r t h e f i r s t q u a r te r o f 1 9 9 3 , i t p a i d o n 3 0

M a y 19 9 3 i ts q u a r te r l y i n co m e t ax i n th e a m ou n t o f P h p 3 mi l l i on . O n 2 0 Au g u s t 19 9 3 , it p a i d th e s e c on d

quarterly income tax of Php 0.5 million. The third quarter resulted in a net loss, and no tax w as paid. For the

f o u r t h a n d f i n a l r e t u r n f o r 1 9 9 3 , t h e c o m p a n y r e p o r t e d a n e t l o s s f o r t h e y e a r , a n d t h e t a x p a y e r i n d i c a t e d i n

the income tax return that it opted to claim a refund of the quarterly tax payments.

On 10 January 1994, the corporation filed w ith the BIR a w ritten claim for the refund of Php 3.5 million.

B I R f a i l e d t o a c t o n t h e c l a i m f o r r e f u n d ; h e n c e , o n 0 2 M a r c h 1 9 9 6 , t h e c o r p o r a t i o n f i l e d a p e t i t i o n f o r

r e v i e w wi t h t h e C T A o n i t s c l a i m f o r r e f u nd o f t h e o v e r p a y m e nt o f i t s 1 9 9 3 q u a r t e r l y i n co m e t a x . B I R , i n i t s

answ er to the petition, alleged that the claim for refund w as filed beyond the reglementary period.

Did the claim for refund prescribe? [1997 Bar Exams]

T h e c l a im f o r r e f un d h as p r es c ri b ed . T h e c o u nt i ng o f t h e t w o y ea r p r e s cr ip t iv e p e ri o d f o r f i li n g a

claim for r efund is counted not fr om the date when the q uar ter ly income taxes wer e paid but on the date

when the final adjustment r etur n was filed. ( C I R v s. T M X S a l es , I n c . G R N o . 8 3 73 6 . J a n . 1 5, 1 9 9 2 ; C I R v s .

P h i l A m L i f e I n s u r a n c e C o . , I n c . . G R N o . 1 0 5 2 0 8 . M a y 2 9 , 1 9 9 5 ) . I t i s o b v i ou s t h a t t h e an n u al i n c o m e t ax

r etur n was filed befor e Januar y 10, 1994 because the wr itten claim for r efund was filed with the BIR on

J a n ua r y 1 0 , 1 9 9 4 . S i n ce t h e t w o y e a r p r e sc r i pt i v e p e r io d i s n o t o n l y a l i m i ta t i on o f a c t io n f o r b r i n g i n g

the case to the judicial stage, the petition for r eview filed with the CTA on Mar ch 02, 1996 is beyond the


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r eglementar y per iod.

Note: For VAT refunds, the counting of the tw o year prescriptive period is counted from the close of

the taxable quarter (Sec. 112, NIRC)

45. A t ax pa ye r r e ce iv ed , o n 1 5 J an u ar y 1 99 6, a n a ss es sm en t f or a n i nt er na l r ev en ue t ax d ef ic ie n cy . O n 1 0

February 1996, the taxpayer forthw ith filed a petition for review w ith the CTA. Could the Tax Court entertain

the petition? [1997 Bar Exams]

No. Befor e a taxpayer can avail of judicial r emedy he must fir st exhaust administr ative r emedies by

f i l i ng a p r o te s t w i t h i n 3 0 d a y s f r o m r e c e ip t o f t h e a s s e ss m e nt . I t i s t h e C o m m i ss i o ne r s d e c i si o n o n t h e

pr otest that give the Tax Cour t jur isdiction over the case pr ovided that the appeal is filed within 30 days

f ro m r ec ei pt o f t he C om mi ss io ne r s d ec is io n. A n a ss es sm en t b y t he B IR i s n ot t he C om mi ss io ne r s

decision fr om which a petition for r eview may be filed with the CTA. Rather , it is the action taken by the

