Taxation Law Quamto 2021: Questions Asked More Than Once

University
of Santo Tomas
Faculty of Civil Law

TAXATION LAW

Questions Asked More Than Once
QuAMTO 2021

QuAMTO is a compilation of past bar questions with answers as suggested by the UPLC and other distinct
luminaries in the academe, and updated by the UST Academics Committee to fit for the 2021 Bar Exams.

Bar questions are arranged per topic in accordance with the bar syllabus released by the Supreme Court
and were selected based on their occurrence on past bar examinations from 1987 to 2019.

ACADEMICS COMMITTEE

MARIA FRANCES FAYE R. GUTIERREZ SECRETARY GENERAL

JOHN EDWARD F. FRONDA
ANGEL ISAH M. ROMERO
KIRBY ANNE C. RENIA EXECUTIVE COMMITTEE
KAREN ABBIE C. ASPIRAS
JOSE CHRISTIAN ANTHONY I. PINZON
NATHAN RAPHAEL D.L. AGUSTIN

MARIA FRANCES FAYE R. GUTIERREZ LAYOUT AND DESIGN

QuAMTO COMMITTEE MEMBERS

MA. SELYNA V. ROÑO
MARFE B. GADDI
MERVIN ANGELO V. MANALO

ATTY. CLARICE ANGELINE V. QUESTIN
ATTY. AL CONRAD B. ESPALDON
ADVISERS

OUR DEEPEST APPRECIATION TO
OUR MENTORS AND INSPIRATION

JUSTICE JAPAR B. DIMAAMPAO

ATTY. ABELARDO T. DOMONDON

ATTY. BENEDICTA DU-BALADAD

ATTY. KENNETH GLENN L. MANUEL

ATTY. LEAN JEFF M. MAGSOMBOL

ATTY. NOEL M. ORTEGA

ATTY. PRUDENCE ANGELITA A. KASALA

ATTY. RIZALINA V. LUMBRERA

ATTY. VIRGINIA JEANNIE P. LIM

ATTY. CLARICE ANGELINE V. QUESTIN

For being our guideposts in understanding
the intricate sphere of Legal and Judicial Ethics.
-Academics Committee 2021

QuAMTO (1987-2019)

the government (Chamber of Real Estate and
TAXATION QUAMTO Builders’ Associations, Inc. v. Romulo, 614 SCRA

605, 2010) and their prompt and certain

availability is imperious need. (Bull v. United
GENERAL PRINCIPLES OF TAXATION States, 295 US 247) For without taxes, the

government can neither exist nor endure.

NATURE AND CHARACTERISTICS (National Power Corporation v. City of Cabanatuan,
OF TAXATION G.R. No. 149110, April 9, 2003, citing various cases)
(1989, 1991, 1996, 2003, 2005, 2016)
PRINCIPLES OF A SOUND TAX SYSTEM
Q: Describe the power of taxation. May a (2009, 2015)
legislative body enact laws to raise revenues in
the absence of a constitutional provision Q: Explain the principles of a sound tax system.
granting said body the power to tax? Explain. (2015 BAR)
(2005 BAR)
A: The principles of a sound tax system and their
A: The power of taxation is inherent in the State respective explanations, are as follows:
being an attribute of sovereignty. As an incident of
sovereignty, the power to tax has been described 1. Fiscal adequacy which means that the
as unlimited in its range, acknowledging in its sources of revenue should be sufficient to
very nature no limits, so that security against its meet the demands of public expenditures
abuse is to be found only in the responsibility of (Chavez v. Ongpin, G.R. No. 76778, June 6,
the legislature which imposes the tax on the 1990);
constituents who are to pay it. (Mactan Cebu
International Airport Authority v. Marcos, 261 2. Equality or theoretical justice which means
SCRA 667) that the tax burden should be proportionate
to the taxpayer’s ability to pay (Section [Sec.]
Being an inherent power, the legislature can enact 28(1), Art. VI, 1987 Constitution); and
laws to raise revenues even without the grant of
said power in the Constitution. It must be noted 3. Administrative feasibility which means that
that Constitutional provisions relating to the the tax law should be capable of convenient,
power of taxation do not operate as grants of the just and effective administration, as well as
power of taxation to the Government, but instead easy compliance by taxpayer.
merely constitute limitations upon a power which
would otherwise be practically without limit. Q: TRUE or FALSE.
(Cooley, Constitutional Limitations, 1927 8th Ed., p.
787) (a) A law that allows taxes to be paid either in
cash or in kind is valid. xxx (2009 BAR)
Power of Taxation as distinguished from Police
Power and Eminent Domain (1989, 1991, A: True. There is no law which requires the
2003) payment of taxes in cash only. However, a law
allowing payment of taxes in kind, although valid,
Q: The City of Manila passed an ordinance may pose problems of valuation, hence, will
imposing an annual tax of P 5,000.00 to be violate the principle of administrative feasibility.
paid by an operator of a massage clinic and an
annual fee of P 50.00 to be paid by every INHERENT LIMITATIONS
attendant or helper in the said clinic. Is the (1989, 1991, 2009)
imposition a tax or a license fee? (1989 BAR)
Q: Enumerate the four (4) inherent
A: The imposition on the operator of the massage limitations on taxation. Explain each item
clinic is both a tax and a license fee. The amount of briefly. (2009 BAR)
P 5,000.00 exceeds the cost of regulation,
administration and control but it is likewise A: The inherent limitations on the power to tax
imposed to regulate a non-useful business in are:
order to protect the health, safety and morals of
the citizenry in general. The P 50.00 impositions 1. Taxation is for a public purpose – The
on the helpers or attendants are license fees proceeds of the tax must be used (a) for
sufficient only for regulation, administration and the support of the State; or (b) for some
control. recognized objective of the government or
to directly promote the welfare of the
Theory and Basis of Taxation (1991, 2016 community.
BAR)
2. Taxation is inherently legislative – Only the
Q: Briefly explain the following doctrines: legislature has full discretion as to the
lifeblood doctrine xxx (2016 BAR) persons, property, occupation or business
to be taxed provided these are all within
A: Lifeblood doctrine. Taxes are the lifeblood of the State’s territorial jurisdiction. It can
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Taxation Law
also finally determine the amount or rate condonation of all penalties on fines resulting
of tax, the kind of tax to be imposed and from the late payment.
the method of collection. (1 Cooley 176184)
Arguing that the ordinance rewards
3. Taxation is territorial– Taxation may be delinquent taxpayers and discriminates
exercised only within the territorial against prompt ones, RC demands that he be
jurisdiction of the taxing authority. (61 Am. refunded an amount equivalent to one- half of
Jur. 88) Within the territorial jurisdiction, the real taxes he paid. The municipal attorney
the taxing authority may determine the rendered an opinion that RC cannot be
place of taxation” or “tax situs." reimbursed because the ordinance did not
provide for such reimbursement. RC files suit
4. Taxation is subject to international comity to declare the ordinance void on the ground
– This is a limitation which is founded on that it is a class legislation. Will his suit
reciprocity designed to maintain a prosper? Explain your answer briefly. (2004
harmonious and productive relationships BAR)
among the various states. Under
international comity, a state must A: The suit will not prosper. The remission or
recognize the generally accepted tenets of condonation of taxes due and payable to the
international law, among which are the exclusion of taxes already collected does not
principles of sovereign equality among constitute unfair discrimination. Each set of taxes
states and of their freedom from suit is a class by itself, and the law would be open to
without their consent, that limit the attack as class legislation only if all taxpayers
authority of a government to effectively belonging to one class were not treated alike.
impose taxes on a sovereign state and its (Juan Luna Subdivision, Inc., v. Sarmiento, 91 Phil
instrumentalities, as well as on its property 371, 1952)
held, and activities undertaken in that
capacity. Non-Impairment of Obligations of Contracts
(1997, 2004 BAR)
Public Purpose (1989, 1991 BAR)
Q: A law was passed granting tax exemption to
Q: An ordinance of Quezon City on the certain industries and investments for a
operation of market stalls and the collection period of five years. But three years later, the
of market stall fees created a market law was repealed. With the repeal, the
committee “to formulate, recommend and exemptions were considered revoked by the
adopt subject to the ratification of the BIR, which assessed the investing companies
Sangguniang Panglungsod regulations in the for unpaid taxes effective on the date of the
operations of the market stalls.” It also repeal of the law.
entrusted the collection of the market stall
fees to a private corporation. Does the NPC and KTR companies questioned the
entrusting of the collection of the market assessments on the ground that, having made
stall fees destroy the “public purpose” of the their investments in full reliance with the
ordinance? (1989 BAR) period of exemption granted by the law, its
repeal violated their constitutional right
A: YES, because a portion of the fees collected against the impairment of the obligations and
would be diverted as fees to private corporation. contracts. Is the contention of the companies
Entrusting of the collection of the market stall tenable or not? Reason briefly. (2004 BAR)
fees violates the limitation that local government
units shall in no case let to any private person the A: The contention is not tenable. The exemption
collection of local taxes, fees, charges and other granted is in the nature of a unilateral tax
impositions. (Sec. 130(c), Republic Act [R.A.] No. exemption. Since the exemption given is
7160, The Local Government Code [LGC]) As a spontaneous on the part of the legislature and no
result of this prohibition, public funds are service or duty or other remunerative conditions
therefore utilized for a private purpose, which is have been imposed on the taxpayers receiving the
to pay the private corporation for its services. exemption, it may be revoked at will by the
legislature. (Manila Railroad Company v. Insular
CONSTITUTIONAL LIMITATIONS Collector of Customs, 12 Phil 146, 1915)
(1988, 1997, 2000, 2003, 2004, 2017)
Tax Exemption Granted to Non-Stock, Non-
Equality and Uniformity (1988, 2000, 2003, Profit Educational Institutions (2004, 2017
2004 BAR) BAR)

Q: RC is a law-abiding citizen who pays his Q: XYZ Colleges is a non-stock, non-profit
real estate taxes promptly. Due to a series of educational institution run by the Archdiocese
typhoons and adverse economic conditions, of BP City. It collected and received the
an ordinance is passed by MM City granting a following:
50% discount for payment of unpaid real
estate taxes for the preceding year and the (a) Tuition fees
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QuAMTO (1987-2019)
(b) Dormitory Fees actually, directly, and exclusively for educational

(c) Rentals from canteen concessionaires purposes as provided under Article XIV, Sec. 4(3)
(d) Interest from money-market placements of the 1987 Constitution. The requisites for
of the tuition fees availing the tax exemption under Article XIV,
(e) Donation of a lot and building by school Section 4(3) are as follows: (1) the taxpayer falls
alumni under the classification non- stock, non-profit
educational institution; and (2) the income it
Which of these above cited income and seeks to be exempted from taxation is used
donation would not be exempt from taxation? actually, directly and exclusively for educational
Explain briefly. (2004 BAR) purposes. Thus, so long as the requisites are met,
the revenues may be exempt from tax. (CIR v. De
A: The following are not exempt from taxation, La Salle University, Inc., G.R. Nos. 196596, 198841,
viz: 198941, November 9, 2016)

(c) xxx. Rental income is considered as unrelated KINDS OF TAXES
to the school operations; hence, taxable. (DOF (1994, 2000, 2001, 2006 BAR)
Order No. 137-87, Dec. 16, 1987)
Direct and Indirect Taxes (1994, 2000, 2001,
(d) xxx. The interest on the placement is taxable. 2006 BAR)
(Ibid)
Q: Distinguish “direct taxes” from “indirect
If, however, the said rental income and/or taxes." Give examples. (2006 BAR)
interest are used actually, directly and exclusively
for educational purposes as proven by substantial A: Direct taxes are demanded from the very
evidence, the same will be exempt from taxation. person who, as intended, should pay the tax which
(CIR v. CA, 298 SCRA 83, 1998) he cannot shift to another; while an indirect tax is
demanded in the first instance from one person
The other items of income which were all derived with the expectation that he can shift the burden
from school-related activities will be exempt from to someone else, not as a tax, but as part of the
taxation in the hands of the recipient if used purchase price. (Maceda v. Macaraig, Jr., 223 SCRA
actually, directly and exclusively for educational 217, 1993) Examples of direct taxes are income
purposes. (Sec. 4 par. 3, Art. XIV, 1987 tax, estate tax and donor’s tax. Examples of
Constitution) indirect taxes are value-added tax, percentage tax
and excise tax on excisable articles.
The donation to a non-stock, non-profit
educational institution will be exempt from the CONSTRUCTION AND INTERPRETATION
donor’s tax if used actually, directly and OF TAX LAWS
exclusively for educational purposes and (1996, 2005, 2007)
provided, that, not more than 30% of the
donation is used for administration purposes. Tax Exemption and Exclusion (1996, 2005,
(Sec. 4, par. 4, Art XIV, 1987 Constitution, in 2007 BAR)
relation to Section 101(A)(3), National Internal
Revenue Code [NIRC]) Q: Why are tax exemptions strictly construed
against the taxpayer? (1996 BAR)
Q: San Juan University is a non-stock, non-
profit educational institution. It owns a piece A: Tax exemptions are strictly construed against
of land in Caloocan City on which its three 2- the taxpayer because such provisions are highly
storey school buildings stood. Two of the disfavored and may almost be said to be odious to
buildings are devoted to classrooms, the law. (Manila Electric Company v. Vera, 67 SCRA
laboratories, a canteen, a bookstore, and 351) The exception contained in the tax statutes
administrative offices. The third building is must be strictly construed against the one
reserved as dormitory for student athletes claiming the exemption because the law does not
who are granted scholarships for a given look with favor on tax exemptions, they, being
academic year. contrary to the life-blood theory which is the
underlying basis for taxes.
In 2017, San Juan University earned income
from tuition fees and from leasing a portion of Q: An alien employee of the Asian
its premises to various concessionaires of Development Bank (ADB) who is retiring soon
food, books, and school supplies. has offered to sell his car to you which he
imported tax-free for his personal use. The
xxx privilege of exemption from tax is granted to
qualified personal use under the ADB Charter
(b) Is the income earned by San Juan which is recognized by the tax authorities. If
University for the year 2017 subject to income you decide to purchase the car, is the sale
tax? Explain your answer. (2017 BAR) subject to tax? Explain. (2005 BAR)

A: NO, provided that the revenues are used A: YES. The sale is subject to tax. Section 107(B) of
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Taxation Law
the NIRC provides that: "In the case of tax-free final withholding tax on the interest income
importation of goods into the Philippines by from the time deposit.
persons, entities or agencies exempt from tax
where such goods are subsequently sold, Alfredo contends that the 20% final tax on the
transferred or exchanged in the Philippines to interest income constituted double taxation
non-exempt persons or entities, the purchasers, because his salary had been already subjected
transferees or recipients shall be considered the to withholding tax.
importer thereof, who shall be liable for any
internal revenue tax on such importation”. Tax Is Alfredo's contention correct? Explain your
exemptions are to be construed strictly and are answer. (2017 BAR)
not considered transferable in character.
A: NO. Double taxation means taxing for the same
DOUBLE TAXATION tax period the same thing or activity twice, when
(1996, 1997, 2004, 2015, 2017, 2018, 2019) it should be taxed but once, for the same purpose
and with the same kind of character of tax. (CIR v.
Q: Differentiate between double taxation in the Citytrust Investment Phils., G.R. Nos. 139786,
strict sense and in a broad sense and give an 140857, 2006) The 20% final tax is imposed on
example of each. (2015 BAR) the interest income, while the tax earlier
withheld is on the salary or compensation
A: Double taxation in the strict sense pertains to income. Thus, though both pertain to income tax,
the direct double taxation. This means that the they do not pertain to the same thing or activity
taxpayer is taxed twice by the same taxing and consequently, no double taxation exists.
authority, within the same taxing jurisdiction, for
the same property and same purpose. Example: Q: KM Corporation, doing business in the City
Imposition of final withholding tax on cash of Kalookan, has been a distributor and
dividend and requiring the taxpayer to declare retailer of clothing and household materials. It
this tax-paid income in his income tax returns. has been paying the City of Kalookan local
taxes based on Sections 15 (Tax on
On the other hand, double taxation in the broad Wholesalers, Distributors or Dealers) and 17
sense pertains to indirect double taxation. This (Tax on Retailers) of the Revenue Code of
extends to all cases in which there is a burden of Kalookan City (Code). Subsequently, the
two or more impositions. It is the double taxation Sangguniang Panlungsod enacted an
other than those covered by direct double ordinance amending the Code by inserting
taxation. (CIR v. Solidbank Corp., 436 SCRA 416) Section 21 which imposes a tax on "Businesses
Example: Subjecting the interest income of banks Subject to Excise, Value-Added and Percentage
on their deposits with other banks to the 5% Taxes under the National Internal Revenue
gross receipts tax (GRT) despite of the same Code (NIRC)," at the rate of 50% of 1 % per
income having been subjected to 20% final annum on the gross sales and receipts on
withholding tax (FWT), is only a case of indirect persons "who sell goods and services in the
double taxation. The GRT is a tax on the privilege course of trade or business." KM Corporation
of engaging in business while the FWT is a tax on paid the taxes due under Section 21 under
the privilege of earning income. protest, claiming that (a) xxx and (b) this
would amount to double taxation, since its
Q: X, a lessor of a property, pays real estate tax business was already taxed under Sections 15
on the premises, a real estate dealer’s tax and 17 of the Code.
based on rental receipts and income tax on the
rentals. X claims that this is double taxation. Does this amount to double taxation? (2018
(1996 BAR) BAR)

A: There is no double taxation. Double taxation A: YES. The three taxes are all in the nature of
means taxing for the same tax period the same local business taxes on wholesalers, retailers and
thing or activity twice, when it should be taxed service providers which are imposed by the same
but once, by the same taxing authority for the taxing authority on the same subject matter for
same purpose and with the same kind or the same tax period; hence, the elements of double
character of tax. The real estate tax is a tax on taxation are present. (Nursery Care Corporation v.
property; the real estate dealer’s tax is a tax on Anthony Acebedo, G.R. No. 180651, July 30, 2014)
the privilege to engage in business; while the
income tax is a tax on the privilege to earn an ALTERNATIVE ANSWER:
income. These taxes are imposed by different
taxing authorities and are essentially of different YES. Double taxation means taxing the same
kind and character. (Villanueva v. City of Iloilo, 26 property twice when it should be taxed only once;
SCRA 578) that is, “taxing the same person twice by the same
jurisdiction for the same thing”. It is obnoxious
Q: Upon his retirement, Alfredo transferred when the taxpayer is taxed twice when it should
his savings derived from his salary as a be only once. In double taxation, which is
marketing assistant to a time deposit with otherwise described as “direct duplicate taxation”,
AAB Bank. The bank regularly deducted 20% the two taxes must be imposed on the same
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QuAMTO (1987-2019)
subject matter, for the same purpose, by the same must be imposed on 1) the same subject matter;
taxing authority, within the same jurisdiction, 2) for the same purpose; 3) by the same taxing
during the same taxing period, and the taxes must authority; 4) within the same jurisdiction; 5)
be of the same kind or character. during the same taxing period; and 6) the taxes
must be of the same kind or character.
It is obnoxious when the taxpayer is taxed twice
when it should be only once. In double taxation, ESCAPE FROM TAXATION
which is otherwise described as “direct duplicate (TAX AVOIDANCE v. TAX EVASION)
taxation”, the two taxes must be imposed on the (1989, 1996, 2000, 2005, 2008, 2014, 2016
same subject matter, for the same purpose, by the BAR)
same taxing authority, within the same
jurisdiction, during the same taxing period, and Tax avoidance and Tax Evasion (1989, 1996,
the taxes must be of the same kind or character. 2000, 2005, 2008, 2014, 2016 BAR)

Using the afore-mentioned test, there is indeed, Q: Distinguish tax evasion from tax avoidance.
double taxation since KM Corporation is subjected (1996 BAR)
to the taxes under both Sections 15 (Tax on
Wholesalers, Distributors or Dealers), 17 (Tax on A: Tax evasion is a scheme used outside of those
Retailers) and 21 (Tax on Businesses Subject to lawful means to escape tax liability and, when
Excise, Value-Added and Percentage Taxes under availed of, it usually subjects the taxpayer to
the NIRC) of the Revenue Code of Kalookan City. further or additional civil or criminal liabilities.
These taxes are being imposed: (1) on the same Tax avoidance, on the other hand, is a tax saving
subject matter — the privilege of doing business device within the means sanctioned by law, hence
in Kalookan City; (2) for the same purpose — to legal.
make persons conducting business within
Kalookan City contribute to city revenues: (3) by Q: Maria Suerte, a Filipino citizen, purchased a
the same taxing authority — Kalookan City; (4) lot in Makati City in 1980 at a price of P1
within the same taxing jurisdiction — within the million. Said property has been leased to MAS
territorial jurisdiction of Kalookan City: (5) for the Corporation, a domestic corporation engaged
same taxing periods — per calendar year; and (6) in manufacturing paper products, owned 99%
of the same kind or character — a local business by Maria Suerte. In October 2007, EIP
tax imposed on gross sales or receipts of the Corporation, a real estate developer,
business. (City of Manila v. Coca-Cola Bottlers expressed its desire to buy the Makati
Philippines, Inc., GR. No. 181845, August 4, 2009, property at its fair market value of P300
595 SCRA 299 and GR. No, 167283, February 19, million, payable as follows: (a) P60 million
2010, reiterated in Swedish Match Philippines, Inc. down payment; and (b) balance, payable
v. The Treasurer of the City of Manila, GR. No. equally in twenty-four (24) monthly
181277, July 3, 2013, 700 SCRA 428, 439-442 bota consecutive installments. Upon the advice of a
cited in Nursery Care Corporation v. Acevedo, GR. tax lawyer, Maria Suerte exchanged her
No. 180651, July 30, 2014) Makati property for shares of stock of MAS
Corporation. A BIR ruling, confirming the tax-
Q: In 2018, City X amended its Revenue Code to free exchange of property for shares of stock,
include a new provision imposing a tax on was secured from the BIR National Office and
every sale of merchandise by a wholesaler a Certificate Authorizing Registration was
based on the total selling price of the goods, issued by the Revenue District Officer (RDO)
inclusive of value-added taxes (VAT). ABC where the property was located.
Corp., a wholesaler operating within City X, Subsequently, she sold her entire
challenged the new provision based on the stockholdings in MAS Corporation to EIP
following contentions: (1) the new provision is Corporation for P300 million. In view of the
a form of prohibited double taxation because it tax advice, Maria Suerte paid only the capital
essentially amounts to City X imposing VAT gains tax of P29,895,000 (P100,000 x 5% plus
which was already being levied by the national P298,900,000 x 10%), instead of the corporate
government xxx income tax of P104,650,000 (35% on P299
million gain from sale of real property). After
Rule on each of ABC Corp.'s contentions. (2019 evaluating the capital gains tax payment, the
BAR) RDO wrote a letter to Maria Suerte, stating
that she committed tax evasion.
A: ABC’s first contention is without merit.
Considering that the taxing authorities are Is the contention of the RDO tenable? Or was it
different and that the local tax is imposed on the tax avoidance that Maria Suerte had resorted
total selling price, inclusive of VAT, and VAT is to? Explain. (2008 BAR)
imposed on gross sales/receipts, the present
situation could not be considered as double A: The contention of the RDO is not tenable. Maria
taxation. There is no double taxation since in Suerte resorted to tax avoidance and not tax
order to constitute prohibited double taxation, it evasion. Tax avoidance is the use of legal means
must constitute taxing the same property twice to reduce tax liability and it is the legal right of a
when it should be taxed only once. The two taxes taxpayer to decrease the amount of what
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Taxation Law
otherwise would be his taxes by means which the executive agreement in respect of a loan
law permits. (Heng Tong Textiles Co., Inc. v. facility to the Philippines from Japan whereby
Commissioner) There is nothing illegal about it was stipulated that interest on loans granted
transferring first the property to a corporation in by private Japanese financial institutions to
a tax-free exchange and later selling the shares private financial Institutions in the
obtained in the exchange at a lower tax than what Philippines shall not be subject to Philippine
could have been imposed if the property was sold income taxes. (1992 BAR)
directly.
Is this tax exemption valid? Explain.
Q: Lucky V Corporation (Lucky) owns a 10-
storey building on a 2,000 square meter lot in A: YES. The tax exemption is valid because an
the City of Makati. It sold the lot and building executive agreement has the force and effect of a
to Rainier for P80 million. One month after, treaty under the provision of the Revenue Code.
Rainier sold the lot and building to Healthy Taxation is subject to International Comity.
Smoke Company (HSC) for P200 million, Lucky
filed its annual return and declared its gain ALTERNATIVE ANSWER:
from the sale of the lot and building in the
amount of P750,000.00. The act of tax exemption is an act of taxation
which is inherently legislative. Therefore, a mere
An investigation conducted by the BIR executive agreement cannot provide for a tax
revealed that two months prior to the sale of exemption.
the properties to Rainier, Lucky received P40
million from HSC and not from Rainier. Said COMPENSATION AND SET-OFF
amount of P40 million was debited by HSC and (1990, 1992, 1996, 2001, 2005 BAR)
reflected in its trial balance as “other inv. –
Lucky Bldg.” The BIR concluded that there is Q: May taxes be the subject of set-off or
tax evasion since the real buyer of the compensation? Explain. (2005 BAR)
properties of Lucky is HSC and not Rainier. It
issued an assessment for deficiency income A: NO. Taxes cannot be the subject of set-off or
tax in the amount of P79 million against Lucky. compensation for the following reasons: (1) taxes
Lucky argues that it resorted to tax avoidance are of distinct kind, essence and nature, and these
or a tax saving device, which is allowed by the impositions cannot be classed in merely the same
NIRC and BIR rules since it paid the correct category as ordinary obligations; (2) the
taxes based on the sale to Rainier. On the applicable laws and principles governing each are
other hand, Rainier and HSC also paid the peculiar, not necessarily common, to each; and (3)
prescribed taxes arising from the sale by public policy is better subserved if the integrity
Rainier to HSC. Is the BIR correct in assessing and independence of taxes are maintained.
taxes on Lucky? Explain. (2016 BAR) (Republic v. Mambulao Lumber Company, 4 SCRA
622, 1962)
A: YES. The BIR is correct in assessing the taxes
on Lucky. However, if the obligation to pay taxes and the
taxpayer’s claim against the government are
There was no tax avoidance, instead there was tax both overdue, demandable, as well as fully
evasion on the part of Lucky because of the liquidated, compensation takes place by
simulated sale to Rainier which had its apparent operation of law and both obligations are
purpose to reduce the income tax to be paid by extinguished to their concurrent amounts.
Lucky on the sale to HSC. (Domingo v. Garlitos, 8 SCRA 443, 1963)

The sale to Rainier was simulated as evidenced by Q: Can an assessment for a local tax be the
the fact that two months prior to the sale of the subject of set-off or compensation against a
properties to Rainier, Lucky received P40 million final judgment for a sum of money obtained by
from HSC and not from Rainier. the taxpayer against the local government that
made the assessment? Explain. (2005 BAR)
The intermediary transaction (the simulated sale
to Rainier) was prompted more on the mitigation A: NO. Taxes and debts are of different nature and
of tax liabilities than for legitimate business character; hence, no set-off or compensation
purpose constitutes one of tax evasion. between these two different classes of obligations
is allowed. The taxes assessed are the obligations
EXEMPTION FROM TAXATION of the taxpayer arising from law, while the money
(1989, 1992 BAR) judgment against the government is an obligation
arising from contract, whether express or implied.
Constitutional Limitation to the power of Inasmuch that taxes are not debts, it follows that
Congress in granting tax exemptions (1989, the two obligations are not susceptible to set-off
1992 BAR) or legal compensation. (Francia v. Intermediate
Appellate Court, 162 SCRA 753, 1988)
Q: The President of the Philippines and the
Prime Minister of Japan entered into an It is only when the local tax assessment and the
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QuAMTO (1987-2019)
final judgment are both overdue, demandable, as 1. Any taxpayer upon his written consent;
well fully liquidated may set-off or compensation
be allowed. (Domingo v. Garlitos, 8 SCRA 443, 2. A decedent to determine his gross estate;
1963)
3. Any taxpayer who has filed an application
TAXPAYER’S SUIT for compromise of his tax liability by means
(1990, 1996 BAR) of financial incapacity to pay his tax liability;

Q: When may a taxpayer’s suit be allowed? 4. A specific taxpayer or taxpayers subject of a
(1996 BAR) request for the supply of tax information
from a foreign tax authority pursuant to an
A: A taxpayer's suit may only be allowed when an international convention or agreement on
act complained of, which may include a legislative tax matters to which the Philippines is a
enactment, directly involves the illegal signatory. (Sec. 6(F), NIRC)
disbursement of public funds derived from
taxation. (Pascual v. Secretary of Public Works, 110 The limited power of the Commissioner does not
Phil. 331) conflict with R.A. No. 1405 because the provisions
of the Tax Code granting this power is an
Q: A law imposes a tax of 1/5 of 1% of the exception to the Secrecy of Bank Deposits Law as
export price of prawns produced in the embodied in a later legislation.
Philippines. The law provides that the
proceeds of the tax shall be turned over to the Furthermore, in case a taxpayer applies for an
Philippine Prawn Growers Association, Inc. application to compromise the payment of his tax
(PPGA), a non-profit private corporation liabilities on his claim that his financial position
registered with the Securities and Exchange demonstrates a clear inability to pay the tax
Commission to be used by PPGA exclusively to assessed, his application shall not be considered
undertake activities that promote the growth unless and until he waives in writing his privilege
of the Philippine prawns industry, such as under R.A. No. 1405, and such waiver shall
undertaking research on how to improve the constitute the authority of the Commissioner to
productivity of prawn farms in the Philippines, inquire into the bank deposits of the taxpayer.
undertaking marketing activities that will
directly further the growth of the industry.
NATIONAL TAXATION