C om mi ss io ne r i n r es po ns e t o t he t ax pa ye r s p ro te st o n t he a ss es sm en t t ha t w ou ld c on st it ut e t he

appealable decision. ( S e c ti o n 7 , R A N o . 1 12 5 )

L oc al G ov er nm en t C od e

46. X , a t a xp a y e r wh o b e l ie v e s t ha t a n o rd i n a nc e p a s se d b y t h e Ci t y C o un c i l of P a s a y i s u n c on s t i tu t i o na l f o rb ei ng d is cr im in at or y a ga in st h im , w an ts t o k no w f r om y ou , h is t ax l aw ye r, w he th er o r n ot h e c an f il e a n

a p p e al . I n t h e a f f i r m a ti v e , h e a s k s y o u w h e r e s u c h a p p e a l s h o u l d b e m a d e : t h e S e c r e t a r y o f F i n a n ce , o r t h e

S e c r e ta r y o f J u s t i c e, o r t h e C o u r t o f T a x A p p e a l s, o r t h e r e g u l ar c o u r t s . W h a t w o ul d y o u r a d v i c e b e t o y o u r

client, X? [2003 Bar Exams]

T h e a p p e al s h o ul d b e m a d e w i t h t h e S e c r et a r y o f J u s t i c e. A n y q u e s t io n o n t h e c o n s t it u t i on a l i ty o r

legality of a tax or dinance may be r aised on appeal with the Secr etar y of Justice within 30 days fr om the

effectivity ther eof. ( S e c t i o n 1 8 7 , L G C ; H a g o n o y M a r k e t V e n d o r A s s o c i a t i o n v s . M u n i c i p a l i t y o f H a g o n o y .

376 SCRA 376)

4 7 . U n d e r A r t . 4 1 5 o f th e C iv i l C o d e , i n or d e r fo r m ac h i n e ry a n d e q u i p me n t to b e c o n si d e r e d r e a l p r o p er t y ,

t h e y m u s t b e p l a c e d b y t h e o w n e r o f t h e l a n d a n d i n a d d i t i o n , m u s t t e n d t o d i r e c t l y m e e t t h e n e e d s o f t h eindustry or w orks carried on the ow ner. Oil companies such as Caltex and S hell, install underground tanks in

t h e g a so l in e s t at i on l o ca t ed o n l a nd l e as e d b y t h es e c o mp a ni e s f r om o t he r s. A r e t h os e u n de r g ro u nd t a nk s

w h i c h w e r e n o t p l a c e d b y t h e o w n e r o f t h e l a n d b u t w e r e i n s t e a d p l a c e d t h e r e b y t h e l e s s e e o f t h e l a n d ,

c o n s id e r e d r e a l p ro p e r t y f or p u r p o se s o f r e a l p r o pe r t y t a x at i o n u n d er t h e L G C ? E x p l ai n . [ 2 0 0 1 & 2 00 3 B a r

Exams]

Y e s . T h e u n d e r gr o u nd t a n ks a l t h o u g h i n s t al l e d b y t h e l e s s e e, S h e ll a n d C a l t e x, a r e c o n s id e r ed r e al

p r o p e r t y f o r p u r p o s e s o f t h e i m p o s i t i o n o f t h e r e a l p r o p e r t y t a x e s . I t i s o n l y f o r p u r p o s e s o f e x e c u t i n g a

f i n a l j u d g m e n t t h a t t h e s e m a c h i n e r y a n d e q u i p m e n t , i n s t a l l e d b y t h e l e s s e e o n a l e a s e d l a n d , w o u l d n o t

be consider ed as r eal pr operty. But in the imposition of the r eal pr oper ty tax, the under gr ound tanks ar e

t a xa b le a s n e ce s sa r y f i xt u re s o f t h e g a so l in e s t at i on w i th o ut w h ic h t h e g a so l in e s t at i on w o ul d n o t b e

oper ational. (C a l t ex P h i l s . I n c. v s C B A A . 1 1 4 S C RA 2 9 6)