The members of PPGA constitute 90% of all

the Prawn growers in the country REALIZATION AND RECOGNITION OF INCOME
representing 100% of the country’s prawn (1989, 1993, 2009, 2010, 2012 BAR)
exports. JN, a practicing lawyer and taxpayer,
filed a suit with the Supreme Court Q: What is the “all event test”? Explain Briefly.
questioning the constitutionality of the law on (2010 BAR)
the ground that the funds raised through
taxation will be used for a private purpose. A: The “all events test” is a test applied in the
Will said suit prosper? Explain. (1990 BAR) realization of income and expense by an accrual-
basic taxpayer. The test requires (1) the fixing to
A: No because Atty. JN is not prejudiced by the the right to the income or liability to pay; and (2)
law. It is not his tax money that is being used. In the availability of reasonably accurate
short, he has no locus standi. Furthermore, determination of such income or liability, to
assistance to the prawn industry is for a public warrant the inclusion of the income or expense
purpose because the industry is one of the pillars the gross income or deductions during the taxable
of the economy contribution to employment and year. (CIR v. Isabela Cultural Corporation, GR No.
foreign exchange. (Domondon, Remedies, p. 815) 172231, Feb 12, 2007)

POWERS AND FUNCTIONS OF THE Q: Mr. Jose Castillo is a resident Filipino
COMMISSIONER OF INTERNAL REVENUE Citizen. He purchased a parcel of land in
(1998, 1999, 2000, 2003, 2012 BAR) Makati City in 1970 at a consideration of P1
million. In 2011, the land, which remained
Power to inquire into bank deposits (1998, undeveloped and idle, had a fair market value
1999, 2000, 2003, 2012 BAR) of P20 million. Mr. Antonio Ayala, another
Filipino citizen, is very much interested in the
Q: Can the Commissioner of Internal Revenue property and he offered to buy the same for
inquire into the bank deposits of a taxpayer? If P20 million. The Assessor of Makati City re-
so, does this power of the Commissioner assessed in 2011 the property at P10 million.
conflict with R.A.1405 (Secrecy of Bank Is Mr. Castillo liable for income tax in 2011
Deposits Law). (1998 BAR) based on the offer to buy by Mr. Ayala? Explain
your answer. (2012 BAR)
A: The Commissioner of Internal Revenue is
authorized to inquire into the bank deposits of: A: NO. Mr. Castillo is not liable for income tax in
2011 because no income is realized by him during
7

Taxation Law
that year. Tax liability for income tax attaches stipend of ₱50,000.00 for the first vacation
only if there is a gain realized resulting from a leave that any employee takes during a given
closed and complete transaction. (Madrigal v. calendar year. In addition, the senior
Rafferty, G.R. No. L- 12287, August 7, 1918) engineers were also given housing inside the
factory compound for the purpose of ensuring
CLASSIFICATION OF INCOME that there are available engineers within the
SUBJECT TO TAX premises every time there is a breakdown in
(1991, 1993, 1995, 2001, 2003, 2016, 2019 the factory machineries and equipment.
BAR)
(a) Is the special stipend part of the taxable
Taxable Income Fringe Benefits (1991, 1993, income of the employees receiving the
1995, 2001, 2003, 2016, 2019 BAR) same? If so, what tax is applicable and
what is the tax rate? Explain.
Q: A “fringe benefit” is defined as being any
good, service or other benefit furnished or A: The special stipend is a taxable income of
granted in cash or in kind by an employer to an employee. If the individual is a rank-and-
an individual employee. Would it be the file employee, the same forms part of his
employer or the employee who is legally compensation income and it is subject to
required to pay an income tax on it? Explain. income tax (or withholding tax on
(2003 BAR) compensation) at a schedular rate. However,
if the stipend allowance, if lumped-up with
A: It is the employer who is legally required to 13th month pay and other benefits, the
pay an income tax on the fringe benefit. The fringe aggregate amount do not exceed the
benefit tax is imposed as a final withholding tax exclusion threshold of P90,000.00, the same
placing the legal obligation to remit the tax on the shall be excluded from gross income and not
employer, such that, if the tax is not paid the legal subject to income tax.
recourse of the BIR is to go after the employer.
Any amount or value received by the employee as If the employee is not a rank-and-file
a fringe benefit is considered tax paid hence, net employee (but a managerial or supervisory),
of the income tax due thereon. The person who is the same is subject to fringe benefits tax or
legally required to pay (same as statutory final tax at 35% based on the grossed-up
incidence as distinguished from economic monetary value of the special stipend. (Sec.
incidence) is that person who, in case of non- 33, NIRC, as amended)
payment, can be legally demanded to pay the tax.
(b) Is the cash equivalent value of the
Q: In 2011, Solar Computer Corporation housing facilities received by the senior
(Solar) purchased a proprietary membership engineers subject to fringe benefits tax?
share covered by Membership certificate No. 8 Explain. (2019 BAR)
from the Mabuhay Golf Club, Inc. for P500,
000.00. On December 27, 2012, it transferred A: NO, the cash equivalent value of the
the same to David, its American consultant, to housing facilities inside the factory granted
enable him to avail of the facilities of the Club. to the senior engineers are not considered as
David executed a Deed of Declaration of Trust fringe benefits subject to tax. The housing
and Assignment of Shares wherein he facility is furnished by the employer for his
acknowledged the absolute ownership of Solar convenience or advantage because it is
over the share; that the assignment was furnished to ensure that the senior engineers
without any consideration; and that the share are always available to attend to possible
was placed in his name because the Club breakdown of machineries and equipment.
required it to be done. In 2013, the value of Benefits which are granted for the
the share increased to P800,000.00. convenience or advantage of the employer
are exempt from the fringe benefits tax. (Sec.
Is the said assignment a “gift” and, therefore, 2.33(A), RR No. 03-98 implementing Sec. 33,
subject to gift tax? Explain. (2016 BAR) NIRC)

A: NO. The assignments are not gratuitous, and INCOME FROM DEALINGS IN PROPERTY (1987,
there is no intent to transfer ownership hence not 1988, 1989, 1991, 1992, 1993, 1994, 1997,
subject to gift tax. 1998, 2001, 2003, 2005, 2007, 2008, 2009,
2012, 2014, 2015, 2017, 2019)
The value of the right to avail of the privileges
attendant to Mabuhay Golf Club, Inc. Membership Q: Distinguish a “capital asset" from an
Certificate is due to David’s merits or services as a “ordinary asset". (2003 BAR)
computer consultant. It is a fringe benefit taxable
to the employer. (Sec. 33(B)(6), NIRC) A: The term “capital asset” regards all properties
not specifically excluded in the statutory
Q: As a way to augment the income of the definition of capital assets, the profits or loss on
employees of DEF, Inc., a private corporation, the sale or the exchange of which are treated as
the management decided to grant a special capital gains or capital losses. Conversely, all those
8
QuAMTO (1987-2019)
properties specifically excluded are considered as P1,000,000.00 in a subdivision with the

ordinary assets and the profits or losses realized intention of building his residence on it. In
must have to be treated as ordinary gains or 1994, he abandoned his plan to build his
ordinary losses. Accordingly, “capital assets” residence on it because the surrounding area
includes property held by the taxpayer whether or became a depressed area and land values in
not connected with his trade or business, but the the subdivision went down; instead, he sold it
term does not include any of the following, which for P800,000.00. At the time of the sale, the
are consequently considered “ordinary assets:” zonal value was P500,000.00.

1. Stock in trade of the taxpayer or other 1. Is the land a capital asset or an ordinary
property of a kind which would properly be asset? Explain.
included in the inventory of the taxpayer if
on hand at the close of the taxable year; A: The land is a capital asset because it is
neither for sale in the ordinary course of
2. Property held by the taxpayer primarily for business nor a property used in the trade or
sale to customers in the ordinary course of business of the taxpayer. (Sec. 33, NIRC)
trade or business;
2. Is there any income tax due on the sale?
3. Property used in the trade or business of a Explain. (1994 Bar)
character which is subject to the allowance
for depreciation provided in Section 34(F) of A: Yes. Mr. Naval is liable to the 6% capital
the Tax Code; or gains tax imposed under the Tax Code based
4. Real property used in trade or business of on the gross selling price of P 800,000.00
the taxpayer. which is an amount higher than the zonal
value.
The statutory definition of “capital assets”
practically excludes from its scope, it will be Q: In January 1970, Juan Gonzales bought one
noted, all property held by the taxpayer if used in hectare of agricultural land in Laguna for P
connection with his trade or business. 100, 000. This property has a current fair
market value of P 10 million in view of the
Q: What is the rationale for the rule construction of a concrete road traversing the
prohibiting the deduction of capital losses property. Juan Gonzales agreed to exchange
from ordinary gains? Explain. (2003 BAR) his agricultural lot in Laguna for a one-half
hectare residential property located in
A: It is to ensure that only costs or expenses Batangas, with a fair market value of P 10
incurred in earning the income shall be million, owned by Alpha Corporation, a
deductible for income tax purposes consonant domestic corporation engaged in the purchase
with the requirement of the law that only and sale of real property. Alpha Corporation
necessary expenses are allowed as deductions acquired the property in 2007 for P 9 million.
from gross income. The term “necessary
expenses” presupposes that in order to be 1. What is the nature of the real properties
allowed as deduction, the expense must be exchanged for tax purposes - capital asset
business connected, which is not the case insofar or ordinary asset? Explain.
as capital losses are concerned. This is also the
reason why all nonbusiness connected expenses A: The one-hectare agricultural land owned
like personal, living and family expenses, are not by Juan Gonzales is a capital asset because it
allowed as deduction from gross income. (Sec. is not a real property used in trade or
36(A)(1), NIRC of 1997) business. The one-half hectare residential
property owned by Alpha Corporation is an
ALTERNATIVE ANSWER: ordinary asset because the owner is engaged
in the purchase and sale of real property.
The prohibition of deduction of capital losses from (Sec. 39, NIRC, RR No. 07-03)
ordinary gains is designed to forestall the shifting
of deductions from an area subject to lower taxes 2. Is Juan Gonzales subject to income tax on
to an area subject to higher taxes, thereby the exchange of property? If so, what is
unnecessarily resulting in leakage of tax revenues. the tax base and rate? Explain.
Capital gains are generally taxed at a lower rate to
prevent, among others, the bunching of income in A: YES. The tax base in a taxable disposition
one taxable year which is a liberality in the law of a real property classified as a capital asset
begotten from motives of public policy (Rule on is the higher between two values: the fair
Holding Period). It stands to reason therefore, that market value of the property received in
if the transaction results in loss, the same should exchange and the fair market value of the
be allowed only from and to the extent of capital property exchanged. Since the fair market
gains and not to be deducted from ordinary gains value of two properties are the same, the
which are subject to a higher rate of income tax. said fair market value should be taken as the
tax base which is P 10 million. The income
Q: In 1990, Mr. Naval bought a lot for tax rate is 6%. (Sec. 24(D)(1), NIRC)
9

Taxation Law
3. Is Alpha Corporation subject to income tax Exemptions from capital gains tax (1991, 2015
on the exchange of property? If so, what is BAR)
the tax base and rate? Explain. (2008 BAR)
Q: Mr. H decided to sell the house and lot
A: YES. The gain from the exchange wherein he and his family have lived for the
constitutes an item of gross income, and past 10 years, hoping to buy and move to a
being a business income, it must be reported new house and lot closer to his children’s
in the annual income tax return of Alpha school. Concerned about the capital gains tax
Corporation. From the pertinent items of that will be due on the sale of their house, Mr.
gross income, deductions allowed by law H approaches you as a friend for advice if it is
from gross income can be claimed to arrive at possible for the sale of their house to be
the net income which is the tax base for the exempted from capital gains tax and the
corporate income tax rate of 35%. (Secs. conditions they must comply with to avail
27(A) & 31, NIRC) themselves of said exemption. (2015 BAR)

NOTE: That from January 1, 2009 to June 30, A: I would advise Mr. H that he may be exempted
2020 the tax rate is 30%. (R.A. No. 9337; R.A. from the payment of the capital gains tax on the
No. 11534 – CREATE Act) Starting July 1, sale or disposition of the house and lot where his
2020, the tax rate for Domestic Corporations family lives because the sale of principal
in general is 25%, and the tax rate for residence by a natural person is exempt provided
Domestic Corporations classified as Micro, the following conditions are complied with:
Small and Medium Enterprise, is 20%. (Sec.
27(A), NIRC as amended by R.A. No. 11534 – 1. The proceeds of the sale is fully utilized in
CREATE Act) For a corporation to be acquiring or construction new principal
classified as Micro, Small and Medium residence within 18 calendar months from
Enterprise, during the taxable year for which the date of the sale or disposition;
the tax is imposed, the net taxable income
does not exceed P 5,000,000 and the total 2. The historical cost or adjusted basis of the
assets does not exceed P 100,000,000, real property sold or disposed will be carried
excluding land on which the particular over to the new principal residence built or
business entity’s office, plant, and equipment acquired;
are situated. (CREATE Act is not covered by
2020 bar syllabus) 3. The Commissioner has been duly notified,
through a prescribed return, within 30 days
Q: GHI, Inc. is a corporation authorized to from the date of sale or disposition of the
engage in the business of manufacturing ultra- person’s intention to avail of the tax
high density microprocessor unit packages. exemption; and
After its registration on July 5, 2005, GHI, Inc.
constructed buildings and purchased 4. The exemption was availed only once every
machineries and equipment. As of December 10 years. (Sec. 24(D)(2), NIRC)
31, 2005, the total cost of the machineries and
equipment amounted to ₱ 250,000,000.00. Q: Cebu Development Inc. (CDI) has an
However, GHI, Inc. failed to commence authorized capital stock of P 5,000,000.00
operations. Its factory was temporarily closed divided into 50,000 shares with a par value of
effective September 15, 2010. On October 1, One Hundred Pesos (P 100.00) per share. Of
2010, it sold its machineries and equipment to the authorized capital stock, twenty-five
JKL Integrated for ₱ 300,000,000.00. thousand (25,000) shares have been
Thereafter, GHI, Inc. was dissolved on subscribed. Mr. Juan Legaspi is a stockholder
November 30, 2010. of CDI where he has subscription amounting to
13,000 shares. To fully pay his unpaid
(a) Is the sale of the machineries and subscription in the amount of P 950,000.00,
equipment to JKL Integrated subject to normal Mr. Legaspi transferred to the corporation a
corporate income tax or capital gains tax? parcel of land that he owns by virtue of a Deed
Explain. xxx (2019 BAR) of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said
A: The sale of machineries and equipment is property for only P 500,000.00. Is Mr. Legaspi
subject to normal corporate income tax and not to liable for any taxable gain? (1991 BAR)
the capital gains tax. As explained by the Supreme
Court in one case, the capital gains tax of 6% A: The transfer by Mr. Legaspi to the corporation
imposed under Section 27(D)(5) of the NIRC, as of the parcel of land in payment of his unpaid
amended, is on the presumed gain from the sale subscription did not increase his stockholdings in
of a land and/or building only. (SMI-ED the corporation. It cannot be said that he acquired
Philippines Technology, Inc. v. CIR, G.R. No. 175410, control of the corporation by virtue of the transfer
November 12, 2014) of the land. His percentage of stockholdings in the
capital stock of the corporation remains the same
after the transfer as before. Therefore, Mr.
Legaspi derived taxable gain for his economic
10
QuAMTO (1987-2019)
gain which was realized by virtue of the exchange A: Dividends received by a non-resident
of the land for the liability for the subscription. foreign corporation from a domestic
corporation are generally subject to an
ALTERNATIVE ANSWER: income tax of 30% to be withheld at source.
(Sec. 28(B)(1), NIRC) However, a final
Mr. Legaspi is not liable for any taxable gain. The withholding tax of fifteen percent (15%) is
transaction amounted to an exchange of shares of imposed on the amount of cash dividends
property for shares of stock as a result of which received from a domestic corporation like
the property transferor acquired control of the BBB, Inc. if the tax sparing rule applies. (Sec.
corporation. The 13,000 shares of stock acquired 28(B)(5)(b), NIRC) Pursuant to this rule, the
in exchange of property was more than fifty lower rate of tax would apply if the country
percent (50%) of the total subscribed capital in which the non- resident foreign
stock of Cebu Development, Inc. (CDI) that corporation is domiciled would allow as tax
qualified the transaction as a tax-exempt under credit against the tax due from it, taxes
the provisions of Sec. 40(C)(2) of the NIRC, as deemed paid in the Philippines of 15%
amended by R.A. No. 8424 (the Tax Reform Act of representing the difference between the
1997). regular income tax rate and the preferential
rate.
PASSIVE INVESTMENT INCOME
(1994, 1995, 1997, 2000, 2003, 2005, 2015, NOTE: Starting July 1, 2020, the income tax
2018 BAR) rate for non-resident foreign corporations is
25%. (Sec. 28(B)(1), as amended by R.A. No.
Q: BBB, Inc., a domestic corporation, enjoyed a 11534 – CREATE Act) (CREATE Act is not
particularly profitable year in 2014. In June covered by 2020 bar syllabus)
2015, its Board of Directors approved the
distribution of cash dividend to its Q: Mr. Javier is a non-resident senior citizen.
stockholders. BBB, Inc. has individual and He receives a monthly pension from the GSIS
corporate stockholders. What is the tax which he deposits with the PNB-Makati
treatment of the cash dividends received from Branch. Is he exempt from income tax and
BBB, Inc. by the following stockholders: therefore not required to file an income tax
return? (2000 BAR)
1. A resident citizen
A: Mr. Javier is exempt from income tax on his
A: A final withholding tax for ten percent monthly GSIS pension (Sec. 32(B)(6)(f), NIRC) but
(10%) shall be imposed upon the cash not on the interest income that might accrue on
dividends actually or constructively received the pensions deposited with PNB which are
by a resident citizen from BBB, Inc. (Sec. subject to final withholding tax.
24(B)(2), NIRC)
Consequently, since Mr. Javier’s sole taxable
2. Non-resident alien engaged in trade or income would have been subjected to a final
business withholding tax, he is not required anymore to file
an income tax return. (Sec. 51(A)(2)(c), NIRC)
A: A final withholding tax of twenty percent
(20%) shall be imposed upon the cash Q: What are disguised dividends in income
dividends actually or constructively received taxation? Give an example. (1994 BAR)
by a non-resident alien engaged in trade or
business from BBB, Inc. (Sec. 25(A)(2), NIRC) A: Disguised dividends are those income
payments made by a domestic corporation, which
3. Non-resident alien not engaged in trade is a subsidiary of a non-resident foreign
or business corporation, to the latter ostensibly for services
rendered by the latter to the former, but which
A: A final withholding tax equal to twenty- payments are disproportionately larger than the
five percent (25%) of the entire income actual value of the services rendered. In such case,
received from all sources within the the amount over and above the true value of the
Philippines, including the cash dividends service rendered shall be treated as a dividend
received from BBB, Inc. (Sec. 25(B), NIRC) and shall be subjected to the corresponding tax on
Philippine sourced gross income, or such other
4. Domestic corporation preferential rate as may be provided under a
corresponding Tax Treaty.
A: Dividends received by a domestic
corporation from another domestic Example: Royalty payments under a
corporation, such as BBB, Inc., shall not be corresponding licensing agreement.
subject to tax (Sec. 27(D)(4), NIRC)
Q: Spouses Konstantino and Karina are
5. Non-resident foreign corporation (2015 Filipino citizens and are principal
BAR) shareholders of a restaurant chain, Karina's,
Inc. The restaurant's principal office is in
11

Taxation Law
Makati City, Philippines. Packard. To entice him to accept the offer of

employment, he was offered the arrangement
Korina's became so popular as a Filipino that part of his compensation would be an
restaurant that the owners decided to expand insurance policy with a face value of P 20
its operations overseas. During the period million. The parents of Noel are made the
2010-2015 alone, it opened ten (10) stores beneficiaries of the insurance policy.
throughout North America and five (5) stores
in various parts of Europe where there were Will the proceeds of the insurance form part
large Filipino communities. Each store abroad of the income of the parents of Noel and be
was in the name of a corporation organized subject to income tax? Reason briefly. (2007
under the laws of the state or country in which BAR)
the store was located. All stores had identical
capital structures: 60% of the outstanding A: NO. The proceeds of life insurance policies paid
capital stock was owned by Karina's, Inc., to the heirs or beneficiaries upon the death of the
while the remaining 40% was owned directly insured are not included as part of the gross
by the spouses Konstantino and Korina. income of the recipient. (Sec. 32(B)(1), NIRC)
There is no income realized because nothing
Beginning 2017, in light of the immigration flows to Noel’s parents other than a mere return
policy enunciated by US President Donald of capital, the capital being the life of the insured.
Trump, many Filipinos have since returned to
the Philippines and the number of Filipino Q: Born of a poor family on 14 February 1944.
immigrants in the US dropped significantly. On Mario worked his way through college. After
account of these developments, Konstantino working for more than 2 years in X
and Karina decided to sell their shares of Manufacturing Corporation, Mario decided to
stock in the five (5) US corporations that were retire and avail of the benefits under the very
doing poorly in gross sales. The spouses' reasonable retirement plan maintained by his
lawyer-friend advised them that they will be employer. He planned to invest whatever
taxed 5% on the first PhP100,000 net capital retirement benefits he would receive in a
gain, and 10% on the net capital gain in excess business that will provide his employer with
of P 100,000. the needed raw materials. On the day of his
retirement on 30 April 1985, he received P
Is the lawyer correct? If not, how should the 400,000.00 as retirement benefit. In addition,
spouses Konstantino and Karina be taxed on his endowment insurance policy, for which he
the sale of their shares? (2018 BAR) was paying an annual premium of P 1,520.00
since 1965 also matured. He was then paid the
A: The lawyer’s advice is wrong. The capital gains face value of his insurance policy in the
tax of 5% for the first P 100,000 net capital gain, amount of P 50,000.00. Is his P 50, 000.00
and 10% on the net capital gain in excess of insurance proceeds exempt from income
P100,000 applies only to the net capital gains taxation? (1991 BAR)
realized from the sale, barter, exchange or other
disposition of shares of stock in a domestic A: The P 50, 000.00 insurance proceeds is not
corporation. (Sec. 24(C), NIRC) Since the shares of totally exempt from income tax. The excluded
stock sold are shares of foreign corporations held amount is only that portion which corresponds to
as capital assets, the recognized portion of the the premiums that he had paid since 1965. At the
capital gain realized from the sale must be rate of P 1,520.00 per year multiplied by twenty
reported as part of their gross income in their (20) years which was the period of the policy, he
income tax returns where the taxable income will must have paid a total of P 30,400.00.
be subject to the graduated income tax rates for Accordingly, he will be subject to report as
individuals. (Sec. 24(A)(1)(a) in relation to Sec. 39, taxable income the amount of P 19,600.00.
NIRC)
PRZES AND AWARDS
[NOTE: Starting January 1, 2018, a final tax rate of (1993, 1996, 2000, 2015, 2019 BAR)
15% is imposed upon the net capital gains
realized during the taxable year from the sale, Q: Mr. A, a citizen and resident of the
barter, exchange, or other disposition of shares of Philippines is a professional boxer. In a
stock in a domestic corporation, except shares professional boxing match held in 2013, he
sold, or disposed of through the stock exchange. won prize money in United States (US) dollars
(Sec. 24(C), NIRC as amended by R.A. No. 10963 – equivalent to P 300, 000.00.
TRAIN Law)]
a. Is the prize money paid to and received
ANNUITIES, PROCEEDS FROM by Mr. A in the US taxable in the
LIFE INSURANCE OR Philippines? Why?
OTHER TYPES OF INSURANCE
(1988, 1991, 2003, 2005, 2007 BAR) A: YES. Under the Tax Code, the income
within and without of a resident citizen is
Q: Noel Santos is a very bright computer taxable. Since Mr. A is a resident Filipino
science graduate. He was hired by Hewlett citizen, his income worldwide is taxable in
12
QuAMTO (1987-2019)
the Philippines. (Sec. 23(A)(1), NIRC) Meanwhile, under Section 24(B)(1) of the NIRC,
the winnings amounting to P 10,000 or less from
b. May Mr. A’s prize money qualify as an Lotto shall be exempt from tax, therefore the Lotto
exclusion from his gross income? Why? prize of P 5,000 is not subject to income tax.
(NIRC, Sec. 24(B)(1), amended by R.A.10963 –
A: NO. Under the law, all prizes and awards TRAIN Law)
granted to athletes in local and international
sports competitions and tournaments PENSIONS, RETIREMENT BENEFIT
whether held in the Philippines or abroad OR SEPARATION PAY
and sanctioned by their national sports (1988, 1991, 1994, 1995, 1996, 1999, 2000,
associations are excluded from gross 2005, 2007 BAR)
income. The exclusion find application only
to amateur athletes where the prize was Q: Z is a Filipino immigrant living in the United
given in an event sanctioned by the States for more than 10 years. He is retired
appropriate national sports association and he came back to the Philippines as a
affiliated with the Philippine Olympic balikbayan. Every time he comes to the
Committee and not to professional athletes Philippines, he stays here for about a month.
like Mr. A. Therefore, the prize money would He regularly receives a pension from his
not qualify as an exclusion from Mr. A’s former employer in the United States,
gross income. (Sec. 32(B)(7)(d), NIRC) amounting to US$1,000 a month. While in the
Philippines, with his pension pay from his
c. The US already imposed and withheld former employer, he purchased three
income taxes from Mr. A’s prize money. condominium units in Makati which he is
How may Mr. A use or apply the income renting out for P15, 000 a month each.
taxes he paid on his prize money to the
US when he computes his income tax (a) Does the US$ 1,000 pension become
liability in the Philippines for 2013? taxable because he is now residing in the
(2015 BAR) Philippines? Reason briefly. xxx (2007 BAR)

A: The income taxes withheld and paid to A: NO. The provisions of any existing law to the
the US government maybe claimed by Mr. contrary notwithstanding, social security benefits,
A, either as a deduction from his gross retirement gratuities, pensions and other similar
income (Sec. 34(C)(1)(b), NIRC) or as a tax benefits received by a resident citizen of the
credit (Sec. 34(C)(3)(a), NIRC) from the Philippines, such as Z, from a foreign private
income tax due when he computes his institution, is excluded from income taxation. (Sec.
Philippine income tax liability for taxable 32(B)(6)(c), NIRC)
year 2013.
Q: X, an employee of ABC Corporation died.
Q: Mr. D, a Filipino amateur boxer, joined an ABC Corporation gave X’s widow an amount
Olympic qualifying tournament held in Las equivalent to X’s salary for one year. Is the
Vegas, USA, where he won the gold medal. amount considered taxable income to the
Pleased with Mr. D's accomplishment, the widow? Why? (1996 BAR)
Philippine Government, through the
Philippine Olympic Committee, awarded him a A: NO. The amount received by the widow from
cash prize amounting to ₱ 1,000,000.00. Upon the decedent’s employer may either be a gift or a
receipt of the funds, he went to a casino in separation benefit on account of death. Both are
Pasay City and won the ₱ 30,000,000.00 exclusions from gross income pursuant to
jackpot in the slot machine. The next day, he provisions of Section 32(B)(6)(b) of the NIRC, as
went to a nearby Lotto outlet and bought a amended by R.A. No. 8424 (the Tax Reform Act of
Lotto ticket which won him a cash prize of ₱ 1997).
5,000.00.
ALTERNATIVE ANSWER:
Which of the above sums of money is/are
subject to income tax? Explain. (2019 BAR) NO. Since the amount was given to the widow and
not to the estate, it becomes obvious that the
A: Only the amount of P 30,000,000.00, amount is more of a gift. In one U.S. tax case
constituting the winnings from casino, is subject (Estate of Hellstrom v. Commissioner, 24 T.C. 916),
to income tax, specifically to a final tax at the rate it was held that payments to the widow of the
of 20%. (Sec. 24(B)(1), NIRC, as amended) president of a corporation of the amount the
president would have received in salary if he lived
The cash prize of P 1,000,000 is exempt from out the year constituted a gift and not an income.
taxation under Section 32(B)(7)(d) of the NIRC, as
amended, considering that it is in the nature of a The controlling facts which would lead to the
prize granted to Mr. D as an athlete after winning conclusion that the amount received by the
an international sports competition, i.e., an widow is not an income are as follows:
Olympic qualifying tournament, sanctioned by his
national sports association. a. The gift was made to the widow rather than
13

Taxation Law
the estate; TAXABLE INCOME

b. There was no obligation for the corporation (2012, 2013, 2014, 2015 BAR)
to make further payments to the deceased;
c. The widow had never worked for the Gross Income (2012, 2013, 2014, 2015 BAR)
corporation;
d. The corporation received no economic Q: Mr. Gipit borrowed from Mr. Maunawain P
benefit; and 100,000.00, payable in five (5) equal monthly
e. The deceased had been fully compensated installments. Before the first installment
for his services. (Estate of Sydney Carter us. became due, Mr. Gipit rendered general
Commissioner, 453 F. 2d 61, 2d Cir. 1971) cleaning services in the entire office building
of Mr. Maunawain, and as compensation
Q: A, an employee of the Court of Appeals, therefor, Mr. Maunawain cancelled the
retired upon reaching the compulsory age of indebtedness of Mr. Gipit up to the amount of
65 years. Upon compulsory retirement, A P 75,000.00. Mr. Gipit claims that the
received the money value of his accumulated cancellation of his indebtedness cannot be
leave credits in the amount of P500,000.00. Is considered as gain on his part which must be
said amount subject to tax? Explain. (1996 subject to income tax, because according to
BAR) him, he did not actually receive payment from
Mr. Maunawain or the general cleaning
A: NO. The commutation of leave credits, more services. Is Mr. Gipit correct? Explain. (2014
commonly known as terminal leave pay, i.e., the BAR)
cash equivalent of accumulated vacation and sick
leave credits given to an officer or employee who A: NO. Sec. 50 of RR No. 02-40, otherwise known
retires or separated from the service through no as Income Tax Regulations, provides that if a
fault of his own, is exempt from income tax. (BIR debtor performs services for a creditor who
Ruling 238-91 dated November 8, 1991; cancels the debt in consideration for such
Commissioner v. CA and Efren Castaneda, GR No. services, the debtor realizes income to that
96016, October 17, 1991) amount as compensation for his services. In the
given problem, the cancellation of Mr. Gipit’s
Q: Under what conditions are retirement indebtedness up to the amount of P 75,000.00
benefits received by officials and employees of gave rise to compensation income subject to
private firms excluded from gross income and income tax since Mr. Maunawain condoned such
exempt from taxation? (2000 BAR) amount as consideration for the general cleaning
services rendered by Mr. Gipit.
A: Retirement benefits received under R.A. No.
7641 and those received by officials and Q: In 2010, Mr. Platon sent his sister Helen $
employees of private firms, whether, individual or 1, 000 via a telegraphic transfer through the
corporate, in accordance with the employer’s Bank of PI. The bank's remittance clerk made a
reasonable private benefit plan approved by the mistake and credited Helen with $ 1,000,000
BIR, are excluded from gross income and exempt which she promptly withdrew. The bank
from income taxation if the retiring official or demanded the return of the mistakenly
employee was: credited excess, but Helen refused. The BIR
entered the picture and investigated Helen.
1. In service of same employer for at least 10 Would the BIR be correct if it determines that
years; Helen earned taxable income under these
2. Not less than fifty years of age at time of facts? (2013 BAR)
retirement;
3. Availed of the benefit of exclusion only once; (A) No, she had no income because she had
(Sec. 32(B)(6)(a), NIRC) no right to the mistakenly credited
4. The retiring official or employee should not funds.
have previously availed of the privilege (B) Yes, income is income regardless of the
under the retirement plan of the same or source.
another employer. (Sec. 2.78(B)(1), 1st par. (C) No, it was not her fault that the funds in
RR No. 02-98) excess of $ 1,000 were credited to her.
(D) No, the funds in excess of $ 1,000 were in
INCOME FROM ANY SOURCE WHATSOEVER effect donated to her.
(1989, 1995, 2001, 2005 BAR)
A: (B) YES, income is income regardless of the
Q: Explain briefly whether the following items source.
are taxable or non- taxable:
Section 32 of the NIRC defines gross income as all
(a) Income from jueteng (2005 BAR) income derived from whatever source.
Consequently, the flow of wealth, without any
A: It is taxable. The law imposes a tax on income distinction as to the lawfulness of its source, is
from any source whatever which means that it subject to income tax. In other words, the phrase
includes income whether legal or illegal. (Sec. “income from whatever source” discloses a
32(A), NIRC) legislative policy to include all income not
14
QuAMTO (1987-2019)
expressly exempted within the class of taxable assessment. The transfer of the property by Mr.
income under the law. Rodrigo to Ms. Sonora was gratuitous. The deed
of sale indicating a P 10 million consideration
EXCLUSIONS FROM GROSS INCOME was simulated because Mr. Rodrigo did not
(1988, 1991, 1993, 1994, 1995, 1996, 1997, receive anything from the sale. The problem
1999, 2000, 2003, 2005, 2007, 2008, 2015, categorically states that the transfer was made in
2018, 2019 BAR) gratitude to Ms. Sonora’s companionship. The
transfer being gratuitous is subject to donor’s tax.
EXCLUSIONS UNDER THE TAX CODE Mr. Rodrigo should be assessed deficiency
donor’s tax and a 50% surcharge imposed for
Proceeds of life insurance policy (1988, 1991, fraudulently simulating a contract of sale to
2003, 2005, 2007 BAR) evade donor’s tax. (Sec. 98(B), NIRC, as amended
by R.A. No. 8424 – the Tax Reform Act of 1997)
Q: State with reasons the tax treatment of the
following in the preparation of annual income Awards and agreements for damages paid on
tax returns: account of or resulting from injuries or
sickness (1995, 2003, 2005, 2007 BAR)
a. Proceeds of life insurance received by a
child as irrevocable beneficiary; Q: Mr. Infante was hit by a wayward bus while
b. xxx (2005 BAR) on his way to work. He survived but had to pay
P 400,000.00 for his hospitalization. He was
A: The proceeds of life insurance received by a unable to work for six months which meant
child as irrevocable beneficiary are not to be that he did not receive his usual salary of P
reported in the annual income tax returns, 10,000.00 a month or a total of P 60, 000.00.
because they are excluded from gross income. He sued the bus company and was able to
This kind of receipt does not fall within the obtain a final judgment awarding him P
definition of income – “Many wealth which flows 400,000.00 as reimbursement for his
into the taxpayer other than a mere return of hospitalization, P 60,000 for the salaries he
capital.” Since insurance is compensatory in failed to receive while hospitalized, P
nature, the receipt is merely considered as a 200,000.00 as moral damages for his pain and
return of capital. (Sec. 32(B)(1), NIRC; Fisher v. suffering, and P 100,000.00 as exemplary
Trinidad, 43 Phil. 73, 1922) damages. He was able to collect in full from
the judgment.
Gifts, bequests and devises (1988, 1995, 1996,
1997, 2008 BAR) How much income did he realize when he
collected on the judgment? Explain. (1995
Q: Mr. Rodrigo, an 80-year-old retired BAR)
businessman, fell in love with 20-year-old
Tetchie Sonora, a night club hospitality girl. A: P 60,000.00 for salaries he failed to receive. As
Although she refused to marry him, she a general rule, compensatory damages, actual
agreed to be his “live-in" partner. damages (P 400,000.00), moral damages (P
200,000.00), exemplary damages (P 100,000.00),
In gratitude Mr. Rodrigo transferred to her a attorney’s fees, and the cost of the suit, are
condominium unit, where they both live, excluded from gross income of the awarded party.
under a deed of sale for P10 million. Mr. (Sec. 32(B)(4) NIRC, as amended by R.A. No. 8424 –
Rodrigo paid the capital gains tax of 5% of the Tax Reform Act of 1997, Sec. 63 of RR No. 02-
P10 million. 40) However, consequential damages
representing the loss of the victim’s earning
The Commissioner of Internal Revenue found capacity are not excluded from gross income.
that the property was transferred to Tetchie Such damages are merely replacement of income
Sonora by Mr. Rodrigo because of the which would have been subject to tax if earned.
companionship she was providing him. (BIR Ruling No. 26-2018)
Accordingly, the Commissioner made a
determination that Sonora had compensation Q: JR was a passenger of an airline that
income of P10 million in the year the crashed. He survived the accident but
condominium unit was transferred to her and sustained serious physical injuries which
issued a deficiency income tax assessment. required hospitalization for 3 months.
Following negotiations with the airline and its
Tetchie Sonora protests the assessment and insurer, an agreement was reached under the
claims that the transfer of the condominium terms of which JR was paid the following
unit was a gift and therefore excluded from amounts: P 500,000.00 for his hospitalization;
income. P 250,000.00 as moral damages; P 300,000.00
for loss of income during the period of his
How will you rule on the protest of Tetchie treatment and recuperation. In addition, JR
Sonora? Explain. (1995 BAR) received from his employer the amount of P
200,000.00 representing the cash equivalent
A: I will grant the protest and cancel the of his earned vacation and sick leaves. Which,
15

Taxation Law
if any, of the amounts he received are subject excluded from gross income. The ex-gratia
to income tax? Explain. (2005 BAR) payment also qualifies as an exclusion from gross
income being in the nature of benefit received on
A: The amount of P 200,000.00 that JR received account of separation due to causes beyond the
from his employer is subject to income tax except employees' control. (Sec. 32(B)(6), NIRC) The cash
the money equivalent of ten (10) days unutilized equivalent of unused vacation and sick leave
vacation leave credits, which is not taxable. credits qualifies as part of separation benefits
Amounts of vacation allowances or sick leave excluded from gross income. (CIR v. Court of
credits which are paid to an employee constitutes Appeals, GR No. 96016, October 17, 1991)
compensation. (Sec. 2.78(A)(7), RR No. 02-98, as
amended by RR No. 10-2000) For category B employees, all the benefits
received by them will also be exempt from income
The amounts that JR received from the airline are tax, hence not subject to withholding tax. These
excluded from gross income and not subject to are benefits received on account of separation due
income tax because they are compensation for to causes beyond the employees' control, which
personal injuries suffered from an accident as well are specifically excluded from gross income. (Sec.
as damages received as a result of an agreement 32(B)(6), NIRC)
(negotiation) on account of such injuries. (Sec.
32(B)(4), NIRC) ALTERNATIVE ANSWER:

Retirement benefits, gratuities, pensions etc. All of the payments are not subject to income tax
(1988, 1991, 1994, 1995, 1996, 1999, 2000, and should not also be subject to WT. The
2005, 2007 BAR) employees were laid off, hence separated for a
cause beyond their control. Consequently, the
Q: A Co., a Philippine corporation, has two amounts to be paid by reason of such involuntary
divisions — manufacturing and construction. separation are excluded from gross income,
Due to the economic situation, it had to close irrespective of whether the employee at the time
its construction division and lay-off the of separation has rendered less than ten years of
employees in that division. A Co. has a service and/or is below fifty years of age. (Sec.
retirement plan approved by the BIR, which 32(B), NIRC)
requires a minimum of 50 years of age and 10
years of service in the same employer at the Prizes and awards (1993, 1996, 2000, 2015
time of retirement. BAR)

There are 2 groups of employees to be laid off: Q: Onyoc, an amateur boxer, won in a boxing
competition sponsored by the Gold Cup
1. Employees who are at least 50 years of Boxing Council, a sports association duly
age and has at 10 years of service at the accredited by the Philippine Boxing
time of termination of employment. Association. Onyoc received the amount of P
500,000 as his prize which was donated by
2. Employees who do not meet either the Ayala Land Corporation. The BIR tried to
age or length of service, A Co. plans to give collect income tax on the amount received by
the following: Onyoc and donor’s tax from Ayala Land
Corporation, which taxes, Onyoc and Ayala
a. For category (A) employees – the Land Corporation refuse to pay. Decide. (1996
benefits under the BIR approved BAR)
plan plus an ex-gratia payment of
one month of every year of service. A: The prize will not constitute a taxable income
to Onyoc, hence the BIR is not correct in imposing
b. For category (B) employees – one the income tax. R.A. No. 7549 explicitly provides
month for every year of service. that “All prizes and awards granted to athletes in
local and International sports tournaments and
For both categories, the cash competitions held in the Philippines or abroad
equivalent of unused vacation and and sanctioned by their respective national sports
sick leave credits. associations shall be exempt from income tax".

A Co. seeks your advice as to whether or not it Neither is the BIR correct in collecting the donor’s
will subject any of these payments to tax from Ayala Land Corporation. The law is clear
Withholding Tax (WT). Explain your advice. when it categorically stated “That the donor’s of
(1999 BAR) said prizes and awards shall be exempt from the
payment of the donor’s tax."
A: For category A employees, all the benefits
received on account of their separation are not Tax-free exchanges (2018, 2019 BAR)
subject to income tax, hence no withholding tax
shall be imposed. The benefits received under the Q: B transferred his ownership over a 1,000-
BIR-approved plan upon meeting the service square meter commercial land and three-door
requirement and age requirement are explicitly apartment to ABC Corp., a family corporation
16
QuAMTO (1987-2019)
of which B is a stockholder. The transfer was the computation of net income.

in exchange of 10,000 shares of stock of ABC
Corp. As a result, B acquired 51% ownership 3. Tax exclusions are something received or
of ABC Corp., with all the shares of stock earned by the taxpayer which do not form
having the right to vote. B paid no tax on the part of gross income, while deductions are
exchange, maintaining that it is a tax something spent or paid in earning gross
avoidance scheme allowed under the law. The income.
Bureau of Internal Revenue, on the other
hand, insisted that B's alleged scheme ITEMIZED DEDUCTIONS
amounted to tax evasion.
Ordinary and necessary trade, business or
Should B pay taxes on the exchange? Explain. professional expenses (1988, 1989, 1990,
(2019 BAR) 1993, 2006, 2009, 2016, 2017 BAR)

A: NO, B shall not pay taxes on the exchange. Q: Peter is the Vice-President for Sales of
Section 40(C)(2) of the Tax Code provides that no Golden Dragon Realty Conglomerate, Inc.
gain or loss shall be recognized if property is (Golden Dragon). A group of five (5) foreign
transferred to a corporation by a person in investors visited the country for possible
exchange for stocks in such corporation wherein investment in the condominium units and
as a result of such exchange, such person, alone or subdivision lots of Golden Dragon. After a tour
together with others, not exceeding four, gains of the properties for sale, the investors were
control of the corporation. When B transferred wined and dined by Peter at the posh Conrad's
the properties for shares in ABC Corporation, he Hotel at the cost of P150,000.00. Afterward,
acquired control (51% of voting shares) over the the investors were brought to a party in a
corporation, thus, the transaction shall not be videoke club which cost the company
subject to income tax, capital gains tax, and value P200,000.00 for food and drinks, and the
added tax. amount of P80,000.00 as tips for business
promotion officers. Expenses at Conrad's
DEDUCTIONS FROM GROSS INCOME Hotel and the videoke club were receipted and
(1988, 1989, 1990, 1993, 1996, 1998, 1999, submitted to support the deduction for
2004, 2006, 2009, 2010, 2015, 2016, 2017, representation and entertainment expenses.
2018, 2019 BAR) Decide if all the representation and
entertainment expenses claimed by Golden
Q: Differentiate tax exclusions from tax Dragon are deductible. Explain. (2016 BAR)
deductions. (2019 BAR)
A: Not all of the representation and entertainment
A: Tax exclusions refer to income received or expenses claimed by Golden Dragon are
earned but is not taxable as such since it is deductible. Only those that are reasonable in
exempted by law or by treaty, thus, the same is amount and nature should be deductible. It
not included in the computation of gross income. should be noted that the total expenses are PhP
Meanwhile, tax deductions are those which are 430,000.00 for the five (5) investors or PhP
subtracted from gross income to arrive at the 86,000.00 each.
taxable income.
I would allow only a deduction in such amounts
ALTERNATIVE ANSWER: as are reasonable under the circumstances but in
no case shall all deductions for representation
The distinction between tax exclusions and tax and entertainment expenses, including those
deductions are as follows: above enumerated, exceed 0.50% of net sales.
(Sec. 34(A)(1)(iv), NIRC of 1997; RR 10-2002;
1. Tax exclusions refer to a flow of wealth to the Domondon)
taxpayer which are not treated as part of
gross income for purposes of computing the Q: Masarap Food Corporation (MFC) incurred
taxpayer’s taxable income, due to the substantial advertising expenses in order to
following reasons: protect its brand franchise for one of its line
products. In its income tax return, MFC
a. It is exempted by the fundamental law; included the advertising expense as deduction
from gross income, claiming it as an ordinary
b. It is exempted by statute; and business expense. Is MFC correct? Explain.
c. It does not come within the definition of (2009 BAR)
income (Sec. 61, RR No. 2);
A: NO. The protection of taxpayer’s brand
while tax deductions are the amounts which franchise is analogous to the maintenance of
the law allows to be subtracted from gross goodwill or title to one’s property which is in the
income in order to arrive at net income. nature of a capital expenditure. An advertising
expense, of such nature does not qualify as an
2. Tax exclusions pertain to the computation of ordinary business expense, because the benefit to
gross income, while deductions pertain to be enjoyed by the taxpayer goes beyond one
17

Taxation Law
taxable year. (CIR v. General Foods Inc., 401 SCRA representation incurred by the employee in the
545, 2003) performance of his duties is not compensation
subject to withholding, if the following conditions
Q: Calvin Dela Pisa was a Permits and are satisfied: (i) It is for ordinary and necessary
Licensing Officer (rank-and-file) of Sta. Portia representation expense paid or incurred by the
Realty Corporation (SPRC). He invited the employee in the pursuit of the trade, business or
Regional Director of the Housing and Land Use profession, and (ii) The employee is required to
Regulatory Board (HLURB) to lunch at the Sulo account/liquidate for the such expense in
Hotel in Quezon City to discuss the approval of accordance with the specific requirements of
SPRC's application for a development permit substantiation pursuant to Sec. 34 of the NIRC, as
in connection with its subdivision amended. The amounts are actually spent by the
development project in Pasig City. At breakfast employee for the benefit of his employer, so no
the following day, Calvin met a prospective income is considered to have flowed to the
client interested to enter into a joint venture employee.
with SPRC for the construction of a residential
condominium unit in Cainta, Rizal. Losses (1993, 1998, 1999, 2010 BAR)

Calvin incurred expenses for the lunch and Q: Give the requisites for deductibility of a loss.
breakfast meetings he had with the Regional (1998 BAR)
Director of HLURB and the prospective client,
respectively. The expenses were duly A:
supported by official receipts issued in his 1. They must be ordinary losses that are
name. At month's end, he requested the incurred by a taxable entity as a result of its
reimbursement of his expenses, and SPRC day-to-day operations conducted for profit
granted his request. or otherwise, or casualty losses.

(a) Can SPRC claim an allowable deduction 2. They must have been losses that are actually
for the expenses incurred by Calvin? sustained during the taxable year.
Explain your answer.
3. Must not have been compensated for by
A: NO. SPRC cannot claim as a deduction, the insurance or other forms of indemnity.
amount spent for lunch in the meeting with the
Regional Director of HLURB. While the expense is 4. If they are casualty losses, they are of
business connected, the same is not allowed as property connected with trade, business, or
deduction because it was incurred as an indirect profession and the lose arises from fires,
payment to a government official which, not only storms, shipwreck, or other casualties, or
amounts to a violation of the Anti-Graft and from robbery, theft or embezzlement.
Corrupt Practices Act, but also constitutes bribes,
kickbacks and similar payments. (Sec 34(A)(1)(c), 5. Must not have been claimed as a deduction
NIRC) for estate tax purposes in the estate tax
return.
With respect, however, to the amount spent for
breakfast with a prospective client, the same is Q: A is a travelling salesman working full time
deductible from gross income of SPRC. The for Nu Skin Products. He receives a monthly
expense complies with the requirements for salary plus 3% commission on his sales in a
deductibility, namely: (a) the expense must be Southern province where he is based. He
ordinary and necessary; (b) it must have been regularly uses his own car to maximize his
paid or incurred during the taxable year; (c) it visits even to far flung areas. One fine day a
must have been paid or incurred in carrying on group of militants seized his car. He was
the trade or business of the taxpayer, and (d) it notified the following day by the police that
must be supported by receipts, records or other the marines and the militants had a bloody
pertinent papers. (CIR v. General Foods (Phils.), encounter and his car was completely
Inc., G.R. No. 143672, 2003) Section 34(A)(1)(b) of destroyed after a grenade hit it. A wants to file
the NIRC, as amended, does not require that the a claim for casualty loss. Explain the legal basis
substantiation be in the form of official receipts of your tax advice. (2010 BAR)
or invoices issued in the name of the taxpayer
claiming the expense. It must only be proven that A: A is not entitled to claim a casualty loss
there is a “direct connection or relation of the because all of his income partake the nature of
expense being deducted to the development, compensation income. Taxpayers earning
management, operation and/or conduct of the compensation income arising from personal
trade, business or profession of the taxpayer”. services under an employer-employee
relationship are not allowed to claim deduction
(b) Is the reimbursement received by Calvin except that allowed under Section 34(M)
from SPRC subject to tax? Explain your referring only to the PhP 2,400 health and/or
answer. (2017 BAR) hospitalization insurance premium; perforce, the
claim of casualty loss has no legal basis. (Sec.
A: NO Any amount paid as reimbursements for 34(M), NIRC)
18
QuAMTO (1987-2019)
Bad Debts (1999, 2004, 2016 BAR) duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17)
Such is not the case with goodwill.
Q: Rakham operates the lending company that
made a loan to Alfonso in the amount of ALTERNATIVE ANSWER:
P120,000.00 subject of a promissory note
which is due within one (1) year from the Depreciation of goodwill is allowed as a
note’s issuance. Three years after the loan deduction from gross income if the goodwill is
became due and upon information that acquired through capital outlay and is known
Alfonso is nowhere to be found, Rakham asks from experience to be of value to the business
you for advice on how to treat the obligation for only a limited period. (Sec. 107, RR No. 02-40)
as “bad debt.” Discuss the requisites for In such case, the goodwill is allowed to be
deductibility of a “bad debt.” (2016 BAR) amortized over its useful life to allow the
deduction of the current portion of the expense
A: I shall advise Rakham to treat the obligation as from gross income, thereby paving the way for a
“bad debt” by deducting the same from his proper matching of costs against revenues which
income tax return and proving compliance with is an essential feature of the income tax system.
the following requisites for the deductibility of a
“bad debt.” Charitable and other contributions (1993,
1996, 1998, 2018 BAR)
The requisites for the deductibility of a “bad debt”
are: Q: The Filipinas Hospital for Crippled
Children is a charitable organization. X
a. There must be an existing indebtedness due visited the hospital, on his birthday, as was
to the taxpayer which must be valid and his custom. He gave P100,000.00 to the
legally demandable. hospital and P5,000.00 to a crippled girl
whom he particularly pitied. A crippled son
b. The same must be connected with the of X is in the hospital as one of its patients. X
taxpayer’s trade, business or practice of wants to exclude both the P100,000.00 and
profession. the P5,000.00 from his gross income. Discuss.
(1993 BAR)
c. The same must not be sustained in a
transaction entered into between related A: Under the National Internal Revenue Code,
parties. charitable contributions to be deductible must
be:
d. The same must be actually charged off the
books of accounts of the taxpayer as of the a. Actually paid or made to domestic
end of the taxable year. corporations or associations organized and
operated exclusively for religious,
e. The debt must be actually ascertained to be charitable, scientific, youth and sports
worthless and uncollectible during the development, cultural or educational
taxable year. purposes or for rehabilitation of veterans
or to social welfare institutions no part of
f. The debts are uncollectible despite diligent which inures to the benefit of any private
effort exerted by the taxpayer. (Sec. 34(E)(1), individual;
NIRC, arrangement and numbering supplied;
Sec. 3, RR No. 05-99, reiterated in RR No. 25- b. Made within the taxable year;
2002; Philippine Refining Corporation v. Court
of Appeals, et al., 256 SCRA 667) c. Not more than 10% (for individuals) of 5%
(for corporations) of the taxpayer’s taxable
g. Must have been reported as receivables in income to be computed without including
the income tax return of the current or prior the contribution.
years. (RR No. 2, Sec. 103)
Applying the above provisions of law to the case
Depreciation (1989, 1998, 1999 BAR) at bar, it is clear therefore that only the P
100,000.00 contribution of X to Filipinas Hospital
Q: Explain if the following items are for Crippled Children qualified as a deductible
deductible from gross income for income tax contribution.
purposes. Disregard who is the person
claiming the expense. The NIRC expressly provides that the same must
be actually paid to a charitable organization to be
(b) Depreciation of goodwill. (1999 BAR) deductible. Note that the law accorded no
privilege to similar contributions extended to
A: Depreciation for goodwill is not allowed as private individuals. Hence, the PhP 5,000.00
deduction from gross income. While intangibles contribution to the crippled girl cannot be
maybe allowed to be depreciated or amortized, it claimed as a deduction.
is only allowed to those intangibles whose use in
the business or trade is definitely limited in ALTERNATIVE ANSWER:
19

Taxation Law
income shall be the acquisition cost of said

a. The P 100,000.00 donation may properly be property by the donor which is P 6.5 million. (Sec.
deducted from X’s gross income, but not the 34(H)(3), NIRC)
P 5, 000.00 donated to the crippled girl, as
charitable and other contributions that may ALTERNATIVE ANSWER:
be deducted from taxable income do not
contemplate those given to individuals. Katrina may claim a deduction from her gross
While it may be that X’s son is a patient in income an amount not in excess of ten percent
the hospital, it cannot be said that part of its (10%) of her taxable income derived from trade,
net income inures to the benefit of X as to be business or profession as computed price to the
disallowed as a deduction from taxable deduction of the value of the donation made to
income. Klaret School, and other charitable contributions
that may have been made by Katrina during the
b. Assuming X is a self-employed individual, he taxable year, after compliance with the
may not deduct the donations made because substantiation requirements. (Sec. 34(H), NIRC)
under Section 29 of the NIRC as amended by
R.A. No. 7496 better known as Self- OPTIONAL STANDARD DEDUCTION
Employed and Professionals Engaged in the (2009, 2015 BAR)
Practice of their Profession (SNITS), only
contribution to the government or to an Q: In 2012, Dr. K decided to return to his
accredited relief organization for the hometown to start his own practice. At the end
rehabilitation of calamity-stricken areas of 2012, Dr. K found that he earned gross
declared by the President may be deducted professional income in the amount of
for income tax purposes. Clearly, the donees P1,000,000.00. While he incurred expenses
do not qualify as relief organizations. amounting to P 560,000.00 constituting
mostly of his office space rent, utilities, and
c. Assuming X is receiving purely miscellaneous expenses related to his medical
compensation income, he can only deduct practice. However, to Dr. K’s dismay, only
from gross compensation income premium P320,000.00 of his expenses were duly
on Health and/or Hospitalization Insurance. covered by receipts. What are the options
(Sec. 34(M), NIRC) available for Dr. K so he could maximize the
deductions from his gross income? (2015
Personal exemption, additional personal BAR)
exemption, and special additional personal
exemption have been repealed by Sec. 12 of A: In order to maximize his deductions, Dr. K may
R.A. No. 10963 – TRAIN Law. avail of the optional standard deduction (OSD)
which is an amount not exceeding forty percent
Q: Years ago, Krisanto bought a parcel of land (40%) of his gross sales or gross receipts. The
in Muntinlupa for only PhP65,000. He donated OSD can be claimed without being required to
the land to his son, Kornelio, in 1980 when the present proof or evidence of expenses paid or
property had a fair market value of incurred by him. (Sec. 34(L), NIRC; RR No. 16-08,
PhP75,000, and paid the corresponding as amended)
donor's tax.
PERSONAL AND ADDITIONAL EXEMPTIONS
Kornelio, in turn, sold the property in 2000 to (1993, 1998, 2004, 2006, 2012, 2014, 2015
Katrina for P 6.5 million and paid the capital BAR)
gains tax, documentary stamp tax, local
transfer tax, and other fees and charges. Q: Mr. E and Ms. F are both employees of AAA
Katrina, in turn, donated the land to Klaret Corp. They got married on February 14, 2011.
School last August 30, 2017 to be used as the On December 29, 2011, the couple gave birth
site for additional classrooms. No donor's tax to triplets. On June 25, 2013, they had twins.
was paid, because Katrina claimed that the What were the personal
donation was exempt from taxation. At the exemptions/deductions which Mr. E and Ms. F
time of the donation to Klaret School, the land could claim in the following taxable years?
had a fair market value of P 65 million. (2015 BAR)

(b) How much in deduction from gross income (a) For 2010
may Katrina claim on account of the said
donation? (2018 BAR) A: For 2010, Mr. E and Ms. F are each
entitled to personal exemptions of PhP
A: If Klaret School is an accredited ‘non- 50,000.00. (Sec. 35(A), NIRC)
government organization, having been
established as a non-profit domestic corporation, (b) For 2011
organized and operated exclusively for
educational purposes, the donation to it as a A: For 2011, Mr. E and Ms. F are each
qualified donee-institution is deductible in full. entitled to basic personal exemption of PhP
(Sec. 34(H)(2)(c), NIRC) The deduction from gross 50,000.00. In addition to his basic personal
20
QuAMTO (1987-2019)
exemption, Mr. E could claim additional that part of his compensation would be an
personal exemptions for three qualified insurance policy with a face value of P20
dependent children in the amount of PhP million. The parents of Noel are made the
25, 000.00 for each child. (Sec. 35(B), NIRC) beneficiaries of the insurance policy.