4 8 . T h e r e a l p r o p e r t y o f M r . a n d M r s . A n g e l e s , s i t u a t ed i n a c o m m e r ci a l a r e a i n f r o n t o f

t h e p u b l i c M a r k e t , w a s d e c l a r e d i n t h e i r T a x D e c l a r a t i o n a s r e s i d e n t i a l b e c a u s e i t h a d b e e n u s e d

b y t h e m a s t h e i r f a m i l y r e s i d e n ce f r om t h e t i me o f i t s c o n s t r u c t i o n i n 1 9 90 . H o w e v e r, s i n c e

J a n u a r y 1 9 9 7 , w h e n t h e s p o u s e s l e f t f o r t h e U n i t e d S t a t e s t o s t a y t h e r e p e r m a n e n t l y w i t h t h e i r

c h i l d r e n , t h e p r o p e r t y h a s b e e n r e n t e d t o a s i n g l e p r o p r i e t o r e n g a g e d i n t h e s a l e o f a p p l i a n c e s

a n d a g ri - pr o du c t s . T h e P r ov i nc i a l A s s e ss o r r e cl a ss i f i e d t h e p r op e r t y a s c o m m e r ci a l f o r t a x

p u r p o s e s s t a r t i n g J a n u a r y 1 9 9 8 . M r . a n d M r s . A n g e l e s a p p e a l e d t o t h e L o c a l B o a r d o f

A s s e s s m e n t A p p e a l s c o n t e n d i n g t h a t t h e T a x D e c l a r a t i o n p r e v i o u s l y c l a s s i f y i n g t h e i r p r o p e r t y a s

r e s i d e n t i a l i s b i n d i n g .

H o w s h o u l d t h e a p p e a l b e d e c i d e d ? [ 2 0 0 2 B a r E x a m s ]


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The appeal should be decided against Mr. and Mrs. Angeles. The law focuses on the actual use of the property for

classification, valuation and assessment purposes regardless of ownership. Section 217 of the Local Government Code

provides that "real property, shall be classified, valued, and assessed on the basis of its actual use regardless of where

located, whoever owns it, and whoever uses it".

4 9 . A s id e f r om t h e b as i c re a l e st a te t a x , gi v e t hr e e o th e r t ax e s th a t ma y be i m p os e d b y p ro v in c ia l a n d ci t y

government as well as by municipalities in the Metro Manila area? [2002 Bar Exams]

T h e f o l l o wi n g r e a l p r op e rt y t a xe s a re a a s id e f r om t h e b a s i c r e a l p r op e rt y t a x, m a y b e i m po s ed b y

pr ovincial and city gover nment as well as by municipalities in the Metr o Manila ar ea:

a. Additional levy on r eal pr oper ty for the Special Education Fund (Sec.235, LGC);

b. Additional Ad-valor em tax on idle lands (Sec.236, LGC);

c. Special Levy (SEC.240).

Alter native Answer :

A. The following taxes, aside fr om the basic r eal estate tax may be imposed by:

1. City/Pr ovincial Gover nment

a) Pr inter s or publisher s tax

b) Franchise taxc) Pr ofessional tax

2. Municipalities in the Metro Manila area

a) Annual fixed tax on manufactur er s, assembler s, r epacker s, pr ocessor s, br ewer s, distiller s,

r e c t i f i e r s , a n d c o m p o u n d e r s o f l i q u o r s , d i s t i l l e d s p i r i t s a n d w i n e s o r m a n u f a c t u r e o f a n y

ar ticle of commer ce of whatever kind or natur e;

b) A n nu a l f i xe d t a x o n w ho l es al e rs , d i st r ib u to r s, o r d e al e rs i n a n y a rt i cl e o f c o mm e rc e o f

whatever kind or nature;

c) Percentage tax on retailers.