(c) For 2013 xxx

A: For 2013, Mr. E and Ms. F are each (b) Can the company deduct from its gross
entitled basic personal exemptions of income the amount of the premium?
P50,000.00. Mr E could claim additional Reason briefly. (2007 BAR)
personal exemptions for four qualified
dependent children in the amount of A: YES. The premiums paid are ordinary and
P25,000.00 for each child. (Sec 35(B), NIRC) necessary business expenses of the company.
They are allowed as a deduction from gross
NOTE: Allowance for personal exemption for income so long as the employer is not a direct or
individual taxpayer was repealed by Sec. 12 of indirect beneficiary under the policy of insurance.
R.A. No. 10963 – TRAIN Law. (Sec. 36(A)(4), NIRC) Since the parents of the
employee were made the beneficiaries, the
ITEMS NOT DEDUCTIBLE prohibition for their deduction does not exist.
(1989, 1993, 1998, 2004, 2007, 2014 BAR)
Bribes (1993, 1998, 2014 BAR)
Premiums paid on life insurance policy (1989,
2004, 2007 BAR) Q: Freezy Corporation, a domestic corporation
engaged in the manufacture and sale of ice
Q: OXY is the president and chief executive cream, made payments to an officer of Frosty
officer of ADD Computers Inc. When OXY was Corporation, a competitor in the ice cream
asked to join the government service as business, in exchange for said officer’s
director of a bureau under the Department of revelation of Frosty Corporation’s trade
Trade and Industry, he took a leave of absence secrets.
from ADD. Believing that its business outlook,
goodwill and opportunities improved with May Freezy Corporation claim the payment to
OXY in the government, ADD proposed to the officer as deduction from its gross income?
obtain a policy of insurance on his life. On Explain. (2014 BAR)
ethical grounds, OXY objected to the
insurance purchase but ADD purchased the A: NO. The payments made in exchange for the
policy anyway. Its annual premium amounted revelation of a competitor’s trade secrets is
to P100,000. Is said premium deductible by considered as an expense which is against law,
ADD Computers, Inc.? Reason. (2004 BAR) morals, good customs or public policy, which is
not deductible. (3M Philippines, Inc. v. CIR, GR No.
A: NO. The premium is not deductible because it 82833, 1988) Also, the law will not allow the
is not an ordinary business expense. The term deduction of bribes, kickbacks and other similar
"ordinary” is used in the income tax law in its payments. Applying the principle of ejusdem
common significance and it has the connotation of generis, payment made by Freezy Corporation
being normal, usual or customary. (Deputy v. Du would fall under “other similar payments” which
Pont, 308 US 48) Paying premiums for the are not allowed as deduction from gross income.
insurance of a person not connected to the (Sec. 34(A)(1)(c). NIRC)
company is not normal, usual or customary.
INCOME TAX ON INDIVIDUALS
Another reason for its non-deductibility is the fact (1997, 1999, 2000, 2001, 2002, 2007, 2015,
that it can be considered as an illegal 2016, 2017, 2018, 2019 BAR)
compensation made to a government employee.
This is so because if the insured, his estate or Income tax on Resident Citizens, Non- resident
heirs were made as the beneficiary (because of Citizens and Resident Aliens (1997, 1999,
the requirement of insurable interest), the 2000, 2001, 2002, 2007, 2015, 2016, 2017,
payment of premium will constitute bribes which 2018, 2019 BAR)
are not allowed as deduction from gross income.
(Sec. 34(A)(1)(c), NIRC) Q: Patrick is a successful businessman in the
United States and he is a sole proprietor of a
On the other hand, if the company was made the supermarket which has a gross sales of $10
beneficiary, whether directly or indirectly, the million and an annual income of $3 million. He
premium is not allowed as a deduction from gross went to the Philippines on a visit and in a
income. (Sec. 36(A)(4), NIRC) party, he saw Atty. Agaton who boasts of being
a tax expert. Patrick asks Atty. Agaton: if he
Q: Noel Santos is a very bright computer (Patrick) decides to reacquire his Philippine
science graduate. He was hired by Hewlett citizenship under R.A. NO.9225, establish
Packard. To entice him to accept the offer of residence in this country, and open a
employment, he was offered the arrangement supermarket in Makati City, will the BIR tax
21

Taxation Law
him on the income he earns from his U.S. Determine whether the compensation they
business? If you were Atty. Agaton, what received from KKI in 2017 is taxable under
advice will you give Patrick? (2016 BAR) Philippine laws and whether they are
required to file tax returns with the Bureau of
A: I will advise Patrick that if he reacquires his Internal Revenue (BIR).
Philippine citizenship and establish residence in
the Philippines, he shall be considered as a (a) Kris Konejero, a Filipino accountant in
resident citizen subject to tax on incomes derived KKl's Tax Department in the Makati
from sources within or without the Philippines. office, and married to a Filipino engineer
(Sec. 23(A), NIRC) also working in KKI;

Consequently, the BIR could now tax him on his A: Taxable. (Sec. 23 & 24(A), NIRC) Kris must
income derived from sources without the file tax returns with the BIR, unless she
Philippines which is the income he earns from his qualifies for substituted filing of income tax
U.S. business. (Domondon) returns because the tax was correctly
withheld by the employer. (Sec. 51(A)(2)(b),
Q: Mr. Sebastian is a Filipino seaman employed NIRC)
by a Norwegian company which is engaged
exclusively in international shipping. He and (b) Klaus Kloner, a German national who
his wife, who manages their business, filed a heads KKl's Design Department in its
joint income tax return for 1997 on March Makati office;
15,1998. After an audit of the return, the BIR
issued on April 20, 2001 a deficiency income A: Taxable being an income earned by a
tax assessment for the sum of P250,000.00, resident alien from Philippine sources. (Sec.
inclusive of interest and penalty. For failure of 23 & 24(A), NIRC) Klaus is required to file a
Mr. and Mrs. Sebastian to pay the tax within tax return unless the compensation income
the period stated in the notice of assessment, from KKJ is his only returnable income and
the BIR issued on August 19, 2001 warrants of the withholding tax thereon was correctly
distraint and levy to enforce collection of the withheld by his employer. (Sec. 51(A)(2)(b),
tax. NIRC)

What is the rule of income taxation with (c) Krisanto Konde, a Filipino engineer in
respect to Mr. Sebastian's income in 1997 as a KKl's Design Department who was hired
seaman on board the Norwegian vessel to work at the principal office last
engaged in international shipping? Explain January 2017. In April 2017, he was
your answer. (2002 BAR) assigned and detailed in the company's
project in Jakarta, Indonesia, which
A: Mr. Sebastian’s income as seaman on board the project is expected to be completed in
Norwegian vessel engaged in international April 2019;
shipping shall not be subjected to income tax. An
individual citizen of the Philippines who is A: His compensation from January 1 up to
working and deriving income from abroad as an the time he left the Philippines is taxable and
overseas contract worker is taxable only on he must file tax returns, unless the
income derived from sources within the compensation income is his only returnable
Philippines: provided, that a seaman who is a income, and the withholding tax thereon
citizen of the Philippines and who receives was correctly withheld by KKI. (Sec.
compensation for services rendered abroad as a 51(A)(2)(b), NIRC) The compensation for his
member of the complement of a vessel engaged services abroad from the date of bis actual
exclusively in international trade shall be treated assignment thereat up to the time of the
as an overseas contract worker. (Sec. 23(C), NIRC) completion of the project is not taxable
Mr. Sebastian shall be considered as an overseas being an income from a source without the
contract worker. His income as seaman, which is Philippines earned by a non-resident citizen.
an income from without the Philippines, shall not (Secs. 23 & 42, NIRC) He is not required to
be liable for income tax in the Philippines. file a return for this income derived from
without, because said income is not subject
Q: Kronge Konsult, Inc. (KKI) is a Philippine to income tax in the Philippines. (Sec. 23,
corporation engaged in architectural design, NIRC)
engineering, and construction work. Its
principal office is located in Makati City, but it (d) Kamilo Konde, Krisanto's brother, also an
has various infrastructure projects in the engineer assigned to KKl's project in
country and abroad. Thus, KKI employs both Taipei, Taiwan. Since KKI provides for
local and foreign workers. The company has housing and other basic needs, Kamila
adopted a policy that the employees' salaries requested that all his salaries, paid in
are paid in the currency of the country where Taiwanese dollars, be paid to his wife in
they are assigned or detailed. Manila in its Philippine Peso equivalent;
and
Below are some of the employees of KKI.
22
QuAMTO (1987-2019)
A: Not taxable and no need to file tax Based on the amount of annual
returns. Kamilo is a non-resident citizen who compensation income Mr. S received, he is
is taxable only on income from sources considered a minimum wage earner. Being a
within the Philippines. Compensation for minimum wage earner, he is not required to
services rendered outside of the Philippines file an income tax return. (Sec. 51(A)(2)(d),
is an income from a source without the NIRC)
Philippines which is not subject to the
Philippine income tax. (Secs. 23 & 42, NIRC) EXCLUSIONS
(1991, 1994, 1996, 2005, 2015, 2016 BAR)
(e) Karen Karenina, a Filipino architect in
KKl's Design Department who reported De minimis benefits (1994, 2005, 2015, 2016
back to KKl's Makati office in June 2017 BAR)
after KKl's project in Kuala Lumpur,
Malaysia was completed. (2018 BAR) Q: Mapagbigay Corporation grants all its
employees (rank and file, supervisors, and
A: Compensation from January 1 up to the managers) 5% discount of the purchase price
time of her return in June 2017 is an income of its products. During an audit investigation,
from a source without the Philippines which the BIR assessed the company the
is not taxable if received by a nonresident corresponding tax on the amount equivalent
citizen. (Secs. 23 & 42, NIRC) Compensation to the courtesy discount received by all the
from June 2017 to December 31, 2017 is an employees, contending that the courtesy
income from a source within the Philippines discount is considered as additional
and taxable to Karen, who is taxable on compensation for the rank-and-file employees
worldwide income from the time she and additional fringe benefit for the
regained the status of a resident citizen and supervisors and managers. In its defense, the
accordingly, must file returns to pay for the company argues that the discount given to the
tax, unless she is purely compensation rank-and-file employees is a de minimis
income earner for which the withholding tax benefit and not subject to tax. As to its
on wages was correctly withheld by KKI. managerial employees, it contends that the
(Sec. 51(A)(2)(b), NIRC) discount is nothing more than a privilege and
its availment is restricted.
Q: Mr. C is employed as a Chief Executive
Officer of MNO Company, receiving an annual Is the BIR assessment correct? Explain. (2016
compensation of ₱ 10,000,000.00, while Mr. S BAR)
is a security guard in the same company
earning an annual compensation of ₱ A: NO. The 5% discount of the purchase price of
200,000.00. Both of them source their income its products, so-called “courtesy discounts” on
only from their employment with MNO purchases, granted by Mapagbigay Corporation to
Company. (2019 BAR) all its employees (rank and file, supervisors, and
managers) otherwise known as “de minimis
(a) At the end of the year, is Mr. C personally benefits,” furnished or offered by an employer to
required to file an annual income tax his employees merely as a means of promoting
return? Explain. the health, goodwill, contentment, or efficiency of
his employees, are not considered as
A: NO, Mr. C is not required, as he is compensation subject to income tax and
qualified for substituted filing of income tax consequently to withholding tax. (RR No. 02-98,
return under Section 51(A) of the NIRC, Sec. 2.78.1(A)(3), as amended by RR No. 08-2000,
since he is receiving purely compensation RR No. 05-2008, RR No. 10-2008, RR No. 05-2011,
income from one employer (MNO Company) and RR No. 08-2012)
in the Philippines for a given calendar year;
provided the employer has correctly As such, de minimis benefits, if given to
withheld the tax on the said compensation supervisors and managerial employees, they are
income. also exempt from the fringe benefits tax.

(b) How about Mr. S? Is he personally Q: What are de minimis benefits and how are
required to file an annual income tax these taxed? Give three (3) examples of de
return? Explain. minimis benefits. (2015 BAR)

A: NO, Mr. S is also not required. Since the A: De minimis benefits are facilities and privileges
only income earned (P 200,000) during the furnished or offered by an employer to his
taxable year did not exceed the exemption employees, which are not considered as
threshold of P 250,000 provided in the NIRC, compensation subject to income tax and
the employee need not file the income tax consequently to withholding tax, if such facilities
return. (Sec. 51(A)(2)(a), NIRC, as amended or privileges are of relatively small value and are
by R.A. No. 10963 – TRAIN Law) offered or furnished by the employer merely as
means of promoting the health, goodwill,
ALTERNATIVE ANSWER: contentment, or efficiency of his employees. If
23

Taxation Law
received by rank-and-file employees, they are leave credits in the amount of P 500,000.00. Is
exempt from income tax on wages; if received by said amount subject to tax? Explain. (1996
supervisory or managerial employees, they are BAR)
exempt from the fringe benefits tax. (RR No. 02-
98, as amended by RR No. 08-2000) A: NO. The accumulated leave credits in the
amount of P 500,000.00 is not subject to tax. The
The following shall be considered as de minimis monetized value of leave credits paid to
benefits: government officials and employees shall not be
subject to income tax and consequently to
1. Monetized unused vacation leave credits of withholding tax. (RR No. 03-98, Sec. 2.78.1(A)(7),
private employees not exceeding 10 days 3rd sentence, as amended by RR No. 10- 2000)
during the year;
INCOME TAX ON CORPORATIONS
2. Monetized value of vacation and sick leave (1987, 1988, 1989, 1990, 1991, 1994, 1997,
credits paid to government officials and 2001, 2005, 2009, 2013, 2014, 2015 BAR)
employees;
Minimum Corporate Income Tax (2001, 2015
3. Medical cash allowance to dependents of BAR)
employees, not exceeding P 1,500 per
employee per semester or P 250 per month; Q: KKK Corp. secured its Certificate of
Incorporation from the Securities and
4. Rice subsidy pf P 2,000 or 1 sack of 50 kg. Exchange Commission on June 3, 2013. It
rice per month amounting to not more than commenced business operations on August
P 2,000; 12, 2013. In April 2014, Ms. J, an employee of
KKK Corp. in charge of preparing the annual
5. Uniform and clothing allowance not income tax return of the corporation for 2013,
exceeding P 6,000 per annum; got confused on whether she should prepare
payment for the regular corporate income tax
6. Actual medical assistance not exceeding P or the minimum corporate income tax.
10,000 per annum;
a. As Ms. J’s supervisor, what will be your
7. Laundry allowance not exceeding P 300 per advice?
month
A: As Ms. J’s supervisor, I will advise that
8. Employees achievement awards, e.g., for KKK Corp. should prepare payment for the
length of service or safety achievement, regular corporate income tax and not the
which must be in the form of a tangible minimum corporate income tax. Under the
personal property other than cash or gift Tax Code, minimum corporate income tax is
certificate, with an annual monetary value only applicable beginning on the fourth
not exceeding P 10,000 received by the taxable year following the commencement of
employee under an established written plan business operation. (Sec. 27(E)(1), NIRC)
which does not discriminate in favor of
highly paid employees; b. What are the distinctions between
regular corporate income tax and
9. Gifts given during Christmas and major minimum corporate income tax? (2015
anniversary celebrations not exceeding P BAR)
5,000 per employee per annum
A: As to taxpayer: Regular corporate
10. Daily meal allowance for overtime work and income tax applies to all corporate
night/graveyard shift not exceeding 25% of taxpayers, while minimum corporate
the basic minimum wage on a per region income tax applies to domestic
basis; corporations and resident foreign
corporations.
11. Benefits received by an employee by virtue
of a collective bargaining agreement (CBA) As to tax rate: Regular corporate income
and productivity incentive schemes tax is 30%; while minimum corporate
combined do not exceed P 10,000 per income tax is 2%.
employee per taxable year. (RR No. 02-98, as
amended by RR No. 05-11, RR No, 01-15, & RR As to tax base: Regular corporate income
No. 11-18) tax is based on the net taxable income,
while minimum corporate income tax is
Leave Credits (1991, 1996 BAR) based on gross income.

Q: A, an employee of the Court of Appeals, As to period of applicability: Regular
retired upon reaching the compulsory age of corporate income tax is applicable
65 years. Upon compulsory retirement, A beginning on the fourth taxable year
received the money value of his accumulated following the commencement of business
24
QuAMTO (1987-2019)
operation, while minimum corporate rate for Resident Foreign Corporations is 25%.
income tax is applicable beginning on the (CREATE Act is not covered by 2020 bar syllabus)
fourth taxable year following the
commencement of business operation. Tax on Co-ownerships (1990, 1991, 1994,
1997 BAR)
As to imposition: The minimum corporate
income tax is imposed whenever it is Q: Mr. Santos died Intestate in 1989 leaving
greater than the regular corporate income his spouse and five children as the only heirs.
tax of the corporation. (Sec. 27(A) & (E), The estate consisted of a family home and a
NIRC; RR No. 09-98) four-door apartment which was being rented
to tenants. Within the year, an extrajudicial
Off-line International carriers (1987, 1990, settlement of the estate was executed from the
1994, 2005, 2009 BAR) heirs, each of them receiving his/her due
share. The surviving spouse assumed
Q: Kenya International Airlines (KIA) is a administration of the property. Each year, the
foreign corporation, organized under the laws net income from the rental property was
of Kenya. It is not licensed to do business in distributed to all, proportionately, on which
the Philippines. Its commercial airplanes do they paid respectively, the corresponding
not operate within Philippine territory, or income tax.
service passengers embarking from Philippine
airports. The firm is represented in the In 1994, the income tax returns of the heirs
Philippines by its general agent, Philippine were examined and deficiency income tax
Airlines (PAL), a Philippine corporation. assessments were issued against each of them
for the years 1989 to 1993, inclusive, as
KIA sells airplane tickets through PAL, and having entered into an unregistered
these tickets are serviced by KIA airplanes partnership. Were the assessments justified?
outside the Philippines. The total sales of (1997 BAR)
airline tickets transacted by PAL for KIA in
1997 amounted to P2,968,156.00. The A: YES. The assessments were justified because
Commissioner of Internal Revenue assessed for income tax purposes, the co-ownership of
KIA deficiency income taxes at the rate of 35% inherited property is automatically converted into
on its taxable income, finding that KIA’s an unregistered partnership from the moment the
airline ticket sales constituted income derived said properties are used as a common fund with
from sources within the Philippines. intent to produce profits for the heirs in
proportion to their shares in the inheritance.
KIA filed a protest on the ground that the
P2,968,156.00 should be considered as From the moment of such partition, the heirs are
income derived exclusively from sources entitled already to their respective definite shares
outside the Philippines since KIA only of the estate and the income thereof, for each of
serviced passengers outside Philippine them to manage and dispose of as exclusively his
territory. own without the intervention of the other heirs,
and, accordingly, he becomes liable individually
Is the position of KIA tenable? Reasons. (2009 for all taxes in connection therewith. If after such
BAR) partition, he allows his shares to be held in
common with his co-heir under a single
A: KIA’s position is not tenable. The revenue it management to be used with the intent of making
derived in 1997 from sales of airplane tickets in profit thereby in proportion to his share, there
the Philippines, through its agent PAL, is can be no doubt that, even if no document or
considered as income from within the Philippines, instrument were executed for the purpose, for tax
subject to the 35% tax based on its taxable purposes, at least, an unregistered partnership is
income pursuant to the Tax Code. The transacting formed. (Lorenzo Ona, et al v. CIR, 45 SCRA 74)
of business in the Philippines through its local
sales agent, makes KIA a resident foreign ALTERNATIVE ANSWER:
corporation despite the absence of landing rights,
thus, it is taxable on income derived from within. NO, the assessments are not justified. The mere
The source of an income is the property, activity sharing of income does not of itself establish a
or service that produced the income. In the partnership absent any clear intention of the co-
instant case, it is the sale of tickets in the owners who are only awaiting liquidation of the
Philippines which is the activity that produced the estate.
income. KIA’s income being derived from within,
is subject to Philippine income tax. (CIR v. British Tax on General Professional Partnerships
Overseas Airways Corporation, 149 SCRA 395, (1988, 1989, 1990, 2013, 2014 BAR)
1987)
Q: A, B, and C, all lawyers, formed a
NOTE: That from January 1, 2009 to June 30, partnership called ABC Law Firm so that they
2020 the tax rate is 30%. (R.A. No. 9337; R.A. No. can practice their profession as lawyers. For
11534 – CREATE Act) Starting July 1, 2020, the tax the year 2012, ABC Law Firm received
25

Taxation Law
earnings and paid expenses, among which are (c) If ABC Law Firm earns net income in
as follows: 2012, what, if any, is the tax consequence
on the part of ABC Law Firm insofar as
Earnings: the payment of income tax is concerned?
What, if any, is the tax consequence on
1. Professional/legal fees from various the part of A, B, and C as individual
clients; partners, insofar as the payment of
income tax is concerned? (2014 BAR)
2. Cash prize received from a religious
society in recognition of the exemplary A: The net income having been earned by
service of ABC Law Firm; the law firm which is formed and qualifies
as a general professional partnership, is not
3. Gains derived from sale of excess subject to income tax because the earner is
computers and laptops. devoid of any income tax personality. Each
partner shall report as gross income his
Payments: distributive shares, actuality or
constructively received, in the net income
1. Salaries of office staff; of the partnership. The partnership is
merely treated for income tax purposes as a
2. Rentals for office space; pass-through entity so that its net income is
not taxable at the level of the partnership
3. Representation expenses incurred in but said net income should be attributed to
meetings with clients. the partners, whether or not distributed to
them, and they are liable to pay the income
(a) What are the items in the above tax based on their respective taxable
mentioned earnings which should be income as individual taxpayers. (Sec. 26,
included in the computation of ABC Law NIRC)
Firm’s gross income? Explain.

ESTATE TAX
A: The three (3) items of earnings should be
included in the computation of ABC Law

Firm’s gross income. The professional/legal TIME AND TRANSFER OF PROPERTIES
fees from various clients are included as part (DATE OF DEATH VALUATION RULE)
of gross income being in the nature of (1994, 2007, 2008 BAR)
compensation for services. (Sec. 32(A)(1),
NIRC) The cash prize from a religious society Q: Jose Cernan, Filipino citizen, married to
in recognition of its exemplary services is Maria Ceman, died in a vehicular accident in
also included there being no law providing NLEX on July 10, 2007. The spouses owned,
for its exclusion. This is not a prize in among others, a 100-hectare agricultural land
recognition of any of the achievements in Sta. Rosa, Laguna with current fair market
enumerated under the law hence, should value of P 20 million, which was the subject
form part of gross income. (Sec. 32(B)(7)(c), matter of a Joint Venture Agreement about to
NIRC) The gains from sale of excess be implemented with Star Land Corporation
computers and laptops should also be (SLC), a well-known real estate development
included as part of the firm’s gross income company. He bought the said real property for
because the term gross income specifically P 2 million fifty years ago. On January 5, 2008,
includes gains derived from dealings in the administrator of the estate and SLC jointly
property. (Sec. 32(A)(3), NIRC) announced their big plans to start conversion
and development of the agricultural lands in
(b) What are the items in the above- Sta. Rosa, Laguna, into first-class residential
mentioned payments which may be and commercial centers. As a result, the prices
considered as deductions from the gross of real properties in the locality have doubled.
income of ABC Law Firm? Explain.
The Administrator of the Estate of Jose Cernan
A: The law firm being formed as general filed the estate tax return on January 9,2008,
professional partnership is entitled to the by including in the gross estate the real
same deductions allowed to corporation. property at P 2 million. After 9 months, the
(Sec. 26, NIRC) Hence, the three (3) items of BIR issued deficiency estate tax assessment,
deductions mentioned in the problem are all by valuing the real property at P40 million.
deductible, they being in the nature of
ordinary and necessary expenses incurred in (a) Is the BIR correct in valuing the real
the practice of profession. (Sec. 34(A), NIRC) property at P 40 million? Explain.
However, the amount deductible for
representation expenses incurred by a A: NO. The value of the property for estate tax
taxpayer engaged in sale of services, purposes shall be the fair market value thereof at
including a law firm, is subject to a ceiling of the time of death. (Sec. 88(B), NIRC)
1% of net revenue. (RR No. 10-02)
26
QuAMTO (1987-2019)
(b) If you disagree, what is the correct value hospitalized for pneumonia a month
to use for estate tax purposes? Explain. before her death; and
(2008 BAR)
3. Loss valued at PhP6 million arising from
A: The correct value to use for estate tax the destruction of Karissa's
purposes is P 20 million which is the current fair condominium unit due to fire which
market value of the property at the time of the occurred on September 15, 2017.
decedent's death. (Sec. 88(B), NIRC)
(a) Should the beachfront property be
CLASSIFICATION OF DECEDENT FOR PURPOSES included in Karissa's gross estate? xxx (2018
OF DETERMINING BAR)
COMPOSITION OF GROSS ESTATE
(1987, 1990, 1994, 2010 BAR) A: YES. The property is registered in the name of
the decedent, so it’s a property owned by her as of
Q: Cliff Robertson, an American citizen, was a the time of death which must properly be
permanent resident of the Philippines. He died included as part of her gross estate. The extent of
in Miami, Florida. He left 10, 000 shares of her interest in the property, which is full
Meralco, a condominium unit at the Twin ownership, must form part of her gross estate.
Towers Building at Pasig. Metro Manila and a (Sec. 85(A), NIRC)
house and lot in Los Angeles, California.
Transfers in Contemplation of Death (2001,
What assets shall be included in the Estate Tax 2013 BAR)
Return to be filed with the BIR? (1994 BAR)
Q: A, aged 90 years and suffering from
A: All of Mr. Robertson’s assets consisting of 10, incurable cancer, on August 1, 2001 wrote a
000 shares in the Meralco, a condominium unit in will and, on the same day, made several inter-
Pasig, and his house and lot in Los Angeles, vivos gifts to his children. Ten days later, he
California are taxable. The properties of a resident died. In your opinion, are the inter-vivos gifts
alien decedent like Mr. Robertson are taxable considered transfers in contemplation of
wherever situated. (Sec. 85, NIRC as amended by death for purposes of determining properties
R.A. No. 8424 – the Tax Reform Act of 1997) to be included in his gross estate? Explain
your answer. (2001 BAR)
ITEMS TO BE INCLUDED AS PART OF
GROSS ESTATE (2001, 2003, 2005, 2007, 2013, A: YES. When the donor makes his will within a
2018, 2019 BAR) short time of, or simultaneously with, the making
of gifts, the gifts are considered as having been
Q: Karissa is the registered owner of a made in contemplation of death. (Roces v. Posadas,
beachfront property in Kawayan, Quezon 58 Phil. 108) Obviously, the intention of the donor
which she acquired in 2015. Unknown to in making the inter-vivos gifts is to avoid the
many, Karissa was only holding the property imposition of the estate tax and since the donees
in trust for a rich politician who happened to are likewise his forced heirs who are called upon
be her lover. It was the politician who paid for to inherit, it will create a presumption juris
the full purchase price of the Kawayan tantum that said donations were made mortis
property. No deed of trust or any other causa, hence, the properties donated shall be
document showing that Karissa was only included as part of A's gross estate.
holding the property in trust for the politician
was executed between him and Karissa. Proceeds of Life Insurance Policy (2003, 2005,
2007 BAR)
Karissa died single on May 1, 2017 due to a
freak surfing accident. She left behind a Q: Antonia Santos, 30 years old, gainfully
number of personal properties as well as real employed, is the sister of Eduardo Santos. She
properties, including the Kawayan property. died in an airplane crash. Edgardo is a lawyer
Karissa's sister, Karen, took charge of and he negotiated with the airline company
registering Karissa's estate as a taxpayer and and insurance company and they were able to
reporting, for income tax and VAT purposes, agree to a total settlement of P10 million. This
the rental income received by the estate from is what Antonia would have earned as
real properties. However, it was only on somebody who was gainfully employed.
October 1, 2017 when Karen managed to file Edgardo was her only heir.
an estate tax return for her sister's estate. The
following were claimed as deductions in the Is the P 10 million subject to estate tax?
estate tax return: Reason briefly. (2007 BAR)

1. Funeral expenses amounting to P A: NO. The estate tax is a tax on the privilege
250,000; enjoyed by an individual in controlling the
disposition of her properties to take effect upon
2. Medical expenses amounting to P her death. The P 10M is not a property existing as
100,000, incurred when Karissa was of the time of decedent’s death; hence, it cannot
27