50. A C o . , a P h i l ip p i n e co r p o r at i o n , is t h e o wn e r o f ma c h i ne r y , e q ui p m e nt a n d f ix t u r e s lo c a te d a t i ts p l a nt i n

M u n t in l u p a C i t y . T h e C i t y A s s e s s or c h a r a c t e ri z e d a l l t h e s e p r o p e r t i e s a s r e a l p r o p e r t i es s u b j e c t t o t h e r e a l

property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment Appeals. The Board ruled inf a vo r o f t h e C i t y. I n a c c or d an c e w i t h R A N o . 1 1 25 , A C o . b r o ug h t a p e ti t io n f o r r e vi e w b e f or e t h e C T A t o

appeal the decision of the City Board of Assessment Appeals.

Is the Petition for Review proper? Explain. [1999 Bar Exams]

N o. T he C TA i s d ev oi d o f j ur is di ct io n t o e nt er ta in a pp ea ls f ro m t he d ec is io n o f t he C it y B oa rd o f

A s se s sm e nt A p pe a ls . S ai d d e ci s io n i s i ns t ea d a pp e al a bl e t o t h e C en t ra l B o ar d o f A s se s sm e nt A p pe al s ,

w h ic h u n de r t h e L o ca l G o ve r nm e nt C o de , h a s a p pe l la t e j u ri s di c ti o n o v er d e ci s io n s o f L o ca l B o ar d o f

Assessment Appeals. ( C a l te x P h i l s . I n c. v s . C e n t ra l B o a r d o f A s s e ss m e n t A p p ea l s . L - 5 04 6 6 . M a y 3 1 , 1 9 8 2 )


18/45

N o te : U n de r t h e n e w C T A l a w , R A N o . 9 2 8 2 w h i ch a m en d ed R A N o . 1 1 2 5, d e c i si o ns o f t h e C e n t r al

Board of Assessment Appeals are now appealable to the Court of Tax Appeals and no long er to the Court

o f A p pe a ls .

51. T h e M un i ci p al i ty o f M a l ol o s p as s ed a n o r d in a nc e i m po s in g a t a x o n a n y s al e o r t r an s fe r o f r e a l p ro p er t y

located w ithin the municipality at a rate of one-fourth (1/4) of one percentum (1%) of the total consideration

o f s uc h t r an sa ct io n. X s ol d a p ar ce l o f l an d i n M al ol os w hi ch h e i nh er it ed f ro m h is d ec ea se d p ar en ts a nd

refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null

a n d v o i d s i n c e s u c h a t a x c a n o n l y b e c o l l e c t e d b y t h e n a t i o n a l g o v e r n m e n t , a s i n f a c t h e h a s p a i d B I R t h e

required capital gains tax. The municipality countered that under the constitution, each local government is

v e s t e d w i t h t h e p o w e r t o c r e a t e i t s o w n s o u r c e s o f r e v e n u e a n d t o l e v y t a x e s , a n d i t i m p o s e d t h e s u b j e c t t a x

in the exercise of said constitutional authority.

Resolve the controversy. [1992 Bar Exams]

T h e o r d i na n ce p a ss ed b y t h e M u n ic i pa l it y o f M a lo l os i m po s in g a t a x o n t h e s a l e o r t r an s fe r o f r ea l

p r o p e r t y i s v o i d . T h e L o c a l T a x C o d e o n l y a l l o w s p r o v i n c e s a n d c i t i e s t o i m p o s e T a x o n t h e t r a n s f e r o f

owner ship of r eal pr oper ty. ( S e c 7 a n d 2 3 , L o c a l T a x C o d e ) . Municipalities ar e pr ohibited fr om imposing

said tax that pr ovinces ar e specifically author ized to levy (Sec. 22, Local Tax Code)

W h i l e i t i s t r u e t h a t t h e C o n s t i t u t i o n h a s g i v e n b r o a d p o w e r s o f t a x a t i o n t o l o c a l g o v e r n m e n t u n i t s ,

t h i s d e l e g a t i o n h o w e v e r , i s s u b j e c t t o s u c h l i m i t a t i o n s a s m a y b e p r o v i d e d b y l a w . ( S e c 5 , A r t X , 1 9 8 7

Constit

Date post:	03-Jun-2018
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