Taxation Law
be said that she exercised control over its Funeral 300,000

disposition. Since the privilege to transmit the Expenses
property is not exercised by the decedent, the
estate tax cannot be imposed thereon. (Definition (a) Is the Estate of Jaime Asuncion liable for
of Estate Tax, Compendium of Tax Law and estate tax? Explain. (2008 BAR)
Jurisprudence, Third Revised Edition, Vitug, p. 184)
A: NO. The estate comprised of properties of only
DEDUCTIONS FROM GROSS ESTATE P 1.2 million is not liable to any estate tax. The
(2000, 2008, 2009, 2010, 2015, 2017, 2018, estate is entitled to a standard deduction of P 5
2019 BAR) million deductible from the gross estate without
the benefit of substantiation, thereby placing the
Vanishing Deduction (2008, 2009 BAR) net estate at a negative. Since there is no net
taxable estate, no estate tax is due. (Secs. 86(A)(1)
Q: In 1999, Xavier purchased from his friend, & 84, NIRC, as amended by R.A. No. 10963 – TRAIN
Yuri, a painting for P 500,000.00. The fair Law)
market value (FMV) of the painting at the time
of the purchase was P 1 million. Yuri paid all Medical Expenses (2010, 2015, 2018 BAR)
the corresponding taxes on the transaction. In
2001, Xavier died. In his last will and Q: State the conditions for allowing the
testament, Xavier bequeathed the painting, following as deductions from the gross estate
already worth P 1.5 million, to his only son, of a citizen or resident alien for the purpose of
Zandro. The will also granted Zandro the imposing estate tax ------- Medical Expenses
power to appoint his wife, Wilma, as successor (2015 BAR)
to the painting in the event of Zandro’s death.
Zandro died in 2007, and Wilma succeeded to A: The conditions for the allowance of medical
the property. expenses as deductions from the gross estate of a
citizen or resident alien are:
May a vanishing deduction be allowed in
either or both of the estates? Explain. (2009 1. The medical expenses must have been
BAR) incurred within one (1) year before the
death of the decedent;
A: Vanishing deduction shall be allowed to the
estate of Xavier but only to the extent of the 2. That the medical expenses are duly
property which is the portion acquired by gift. substantiated with receipts; and
(Sec. 100, NIRC) The donation took place within 5
years (1999 to 2001) from the death of Xavier; 3. The total amount thereof, whether paid or
hence, there is a vanishing deduction. However, unpaid, does not exceed P 500, 000.00. (Sec.
Zandro’s estate will not be entitled to claim 86(A)(6), NIRC)
vanishing deduction because, first and foremost,
the property previously taxed is not includable in NOTE: Specific deductions for actual funeral
his gross estate and second, even if it is expenses, judicial expenses of the testamentary of
includable, the present decedent died more than 5 intestate proceedings and medical expenses were
years from the death of the previous decedent, removed by Sec. 23 of R.A. No. 10963 – TRAIN
and that a vanishing deduction is already claimed Law.
by the previous estate involving the same
property. Claims against the Estate (2010, 2015, 2017
BAR)
Standard Deduction (2000, 2008, 2019 BAR)
Q: State the Conditions for allowing the
Q: While driving his car to Baguio last month, following as deductions from the gross estate
Pedro Asuncion, together with his wife of a citizen or resident alien for the purpose of
Assunta, and only son, Jaime, met an accident imposing estate tax ------ Claims against the
that caused the instantaneous death of Jaime. estate. (2015 BAR)
The following day, Assunta also died in the
hospital. The spouses and their son had the A: In order that claims against the estate may be
following assets and liabilities at the time of allowed as deductions from the gross estate of a
death: citizen or resident alien for purposes of imposing
the estate tax, the law requires at the time the
Assunta Conjugal Jaime indebtedness was incurred, the debt instrument
Exclusive Exclusive was duly notarized. In addition, if the loan was
Cash P 10,000,000 P 1,200,000 contracted within three (3) years before the death
Cars P 2,000,000 500,000 of the decedent, the executor or administrator
Land 5,000,000 2,000,000 shall submit a statement showing the disposition
Residential 4,000,000 of the proceeds of the loan. (Sec. 86(A)(2), NIRC, as
House amended by R.A. No. 10963 – TRAIN Law)
Mortgage 2,500,000
Payable
28
QuAMTO (1987-2019)
Funeral Expenses (2018, 2019 BAR) filed the estate tax return on March 30,2007.
Because he needed to sell one unit of the
Q: A, a resident Filipino citizen, died in condominium to pay for the estate tax, he
December 2018. A's only assets consist of a asked the Commissioner of Internal Revenue
house and lot in Alabang, where his heirs to give him one year to pay the estate tax due.
currently reside, as well as a house in Los The Commissioner approved the request for
Angeles, California, USA. In computing A's extension of time provided that the estate tax
taxable net estate, his heirs only deducted: 1. be computed on the basis of the value of the
₱ 10,000,000.00 constituting the value of their property at the time of payment of the tax.
house in Alabang as their family home; and 2.
₱ 200,000.00 in funeral expenses because no (a) Does the Commissioner of Internal
other expenses could be substantiated. Revenue have the power to extend the
payment of estate tax? If so, what are the
Are both deductions claimed by A's heirs requirements to allow such extension? xxx
correct? Explain. xxx (2019 BAR) (2007 BAR)

A: NO. The claim of both deductions by the heirs A: YES. The Commissioner may allow an
is incorrect. Only the claim for the deduction of extension of time to pay the estate tax if the
the family home worth P 10,000,000.00 is payment on the due date would impose undue
correct, if the property is the decedent’s family hardship upon the estate or any of the heirs. The
home as of the time of his death. (Sec. 86(A)(7), extension, in any case, will not exceed two years if
NIRC) As for the funeral expense, upon the the estate is under extrajudicial settlement or five
amendment introduced by R.A. No. 10963 – years if it is under judicial settlement. The
TRAIN Law, funeral expense was not specified as Commissioner may also require the posting of a
a separate deductible item, hence, not allowed as bond to secure the payment of the tax. (Sec. 91(B),
a deduction from the gross estate of the decedent. NIRC)

PERIOD FOR FILING OF ESTATE TAX RETURN, ALTERNATIVE ANSWER:
PAYMENT AND EXTENSION
(2000, 2007, 2010, 2017 BAR) YES The requirements to be complied with so that
an extension may be allowed are: (1) a request for
Q: Mr. Felix de la Cruz, a bachelor resident extension must be filed before the expiration of
citizen suffered from a heart attack while on a the original period to pay; (2) there must be a
business trip to the USA. He died intestate on finding that the payment on the due date of the
June 15, 2013 in New York City, xxx xxx where estate tax would impose undue hardship upon the
shall the return be filed and estate tax be estate or any of the heirs; (3) the extension must
paid? (2000 BAR) be for a period of not exceeding 5 years if the
estate is settled judicially or 2 years if settled
A: The estate tax return shall be filed within six extrajudicially; and (4) the Commissioner may
(6) months from the decedent’s death (Sec. 90(B), require the posting of a bond in an amount not
NIRC, as amended by R.A. No. 8424 – the Tax exceeding double the amount of tax to secure the
Reform Act of 1997), provided that the payment thereof. (Sec. 91(B), NIRC)
Commissioner of Internal Revenue shall have
authority to grant in meritorious cases, a COLLECTION OF ESTATE TAXES PENDING
reasonable extension not exceeding thirty (30) PROBATE PROCEEDING
days for filing the return. (Sec. 90(C), Ibid) (1998, 2004, 2005 BAR)

NOTE: R.A. No. 10963 – TRAIN Law amended the Q: Is the approval of the court, sitting as
deadline for filing the estate tax return, from probate or estate settlement court, required
within six months from the decedent’s death to in the enforcement and collection of estate
within one year from the decedent’s death. tax? Explain. (2005 BAR)

Except in cases where the Commissioner of A: NO. The approval of the court, sitting in
Internal Revenue otherwise permits, the estate probate, is not a mandatory requirement in the
tax return shall be filed with an authorized agent collection of estate tax. On the contrary, under
bank, or Revenue District Officer, Collection Section 94 of the NIRC, it is the probate or
Officer, or duly authorized Treasurer of Pasig City, settlement court which is forbidden to authorize
the City in which the decedent Mr. de la Cruz was the executor or judicial administrator of the
domiciled at the time of his death. (Sec. 90(D), decedent’s estate, to deliver any distributive
NIRC, as amended by R.A. No. 8424 – the Tax share to any party interested in the estate, unless
Reform Act of 1997) a certification from the Commissioner of Internal
Revenue that the estate tax has been paid is
Q: Remedios, a resident citizen, died on shown. (Marcos II v. Court of Appeals, 273 SCRA 47,
November 10, 2006. She died leaving three 1997)
condominium units in Quezon City valued at
P5 Million each. Rodolfo was her only heir. He
reported her death on December 5, 2006 and
29

Taxation Law
POWER OF THE strike and volunteered to picket the company

COMMISSIONER OF INTERNAL REVENUE premises from 8:00 A.M. to 12:00 P.M.,
TO INQUIRE INTO BANK ACCOUNTS Monday to Friday. Six months into the strike, X
FOR PURPOSES OF DETERMINING THE ran out of money and asked financial aid from
GROSS ESTATE OF A DECEDENT the union since he has no other source of
(1992, 2003 BAR) income and needed financial assistance in
order to live. The union gave him P1, 000.00 a
Q: X dies in year 2000 leaving a bank deposit month to take care of his food requirements
of P 2, 000,000.00 under joint account with his plus P500.00 to take care of his monthly rent.
associates in a law office. Learning of X’s death When X filed his return, he excluded these
from the newspapers, the Commissioner of benefits from his gross income. The exclusion
Internal Revenue wrote to every bank in the was denied by the BIR Decide. (1993 BAR)
country asking them to disclose to him the
amount of deposits that might be outstanding A: The P 1,500.00 is not compensation income.
in his name or jointly with others at the date Compensation income, in general, means all
of his death. May the bank holding the deposit renumeration for services performed by an
refuse to comply on the ground of the Secrecy employee for his employer under an employer-
of Bank Deposit Law? Explain. (2003 BAR) employee relationship, unless specifically
excluded by the Code. The P 1,500.00 is a gift
A: NO. The Commissioner of Internal Revenue has from the labor union. According to Section
the authority to inquire into bank deposit 32(B)(3) of the NIRC as amended by R.A. No. 8424
accounts of a decedent to determine his gross (the Tax Reform Act of 1997), gifts are to be
estate notwithstanding the provisions of the Bank excluded from gross income. Thus, the BIR's
Secrecy Law. Hence, the banks holding the denial is not valid.
deposits in question may not refuse to disclose
the amount of deposits on the ground of secrecy ALTERNATIVE ANSWER:
of bank deposits. (Sec. 6(F), NIRC) The fact that
the deposit is a joint account will not preclude the Under the law, gross income consists of all gains,
Commissioner from inquiring thereon because profits, and income of the taxpayer during a
the law mandates that if a bank has knowledge of taxable year of whatever kind and in whatever
the death of a person, who maintained a bank form derived from any source, whether legal or
deposit account alone, or jointly with another, it illegal, except items of gross income subject to
shall not allow any withdrawal from the said final income tax and income exempt from taxation
deposit account, unless the Commissioner has under Section 32(B) of the NIRC, as amended by
certified that the taxes imposed thereon have R.A. No. 8424 (the Tax Reform Act of 1997).
been paid. (Sec. 97, NIRC) Hence, to be able to give
the required certification, the inclusion of the Moreover, in the case of Gutierrez v. Collector of
deposit is imperative, which may be made Internal Revenue, CTA Case No. 65, 31 August 1965,
possible only through the inquiry made by the it was held that the phrase income from whatever
Commissioner. source derived covers all other forms of income. It
discloses a legislative policy to include all income
NOTE: R.A. 10963 – TRAIN Law amended Sec. 97 not expressly exempted, as within the class of
of the NIRC as follows: “If a bank has knowledge taxable income under our laws, irrespective of the
of the death of a person, who maintained a bank voluntary or involuntary action of the taxpayer in
deposit account alone, or jointly with another, it producing the gain.
shall allow any withdrawal from the said deposit
account, subject to a final withholding tax of six Therefore, based on the foregoing considerations,
percent (6%). For this purpose, all withdrawal the benefits subject in the case at bar, not
slips shall contain a statement to the effect that expressly exempted by law, are considered as
all of the joint depositors are still living at the income.
time of withdrawal by any one of the joint
depositors and such statement shall be under Q: A, an individual, sold to B, his brother-in-
oath by the said depositors.” law, his lot with a market value of P1,000.000
for P600.000. A’s cost in the lot is P100, 000. B

is financially capable of buying the lot.
DONOR’S TAX

A also owns X Co., which has a fast growing
TRANSFERS WHICH MAY BE business. A sold some of his shares of stock in
CONSTITUTED AS DONATION X Co. to his key executives in X Co. These
(1989, 1991, 1993, 1995, 1996, 1999 BAR) executives are not related to A. The selling
price is P3, 000.000, which is the book value of
Sale/exchange/transfer of property for the shares sold but with a market value of
insufficient consideration (1989, 1991, 1993, P5,000,000. A’s cost in the shares sold is
1995, 1996, 1999 BAR) P1,000, 000. The purpose of A in selling the
shares is to enable his key executives to
Q: The employees of Travellers, Inc. staged a acquire a propriety interest in the business
strike. X, a non-union member joined the and have a personal stake in its business.
30
QuAMTO (1987-2019)
Explain if the above transactions are subject Renunciation of share of surviving spouse
to donor's tax. (1999 BAR) (2010, 2013 BAR)

A: The first transaction where a lot was sold by A Q: In the settlement of the estate of Mr.
to his brother-in-law for a price below its fair Barbera who died intestate, his wife
market value will not be subject to donor's tax if renounced her inheritance and her share of
the lot qualifies as a capital asset. The transfer for the conjugal property in favor of their
less than adequate and full consideration, which children. The BIR determined that there was a
gives rise to a deemed gift, does not apply to a taxable gift and thus assessed Mrs. Barbera as
sale of property subject to capital gains tax. (Sec. a donor. Was the BIR correct? (2013 BAR)
100, NIRC) However, if the lot sold is an ordinary
asset, the excess of the fair market value over the A: The BIR is correct that there was a taxable gift
consideration received shall be considered as a but only insofar as the renunciation of the share
gift subject to the donor's tax. of the wife in the conjugal property is concerned.
This is a transfer of property without any
The sale of shares of stock below the fair market consideration which takes effect during the
value thereof is subject to the donor's tax lifetime of the transferor/wife and thus qualifies
pursuant to the provisions of the Tax Code. The as a taxable gift. (RR No. 2-2003)
excess of the fair market value over the selling
price is a deemed gift. But the renunciation of the wife’s share in the
inheritance during the settlement of the estate is
ALTERNATIVE ANSWER: not a taxable gift considering that the property is
automatically transferred to the other heirs by
The sale of shares of stock below the fair market operation of law due to her repudiation of her
value will not give rise to the imposition of the inheritance. (BIR Ruling DA No. 333-07)
donor's tax. In determining the gain from the
transfer, the selling price of the shares of stocks EXEMPTION OF GIFTS FROM
shall be the fair market value of the shares of DONOR’S TAXES
stocks transferred. (Sec. 6, RR No. 02- 82) In (1992, 1994, 1995, 2000, 2001, 2002, 2007,
which case, the reason for the imposition of the 2008, 2014, 2017, 2018, 2019 BAR)
donor's tax on sales for inadequate consideration
does not exist. Q: Due to rising liquidity problems and
pressure from its concerned suppliers, P Corp.
CLASSIFICATION OF DONORS instituted a flash auction sale of its shares of
(1992, 1996, 2009 BAR) stock. P Corp. was then able to sell its treasury
shares to Z, Inc., an unrelated corporation, for
Situs of Donor’s Tax (1992, 1996, 2009 BAR) P l,000,000.00, which was only a little below
the valuation of P Corp. 's shares based on its
Q: Mr. Bill Morgan, a Canadian citizen and a latest audited financial statements. In
resident of Scarborough, Ontario, sends a gift connection therewith, P Corp. sought a Bureau
check of $ 20,000.00to his future Filipino of Internal Revenue ruling to confirm that,
daughter-in-law who is to be married to his notwithstanding the price difference between
only son in the Philippines. the selling price of the shares and their book
value, the said transaction falls under one of
Is the donation by Mr. Morgan subject to tax? the recognized exemptions to donor's tax
Explain. (1992 BAR) under the Tax Code.

A: YES. While the gift has been made on account (a) Cite the instances under the Tax Code
of marriage, to qualify for exemption to the extent where gifts made are exempt from
of the first P 10, 000.00 of the value thereof, such donor's tax.
gift should have been given to a legitimate,
recognized natural or adopted child of the donor. A: Under the Tax Code, the following gifts are
(Sec. 101(A)(1), NIRC, as amended by R.A. No. 8424 exempt from the donor’s tax:
– the Tax Reform Act of 1997)
1. Total net gifts not in excess of Two hundred
NOTE: R.A. No. 10963 (TRAIN Law) removed the fifty thousand pesos (P 250,000.00) made
provision on dowries or gifts made on account of during the calendar year. (Sec. 99(A), NIRC,
marriage. as amended by R.A. No. 10963 – TRAIN Law)

ALTERNATIVE ANSWER: 2. Sale or exchange for insufficient
consideration where said sale, exchange, or
It is not subject to tax because the gift was made other transfer of property is made in the
outside the Philippines. ordinary course of trade or business, a
transaction which is bona fide, at arm’s
DETERMINATION OF GROSS GIFT length, and free from any donative intent.
(2010, 2013 BAR) (Sec. 100, NIRC, as amended by R.A. No.
10963 – TRAIN Law)
31

Taxation Law
3. Gifts made to or for the use of the National cumulative donations, the aggregation of all
Government or any entity created by any of donations made by a donor is allowed only over
its agencies which is not conducted for one calendar year.
profit, or to any political subdivision of the
said Government. (Sec. 101, NIRC) NOTE: Under Sec. 99(A) of the NIRC, as amended
by R.A. No. 10963 (TRAIN Law), total net gifts not
4. Gifts in favor of an educational and/or in excess of Two hundred fifty thousand pesos (P
charitable, religious, cultural or social 250,000.00) made during the calendar year are
welfare corporation, institution, accredited exempt from donor’s tax.
non-government organization, trust or
philanthropic organization or research Donations in favor of the government,
institution or organization: Provided, educational, charitable, religious etc.
however, that not more than thirty percent institutions (1992, 1994, 2000, 2002, 2007,
(30%) of said gifts shall be used by such 2014, 2017, 2018 BAR)
donee for administration purposes. (Sec.
101, NIRC) Q: On December 06, 2001, LVN Corporation
donated a piece of vacant lot situated in
(b) Does the above transaction fall under any Mandaluyong City to an accredited and duty
of the exemptions? Explain. (2019 BAR) registered non-stock, non-profit educational
institution to be used by the latter in building
A: YES. The transaction is not subject to a sports complex for students.
donor’s tax. Generally, the sale of property,
other than real property held as capital (a) May the donor claim in full as deduction
assets, for less than its fair market value is from its gross income for the taxable year
subject to donor’s tax on the amount by 2001 the amount of the donated lot
which the fair market value exceeds the equivalent to its fair market value/zonal
consideration received. However, if the sale value at the time of the donation? Explain
of property is made in the ordinary course of your answer.
business (i.e., (i) a transaction which is bona
fide, (ii) at arm’s length, and (iii) free from A: NO. Donations and/or contributions made to
any donative intent), the sale will be qualified donee institutions consisting of
considered made for an adequate and full property other than money shall be based on the
consideration in money or money’s worth acquisition cost of the property. The donor is not
and will not be subject to donor’s tax. (Sec. entitled to claim as full deduction the fair market
100, NIRC, as amended by R.A. No. 10963 – value/zonal value of the lot donated. (Sec.
TRAIN Law) 34(H)(3), NIRC)

In this case, the transfer was made in the (b) In order that donations to non-stock, non-
ordinary course of business since it was done profit educational institution may be
for a valid business purpose, which is to exempt from the donor’s gift tax, what
address liquidity problems and relieve conditions must be met by the donee?
pressure from the Company’s suppliers. (2002 BAR)

Gift Splitting (1995, 2001, 2008 BAR) A: In order that donations to non-stock, non-
profit educational institution may be exempt
Q: Your bachelor client, a Filipino residing in from the donor’s gift tax, it is required that not
Quezon City, wants to give his sister a gift of P more than 30% of the said gifts shall be used by
200,000.00. He seeks your advice, for the donee-institution for administration
purposes of reducing if not eliminating the purposes. (Sec. 101(A), NIRC)
donor’s tax on the gift, on whether it is better
for him to give all of the P 200,000.00 on
VALUE ADDED TAX

Christmas 2001 or to give P 100, 000.00 on
Christmas 2001 and the other Php100,000.00

on January 1, 2002. Please explain your CONCEPT, NATURE AND
advice. (2001 BAR) CHARACTERISTICS OF VAT
(1988, 1996, 2015, 2019 BAR)
A: I would advise him to split the donation. Giving
the P 200, 000 as a one-time donation would Q: What are the characteristics of the Value-
mean that it will be subject to a higher tax bracket Added Tax? (1996 BAR)
under the graduated tax structure thereby
necessitating the payment of donor's tax. On the A: The value-added tax is an indirect tax and the
other hand, splitting the donation into two equal amount of tax may be shifted or passed on to the
amounts of P 100, 000 given on two different buyer, transferee, or lessee of the goods,
years will totally relieve the donor from the properties or services.
donor’s tax because the first P 100,000 donation
in the graduated brackets is exempt. (Sec. 99, ALTERNATIVE ANSWER:
NIRC) While the donor’s tax is computed on the
32
QuAMTO (1987-2019)
The value-added tax has the following Q: In June 2013, DDD Corp., a domestic
characteristics: corporation engaged in the business of leasing
real properties in the Philippines, entered into
a. It is an indirect tax where tax shifting is a lease agreement of a residential house and
always presumed; lot with EEE, Inc., a non-resident foreign
b. It is consumption-based; corporation. The residential house and lot will
c. It is imposed on the value-added in each be used by officials of EEE, Inc. during their
stage of distribution; visit to the Philippines. The lease agreement
d. It is a credit-invoice method value-added was signed by representatives from DDD Corp.
tax; and and EEE, Inc. in Singapore. DDD Corp. did not
e. It is not a cascading tax. subject the said lease to VAT believing that it
was not a domestic service contract. Was DDD
Q: For purposes of value-added tax, define, Corp. correct? Explain. (2015 BAR)
explain or distinguish the following terms:
A: DDD Corp. is not correct. Lease of properties
(a) Input tax and output tax shall be subject to VAT irrespective of the place
where the contract of lease was executed if the
A: Input tax means the VAT due on or paid by a property is leased or used in the Philippines. (Sec.
VAT-registered person on importation of goods 108(A), NIRC)
or local purchases of goods, properties, or
services, including lease or use of properties. It VAT ON SALE OF PROPERTIES
includes presumptive input tax and transitional (1988, 1998, 2014 BAR)
input tax.
Q: MasarapKumain, Inc. (MKI) is a Value-
Output tax refers to the VAT billed by a VAT- Added Tax (VAT)-registered company which
registered or VAT-registrable seller on his sale has been engaged in the catering business for
of goods, properties and services. the past 10 years. It has invested a substantial
portion of its capital on flat wares, table
(b) Zero-rated and effectively zero-rated linens, plates, chairs, catering equipment, and
transactions delivery vans. MKI sold its first delivery van,
already 10 years old and idle, to Magpapala
A: Zero-rated transactions are transactions that Gravel and Sand Corp. (MGSC) a corporation
are immune from the imposition of the VAT and engaged in the business of buying and selling
the term includes export sales and effectively gravel and sand. The selling price of the
zero-rated sales. (Sec. 106(A)(2), NIRC) delivery van was way below its acquisition
cost. Is the sale of the delivery van by MKI to
A zero-rated sale of goods or properties MGSC subject to VAT? (2014 BAR)
(whether export sale or effectively zero-rated
sale) is a taxable transaction for VAT purposes, A: YES, the sale of the delivery van is subject to
although the VAT rate applied is 0%. A sale by a VAT being a transaction incidental to the catering
VAT-registered taxpayer of goods and/or business which is a VAT-registered activity of
services taxed at 0% shall not result in any MKI. Transactions that are undertaken incidental
output tax, while the input tax on its purchase of to the pursuit of a commercial or economic
goods or services related to such zero-rated sale activity are considered entered into in the course
shall be available as tax credit or refund. (Atlas of trade or business. (Sec. 105, NIRC) A sale of a
Consolidated v. CIR, June 8, 2007) fully depreciated vehicle that has been used in
business is subject to VAT as an incidental
An effectively zero-rated transaction is limited transaction, although such sale may be considered
in its context because it does not cover export isolated. (Mindanao II Geothermal Partnership v.
sales. More specifically, effectively zero-rated CIR)
transactions refer to the local sale of goods or
supply of services by a VAT-registered person to VAT ON SERVICES
persons or entities who were granted tax (1998, 2010, 2013, 2015, 2016, 2019 BAR)
exemption under special laws or international
agreement to which the Philippines is a Q: All the homeowners belonging to ABC
signatory. (CIR v. Seagate Technology Phils., Inc. Village Homeowners' Association elected a
G.R. No. 153866, Feb. 11, 2005) new set of members of the Board of Trustees
for the Association effective January 2019. The
(c) Destination principle (2019 BAR) first thing that the Board looked into is the
need to increase the prevailing association
A: The destination principle provides that “no dues. Mr. X, one of the trustees, proposed an
VAT shall be imposed to form part of the cost of increase of 100% to account for the payment
goods destined for consumption outside of the of the 12% value-added tax (VAT) on the
territorial border of the taxing authority”. association dues which were being collected
Hence, exports are zero-rated while imports are for services allegedly rendered "in the course
subject to the 12% VAT. (Coral Bay Nickel of trade or business" by ABC Village
Corporation v. CIR, June 13, 2016) Homeowners' Association.
33

Taxation Law
What constitutes transactions done "in the MMM, Inc. filed its Quarterly VAT Returns for
course of trade or business" for purposes of 2000. Subsequently, MMM, Inc. timely filed
applying VAT? xxx (2019 BAR) with the BIR an administrative claim for the
refund of the amount of P 6,321,486.50,
A: “In the course of trade or business” means the representing excess input VAT attributable to
regular conduct of pursuit of a commercial or an its effectively zero- rated sales in 2000. The
economic activity, including transactions BIR ruled to deny the claim for refund of
incidental thereto, by any person regardless of MMM, Inc. because the VAT official receipts
whether or not the person engaged therein is a submitted by MMM, Inc. to substantiate said
nonstock, nonprofit private organization claim did not bear the words "zero-rated" as
(irrespective of the disposition of its net income required under Section 4.108-1 of Revenue
and whether or not it sells exclusively to members Regulations (RR) No. 7-95. On appeal, the CTA
or their guests), or government entity. (Sec. 105, division and the CT A en banc affirmed the BIR
NIRC) ruling.

Zero-rated Sale of Services (1998, 2010, 2013, MMM, Inc. appealed to the Supreme Court
2015, 2016 BAR) arguing that the NIRC itself did not provide for
such a requirement. RR No. 7-95 should not
Q: Pursuant to Sec. 11 of the "Host Agreement" prevail over a taxpayer's substantive right to
between the United Nations and the Philippine claim tax refund or credit.
government, it was provided that the World
Health Organization (WHO), "its assets, (a) Rule on the appeal of MMM, Inc.
income and other properties shall be: a)
exempt from all direct and indirect taxes." A: The appeal of MMM, Inc. must be denied.
Precision Construction Corporation (PCC) was MMM, Inc.’s position that the requirements
hired to construct the WHO Medical Center in under RR No. 07-95 should not prevail over a
Manila. Upon completion of the building, the taxpayer’s substantive right to claim tax refund
BIR assessed a 12% VAT on the gross receipts or credit is unmeritorious. The Secretary of
of PCC derived from the construction of the Finance has the authority to promulgate the
WHO building. The BIR contends that the 12% necessary rules and regulations for the effective
VAT is not a direct nor an indirect tax on the enforcement of the provisions of the NIRC. Such
WHO but a tax that is primarily due from the rules and regulations are given weight and
contractor and is therefore not covered by the respect by the courts in view of the rule- making
Host Agreement. The WHO argues that the authority given to those who formulate them and
VAT is deemed an indirect tax as PCC can shift their specific expertise in their respective fields.
the tax burden to it. Is the BIR correct?
Explain. (2016 BAR) An applicant for a claim for tax refund or tax
credit must not only prove entitlement to the
A: NO. The BIR is not correct. claim, but also compliance with all the
documentary and evidentiary requirements.
While it is true that the VAT is an indirect tax, it is Consequently, the Court of Tax Appeal (CTA),
clear from the agreement that WHO is “exempt and the CTA en banc correctly ruled that the
from all direct and indirect taxes.” Since the 12% failure to indicate the words “zero-rated” on the
VAT is an indirect tax whose burden was shifted invoices and receipts issued by a taxpayer,
by PCC to WHO then it is evident that the BIR is would result in the denial of the claim for refund
not correct. (CIR v. John Gotamco & Sons, Inc., G.R. or tax credit. (Eastern Telecommunications
No. L-31092, Feb. 27, 1987, 148 SCRA 36, 1987) Philippines, Inc. v. CIR, G.R. No. 183531, March 25,
2015)
To allow the shifting of the burden to WHO would
negate its exemption and in violation of the (b) Will your answer in (a) be any different if
international agreement entered into by the MMM, Inc. was claiming refund of excess
Philippines. (Domondon) input VAT attributable to its effectively
zero-rated sales in 2012? (2015 BAR)
Q: MMM, Inc., a domestic telecommunications
company, handles incoming A: NO, my answer will not be different if the
telecommunications services for non-resident claim for refund is for effectively zero-rated sales
foreign companies by relaying international in 2012. The requirement to print the word
calls within the Philippines. To broaden the “zero-rated” is no longer by mere regulations but
coverage of its telecommunications services is now clearly provided by law as follows – “If
throughout the country, MMM, Inc. entered the sale is subject to zero percent (0%) value-
into various interconnection agreements with added tax, the term “zero-rated sale” shall be
local carriers. The non-resident foreign written or printed prominently on the invoice or
corporations pay MMM, Inc. in US dollars receipt. Failure to comply with this invoicing
inwardly remitted through Philippine banks, requirement is fatal to a claim for refund of input
in accordance with the rules and regulations of taxes attributable to the zero-rated sale. (Sec.
the Bangko Sentral ng Pilipinas. 113(B)(2)(c), NIRC)

34
QuAMTO (1987-2019)
Moreover, as recently ruled by the Supreme A: NO. The real property sold, being in the nature
Court, the subsequent incorporation of Sec. of a capital asset, is not subject to VAT. The sale is
4.108-1 of RR No. 07-95 in Sec. 113 of the NIRC subject to VAT only if the real property sold is
as introduced in R.A. No. 9337, actually held primarily for sale to customers or held for
confirmed the validity of the imprinting lease in the ordinary course of trade or business.
requirement on VAT invoices or official receipts A real property classified as a capital asset does
– a case falling under the principle of legislative not include a real property held for sale or for
approval of administrative interpretation by lease, hence, its sale is not subject to VAT. (Secs.
reenactment. (Northern Mindanao Power Corp. v. 39 & 106, NIRC)
CIR, G.R. No. 185115, February 18, 2015)
Q: Give at least three (3) real estate
Q: State whether the following transactions transactions which are not subject to the
are: a) VAT exempt; b) subject to VAT at 12%; Value-Added Tax. (1996 BAR)
or c) subject to VAT at 0%:
A: Real estate transactions which are exempt
Services rendered by Jake’s Construction from the value-added tax are:
Company, a contractor to the World Health
Organization in the renovation of its offices in 1. Sale of real property not primarily held for
Manila. (1998 BAR) sale or lease in the ordinary course of trade
or business;
A: VAT at 0%. Since Jake's Construction Company 2. Sale of real property utilized for socialized
has rendered services to the World Health housing as defined by R.A. No. 7279;
Organization, which is an entity exempted from 3. Sale of real property utilized under the low-
taxation under international agreements to which cost housing as defined by R.A. No. 7279.
the Philippines is a signatory, the supply of (Sec. 109(1)(P), NIRC, as amended by R.A. No.
services is subject to zero percent (0%) rate. (Sec. 10963 – TRAIN Law)
108(B)(3), NIRC, as amended by R.A. No. 10963 –
TRAIN Law) Lease of residential unit and Association Dues
(1998, 2008, 2009, 2019 BAR)
VAT EXEMPT TRANSACTIONS
(1996, 1998, 2008, 2009, 2010, 2019 BAR) Q: Emiliano Paupahan is engaged in the
business of leasing out several residential
Sale or importation of agricultural and marine apartment units he owns. The monthly rental
food products in their original state and for each unit ranges from P 8,000.00 to P
certain kinds of livestock, poultry, breeding 10,000.00. His gross rental income for one
stock and genetic materials (1998, 2010 BAR) year is P 1,650,000.00. He consults you on
whether it is necessary for him to register as a
Q: State whether the following transactions VAT taxpayer. What legal advice will you give
are: a) VAT Exempt; b) subject to VAT at 10%; him, and why? (2009 BAR)
or c) subject to VAT at 0%:
A: I will advise Emiliano that he is not required to
Sale of fresh vegetables by Aling Ining at the register as a VAT taxpayer. His transactions of
Pamilihang Bayan ng Trece Martirez. xxx leasing residential units for an amount not
(1998 BAR) exceeding P 12,800.00 per unit per month are
exempt from VAT irrespective of the aggregate
A: VAT exempt. Sale of agricultural products, such amount of rentals received annually.
as fresh vegetables, in their original state, of a
kind generally used as, or producing foods for Q: Greenhills Condominium Corporation
human consumption is exempt from VAT. (Sec. incorporated in 2001 is a non-stock, non-
109(1)(A), NIRC, as amended by R.A. No. 10963 – profit association of unit owners in Greenhills
TRAIN Law) Tower, San Juan City. To be able to reduce the
association dues being collected from the unit
Sale of certain Real Estate (1996, 2009 BAR) owners, the Board of Directors of the
corporation agreed to lease part of the ground
Q: Melissa inherited from her father a 300- floor of the condominium building to DEF
square-meter lot. At the time of her father’s Savings Bank for P 120,000 a month or P 1.44
death on March 14, 1995, the property was million for the year, starting January 2007.
valued at P720,000.00. On February 28, 1996,
to defray the cost of the medical expenses of (a) Is the non-stock, non-profit association
her sick son, she sold the lot for P600,000.00, liable for value added tax in 2007? If your
on cash basis. The prevailing market value of answer is in the negative, is it liable for
the property at the time of the sale was P3, another kind of business tax?
000.00 per square meter.
A: NO. Since the association’s annual gross
Is Melissa liable to pay Value Added Tax (VAT) receipts do not exceed P 1,500,000, it is exempt
on the sale of the property? If so, how much from the VAT. It is, however, liable to the 3%
and why? If not, why not? (2009 BAR) percentage tax which is imposed on persons
35

Taxation Law
exempt from value-added tax on account of 1998. For the CIR, the 120-day period is
failure to reach the PhP 1,500,000 threshold. mandatory and jurisdictional so that any suit
filed before its expiration is premature and,
NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN therefore, dismissible.
Law), the VAT threshold was amended to three
million pesos (PhP 3,000,000). API, on the other hand, invokes BIR Ruling No.
DA-489-03 issued by the CIR on December 10,
(b) Will the association be liable for value 2003 in answer to a query posed by the
added tax in 2008 if it increases the rental Department of Finance regarding the
to P 150,000 a month beginning January propriety of the actions taken by Lazi Bay
2008? Explain. (2008 BAR) Resources Development, Inc., which filed an
administrative claim for refund with the CIR
A: YES. When it increased the rentals to P and, before the lapse of the 120-day period
150,000 per month, its gross annual receipts will from its filing, filed a judicial claim with the
now exceed P 1,500,000. It is liable to the VAT CTA. BIR Ruling No. DA-489-03 stated that the
beginning January 2008. taxpayer- claimant need not wait for the lapse
of the 120-day period before it could seek
NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN judicial relief with the CTA.
Law), the VAT threshold was amended to three
million pesos (P 3,000,000). Will API's Petition for Review prosper? Decide
with reasons. (2016 BAR)
Q: All the homeowners belonging to ABC
Village Homeowners' Association elected a A: YES. API’s petition for review will prosper.
new set of members of the Board of Trustees Since API’s petition for review was filed on
for the Association effective January 2019. The September 15, 2010, it is an exception to the
first thing that the Board looked into is the general rule. The premature filing is allowed
need to increase the prevailing association because it was filed between 10 December 2003
dues. Mr. X, one of the trustees, proposed an and 5 October 2010, when BIR Ruling No. DA-
increase of 100% to account for the payment 489-03 was still in force. (Mindanao II Geothermal
of the 12% value-added tax (VAT) on the Partnership v. Commissioner of Internal Revenue,
association dues which were being collected G.R. No. 193301, March 11, 2013 and companion
for services allegedly rendered "in the course case)
of trade or business" by ABC Village
Homeowners' Association. Q: For calendar year 2011, FFF, Inc., a VAT-
registered corporation, reported unutilized
Is Mr. X correct in stating that the association excess input VAT in the amount of P
dues are subject to VAT? Explain. (2019 BAR) l,000,000.00 attributable to its zero-rated
sales. Hoping to impress his boss, Mr. G, the
A: NO, association dues are not subject to VAT. accountant of FFF, Inc., filed with the Bureau of
Under Section 109(Y) of the NIRC, association Internal Revenue (BIR) on January 31, 2013 a
dues, membership fees, and other assessments claim for tax refund/credit of the P
and charges collected by homeowners l,000,000.00 unutilized excess input VAT of
associations and condominium corporations are FFF, Inc. for 2011. Not having received any
VAT-exempt. communication from the BIR, Mr. G filed a
Petition for Review with the CTA on March 15,
REFUND OR TAX CREDIT OF 2013, praying for the tax refund/credit of the
EXCESS INPUT TAX Pl,000,000.00 unutilized excess input VAT of
(2014, 2015, 2016, 2017 BAR) FFF, Inc. for 2011.

Q: Amor Powers, Inc. (API) is a domestic (a) Did the CTA acquire jurisdiction over the
corporation registered with the BIR as a Petition of FFF, Inc.?
value-added taxpayer. API incurred excess
input VAT in the amount of P 500,000,000.00 A: The CTA has not acquired jurisdiction over
on August 3, 2008. Hence, it filed with the BIR the Petition of FFF, Inc. because the judicial claim
an administrative claim for the refund or has been prematurely filed on March 15, 2013.
credit of these input taxes on August 15, 2010. The Supreme Court ruled that the 30-day period
Without waiting for the CIR to act on its claim, after the expiration of the 120-day period fixed
API filed a Petition for Review with the CTA on by law for the Commissioner of Internal Revenue
September 15, 2010 before the lapse of two to act on the claim for refund is jurisdictional
years after the close of the taxable quarter and failure to comply would bar the appeal and
concerned. deprive the Court of Tax Appeals of its
jurisdiction to entertain the appeal. (CIR v. Aichi
In its Comment on the Petition, the CIR argues Forgin Company of Asia, Inc., G.R. No. 183421,
that API's Petition should be dismissed as it October 22, 2014, 632 SCRA 422)
was filed before the lapse of the 120-day
period given to the CIR by Sec. 112(D) of the In this case, Mr. G filed the administrative claim
NIRC, which became effective on January 1, on January 31, 2013. The petition for relief
36
QuAMTO (1987-2019)
should have been filed on June 30, 2013. Filing he must within fifteen (15) days from
the judicial claim on March 15, 2013 is receipt explain why no additional taxes
premature, this the CTA did not acquire should be assessed against him.
jurisdiction.
2. If the Commissioner of Internal Revenue
NOTE: The Commissioner shall grant a refund issues an assessment notice, the taxpayer
for creditable input taxes within ninety (90) must administratively protest or dispute the
days from the date submission of the official assessment by filing a motion for
receipts or invoices and other documents in reconsideration or reinvestigation within
support of the application filed, as amended by thirty (30) days from receipt of the notice of
Sec. 36 of R.A. No. 10963 (TRAIN Law). assessment. (4th par., Sec. 228, NIRC)

(b) Discuss the proper procedure and 3. Within sixty (60) days from filing of the
applicable time periods for protest, the taxpayer shall submit all
administrative and judicial claims for relevant supporting documents.
refund/credit of unutilized excess input
VAT. (2015 BAR) The judicial remedies of an aggrieved taxpayer
relative to an assessment notice are as follows:
A: The administrative claim must be filed with
the Commissioner of Internal Revenue (CIR) 1. Where the Commissioner of Internal
within two years from the close of the taxable Revenue has not acted on the taxpayer’s
quarter when the zero-rated sales were made. protest within a period of one hundred
The CIR has 120 days from the date of eighty (180) days from submission of all
submission of the complete documents in relevant documents, then the taxpayer has a
support of the claim to decide. If the CIR decides period of thirty (30) days from the lapse of
within the 120-day period or the 120- day period said 180 days within which to interpose a
expires without the CIR rendering a decision, the petition for review with the Court of Tax
taxpayer has 30 days to file a petition for review Appeals.
with the CTA reckoned from the receipt of
adverse decision or from the lapse of the 120- 2. Should the Commissioner deny the
day period. taxpayer's protest, then he has a period of
thirty (30) days from receipt of said denial
NOTE: Under R.A. No. 10963 (TRAIN Law), the within which to interpose a petition for
CIR is given a 90-day period to decide. review with the Court of Tax Appeals.

As a general rule, the 30-day period to appeal is In both cases the taxpayer must apply with the
both mandatory and jurisdictional. As an Court of Tax Appeals for the issuance of an
exception to the general rule, premature filing is injunctive writ to enjoin the Bureau of Internal
allowed only if filed between December 10, 2003 Revenue from collecting the disputed tax during
and October 5, 2010, when BIR Ruling No. DA- the pendency of the proceedings.
489-03 was still in force prior to the reversal of
the aforesaid ruling by the CTA in the Aichi case The adverse decision of the Court of Tax Appeals
on October 6, 2010. (Mindanao II Geothermal is appealable to the Court of Appeals by means of
Partnership v. CIR, G.R. No. 204745, December 8, a petition for certiorari within a period of fifteen
2014, 713 SCRA 645) (15) days from receipt of the adverse decision,
extendible for another period of fifteen (15) days

for compelling reasons, but the extension is not
TAX REMEDIES
to exceed a total of thirty (30) days in all.

REMEDIES AVAILABLE TO TAXPAYERS UNDER The adverse decision of the Court of Appeals is
THE NIRC, IN GENERAL appealable to the Supreme Court by means of a
(1992, 2000 BAR) petition for review on certiorari within a period of
fifteen (15) days from receipt of the adverse
Q: Describe separately the procedures on the decision of the Court of Appeals.
legal remedies under the Tax Code available
to an aggrieved taxpayer both at the The employment by the Bureau of Internal
administrative and judicial levels. (2000 BAR) Revenue of any of the administrative remedies for
the collection of the tax like distraint, levy, etc.
A: The legal remedies of an aggrieved taxpayer may be administratively appealed by the taxpayer
under the Tax Code, both at the administrative to the Commissioner whose decision is appealable
and judicial levels, may be classified into those for to the Court of Tax Appeals under other matter
assessment, collection and refund. arising under the provisions of the National
Internal Revenue Code. The judicial appeals start
The procedures for the administrative remedies with the Court of Tax Appeals and continues in
for assessment are as follows: the same manner as shown above.

1. After receipt of the Pre-Assessment Notice, Should the Bureau of Internal Revenue decide to
37

Taxation Law
utilize Its judicial tax remedies for collecting the Juliana Diezvda. De Gabriel v. CIR, 421 SCRA
taxes by means of an ordinary suit filed with the 266, 2004)
regular courts for the collection of a sum of
money, the taxpayer could oppose the same by (b) As tax lawyer of EDS Corporation, what
going up the ladder of judicial processes from the legal defense(s) would you raise against
Municipal Trial Court (as the case may be) to the the assessment? Explain. (2008 BAR)
Regional Trial Court, to the Court of Appeals,
thence to the Supreme Court. A: I will question the validity of the assessment
because of the failure to send the demand letter
The remedies of an aggrieved taxpayer on a claim which contains a statement of the law and the
for refund is to appeal the adverse decision of the facts upon which the assessment is based. If an
Commissioner to the CTA in the same manner assessment notice is sent without informing the
outlined above. taxpayer in writing about the law and facts on
which the assessment is made, the assessment is
ASSESSMENT void. (Sec. 228, NIRC; Azucena T. Reyes v. CIR, 480
(1989, 1996, 1997, 1998, 1999, 2000, SCRA 382, 2006)
2002, 2006, 2008, 2009, 2013, 2014,
2017, 2018, 2019 BAR) Q: On October 5, 2016, the Bureau of Internal
Revenue (BIR) sent KLM Corp. a Final
Requisites of a valid assessment (2008, 2013, Assessment Notice (FAN), stating that after its
2019 BAR) audit pursuant to a Letter of Authority duly
issued therefor, KLM Corp. had deficiency
Q: After examining the books and records of value-added and withholding taxes.
EDS Corporation, the 2004 final assessment Subsequently, a warrant of distraint and/or
notice, showing basic tax of P 1,000,000, levy was issued against KLM Corp. KLM Corp.
deficiency interest of P 400,000, and due date opposed the actions of the BIR on the ground
for payment of April 30, 2007 but without the that it was not accorded due process because
demand letter, was mailed and released by the it did not even receive a Preliminary
BIR on April 15, 2007. The registered letter, Assessment Notice (PAN) after the BIR' s
containing the tax assessment, was received by investigation, which the BIR admitted:
the EDS Corporation on April 25, 2007.
Are the deficiency tax assessment and warrant
(a) What is an assessment notice? What are of distraint and/or levy issued against KLM
the requisites of a valid assessment? Corp. valid? Explain. (2019 BAR)
Explain.
A: NO. Both the deficiency tax assessment and the
A: An assessment notice is a formal notice to the warrant issued are invalid. The deficiency tax
taxpayer stating that the amount thereon is due assessment issued against KLM Corp. is invalid
as a tax and containing a demand for the due to the absence of a preliminary assessment
payment thereof. (Alhambra Cigar and Cigarette notice (PAN), which is required by law for the
Mfg. Co. v. Collector, 105 PR 1337, 1959; CIR v. validity of the assessment. (Sec. 228, NIRC)
Pascor Realty and Development Corp., 309 SCRA Sending a PAN to the taxpayer to inform him of
402, 1999) To be valid, the taxpayer must be the assessment made is but a part of the “due
informed in writing of the law and the facts on process requirement in the issuance of a
which the assessment is made. (Sec. 228, NIRC) deficiency tax assessment,” the absence of which
renders nugatory any assessment made by the tax
ALTERNATIVE ANSWER: authorities. (CIR v. Metro Star Superama, Inc. G.R.
o. 185371, Dec. 8, 2010)
An assessment is a written notice and demand
made by the Bureau on the taxpayer for the The warrant of distraint and/or levy cannot be
settlement of a tax liability that is due, definitely issued to enforce an invalid assessment. An
set and fixed therein. The requisites of a valid assessment is a preliminary step for the collection
assessment are: of taxes. If the preliminary step in the collection
process is invalid, the entire collection process is
1. It must be made within the prescriptive also invalid which includes the warrant issued.
period to assess; (Sec. 203, NIRC)
Prescriptive Period for Assessment General
2. There must be a preliminary assessment Rule (1989, 1997, 1999, 2000, 2002, 2006,
previously issued, except in those instances 2017, 2019 BAR)
allowed by law; (Sec. 228, NIRC)
Q: Mr. Sebastian is a Filipino seaman
3. The taxpayer must be informed in writing employed by a Norwegian company which is
about the law and facts on which the engaged exclusively in international shipping.
assessment is based; (Sec. 228, NIRC) and He and his wife, who manages their business,
filed a joint income tax return for 1997 on
4. It must be served upon the taxpayer or any March 15, 1998. After an audit of the return,
of his authorized representatives. (Estate of the BIR issued on April 20, 2001 a deficiency
38
QuAMTO (1987-2019)
income tax assessment for the sum of 2012 has not yet prescribed.
P250,000.00, inclusive of interest and penalty.
For failure of Mr. and Mrs. Sebastian to pay the (b) Should the CIR's motion to dismiss be
tax within the period stated in the notice of granted? Explain. (2019 BAR)
assessment, the BIR issued on August 19, 2001
warrants of distraint and levy to enforce A: YES. Since the taxpayer failed to file a protest
collection of the tax. against the FAN within 30 days from date of
receipt, the assessment had become final,
If you are the lawyer of Mr. and Mrs. Sebastian, executory and demandable. (Sec. 228, NIRC, RR
what possible defense or defenses will you No. 18-13)
raise in behalf of your clients against the
action of the BIR in enforcing collection of the False or fraudulent returns and non-filing of
tax by the summary remedies of warrants of returns (1989, 1996, 1998, 2002, 2009, 2018
distraints and levy? Explain your answer. BAR)
(2002 BAR)
Q: Distinguish a false return from a fraudulent
A: I will raise the defense of prescription. The return. (1996 BAR)
right of the BIR to assess prescribes after three
years counted from the last day prescribed by law A: The distinction between a false return and a
for the filing of the income tax returns when the fraudulent return is that the first merely implies a
said return is filed on time. (Sec. 203, NIRC) The deviation from the truth or fact whether
last day for filing the 1997 income tax return is intentional or not, whereas the second is
April 15,1998. Since the assessment was issued intentional and deceitful with the sole aim of
only on April 20, 2001, the BIR’s right to assess evading the correct tax due. (Aznar v.
has already prescribed. Commissioner, L-20569. August 23, 1974)

Q: After a Bureau of Internal Revenue (BIR) ALTERNATIVE ANSWER:
audit, T Corp., a domestic corporation engaged
in buying and selling of scrap metals, was A false return contains deviations from the truth
found to have deficiency income tax of which may be due to mistakes, carelessness or
₱25,000,000.00, including interests and ignorance of the person preparing the return. A
penalties, for the year 2012. For 2012, T Corp. fraudulent return contains an intentional
filed its income tax return (ITR) on April 15, wrongdoing with the sole object of avoiding the
2013 because it used the calendar year for its tax and it may consist in the intentional under
accounting. The BIR sent the Preliminary declaration of income, intentional over
Assessment Notice (PAN) on December 23, declaration of deductions or the recurrence of
2015, and eventually, the Final Assessment both. A false return is not necessarily tainted with
Notice (FAN) on April 11, 2016, which were fraud because the fraud contemplated by law is
received by T Corp. on the same dates that they actual and not constructive. Any deviation from
were sent. Upon receipt of the FAN, T Corp. the truth on the other hand, whether intentional
filed its protest letter on June 25, 2016. or not, constitutes falsity. (Aznar v. Commissioner,
L-20569, August 23, 1974)
Thereafter, and without action from the
Commissioner of Internal Revenue (CIR), T Q: Mr. Castro inherited from his father, who
Corp. filed a petition for review before the died on June 10, 1994, several pieces of real
Court of Tax Appeals, alleging that the property in Metro Manila. The estate tax
assessment has prescribed. return was filed and the estate tax due in the
amount of P250,000.00 was paid on December
For its part, the CIR moved to dismiss the case, 6, 1994. The Tax Fraud Division of the BIR
pointing out that the assessment had already investigated the case on the basis of
become final because the protest was filed confidential information given by Mr. Santos
beyond the allowable period. on January 6, 1998 that the return filed by Mr.
Castro was fraudulent and that he failed to
(a) Is T Corp.'s contention regarding the declare all properties left by his father with
prescription of the assessment intent to evade payment of the correct tax. As a
meritorious? Explain. result, a deficiency estate tax assessment for
P1,250,000.00, inclusive of 50% surcharge for
A: NO. The three-year prescriptive period for the fraud, interest and penalty, was issued against
assessment of tax shall start to run from the last him on January 10, 2001. Mr. Castro protested
day prescribed by law for the filing of the return, the assessment on the ground of prescription.
or the day the return was filed, whichever comes
later. (Sec. 203, NIRC) In the present case, since T. Decide Mr. Castro’s protest. (2002 BAR)
Corp. filed its annual income tax return on April
15, 2013, which is also the last day to file the said A: The protest should be resolved against Mr.
return, the last day to assess shall fall on April Castro. What was filed is a fraudulent return
15, 2016. By issuing the FAN on April 11, 2016, making the prescriptive period for assessment
the right to assess deficiency income tax for year ten (10) years from discovery of the fraud. (Sec.
39

Taxation Law
222, NIRC) Accordingly, the assessment was Prescriptive Periods (1994, 1997, 2001, 2002,
issued within the prescriptive period to make an 2009 BAR)
assessment based on a fraudulent return.
Q: A final assessment notice was issued by the
Q: The BIR Commissioner, in his relentless BIR on June 13, 2000 and received by the
enforcement of the Run After Tax Evaders taxpayer on June 15, 2000. The taxpayer
(RATE) program, filed with the Department of protested the assessment on July 31, 2000.
Justice (DOJ) charges against a movie and The protest was initially given due course but
television celebrity. The Commissioner was eventually denied by the Commissioner of
alleged that the celebrity earned around PhP Internal Revenue in a decision dated June 15,
50 million in fees from product endorsements 2005. The taxpayer then filed a petition for
in 2016 which she failed to report in her review with the Court of Tax Appeals (CTA),
income tax and VAT returns for said year. The but the CTA dismissed the same.
celebrity questioned the proceeding before
the DOJ on the ground that she was denied due Assume that the CTA’s decision dismissing the
process since the BIR never issued any petition for review has become final. May the
Preliminary Assessment Notice (PAN) or a Commissioner legally enforce collection of the
Final Assessment Notice (FAN), both of which delinquent tax? Explain. (2009 BAR)
are required under Section 228 of the NIRC
whenever the Commissioner finds that proper A: NO. The protest was filed out of time and,
taxes should be assessed. therefore, did not suspend the running of the
prescriptive period for the collection of the tax.
Is the celebrity's contention tenable? (2018 Once the right to collect has prescribed, the
BAR) Commissioner can no longer enforce collection of
the tax liability against the taxpayer. (CIR v. Atlas
A: NO. In cases where a fraudulent return is filed Mining and Development Corp., February 14, 2000)
with the intent to evade a tax, a proceeding in
court for the collection of such tax maybe filed
TAXPAYERS REMEDIES
without assessment. (Sec. 222(a), NIRC)
Assessment is not necessary before the filing of a

criminal complaint for tax evasion. (CIR v. Pascor PROTESTING AN ASSESSMENT
Realty and Development Corp., G.R. No. 128315, (1987, 1992, 1997, 1999, 2005, 2009, 2012,
June 29, 1999) 2014 BAR)

Issuance of Preliminary Assessment Notice Forms of Administrative Protest (1992, 2012
(2002, 2014 BAR) BAR)

Q: Mr. Tiaga has been a law-abiding citizen Q: What are the differences between a request
diligently paying his income taxes. On May 5, for reconsideration and a request for
2014, he was surprised to receive an reinvestigation? (2012 BAR)
assessment notice from the Bureau of Internal
Revenue (BIR) informing him of a deficiency A:
tax assessment as a result of a mathematical 1. A request for reinvestigation suspends the
error in the computation of his income tax, as running of the prescriptive period for
appearing on the face of his income tax return collection of taxes while a motion for
for the year 2011, which he filed on April 15, reconsideration does not.
2012. Mr. Tiaga believes that there was no
such error in the computation of his income 2. A request for reinvestigation requires the
tax for the year 2011. presentation of newly discovered or
additional evidence while a motion for
Based on the assessment received by Mr. reconsideration does not.
Tiaga, may he already file a protest thereon?
(2014 BAR) 3. The period of 60 days for submission of the
relevant supporting documents finds
A: YES. Mr. Tiaga may consider the assessment application only to a request for
notice as a final assessment notice and his right to reinvestigation and not to a request for
protest within 30 days from receipt may now be reconsideration.
exercised by him. When the finding of a deficiency
tax is the result of mathematical error in the 4. The failure of the Commissioner of Internal
computation of the tax appearing on the face of Revenue to act on the request for
the return, a pre-assessment notice shall not be reconsideration after a period of 180 days
required, hence the assessment notice is a final from filing thereof authorizes the taxpayer
assessment notice. to file a petition for review with the CTA
within a period of 30 days from the
COLLECTION expiration of such 180-day period while for
(1994, 1997, 2001, 2002, 2009 BAR) a request for reinvestigation the period is
the expiration of the 180-day period from
40
QuAMTO (1987-2019)
the submission of the complete supporting involving claim for tax refunds are within the
documents. exclusive and primary jurisdiction of the Court of
Tax Appeals.
Effect of failure to file protest (1997, 2009
BAR) Decision/Inaction of the Commissioner on the
protest filed (1987, 1999, 2005, 2009, 2012,
Q: A final assessment notice was issued by the 2014 BAR)
BIR on June 13, 2000 and received by the
taxpayer on June 15, 2000. The taxpayer Q: In the examination conducted by the
protested the assessment on July 31, 2000. revenue officials against the corporate
The protest was initially given due course but taxpayer in 2010, the BIR issued a final
was eventually denied by the Commissioner of assessment notice and demand letter which
Internal Revenue in a decision dated June 15, states: “It is requested that the above
2005. The taxpayer then filed a petition for deficiency tax be paid immediately upon
review with the Court of Tax Appeals (CTA), receipt hereof, inclusive of penalties incident
but the CTA dismissed the same. to delinquency. This is our final decision
based on investigation. If you disagree, you
Is the CTA correct in dismissing the petition may appeal this final decision within 30 days
for review? Explain your answer. xxx (2009 from receipt hereof, otherwise said deficiency
BAR) tax assessment shall become final, executory
and demandable.” The assessment was
A: YES. The protest was filed out of time, hence immediately appealed by the taxpayer to the
the CTA does not acquire jurisdiction over the Court of Tax Appeals, without filing its protest
matter. (CIR v. Atlas Mining and Development against the assessment and without a denial
Corp., 2000) thereof by the BIR. If you were the judge,
would you deny the petition for review filed
Q: by the taxpayer and consider the case as
(a) A taxpayer received, on 15 January 1996, prematurely filed? Explain you answer. (2012
an assessment for an internal revenue BAR)
tax deficiency. On 10 February 1996, the
taxpayer forthwith filed a petition for A: NO, the Petition for Review should not be
review with the Court of Tax Appeals. denied. The case is an exception to the rule on
Could the Tax Court entertain the exhaustion of administrative remedies. The BIR is
petition? estopped from claiming that the filing of the
Petition for Review is premature because the
A: NO. Before taxpayer can avail of judicial taxpayer failed to exhaust all administrative
remedy, he must first exhaust administrative remedies. The statement of the BIR in its Final
remedies by filing a protest within 30 days from Assessment Notice and Demand Letter led the
receipt of the assessment. It is the taxpayer to conclude that only a final judicial
Commissioner's decision on the protest that give ruling in his favor would be accepted by the BIR.
the Tax Court jurisdiction over the case provided The taxpayer cannot be blamed for not filing a
that the appeal is filed within 30 days from protest against the Formal Letter of Demand with
receipt of the Commissioner’s decision. An Assessment Notices since the language used and
assessment by the BIR is not the Commissioner's the tenor of the demand letter indicate that it is
decision from which a petition for review may be the final decision of the respondent on the matter.
filed with the Court of Tax Appeals. Rather, it is The CIR should indicate, in a clear and
the action taken by the Commissioner in unequivocal language, whether his action on a
response to the taxpayer's protest on the disputed assessment constitutes his final
assessment that would constitute the appealable determination thereon in order for the taxpayer
decision. concerned to determine when his or her right to
appeal to the tax court accrues. Although there
(b) Under the above factual setting, the was no direct reference for the taxpayer to bring
taxpayer, instead of questioning the the matter directly to the CTA, it cannot be denied
assessment he received on 15 January that the word “appeal” under prevailing tax laws
1996, paid on 01 March 1996 the refers to the filing of a Petition for Review with
"deficiency tax" assessed. The taxpayer the CTA. (Allied Bank vs CIR, GR No 175097,
requested a refund from the February 5, 2010)
Commissioner by submitting a written
claim on 01 March 1997. It was denied. Q: On March 27, 2012, the Bureau of Internal
The taxpayer, on 15 March 1997, filed a Revenue (BIR) issued a notice of assessment
petition for review with the Court of against Blue Water Industries Inc. (BWI), a
Appeals. Could the petition still be domestic corporation, informing the latter of
entertained? (1997 BAR) its alleged deficiency corporate income tax for
the year 2009. On April 20, 2012, BWI filed a
A: NO, the petition for review cannot be letter protest before the BIR contesting said
entertained by the Court of Appeals, since assessment and demanding that the same be
decisions of the Commissioner on cases cancelled or set aside.
41

Taxation Law
However, on May 19, 2013, that is after more (b) Cases under administrative protest, after
than a year from the filing of the letter protest, issuance of the final assessment notice to
the BIR informed BWI that the latter’s letter the taxpayer, which are still pending;
protest was denied on the ground that the
assessment had already become final, A: These may be compromised, provided that it
executory and demandable. The BIR reasoned is premised upon doubtful validity of the
that its failure to decide the case within 180 assessment or financial incapacity to pay. (Ibid)
days from filing of the letter protest should
have prompted BWI to seek recourse before (c) Criminal tax fraud cases;
the CTA by filing a petition for review within
30 days after the expiration of the 180-day A: These may not be compromised, so that the
period as mandated by the provisions of the taxpayer may not profit from his fraud, thereby
last paragraph of Section 228 of the NIRC. discouraging its commission. (Ibid)
Accordingly, BWI’s failure to file a petition for
review before the CTA rendered the (d) Criminal violations already filed in court;
assessment final, executory and demandable.
A: These may not be compromised in order that
Is the contention of the BIR correct? Explain. the taxpayer will not profit from his criminal
(2014 BAR) acts. (Ibid)

A: NO, the contention of BIR is not correct. The (e) Cases where final reports of
right of BWI to consider the inaction of the reinvestigation or reconsideration have
Commissioner on the protest within 180 days as been issued resulting in the reduction of
an appealable decision is only optional and will the original assessment agreed to by the
not make the assessment final, executory and taxpayer when he signed the required
demandable. (Sec 228, NIRC; Lacsona Land Co., Inc. agreement form. (2005 BAR)
v. CIR, GR No. 171251, March 5, 2012)
A: Cases where final reports of reinvestigation or
COMPROMISE OF TAXES reconsideration have been issued resulting in the
(1989, 1996, 1998, 2000, 2002, 2005, 2009 reduction of the original assessment agreed to by
BAR) the taxpayer when he signed the required
agreement form, cannot be compromised. By
Authority, Grounds and Conditions to giving his conformity to the revised assessment,
Compromise taxes (1989, 1996, 2000, 2009 the taxpayer admits the validity of the
BAR) assessment and his capacity to pay the same.
(Sec. 2, RR No. 30-02)
Q: Under what conditions may the
Commissioner of Internal Revenue be ABATEMENT OF TAXES
authorized to compromise the payment of any (1989, 1996, 2000 BAR)
internal revenue tax? xxx (2000 BAR)
Authority and Conditions to abate taxes (1989,
A: The Commissioner of Internal Revenue may be 1996, 2000 BAR)
authorized to compromise the payment of any
internal revenue tax where: Q: Under what conditions may the
Commissioner of Internal Revenue be
1. A reasonable doubt as to the validity of the authorized to abate or cancel a tax liability
claim against the taxpayer exists; or (2000 BAR)
2. The financial position of the taxpayer
demonstrates a clear inability to pay the A: The Commissioner of Internal Revenue may
assessed tax. abate or cancel a tax liability when:

Tax cases which may be subject of compromise 1. The tax or any portion thereof appears to be
(1998, 2002, 2005 BAR) unjustly or excessively assessed; or
2. The administration and collection costs
Q: State and discuss briefly whether the involved do not justify the collection of the
following cases may be compromised or may amount due. (Sec. 204(B). NIRC)
not be compromised:
RECOVERY OF TAX ERROUNEOUSLY OR
(a) Delinquent accounts; ILLEGALY COLLECTED
(2002, 2005, 2017 BAR)
A: Delinquent accounts may be compromised if
either of the two conditions is present: (1) the Q: Wreck Corporation is a domestic
assessment is of doubtful validity, or (2) the corporation engaged in the business of
financial position of the taxpayer demonstrates a importing, refining and selling petroleum
clear inability to pay the tax. (Sec. 204(A), NIRC; products. During the period from September 1,
Sec. 2, RR No. 30-02) 2014 to December 31, 2014, Wreck
Corporation imported 225 million liters of Jet
42
QuAMTO (1987-2019)
A-1 aviation fuel and paid the excise taxes taxable year, ABC Corp. had excess tax credits
thereon. Seventy-five percent (75%) of the arising from its overwithholding of income
total volume of aviation fuel imported were payments. It opted to carry over the excess tax
actually sold to international carriers of credits to the following year. Subsequently,
Philippine and foreign registries for their use ABC Corp. changed its mind and applied for a
or consumption outside of the Philippines in refund of the excess tax credits.
the period from November 1, 2014 to
December 31, 2014. Wreck Corporation did Will the claim for refund prosper? (2013 BAR)
not pass on to the international carriers the
excise taxes it paid on the importation of A: NO. The claim for refund will not prosper.
petroleum products. While the law gives the taxpayer an option
whether to carry-over or claim as refund the
On June 25, 2015, Wreck Corporation filed an excess tax credits shown on its final adjustment
administrative claim for refund or issuance of return, once the option to carry over has been
tax credit certificate amounting to the excise made, such option shall be considered irrevocable
taxes it had paid on the importation of 225 for that taxable period and no application for cash
million liters of Jet A-1 aviation fuel. refund or issuance of a tax credit certificate shall
be allowed. (Sec. 76, NIRC; CIR v. PL Management
If you were the Commissioner of Internal International Phils, Inc., GR No. 160949, April 4,
Revenue, will you grant Wreck Corporation's 2011)
administrative claim for refund or issuance of
tax credit certificate? Explain your answer. Q: Vanderful, lnc.'s income tax return for
(2017 BAR) taxable year 2015 showed an overpayment
due to excess creditable withholding taxes in
A: YES, but only the excise tax which corresponds the amount of ₱ 750,000.00. The company
to the 75% of the total volume of aviation fuel opted to carry over the excess income tax
imported that were actually sold to the credits as tax credit against its quarterly
international carriers. Wreck Corporation, as the income tax liabilities for the next succeeding
statutory taxpayer who is directly liable to pay the years. For taxable year 2016, the company's
excise tax on its petroleum products, is entitled to income tax return showed an overpayment
a refund or credit of the excise taxes it paid for due to excess creditable withholding taxes in
petroleum products sold to international carriers, the amount of ₱ 1,100,000.00, which included
the latter having been granted exemption from the the carry-over from year 2015 in the amount
payment of said excise tax under Sec. 135(a) of the of ₱ 750,000.00 because its operations
NIRC. (CIR v. Pilipinas Shell Petroleum Corporation, resulted in a net loss; hence, there was no
G.R. No. 188497, 2014) application for any tax liability. This time, the
company opted and marked the box “To be
Conditions for the grant of a refund or credit refunded” in respect of the total amount of ₱
(2002, 2005 BAR) 1,100,000.00.

Q: State the conditions required by the Tax Vanderful, Inc. now files in the BIR a claim for
Code before the Commissioner of Internal refund of unutilized overpayments of ₱
Revenue could authorize the refund or credit 1,100,00.00.
of taxes erroneously or illegally received.
(2005 BAR) Is the claim meritorious? (2017 BAR)

A: The conditions are: A: NO, but only to the extent of the amount of P
750,000.00 which was carried over from year
1. A written claim for refund is filed by the 2015. Section 76 of the NIRC clearly states: Once
taxpayer with the Commissioner of Internal the option to carry-over and apply the excess
Revenue (NIRC); quarterly income tax against income tax due for
2. The claim for refund must be a categorical the taxable quarters of the succeeding taxable
demand for reimbursement (Bermejo v. years has been made, such option shall be
Collector of Internal Revenue, 87 Phil. 96, considered irrevocable for that taxable period and
1950); no application for cash refund or issuance of a tax
3. The claim for refund or tax credit must be credit certificate shall be allowed therefor. Section
filed with the Commissioner, or the suit or 76 expressly states that the option shall be
proceeding therefore must be commenced in considered irrevocable for that taxable period
court within 2 years from date of payment of referring to the period comprising the succeeding
the tax or penalty regardless of any taxable years. Section 76 further states that no
supervening cause. (NIRC) application for cash refund or issuance of a tax
credit certificate shall be allowed, referring to that
OPTION TO CARRY OVER EXCESS QUARTERLY taxable period comprising the succeeding taxable
INCOME TAX PAID (1992, 1994, 1997, 2008, years. (Asiaworld Properties Philippine Corporation
2012, 2013, 2017 BAR) v. CIR, G.R. No. 171766, 2010)

Q: In its final adjustment return for the 2010
43

Taxation Law
Period for filing claim for refund or credit xxx (2009 BAR)
(1992, 1994, 1997, 2008 BAR)
A: YES, withholding agents is not only an agent of
Q: DEF Corporation is a wholly owned the government but is also an agent of the
subsidiary of DEF, Inc., California, USA. taxpayer/income earner. Hence, ABCD is also an
Starting December 15, 2004. DEF Corporation agent of the beneficial owner of the dividends
paid annual royalties to DEF, Inc., for the use with respect to the actual payment of the tax to
of the latter's software, for which the former, the government, such authority may reasonably
as withholding agent of the government, be held to include the authority to file a claim for
withheld and remitted to the BIR the 15% refund and to bring an action for recovery of such
final tax based on the gross royalty payments. for refund and to bring an action for recovery of
The withholding tax return was filed and the such claim (CIR v. Procter & Gamble, 204 SCRA
tax remitted to the BIR on January 10 of the 377, 1991)
following year. On April 10, 2007, DEF
Corporation filed a written claim for tax credit
GOVERNMENT REMEDIES
with the BIR, arising from erroneously paid
income taxes covering the years 2004 and

2005. The following day, DEF Corporation NON-AVAILABILITY OF INJUNCTION TO
filed a petition for review with the Court of RESTRAIN COLLECTION OF TAX
Tax Appeals involving the tax credit claim for (1996, 1998, 2001 BAR)
2004 and 2005.
Q: May the courts enjoin the collection of
As a BIR lawyer handling the case, would you revenue taxes? Explain your answer. (2001
raise the defense of prescription in your BAR)
answer to the claim for tax credit? Explain. xxx
(2008 BAR) A: As a general rule, the courts have no authority
to enjoin the collection of revenue taxes. (Sec. 218,
A: YES. The claim for refund for the 2004 NIRC) However, the Court of Tax Appeals is
erroneously paid income tax was filed out of time empowered to enjoin the collection of taxes
because the claim was only filed after more than through administrative remedies when collection
two years had elapsed from the payment thereof. could jeopardize the interest of the government
(Sec. 204(C) & 229, NIRC) or taxpayer. (R.A. No. 1125)

WITHHOLDING AGENT AS A PROPER PARTY
TO FILE A CLAIM FOR REFUND OR CREDIT JUDICIAL REMEDIES

(1992, 1999, 2005, 2008, 2009 BAR)

JURISDICTION OF THE
Q: ABCD Corporation (ABCD) is a domestic COURT OF TAX APPEALS
corporation with individual and corporate (1989, 1997, 1998, 2004, 2006, 2014, 2015,
shareholders who are residents of the United 2016, 2017, 2018 BAR)
States. For the 2nd quarter of 1983, these U.S.-
based individual and corporate stockholders Q: State At least five (5) cases under the
received cash dividends from the corporation. exclusive appellate jurisdiction of the Court of
The corresponding withholding tax on Tax Appeals (CTA) (2016 BAR)
dividend income — 30% for individual and
35% for corporate non- resident stockholders A: Exclusive original or appellate jurisdiction to
— was deducted at source and remitted to the review by appeal the following:
BIR.
1. Decisions of the Commissioner of Internal
On May 15, 1984, ABCD filed with the Revenue in cases involving disputed
Commissioner of Internal Revenue a formal assessments, refunds of internal revenue
claim for refund, alleging that under the RP- taxes, fees or other charges, penalties in
US Tax Treaty, the deduction withheld at relation thereto, or other matters arising
source as tax on dividends earned was fixed at under the National Internal Revenue Code or
25% of said income. Thus, ABCD asserted that other laws administered by the Bureau of
it overpaid the withholding tax due on the Internal Revenue;
cash dividends given to its non-resident
stockholders in the U.S. the Commissioner 2. Inaction by the Commissioner of Internal
denied the claim. Revenue in cases involving disputed
assessments, refunds of internal revenue
On January 17, 1985, ABCD filed a petition taxes, fees or other charges, penalties in
with the Court of Tax Appeals (CTA) relation thereto, or other matters arising
reiterating its demand for refund. under the National Internal Revenue Code or
other laws administered by the Bureau of
(a) Does ABCD Corporation have the legal Internal Revenue where the National
personality to file the refund on behalf of its Internal Revenue Code or other applicable
non-resident stockholders? Why or why not? law provides a specific period for action:
44
QuAMTO (1987-2019)
Provided, that in case of disputed a. Cases arising from administrative

assessments, the inaction of the agencies – Bureau of Internal Revenue,
Commissioner of Internal Revenue within Bureau of Customs, Department of
the one hundred eighty day-period under Finance, Department of Trade and
Section 228 of the National Internal Revenue Industry, Department of Agriculture;
Code shall be deemed a denial for purposes
of allowing the taxpayer to appeal his case to b. Local tax cases decided by the Regional
the Court and does not necessarily Trial Courts in the exercise of their
constitute a formal decision of the original jurisdiction; and
Commissioner of Internal Revenue on the
tax case; Provided, further, that should the c. Tax collection cases decided by the
taxpayer opt to await the final decision of Regional Trial Court in the exercise of
the Commissioner of Internal Revenue on their original jurisdiction involving
the disputed assessments beyond the one final and executory assessments for
hundred eighty (180)-day period taxes, fees, charges and penalties,
abovementioned, the taxpayer may appeal where the principal amount of taxes
such final decision to the Court under and penalties claimed is less than one
Section 3(a), Rule 8 of these Rules; and million pesos;
Provided, still further, that in the case of
claims for refund of taxes erroneously or 2. Decisions, resolutions or orders of the
illegally collected, the taxpayer must file a Regional Trial Courts in local tax cases
petition for review with the Court prior to decided or resolved by them in the exercise
the expiration of the two-year period under of their appellate jurisdiction;
Section 229 of the National Internal Revenue
Code. 3. Decisions, resolutions or orders of the
Regional Trial Courts in tax collection cases
3. Decisions, resolutions or orders of the decided or resolved by them in the exercise
Regional Trial Courts in local tax cases of their appellate jurisdiction;
decided or resolved by them in the exercise
of their original jurisdiction; 4. Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
4. Decisions of the Commissioner of Customs in in division in the exercise of its exclusive
cases involving liability for customs duties, original jurisdiction over tax collection
fees or other money charges, seizure, cases;
detention or release of property affected,
fines, forfeitures or other penalties in 5. Decisions of the Central Board of
relation thereto or other matters arising Assessment Appeals (CBAA) in the exercise
under the Customs Law or other laws of its appellate jurisdiction over cases
administered by the Bureau of Customs; involving the assessment and taxation of
5. Decisions of the Secretary of Finance on real property originally decided by the
customs cases elevated to him automatically provincial or city board of assessment
for review from decisions of the appeals;
Commissioner of Customs adverse to the
Government under Sec. 2325 of the Tariff 6. Decisions, resolutions or orders on motions
and Customs Code; and for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
6. Decisions of the Secretary of Trade and original jurisdiction over cases involving
Industry, in the case of nonagricultural criminal offenses arising from violations of
product, commodity or article, and the the National Internal Revenue Code or the
Secretary of Agriculture, in the case of Tariff and Customs Code and other laws
agricultural product, commodity or article, administered by the Bureau of Internal
involving dumping and countervailing duties Revenue or Bureau of Customs;
under Secs. 301 and 302, respectively, of the
Tariff and Customs Code, and safeguard 7. Decisions, resolutions or orders on motion
measures under R.A. No. 8800, where either for reconsideration or new trial of the Court
party may appeal the decision to impose or in Division in the exercise of its exclusive
not to impose said duties.” (Rule 4, Sec. 3(a), appellate jurisdiction over criminal offenses
RRCTA) mentioned in the preceding subparagraph;
and
The Court en banc shall exercise exclusive
appellate jurisdiction to review by appeal the 8. Decisions, resolutions or orders of the
following: Regional Trial Courts in the exercise of their
appellate jurisdiction over criminal offenses
1. Decisions or resolutions on motion for mentioned in subparagraph (f).” (Rule 4, Sec.
reconsideration or new trial of the Court in 2, RRCTA)
Divisions in the exercise of its exclusive
appellate jurisdiction over: Q: On May 15, 2013, CCC, Inc. received the Final
45

Taxation Law
Decision on Disputed Assessment issued by NIRC or other laws administered by the BIR.
the Commissioner of Internal Revenue (CIR) Furthermore, the Supreme Court held that the
dismissing the protest of CCC, Inc. and jurisdiction to review the rulings of the Secretary
affirming the assessment against said of Finance on the issues raised against a ruling of
corporation. On June 10, 2013, CCC, Inc. filed a the Commissioner of Internal Revenue, pertains
Petition for Review with the Court of Tax to the Court of Tax Appeals in the exercise of its
Appeals (CTA) in division. On July 31, 2015, appellate jurisdiction. (Philamlife v. The Sec. of
CCC, Inc. received a copy of the Decision dated Finance and CIR, G.R. No. 210987, November 24,
July 22, 2015 of the CT A division dismissing its 2014)
Petition. CCC, Inc. immediately filed a Petition
for Review with the CT A en banc on August 6, Q: Mr. Abraham Eugenio, a pawnshop
2015. Is the immediate appeal by CCC, Inc. to operator, after having been required by the
the CTA en banc of the adverse Decision of the Revenue District Officer to pay value-added
CTA division the proper remedy? (2015 BAR) tax pursuant to a Revenue Memorandum
Order (RMO) of the Commissioner of Internal
A: NO. CCC, Inc. should first file a motion for Revenue, filed with the Regional Trial Court an
reconsideration or motion for new trial with the action questioning the validity of the RMO.
CTA Division. Before the CTA en banc could take
cognizance of the petition for review concerning a If you were the judge, will you dismiss the
case falling under its exclusive appellate case? (2006 BAR)
jurisdiction, the litigant must sufficiently show
that it sought prior reconsideration or moved for A: YES. A RMO is in reality a ruling, or an opinion
a new trial with the concerned CTA Division. issued by the Commissioner in implementing the
(Commissioner of Customs v. Marina Sale, G.R. No. provisions of the Tax Code dealing with the
183868, November 22, 2010, 635 SCRA 606; Rule 8, taxability of pawnshops. The power to review
Sec. 1 of the Revised Rules of Court of Tax Appeals) rulings issued by the Commissioner is lodged
with the Court of Tax Appeals (CTA) and not with
Q: GGG, Inc. offered to sell through competitive the Regional Trial Court. A ruling falls within the
bidding its shares in HHH Corp., equivalent to purview of “other matters arising under the Tax
40% of the total outstanding capital stock of Code,’’ appealable only to the CTA. (CIR v. Leal,
the latter. JJJ, Inc. acquired the said shares in 392 SCRA 9, 2002)
HHH Corp. as the highest bidder. Before it
could secure a certificate authorizing Q: Krisp Kleen, Inc. (KKI) is a corporation
registration/tax clearance for the transfer of engaged in the manufacturing and processing
the shares of stock to JJJ, Inc., GGG, Inc. had to of steel and its by-products. It is both
request a ruling from the BIR confirming that registered with the Board of Investments with
its sale of the said shares was at fair market a pioneer status, and with the BIR as a VAT
value and was thus not subject to donor's tax. entity. On October 10, 2010, it filed a claim for
In BIR Ruling No. 012-14, the CIR held that the refund/credit of input VAT for the period
selling price for the shares of stock of HHH January 1 to March 31, 2009 before the
Corp. was lower than their book value, so the Commissioner of Internal Revenue (CIR). On
difference between the selling price and the February 1, 2011, as the CIR had not yet made
book value of said shares was a taxable any ruling on its claim for refund/credit, KKI,
donation. GGG, Inc. requested the Secretary of fearful that its period to appeal to the courts
Finance to review BIR Ruling No. 012-14, but might prescribe, filed an appeal with the Court
the Secretary affirmed said ruling. GGG, Inc. of Tax Appeals (CTA).
filed with the Court of Appeals a Petition for
Review under Rule 43 of the Revised Rules of (a) Can the CTA act on KKl's appeal?
Court. The Court of Appeals, however,
dismissed the Petition for lack of jurisdiction A: NO. Pursuant to the pronouncement made the
declaring that it is the CTA which has Supreme Court in the case of Commissioner of
jurisdiction over the issues raised. Before Internal Revenue v. Aichi Forging Company of
which Court should GGG, Inc. seek recourse Asia, Inc. (G.R. No. 184823, February 12, 2013),
from the adverse ruling of the Secretary of the observance of the “120+30-day” period is
Finance in the exercise of the latter's power of jurisdictional. Now, counting 120 days from
review? (2014 BAR) October 10, 2010, the last day for the CIR to act
on the claim for refund/credit fell on February 7,
A: GGG, Inc. should seek recourse with the Court 2011, thus musing the February 1, 2011 filing
of Tax Appeals (CTA) which has jurisdiction. premature.

There is no provision in law that expressly NOTE: Under Sec. 34 of R.A. No. 10963 (TRAIN
provides where exactly the adverse ruling the Law), the VAT threshold was amended to three
Secretary of Finance under Sec. 4 of the NIRC is million pesos (P 3,000,000).
appealable. However, R.A. No. 1125, as amended,
addresses the seeming gap in the law as it vests (b) Will your answer be the same if KKI filed
upon the CTA, albeit impliedly, with jurisdiction its appeal on March 20, 2011 and CIR had
over the case as “other matters” arising under the not yet acted on its claim? (2018 BAR)
46
QuAMTO (1987-2019)
A: YES. The filing of March 20, 2011 is still not for the proper determination of the necessity of a
compliant with the “120+30-day” rule. As surety bond or the reduction thereof. In the
mentioned, the CIR has until February 7. 2011 to conduct of its preliminary hearing, the CTA must
decide on the claim for refund/credit of input balance the scale between the inherent power of
VAT. After the lapse of the 120-day period, the the State to tax and its right to prosecute
taxpayer-claimant has 30 days to file an appeal perceived transgressors of the law, on one side,
before the CTA. In the present ease. KKI had until and the constitutional rights of petitioners to due
March 9, 2011 to file the appeal based on a process of law and the equal protection of the
deemed adverse decision on the claim fer laws, on the other. In this case, the CTA failed to
refund/credit; hence, the filing on March 26, 2011 consider that the amount of the surety bond that
was belatedly done, and the CTA has no it is asking Globesmart Services, Inc. to pay is
jurisdiction over such claim for refund/credit. more than its net worth. It is, thus, necessary for
the CTA to first conduct a preliminary hearing to
NOTE: Under R.A. No. 10963 (TRAIN Law), the give the taxpayer an opportunity to prove its
CIR is given a 90-day period to decide. inability to come up with such amount.

Q: Globesmart Services, Inc. received a final CRIMINAL ACTIONS
assessment notice with formal letter of (1998, 2005, 2015 BAR)
demand from the BIR for deficiency income
tax, value-added tax and withholding tax for Q: After filing an Information for violation of
the taxable year 2016 amounting to P48 Section 254 of the National Internal Revenue
million. Globesmart Services, Inc. filed a Code (Attempt to Evade or Defeat Tax) with
protest against the assessment, but the the CTA, the Public Prosecutor manifested that
Commissioner of Internal Revenue denied the the People is reserving the right to file the
protest. Hence, Globesmart Services, Inc. filed corresponding civil action for the recovery of
a petition for review in the CTA with an urgent the civil liability for taxes. As counsel for the
motion to suspend the collection of tax. accused, comment on the People's
manifestation. (2015 BAR)
After hearing, the CTA Division issued a
resolution granting the motion to suspend but A: The manifestation is not proper. The criminal
required Globesmart Services, Inc. to post a action and the corresponding civil action for the
surety bond equivalent to the deficiency recovery of the civil liability for taxes and
assessment within 15 days from notice of the penalties shall at all times be simultaneously
resolution. Globesmart Services, Inc. moved instituted with, and jointly determined in the
for the partial reconsideration of the same proceeding before the Court of Tax Appeals
resolution and for the reduction of the bond to (CTA). The filing of the criminal action is deemed
an amount it could obtain. The CTA Division to necessarily carry with it the filing of the civil
issued another resolution reducing the action, and no right to reserve the filing of such
amount of the surety bond to P24 million. The civil action separately from the criminal action
latter amount was still more than the net shall be recognized. (Sec. 7(b)(1) of R.A. No. 9282;
worth of Globesmart Services, Inc. as reported Judy Ann Santos v. People, G.R. No. 173176, August
in its audited financial statements. 26, 2008, 563 SCRA 341)

(a) May the collection of taxes be suspended? Necessity of an assessment in criminal
Explain your answer. prosecution (1998, 2005 BAR)

A: YES. As provided by R.A. No. 1125, as Q: In 1995, the BIR filed before the
amended by R.A. No. 9282, that when in the Department of Justice (DOJ) a criminal
opinion of the Court the collection by the complaint against a corporation and its
aforementioned government agencies may officers for alleged evasion of taxes. The
jeopardize the interest of the Government and/or complaint was supported by a sworn
the taxpayer, the Court at any stage of the statement of the BIR examiners showing the
proceeding may suspend the collection and computation of the tax liabilities of the erring
require the taxpayer either to deposit the amount taxpayer. The corporation filed a motion to
claimed or to file a surety bond for not more than dismiss the criminal complaint on the ground
double the amount with the Court. that there has been, as yet no assessment of its
tax liability; hence, the criminal complaint was
(b) Is the CTA Division justified in requiring premature. The DOJ denied the motion on the
Globesmart Services, Inc. to post a surety ground that an assessment of the tax
bond as a condition for the suspension of deficiency of the corporation is not a
the deficiency tax collection? Explain your precondition to the filing of a criminal
answer. (2017 BAR) complaint and that in any event, the joint
affidavit of the BIR examiners may be
A: NO. The Supreme Court in the Tridharma Case considered as an assessment of the tax
cited the case of Pacquiao v. Court of Tax Appeals liability of the corporation.
(G.R. No. 213394, 2016) where it ruled that the
CTA should first conduct a preliminary hearing Is the ruling of the DOJ correct? Explain. (2005
47

Taxation Law
BAR) A: NO. Congress cannot abolish what is expressly

granted by the fundamental law. The only
A: YES. The ruling of the DOJ in denying the authority conferred to Congress is to provide the
motion is correct. The issuance of the deficiency guidelines and limitations on the local
assessment notice prior to prosecution is not government’s exercise of the power to tax. (Sec. 5,
necessary because the facts of the case show that Art X, 1987 Constitution)
the crime of evasion is complete since the violator
has knowingly and willfully filed a fraudulent Q: KM Corporation, doing business in the City
return with intent to evade/defeat a part or all of of Kalookan, has been a distributor and
the tax. (Ungab v. Cusi, Jr., 97 SCRA 877, 1980) retailer of clothing and household materials. It
What is involved here is not the collection of taxes has been paying the City of Kalookan local
but a criminal prosecution for violation of the taxes based on Sections 15 (Tax on
NIRC. Wholesalers, Distributors or Dealers) and 17
(Tax on Retailers) of the Revenue Code of
However, the contention that the joint affidavit of Kalookan City (Code). Subsequently, the
the BIR examiners showing the computation of Sangguniang Panlungsod enacted an
tax liabilities maybe considered an assessment is ordinance amending the Code by inserting
erroneous. It is not an assessment which may Section 21 which imposes a tax on "Businesses
entitle the taxpayer to protest. (CIR v. Pascor Subject to Excise, Value-Added and Percentage
Realty 81 Development Corp., 309 SCRA 402, 1999) Taxes under the National Internal Revenue
An assessment is a formal notice to the taxpayer Code (NIRC)," at the rate of 50% of 1 % per
stating that the amount thereon is due as a tax annum on the gross sales and receipts on
and containing a demand for the payment thereof. persons "who sell goods and services in the
(Alhambra Cigar & Cigarette Mfg. Co. v. Collector, course of trade or business." KM Corporation
105 Phil. 1337, 1959) paid the taxes due under Section 21 under
protest, claiming that (a) local government

units could not impose a tax on businesses
LOCAL GOVERNMENT CODE OF 1991
already taxed under the NIRC and (b) this
would amount to double taxation, since its
NATURE AND SOURCE OF business was already taxed under Sections 15
TAXING POWER and 17 of the Code.
(1987, 1998, 2001, 2003, 2007, 2018 BAR)
May local government units impose a tax on
Grant of Local Taxing power under the Local businesses already subjected to tax under the
Government Code (1987, 1998, 2001, 2003, NIRC? xxx (2018 BAR)
2007, 2018 BAR)
A: YES. Sec. 143 in relation to Section 151 of the
Q: What is the nature of the taxing power of Local Government Code (LGC) provides for the
the provinces, municipalities and cities? How power of cities to impose a local business tax, and
will the local government units be able to one of those which may be subjected to such tax
exercise their taxing powers? (2007 BAR) are those businesses that are subject to “excise
tax, value-added tax or percentage tax” under the
A: The taxing power of the provinces, NIRC, other than those specifically enumerated by
municipalities and cities is directly conferred by the same provision. The tax to be imposed by the
the Constitution by giving them the authority to city shall not exceed 2% of gross sales or gross
create their own sources of revenue. The local receipts of the preceding calendar year. (Sec.
government units do not exercise the power to 143(h), in relation to Sec. 151, LGC)
tax as an inherent power or by a valid delegation
of the power by Congress, but pursuant to a direct CHALLENGING LOCAL TAX ORDINANCES
authority conferred by the Constitution. (Mactan (1991, 2003, 2015 BAR)
Cebu International Airport Authority v. Marcos,
261 SCRA 667, 1996; NPC v. City of Cabanatuan, Q: What is the proper procedural remedy and
401 SCRA 259, 2003) applicable time periods for challenging a tax
ordinance? (2015 BAR)
The local government units exercise the power to
tax by levying taxes, fees and charges consistent A: Any question on the constitutionality or
with the basic policy of local autonomy, and to legality of tax ordinances may be raised on appeal
assess and collect all these taxes, fees and charges within 30 days from the effectivity to the
which will exclusively accrue to them. The local Secretary of Justice. The Secretary of Justice shall
government units are authorized to pass tax render a decision within 60 days from the date of
ordinances (levy) and to pursue actions for the receipt of the appeal. Thereafter, within 30 days
assessment and collection of the taxes imposed in after receipt of the decision or the lapse of the
said ordinances. (Secs. 129 & 132, LGC) sixty-day period without the Secretary of Justice
acting upon the appeal, the aggrieved party may
Q: May Congress, under the 1987 Constitution, file the appropriate proceedings with the
abolish the power to tax of local governments? Regional Trial Court. (Sec. 187, LGC)
(2003 BAR)
48
QuAMTO (1987-2019)
TAXING POWER OF PROVINCES several places. The professional tax paid as a

(1991, 2016 BAR) lawyer in Pasig City, a place where he practices
his profession, will entitle him to practice his
Tax on transfer of real property ownership profession in any part of the Philippines without
(1991, 2016 BAR) being subjected to any other national or local tax,
license, or fee for the practice of such profession.
Q: The City of Maharlika passed an ordinance (Sec. 139 in relation to Sec. 151, LGC)
imposing a tax on any sale or transfer of real
property located within the city at a rate of (b) May Quezon City, where he has his
fifty percent (50%) of one percent (1%) of the residence and where he also practices his
total consideration of the transaction. Jose two professions, go after him for the
sold a parcel of land in the city, which he payment of his professional tax as a CPA
inherited from his deceased parents, and and a lawyer? Explain. (2005 BAR)
refused to pay the aforesaid tax. He instead
filed a case asking that the ordinance be A: NO. The professional tax shall be paid only
declared null and void since the tax it imposed once for every taxable year and the payment
can only be collected by the national shall be made either in the city where he
government, as in fact he has paid the Bureau practices his profession or where he maintains
of Internal Revenue (BIR) the required capital his principal office. The city of residence cannot
gains tax. If you were the City Legal Officer of require him to pay his professional taxes. (Sec.
Maharlika, what defenses would you raise to 139 in relation to Sec. 151, LGC)
sustain the validity of the ordinance? (2016
BAR) TAXING POWERS OF MUNICIPALITIES
(2008, 2009 BAR)
A: The defenses I would raise are the following:
Fees and charges for regulation and licensing
1. Cities like the City of Maharlika have the (2008, 2009 BAR)
power to pass an ordinance imposing a tax
on the sale, donation, barter, or on any other Q: The Sangguniang Bayan of the Municipality
mode of transferring ownership of title to of Sampaloc, Quezon, passed an ordinance
real property located within its territorial imposing a storage fee of ten centavos (P 0.10)
boundaries; (Sec. 135, in relation to Secs. 142 for every 100 kilos of copra deposited in any
& 151, LGC) bodega within the Municipality’s jurisdiction.
2. The required capital gains tax collected by
the national government is different from The Metropolitan Manufacturing Corporation
the tax that is imposable by the local (MMC), with principal office in Makati, is
government units such as the City of engaged in the manufacture of soap, edible oil,
Maharlika; margarine, and other coconut oil-based
3. The transfer tax imposed and collected by products. It has a warehouse in Sampaloc,
cities are not among those included in the Quezon, used as storage space for the copra
common limitations on the power of purchased in Sampaloc and nearby towns
taxation which are reserved solely for the before the same is shipped to Makati. MMC
exercise by the national government; goes to court to challenge the validity of the
4. There is no direct duplicate taxation because ordinance, demanding the refund of the
there are two different taxing authorities, storage fees it paid under protest.
the national government and a local
government unit. (Domondon) Is the ordinance valid? Explain your answer.
(2009 BAR)
PROFESSIONAL TAX
(1991, 2005 BAR) A: YES. The municipality is authorized to impose
reasonable fees and charges as a regulatory
Q: Mr. Fermin, a resident of Quezon City, is a measure in an amount commensurate with the
Certified Public Accountant-Lawyer engaged cost of regulation, inspection and licensing. (Sec.
in the Practice of his two professions. He has 147, LGC) In the case at bar, the storage of copra
his main office in Makati City and maintains a in any warehouse within the municipality can be
branch office in Pasig City. Mr. Fermin pays his the proper subject of regulation pursuant to the
professional tax as a CPA in Makati City and police power granted to municipalities under the
his professional tax as a lawyer in Pasig City. Revised Administrative Code or the “general
welfare clause.” A warehouse used for keeping or
(a) May Makati City, where he has his main storing copra is an establishment likely to
office, require him to pay his professional endanger the public safety or likely to give rise to
tax as a lawyer? Explain. conflagration because the oil content of the copra,
when ignited, is difficult to put under control by
A: NO. Mr. Fermin is given the option to pay water and the use of chemicals is necessary to put
either in the city where he practices his out the fire. It is, thus, reasonable that the
profession or where he maintains his principal Municipality impose storage fees for its own
office in case he practices his profession in surveillance and lookout. (Procter & Gamble
49

Taxation Law
Philippine Manufacturing Corporation v. establishments, while the rest of the property,

Municipality of Jagna, Province of Bohol, 94 SCRA in particular the northwestern side, is idle or
894, 1979) unoccupied.

COMMON LIMITATIONS ON THE TAXING May the Church claim tax exemption on the
POWERS OF LGU’S entire land? Decide with reasons. (2005 BAR)
(1987, 2015, 2019 BAR)
A: NO. The portions of the land occupied and used
Q: In 2018, City X amended its Revenue Code by the church, convent and school run by the
to include a new provision imposing a tax on church are exempt from real property taxes while
every sale of merchandise by a wholesaler the portion of the land occupied by commercial
based on the total selling price of the goods, establishments and the portion, which is idle, are
inclusive of value-added taxes (VAT). ABC subject to real property taxes. The “usage” of the
Corp., a wholesaler operating within City X, property and not the “ownership" is the
challenged the new provision based on the determining factor whether or not the property is
following contentions: xxx 2. since the tax taxable. (Lung Center of the Philippines v. Q.C., 433
being imposed is akin to VAT, it is beyond the SCRA 119, 2004)
power of City X to levy the same
Q: In 2015, Kerwin bought a three-story house
Rule on each of ABC Corp.'s contentions. (2019 and lot in Kidapawan, North Cotabato. The
BAR) property has a floor area of 600 sq.m. and is
located inside a gated subdivision. Kerwin
A: ABC’s second contention is meritorious. One of initially declared the property as residential
the common limitations of the local government for real property tax purposes.
unit’s (such as City X) taxing power under Sec.
133 of the LGC is that it may not levy VAT on In 2016, Kerwin started using the property in
sales, barters or exchanges on goods or services. his business of manufacturing garments for
Hence, ABC Corp. is correct in saying that the local export. The entire ground floor is now
tax, which is imposed on every sale transaction, is occupied by state-of-the-art sewing machines
akin to VAT; and necessarily, it may not be and other equipment, while the second floor is
imposed by City X. used as offices. The third floor is retained by
Kerwin as his family's residence. Kerwin's
Levy upon goods carried into, leaving or neighbors became suspicious of the activities
passing through and LGU’s territorial going on inside the house, and they decided to
boundaries (1987, 2015 BAR) report it to the Kidapawan City Hall. Upon
inspection, the local government discovered
Q: In 2014, M City approved an ordinance that the property was being utilized for
levying customs duties and fees on goods commercial use. Immediately, the Kidapawan
coming into the territorial jurisdiction of the Assessor reclassified the property as
city. Said city ordinance was duly published on commercial with an assessment level of 50%
February 15, 2014 with effectivity date on effective January 2017, and assessed Kerwin
March 1, 2014. back taxes and interest. Kerwin claims that
only 2/3 of the building was used for
Is there a ground for opposing said ordinance? commercial purposes since the third floor
(2015 BAR) remained as family residence. He argues that
the property should have been classified as
A: YES, on the ground that the ordinance is ultra partly commercial and partly residential.
vires. The taxing powers of local government
units such as M City, cannot extend to the levy of (a) Is the Kidapawan assessor correct in
taxes, fees and charges already imposed by the assessing back taxes and interest?
national government, and this includes, among
others, the levy of customs duties under the Tariff A: NO. The assessor cannot assess back taxes and
and Customs Code. (Sec. 133(e), LGC) interest. Since this involves a reassessment of
real property due to a major change in its actual

use, the same cannot be given a retroactive effect.
REAL PROPERTY TAXATION
The reassessment shall only be effective at the
beginning of the quarter next following the
ACTUAL USE PRINCIPLE reassessment. (Sec. 221, LGC)
(1988, 1990, 2000, 2001, 2003,
2005, 2009, 2018 BAR) (b) Is Kerwin correct that only 2/3 of the
property should be considered
Q: The Roman Catholic Church owns a 2- commercial? xxx (2018 BAR)
hectare lot in a town in Tarlac province. The
southern side and middle part are occupied by A: YES. The property must be classified, valued
the Church and a convent, the eastern side by and assessed on the basis of its actual use
a school run by the Church itself, the regardless of where located, whoever owns it,
southeastern side by some commercial and whoever uses it. (Sec. 217, LGC)
50
QuAMTO (1987-2019)
ALTERNATIVE ANSWER: respect of the power barges, shall be for the

account of RPC.
NO. One of the fundamental principles in the
appraisal, assessment, levy and collection of real In 2007, JEC received an assessment of real
property tax under Section 198 of the LGC is that property taxes on the power barges from the
the real property shall be classified for assessment Assessor of Batangas City. JEC sought
purposes on the basis of its actual use. Section 199 reconsideration of the assessment on the
of the LGC defines “actual use” as referring to the ground that the power barges are exempt
purpose for which the property is principally or from real estate taxes under Section 234 (c) of
predominantly utilized by the person in R.A. No. 7160 as they are actually, directly and
possession thereof. Hence, considering that, as exclusively used by RPC, a government- owned
admitted by Kerwin, 2/3 of the property ‘s used and controlled corporation. Furthermore,
for commercial purposes, the entire property even assuming that the power barges are
must be classified as “commercial” for real subject to real property tax, RPC should be
property tax purposes. held liable therefore, in accordance with the
terms of the lease agreement. Is the
Real Properties for Purposes of Taxation contention of JEC correct? Explain your
(2001, 2003, 2009 BAR) answer. (2009 BAR)

Q: Under Article 415 of the Civil Code, in order A: The contention of JEC is not correct. The owner
for machinery and equipment to be of the power barges is JEC which is required to
considered real property, the pieces must be operate, manage and maintain the power barges
placed by the owner of the land and, in for the purpose the claim that RPC, a government-
addition, must tend to directly meet the needs owned and controlled corporation engaged in the
of the industry or works carried on by the supply, generation and transmission of electric
owner. Oil companies install underground power, is the actual, direct and exclusive user of
tanks in the gasoline stations located on land the barge, hence, does not fall within the purview
leased by the oil companies from the owners of the exempting provision of Section 234(c) of
of the land where the gasoline stations (are) R.A. No. 7160. Likewise, the argument that RPC
located. Are those underground tanks, which should be liable to the real property taxes
were not placed there by the owner of the land consonant with the contract is devoid of merit.
but which were instead placed there by the The liability for the payment of the real estate
lessee of the land, considered real property taxes is determined by law and not by the
for purposes of real property taxation under agreement of the parties. (FELS Energy Inc. v. The
the local Government Code? Explain. (2003 Province of Batangas, 516 SCRA 186, 2007)
BAR)
EXEMPTION FROM
A: YES. The properties are considered as REAL PROPERTY TAX
necessary fixtures of the gasoline station, without (1987, 1988, 1990, 1996, 2000, 2002, 2005,
which the gasoline station would be useless. 2006, 2009, 2015, 2016, 2017, 2018, 2019
Machinery and equipment installed by the lessee BAR)
of leased land is not real property for purposes of
execution of a final judgment only. They are Constitutional Exemptions (1987, 1988, 1990,
considered as real property for real property tax 1996, 2000, 2005, 2006, 2017, 2018 BAR)
purposes as “other improvements to affixed or
attached real property under the Assessment Law Q: The Constitution exempts from taxation
and the Real Property Tax Code. (Caltex v. Central charitable institutions, churches, parsonages
Board of Assessment Appeals, 114 SCRA 296, 1982) or convents appurtenant thereto, mosques
and non-profit cemeteries and lands,
Q: Republic Power Corporation (RPC) is a buildings and improvements actually, directly
government – owned and controlled and exclusively used for religious, charitable
corporation engaged in the supply, generation and educational purposes.
and transmission of electric power. In 2005, in
order to provide electricity to Southern Mercy Hospital is a 100-bed hospital
Tagalog provinces, RPC entered into an organized for charity patients. Can said
agreement with Jethro Energy Corporation hospital claim exemption from taxation under
(JEC), for the lease of JEC’s power barges which the above-quoted constitutional provision?
shall be berthed at the port of Batangas City. Explain. (1996 BAR)
The contract provides that JEC shall own the
power barges and the fixtures, fittings, A: Yes. Mercy Hospital can claim exemption from
machinery, and equipment therein, all of taxation under the provision of the Constitution,
which JEC shall supply at its own cost, and that but only with respect to real property taxes
JEC shall operate, manage and maintain the provided that such real properties are used
power barges for the purpose of converting actually, directly and exclusively for charitable
the fuel of RPC into electricity. The contract purposes.
also stipulates that all real estate taxes and
assessments, rates and other charges, in Q: Kilusang Krus, Inc. (KKI) is a non-stock,
51

Taxation Law
non-profit religious organization which owns that the assets of a non-stock, non-profit
a vast tract of land in Kalinga. educational institution shall be exempt from taxes
and duties only if the same are used actually,
KKI has devoted 1 /2 of the land for various directly, and exclusively for educational purposes.
uses: a church with a cemetery exclusive for The test of exemption from taxation is the use of
deceased priests and nuns, a school providing the property for purposes mentioned in the
K to 12 education, and a hospital which admits Constitution. The leased portion of the building
both paying and charity patients. The may be subject to real property tax since such
remaining 1/2 portion has remained idle. lease is for commercial purposes, thereby, it
removes the asset from the property tax
The KKI Board of Trustees decided to lease exemption granted under the Constitution. (CIR v.
the remaining 1 /2 portion to a real estate De La Salle University, Inc., G.R. Nos. 196596,
developer which constructed a community 198841, 198941, 2016)
mall over the property.
Exemptions under the LGC (1987, 1990, 2002,
Since the rental income from the lease of the 2006, 2009, 2015, 2016, 2019 BAR)
property was substantial, the KKI decided to
use the amount to finance (1) the medical Q: Philippine National Railways (PNR)
expenses of the charity patients in the KKI operates the rail transport of passengers and
Hospital and (2) the purchase of books and goods by providing train stations and freight
other educational materials for the students of customer facilities from Tutuban, Manila to
KKI School. the Bicol Province. As the operator of the
railroad transit, PNR administers the land,
Is KKI liable for real property taxes on the improvements and equipment within its main
land? xxx (2018 BAR) station in Tutuban, Manila.

A: YES, but only on the leased portion. Article VI, Invoking Section 193 of the Local Government
Section 28(3) of the 1987 Constitution provides Code (LGC) expressly withdrawing the tax
that “charitable institutions, churches and exemption privileges of government-owned
personages or convents appurtenant thereto, and controlled corporations upon the
mosques, non-profit cemeteries, and all lands, effectivity of the Code in 1992, the City
buildings, and improvements, actually, directly, Government of Manila issued Final Notices of
and exclusively used for religious, charitable, or Real Estate
educational purposes shall be exempt from
taxation”. The test of exemption from taxation is Tax Deficiency in the amount of
the use of the property for purposes mentioned in P624,000,000.00 for the taxable years 2006 to
the Constitution. The leased portion of the land 2010. On the other hand, PNR, seeking refuge
may be subject to real property tax since such under the principle that the government
lease is for commercial purposes, thereby, cannot tax itself, insisted that the PNR lands
removing the asset from the property tax and buildings are owned by the Republic.
exemption granted under the Constitution. (CIR v.
De La Salle University, Inc., GR. Nos, 196596, Is the PNR exempt from real property tax?
198841, 198941, November 9, 2016) Explain your answer. (2016 BAR)

Q: San Juan University is a non-stock, non- A: YES. The Philippine National Railways (PNR)
profit educational institution. It owns a piece was created as a corporation to serve as an
of land in Caloocan City on which its three 2- instrumentality of the Government of the
storey school buildings stood. Two of the Philippines (R.A. No. 10638, amending Sec. 1 of R.A.
buildings are devoted to classrooms, No. 4156) upon which the local governments are
laboratories, a canteen, a bookstore and not allowed to levy taxes, fees or other charges
administrative offices. The third building is including real property taxes. (Manila
reserved as dormitory for student athletes International Airport Authority v. Court of Appeals,
who are granted scholarships for a given et al., G. R. No. 155650, July 20, 2006; Manila
academic year. International Airport Authority v. City of Pasay, G.
R. No. 163072, April 2, 2009, 583 SCRA 234, 2009
In 2017, San Juan University earned income citing Philippine Fisheries Development Authority
from tuition fees and from leasing a portion of v. Court of Appeals, G.R. No. 150301, 2 October
its premises to various concessionaires of 2007, 534 SCRA 490)
food, books, and school supplies.
PNR is not a government and controlled
(a) Can the City Treasurer of Caloocan City corporation but an instrumentality of the
collect real property taxes on the land and government hence it is not included in the
building of San Juan University? Explain your withdrawal of exemptions. Finally, under the
answer. (2017 BAR) common limitations on local government units’
power of taxation, it shall not extend to the levy of
A: YES but only on the leased portion. Article XIV, “taxes, fees or charges of any kind on the National
Section 4(3) of the 1987 Constitution provides Government, its agencies and instrumentalities,
52
QuAMTO (1987-2019)
and local government units.” (Sec. 133 (o), LGC, thereof has been granted, for consideration or
paraphrasing supplied) otherwise, to a taxable person. When LLL leased
out portions of the reclaimed properties to
The railroad tracks, train stations, freight taxable entities, such as the popular fast food
customer facilities, land improvements, and restaurants, the reclaimed properties are subject
equipment within its main station in Tutuban, to real property tax. (Sec. 234(a), LGC; GSIS v. City
Manila are properties of public dominion Treasurer and City Assessor of the City of Manila)
intended for public use, and as such are exempt
from real property tax under Section 234(a) of Q: The Philippine-British Association, Inc.
the LGC. (Manila International Airport Authority v. (Association) is a non-stock, non-profit
City of Pasay, supra) organization which owns the St. Michael's
Hospital (Hospital). Sec. 216 in relation to Sec.
Q: LLL is a government instrumentality created 215 of the LGC classifies all lands, buildings
by Executive Order to be primarily responsible and other improvements thereon actually,
for integrating and directing all reclamation directly, and exclusively used for hospitals as
projects for the National Government. It was "special." A special classification prescribes a
not organized as a stock corporation, nor was lower assessment than a commercial
it intended to operate commercially and classification.
compete in the private market.
Within the premises of the Hospital, the
By virtue of its mandate, LLL in 2008 Association constructed the St. Michael's
reclaimed several portions of the foreshore Medical Arts Center (Center) which will house
and offshore areas of the Manila Bay, some of medical practitioners who will lease the
which were within the territorial jurisdiction spaces therein for their clinics at prescribed
of Q City. Certificates of titles to the reclaimed rental rates. The doctors who treat the
properties in Q City were issued in the name of patients confined in the Hospital are
LLL in 2008. In 2014, Q City issued warrants of accredited by the Association.
Levy on said reclaimed properties of LLL
based on the assessment for delinquent The City Assessor classified the Center as
property taxes for the years 2010 to 2013. "commercial" instead of "special" on the
ground that the Hospital owner gets income
(a) Are the reclaimed properties registered from the lease of its spaces to doctors who
in the name of LLL subject to real also entertain out-patients. Is the City
property tax? Assessor correct in classifying the Center as
"commercial?" Explain. (2016 BAR)
A: The reclaimed properties are not subject to
real property tax because LLL is a government A: NO. The City Assessor is not correct in
instrumentality. Under the law, real property classifying the Center as “commercial.”
owned by the Republic of the Philippines is
exempt from real property tax unless the The fact alone that the separate St. Michael’s
beneficial use thereof has been granted to a Medical Arts Center will house medical
taxable person. (Sec 234, LGC) When the title of practitioners who shall treat the patients confined
the real property is transferred to LLL, the in the Hospital and are accredited by the
Republic remains the owner of the real property. Association takes away the said Medical Arts
Thus, such arrangement does not result in the Center from being categorized as “commercial”
loss of the tax exemption. (Republic of the since a tertiary hospital is required by law to have
Philippines, represented by The Philippine a pool of physicians who comprise the required
Reclamation Authority v. City of Paranaque) medical departments in various medical fields.
(City Assessor of Cebu City v Association of
ALTERNATIVE ANSWER: NO. LLL is an Benevola de Cebu, Inc., 524 SCRA 128, 2007;
instrumentality of the national government Domondon)
which cannot be taxed by local government
units. LLL is not a government-owned or REFUND OR CREDIT OF
controlled corporation taxable for real property REAL PROPERTY TAX
taxes. (City of Lapu-Lapu v. PEZA, GR No. 184203, (1988, 1991, 1993, 2014, 2018 BAR)
Nov. 26, 2014)
Payment under protest (1988, 1991, 1993,
(b) Will your answer be the same in (a) if 2014, 2018 BAR)
from 2010 to the present time, LLL is
leasing portions of the reclaimed Q: Madam X owns real property in Caloocan
properties for the establishment and use City. On July 1, 2014, she received a notice of
of popular fastfood restaurants J Burgers, assessment from the City Assessor, informing
G Pizza, and K Chicken? (2015 BAR) her of a deficiency tax on her property. She
wants to contest the assessment.
A: NO. As a rule, properties owned by the
Republic of the Philippines are exempt from real (a) What are the administrative remedies
property tax except when the beneficial use available to Madam X in order to contest
53

Taxation Law
the assessment and their respective Assessor reclassified the property as

prescriptive periods? commercial with an assessment level of 50%
effective January 2017 and assessed Kerwin
A: The administrative remedies available to back taxes and interest. Kerwin claims that
Madam X to contest the assessment and their only 2/3 of the building was used for
respective prescriptive periods are as follows: commercial purposes since the third floor
remained as family residence. He argues that
1. Pay the deficiency real property tax under the property should have been classified as
protest (Sec 252, LGC); partly commercial and partly residential.

2. File the protest with the local treasurer – If Kerwin wants to file an administrative
The protest in writing must be filed within protest against the assessment, is he required
30 days from payment of the tax to the to pay the assessment taxes first? With whom
provincial, city or municipal treasurer, in shall the protest be filed and within what
the case of municipality within Metro period? (2018 BAR)
Manila Area, who shall decide the protest
within 60 days from receipt (Sec. 252, LGC); A: YES. No protest shall be entertained unless
Kerwin first pays the tax. The words “paid under
3. Appeal to the LBAA – If the protest is protest” must be annotated on the tax receipts
denied or upon the lapse of the 60-day issued by the treasurer. The protest in writing
period for the treasurer to decide, the must be filed with the treasurer within 30 days
taxpayer may appeal to the LBAA within 60 from payment of the tax. (Sec. 252, LGC)
days and the case decided within 120 days
(Sec. 226 and 229);

4. Appeal to the CBAA – If not satisfied with
the decision of the LBAA, appeal to the
CBAA within 30 days from receipt of a copy
of the decision. (Sec. 229 (c), LGC)

(b) May Madam X refuse to pay the deficiency
tax assessment during the pendency of
her appeal? (2014 BAR)

A: NO. The payment of the deficiency tax is a
condition before she can protest the deficiency
assessment. It is the decision on the protest or
inaction thereon that gives her the right to
appeal. This means that she cannot refuse to pay
the deficiency tax assessment during the
pendency of the appeal because it is the payment
itself which gives rise to the remedy. The law
provides that no protest (which is the beginning
of the disputation process) shall be entertained
unless the taxpayer first pays the tax. (Sec. 252,
LGC)

Q: In 2015, Kerwin bought a three-story house
and lot in Kidapawan, North Cotabato. The
property has a floor area of 600 sq.m. and is
located inside a gated subdivision. Kerwin
initially declared the property as residential
for real property tax purposes.

In 2016, Kerwin started using the property in
his business of manufacturing garments for
export. The entire ground floor is now
occupied by state-of-the-art sewing machines
and other equipment, while the second floor is
used as offices. The third floor is retained by
Kerwin as his family's residence. Kerwin's
neighbors became suspicious of the activities
going on inside the house, and they decided to
report it to the Kidapawan City Hall. Upon
inspection, the local government discovered
that the property was being utilized for
commercial use. Immediately, the Kidapawan
54

Taxation Law Quamto 2021: Questions Asked More Than Once

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University

605, 2010) and their prompt and certain

government can neither exist nor endure.

(b) Dormitory Fees actually, directly, and exclusively for educational

The members of PPGA constitute 90% of all

properties specifically excluded are considered as P1,000,000.00 in a subdivision with the

Makati City, Philippines. Packard. To entice him to accept the offer of

the estate; TAXABLE INCOME

of which B is a stockholder. The transfer was the computation of net income.

income shall be the acquisition cost of said

included in the computation of ABC Law

be said that she exercised control over its Funeral 300,000

POWER OF THE strike and volunteered to picket the company

VALUE ADDED TAX

Christmas 2001 and the other Php100,000.00

Assessment is not necessary before the filing of a

income taxes covering the years 2004 and

TO FILE A CLAIM FOR REFUND OR CREDIT JUDICIAL REMEDIES

(1992, 1999, 2005, 2008, 2009 BAR)

Provided, that in case of disputed a. Cases arising from administrative

BAR) A: NO. Congress cannot abolish what is expressly

TAXING POWER OF PROVINCES several places. The professional tax paid as a

Philippine Manufacturing Corporation v. establishments, while the rest of the property,

ALTERNATIVE ANSWER: respect of the power barges, shall be for the

the assessment and their respective Assessor reclassified the property as

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